Q2 2022 Agilent Technologies Inc Earnings Call
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And now I'd like to turn the call over to Mike.
Thanks, Jeremy.
Thanks to everyone for joining our call today.
In Q2, the Ashland team again demonstrate 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 six 1 billion. This is up 7% core.
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 of 25, 3% continue to expand up 140 basis points from last year.
Earnings per share of $1 13 or up 16%.
We achieved these results despite the COVID-19 related lockdowns that closed our operations in Shanghai, starting in late March and continuing through the entire month of April.
We estimate that this was roughly a 350 basis point headwind to our core revenue growth for the quarter.
As Bob indicated when he takes you through the details this business and that loss 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 market again led the way for us.
Our pharma business <unk> largest market grew 13% led by Biopharma growing high twenties.
This represents our seventh consecutive quarter.
Double digit growth in the pharma market.
And also build on top of a stellar 29% growth rate last year.
The momentum in our chemical and energy business also continue this quarter delivering 9% growth in line with expectations and overcome 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 build on top of 27% growth a year ago.
Europe also performed well with growth coming in at 7% following a 16% growth last year.
China revenues are on track with expectation through March, but we exited the quarter down 3% given the COVID-19 related lockdowns.
While revenues were affected by the temporary shutdowns in the quarter overall demand in China remained very robust in fact, China was our 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 Science 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, <unk> was disproportionately impacted by the Covid related shutdowns there.
To provide some additional perspective, all major product lines, excluding GSE related products grew slightly in the quarter.
Led by strong performance of our cell analysis business growing in the mid teens.
Orders for LC and LC Ms continue to be strong orders grew mid twenty's globally, with particularly high adoption of our two new <unk> products.
On the <unk> front, we look forward to announcing some exciting new offerings at the upcoming <unk> conference that will expand our portfolio.
Our value proposition continues to resonate with our customers and <unk> exited the quarter with record backlog.
The ASEAN Crosstie 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 Informatic enterprise services.
The scale of our ACG business and the breadth of portfolio continue to drive growth and margin expansion, even in the face of inflationary pressures.
Q2 marked the sixth straight quarter, we delivered growth across all markets and regions.
The diagnostic and genomics group delivered revenue of $358 million up 15% quarter versus 16% last year.
Our excellent growth led by NASD and genomics.
The <unk> 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 has been made leading current customer needs and also the work underway and continue to build for future growth with our train B expansion.
We remain extremely bullish about nasp's future and retrain be come online in 2023, we're adding yet another 150 million plus in capacity.
Looking across the company are one agile 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 $2 50 ranking developed by the Drucker Institute.
In addition, new asthma commercialization is already resonating well and deliver successfully for our customers.
<unk> Q2 results are yet another proof point for how we build a resilient company.
That can quickly adjust to a changing environment and still post strongly swaps.
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're now expecting 8% to 9% core revenue growth and EPS of $4 86 to $4 93.
Bob will provide more detail on our Q3 outlook along with more information on what we expect for the rest of the year.
After Bob's comments and before we take your questions I will be rejoined the call so including remarks.
Thank you being on the call today, and now I will hand, the call off to Bob Bob.
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 six 1 billion up.
<unk> reported five 4%.
In the current quarter currency was a headwind of two one points, while M&A added 20 basis points of growth.
Core growth was up seven 3% inline with expectations. Despite the COVID-19 related lockdowns in China, which primarily affected us in April.
We estimate the lockdowns deferred $50 to $55 million of revenue into future quarters impacting growth in Q2 by roughly 350 basis points.
In addition, COVID-19 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 continues to be the main driver of results growing 27% year on year led by NASD invest.
Investments in R&D programs and demand for instrumentation consumables and critical components remained strong.
Pharma represented 37% of our overall revenues this quarter.
To put that in perspective in Q2 2019, effectively one year before the pandemic started pharma represented just 30% of our business.
This not only highlights the.
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 in 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 and Covid related revenues and the temporary shutdowns in China muted our results.
The academia and government market was a nice surprise for us growing 5% in Q2 on top of 21% growth last year, we saw an increase in spending in this market as more University labs opened up and students returned to on campus learning and additional 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.
And rounding out our end markets environmental and forensics grew 1% versus an 8% growth last year.
On a geographic basis, the Americas grew 13% Europe grew 7% Asia, Excluding China grew 8%, while China declined 3% in the quarter as the Lockdowns affected our manufacturing and logistics operations for over a month.
Regarding China I would 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-19 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 remain closed throughout April .
We were able to partially reduce the impact of the lockdown by shifting production to other factories where possible.
And adjusting the shipping routes into and out of China.
We expect the $50 million to $55 million in revenue to be recovered throughout the rest of the calendar year. So it is deferred not lost.
In terms of phasing, we expect to continue to ramp our operations and anticipate modest recovery of the Q2 impact in Q3.
We expect the majority of the recovery to occur in fiscal Q4, with some spillover into November and December which is our first fiscal quarter of 2023.
This phasing is baked into our updated guidance.
Now turning to the P&L the team continues to execute at a very high level set.
