Agilent Technologies Q2 2022 Earnings Report

Agilent Technologies EPS Results

• Actual EPS: $1.13
• Consensus EPS: $1.11
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $0.97

Agilent Technologies Revenue Results

• Actual Revenue: $1.61 billion
• Expected Revenue: $1.62 billion
• Beat/Miss: Missed by -$8.65 million
• YoY Revenue Growth: +5.40%

Agilent Technologies Announcement Details

• Quarter: Q2 2022
• Date: 5/24/2022
• Time: After Market Closes
• Conference Call Date: Monday, May 23, 2022
• Conference Call Time: 8:00PM ET

Agilent Technologies (NYSE:A) is a global provider of scientific instrumentation, consumables, software and services for laboratories across the life sciences, diagnostics and applied chemical markets. The company’s product portfolio includes analytical instruments such as liquid and gas chromatographs, mass spectrometers, spectroscopy systems, and laboratory automation solutions, together with reagents, supplies and informatics tools that support measurement, testing and data analysis workflows. Agilent also offers instrument maintenance, qualification and laboratory services designed to help customers improve productivity and comply with regulatory requirements.

Founded as a corporate spin-off from Hewlett‑Packard in 1999, Agilent has evolved through a combination of strategic restructuring and acquisitions to concentrate on life sciences, diagnostics and applied laboratories. In the 2010s the company refocused its businesses through a separation that resulted in a dedicated electronic measurement company, allowing Agilent to prioritize analytical and diagnostic technologies. Over time Agilent has expanded its capabilities and product lines to address increasingly complex analytical challenges faced by its customers.

Headquartered in Santa Clara, California, Agilent serves a broad international customer base across the Americas, Europe, Middle East & Africa, and Asia-Pacific. Its customers include pharmaceutical and biotechnology companies, academic and government research institutions, clinical and diagnostic labs, environmental and food-safety testing organizations, and industrial manufacturers. The company is managed by an executive leadership team and a board of directors that oversee its global operations and strategic direction.

Agilent Technologies Q2 2022 Earnings Call Transcript

Key Takeaways

• Agilent reported Q2 revenue of $1.61 B, 7.3% core growth, operating margin of 25.3% (+140 bps), and EPS of $1.13 (+16%).
• China’s COVID-19 lockdowns imposed a ~3.5 ppt headwind (≈$50–55 M deferred), but orders in China rose ~20% and the deferred revenue is expected to be recovered by FY 22 Q4.
• Pharma and Chemical & Energy markets powered growth: pharma revenue grew 13% (biopharma +27%), chemical & energy +9%, with the Americas up 13% and Europe 7%.
• By segment, LSAG advanced 4% core with record backlog despite factory constraints, CrossLab grew 10% on broad‐based services strength, and Diagnostics & Genomics rose 15% led by NASD expansion.
• Agilent raised its FY 22 guidance to 8–9% core revenue growth and EPS of $4.86–4.93, and forecasts Q3 core revenue growth of 7–9% as China operations fully resume.

Presentation

[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. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Parmeet Ahuja, Vice President of Investor Relations. Please go ahead.

[Parmeet Ahuja, VP of Investor Relations at Agilent Technologies]

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 the 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.

[Parmeet Ahuja, VP of Investor Relations at Agilent Technologies]

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.

[Parmeet Ahuja, VP of Investor Relations at Agilent Technologies]

Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. Now, I'd like to turn the call over to Mike.

[Mike McMullen, President and CEO at Agilent Technologies]

Thanks, Parmeet. 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% continued to expand, up 140 basis points from last year. Earnings per share of $1.13 are up 16%.

[Mike McMullen, President and CEO at Agilent Technologies]

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 is 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 GC factory and logistics center in Shanghai. 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.

[Mike McMullen, President and CEO at Agilent Technologies]

It also builds on top of a stellar 29% growth rate last year. Momentum in our chemical 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 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.

[Mike McMullen, President and CEO at Agilent Technologies]

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 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-20s globally with particularly high adoption of our two new Bio LC products.

[Mike McMullen, President and CEO at Agilent Technologies]

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 revenues of $353 million. This is up 10% core. Growth in services, again, broad-based across services contracts, preventive maintenance, compliance, education, and informatics 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.

[Mike McMullen, President and CEO at Agilent Technologies]

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 firsthand the excellent progress that's being made meeting current customer needs and also the work underway and continuing to build for future growth with our Train B expansion. We remain extremely bullish about NASD's future, and with Train B coming online 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 Top 250 ranking developed by the Drucker Institute. In addition, new Agilent commercial organization is already resonating well and delivering successfully for our customers.

