Q2 2021 Agilent Technologies Inc Earnings Call
Good afternoon, and welcome to the agile and technologies second quarter earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply press star followed by 1 on your telephone keypad. If you would like to withdraw your question press the pound key.
And now I'd like to introduce you to the host for todays conference Reuben Dorado Director Investor Relations. Please go ahead Sir.
Thank you Gabriel and welcome everyone to agile second quarter conference call for fiscal year 2021.
With me are Mike Mcmullin, agile, <unk>, President and CEO, and Bob Mcmahon Agile senior Vice President and CFO.
Joining in the Q&A after Bob's Mike's comments will be Jacob Tyson President of <unk> life Science and applied markets group.
Samirah President of agile <unk> diagnostics, and genomics group and pouring Mcdonnell president of the Agile Cross Lab group.
This presentation is being webcast live.
The news release Investor presentation, and information of supplement today's discussion along with a recording of this webcast are made available on our website at investor Dot agile Dot com.
Today's comments by Mike and Bob will refer to non-GAAP financial measures you.
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.
On a core basis.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months guidance is based on exchange rates as of April 30th.
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.
Now I'd like to turn the call over to Mike Mike.
Thanks, Robin and thanks, everyone for joining our call today.
Before I get into the detail into the quarterly detail I want to start by recognize our agile in India team.
Despite the challenging COVID-19 situation.
Our India team is working closely with our customers do all we can to help in this time of extreme need.
In addition, our Agila, India customer support.
Finance and it teams have worked tirelessly to help us close out the second quarter.
And keep us moving forward.
I could not be more proud.
Of how the team has worked together and true 1 agile fashion.
Our thoughts go out to the entire Agila, India team and their families. During this difficult time.
In Q2, the strong momentum in our business continues against the backdrop of a recovering market.
The Ashland team delivered another outstanding quarter exceeding our expectations.
Both revenue and earnings are up sharply.
Versus a solid Q2 of last year when.
When revenue and earnings per share were relatively flat.
Our growth is broad based across all business groups markets and geographies.
We also expanded margins driving faster earnings per share growth.
Revenues for the quarter or 152.5 billion.
This is up 23% on a reported basis and up 19% core.
COVID-19 related revenues.
Counted for roughly 2% of overall revenues as expected.
And contribute about a point to our overall growth.
Our revenue growth is not a 1 quarter or easy compare story, but 1 of sustained above market growth.
For example, our Q2 revenues are up more than 17% core from 2 years ago.
Q2 operating margin of 23, 9%. This is up 150 basis points.
EPS of <unk> 97 is up 37% year over year.
Late in the quarter, we also welcomed the resolution bioscience team to Ashland.
Continuing our investments in high growth markets, and bringing outstanding talented Ashland.
Like our recent acquisitions and cell analysis.
Resolution Biosciences example of our build and buy growth strategy inaction.
The AD the story remains the same.
It is a story of 1 team outpace in the market to deliver strong broad based growth in an environment of continued market recovery.
Moving onto our end market highlights we do strongly in all markets. Our growth is led by 29% growth in pharma.
And 22% in food.
We are seeing improving growth in the chemical and energy market with 14% growth.
We also posted low teens growth in diagnostics and over 20% growth in academia and government.
Lastly, environmental forensics grew 8%.
Bob will provide more end market detail later in his comments.
Geographically the Americas led the way with 27% growth.
<unk> in China, Europe, and the rest of Asia continues with all growing in the mid teens.
The 13% growth in China is on top of a 4% growth last year when the business started to recover from the pandemic.
As we look at our performance by business group, the life Science and applied markets group generated revenues of $674 million during the quarter.
<unk> is up 28% on reported basis and up 25% core off a 7% decline last year.
<unk> growth was broad based across all end markets and geographies.
Our focus and investments in fast growing end markets continues to pay off.
The <unk> pharma business is very strong.
Growing 41% with strength in both Biopharma and small molecule.
From a product perspective, we saw strength in liquid chromatography and L. CMS, along with continued growth in cell analysis.
During the quarter cell analysis grew 34%.
With our biotech business growing close to 40%.
During the quarter. The <unk> team also contributed to our long term companywide focus.
On sustainability in advancing important ESG initiatives.
<unk> announced several new products that have earned the highly respected accountability.
Insistency in Transparency Act label for migraine lab.
<unk> lab is a nonprofit organization dedicated to improving the sustainability of scientific research.
AG products also received 2 scientist choice awards.
And now for the select science virtual analytical summit.
Our cell analysis business during the quarter in our cell analysis business during the quarter excuse me, we launched our citation 10, confocal imaging reader, a multi functional automated system focused on research labs and core facilities looking for increased productivity.
This product builds on the biotech cell imaging leadership with the citation multimode reader and expands our reach in a strategic business.
While still early customer feedback has been extremely positive.
We're also very pleased with the progress and trajectory of our cell analysis business overall and see a very positive future for this space.
The gas on Crosstie group posted revenues of $536 million.
This was up a reported 19% and up 15% on a core basis versus a 1% increase last year.
Acg's growth is driven by demand for consumables and services across the portfolio as lab back that it continues to increase for our customers.
This is leading to more on demand services and parts consumption.
Revenues from our contract business continue to drive strong growth due.
Due to the high level of contract renewals seem the previous quarter.
Our strong instrument placements.
