Avantor Inc

NYSE:AVTR

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the Avantor Second Quarter Earnings Call. [Operator Instructions] Helen O'Donnell, Investor Relations Contact for Avantor. You may begin your conference.

[Helen O'Donnell]

Thank you, and good morning, everyone. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Tom Szlosek, Executive Vice President and Chief Financial Officer. The press release and a slide deck accompanying this call are available on our Investor website at ir.avantorsciences.com. A replay of this webcast will also be available on our website following this call.

Following our prepared remarks, we will open up the lines for questions. I would like to note that we will be making some statements during the call that are 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, and we do not assume any obligation to update whether as a result of new information, future events and developments or otherwise.

This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found at the back of the presentation.

With that, I will now turn the call over to Michael.

[Michael Stubblefield, executive]

Thank you, Helen. Good morning, everyone. Welcome to Avantor's First Quarterly Earnings Call as a public company, following the successful completion of our initial public offering in May. We are pleased to report strong second quarter results with outstanding organic growth, margin expansion and cash flow generation.

Before discussing the quarter in more detail, I would like to provide a brief overview of the business and Avantor's customer-centric model. Avantor is among the most recognized and trusted global providers of products and services in the life sciences and advanced technology and applied materials industries. Our customers rely on us in virtually every stage of the most important research, development and production activities they perform and they value and trust our integrative approach. It is the basis for our enduring relationships. We believe that our customer-centric model differentiates us from other industry participants and suppliers. One of Avantor's greatest strengths comes from our global footprint that enables us to serve more than 240,000 customer locations, giving us extensive access to research labs and scientists in more than 180 countries.

With this access, we're able to position our comprehensive portfolio of products and solutions for a wide variety of customer workflows. Importantly, as we engage scientists in early phase discovery work, we can customize solutions that often get specified into customer formulations, driving stickiness and recurring revenue as these platforms are commercialized. We extend our reach and further embed ourselves in our customers' workflows through our robust service capabilities. And our offering is underpinned by a world-class quality system and robust supply chain that enables us to meet the stringent requirements of an exacting customer base. This differentiated framework enables us to partner with our customers every step of the way as they bring critical life-saving therapies to patients around the world.

The value of our model is evident in our attractive growth, margin and deleveraging profile. We have a very diverse revenue base that spans a wide range of customer applications and end markets. When combined with the customized nature of our business, it makes for a very resilient model. We are well positioned for continued growth in the Americas and Europe and are realizing upside from outsized growth in Asia, the Middle East and Africa, where our infrastructure and footprint continue to expand. For example, during my recent trip to China, I was able to see firsthand the progress we are making on the construction of our new application and technology center that will open in Shanghai later this year.

Avantor offers a comprehensive portfolio that includes more than 6 million distinct products and services that enable us to contribute to some of the most demanding and challenging areas of science. Approximately half of our revenue comes from the Avantor branded solutions and roughly 85% of our business is recurring. We strategically serve 4 end markets that share similar characteristics, including high regulatory oversight and complex development processes. Our penetration of market leaders and startups alike is a proof point of our relevance and importance in the industries we serve. We are well diversified as no single end customer represents more than 4% of our net sales. With more than half of our revenue in biopharma and health care, we are well positioned to leverage the favorable macro trends in the life sciences space.

Our largest customer end market is biopharma, where industry dynamics remain favorable, especially for the large molecule space where we are well positioned to support our customers across a range of disease indications, including oncology, rheumatology, respiratory and neurodegeneration. Given the breadth of our solution and our access to the critical phases of early-stage development, we ultimately earn specifications that allow us to serve our customers' critical workflows at production scale.

This slide demonstrates the breadth and relevance of our solution for biopharma manufacturing. Our solution spans the upstream fermentation processes that drive cell growth and protein expression, the downstream protein recovery and purification steps as well as the final formulation processes. Our solution is underpinned by our single-use sterile fluid transfer technologies that connect each of the unit operations, helping to minimize the risk of product contamination. Our penetration of market leaders is a proof point of our relevance and importance in this critical workflow. We are specified into more than 80% of the top 20 biologic drugs and have a leading position in our core technologies, including buffers and excipients. Our recently completed IPO was the largest healthcare IPO in U.S. history and provides us with a stronger financial position to continue to grow our business. Given strong investor demand, we were able to build a high-quality blue-chip investor base and increased the total capital raise to $4.4 billion. We used the proceeds to retire $2.6 billion of senior preferred equity and paid down $1.6 billion in term loans.

