AVTR - NYSE

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. [Operator Instructions] I will now turn the call over to Chris Fidyk, Vice President of Investor Relations. Chris, you may begin the conference.

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 Steve [indiscernible], 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.

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 BioScience and Medtech product segments, 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 condition 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 road map 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 [indiscernible] had a heavy influence on a 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 team are working. BMP had a book-to-bill of more than 1.1x in the quarter. Other element 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 3 key messages I want to convey about their 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 user 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 position 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 2 examples of actions that we have taken as part of Revival. Please turn to Slide #4. Revival begins enhanced with people. And 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 summarize the change 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 [indiscernible] 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 will allow us to best execute the Revival agenda. Please turn to Slide 5. Enhancing operation is one of our 4 most priorities. So I wanted to dig deeper into action underway within this important revival pillar, which is led by our COO, Mary Blenn. In the first quarter alone, we completed over 8 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 high focused on long-term strategic requirements. Our CapEx Council has sanctioned 12 projects recently, one of which is depicted in 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 reimagine 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 [indiscernible] 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.

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 Steve, 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 sale, 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 declined 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 road map 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 declined sequentially versus Q4 2025 is due to seasonal declines in revenues with a number of other puts and takes. There are 2 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 sale. 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 sale and the serum and electronic materials businesses within research and specialty chemicals would be headwinds to growth in 2026 and 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 and 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 2 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 Steve Eck to discuss our guidance.

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 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 and 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 tougher comp and process chemicals. Therefore, we expect BMP's year-over-year organic growth in Q2 will be worse than the Q1 experienced 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.

Thank you, Steve. 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, give 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 Instructions] The first question today comes from Dan Leonard with RBC.

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.

Yes. I think, Dan, if I understand correctly your question, you're talking about the measures we are taking, again, the inflation that we are seeing. Is that correct?

Correct.

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 worked with them a lot in the past, 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 2 areas. The first in inbound and outbound threat. And of course, the team is really looking at our contract and seeing what we can do on that side. And then the other thing is a few critical materials, which will not be in short supply, but really where we will see inflation. So we have a task force in place already evaluating the impact. I think, Steve, in the opening remarks, talked about the $10 million to $20 million headwind that we are seeing that we are contemplating in the reforming of our guide. And I think it's really an action for us in terms of monitoring and in terms of things what we can pass to our customers.

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?

Yes. No, it's a very good question, Dan. Look, I think if we look at what we shared in Q4, our order intake in process chemical was high single digit in Q4. And with the operation and the Revival impact on operation, we were able to deliver a double-digit growth in Q1 in terms of revenue. The very positive things and what we are very encouraged is that in Q1, our order intake was double digit. So there is a sequential acceleration, and it's down again to revival on the commercial side. A lot of those products are between between 30 to 60 days, 90 days lead times. It also depends on the customer that gave us some blanket order with a lot of visibility. We have asked the commercial team to work on this. to make sure that through the [indiscernible] process that we have put in place, we are helping as well the operation to have a good visibility of what is coming. So we are super encouraged with what happened in both operation and commercial due to revival. And so 60 days, 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.

The next question comes from Patrick Donnelly with Citigroup.

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?

Yes. Yes, Patrick, it's [indiscernible] take this. Look, I think for Emmanuel and Steve as well as my comments there, 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 there. Even though on BMP, you'll see lower organic growth that has to do more with the idiosyncratic competition we brought up it's a nice sequential increase, but not substantial there. You put those together, you get better fixed cost absorption against that, and then you'll see modest increases and margin against that sequentially. You marry that to revival working in other cost outs there and that very comfortably gets you to the range of our guidance.

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.

Yes. Patrick, I think there's not much change in terms of market dynamics versus what we shared in our last call 90 days ago, biopharma market is healthy, in particular, in bioproduction. We see that in our order book. This is also particularly in process chemicals for Q1 in terms of revenue but also in order, as I just talked about. We also see a strong funnel for us, again, we have pushed commercial team to have a better visibility on the opportunity. So we are looking at a strong funnel. Around academy and government, nothing really changed. The market is pretty stable. There's maybe a lower level of activity than what we will prefer, and we continue to assume that customers are a bit reluctant to spend money in that part. NHI funding is stabilizing, capitalizing incremental demand that will represent upside potentially, again, if the customer decided to spend their budget. Bottom line is that the end market we exactly as we were expecting it. All right. And I think there's no assumption that there's major change during the year. I just want to maybe add one comment. We shared in the past that despite the difficulty that we had we never let down the customers, in particular in bioprocessing. And I think we can really say that [indiscernible] I meet customers there is strong feedback about the service level and the engagement that we have. And this is again reflected in our Q1 order book and the book-to-bill, which is 1.1x.