[Mike McMullen, President and CEO at Agilent Technologies]

Agilent's Q2 results are yet another proof point for how we build a resilient company that can quickly adjust to the 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%-9% core revenue growth and EPS of $4.86-$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, Senior VP and CFO at Agilent Technologies]

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 top-line 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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

We estimate the lockdowns deferred $50 million-$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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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 in 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. In 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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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 in 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-$55 million in revenue to be recovered throughout the rest of the calendar year, so it is deferred, not lost.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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 on 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're 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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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 0.9x. 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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Given the strong business performance in the first half of the year and our order backlog, we are raising our full year core revenue growth to an expected range of 8%-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 an estimated currency headwind 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-$6.73 billion for the full year.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

We have also increased our EPS guidance for the full year to $4.86-$4.93 per share. This is up from the previous range of $4.80-$4.90 per share, and now represents 12%-14% growth versus fiscal year 2021. For Q3, we're expecting revenue to range from $1.625 billion-$1.650 billion. This represents core growth between 7%-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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Closing out our guidance in Q3, non-GAAP EPS is expected to be in the range of $1.20-$1.22, up 9%-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, President and CEO at Agilent Technologies]

Thanks, Bob. Before we take your questions, I would like to share some thoughts with you on the current environment. As you know, we live 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 in-line 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.

[Mike McMullen, President and CEO at Agilent Technologies]

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. Now back to Parmeet as we take your questions. Parmeet.

[Parmeet Ahuja, VP of Investor Relations at Agilent Technologies]

Thanks, Mike. Selena, please provide instructions for Q&A now.

[Operator]

Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from Vijay Kumar with Evercore ISI. Please proceed.

[Vijay Kumar, Senior Managing Director and Equity Research Analyst at Evercore ISI]

Hey, guys. Thanks for taking my question. Mike, clearly-

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Vijay

[Vijay Kumar, Senior Managing Director and Equity Research Analyst at Evercore ISI]

You did mention, you know, this is an impressive performance given the relative fears on the Street on impact from China lockdowns. I guess one, you know, when you look at your peers, very strong instrument growth across LC and mass spec. Maybe could you talk about, you know, how did Agilent's portfolio within that instrument segment perform? What were the trends within the quarter? Were there any lockdown impact for instruments and maybe order trends specific to instruments, please?

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Vijay Kumar. Thanks, first of all, for the comments. We're really pleased with the performance given all the teams we're dealing with in the external environment. We're gonna tag team the response here with myself and Jacob Thaysen. The story is our instrument business is doing very well. In the call, we highlighted a few areas where we received outstanding order growth. We talked about the cell analysis business, LC and LC-MS, particularly on the bio side. I'll have Jacob add some specifics. 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.

[Mike McMullen, President and CEO at Agilent Technologies]

We're very bullish about the strength of our LSAG business, exiting the quarter with record backlog. Jacob, why don't you talk about what's been going on and why you're excited about the future?

[Jacob Thaysen, President of Life Sciences and Applied Markets Group at Agilent Technologies]

Yeah, absolutely. Yeah, 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-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. 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.

[Jacob Thaysen, President of Life Sciences and Applied Markets Group at Agilent Technologies]

Besides that, I think we have seen also for the spectroscopy business that the material science is a really a strength for us right now. Overall, very strong performance across the portfolio.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. Hey, Vijay, this is Bob. Just to, you know, kind of dimensionalize that impact when we talk about disproportionate, roughly 80%-85% of the impact, due to the COVID lockdowns was instrument in LSAG related.

[Vijay Kumar, Senior Managing Director and Equity Research Analyst at Evercore ISI]

That's helpful, Bob. Maybe one on the lockdown impact in China. The guidance is assuming that $50 million-$75 million comes back in second half. What gives you the confidence that this is coming back in second half? Where are we in China? Have the markets reopened? Like, is your production facility up and running? 'Cause 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, President and CEO at Agilent Technologies]

Hey, Vijay, how about I lead off with a response here? This ties into why we have confidence about the outlook. 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. Our view is that the lockdown controls will start to ease over the coming weeks, and that you know we'll be up and fully operational by the end of the quarter. 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.

[Mike McMullen, President and CEO at Agilent Technologies]

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, but volunteering to do that. I've also got confidence in the outlook because I know what this team can do.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. 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. 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. We are expecting, as Mike said, a very modest recovery of that $50 million-$55 million in Q3, the majority of it being in Q4, and then spilling over a little into November or December. Given the backlog and the fact that we haven't seen any of those orders canceled, we feel like we definitely will get the product back.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

If we go back to what happened in the initial phases of COVID, China dropped down pretty substantially and then came back fairly quickly.

[Vijay Kumar, Senior Managing Director and Equity Research Analyst at Evercore ISI]

That's helpful, the context, Mike and Bob. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

You're quite welcome. Thanks for the comments, Vijay.

[Operator]

Thank you. The next question comes from Matt Sykes with Goldman Sachs. Please proceed.