Following the IPO, we received upgrades from all 3 rating agencies and successfully repriced our term loans. With these actions, we reduced our annual interest expense by more than $100 million annually. With our improved capital structure and continued strong business performance, we reduced our leverage 1.8 turns in the second quarter, positioning us to end the year with leverage near 4.5x.

Turning to our second quarter business results. Our strong momentum continued and we delivered another excellent quarter, with 6.1% organic revenue growth and a 140 basis point improvement in adjusted EBITDA margin. Importantly, we made great progress in executing our growth strategy. We had a number of significant contract wins and renewals, made key additions to our product portfolio and realized a substantial increase in web activity following recent investments to our e-commerce platform. In addition to delivering a record quarter in our bioproduction platform, we secured a major supply position with our aseptic single-use technology for a leading pharmaceutical customer that is launching a lifesaving gene therapy treatment. We also broke ground on our new biorepository facility in Germany, reinforcing our commitment to the services platform and enabling sustained double-digit growth. Our integration of VWR continues to track ahead of schedule, including realization of synergies. As we have previously outlined, we expect to capture more than $300 million of cost and commercial synergies by the end of 2020.

As of the end of the second quarter, our program is more than 3/4 complete, with a run rate impact of approximately $230 million. These synergies are an important driver of our margin expansion and overall value creation. As I referenced earlier, we reduced our leverage in the second quarter by 1.8 turns, with 0.3 turns coming from our operational performance within the quarter. We remain committed to deleveraging our balance sheet by roughly 1 turn per year as we look to operate in a more normalized leverage range long term.

Before I hand off to Tom to discuss our second quarter results in more detail, I would like to remind you of our long-term financial goals and convey how well we performed against them this quarter. Avantor's organic growth of 6% demonstrates the continued momentum of our business as well as the value of our integrated platform. Our operational discipline and synergy capture drove significant margin expansion and increased unlevered free cash flow. As I referenced earlier, we are on pace to end the year with leverage near 4.5x and are well positioned for a strong finish to 2019.

Now I'd like to turn the call over to Tom to review our financial performance in more detail.

[Thomas Szlosek, executive]

Thank you, Michael, and good morning to you all. I'm starting with Slide 9. As a reminder, our external reporting segments are the geographic regions. This is how we run the business and evaluate our performance internally. The Americas and Europe regions comprise about 95% of our business. AMEA growth and results certainly stand out, but the other 2 regions account for the bulk of our overall performance currently. This ratio will change over time as we continue to invest and deliver outsized growth in AMEA. We had good momentum coming into the quarter, having experienced 7% growth in 2018 and 8% in the first quarter of 2019. So the 6% growth continues that growth trend.

Starting with the Americas. Net sales increased 5.2%, primarily a result of improved pricing and volume growth, offset by a slight foreign currency impact. Sales to biopharma, our largest customer group, grew by a mid-single-digit rate. Growth was strong across the full spectrum of workflows from discovery to delivery. We have a comprehensive solution for bioproduction, including process ingredients, excipients, process chromatography and single-use solutions that is contributing to our customers' innovation and productivity. We experienced low double-digit growth in education and government, driven by continued volume growth from universities and from the timing of certain seasonal orders in 2019 compared to 2018.

Advanced technologies and applied materials was essentially flat. This is a diverse set of customers and applications, and we play this space in a unique way that somewhat isolates us from macro volatility. We continue to see growth on the back of new specifications and platform wins in the electronic materials business and in aerospace and defense, that is offset by some sluggish demand in other areas like petrochemicals and food and beverage.

In Europe, net sales increased 6.1%, driven by strong volume growth and improved pricing. On a reported basis, the strength in the U.S. dollar created a currency headwind that almost completely offset the organic growth. Biopharma grew low double digits, driven by our broad offering in areas like cell biology and high-performance liquid chromatography products as well as continued growth from our larger global customers. Advanced technologies and applied materials grew in the mid-single-digit range, driven by chemicals and consumables, offset by non-repeating 2018 projects in equipment and instrumentation. We experienced low single-digit growth in education and government as a healthy demand environment was partially offset by the completion of a nonrecurring project sale recognized in 2018.

In AMEA, the 17% organic sales increase was driven by volume growth, principally in our largest customer set, biopharma, as the investments we have made in our sales force, supply chain and warehousing continue to bear fruit. We did see some modest declines in the industrial customer set, driven by softer demand from our semiconductor customers in this region, partially offset by continued growth in industrial labs. On a reported basis, the strong organic growth for AMEA was slightly offset by an approximate 2% unfavorable foreign currency impact.