And the increase in installed base will benefit the ACG business going forward.
At the same time, our digital investments continue to pay off with continued strong customer uptake and consumables and our digitally enabled services offerings.
Our LSA G and ACG businesses come together in the analytical lab.
This is where we believe we are well positioned to continue driving above market growth.
As we build on our market leading portfolio strong service organization and outstanding customer service.
For the diagnostic genomics group revenues were $315 million up 20% reported and up 16% core versus a 5% increase last year.
Growth is broad based led by our NASD all ago and genomics businesses.
Demand for our NASD offerings remains strong and our capacity expansion plans for our high growth NASD business remain on track.
We're very pleased with the acquisition of resolution bioscience during the quarter with our liquid biopsy technology resolution Biosciences, a key player in a very exciting area of cancer diagnostics.
We are very glad to have them on the agile team I am confident that as time goes on you'll be hearing more and more from us on this business and its contributions.
I would now like to recap the second quarter and take a look forward.
The strong momentum in our business continues.
This is being driven by a relentless customer focus the strength of our portfolio and the execution capabilities, although 1 ashland team.
Our build and buy growth strategy is delivering as intended with above market growth.
Over the last year have often said that Ashland is focused on coming out of the pandemic, even stronger as a company.
I believe you're seeing the impact of this approach in our current results.
As we look ahead, we do so with a sense of both optimism and confidence.
We are optimistic because of the continued market recovery and the strength of our portfolio.
We are confident because we have the right team customer focused operationally excellent and driven to win.
As a result, we are once again, raising our full year revenue and earnings guidance.
Bob will share more details, but we are expecting a continuation of our excellent top line growth.
We also expect to confirm this strong top line.
Excellent earnings growth and cash generation.
During our Investor event in December we discussed our shareholder value creation model.
And our goals for increasing long term growth and expanding margins.
6 months into fiscal 2021, we are well on our way to achieving those objectives.
Our build and buy growth strategy is delivering.
The 1 agile team continues to demonstrate our execution prowess and strong drive to win we raised the bar on customer service and continue to exceed customer expectations, and providing industry, leading products and services.
While we've yet to fully emerged from the global pandemic we.
We are looking forward to the future with both optimism and confidence.
Thank you for being on the call today.
Look forward to your questions I will now hand, the call off to Bob Bob.
Thanks, Mike and good afternoon, everyone.
In my remarks today I'll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics.
I will then finish up with our updated outlook for the year in the third quarter.
Unless otherwise noted my remarks will focus on non-GAAP results.
Revenue for the second quarter was $1.5.5 billion, reflecting reported growth of 23%.
Core revenue growth was 19% while currency contributed just under 4 points of growth.
We are very pleased with our second quarter results as we saw strong broad based growth with all 3 business groups, posting mid teens growth or higher in all end markets growing strongly.
From an end market perspective, our focus on fast growing markets is paying off.
Pharma, our largest market again led the way delivering 29% growth.
This is on top of growing 5% last year.
Growth was led by cell analysis, LC and mass spec.
These tools are delivering critical capabilities to our biopharma customers as they continue to make investments to develop new therapies and vaccines.
Our biopharma business grew roughly 40%.
And represented over 35% of our pharma business in the quarter.
Our small molecule segment also has momentum growing in the mid <unk> in the quarter.
Overall, we are well positioned within pharma and expect the pharma market to continue to be the strongest end market as we entered the second half of the year.
The food market continued its strong performance growing 22% we experienced.
<unk> strong growth across all regions and segments as we continue to see global investments across the entire food supply chain.
And we were very pleased to see the non COVID-19 diagnostics businesses continue to improve throughout the quarter growing 13% as routine doctor visits return closer to pre pandemic levels.
We posted a very strong month in the diagnostics and clinical market as we came to anniversary. The week April we experienced in our large markets at the onset of the pandemic last year.
And we exited the quarter with testing volumes at a run rate slightly higher than pre pandemic levels.
The chemical and energy market continues to recover as we grew 14% off a decline of 10% last year.
Our results were primarily driven by continued strength in the chemicals and materials markets.
And in a positive sign our order growth rates were ahead of revenues and finished the quarter strong leading us to believe this trend will continue.
We also saw a nice recovery in the academia and government market is non COVID-19 related labs resume operations and a strong funding environment.
With the increase in activity our business grew 21% against the weakest comparison of the year.
We would expect the academia and government market to continue to recover throughout the rest of the year.
And lastly, the environmental and forensics market saw high single digit growth driven by the Americas services and consumables at atomic spectroscopy.
On a geographic basis, all regions grew led by the Americas at 27%.
Pharma and academia and government markets in Americas grew in the low 30% range in all markets grew at least 20%.
Europe experienced 16% growth led by food academia and government and see any.
Those 3 markets all grew more than 20%.
And as Mike noted, China grew 13% after growing 4% last year.
This was driven by pharma growth in the high Thirty's.
And our growth and orders outpaced revenue growth by mid single digits during the quarter.
Now turning to the rest of the P&L.
Second quarter gross margin was 55, 4%.
<unk> year on year, despite a headwind of more than 30 basis points from currency.
Our operating margin for the second quarter came in at 23, 9%.
Driven by volume this was up a solid 150 basis points from last year, even as we saw increased spending as activity ramped and we invest in the future.
Strong topline growth coupled with our operating leverage helped deliver EPS of <unk> 97.