Second quarter gross margin was 55, 7% up 30 basis points from a year ago as pricing actions and productivity helped to offset inflationary pressures tied to ongoing supply chain constraints and higher logistics costs.
Operating expense leverage and strong cost management helped drive very healthy incremental improvements as we delivered an operating margin of 25, 3% up 140 basis points from last year.
Our tax rate for the quarter was 50 basis points better than forecast.
<unk> us deliver earnings per share of $1 13.
Up 16% versus last year and exceeding our expectations.
Looking at cash flow and our balance sheet, we generated operating cash flow of $283 million in the quarter, while investing in $64 million in capital expenditures during Q2 with a 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.
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.
We also paid out $63 million in dividends returning to a combined total of $297 million to shareholders.
Our balance sheet continues to be healthy with a net leverage ratio of 0.9 times.
And earlier this month, we refinanced $600 million in senior notes Opportunistically and now have no long term debt maturing until 2025.
As we stated last quarter our approach given current market conditions is to continue to be aggressive in deploying our capital.
Given our strong balance sheet and confidence in the future, we intend to deploy another $250 million in opportunistic share repurchases in Q3, while continuing to actively look at M&A opportunities.
Now, let's move to our improved full year guidance and our outlook for the third quarter.
Given the strong business performance in the first half of the year and our order backlog, we are raising our full year core revenue growth to an expected range of 8% to 9% up a full point from our previous guide.
This core revenue takes into account the recovery phasing in China, as well as a $35 million or <unk> 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 headwinds of $170 million for the year up $60 million since our last guide.
And the impact of M&A remains unchanged.
This results in us maintaining our full year reported revenue guidance range of $6 67 to $6 $73 billion for the full year.
We have also increased our EPS guidance for the full year to $4 86 to $4 93 per share. This is up from the previous range of $4 80 to $4 90 per share and now represents 12% to 14% growth versus fiscal year 2021.
For Q3, we're expecting revenue to range from $1 65 billion to $1 65 zero billion.
This represents core growth between 7% to 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 four seven points on the reported growth in the quarter.
Closing out our guidance in Q3, non-GAAP EPS is expected to be in the range of $1 20 to $1 22 up 9% to 11% versus the prior year.
This is based on a 14% tax rate and 300 million diluted shares outstanding.
The agile 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'll turn it over to you for some concluding comments.
Thanks, Bob before we take your questions I would like to share some thoughts with you on the current environment.
As you know we're living in very dynamic times. However, our end markets remain strong our build and buy growth strategy is working.
What is also very clear is the ability of the agile team to continue to deliver in a challenging external environment.
We have built a resourceful quick moving team and our resilient business model that has shown again and again time. After time that we can successfully address any challenges or obstacles that come our way.
We delivered inline growth increased margins by 140 basis points and exceeded our EPS expectations.
Anytime a rapidly growing inflation continued supply chain challenges and the effects of the COVID-19 related lockdown in a key market.
In times like this our customers want to work with people and companies. They can rely on this.
This works to our advantage and I remain confident in our growth strategy continues to deliver and in the power of the unstoppable one agile and team are growth drivers remain intact and our business prospects remain strong now and into the future. Thank you and now back to <unk> as we take your questions pardon me.
Thanks, Mike.
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Before asking your question, we will pause here briefly ask questions are registered.
Our first question comes from Vijay Kumar with Evercore ISI. Please proceed.
Hey, guys. Thanks for taking my question and Mike Certainly Ajay you did mentioned.
This is an impressive performance given.
The relative <unk> Street on impact from China Lockdowns.
I guess, one when you look at your peers very strong instrument growth across LC and mass spec maybe could you talk about.
How did ashland's portfolio within the instruments segment.
Perform for them.
Within the Q4, there any lockdown impact for instruments, and maybe order trends specific to instruments.
And Vijay Thanks first of all the comments, we're really pleased with the performance given all of the teams were dealing with in the external environment. So we're going to tag team. The response here with myself and Jacobs. So the story is the <unk> business is doing very well.
In the call we highlighted a few areas, where we received an outstanding order growth, we talked about the cell analysis business LC and LC Ms, particularly on the biocide.
Think about some specifics and absolutely.
As I tried to pull that in our remarks, I think Jacobs business was disproportionately impacted by the shutdown. So that we experienced of a COVID-19 nature in China. So we're very bullish about the strength of our LSA business exiting the quarter with record record backlog and Jacob I wanted to talk about what's been going on and why you're excited about the future absolutely to your call.
The quarter was Johnson with <unk>.
Shanghai locked down, but overall, we continue to see very strong growth in orders coming in particularly in our <unk> business, which I think Mike alluded to also some of the NPI as we came out with approximately a year ago, and DLC business and where that connected with our very strong.
Positioning in the mass spec, we continued to see very strong growth in that aspect clearly with GCN Dcms was challenged in China. This year this quarter due to the situation, but overall the orders continue to very strong so I'm not concerned about that and besides that I think we have seen also for the spectroscopy business that the material science.
It's really a strength for us right now so overall very strong performance across the portfolio.
Yeah, and Hey, Vijay this is Bob.
Kind of Dimensionalize that to impact when we talk about disproportionate roughly 80% to 85% of the impact due to the Covid Lockdowns was instrumental in <unk> related.