Moving to Slide 10, where we provide some color on our Q2 global growth by end market and by product group. Biopharma is our largest end market. I mentioned it several times in my regional commentary, and you can see that the growth in Q2 was low double digits. That growth was fairly consistent across the full spectrum of workflows in the industry from discovery to delivery. Health care is less than 10% of the overall portfolio, although it is very profitable. Americas was slightly down as strong sales of our biomaterials offerings were offset by slower sales in Canada from customers dependent upon government funding and by our exit of certain lower-margin customer accounts. In Europe, health care was slightly up as the steady growth across the platform, was slightly offset by the absence of a non-repeating project from 2018.

Education and government grew in the high single-digit range, principally driven by the strength I mentioned in the Americas. Last, advanced materials -- advanced technologies and applied materials grew in the low single-digit range. I mentioned the factors in Americas and Europe contributing to this result. The right side of the slide depicts the growth across the product groups. And as a reminder, most of our offerings are rapidly consumed or deployed, making the revenue recurring in its nature and resilient to cyclical variations. We experienced the highest growth rates in Q2 in our proprietary materials and consumables, which provide a richer mix of margins. Also, our growth in the services and specialty procurement product group stands out, as the investments we continue to make in these spaces continue to pay off.

Moving on to Q2 performance on Slide 11. I'm pleased to report that our adjusted EBITDA of $269 million was up 15% on a constant currency basis from 2018, and that we expanded margins 140 basis points. This continues the trend we had in 2018 where we expanded margins 160 basis points, and in the first quarter where we expanded margins 150 basis points. The performance reflects the accretive margin profile of our business, owing to its natural operational leverage in growth environments and to the ongoing realization of synergies from the VWR integration.

I will walk through the drivers of the Q2 margin performance in more detail on a subsequent page.

A little housekeeping on adjusted EBITDA. Adjusted EBITDA is our primary profitability measure. It is GAAP-based EBITDA adjusted for nonrecurring items. We had 3 meaningful nonrecurring items in the second quarter. Share-based compensation expense, which was $43 million; loss on extinguishment of debt of $70 million; and foreign currency gain on intercompany transactions of $14 million. The share-based compensation item is a noncash charge that was triggered by the successful completion of our IPO in the quarter. The loss on extinguishment of debt results from the write-off of previously capitalized costs associated with a debt that was paid down with the May 17th IPO proceeds. Our cash flow has markedly improved from 2018. In the second quarter, our free cash flow was up $15 million, and for the first half we were up $43 million, going from 0 in 2018 to $43 million in 2019. We measure the business performance on free cash flow, excluding interest expense or unlevered free cash flow. In the second quarter, our unlevered free cash flow was up 8%, and for the year we are up 21%. I have a subsequent slide with more details on free cash flow.

The last area to cover on the slide is adjusted earnings per share. For comparability purposes in this presentation and in our press release, we have used a share count of 643 million shares for both 2019 and 2018. This represents the outstanding share count post-IPO of 565 million shares plus the dilutive impact of the mandatory convertible preferred stock and options outstanding. Our adjusted earnings per share on this pro forma basis grew from $0.09 in 2018 to $0.14 in 2019, or a growth of 60%. That is approximately $0.055 per share, of which approximately $0.04 or 3/4 of the growth came from operations improvement. The remainder was driven by the netting of lower interest expense, offset by a slightly higher tax provision.

On Slide 12, I want to spend a few minutes highlighting the drivers of our EBITDA margin expansion. On the gross margin side, we enjoyed 40 basis points of expansion with pricing being ahead of overall cost inflation for the quarter and synergies from the integration of VWR also contributing. The bigger impact on the adjusted EBITDA improvement was from SG&A, which contributed 100 basis points of EBITDA margin expansion. Our 6% organic sales growth resulted in the leverage of the fixed cost base that we have in the business. In addition, the cost synergies from the integration of VWR also had a meaningful impact. These factors were slightly offset by some modest cost investments that we've made in our front end sales, marketing and technology functions, particularly in the major AMEA region. I also want to give you a brief update on the VWR integration and the result in cost synergies. As a reminder, we closed the VWR acquisition in November 2017 and identified $300 million of synergies, including $230 million of cost synergies. At that time, we expected the cost synergies to be realized over a 3-year time frame, with a heavier proportion of G&A type synergies at the front end and the supply chain synergies coming at the back end. Through the end of the second quarter, we have completed actions to earn $153 million of that $230 million. Of the $153 million, $120 million has already been realized in our P&L and including the value of the commercial synergies, we have earned $230 million of the $300 million in total deal synergies. The synergy program is on track and is clearly resulting in attractive profits and cash growth and balance sheet deleveraging.