Okay. And Brent, just to close the loop on 2Q, is there a specific organic number you can give?

We're -- you're probably talking about a decline of 500 basis points there for the quarter on top line.

The next question comes from Vijay Kumar with 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 error. 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?

Do you want to -- the we're talking about at the firm level there, Vijay. So you're going to see more decrementals in BMP taking the firm rate down to minus 5% there. So you'll see a sequential improvement in VWR and then going backwards by 500 basis points or more in BMP.

Yes. I was going to add that around VWR. I think we had a strong reset of VWR last year. We shared with you that we've lost market share. Q1 was really the tail of those market share loss. We have really stabilized the situation with VWR. And we also looked at the order trend, okay? We look at the contract conversion, the new contract we win, 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, with strengthening the [indiscernible]. And I think this is why we're expecting stabilization really of Q2 and then onwards positive growth.

Understood. No, that's helpful. Maybe one follow-up Emmanuel for you. We're starting the first half, somewhere down mid-single rate minus 4% to minus 5%. What improves in back half, right? 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?

Sure. I think this is what I -- what we said in our opening comments, all right? So bottom for VWR Q2 bottom for BMP, stabilization of VWR. And then we have the order book that we just talked about, which is really on crashing on the BMP side. And I think basically, the confidence about the impact that revival has on the commercial intensity on the operation excellence and also on the fact that we are bringing all those talents, which some of them are already having an impact and there are many more coming. So I think this is a combination of all of this that give us confidence that second half will be back to growth. And of course, [indiscernible] as well in terms of VWR in particular.

And Vijay, coming off -- taking the comp piece aside, not a dramatic sequential increase that we have baked in the plan, certainly, Q1 to Q2, and then we aren't getting more specific on the back half, but broadly beyond that. And just to be super clear into Q2 you'd say about minus 5% at an enterprise level, improvement in VWR coming up sequentially coming off a negative 5% in Q1. And then going backwards, about 500 basis points more in BMP, you can put that math together and gives you a clean picture for that, and that does not require a significant sequential ramp for the company in Q2.

Our next question comes from Catherine Schulte with 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 time line to complete those?

Yes. Thanks, Catherine. Look, I think I visited probably all of them. I think there's maybe a few factory where I have not been like India, which I'm planning to go by the end of May and maybe 1 or 2 in the U.S. So I don't have yet the complete picture of all our sites. But look, we have excellent sites. I was recently in Poland, and Briar in France and [ Luban ] in Belgium, I think, generally speaking, the -- look, in terms of projects, there's always projects to happen in every site, right? There's not one site that consume all our CapEx or not. Every site as their project, we encourage every leader to look at to apply lean and kaizen on the site to make sure that we have productivity, okay? I think Mary is driving a huge improvement on that side where we are measuring the productivity by site. And therefore, every site leaders are encouraged with the help of our internal lean team to come back with projects that are going to create productivity, and we just shared one of them. So those projects are very different. We did 12 in Q1, but I think we will have more coming on into the rest of the year. And I think this is where we are on curage as the team is responding very well in there.

Okay. Great. And then can you just walk through how the BMP idiosyncratic order pattern comp base throughout the year? I think you said they were a mid-single-digit headwind in 1Q will be higher in 2Q. 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?

Yes. I mean the idiosyncratic gets a little better in the back half of the year. If you recall, the primary driver on the back half is going to be headwinds in electronic materials, and I would just continue to think about sequential improvement here. And that's really the theme we're driving. We're really trying to talk through here is sequential stability than modest growth against that.

Yes. I think we shared in the past call that new sale, serum and electronics had actually different timing in the past. And so new steel serum giving a headwind first half, electronic material giving headwind in the second half. And I think this is important for us to continue to work with the supply chain team, but also with our customers so that we come back to a normalization of the customer ordering pattern and, therefore, shipment across the year.

Our next question comes from Casey Woodring with 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. So some more color on pricing in the quarter and updated pricing expectations for the year would be helpful. And we'll also be curious to hear your updated thoughts around gross margins and where those could land on the year, just given some of your comments around freight costs and such.