That's helpful, Bob and maybe one on.
On the top block on impacts in China. The guidance is assuming that 50 to 75 comes back in second half.
What gives you the confidence that this is coming back in second half and where are we in China.
The markets reopening like SCO production facility up and running because I know you have a GC manufacturing facility and there have been some questions on perhaps there could be an impact in PC shipments out.
China.
Hey, Vijay how would I lead off response here so.
Ms into why we have confidence about the outlook. So we are back up and running in Shanghai, albeit unlimited capacity.
With our logistics and production facilities are now up to 25% operating capacity.
And we've actually started some limited international and in country shipments of product is starting to move.
And we expect to have our view is that the lockdown controls will start to ease over the coming weeks and that will be up by fully operational by the end of the quarter, but we don't want to get too far ahead of ourselves here and that's why I think Bob will describe a fairly modest recovery assumption in Q2, I'd also like to take this.
Opportune the call just to do a shout out to our team in Shanghai, who are actually camped out leaving at the factory and not being Aspen volunteer to do that so I've also got confidence in the outlook because I know what this team can do.
And to build on that point Vijay couple of thoughts I mean, we we've watched the order backlog very closely we haven't seen any cancellations associated with this.
And as we're ramping up the factory in Shanghai, We also have dual manufacturing capabilities and we continue to ramp up the factory here in the United States to be able to also provide <unk> and <unk>. So we are expecting as Mike said, a very modest recovery of that $50 to $55 million in Q3, the majority of it being in Q.
Four and then spilling over a little into in November December , but given the backlog and the fact that we haven't seen any of those orders cancelled we feel like we definitely will get.
The product back and if we go back to what happened in the initial phases of Covid chime.
China dropped down pretty substantially and then it came back fairly quickly so.
Yeah.
That's helpful context, Mike and Bob Thank you.
You're quite welcome thanks kilometers Vijay.
Thank you. The next question comes from Mac Sykes with Goldman Sachs. Please proceed.
Hi, Mike Bob Thanks, taking my questions and congrats on.
On a quarter in a tough environment.
Maybe kind of following up on the instrument question, just if we take a little bit more and just see any another good quarter there.
And a couple of things you called out in terms of advanced materials battery.
Yes.
I mean, I think traditionally this has been looked at as sort of a highly cyclical sector, but when youre seeing sort of the secular growth drivers within those sub segments. It just seems less cyclical could you maybe kind of help us size that sort of cyclicality versus non cyclicality within CNA and what could be actually a far more durable from an instrument growth standpoint in that segment.
Over the course of this year and into next year.
So I'm going to lead off with this and then tag team again with Jacob involved but we completely agree with your premise of your question. In fact, you may recall some of our earlier presentations, where we talked about there is elements of the <unk> segment that arent fully appreciated there being driven by capacity expansion for supply chain concerns move too.
New materials.
<unk> and semiconductor batteries. All you have to do is see what's happening in the whole automobile industry, where a part of that.
And I think it's important to just remind the audience here of the three segments that we have and advanced materials grew I think mid twenties for us.
The chemical side grew high teens, we were down in the energy segment and.
And I think thats been historically, the more cyclical element of the business, but I think you need to keep in mind that thats.
Less than 3% and energy side less than 3% of agile in total revenues and perhaps.
Perhaps I'll pass it over to you, Bob and Jacob to some commentary on the.
The relative size of those buckets. If you will yes. It can also mentioned that.
<unk> has historically been very strong in material science. So we have a very strong market presence both in the.
In the semicon industry, especially with our ICP Ms portfolio, but also with the GC and generally speaking an immaterial in batteries and other renewable energy with our <unk> business. So I think we see a great potential and that Bob Yes, just one other thing I think on the <unk>.
Just a couple of things energy was down that is one area that was disproportionately impacted in China as well. So we also had that impact. So it wasn't it was a temporary phenomenon. There and then you can speak to it was China was also impacting the chemicals in advanced materials and they still grew so it kind of speaks to the strength of those markets and these these.
Our area, assuming it's our second largest market we have a leadership presence in these areas and I would say, it's just starting when you think about the amount of capacity thats needed just for lithium ion batteries. As an example, we're only at a fraction of the capacity that needs to be there. So these are these are probably $100 million plus markets today.
Day that are having a long runway.
Just look at the cars and the opportunities here to continue to develop those and Thats 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.
Great. Thanks, very much I appreciate the color and then just secondly on the pricing side, Bob you mentioned that some of the offsets on the gross margin pressure coming from pricing can you just kind of remind us of what your expectations are for pricing this year.
And then in terms of some of the actions you did last year. How quickly are you realizing some of those higher prices that you've put in place.
Yes, it's a really good question and we continue to be pleased by the ability for our our value proposition to be recognized in the marketplace and actually having higher price than what we had initially had at the beginning of the year. If you recall, we had talked about roughly a one point.
Year on year price realization Q1, we were ahead of that in Q2, we actually accelerated beyond that and I would say most of the pricing that we're realizing today.
Or for actions that we took most in the fall of last year and just starting to see some of the some of the actions that we took in January of this year, just given the strength of our backlog so.
