Avantor - Q1 2023
April 28, 2023
Transcript
Operator (participant)
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 Q1 2023 Earnings Results Conference Call. After the prepared remarks, there will be the opportunity for any questions, which you can ask by pressing Start, followed by the number one on your telephone keypad. I will now turn the call over to Christina Jones, Vice President of Investor Relations. Mrs. Jones, you may begin the conference.
Christina Jones (VP of Investor Relations)
Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer, and Thomas Szlosek, 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 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 statement that we make today.
These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward-looking statements as a result of new information, future events, or other developments. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the supplemental disclosures package on our IR website. With that, I will now turn the call over to Michael.
Michael Stubblefield (President and CEO)
Thank you, CJ. Good morning, everyone. I appreciate you joining us today. I'm starting on slide three. Our Q1 operating results were in line with our expectations, with reported revenue of $1.78 billion and adjusted EPS of $0.29. Market dynamics played out as anticipated, including ongoing destocking of customer inventories and a downturn in semiconductor demand, resulting in a core organic revenue decline of 1.8%. We continue to leverage the Avantor Business System to drive execution of our plan and enhance operational rigor and efficiency. Reflective of strong contributions from commercial excellence and productivity, adjusted EBITDA margin was 19.4%, at the high end of our expectations.
Free cash flow increased approximately 50% compared to Q1 last year, and free cash flow conversion was approximately 100% in the quarter, reflecting our focus on improving working capital performance. We also continue to make progress on our long-term strategy and are seeing the positive impact of our investments in capacity expansion, new product introductions, and digital infrastructure to support our growth. Some notable highlights for the quarter include expanding our hydration capabilities in Gliwice, Poland, and Aurora, Ohio, to provide ready-to-use buffer solutions for our bioproduction customers. Successfully launching multiple new J.T.Baker product lines produced at our Ritter facility in Germany. Rolling out our enhanced Inventory Manager digital solution, which supports our customers' needs for real-time information about their critical lab products in a user-friendly interface. Winning the Asia-Pacific Bioprocessing Excellence Award, a testament to the power of our customer-centric model.
We also continue to push forward on our Science for Goodness sustainability platform and look forward to publishing our annual sustainability report later this quarter. Looking ahead, there are indications from customers that inventory health is improving. Current run rates suggest that there is a heightened risk that destocking will extend into the second half of the year. We think it is appropriate to reflect the risk of a more gradual return to normalized growth and are updating our full year outlook accordingly. Tom will walk you through the details of our updated guidance in a moment. We do view the factors impacting the current operating environment as transitory and remain focused on executing our plan and taking actions to drive growth and profitability. Our long-term algorithm remains unchanged and we are confident in the resilience of our end markets and our proven business model.
With that, let me turn it over to Tom to walk you through our financial results and updated guidance in more detail.
Thomas Szlosek (EVP and CFO)
Thank you, Michael, and good morning, everyone. Starting from the top of slide four, reported revenue was $1.78 billion for the quarter at the higher end of our Q1 revenue range. Revenue declined 1.8% on a core organic basis, reflecting inventory destocking in lab consumables and single-use solutions for bioprocessing, as well as softer demand for formulated solutions from our semiconductor customers, as expected. Core organic revenue in our bioproduction platform grew low single digits, with sales of bioprocess ingredients and excipients up high single digits. We also continue to see strong momentum in our medical-grade silicone platform, with Q1 revenue up more than 20%. Adjusted gross profit for the quarter was 35.1%. Favorable contribution from commercial excellence was offset by headwinds associated with inventory destocking and the roll-off of margin-rich COVID-19 revenues.
Adjusted EBITDA was in line with our expectations at approximately $346 million, driven by our gross margin results, offset by a sequential increase in SG&A related to wage inflation and investments in our workforce to support our growth strategy. Adjusted earnings per share came in at $0.29 for the quarter, reflecting revenue and EBITDA results as well as an increase in interest expense to about $74 million in the quarter as compared to $65 million in Q1 2022. COVID-19 revenue declines, foreign exchange and interest expense in aggregate represented a $0.06 headwind to adjusted EPS. We generated free cash flow of $191.5 million, representing approximately 50% growth from Q1 last year and approximately 100% conversion of adjusted net income.
Our working capital performance improved from Q1 of 2022. We're actively working a pipeline of initiatives to improve receivables and inventory balances. Our adjusted net leverage ended the quarter at 3.8x adjusted EBITDA within our stated target leverage of 2x to 4x adjusted EBITDA. We paid down over $200 million of debt this quarter and continue to prioritize free cash flow for further deleveraging while remaining active in driving the commercial synergies of our 2021 acquisitions and building our M&A pipeline. Slide five outlines the components of our Q1 revenue growth. As previously indicated, core organic revenue declined 1.8% in the quarter. Customer destocking and liquid handling consumables and single-use solutions played out as expected, representing an approximate 500 basis point headwind in the quarter.
COVID-related revenues represented a 4.8% headwind for the quarter, reflecting the roll-off of approximately $90 million of COVID-related sales from Q1 2022, resulting in a 6.6% organic revenue decline. Foreign exchange translation represented a 2.1% headwind, driven primarily by the strength of the US dollar versus the euro, resulting in a Q1 reported revenue decline of 8.7%. On to slide 6six. From a regional perspective, the Americas declined 3.7% on a core organic basis, reflecting strong contributions from commercial excellence, bioprocess ingredients, biomaterials and services, offset by the impact of customer destocking and soft demand in semiconductors and biotech. Europe achieved 1% core organic revenue growth in the quarter.