[Matt Sykes, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Hi, Mike, Bob. Thanks for taking my questions, and congrats on a quarter in a tough environment. Maybe kind of following up on the instrument question, just if 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, President and CEO at Agilent Technologies]

I'm gonna lead off with this and then tag-team again with Jacob and Bob. We completely agree with your premise of your question. In fact, you may recall some of our earlier presentations where we talked about, you know, 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 semiconductors, batteries. All you have to do is see what's happened in the whole automobile industry. We're a part of that. I think it's important to just remind the audience here of the three segments that we have. Advanced materials grew, I think, mid-20s% for us. The chemical side grew high teens%. We were down in the energy segment.

[Mike McMullen, President and CEO at Agilent Technologies]

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% of Agilent's total revenues. 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, President of Life Sciences and Applied Markets Group at Agilent Technologies]

Yeah. I can also mention that, you know, Agilent has actually historically been very strong in materials science, so we have a very strong market presence both in the, in the semiconductor industry, especially with our ICP-MS portfolio, but also with the GC and generally speaking in materials, in batteries and other renewable energy with our GC business. I think we see a great potential in that. Bob, you-

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah, 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.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

We also had that impact. It was a temporary phenomenon there. Then you can speak to it. China was also impacting, you know, the chemicals and advanced materials, and they still grew. It kind of speaks to the strength of those markets. These are areas, I mean, it's our second-largest market. We have a leadership presence in these areas. 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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Great. Thanks very much for that. Appreciate the color. Just secondly, on the pricing side, Bob, you mentioned that some of the offsets on the gross margin pressure came from pricing. Could you just kind of remind us of what your expectations are for pricing this year? 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, Senior VP and CFO at Agilent Technologies]

Yeah, 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 it roughly a 1-point year-on-year price realization. Q1 we were ahead of that, and Q2 we actually accelerated beyond that. 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 -

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

-Some of the actions that we took in January of this year, just given the strength of our backlog. 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 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. We feel very good about our ability to continue to manage that across our entire portfolio.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, 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. It's a combination of pricing and productivity improvements we're having across the company.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

That's right, Mike.

[Matt Sykes, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Great. Thanks very much.

[Mike McMullen, President and CEO at Agilent Technologies]

You're quite welcome, Matt.

[Operator]

Thank you. The next question comes from Brandon Couillard with Jefferies. Please proceed.

[Brandon Couillard, Senior VP and Senior Equity Research Analyst at Jefferies]

Hey, thanks.

[Mike McMullen, President and CEO at Agilent Technologies]

Brandon.

[Brandon Couillard, Senior VP and Senior Equity Research Analyst at Jefferies]

Good afternoon. Mike, BioTek end market, very strong again in the second quarter. Can you just talk about sustainability of trends there and perhaps the impact of NASD specifically on the BioTek segment growth?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. I'll have you call that out, Bob. I know that's in our notes. I think what you 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. We're feeling really good about the long-term growth prospects of biopharma as well as the impact it's having on the business right now.

[Mike McMullen, President and CEO at Agilent Technologies]

You heard me crowing about a few of our growth numbers in the prepared remarks. Bob, before I pass it over to Padraig for some comments, can you remind me what the-

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Sure

[Mike McMullen, President and CEO at Agilent Technologies]

result was?

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. Our biopharma continues to, first of all, Brandon, be a greater proportion of the overall pharma market. 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%. It still says that we have very strong growth there. We grew backlog. We 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, President and CEO at Agilent Technologies]

Thanks, Bob. I thought, you know, given the start of this fiscal year of our One Commercial organization, maybe, Padraig, you can make some comments on how that's helping to gain further penetration in the biopharma space.

[Padraig McDonnell, President of Agilent CrossLab Group at Agilent Technologies]

Yes, Mike, we're absolutely seeing that we have a you know bigger focus on the longer tail of accounts or smaller biopharma accounts, as well as the large players. Of course, our strong focus on biopharma with application support and so on really helps us with attach rate in that business, and it really helps the instruments trend with that attach rate. Overall, I think we see both services and consumables has been a very strong play and very strong enabler within the biopharma accounts, which we're of course getting a lot more access to.

[Mike McMullen, President and CEO at Agilent Technologies]

Thanks, Padraig.

[Brandon Couillard, Senior VP and Senior Equity Research Analyst at Jefferies]

Gotcha. That's helpful. The DGG gross margins at 56% were 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, President and CEO at Agilent Technologies]

I'll let you and Sam hash that one out, Bob. Go ahead.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. I think we certainly benefited from, you know, extremely strong performance there. You know, Sam and team have continued to-

[Mike McMullen, President and CEO at Agilent Technologies]

Yes, please. Sure.

[Mike McMullen, President and CEO at Agilent Technologies]

To continue to drive, you know, productivity in the business there. We did benefit from mix, but I wouldn't necessarily put that number in for Q3 and Q4, 'cause if you recall, one of the things that we are starting to do in the second half of the year is ramp up the startup costs for Train B in our NASD facility and so forth. And that hits our gross margin, but obviously that has a great payoff in 2023 with that $150 million plus capacity. I would say the team had a benefit of mix.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

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 startup costs.

