Good morning. My name is Emily, and I'll be your conference operator today. At this time, I would like to welcome everyone to Avantor's First Quarter 2024 Earnings Results Conference Call. [Operator Instructions] I will now turn the call over to Christina Jones, Vice President of Investor Relations. Ms. Jones, you may begin the conference. .

Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Brent Jones, Executive Vice President and Chief Financial Officer. .

The press release and a presentation accompanying this call are available on our Investor Relations website at ir.avantorsciences.com. A replay of this webcast will also be made available on our website after the call. Following our prepared remarks, we will open the line for questions. .

During this call, we will be making forward-looking statements within the meaning of the U.S. Federal Securities Laws, including statements regarding events or developments that we believe or anticipate may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of the date that they are made.

We do not assume any obligation to update these forward-looking statements as a result of new information, future events or other developments. .

This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the press release and in the supplemental disclosure package on our Investor Relations website.

As a reminder, on January 1, 2024, we transitioned from our former regional segment structure to 2 global operating segments, Laboratory Solutions and Bioscience Production. Our Q1 2024 results are presented on this basis. With that, I will now turn the call over to Michael. .

Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on Slide 3. The year is off to a good start as we delivered first quarter revenue in line with our guidance, with reported revenue of $1.68 billion and organic growth of minus 6.3%. As anticipated, market conditions remained similar to the fourth quarter.

Our team continues to execute well, as evidenced by our margin and profitability outperformance with adjusted EBITDA margin of 16.8% and adjusted EPS of $0.22. .

As Brent will outline in his section, our margins were driven by pricing, favorable product mix, disciplined cost management and accelerated realization of savings from our multiyear cost transformation initiative. .

We also generated $107 million of free cash flow in the quarter. Consistent with our current capital allocation priorities, we paid down approximately $170 million of debt and continue to target an adjusted net leverage ratio below 3x. .

As CJ noted, our new operating model became effective in January. Our new business segments enhance our focus on customers' needs in the lab and production environments, positions us for accelerated long-term growth and unlocks significant operating efficiencies.

We are early in our journey, but are out of the gate strong and are already realizing benefits from the new model. .

During the first quarter, we aligned our organization with the new business segments and initiated several work streams to optimize the Avantor customer experience.

Our commercial intensity and the relevance of our workflow solutions resulted in multiple competitive wins and contract renewals with biopharma, health care and education and government customers. .

As part of our innovation strategy, we enhanced our offerings for cell engineering, gene therapy and synthetic biology applications through supplier partnerships and proprietary innovation.

We are seeing strong customer response to recent proprietary new product introductions, including our Viral Inactivation solutions launched earlier this year and our integrated mixing systems and fluid handling assemblies, which are delivering critical efficiency and quality improvements to our bioprocessing customers.

We also advanced our multiyear cost transformation initiative, including footprint optimization, organizational efficiency, go-to-market and procurement savings. .

Our disciplined execution enabled us to accelerate the realization on some savings into the first quarter, contributing to our margin and profitability outperformance. We continue to be encouraged by the positive trends we are seeing in our end markets. .

In Laboratory Solutions, biotech funding is improving, and our large pharma customers are engaging with us on new projects that are driving an increase in our commercial opportunity funnel. Core diagnostic testing has returned to growth, and QA/QC workflows in the applied markets have been relatively stable.

Additionally, internal and external surveys suggest that inventory health continues to improve. Collectively, these factors resulted in a sequential increase in sales of our consumables and chemicals offerings, both key drivers of our long-term growth. .

In Bioscience Production, the bioprocessing end market remains healthy with a robust pipeline of new therapies, a favorable regulatory landscape, including 3 new cell and gene therapy approvals in the quarter and strong patient demand. Importantly, we saw another quarter of sequential improvement in our bioprocessing order rate.

Within health care, medical implant procedure rates continue to be positive, and overall demand within the semiconductor end market has rebounded from the lows we experienced in 2023.

Consistent with our in-line revenue performance in the quarter, these encouraging market signals have not yet translated into an inflection in aggregate sales levels as pockets of inventory destocking and cautious customer spending, notably in equipment and instrumentation, continue to impact demand.

We believe our current approach to guidance, which assumes a continuation of current market conditions, is appropriate, and we are reaffirming our full year outlook. Should a meaningful market recovery take place within the year, that would present upside to our guidance. .

Before I turn it over to Brent, I'd like to share a few takeaways from the quarter which show that our model is working.

First, momentum in our consumables portfolio, representing the vast majority of our revenue, largely offset industry-wide weakness in capital-driven equipment and instrumentation sales and translated to outperformance in margins and EPS.

Second, our bioprocessing offerings are strategically positioned to benefit from attractive end market fundamentals, and we outperformed our bioprocessing guidance and realized another sequential step up in bioprocessing orders. .

Finally, we are taking action to strengthen performance and drive productivity. We made meaningful progress in transforming our operating model, and we are ahead of plan on our cost transformation initiative. With that, I'll now turn it over to Brent to walk you through our Q1 results in more detail. .