Bioproduction was up double digits on a core organic basis in the region, and our applied technologies and advanced materials end market continues to perform well. Like the Americas, inventory destocking in Europe played out in line with our expectations. EMEA also grew 1% on a core organic basis in the Q1, with strong growth in our bioproduction Bioprocess ingredients and excipients, partially offset by a high single-digit decline in sales of proprietary materials to advanced technologies and applied materials customers, primarily in semiconductors. Slide seven shows our core organic revenue growth for the quarter by end market and product group. Biopharma, representing almost 55% of our annual revenue, declined low single digits in the quarter, impacted by destocking of lab consumables and single-use solutions as anticipated.
Biopharma production was up low single digits on a core organic basis, including high single-digit growth in process chemicals and ingredients, reflecting the strength of underlying end market demand. Healthcare, which represents approximately 10% of our annual revenue, declined mid-single digits on a core organic basis in the Q1. Biomaterials performance was strong with double-digit growth across all three regions, while diagnostic sales were negatively impacted by destocking of lab consumables. Education and government, representing approximately 10% of our annual revenue, grew mid-single digits on a core organic basis in the Q1, with growth across all three regions. We are encouraged by the return to growth of this platform and the support of research environment, including healthy Q1 NIH outlays, and expect customers in this end market to remain active.
Advanced technologies and applied materials, representing approximately 25% of our annual revenue, declined low single digits on a core organic basis in the Q1, with solid performance in Europe offset by declines in the Americas and EMEA, largely attributable to softer demand from semiconductor customers and a broader macroeconomic pressure on industrial customers. By product group, proprietary materials and consumables offerings were flat in the quarter, with strong biomaterials and bioproduction process ingredient sales offset by destocking in single-use solutions and reduced demand for formulated solutions for semiconductor customers. Sales of third-party materials and consumables declined mid-single digits, impacted by a moderation in lab consumables demand related to destocking. Services and specialty procurement grew mid-single digits, while equipment and instrumentation declined low single digits. Turning to slide eight, I'd like to take a moment to talk through our updated 2023 guidance.
We now expect organic revenue declines of 3% to 1% and core organic revenue of -0.5% to +1.5%. This reflects a more gradual wind down of customer destocking of lab consumables and single-use solutions, more pronounced semiconductor headwinds, and a modestly weaker macro environment. We continue to expect FX to be neutral for the full year, leading to reported revenue declines of 3%-1%. Based on our updated top-line view, as well as our commercial and productivity initiatives, we expect adjusted EBITDA margin to contract between 75 and 25 basis points. We continue to expect interest expense of $270 million to $295 million. A tax rate of 21.5%, leading to adjusted EPS of $1.28 to $1.36.
We are updating our free cash flow range to $675 million-to $750 million. For the Q2, we estimate organic revenue declines of 6% to 4% as compared with the Q1 decline of 6.6%. This includes a COVID headwind of 2.6%, resulting in core organic decline of 3.4 to -1.4% as compared with the Q1 core organic decline of 1.8%. This core organic decline reflects an aggregate headwind of approximately 700 basis points, reflecting customer inventory destocking at similar levels to Q1 and a modest further deceleration in sales to our semiconductor customers. We expect a roughly 0.5% negative impact from FX, leading to reported revenue of $1.785 billion to to $1.825 billion.
We also expect adjusted EBITDA margin of 19% to 19.5% in the quarter, reflecting the ongoing volume and mix dynamics as well as our continued focus on commercial excellence. We expect interest expense to be approximately $2 million lower than Q1, driven by ongoing paydown of our floating rate debt. We expect free cash flow generation to be more modest in Q2 given the timing of cash tax payments. With that, I will now hand the call back to Michael.
Michael Stubblefield (President and CEO)
Thanks, Tom. As we conclude, I want to emphasize our conviction in both the attractiveness and resilience of our end markets and the relevance of our offering to serve our customers. Earlier this month, we hosted our Americas Sales Conference, which brought together hundreds of our suppliers and our entire North America sales organization. This important forum strengthened collaboration across Avantor functions and with our suppliers to drive growth. This was our first in-person forum since early 2020, and the energy and feedback we received reinforced the opportunities ahead of us. We are looking forward to similar forums in Europe and EMEA next month. We remain confident in our growth strategy and are investing in new capacity, launching new products, and expanding our geographic footprint and digital infrastructure to support our long-term financial algorithm.
Continuous improvement is in our DNA, and we are taking actions to strengthen our operational rigor, efficiency, and commercial execution. Thank you for your interest in Avantor and for your continued support. Thank you to the 14,500 associates around the world who are working to deliver for our customers and support our mission of setting science in motion. I will now turn it over to the operator to begin the Q&A portion of our call.
Operator (participant)
Thank you. If you would like to ask a question, please do so now by pressing star followed by one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. We would ask that you please limit yourself to one question and one follow-up. Our first question today comes from Vijay Kumar with Evercore ISI. Please go ahead, Vijay.
Vijay Kumar (Senior Managing Director)
Hey, guys, thanks for taking my question. You know, I just wanna make sure, I had some of these numbers correct. Michael, of this updated guidance here, destocking, I think for Q2, I heard it as minus 700 basis points. Is there a continued destocking impact? Like I think the prior destocking impact for the year was, you know, something like 250 basis points. Was that changed for the year? What was the change? I think biopharma, there's been a lot of questions. What is your exposure to emerging biopharma, early stage biotech, and has the bioproduction growth of, like double digits changed at all?
