Earnings Call Transcript - AVTR Q1 2023

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 2023 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.

Christina Jones, Vice President of Investor Relations

Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Tom Szlosek, Executive Vice President and Chief Financial Officer. The press release and a presentation accompanying this call are available on our Investor Relations website. A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open the line for questions. During this call, we will be making some forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward-looking statements 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 supplemental disclosures package on our IR website. With that, I will now turn the call over to Michael.

Michael Stubblefield, President and Chief Executive Officer

Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on Slide 3. Our first quarter operating results were in line with our expectations with reported revenue of $1.78 billion and adjusted EPS of $0.29. Market dynamics played out as anticipated, including ongoing destocking of customer inventories and a downturn in semiconductor demand resulting in a core organic revenue decline of 1.8%. We continue to leverage the Avantor Business System to drive execution of our plan and enhance operational rigor and efficiency. Reflective of strong contributions from commercial excellence and productivity, adjusted EBITDA margin was 19.4%, at the high end of our expectations. Also, free cash flow increased approximately 50% compared to Q1 last year, and free cash flow conversion was approximately 100% in the quarter, reflecting our focus on improving working capital performance. We also continue to make progress on our long-term strategy and are seeing the positive impact of our investments in capacity expansion, new product introductions and digital infrastructure to support our growth. Some notable highlights for the quarter include: expanding our hydration capabilities in Gliwice, Poland and Aurora, Ohio to provide ready-to-use buffer solutions for our bioproduction customers; successfully launching multiple new J.T. Baker product lines produced at our Ritter facility in Germany; rolling out our enhanced inventory manager digital solution, which supports our customers' needs for real-time information about their critical lab products in a user-friendly interface; and winning the Asia Pacific Bioprocessing Excellence Award, a testament to the power of our customer-centric model. We also continue to push forward on our Science for Goodness sustainability platform and look forward to publishing our annual sustainability report later this quarter. Looking ahead, there are indications from customers that inventory health is improving. However, current run rates suggest that there is a heightened risk that destocking will extend into the second half of the year. Therefore, we think it is appropriate to reflect the risk of a more gradual return to normalized growth and are updating our full year outlook accordingly. Tom will walk you through the details of our updated guidance in a moment. We do view the factors impacting the current operating environment as transitory and remain focused on executing our plan and taking actions to drive growth and profitability. Our long-term algorithm remains unchanged, and we are confident in the resilience of our end markets and our proven business model. With that, let me turn it over to Tom to walk you through our financial results and updated guidance in more detail.