Up 37% versus last year or.
Our tax rate was 14% and 3 quarters percent and our share count was 307 million shares.
Now onto cash flow and the balance sheet.
Our performance strength translated into very strong cash flows we delivered $472 million in operating cash flow during the quarter up more than 50% from last year.
The strong cash flow has continued to help drive our balanced capital deployment strategy.
During the quarter, we returned $254 million to our shareholders paying out $59 million in dividends and repurchasing.
155 million shares for $195 million.
And as Mike mentioned, we also continue to strategically invest in the business. We spent a net of $547 million.
Purchase resolution bioscience, and invested $31 million in capital expenditures.
Year to date, we've returned $657 million to shareholders in the form of dividends and share repurchases, while reinvesting in the business by spending $619 million on M&A and capital expenditures.
And we ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward during.
During the quarter, we raised $850 million in long term debt at very favorable terms redeemed $300 million of it was maturing next year and reduced our ongoing interest expense.
We ended the quarter with $1.4 billion in cash $2.9 billion and it's to outstanding debt and our net leverage ratio of 1 time.
Now turning to the outlook for the full year in the third quarter, we see a great opportunity to build on our strong first half results.
Looking forward, while the pandemic is still with US we continue to see recovery in our end markets and have solid momentum in all of our businesses.
As a result, we're again, increasing our full year projections for both revenue and earnings per share.
This reflects our strong Q2 results and increasing expected expectations for the second half of the year.
We are also incorporating the resolution bioscience into our guidance.
For revenue, we are increasing our full year range.
To a range of $6, 1.5 billion to $6, 2.1 billion up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% 13%.
Included is roughly 3 points of currency and about a half a point attributable to M&A.
This increased outlook also reflects continued growth in our end markets, we see sustained momentum in the second half of the year in pharma food and environmental and forensic markets.
And markets that we expect to continue to recover in the second half include the diagnostics and clinical academia and government can see any.
As Mike mentioned during our Investor event in December we provided our long range plan of annual margin expansion in the range of 50 to 100 basis points, our updated guidance for the year exceeds the top end of that range.
And in addition, we are increasing our fiscal 2021, non-GAAP EPS to a range of $4.9 to $4.14 per share. This was growth of 25% to 26% for the year.
Now for the third fiscal quarter, we're expecting revenue to range from 151 to $1.5.4 billion, representing reported growth of $20 to 22% and core growth of 15 to 17, 5%.
And we expect third quarter <unk>.
Non-GAAP EPS to be in the range of <unk> 97 to <unk> 99 per share with growth of 24% to 27%.
Now before opening the call for questions.
Want to say, we're extremely pleased with how we started the first half of the year.
We believe our strategies and our execution are driving the strong results, we've achieved and put us in a great position to continue to drive strong results for the remainder of the year.
With that Ruben back to you for Q&A.
Thanks, Bob Gabriel if you could please provide instructions for the Q&A.
Absolutely and as a reminder, in order to ask a question you will need to press star 1 on your telephone to.
To withdraw your question press the pound key.
Our first question will come from Vijay Kumar of Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question and Matt Congrats on a pretty impressive op for Infinera.
Thank you Bob.
I did want to start on the pharma biotech.
Really impressive.
At 35 on large molecule plus <unk> and now the small molecule side, maybe talk about.
What is driving that.
At a high level. If you can talk about wood into your end market growing is this a market acceleration are you guys gaining share and how much of this is.
Incremental contribution for NASD I think the prior assumption was $200 million platform, the physical coming in apparel.
Yes, there is a lot to unpack there Vijay will take the crowd and congratulations Vijay in El Paso.
Yes, no yes.
We're extremely pleased with the.
The results that we've seen in the pharma business really across all 3 of our end business groups I think.
It shows the investments and the great execution by the team that has been paying off over the last several years and I think what youre seeing is not only a market recovery for sure, but I think the relevance of our.
Portfolio across all all 3 of our business groups in that business and certainly we are benefiting from the investments to expand capacity and new therapeutics across across various end markets.
But I also think the number of new products that we have launched in this space are really seeing a nice uptake.
And on NASD to your point I mean, we saw nice growth in NIH.
Steve was in the high thirties.
And we are still on track for that $200 million that you talked about.
We feel very good about that business going forward.
And my perspective on that I think we're capturing share in a faster growing market. So I think there is a combination of both above expectations on market growth, but we're also getting more than our fair share of this market rate.
That's helpful. Bob common stock Mike in that 1 question.
Perhaps a more medium term question and I'm not asking for guidance, but I think.
The question on the group has been.
The comps are going to be a pretty hard for some of these companies surgical diagnostics has been a complex debate I think guy.
1 of the cleanest totally SaaS here in the crude oil and again, if I'm looking at this guy.
Ikea, perhaps talk about maybe in broad strokes what is sustainable.
All of these trends biopharma share gains that.
Can be sustainable maybe some broader client on that.
How to think about.
The plus and the minuses.
Hey, Paul maybe I can start with some comments.
<unk>.
If there has been a positive on Covid I think it is actually stimulating some increased levels of investments in some of these end markets, we think that.
Some of these growth rates.
From a market perspective are sustainable for a while.
You mentioned earlier, our story is a core business story, we've been very pleased that our team has been able to participate and have a role here to play in the fight against COVID-19, but our story really is all about what we're doing in terms of driving the core business.