[Sam Raha, President of the Diagnostics and Genomics Group at Agilent Technologies]

Bob, it's I completely agree with everything you said. It is mix, it is volume. You know, by the way, just to also affirm, we benefited from price. We have some leadership positions in the market, which we are absolutely able to go after. You know, continued good performance expected, though, as you said. The expectation is gonna be a little tougher with NASD, Train B coming aboard.

[Brandon Couillard, Senior VP and Senior Equity Research Analyst at Jefferies]

Very good. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

Thanks, Brandon.

[Operator]

Thank you. The next question comes from Puneet Souda with SVB Securities. Please proceed.

[Puneet Souda, Senior Managing Director of Life Science Tools and Diagnostics at SVB Securities]

Yeah. Hi.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Puneet.

[Puneet Souda, Senior Managing Director of Life Science Tools and Diagnostics at SVB Securities]

Bob, Mike, thanks for taking the question. First one, strong pharma obviously, but just focusing on North America and pharma, you know, 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, you know, we're seeing your peers deliver very strong growth rate in U.S. pharma. Wondering if there's any element of pull forward you're seeing here, and should we see a sustained sort of growth rate in when we think about North America and U.S. pharma? Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, 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, Senior VP and CFO at Agilent Technologies]

Yeah. To give you a perspective, I mean, our Americas business in pharma grew twice as fast as the overall pharma business. We will have some comps in NASD that we won't be continuing to post the strong performance there, as strong a performance, I should say, because we're ramping up against the capacity, which is what's Train B is gonna help us provide. 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, Senior Managing Director of Life Science Tools and Diagnostics at SVB Securities]

Okay, great. Just briefly on another smaller segment, academic and government.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Mm-hmm

[Puneet Souda, Senior Managing Director of Life Science Tools and Diagnostics at SVB Securities]

For you, that was strong in the quarter. Maybe could you just elaborate a little bit there on what's driving that and, you know, what sort of what are some of the elements of growth that we should continue to expect through the year? Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. As Bob mentioned, Puneet, this is Mike, that was a nice surprise for us. You know, I think we came off a 21% compare and still grew 5%. We're seeing some positive developments. The funding environment seems to be quite healthy, and you know, even though we had some COVID-related headwinds in the academia segment in China, even that area was strong. We think it's continuing to be a healthy funding environment. I think perhaps some of the COVID challenges we had as a society over the last several years has reinforced the importance of funding in those areas. As well, we're seeing you know, return to labs, more access for students and others in lab activities as well.

[Mike McMullen, President and CEO at Agilent Technologies]

I think it's that combination of a healthy funding environment as well as lab access.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah, I think, Puneet, just to build on what Mike was talking about, you know, if you go back to our first quarter results, you know, we had January in our first quarter, and that was just coming off of Omicron, the wave of Omicron. We were talking about seeing increased activity, you know, starting in February as late 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. 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.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

I think it continues to speak to kind of the value proposition that we have in cell analysis.

[Puneet Souda, Senior Managing Director of Life Science Tools and Diagnostics at SVB Securities]

Got it. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

You're quite welcome.

[Operator]

Thank you. The next question comes from Derik De Bruin with Bank of America. Please proceed.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Hey, it's Derik. Thanks for taking the questions. Just to sort of follow up on something Puneet asked. Hey, 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 catch-up orders from 2021 that didn't get shipped this year? Just something like that, 'cause the instrumentation numbers have been just so strong across the group.

[Mike McMullen, President and CEO at Agilent Technologies]

No, we haven't seen any indication of that. You know, I think the supply chain challenges, if you will, are no better, no worse. There's nothing that would be, you know, from a supply chain standpoint that would be encouraging customers, "Oh, I got to get my order book now or I won't get a product." 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, as I mentioned earlier, have actually led to a more positive funding environment, in some aspects of our marketplace. Bob, I don't know if you have thoughts on this as well or-

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah, I think you know from this from the standpoint of order growth you know from a budget perspective it only counts if they actually get the product right? If you look at the order growth it continues to grow faster than revenue which says hey the you know from our standpoint there's not necessarily pull forward and it's just robust demand.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Got it. No sign of over-ordering, for example, that you can see. Okay.

[Mike McMullen, President and CEO at Agilent Technologies]

No. No.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

I guess another question.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Hey, Derik, just one other thing. I think just real quick in that regard.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. Quick on that before we watch him. Yeah.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah, 'cause we continue to look at, we talked about it relative to China, but we look at it on a regional and global basis. Again, the order cancellations are, year-on-year, lower than they were last year, and last year they were lower than the prior year. They continue to be at a very de minimis amount. It's something that, you know, we haven't seen where somebody's placing orders with multiple vendors and whoever can deliver, you know, gets the product first. I think it is consistent across the industry where we just are seeing very strong demand.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Got it. Thanks. That's really helpful. Just in terms of some of the competitive dynamics, I mean, it, you know, some of the other companies in the space have been talking about, you know, 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, do I hear you correctly, you said mid-20s% 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, President and CEO at Agilent Technologies]

At least not with us.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

I can't speak to the other guys.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah, I was gonna say for some of our core technologies, it's mid-20s globally.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. You know, we have.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Got it.

