Description

Avantor is an under-appreciated May 2019 IPO (ugly IPO market) of the recent merger of two sponsor-backed companies with limited public markets history and materially more leverage than their peers that proceeded to print two rocky quarters out of their first three and has now rebased 2020 expectations.  Herein lies the opportunity to buy a business with ~85% recurring revenue, strong secular tailwinds, minimal capital intensity, and multiple company-specific opportunities to outgrow their growing end market available at a significant discount to peers (14.5x 2020 EBITDA vs peers 17-22x) on an un-levered basis and a potentially ~10% levered FCF yield if you’re willing to look 2-3 years out with further optionality down the road to allocate capital to consolidate a highly fragmented industry following a very clear playbook from highly successful peers.  

Avantor is a distributor and manufacturer of consumables and equipment serving the research-oriented scientific and healthcare laboratory end markets.  Life science tools (~50% of their revenue) is an end market with strong secular tailwinds due to the aging population and accelerating pace of scientific innovation.  It’s grown 2x the pace of GDP for decades (see below).  Their business is ~85% recurring “picks and shovels” (consumables) and enjoys a strong competitive position and significant free cash flow generation (minimal capex needs).  They saw ~2% revenue  growth in 2008-09.  AVTR’s products are mission-critical, highly regulated, a small portion of total costs, and highly embedded in customer workflows, resulting in >35% of revenue from >15 year customer relationships.  

With the ability to grow revenue MSD and EBITDA HSD, and FCF per share even faster as they de-lever, re-price materially over-priced debt (owing to its history as an LBO), and converge their tax rate towards peers that can potentially drive FCF per share to triple from 2019 to 2023.  Further, as AVTR de-levers, I believe they have a significant opportunity to deploy capital into accretive M&A.  

Critically, with their 4Q’19 results, Avantor has embedded a healthy level of conservatism into their 2020 guidance, which I believe will allow them to string together a steady sequence of beat and raise quarters rather than their couple rocky ones out of the gate.  As public markets see the company execute consistently, digest the business model, and the business organically de-levers, I think there is a reasonable path to the shares doubling in the next 2-3 years.  

Business Overview

Avantor manufactures and distributes research and lab products including proprietary and third-party lab consumables (chemicals, biomaterials, solvents, silicones, diagnostics, etc), equipment and instrumentation (filtration systems, biological safety cabinets, virus-inactivation systems, analytical instruments, ultra-low temperature freezers) , and services (~1,400 associates co-located with lab customers, installation and maintenance services, procurement and development services).  Avantor distributes over 6mm SKU’s from ~4,000 core suppliers to 11k customers across 240k+ customer locations.   ~85% of revenue is recurring consumable products (33% proprietary materials and consumables, 40% third-party materials and consumables, 12% specialty & services, 15% equipment and instrumentation).  No single customer accounts for >4% of revenue.  In Nov 2017, AVTR (PE owned at the time) acquired VWR (public at the time) for $6.4bn, a global lab-products distributor.  AVTR was owned by New Mountain Capital and GS after being carved out of Covidien’s Specialty Chemical business in 2010.  AVTR then acquired NuSil in August 2016 (price undisclosed).  VWR had previously been owned by Madison Dearborn Partners prior to its 2014 IPO.  MDP acquired VWR (~$4bn, terms undisclosed) from CD&R in 2007 who had carved it out of Merck for $1.68bn in 2004.  The combined entity went public in May 2019 at $14

Life Sciences Secular Tailwinds

Avantor essentially sells recurring “picks and shovels” into the growing biotech (and other scientific) R&D market, which is ~$70bn and growing mid-single digits.  To make the metaphor even more fun, VWR actually traces its history all the way back to selling shovels in the California gold rush in the 1850’s.  Avantor serves all of the top 10 biotech and pharma companies, med device manufacturers, and diagnostics companies, as well as 19 of the top 20 research universities and 4 of the top 5 global semiconductor manufacturers and aerospace and defense companies.  