Michael Stubblefield (President and CEO)
Yeah. Thanks, Vijay, for the questions. Let me unpack both of those areas for you. First, starting with destocking. As we indicated in our prepared remarks, you know, Q1 played out essentially in line with our expectations, you know, with roughly 500 basis points of destocking headwinds. What we've modeled for the Q2 is a continuation at approximately, you know, that same same level. And then, similar to what we had in the Q1, it's important to take into account we also had, you know, roughly 100 basis points of, you know, semiconductor headwinds, and we see that accelerating modestly in the Q2.
Those are probably the two key factors as we think about moving from the Q1 to the Q2. We see the quarters playing out, you know, pretty similarly, you know, particularly around destocking. You were asking a little bit about how we see the bioprocessing, you know, market overall, and, you know, I think we continue to be, you know, quite encouraged by, you know, the underlying, you know, growth drivers, you know, for that, you know, for that space. There's been some, you know, pretty exciting approvals here around Alzheimer's and obesity and multiple myeloma. You know, recently the pipelines are, you know, quite robust, and the underlying demand continues to be quite strong.
The read-through in our business to, you know, to validate that would be in the strength of our, you know, bioprocess ingredients and excipients, platforms that, you know, don't suffer from some of the same destocking headwinds that our single-use platform does. We grew those, you know, high single digits in the quarter.
Based on, you know, the trends we are seeing on destocking and the expectation that we had that those, you know, would, we would have seen an inflection point on that by now, and the fact that we haven't, you know, we've reflected that risk of, you know, destocking continuing into the second half of the year. We've moderated in our full year guide, it would reflect more of a, you know, mid-single digit growth in aggregate for our bioproduction, you know, platform. We continue to be, you know, quite bullish about the long-term prospects of not only the end market, but certainly our positioning within it. The last, you know, point there to address your question around biotech.
As we've, you know, said consistently, you know, biotech is an important part of our, of our customer base, particularly given the science that they're developing. We have moderate exposure here. It's probably, you know, on the order of 2% to 3% of our overall revenues. It's, you know, concentrated in our, in our research platform. You know, certainly we see, you know, the headwinds in that space playing out. That, that space was probably off double digits, in the Q1, seems to have stabilized in and around those, levels. We overall, you know, it's a modest, you know, exposure in our portfolio.
Vijay Kumar (Senior Managing Director)
That's helpful, Michael. Just a follow-up to that. If I just take a step back simplistically at a very high level, we had a big guidance change over the last call it three to four months, another guidance reset here. You know, when we look at these assumptions, can you talk about your visibility and how investors can take comfort in numbers having reset, perhaps a second half guide now being de-risked? What visibility does Avantor's have?
Michael Stubblefield (President and CEO)
Yeah, happy to weigh in on that, Vijay. When we look at, you know, the assumptions that we had, you know, coming into the year here, the Q1 played out very much in line with our expectations, as you see by our Q1 prints coming in at the high end of our range. We had obviously contemplated that the destocking headwinds would subside by, you know, the middle of the year. While we were encouraged by you know, the ramp that we saw as we moved through the Q1, we were also needing to see an additional, you know, step up in, you know, growth in those categories as we, you know, moved into the early days of the Q2 here. Frankly, you know, we don't see that happening.
What we've tried to do today is to reflect the risk that this destocking, you know, persists through the balance of the year. If I step back then and look at how what's embedded in our guidance, if I look at the underlying core business, we're assuming that that continues to run for the balance of the year at levels that we saw in the Q1. We assume that we'll continue to face the headwinds in the semiconductor market for the balance of the year, with a, you know, a bit of a step up in headwinds in the Q2.
You can kind of see the read-through on that in, you know, some of the earnings announcements from our, from our customers in that, in that space that, you know, definitely validate, you know, the depths of the downturn there. Then on the destocking, what we've assumed there is that, as I said earlier, the Q2 destocking for both lab and bioprocessing, you know, are similar to what we saw in Q1. We've extended those, you know, through the balance of the year. It has the effect in the second half of the year of, you know, showing a modest improvement, as you see in our growth rate.
Of course, that's, you know, somewhat mathematical in that you're running, you know, incremental headwinds on top of the destocking that was embedded in our numbers last year. The, you know, the impact on growth is a little bit more muted in the second half, you know, given the dynamics last year. We have pretty similar levels of destocking factored in here for the second half of the year. From our perspective, we think it's a prudent change that reflects the current dynamics and doesn't really require, you know, much improvement in the business as we move, you know, through the balance of the year.
Vijay Kumar (Senior Managing Director)
Understood. Thanks, guys.
Operator (participant)
Our next question comes from Patrick Donnelly with Citi. Please go ahead, Patrick.
Patrick Donnelly (Managing Director, Equity Research)
Hey, guys. Thanks for taking the questions. Michael, maybe a follow-up on that one. You know, I think you've talked about when you're talking about stocking, you're at least seeing some early signs of things maybe bottoming out or turning a little bit. I guess, what are you seeing in the channel there? You know, to Vijay's question, just on the visibility, you know, what are you hearing from customers? Obviously, you know, the headwind in 2Q, you know, being similar is prudent, but it does sound like you're maybe at least seeing some signs. Would love you to just give us a little more color there on what you're seeing and any levels of confidence that, you know, we are at a trough of sorts.