Well, so Casey, broadly in the quarter, and let's talk about this on the gross margin side. And I think the right way to think about it is sequentially. And we talked about -- we talked on the last call about taking the 31.5% gross margin -- adjusted gross margin is a jumping off point to think about to think about this year. And on a total company basis, you really had the decrementals on volume offset by pricing actions that came from the beginning of the year. And then you have other puts and takes with with freight and et cetera, there. We saw somewhat better performance there. We like that. We believe that will continue to grind up during the year. on a full year-over-year basis, price cost spread was negative. Again, that's due to the VWR margin reset we saw beginning in the second half of of last year, but we like to set up for that. We like the execution, and then we believe you'll see a grinding up certainly into Q2. And then we're not being more specific about the back half of the year. But certainly, our guide is predicated on that gross margin improvement.

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. And I guess the guide does imply a pretty big step-up moving forward. So maybe just walk through how you plan on getting there, the puts and takes? And any sense for just phasing and how back-end loaded that range is?

Yes. No, certainly, Casey. So we noted that it was consistent with our expectations. Our guide is before restructuring expenses. So then it was around $40 million when you exclude restructuring expenses, we cited the significant prebate. If we had not had the significant prepay in the quarter, we would have looked a lot more like last year, and then we would expect a similar sort of 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 or otherwise, it drove it different way. So really, the story in the quarter on the relative was the prebate as well as on the absolute -- on the year-over-year lower earnings. And again, that will -- it's not unusual for Q1 to be lower on a seasonal basis, and then you'll see strong continued sequential improvement, which you've seen from us.

The next question comes from Brandon Couillard with 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 U.S. in the quarter. I guess 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 they just lost revenue in general?

Just on the weather, I think what we were saying is it did impact. But fortunately, the team works very well and finished to deliver what we were expected. So VWR in Q1 was really spot on in terms of our expectations. So again, another confidence about the team capable of being flexible and really make it works. So that's the comment. On Europe, I think there is some softness in particular in the industry in Germany and in a couple of areas like this. Also, I think remember that in Europe, we are very proud of being the largest distributor there. And so it's the places where the market is when you are the #1 always impact you a bit more than anybody else. I think there is Look, it's an area where we didn't have a leader for a long time there. I think we have [ Christophe ] now, which is really taking care of that. We did some reorganization and the team is reverted right now. And so that's where it's -- we have confidence in the second half in Europe as well.

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 kind of, I guess, 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?

Brandon, let me start just a quick comment on the contract and then I'll let Brent and Steve answer for the rest. We tested that during COVID and post-COVID inflation. I don't know if you remember. So we have a tool in place for surcharge it's working well in some area, in geographical area -- other geographical area, it's a bit more difficult. But we are looking at the success story that we had post-COVID when we had huge inflation, and we are just putting a team in place to make sure that we reproduce that and not only one geography, but across the entire territory. So the answer is, yes, maybe not every contract but a huge majority [Technical Difficulty] potential headwind we see in the year related to the Middle East conflict that we're carefully watching that situation and estimating the impact that it could have on our operating income. And like Emmanuel said, we are monitoring weekly and looking for every opportunity to mitigate that impact on our results, the best we can.

Brandon, I'd just add, you coined a phrase known unknowns there. I suspect -- I don't know if we can never know an unknown. We certainly thought very deeply about this. So we think we've identified that appropriately.

The next question comes from Matt Larew with William Blair.

I wanted to ask about the bioprocess portfolio. You referenced BMP as a category in down slightly in and then improving in the back half. Many of the bioprocessing peers, I think, at this point are closer to normalized growth in the high single digits. So Emmanuel, just curious if you think on a on a long-term basis as is now a chance to really review the business if this is a portfolio that you think can grow kind of at that market rates and maybe how long you think it will take to get back there?

Yes. No doubt. Look, the BMP negative growth into Q2 that we are anticipated. And for that segment to be at the bottom is mostly due to what we talk about the seasonality and the speed static purchasing that we've seen, in particular into serum and new sale last year, all right? So it's a really what is the core of that segment, which is processed chemical. We've seen double-digit in process chemicals in Q1 and in revenue, but also in order, a positive book-to-bill. We think that the market is 6%, 7%, like our peers looked at it, and we are really pushing the team to make sure that we are growing at market or even above market for the rest of the year. Again, the focus that we've done on Revival around commercial intensity as well as operation, give us confidence that we'll go back in the second half of the year to grow on both segments. And we're getting -- every day, we're getting more optimistic about the business.