Life science tools benefits from numerous secular tailwinds, growing at 2x+ GDP for decades: 

• Aging population

• Increased prevalence of chronic disease

• Proliferation of new therapeutic modalities and biologic drugs

• Improved access to healthcare 

• Strong drug discovery and medical device funding environment

• Digitization of science

While AVTR’s peer group contains many terrific companies (Thermo Fisher, Danaher, Agilent, etc), they all have different exposures and product cycles and trade very well.  I would simply point out that AVTR has among the best exposures with ~49% of revenue from biopharma (ahead of nearly all peers) and ~85% recurring revenue – again, ahead of nearly all peers.  

Attractive business model 

Precision R&D consumables (razor-razorblade model) is an extremely attractive business with very high switching costs.  Scientific R&D requires maximum precision with a high cost of failure in a highly regulated environment.  These consumables are typically a small component of overall costs.  Focus on materials and consumables creates a strong component of price-agnostic recurring revenue.  These are low ticket, daily use items.  ~36% of revenue comes from customers with 15+ year relationships.  Some chemicals (JT Baker, SeaStar) are manufactured at purity levels as stringent as one part-per-trillion.

Additionally, AVTR is highly embedded in customer workflows.  ~1,400 AVTR associates are co-located with certain customers, working side by side with their scientists on a daily basis.  Some downstream and fill/finish workflows have 12mo+ and $3mm+ switching costs.  Avantor products are incorporated in over 800 of customers' master access files ("MAF") and drug master files ("DMF") that are registered with regulatory authorities.   AVTR products are specified into 80% of the top 20 currently marketed biologic drugs, which make up 50% of biopharma industry revenues.  Further, the business requires minimal capital intensity driving strong (unlevered) cash flow conversion. 

Multiple levers to drive mid-single digit or better organic top-line growth and EBITDA growth at 1.5-2x pace of revenue….but now facing an easier expectations bar 

During the IPO roadshow, AVTR guided for 5-8% medium-term organic revenue growth.  This received significant push back as legacy VWR grew closer to GDP pace. The company has outlined a number of discrete parts of their business that are growing high single digits to double-digits.  

“If you look at our business, I think, firstly it's important to understand the breadth and the access that we have to customers' labs around the world. We have unparalleled customer access and today we would be serving more than 250,000 labs around the world, which obviously gives us the ability to leverage our technologies and innovations at scale. The growth algorithm is relatively straightforward. I think many of you are probably familiar with our base lab products business which historically has grown, call it 2% to 4% somewhere in that range.

On top of that then now we have a number of different growth levers that put you into that 5% to 8% range that we've guided as our long-term objective. Those would include things like the exposure we have to the bioprocessing space which we would peg in the high single-digit, low double-digit kind of growth rates with significantly higher than that here over recent times. We have a pretty compelling medical-grade silicone platform that serves the medical implant space that has some frothy growth characteristics.

We have a unique opportunity to grow in Asia. The legacy Avantor business was well positioned prior to the combination with VWR to serve the biologics growth in places like Southeast Asia and Korea, roughly 25% of our revenue was in those areas. As we sit here today on a combined basis, we're only roughly 5% of my revenue is there. So, we've got the growth that comes from the evolution of the biologic space in Asia as well as just the catch up of positioning our lab products portfolio in the region and so you've seen us in recent times, printing mid double-digit, mid-teens type growth which obviously adds to the growth algorithm.

The last area that I would say that gives you an outsized growth opportunity here is our services platform. We have a number of different pillars to our services platform whether that be the deployment of Avantor resources at our customer sites, all the way to a pretty compelling clinical trial services business where we would do things like custom kitting to support sample collection and transportation or the repository services associated with archiving and storing regulated materials in a controlled environment. That's roughly 12%, 13% of our revenue growing again mid-teens. So, off of a base business that's maybe low single-digits there are a number of different levers that contributes to growth that puts you in that 5% to 8% range depending on kind of what's going on and which levers are hitting at any one time.

