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Good morning, ladies and gentlemen. My name is Irene and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor's Second Quarter 2022 Earnings Results Conference Call.
I will now turn the call over to Christina Jones, Vice President of Investor Relations. Mrs. Jones, you may begin the conference.
Good morning. Thank you for joining us. Our speakers today are Michael Stubblefield, President and Chief Executive Officer; and Tom 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 statements 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 appendix to the presentation.
With that, I will now turn the call over to Michael.
Thanks, CJ and good morning, everyone. I appreciate you joining us today. I'm starting on Slide 3. As we announced in our press release, we delivered another outstanding quarter, with strong results across all key financial metrics, including core revenue growth, margin expansion, earnings growth and free cash flow generation. Our results cap a strong first half of the year and highlight our exposure to attractive end markets, our differentiated product and service offerings, the resiliency of our business model in a dynamic macro environment and our continued track record of execution.
Continuing our momentum from the first quarter, we achieved 6.4% core organic revenue growth on an 18.4% comparable from a year ago, driven by continued strength in biopharma and advanced technologies and applied materials. Once again, our core bioproduction business grew over 20% in the quarter. And we are set up for continued growth with a robust order book, reflecting the ongoing strength of the biologics pipeline and our broad exposure to all modalities. We expanded EBITDA margins by over 140 basis points, including strong expansion in our core business and benefits from our 2021 acquisitions. Through the first six months of the year, our core organic revenue growth and margin expansion are tracking our 2022 guidance and above our long-term targets.
As we execute our operating plan, we also continued to progress our long-term growth strategy through product innovation, exciting new collaborations and ongoing capacity expansion projects. In the second quarter, we launched new products in several areas, including J.T. Baker high-precision consumables, viral and activation solutions, as well as a new line of Masterflex pumps with an advanced user interface to support customer fluid transfer needs in both lab and production environments.
We also entered into collaborations with GeminiBio to provide plasmid DNA and Cytovance to provide custom hydrated solutions and cell culture media to biopharma customers. With these collaborations, we have expanded our bioproduction offering and enabled our customers to utilize custom cGMP products through the full development cycle, including early-stage research, scale-up and commercialization. We have several capacity expansion projects in flight and recently started construction in our Phillipsburg, New Jersey manufacturing site to significantly increase our global capacity for process ingredients to support growth in our bioproduction platform.
Our M&A integrations remain on track. And we achieved several critical milestones for Masterflex this quarter, including successfully executing on our planned ERP implementations in Europe, India and China. At this point, all ERP integrations outside of the Americas are complete and we remain on schedule to wind down all TSAs before year-end. Ritter is now integrated into our portfolio and we remain focused on executing our new product launches and commercial synergies.
Looking ahead, we have good momentum in our end markets. Our order book is strong. And we continue to leverage the Avantor Business System to drive execution in a challenging operating environment. We remain confident in delivering another year of strong financial results. Given the dynamic macro environment, we thought it would again be helpful to provide a brief update on some of the factors impacting our space and how we are leveraging the Avantor Business System to manage through these challenges.
Starting on the left side of Slide 4. The global economy has become a bit choppier, with slowing GDP growth, tighter financial conditions and the ongoing geopolitical conflict in Ukraine. Despite these headlines, we continued to see strength in our end markets. Notably, in the second quarter, we experienced more than 20% core organic growth in our bioproduction business and strong growth in our semiconductor platform, that drove double-digit growth in our advanced technologies and applied materials end market. The order books for our proprietary businesses remain strong, highlighted by bioproduction and biomaterials, where we have nearly a full year of demand on order.
Moving to foreign exchange. The U.S. dollar has strengthened considerably against most currencies since the beginning of the year. This presents incremental foreign currency translation headwinds for the roughly 40% of our business outside the U.S. In the second quarter, FX was a 4.4% headwind to reported revenue and impacted earnings per share by approximately $0.02. Based on the expectation that the U.S. dollar will remain strong through the balance of the year, we have updated our full year EPS guidance to reflect this impact.
Regarding interest rates, our financing structure and strong free cash flows have enabled us to maintain our 2022 interest cost at the originally forecasted level despite the escalation in U.S. LIBOR and Euribor indices. We also expect interest cost reduction in 2023 and beyond as we continue to delever. And we have no significant required debt repayments until 2025.
COVID headwinds increased in the second quarter to approximately 4%. Looking ahead, we expect full year COVID headwinds of around 3%, reflecting approximately $100 million less COVID-related revenues than planned at the beginning of the year, as vaccine-related revenue is moderating faster than anticipated. We expect our core bioproduction business to offset this incremental headwind as we redeploy production capacity. And we are maintaining our full year guidance for Avantor of mid-single digit organic growth.
