Q3 2022 Agilent Technologies Inc Earnings Call
China.
In Q3, the China team delivered 29% growth. These stellar results were driven by continued strong end market demand, coupled with a fast and expect recovery production and shipment activity. Following the end of the Shanghai area of Lockdown.
We're also very pleased with results, which highlights the customer focus drive and outstanding execution of the add on China team.
Strength in Americas continued as we posted another quarter of double digit growth on top of 32% growth last year.
Our European business grew 6% against the 23% last year. Despite a two point headwind for the curtailment of our operations in Russia.
In terms of business unit performance, the life Sciences and applied.
And revenues of 1.02 billion up 18% on a core basis.
Growth was broad based with continued strong demand for our LC and LC Ms offerings.
We're a posted high twenty's growth.
Our spectroscopy business grew low thirties, driven by strength in advanced materials market Kemet.
Chemistries and consumables cell analysis, and our <unk> business, each delivered double digit growth in the quarter.
Now, let's say Gees end market growth was broad based with particular strength in the pharma and chemical <unk> markets.
<unk> results were driven by strength in the Biopharma segment, which grew more than 20%.
We had an excellent showing at the recent ASML conference introducing several important L CMS and <unk> instruments and Biopharma workflow solutions.
These innovative and intelligent Lcs and Gcm's systems have been designed to make the lives of our customers easier.
The build in instrument intelligence and a higher level of instrument diagnostics helped maximize system uptime and improved lab productivity by allowing operators to focus on the analysis rather than their instruments.
In addition, we are introducing an industry first hydro <unk> source for GC single Quad and GC Triple Quad instruments.
Enabling customers to seamlessly migrate from helium as a supplier of gas to lower cost hydrogen.
And rounding out the list of new products announced at ASML.
We introduced the mass Hunter biopsy confirmed 12.0 software and integrated compliant workflow targeted at the fast growing <unk> based therapeutic development market.
These new products have already been well received by customers and represent the latest addition to adds a history of leadership in mass spectrometry.
Our <unk> business also won some important awards during the quarter, including 6500, 60, <unk> ion mobility LLC Q12 system, winning the scientist Choice Award for best New spectroscopy products.
Early this month, we also strengthen and broaden our advanced materials and Biopharma portfolio with the acquisition of PSS polymer standards service a leader in polymer characterization.
We're extremely pleased to welcome the PSS team and their technology to the asthma family.
The asthma classified group posted services revenue of $359 million. This is up 10% core.
We do have 10% core even as lab activity continues to ramp in China.
Growth in services was again broad based across services contracts.
<unk> maintenance compliance education, and Informatic enterprise services.
Strong instrument placements and increased connect rates continue to be a driver of our service business as customers continue to see value in our ACG offerings.
Another critical important factor in our results is the scale and execution capability of Ashland's World Class Global service delivery organization and sort of our customers to meet their needs.
I don't see that the trust a company to work with among our global customers.
The diagnostic genomics group delivered revenue of $340 million up 3% core.
This is the worst that compare at 37% growth last year.
The solid results in our clinical cancer testing and NGL businesses were partially offset by Covid testing headwinds in Q Pcr portfolio.
In addition, the DVD business in China continues to ramp from the Covid related shutdowns there.
NASD revenues were up modestly in line with expectations.
As we noted last quarter Q3 included the impact of a planned shutdown, where all the manufacturing line in Frederick Colorado.
The shutdown of Frederick was for both routine maintenance and development are key elements of our train B, our new manufacturing line or increase our capacity of $150 million plus when fully ramped.
While we continue to make good progress on the construction on train B, we have seen some supply chain related delays and are now targeting mid year 2023 go live a slight delay.
We see continued strong demand for <unk> based therapies as.
As a number of approved drugs continues to increase and our pipeline of drugs in development are targeting disease states with larger patient populations.
We are more confident than ever in the long term trajectory of the market and our business.
In addition, these highlights I'd like to also pointed the recent release of Ashland's 2020 ESG report.
While we've always published our progress and sustainability and addressing societal needs. This year, we've taken an approach to the next level.
We address these issues a new format that for the first time that looked specifically at our progress in the areas of environmental social and governance issues.
We hope you have a chance to review our progress in ESG by checking out the report on the <unk> website learning more about how we're executing our mission to advance the quality of life.
<unk> Q3 results again point to the strength of our diversified business and the outstanding execution ability of the Ashland team.
We continue to bring innovative differentiated new offerings in the marketplace.
Acceleration on digital orders growth continues as well as new customer acquisition.
In addition, as we started 2022, we undertook a bold move to create a one as a commercialization to further drive customer focus on growth the strength of our portfolio and the continued strong execution by our one as a commercial organization make apparel or a combination and.
And you'll see in the results we're delivering.
Customer satisfaction hit another all time high this quarter, we continue to outgrow the market.
As a result of our strong Q3 performance and continued momentum we are once again raising.
Our full year revenue and EPS guidance.
Bob will share more of the specifics.