Okay.
Thanks, guys.
Awesome.
Our next question will come from Tycho Peterson of Jpmorgan. Please go ahead.
Hey, good afternoon.
I wanted to ask to start with an M&A question stock resolution. There are obviously, a CLIA lab a distributed model as well can you just talk about those 2 businesses I know the overall revenue contribution of shares at $50.55 million, but how do you think about leveraging the CLIA lab and the distributed model across your portfolio going forward.
Yeah, Tycho Thanks for the question and good afternoon, I'll make a few comments here in the pass it over to Sam. So my comments are going to be we're very excited about having the resolution bioscience team as part of Ashland and Sam I think we're even come even more excited now that we've had even a deeper look about.
What's been going on with the company and I think you've just come back from a visit from with the team. So you've had a chance to have our biggest made perhaps your first face to face business trip in well over a years, but.
With that.
Leading them on I pass it over to you and answer Tyco's question.
Yes, Thanks, Mike. Thanks for the question Tycho, Yes, it was very exciting to finally get out in the real human beings again, and very exciting to see the enthusiasm of the team there and.
Firsthand what is now part of our company and Tycho. The specific answer is both parts are important primary business today that we have and resolution <unk> is related to pharma services.
Much akin to what we do in our traditional CDN business here at agile and it's working with pharma.
To better understand Biomarkers, and then to develop companion diagnostics, which will ultimately you've got the market.
There is some testing thats done in the in the CLIA Lab is you mentioned that there is it relationship with Labcorp.
And that is something that we expect over time to ramp both because of the testing for for lab core and also.
Testing that will result from actual companion diagnostics that are approved as part of the pharma work that we're doing but both are important but.
The substantial part of our revenue today in this year and even in the coming 18 to 24 months will continue to be some pharma services revenue.
Yep Yep, that's the focus.
Okay, and then on the quarter 2.2 quick follow ups, Mike food up 22% I know you talked about all regions and segments strong and sustained momentum but.
Yes, we don't think about that market being 20% growth.
So can you just talk about.
Whether they are stockpiling, how much of this is China coming out of the.
Overhaul there and then totally unrelated question on ACG operating margins they were down about that.
Chris Yes reinvestment there.
Yes, sure Youre Youre close study on the number that I can see Tycho. So thanks, Nick 2 great questions. So no while we're super pleased with the overall growth rate.
Food and it's been a story here for a number of quarters.
We don't expect it to be a 20% growth rate.
And 'twenty, 2 and years beyond but we're expecting continued strength throughout this year, probably not of that same level and Bob I think it's really a clinical lead China's part of that story.
But in fact, when you look across the globe it's been a.
We also saw strength in other geographies as well.
I don't have exact alright, the geographic split, but it was a broad based kind of story, but China, leading the way our being a key part of our net the only part of the story.
Absolutely Tycho to Mike's point.
I think we see this kind of reverting back over time, but certainly what we're seeing is increased investment in increased testing here really around the globe and China, China was actually slightly lower than the overall core business. So you saw a strong recovery both in Americas, and Europe, and the rest of Asia and I think we're seeing some halo effect of.
Covid testing kind of the surveillance testing.
And in various aspects of China are.
Food testing.
So I think we feel very good about the business there and then I think on your question. It sounds like <unk> decided 1 thing additional thought on the Americas you know historically, that's been a lower growth rate for us in food, but with the inclusion of the cannabis testing market, we are getting a bit of a bump bump there as well yeah. That's right yeah. Thanks, Thanks, Mike.
What youre seeing in.
And the ACG business Tycho is a combination of 2 things 1 is some reinvestment that we continue to double down in areas like the digital investments to.
To continue to incur.
<unk> increased our capabilities there and then you did see some increased activity and so as we we actually see this as a good thing in our sales.
And field service engineers are traveling to more more customers and so we're seeing some increases there associated with just increased activity, which we saw on the on demand side, but it also comes with some incremental cost.
But long term, we feel very good about our ACG business and our continued ability to scale that business going forward really.
Okay.
Youre welcome.
And your next question will come from Doug Schenkel of Cowen. Please go ahead.
Good afternoon, guys. Thanks for taking my questions.
Yes, I'm just doing some math here and Bob.
Trying to take a look.
More sense of your guidance.
On 1 hand, you guided fiscal Q3 revenue expectations well above consensus on the other hand, our guidance assumes essentially net revenue has kind of moved sideways, maybe even move.
Down sequentially in a quarter, which I think is normally a little bit better relative to fiscal Q2, if for no. Other reason than China..1 of your bigger markets you don't have a lunar new year in that period.
And then if we're kind of back into the Q4 implied number.
There is I think something like 4% sequential growth and a pretty big.
<unk> moderation in year over year growth in the fourth quarter relative to the rest of the year, even accounting for comps.
So there's all of that you've got more M&A in there.
And then I listen to what you are saying in your prepared remarks and look at the numbers. It sure seems like Youre crusher net with no slowdown so am I missing anything there.
No I think youre reading the numbers very well, Doug what I would say is certainly we feel very good about Q3, and that's where we have most of our visibility we still are in a in a pandemic but.
We feel good about the recovery and our.
I think still a little prudent in terms of our forecast going forward, we want to see how the continued rollout of the vaccines are around the world.
And.
I think there isn't anything that.
In the near term that we see is going to stop us from our momentum.