We are encouraged by the recent improvements in China activity levels. However, the strict lockdowns in the quarter did create a roughly 50 basis point headwind to our top line results. Excluding this headwind, our EMEA business grew high single-digits on a core organic basis in the quarter.
While inflation continues to impact nearly all our cost categories, we delivered over 140 basis points of margin expansion in the second quarter and first half. The Avantor Business System is helping us deliver commercial excellence and productivity. And together with the favorable impact of our 2021 acquisitions, our first half margin expansion is above our 2022 full year guidance of 125 basis points and above our long-term algorithm of 50 to 100 basis points per year.
A final point on supply chain. The global supply chain has been constrained since the start of the pandemic. For example, in the second quarter, we faced printed circuit board and resin shortages which impacted our single-use revenues. We continue to leverage our global network to mitigate episodic supply chain issues and expect modest improvements over the course of the year. We remain confident that our investments across the network will enable us to continue to improve service levels and shorten lead times. While the macroeconomic situation is challenging, the resiliency of our business model and our track record of execution give us confidence in serving our customers and delivering strong financial performance.
Moving to Q2 performance on Page 5. Second quarter core organic revenue growth was 6.4%, on top of an 18.4% growth comparison from the prior year. Adjusted EBITDA in the quarter was up 10.2%, driven by commercial excellence, a stronger weighting of proprietary offerings and the favorable boost from our 2021 acquisitions. Our strong operating results drove adjusted net income growth of 11.1% and $0.37 of adjusted earnings per share this quarter.
We generated free cash flow in excess of $190 million in the quarter, while continuing to ramp investments in the business to support our growth. Our adjusted net leverage of 3.9x adjusted EBITDA is in line with our 2x to 4x target leverage, supporting our ongoing focus on building a robust M&A pipeline.
With that, let me turn it over to Tom to walk you through our financial results in more detail.
Thank you, Michael and good morning, everyone. I'm starting on Slide 6. Building on Michael's comments, we generated total revenue of $1.91 billion in the second quarter, representing a 2.8% reported growth rate. Our underlying core organic growth rate, excluding COVID headwinds, was 6.4% despite the challenging 18.4% comparable. Over the last three years, we have averaged 5.8% core organic growth in the second quarter which is at the higher end of our 4% to 6% long-term target.
Our COVID-related headwinds were higher this quarter, coming in at 4.1%. COVID vaccine-related revenues are moderating faster than anticipated and we now expect COVID-related headwinds of approximately 3% for the year. You'll see in a minute that we expect to offset these higher COVID headwinds with core growth and are maintaining our full year organic revenue growth guidance. Our 2021 acquisitions increased our revenues by 4.9%, more to come on this in a minute. And the stronger U.S. dollar created foreign currency translation headwinds of roughly 4.4%.
On to Page 7. From a regional perspective, Americas which represents approximately 60% of annual global sales, achieved an 8.1% core organic revenue growth, driven by continued strength in biopharma and advanced technologies and applied materials. Within Americas biopharma, our bioproduction business grew more than 20% on a core organic basis, with strength across process ingredients, excipients, single-use and serum.
Reflecting a strong research environment, our biopharma R&D revenues were up high-single digit, driven by strength in lab chemicals and equipment and instrumentation. Within advanced technologies and applied materials, double-digit sales growth was driven by our proprietary offerings to semiconductor and electronic device manufacturers.
Europe which represents approximately 35% of annual global sales, achieved 4.7% core organic revenue growth. Despite a challenging economic climate across Europe, underlying demand remained strong. Proprietary materials grew high-single digits, outpacing growth in all other categories. Bioproduction grew over 25% in the region, driven by demand for our process ingredients, excipients and single-use solutions. Advanced technologies and applied materials grew low single-digits, driven by strong sales of equipment and instrumentation.
EMEA, representing approximately 5% of annual global sales, declined 0.3% on a core organic basis, with lockdowns in China impacting sales for the quarter. Excluding China, EMEA core organic sales increased high-single digits. Advanced technology and applied materials sales grew double digits, driven by sales of our proprietary offerings to the semiconductor industry and strong industrial demand in the region.
Slide 8 shows our core organic revenue growth for the quarter by end market and product group. Biopharma, representing almost 55% of our annual revenue, experienced high-single digit core organic growth in the quarter, including more than 20% core organic growth in bioproduction. Our strong order book for proprietary offerings reflects a healthy bioproduction pipeline across mAbs, cell and gene therapy and mRNA. With attractive end market dynamics and incremental capacity coming online over the course of the next 18 months, we expect continued momentum in this business.
Health care which represents approximately 10% of our annual revenue, declined low-single digits on a core organic basis in the second quarter against the more than 30% growth comp from last year. The growth in our medical-grade silicone offerings was offset by declines in third-party offerings, in part relating to supply chain challenges. We expect this end market to return to growth as comparables moderate in the second half of the year and expect continued strength from biomaterials given the strong order book for our proprietary silicone offerings.
