Avantor Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 14, 2024

Key Takeaways

  • Delivered Q4 results at the high end of guidance with a 4.8% core organic revenue decline, 17.5% adjusted EBITDA margin, $0.25 adjusted EPS and generated $725 M of free cash flow enabling ~$850 M of debt paydown.
  • Industry headwinds persisted in Q4 as inventory destocking and cautious customer spending continued, and management provided conservative 2024 guidance assuming current market conditions with no clear inflection point.
  • Started 2024 with a new, customer-focused operating model—Laboratory Solutions and Bioscience Production segments—and released recast historical data to improve transparency and comparability.
  • Launched a multiyear cost savings initiative targeting ~$300 M of annual run-rate savings by end of 2026 (including $75 M in 2024) to boost margins and drive over 90% free cash flow conversion.
  • 2024 guidance assumes organic revenue growth of –2% to +1%, adjusted EBITDA margins of 17.4%–17.9%, adjusted EPS of $0.96–$1.04 and $600 M–$650 M of free cash flow, with upside if a market recovery occurs.
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Earnings Conference Call
Avantor Q4 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

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 4th Quarter 2020 3 Earnings Results Conference Call. I will now turn the call over to Christina Jones, Vice President of Investor Relations. Mrs.

Operator

Jones, you may begin the conference.

Speaker 1

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 the 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.

Speaker 1

Following our prepared remarks, we will open the line for questions. During this call, we will be making some forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward looking statements that we make today. These forward looking statements speak only as of the date that they are made.

Speaker 1

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. At our Investor Day in December, we announced a transformation of our operating model. As of January 1, 2024, we have transitioned from our former regional structure to our 2 new business segments, Laboratory Solutions and Bioscience Production.

Speaker 1

The Q4 of 2023 is our last quarter of reporting based on geographic segments, and we will report business performance under the new structure beginning with Q1 2024 results. In order to assist with comparability and modeling, this morning we released a Form 8 ks with recast historical data following the new segment structure. We have also published an incremental supplemental disclosure package that is also available on our Investor Relations website. With that, I will now turn the call over to Michael.

Speaker 2

Thank you, CJ, and good morning, everyone. I appreciate you joining us today. I'm starting on Slide 3. We delivered 4th quarter business results at the high end of our guidance across all key financial metrics, including a core organic revenue decline of 4.8%, adjusted EBITDA margin of 17.5% and adjusted EPS of $0.25 Our free cash flow conversion was over 120% in the quarter and we delivered approximately $725,000,000 of free cash flow in the year. This exceeded our guidance range and enabled us to pay down approximately $850,000,000 of debt.

Speaker 2

As anticipated, market conditions in the 4th quarter were similar to conditions in recent quarters, as inventory destocking and cautious customer spending continued to impact demand. Despite these industry wide headwinds, we are encouraged by the relative stability we have seen over the past couple of quarters across our end markets. Our continued execution of our growth strategy led to a number of notable accomplishments in the 4th quarter. We won several new customer accounts in biotech and biopharma and our sustained commercial intensity in higher education led to new relationships with multiple renowned academic and medical research institutions. Our focus on providing discovery to delivery solutions drove scope expansion with several biopharma customers, including services and bioprocessing contracts.

Speaker 2

In addition, we renewed multi year agreements with 2 significant semiconductor customers. We also launched innovative new products, including our J. T. Baker viral inactivation solution to address a critical regulatory need in bioprocessing and next generation coatings and custom resins for 3 d printing as a part of our Nucell high purity silicone platform. Additionally, we continue to realize the impact of investments in our digital capabilities.

Speaker 2

For the full year, our multi channel approach resulted in a double digit increase in traffic to our e commerce platform and our inventory manager digital solution drove a double digit increase in product pull through. As a part of our continued commitment to sustainability, we set new science based climate targets and progressed our renewable energy strategy with several solar projects coming online in multiple locations around the world. Looking ahead to 2024, while we do see early signs of a recovery and are encouraged by healthy customer activity levels and a modest improvement in our bioprocessing order book, we have not yet seen a clear inflection point. Given limited visibility regarding the timing and shape of the expected recovery, our initial guidance is based on a continuation of trends from the last several quarters, giving us upside if a recovery does materialize within the year. Brent will walk you through our 2024 guidance in more detail later in the call.

Speaker 2

Our focus for 2024 is executing on our business model transformation and growth strategy for laboratory solutions and bioscience production, as well as driving our cost savings initiative that is expected to generate approximately $300,000,000 of annual run rate savings by the end of 2026. We will continue to be agile as we navigate the current environment to ensure we are well positioned to achieve our long term financial targets. I'll now turn it over to Brent to walk you through our Q4 and full year 2023 results and our 2024 guidance.

Speaker 3

Thank you, Michael, and good morning, everyone. I'm starting with the numbers on Slide 4. Reported revenue was 1 point $72,000,000,000 for the quarter $6,970,000,000 for the full year. While revenue declined 4.8% on a core organic basis in Q4, it was flat on a sequential as reported basis consistent with our expectations for the quarter. We continue to navigate industry wide headwinds and view market conditions as stable, but not yet inflecting upward.