Okay, Alright, that's helpful. And then again doing math on the fly so hopefully I'm not messing up anything but.
Your math on the fly as pretty good Doug I'm doing okay. So far thank you.
[laughter].
So it seems like you're assuming operating investment grows 15% year over year in the second half or something like that just backing into that from a top and bottom line.
And that seems to be a couple of points higher than the revenue growth rate you're guiding to for the second half. So I am still doing this right could you just talk about what some of the key areas of investment focus are there. It seems like Youre planning on maybe opportunistically pulling forward some investment even separate from the M&A.
And then building off of that if you are in a position to drive revenue upside relative to guidance.
Do you think it's possible, we could see flow through to the operating line and the bottom line along the lines of what we saw in the first half of the year.
Yes.
Short answer on that let me, let me take the question around an investment the biggest investment that we have going forward is really the addition of the resolution bio science business and continuing to invest behind the capabilities. There both from an R&D and development perspective, as well as the channel.
So that that does have.
An outsized investment relative to the second half versus the first half where we didn't really have that in here, but we are continuing to invest.
In.
Demand driving activities some of those things like we just talked about in ACG around the digital aspects, but also building capabilities to continue that momentum going forward, whether it be marketing programs and other activities within our R&D pipeline.
And.
I think the last question that you had is if we do have upside will it drive the same kind of level of.
Incrementals and I would say the answer is yes.
Okay Super helpful. Thanks, Scott.
Yeah. Thanks, Doug I appreciate your comments.
Our next question will come from Dan Leonard with Wells Fargo. Please go ahead.
Thank you so first off on the core analytical business do you think you have seen any any benefits from onshoring in either of the order book or the revenue line as of yet.
Hey, Thanks for that question not yet.
We've talked about with with you in prior quarters, and we still think it's a area of Av.
Interest of our customers in terms of future investments, but nothing material yet this.
This core kind of reinvestment happening in the chemical and materials side of CNA.
Yes.
As you heard in our prepared remarks, you net the order book actually was stronger than the revenue book So Paul.
Hunting to a recovery of.
This segment, which.
<unk> been fairly cautious about that in terms of calling it but.
The trends are positive now.
Okay, and Mike I wanted to ask a follow up on resolution bio you're kind of assuming is that both the future future positive updates to come there.
Can you talk about your stomach to invest in that business and the reason I ask is it does seem like a driver of success in that space is a willingness to absorb losses for long periods of time. So so can you talk about how you.
Plan to invest in the business and how that fits your overall operating model. Thank you.
Yes, I'm not sure I accept the premise that do you need to have huge operating losses to Wearables business, Tim on the type of player China to make here and Bob and semi guys keep me honest here as well, but in our pharma services business model, we have where we can leverage a lot of investments that we've already made around our <unk>.
Base CTX business, we're not in the same position increments.
So maybe a startup or somebody brand new entering this space. So we have something to build from so I think our.
<unk>.
Expense structure may look, perhaps look different than others. In this space, we do plan to invest aggressively on the R&D side as well as building out additional commercial relationships. So, but we think our plan has been to absorb it within the overall operating model. So it wasn't a accurate when we put.
Our long term goals outlets that you know well with or without <unk>. So I think we believe that we can manage within our in our overall.
Operating model and I think.
Given where we are starting from which is we're not starting from zero in this business. We have we have something to build from.
Our acquisition of a number of years ago from Darko I think that puts us in a different perhaps a different place.
Anything else, yet and I appreciate that color John.
Okay. Thank you Youre welcome.
Our next question will come from Derik Debruin of Bank of America. Please go ahead.
Hi, Derik.
It Hasnt moved on sorry about that.
No problem.
So can you talk a little bit more about the <unk> growth and just sort of what's going on there in a couple of questions on that 1 first of all.
I've asked this question about are you seeing an accelerated replacement cycle in that market or any of your mark is basically our people feeling good about budgets. They are spending a little bit more than they had so that general question and I guess 1 of your 1 of your competitors has been talking about the new LC platforms, particularly targeting the biologics area I'm just sort of 1.
<unk>, what your sort of competitive response and product offerings artist, who would go against that and then I've got 1 follow up.
It's maybe their competitive response, but I'm going to pass it over to Jacob because.
We're in the conference room here and I'm looking at on the screen and he is smiling he loved to be able to answer your question Derik I want to pass interview.
Jacob.
Yeah, Thanks, Mike and Eric Great question, Paul Thanks for that stock Volte.
What was the growth youre seeing both in our LTM LTM basis, certainly not a coincidental function. We have invested in for quite some years. If you really think about our <unk>.
<unk> portfolio, we have really invested and innovated around the lines are robust reliable on the team and we really see our customers, especially on a single triple quads have taken off here and there and the Doctor of time, I think terrific Paul in the food space, but we see a lot of upgrades interest.
But clearly in the pharma and Biopharma space, we have we have doubled and tripled down on that really we can see that that great opportunities. There. So when you move from from small molecule large molecule. We're also seeing that the customer base is changing in the end.
The customers of the user's doctor mass spec attempting and hence they are looking for a different experience and we have invested quite a lot into our software platforms first of all toward it up to the expectation from a regulatory perspective, but also from that from a use of <unk>.
A big part of our success and what we see and I truly believe there's a lot more to come in that area. When you look at the LP.