Michael Stubblefield (President and CEO)
Yeah. Thanks, Patrick. I think probably helpful to maybe provide a little bit of context on, you know, just the operating model that we have here and the level of visibility we have into the different parts of the business. You know, we're facing destocking headwinds, as we've indicated previously, in both our lab consumables category, and in our, you know, liquid handling consumables in bioprocessing. Within those categories, those are, you know, products that our customers would generally expect us to have, you know, on the shelf and, you know, order times and lead times would tend to be, you know, rather muted, you know, certainly measured in days and weeks as opposed to months or quarters.
That's, you know, one of the dynamics that, you know, make, you know, predicting these things somewhat difficult. We obviously have, you know, great access to our customers and are, you know, spending a lot of time in pulsing them to understand the dynamics and the, and the trends. We continue to receive, you know, positive feedback from our customers that in fact, you know, that the health of inventories in these categories are indeed improving. We do see the inventory coming out, perhaps just not at the rate that we, you know, had originally anticipated. We saw improvements in our daily rate of sales in these categories as we moved through the Q1.
The exit run rate in March was, you know, essentially in line with, you know, what we had anticipated going into the year. We had also expected to see an additional step up into the Q2. While, you know, rates are moderately improving, they're just not improving at the rate that we had, you know, originally contemplated. We've, you know, felt it was appropriate to reflect, you know, the risk that this thing extends for, you know, more time than what we had originally modeled, and that's what we have baked into our outlook today.
Patrick Donnelly (Managing Director, Equity Research)
Okay. That's appreciated. Then on the margin side, maybe one for Tom. I mean, when you think about, you guys reset the margin guidance here, down 50 bits to the midpoint now year-over-year, are you taking any cost actions, or is the view this is transitory and we'll keep the PNL where it is, and then there's a level of confidence that next year we get back to the algorithm that you guys have provided in terms of margin expansion? Can you just talk about how you're approaching this and how we should think about that?
Thomas Szlosek (EVP and CFO)
Yeah.
Patrick Donnelly (Managing Director, Equity Research)
that construct going forward?
Thomas Szlosek (EVP and CFO)
Yeah. Of course. Yeah, first of all, Patrick, the view is that it is transitory. You know, we do expect, you know, to be through these headwinds by the end of the year. Notwithstanding that, our plan and even our, you know, our updated guidance reflects, you know, the ongoing productivity initiatives that we continue to, you know, to take. Recall that the three margin drivers for us that we continue to talk about are, you know, pricing and, you know, commercial excellence as well as that the proprietary mix growth that gives us the, you know, better margin mix. Then the third has always been, you know, productivity. We built this year's plan with significant productivity in it.
We're using the ABS, the Avantor Business Systems, to drive a number of discrete projects across the entire enterprise. We've got actions in Americas, in Europe, and in EMEA to drive, you know, continued fixed cost reduction. The one thing that's that is, you know, not being impacted is our investments in on the front end of the business. In terms of commercial sales force, marketing teams and so forth, we continue to invest there across the entire landscape to, you know, to drive the, you know, better top line.
You know, even as we head into the, you know, back half of the year, that continues to be true, while we do, you know, continue to look, you know, at additional opportunities on the cost side. It's front and center for us, was at the beginning of the year and continues to be throughout this year.
Patrick Donnelly (Managing Director, Equity Research)
Okay. Appreciate it, guys.
Thomas Szlosek (EVP and CFO)
Thanks, Patrick.
Operator (participant)
Our next question comes from Michael Ryskin with Bank of America. Please go ahead, Michael.
Michael Ryskin (Managing Director and Senior Equity Research Analyst)
Great. Thanks. Let me throw in one big one to start, and then I'll have a follow-up. First, I'm just trying to deconvolute the change to the guide a little bit. You provided a lot of commentary, but given all the moving pieces, anything you can say in terms of, you know, has the, has demand, has the macro deteriorated at all? You talked about inventory levels as feels like being the biggest change to the guide. Given your comments on semiconductor and some of the, some of the comments you had in the prepared remarks, I'm just trying to parse out the moving pieces here. You know, the $200 million roughly cut to the top line, how much of that is from the inventory of destock?
How much is, you know, semiconductor versus just broader macro expectations going forward? What's built in?
Michael Stubblefield (President and CEO)
Michael, let me take a shot at that. If you look at the adjustment in the guide, it's roughly 300 basis points at the midpoint. Probably the way I'd have you think about that was it's roughly, you know, two-thirds associated with, you know, incremental destocking headwinds that we've, you know, anticipated in the business. The balance of that would be, you know, probably split somewhat equally between a little bit weaker, you know, semiconductor end market, particularly in the Q2, and, you know, moderately weaker, you know, macro environment overall. It's probably those three factors, but clearly more weighted towards destocking.
Michael Ryskin (Managing Director and Senior Equity Research Analyst)
Okay. Thanks. Then on the, on the stocking point, just anything you can say in terms of how much inventory is actually left with these customers? I mean, they can't keep destocking forever. There, there's a finite amount. Any clarity on, you know, where inventory levels. This is both for lab and bioprocess, by the way. Where were inventory levels pre-COVID? Where were they sort of at the peak? Where are they now? You know, any sense of could you be seeing incremental share losses that would account for some of those changes? Thanks.