Thank you, Michael, and good morning, everyone. I'm starting with the numbers on Slide 4. Reported revenue was $1.68 billion for the quarter, declining 6.3% on an organic basis. In our Laboratory Solutions segment, sales trends were generally similar to the fourth quarter levels.

We are seeing nice momentum in consumables and chemicals, offset by softer-than-expected demand for equipment and instrumentation. Our Bioscience Production segment performed modestly ahead of expectations, driven by upside in bioprocessing and biomaterials. .

Adjusted gross profit for the quarter was $572 million, and adjusted gross margin was 34%. Year-over-year, our adjusted gross profit was impacted by lower sales volume and unfavorable product mix, partially offset by productivity. Adjusted gross margin improved nicely on a sequential basis.

This was largely due to pricing and the positive mix impact from strength in higher-margin consumables and weakness in lower-margin equipment and instrumentation. Adjusted EBITDA was $283 million, and adjusted EBITDA margin was 16.8%. Adjusted operating income was $258 million at a 15.4% margin.

Year-over-year, our adjusted EBITDA and adjusted operating income performance were impacted by lower sales volumes and unfavorable mix. .

While adjusted EBITDA and adjusted operating income were down sequentially, primarily from the reset of incentive compensation, our margins were well above our expectations. This outperformance was driven by better-than-expected mix and the accelerated impact of certain cost transformation initiatives up and down the P&L.

Net interest expense and adjusted tax expense were in line with our expectations, resulting in adjusted earnings per share above expectations at $0.22 for the quarter. .

Moving to free cash flow. We generated $107 million in the quarter. Our free cash flow performance was impacted by costs associated with our cost transformation initiative. Our adjusted net leverage ended the quarter at 4x adjusted EBITDA. The slight uptick in leverage was driven by a reduction in our trailing 12 months adjusted EBITDA.

As Michael noted, we remain focused on deleveraging and paid down approximately $170 million of debt in the quarter. .

In April, we favorably repriced about $770 million of term loans, reflecting a supportive financing market and strong demand for our debt. Slide 5 outlines our segment performance. Launching our 2 new segments has been a critical strategic move to sharpen our focus on accelerating growth and streamlining organizational accountability.

It also has the benefit of unlocking significant cost savings. .

In Laboratory Solutions, which represents roughly 2/3 of our revenue, we provide an industry-leading platform of products, services and digital solutions to support our customers' research, diagnostic and QC workflows. Laboratory Solutions revenue was $1.16 billion for the quarter, declining approximately 4.5% versus prior year on an organic basis.

Our consumables and chemicals, both proprietary and third-party, showed sequential growth, performing better than our expectations. However, momentum in these categories was offset by lower equipment and instrumentation sales in each of our end markets. .

Adjusted operating income for Laboratory Solutions was $148 million for the quarter, representing a 12.8% margin. Year-over-year adjusted operating income decline was driven by negative sales volume.

Sequentially, we saw a favorable mix due to strength in higher-margin consumables and chemicals and weakness in lower-margin equipment and instrumentation. However, despite the mix impacts on gross profit, adjusted operating income declined due to the impact of our annual incentive compensation reset.

This expense increase was partially offset by savings from our cost transformation initiative. .

Our Bioscience Production segment represents about 1/3 of our revenue and over 45% of our enterprise profitability.

This business supports customers' production platforms by providing high-purity process ingredients and single-use solutions for bioprocessing, ultra-high purity silicone formulations for medical implants and custom solutions for semiconductor and advanced technology applications.

Bioscience Production revenue was $523 million, representing an organic decline of approximately 10% and slightly ahead of our expectations for the quarter. Bioprocessing was down low teens on an organic basis versus our expectations of down mid-teens. .

Adjusted operating income for Bioscience Production was $127 million for the quarter, representing a 24.3% margin. Year-over-year adjusted operating income declined as a result of lower sales volume.

On a sequential basis, despite revenue performance exceeding our expectations and solid mix, adjusted operating income declined modestly, driven by the expense side. .

Like laboratory Solutions, this was largely due to our incentive compensation reset. However, these expense accruals were partially offset by savings from our cost transformation initiative. Altogether, a solid quarter in both segments. .

Moving to the next slide. Slide 6 shows our full year 2024 guidance. As referenced throughout the call today, we see encouraging signs in our end markets. However, it is still early in the year, and the operating environment remains dynamic.

As Michael indicated, we believe it is prudent to base our guidance on the continuation of current market conditions, and we are reaffirming our full year guidance as outlined last quarter. This includes organic revenue growth of negative 2% to plus 1%, adjusted EBITDA margin of 17.4% to 17.9% and adjusted EPS of $0.96 to $1.04.

We also expect free cash flow performance of $600 million to $650 million, excluding any cash costs associated with our cost transformation initiative. .