It was above that I would say in our new guide that we've actually.
I feel more optimistic about being able to be higher than that 1%. It was it was 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.
But we feel very good about our ability to continue to manage that across across our entire portfolio.
It's also very well, we feel really pleased about the net price realization. That's occurred we also continue to drive productivity as well. So it's a combination of pricing and productivity improvements are having across the company that's right that's right Mike.
Great. Thanks very much.
Youre quite welcome Matt.
Thank you. The next question comes from Brandon Couillard with Jefferies. Please proceed.
Thanks, Brian and good afternoon.
Yes.
Biotech end market.
Our strong again in the second quarter, you just talked about sustainability of trends, there and perhaps the impact of NASD, specifically on the biotech segment growth.
Yes, so I'll have you call that out Bob I know thats in our notes and I think what you hear from Bob is it's a it's a broad based of Biopharma story with really strong growth in both the both sides of the market. The analytical lab in NASD, we remain quite bullish on the outlook in Biopharma and in fact.
In fact, we continue actually gained new business and.
Akshay I have talked about in the second we've actually expanded the number of accounts, we're serving in the Biopharma space. So we're feeling really good about the long term growth prospects of Biopharma as well as the impact it's having on the business right now.
You heard me crowing about few of our growth numbers.
In the prepared remarks, and Bob before I pass over to pork for some comments can.
Can you remind me what the share to us yes.
Biopharma continues to first of all Brandon continues to be a greater proportion of the overall pharma market. So we're not only disproportionately growing in pharma, but the fastest growing market continues to be bigger and bigger it grew 27%.
You took out NASD that number was still 19%. So it's still says that.
We have very strong growth there.
We grew backlog in.
And so I.
Feel very good about our offerings across both the instrumentation, but then also across the entire portfolio of products and solutions that we have yes. Thanks, Bob I thought given the start of this fiscal year of our one commercialization maybe point you are going to make some comments on how thats, helping to gain further penetration in the bio biopharma space.
Yes, Mike.
Absolutely have seen that we have a bigger.
Bigger bigger focus on the longer chain of accounts with smaller biopharma accounts as well as the large players and 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 really helps the instruments trend without attach rates. So overall I think we see both services and consumables being a very strong play in very strong.
Our neighborhood in the Biopharma accounts, which were of course gets.
A lot more access to it.
Thanks Mark.
Got you.
Helpful and then the <unk>.
<unk> gross margins at 56% or quite strong is that a mixed dynamic or pricing should we think about mid $50 is sustainable for this business going forward now.
I'll, let you and as Sam Hashed out went out Bob.
Yes, I think we certainly benefited from <unk>.
Extremely strong performance, there and Sam and team have continued to see future.
Continued to drive.
Productivity in in the in the business there, we did benefit from mix, but.
I wouldn't necessarily put that number in Q4.
For Q3, and Q4, because if you recall one of the things that we are starting to do in the second half of the year is ramp up the stark startup costs for train B and our NASD facility and so forth. So and that is our gross margin, but obviously that has a great payoff in 'twenty three.
With that $150 million plus capacity so.
I would say the team had a benefit of mixed and 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.
Bob.
Completely agree with everything you said so it is mix it is volume.
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 and.
Continued good performance expected, though as you said.
The expectation is going to be a little tougher with NASD.
Becoming coming aboard.
Okay. Good thank you.
Thanks Brandon.
Thank you. The next question comes from Puneet <unk> with <unk>.
Securities. Please proceed.
Yes, hi.
Bob Mike Thanks for taking the questions so far.
So first of all on strong pharma obviously.
But just focusing on North America and pharma any reason why.
You should you Shouldnt continue to see that in the second half too I mean, the question is more around instrumentation and it's really around.
We're seeing your peers deliver very strong growth rate in the U S. Pharma. So wondering if there is any element of pull forward youre seeing here and should we see a sustained sort of growth rate and when we think about North America and U S pharma.
Anthony and 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 yes.
To give you a perspective I mean, our Americas business in pharma grew twice as fast as the overall pharma business.
And we do we will have some comps in NASD that we won't be continuing to post the <unk>.
Strong performance there as strong a performance I should say because we're ramping up against.
The capacity, which is whats train b is going to help us provide.
But we're still seeing that very strong performance, particularly in the instrumentation that you were just asking about that has been a standout.
Okay, Great and then just.
Just briefly on another a smaller segment of our academic and government for you that was strong in the quarter, maybe could you just elaborate a little bit there what what's driving that in.
What sort of what are some of the elements of growth that we should continue to expect through the year. Thank you.
And as Bob mentioned this Mike that was a nice surprise for US I think we came off a 21% compare and still grew 5%. So we're seeing some.
Positive developments the funding environment seems to be quite healthy.
And even though we had some COVID-19 related headwinds in the in the academia segment in China, even in that area was strong. So we think it's continuing to be a healthy funding environment I think perhaps some of the Covid challenge. We had is the society over the last several years has reinforced the importance of funding in those areas.
As well we're seeing.
We returned two to labs or access for students and others in the lab activity as well. So I think that combination of a healthy funding funding environment as well as our lab access yes, I think puneet just to build on what Mike was talking about.