Thomas Szlosek, Executive Vice President and Chief Financial Officer

Thank you, Michael, and good morning, everyone. Starting from the top of Slide 4. Reported revenue was $1.78 billion for the quarter at the higher end of our Q1 revenue range. Revenue declined 1.8% on a core organic basis, reflecting inventory destocking in lab consumables and single-use solutions for bioprocessing as well as softer demand for formulated solutions from our semiconductor customers as expected. Core organic revenue in our Bioproduction platform grew low single digits with sales of process ingredients and excipients up high single digits. We also continue to see strong momentum in our medical-grade silicone platform with first quarter revenue up more than 20%. Adjusted gross profit for the quarter was 35.1%. Favorable contribution from commercial excellence was offset by headwinds associated with inventory destocking and the roll-off of margin-rich COVID-19 revenues. Adjusted EBITDA was in line with our expectations at approximately $346 million, driven by our gross margin results, offset by a sequential increase in SG&A related to wage inflation and investments in our workforce to support our growth strategy. Adjusted earnings per share came in at $0.29 for the quarter, reflecting revenue and EBITDA results as well as an increase in interest expense to about $74 million in the quarter as compared to $65 million in Q1 2022. COVID-19 revenue declines, foreign exchange and interest expense in aggregate represented a $0.06 headwind to adjusted EPS. We generated free cash flow of $191.5 million, representing approximately 50% growth from Q1 last year and approximately 100% conversion of adjusted net income. Our working capital performance improved from Q1 of 2022 and we're actively working a pipeline of initiatives to improve receivables and inventory balances. Our adjusted net leverage ended the quarter at 3.8 times adjusted EBITDA within our stated target leverage of 2 times to 4 times adjusted EBITDA. We paid down over $200 million of debt this quarter and continue to prioritize free cash flow for further deleveraging, while remaining active in driving the commercial synergies of our 2021 acquisitions and building our M&A pipeline. Slide 5 outlines the components of our first quarter revenue growth. As previously indicated, core organic revenue declined 1.8% in the quarter. Customer destocking in liquid handling consumables and single-use solutions played out as expected, representing an approximate 500 basis point headwind in the quarter. COVID-related revenues represented a 4.8% headwind for the quarter, reflecting the roll-off of approximately $90 million of COVID-related sales from Q1 '22, resulting in a 6.6% organic revenue decline. Foreign exchange translation represented a 2.1% headwind, driven primarily by the strength of the U.S. dollar versus the euro resulting in a first quarter reported revenue decline of 8.7%. On to Slide 6. From a regional perspective, the Americas declined 3.7% on a core organic basis, reflecting strong contributions from commercial excellence, process ingredients, biomaterials and services, offset by the impact of customer destocking and soft demand in semiconductors and biotech. Europe achieved 1% core organic revenue growth in the quarter. Bioproduction was up double digits on a core organic basis in the region, and our Applied Technologies and Advanced Materials end market continues to perform well. Like the Americas, inventory destocking in Europe played out in line with our expectations. EMEA also grew 1% on a core organic basis in the first quarter, with strong growth in our bioproduction process ingredients and excipients, partially offset by a high single-digit decline in sales of proprietary materials to advanced technologies and applied materials customers, primarily in semiconductors. Slide 7 shows our core organic revenue growth for the quarter by end market and product group. Biopharma representing almost 55% of our annual revenue, declined low single digits in the quarter, impacted by destocking of lab consumables and single-use solutions as anticipated. Biopharma production was up low single digits on a core organic basis, including high single-digit growth in process chemicals and ingredients, reflecting the strength of underlying end market demand. Health care, which represents approximately 10% of our annual revenue, declined mid-single digits on a core organic basis in the first quarter. Biomaterials performance was strong with double-digit growth across all three regions, while diagnostic sales were negatively impacted by destocking of lab consumables. Education and Government representing approximately 10% of our annual revenue, grew mid-single digits on a core organic basis in the first quarter, with growth across all 3 regions. We are encouraged by the return to growth of this platform and the supportive research environment, including healthy Q1 NIH outlays and expect customers in this end market to remain active. Advanced Technologies and Applied Materials, representing approximately 25% of our annual revenue, declined low single digits on a core organic basis in the first quarter, with solid performance in Europe, offset by declines in the Americas and EMEA, largely attributable to softer demand from semiconductor customers and broader macroeconomic pressure on industrial customers. By product group, proprietary materials and consumables offerings were flat in the quarter, with strong biomaterials and bioproduction process ingredient sales, offset by destocking in single-use solutions and reduced demand for formulated solutions for semiconductor customers. Sales of third-party materials and consumables declined mid-single digits, impacted by a moderation in lab consumables demand related to destocking. Services and Specialty Procurement grew mid-single digits, while Equipment and Instrumentation declined low single digits. Turning to Slide 8. I'd like to take a moment to talk through our updated 2023 guidance. We now expect organic revenue declines of 3% to 1% and core organic revenue of minus 0.5% to positive 1.5%. This reflects a more gradual wind down of customer destocking of lab consumables and single-use solutions, more pronounced semiconductor headwinds and a modestly weaker macro environment. We continue to expect FX to be neutral for the full year, leading to reported revenue declines of 3% to 1%. Based on our updated top-line view as well as our commercial and productivity initiatives, we expect adjusted EBITDA margin to contract between 75 and 25 basis points. We continue to expect interest expense of $270 million to $295 million and a tax rate of 21.5%, leading to adjusted earnings per share of $1.28 to $1.36. We are updating our free cash flow range to $675 million to $750 million. For the second quarter, we estimate organic revenue declines of 6% to 4% as compared with the first quarter decline of 6.6%. This includes a COVID headwind of 2.6% resulting in core organic decline of 3.4% to 1.4% as compared with the first quarter core organic decline of 1.8%. This core organic decline reflects an aggregate headwind of approximately 700 basis points, reflecting customer inventory destocking at similar levels to Q1 and a modest further deceleration in sales to our semiconductor customers. We expect a roughly 0.5% negative impact from FX, leading to reported revenue of $1.785 billion to $1.825 billion. We also expect adjusted EBITDA margin of 19% to 19.5% in the quarter, reflecting the ongoing volume and mix dynamics as well as our continued focus on commercial excellence. We expect interest expense to be approximately $2 million lower than Q1, driven by an ongoing paydown of our floating rate debt and expect free cash flow generation to be more modest in Q2 given the timing of cash tax payments. With that, I will now hand the call back to Michael.