And it's not so aspirational. If you look where we've been in 2018, where we've been early this year, there's been quarters where we've been on the high end outside that range. Third quarter a year ago, we grew at roughly 9%. Late last year, we were in the 8s and 7s type range. So, not only do we have confidence in kind of that as a range over the longer period of time, we've been in those – in that zip code here more recently.” – CEO Michael Stubblefield; MS Health Conference 9/10/2019

The company could benefit from further disclosure around exactly what part of their revenue is exposed to each of these opportunities, but I have pieced together some estimates below and it indicates ~5-7% organic revenue growth could be feasible.  The company has now reset the bar to a more moderate 4-6% for 2020 and sell-side only models 5%, so if this plays out, I believe revenue can end up growing a bit faster than currently expected.  

Additionally, the company has outlined a number of opportunities to drive EBITDA growth at 1.5-2x the pace of organic top-line.  

“The other half of the margin expansion is just running the business well. When you look at the post-synergy period, we feel like our organic growth fits 5% – call it 5%. We should be growing EBITDA at about 1.5 times to 2 times that growth rate. So, if it's 5% then it's call it 7.5% or 10% kind of EBITDA growth and that's a reflection of we do have a fixed cost base that permeates our supply chain, our distribution and so forth. So, if you get growth, you're going to leverage that cost structure. We also do a really decent job of managing pricing and that price COGS variable and also just driving productivity in the normal course of operating the business.” – CFO Thomas Szlosek, MS Conference 9/10/19

In addition to the fixed cost/natural operating leverage outlined below, the company benefits from positive mix shift as proprietary products with higher margins grow faster than third-party products.  Interestingly, after ~6 straight quarters of proprietary growth exceeding third-party growth, AVTR’s Q3’19 margin miss was driven by the reversal of this dynamic, in a way validating the powerful margin dynamic here.  By Q4’19, proprietary product was back to its historical trend of outgrowing third-party and margins were back in-line.  

This all brings us to AVTR’s 2020 guidance and what we find particularly interesting about the setup here.  AVTR sold off ~10% on the day they gave 2020 guidance as they guided to revenue growth of +4-6% vs. their prior medium-term outlook of +5-8% (consensus was at 5% anyways) and EBITDA growth of ~6-10% which was 2-6% below sell-side consensus.  Combined with the still considerable leverage and the second quarter of volatility in a row, the sell-off is not shocking.  

However, peeling back the company’s commentary around the reset in guidance leads me to suspect they have set a very conservative bar so that they can begin to establish a more credible quarterly track record.  While 6-10% EBITDA growth on 4-6% revenue growth seems in-line with the company’s growth algorithm, the company admitted there are still ~$40-50mm of EBITDA benefits from synergies rolling through into 2020 results.  The company had previously indicated they expected 100-150bps of annual margin expansion through 2020 as the synergies continue to roll in. Thus if you strip that out, it implies margins are declining on an organic basis – certainly not the operating leverage that I have discussed above.  

The company’s commentary as well as a follow-up call with the company indicate that they have embedded a healthy conservatism into the guidance:

“First of all, the guide implies on the high end about 75 basis points of margin expansion. Certainly, we are shooting and targeting for more internally. We do have some incremental headwinds from what we would have had in our long-term. There's a little bit more public company cost between having to become a (SOX) adopter this year and a little bit of other things like directors' and officers' insurance. We're doing a little bit more inflation than we had anticipated as well. But again, certainly, we're shooting for higher. We're early in the year. We want to be a little bit more prudent in terms of what we commit to at this point, and obviously, we'll update you every quarter in terms of how we're progressing on that.”

Subsequent conversations with management indicate the incremental public company costs and inflation hitting in 2020 are ~$5mm (most hit in 2019) and that there are also incremental investments for growth in Asia of ~$10-15mm.  This seems to imply ~$25-50mm of conservatism in their EBITDA guidance (2-5%) in a business with very steady revenue visibility (IE global financial crisis revenue slowdown was from mid-single digits growth to 2%).  