Speaker 3

Throughout the year, we delivered strong performance in our education and services platforms and despite an expected moderation in Q4, our Biomaterials platform delivered double digit growth in 2023. Adjusted gross profit for the quarter was $570,000,000 representing a 33.1 percent margin. For the year, it was $2,360,000,000 33.9 percent. Our gross profit was impacted by lower sales volume, mix, inflation and negative fixed cost leverage. However, we were able to partially offset these effects with productivity efforts and we continue to work diligently on improving our cost base.

Speaker 3

We did experience better mix than expected, which helped our achievement versus expectations in Q4. Adjusted EBITDA was $302,000,000 in Q4 and approximately $1,300,000,000 for the year, representing 17.5% and 18.8 percent percent adjusted EBITDA margin respectively. Q4 margin was at the high end of our expectations for the quarter, driven by top line results, which were also at the high end of our expected range. Year over year, our EBITDA margin performance was impacted by lower gross profit and negative fixed cost leverage on SG and A. Interest and tax expenses were in line with our expectations.

Speaker 3

As a result, adjusted earnings per share came in at $0.25 for the quarter and $1.06 for the year, reflecting the flow through of adjusted EBITDA performance. Moving to cash flow, we generated over $200,000,000 in free cash flow in the quarter, bringing our full year free cash flow to approximately $725,000,000 representing over 100 percent conversion of adjusted net income. Our free cash flow performance was enhanced by continued discipline in working capital management. Our adjusted net leverage ended the quarter at 3.9x adjusted EBITDA and we paid down approximately $850,000,000 of debt in 2023. Deleveraging remains our top capital allocation priority and we continue to target an adjusted net leverage ratio below 3 times.

Speaker 3

Slide 5 outlines the components of our 4th quarter and full year revenue performance. Starting with the Q4, core organic revenue declined 4.8% in the quarter. COVID related revenues represented a 1.1 percent headwind resulting in a 5.9 percent organic revenue decline. Foreign exchange translation represented a 1.9% tailwind driven by a modest appreciation of the euro, resulting in a reported revenue decline of 4% for the quarter. For the full year, core organic revenue declined 5.2%.

Speaker 3

COVID represented a 2.6% headwind, resulting in a 7.8 percent organic revenue decline. Foreign exchange translation represented a 0.5% tailwind, leading to a 7.3% reported revenue decline. Moving forward with 2024, as we did not highlight any COVID related revenues in our 2023 results, we will simplify our revenue reporting by only showing organic and reported revenue. On to Slide 6. From a regional perspective, the Americas declined 3.8% on a core organic basis in the quarter.

Speaker 3

Our daily rate of sales was relatively consistent from Q3, while our growth rate benefited from an easier comparable. We continue to experience pressure from destocking and lower demand in biopharma, healthcare and advanced technologies and applied materials end markets. Increased commercial intensity in education and government is driving share gains and led to the 4th consecutive quarter of growth with higher education growing high single digits in the quarter. Europe declined 6.8% on a core organic basis in the quarter, consistent with our expectations. On a year over year basis, Europe's performance was driven by weakness in the biopharma and healthcare end markets with softer demand for lab consumables and single use solutions driven by ongoing destocking.

Speaker 3

Aimia declined 3.5% on a core organic basis in the 4th quarter driven by declines in lab consumables as well as formulated solutions for our semiconductor customers. Despite the macroeconomic challenges, particularly in China, our business delivered another quarter of solid growth in bioprocessing and biomaterials. Slide 7 shows our core organic revenue change for the quarter and full year by end market and product group. Biopharma representing about 50% of our annual revenue declined high single digits in the quarter in both the research and production environments. In the research environment, we saw a continuation of both destocking and the conservative approach to customer spending that began in the 2nd quarter.

Speaker 3

While spending is constrained, customers continue to advance meaningful R and D pipelines and fund promising science. In the production environment, sales were similar to our 3rd quarter results as demand continues to be impacted by inventory destocking and customer campaign delays. Cell and gene therapy remains a bright spot and we delivered another quarter of double digit growth in several critical product lines targeting these workflows. Within bioprocessing, we again saw promising market signals, but not enough to characterize as a recovery. Specifically, order intake improved modestly compared to the 3rd quarter, customer inventory health continues to improve and customer sentiment remains positive.

Speaker 3

And while we still have not seen the inflection, we believe that it is coming. Underpinned by another record year of approvals for new therapies and indications, together with robust pipelines across all modalities, we remain confident in the long term potential of this critical end market. Healthcare, which represents approximately 10% of our annual revenue, declined high single digits in the quarter on a core organic basis, driven by consumables destocking in Europe and the Americas and an expected moderation in our Biomaterials business after several quarters of double digit growth. Education and government representing approximately 15% of our annual revenue grew mid single digits on a core organic basis in the 4th quarter, the 4th consecutive quarter of growth driven by share gains in higher education in the Americas. We are encouraged by our recent commercial wins and the success of our digital strategy and expect continued momentum in this platform.

