安捷倫 (A) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Agilent Technologies Second Quarter Earnings Conference Call. (Operator Instructions) And now I'd like to introduce you to the host for today's conference, Ruben Dirado, Director of Investor Relations. Please go ahead, sir.

Thank you, Gabriel, and welcome, everyone, to Agilent's Second Quarter Conference Call for Fiscal Year 2021. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A, after Bob and Mike's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group.

This presentation is being webcast live. The news release, investor presentation and information to supplement today's discussion along with a recording of this webcast are made available on our website at investor.agilent.com.

Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30.

We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike. Mike?

Thanks, Ruben, and thanks, everyone, for joining our call today. Before I get into detail -- into the quarterly details, I want to start by recognizing our Agilent India team. Despite the challenging COVID-19 situation, our India team is working closely with our customers to do what we can to help in this time of extreme need. In addition, our Agilent India customer support, finance, and IT teams have worked tirelessly to help us close out the second quarter and keep us moving forward. I could not be more proud of how the team has worked together in true One Agilent fashion. Our thoughts go out the entire Agilent India team and their families during this difficult time.

In Q2, the strong momentum in our business continues against the backdrop of a recovery market. The Agilent team delivered another outstanding quarter, exceeding our expectations. Both revenue and earnings are up sharply versus a solid Q2 last year when revenue and earnings per share were relatively flat. Our growth is broad-based across all business groups, markets and geographies. We also expanded margins, driving faster earnings per share growth.

Revenues for the quarter are $1.525 billion. This is up 23% on a reported basis and up 19% core. COVID-19-related revenues accounted for roughly 2% of overall revenues as expected and contributed about 1 point to our overall growth.

Our revenue growth is not a one quarter or easy compare story, but one of sustained above-market growth. For example, Our Q2 revenues are up more than 17% core from 2 years ago. Q2 operating margin of 23.9%; this is up 150 basis points. EPS of $0.97 is up 37% year-over-year.

Late in the quarter, we also welcomed the Resolution Bioscience team to Agilent to continue our investments in high-growth markets and bring in outstanding talent into Agilent. Like our recent acquisitions in cell analysis, Resolution Bioscience is an example of our Build and Buy growth strategy in action.

The Agilent story remains the same. It is a story of 1 team, outpacing the market to deliver strong broad-based growth in an environment of continuing market recovery.

Moving on to our end market highlights, we do strongly in all markets. Our growth is led by 29% growth in pharma and 22% in food. We are seeing improving growth in the chemical and energy market with 14% growth. We also posted low teens growth in diagnostics and over 20% growth in academia and government. Lastly, environmental forensics grew 8%. Bob will provide more end market detail later in his comments.

Geographically, the Americas led the way with 27% growth. Strength in China, Europe, and the rest of Asia continues with all growing in the mid-teens. The 13% growth in China is on top of a 4% growth last year when the business started to recover from the pandemic.

As we look at our performance by business group, the Life Sciences Applied Markets Group generated revenues of $674 million during the quarter. LSAG is up 28% on a reported basis and up 25% core off a 7% decline last year. LSAG's growth is broad-based across all end markets and geographies.

Our focus in investments in fast-growing end markets continues to pay off. The LSAG pharma business is very strong, growing 41% with strength in both biopharma and small molecule. From a product perspective, we saw strength in liquid chromatography and LC/MS along with continued growth in cell analysis.

During the quarter, cell analysis grew 34% with our BioTek business growing close to 40%. During the quarter, the LSAG team also contributed to our long-term company-wide focus on sustainability in advancing important ESG initiatives. LSAG announced several new products that have earned the highly respected accountability, consistency and transparency ACT label from My Green Lab. My Green Lab is a nonprofit organization dedicated to improving the sustainability of scientific research. LSAG products will also receive 2 Scientist Choice Awards, and now for the Select Science Virtual Analytical Summit.

Our cell analysis business during the quarter -- in our cell analysis business during the quarter, excuse me, we launched our Cytation 10 confocal imaging reader, a multifunctional automated system focused on research labs and core facilities looking for increased productivity. This product builds on the BioTek cell imaging leadership with the Cytation multimode reader and expands our reach in a strategic business. While still early, customer feedback has been extremely positive. We are also very pleased with the progress and trajectory of our cell analysis business overall and see a very positive future for this space.