Potential to Triple FCF in 3-4 Years

Above we’ve discussed the opportunity for the AVTR to grow their mostly recurring revenue at a minimum of 2-4% organically, but potentially closer to 5-8% per year.  Further, we’ve discussed operating leverage and positive mix shift driving organic EBITDA growth in the mid to high single digits per year. Additionally, Avantor has a number of opportunities below the EBITDA line to drive a significant transformation in the companies FCF profile.  

Interest expense: The company has de-levered from 7x pre-IPO to ~4x LTM and intends to continue to de-lever.  Given the significant leverage and lack of public equity when the LBO bonds were issued, ~$2bn of the company’s $5bn of debt currently has a 9% coupon (and trades at ~110).  The company has been quite clear they intend to refi this in October 2020 and has recently borrowed at <5%. The company also has another $1.5bn of debt paying 6% that could be an opportunity down the road.  

“So you're talking about debt structure, we've got about $5 billion of debt. Most of it came into being as part of the acquisition in 2017. If you take it apart a little bit, you'd see the biggest chunk in there our bonds that carried interest rate of 9%. There's another tranche of the debt that's about 6% on $1.5 billion. Certainly, we think we have opportunities, when you – for example, when you look at where those bonds are trading today, they're publicly-traded bonds, when you look at that you'd say you guys can do a lot better than 9% and that is true, I mean, it would suggest something closer to 5% or less. But until this time next year, call it, October 2020, there are make-whole provisions in those tenors that really would make it uneconomic for us to do that. But certainly it's one of the – one of our big value drivers is that we will continue to be able to take down the costs of our debt both through refinancing but also the deleveraging. I mean that shouldn't be lost on anybody that – put the rates aside, the overall amount of leverage has come down significantly.” – CFO Thomas Szlosek at Evercore Conf. 12/4/19

Tax Rate: AVTR current pays a materially higher tax rate than peers at ~30% at time of IPO with peers in the low-teens (and TMO as low as ~9%).  They expected that to improve to 26-27% in 2020 and have since moved down to 25-26%.  

“We started before the IPO with a 30% plus tax rate, run rate and we explained that a big part of that was some inefficiencies in our rate structure or in our structure for financing some of our international operations. Over the course of 2019, we've kept you up-to-date on that. And the fourth quarter really finalized the new structures to enable us to have a much more efficient tax rate. That enables us to adjust the overall tax rate for the full year and you saw that impact come through in the fourth quarter. I'd say I would consider the run rate for the full year to be, if I take out that onetime kind of impact, somewhere in the 28% range.

And when I look at 2020, the guide is 25% to 26%. Hopefully, we'll be at the lower end of that but we've got pretty clear line of sight to being within that range. I think longer-term, Doug, we should be low 20s kind of company. We see a path in the timeframe you talked about, three to five years, to certainly get there. The activities we have to undertake impact our operations more than what we've had to undertake so far to drive the improvement. And so it's a more enterprise-wide type of initiative, involving supply chains, commercial teams, and the like that we have to engage into to keep that progress going.” – CFO Thomas Szlosek, Q4 2019 Earnings Call 

Working capital: 20% of management bonuses are tied to performance on working capital.  

“First of all, operationally it is a big focus for us. You mentioned that we have – in our incentive plans – for the first time 2020 we entered – in 2019 we introduced an element of – we're 20% of the management bonuses tied to performance on working capital. That in itself is a nice incentive. But we're also applying some of our management techniques to segment the various work streams within working capital, measure them and make them perform better. You saw that in the third quarter, I mean our working capital growth in the third quarter was significantly less than our sales growth rate such that we only had a $20 million of capital in Q3. If you look at a year ago we had $100 million of working capital. So we think we're starting to get some traction, but operationally we've a lot more opportunity there.” – CFO Thomas Szlosek, Evercore Conference 12/4/19

Below I present an illustrative summary of potential stemming from the moving pieces described above.  

Compelling Valuation & Risk-Reward 

I believe AVTR presents compelling risk-reward at current prices.  