Investing into bio is a part of the game. We have had all of that all biopsy heightened RFP for quite a while now and is doing very well.
Again, everyone in the space and you will see us come out continues to come out with new products in that space. So we feel very good day.
Continue to invest to continue to keep not take market share in this very important market Paul.
And Derek if I could just add onto that I think thats fair to say Jacob where we're seeing both market expansion, but also some acceleration of of <unk>.
Place in the market as well, particularly in small molecule.
Absolutely.
Great. Thanks, and then I'm going to ask you an unfair question, but what the Hell.
[laughter].
And part of it goes like this is Mike all the tools companies that put up really strong results.
They're coming off of easier comps and that's great, but I think that.
Everyone's sort of focused on over the next fiscal year.
And the ability to grow earnings Im just sort of thought can you just sort of generally share any thoughts on sort of earnings growth next year and will it be into the double digit range just sort of your general thoughts right now as people are going to start worrying about the tough comps not the covered tough comps and then other boards upfront.
Bob and I haven't actually compare notes on this I'll start with a few comments and then I think we'll probably end up being in the <unk> potential.
Potential U S tax reform aside.
Jack.
Our model has been to be able to deliver double digit EPS growth.
Not seeing a need to deviate from that in 2002.
Agreed.
Okay.
Have a great day.
[laughter].
Your next question will come from Matt <unk> of Goldman Sachs. Please go ahead.
Hey, Thanks for taking my questions.
Sure Mike.
Just.
And maybe in the category of too early but just looking at the growth rate that you guys have been showing in cell analysis.
Just wondering if you can kind of give us an idea of contribution from that just given it's been integrated and growing at a pretty good clip and then also John.
Sort of what Youre seeing in terms of customers largely new customers and deepening relationships with existing customers just want more color on cell analysis.
Sure sure, Matt I think Bob kind of give a view on potential overall size of the business and maybe pass it to you Jacob for more insights on the customer side, Yes, I was going to say.
We're extremely pleased with the performance really across all 3 of the major business groups within cell analysis really driving strong growth.
And we are we are well on our way to continue to drive.
Accelerated growth in those areas and I would say that the margin profile of that business is above the agile on average and so.
I'll, let mark.
Sure.
Jacob I actually talk about some of the areas, where we continue to invest in new products such as the the citation 10, but also some of the areas around customer acquisition and.
What we're doing in the marketplace.
Yes, thanks to another.
Another great question and as you can hear we are super excited about the cell analysis business, particularly I'll focus on lifestyle analysis, Paul immuno oncology and immunology.
The immunology at the hold and as bump was also mentioned we have made some quite some good investments into that space, particularly.
And also the imaging space, where we have recently come out with a titanium high taking Tim I think Bob also talked about that.
And you can focus on microscope and widely adopted that allows.
<unk> and <unk>.
Build it out this way that you can get a relatively good entry level microscope that will compete very well in the market and then you can upgrade it and all the other automation platform and configurations that we already have established.
In biotech so it's Tim.
Really at and mix and match that that our customers are really delighted about.
And our customer base costs, we enjoy a very strong installed base from from the biotech acquisition, which we now leveraging also Paul and Seahorse, but we also see a much stronger push into the Biopharma space, where some of our businesses have been very exposed to the academia and government and we had.
A very clear focus areas to move in that net works very well. So we're excited very on point I would say that our main growth comes from from the Biopharma space, We're clearly now with Gulf.
Government coming back that of course also trough.
Paul.
Yes, and Matt just 1 other thing to add to what Jacob is saying I mean, this is an area that.
If you look at over the last several years, we continue to invest both organically and Inorganically and I would say given our success and the strength in that marketplace and the strength of our portfolio. Those are areas, where we continue to look to to invest further.
Great.
Thanks for that that's very helpful. And then just on diagnostics. Your comment that you exited the quarter as stronger run rate I'm sure some of that sort of catch up demand from the Covid period, but just can you talk about the sustainability and your views on diagnostics throughout the rest of the year.
Yes, that's 1 where we are.
If we think about the opportunities we're very very pleased with kind of the progression of that business recovery throughout the course of.
The year, if you recall last year, we actually grew in that business.
And then saw a strong <unk>.
Paul off when the pandemic really hit and we're expecting accelerated growth in Q3, but this is an area where we're watching to say is there going to be sustained how fast is that sustained recovery going but all signs right now are very positive from the standpoint of the.
The recovery not only in our business, but if you look at just the overall testing environment continues to be very positive on non COVID-19 testing so.
So I think people are getting back into into the doctor for wellness.
The tests certainly diagnostic test cycle.
Cancer diagnostics, and so forth and I think we're seeing the benefit of that going forward and then couple that with the addition of the <unk> bio business and I think we've got a very compelling portfolio of opportunities to provide to our customers going forward.
Great. Thank you very much.
Just as a reminder, in order to ask a question Chris.
Star 1 on your telephone keypad.
Our next question will come from <unk> of <unk>. Please go ahead.
Thanks.
Mike and Bob Bob question for you first.
What are you baking in for pricing expectations for the year and I think the bigger question here is your ability to take pricing.
The market in the case.
There is a rise in raw.
<unk> prices.
And in line with expectations and outlook for Jacob.
Yes, that's a great question, Puneet, and but I would say is.
First of all just a shout out to our.
Oss team our supply chain organization, who has just done a fantastic job of being able to manage the increased.