If you go back to our first quarter results, we have Jamie we had January in our in our first quarter and that was just coming off of omicron. The wave of <unk> and we were talking about seeing an increased activity starting in February as it late in late January early February is as kids were going back to school, we saw that continue through <unk>.
Throughout the course of our second quarter and.
Really across across the board so I think it's pretty broad based.
Particularly in our cell analysis business was one of the probably the strongest.
In that area.
And saw a really nice recovery after that first wave of omicron, there and I think it continues to speak to kind of the value proposition that we have in cell analysis.
Got it thank you.
Yeah.
You're quite welcome.
Thank you. The next question comes from Eric <unk> with Bank of America. Please proceed.
Hey.
Derrick Thanks for taking the questions.
A follow up on some of the pain Puneet asked.
So we've been getting a lot of questions from investors basically asking if what the instrumentation sector is seeing is sort of like a pull forward of the budget flush earlier in the year because customers are worried about delays in product supply chains or anything like this are.
I mean are you seeing any sort of like unusual order patterns or anything that's still suggesting it could be still catch up orders from 2022, they didn't get.
I'm, sorry for 2021 that didn't get sure.
This year it just seemed like it because the instrumentation numbers had been just so strong across the group.
No we haven't seen any indication of that and.
The supply chain challenges, if you will or no better no worse, so theres nothing that would be on <unk>.
Hi chain standpoint that wouldn't be encouraging customers and I've got to give us order book now I won't get a product. So we're not seeing that we do think that some of the markets have seen an increase in their overall inherent long term growth rate, particularly pharma biopharma, we actually think some of the.
Some of the Covid challenge, we had as I mentioned earlier have actually led to a more positive funding environment.
Aspects of our marketplace and Bob I know if you have thoughts on this as well I think I think.
From this from the standpoint of order growth.
From a budget perspective that only counts if they actually get the product right and so.
If you look at the order growth that continues to grow faster than revenue, which says hey that from our standpoint, there's not necessarily pull forward.
And it's just robust demand.
Got it so no sign of over ordering for example, but you can say okay.
And I guess another question.
Eric just one other thing I think just real quick on that forget watching because we continue to look at we talked about it relative to China, but we look at it on a.
On a regional and global basis and again the order cancellations are at.
Year on year, they are lower than they were last year and last year, they were lower than the prior year. So they continue to be at a very de minimis amount something that.
We haven't seen more somebody's, placing orders with multiple vendors and whoever can deliver gets the product first I think it is consistent across the industry, where we just are seeing very strong demand.
Yeah.
Got it. Thanks, that's really helpful and just in terms of some of the competitive dynamics I mean it.
Some of the some of the other companies in the space have been talking about share shifts and changes going on in the markets and customers going on I mean, it sounds like your order book is still I mean, I hear you correctly, you said mid Twenty's order growth in China. It doesn't sound like there's any sort of like change in the competitive dynamics going on in that region.
At least not with us.
Yes.
Yes, I was going to say for some of our core technologies is mid twenties globally, yeah yeah.
And we have got it good analytics on this Derrick Derrick with win loss ratio. So we know what's going on with the business and we can kind of parse through the rhetoric.
Great.
Thank you.
Sure Derrick with pleasure.
Thank you. The next question comes from Patrick Donnelly with Citi. Please proceed.
Hey, guys. Thanks for taking the questions Patrick Bob maybe following up on that just looking at the guidance.
Are you.
In terms of the guidance. Obviously you guys are typically pretty conservative. So it's encouraging to see that 100 bps bump for the year can you just talk about I guess, what gave you the confidence that obviously implies a decent <unk> ramp is that just coming from exactly you talked about there the order growth, obviously, China coming back visibility into that maybe just talk through the confidence level.
Historically pretty conservative so so that 100 bps bump often in line quarter, maybe just talk through that a little bit. Thank you.
Yes, yes no.
Youre spot on Patrick you hit on the two key points. One is continued strength in our order book globally.
Where orders continue to outpace our revenue and then you build on that fact.
We have a strong conviction that the revenue.
Differed from from China, We will recover and so you see that.
In both Q3, and really Q4, you'll see that that step up because of the strength that I would say our visibility remains high particularly in the <unk>.
Instrument side of the business with with record backlogs.
Across all of our all of our technology stacks.
Okay, Great and then Mike maybe following up on one of the earlier questions on cyclicality sure. We get a lot of questions about recession sensitivity and thoughts about if there is a recession worthy companies look like you guys are obviously transform the portfolio quite a bit since the last time, we saw.
Real pullback can you just talk about the resiliency of the portfolio broadly how you would think about what this will look like into a recession and then again, maybe just expand a little bit on what cyclical whatnot, what's not across the entire portfolio. There and then similarly, Bob just the levers on the cost side, if things were to slow.
So I'm going to I'm going to make a few opening comments here then Boston doing a nice little set of modern hearing.
The slides referenced so it can be even more precise answer but I must have used the word resiliency are resilient in my script comments, Liza five or 10 times, because really to drive the point home that the ambulance business model business portfolio significantly different.