On a segment basis, we expect low single-digit growth in Laboratory Solutions and a mid-single-digit decline in Bioscience Production. A couple of comments on phasing. As laid out at the beginning of the year, we expect to generate 49% of our full year revenue in the first half and 51% in the second half.

This leads to Q2 organic revenue growth of approximately negative 3.5% to negative 1.5%. The modest sequential increase in reported revenue dollars as we progress through the year is driven by pricing phasing, lot of seasonality, timing of known orders and nominal billing day adjustments. .

In terms of profitability, we expect our Q2 gross margin percentage to be similar to Q1. Adjusted EBITDA margin should improve by about 25 to 50 basis points sequentially, driven by the impact of our cost transformation initiative.

Our ability to accelerate our transformation savings into the first quarter flattens the margin ramp needed to achieve our full year plan. We are executing well against the transformation plan, evidenced by the nice pull forward of savings into Q1. We are solidly on track to achieve at least $75 million of in-year savings in 2024. .

With that, I will turn the call back to Michael. .

Thank you, Brent. With our new operating model in place, we are well positioned to realize accelerated long-term growth and unlock significant operating efficiencies.

We are seeing the benefits of our new business segments in driving commercial momentum with our research and production customers, as well as enhancing our operational rigor and forecasting. .

I am pleased with the progress we've made on our multiyear cost transformation initiative. We are ahead of plan and are already seeing the impact in our cost structure and margins. As the market recovers, we'll be well positioned to enhance the conversion of top line growth to improve bottom line profitability.

I'd like to close by thanking our Avantor associates for their steadfast dedication to serving our customers and to creating a better, healthier world. Their contributions enabled us to make meaningful progress on our business transformation and deliver on our operating plan.

I will now turn it over to the operator to begin the question-and-answer portion of our call. .

Thank you. [Operator Instructions] Our first question today comes from the line of Michael Ryskin with Bank of America. .

Great. Michael, I want to start with one for you if I could. You talked throughout the call about consistent market conditions, no real change there. But you also did call out some encouraging market signals that just haven't translated to sales yet. When we think about Avantor, we typically think of it as being a relatively fast order cycle.

So could you just help us understand, if the market signals do start to flow through, if the market conditions do improve, sort of like what's the lag between when you start seeing that and when it starts shows up in the revenues? And obviously, there could be differences between different end markets, maybe touch on some bioprocessing, anything else?.

Yes. Michael, thanks for the question. Yes, you're right. We are, as we said in the script, reasonably encouraged by what we're seeing in the marketplace, a lot of the leading indicators, whether it's funding, improvements in order books, particularly in bioprocessing, customer activity, building of pipelines, approvals of new drugs.

I think there was even another approval this morning coming out of the pipeline. So a lot to like about the setup for our end markets. .

Our -- we do have a relatively short order cycle business model, as we've talked about previously. Within our Lab Solutions segment, it's more of a book and ship type of business. So we kind of take orders real time and would anticipate shipping those typically within a 24- to 48-hour period.

So as these signals translate into increase in orders and ultimately into revenue, we'll see that pretty much real time. .

Our Bioscience Production segment tends to be driven by a little bit longer lead times that have normalized post the pandemic. We're, on average, probably 2 to 3 months out in terms of being able to satisfy a customer order there. And so we'll see that inside of a quarter at most, maybe with a 1-quarter lag. .

That's really helpful. And then a quick follow-up. You did call out in Lab Solutions, a little bit of pressure on equipment and instrumentation. I realize it's a very small part of your overall mix.

But anything specific you can touch on there, whether it's a big pharma or biotech that's still a little bit lagging? And just there, you would have a little bit better visibility.

So do you think that's just the timing thing to start the year? Or is that budget still be constrained?.

So I'd probably highlight a couple of things here, Michael. Firstly, as you suggest, E&I for us is a relatively modest part of the business. About 15% of our overall revenue, a little bit more pronounced in our Lab Solutions segment.

We are seeing an industry-wide pressures for purchase of equipment and instrument driven by project delays and extended times to get projects approved and a little bit more cautious approach to just getting capital-related purchasing items and approved real time here. .

So it was a slow start to the year in that, which isn't unusual coming out of year-end, where folks will typically try to buy ahead for some of their demand. But unlike a normal year where you'd see that kind of pick up as you move through the quarter, we didn't really see that acceleration.

And so unlike the momentum that we saw in our consumables portfolio, where both in consumables and chemicals, both in both of our segments, where we saw a nice acceleration coming from Q4 to Q1, we didn't really see that in the E&I piece.

I'd probably say it's probably most notably in biopharma is where we see it, but we probably look at it across all of our end markets at some level. .

The next question comes from Dan Leonard with UBS. .

I have a follow-up on that last question. Michael, possible you could frame the magnitude of the decline in E&I in the quarter? And I ask because it's not a big part of your business, but it seems to have fully offset the outperformance in recurring within your Lab business specifically. .

Yes. I guess I'd say probably a couple of things to maybe leave some tracks for you on that.