In my base case, I assume ~5% revenue CAGR (vs 5-8% LT guide and 4-6% 2020 guide) and assume incremental margins of ~28%, implying EBITDA growth at 1.5x the pace of revenue, at the bottom of management’s algorithm.  In this case, trading at 15x 2022 EBITDA, the stock is worth ~35% more for a 17% IRR.  16x EBITDA is still a discount to their peers and implies an ~4% FCF yield.  

In my bull case, which essentially just assumes the center of mgmt’s medium-term guidance (~6% revenue CAGR vs. 5-8% LT target) and ~35% incremental margins (EBITDA growing towards high end of 1.5-2x algorithm) and the company trades at 17x 2022 EBITDA (low end of peers), we see ~90% upside for an ~38% IRR.

My bear case assumes revenue growth is 2.5% (in line with GDP despite secular tailwinds) and flat EBITDA margins.  Further, I assume it trades materially lower than peers (12x EBITDA) at an ~6% FCF yield. This creates ~16% down-side (admittedly 2-years from now).  

Solid management + capital allocation optionality

CEO had 20 year technical/operational career at Celanese (specialty chemicals), engineering background.  That said, he also worked at McKinsey, which I’ll let you be your own judge of.  CFO was previously CFO of Honeywell ($80bn+ market cap when he left for AVTR).  

Life science tools businesses have historically been highly cash generative and there are many examples of competitors deploying capital accretively to consolidate a fragmented industry.  That said, I’m encouraged by the need to de-lever first, giving management an opportunity to prove themselves on execution as a standalone company before deploying capital for M&A.  

“In terms of alternative capital deployment, first and foremost, we continue to just focus on deleveraging. I mean that's where we plan for most of our cash flow to go in 2020 and that will continue to be the priority. But once we get into that range, once we get into that 2 to 4 times, we do think that we'll be in a position to pursue some of the opportunities that are out on the market particularly in things that would be in the proprietary offerings space that Michael was referring to particularly around biopharma, biopharma production, and the like. As Michael mentioned, you have brought on an M&A leader. We're excited about that. But that's something that we've clearly focused on the long-term horizon, trying to find and be prepared for opportunities when our capital structure allows it. So that's kind of overall the short-term, medium-term, long-term the way we're thinking about the leverage and the alternative capital deployment opportunities.” – CFO Thomas Szlosek, Q4’19 Call 

Recent History

Since IPO’ing at $14 in May, the shares topped out around $19 then pulled back 30%+ from their peak heading into Q3 as the company foreshadowed a weak 3Q along with the departure of their COO in an ugly tape for recent IPO’s combined with leverage.  The COO departure was explained by his preference to be near his family and that he was returning to the sponsor (New Mountain).  Their first (Q2) print in August as a public company was uneventful, with the company reporting +6% YoY organic constant currency revenue growth and 150bps of margin expansion, in line with their targets.  The shares rallied back into the $18-19 range after Q3 did indeed bring a guide-down (with only ~2.4% organic revenue growth and EBITDA margins down 38bps YoY due to FX and mix headwinds), but with a reasonable explanation (large, nonrecurring order from a new customer win in Q3’18 as well as FX and mix).  The shares then pulled back to current ~17-18 range on Q4 results, which ended up at +4.2% organic top-line growth and the aforementioned 2020 guidance reset.  

Appendix/Risks: Thermo Fisher Commentary: Healthy Competitive Environment/Defensiveness from Amazon Disruption

“Basically, there are two major players, ourselves and now Avantor. Avantor is an excellent company and has done well so it's been a very stable set of market conditions over a long period of time. 

We have good relationships with the other players in the industry, and we're a core supplier to them, just like we're a core supplier to Avantor and VWR. And we make sure that we continue to serve them extraordinarily well and help them be successful, and that's allowed us to continue to grow our offering across the range of what we do.

Very importantly, you see these purpose-built distribution centers and the supply chain that we built around that. So, the nature of these products, you have to handle frozen products, refrigerated products. You have to control the temperature in terms of ambient for medical device products. And you have to handle hazardous goods. We do all that within our distribution centers, and not only are those specialized handling requirements, but for those regulated markets, there are additional needs around lock control, as an example, for medical devices and biopharma production.