Speaker 3

Advanced Technologies and Applied Materials, representing driven by declines in the Americas and Aimia in our semiconductor business, partially offset by strong growth in our aerospace and defense business. By product group, proprietary materials and consumables offerings were down high single digits in the quarter, driven by customer inventory destocking within our bioprocessing and semiconductor platforms. Total proprietary material sales were similar to Q3, while the growth rate improved modestly as a result of easier comparables. Sales of 3rd party materials and consumables declined mid single digits impacted by continued destocking of lab consumables and cautious purchasing behavior across research settings. Our nominal sales rate was unchanged from Q3 levels.

Speaker 3

Services and Specialty Procurement, which integrate us directly in our customers' critical operations, grew high single digits, the 4th consecutive quarter of mid single digit or higher growth, while equipment and instrumentation declined high single digits reflecting constrained capital spending in the current macro environment and the absence of a typical year end budget flush. Turning to Slide 8. As of January 1st, we successfully transitioned from 3 geographic segments to 2 new customer focused segments, Laboratory Solutions and Bioscience Production. In Laboratory Solutions, which represents roughly 2 thirds of our revenue, we provide an industry leading platform of products and services to support our customers' research, diagnostic and QC workflows. In our Bioscience Production segment, which represents about 1 third of our revenue and over 45% of our enterprise profitability, we support our customers' production platforms by providing high purity materials for bioprocessing, ultra high purity silicone for medical implants and custom formulations for semiconductor and advanced technology applications.

Speaker 3

Echoing Michael's commentary, this has been a critical strategic move. It is sharpening our focus on accelerating growth, streamlining accountability and unlocking additional cost savings and operating efficiencies. While we are in the early days of our transition to the new operating model and cost optimization initiative, I'm encouraged by our initial progress. On to Slide 9. As a part of our transition, we have released some additional financial information today.

Speaker 3

In addition to filing our Form 10 ks and our standard Q4 and fiscal year earnings materials with our legacy geographic segments, we have also filed a Form 8 ks and provided a supplemental package containing historical information for the new segments. This is designed to help bridge our transition and assist with financial modeling. Beginning next quarter, we will only report under our new segment structure. Slide 10 shows our full year 2024 guidance. As Michael noted in his overview comments, we do see encouraging leading indicators supporting a market recovery, including improving order book trends in bioprocessing.

Speaker 3

However, our guidance is based on a continuation of current market conditions in both our laboratory and production businesses. Given limited visibility regarding the shape and timing of a recovery and the lack of a clear inflection in the business, we think it is prudent to base our guidance on current sales levels. To the extent that we do see a top line recovery within the year, that would present upside to our current guidance. To get into specifics, we expect full year organic revenue growth of negative 2% to +1%. Based on current FX rates, we expect a modest tailwind from FX of approximately 0.3% leading to reported revenue growth of negative 1.7% to positive 1.3%.

Speaker 3

This view reflects a continuation of current market conditions plus a modest contribution from price. On a segment basis, we expect low single digit growth in lab solutions and a mid single digit decline in bioscience production. Moving to profitability, we expect adjusted EBITDA margins of approximately 17.4% to approximately 17.9%. This reflects our 2023 second half exit rate as well as incremental headwinds due to a reset of incentive compensation systems, wage inflation and top line expectations. These headwinds will be partially offset by approximately $75,000,000 of gross cost savings from our transformation initiative as well as customary productivity.

Speaker 3

While we are not calling a growth inflection, when that does happen, our incremental margins will be very attractive. We expect interest expense to improve by roughly $35,000,000 year over year resulting in approximately $250,000,000 of interest expense and expect a full year tax rate of 22.5 percent. Our adjusted EPS range is $0.96 to $1.04 We also expect free cash flow performance of $600,000,000 to $650,000,000 prior to any one time cash expenses associated with our cost savings initiative. We are confident in the outlook for the business. Our competitive position is strong as evidenced by continued share gains in academia and biopharma and our long term growth entitlement is unchanged.

Speaker 3

This guidance is a well balanced combination of prudence and confidence in our business positioning and our self help transformation actions. A couple of final comments on phasing. We expect Q1 organic revenue to decline approximately 6.5% to 5.5% and reported revenue to decline approximately 6% to 5%. Adjusted EBITDA margin is forecasted to be approximately 200 basis points below our full year 2024 adjusted EBITDA margin expectation. We expect interest expense of approximately $65,000,000 in the first quarter.

Speaker 3

Our guidance contemplates a very modest sequential increase in reported revenue dollars each quarter driven by pricing, modest seasonality, timing of known orders and nominal billing day adjustments. This results in approximately 49% of our revenue in the first half of the year and 51% of our revenue in the second half of the year. We also expect margins to increase each quarter driven by the phasing of our expected cost savings. We are laser focused on executing on the current transformation and I am confident that our growth strategy and more efficient operating structure will set us up well to achieve our long term targets. With that, I will turn the call back to Michael.

Speaker 2

Thank you, Brent. As I mentioned at the beginning of the call, we are closely monitoring end market dynamics. While we are seeing encouraging trends, we are taking an appropriately prudent approach to our full year guidance and are positioned for upside if a market recovery materializes within the year. Our new operating model, which became effective on January 1st, sharpens our focus on accelerating growth with our laboratory and production customers, while unlocking significant operating efficiencies. I am already seeing the benefits of the new model in practice through the clarity it is bringing to our forecasting and operating processes.