It's an exciting time at Ashland with the best yet to come.
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'll provide some additional details on revenue in the quarter and take you through the income statement and other key financial metrics.
I'll, then finish up with our guidance for the fourth quarter and fiscal year.
Unless otherwise noted my remarks will focus on non-GAAP results.
We are extremely pleased with our Q3 performance.
<unk> were above expectations, and we expect that strength to continue in the fourth quarter.
Q3 revenues were $1 72 billion.
Up eight 4% on a reported basis and up 13, 2% core.
FX was a four eight point headwind to growth were $76 million.
Pricing for the quarter contributed over three points of growth year on year and improved sequentially.
The performance was broad based as all end markets and regions grew during the quarter.
As we mentioned last quarter, the Covid related Lockdowns in China deferred an estimated $50 million to $55 million in revenue from Q2.
And we forecasted that revenue would be recovered during the rest of the calendar year.
Our team in China did a fantastic job ramping production and shipments faster than expected following the shutdowns.
We estimate over half of that deferred total was delivered in Q3 exceeding our expectations.
Given the strong performance, we now expect the remainder will be delivered in Q4, which is an acceleration from our thinking from last quarter.
The acceleration of the Covid related shutdown recovery in China contributed to an already strong Q3 for the company for.
For perspective, we estimate the total business grew double digits, excluding the accelerated recovery.
As Mike mentioned earnings per share of $1 34 were up 22% from a year ago, representing strong incremental flow through of the better than expected revenue growth.
This performance is against our most difficult comparison of the year as EPS grew 41% in Q3 of last year.
Now, let me dive a little deeper into the end markets.
Our largest market pharma was up 16% exceeding our expectations.
Biopharma grew 18% and small molecule was up 14%.
Biopharma is a focus area for us and now represents 38% of our overall pharma business.
We expect that ratio to continue to climb over time.
In addition, all three business groups grew double digits in the pharma segment.
And our LC portfolio continues to perform very well growing 25% in this important market for us.
Chemical and energy continued to show strength growing 22% during the quarter.
Driven by the chemicals and advanced materials segments of this market.
We saw strength in plastics and packaging for chemicals and ongoing demand in advanced materials coming from the market for semiconductors in batteries.
In the food segment, we achieved growth of 11% on top of 12% growth a year ago.
Strength in the food market was led by the Americas and China.
Our environmental and forensics market also grew 11% during the quarter driven by the Americas and China.
In the Americas, we saw increased funding to support P fast testing, while China experienced faster than expected recovery post the Shanghai shutdowns for Gcs in Gcs.
The academia and government market grew 5% on top of a 12% comparison last year in line with expectations.
And rounding out the review of our end markets our business in the diagnostics and clinical market grew 2% against the very strong 28% compare versus last year.
While not material at the Agila level. This market did experience some headwinds associated with COVID-19 related revenues being lower than last year.
Excluding this the growth would have been mid single digits in this quarter.
On a geographic basis, China led the way with 29% growth driven by underlying demand and a faster than expected recovery following the COVID-19 related lockdowns and.
And looking forward demand in China continues to be very strong.
The Americas grew 11%.
Another strong showing in Europe grew 6% which exceeded expectations.
Now turning to the rest of the P&L our team continues to execute at a very high level.
Third quarter gross margin was 56, 4% up 50 basis points from a year ago as pricing actions volume and productivity helped to offset inflationary pressures tied to ongoing supply chain challenges and higher logistics costs.
Operating expense leverage driven by the strong top line and continued attention to cost management helped to deliver very healthy margin improvements. Our operating margin was 27, 5% up 150 basis points from last year.
Below the line our tax rate was 14% for the quarter as expected and.
And we had 299 million diluted shares outstanding.
Looking at cash flow and our balance sheet, we generated operating cash flow of $326 million in the quarter, while investing $82 million in capital expenditures during Q3, driven by our NASD expansion.
During the quarter, we also repurchased $323 million worth of shares.
We paid out $62 million in dividends in Q3, returning to a combined total of $385 million to shareholders in the quarter.
Year to date, we have purchased over $1 billion of shares given the ongoing strength of the business. We believe this is a very good investment.
Our balance sheet continues to remain healthy with a net leverage ratio of one.
Now, let's move to our outlook for the full year in the fourth quarter.
We now expect revenues for the full year to be in the range of $6 75 to $6 775 billion.
This takes into account our Q3 results and an improved outlook in Q4, partially offset by an additional $40 million headwind associated with the strengthening of the dollar.
This represents core revenue growth of between $9 nine and 10, 3%.
We are also raising our EPS guidance for the year to a range of $5 <unk>.
To $5 eight reps.
Representing 17% growth year on year.
This translates to Q4 revenue in the range of $1 75 to $1 77 5 billion.
Core growth is expected to be in the range of 10, 3% to 11, 8% while exchange rates will be a five point headwind and M&A will contribute 0.1 points.
In closing out our Q4 guidance non-GAAP EPS is expected to be in the range of $1 38 to $1 40.