If I look at our Bioscience Production segment, as an example, you saw the modest outperformance that we -- that we drove there, reflecting a bit of momentum in bioprocessing and certainly our biomaterials business, our electronics business has recovered from the lows that we experienced in '23.

But again, it was somewhat modest, but encouraging nonetheless, but nothing that we would consider to be an inflection point. And we have relatively modest equipment and instrumentation exposure in that segment. .

Now if I look at the Lab Solutions segment, by comparison, we have a bit more exposure there. It's probably on the order of 20% of the revenues or thereabouts would be in the equipment and instrument space. So reasonably meaningful.

We did see similar upside to our consumables and chemicals growth is what we saw in the -- in our production segment that was basically fully offset by the sequential weakness in the E&I. So although we are a consumables-driven business, roughly 15% of our overall sales are linked to equipment and instrumentation.

So weakness certainly does get reflected. Fortunately, with the consumables portfolio and the higher margins that are associated with that part of the portfolio, you see the impact on mix.

And as I highlighted in my script, we really focus here on the consumables business, and I'm quite encouraged by a, not only the momentum on the top line, but the flow-through of that to margins on the bottom line, and you see that helping with some of the outperformance on the margin line. .

Appreciate that. And then as a follow-up, you mentioned that bioprocessing is doing a bit better, but not yet an inflection.

I was hoping you could elaborate on the performance of any of the leading indicator product categories within bioprocessing and what they're telling you?.

So we are quite encouraged to see a second straight quarter here of sequential improvement in bioprocessing order book trends. And maybe adding to our encouragement here is we saw the pace of step-up here accelerate in Q1 even a bit more than what we saw in Q4. And it's widespread.

We're seeing it both in the process ingredients, excipients part of our business as well as encouraging in our single-use platform. We've talked over recent quarters a fair bit about the pickup in engineering activity, which is certainly historically a nice leading indicator for our single-use business. Hadn't yet translated into an order book.

It feels like we're starting to see that start to translate quite nicely. And it's -- with large pharma, with CDMOs, and so we like how broad the pickup appears to be at the moment. .

But to your point, and consistent with what we've said and how we've guided, we've not yet realized that pickup in the order book in a meaningful change in our sales trends. And so our guidance reflects a continuation of current conditions. But certainly, a couple of straight quarters here where we're pretty encouraged. .

The next question comes from Dan Brennan with TD Cowen. .

Great. Michael, maybe just on the Lab Solutions business since that came in a bit weaker here.

Just, can you discuss kind of how the quarter played out? Any -- versus expectations kind of what trended a little bit lighter than what you expected and what gives you confidence in kind of the full year there?.

Yes. So I think we called for roughly low single-digit decline in the quarter. It came out maybe a point or so weaker than that, really all on the back of the E&I trends that we've discussed here in the call and in the early questions.

The 80% of that segment, that's consumables, chemicals, services actually performed better than our expectations, and we're starting to see some nice acceleration there, which I think is reflective of the destocking trends that we're seeing and the -- the improvement of inventory health as well as just a good indicator of funding and activity levels, engagement with our customers across the board.

So the two largely offset one another. But yes, the weakness there was really driven by a continued cautious approach to capital purchase spending there in the equipment and instrument category. .

And then maybe a follow-up for Brent. Just in terms of the nice progress on the cost saves and the nice margins in the quarter. You guys have maintained in the full year guide.

Just walk through a little bit of like what drove the upside in the quarter there? And did that give you potential upside bias to how you think the full year plays out?.

organizational efficiency, footprint optimization, go-to-market and procurement. Unsurprisingly, given that they're sort of shorter cycle in actions, we outperformed on the organizational efficiency and the procurement side there.

A lot of this is frankly unlocked by the new segment structure, which really allows us to get the efficiencies of the new model. And frankly, that also drove to the procurement piece of it. .

In terms of the look on the full year there, we are gratified with a strong start. We worked really hard at that, and we're going to continue. But it's early in the year and there are a lot of moving pieces. So I think let's hold at $75 million is a good assumption for the year.

But if we get acceleration, certainly the next time we talk to you, we'll let you know. .

The next question comes from Luke Sergott with Barclays. .

Just wanted to follow up on that last question. And -- so when we're thinking about the pacing of the cost out structure across the margins for the rest of the year, can you help give us a little help on the modeling side and then by segment? And then the blend there between the gross margin and operating -- and SG&A. .

Luke, I think that's 7 questions, but I'll -- I'll do my best. So yes, so on the progression there, again, nice outperformance in transformation in Q1. We'll see a meaningful uptick from transformation saves in Q2 and then that will increase somewhat ratably in Q3 and Q4.

Unsurprisingly, just due to the timing of actions, particularly on org efficiency, but as well as procurement and the others..

Now we do, starting in Q2, have merit coming in, so that's not a material headwind against it. So you won't see a dramatic change in the SG&A line in Q2. You will see some goodness with additional actions then in the back half of the year. We're not breaking the transformation down really by segment here.

