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Agilent Technologies Inc. (A) CEO Mike McMullen on Q2 2022 Results - Earnings Call Transcript

Company Participants Parmeet Ahuja - VP, IR Mike McMullen - President and CEO Bob McMahon - SVP and CFO Jacob Thaysen - President, Life Sciences and Applied Markets Group Sam Raha - President, Diagnostics and Genomics Group Padraig McDonnell - President, CrossLab Group Conference Call Participants Vijay Kumar - Evercore ISI Matt Sykes - Goldman Sachs Puneet Souda - SVB Securities Derik De Bruin - Bank of America Patrick Donnelly - Citi Jack Meehan - Nephron Research Daniel Arias - Stifel Catherine Schulte - Baird Operator Good afternoon and thank you for attending today's Agilent Technologies Inc. Q2 2022 Earnings Conference Call. My name is Selena, and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Parmeet Ahuja, Vice President of Investor Relations. Please go ahead. Parmeet Ahuja Thank you, Selena, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Sciences and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30th. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our Company's consolidated financial statements. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike. Mike McMullen Thanks, Parmeet. And thanks to everyone for joining our call today. In Q2, the Agilent team again demonstrated the resilience and strength of our business model. We delivered core revenue growth in-line with our forecast, expanded operating margins, and exceeded our EPS expectations. We did this while navigating a dynamic macro environment, including the conflict in Ukraine and COVID-related lockdowns in China. Our Q2 revenues are $1.61 billion. This is up 7% core and is on top of growing 19% in Q2 a year ago. Order performance was even stronger, growing double digits on a core basis. Second quarter operating margins at 25.3% continue to expand, up 140 basis points from last year. Earnings per share of $1.13 are up 16%. We achieved these results despite the COVID-related lockdowns that closed our operations in Shanghai, starting in late March and continuing through the entire month of April. We estimate that this was roughly a 350-basis point headwind to our core revenue growth for the quarter. As Bob will indicate when he takes you through the details, this business is not lost and is expected to be recovered through the rest of the calendar year. Most importantly, our team in China is safe and we restarted limited operations in May at our From an end-market perspective, the pharma and chemical and energy markets again led the way for us. Our pharma business, Agilent’s largest market, grew 13%, led by biopharma growing high 20s. This represents our seventh consecutive quarter of double-digit growth in the pharma market. It also builds on top of a stellar 29% growth rate last year. The momentum in our chemical and energy business also continued this quarter, delivering 9% growth in line with expectations, and overcoming the shutdown of our primary GC production facility in Shanghai and the conflict in Ukraine. Growth was driven by advanced materials and chemicals. On a geographic basis, the Americas again led the way with 13% growth built on top of 27% growth a year ago. Europe also performed well with growth coming in at 7% following 16% growth last year. China revenues were on track with our expectations through March, but we exited the quarter down 3% given the COVID-related lockdowns. While revenues were affected by the temporary shutdowns in the quarter, overall demand in China remains very robust. In fact, China was the fastest growing region in Q2 from an order perspective, up about 20%. We remain very confident about the ongoing strength of our business in China. Looking at our performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $896 million, an increase of 4% on a core basis. Given our manufacturing footprint and relative strength in China, LSAG was disproportionately impacted by the COVID related shutdowns there. To provide some additional perspective, all major product lines, excluding GC related products, grew solidly in the quarter, led by strong performance in our cell analysis business growing in the mid-teens. Orders for LC and LC/MS continue to be strong. Orders grew mid-20’s globally with particularly high adoption of our two new Bio-LC products. On the LC/MS front, we look forward to announcing several exciting new offerings at the upcoming ASMS conference that will expand our portfolio. Our value proposition continues to resonate with our customers and LSAG exited the quarter with record backlog. The Agilent CrossLab Group posted services revenue of $353 million. This is up 10% core. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education and informatic enterprise services. The scale of our ACG business and breadth of portfolio continue to drive growth and margin expansion even in the face of inflationary pressures. Q2 marked the sixth straight quarter we’ve delivered growth across all markets and regions. The Diagnostics and Genomics Group delivered revenue of $358 million, up 15% core versus 16% last year. Our excellent growth was led by NASD and genomics. The NASD team delivered yet another strong quarter, generating record revenue and profitability. During the quarter, I had a chance to visit our team in Colorado and see first-hand the excellent progress that’s being made meeting current customer needs and also the work underway in continuing to build for future growth with our Train B expansion. We remain extremely bullish about NASD’s future and with Train B coming on line in 2023, we’re adding yet another $150 million plus in capacity. Looking across the company, our One Agilent approach and focus on our customers has never been stronger. During the quarter, we were ranked number one in our industry and number two overall in customer satisfaction in The Management 250 ranking, developed by the Drucker institute. In addition, the new Agilent Commercial organization is already resonating well and delivering successfully for our customers. Agilent’s Q2 results are yet another proof point for how we’ve built a resilient company that can quickly adjust to a changing environment and still post strong results. Given our results to date, along with our backlog and continued order strength, we are again raising our full year core revenue growth and EPS guidance. For the year, we are now expecting 8% to 9% core revenue growth and EPS of $4.86 to $4.93. Bob will provide more detail on our Q3 outlook along with more information on what we expect for the rest of the year. After Bob’s comments and before we take your questions, I will be rejoining the call for some concluding remarks. Thank you for being on the call today and now, I will hand the call off to Bob. Bob? Bob McMahon Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our guidance for the third quarter and the fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted solid topline results in Q2 while overcoming some difficult macro challenges in the business environment. Revenue was $1.61 billion, up a reported 5.4%. In the current quarter, currency was a headwind of 2.1 points while M&A added 20 basis points of growth. Core growth was up 7.3%, in line with expectations, despite the COVID-related lockdowns in China, which primarily