Up 14% to 16% versus the prior year.
This is based on a 14% tax rate and 299 million diluted shares outstanding.
The agile team once again performed extremely well in Q3, delivering strong results driving excellent execution and building a strong foundation for the future.
Our diversified business and most importantly, our team has.
Put us in an excellent position to again deliver strong results in Q4.
And now back to <unk> as we take your questions pardon me.
Thanks, Bob.
If you could please provide instructions for the Q&A now.
Okay. Thank you.
To ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to turn that question. Please press star followed by two again to ask a question Press Star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking a question.
My first question is from the line of Matt <unk> with Goldman Sachs. Please proceed.
Hey, good afternoon, Mike Bob Congrats on the quarter.
My question good afternoon, Matt.
Sure.
Maybe just.
Maybe just starting on <unk>, we had a really good quarter just interested to know one what drove the operating margin expansion in the quarter relative to your expectations in last year, and then specifically I know it was broad based strength across instrument categories, but was there one or two areas that really surprised you to the upside where you feel is either underappreciated or can see.
<unk> continued momentum in the back half of the calendar year.
Yes.
Yeah, So I'll take the first part of that and we will jump in.
Bob and Jacob other thoughts here as well, so I think relative to the strength and why the operating margin was so high is one is I think we've been.
We really benefited from the leverage impact of having those higher than expected revenues, but more importantly, we've been working on the pricing side and really ensuring that we are receiving the value of our offerings and Bob I think we are well over three points of price depreciation overall for the portfolio in LSA I believe that's correct that's correct and we are.
As you may have picked up in my script it was that.
Across the board great quarter for LSA gene across all product categories, but particularly I think a couple of really stood out for you.
Yes, I think.
We continue to do really well in the <unk> space, but this quarter, it's really the spectroscopy that was standing out.
Especially in our atomic spectroscopy, we feel we have really seen a lot of momentum based of course on the dynamics in the market, but also the innovation that has been created over the past year and I think we really see the impact.
The impact of that the study I think it was a race to see who are the highest growth rate spectroscopy, LC and LC Ms. They both did extremely well.
Okay.
Great and then maybe just hitting a follow up.
I know Europe sure.
Yes, I would just say.
For a follow up can you hear me.
Yes, yes, yes.
Yeah.
Oh, yes, sorry, just for a follow up on Europe .
6% growth I think getting a lot of questions on just the spend environment in that region. What are you seeing there and is there any kind of concerns you might have in terms of.
Demand either from the currency fluctuations or just overall demand in certain end markets within Europe .
Yeah sure, Matt So we posted a 6%.
Growth rate core growth.
Third quarter, albeit there was actually two points of headwind from the co chairman of our Russia operations, So really with high single digit 8% on a restated basis and.
Europe , clearly as a watch area for us, but we haven't seen any significant signals of movement to to the downside, yes, I think Matt to.
To build on what Mike is saying I think in particular, we continue to see very strong growth in our pharma business and that really is a global phenomenon.
But we also saw very nice growth in our chemical and energy businesses as well and so.
As Mike mentioned, it isn't a watch area, but the demand.
<unk>.
From what we're seeing in the health of the order funnel continues to be there.
Great. Thanks very much.
Yeah.
Hum.
Thank you.
The next question is from the line of Brandon Couillard with Jefferies. Please proceed.
Hey, Thanks, good afternoon.
Hey, Brian could you elaborate just on the core order growth that you saw in the third quarter and given the strength of the order momentum over the last several periods. How does that inform kind of your initial thoughts on 'twenty three I mean should we still think about five to seven still being relevant.
Bob should we expect a normal 30% to 40% Incrementals next year at any headwinds to consider maybe then NASD line.
Hey, Brandon.
We're probably not ready to talk about 'twenty, three but I'll leave it there is a couple of thoughts here, which is very clearly the business has momentum.
And even though we had the highest revenue quarter ever ever for Ashland. In this recent third quarter, we still build backlog both globally and also in China. So our order orders that exceeded our revenues and this sets us up nicely I think for 'twenty, three but we'll get to 23 guide when we get there.
I think Brandon on your on your.
Core Incrementals I mean, I think that if you look at historically, that's where we've been obviously, we do have.
Some startup costs in.
'twenty three for NASD, and we'll we'll spell those out when we get to the numbers, but I don't think that theres going to be anything fundamentally different on an incremental incremental basis going forward.
Okay. That's helpful and then on the NASD train B line.
<unk> pushed out a little bit in terms of the the launch timeline is that like one or two months I thought the plan was already mid next year and could you elaborate a little more specifically on kind of where the supply chain issues exactly what those are that are pushing the delay.
I think you got the right timeframe in there, which is a month or two it's really been sort of specialized specialized steel that's required so actually had a chance to see myself, where you go into a room or ear.
The steel pipe Fitters are working and get into the area ready they can close things off because of missing one valve or something so we've had.