Then the last time that we have seen some type of recessionary pressure on the business and I have at this point for example to a service business that just posted another 10% core revenue growth.
I've got over 10% of my total company revenues under a service contract.
While 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 recessionary pressure if that was to occur and Bob I noted that there is something youre keen keen study of student oven.
I think we'd be happy to share more insights here, yes, thanks, Mike and Youre, telling all my secrets with my my secret pages here, but.
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 <unk> in the great financial crisis.
Our business was a much more capital intensive much more instrument oriented than it is today. It was probably in the mid <unk> in terms of services and consumables and today, it's closer to 60% and then if you also look at it the pharma.
In clinical businesses, which are probably more recession resistance. There now now 50% greater than 50% of the entire company. So back then we were pretty close to GDP and if you just look at what happened in Covid 2020.
One of the greatest shocks, we had actually we still grew 1% and so you can see that we've got a much more resilient business model.
The higher concentration not only in faster and more resilient markets like diagnostics and the pharma business, but then when you look at the types of products that we have the greater element of services a lot of them on contract as Mike just talked about but then the consumables piece and then the.
Consumables and services.
Later proportion of the business than we had before and then even in some of those areas that we talked about the <unk>.
Where traditionally viewed as cyclical theres some longer term growth drivers I think that you know.
People are kind of still transition from gas powered cars to electrical cars. There is still going to be a regionalization of investments and kept 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 2029, so I think we've got some tailwind from a market perspective in the business composition looks very different.
Thanks, Bob.
Sorry to get away your secret.
Helpful and comprehensive thank you guys.
Thanks, Mike Thanks, Bob.
Thanks Brandon.
Yeah.
Thank you. The next question comes from Rachel <unk> with Jpmorgan. Please proceed.
Hey, Thanks for taking the question.
Another question on Biopharma and biotech funding Bobby.
Area of concern.
So could you just talk about if you've seen any slowdown from customers related to funding concerns at all and then have you had any concern among cell and gene therapy customers or is that business really operating as expected as well.
Yes, So let me let me leave with some thoughts on the Biopharma, maybe you want to jump in on the cell and gene therapy.
Jacob.
No we haven't haven't seen we've seen some of the publicized concerns, but it's not showing up in our discussions with customers or in our order book, our order funnel and in fact, that's why I pulled pork into.
And to the conversation earlier, because we're actually expanding our penetration in that so the funding environment still remains strong for the products and services is looking for from Ashland, and then I know that you've got something going on with Alonso right now already on the <unk>, Yes, actually theyre all the cell analysis business doing really well and we are we have a high penetration into biopharma actually one of the areas we didn't have that.
Hi was into Seahorse, maybe we were very.
Balanced towards academia in here over the last.
A period of time, we have launched a new product.
Which is really penetrating into biopharma really doubled our penetration into the biopharma for the especially for the gene and cell therapy area is also the same for the our <unk> business, where we have a strong presence in the <unk> and <unk>.
Further.
<unk> that over over the next period of time here so.
So we actually see a lot of strength still in in that area and as Mike mentioned, we also co.
Committed through partnerships long set where they have.
The new platform that can be that can be a bioreactor that can actually that could be used out in the in hospital settings, and we are working with them to improve that to put QC methodologies and that based on also sending out the technology. So we continue to be very bullish in this space.
Hey, Rachel one other thing.
It's a question that's come up a number of times. So we've we've done a fair amount of analysis and this is.
As Mike and Jacob talked about we haven't really we haven't seen any slowdown in the order book or even in the elongation any material elongation in kind of the order conversion cycles. 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 consumable space and so we have probably some of the highest attach rates in our biopharma business, just because of the types of instruments that they buy.
The amount of.
Service uptime that they require and as long as those customers don't go bankrupt.
We'll still have that and we haven't seen any.
Any material write offs in any of those things. So I think people think about it you can go right to instrument, but there's a big component of services and consumables there too that we will continue to be kind of the gift that keeps on giving.
Okay.
Great. Thanks, that's really helpful. And then two more questions for me on <unk> or lateral corner, you lifted to see any guidance for the year to high single digits to low double digit growth.
Can you give us an update on that that outlook has changed at all given the 9% growth. This quarter, and then kind of diving deeper into <unk> and <unk> touched on battery testing being an opportunity.
And then really starting to get some increasing traction. So can you walk us through that market opportunity and how meaningful that can be over time.
Yes.
Yes, so our guidance for foreseen he hasnt changed.
We were in line with the expectations for Q3, despite kind of the push out of some of the China <unk>.
<unk> business if you can.
<unk> have probably a higher concentration into in the chemical and energy business and actually we still grew 9%. So we're expecting to see a nice rebound into Q3 and Q4.
Primarily Q4 as that business comes back.
And they are still on track to that.
Double digit and so I think it's fair to say it wasn't just see any in China. It also mosinee globally correct.
Where our product is provided by China for those customers.
And I think in terms of the areas around battery technology and clean energy technology.
And I would throw in kind of semiconductor and that is some of the capacity expansion certainly battery technology those are emerging areas.
We've talked about for the last several several quarters here. It is still an emerging technology.
A handful of battery manufacturers right now, but they are significantly increasing capacity around the world and so.