Speaker 2

In addition, I am encouraged by the early progress we have been making on our cost optimization initiative. We have launched multiple work streams led by executive leadership team sponsors across each of our 4 focus areas organizational efficiency, footprint optimization, reduced cost to serve and procurement savings. As mentioned at our Investor Day, this is a multiyear initiative and we will keep you updated on our progress. In closing, while we continue to operate in a dynamic environment, we are implementing proactive initiatives to control costs, enhance productivity and efficiency, and accelerate growth. We remain confident in the rich set of opportunities across our end markets based on the strong pipeline of scientific innovation and our proven ability to win and retain customer relationships, solve scientific challenges and grow share of wallet.

Speaker 2

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

Operator

Thank Our first question comes from the line of Dan Arias with Stifel. Please go ahead.

Speaker 4

Good morning, guys. Thanks for the questions here. Brent, maybe just to start on the outlook. Certainly understand the need for prudence here, but it does sort of feel like the guidance approach is to say that business conditions 10 to 12 months from now are basically the same as they are today, which does seem a little bit out of line maybe with what the peer group is kind of pointing to and maybe even the hints of improvement that you've touched on when you mentioned things like bioprocess, gene and cell, etcetera. So is that the base case that you see or is this really just more about creating upside potential for the year?

Speaker 3

Yes. Dan, thanks for the question and absolutely appreciate the sentiments there. As I said in the prepared remarks, we're really looking at the business on a run rate basis now. We sort of reset to doing that after Q2 last year. We believe that approach really served us well through the end of the year.

Speaker 3

It is a dynamic environment and we don't see the inflection yet. And you noted the comment about prudence. We really think this is the prudent and right way to show it here. And I think a really important takeaway from this is we are not banking on a recovery to achieve these results. We just think it's the right way to forecast the year with what we're seeing now.

Speaker 3

We're basing our forecast on an order book, not on a hope.

Speaker 4

Okay, fair enough. And then maybe just as a follow-up on the destocking phenomenon, I'm curious how you would describe bioprocess versus routine consumables separately. Is there a difference in terms of how far along in the process we are for 1 versus the other and when you think one might be flushed out of the system versus the other? Or are they more or less moving at the same pace and likely to resolve themselves at the same time?

Speaker 5

Yes, Dan, thanks for the question. This is Michael. I think as we've been saying throughout the last year or so, they have seemingly been moving in similar directions in the lab segment. Of course, that's going to be the lab consumables where there was the excess inventory. We've seen that coming down at the very similar rates as what we see on the single use offerings that we have in our bioprocessing platform.

Speaker 5

And our interactions with our customers would indicate kind of very similar dynamics in terms of where their inventory health stands, which as we've noted continues to improve quarter by quarter. Maybe the one different dynamic I might call out within the bioprocessing business is, as you move downstream from our materials, I think part of what we're seeing in our business is continual work down of our customers' inventory of drug substance inventories that were built during the pandemic and we see that improving as well. But that's probably the only different dynamics that I might call out between what we're seeing in lab versus the production segment.

Speaker 4

Okay. Appreciate it.

Operator

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

Speaker 6

Great. Thanks guys. First question I want to ask is on the cost actions. You had talked about the $300,000,000 to $20,26,000,000 and also how that plays out this year. You talked about the impact on the margins improving as you go through the year as those are layered in.

Speaker 6

Just any additional color on where the cost actions are incoming and how should we think about 2024, 2025, 2020 6 cadence relatively linear throughout or any big milestones we should be keeping an eye on? And I got a follow-up on that.

Speaker 3

Okay. Yes, Michael, it's Brent. Thanks for the note. It's obviously a big focus we have here. We have clear line of sight consistent with what we said at Investor Day to $75,000,000 of cost savings this year, 25% of what we've talked about.

Speaker 3

We're obviously pushing to outperform on that, but $75,000,000 is what you should assume in your modeling there. There aren't any particular milestones, I would say, I think we'll keep you updated very dynamically, but I'll say it's something we're working really hard at. I think we have really, really good traction. Consistent with what we said before, about a third of that will be organizational efficiency related, about 20% of it will be related to footprint and then the balance through procurement and cost to serve broadly. But and it's really important to think about this is this is unlocked by these segments and this reorganization that Michael is talking about and the organizational realignment, that's what's allowing these things to happen.

Speaker 3

So this is something we're dynamically doing every day, taking costs out of the business.

Speaker 6

Okay. And then a follow-up specifically as it relates to 1Q margin guide. I think you just said in the prepared remarks about 200 bps lower than the full year. So something in the 15.5% to 60% range, give or take, EBITDA margins. Relatively high number, even though, as you said, you're only going to be taking cost out throughout the rest of the year.

Speaker 6

Is that just a mixed component in terms of the top line being down sort of what's driving the lower margin in the Q1? Thanks.

Speaker 3

Yes. No, I appreciate that note. No, the largest driver is really the reset of incentive comp. How it goes through the year is the costs start right at the beginning of the year and the cost actions are going to get feathered into the year as we achieve against them. So it's literally the math of just having much higher expenses there.