affected us in April. We estimate the lockdowns deferred $50 million to $55 million of revenue into future quarters, impacting growth in Q2 by roughly 350 basis points. In addition, COVID testing-related revenues were roughly a one-point headwind in the quarter. Our largest market, pharma, grew 13% during the quarter, on top of 29% growth last year. Biopharma continued to be the main driver of results, growing 27% year-on-year, led by NASD. Investments in R&D programs and demand for instrumentation, consumables and critical components remained strong. Pharma represented 37% of our overall revenues this quarter. To put that in perspective, in Q2 2019, effectively one year before the pandemic started, pharma represented just 30% of our business. This not only highlights the strength and resilience of this market, but it also demonstrates how our innovation and investments in higher growth markets continues to pay off. Chemical and energy continued its strong trend of positive results, growing 9% during the quarter despite the impact of the COVID-related lockdowns in China and the conflict in Ukraine. Results were led by strong double-digit growth in advanced materials and specialty chemicals. We expect strong demand to continue in these areas, particularly in semiconductors and battery and clean energy technologies as industry-wide capacity expands. Diagnostics and clinical grew 5% on top of 13% growth last year as year-on-year declines in COVID-related revenues and the temporary shutdowns in China muted our results. The academia and government market was a nice surprise for us, growing 5% in Q2 on top of 21% growth last year. We saw an increase in spending in this market as more university labs opened up and students returned to on-campus learning. In addition, sales activity and the funding environment continues to be healthy. In the food segment, we saw growth across all regions except for China due to the shutdowns. The higher concentration of food business in China drove the food segment to decline low single digits against a very strong comparison of 22% growth last year. And rounding out our end-markets, environmental and forensics grew 1% versus an 8% growth last year. On a geographic basis, the Americas grew 13%, Europe grew 7%, Asia, excluding China grew 8%, while China declined 3% in the quarter as the lockdowns affected our manufacturing and logistics operations for over a month. Regarding China, I’d like to provide some additional detail on how the quarter evolved and how we expect to see the recovery progress. First, as Mike said, demand remains strong with the order growth of about 20%, despite the temporary COVID lockdowns. Second, our business in China was tracking very well with our expectations through late March when production and our main logistics hub in Shanghai were shut down and remained closed throughout April. We were able to partially reduce the impact of the lockdown by shifting production to other factories where possible and adjusting the shipping routes into and out of China. We expect the $50 million to $55 million in revenue to be recovered throughout the rest of the calendar year, so it is deferred, not lost. In terms of phasing, we expect to continue to ramp our operations and anticipate modest recovery of the Q2 impact in Q3. We expect the majority of the recovery to occur in fiscal Q4 with some spillover into November and December, which is our first fiscal quarter of 2023. This phasing is baked into our updated guidance. Now turning to the P&L. The team continues to execute at a very high level. Second quarter gross margin was 55.7%, up 30 basis points from a year ago as pricing actions and productivity helped offset inflationary pressures tied to ongoing supply chain constraints and higher logistics costs. Operating expense leverage and strong cost management helped drive very healthy incremental improvements as we delivered an operating margin of 25.3%, up 140 basis points from last year. Our tax rate for the quarter was 50 basis points better than forecast, helping us deliver earnings per share of $1.13, up 16% versus last year, and exceeding our expectations. Looking at cash flow and our balance sheet, we generated operating cash flow of $283 million in the quarter while investing in $64 million in capital expenditures during Q2, with the year-on-year increase primarily related to the NASD expansion. Cash flow in the quarter was impacted by the transitory impact of COVID-related lockdowns in China as well as increased inventory to fulfill strong demand in a challenging supply chain and logistics environment, as expected. We are still on track to deliver our cash flow forecast for the year. During the quarter, we again took advantage of market volatility to repurchase $234 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $297 million to shareholders. Our balance sheet continues to be healthy with a net leverage ratio of 0.9 times. And earlier this month, we refinanced $600 million in senior notes opportunistically, and now have no long-term debt maturing until 2025. As we stated last quarter, our approach given current market conditions is to continue to be aggressive in deploying our capital. Given our strong balance sheet and confidence in the future, we intend to deploy another $250 million in opportunistic share repurchases in Q3 while continuing to actively look at M&A opportunities. Now, let’s move to our improved full year guidance and our outlook for the third quarter. Given the strong business performance in the first half of the year and order backlog, we are raising our full year core revenue growth to an expected range of 8% to 9%, up a full point from our previous guide. This core revenue takes into account the recovery phasing in China, as well as a $35 million, or 55 basis-point headwind due to the conflict in Ukraine. While we’ve increased our core growth expectations, the dollar has again strengthened considerably since our last guide, resulting in estimated currency headwinds of $170 million for the year, up $60 million since our last guide. And the impact of M&A remains unchanged. This results in us maintaining our full year reported revenue guidance range of $6.67 billion to $6.73 billion for the full year. We have also increased our EPS guidance for the full year to $4.86 to $4.93 per share. This is up from the previous range of $4.80 to $4.90 per share, and now represents 12% to 14% growth versus fiscal year 2021. For Q3, we’re expecting revenue to range from $1.625 billion to $1.650 billion. This represents core growth between 7% and 9%. We expect operations in China to ramp and be fully operational before the end of the quarter and continue to accelerate into Q4. Given the strengthening of the dollar, exchange rates are expected to have a negative impact of about 4.7 points on the reported growth in the quarter. Closing out our guidance, in Q3 non-GAAP EPS is expected to be in the range of $1.20 to $1.22, up 9% to 11% versus the prior year. This is based on a 14% tax rate and 300 million diluted shares outstanding. The Agilent team once again performed extremely well in Q2 under some very challenging circumstances. At the same time, our business remains strong, and I’m confident we will continue to deliver strong results in Q3 and through the rest of the year. With that, Mike, I will turn it over