That's great. And then Emmanuel, you joined last July. And so then there almost a year, you referenced the 25% of kind of top leaders changing the number of folks that you've brought in from other companies. In response to Catherine's question, you've been out to most of the facilities. I guess where would you assess in terms of the structural kind of personnel changes that you would like to make the -- any kind of accidents you wanted to implement and get going? Where would you say you're at in terms of getting that started and really ready for the company to jump off versus additional structural changes that you think need to be made to position the company?

And this is a very good question. Let me first because I like to be precise. I joined mid-August exactly. So it's not yet a year, right? It may be more time to celebrate my anniversary. But I'm super the about, first of all, the reaction of the team internally, all right? We have some really good talent internally. There's absolutely no doubt. And what we are trying to do is just buying this internal talent with additional external talent. Some of the roles that we've shared today and that are in that early slide, a role that we have created, that we didn't have in the past, okay? And so I think where I am today, well, look at need a strong right-hand person and the CFO search is on its way, someone that can really be a partner to really continue to push and execute revival. But I will say, generally speaking, at my anniversary. So in a couple of more months, I think we will be almost there. We will announce soon some additional executive member that we should be able to position a couple of weeks to share with you around [indiscernible] and CIO, and I think we will be there. Nevertheless, let me just say one more thing. Talent is always something which is very dynamic as well, okay? And what we are trying to do is to make sure that we do not lose the talent that we have as well. But this is always something very dynamic. And I think we are constantly making sure that we are motivating our talent. And one of the things that we're doing in revival around simplification is also about changing the delegation of authority to make sure that we empower the right people to make the right decision at the right place, at the place of impact as close as possible to the business. And I think, again, this is something that the team is reacting very quickly and very nicely. And I think the first quarter, we're pretty happy with our results, and we are very optimistic about the rest of the year.

The next question comes from Michael Ryskin with Bank of America.

Great. I've got a couple of minor ones I'm going to throw in. First, you alluded to prebates a number of times. Just wondering if you could expand on that, just sort of the magnitude of it in the quarter, was that unusual for 1Q? Just sort of the impact that had on numbers is how to think about that going forward?

Yes, Michael, it's Brent. So 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, that had very significant. We're not specifically quantifying it, but it had a very significant impact on the cash flow let's also be clear. It was anticipated. It was expected in our guidance as expected and how our cadence was going to get.

Michael, I will also look at it in a sense that if you do not renew and do not win contract, you don't have prebate. So we'll look at it as well as a positive.

Okay. Okay. And then on the VWR business, I hear your comments about 1Q. You expect that to be the organic low point, and you talked about some improvement in 2Q and beyond. You've got easier comps in the second half. But still, you did post a negative 5% organic trend on a negative 3% comp. So could you just talk about share dynamics, share gains, share losses, maybe touching on the prebates and the enterprise customers there? Just confidence that, that's really stabilized and is going to be less and less of an issue going forward?

So we talked about last year, we had some share loss. I think I explained as well that you don't lose share at a one-off, all right? It's a headwind that gone month after month, it takes time for our competitors to convert the loss that -- the win that they had, which is more or less on paper at the very beginning. And this is where we are. We are, first of all, on a seasonal low quarter. We are at the tail of those losses. And we talked also about the fact that last year, we renewed contract, we renew contract with opportunity to grow license to go hand. And this is what we are doing. We're happy about what's going on right now. And so we have that tangible point, which is stabilization, stabilization of our commercial activity we win contracts, we renew contracts. We lost some contracts. We lost some share within a contract. The customer gave us a certain share of wallet. There's a huge dynamic here. But what I can tell you is we are stabilizing. And that's the most important thing. It's a stabilization. And as we are moving into the second half of the year, we have an easy comp. And that is because we are stabilizing because we are taking the action that we are taking in particular in e-commerce that we are confident about the fact that Q1 is the bottom.

Okay. Okay. If I could squeeze in one small follow-up. To Patrick's question, I think you pushed you on 2Q organic and margins. I want to make sure I understand the margin cadence properly. It sounds like you're pointing to some gradual improvement through the year, including on the gross margin on just looking at prior seasonality that seems to go against that. Is there anything unusual in gross margin that I'm missing for this year that would explain that?

Yes, Michael, I think we're coming up sort of the rebate for the company. We have significant revival productivity initiatives. There's always the noise of mix within that. And we're also not pointing to heroic improvement in that, just the kind of classic revival productivity and other things along with along with just better top line to better absorption against it.