Speaker 3

It's not an issue on the gross margin side at all. It's purely a cost piece there. And Q1 will be the low point for the year. And then as a reminder, as those phase in over the year, you'll see margin improvement there driven by cost out, which will help both gross margin and SG and A.

Speaker 6

Great.

Speaker 3

Thanks. Thank you.

Operator

Our next question comes from Tasia Savant with Morgan Stanley. Please go ahead.

Speaker 7

Hey guys, good morning and appreciate the time here. Michael,

Speaker 8

one for you that's sort of

Speaker 7

a follow-up to Dan's question at the top of the call. Specifically at the low end of the guide, you're talking of organic growth down 2%. Is it fair to say that at least at that level at the low point, you're actually baking in deterioration versus current trends? And then Brent, can you help us just build a bridge on the free cash flow side similar to what you did on the margins, please?

Speaker 5

On your first question regarding the minus 2 at the low end of our full year guide, Really, what you're picking up there is just the year over year comparables. Q1 last year was the high watermark, and it things deteriorated a bit as we moved throughout the year as some of the cautious spending patterns worked their way in. What way we've guided the business, just with Brent's remarks, is kind of looking at where we exited the year, assuming that, that continues throughout the year, plus a modest contribution from price. So that range kind of reflects just I would say normal volatility in the business, the impact of the price and then just the year over year comparables.

Speaker 3

Hey, just following up in the free cash flow bridge, I mean that free cash flow is largely ratable what we're seeing on an EBITDA basis there. So you can largely think of that in the walk. Our performance in 2023 was really exceptional in free cash flow conversion. So our guidance still reflects in excess of 90% conversion, which is exactly what we talked about with our long term financial model there. I would also say we had really, really nice performance on the working capital side, particularly ending 2023.

Speaker 3

The second half of the year, we did really, really well on the DSO side and really a story of the year was dramatic work on inventory. So

Speaker 4

I'd like

Speaker 3

to tell you, we can get to a higher entitlement. I think this is sort of the right place and let us continue to execute against that.

Speaker 7

Got it. That's super helpful. And just a follow-up there, Michael, on your comment on pricing. Any color you can share on those new customer wins you flagged in pharma and semis, especially how does the pricing look there? And more broadly, what are you baking in for pricing at the midpoint of the guide?

Speaker 7

I believe you said modest benefit there from pricing?

Speaker 5

Yes. Maybe I'll take them in reverse order. Consistent with kind of our long term algorithm, we're assuming kind of 1 to 2 points of price flowing into our outlook for the year. And then I would say probably nothing out of the ordinary to call out regarding the new customer wins. I think they're in line with the pricing and margins of the rest of the business.

Speaker 5

Nothing specific notable there.

Operator

The next question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Speaker 9

Hi, Michael. Thanks for taking my question. Just one on, I guess, the revenue guidance assumption here. Bio production down mid singles or base organic coming off of minus high singles. I think most of your peers are assuming perhaps first half somewhere to back half of last year and some improvement in second half.

Speaker 9

I'm curious what your bio production segment assumptions are? Is there any quarterly cadence? Looks like you certainly have easier comps given you guys saw a step down in 2Q versus your up here. So maybe just help us understand the bio production, which is driving that minus mid singles assumptions?

Speaker 5

Yes. Vijay, thanks for the question. Thanks for joining the call today. I think it's important to just start with, we continue to be extremely bullish on this space. We're coming off another year of record approvals and the pipelines are full and a lot of the modalities are getting traction.

Speaker 5

I think it's also important to recognize the trends we've seen in the order book. As we talked about over the last couple of months, Q4 order rate of intake did improve sequentially from Q3, and we've seen that trend continue into the early days of Q1. But to be clear, we've not yet seen what we would consider to be a step change in the order book. We finished the year last year with what I would think is probably best in class performance for that platform. It's down mid single digits, and we're expecting kind of similar performance the year ahead.

Speaker 5

And the way we've guided way that gets reflected in our guidance, of course, is looking at kind of exit run rates at the end of 20 3, flowing that through on a full year basis with modest benefit coming from pricing. The quarter numbers, while the absolute numbers are going to look pretty similar, on a rate basis, you will see a step down in Q1 just given the comparable of what we're running into on a year over year basis. So Q1 is going to want to be down probably mid teens, Vijay, but not because we see a difference in the revenue, it's just the year over year math that flows into that. So assuming full year of down and single digits.

Speaker 9

Understood. And that would imply 2Q to 4Q sort of it improves maybe flattish. Is that what the guidance is assuming? I think peers are assuming a normalization, but I'm curious is your guidance? Yes, but not because Is the guidance assuming?

Speaker 5

Yes, the guidance assumes similar absolute revenues throughout the year, Vijay.

Speaker 10

You might see

Speaker 5

a little bit based on number of days in a quarter or how the pricing phases in, you might see some differences there, but nothing fundamentally different from an underlying demand perspective. Of course, the way we've guided this does imply that you're going to be roughly flattish by the time you exit the year, but not because we're forecasting an inflection in the order book.

Speaker 9

That's helpful, Michael. And Brent, maybe one for you on the margins here. Are you assuming OpEx dollars to be flattish up or down year on year? I'm trying to understand, is this margin mostly a function of gross margins and volume leverage or if you may operating expense on a dollar basis to go up?