to you for some concluding comments. Mike McMullen Before we take your questions, I would like to share some thoughts with you on the current environment. As you know, we’re living in very dynamic times. However, our end markets remain strong. Our build and buy growth strategy is working. What is also very clear is the ability of the Agilent team to continue to deliver in a challenging external environment. We have built a resourceful, quick moving team and a resilient business model that has shown again-and-again, time-after-time, that we can successfully address any challenges or obstacles that come our way. We delivered inline growth, increased margins by 140 basis points and exceeded our EPS expectations during a time of rapidly growing inflation, continued supply chain challenges and the effects of a COVID-related lockdown in a key market. In times like this, our customers want to work with people and companies they can rely on. This works to our advantage, and I remain confident in our growth strategy continuing to deliver, and in the power of the unstoppable One Agilent team. Our growth drivers remain intact, and our business prospects remain strong now, and into the future. Thank you. And now, back to Parmeet as we take your questions. Parmeet? Parmeet Ahuja Thanks, Mike. Selena, please provide instructions for Q&A now. Question-and-Answer Session Operator [Operator Instructions] The first question comes from Vijay Kumar with Evercore ISI. Vijay Kumar Hey, guys. Thanks for taking my question. Mike, certainly, you did mention this is an impressive performance given the relative fears on the Street on impact from China lockdowns. So, I guess, one, when you look at your peers, very strong instrument growth across LC and mass spec. Maybe could you talk about how did Agilent's portfolio within that instruments segment perform? What were the trends within the Q? Were there any lockdown impact for instruments and maybe order trends specific to instruments, please? Mike McMullen Yes. Vijay, thanks for the comments. We're really pleased with the performance given all the teams we're dealing with in the external environment. So, we're going to tag team the response here with myself and Jacob. So, the story is the -- our instrument business is doing very well. And in the call, we highlighted a few areas where we received an outstanding order growth. We talked about the cell analysis business, LC and LC/MS, particularly on the bio side, and I'll have Jacob add some specifics. And absolutely, as I tried to pull out in remarks, I think Jacob's business was disproportionately impacted by the shutdowns that we experienced of a COVID nature in China. So, we're very bullish about the strength of our LSAG business, exiting the quarter with record, record backlog. And Jacob, why don't you talk about what's been going on and why you're excited about the future? Jacob Thaysen Yes. Absolutely. Of course, the quarter was challenging with the Shanghai lockdown. But overall, we continue to see very strong growth in orders coming in, particularly in our LC, LC/MS business, which I think Mike alluded to also some of the NPIs we came out with approximately a year ago in the LC business. And with that connected with our very strong positioning in the mass spec, we continue to see very strong growth in that aspect. Clearly, with GC and GC/MS was challenged in China this year -- or this quarter due to the situation. But overall, the orders continue to be very strong. So, I'm not concerned about that. And besides that, I think we have seen also for the spectroscopy business that the material science is really a strength for us right now. So overall, very strong performance across the portfolio. Bob McMahon Yes. And hey, Vijay, this is Bob. Just to kind of dimensionalize that impact when we talk about disproportionate, roughly 80 to 85% of the impact due to the COVID lockdowns was instrument -- LSAG-related. Vijay Kumar That's helpful, Bob. And maybe one on the top -- lockdown impact in China. The guidance is assuming that $50 million to $75 million comes back in the second half. What gives you the confidence that this is coming back in second half? And where are we in China? Have the markets reopened? Like is your production facility up and running? Because I know you have a GC manufacturing facility, and there have been some questions on perhaps there could be an impact in GC shipments out of China. Mike McMullen Vijay, how would I lead off the response here? So -- and this ties into why we have confidence about the outlook. So, we are back up and running in Shanghai, albeit on limited capacity. Both our logistics and production facilities are now up to 25% operating capacity. And we've actually started some limited international and in-country shipments. So product is starting to move. And we expect to have -- our view is that the lockdown controls will start to ease over the coming weeks and that we'll be fully operational by the end of the quarter. But we don't want to get too far ahead of ourselves here, and that's why I think Bob will describe a fairly modest recovery assumption in Q2. I'd also like to take this opportunity to call just to do a shout out to our team in Shanghai, who are actually camped out, living at the factory and not being asked and volunteering to do that. So, I've also got confidence in the outlook because I know what this team can do. Bob McMahon Yes. And to build on that point, Vijay, a couple of thoughts. I mean, we've watched the order backlog very closely. We haven't seen any cancellations associated with this. And as we're ramping up the factory in Shanghai, we also have dual manufacturing capabilities, and we continue to ramp up the factory here in the United States to be able to also provide GC and GC/MS. So, we are expecting, as Mike said, a very modest recovery of that $50 million to $55 million in Q3, the majority of it being in Q4 and then spilling over a little into November and December. But given the backlog and the fact that we haven't seen any of those orders cancelled, we feel like we definitely will get the product back. And if we go back to what happened in the initial phases of COVID, China dropped down pretty substantially and then came back fairly quickly, so. Operator The next question comes from Matt Sykes with Goldman Sachs. Matt Sykes Congrats on a quarter in a tough environment. Maybe kind of following up on the instrument question, just we dig a little bit more into C&E. Another good quarter there. And a couple of things you called out in terms of advanced materials, battery, semis. I mean, I think traditionally, this has been looked at as sort of a highly cyclical sector, but when you're seeing sort of the secular growth drivers within those subsegments, it just seems less cyclical. Could you maybe kind of help us size that sort of cyclicality versus non-cyclicality within C&E? And what could be actually far more durable from an instrument growth standpoint in that segment over the course of this year and into next year? Mike McMullen So, I'm going to lead off with this and then tag team again with Jacob and Bob. But we completely agree with your premise of your question. In fact, you may recall some of our earlier presentations where we talked about there's elements of the C&E segment that aren't fully appreciated. They're being