Michael Stubblefield (President and CEO)
The, certainly the pulsing and the feedback that we get from our, from our customers, as I indicated before, would certainly support a view that inventory health across the network is improving. you know, I think we've taken a, you know, a prudent approach here in, you know, trying to de-risk the second half of the year, if you will, just given that, you know, you don't have a, you know, pre-precise data here to call it exactly. Extending kind of similar levels of drawdown, in, you know, through the, through the balance of the year here, I think, you know, certainly, would cover probably, our expectations for what theoretically could be, you know, being held at our, at our customers.
you know, hopefully, you know, it proves to, you know, to be just that, to be a bit on the conservative side. In fact, we don't have, you know, visibility that takes us all the way through the end of the year in order books and such. you know, certainly this would indicate that there was, you know, perhaps a year's worth of inventory in some of these categories, which, you know, that's probably on the outer end of any data that we've seen or any input that we've received from our customers. I think it's a prudent approach given the data that we do have.
Thomas Szlosek (EVP and CFO)
Yeah, Mike, and I would, you know, I would just like follow up some of the conversations you've had with us, along the way here. I mean, it was pretty clear that our original guide had anticipated, you know, an earlier inflection point on destocking. As we're here deep into April, just haven't seen it yet. The feedback, as Michael said, from customers is very clear that inventory levels are moderating. But it isn't at a point yet where we're seeing that in order rates. You know, so we felt that it was prudent to incorporate, you know, more of that through the balance of the year as we have.
Michael Stubblefield (President and CEO)
Michael, the other thing I would add, you mentioned, you know, what's the, you know, the, this topic of potential, you know, share loss. You know, what I would, you know, say to that is, which probably won't surprise you, is that, you know, we would fundamentally, you know, disagree with any assertion that we are, you know, losing share. We, you know, continue to be encouraged by, you know, the traction that we're getting with our customers. If you look beyond just these categories that are destocking, I think there are some pretty healthy trends there that support our views.
If I, you know, look at, you know, sales of lab chemicals, for example, and the growth that we saw in the Q1, which was, you know, rather healthy and, you know, certainly well above our group average here, you know, certainly A, you know, gives us some confidence in the health of the end markets, but certainly also, you know, revalidates the position we have with our customers. We've had some number of really high-profile customer wins here of late. We talked a little bit about Catalent last quarter, which is, you know, one of the larger wins we've had. We also, you know, have some a number of other accounts that have, you know, flowed our way here in recent, you know, weeks and months.
When we look at our growth with our, with our core customers relative to, you know, things like, you know, the change in their R&D spend, you know, we continue to run well ahead of, you know, the trends of their own spend levels. I think, you know, we continue to be quite encouraged by the traction and momentum that we have with our customers. If I broaden it beyond just like, the lab, category and the research environment, you know, our bioproduction business continues to, you know, to be a real source of strength for us. We continue to outgrow the broader market by, you know, several hundred, you know, basis points.
Similar to lab, you know, if you move beyond the destocking categories, you know, we see things like processing ingredients and excipients, which, you know, we don't think are, you know, facing some of these headwinds, you know, again, really, you know, strong momentum that gives us, you know, encouragement about just the underlying health and activity level at our, at our customers and our positioning.
Michael Ryskin (Managing Director and Senior Equity Research Analyst)
Okay, thanks. The next question comes from Rachel Vatnsdal with JPMorgan. Please go ahead.
Rachel Vatnsdal (Executive Director, Equity Research)
Great. Thanks for taking the questions. Appreciate the comments of emerging biotech being 2% to 3% of total revenues. Can you walk us through your exposure to emerging biotech within bioprocessing? Separately, there's been some concern about the cell and gene therapy market, just with some of the comments from peers this week. Walk me through what's your exposure to cell and gene, and then have you seen any shift in demand or ordering patterns from customers within that market?
Michael Stubblefield (President and CEO)
Yeah, let me unpack those questions for you, Rachel. I'll maybe take them in reverse. On the cell and gene, you know, therapy space, you know, one of the things I really like about our platform is, you know, we're gonna be, you know, relevant across all modalities, both at commercial scale as well as in, you know, the pipeline. While we're encouraged by the momentum overall in cell and gene therapy, and, you know, the health of the pipeline, clearly the commercial platforms are heavily, you know, slanted towards, you know, monoclonal antibodies driving the bulk of our revenue there, kind of in line with just the split of revenue, you know, at an end market level there.
You know, yes, we certainly have exposure to cell and gene therapy within our bioproduction platform, but it would be, you know, in the proportion of, you know, overall cell and gene therapy end market revenue as a proportion of total, you know, biologics end market revenue. Certainly nothing outsized to think about there. Certainly in the pipeline, you know, a lot of our R&D activity certainly would be supporting, you know, a rather, you know, fulsome, you know, cell and gene therapy, you know, pipeline. It's an end market that I think, you know, long term, you know, favor, you know, growth in that space. You know, we're not gonna be over-indexed to any particular, you know, product or, you know, customer.
It's a rather diverse platform as you know. You know, regarding, you know, order rates or things like that, have we seen a change in patterns? I'd say, you know, just, you know, given the diversity of the platform, certainly nothing that I would call out as driving, you know, momentum one way or another. I think, we continue to have, you know, strong specifications across all these platforms. We are certainly seeing, you know, good growth across, you know, all of our, you know, modalities and are encouraged by the approvals that we see coming through. On the biotech side, you know, most of our exposure there is going to be on the research side, as I said, earlier.