Bits and pieces that had been missing that actually caused us a certain delays I mean, the team has been all over I think the global supply chains are pretty well publicized but.
We thought it was.
We thought we should in the spirit of transparency, let's now we're still on track for revenue coming out of the facility in 'twenty, three but maybe a month or two later than you thought initially.
Yeah, and I think Brandon.
There is one more important piece I think based on what we know today.
We still expect to be at capacity at the exit of FY 'twenty three as well in terms of a ramp up.
Great. Thank you.
Mhm.
Okay.
Thank you. The next question is from the line of these <unk> Kumar with Evercore ISI. Please proceed.
Hey, guys congrats on a really strong quarter here.
Hi, Mike.
Congrats on the print.
One maybe on the guidance here.
Q4 at the midpoint of circa 11% organic you guys soon.
10%.
The comps do get easier for Q4.
I'm curious sequentially. When you think about it is the change just because of the cadence of how the China deferred revenues were recognized more on <unk> Q4, we just talk about the sequential.
Assumptions here for the <unk> guidance.
Sure Vijay and again, we're very very pleased with the print. So thanks for that thanks for the feedback.
While we didnt use it in our script, but I think the word prudent apply to our Q4 guide as well that's right. Yes, I think Vijay if you think about kind of the moving pieces within China. What we did was we pulled forward.
Some of the revenue that was deferred into Q3, but we also pulled Q1 revenue into Q4. So Q4 I would say we didn't have a material change one way or another we actually feel very good that we're going to.
Yes.
Realize that full $50 to $55 million here in the fiscal year versus having it bleed a little into into Q1 and as Mike said I mean, we're not out of the woods certainly in supply chain challenges in Covid.
Situations and so we thought at this point in time.
No.
Okay.
Double digit core growth is.
Very good but also prudent as Mike said.
The court may.
Maybe one on <unk>.
And some of the moving parts for <unk>.
'twenty, three Mike and I'm, not asking for a guidance, but if I look at pricing contribution I think we started with the euro at 100 basis points, we're running at 300 basis points.
That pricing should continue until we annualize the central made a fact that mid of next year you.
You Didnt mentioned orders.
Coming in about <unk>.
Revenues, what is the backlog conversion if that a three month or six month or 12 month visibility that you have from backlog any impact from <unk> sorry.
On <unk>.
Strong with obviously, what the macro would be perhaps the prudent for 'twenty three.
Yes, so great question Vijay So I think I'd like to the headline here was as way Bob closed off us.
Repaired remarks, we're building a strong foundation for the future. So we've got we had record revenues in Q3, yet we still build backlog.
And some of that backlog, obviously carrying into 'twenty three and we it's probably three to six month visibility for sure on the revenue coming from from the backlog and Bob I don't view that end and we agree with your thesis around pricing and impactful it'll have on our 23 business as well and Bob maybe you want to ask so the only thing I think you are.
Youre spot on Vijay I would say, there's not a material change right now in terms of how we're thinking about NASD.
And.
If I think about the various pieces there they certainly set us up for a.
Good momentum going into FY 'twenty, three now theres still some unknowns in terms of kind of the macro environment, but.
We're expecting to have a stronger than normal backlog, we certainly have that right now and are expecting to continue that into into 'twenty. Three and then obviously pricing is continuing to anniversary.
I would expect it to be a higher contributor to growth next year, all things being equal.
Understood. Thank you guys.
Thanks P J.
Thank you.
Question is from the line of with.
At BP.
Please proceed.
Sure.
Yeah, Hi, Mike Thanks for taking the questions. So first one just LSA, obviously very strong quarter and I mean, obviously congrats on the quarter Eric.
When you look at the 25% growth that youre seeing in healthy overall, the order book being strong.
Can you, maybe just characterize sort of.
From an end market perspective seems like Biopharma continues to do well, but geographically can you just characterize this contribution from Biopharma China.
In the quarter and how should we think about the sort of order book can you maybe characterize the order book more geographically and do you.
This again in line with sort of some of the other questions.
How should we think about this order book flow throwing flowing through into to enter 2023.
Yes, Puneet you factored in a lot of in that one question.
To address it.
Maybe you want to come to that Bob, but I think the answer was really across the board I mean.
Both I mean, clearly biopharma and pharma.
Our portfolio is doing really really well there.
And as I mentioned to the team. The other day, we just got the most recent auto report, which shows market share movements and as my Dana's colleagues like to say it was green at the Dana as far as so I get that right Jacobs. So that's right.
Mike.
It was across the board I think but I think it's the same story holds geographically as well so it really is a nice global.
The story, but I think it's more than just pharma I know youre getting some good CD growth rate for in the advanced materials LCL CMS, we posted some really good numbers in food and environmental market, which also are big users of the LC and LC Ms. I think it was really a broad based story there if I remember correctly Jacob Yes, correct, Mike I think we read.
<unk> seen good performance across the border to saying, Mike and we are also seeing that the customers are really.
Really interested in our full solutions I think PFS is a good example of where we see a lot of interest right now.