driven by capacity expansion for supply chain concerns, move to new materials, investments in semiconductor batteries. All you have to do is see what's happening in the whole automobile industry. We're a part of that. And I think it's important to just remind the audience here of the three segments that we have. And advanced materials grew, I think, mid-20s for us. The chemical side grew high teens. We were down in the energy segment. And I think that's been historically the more cyclical element of the business. But I think you need to keep in mind that that's less than 3% -- and energy side, less than 3% of Agilent's total revenues. And perhaps I'll pass it over to you, Bob and Jacob, to -- some commentary on the relative size of those buckets, if you will. Jacob Thaysen Yes. I can also mention that Agilent has actually historically been very strong in material science. So, we have a very strong market presence both in the semicon industry, especially with our IC-PMS portfolio, but also with the GC, and generally speaking, in materials, in batteries and other renewable energy with our GC business. So I think we see a great potential in that. Bob? Bob McMahon Yes. Just one other thing. I think on the -- just a couple of things. Energy was down. That is one area that was disproportionately impacted in China as well. So, we also had that impact. So, it wasn't -- it was a temporary phenomenon there. And then you can speak to -- it was -- China was also impacting the chemicals and advanced materials, and they still grew. So, that kind of speaks to the strength of those markets. And these are areas -- I mean it's our second-largest market. We have a leadership presence in these areas. And I would say it's just starting. When you think about the amount of capacity that's needed just for lithium-ion batteries as an example, we're only at a fraction of the capacity that needs to be there. So, these are probably $100 million-plus markets today that are having a long runway, if you just look at the cars and the opportunities here to continue to develop those. And that's just on the battery side. If you look at that, this is a very significant opportunity for us going forward, and we are definitely the leader. Matt Sykes Great. Thanks very much. I appreciate the color. And then just secondly, on the pricing side. Bob, you mentioned that some of the offsets on the gross margin pressure coming from pricing. Can you just kind of remind us of what your expectations are for pricing this year? And then, in terms of some of the actions you did last year, how quickly are you realizing some of those higher prices that you put in place? Bob McMahon Yes. It's a really good question. And we continue to be pleased by the ability for our value proposition to be recognized in the marketplace and actually having higher price than what we had initially had at the beginning of the year. If you recall, we had talked about roughly a 1-point year-on-year price realization. Q1, we were ahead of that. In Q2, we actually accelerated beyond that. And I would say most of the pricing that we're realizing today were for actions that we took most in the fall of last year and just starting to see some of the actions that we took in January of this year just given the strength of our backlog. So, it was above that. I would say in our new guide that we actually feel more optimistic about being able to be higher than that 1%. It was higher than that, certainly in Q2, which we needed because we -- our costs have been higher as well in terms of being able to have higher logistics costs given the price of oil and the cost of shipping. But we feel very good about our ability to continue to manage that across our entire portfolio. Mike McMullen Bob, I think it's also very well. We feel really pleased about the net price realization that's occurred. We also continue to drive productivity as well. So, it's a combination of pricing and productivity improvements we're having across the Company. Bob McMahon That's right. That's right, Mike. Operator The next question comes from Brandon Couillard with Jefferies. Brandon Couillard Mike, biotech end market, very strong again in the second quarter. Just talk about sustainability of trends there and perhaps the impact of NASD specifically on the biotech segment growth. Mike McMullen Yes. So, I'll have you call that out, Bob. I know that's in our notes. And I think what you'll hear from Bob is it's a broad-based biopharma story with really strong growth in both sides of the market, the analytical lab and NASD. We remain quite bullish on the outlook in biopharma. In fact, we continue to actually gain new business. And actually, I'll have Padraig talk about in a second. We've actually expanded the number of accounts we're serving in the biopharma space. So we're feeling really good about the long-term growth aspects of biopharma as well as the impact it's having on the business right now. You heard me crone about a few of our growth numbers in the prepared remarks. And Bob, before I pass it over to Padraig for some comments, can you remind me what it was? Bob McMahon Yes. Our biopharma continues to -- first of all, Brandon, continues to be a greater proportion of the overall pharma market. So we're not only disproportionately growing in pharma, but the fastest-growing market continues to be bigger and bigger. It grew 27%. If you took out NASD, that number was still 19%. So, it still says that we have very strong growth there, and we grew backlog. And so, I feel very good about our offerings across both the instrumentation but then also across the entire portfolio of products and solutions that we have. Mike McMullen Yes. Thanks, Bob. And I thought given the start of this fiscal year of our one commercial organization, maybe Padraig, you think some comments of how us helping to gain further penetration in the biopharma space. Padraig McDonnell Yes. Mike, we're absolutely seeing that we have a bigger focus on the longer tail of accounts or smaller biopharma accounts as well as the large players. And of course, our strong focus in biopharma was with application support and so on, really helps us with attach rate in that business. And it really helps the instrument trend with that attach rate. So overall, I think we see both services and consumer has been a very strong play and very strong enabler within -- in the biopharma accounts, which we're, of course, getting a lot more access to. Brandon Couillard Got you. That's helpful. And then, the DGG gross margin at 56% are quite strong. Is that a mix dynamic or pricing? And should we think about mid-50s as sustainable for this business going forward now? Mike McMullen I'll let you and Sam hash that one out, Bob. Go ahead. Bob McMahon Yes. I think we certainly benefited from an extremely strong performance there. And Sam and team have continued to drive productivity in the business there. We did benefit from mix, but it -- I wouldn't necessarily put that number in for Q3 and Q4 because if you recall, one of the things that we are starting to do in the second half of the year is ramp up the start-up costs for Train B in our NASD facility and so forth. So -- and that hits our gross margin. But obviously, that has a great payoff in '23 with that $150 million-plus capacity. So, I would say the team had a benefit of mix. They're