It's unlocked by that, but we're not going to make external comments there. But then it just -- that will lead to kind of as you get that ratable improvement there as well as -- as you get that ratable improvement there, that will just nicely lift EBITDA margin there when you do the math on keeping the full year guide.

And we really expect gross margins to be pretty consistent based on what we're seeing. So you manage those together, I would think of that in a pretty linear basis, honestly, for how the year lays out. .

All right. That's helpful.

And then so on the BIOSECURE Act, what are you guys hearing from your customer -- CDMO customers on that side? And then any exposure to [ Wuxi ] and that complex that might provide some near-term disruption? Or how are you guys thinking about that?.

Yes. Luke, we obviously are monitoring the developments with that legislation pretty closely. Obviously, the final details are -- still be determined, and we're not in any better position than anybody else probably to, to try to anticipate where that's going to land and how it ultimately gets implemented.

But what I would say is, we benefit from a global presence and certainly are well positioned to support our customers through our collaboration model to ensure that we can help them through whatever implications of that act might mean for them. .

We don't anticipate any particular meaningful at an aggregate level for us. We don't have a lot of exposure into China specifically. And then on the -- maybe on the U.S. side, we're obviously well positioned with both CDMOs as well as the OEMs.

And so I think from our perspective, there -- you can end up to see some puts and takes between specific accounts. But as deeply as embedded we are across this space. I think we view us as a solution provider here that will be able to help our customers with any implications here. .

The next question comes from the line of Vijay Kumar with Evercore ISI. .

I guess my first question, Michael, on consumables. I think you said improved sequentially. Can you split that out between bioprocessing and Lab Solutions? Were consumables up in both segments sequentially? Was it flattish? I think on the order side for bioprocessing, you didn't mention sequential growth.

Could you quantify that with book-to-bill, perhaps north of 1?.

Yes. Let me take the 2 questions there. So consumables are pervasive across both segments, as you noted. And encouragingly, we saw sequential improvement in both segments. We probably have less than, I don't know, 5% of our revenues in our production segment, our equipment and instruments. And so that's largely a consumables play for us in that segment.

And you saw the modest beat to expectations there, and that's all linked to the consumables trends that we did see. And similarly, although a bit more equipment and instrument exposure on the Lab segment, we saw a similar upside from the consumables part of that business as well. .

So again, I think that speaks to just the power of our model. I indicated in my remarks that I think this quarter is actually a really good illustration of how our model is working.

Where you see the activity levels, inventory health improving, leading to stronger pull-through of our core portfolio here, which are bringing the higher margins with it, which led to better mix in the quarter and the higher margins as you see. So really like how the model worked in the quarter. .

Relative to your second question there around the impact of the -- some of the insights there on our power processing order book, I don't think we've historically discussed a book-to-bill. We don't find that to be particularly meaningful in our business. But what I can say is we're now a couple of straight quarters here of sequential improvement.

The acceleration of the improvement that we saw in Q1 was actually even a bit more than what we saw in Q4. So the rate does seem to be picking up some momentum here. It's broad-based.

It's across not only our chemicals process ingredients, excipients, categories, but also across our single-use platform, which, as I said before, we think is maybe the first sign that all the engineering drawing activity we discussed last year is now starting to work its way through the pipeline. .

We've talked a lot in these forms, Vijay, about our best-in-class bioprocessing performance, both in terms of absolute revenue performance. And we think with the performance in this quarter, we were as good, better than anybody out there. And I think you could probably say the same about the order book trends that we saw.

I mean, obviously, we're looking at a lot of the same things that you are. And I would say we're very pleased with the development of our order book. And I think you could be safe in assuming that it was as good, if not better, than anything that you've seen reported so far. .

That's very helpful, Michael. Maybe one more on instrumentation.

Anything on phasing, Michael, in the quarter on instrumentation? Were there any days impact or holiday impact, Easter, et cetera? I'm just trying to think instrument was down consistently throughout or anything happened late in the quarter?.

The only thing meaningful intra quarter dynamic that I would point out was we got off to a slow start in the year for equipment and instruments, which wasn't such a huge surprise.

That's not unusual, coming into a new year, folks are -- had satisfied probably a lot of their near-term needs at year-end using whatever budget they had, getting budget set for the coming year. What you normally then see though is a pickup in acceleration as you move through the quarter. We didn't see it. It was weak all quarter, as it turned out.

So that's probably the only intra-quarter dynamic that I would highlight for you. .

The next question comes from Jack Meehan with Nephron Research. .

Thank you. Good morning. Michael, could you talk a little bit about the academic end market? It looks like it took a little bit of a step back with the low single-digit decline. I heard some -- probably similar to what we're seeing in others.

But can you just talk about what you're seeing in terms of marketing conditions there?.

I'd say a couple of things, Jack. Firstly, you're right. We were down, I think, low single digits in aggregate for that education and government end market.