Both both right now, but also what we see some of the big deals and it's coming through in U S where PFS is prominent exposure. So we expect to continue to see inventory and that's great.
I think puneet just to build on what Mike and Jacob we're saying I think one of the things you're really seeing come out in Q3 is just the strength and breadth of our portfolio and.
Why we haven't talked about spectroscopy, a lot in the past it continues to be a very important part of our portfolio and solution set and I think it fits nicely across multiple end markets.
The LC and LC Ms get a lot of headlines.
But we're more than just an LC and LC Ms.
Business.
Got it.
Thanks for that and then just I'll keep it simple from that follow up Shalimar standards acquisition can you characterize sort of what's the contribution this year end.
How does that enhance your offering for columns and sort of bio molecules.
And how should we think about that.
All acquisition overall putting into.
OSA to regroup.
You'll take the first piece of that.
It's not a material.
Cereal business.
Business we.
We estimate that is less than 10 less than $10 million annualized today, that's the 0.1% that we built into our guide for Q4.
But more importantly, I think strategically I'll let.
Jacob talk about the merits of the portfolio and how we think it's going to continue to drive growth for us.
Yes, thanks for that.
We have a long standing relationship with PFS, So we knew exactly that strength.
Very impressed with what they have done in the polymer business for the for a long period of time and particularly our interest.
Intrigued when B and we also see polymer science going from advanced material into Biopharma, but we see a lot of opportunities and.
PSS have done a wonderful job using our instrumentation together with their columns and also on informatics pack. They have built to really go after a segment of the market and also the expertise in the field.
They have more than 500 application notes within this field. So we can really leverage that with a strong presence we have across across the globe to really accelerate the.
Business opportunity that had built up over the pasta.
Okay.
Got it okay, great. Thanks, guys Congrats again.
Thank you appreciate it.
Thank you the.
The next question is from the line of rates all of that and start with Jpmorgan. Please proceed.
Hi, Thanks for taking the questions and congrats on a nice quarter and Rachel.
Yes.
Some of that catch up and China foreign that also creates a double digit growth for.
That exploration recovery.
So first off can you just walk us through specifically what drove that pull forward on the catch up locked out.
Are you seeing an acceleration in demand catch up in China, and then second how are you thinking about that longer term growth in China and could that be a source of upside for the year.
Great. So I'll start Bob here, so I'd have to say it was the extraordinary effort of our team in China, I mean people sacrificed and.
Tremendously hard we had people coming into our factories and living at the factories.
<unk> and worked with the factories for entire period of when before you Couldnt really get out beyond the back to your local community. So they did that for several weeks both in our logistics operation as well as our factories and that allowed us to get our.
Global GC production going as well as the import export of our products as well. So I have to say it really was extraordinary effort of the team that made that happen.
And we're very optimistic about ability to continue to grow well in China and.
In Q2, I think we've talked about greater than 20% order rate.
We posted a number of 29% growth.
In Q3, we still build backlog in the third quarter in China. So I think we're well positioned for for the fourth quarter and Bob I'd say that probably does represent a level of upside potentially with things continue to develop as we as we hope.
The wildcard from my perspective, or how much money could come into this segment from government stimulus I know, they're there they're talking about some of the things we haven't seen any specifics so that would be something that would be there on a positive but again, our demand really is coming from the core private sector commercial sector around pharma and CNA, we think those things are some.
Stable.
Yes, exactly Mike I think you mentioned Q2 kind of order growth rate in Q3 was in that same range and so we're seeing very strong demand.
And been able to do a fantastic job of of.
Ramping up that capacity and we expect that to continue into Q4.
Great to hear and then last one for me.
And then 22% growth is quite impressive.
But I can see it accelerate in recent quarters on that end market.
Should we be thinking about that longer term outlook.
Especially given some of the macro dependence on that portfolio.
Well, we think that the structure of this market places change over the last few years and yes. There is still a segment that's tied directly to what happens to the global GDP.
Situation, but we've hired in my in my comments, there is secular demand happening here, particularly in advanced materials, when there's investments being made in battery technology more sustainable materials semi.
Semiconductors onshoring our production. So we think those trends are here.
For a number of years I think our view is the sector has probably got a higher growth rate than we viewed as having a couple of years ago because of the secular.
Aspect of our growth in <unk> and by what else might be out there. Yes, I think as you said I think one of the things that I think is really important don't take 22 and take.
It into your model, because we don't think that that growth rate is.
It's going to continue we certainly are pleased with it but I think the other more important pieces.
We have a very strong right to win in the <unk> business, We're a leader in this space.
I feel good about our portfolio and as Mike said this is an area that.
We are seeing kind of a renewed sense in some of these areas that.
We do think that has many years to come in terms of investment I'm going to use or an undisputed leader in this space.
I won't disagree.
Thanks for the question Rachel.
Okay. Thank you.
Thank you.
The next question is from the line of Derik de Bruin with Bank of America. Please proceed.
Okay.
Great. Thanks for taking the question. This is Matt Rhodes can off the deck.