working on that productivity and activities. But I would say in the second half of the year, we probably will see some pressure because of some of that start-up costs. Sam Raha Bob, it's -- completely agree with everything you said. So, it is mix, it is volume. By the way, just also affirm we benefited from price. We have some leadership positions in the market, which we are absolutely able to go after. And continued good performance expected, though. As you said, the expectation is going to be a little tougher with NASD Train B coming on board. Operator The next question comes from Puneet Souda with SVB Securities. Puneet Souda So, first one, strong pharma, obviously. But just focusing on North America and pharma. Any reason why you shouldn't continue to see that in the second half, too? I mean, the question is more around instrumentation, and it's really around -- we're seeing your peers deliver very strong growth rate in U.S. pharma. So, wondering if there is any element of pull-forward you're seeing here. And should we see a sustained sort of growth rate when we think about North America and U.S. pharma? Mike McMullen Puneet, happy to answer that question. We're seeing the same phenomena. Pharma remains very, very strong in the U.S., and our outlook remains very bullish for the remainder of this year. Bob McMahon Yes. To give you perspective, I mean, our Americas business in pharma grew twice as fast as the overall pharma business. And we do -- we will have some comps in NASD that we won't be continuing to post a great -- the strong performance there -- as strong a performance, I should say, because we're ramping up against the capacity, which is what Train B is going to help us provide. But we're still seeing that very strong performance, particularly in the instrumentation that you were just asking about. That has been a standout. Puneet Souda Okay, great. And then just briefly on another smaller segment, academic and government for you, that was strong in the quarter. Maybe could you just elaborate a little bit there what's driving that? And what sort of -- what are some of the elements of growth that we should continue to expect through the year? Thank you. Mike McMullen Yes. And as Bob mentioned -- this is Mike. That was a nice surprise for us. I think we came off a 21% compare and still grew 5%. So, we're seeing some positive developments. The funding environment seems to be quite healthy. And even though we had some COVID-related headwinds in the academia segment in China, even that area was strong. So, we think it's continuing to be a healthy funding environment. I think perhaps some of the COVID challenges we had as the society over the last several years has reinforced the importance of funding in those areas. As well, we're seeing return to labs or access for students and others in the lab activity as well. So, I think it's that combination of a healthy funding environment as well as lab access. Bob McMahon Yes. I think, Puneet, just to build on what Mike was talking about, if you go back to our first quarter results, we had January in our first quarter, and that was just coming off of Omicron -- the wave of Omicron. And we were talking about seeing increased activity starting in February as -- late in January, early February as kids were going back to school. We saw that continue throughout the course of our second quarter and really across the board. So, I think, it's pretty broad-based, particularly in our cell analysis business was one of the -- probably the strongest in that area and saw a really nice recovery after that first wave of Omicron there. And I think it continues to speak to kind of the value proposition that we have in cell analysis. Operator The next question comes from Derik De Bruin with Bank of America. Derik De Bruin Hey. It's Derik. Thanks for taking the questions. Just sort of follow-up on some things Puneet asked. So, we've been getting a lot of questions from investors basically asking if what the instrumentation sector is seeing is sort of like a pull-forward of the budget flush earlier in the year because customers are worried about delays in products, supply chains or anything like this. I mean, are you seeing any sort of like unusual order patterns? Or anything that's still suggesting it could be still catch-up orders from 2022 that didn't get -- sorry, for 2021 that didn't get shipped this year? Just like to because the instrumentation numbers have been just so strong across the group. Mike McMullen No. We haven't seen any indication of that. And I think the supply chain challenges, if you will, are no better, no worse. So, there's nothing that would be -- from a supply chain standpoint that would be encouraging customers. I got to get my order book now or I won't get a product. So we're not seeing that. We do think that some of the markets have seen an increase in their overall inherent long-term growth rate, particularly pharma, biopharma. We actually think some of the COVID challenges we had that I mentioned earlier have actually led to a more positive funding environment in some aspects of our marketplace. And Bob, I don't know if you have thoughts on this as well or... Bob McMahon Yes. I think from the standpoint of order growth, from a budget perspective, it only counts if they actually get the product, right? And so, if you look at -- the order growth continues to grow faster than revenue, which says, hey, from our standpoint, there's not necessarily pull-forward and it's just robust demand. Derik De Bruin Got it. So, no sign of over-ordering, for example, that you can see? Okay. And I guess another question... Bob McMahon Derik, just one other thing, I think, just real quick on that. Yes, because we continue to look at -- we talked about it relative to China, but we look at it on a on a regional and global basis. And again, the order cancellations are at -- year-on-year, they're lower than they were last year. And last year, they were lower than the prior year. So, they continue to be at a very de minimis amount. It's something that we haven't seen more -- somebody is placing orders with multiple vendors and whoever can deliver gets the product first. I think it is consistent across the industry where we just are seeing very strong demand. Derik De Bruin Got it. Thanks. That's really helpful. And just in terms of some of the competitive dynamics, I mean, it -- some of the other companies in the space have been talking about share shifts and changes going on in the markets and customers going on. I mean, it sounds like your order book is still -- I mean, did I hear you correctly you said mid-20s order growth in China? It doesn't sound like there's any sort of like change in the competitive dynamics going on in that region? Mike McMullen At least not with us. Bob McMahon Yes. I was going to say for some of our core technologies, it's mid-20s globally. Mike McMullen Yes. And we have included analytics on this, Derik, with win-loss ratio. So, we know what's going on with the business, and we can kind of parse through the rhetoric. Operator The next question comes from Patrick Donnelly with Citi. Patrick Donnelly Bob, maybe following up on that. Just looking at the guidance -- in terms of the guidance, obviously, you guys are typically pretty conservative. So, it's encouraging to see that 100 bp bump for the year. Can