Education and government, representing approximately 10% of our annual revenue, experienced a low-single digit core organic revenue decline in the second quarter and like health care, was up against a challenging comp of nearly 40% in 2021 that included project-related spend which is not repeated. We expect this end market to also return to growth in the second half.
Advanced technologies and applied materials, representing approximately 25% of our annual revenue, achieved double-digit core organic revenue growth in the second quarter, driven by growth of proprietary materials to semiconductor and electronic device customers.
By product group, proprietary materials and consumables offerings achieved double-digit core organic revenue growth, driven by strong demand for our process ingredients, chromatography resins, excipients, single-use solutions and serum, as well as for our electronic chemicals platform.
Sales of third-party materials and consumables increased mid-single digits, reflecting broad chemicals and consumables demand across our end markets. Equipment and instrumentation sales remained strong in the quarter. And services grew low-single digits, reflecting strong demand for clinical services, offset by reduced spend on specialty procurement services.
Let me turn to Slide 9 to offer some perspective regarding our other key financial performance metrics. Michael previously mentioned the 10.2% growth in adjusted EBITDA or about 14% without the foreign exchange translation headwinds and over 140 basis points of adjusted EBITDA margin expansion to 21.2%, reflecting expansion in our core business and contributions from our 2021 acquisitions.
Core margin expansion was driven by commercial excellence and favorable mix from double-digit growth in sales of our proprietary materials and consumables. These positive factors were partially offset by increased cost of materials and freight as well as investments in our workforce made over the course of 2021 and into 2022.
Adjusted earnings per share in the second quarter was $0.37. And adjusted net income was up approximately 11%, or closer to 15% when adjusted for FX. Free cash flow in the second quarter was $191 million compared to $265 million in the prior period. Our working capital performance was strong and was, as planned, offset by higher capital spending to support our growth, higher interest relating to the 2021 acquisitions and increased income tax payments as a result of higher pretax income and timing.
Turning to Slide 10. I want to provide an update on the progress of our 2021 acquisitions. We deployed approximately $4 billion for M&A in 2021, principally for the acquisitions of Ritter and Masterflex. Similar to our legacy platform, these businesses have a highly-recurring, specification-driven revenue profile and expand our proprietary offering to the biopharma and health care end markets.
This is our second full quarter with Masterflex in the portfolio. And the integration is progressing on track, including recent ERP cutovers in Europe and EMEA and excellent traction on cost synergies. The demand for the Masterflex offering is strong. We continue to collaborate with our biopharma customers and the order book is growing at an attractive rate. Q2 revenue was up high-single digits on a like-for-like basis, while absorbing adverse impacts from the China lockdown and supply chain constraints, most notably, printed circuit boards for our peristaltic pump offerings and resin-based materials for the tubing product line.
The Ritter business is fully integrated into our portfolio. And we are excited to provide these high-precision liquid handling consumables alongside our existing offerings for diagnostic and drug discovery applications. Ritter revenues were less than anticipated in the quarter, driven by continued foreign exchange headwinds and COVID-related declines.
We continue to focus on executing our commercial synergy pipeline which leverages the Avantor distribution channel to create an aftermarket stream of revenues for this traditionally OEM-focused business. The lead time for this transition is considerable as the products must be formally approved and specified by our customers via an extensive sampling, testing and qualification protocol. We also continue to invest in expanding the product line through new product introductions to leverage Ritter's capabilities as our high-precision consumable center of excellence.
Our opportunity pipeline continues to progress and we remain confident in achieving the targeted returns on this investment. We have incorporated these developments into our full year 2022 expectations and are now forecasting over $450 million of revenue, greater than $155 million of adjusted EBITDA and more than $0.06 of earnings per share.
The first half is in the books in line with our guidance. We delivered 6.8% core organic growth and expanded adjusted EBITDA margins by approximately 140 basis points. We grew adjusted net income by about 13%, resulting in $0.75 of adjusted EPS in the first half of 2022.
Given ongoing business momentum and less aggressive comparable growth in the second half, we anticipate modestly stronger core organic growth rates in Q3 and Q4 and attractive margin expansion in line with our original full year guide. Our 4% to 6% organic revenue growth guidance remains intact. Including COVID headwinds of 3%, we expect to deliver core organic revenue growth of 7% to 9%. We are encouraged by healthy demand patterns in our end markets and remain confident in our ability to offset higher COVID-related headwinds by continued strength in our core business.
On adjusted EBITDA, we anticipate continued commercial and operational execution in attractive weighting of higher-margin proprietary offerings, including those in bioproduction to drive margin expansion in excess of 125 basis points for the full year.