I want to follow up on your comments on price.
Hey, guys.
I've indicated that.
Rice continues to sort of grow as we go through the year is that a factor.
The timing of when the orders are converted to revenues and when Youre recognizing those revenues. So there's just more of a.
The dynamic of that or is this.
An incremental price increase that Youre building in as you go through the year and just alongside that any comments you could take in terms of.
Reception to price any pushback or any particular areas, where you're able to take more versus last year.
Give us an update on the pricing dynamic as you go through the year.
Yeah, Hey, Mike This is Bob I'll tell you I'll take that Nir.
The former and so when we take price. It takes some time to get through the backlog and so were seeing the price realization from the orders at the price increase that we took.
That we took back in the beginning of the calendar year and really what we're trying to do is cover our costs.
And we're seeing increased logistics costs and increased material costs.
So we've taken it across the board, but also recognizing where the costs are higher we've taken those prices up higher.
We haven't really heard any pushback I think is evidenced by.
Our strong order growth and then also we look very closely at.
Cancellations are within our order book and that continues to be very low and so I think our customers understand why.
Why.
Why we're having to raise prices because of the inflationary environment and.
I think to date.
<unk> been able to actually generate more price than I think we anticipated at the beginning of the year.
Okay, Great and then for the follow up.
You commented on the balance sheet and sort of getting the leverage lower and lower.
A couple of deals.
Yes.
Good to be on a much smaller side. So could you talk about your willingness to lever up a little bit and put a little bit more of that capital to work and if so what are the types of assets youre looking for sort of our sellers willing to.
To engage in this market.
How are things proceeding on that farm from thanks.
Yes, I think.
We've been public about being willing to take on bigger deals and what we have had historically I think we're still we have the benefit of having a very very strong balance sheet, we're going to first invest in our business, we think that thats the greatest opportunity, but we're always out of on the lookout for M&A and as you said I would say the pipeline.
Continues to be healthy.
The dynamic has certainly changed in the last nine months, particularly on the public market side and I think there's some good assets out there, it's probably taken a little longer on the private private market side, which is where we we tend to focus our efforts, but I can tell you that.
We.
Hi.
Beauty of our model is that we have organic growth first and M&A is kind of an add on top of that and so it is something that we're continuing to look at and would be.
Not uncomfortable levering up a little higher than where we are today for the right deal and if the if the economics work.
Absolutely Bob.
Is that correct.
Four times lever or.
That's pretty rich.
But.
I think it all depends on what the right.
Asset and what it looks like.
Got it thanks.
Okay.
Thank you.
The next question is from the line of Josh Waldman with.
Please learn research Christine.
Thanks, Laura.
Okay. Thanks for taking my questions just two for you guys first Mike.
Mike wondering if you could provide more context on the supply chain situation, how supply and cost of track versus your expectations over the last 90 days.
Have you seen any relief on supply and then it sounds like you build backlog in Q3 serious whether you're <unk>.
Fourth quarter guide assumes any work down in the backlog.
Given recent order rates.
Yes, so I'll, let Bob handle the second question and I'll start with the first one so.
Supply chain challenges are still out there.
But our team continues to do an excellent job navigating them getting the material that we need for our customers.
We continue to have very very low order cancellation rates is simply watch like a hawk.
<unk>.
Think we're managing the price changes so I think in the early days of things, we were kind of surprised at what things would cost on the on the on the on the market for chips and others, but I think we've now found ways to work that in and offset that with some of the pricing actions that we have.
I mentioned earlier, so I think if anything it's probably trending in a more positive direction, albeit is still challenging out there yes.
I would say on the second question, Josh I would say first and foremost demand continues to be very strong.
In our marketplace and so we're we're expecting order growth to continue in.
Into our fourth quarter as you know that typically is one of the larger quarters that we have for our sales organization and certainly for our customers as well.
That being said.
I would expect maybe some slight degradation in backlog just given again the deferral that were talking about within within China, but don't don't interpret that as seeing anything slowing in the marketplace.
Got it and then kind of along those lines I Wonder if the group has any initial thoughts on <unk>.
Pharma budget Flushing this year given the strength in orders from these accounts curious at this point, if youre getting India.
Any indication that.
Maybe the strength in the order book is reflecting a pull forward or are just not seeing that yet.
Josh I'm going to pass this call over to pork he's he's the closest to what's going on as you know he heads up our one commercialization. In addition to running our ACG services business support what's your thoughts on that.
Yes, no I think it's pretty steady at Mike, we're not seeing any pull forward.
At this point and of course the team are very focused on key end markets.
It sounds to meet the customer needs. So we're we're seeing a very steady stage order rate and.
And how much pull forward.
Got it appreciate it.
Quite welcome.
Thank you.
The next question is from the line of Jack Meehan with Nephron Research. Please proceed.
Thank you good afternoon.
Wanted to ask about the chemical and energy good afternoon, so the chemical and energy acceleration.
My first question's on the chemicals customers. So your commentary sounds pretty bullish.