The Agilent CrossLab group posted revenues of $536 million. This is up a reported 19% and up 15% on a core basis versus a 1% increase last year. ACG's growth is driven by demand for consumables and services across the portfolio as lab activity continues to increase for our customers. This is leading to more on-demand services and parts consumption.

Revenues from our contract business continued to drive strong growth due to the high level of contract renewals seen in the previous quarter. Our strong instrument placements and the increased installed base will benefit the ACG business going forward. At the same time, our digital investments continue to pay off with continued strong customer uptake in consumables and our digitally-enabled services offerings.

Our LSAG and ACG business has come together in the analytical lab. This is where we believe we are well positioned to continue driving above-market growth as we build on our market-leading portfolio, strong service organization and outstanding customer service.

For the Diagnostics and Genomics Group, revenues were $315 million, up 20% reported and up 16% core versus the 5% increase last year. Growth is broad-based led by our NASD oligo and genomics businesses. Demand for our NASD offerings remain strong and our capacity expansion plans for our high-growth NASD business remain on track.

We're very pleased with our acquisition of Resolution Bioscience during the quarter. With our liquid biopsy technology, Resolution Bioscience is a key player in a very exciting area of cancer diagnostics. We are very glad to have them on the Agilent team. I'm confident that as time goes on, you'll be hearing more and more from us on this business and its contributions.

I would now like to recap the second quarter and take a look forward. The strong momentum in our business continues. This is being driven by our relentless customer focus, the strength of our portfolio and the execution capability of the One Agilent team. Our Build and Buy growth strategy is delivering as intended with above-market growth. Over the last year, I've often said that Agilent is focused on coming out of the pandemic even stronger as a company. I believe you've seen the impact of this approach in our current results.

As we look ahead, we do so with a sense of both optimism and confidence. We are optimistic because of the continued market recovery and the strength of our portfolio. We are confident because we have the right team; customer-focused, operationally excellent and driven to win. As a result, we are once again raising our full year revenue and earnings guidance. Bob will share more details, but we are expecting a continuation of our excellent top line growth. We also expect to convert the strong top line into excellent earnings growth and cash generation.

During our investor event in December, we discussed our shareholder value creation model and our goals for increasing long-term growth and expanding margins. Six months into fiscal 2021, we are well on our way to achieving those objectives. Our Build and Buy growth strategy is delivering. The One Agilent team continues to demonstrate its execution prowess and strong drive to win. We raised the bar in customer service and continue to exceed customer expectations in providing industry-leading products and services. While we get to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence.

Thanks for being on the call today, and I look forward to your questions. I'll now hand the call off to Bob. Bob?

Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics. I'll then finish up with our updated outlook for the year and the third quarter. Unless otherwise noted, my remarks will focus on non-GAAP results.

Revenue for the second quarter was $1.525 billion, reflecting reported growth of 23%. Core revenue growth was 19%, while currency contributed just under 4 points of growth. We are very pleased with our second quarter results as we saw strong broad-based growth with all 3 business groups posting mid-teens growth or higher and all end markets growing strongly.

From an end market perspective, our focus on fast-growing markets is paying off. Pharma, our largest market, again led the way to delivering 29% growth. This is on top of growing 5% last year. Growth was led by cell analysis, LC and mass spec. These tools are delivering critical capabilities to our biopharma customers as they continue to make investments to develop new therapies and vaccines. Our biopharma business grew roughly 40% and represented over 35% of our pharma business in the quarter.

Our small molecule segment also has momentum, growing in the mid-20s in the quarter. Overall, we are well positioned within pharma and expect the pharma market to continue to be the strongest end market as we enter the second half of the year.

The food market continued its strong performance, growing 22%. We experienced strong growth across all regions and segments as we continue to see global investments across the entire food supply chain. And we were very pleased to see the non-COVID diagnostics businesses continue to improve throughout the quarter, growing 13% as routine doctor visits return closer to pre-pandemic levels.

We posted a very strong month in the diagnostics and clinical market as we came to anniversary the weak April we experienced in our large markets at the onset of the pandemic last year. And we exited the quarter with testing volumes at a run rate slightly higher than pre-pandemic levels.

The chemical and energy market continues to recover as we grew 14% off a decline of 10% last year. Our results were primarily driven by continued strength in the chemicals and materials markets. And in a positive sign, our order growth rates were ahead of revenues and finished the quarter strong, leading us to believe this trend will continue.

We also saw a nice recovery in the academia and government market as non-COVID-related labs resume operations in a strong funding environment. With the increase in activity, our business grew 21% against the weakest comparison of the year. We would expect the academia and government market to continue to recover throughout the rest of the year.