We are updating our adjusted EPS range to $1.43 to $1.49, principally reflecting foreign exchange translation headwinds as well as the updated outlook we provided on our recent acquisitions. We have modestly reduced free cash flow to reflect these factors.
This concludes my prepared remarks. I will now hand the call back to Michael.
Thanks, Tom. I'm now on Slide 12. We delivered another solid quarter with strong results across all key financial metrics in a dynamic macro environment. I remain encouraged by the strength of our end markets, the resiliency of our business model and our team's ongoing traction with commercial excellence and productivity initiatives that will enable continued growth and margin expansion.
The integration of our 2021 acquisitions is progressing well and we are excited about the growth potential of our combined portfolio. Given the continued momentum of our business and ongoing deleveraging, we continue to actively build our M&A pipeline. We recently announced that Kitty Sahin has joined Avantor to lead strategy and corporate development. We are excited to have her on the team and look forward to her contributions in helping us shape and execute our enterprise growth strategy.
In May, we released our 2022 sustainability report which highlights significant progress across of Avantor's four ESG priorities. As a company focused on advancing science to create a better world, we recognize our immense responsibility to invest in sustainability for all our stakeholders. And we remain committed to delivering our sustainability goals.
I want to thank you for your interest in Avantor and for your ongoing support. I will now turn it over to the operator to begin the question-and-answer portion of our call.
[Operator Instructions] Our first question comes from Vijay Kumar from Evercore.
I had a two part question. I think there's some confusion on acquisition revenues. They were cut from $500 million to $450 million. There were two different numbers. There was a $90 million acquisition contribution and I think the slide deck had $100 million number. Can you reconcile the $90 million versus $100 million? And this cut from $500 million to $450 million, how Much of this is FX with Masterflex revenues cut down? And I think related to that, Michael, to you -- I mean, the stock's right now at 13, 14 turns forward EBITDA. You guys just put up 6%-plus core growth. I mean the stock's pricing in a massive growth slowdown for next year. Are there any sensitivities, variables we need to be aware of when you think about '22's comps? Is it any slowdown in customer activity, economic activity? Any comments would be helpful.
Yes. Thanks, Vijay. This is Tom. And I apologize for the technical difficulties. We -- somehow our line got cut when we've started. So I thank you for your patience. On your first question, yes, we -- I'll just tell you that the $102 million that we show in the slides is the Q2 revenue from RIM, Ritter and Masterflex. When you look at the 10-Q which will be out shortly, you'll be at -- we disclosed the Q2 revenues for both RIM and Ritter -- sorry, for both Ritter and Masterflex, as we normally do. The total of those two will show $97 million. The remaining portion up to the $102 million represents RIM Bio as well as the revenues that go to third-parties through the Avantor channels and not through Masterflex or Ritter. So again, I can understand why that wasn't clear.
The press release tables that show the $90 million, that really is a reconciliation. The $90 million is the growth -- year-over-year growth from last year's starting point in the revenue for the acquisitions. And that excludes organic growth. But the bulk of the growth, as you know, given the timing of those acquisitions was inorganic year-over-year. So hopefully, that clarifies the $102 million. But again, the $102 million is what you'll see in the 10-Q. Michael is going to touch on...
Vijay, I'll take the second part to your question there. On the walk from the $500 million that we had previously for M&A down to $450 million, I think that the principal factors there, as we noted on the call were, certainly FX as well as stronger COVID headwinds and then some of the supply chain constraints that we noted. I think the way I think about it is our internal plan rolls up to certainly higher than the $450 million if you take Masterflex for example, we actually have line of sight to demand to our original plan. And maybe being a bit conservative here, not wanting to take an aggressive stance on how the supply chain constraints might play out in the second half, we thought it would be prudent to be a bit conservative here.
On the Ritter front, again, we're really encouraged by the momentum we have in our pipeline. We have several thousand opportunities that we're in progress of qualifying. And as that end market adjusts from the COVID focus that it's had in 2021 to a more normalized environment with more normalized inventory levels, we're confident that we're going to see the growth going forward.
And as we think about 2023, obviously, a bit early for us to speculate on how that might turn out. We're operating in a pretty choppy macro environment at the moment with a lot of things moving around, whether it be FX or inflation, certainly GDPs around the world. But as we see it today, there's certainly nothing in our end markets, as you can see from our strong core growth in the quarter that gives us any signals that we're headed for an environment that would deteriorate.
Now having said that, one of the things that I think is important to understand about our business is it is a very resilient model. It's built to withstand the storms in the marketplace that can come from time to time have. We have a consumables specification-driven model that yields more than 85% recurring revenue and has performed historically well through the previous downturns. And since those downturns, I would say that the quality of our business has improved substantially. When you look at the percentage of revenue that's exposed to biopharma, the amount of our revenue that's specked into production platforms. And certainly, we're starting from a position of strength here with a lot of momentum.