[noise] demands on a <unk>.
Increasingly.
Fragile supply chain or logistics, I would say and so they've just done a fantastic job of supporting our customers and as you say we are starting to see.
Inflationary pressures.
In these areas, but I would say our contracts or are more long term in nature and the teams have been able to drive.
With the volume as well as continued discussions good good cost.
Controls there.
At least in the near term and on pricing our pricing Hasnt changed.
We felt that.
Yeah.
We had modest price built into our plan that's what we've seen through the first half of the year and Thats what were assuming in the second half of the year it depends on what.
Group, but overall.
We haven't built in any expectation of significant price increase or decreases into our <unk>.
Into our business.
Okay. That's helpful.
And then a quick 1 for Sam first and then another 1 for Jacob.
If you could.
I would characterize what are your expectations on the pipeline in terms of.
Mark D beyond therapy management for a resolution biosciences.
And if you could also talk a little bit about the regulatory framework in the past you've followed PD Lone farm Dx assays into FDA had been 2 FDA approvals.
How should we think about new product launches are they going to follow a similar path and then for Jacob briefly could you update us briefly on the open lab efforts and your position in pharma. There obviously with your competitor now being focused again on that we're very much on the core LC positioning.
I'm wondering if you're seeing any changes in the market.
And I totally appreciate your 1100.1200 else's has done well, but I just wanted to get a sense of the open lap. Thank you very much and congrats again on the quarter.
Thank you for the question on resolution Bio I think John Rowe.
Many questions in there.
Yeah.
Quick quick response for you.
Our primary focus remains therapy selection and Thats, where the programs that we have contracted in the the continued.
Significant interest we're seeing both from our existing pharma partners on the agile side as well as the resolution bio.
Clientele that are coming into our pipeline as well now the fundamental technology is we do believe amenable to more applications, including.
Minimum residual disease and monitoring but.
Once again, our primary focus remains therapy selection now in terms of the model I think you asked about that.
It is it is what we conveyed before which is we believe is agile and we've got Ah.
Our capability set which we've used for PD lone where we work specifically with pharma partners to work on companion diagnostics, meaning to develop register and then commercialize those companion diagnostics.
As they as they come to market in our approved tied to a specific indication specific drugs. So that is our model and ultimately.
Our vision is to have IBD kitted <unk> solutions that are nearer to patients that are distributable but of course as you heard even earlier, we've got a CLIA lab.
Diagnostic testing that'll happen, along the way and that's a little bit different than the PDL..1 model that we have today because that's the nature of mgs based diagnostic testing, but R. R.
Our interest in long term focus remains on IBD kitted diagnostic tests.
Jacob over to you.
Thank you will and that type of thing that informatics on open lab with Peter our strategy. So we don't really like to talk about our instrument. It's always connect almost unconnected with in a very strong.
And in Connecticut, and we continue to invest in so open lap in fact, we believe that the bid flap.
Baidu connect all our instruments into an ecosystem.
In our cloud, but you can also track samples and in the end also connect into and you can most setup, it's going to be the future and with <unk> broad portfolio of <unk> and can we can very quickly.
And maybe you can very well do this.
So I'm very excited about that and we continue to invest in fact, we have over the last few months decided to further invest in this area to further accelerate our presence here.
Okay. That's great and then I appreciate you guys taking that extra question. Thanks, guys sure on a problem.
Our next question will come from Brandon Couillard of Jefferies. Please go ahead.
Hey, Thanks, Good afternoon, Hey.
Hey, Brendan Barber, Mike in terms of the chemical and energy business could you break out instruments versus aftermarket in the quarter I suspect, it's probably the first quarter in a while that you've seen with solid instrument growth I just want to confirm that's the case and then what's embedded in terms of the full year guide.
For that end market specifically.
Bob I know I know that.
The instrument business was strong for us in CNA I can't remember the actual relative ratios of Panama, We're looking for our notes here right now.
Answer to your question.
And.
<unk>.
We've gone into Q3, it's probably our easiest compare in.
<unk> seen a we're still looking for that stacked growth Doug to kind of move up a bit on us but.
Yes, I was going to say Brandon to your point.
Of that 14% LSA G or the instrument business was slightly higher than that in <unk> was slightly lower than that but both both double digit growth and as we think about where we are going forward in terms of the guide for.
The third quarter and it kind of going forward.
Our assumption for Q3 is somewhat similar to Q2.
In terms of continued recovery off a weak base it was down 10% again last year.
<unk> Q3, and then we started seeing recovery and so think about it.
Thinking about it roughly the same kind of terms in Q3 that we saw in Q2, I think right now we're taking it quarter by quarter, Bob, but I think I think of overall.
It is trending to be more upside than downside thats right.
Got you and then just 1 more it doesn't sound like based on your prepared remarks today, but to what extent if at all are you seeing any.
Supply constraints.
Printed circuit boards or other parts materials.
No.
And I just would echo what Bob mentioned earlier, our off his team has done a spectacular job so.
In our remarks, we heard we talked about you know some some strong orders order growth higher in China, and <unk>, but that was not at all tied to any supply chain constraints and we've been able to get product, we've been able to ship product and listen it's not it's not easy.
But the teams are finding a way to make it happen. So I think Bob is relatively immaterial to all through the quarter in and we think it's manageable moving forward as well that's right.
Great. Thanks.
The next question will come from Patrick Donnelly with Citi. Please go ahead.