There's certainly been some headlines from some of the big European chemical players that had been a little bit more mixed though so I would just be great to get your perspective on how you feel about the durability of that customer class and kind of squaring your view versus what we might be hearing from others in the market.
Yes that may be more regionally specific to Europe , where we did see a level of growth a little bit slower than we've seen in the Americas and China. So I'd say, that's probably more regionally specific and as we mentioned earlier in the call Europe remains sort of a watch area for us because of obviously office.
Challenges in that region right now.
But I think we think it's pretty pretty durable right now I mean, I think if you'll remember the chemical pieces going into some of these supply chain as Fabs go up and other things. So it is fueling some of the efforts in the.
Advanced materials area, and I know that you and Jacob looked at this a little more closely I don't there is anything else you'd add to that though I think youre spot on Mike I mean, if we looked at across the all regions grew in CME has.
Yes.
As Mike you were saying, but.
Europe was below the average.
So.
But I think over time.
That investment in some of these areas. We think is an ongoing demand.
Great.
And then it was.
Only a week ago the chips in science that got signed in the law I'm not sure. If you have any early perspectives as to what this might mean for agile line. If you could call out kind of the businesses that you think.
Could benefit from some of the funding thats going in.
And can you just maybe call out what did the advanced materials business grow this quarter. Thanks.
Yes so.
I'll, let Bob handle the second question is got more numbers on the pages and ideally in front of them, but relative to the recent enacted by Congress, we see some real upside for us and we actually were just talking about that before this call I think the big debate is when does it actually going to going to release, but.
Jacob mentioned earlier.
While we can see there.
There is some funding in there for DFAST, which will help our <unk> business and then.
Tied to the chips, both the upstream and downstream side of semiconductor Fabs play right into spectroscopy strength.
That we mentioned as well and Jacob perhaps you want to add a few of them.
Actually even though spectroscopy GC other big winners in the related to the chips Act.
We actually see across the board. It's both the mass spec business also the LC LC and LC Ms that Mike was mentioning and then of course, a lot of our consumables also and so we see a lot of opportunities here I think both both the Chip Act, but also the other build what's called mute.
Can you talk to Bill Andy inflation Bell here all of them are driving some of our technologies. So we see a lot of it.
<unk> is in that now it all comes down to timing here.
And the answer to your last question it was above 30%.
Yeah.
Okay Super Thank you guys.
Youre welcome Jack.
Thank you.
Next question is from the line of Elizabeth Garcia with UBS. Please proceed.
Hey, guys. Thanks, so much for taking the question.
Congrats sure no problem.
Thanks very much.
Yeah great.
No.
Maybe I just didn't catch it but I know there was the planned shutdown this quarter for now, but just thinking about kind of how we should think about kind of.
Closed this quarter and then maybe sequentially as we head into the next quarter.
And forecast.
Bob you and say I'm going to tag team on this one yes.
Yes, we had a planned shutdown this quarter.
Expect.
<unk> returned to strong growth in Q4.
For NASD.
700, <unk> you want to add some comments about what youre seeing in the market as well.
Yes, yes, thanks, Mike and thanks for the question listen it was a good quarter, we had the planned shutdown you already heard about.
To note that we are very pleased with the trend that we're seeing that increasingly these.
These therapeutic oligos that we're working on that the treatment modalities.
Beyond the more rare indications are expanding into diseases for larger populations. For example, you might have seen just recent news from long island that reported favorable results from their phase III study for <unk> and this is for patients with ATR for cardiomyopathy and is online now.
Island supplier for the API entities are and we're of course excited. We also think this is indicative of just generally the trend that we're starting to see in the promise of therapeutic Oligos and <unk>.
Our book of business remains strong as we go into the quarter and as we go into next year.
Yeah, Hey, Thanks, Sam.
Elaborate a little more a little bit on the routine I think it's also important and why we were shutting down right as both for routine maintenance, but also is a critical milestone in the construction on train B. So we tied the infrastructure together. So that's why we're speaking with confidence about our ability to to get revenue in 'twenty three.
Great and I guess, just one more for me I'm looking at kind of Biopharma.
Now the collaboration with agency.
Real time process monitoring.
Hill had announcements marks around downstream.
Great.
And just thoughts around the space and kind of the work Youre doing here.
Yes.
I'll make some high level comments, and then inland JV owner provide some specific as well. So we love this space and we've been putting a lot of our investments over the last several years, it's targeted at the Biopharma space and you see it reflected now in the growth rates and actually how we're shifting the mix of our pharma business. Both in the lab. It also plays outside the lab.
I know you got a lot of interesting things happening there, yes, thanks for that Mike and we are very interesting in the bio processing space, especially from the analytical instruments perspective, where we truly believe that the debt instruments will start to.
Move into the manufacturing historically, we have had in the small molecule space to QC QA QC sitting in a different lab and now we see the opportunity to bring Atlanta online LC and LC Ms technologies into the into the byproducts thing space itself on manufacturing space itself and hence we have decided and we have made collaborations will lead us in that.