And because of the specialized nature of those products and the handling required, it's not enough just for us to do it within our distribution centers. We take orders all day long. We package those up into one pallet that goes into a carrier for delivery the next morning at the prescribed time by our customer. Those carriers just can't be any parcel carrier. You can see that they have to be certified for Department of Transportation hazmat requirements. 

So, customers like the opportunity to buy from us and they have more than one channel to do that. They can buy from us; they can buy from VWR and we supply them as well, but that also works to our advantage.

And I think that's particularly unusual on the space, because in most categories, the channels to market are separate from the manufacturers. In this case, the two largest channels are owned by manufacturers, and therefore, you have some stickiness that are there.”

Appendix/Risks: Various Legacy VWR Commentary on Market Structure 

Maybe if you look at the lab product market and in the past we talked about $39 billion, the latest number is more around $41 billion, probably between Fisher distributions and VWR, we cover a 20% of that market. And then there is another 30% that's covered by all of those regional guys. And just to give you an order of magnitude here, both Fisher and us are north of $4 billion in that space. And the next guy might be a $200 million company. And then the next would be $150 million and then it tapers off very quickly. So we have a very fragmented market that we are dealing with, with a lot of regional or a national players. And so, we believe that the more sophisticated distributors will benefit from the market trends, more consolidation on the customer side, more international business to be had. And there are only a couple of guys like us that can actually capture that additional business.

So the share gain will not necessarily happen always between VWR and Fisher, that's actually not a very healthy situation, it's better to actually gain share from the regional guys. And that's where we see the actual growth coming from the above market

We are uniquely positioned in the highly fragmented lab product market. This chart does a good job illustrating the competitive environment with product range on the Y-axis and global scale on the X-axis. Beyond VWR and Fisher distribution, there are literally thousands of smaller regional and local players, this gives VWR some distinct advantages. We have the largest global scale, allowing us to provide efficient distribution services from the very local to global customers.

The fragmented nature of the market gives us attractive acquisition opportunities. Since 2007, VWR has executed 38 acquisitions. We actually have a three-pronged strategy, so called tuck-ins, geographic expansion to countries where our global customers need us, and product growth platform. The majority of our acquisitions focus on product growth platform, targeting higher margin and manufacturing assets that are generally not competing with our supplier base. 

For the last 20 years that really hasn't changed. There's always a primary distributor that they choose and then there's very often a secondary that they have. And we have a lot of accounts where we're not the primary but we still have sales in excess of $10 million. And I would assume it's the other way around as well; if we are the primary that our competition also has some business at those accounts. To really go to one, I think that's very difficult to actually execute and then you have also strength and weaknesses in different geographies. We obviously have a much better footprint in Europe. We also have invested into Latin America. 

This is not a game about price comparison in our industry. I mean, usually what you have with the big pharma company, you have a preferred supplier contract and then you obviously want to put all the information in front of the researcher as good as possible. That's what I meant by saying we constantly have to work on the content. We're linking into manufacturer's website to make it a seamless process.

And if you're a researcher, you not only look at catalog product, sometimes you read in a journal, somebody use this monoclonal antibody in that experiment, and I would like to try it. So we need to make it very easy for customers to actually find that product and order it. And that's where we are really good at. We call that our third-party services and a lot of organization goes into this because if you're importing a chemical, there are a lot of regulatory pieces that you have to consider. So, that's a real value add for a research company.

Yeah, what I would say is in a consolidating market on the customer side and with customers wanting to leverage their spend with fewer suppliers like us and our main competitor, there's a natural growth coming more to the big distributors, to the more sophisticated service providers. And we certainly benefit from that.

Yeah, so the question is, Thermo Fisher Scientific as a competitor and what do we do differently? I think, there is a couple of differences, first of all, we've a great relationship with Thermo Fisher, the manufacturer. We sell a lot of their products and they utilize our distribution services, particularly in EMEA-APAC, we've got a very strong position.