Probably the more important part for us and consistent with what we've been seeing actually over the last several quarters in 2023 was our ongoing share wins and momentum in large academic institutions. And despite the end market overall for education and government being down, our large academic customers were up again in the quarter.

So continued momentum and nice activity levels, and that's -- I highlighted in my prepared remarks some of the customer wins, renewals and share gains. Certainly, this academic setting, particularly in the U.S., is a large focus for us and pleased to see yet another quarter of growth. .

Great. And then for Brent, can you just lay out for us on the segment level what the expectations are for organic growth in 2Q? I'm trying to tease out like what comps versus kind of recovery as we phase through the year. .

Yes. The -- as we think about Q2 there, as we noted, we expect Lab Solutions to be down low-single digits and BPS to be down sort of low single digit, mid-single digit, which -- and within that, bioprocessing down sort of mid-single digit, high single digit. .

The next question comes from Doug Schenkel with Wolfe Research. .

First, just on geographic trends. Anything you can share across the business, capital versus recurring segment by segment or even specifically for bioprocessing. I think that would be really helpful as we're just thinking about how we update our models for the balance of the year. .

Yes. I don't think we saw anything meaningful to point out between the regions that are probably too helpful, I think the trends in each region were pretty similar. With maybe the 1 caveat in Asia, continued weakness, maybe some early signs of stability in China, but less meaningful for us.

But continued strength in some of the other submarkets within Asia for us in bioprocessing, particularly Korea and Southeast Asia. So that might be the only other trend that I might point out. But I think similar trends between Europe and the Americas. .

I want to come back to the topic of activity. Again, you've talked about some permit and activity levels. It totally makes sense how you're managing screen expectations. It's really prudent coming off of a tough period for the group over the last several quarters.

But in terms of how you're managing the business and keeping in mind internal metrics like corporate goals, are you managing the business with an assumption that the improvement in activity that you described translates into an increase in the need for product support and ultimately, revenue generation in the back half of the year?.

Yes.

I'd say a couple of things about that, Doug, is we're laser-focused on executing our long-term growth strategy, which means we're investing in innovation, new product introductions, strategic marketing, a lot of investments in our digital platform to position our business for sustained long-term growth and to build on our leading position in both of our segments.

When I think about the cost transformation initiative that we're driving, it's a multiyear effort, quite strategic in nature linked to the rollout of our new operating segments, which in a very unique way, do unlock significant efficiencies. .

So these come with investments in capability that strengthen the footprint, investments in technology that allow us to do things a bit more efficiently. So we'll benefit from the savings associated with that in the near term, which is helpful in an environment of maybe a little bit muted volumes.

But there's nothing that we're doing here that prevents us from growing the business as it returns. And when I think about our incentive systems, certainly, there's a bias for delivering upside in both our -- in-year as well as our equity plans. .

Our next question comes from Rachel Vatnsdal with JPMorgan. .

So I want to follow up on Vijay's question around bioprocessing. Great to hear that sequential growth on orders.

So can you actually give us what was the number in terms of sequential growth for this quarter and for last quarter since you said it accelerated in terms of the velocity?.

And can you break out how orders trended by customer type across pharma, biotech and CDMOs? And then specifically on the full year guide, we heard you reiterate the mid-single-digit declines on Bioscience Production, but can you just confirm, are you still expecting the single-digit decline for the full year in bioprocessing as well?.

Yes, a lot to unpack there. You may have to redirect me if I don't respond to each of your questions there, Rachel. But to your first one about the bioprocessing order book, we haven't quantified a book-to-bill or you've gotten too specific about this. I'm not sure we're going to be granular enough to satisfy your needs here.

But we just reiterate again, 2 straight quarters of sequential improvement. The rate of that improvement is increasing in terms of comparative to other numbers that you've seen out there, consistent with how I answered one of the earlier questions.

We do have a best-in-class platform, and that pertains to in-period revenue performance and growth as well as order book. And I'd characterize our order book as best-in-class based on the data points that we've seen that are out there. .

As I think about the full year, while processing did perform a bit better in the quarter, as Brent indicated, on the second quarter we would see bioprocessing moving from kind of a low teens decline in Q1 to something in that mid- to high single-digit declines for the second quarter.

And as you suggest, on a full year basis, I think the right way to model it at this stage would still be a mid-single-digit decline overall, which implies another sequential improvement in Q3 and ultimately, a final improvement there in Q4, primarily driven by just the weaker comparables.

We're -- as we've said before, our guidance assumes relatively similar absolute levels of revenue in each period. And so the step-up in growth rate there is really just driven off of the prior year comparables. .

Great. And then I appreciate we're only a few weeks into the quarter here.

But can you talk to us about the trends that you've been seeing in April so far across Lab Solutions and then Bioscience Production and bioprocessing specifically as well? So has there been anything specifically to call out that shifted relative to exit rates from 1Q and March as well?.

Yes. I'd say we're obviously early in the quarter here, not quite through April yet.