While we, you know, like that customer segment a lot, just given the number of molecules that they're developing, it is, you know, kind of low single-digit exposure for our platform. It was off, you know, double-digits in the Q1. It was also off in the Q4 following, you know, quite a lengthy period of growth. It seems to have moderated a bit. When I look at the bioproduction side of our business, which we tend to think about only on, you know, commercialized, you know, platforms, your exposure there would typically be, you know, through the, you know, CDMO lens where you have, you know, biotechs that are scaling up to produce commercial quantities, probably don't have their own capabilities.
We would probably service those through, you know, the CDMOs around the world that we would, you know, that we'd be working with there. You know, overall, you know, I don't think we, you know, are calling out any particular, you know, risk here from a biotech standpoint that's, you know, moving the needle one way or another on our numbers.
Rachel Vatnsdal (Executive Director, Equity Research)
Great. Thanks. One on semis here. Appreciate that your products are really used in that semi processing in bulk on the production side, so you're more closely tied to current demand levels than some of your peers. Can you just confirm for us that your exposure to the semiconductor market is still 2% to 3%? It sounds like roughly 75 basis points of the guidance change is tied to the worsening market for semis. How much revenue is really left in that model for semiconductors this year? Is there any risk to that declining further? You know, finally, on semiconductors, when do you think you're gonna have visibility on this market, and at what point could it really flip positive? Thank you.
Michael Stubblefield (President and CEO)
Yeah. Just to remind you all on our offering into the semiconductor market, we certainly have a host of, you know, lab consumables and PPE and clean room offerings that support our customers there. Probably the biggest headwind we're facing at the moment would be on the formulated, you know, chemical solutions that are used in the actual manufacturing of a semiconductor wafer, primarily in logic chips that provide, you know, cleaning and etching functionality, you know, throughout the manufacturing process. It's, you know, truly a consumable that's gonna mirror our customers' manufacturing output and their production levels.
Similar to what we see in life sciences, there is a very, very significant inventory correction that's underway within the semiconductor space. You know, if you look at the earnings release from our customers, you know, that space, they're off, you know, 40%+ and their production schedules are probably off even more than that as they, you know, look to reset inventories. We typically, you know, get a little bit longer range forecast from our semiconductor customers that are updated, you know, kind of on a rolling monthly basis.
We do see a step down coming through in the Q2, but we are encouraged by, you know, the feedback we're getting from our customers that they see kind of arresting the inventory headwinds, you know, somewhere around mid-year here and, you know, then the return to kind of recovery as we move through the back half of the year. We've factored in, you know, pretty much headwinds all year, probably the steepest in the Q2. You know, I think the view here is that the health of that end market, you know, improves heading into 2024.
Operator (participant)
Our next question comes from Dan Brennan with TD Cowen. Please go ahead, Dan.
Dan Brennan (Senior Analyst)
Thanks, thanks for taking the questions, Michael and Tom. Maybe just one on back to the guide. For the inventory destock, it sounds like it's around 4% in the first half, right? Roughly, I believe, you know. Maybe a little higher in 2Q, I guess, but I'm not sure if the delta between the 1Q and 2Q is all semis. Are you now contemplating or is included in the guidance now that 4% headwind persists in 3Q, 4Q? When we look at your guidance, we should be thinking about that's baked in to the implied organic growth, that much of a headwind drags through the full year now.
Michael Stubblefield (President and CEO)
Yeah. Maybe clarify a couple of points there, Dan. On the Q1 headwinds from destocking, it was roughly 500 basis points, and we have a similar level factored in for the Q2. No real change there. If you look at the back half of the year, you know, you can do the math and see that our core organic growth rate overall, you know, improves somewhat relative to the first half of the year, in order to come in at the midpoint of our full year guidance. Really what you see reflecting there is the fact that the second half of last year also had, you know, meaningful, you know, destocking headwinds in there.
While we're indeed, you know, carrying forward incremental destocking in the second half beyond what we saw last year, it does have the effect of, you know, showing an improved, you know, growth rate in that it was off of a lower base or a time period that also reflected the headwinds. We're seeing, you know, kind of similar levels of destocking is what the guidance contemplates in the second half as we see in the first half.
Dan Brennan (Senior Analyst)
Okay.
Michael Stubblefield (President and CEO)
You made a comment about semiconductors. Semiconductors, you know, are in fact worsening by, you know, roughly a full point in the Q2 relative to the first point, the Q1. If, you know, if we think about having roughly 600 basis points of headwinds in Q1, that was roughly 500 associated with destocking, another, you know, 100 basis points or so for semis. As you look at Q2, it steps up to roughly 700 basis points of headwinds, as Tom indicated in his prepared remarks. Similar levels, 500 basis points of destocking, roughly 200 basis points of semi headwind in the Q2 that we see moderating back to, you know, something closer to the 1% headwind for the balance of the year.
Dan Brennan (Senior Analyst)
Got it. Great. Thank you for that. Maybe just one other, I know you highlighted beyond semis, there was, you know, some impact from broader industrial. Just kind of remind us, I think, you know, maybe half of your advanced tech and applied materials could be considered some more cyclical industries, but just kind of ex-semis, what else like kind of are you seeing in there? Just kind of quantify and give us some color about kind of what's baked in and kind of how you arrived at that. Thank you.