On Slide 13, I'd like to share the P&L results for each of our 3 segments. I previously discussed the sales growth drivers for each segment and the adjusted EBITDA growth drivers for the enterprise in total. So here, I'll focus on management EBITDA for each region. We utilized management EBITDA as the measure for segment profitability. Management EBITDA is similar to adjusted EBITDA, but excludes ongoing share-based compensation and a few other less significant items. Americas margin improved 250 basis points, driven by strong pricing performance, volume growth and productivity initiatives, including the VWR integration synergies. Europe margins grew by 80 basis points, with volume growth and VWR integration synergies, more than offsetting the dilutive impacts of the strengthening U.S. dollar on the region's performance. AMEA margins contracted 430 basis points as the margin benefits from the 17% sales growth were more than offset by cost investments that we've been making in sales, marketing and technology resources to foster stronger growth in the region. We've not presented the corporate segment on this page, but corporate costs decreased 16% during the quarter, reflecting ongoing productivity initiatives and the cost synergies from the VWR integration.

On Slide 14, we present some additional detail on free cash flow. Again, this is a very strong story for us, with GAAP-based free cash flow going from 0 in the first half of 2018 to $43 million in the first half of 2019 and unlevered free cash flow growing 21% in the first half to approximately $200 million. There are a few drivers of the cash flow growth to point out. First, the growth in profits. So adjusted EBITDA is clearly benefiting our cash flow. Second, the impact from the deleveraging and the debt repricing are starting to benefit both interest expense and cash paid for interest. This impact will accelerate over the course of the next 4 quarters based solely on what has already been completed, not to mention future repricing opportunities. Third, cash taxes are becoming a bigger outflow, but we also have significant opportunity in this area. In the second quarter, our cash paid for taxes increased $15 million, and we expect to pay approximately $145 million in cash tax in 2019, an increase of about $80 million from 2018's $66 million.

The improving profitability in the business and the reduction in the costs incurred to generate the VWR synergies, including restructuring, are driving taxable income higher, particularly in the U.S. Additionally, we are subject to a 30% limitation in the amount of interest that can be deducted in the U.S. The good news is that amounts over that limit are carried forward and can be used to lower taxes, otherwise payable in future periods as we reduce debt. Additionally, in 2018, we utilized loss carryforwards that reduced our total payments by approximately $30 million, and we also received a refund of approximately $25 million. Cash taxes and our effective tax rate are a big area of attention for this management team. We expect our effective tax rate to be 30% to 31% for 2019 and are in the process of implementing actions to further reduce that rate in 2020 and 2021. The fourth element in the discussion of cash is working capital. You can see that we added $40 million to our working capital in the second quarter, reflecting some seasonal build of inventory to support certain customer contracts as well as to support growth overall, particularly in AMEA. Putting inventory aside, we're doing a decent job with receivables, particularly in the Americas and Europe regions and are carefully managing investments to support growth.

Working capital is receiving a significant amount of attention from our management and our Board. It comprises 20% of the company-wide incentive plan and is an area very fertile for the application of the Avantor business system, which is our approach to continuous process improvement. The last item on free cash flow I want to touch on is capital expenditures. While our model has historically required only modest CapEx investment, we do continue to invest to support attractive growth opportunities. Recent examples include the European biorepository facility, which Michael mentioned earlier. A new production line in electronic materials, application and technology infrastructure in Shanghai and a new GMP warehouse in Singapore.

Slide 15 provides a leverage update. We calculate leverage as total debt divided by our adjusted EBITDA. From that adjusted EBITDA, we subtract ongoing share-based compensation expense, a noncash burden on the enterprise and add in the cost synergies from the VWR acquisition that had been earned but not yet realized in the P&L. As you can see from the slide, we started the year at 7x and are down to 5x at the midpoint of the year. A 2x reduction, 1.5 of that 2x reduction came from the IPO. The remaining 0.5 resulted from the natural deleveraging that our business model provides. For 2019, we are well positioned to achieve our goal of deleveraging 1/2 to a full turn per year through 2020. Longer term, we expect to maintain leverage levels in the range of 2x to 4x depending on alternative capital deployment opportunities. M&A will become an important part of our long-term growth strategy and will influence where we are positioned within this leverage range. As I suggested earlier, the deleveraging and pricing are starting to have a meaningful impact on our interest expense. In 2018, our interest expense was $530 million. In 2019, we expect it to approximate $440 million. And in 2020, we're forecasting approximately $380 million. Net of tax, that reduction will be greater than $0.05 benefit in EPS for 2020 or more than a 10% increase in EPS. And these interest expense estimates do not include any further benefit from repricing or deleveraging what -- beyond what has already been done today. To be more specific, in the second half of 2020 we will have opportunity to reprice a significant portion of our outstanding debt, the majority of which currently carries interest rates in the 6% to 9% range.