So, that good excellent relationship continues, and then at the same time, we've got the competitive dynamic with Fisher Scientific, particularly in the U.S. where they are even though a little bit bigger than us, they've got the number one position and we're number two. So, I think the historical relationship with Thermo, where they value our distribution, and we value their products and their manufacturing, that continues, and that's separate from the competitive element where we compete with Fisher distribution on the distribution side.  

If you break down the portfolio that we're talking about at our customers that are relevant for their decision making process to choose a major distributor, we are, despite all the consolidation happening on the high end instrumentation side very similar than our main competitor here. So from a portfolio perspective, that's certainly not a negative for us in all the discussions. And you have to bear in mind that the decision making process on let's say research, consumables is not necessarily tied into purchases of major instrumentation at customers. So what customers try to do is to manage the tail of their consumables suppliers more and more and there we have actually a very good answer for our customers and we believe that's one of our strong points at VWR

We always get compared obviously to Thermo, but their definition of the market is very different from ours because we're not playing in the high-end markets, with the exception of some HPLC business that we have in Europe with the Hitachi brand that we represent exclusively for more than 30 years now. But other than that, we are not in the high end instrumentation space. And so, whatever happens in that space really doesn't affect us.

Appendix/Risks: TMO Commentary on AMZN Risk

So, in the case of scientific supplies, Amazon has been trying to get into this market for five years, and Amazon has been unsuccessful over that five-year period.  So, why is that? Right? So, a tough competitor that we respect tremendously. A big part of it is, we are the Amazon of the scientific supply space, right? We've aggregated the categories. We've driven the efficiencies. We have a world-class e-commerce capability to that customer base. We manage the on-site inventories. We help the customer select the optimal products. We deliver right to the desktop for them, and that's the infrastructure that we've built. So, when you think about why will that continue? All right, and what's the trends around there, right? So because, obviously, we have an attractive business, the first of which is some nuances to the products relative to some other spaces, a lot of hazardous goods, a lot of cold chain, frozen product here, that are very high value. So, this is not your meat goes bad. This is a $1,000 bottle; you throw out a few, if you get outside of the cold chain. So, you have high-value products that really requires that level of attention.

Basically, there are two major players, ourselves and now Avantor. Avantor is an excellent company and has done well so it's been a very stable set of market conditions over a long period of time. 

We have good relationships with the other players in the industry, and we're a core supplier to them, just like we're a core supplier to Avantor and VWR. And we make sure that we continue to serve them extraordinarily well and help them be successful, and that's allowed us to continue to grow our offering across the range of what we do.

Very importantly, you see these purpose-built distribution centers and the supply chain that we built around that. So, the nature of these products, you have to handle frozen products, refrigerated products. You have to control the temperature in terms of ambient for medical device products. And you have to handle hazardous goods. We do all that within our distribution centers, and not only are those specialized handling requirements, but for those regulated markets, there are additional needs around lock control, as an example, for medical devices and biopharma production.

And because of the specialized nature of those products and the handling required, it's not enough just for us to do it within our distribution centers. We take orders all day long. We package those up into one pallet that goes into a carrier for delivery the next morning at the prescribed time by our customer. Those carriers just can't be any parcel carrier. You can see that they have to be certified for Department of Transportation hazmat requirements. 

We are the Amazon of scientific supplies, and when you think about the purpose-built supply chain, the assortment, transparency on pricing, those things that we do for our customers are tailored to handling hazardous goods, cold chain, all the things customers need, they really use us to manage that convenience in choice and that business continues to perform well. And there's always competition out there and we treat all of our competitors seriously, because it's our job, and if we don't, then we're not going to have a bright future and Avantor is a good customer of ours, right, and a successful business. 

Catalyst

Company executes consistently on strategic plan, steadily beating and raising

Investors begin to appreciate compelling business model at discount to peers

Free cash flow triples

Company de-levers materially

Mgmt begins deploying capital towards share repurchases or accretive M&A