And lastly, the environmental and forensics market saw high single-digit growth driven by the Americas, services and consumables and atomic spectroscopy.

On a geographic basis, all regions grew, led by the Americas at 27%, while pharma and academia and government markets in Americas grew in the low 30% range and all markets grew at least 20%.

Europe experienced 16% growth led by food, academia and government and C&E. Those 3 markets all grew more than 20%. And as Mike noted, China grew 13% after growing 4% last year. This was driven by pharma growth in the high 30s. Our growth in orders outpaced revenue growth by mid-single digits during the quarter.

Now turning to the rest of the P&L. Second quarter gross margin was 55.4%, flat year-on-year despite a headwind of more than 30 basis points from currency. Our operating margin for the second quarter came in at 23.9%. Driven by volume, this is up a solid 150 basis points from last year even as we saw increased spending as activity ramped and we invest in the future. Strong top line growth, coupled with our operating leverage, helped deliver EPS of $0.97, up 37% versus last year. Our tax rate was 14.75%, and our share count was 307 million shares.

Now on to cash flow and the balance sheet. Our performance translated into very strong cash flows. We delivered $472 million in operating cash flow during the quarter, up more than 50% from last year. The strong cash flow has continued to help drive our balanced capital deployment strategy.

During the quarter, we returned $254 million to our shareholders, paying out $59 million in dividends and repurchasing 1.55 million shares for $195 million. And as Mike mentioned, we also continue to strategically invest in the business. We spent a net of $547 million to purchase Resolution Bioscience and invested $31 million in capital expenditures.

Year-to-date, we've returned $657 million to shareholders in the form of dividends and share repurchases while reinvesting in the business by spending $619 million on M&A and capital expenditures. And we ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward.

During the quarter, we raised $850 million in long-term debt at very favorable terms, redeemed $300 million that was maturing next year and reduced our ongoing interest expense. We ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 1x.

Now turning to the outlook for the full year and the third quarter. We see a great opportunity to build on our strong first half results. Looking forward, while the pandemic is still with us, we continue to see recovery in our end markets and have solid momentum on all of our businesses. As a result, we're again increasing our full year projections for both revenue and earnings per share. This reflects our strong Q2 results and increasing expectations for the second half of the year. We are also incorporating the Resolution Bioscience into our guidance.

For revenue, we are increasing our full year range to a range of $6.15 billion to $6.21 billion, up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% to 13%. Included is roughly 3 points of currency and about 0.5 point attributable to M&A.

This increased outlook also reflects continued growth in our end markets. We see sustained momentum in the second half of the year in pharma, food and environmental and forensic markets, and markets that we expect to continue to recover in the second half include the diagnostics and clinical, academia and government and C&E.

As Mike mentioned during our investor event in December, we provided a long-range plan of annual margin expansion in the range of 50 to 100 basis points. Our updated guidance for the year exceeds the top end of that range. And in addition, we're increasing our fiscal 2021 non-GAAP EPS to a range of $4.09 to $4.14 per share. This is growth of 25% to 26% for the year.

Now for the third fiscal quarter, we're expecting revenue to range from $1.51 billion to $1.54 billion, representing reported growth of 20% to 22% and core growth of 15% to 17.5%. And we expect third quarter non-GAAP EPS to be in the range of $0.97 to $0.99 per share with growth of 24% to 27%.

Now before opening the call for questions, I want to say we're extremely pleased with how we've started the first half of the year. We believe our strategies and our execution of driving the strong results we've achieved can put us in a great position to continue to drive strong results for the remainder of the year. With that, Ruben, back to you for Q&A.

Thanks, Bob. Gabriel, if you could please provide instructions for the Q&A.

(Operator Instructions) Your first question will come from Vijay Kumar of Evercore ISI.

Congrats on a pretty impressive offering here. Bob, maybe on -- I do want to start on pharma, BioTek. It accelerated sequentially. The number, it's really impressive. 35 large molecule plus 20 in the small molecule. So maybe talk about what is driving this? Maybe at a high level, if you can talk about what is your end market drilling? Is this a market acceleration? Are you guys gaining share? And how much of this is incremental contribution for ASP. I think the prior assumption was $200 million for the fiscal. Is it coming in about?