Before turning it back over to Michael, I'd like to provide some guidance for our 2019 earnings. I'm on Slide 16, we currently expect revenues of $6.08 billion to $6.14 billion, an organic increase of roughly 6% to 7%. This is comparable to our first half organic growth rate of approximately 7%. On adjusted EBITDA, we expect $1.04 billion to $1.06 billion, an increase of 10% to 12%, or 11% to 13% excluding the impacts of foreign exchange. The relationship of sales to EBITDA growth is in line with what we expect during the period, that we are integrating VWR and benefiting from the resulting synergies. The guidance assumes stable demand and a foreign exchange environment that is also stable, also a limited impact from Brexit.

Michael will have a few wrap up comments before we take your questions.

[Michael Stubblefield, executive]

Thanks, Tom. To conclude, we are pleased with the strong performance and growth we delivered in the second quarter, led by the strength of our biopharma and service platforms. The execution focus enabled by our Avantor business system yielded significant margin expansion, synergy realization and deleveraging. We remain confident in the value of our business model and role as a trusted partner to our customers in the life sciences, advanced technologies and applied materials industries. We delivered an outstanding first half and have great momentum heading into the back half of the year.

With that, I'll turn the call back over to the operator. We are ready to take your questions.

[Operator]

[Operator Instructions] Tycho Peterson with JPMorgan.

[Tycho Peterson, analyst]

Congrats on the quarter. I'd like to start with the EBITDA outlook. You are coming in at between 70 and 100 bps this year, a little bit below your kind of long-term guidance. Is that all FX impact? Or is there anything else to factor in for the EBITDA outlook for the remainder of the year?

[Thomas Szlosek, executive]

No. And in fact, the guide of $1,040 billion to $1,060 billion, as you know, is in the 11% to 13% range growth. And we've carefully considered the second half opportunities ahead of us. I would say the margin expansion, probably be on the higher end of what you mentioned, Tycho. I think we'll be in 100% -- or sorry, 100 basis points or more. I mean first half has been well over 150 basis points. So I expect that to continue.

[Tycho Peterson, analyst]

And then on the biopharma piece, can you provide a little bit more color on pharma versus biotech? And you called out the gene therapy wins. If you could talk a little bit about how big that business is year-to-date?

[Michael Stubblefield, executive]

Yes, thanks for the question, Tycho. Obviously, our biopharma is an important end market for us, represents roughly half of our revenue. And we're positioned to service that market, as you know, all the way from the research and development activities all the way through to full-scale manufacturing. And we've got great exposure to not only the large players in that market, but importantly, to the startup community where the lion's share of molecules are being developed today. Naturally, just given our broad exposure, we're going to have some exposure to the small molecule space today, which is an important growth driver for the business, but perhaps more excitingly is the investments and the growth that we see in the large molecule space, which is where we see significant upside to opportunities, not only today, but going forward. Cell and gene therapy, as you mentioned, is an important subset of that biologics therapeutic area, and we're super excited about the promise that those therapies hold for patients around the world. And our portfolio is well positioned to serve not only the traditional monoclonal antibody technologies, but it's also fairly readily transferable into the cell and gene therapy space. So we have a growing pipeline. We're going to be spec-ed into or we are spec-ed into, all of the commercialized platforms today. And as we noted in our prepared remarks, secured an important win, particularly with our single-use technologies on our recently commercialized platform. So as we've outlined before, we expect to see this platform grow high single digits to low double digits going forward. And our quarter came right in the middle of that this year -- in this quarter.

[Tycho Peterson, analyst]

Okay. And then if I could ask one last quick one for Tom. Just if we think about the back half of the year, 3Q versus 4Q, given the tough comps in 3Q, any color you can give us on kind of pacing for the back half of the year? Sequential pacing?

[Thomas Szlosek, executive]

So yes. I mean, it shouldn't be too much different than what we've done historically. I will say that there was a little bit of timing 2Q to Q3, where there's some seasonal sales, but kind of fall on the cusp of that June 30 time frame, a little bit later. We were able to pull a little bit of those into the second quarter. So I think third quarter will be a little more modest than in historical patterns, but not significant. And then you'll see our normal fourth quarter ramp up.

[Operator]

Patrick Donnelly with Goldman Sachs.