Michael Stubblefield, President and Chief Executive Officer

Thanks, Tom. As we conclude, I want to emphasize our conviction in both the attractiveness and resilience of our end markets and the relevance of our offering to serve our customers. Earlier this month, we hosted our Americas sales conference, which brought together hundreds of our suppliers and our entire North America sales organization. This important forum strengthened collaboration across Avantor functions and with our suppliers to drive growth. This was our first in-person forum since early 2020 and the energy and feedback we received reinforced the opportunities ahead of us. We are looking forward to similar forums in Europe and EMEA next month. We remain confident in our growth strategy and are investing in new capacity, launching new products and expanding our geographic footprint and digital infrastructure to support our long-term financial algorithm. Continuous improvement is in our DNA, and we are taking actions to strengthen our operational rigor, efficiency, and commercial execution. Thank you for your interest in Avantor and for your continued support. And thank you to the 14,500 associates around the world who are working to deliver for our customers and support our mission of setting science in motion. I will now turn it over to the operator to begin the question-and-answer portion of our call.

Operator, Operator

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

Vijay Kumar, Analyst

Hey, guys. Thanks for taking my question. I just want to make sure I had some of these numbers correct. Michael, this updated guidance here, so destocking, I think, for the second quarter, I heard as minus 700 basis points. Is there a continued destocking impact, like I think the prior destocking impact for the year was something like 200, 250 basis points, was that change for the year? What was the change? And I think biopharma, there's been a lot of questions, what is your exposure to emerging biopharma, early-stage biotech and has the bioproduction growth of double digit changed at all?

Michael Stubblefield, President and Chief Executive Officer

Thank you for the question. Let me explain both areas for you. First, regarding destocking, the first quarter aligned with our expectations, showing about 500 basis points of destocking headwinds. For the second quarter, we anticipate this trend continuing at a similar level. Additionally, we experienced around 100 basis points of semiconductor headwinds, which we expect to modestly increase in the second quarter. These are the main factors we are considering as we transition from the first quarter to the second quarter, and we expect the quarters to reflect similar trends, especially concerning destocking. Now, regarding the bioprocessing market, we remain optimistic about the underlying growth drivers in this space. There have been notable approvals related to Alzheimer's, obesity, and multiple myeloma, and the pipelines are quite strong. The demand in this market continues to be robust, and our performance in process ingredients and excipients reflects this strength, as they are not facing the same destocking challenges as our single-use platform, demonstrating high single-digit growth for the quarter. However, considering the ongoing trends in destocking and the fact we had hoped to see an inflection point by now, we believe that the risk of continued destocking into the second half of the year is valid. Therefore, we revised our full year guidance to project mid-single-digit growth for our bioproduction platform. We remain very positive about the long-term potential not only in the market but also regarding our position within it. Lastly, addressing your question about biotech, it's a significant part of our customer base due to the innovative science they are pursuing. Our exposure here is relatively modest, around 2% to 3% of our total revenues, mainly concentrated in our research platform. We are experiencing headwinds in this area, which has likely declined by double digits in the first quarter but appears to have stabilized at those levels. Overall, it remains a minor part of our portfolio.

Vijay Kumar, Analyst

That's helpful, Michael. And just a follow-up to that. If I just take a step back, simplistically, at a very high level, we had a big guidance change over the last, call it, 3 to 4 months, another guidance reset here. When we look at these assumptions, can you talk about your visibility, I mean how investors can take comfort in numbers having the reset perhaps the second half guide now being derisked, what visibility does Avantor have?

Michael Stubblefield, President and Chief Executive Officer

Yes, I'm glad to address that, Vijay. Looking at our assumptions for the year, the first quarter aligned closely with our expectations, as reflected in our results. We had anticipated that the destocking challenges would ease by mid-year. While we were encouraged by the progress made in the first quarter, we needed to see further growth in those areas as we entered the early second quarter, which we currently do not see happening. Therefore, we have adjusted our outlook to account for the possibility that this destocking may continue for the rest of the year. In terms of our guidance, we expect that our core business will maintain the performance levels observed in the first quarter throughout the remainder of the year. We also expect ongoing challenges in the semiconductor market, with an increase in these challenges anticipated in the second quarter, as seen in some recent earnings reports from our customers in that sector, confirming the depth of the downturn. Regarding destocking, we expect the trends in the second quarter for both lab and bioprocessing to mirror those in the first quarter, and we've carried those expectations forward for the rest of the year. This means we anticipate a slight improvement in growth rates in the second half, although this is somewhat due to mathematical adjustments reflecting ongoing headwinds layered on top of last year's destocking. Consequently, the impact on growth in the second half will be less pronounced due to last year's dynamics. Overall, we believe this is a reasonable adjustment that reflects the current market conditions without needing substantial improvement in our business for the rest of the year.