you just talk about, I guess, what gave you the confidence? It obviously implies a decent 4Q ramp. Is that just coming from exactly what you talked about there, the order growth, obviously, China coming back, visibility into that? Maybe just talk to the confidence level. Again, historically pretty conservative. So, that 100-bp bump off an in line quarter, maybe just talk through that a little bit. Thank you. Bob McMahon Yes. No, you're spot on, Patrick. You hit on the two key points. One is the continued strength in our order book globally, where our orders continue to outpace our revenue. And then you build on that fact we have a strong conviction that the revenue deferred from China we will recover. And so, you see that in both, Q3 and really Q4. You see that step-up because of the strength. I would say our visibility remains high, particularly in the instrument side of the business with record backlogs across all of our technology stacks. Patrick Donnelly Okay, great. And then, Mike, maybe following up on one of the earlier questions on cyclicality. Mike McMullen Patrick Donnelly We get a lot of questions about recession sensitivity and thoughts about if there is a recession where the companies look like. You guys have obviously transformed the portfolio quite a bit since the last time we saw a real pullback. Can you just talk about the resiliency of the portfolio broadly, how you would think about, what this would look like into a recession? And then again, maybe just expand a little bit on what's cyclical, what's not across the entire portfolio there. And then similarly, Bob, just the levers on the cost side, if things were to slow. Mike McMullen So I'm going to make a few opening comments here. Then Bob has been doing a nice little set of model here. He has a few slides to reference, so he can give an even more precise answer. But I must use the word resiliency or resilient in my script comments at least 5 or 10 times because -- really to drive the point home that the Agilent business model, business portfolio, is significantly different than the last time that we've seen some type of recessionary pressure on the business. And at this point, for example, to a service business that just posted another 10% core revenue growth where I've got over 10% of my total company revenues under a service contract, whole consumables business, our NASD business, what we've been doing to really change the nature of our business and also deeper penetration in markets such as pharma, biopharma, which tend not to be as affected by a recessionary pressure if that was to occur. And Bob, I know this is something you're a keen student of, and I think we'd be happy to share some more insights here. Bob McMahon Yes. Thanks, Mike, and you're telling all my secrets with my secret pages here. But I think, Patrick, to your point, this is something -- as Mike was talking about, the portfolio really has dramatically changed. So, if you went back to probably '08, '09, the great financial crisis, our business was much more capital-intense, much more instrument-oriented than it is today. It was probably in the mid-30s in terms of services and consumables. And today, it's closer to 60%. And then, if you also look at it, the pharma and clinical businesses, which are probably more recession-resistant, they're now 50% -- greater than 50% of the entire company. And so, back then, we were pretty close to GDP. And if you just look at what happened in COVID 2020, one of the greatest shocks we had, actually, we still grew 1%. And so, you can see that we've got a much more resilient business model because of the higher concentration, not only in faster and more resilient markets like diagnostics and the pharma business. But then when you look at the types of products that we have, the greater element of services, a lot of them on contract, as Mike just talked about, but then the consumables piece and then the consumables and services a greater proportion of the business than we had before. And then, even in some of those areas that we talked about, the more -- we're traditionally viewed as cyclical, there's some longer-term growth drivers. I think that people are going to still transition from gas-powered cars to electrical cars. There's still going to be a regionalization of investments and capacity around semiconductors and so forth to bring them closer to the markets, whether that be here in the U.S., Europe and other places to diversify that supply chain. Those are things that weren't there in 2020 -- or in 2008-2009. So I think we've got some tailwinds from a market perspective, and the business composition looks very different. Operator The next question comes from Rachel Vatnsdal with JP Morgan. Rachel Vatnsdal So, another question around biopharma. Biotech funding slowdowns have obviously been an area of concern. So, could you just talk about if you've seen any slowdown from customers related to funding concerns at all? And then, have you had any concern amongst challenging therapy customers? Or is that business really operating as expected as well? Mike McMullen Yes. So, let me leave with some thoughts on the biopharma, and maybe you want to jump in on the cell and gene therapy, Jacob. But no, we haven't seen it. We've seen some of the publicized concerns, but it's not showing up in our discussions with customers or in our order book or order funnel. In fact, that's why I pulled Padraig into the conversation earlier because we're actually expanding our penetration in there. So, the funding environment still remains strong for the products and services looking from Agilent. And then, I know that you've got something going on with Lonza right now already on the cell... Jacob Thaysen Yes. Actually, the -- overall the cell analysis business is doing really well, and we are -- we have a high penetration into biopharma. Actually, one of the areas we didn't have that high was in the Seahorse, where we were very balanced towards academia. And here over the last a period of time, we have launched a new product which is really penetrating into biopharma, really doubled our penetration into the biopharma for the -- especially for the gene and cell therapy area. Also the same for the our LC/MS business where we have a strong presence in the oligo, and we will further improve that over the next period of time here. So, we actually see a lot of strength still in that area. And as Mike mentioned, we also are committed to partnerships. Lonza, where they have built a new platform that can be a bioreactor that can actually -- that could be used out in the in the hospital settings. And we are working with them to improve that to put QC methodologies in there based on our cell analysis technology. So we are -- continue to be very bullish in this space. Bob McMahon Yes. Hey Rachel, one other thing, it's a question that's come up a number of times. So, we've done a fair amount of analysis. And as Mike and Jacob talked about, we haven't really -- we haven't seen any slowdown in the order book or any -- even in the elongation, any material elongation, in kind of the order conversion cycle, so to speak, in terms of getting from proposal to order. The other piece that I think is probably underappreciated is the penetration that we have actually into this market from a services and consumables base. And so, we have