[Patrick Donnelly, analyst]

Pretty impressive results there with 6% organic growth, particularly in the light of what peers are putting up in some of the macro data we're seeing. Can you just talk through the growth drivers there as well as the sustainability, your outlook in Europe for the rest of the year?

[Michael Stubblefield, executive]

Yes, sure. Thanks for the question, Patrick. Obviously, we're excited about the momentum that we have in our European business. And I would point out that in the second quarter can always be a bit tricky given the -- where the Easter holiday falls in the quarter. And I would point out that the 6% top line growth we delivered in the quarter was despite the fact that the Easter holiday fell squarely in the quarter. And on a comp basis, we had Easter straddling the quarter in 2018. So without that effect, you would have actually seen even a bit stronger results. But we actually see broad-based momentum building in Europe, led not surprisingly perhaps by our biopharma space. We're well positioned across that important end market. And as we connect in our proprietary materials from our portfolio into our supply chain in Europe, we are seeing considerable growth in the region, would expect it to continue. Obviously, there's noise around the globe at a macro level around the industrial complex, and in Europe there are certainly certain pockets where demand is somewhat muted. But I think when you see our results in that context, obviously, it speaks to the resiliency of our portfolio. The fact that 85% of our revenue is recurring and the fact that we have great, not only end market diversity, but also a diverse customer set with limited exposure to any single customers. So we're excited about the momentum that we have there, Patrick, and see that continuing in the second half of the year.

[Patrick Donnelly, analyst]

That's helpful. And maybe just one for Tom. I appreciate all the color on the tax rate. Obviously, quite a bit higher than your peers there. And now that you've been able to restructure some debt and talk through the interest deductibility. Maybe just talk through opportunity for further leverage on the tax rate? What's a realistic rate a couple of years out, again, given the significant gap between your peers?

[Thomas Szlosek, executive]

Yes, that's a good question, Patrick. Thank you. The -- certainly, we -- this has been a big area of attention for us. And when you look at the guide that we initially provided, we were talking about 29% to 33% for 2019. We've narrowed that to 30% to 31%. And so we see a little bit of progress there. I think one of the biggest opportunities that we have is in just how we're financing our international operations. And we're doing some restructuring. I expect the rate in 2020 to come down markedly, probably in that 25% to 27% range. And then going forward, there are a number of more meaningful opportunities that we're pursuing, that have to be carefully considered in light of how we're serving our customers across the globe. But it's something that is a big focus. So I think -- to summarize, I think you're right. I think 2020 will be markedly better, and we'll continue to pursue opportunities.

[Operator]

Derik De Bruin with Bank of America.

[Derik De Bruin, analyst]

So can you talk a little bit about FX impact for the top line for the rest of the year in 3Q?

[Thomas Szlosek, executive]

Yes. I mean, we've assumed a constant rate from here on out for the rest of the year. And so if you look at the growth for the year, the difference between reported growth and organic growth should be fairly similar to what we saw in the first half.

[Derik De Bruin, analyst]

Got it. And the organic revenue growth guide was actually more than we were forecasting. And so I'm just curious about the second half expectations on mix, just given that the EBITDA guide for the second half of the year was just a little bit lower than what we had sort of anticipated. Can you sort of -- is there anything weird going on in the mix that you're looking for in the back half?

[Thomas Szlosek, executive]

Yes. I mean, first of all, I'd start with overall margin expansion. As you saw in the -- in the first half, strong, 140 basis points margin expansion. And we think that for the full year, as I said, to answer Tycho's question, we'll be certainly north of 100 basis points, not 120 basis points. A couple of things, the -- doing a nice job on managing on the gross margin side, the price COGS, and you're seeing that show up, and we'll -- we have confidence that will continue. Also the integration synergies from the VWR acquisition continue to come through. I'm happy to talk about the details of that, but we're tracking ahead of plan, as I said in my comments. We do have a little bit of headwind from mix. And it's kind of a double-edged sword. It's -- we're growing more in some areas than others. And so we had faster than anticipated growth in consumables, faster than anticipated growth in service. As you know, on the service side, it's a higher variable cost model. And so you have a little bit of a mix impact from that. Inflation is pretty well managed, probably a little bit more in Europe than we expected. But overall, we're certainly covering that with our commercial activities. And then there's a modest impact from the integration on the supply chain side. Our manufacturing plants, as we continue on the journey to a fully integrated supply chain, there is some inventory provisioning that has come through. Pretty focused, pretty narrow. I don't expect it to recur. But that has had a little bit of a headwind on the margin. So but overall, I think we're comfortable with the ranges that I articulated.

[Operator]

Jack Meehan with Barclays.