Great. Thanks for taking the questions guys.
Maybe just following up maybe following up on Brandon's question on fee. There can you just talk through what Youre seeing there a bit more obviously the order book growth is encouraging coming in higher than revenue was that enough to give you confidence that this will.
Kind of turned quickly on your I know you've noted historically, it's been a bit hesitant to bake in too much growth. There I mean this is among the most positive John I've heard from you guys over over the past couple of years. So can you just talk through that and then I guess was that segment. The biggest piece because at that back half guidance really feeling a bit more comfortable about the sustainability there.
Yep. Thanks, Patrick.
I'm glad you remember earlier comments because.
And I've always said once the orders are in my book I'll start to talk a little bit differently about it.
And Thats why youre getting a more positive tone I would say that we're still in the early phases of the transition.
We feel really good about where things are on the on the chemical materials side of <unk> I would say, we're starting to see quoting and some initial order activity.
Refining side still relatively light compared to the sea to the materials and chemicals segments. As you know the larger part of that business for us, but yeah. We are I am much more positive I think it's probably the first time in a long time that we've had this kind of view on the trends we're seeing.
And in the CNS space and yes, we had in prior quarters is seamless.
But I wanted to see it in the order book and I started to see it this quarter and I would say Patrick to build on what Mike, saying, we still have we're taking it as he said kind of 1 quarter at a time, we built in some of that into into Q2, Q3, and I would still say there is a bias to the upside in Q4.
Okay. That's helpful. And then just maybe on the M&A landscape. Bob you mentioned the balance sheet health. Obviously, we saw the resolution deal you guys touched on that a few times should we expect more deals of that nature or are you still on the hunt for something a bit larger Mike maybe if you could talk a little bit about the pipeline activity and <unk> segments, you focused on and then Bob if youre willing to talk about weather.
Average could go that would certainly be appreciated.
Yes, so I think our view on M&A remains the same we see that as a.
A key part of our will be terming, our build and buy growth strategy.
We've signaled that we'd be willing to do.
Deals in the multiples of biotech, which to date is our largest deal.
And that's still that's still a day.
Area of interest for us.
We like we like the kind of growth accretive deals that youre seeing.
We're getting great new teams like <unk>, Mike Mike the biotech.
So we maintain our focus on higher growth segments, we like we like the areas. We're going we've been gone after we like cell analysis, we really like.
The genomics liquid biopsy space I think informatics. So there's we have a number of areas that we're continuing to look for.
Growth opportunities again, we don't have to do deals to make our model work, but if we can find great new teams and great businesses to bring into the company, we're quite willing to do that.
You just have to remain disciplined in terms of of a valuation expectations.
There's a lot of frothiness.
Certain segments of the market, but we're going to stay where we've been successful in the private space, where we're <unk>.
Company founders.
Often looked at analyst day listen this will be a great home for my.
Mike Company My team.
We like but we like how you guys run your company like your culture and we'd like to just ask for in terms of growing the business for the long term. So we're going to stick to our models.
Working for Us Bob and I think maybe you can just quickly.
Quickly, we're not going to give a specific target around that other than to say that our intent is to maintain an investment grade and we ended the quarter at kind of 1 times net leverage and.
That gives us plenty of flexibility to continue to invest in it.
Deals growth accretive deals as Mike just talked about.
Okay, Thanks, Mike and Bob really appreciate it.
Very welcome.
And your last question today will come from Dan Brennan of UBS. Please go ahead.
Hi, This is Nathan on for Dan.
Just a quick question.
To what extent has your upgrade cycle been impacted by the pandemic and outerwear kind of coming out and the pandemic are you seeing any traction any acceleration in the upgrade cycle on any of your instruments are a mark.
Yeah.
Yes, I think to answer your question I think when the pandemic hit.
It really slowed down any kind of replacement cycle, particularly I would say in the <unk> side of our business and as we just common ever seen.
Positive indications that that actually has now turned into a different direction. So I'd say, it's been it's mainly in the CNS space.
Tied to co mattagami spectroscopy platforms.
Yes.
I would say Nathan as Mike said, it's still early days, but all the trends are looking forward looking positive.
Great and just if I can switch farnell you did mentioned that you are seeing share gains on top of market growth.
Can you just elaborate on what is driving share gains for you.
But as if you think about our.
The combination of our LSA gene ACG businesses, where it would come into the analytical lab.
As Jacob mentioned earlier and I haven't had a chance to have for jumping on the call yet but.
They've been working very well together for multiple years and youre seeing it by bringing innovative solutions to the market that have a differentiated value proposition from the competition a superior service experience.
And I think it's.
We continue to build out our commercial reach as well. So I think it's been the combination of our portfolio.
And then the workflow focusing within our portfolio.
Building, our service capability and then building out further commercial rates I think it's been a combination of all those factors lead us to do really really well in our LSA gene ACG groups, but and then obviously, we talked earlier about the play and cell analysis, which is a new addition to the company and Biopharma and then our NASD play.
In Sam's business. So I think it's been a combination of all those factors. So that's why we keep using the word.
Broad based growth because you're seeing it in all parts of the business and so we feel really good about the.
From a size and you're working on for a while.
Alright. Thanks.
This concludes today's conference call. Thank you everyone for joining US you may now disconnect.
[music].
Yes.
John.
Chris.
Yes.
Okay.
Okay.