Vijay Kumar, Analyst

Understood. Thanks, guys.

Operator, Operator

Our next question comes from Patrick Donnelly with Citi. Please go ahead, Patrick.

Patrick Donnelly, Analyst

Hey, guys. Thanks for taking the questions. Michael, maybe a follow-up on that one. I think you've talked about, when you're talking about stocking, you're at least seeing some early signs of things maybe bottoming out or turning a little bit. I guess what are you seeing in the channel there? To Vijay's question, just on the visibility, what are you hearing from customers? Obviously, the headwind in Q2 being similar is prudent, but it does sound like you're maybe at least seeing some signs, I would love you to just give us a little more color there on what you're seeing and any levels of confidence that we are at a trough of sorts?

Michael Stubblefield, President and Chief Executive Officer

I think probably helpful to maybe provide a little bit of context on just the operating model that we have here and the level of visibility we have into the different parts of the business. We're facing destocking headwinds, as we've indicated previously in both our lab consumables category and in our liquid handling consumables and vial processing. Within those categories, those are products that our customers would generally expect us to have on the shelf, and order times and lead times would tend to be rather muted, certainly measured in days and weeks as opposed to months or quarters. So that's one of the dynamics that make predicting these things somewhat difficult. But we obviously have great access to our customers and are spending a lot of time in posting them to understand the dynamics and the trends. And we continue to receive positive feedback from our customers that, in fact, the health of inventories in these categories are indeed improving. We do see the inventory coming out, perhaps just not at the rate that we had originally anticipated. So we saw improvements in their daily rate of sales in these categories as we move through the first quarter. The exit run rate in March was essentially in line with what we had anticipated going into the year. But we had also expected to see an additional step-up into the second quarter. And while rates are moderately improving, they're just not improving at the rate that we had originally contemplated. So we felt it was appropriate to reflect the risk that this thing extends for more time than what we had originally modeled, and that's what we have baked into our outlook today.

Patrick Donnelly, Analyst

Okay, that's appreciated. On the margin front, I have a question for Tom. You adjusted the margin guidance, lowering it by 50 basis points at the midpoint year-over-year. Are you implementing any cost-saving measures, or do you believe this situation is temporary? Will you maintain the current P&L, with confidence that next year we will return to the margin expansion plan you previously outlined? Can you elaborate on your approach and how we should consider this moving forward?

Thomas Szlosek, Executive Vice President and Chief Financial Officer

Yes. First of all, Patrick, the view is that it is transitory. And we do expect to be through these headwinds by the end of the year. But notwithstanding that, our plan and even our updated guidance reflects the ongoing productivity initiatives that we continue to take. So recall that the three margin drivers for us that we continue to talk about are pricing and commercial excellence as well as that proprietary mix growth that gives us a better margin/mix. And then the third has always been productivity. And we built this year's plan with significant productivity in it. We're using the Avantor Business Systems to drive a number of discrete projects across the entire enterprise. We've got actions in the Americas, in Europe and in EMEA to drive continued fixed cost reduction. The one thing that is not being impacted is the investments on the front end of the business. So in terms of commercial sales force, marketing teams and so forth, we continue to invest there across the entire landscape to drive the better top line. But even as we head into the back half of the year, that continues to be true while we do continue to look at additional opportunities on the cost side. So it's front and center for us, was at the beginning of the year and continues to be throughout this year.

Patrick Donnelly, Analyst

Okay. Appreciate, guys.

Operator, Operator

Our next question comes from Michael Ryskin with Bank of America. Please go ahead, Michael.

Michael Ryskin, Analyst

Great. Thanks. Let me throw in one big one to start and then I'll have a follow-up. So first, I'm just trying to deconvolute the change to the guide a little bit. You provided a lot of commentary, but given all the moving pieces, anything you can say in terms of has demand, has the macro deteriorated at all? You're talking about inventory levels as feels like being the biggest change to the guide, but then given your comments on semiconductor and some accounts you had in the prepared remarks. I'm just trying to parse out the moving pieces here. The $200 million roughly cuts to the top line, how much of that is for the inventory destock, how much is semiconductor versus just broader macro expectations going forward? What's built in?