[Jack Meehan, analyst]

Michael, I was hoping you could elaborate a little bit more on the advanced technologies and applied. I appreciate you kind of have some unique mix there. And -- but maybe just focus on what's the exposure to some of the more cyclical areas? How much visibility do you have into the back half? And what is the guidance assumed in terms of the growth rate for that business in the second half?

[Michael Stubblefield, executive]

Yes, thanks for the question, Jack. Obviously, given what we see globally from a macro perspective, I certainly understand the concern about exposure to the industrial complex. And fortunately, as you know, that any of the industrial exposure that we have is isolated to that advanced technologies and applied materials portion of our portfolio, where we serve a really diverse set of end markets, where none of them -- whether that's in semiconductor or food and beverage or aerospace and defense and many others. None of them on their own represent more than low single-digit percentage of our overall revenue. So we don't have a high degree of exposure. And you see that in our second quarter numbers, where that part of our business did have low single-digit growth. I think it owes to the unique exposure that we do have to that space, where similar to our life sciences platform, a lot of what we do there is going to be backed by specifications on commercialized platforms. So we tend to have more unique project or platform exposure, as well as a lot of consumables, chemical reagents revenue into the quality control, quality assurance functions within the R&D and production laboratories of those end markets. So again, resilient, highly recurring portfolio that allows us to kind of weather the ups and downs in that market. Now clearly, there were some pronounced headwinds in the quarter that offset some of the growth that we did see, which would specifically point to a weak semiconductor environment in Asia. We actually grew our semiconductor business in the U.S. quite significantly. But in Asia, there are definitely headwinds as that supply chain resets their inventory levels. We had some nice growth on the back end of some aerospace incentive specifications. For example, food and beverage, pet chem a bit weak. But net-net, we did see low single-digit growth. As we look to the back half, I think the guidance that we've baked in would come with the expectation of relatively similar performance. The second half of the year relative to the first half, we don't really see a meaningful change or improvement in any of the markets that we -- where we had the headwinds.

[Jack Meehan, analyst]

That makes sense. And then just one follow-up on the commercial side with the integration. I was actually curious what pricing added in the quarter, and I know you've been doing work with different algorithms and AI. Just how you're rolling that out and whether there's any important rollouts in the back half of the year, if you can?

[Michael Stubblefield, executive]

Thanks for the question. Obviously, pricing in a business like this is certainly important, and we have a number of different mechanisms for thinking about price, including capturing the value of the offering that we do have as well as some sophisticated algorithms to manage a really diverse portfolio that includes more than 6 million products. And Tom referenced kind of the inflationary environment that we've seen through the year. Our teams have done a really nice job of taking that into account and being able to offset that through pricing. At an overall level, I would say pricing did play an important role in the growth of the business. But probably within the historical range of 20% to 40% of our growth coming through pricing, 60% to 80% of our growth coming through volume, and I think we saw those ratios hold in the second quarter.

[Operator]

Ross Muken with Evercore ISI.

[Ross Muken, analyst]

You talked a little bit -- maybe I missed it on the healthcare business. I know that sort of accelerated a little bit sequentially. It could be a bit lumpy. So give us a little color underlying some of the moving parts there?

[Michael Stubblefield, executive]

Yes, sure, Ross. I think we obviously have a number of different parts of our business that touch that space, including our biomaterials area, our medical-grade silicon platform, where we realized record revenue in the quarter. As I mentioned in my remarks, we have, obviously, consumables exposure there through our offerings into the hospital and clinical environment, which continued to see strong growth. So overall, I would say, we saw continued strong momentum in that space, offset on the margin here by a little bit tougher funding environment, especially in Canada. We had also -- we've got a modest diagnostics kit exposure in Asia that is somewhat dependent on kind of the timing of monsoon season and such, where, on a year-over-year basis, you see a little bit of a push there in the timing. So a few kind of one-off items that probably are more timing related, with a little bit of funding in Canada that drove that slightly negative. But the core offering there, those platforms continue to run at a pretty high level.

[Ross Muken, analyst]

And then maybe just philosophically. I mean, you talked a little bit about capital allocation. Obviously, near term you'd be deleveraging, but ultimately, there's a business that could obviously take on quite a bit more assets and sort of become a very attractive platform for tuck-in M&A. I guess, how do you think about types of assets or the types of returns? Or what you will target, whether it's geographic versus product segment or the like, just in terms of a blush of what we'll expect eventually as we get to a more manageable leverage levels?