Speaker 3

Well, definitely, I mean, implicit in some of the other comments, we have real headwinds on the OpEx side year over year. I mean, we are getting productivity to offset that, but will not be enough to fully offset that. So yes, there are meaningful year over year OpEx headwinds there.

Speaker 9

And so gross margin, I guess when you look at the 100 basis points margin step down year on year, how much of that is gross margin versus op margin?

Speaker 3

Well, I would say we have some real we have some opportunities in gross margin there in our productivity efforts and then we're going to keep going at our cost savings initiative here to try and blunt as much of the SG and A margin headwinds as we can. But that's really the math of how it comes together. It's very consistent with sort of the exit rate. And when you compare and you can say because we exited higher in Q4 than we originally expected there. We had some goodness in mix.

Speaker 3

We had a lot of things run right in Q4 there. So but on a rate basis, we expect the share to play out exactly as we had signaled earlier there on a margin basis.

Speaker 9

So gross margin similar to Q4, that's what the guidance is assuming for fiscal 'twenty four?

Speaker 3

No, I'm sorry. The EBITDA margin coming out very similar to the back half with those additional headwinds because we had somewhat better achievement in Q4. We believe there's some upside in the year to gross margin.

Speaker 9

From Q4 levels, correct? Or the fiscal sorry, I'm just asking okay, fantastic. Thanks guys.

Operator

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

Speaker 8

Hey, thanks for taking the questions. Maybe first for Michael, in prior quarters you talked about inventories getting close to normal under 3 months. Just wondering if you can describe kind of what you're seeing amongst your customers there? And if that's the case, appreciate the conservative guidance, but is something different with sell through or your share such that if inventories are down at that level, I would assume we should see some kind of pickup here, whether it's first half or certainly by mid year?

Speaker 5

Yes. Thanks for the question. I think the trend has continued when we look at the input we're getting from our customers. The inventory health, as I noted in my prepared remarks, does continue to improve. We haven't yet seen an inflection or what we consider to be an inflection.

Speaker 5

We continue to see sequential improvement in the order book, but nothing that we would consider to be a stub change. Relative to your last point around just performance of the business relative to the peer set, our 2023 performance, I think, speaks for itself. Although we're not jumping up and down with a business that's down mid single digits, I think you'll find that is best in class relative to other players that are exposed to the space. And even if you account for maybe more limited exposure to China, I still think that that statement holds up. So we've had a long standing track record here at least over the last decade of outgrowing the broader bioprocessing end market by 300 to 400 basis points.

Speaker 5

And I think that's reflected again in the 2023 numbers. I can't speak to the ins and outs of how others have guided the year ahead, But I'm confident that our business will hold up as well as anybody's here and likely outperform as we have done in previous years.

Speaker 8

Great. Thank you for that. And we don't have the quarterly dollar numbers yet for bioprocess. I don't think we have anything. We just have the growth numbers going back So I'm just wondering, can you just comment, I know you said bookings grew modestly.

Speaker 8

Was that the Q1 bookings grew modestly? And any color on like book to bill? And does your guidance anticipate like when would that book to book at above 1 for your guidance in the core buyer process? Thank you.

Speaker 9

So a couple

Speaker 5

of time periods that we've talked about in terms of sequential improvement in order book. Firstly, from a Q4 to relative to Q3, we definitely did see a modest improvement in the rate of quarter intake, and we've seen that trend of sequential improvement continue into Q1, albeit at a slower rate of improvement than what we would hope for that would ultimately enable us to call for a full recovery here. But we're encouraged. I think the activity levels remain strong, customer sentiment remains quite positive. And we're certainly our teams are certainly busy working with our customers on supporting their new innovations.

Speaker 5

From a book to bill perspective, I don't think that's something that we've typically or historically quoted. So I don't have a number to give you on that. But we do continue to see modest improvements in the rate of order intake.

Speaker 8

Great. Thank you.

Operator

Next question comes from Patrick Donnelly with Citi. Please go ahead.

Speaker 11

Hey, guys. Good morning. Thanks for taking the questions. Michael, maybe another one just on the recovery path. At the Analyst Day, you talked about kind of the timeframe to get there and that 20% kind of margin exit rate.

Speaker 11

Any more clarity as to the timeframe, how you're seeing that play out? Obviously, it seems like things are stabilizing a bit, but not yet calling that inflection. Just trying to get a sense for as we go through the year, how to think about approaching that margin rate and again the recovery path on the bioprocessing side?

Speaker 5

Yes, thanks for the question, Patrick. My conviction on what I've said before about where we see things exiting 2025 is unchanged. We would see us in that time period performing at or better than kind of where we were at in 2021 on both top line and margins, which does set us up for a year in 2026 with adjusted EBITDA margin performance above 20%. The end market fundamentals remain robust, which is something I certainly look at to support our view that recovery is coming. Again, record levels of new drug approvals, really robust pipelines, positive customer sentiments.

Speaker 5

When you look at funding environment, I think, has stabilized some pockets, including some of the biotech capital market funding levels improving. I think there's a lot of encouraging leading indicators here and we've taken an approach here to guide the year not trying to call the timing of recovery and would consider that upside when it happens. But as we think about over the course of the next couple of years, we are optimistic about the recovery. And when you look at the margin rate that we've guided to for 2026, we can largely get there just with the self help measures that we've talked about at Investor Day and we spend a little bit more time on here today. So we remain quite optimistic about what we've said about this recovery period.