Michael Stubblefield (President and CEO)
If you look at the performance of our advanced tech and applied, you know, materials end market, which, you know, would, you know, certainly have some end markets there within there that do exhibit, you know, more cyclical GDP type, you know, dynamics. We were actually overall, I was, you know, relatively pleased with, you know, given the macro environment we're operating in, on how well that, you know, that platform performed. It was, you know, kind of down, you know, low single digits, if you will, which, you know, in large part is being driven by, you know, what we're seeing here in semiconductors.
We actually saw growth, for example, in Europe, you know, in our applied exposure there, which was, you know, somewhat encouraging given, you know, what we've, you know, been keeping our eye on in, in Europe. You know, whether it's petchem, oil and gas, you know, some of the other, you know, food and beverage, you know, these are the aerospace defense. You know, these are some of the other end markets that we would, you know, serve in there. I'd say generally overall, you know, that part of our business held up reasonably well. You know, the most notable, you know, point to make here is probably the, you know, just the heavy downturn in semiconductors.
I mean, I think on this, you know, what we supply into the manufacturing process itself, you know, is probably down 50% in Q1, and it's probably gonna move to down 70% in Q2 before, you know, bouncing back a bit. It is really driving the numbers there. And, you know, with a lot of that exposure being in the Americas, you know, enables probably a better read-through in Europe where we don't have as much semi exposure. You can see how the applied markets for us are playing out, where we actually grew mid-single digits in the quarter.
Dan Brennan (Senior Analyst)
Great. Thanks, Michael.
Operator (participant)
Our next question comes from Jack Meehan with Nephron Research. Please go ahead, Jack.
Jack Meehan (Research Analyst)
Thank you. Good morning.
Michael Stubblefield (President and CEO)
Good morning.
Jack Meehan (Research Analyst)
I wanted to ask about the margin cadence into the second half of the year. Just playing around with the numbers, I think it implies, you know, about a 200 basis points step-up in second half EBITDA margins relative to the first half. Historically, I look like pre-COVID, it's been a little bit more muted than that. Can you just walk us through the framework on margins, you know, into year-end?
Michael Stubblefield (President and CEO)
Yeah. Thanks, Jack. The, yeah, so, you know, Q1, as you, as you know, as a reference point, you know, came in at, you know, at $19.4, which, you know, was down significantly from, you know, the Q1 of 2022. You know, the COVID impacts on the revenue side, were the most, you know, pronounced impact there. So we had roughly $90 million of COVID headwinds coming out in the Q1. That's, you know, predominantly proprietary materials, which are, you know, very high margin content. You know, so that contributed to, you know, the bulk of that reduction.
The, the headwinds that we've talked about as well in the particularly in the biopharma production, you know, category also, you know, have pretty good margins. The, the combination of those two is what, you know, kind of drove us, you know, to, you know, to the, to the lower margins. As you progress through the year, you know, we do see, you know, improvement in the second half. I do think that when you look at the Q2 and you model that out, it'll be very similar to the first half in, in terms of, you know, pure PNL, you know, numbers, probably, you know, $20 million more of revenue or so at the midpoint. A couple points of EPS.
Your margin rate, I think, you know, continues given that you have that same, you know, complexion of headwinds continuing. We do see the second half an improvement. We do see a step up in the margin rates as, you know, those revenues and the inflection points that we're anticipating, you know, come into play, particularly on the biopharma side. Overall, you know, full year, you know, we do end up, you know, at the midpoint of what we've talked about, you know, would be, you know, modest reduction from, you know, 2022 overall.
Jack Meehan (Research Analyst)
Got it. Okay. As a follow-up, wanted to ask just the performance of Masterflex and Ritter in the quarter. I know, you know, don't break out the M&A sales anymore, but just, you know, how is their progression, you know, to start the year kind of relative to the exit rate at the end of 2022? Thank you.
Michael Stubblefield (President and CEO)
Thanks for the opportunity to talk about those, Jack. We're actually, you know, continue to spend a lot of time in driving the acceleration of synergies on really across all 3 of those 2021 acquisitions. When I look at Q1 in isolation, you know, happy to report that all 3 of those platforms were either, you know, at or above our, you know, plans for the quarter with, you know, starting to see some momentum really across all 3 of those.
I think in the press release we referenced, you know, a couple of, you know, new product launches in our Ritter category that we've been, you know, signaling, and we've got some more that'll come here in the Q2 that will, you know, continue to bolster our portfolio and better position us. You know, we do see inventory positions improving and the engagement with our customers in Ritter, you know, starting to pick up as well.
You know, Masterflex, you know, we continue to drive hard after, you know, some of the innovation, and are, you know, quite encouraged by, you know, what that does for, you know, the, you know, building out and really the only end-to-end aseptic fluid management solution in the, in the space, and certainly a lot of excitement from our customers. I would say one of the more notable things in Masterflex in the Q1 is just the improvement in the supply chain. You know, we've been talking a lot about, you know, headwinds on, you know, access to chips and stuff and the backlogs on the pump and while we continue to work through some of those challenges, you know, I think we've been able to cut the lead times on our peristaltic pump offering by half.
We've got a little bit more room to go yet before that ultimately normalizes, but certainly some good momentum there. On RIM Bio, obviously a more modest sized, you know, platform for us. But we're super excited by, you know, the progress that we're making in translating that, you know, technology, particularly the 2D and 3D bag technology to our customers around the world. You know, we had talked at the Q4 call about, you know, some meaningful revenues that, you know, we were looking to capture in the Q1 on that platform, and, you know, certainly those came through as planned. You know, it's an area that we're gonna continue to drive hard on.