[Michael Stubblefield, executive]

We would definitely agree with your perspective on that. When you look at our customer access that we have through our channel, the global nature of our business. We do think this is a platform that will serve as a consolidator of the space going forward. And we're obviously anxious to be able to deploy capital to accelerate the growth using that mechanism. Now clearly, biopharma is our most important segment and gets certainly a disproportionate share of the capital allocation, and I would expect that to play out going forward. When we think about the type of assets that we would be interested in, they probably fall for us in 2 or 3 different buckets. Clearly, we're underrepresented in Asia. And anything that would accelerate our growth there would be interesting to us. As you know, we're also structured around our customers' workflows. So as we look to enhance the content that we provide to an individual workflow, there's opportunities there that we would look to fill in through M&A. And then lastly, anything that deepens our technology footprint, particularly with an eye towards biopharma and bioproduction, especially would be interesting to us, Ross.

[Operator]

Doug Schenkel with Cowen.

[Doug Schenkel, analyst]

You mentioned the exit of some less profitable customer accounts within the Americas healthcare end market. Is there any more detail you can provide on these accounts? Specifically, how much of a headwind did this layer-in during the quarter? And is this something that is going to continue to be a slight headwind through the rest of the year?

[Thomas Szlosek, executive]

No, good question, Doug. I think the -- it's a normal part of our just managing the business and getting clear analytics and discipline on segmenting the portfolio into various pieces, whether it's a customer, product line or whatever. And to the extent we have opportunities for deploying our resources in more profitable areas, we're going to continue to do that. But you shouldn't read into this as the start of any kind of trend. But as we see opportunities like this and we're not able to resolve them commercially, we've got to make sure that we're addressing it through the means that we control. And if we can't do that, we'll deploy the resources elsewhere. So that -- it's a bit of just an ongoing routine management of the book of business that we have.

[Doug Schenkel, analyst]

Okay. That's helpful. Pivoting to cash flow and specifically working capital. I was just hoping you could give us a little more detail on working capital in the quarter. That appeared to be the primary driver to weaker cash flow from operations than we were expecting. So any details here would be helpful? And I guess, looking ahead, how should we thinking about -- how should we be thinking about cash flow from operations for the whole year?

[Michael Stubblefield, executive]

Yes. Well, I mean, I think the performance has been actually quite strong for the first half. When you consider that on a GAAP basis, we had basically 0 free cash flow in first half of 2018, we're pushing $50 million in the first half of 2019. So -- and on an adjusted basis, it's up 21% when you do the interest adjustment that we do. So we are making strong progress. But I think your observation is fair, Doug, that there is a fair amount of investment this quarter into working capital. I would say that it's more so related to inventory and trying to support the growth in various segments, particularly in Asia. We referenced the opening of a GMP warehouse in Singapore, and certainly, we think that's going to drive more growth but it will require more inventory. I would also just reemphasize that from an overall management focus and incentive perspective, this is a big deal for us. Michael and staff have this as a key element that we're reporting out on and discussing every month. As I said, it's a part of our incentive plan as well. So I think there's been good progress. I do agree with you that there's more opportunity. We have to balance supporting the growth with driving the cash performance, and we'll continue to do so.

[Operator]

We have time for one more question. Brandon Couillard with Jefferies.

[S. Brandon Couillard, analyst]

Mike, could you just touch on biopharma in the Americas. I think Tom said it was mid-single digits, which is below the corporate average and I think a step down from kind of the low double digits you did in the first quarter. Was there a timing dynamic there or perhaps a tough comp?

[Michael Stubblefield, executive]

A little bit of a tough comp, Brandon. But as you know, that segment there is going to include everything we do in the lab as well as what we do in production. So you have a little bit of timing that comes through on some of the production platforms that we do see. But we had a number of significant contract wins in the quarter. It'll continue to drive strength momentum in that business over the long term. So I don't think really anything to point out or be concerned about there, Brandon.

[S. Brandon Couillard, analyst]

And then just a clarification, Tom. I think you said $380 million of interest expense for 2020. That assumes no further debt repayments from the second quarter on. Is that right?

[Thomas Szlosek, executive]

Yes, this -- it assumes current debt levels. There will be -- we will be paying down debt over the course of the second half, but we haven't factored that into the estimate I gave.

[Operator]

I would now like to turn the call back over to management for closing remarks.

[Michael Stubblefield, executive]

Thank you all for participating in our call today. We really appreciate your support of Avantor. And certainly, once again, we're excited about the strength of our second quarter results and believe the business is positioned for a great second half. We look forward to our next update at the end of the third quarter and certainly look forward to seeing some of you in person here over the next couple of weeks. So thank you, everyone. Have a great day.

[Operator]

This concludes the second quarter earnings call. We thank you for your participation. You may now disconnect.