It's a.
Several hundred million dollar kind of market opportunity today and growing quite substantially.
Great. Thank you.
You are quite welcome Rachel.
Thank you. The next question comes from Josh Waltman with Cleveland Research. Please proceed.
Yeah.
Hey, guys. Thanks for taking my questions I think one of them.
Hey, Yeah, Hey, I think one for you, Mike and one for Bob.
Just want to expand on the instrument backlog question curious if you could provide a bit more context on the backlog strength.
Trying to get a sense on how much. This is a reflection of stronger orders versus potentially a function of tighter supply maybe even the China GCE facilities shutdown impact.
You talked on Biopharma strike are you seeing order instrument orders from more cyclical accounts like applied and industrial also run ahead of expectations.
Yes, I think the story of the headline story here is <unk>.
Transitory impact on backlog build for an element of a COVID-19, Lockdowns is on China, but the big story of the Big macro story is orders continue to outpace revenue so strong.
Instrument demand across our two largest markets and I can recall.
Some of the questions. We got earlier this year about hey, what's the upside in your plan. We said, we think that sits in our two largest markets pharma and <unk> and that's actually what's happening so.
And I think we've probably got a little bit larger backlog bill right now in the <unk>, 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 U S and Thats continued to ramp but again I think the macro story here is really strong overall market environment for orders and.
And we're we're feeling really good about our ability to meet our customers' expectations on deliveries, we see cusp.
Customers continue to be satisfied relationship with Ashland I think so let me try to hit that in my closing comments and then as Bob mentioned, we monitor very closely the level of order cancellations and continue to be delighted with where that stands yeah, Hey, Josh.
This is a this is bob to kind of build on that if we kind of peeled the onion back and looked at the backlog for for LSA G.
It's significantly above where it was last year, it's hard to Peel out.
There have been some longer delivery times because of logistics, but I would I would say the majority of it is demand driven it is not.
Because it's longer delivery times.
Yeah.
I mean, even if you took a <unk> buyout.
Yes.
Yep.
Even if you took the $50 to 55 million out.
Significantly higher than than what it.
Would be.
Historically, it's a record backlog, even if you take kind of a onetime $50 to $55 million China deferral.
Okay. Okay, and then Bob can you bridge us to the new EPS outlook. I mean, you beat Q2 guide by a penny at the high end raise the full year by <unk>, just curious how the strong organic growth and other variables like share repo FX in margin or beating it.
Or in the New guide.
Yes, it's a good question so.
It's a point that penny for Q, Q2 beat and basically a penny for Q3 and Q4.
With the share repurchase.
Helping us by.
A couple of points offset by FX.
Okay. So it is a prudent guide appreciate it guys.
Yeah.
A prudent guidance. Okay. So you haven't got that prudent Indonesia, Hey, Bob.
Yeah.
Thank you. The next question comes from Jack Meehan with Nephron Research. Please proceed.
Yeah.
Thank you and good afternoon.
Good afternoon, just wanted to keep going on chemical and energy.
Just first how much of the manufacturing headwind was in this end market, maybe versus food or environmental or elsewhere I'm just guessing the underlying was a lot stronger than the 9% headline for the end market.
Yes.
Your intuition Jack is spot on we.
No we didnt for for purposes of <unk>.
Looking at this we looked at it more on a technology staff rather than kind of end market, but if you look at most of it actually being in in China, That's where most of the impact was.
That is a market that's over index 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 the other three that I just talked about and I do recall, we had some larger European.
Orders in <unk> that will be filled later, because we couldnt get gcs to them this quarter.
Last quarter.
Yeah.
Got it that's helpful and then.
Then just following up on NASD.
Just the expectations in the back half of the year you guys are the masters of eking out additional capacity and what you have today with train a.
The Frederick site.
But is the expectation kind of revenue as more flattish from here for the remainder of the year and then just a quick clarification for train B talk about 2023 I think previously you said end of this year just.
Don't know if theres any I'm reading too much into that but just any comment on the timeline would be great.
Okay.
Bob do you want to take the first one I'll take the first one yes, yes, so I think.
If we looked at what we have been able to do in Q2 as very strong growth.
It is slightly better than flattish as we've kind of tapped out.
Maxed out right now in capacity, but as you point out.
The team continues to do a fantastic job too.
Bring out new capacity I will say that.
We do have a shutdown a plant shutdown in Q3.
As we're doing some of the installation of train B.
Which will.
Temporarily depressed.
The the revenue there that's built into the guide.
And so there may be a slight sequential.
<unk>, but that's that's all and all part of the overall plan.
And Jack as I mentioned in my in my prepared remarks, we had a chance to actually Bob and I and Sam has a chance to actually go down and spend time with the team to see firsthand the great job that our and thank them for the workers and they've really done a great job, both winning new business as it looked into 'twenty three but also meeting.
<unk> also supported a major expansion of our production, which we've been referring to as train being.
To answer your question I would say is first of all there is no changes to our outlook in terms of 2023 revenue.
We do think it's likely that we'll start production this calendar year. So.
Most likely early in calendar 2023, we've had some great support from our construction teams are supporting our effort here, but also have experienced some COVID-19 related to supply chain issues.