Michael Stubblefield, President and Chief Executive Officer

Yes, Michael, let me take a shot at that. If you look at the adjustment in the guide, it's roughly 300 basis points at the midpoint. And probably the way I'd have you think about that was it's roughly two thirds associated with incremental destocking headwinds that we've anticipated in the business. And the balance of that would be probably split somewhat equally between a little bit weaker semiconductor end market, particularly in the second quarter and moderately weaker macro environment overall. So it's probably those three factors, but clearly more weighted towards destocking.

Michael Ryskin, Analyst

Okay. Thanks. And then on the stocking point, just anything you can say in terms of how much inventory is actually left with these customers? I mean they can't keep destocking forever, there's a finite amount. So any clarity on where inventory levels, this is both for a lab and bioprocess, by the way. Where were inventory levels pre-COVID? Where were they sort of at the peak? Where are they now? And any sense of could you be seeing incremental share losses that would account for some of those changes?

Michael Stubblefield, President and Chief Executive Officer

Yes. The feedback from our customers certainly supports the idea that inventory health across the network is improving. We have taken a careful approach to mitigate risks in the second half of the year, as we lack precise data to make definitive calls. Extending similar levels of drawdown for the rest of the year should meet our expectations for what might be held at our customers. We aim to be slightly conservative in our estimates. However, we do lack complete visibility into our order book through the end of the year. This indicates there might be a year's worth of inventory in certain categories, which is on the higher end of what we've seen or been told by our customers. Therefore, we believe this cautious strategy is warranted based on the available data.

Thomas Szlosek, Executive Vice President and Chief Financial Officer

Mike, I want to follow up on some of the conversations we've had. It was clear that our original guidance expected an earlier change in destocking, but as we are now in mid-April, I haven't observed that yet. The feedback from customers indicates that inventory levels are stabilizing, but we haven't seen this reflected in order rates. Therefore, we thought it wise to adjust our expectations for the remainder of the year accordingly.

Michael Stubblefield, President and Chief Executive Officer

Michael, regarding the potential share loss you mentioned, we fundamentally disagree with any claims that we are losing market share. We remain optimistic about the traction we have with our customers. Looking beyond the categories currently experiencing destocking, there are several healthy trends that support our perspective. For instance, the sales of lab chemicals in the first quarter showed significant growth, exceeding our group average, which boosts our confidence in the health of the end markets and reaffirms our strong relationship with customers. We have celebrated notable customer successes recently, such as our large win with Catalent. Additionally, we have secured several other accounts in recent weeks. Our growth with core customers is outpacing their R&D spending trends, which is encouraging. Beyond the lab category and research environments, our bioproduction business remains a key strength, outpacing the broader market by several hundred basis points. In areas outside the destocking categories, like process ingredients and excipients, we are also witnessing strong momentum, which reflects the underlying health and activity levels of our customers and our competitive positioning.

Michael Ryskin, Analyst

Okay, thanks.

Operator, Operator

The next question comes from Rachel Vatnsdal with JPMorgan. Please go ahead.

Rachel Vatnsdal, Analyst

Thanks for taking the questions. So I appreciate the comments of emerging biotech being 2% to 3% of total revenues. Can you walk us through your exposure to emerging biotech within bioprocessing? And then separately, there's been some concern about the cell and gene therapy market just with some of the comments from peers this week. So walk us through, what's your exposure to cell and gene? And then have you seen any shift in demand or ordering patterns from customers within that market?