[Mike McMullen, President and CEO at Agilent Technologies]

Good analytics on this, Derik with, you know, win-loss ratio. We know what's going on with the business, and we can kind of parse through the rhetoric.

[Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America]

Great. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure, Derek. Always a pleasure.

[Operator]

Thank you. The next question comes from Patrick Donnelly with Citi. Please proceed.

[Patrick Donnelly, Director and Senior Equity Resarch Analyst at Citi]

Hey, guys. Thanks for taking the questions.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Patrick.

[Patrick Donnelly, Director and Senior Equity Resarch Analyst at Citi]

Bob, maybe following up on that, just looking at the guidance. Hey, how are you? In terms of the guidance, you know, obviously you guys are typically pretty conservative, so it's encouraging to see that 100 basis points bump for the year. Can you just talk about, I guess, what gave you the confidence? It obviously implies, you know, a decent 4Q ramp. Is that just coming from exactly what you talked about there, the order growth, obviously China coming back, you know, visibility into that. Maybe just talk through the confidence level. Again, historically pretty conservative, so that 100 basis points bump, often in-line quarter, maybe just talk through that a little bit. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, no, you're spot on, Patrick. You hit on the two key points. One is the continued strength in our order book globally, you know, where our orders continue to outpace our revenue, and then you build on that fact, you know, we have a strong conviction that the revenue deferred from China we will recover. 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, Director and Senior Equity Resarch Analyst at Citi]

Okay. Great. Mike, maybe following up on one of the earlier questions on cyclicality.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure.

[Patrick Donnelly, Director and Senior Equity Resarch Analyst at Citi]

You know, we get a lot of

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. Yeah

[Patrick Donnelly, Director and Senior Equity Resarch Analyst at Citi]

Questions about recession sensitivity and thoughts about, you know, if there is a recession, what do these 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, you know, 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, President and CEO at Agilent Technologies]

I'm gonna make a few opening comments here, then Bob's been doing a nice little set of modeling here. He has a few slides to reference, so he can give an even more precise answer. I must use the word resiliency or resilient in my script comments, Lisa, five or 10 times because really to drive the point home that Agilent's business model, business portfolio is significantly different than the last time that we've seen some type of recessionary pressure on the business.

[Mike McMullen, President and CEO at Agilent Technologies]

You know, I would just 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, our 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. 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, Senior VP and CFO at Agilent Technologies]

Yeah. Thanks, Mike. You're telling all my secrets with my secret pages here.

[Mike McMullen, President and CEO at Agilent Technologies]

Uh-oh.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

No, I think, Patrick, to your point, this is something as Mike was talking about, the portfolio really has dramatically changed. If you went back to probably 2008, 2009, the great financial crisis, you know, our business was much more capital-intensive, much more instrument-oriented than it is today. It was probably in the, you know, mid-30s in terms of services and consumables, and today it's closer to 60%. If you also look at it, the pharma and clinical businesses, which are probably more recession-resistant, they're now greater than 50% of the entire company. Back then, we were pretty close to, you know, GDP.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

If you just look at what happened in COVID, you know, the 2020, one of the greatest shocks we had, actually, we still grew 1%. 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 in 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. The consumables piece and then the consumables and services, you know, are a greater proportion of the business, than we had before.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Even in some of those areas that we talked about, the more what were traditionally viewed as cyclical, there's some longer term growth drivers. I think that, you know, people are gonna still transition from gas-powered cars to electric 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. I think we've got some tailwinds from a market perspective, and the business composition looks very different.

[Mike McMullen, President and CEO at Agilent Technologies]

Thanks, Bob. Sorry to give away your secret.

[Patrick Donnelly, Director and Senior Equity Resarch Analyst at Citi]

Very helpful and comprehensive. Thank you, guys. Thanks, Mike. Thanks, Bob.

[Mike McMullen, President and CEO at Agilent Technologies]

Thanks. Thanks, Patrick.

[Operator]

Thank you. The next question comes from Rachel Vatnsdal with JPMorgan. Please proceed.

[Rachel Vatnsdal, Equity Research Analyst at JPMorgan]

Great. Thanks for taking the question. Another question around biopharma. BioTek funding slowdowns have obviously been an area of concern. Could you just talk about if you've seen any slowdown from customers related to funding concerns at all? Then have you had any concern amongst cell and gene therapy customers, or is that business really operating as expected as well?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. Let me lead with some thoughts on the biopharma, and maybe you want to jump in on the cell and gene therapy, Jacob. 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. The funding environment still remains strong for the products and services we're looking for from Agilent. Then I know that you've got something going on with Lonza right now already on the cell.