Merck being one of them will be developing a cost based on our individual strengths new solutions to address that but we're looking at at the multiple partnerships in this space here and we are really bullish about that.
Thanks, so much.
You are quite welcome. Thank you.
The next question is from the line of Patrick Donnelly with Citi. Please proceed.
Hey, guys. Thanks for taking the questions Hey, Patrick.
Sure Mike maybe one for you Hey, how are you.
Maybe one for you just on China, specifically in terms of the linearity in the quarter can you just talk about I mean, it sounds like things clearly picked up as we went obviously on the supply side and you guys kind of got back online can you talk about the demand environment as well. Obviously you guys are the only ones who have kind of a full July in the quarter. So just curious what kind of ramp you saw throughout the quarter.
And then again as we work our way through August here I mean, it certainly seems like the order growth has been encouraging but maybe just talk about how things trended there throughout the quarter, yes, great going into this corner Great question, Yes, sure happy to do so I think it's a great question.
And a partial response in the two areas orders and revenue. So I think I would say the order the order intake throughout the quarter was there it was linear.
Linear smooth no no big Lumpiness back is what we saw in the second quarter as well. So now as you know the revenue side has been a different story, because the ability to get product in and out of China as well as produced in China was affected by the COVID-19.
Shutdowns.
Where we saw maybe a slower start first few weeks of Q3, but then the team's efforts really started paying off when when we were able to get back into a facility. So I think the ramp rate of revenue.
Looked at a little different profile.
Throughout the quarter and Bob I know, if you'd add anything yes, that's exactly right. I mean, if you think about the months in our quarters May was very light as we talked about we were ramping up and I think we exited may at like 25% capacity.
And then.
The team has really started kicking into gear as the COVID-19 restrictions started to ease.
And July was was very strong as they not only got the production up to full capacity, but then we're able to now.
Not only satisfy existing demand, but also some of that deferral and bring it in and they were really focused on meeting the expectations of our customers who wanted the product and as I mentioned earlier in my in my early comments, we had teams working on a lot of overtime working in the factories over the weekend. So really some <unk> that got us back on track.
Yes, it's encouraging to hear and then Bob maybe one for you just on the on the margin side, you talked about pricing few times on the call.
You just talk about I guess the flow through to the margin side, you basically said, it's offsetting some of the increasing costs, maybe just talk about the give and take on that front in terms of the pricing increases cost increases and how we should think about kind of that algorithm going forward on the margin piece.
Yes, I think if you looked at our.
150 basis points year on year. It was roughly 50 50 basis points in gross margin and then 100 basis points of leverage on the SG&A Opex side and I think if you looked at that.
There was some some productivity as I mentioned price probably would have kept things flat and then the other 50 basis points were a benefit of some productivity that the RFS team did and the volume.
That's the thing that really.
I think really helped drive.
A benefit in gross margin is just the amount of product that was able to be produced through the through the factories and so I think think about pricing is covering our costs and then it's.
Those incrementals around better than expected revenues drove.
The margin improvement.
On the gross margin side, what I would say is we continue to leverage the opex side too to drive our productivity.
As a company overall.
Helpful. Thank you guys.
Youre welcome.
Thank you.
The last question is from the line of Tim Daly with Wells Fargo. Please proceed.
Hi, everyone and thanks for the time.
Sure quickly I wanted to touch back on.
<unk> here so.
If we're just thinking about when we're past the <unk> build out things kind of normalize a bit youre starting to leverage those investments and upfront costs here, what the clean run rate margin profile to think about in that business.
I guess initially when we get past that capacity build out there.
Okay.
Tim that question brought a smile to Bob's space I'll, let I'll, let him answer that I would say very good I'll leave it at that above the company average right, yes, yes.
Alright, I can work with that.
Okay.
Just one here on capital allocation.
So another strong quarter of buybacks.
Just thinking about the go forward outlook, how should we.
The sizing this at our heads the $1 billion, you've already hit in 'twenty, two with a quarter left to go is that a good base for the out years, just kind of just general thoughts on the capital allocation hierarchy as some assets are probably getting a bit cheaper and more attractive here.
Yes, I mean, I think our methodology really hasnt changed and I think what we do is invest for growth first internally and then we look for value, creating M&A, but there isn't anything imminent. We're also not going to keep cash on the on the on the books and if I looked at historically.
We've <unk>.
Generally roughly 2% of earnings per share growth kind of below the line through.
Share repurchase and I think that Thats, probably a fair way to look at it going forward, but in terms of to be very clear our priorities are investing for growth internally and then M&A.
Before we would do.
Share repurchases and we're also committed to continuing to grow our dividend as well.
Alright, great. That's it from my end thank you.
Quite welcome.
There are no additional questions waiting at this time I will turn the call back over to you.
Pardon me for closing remarks.
Thanks, Anna and thanks, everyone for joining with that we would like to wrap up the call for today have a grid stress of the day.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Okay.