Our next question comes from Dan Brennan from Cowen.
Great. So Michael and Tom, I feel like Avantor's stock has been penalized in the past maybe for a lack of clarity on maybe some specific guidance items. So maybe with that in mind, I hope to ensure like we understand kind of how we think about the pacing of revenues in the back half of the year, namely, could you just give us some perspective, Q3, Q4, how we should think about COVID and organic growth on the core, plus EBITDA margins and free cash flow pacing? And maybe connected to that, maybe give us some color on what your visibility is like towards the back half of the year in terms of, if you talked about your backlog and what, if anything, you are baking in for weakening economy. It sounds like you're not seeing anything yet so perhaps there's nothing really baked in.
Thanks for the question, Dan. If you go back to kind of what we've said about the second quarter maybe as a starting point, we indicated that our core organic revenue growth would be in the range of first quarter performance and similar on margins. And I think as you see the results here, I think we delivered on both of those. Looking at the second half of the year, as I refer you back to Tom's prepared comments, by holding our full year organic guide at 4% to 6%, we're trending right in the middle of that through the first half of the year, see second half kind of planning out in a similar way. But with stronger COVID headwinds in the third and fourth quarter compared to, say, maybe the first quarter, you're going to see modestly stronger core organic growth in the third and the fourth quarter on principally weaker year-over-year comparables.
And we would anticipate roughly 3% COVID headwind in each of the third and the fourth quarter. We're sitting at about 140 basis points of margin expansion at the midpoint, midway through the year here. And with our guide coming in about $125 million for the full year basis, I think I would see Q3 and Q4 playing out a lot like we saw the first half here to get us above our guidance.
Looking at visibility, there's probably a couple of different ways I think about that. Firstly, on our proprietary offerings that are spec-ed into our customers' production platforms, whether that be in bioproduction or in biomaterials for implantable medical devices or even in things like the semiconductor end market, our order books are at historically high levels which is to say that you're close to having a full year of a demand on orders. So we have really great visibility into that part of our business. And the production part of our business, to remind you, is roughly 40% of our overall revenues.
On the lab portion of our business, is where we principally leverage our strong customer access and global footprint. To service a customer base that is quite agile, in that most of the revenue that we generate there is ordered and shipped within a 24- to 48-hour period. So that business runs more on a momentum basis and kind of a daily rate of sales basis with not a lot of forward visibility into the second half of the year. But the momentum is good, certainly as we progress through the second quarter. Saw momentum improve. And as we sit here today, having nearly finished the first month of the quarter, that momentum has continued into the third quarter.
Our next question comes from Luke Sergott from Barclays.
Two parter for me. First one, on pricing. So Michael, I guess over the conversation you were talking about and from last quarter, that you weren't able to get the full pricing from 1Q and that would basically bleed into 2Q and the rest of the year. And so that's what we were looking for, a step up sequentially here from growth. And just kind of talk about how that played out in the quarter. Were you able to get as much as you were expecting? Or did some of that get pushed out? And then how that impacted volumes essentially? What was the volume offset?
And then the second part here, can you talk about the underlying growth within Masterflex? With the $50 million guide done, everybody is kind of a little skittish on that. So we want to know how that's been growing. I know you gave some color on the order book there. But should we see extra upside here in case that the supply chain releases and those components sourcing that you guys sell through that channel, is that a source upside? Just give us some sense here where that can go.
Thanks for the questions. On the pricing front, I think the second quarter played out in line with how we had anticipated. And as -- you are correct, in that proportion of our orders in the second quarter that we satisfied at current pricing relative to the first quarter, certainly did step up and the pricing that we put into the marketplace played out as we had anticipated. And that was in part reflected in the strong core organic growth that we delivered. Of course, the offset at the organic line then is the stronger COVID headwinds that we realized in the quarter. In the first quarter, COVID headwinds were roughly 2%. And they stepped up against the strongest COVID tailwind that we had in 2021 to about 4% -- 4.1% headwinds, with very little contribution from PPE, significantly decline in contribution from COVID testing. We're probably at 1/4 of the level that we were at in the first quarter. And then vaccine starting to moderate meaningfully as well. So net-net, contributions from pricing playing out as anticipated, strong underlying demand fundamentals, helping us achieve stronger core organic growth to offset the stronger COVID headwinds.
On Masterflex, we remain super excited. That business is essentially performing as well as our legacy businesses. Such as you've seen, we've been printing on a core basis more than 20% growth for bioproduction over the last number of quarters and this quarter was no different. Specific to Masterflex, great order book, similar to our own. As I indicated on one of the previous questions, we've got line of sight to the original kind of demand plan behind our original guidance.