probably some of the highest attach rates in our biopharma businesses just because of the types of instruments that they buy and the amount of service uptime that they require. And as long as those customers don't go bankrupt, we'll still have that. And we haven't seen any material write-offs in any of those things. So, I think people think about it and go right to instrument, but there's a big component of services and consumables there, too, that will continue to be kind of the gift that keeps on giving. Rachel Vatnsdal Great. Thanks. That's really helpful. And then two more questions from me on C&E. So, last quarter, you listed the C&E guide for the year at high single digits to low double-digit growth. So, can you give us an update on if that outlook has changed at all given the 9% growth this quarter? And then, kind of diving deeper into C&E. So, you and your peers have touched on battery testing being an opportunity in that segment, and it's really starting to get some increasing traction. So can you walk us through that market opportunity and how meaningful that could be over time? Bob McMahon Yes. So,, our guidance for C&E hasn't changed. We were in line with the expectations for Q3 despite kind of the pushout of some of the China-related business. If you can -- GC and GC/MS have probably a higher concentration into the chemical and energy business. And actually, we still grew 9%. So, we're expecting to see a nice rebound into Q3 and Q4, primarily Q4 as that business comes back, and they're still on track to that double digit. Mike McMullen And Bob, I think it's fair to say it wasn't just C&E in China. It also was C&E globally where our product is provided by China for those customers. Bob McMahon And I think in terms of the areas around battery and technology and clean energy technology, and I would throw in kind of semiconductor in that and some of the capacity expansion. So on the battery technology, those are emerging areas that we've talked about for the last several quarters here. It's still an emerging technology. There's only a handful of battery manufacturers right now, but they are significantly increasing capacity around the world. And so, it's a several hundred million dollar kind of market opportunity today and growing quite substantially. Operator The next question comes from Josh Waldman with Cleveland Research. Josh Waldman I think one for you, Mike, and then one for Bob. Mike, just want to expand on the instrument backlog questions. I mean, curious if you could provide a bit more context on the backlog strength. Just trying to get a sense on how much of this is a reflection of stronger orders versus potentially a function of tighter supply, maybe even the China GC facility shutdown in fact. You talked on biopharma strength. Are you seeing order -- instrument orders from more cyclical accounts like applied and industrial also run ahead of expectations? Mike McMullen Yes. I think the story -- the headline story here is transitory impact on backlog build for an element of a COVID-19 lockdowns in China. But the big story -- the big macro story is orders continue to outpace revenue, so strong instrument demand across our two largest markets. And I can recall some of the questions we got earlier this year about, hey, what's the upside in your plan. We said, we think it sits in our two largest markets, pharma and C&E. And that's actually what's happening. So -- and I think we've probably got a little bit larger backlog build right now in C&E just because of the need to be able to deliver GCs from our Shanghai factory, albeit we were able to shift some of our production to our site in the U.S., and that's continuing to ramp. But again, I think the macro story here is really strong overall market environment for orders. And we're feeling really good about our ability to meet our customers' expectations on deliveries. We see customers continue to be satisfied with their relationship with Agilent. I think you saw me try to hit that in my closing comments. And then as Bob mentioned, we monitor very closely the level of order cancellations and continue to be delighted with where that stands. Bob McMahon Yes. Hey Josh, this is Bob to kind of build on that. If we kind of peeled the onion back and looked at the backlog for LSAG, it's significantly above where it was last year. It's hard to peel out. There have been some longer delivery times because of logistics, but I would say the majority of it is demand-driven. It is not because it's longer delivery times. I mean, even if you took the $50 million to $55 million out -- yes. Even if you took the $50 million to $55 million out, it's still significantly higher than what it would be historically. It's a record backlog even if you take the kind of the onetime $50 million to $55 million China deferral out. Josh Waldman Okay. And then, Bob, can you bridge us to the new EPS outlook? I mean you beat Q2 guide by $0.01 at the high-end raise, the full year by $0.03. Just curious how strong organic growth and other variables like share repo, FX and margin are being accounted for in the new guide. Bob McMahon Yes. It's a good question. So, it's $0.01 for Q2 beat and basically $0.01 for Q3 and Q4 with the share repurchase helping us by a couple of points, offset by FX. I would say, it's a prudent guide. Josh Waldman Oh, prudent guide. Okay. Mike McMullen We had to get that prudent in today. Didn't we, Bob? Operator The next question comes from Jack Meehan with Nephron Research. Jack Meehan I just wanted to keep going on chemical and energy. Just first, how much of the manufacturing headwind was in this end market, maybe versus food or environmental or elsewhere? I'm just guessing the underlying was a lot stronger than the 9% headline for the end market. Bob McMahon Yes. Your intuition, Jack, is spot on. We didn't -- for purposes of looking at this, we looked at it more on a technology stand rather than kind of end market. But if you look at most of it actually being in China, that's where most of the impact was. And that is a market that's over-indexed to food, chemical and energy and pharma. Those were the 3 biggest markets. Environmental and forensics does have an impact there as well, but it's probably less so than the other three that I just talked about. Mike McMullen I do recall we had some larger European orders in C&E that will be filled later because we couldn't get GCs to them this quarter -- this past quarter. Jack Meehan Got it. That's helpful. And then, just following up on NASD. Just the expectations in the back half of the year. You guys are the masters of eking out additional capacity and what you have today with Train A and the Frederick site. But is the expectation kind of revenue is more flattish from here for the remainder of the year? And then, just a quick clarification for Train B, talked about 2023. I think previously, you said end of this year, just don't know if there's any -- I'm reading too much into that, but just any comment on the time line would be great. Mike McMullen Bob, do you want to take the first one? Bob McMahon I'll take the first one, yes. So I think if we look at what we have been able to do in Q2, it was very strong growth. it is slightly better than flattish as we've kind of tapped out -- as we're maxed out right now in capacity. But as you point out, the team continues