Michael Stubblefield, President and Chief Executive Officer

Yes, let me unpack those questions for you, Rachel, maybe take them in reverse. So on the cell and gene therapy space, one of the things I really like about our platform is we're going to be relevant across all modalities, both at commercial scale as well as in the pipeline. So while we're encouraged by the momentum overall in cell and gene therapy and the health of the pipeline, clearly, the commercial platforms are heavily slanted towards monoclonal antibodies driving the bulk of our revenue. They are kind of in line with just the split of revenue at an end market level there. So yes, we certainly have exposure to cell and gene therapy within our bioproduction platform, but it will be in the proportion of overall cell and gene therapy end market revenue as a proportion of total biologics end market revenues. So certainly, nothing outsized to think about there. And certainly in the pipeline, a lot of our R&D activities certainly would be supporting rather fulsome cell and gene therapy pipeline. So it's an end market that I think long-term favor growth in that space, and we're not going to be over-indexed to any particular product or customer. It's a rather diverse platform as you know. And regarding order rates or things like that, have we seen a change in patterns? I'd say, given the diversity of the platform, certainly nothing that I would call out is driving momentum one way or another. I think we continue to have strong specifications across all these platforms, and we are certainly seeing good growth across all of our modalities and are encouraged by the approvals that we see coming through. On the biotech side, most of our exposure there is going to be on the research side, as I said earlier. And while we like that customer segment a lot, just given the number of molecules that they're developing, it is kind of low single-digit exposure for our platform. It was off double digits in the first quarter. It was also off in the fourth quarter following quite a lengthy period of growth. It seems to have moderated a bit. When I look at the bioproduction side of our business, which we tend to think about only on commercialized platforms, your exposure there would typically be through the CDMO lens, where you have biotechs that are scaling up to produce commercial quantities probably don't have their own capabilities. And so we would probably service those through the CDMOs around the world that we'd be working with there. So overall, I don't think we are calling out any particular risk here from a biotech standpoint that's moving the needle one way or another on our numbers.

Rachel Vatnsdal, Analyst

Great. Thanks. And then one on semis here. I appreciate that your products have really used enough semis processing and bulk on the production side, you're more closely tied to current demand levels with some of your peers. But can you just confirm for us that your exposure to the semiconductor market is still 2% to 3%? And then it sounds like roughly 75 basis points of the guidance change is tied to the worsening market for semis, so how much revenue is really left in that model for semiconductors this year? And is there any risk to that declining further? And then finally, on semiconductors, when do you think you're going to have visibility on this market and at what point could it really flip positive?

Michael Stubblefield, President and Chief Executive Officer

Yes. So just to remind you all on our offering into the semiconductor market. We certainly have a host of lab consumables and PPE and clean room offerings that support our customers there. But probably the biggest headwind we're facing at the moment would be on the formulated chemical solutions that are used in the actual manufacturing of a semiconductor wafer, primarily in logic chips that provide cleaning and etching functionality throughout the manufacturing process. So it's truly a consumable that's going to mirror our customers' manufacturing output in their production levels. Similar to what we see in Life Sciences, there is a very, very significant inventory correction that's underway within the semiconductor space. And if you look at the earnings release from our customers, that space, they're off 40-plus percent and their production schedules are probably off even more than that as they look to reset inventories. We typically get a little bit longer range forecast from our semiconductor customers that are updated kind of on a rolling monthly basis. We do see a step down coming through in the second quarter. But we are encouraged by the feedback we're getting from our customers that they see kind of arresting the inventory headwinds somewhere around midyear here. And then the return to kind of recovery as we move through the back half of the year. So we've factored in pretty much headwinds all year, probably the steepest in the second quarter. And I think the view here is that the health of that end market improves heading into 2024.

Operator, Operator

Our next question comes from Dan Brennan with TD Cowen. Please go ahead, Dan.

Dan Brennan, Analyst

Thanks. Thanks for taking the questions, Mike and Tom. Maybe just one on back to the guide. So for the inventory destock, so it sounds like it's around 4% in the first half, right, roughly, I believe, maybe a little higher in Q2, I guess, but I'm not sure if the delta between the 1Q and 2Q is all semis. But are you now contemplating or is included in the guidance now that 4% headwind persists in Q3, Q4? So when we look at your guidance, we should be thinking about that's baked in to the implied organic growth at that much of a headwind drag through the full year now?

Michael Stubblefield, President and Chief Executive Officer

Yes, to clarify a couple of points, Dan. In the first quarter, the headwinds from destocking were about 500 basis points, and we expect a similar impact in the second quarter. Looking at the second half of the year, our core organic growth rate should improve compared to the first half, allowing us to meet the midpoint of our full-year guidance. This improvement is partly due to the significant destocking challenges we faced in the second half of last year. While we're still looking at additional destocking in the second half beyond what occurred last year, it will result in a better growth rate because it follows a lower base that also reflects the earlier headwinds. We're anticipating similar levels of destocking in the second half compared to the first half. Regarding semiconductors, we are observing a worsening situation with an increase by about a full point in the second quarter compared to the first. In Q1, we had approximately 600 basis points of headwinds, with around 500 from destocking and about 100 from semiconductors. In Q2, the headwinds are expected to rise to about 700 basis points, with 500 coming from destocking and roughly 200 from semiconductors. We anticipate the semi headwind to decrease to around 1% for the remainder of the year.