Certainly, there was some impact from China. There's a bit more exposure in China for that business than maybe our legacy business. And there were some unique supply chain constraints, things like printed circuit boards that we don't face in the rest of our business. So depending on how those things play out, how much of the China demand recovers that we see some relief from the supply chain constraints. We certainly have the demand to deliver something stronger than what we've signaled here.
Our next question comes from Rachel Vatnsdal from JPMorgan.
Two here on Ritter. First is really help to being just a follow-up to Vijay's question. So Ritter closed intra-quarter during 2Q of '21, so can you just confirm for us, that difference between the PR and the slides. Was that $90 million referenced in the press release reflected the inorganic M&A contribution during the quarter and then the slides that showed the $102 million was really that total contribution from M&A which included the month or two of benefits from Ritter that's now moved into organic? And then secondly, just diving a little bit deeper in Ritter, it's a follow-up to Luke's question. So can you just walk us explicitly through the numbers there? How much of a headwind is FX? And then separately, really how much of that was COVID roll-off? And do you still expect to hit that high-single digit core organic growth for Ritter?
Yes. Great questions, Rachel. Let me take those. Your commentary there on the $90 million versus the $102 million was spot on. Good understanding, good explanation there. It's really just the difference between what was reported last June as inorganic and what we're now showing as inorganic. Now that we've lapped the one year milestone there, some of that is starting to be shown as organic.
On the reconciliation here, a little bit challenging to try to allocate the various factors that we've outlined here to get back to the $450 million, principally given our internal plan actually rolls up, as we've indicated to something stronger than that. There's obviously been some noise around the numbers here the last couple of quarters. We're trying to be a bit cautious here and put out maybe a conservative guide here so that we can put the focus on the long-term outlook for this business which continues to be very robust.
Specific to Ritter; the core business continues to grow high-single digits. We're plagued by stronger COVID headwinds than even what we could understood, it's probably more in the range of 20% to 25% of revenues. That jump off point are proving to be somehow linked to COVID. And given a business that's principally denominated in euros, given its legacy, that business is being disproportionately impacted by FX compared to the rest of our business. When you look at the synergy plan which is really where our focus is, we're on track to deliver our year one synergy plan for 2022.
Now given that, the headwinds in COVID, we're obviously -- we're hopeful of trying to pull ahead some of our 2023 synergies into the year. And we're just facing the practical realities of -- there is a specific time line that needs to be followed here as you qualify these products with your customers as well as the reality that there's a bit of inventory overhang in the channel just given the drop-off in COVID testing. But the opportunity pipeline looks great. Again, several thousand opportunities. We've got great traction. We're going to hit our synergy plan for the year and we're alongside that aggressively expanding the product portfolio.
We've been making investments literally from day one. That will roll out over the course of this year and into next year. In my prepared remarks, I mentioned some of the J.T. Baker branded consumables that we launched in the quarter. Those are coming from Ritter. So a lot of momentum there. The core is in great shape. We're super excited about the capabilities that we have here and remain confident in the long-term potential of this business.
Our next question comes from Tejas Savant from Morgan Stanley.
Two parter for me, one on COVID and another follow-up on the tuck-ins here. So on COVID, Michael and Tom, I mean, can you share some color on what you're embedding in the second half outlook in terms of boosters? I know you mentioned seeing a bit of a moderation here. But Pfizer earlier and now Moderna overnight both announced large U.S. government orders. Would that potentially lead to a little bit of upside here? Though I can understand why you want to be prudent about how you frame the outlook.
And then on the M&A piece, this is more of a philosophical question really. I mean in terms of some of the issues, you've agreed they've been largely sort of factors beyond your control, including COVID and the supply chain. Are there any sort of like key learnings from the past 12 months that you'd like to flag? And are there any implications from that on a go-forward basis in terms of either perhaps a near-term breather on the deal front or how you approach forecasting and integration next time around?
Yes, Tejas. Thanks for the questions. On the COVID vaccine front, things have moderated probably quicker than what we would have anticipated coming into the year. And that is the principal driver for why we were maybe early in the year thinking about something closer to $250 million of COVID-related revenues. And we're now signaling at a 3% headwind, something close to $150 million. A big part of that, if not most of that is certainly take down in the vaccine contribution from the year.
And that's really backed by discussions with our customers, the order books that we have and the work we're doing to transition some of that capacity to our core business. So to the extent that there is another massive wave of vaccination, I wouldn't say that it's necessarily reflected in our current order book. And to the extent that, that would play out, perhaps it could provide some upside. But we don't have line of sight to that as we sit here today.
Relative to M&A, as we've said, we're super excited about the capabilities that these acquisitions have brought to us. I think it strengthens our platform. And certainly, the feedback from our customers has been really terrific and the traction we're getting on synergies is as expected. Certainly, the macro environment has injected a bit of noise into the results here that we're facing. And fortunately, the benefits of the acquisitions, principally the core organic growth and the margin expansion from these deals, you can see the impact of those things on our business.