Speaker 11

Okay. That's helpful. And maybe a quick non bioprocessing question. Just in terms of semi industrial demand, maybe just give a little more color on what you're seeing there and then expectations as we work our way through 'twenty four here? Thank you, guys.

Speaker 5

As we've said before, semis is a relatively small portion of our business, although it did take up a disproportionate amount of the airtime in 2023, just given how aggressively that end market took out their excess inventories, similar dynamics as what we see in the life sciences space. They just moved a bit more aggressively to reset the inventories on the back end of the supply chain reset. As we noted, as we moved through the back half of the year and certainly in Q4, we have seen the business improve and we expect a return to modest growth in 2024, which as we realize that certainly is factored into our guidance just given the trending that we saw at the end of the year. And hopefully, it's a platform that we don't need

Speaker 3

to spend a whole lot

Speaker 5

of time talking about on in the year ahead.

Speaker 3

Great. Thank you.

Operator

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

Speaker 12

Great. Good morning. Thanks for taking the questions. So I want to ask on the trends that you've seen so far since the start of the year. We've had some of your peers talk about how spending has been slow out of the gate.

Speaker 12

So can you spend a minute talking about how orders have trended in January and into early February? And have you noticed any differences by geography and market or customer type as well?

Speaker 3

Couple of things I would say

Speaker 5

on that, Rachel. Firstly, I would reiterate the positive customer sentiment and just the level of activity that we're seeing with our customers continues to be encouraging. And when I think about R and D budgets and the discussions we're having with our customers on that front, I think the majority of them are anticipating modest growth of R and D budgets, albeit maybe a bit second half weighted. We've not tried to reflect that in our outlook, and we'll bank that as upside as things improve throughout the year. Relative to what we've seen in the early days

Speaker 3

of the year, I'd say it's consistent

Speaker 5

with the run rates that we experienced at the end of the year. And certainly, that's reflected in our guidance or the direction that Brent provided on what we're anticipating for Q1. Order books continue to modestly improve, but we've not yet seen an inflection point, but very consistent trending moving sequentially from Q4 to Q1.

Speaker 12

Okay. And then maybe just pushing on that 1Q guide a little bit further. I appreciate on the margin line, you have the reset on the incentive comp and that's kind of driving some of the sequential step down there. But can you walk us through the sequentials on top line expectations? Organic declines is down 6.5% to down 5 point 5% in 1Q, just a bit more from a seasonality standpoint than we would have expected typically.

Speaker 12

So are there any other one timers that we should be aware of then? And then just lastly and my follow-up, I want to clarify some of your earlier comments on gross margin to Vijay's question. So can you just clarify, are you implying gross margins for the year to be similar to 4Q 'twenty three? And then where should we land on that gross margin line for 1Q as well? Thank you.

Speaker 3

Yes, sure. So on I mean honestly, Rachel, in Q1, it's really the issue of the expense reset largely. If you go through, I mean, we have well over 100 basis points just due to expense reset there. Then you always have respective noise, difference in the top line, you have a little less absorption related to that. So you just do that as a matter of math and that's very clear that's what Q1 wants to be there.

Speaker 3

There's no unusual one timer embedded in that, no big change in mix or anything else there. Following up on the comment in connection with gross margins, that was a year over year comment. I mean, we are running the transformation. We have improvements in rooftops and otherwise there. So just to indicate, we do see year over year upside in connection with gross margin there.

Speaker 3

We're not going to get to guiding the quarters on gross margin that is given all we will on a quarterly basis there, but I think we largely have everything through the scope of the guidance disclosure we made.

Operator

The next question comes from Matt Sykes with Goldman Sachs. Please go ahead.

Speaker 13

Hey, good morning. Thanks for taking my question. Maybe the first one, just shifting over to the Advanced Tech and Applied Materials end market. In Q4, it looks like you had a sequential little bit better than what the average for 2023 was. You had called out Aerospace and Defense as having strong growth.

Speaker 13

Can you maybe talk about some of the drivers within the A and D segment within this end market and kind of what's driving that and what your expectations are for 2024 within that particular segment end market?

Speaker 5

Matt, a couple of things I would say about that end market. Our exposure is principally into 2 types of workflows. 1, kind of QA QC workflows to support our customers' testing of their finished goods. And then similar to our bioprocessing or other life science platforms, we also have custom materials that are specked into our customers' manufacturing process. In the case of aerospace and defense, that's certainly true where we provide some extremely high performance, high purity materials that are specked into those platforms.

Speaker 5

And so that reflects just the continued growth and momentum and positioning of our technology in that space. The other thing to call out probably for the quarter is a sequential improvement in the semiconductor end market that I mentioned earlier in response to one of the questions. That had been such a drag on the business throughout the year just given the inventory reset and certainly seeing some of the benefits of that modest improvements coming through in the quarter.