Yes. There's a lot to unpack there, Vijay. I'll take the congratulations, VJ, and I'll pass that. Yes. No. Yes, we're extremely pleased with the results that we've seen in the pharma business really across all 3 of our end business groups. I think it shows the investments and the great execution by the team that has been paying off over the last several years. And I think what you're seeing is not only a market recovery for sure, but I think the relevance of our portfolio across all 3 of our business groups in that business. And certainly, we are benefiting from the investments to expand capacity in new therapeutics across various end markets. But I also think the number of new products that we have launched in this space are really seeing a nice uptake.

And on NASD, to your point, I mean, we saw nice growth in NASD. It was in the high 30s, and we are still on track for that $200 million that you talked about and feel very good about that business going forward.

And Bob, my perspective on that, I think we're capturing share in a faster-growing market. So I think there's a combination of above expectations on market growth, but we're also getting more than our fair share of this market.

That's right.

That's helpful comments, Mike. I have one question on -- perhaps a more medium-term question. And I'm not asking for guidance, but I think the question on the group has been -- the comps are going to be pretty hard for some of these companies. Certainly, core diagnostics has been [a topic a bit.] I think you guys are one of the cleanest stories out here in the group, and again if I'm looking at this guide of high teens.

Perhaps talk about maybe broad strokes, what is sustainable? It looks like some of these trends, biopharma, share gains, et cetera, should be sustainable. Maybe some broad outline on that, how to think about the pluses and the minuses?

Bob, maybe if I can start with some comments. I think if there's been a positive on COVID, I think it's actually stimulating some increased levels of investments in some of these end markets. So we think that some of these growth rates we've seen from the market perspective are sustainable for a while. And you mentioned earlier, our story is a core business story. We've been very pleased that our team's been able to participate and have a role here to play in the fight against COVID-19. But our story really is all about what we're doing in terms of driving the core business

And our next question will come from Tycho Peterson of JPMorgan.

Want to actually start with an M&A question just on Resolution. They're obviously a CLIA lab, but have a distributed model as well. Can you just talk about those 2 businesses? I know the overall revenue contribution this year is like $50 million, $55 million. But how do you think about leveraging both the CLIA lab and the distributed model across your portfolio going forward?

Yes, Tycho, thanks for the question, and good afternoon. I'll make a few comments here and then pass it over to Sam. So my comment's going to be We're very excited about having the Resolution Bioscience team as part of Agilent. And Sam, I think, were even -- become even more excited now that we've had even a deeper look about what's been going on with the company. And I think you've just come back from a visit from -- with the team. So you've had a chance to have our -- I think it maybe perhaps your first face-to-face business trip in well over years. But with that lead in, why don't I pass it over to you and answer Tycho's question.

Yes. Thanks, Mike. Thanks for the question, Tycho. Yes, it was very exciting to finally get out and be real human beings again, and very exciting to see the enthusiasm of the team there and firsthand what is now part of our company.

And Tycho, the specific answer is both parts are important. Primary business today that we have in Resolution Bio is related to pharma services, very much akin to what we do in our traditional CDx business here at Agilent. It's working with pharma to better understand biomarkers and then to develop Companion Diagnostics, which we ultimately brought to market. There is some testing that's done in the CLIA lab, as you mentioned. There's a relationship with LabCorp. And that is something that we expect over time to ramp, both because of the testing for LabCorp and also testing that will result from actual Companion Diagnostics that are approved as part of the pharma work that we're doing. But both are important. But the substantial part of our revenue today in this year and even in the coming 18, 24 months will continue to be some pharma services revenue.

Yes. Yes, that's the focus.

Okay. And then on the quarter, 2 quick follow-ups. Mike, food up 22%. I know you talked about all regions and segments strong and sustained momentum. But we don't think about that market being 20-plus percent growth sustainably. So can you just talk about whether they're stockpiling? How much of this is China coming out of the overhaul there.

And then totally unrelated question on ACG operating margins, they were down about 90 bps. I'm just curious, is that reinvestment there?

Yes. Sure. You're close study on the numbers, I can see, Tycho. So thanks. 2 good questions. So no, while we're super pleased with the overall growth rate of food, and it's been a story here for a number of quarters, we don't expect it to be a 20% growth rate in '22 and years beyond, but we're expecting continued strength throughout this year, probably not at that same level. And Bob, I think it's really a -- clearly, China is part of that story. But in fact, when we look across the globe, it's been a -- we also saw strength in other geographies as well. And I don't have exactly...

Yes, that's right.

the geographic split, but it was a broad-based kind of story. But China leading the way being a key part, but not the only part of the story.