And as I indicated in my prepared remarks, we've hired a new Head of Corporate Development and Strategy which we're super excited to have her on board. She brings a really deep background across a lot of our end markets, including biopharma and a tremendous amount of deal experience over the last couple of decades.
With the balance sheet where it's at, we remain active in continuing to build that pipeline. And we would still see our principal capital allocation strategy, continuing to delever and be opportunistic here as we think about M&A.
Our next question comes from Matt Sykes from Goldman Sachs.
My first question is just on the COVID vaccine revenue tailing off faster than you expected. How fungible is that demand? Meaning, given your strong order book, whatever year worth of orders, are those customers, maybe the same customers or new customers, looking to secure that freed up capacity as COVID comes down? So meaning can you just translate that capacity into your order book? Or is there a period of transition that needs to take place within bioproduction for that to happen?
Matt, one of the things we really like about our portfolio here and how things have played out, particularly during COVID, is the applicability of our solution set across all modalities, whether that be the traditional monoclonals or in some of the new emerging therapies, cell and gene therapy and mRNA as we've seen here in COVID vaccines. So in many cases, the infrastructure and the products are the same. And so throughout the pandemic, we've actually been, on a daily basis, sometimes even on hourly basis, these lines are modulating from producing both COVID and non-COVID solutions. So to that extent, it's almost infinitely fungible here.
Probably the one governor as to, at a moment in time, how fungible it can actually be is just the scheduling of raw materials for the specific orders you're trying to satisfy which could inject a few weeks to a few months delay on some of those orders. But generally, we view it to be quite fungible. And as you look at our core organic print here on bioproduction of well over 20%, again, I think we're doing a really nice job of kind of winding down the support for the vaccines and ramping satisfaction of our core order book which, again, remains extremely robust.
So we're certainly driving core growth well ahead of the market growth there which I think is another proof point for you on the success we're having in maximizing capacity utilization to meet the demand for our customers.
Our next question comes from Paul Knight from KeyBanc.
Yes, Michael. I guess when you're talking, you have a year backlog in bioprocess. I think the summary is that the supply chain is limiting to a certain degree, how quickly you can deliver that. Is that a fair way to say it? But you're still at the same token, growing above market. Is that the right way to think about it?
In our bioproduction business, no doubt, we continue to outpace and take share in the marketplace. We view ourselves as the leading materials supplier to a pretty attractive and robust space with a great outlook. Probably a couple of factors here that limit us being able to maybe even do more than that. Certainly, there are supply chain issues. And I don't want to maybe put too bright of a spotlight on this. We've had supply chain issues over the course of the last couple of years and throughout the pandemic. They might move around a bit in terms of where the hotspot happens to be at any moment in time. But as you saw from our slide on the macro environment, supply chain in aggregate was probably somewhat of a push in the quarter, with maybe some acute hotspots that we called out.
But certainly, there were some episodic raw material constraints that prevented probably doing even more in bioproduction. But you also have the practical reality of our customers, for these things, they -- there is a limit to how early they might be willing to accept these materials. They're highly regulated materials that need to be stored in controlled environments. And so there are some practical limitations as to how much of the demand you can pull forward. Certainly, our customers are interested in getting product in advance of their batch cycles. But they're not probably going to be too excited for me to ship at six months early, for example.
Our next question comes from Jack Meehan from Nephron Research.
Michael, there were some questions coming into the quarter around inventory in the channel with customers. Just curious to get your thoughts on just how much visibility you have into this and what you're seeing as it relates to that.
Yes. I think our view today is still consistent with what we said before, Jack, in that we don't have line of sight to any meaningful inventory builds in the channel. There's certainly going to be the one-off category or customer here that would be the outlier as there always is. But we have a pretty interesting seat at the table in a lot of our customers, particularly some of our larger lab customers, in that -- in many cases, it's our associates through our service to offering that are managing stock rooms and inventory and managing the supply chain.
And certainly, there's no signals coming from that population that would indicate that our customers are intentionally trying to build inventory. And then on the production side of our business, there's just a lot of practical constraints that would keep our customers from building meaningful amounts of inventory, including storage space and the fact that these things have to be stored in a controlled environment and there are shelf life considerations that need to be accounted for. So as we sit here, I don't think we see inventory build as a particular concern.
Our next question comes from Michael Ryskin from Bank of America.