But certainly do follow the business real time and the trends that we're seeing in April, I think, are consistent with our commentary today and certainly reflected in our perspective on how we see Q2 trending, which, again, when I look at the first half, based on what we did in Q1 with what we said we anticipate doing in Q2, we're right in line with where we started the year, which is expectation of roughly 49% of our revenues in the first half, 51% of our revenues in the second half.

And so I think what we're seeing here in April certainly is consistent with the guidance that we've provided you here today. .

Next question comes from Tejas Savant with Morgan Stanley. .

Maybe I'll start on the CDMO side, Michael. I think you sort of alluded to what you see in that end market in China and the fallout from the BIOSECURE Act and so on.

But with the prospect of the degree of consolidation here or M&A rather in the U.S., does that impact your near-term visibility at all in terms of your relationship there with Catalent specifically? Is there a possibility that after a change of ownership there, the terms of that contract might need to be renegotiated?.

Yes. So if you're speaking specifically to Catalent, they've been a great partner to us. We're certainly encouraged by the momentum we have there. And not may be unsurprising to you, just given how pervasive we are in serving this market across the board. Clearly, we'd have a relationship with their potential acquirer here.

And so to the extent that gets done, we look forward to continuing the collaboration with Novo..

When we think about our bioprocessing business, one of the things I really like about it, of course, is that our materials, our ingredients, our buffers are chromatography resins, our single-use solutions are specked into the process and are part of the regulatory filing.

So that's one of the things that makes it rather resilient and quite sticky, and there's certainly nothing from a contractual perspective that has us concern there. .

To expand a little bit and take it beyond just Catalent, though, we don't have much customer concentration in this business. And in fact, it's quite a diversified platform. So we're going to be well exposed across, of course, the OEMs, but also the playing field there for all the CMOs around the world.

And so we're well positioned to support the strategies of our -- the OEMs and the innovation cycles that are in play here.

And as it relates to BIOSECURE and China, it's a little bit of a balloon, any impact that some of those partners may see negatively, presumably will show up somewhere else in the network that we'll be able to help our customers through. So I really like our positioning and setup here. .

Got it. That's great to hear. And then a quick follow-up on the geopolitical side of things outside of China. And it's more of a medium-term question, really.

What are you hearing in terms of governments in Europe starting to push for a greater degree of self-reliance when it comes to their own defense expenditures? They want to have a layer of insulation in place relative to the U.S. election outcomes, et cetera.

Is there a risk here in your mind, if that research budgets there could get crowded out? Not so much in '24, like I said, but more in '25 and beyond?.

Undoubtedly, there's a higher degree of geopolitical tensions around the world, and we follow that closely to see how it impacts the business. But I think specific to your question, at the end of the day, it's our strong conviction that good science gets funded.

And we're quite encouraged by the pipelines and the new modalities and the research that's underway. These pipelines are as full as they've ever been. Things are accelerating through, particularly on cell and gene therapy. .

Again, I mentioned, I think there's been 3 approvals year-to-date. I think there was a fourth one that came through even this morning. And so you see the rate of those things starting to pick up.

So I think history has shown -- and I don't think we've seen anything here in the near-term environment that would cause us to waver on that -- this promising good science that's in flight here is going to get the funding it needs to progress. .

The next question comes from Joshua Waldman with Cleveland Research. .

A couple for you.

First, Brent or Michael, wondering if you could comment on how you think visibility in the business has evolved over the last 90 days? Are you seeing any improvement in regards to the team's ability to forecast sales here in the near or medium term? And then along those lines, can you talk about how or if you're seeing bulk orders come back into the business? And how that impacts your ability to forecast?.

Yes. Thanks, Josh. Good to hear from you. A couple of things I would say about visibility. I think one of the remarks I may have made in my prepared remarks was just some of the early returns we're getting from our new operating model.

And one of those certainly is the operational rigor and improved forecasting that comes from a more simplified and more logical, in my opinion, structure to the business.

It's easier to think about these businesses from a customer needs, research or production, environment, and it certainly aligns better with how our customers think about it as opposed to our historical approach from a geographic standpoint.

So our operating reviews have become a lot more streamlined and a lot more straightforward, which, from our perspective, is certainly a helpful improvement..

A relatively short order cycle business, as I commented earlier. And so I wouldn't say we've seen really any meaningful change in that regard over the last 90 days or so. Our supply chains have largely normalized in both segments. So we're back to pretty healthy levels of service in our Lab segment, which means we can satisfy most orders in a day or 2.

On the production side, we're 2 to 3 months out, which is kind of pre-COVID levels of performance there. So I'd say the visibility is similar. .

Now of course, with the accelerating order book and an improved in building order book here, that gives us a little bit more forward visibility on the production side of the business and certainly more confidence in underwriting the outlooks that we have here, which I think is encouraging. .

Your second question there around how we've seen a return for bulk orders. In our business model, if I think about the ingredients or buffers, excipients, our customers don't typically have the ability to store just elevated levels of product. And so they tend to sync their orders with their production campaigns.