[Jacob Thaysen, President of Life Sciences and Applied Markets Group at Agilent Technologies]

Yeah. Actually, the overall cell analysis business doing really well, and 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. Here over the last period of time, we have launched a new product which is really penetrating into the biopharma, really doubled our penetration into the biopharma especially for the gene and cell therapy areas also. The same for 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. We actually see a lot of strength still in that area.

[Jacob Thaysen, President of Life Sciences and Applied Markets Group at Agilent Technologies]

As Mike mentioned, we also are committed to partnerships, Lonza, where they have built a new platform that can be directed that could be used out in the in the hospital settings. We're working with them to improve that, to put QC methodologies in there based on our cell analysis technology. We continue to be very bullish in this space.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. Hey, Rachel, one other thing, you know, it's a question that's come up a number of times. We've done a fair amount of analysis, and as Mike and Jacob talked about, we haven't seen any slowdown in the order book or any pattern 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 space. We have probably some of the highest attach rates in our biopharma business just because of the types of instruments that they buy and the amount of service uptime that they require.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

As long as those customers don't go bankrupt, you know, we'll still have that. We haven't seen any material write-offs in any of those things. 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, Equity Research Analyst at JPMorgan]

Great. Thanks. That's really helpful. Two more questions from me on C&E.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Sure.

[Rachel Vatnsdal, Equity Research Analyst at JPMorgan]

Last quarter, you lifted the C&E guide for the year to high single digits to low double-digit growth. Can you give us an update on if that outlook has changed at all given the 9% growth this quarter? Kind of diving deeper into C&E, 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. Can you walk us through that market opportunity and how meaningful that could be over time? Thanks.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Our guidance for C&E hasn't changed. We were in line with the expectations for Q3, despite kind of the push out of some of the China related business. If you can you know, GC and GC-MS have probably a higher concentration into the chemical and energy business and actually we still grew 9%. We're expecting to see a nice rebound into Q3 and Q4, primarily Q4 as that business comes back, and are still on track to that double digit.

[Mike McMullen, President and CEO at Agilent Technologies]

Bob, I think it's fair to say it wasn't just C&E in China, it also was C&E globally.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Correct.

[Mike McMullen, President and CEO at Agilent Technologies]

-where our product is provided by China for those customers.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

I think, you know, 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. Certainly battery technology, those are emerging areas that you know, we've talked about, you know, 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. You know, it's a several $100 million kind of market opportunity today and growing quite substantially.

[Rachel Vatnsdal, Equity Research Analyst at JPMorgan]

Great. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

You're quite welcome, Rachel.

[Operator]

Thank you. The next question comes from Josh Waldman with Cleveland Research. Please proceed.

[Josh Waldman, Senior Equity Research Analyst at Cleveland Research]

Hey, guys.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Josh.

[Josh Waldman, Senior Equity Research Analyst at Cleveland Research]

Thanks for taking my questions. I think one for you, Mike, and then one for Bob. Mike, just wanna expand on the instrument backlog questions. I mean, curious if you could provide a bit more context on the backlog strength. You know, just trying to get a sense on how much of this is a reflection of stronger orders versus, you know, potentially a function of tighter supply, you know, maybe even the China GC facility shutdown impact. You know, you talked on biopharma strength. Are you seeing instrument orders from, you know, more cyclical accounts like applied industrial also run ahead of expectations?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. I think the story, the headline story here is transitory impact on backlog build for an element of a COVID-19 lockdowns in China. The big story, the big macro story is orders continue to outpace revenues. Strong instrument demand across our two largest markets. I can recall

[Mike McMullen, President and CEO at Agilent Technologies]

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. That's actually what's happening. 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 US, and that's continued to ramp. Again, I think the macro story here is really strong overall market environment for orders. We're feeling really good about our ability to meet our customers' expectations on deliveries.

[Mike McMullen, President and CEO at Agilent Technologies]

We see, you know, customers continue to be satisfied with the relationship with Agilent. I think you saw me try to hit that in my closing comments. As Bob mentioned, we monitor very closely the level of order cancellations and continue to be delighted with where that stands.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. 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, you know, it's significantly above where it was last year. It's hard to peel out. You know, 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.

[Mike McMullen, President and CEO at Agilent Technologies]

I mean, even if you took the $50 million-$55 million out.

[Jacob Thaysen, President of Life Sciences and Applied Markets Group at Agilent Technologies]

Bob-

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, yeah. Yep. Even if you took the $50-$55 million out, it's still significantly higher than what it would be, historically. It's a record backlog, even if you take the one-time, you know, $50-$55 million China deferral out.

[Josh Waldman, Senior Equity Research Analyst at Cleveland Research]

Okay. Okay. Bob, can you bridge us to the new EPS outlook? I mean, you beat Q2 guide by $0.01 at the high end, raised the full year by $0.03. Just curious how, you know, the strong organic growth and other variables like share repo, FX and margin are being accounted for in the new guide.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah, it's a good question. It's $0.01 for Q2 beat and basically $0.01 for Q3 and Q4, with the share repurchase helping us, you know, by a couple points offset by FX.