But as you can imagine Jack we also we're prudent in our initial outlook for 2023 years, So don't read into that any anything beyond the fact that it may take us a little bit longer to get the plant up and running.
The new capacity running but our revenue outlook for 2023 remains unchanged.
Yeah.
Super.
Mike you said that.
Now a couple of times. So I was just wondering could you confirm this is the best still yet to come.
Absolutely.
Thank you Jack.
The best is yet to come <unk> right. After this call I will now be done in earnings calls.
Video for the Ashland team and Thats my clothes, so and thank you very much for that Jay.
Yeah.
Youre welcome.
Yep.
Thank you. The next question comes from Daniel Arias Stifel.
Afternoon, guys. Thanks for the questions Bob I, just wanted to maybe to follow up on that pricing question and ask if there are.
Hey, Mike.
If there are areas in the portfolio, where the backlog or the lead times are long enough to where you sort of need to go back and re quote pricing for the current environment or is that not something that you really have in play and if it is how successful might you be in doing that.
Yeah, I'll I'll look to my colleague Jacob we don't recall when we price so.
<unk>.
Commit to the pricing at the time that the quote was valid or the order and so what we're seeing here is if we take a.
Pricing in January we just started seeing some of that flow through.
In the late second quarter, just given the backlog. So if we take pricing now it's really in terms of.
Anticipating youll expect to see it sometime in late Q4 really into 2023.
Yes, and again right Jacob.
And then maybe just on SaaS okay.
Oh, sorry Jacob.
I don't know the Jonah Im sorry about that.
Go ahead Dan.
I was just going to ask one about NASD.
And just sort of the way that the order book is building out for 2023 is that more a reflection of where backlog is four for NASD or just the acceptance timelines that you have customers talking about at this point.
Okay.
Hey, Sam why don't you speak to that I know you didn't spend much time with Brian on the exact question 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 them.
Materials were making for them right now, but as well as new new programs.
And we are seeing a lot of interest from new pharma clients as well. So when you look at 2023, it's a <unk>.
Very healthy demand in fact, we.
<unk> already sold a very significant part of our capacity for 2023 and are already working on opportunities for 2024.
And beyond and that's just the cycle and the maturity and I think the.
The positive outlook for this segment and our leadership and it is going to say Hey, Dan just to build on what Sam saying I mean, this is really a class effect I mean, when we think about kind of the therapeutic areas in the <unk>.
Proof of now several new products.
That are on the market is really you.
We're seeing multiple.
Big pharma and mid cap pharma looking at therapeutic areas with this technology and so.
It is really something that we're a leader in al we're building capacity aggressively and it is really.
More of a function of the market demand as opposed to.
Anything from our standpoint of capacity.
If we add more capacity we'd have it we can sell revenue.
So just to just to maybe put a bow on that incremental orders that are coming in now is it possible for the for those to be delivered in 2022 are those 2023 deliveries just by virtue of.
What youre, saying our capacity yeah.
We're pretty much caps in 2022, we have all the business we were able to process. This year. So it's really about 2023 and beyond at this point.
I gotcha, Okay. Thanks, Dan.
Last question.
Thank you. The next question comes from Catherine Schulte with Baird. Please proceed.
Hello Catherine.
Hey, guys.
Hey, Thanks for the question I guess first one on the follow.
A follow up on M&A, but.
Within ASD clearly a lot of interest there.
There are a lot of demand from customers I think one of your main customers has that produce a day coming up in July .
You think about evaluating capacity expansions, even beyond <unk>, what should we be expecting to hear from you guys on that front.
Yeah.
Yes.
We're actively working on the answer to that question right now so nothing yet to share, but I can assure you that theres more letters in the alphabet and then A&P. So you can expect us to continue to invest and expand this business.
Okay perfect. That's helpful. And then you mentioned in your comments.
Yes.
Yes.
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 sizing.
So hurdles that you might be at play.
Jim.
Yes, I think our our appetite remains remains the same in terms of as part of our build and buy growth strategy. We've indicated previously that.
We have an appetite to do.
Larger emanated without historically, we've talked about it being multiples of the biotech acquisition, it's really just a matter of making sure we find the targets to make the most sense for us strategically and of course, making sure they create value for our shareholders.
And we have remained disciplined through all of the hype of the.
What we experienced last year with the Spacs in Ipos coming out et cetera, I think the market is still is now becoming a little more rational in terms of and I say, a little bit more rational in terms of price expectations, albeit not everybody has forgotten what they thought they once were.
Six or seven months ago, and Bob So we remain very active nothing to announce but this remains a priority for the company, but we're not going to do deals just to do deals we have to do deals that make sense for our shareholders.
Great. Thank you.
Okay.
You are quite welcome.
Thank you there are no further questions registered at this time.
That concludes the Q&A session I'll pass the conference back to permit to conclude the call.
Thanks, Selena and thanks, everyone for joining.
With that we would like to wrap up the call for today have a great rest of the day.
Yes.
That concludes the adjuvant technology.
Thanks.
Ill hop off.
Yes.
Alex.
Yes.
Okay.
Okay.
Yes.