Dan Brennan, Analyst

Got it. Great. And then maybe just one other. I know you highlighted beyond semis, there was some impact from broader industrial. Just kind of remind us, I think maybe half of your Advanced Tech and Applied Materials could be considered to more cyclical industry. But just kind of ex-semi, what else that kind of are you seeing in there? Just kind of quantify and give us some color about kind of what's baked in and kind of how you arrived at that? Thank you.

Michael Stubblefield, President and Chief Executive Officer

Yes. When examining the performance of our Advanced Tech and Applied Materials end market, we recognize that some segments within it demonstrate cyclical GDP-like dynamics. Overall, I was fairly satisfied with how that platform performed, considering the macroeconomic conditions we are facing. It experienced a slight decline, mainly influenced by the semiconductor sector. However, we did see growth in Europe in our Applied sector, which was encouraging in light of ongoing developments there. Other markets we serve include petrochemicals, oil and gas, and food and beverage, among others in aerospace and defense. Generally, this segment of our business has remained resilient. The most significant concern is the steep decline in the semiconductor sector, which has likely dropped about 50% in the first quarter and is expected to decline around 70% in the second quarter, before showing some recovery. This downturn is significantly impacting our metrics. However, with a larger portion of our business in the Americas, we get a clearer perspective on Europe, where we have less exposure to semiconductors. This leads us to see better performance in the applied markets, where we actually achieved mid-single digit growth during the quarter.

Dan Brennan, Analyst

Great. Thanks, Michael.

Operator, Operator

Our next question comes from Jack Meehan with Nephron Research. Please go ahead, Jack.

Jack Meehan, Analyst

Thank you. Good morning. I wanted to ask about the margin cadence in the second half of the year. So just playing around with the numbers, I think it implies about a 200 bps step-up in the second half EBITDA margins relative to the first half. Historically, I looked like pre-COVID, it's been a little bit more muted than that. Can you just walk us through the framework on margins in the year-end?

Thomas Szlosek, Executive Vice President and Chief Financial Officer

Thank you, Jack. In the first quarter, we saw margins at 19.4%, a significant decline compared to the first quarter of 2022. The primary reason for this drop was the impact of COVID on revenue, which accounted for about $90 million in headwinds, mainly from high-margin proprietary materials. This significantly influenced our overall reduction. Additionally, we've experienced headwinds in the biopharma production category, which also has healthy margins. These factors combined led to lower margins. However, we expect improvements in the second half of the year. If you look at the second quarter and project it, it should closely resemble the first half in terms of financial performance, with potentially around $20 million more in revenue at the midpoint and a slight increase in EPS. That said, margin rates might remain under pressure due to ongoing headwinds. We do foresee better margin rates in the second half as anticipated revenue increases, especially from the biopharma side, come into effect. Overall, for the full year, we're estimating a modest reduction from 2022 at the midpoint of our expectations.

Jack Meehan, Analyst

Got it. Okay. As a follow-up, I wanted to ask about the performance of Masterflex and Ritter in the quarter. I know you don't break out the M&A sales anymore, but how is their progression at the start of the year compared to the exit rate at the end of 2022? Thank you.

Michael Stubblefield, President and Chief Executive Officer

Yes, thanks for the opportunity to talk about those, Jack. We actually continue to spend a lot of time in driving the acceleration of synergies on really across all three of those 2021 acquisitions. And when I look at the first quarter in isolation, happy to report that all three of those platforms were either at or above our plans for the quarter. We're starting to see some momentum really across all three of those. I think in the press release, we referenced a couple of new product launches in our Ritter category that we've been signaling, and we've got some more that will come here in the second quarter that will continue to bolster our portfolio and better position us. We do see inventory positions improving and the engagement with our customers in Ritter starting to pick up as well. Masterflex, we continue to drive hard after some of the innovation and are quite encouraged by what that does for building out and really the only end-to-end aseptic management solution in the space and certainly a lot of excitement from our customers. I would say one of the more notable things in Masterflex in the first quarter is just the improvement in the supply chain. We've been talking a lot about headwinds on access to chips and stuff and the backlogs on the pump. And while we continue to work through some of those challenges, I think we've been able to cut the lead times on our peristaltic pump offering by half. We've got a little bit more room to go yet before that ultimately normalizes, but certainly some good momentum there. And then on RIM Bio, obviously, a more modest-sized platform for us, but we're super excited by the progress that we're making in translating that technology, particularly the 2D and 3D bag technology to our customers around the world. And we had talked at the fourth quarter call about some meaningful revenues that we were looking to capture in the first quarter on that platform. And certainly, those came through as planned. So it's an area that we're going to continue to drive hard on. We've got a lot of resources focusing on capturing these commercial synergies, and we continue to anticipate these platforms growing in 2023. And certainly, we're keeping pace with those plans in the first quarter.