And consistent with kind of the destocking trends that we've seen, that was more prevalent on single-use than it was on the process ingredients for those reasons. And so I would say the size of the orders has been pretty consistent on the process ingredient side. .

And then on the single-use side, I don't know I'd say that we've seen a change in order size. We're certainly starting to see with the orders return, the positive indications of destocking, presumably coming to an end here in the near term and good underlying levels of activity. .

Got it. And then wondering if you could talk a bit more about the pricing and share environment? You commented on contract wins.

Any more context you could provide there? And then do you think you're seeing more account churn than normal this year? So does that pose any risk to pricing as the year plays out? Or would you see it more as a potential opportunity for share and maybe top line outperformance?.

Let me take those in reverse order, maybe talking first about your questions on pricing, and I'll talk about share. On the pricing side, I would say the team has delivered another solid year of execution on this and executing on that playbook.

We expect kind of 1 to 2 points of contribution coming from price that's primarily offsetting the COGS inflation that we are seeing. So pretty close to historical levels of contribution, I would say, coming from price, and I think the teams did a nice job putting that through and not a lot of noise around that at this stage.

We'll see a little bit of a step-up in revenue in the second quarter as those price increases -- we get the full phasing of those in the quarter. So pretty pleased about where we're at from a pricing standpoint, and certainly one of the favorable drivers of margin that we do see. .

Share is a great story for us, and certainly excited to talk about that. On the production side, I think we've got a long-standing track record, particularly in our biomaterials and bioprocessing business of share growth. You typically see us outperforming the broader market on bioprocessing 300 to 400 basis points.

And again, even with the declines we saw in the quarter, I think that performance is as good as you're going to see and certainly, again, best in class. And even if you were to adjust for maybe our more modest exposure to China, I think that's still a true statement. .

On the Lab side, we've talked a lot about our strong focus in the academia world. We continue to see nice growth there, a nice penetration and a lot of new customer wins there, a lot of important contract renewals. That's an end market or a customer segment that historically has been a little bit more open to churn.

I'm not sure we're seeing it any differently now. Maybe we're playing it a bit more aggressively now. But just with the more fixed budget environment and less sensitivity to maybe some of the high regulatory environment that a biopharma customer might have. That is an area that we think that we can continue to be successful with.

So again, another great quarter here of, we think, share expansion in both of our segments. .

We have time for one final question today. And so our next question comes from the line of Patrick Donnelly with Citi. .

Michael, I know on the last call, you talked a little bit about some of the margin pacing and even the exit rate potential this year. I guess with the bioprocessing order improvement, obviously, nice margin flow through on that. The cost savings plan, obviously, Brent talked a lot about just the visibility there.

Can you talk about just the confidence on that margin exit rate and how you are viewing things on that front, given the current trend?.

That's a really good question, Patrick. We've reaffirmed our full year guidance today, which I think does a couple of things for us. One, it shows our confidence in the plan that we have in place.

But with the margin outperformance that we drove in Q1, of course, that has the effect then of derisking the margin ramp that was necessary to hit the full year margin numbers. So I like that. .

Certainly, it's early in the year. Brent talked a bit today about our cost transformation initiative that seems to be ahead of plan. Still a lot of things to get done on that front this year, but we're focused on executing those, and perhaps there'll be some upside as we get further into the year.

But I think it's -- at this stage of where we're at in the calendar, prudent to kind of bank the outperformance in Q1, continue to drive hard on all the initiatives that we have in flight here, and we'll keep you updated as we move through the quarter.

But I think the read for me on this is just a bit of derisking here on being able to deliver that margin target for the full year. .

That's helpful. And just a very quick one. I know we're kind of tight.

But Brent, just on the debt paydown, visibility, leverage exit rate, when you guys love to think about capital deployment getting back in the mix there?.

Yes, sure. Thanks, Patrick. Look, we continue to generate cash very well. We're holding our pre-transformation costs, cash flow guidance for the year. Just -- you do the math on that, it will certainly -- absent a meaningful increase in EBITDA, will certainly be within 2025.

I mean, we're absolutely committed to getting to adjusted net leverage of below 3x. We're certainly doing what we can to accelerate that, but we'll keep posting you every quarter, and we're going to keep diligently grinding down the debt balance. .

Those are all the questions we have time for today. And so this concludes our question-and-answer session. I would now like to turn the call back over to Michael for any concluding remarks. .

Yes. Maybe just a couple of quick comments here. I just would reiterate how well positioned we are here in this environment, particularly with our new operating model. As you can tell from our comments today. We're encouraged by the leading indicators that we're seeing, particularly in the improving order book in bioprocessing.

We're out of the gate strong with our cost transformation initiative. We're able to accelerate some savings into the first quarter here, and I'm pleased with our progress here. So thank you all for joining us today. I certainly look forward to updating you when we meet next. Until then, be well, everyone. .

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