to do a fantastic job to bring out new capacity. I will say that we do have a shutdown -- a planned shutdown in Q3 as we're doing some of the installation of Train B, which will temporarily depress the revenue there. That's built into the guide. And so, there may be a slight sequential downturn, but that's all part of the overall plan. Mike McMullen And Jack, as I mentioned in my prepared remarks, we had a chance -- actually, Bob and I and Sam had a chance to actually go down and spend time with the team to see firsthand does a great job there to thank them for their work. And they've really done a great job both winning new business as we looked into '23 but also meeting -- also supporting a major expansion of our production, which we've been referring to as Train B. And to answer your question, I would say is, first of all, there's no changes to our outlook in terms of 2023 revenue. We do think it's not likely that we'll start production this calendar year. So, it's most likely early calendar 2023. We've had some great support from the construction teams are supporting our effort here, but also have experienced some COVID-related to supply chain issues. But as you can imagine, Jack, we also were prudent in our initial outlook for 2023. So, don't read into that anything beyond the fact that it may take us a little bit longer to get the plant up and running, the new capacity up and running, but our revenue outlook for 2023 remains unchanged. Jack Meehan Super. And Mike, you said prudent now a couple of times but was just wondering, could you confirm, is the best still yet to come? Mike McMullen Absolutely. Thank you, Jack. The best is yet to come. We’re Agilent. Right after this call, I'll be doing an earnings call video for the Agilent team and that might close. So -- and thank you very much for that, Jack. Operator The next question comes from Daniel Arias with Stifel. Daniel Arias Bob, I just wanted to maybe follow up on that pricing question and ask if there are areas in the portfolio where the backlog or the lead times are long enough to where you sort of need to go back and requote pricing for the current environment. Or is that not something that you really have in play? And if it is, how successful might you be in doing that? Bob McMahon Yes. I'll look to my colleague and Jacob, but we don't requote when we price. So we commit to the pricing at the time that the quote was valid or the order. And so, what we're seeing here is, if we take pricing in January, we just started seeing some of that flow through in the late second quarter just given the backlog. So, if we take pricing now, it's really in terms of anticipating you'll expect to see it sometime in late Q4, really into 2023. Mike McMullen Daniel Arias And then, maybe just on NAS -- oh, sorry, Jacob. Yes. Mike McMullen No, no, I was -- just sorry about that. Daniel Arias I was just going to ask one about NASD and just sort of the way that the order book is building out for 2023. Is that more a reflection of where backlog is for NASD or just the acceptance time lines that you have customers talking about at this point? Mike McMullen Sam, why don't you speak to that? I know you spent time with Brian on the exact question. Sam Raha Yes. Happy to. Well, listen, I mean, the backdrop of the market continues to be a strong demand. And we're seeing that both, from existing clients that we have for materials we're making for them right now but as well as new programs. And we are seeing a lot of interest from new pharma clients as well. So, when you look at 2023, it's very healthy demand. In fact, we've already sold a very significant part of our capacity for 2023 and already working on opportunities for 2024 and beyond. And that's just the cycle and the maturity and I think the positive outlook for this segment and our leadership in it. Bob McMahon I was going to say, hey, Dan, just to build on what Sam is saying, I mean, this is really a class effect. I mean when we think about kind of the therapeutic areas and the proof of now several new products that are on the market, this is really -- you're seeing multiple big pharma and mid-cap pharma looking at therapeutic areas with this technology. And so it is really something that we're a leader in. We're building capacity aggressively. And it is really more a function of the market demand as opposed to anything from our standpoint of capacity. If we add more capacity, we'd have more revenue. Daniel Arias So, just to maybe put a bow on that, incremental orders that are coming in now, is it possible for those to be delivered in 2022? Or are those 2023 deliveries just by virtue of what you're saying on capacity? Bob McMahon Yes. We're pretty much capped on 2022. We have all the business we're able to process this year. So it's really about 2023 and beyond at this point. Operator The next question comes from Catherine Schulte with Baird. Catherine Schulte I guess, first one on NASD, and then I have a follow-up on M&A. But with NASD, clearly, a lot of interest there, a lot of demand from customers. I think one of your main customers has a PDUFA date coming up in July. How do you think about evaluating capacity expansions even beyond Train B? And what should we be expecting to hear from you guys on that front? Mike McMullen Yes. We're actively working on the answer to that question right now. So nothing yet to share, but I can assure you there'll be more -- there's more letters in the alphabet than A and B. So you can expect us to continue to invest and expand this business. Catherine Schulte All right. Perfect. And then, you mentioned in your comments -- yes. You mentioned your comments continuing to actively look at M&A opportunities. Can you just give us your latest thoughts there in terms of appetite and of size and substantial hurdles that you would be applying? Mike McMullen Yes. I think our appetite remains the same in terms of as part of our Build and Buy growth strategy. We've indicated previously that we have an appetite to do a larger M&A that we done historically. We've talked about it being multiples of the BioTek acquisition. It's really just a matter of making sure we find the targets that make the most sense for us strategically, and of course, making sure they create value for our shareholders. And we have remained disciplined through all the hype of the -- of what we experienced last year with the SPACs and IPOs coming out, et cetera. I think the market is still -- is now becoming a little more rational in terms of -- and I say a little bit more rational in terms of price expectations, albeit not everybody has forgotten what they thought they once were or were 6 or 7 months ago, Bob. So we remain very active nothing to announce, but this remains a priority for the Company. But we're not going to do deals just to do deals. We have to do deals that makes sense for our shareholders. Operator There are no further questions registered at this time. And that concludes the Q&A session. I'll pass the conference back to Parmeet to conclude the call. Parmeet Ahuja Thanks, Selena. And thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day. Operator That concludes the Agilent Technologies Inc. Q2 2022 earnings conference call. Thank you for your participation. You may now disconnect your line. Comment

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