Operator, Operator

Our next question comes from Dan Arias with Stifel. Please go ahead, Dan.

Dan Arias, Analyst

Good morning, everyone. Thank you for your question. Michael or Tom, regarding biopharma, there was a low single-digit decline in the quarter. What should we expect for growth or decline for the year? Also, what should we anticipate specifically for bioprocess this year? I apologize if I missed any details in the guidance. Additionally, you've mentioned service penetration and its implications for you. Do you believe that service can contribute positively to the biopharma segment, or should we expect it to move in line with the product side? It seems like it could be a bit more stable for your team.

Michael Stubblefield, President and Chief Executive Officer

Yes, I'm happy to discuss biopharma further. There are significant COVID-related challenges impacting our biopharma numbers. It's important to consider this from both an organic and core perspective. In the first quarter, biopharma experienced a decline in the high single digits, largely due to more than 500 basis points of COVID headwinds. This results in a core growth rate in the low single digits, as you mentioned. Looking ahead for the year, as the COVID headwinds begin to ease, we expect to see improved growth rates each quarter. Despite the ongoing destocking modeled for the second half of the year, its impact on growth will be less pronounced. Therefore, while we experienced a low single-digit decline in the first quarter, we anticipate biopharma to achieve low- to mid-single-digit growth for the full year. This includes bioprocessing, which is projected to be around a mid-single-digit growth level.

Dan Arias, Analyst

Okay. Helpful. If I could just maybe ask another and just sort of stay with the details around the inventory topic. When you look at the destocking activity that's taking place and you try to separate bioprocess from routine lab consumables, are you able to discern a difference when it comes to the pace of the work down? I mean is everything looking like it's moving at the same velocity, so to speak? Or do you think that at the end of the day, we see one of these buckets resolve itself a little faster than the other?

Michael Stubblefield, President and Chief Executive Officer

That's a really good question, Dan. As we analyze the data and consider the potential risks for the second half of the year, we see both areas moving at about the same pace. Feedback from our customers supports this perspective. Additionally, observing changes in daily sales rates as we transition from the first quarter to the early part of the second quarter further reinforces our view that both areas appear to be winding down or progressing at a similar pace. Therefore, as we look ahead to the second half, it encompasses both categories.

Dan Arias, Analyst

Okay. Thanks very much, guys.

Operator, Operator

Our next question comes from John Sourbeer with UBS. Please go ahead, John.

John Sourbeer, Analyst

Thanks for taking the question. I guess just continuing on the destocking here. Just any broader regional color and how you see this playing out in the second half by region? And then just a second question here, I'll ask it too at the same time. On the industrial and applied market piece, I guess how much conservatism do you think you have in the guidance for this market? If we were to enter a deeper recession in the second half of the year, I guess, how much do you think that is baked in on the guidance there?

Michael Stubblefield, President and Chief Executive Officer

Yes. The destocking issue aligns with the revenue distribution across regions, meaning we face more challenges with destocking in the Americas, largely because our Americas business is about twice the size of our European business. We notice headwinds in both lab and bioprocessing areas across these regions. With regard to COVID, as we see less impact, especially related to vaccines, the Americas are experiencing more significant challenges. However, on a percentage basis, the trends are similar in both regions, with a lesser impact in Asia. Regarding your second question about the applied markets, I am encouraged by our performance in the first quarter, which saw a decline in the low single digits, while semiconductors dropped 50%. We expect a 70% decline in Q2. So, I believe our current outlook is realistic and we feel more at ease with it now. Yes. Thank you, Emily, and thank you to all of you for participating in our call today. I certainly appreciate your support and interest in our business and look forward to updating you when we meet next. Until then, take care and be well, everyone. Thank you all.

Operator, Operator

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