This is Mike on for Derik De Bruin. I want to follow up on some of the COVID questions. Can you go into a little bit more detail of how much is COVID -- how much COVID is left in the model, right? Based on what you've done year-to-date and your guide of 3% headwind for the year, it looks like you're kind of assuming a similar run rate 2Q, 3Q, 4Q in COVID. Is that sort of the baseline level going forward? Is that derisked for next year? Or is there a chance of another COVID headwind to revenues next year as we try to sort of reconcile that 4% to 6% underlying growth with what we can see overall?
Yes. And Mike, did you have a second question too, because I don't want you to get cut off. Okay. Maybe didn't. So thanks for the question. Yes, I think you have it right. When we entered the year, we were coming off 2021 when we had about $400 million of COVID-related revenue. About half of that was vaccine related and the rest was split between PP&E and diagnostic testing. As we look at our latest -- well, our initial guidance was that we saw about 2% overall impact to organic growth. So the $400 million would come down to, call it, $250 million. We've -- just based on the trending in the first quarter and the second quarter, we're seeing that additional $100 million come out. So by the end of the year, we'll probably be in the $150 million to $180 million range in terms of remaining COVID revenues for the full year 2022.
I would characterize that as the absolute maximum exposure for 2023, because, again, this was built on specific revenue offerings in those three categories that I mentioned. And so once they're fully exhausted, once that revenue is fully exhausted, you're at a point where you're -- everything is organic and there's no difference going forward. Hopefully that helps.
And I think it's also important to remember that, that $400 million or so of COVID revenue last year, it was -- first half versus second half, the comparisons were pretty enormous. We had probably close to $230 million to $250 million of it in the first half and the remainder in the second half. So the COVID comps in the second half begin to moderate a bit. And that's -- we think 4% headwind is probably at a high point for the year and it will average out to the 3% we mentioned.
Our next question comes from Patrick Donnelly from Citi.
I just got two parter. Tom, maybe just to follow up quickly, you kind of touched on it there. Just when we think about the second half organic, I think you guys did about 3.5%, a little more. In the first half, obviously, the guidance staying for 4% to 6%. Is that second half bump up? Is that mainly just that COVID piece easing? Can you kind of talked about there quickly. And then second, just on the M&A strategy, Michael, you touched on it earlier. How are you guys balancing doing a large deal in the near term versus paying down that debt, getting the leverage to kind of a more reasonable level and then becoming more active? Obviously, you kind of hire a new leader, as you talked about. But just curious in terms of the appetite in the near term versus debt paydown, how we should think about that balance?
Yes. Thanks, Patrick. I think you are right on the first one. As I said the tail end of the comment, the -- I think we've hit the sort of the high peak on COVID headwind impact in a given quarter. So second half -- first half was, call it, 4% in the second quarter, probably closer or under 3% given the third and fourth quarter. The absolute revenues and quantum of revenues in the third and fourth quarter for those COVID-related offerings in '21 had moderated as we had disclosed. So the comps get a little bit more moderate, as Michael said. And so the impact on organic growth is more limited. But we've got that factored in into the guide. We do think Q3 picks up even on a core organic basis, ignoring the COVID headwinds in the fourth quarter as well. So that's what we baked into the updated guide.
And Patrick, on your second question regarding kind of M&A strategy, we continue to delever in line with our expectations. With the deleveraging in the quarter, we're now within the 2x to 4x target leverage. And quite purposefully, we financed the Masterflex acquisition with a bit of equity to preserve flexibility and optionality, that we can participate if the right deal came along. Obviously, it's a little bit of a muted M&A environment right now with probably a pretty big gap between buyer and seller expectations right now and probably even more so in the private market.
So we remain focused on integrating the deals that we've got. There's a lot of work going on Masterflex. We've got TSAs that we're looking to wean ourselves off of by the end of the year and making some really terrific progress there. And in the meantime, we'll -- we're fortunate we can create a lot of value for our shareholders by continuing to delever. If we -- if the right deal comes along with the right strategic value to us, I think we've got flexibility to do a deal this year. But if we don't, we'll obviously be disciplined and that will just give us more firepower going into next year. So with cautious continued focus, a lot of activity and we'll be disciplined about it as you would expect and perhaps even more so in this environment.
Ladies and gentlemen, currently, we are not taking any further questions. Therefore, I would like to hand back to Michael Stubblefield for any closing remarks. Michael, over to you.
Yes. Thank you all for participating in our call. Obviously, we're excited about the momentum in our business in a challenging macro environment. And I think the strong core growth really does highlight the resiliency and the positioning of our business. We've got a great order book that will support our views into the second half year here. And we remain very excited about our acquisitions and have a lot of confidence in the long-term contributions from our 2021 acquisitions. Certainly, I would want to express my continued gratitude for the ongoing efforts of our associates around the world who are living our values every day and executing extremely well in an especially challenging environment.
We're confident in our full year growth plans and certainly look forward to updating you when we meet next. And until then, take care and be well, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for being with us today. You may disconnect your lines now.