We've got a lot of resources focusing on, you know, capturing these commercial synergies and, you know, we continue to anticipate, you know, these platforms, you know, growing in 2023. You know, certainly they, you know, we're keeping pace with those plans in the Q1.
Operator (participant)
Our next question comes from Dan Arias with Stifel. Please go ahead, Dan.
Dan Arias (Managing Director and Senior Equity Research Analyst)
Good morning, guys. Thanks for the questions. Michael or Tom, on biopharma overall, low single digit decline in the quarter. What should growth be, growth or decline be for the year there? What should bioprocess specifically be for the year? Apologies if I missed that in the moving parts of the guide. As a follow-up, you guys have talked about service penetration and just what that mean for you. Do you think that service can be accretive for the biopharma piece, or should we more or less expect that to move alongside the product side? It feels like it could be a little bit more sticky for you guys.
Michael Stubblefield (President and CEO)
Yeah, happy to talk a little bit more about, you know, biopharma. Of course, there's some significant COVID, you know, headwinds that run into our biopharma numbers. You probably also have to think about it on both an organic as well as a core basis. You know, within the Q1, you know, biopharma overall was off, you know, high single digits. You had, you know, in that particular end market, we had a bit over 500 basis points of COVID headwinds, you get to a core growth rate of low single digits as you indicated.
You know, I think for the year as you see the, you know, COVID headwinds subsiding as we move through the year, that certainly leads to, you know, better growth rates, you know, sequentially, you know, each quarter. You know, Given the comps in the second half of the year that do include, you know, destocking, you know, although we've, you know, continued to model destocking, you know, persisting through the second half of the year, the impact that that has on growth is a, is a bit more muted.
You know, you move from kind of low single-digit, you know, decline in the, in the 1st quarter to, you know, on a full year basis, you're probably looking at a, at a low to mid single-digit growth for biopharma overall. You know, that would, you know, contemplate bioprocessing, which is the production, you know, component of that, you know, coming in and around, a mid-single-digit level then.
Dan Arias (Managing Director and Senior Equity Research Analyst)
Okay, helpful. If I could just maybe ask another and just sort of stay with the details around the inventory topic. When you look at the destocking activity that's taking place, and you try to separate bioprocess from routine lab consumables, are you able to discern a difference when it just comes to the pace of the workdown? I mean, is everything looking like it's moving at the same velocity, so to speak? Or do you think that at the end of the day, we see one of these buckets resolve itself a little faster than the other?
Michael Stubblefield (President and CEO)
That's a really good question, Dan. As we look into the data, and as we have extrapolated the, you know, the potential risk into the second half of the year, we've got them moving at about the same pace. You know, the data coming back from our customers would certainly indicate that's not a bad way to think about that. If I look at, you know, changes in daily rate of sales as we move through the Q1 and into the early days here of the Q2, I think that's another, you know, validation of our view that they seem to be winding down or, you know, moving at roughly the same pace.
we've, you know, as we've extended the view into the second half, it does cover, you know, both of those categories.
Dan Arias (Managing Director and Senior Equity Research Analyst)
Okay. Thanks very much, guys.
Operator (participant)
Our next question comes from John Sourbeer with UBS. Please go ahead, John.
John Sourbeer (Director)
Hi. Thanks for taking the question. I guess just, you know, continuing on the destocking here. Just any broader, you know, regional color on how you see this playing out in the second half by region? Just second question here I'll ask you too at the same time. You know, on the industrial and applied market piece, I guess just how much conservatism do you think you have in the guidance for this new market? You know, if we were to enter a deeper recession in the second half of the year, I guess, how much do you think that is baked in on the guidance there? Thanks.
Michael Stubblefield (President and CEO)
Yeah. On destocking, you know, that's gonna, you know, kinda cover, flow in line with, you know, just the revenue splits that we have, you know, between the region, which is, you know, just another way of saying we have probably more destocking headwinds in the Americas. That's probably more a function of, you know, our Americas business, you know, being, you know, roughly 2x what our, what our European business is. We certainly see both in the lab as well as in, you know, bioprocessing, you know, headwinds in both regions. On the COVID side of things, as the COVID headwinds wind down, you know, particularly on things like the vaccine, we had more pronounced, you know, headwinds in the Americas.
You know, I would say the on a percentage basis, you know, you see similar dynamics between both regions, and, you know, a bit more, you know, muted exposure in Asia, of course. On your second question regarding, you know, just, you know, the applied markets and how we see those, you know, playing out, you know, pretty encouraged, like I said, by what we saw in the Q1, you know, down low single digits with semiconductors being off, you know, 50%. We've contemplated that being off 70% in Q2.
I think we've got a pretty realistic, you know, view of, you know, baked in here, that, you know, I think we're, you know, we're comfortable with at this point.
Operator (participant)
Thank you everyone for your questions. Unfortunately, those are all the questions we have time for today. I'll now turn the call back to Michael for closing remarks.
Michael Stubblefield (President and CEO)
Yeah. Thank you, Emily. Thank you to all of you for participating in our, in our call today. You know, certainly appreciate your support and interest in our, in our business and look forward to updating you when we meet next. Until then, take care and be well, everyone. Thank you all.
Operator (participant)
Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.