[Josh Waldman, Senior Equity Research Analyst at Cleveland Research]

Okay.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

I'd say it's a prudent guide.

[Josh Waldman, Senior Equity Research Analyst at Cleveland Research]

Appreciate it, guys. A prudent guide. Okay.

[Mike McMullen, President and CEO at Agilent Technologies]

We had to get that prudent in today, didn't we, Bob?

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

There we go.

[Operator]

Thank you. The next question comes from Jack Meehan with Nephron Research. Please proceed.

[Jack Meehan, Partner and Equity Research Analyst at Nephron Research]

Thank you and good afternoon.

[Mike McMullen, President and CEO at Agilent Technologies]

Good afternoon.

[Jack Meehan, Partner and Equity Research Analyst at Nephron Research]

Just wanted to keep going on chemical and energy. You know, 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.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. Your intuition, Jack, is spot on. You know, for purposes of looking at this, we looked at it more on a technology stamp 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. That is a market that's over-indexed to food, chemical and energy, and pharma. Those were the three 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, President and CEO at Agilent Technologies]

I do recall we had some larger European orders in C&E that will be filled later.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah

[Mike McMullen, President and CEO at Agilent Technologies]

-because we couldn't get GCs to them this quarter, this past quarter.

[Jack Meehan, Partner and Equity Research Analyst at Nephron Research]

Got it. That's helpful. 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, you know, what you have today with Train A and the Frederick site. Is the expectation kind of revenue is more flattish from here for the remainder of the year? Just a quick clarification. For Train B, talked about 2023. I think previously you said end of this year. Just don't know if I'm reading too much into that, but just any comment on the timeline would be great.

[Mike McMullen, President and CEO at Agilent Technologies]

Bob, you want to take the first one?

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

I'll take the first one. Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah. I think, you know, if we looked at what we have been able to do in Q2, you know, it was very strong growth. It is slightly better than flattish as we've kind of tapped out, you know, as we're maxed out right now in capacity. 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, you know, temporarily depress the revenue there. That's built into the guide.

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

There may be a slight, you know, sequential downturn, but that's all part of the overall plan.

[Mike McMullen, President and CEO at Agilent Technologies]

Jack, as I mentioned in my prepared remarks, we had a chance, Bob and I and Sam, to go down and spend time with the team to see firsthand just the great job they're doing. Thank them for the work. They've really done a great job both winning new business as we look to 2023, but also supporting a major expansion of our production, which we've been referring to as Train B. To answer your question, I would say, first of all, there's no changes to our outlook in terms of 2023 revenue. We do think it's not likely they will start production this calendar year, so it's most likely early calendar 2023.

[Mike McMullen, President and CEO at Agilent Technologies]

You know, we've had some great support from the construction teams that are supporting our effort here, but also have experienced some COVID-related supply chain issues. As you can imagine, Jack, we also were prudent in our initial outlook for 2023. Don't read into that any

[Jack Meehan, Partner and Equity Research Analyst at Nephron Research]

Mm-hmm

[Mike McMullen, President and CEO at Agilent Technologies]

... 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. Our revenue outlook for 2023 remains unchanged.

[Jack Meehan, Partner and Equity Research Analyst at Nephron Research]

Super. 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, President and CEO at Agilent Technologies]

Absolutely. Thank you, Jack. The best is still yet to come for Agilent.

[Jack Meehan, Partner and Equity Research Analyst at Nephron Research]

You're welcome.

[Mike McMullen, President and CEO at Agilent Technologies]

Right after this call, I'll be doing an earnings call video for the Agilent team, and that's my close. Thank you very much for that, Jack.

[Jack Meehan, Partner and Equity Research Analyst at Nephron Research]

Yeah, you're welcome. Yep.

[Operator]

Thank you. The next question comes from Daniel Arias with Stifel. Please proceed.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Afternoon, guys. Thanks for the questions. Bob, I just wanted to maybe.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Dan.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

... follow up on Matt's pricing question and ask, hey, Mike, if there are areas-

[Mike McMullen, President and CEO at Agilent Technologies]

Mm

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

In the portfolio where the backlog or the lead times are long enough to where you sort of need to go back and re-quote pricing for the current environment, or is that not something that you really have?

[Mike McMullen, President and CEO at Agilent Technologies]

Mm.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Have in play?

[Mike McMullen, President and CEO at Agilent Technologies]

Great question.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

You know, how successful might you be in doing that?

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

Yeah, I'll look to my colleague and Jacob, but we don't re-quote when we price. We commit to the pricing at the time that the quote was valid or the order. What we're seeing here is, you know, if we take pricing in January, we just started seeing some of that flow through in the late second quarter, just given the backlog. If we take pricing now, it's really in terms of anticipating, you know, you'll expect to see it sometime in late Q4, you know, really into 2023.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Yeah. Okay.