Speaker 13

Got it. Thanks. That's helpful. And then just as you think about 2024 and you think about the biopharma end market, if you can kind of characterize large pharma versus sort of emerging biotech and where you see the potential delta or upside in each of those kind of customer cohorts? Where do you see sort of the best chance of upside coming from?

Speaker 13

I know that the emerging biotech really depends on capital markets conditions to a certain extent, but I'm just wondering if you can characterize those 2 customer cohorts and where you see the upside for 2024?

Speaker 5

Yes. So probably important to split my answer into the two ends of the workflow. In the research space, which whether you're large pharma or biotech, those revenues are going to be captured in our new lab segment. And the way we forecasted that, of course, is a continuation of kind of Q4 run rates adjusted for a bit of price, if you will. I'm encouraged by what we're seeing on biotech.

Speaker 5

We probably saw the last step down in Q1 a year ago and things were relatively stable through the back three quarters of the year. When I look at the external data and try to triangulate the disparate data points around funding, I think there are some green shoots there that give us a little bit of hope that they're on their road to recovery. But certainly, we're encouraged by the stability that we've seen there. The back half of the year on large pharma, certainly, we saw the cautionary spending patterns work their way in, reprioritization of pipelines and such. As I mentioned earlier, I think the sentiment and the expectation for most of those large pharma accounts is to see modest growth as we move through the year, particularly in the back half of the year.

Speaker 5

We haven't factored that in and we'll realize that if it doesn't in fact work out that way. On the other end of the workflow in the production environment, we don't really have much exposure to the biotech space, just given the way we manage these businesses, the biotech funding or biotech revenues tend to be in the research space. And so the production segment really is reflecting the revenues associated with commercialized platforms, which again, you've got just the patient demand on one hand and then the launch of new molecules, which continues to run at a high level as key drivers for that platform and we continue to be extremely well positioned here.

Speaker 13

Got it. Thank you very much.

Operator

The next question comes from Andrew Cooper with Raymond James. Please go ahead.

Speaker 5

Hey, everybody. Thanks for

Speaker 10

the questions. A lot has been asked. So maybe just one from me. Just thinking about the commentary on EBITDA pacing, you said 1Q about 200 bps lower than the full year. I guess just thinking through that, to me if we get ratable and improvement over the course of the year, it kind of puts the exit rate as approaching that 20% level at the end of this year.

Speaker 10

Is there something I'm missing there? Or if not, is it that more of the cost saves maybe come in 2Q as opposed to 3Q or 4Q? Just trying to get a sense when the top line clearly is not assuming we're done with that recovery cycle in 2024, how we should think about the exit rate of 2024 in terms of EBITDA margins relative to that entry point in the, call it, mid teens?

Speaker 3

Andrew, it's Brent. Look, you're good and quick on your calculator there. I mean, that it depends upon how you phase the things in there. But look that I mean that is the beauty of layering the cost saves against that and the way we're doing the guide. We won't get really specific as to the exit rates or otherwise there.

Speaker 3

But look, the self help initiatives here are going to be very meaningful as we keep executing against them. And I think you broadly are thinking about that the right way.

Speaker 10

Okay, helpful. I said I'd just ask one, so I will stop there and pick it up offline. Thank you.

Operator

The next question comes from Connor McNamara with RBC Capital Markets. Please go ahead.

Speaker 14

Hey, good morning and thanks for taking the questions. Just on the wage pressures that you talked about this year, how much of that is

Speaker 9

is any

Speaker 14

of that one time catch up from underpayment from prior years? Or is that a new baseline for wages? And then on the inflationary pressures, if inflation were to persist throughout this year, what's your ability to take price above and beyond what you guys have guided to?

Speaker 3

Yes. So on the inflationary, I mean, there's a piece there that the reset of the incentive comp, which is less inflationary and just more of a year over year comp. And then that's just merit. And we know wages are running somewhat higher there, but there's not any dramatic or nefarious story in that connection, Connor. And then your second part of

Speaker 4

your question was Pricing, yes.

Speaker 14

Yes, just on pricing. I mean, I think we all assume that the inflationary pressures that we've seen over the past several years won't persist. But if prices remain elevated or to go continue to go higher, what's your ability to take price above and beyond what you guided to?

Speaker 3

Well, look, I think let's just stick to where we are in the guidance on the pricing there. We've been very consistent with the entitlement we've been able to drive there, sort of no matter the weather. So I think you should assume we always try and execute appropriately there. I think you should also assume that we take the long view with our customers on all of those. And we get a nice price entitlement annually here anyway.

Speaker 3

So if we execute better, you'll see it through, but I wouldn't assume more.

Speaker 9

Great. Thanks for that, Brian.

Speaker 3

Thank you.

Operator

Unfortunately, those are all the questions we have time for today. So I'll turn the call back to Michael for closing comments.

Speaker 5

Yes. Thank you all for joining us today. As we conclude, I'd just like to reiterate that while we're certainly encouraged by the trends that we're seeing, we're also taking appropriately prudent approach to our full year guidance and indeed are positioned for upside if a market recovery does materialize within the year. I'd also like to thank our associates around the world for their many contributions and for their continued commitment to our customers. I look forward to updating you when we meet next.

Speaker 5

And until then, be well, everyone. Have a great

Speaker 3

Valentine's Day.

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