The next question comes from Dan Arias with Stifel.

Brent, just curious how much of the plastic ware portfolio within VWR is yours versus OEM? I ask as I'm just sort of thinking about oil sensitivity and resident put cost, trying to understand how much you have control when it comes to managing inflation just versus sort of being at the mercy of whatever the OEM provider decides to do on price, et cetera?

Dan, Emmanuel here. We have a huge portfolio, and I don't have the data. I don't think -- I'm looking at Brent right now. I don't think we have the data in front of us. So I apologize, this is something that we can follow up. What I can just reinsure is we have also a new sourcing leaders in in VWR and Emilia is really leading that. So Emilia and Keith are really working hand to hand in the task force to make sure that we are controlling and making sure that we are negotiating best deal we can and passing through the increase we manage to see.

Okay. Fair enough. Maybe just sort of looking ahead a little bit and thinking about 2027, which I know is a long ways away, but are you -- does the operational improvement that you feel like you have confidence in right now? Does that give you confidence that EBITDA margins will be up next year?

Let me answer in 2 parts. First of all, let me echo comments from over already it is April '26. It's a bit premature to talk about '27. And I just want to reiterate what I said in the past. I take my comments very seriously. And for me, it is just too early to put a detailed take in the ground. However, and saying said that, I'd like to make a few more observations on the future. look, today, we are pleased with our Q1. We are looking into a second half of the year, which is going to be positive, and we are optimistic about that. Revival is having an impact, and I'm confident that Revival for the rest of the year will have a greater impact. And so we feel that we will exit 2026. And by the end of the year, I think as well that we will have more capital deployment flexibility a higher level of confidence across the organization and revival is going to accelerate to have an impact on the entire organization around commercial, team around operational, team around the rest of the support functions. And so all what I see today over the last 9 months almost, give me confidence, and I am optimistic that 2027 will be a growth year.

Operator, we have time for one more question, please.

Our final question today comes from the line of Dan Brennan with TD Cohen.

Great. Maybe just on the distribution business. Could you just zoom out and talk to what you're seeing in kind of the broader market? There's a lot of uncertainty, what's happening with pharma spending certainly in the U.S. academic government trends. I'm just wondering versus what you're delivering, kind of how is the broader market doing? And then related to that, like are you guys assuming positive price in the back half of the year?

Do you want to answer the price for the back of the year? I'm sorry, Dan, we have very modest price baked into our plan here.

And then I think from an overall market -- yes, sorry, from an overall market, I would say what I just said 3 months ago, I think we are where we are academic and government stable, maybe at a low level. Education is a question mark. Education segment is a question mark. There's pocket in Europe, as we discussed about that include industrial that are really struggled given the macroeconomic environment. There are geography differences. And again, we are in so many different segments, including mining and pharma. Look, we are thinking that from us, and that's very important, we are stabilizing. The team is motivated. We are implementing the plan that we have, in particular in digital. We're super happy to have our new Chief Digital Officer, [ Jim Finn ] and that will really help us to think that the market is probably at a low single digit, and we will be back to growth in second half. I think this is where we are today. And of course, we will continue to monitor the macro environment on this.

Maybe just a final one. I know you called out that material headwind in Q2 from the BMP across those different businesses. Is there any more sounds like it's idiosyncratic very company-specific, but you've got -- it's pretty big. So could you provide any more color on that, like the [indiscernible]? And then it sounds like Brent that current materials is a headwind in the back half of the year. Sorry, if I missed in prior calls, you got to discuss those. But any additional color you can provide on those would be helpful.

Well, look, Dan, I think we've talked about it broadly where it comes as a headwind. But in in the first half of last year due to some timing, both customer orders and our fulfillment, you saw very, very strong performance in new sale. Now that also has very strong margin contribution. That becomes -- that's a headwind right now. You also saw a very strong performance in serum. Then in the back half of the year, we saw exceptional performance in the EM business particularly in Q3. So new sale we talked about discretely, but for the research and specialty chemicals piece of it, that EM and serum just provides a headwind in the front half in the back half to just make the segment comps more difficult. So that's why you see us calling out specifically how we're doing process chemicals and other pieces there. So they're unburdened by those comp pieces, and I continue to point you all to the sequential performance we have in these through the year, moving away from the pieces on the comps.

All right. Thank you, Steve. Thank you, Brent. Thank you, everybody, on the call to joining us today. We moved the company for 1 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. And until then, be well, everyone. Thank you.