[Mike McMullen, President and CEO at Agilent Technologies]

Did I get it right, Jacob?

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Maybe just on NASD

[Mike McMullen, President and CEO at Agilent Technologies]

Okay.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Oh, sorry, Jacob. Yep.

[Mike McMullen, President and CEO at Agilent Technologies]

No, no, I was just joking around. Sorry about that, Dan. Go ahead, Dan.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

I was just gonna 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 timelines that you have customers talking about at this point?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. Hey, Sam, why don't you speak to that? I know you've spent time with Brian on that exact question.

[Sam Raha, President of the Diagnostics and Genomics Group at Agilent Technologies]

Yeah, 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 you know, 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 you know, 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, you know, and beyond. And that's just the cycle and the maturity and I think the you know, the positive outlook for this segment and our leadership in it.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, I was gonna say, hey, Dan, just to build on what Sam's saying. I mean, this is really a class effect. I mean, when we think about kind of the therapeutic areas and the proof is 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. 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, you know, anything from our standpoint of capacity.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Mm.

[Mike McMullen, President and CEO at Agilent Technologies]

If we had more capacity, we'd have more-

[Bob McMahon, Senior VP and CFO at Agilent Technologies]

We could sell.

[Mike McMullen, President and CEO at Agilent Technologies]

-revenue.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Just to maybe put a bow on that, if 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?

[Sam Raha, President of the Diagnostics and Genomics Group at Agilent Technologies]

Yeah. We're pretty much capped on 2022. We have all the business.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

Yeah

[Sam Raha, President of the Diagnostics and Genomics Group at Agilent Technologies]

We were able to process this year, so it's really about 2023 and beyond at this point.

[Daniel Arias, Managing Director and Senior Research Analyst at Stifel]

I gotcha. Okay. Thanks, Sam.

[Mike McMullen, President and CEO at Agilent Technologies]

Last question.

[Operator]

Thank you. The next question comes from Catherine Schulte with Baird. Please proceed.

[Mike McMullen, President and CEO at Agilent Technologies]

Hello, Catherine.

[Catherine Schulte, Senior Research Analyst at Baird]

Hey, guys. Hey, thanks for the questions. I guess first one on NASD, and then I have a follow-up on M&A. You know, 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. You know, 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, President and CEO at Agilent Technologies]

Yeah. 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. You can expect us to continue to invest and expand this business.

[Catherine Schulte, Senior Research Analyst at Baird]

All right, perfect.

[Mike McMullen, President and CEO at Agilent Technologies]

Hope that helps.

[Catherine Schulte, Senior Research Analyst at Baird]

You mentioned in your comments continuing to actively look at M&A opportunities. Can you just give us your latest thoughts there in terms of appetite and size and, you know, potential hurdles that you would be applying?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, I think our appetite remains the same in terms of as part of our build and buy growth strategy. You know, we've indicated previously that we have an appetite to do larger M&A than we've 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. We have remained disciplined through all the hype of what we experienced last year with the SPACs and IPOs coming out, et cetera.

[Mike McMullen, President and CEO at Agilent Technologies]

I think the market is now becoming a little bit more rational in terms of price expectations, albeit not everybody has forgotten what they thought they once were worth six or seven months ago. Bob. We remain very active. Nothing to announce, but this remains a priority for the company, but we're not gonna do deals just to do deals. We have to do deals that make sense for our shareholders.

[Catherine Schulte, Senior Research Analyst at Baird]

Great. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

You're quite welcome.

[Operator]

Thank you. 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, VP of Investor Relations at Agilent Technologies]

Thanks, Selena. 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 Q2 2022 earnings conference call. Thank you for your participation. You may now disconnect your-

Participants

Executives

• Bob McMahon, Senior VP and CFO
• Jacob Thaysen, President of Life Sciences and Applied Markets Group
• Mike McMullen, President and CEO
• Padraig McDonnell, President of Agilent CrossLab Group
• Parmeet Ahuja, VP of Investor Relations
• Sam Raha, President of the Diagnostics and Genomics Group

Analysts

• Brandon Couillard, Senior VP and Senior Equity Research Analyst at Jefferies
• Catherine Schulte, Senior Research Analyst at Baird
• Daniel Arias, Managing Director and Senior Research Analyst at Stifel
• Derik De Bruin, Managing Director and Equity Research Analyst at Bank of America
• Jack Meehan, Partner and Equity Research Analyst at Nephron Research
• Josh Waldman, Senior Equity Research Analyst at Cleveland Research
• Matt Sykes, Managing Director and Senior Equity Research Analyst at Goldman Sachs
• Patrick Donnelly, Director and Senior Equity Resarch Analyst at Citi
• Puneet Souda, Senior Managing Director of Life Science Tools and Diagnostics at SVB Securities
• Rachel Vatnsdal, Equity Research Analyst at JPMorgan
• Vijay Kumar, Senior Managing Director and Equity Research Analyst at Evercore ISI