Yes. Absolutely, Tycho. To Mike's point, I think we see this kind of reverting back over time. But certainly, what we're seeing is increased investment and increased testing here really around the globe. And China was actually slightly lower than the overall core business. You saw a strong recovery both in Americas and Europe and the rest of Asia. And I think we're seeing some halo effect of COVID testing, kind of the surveillance testing in various aspects of China or of food testing. And so I think we feel very good about the business there. And then I think on your question...

And Bob, if I can just add 1 thing, additional thought on the Americas. Historically, that's been a lower growth rate for us in food. But with the inclusion of the cannabis testing market, we're getting a bit of a bump there as well.

Yes. Thanks, Mike. And I think what you're seeing in the ACG business, Tycho, is a combination of 2 things. One is some reinvestment. We continue to double down in areas like the digital investments to continue to increase our capabilities there. And then you did see some increased activity. And so as we -- we actually see this as a good thing. Our sales and field service engineers are traveling to more customers, and so we're seeing some increases there associated with just increased activity, which we saw on the on-demand side, but it also comes with some incremental cost. But long term, we feel very good about our ACG business and the continued ability to scale that business going forward.

Your next question will come from Doug Schenkel with Cowen.

Yes. I'm just doing some math here. And Bob, I'm trying to make a little more sense of your guidance. On one hand, you guided fiscal Q3 revenue expectations well above consensus. On the other hand, your guidance assumes essentially that revenue is going to move sideways, maybe even moved, I think, down sequentially in a quarter, which I think is normally a little bit better relative to fiscal Q2, if for no other reason. Then in China, 1 of your bigger markets, you don't have Lunar New Year in that period. And then if we kind of back into the Q4 implied number, there's, I think, something like 4% sequential growth and a pretty big implied moderation in year-over-year growth in the fourth quarter relative to the rest of the year, even accounting for comps. So there's all that. You got more M&A in there. And then I listened to what you're saying in your prepared remarks and look at the numbers, and it sure seems like you're crushing it with no slowdown. So am I missing anything here?

No, I think you're reading the numbers very well, Doug. And what I would say is, certainly, we feel very good about Q3. That's where we have most of our visibility. We still are in a pandemic, but we feel good about the recovery. And our -- I think still a little prudent in terms of our forecast going forward. We want to see how the continued rollout of the vaccines are around the world. And I think there isn't anything that -- in the near term, that we see is going to stop us from our momentum.

Okay. All right. That's helpful. And then again, doing math on the fly. So hopefully, I'm not messing up anything, but...

Your math on the fly is pretty good, Doug.

I'm doing okay so far? All right. So it seems like you're assuming operating investment grows 15% year-over-year in the second half or something like that, just backing into that from the top and bottom line. And that seems to be a couple of points higher than the revenue growth rate you're guiding to for the second half. So assuming I'm still doing this right, could you just talk about what some of the key areas of investment focus are? It seems like you're planning on maybe opportunistically pulling forward some investment even separate from the M&A. And then building off of that, if you are in a position to drive revenue upside relative to guidance, Do you think it's possible we could see flow through to the operating line and the bottom line along the lines of what we saw in the -- in the first half of the year?

Yes. The short answer on that. Let me take the question around investment. The biggest investment that we have going forward is really the addition of the Resolution Science business and continuing to invest behind the capabilities there, both from an R&D and development perspective as well as the channel. And so that does have an outsized investment relative to the second half versus the first half where we didn't really have that in here.

But we are continuing to invest in demand-driving activities. Some of those things like we just talked about in ACG around the digital aspects, but also building capabilities to continue that momentum going, whether it be marketing programs and other activities within our R&D pipeline. And I think the last question that you had is if we do have upside, will it drive the same kind of level of incrementals? And I would say the answer is yes.

Next question will come from Dan Leonard of Wells Fargo.

So first off, on the core analytical business, do you think you've seen any benefits from onshoring any of the order book or the revenue line as of yet?

Dan, thanks for that question. We've talked about it with you in prior quarters, and we still think it's an area of interest of our customers in terms of future investments, but nothing material yet. This is just core kind of reinvestment happening in the chemical and materials side of C&E. And as you heard in our prepared remarks, the order book actually was stronger than the revenue book. So pointing to a recovery of this segment, which in the past, have been fairly cautious about in terms of calling it. But the trends are positive now.

Okay. And Mike, I wanted to ask a follow-up on Resolution Bio. You kind of see future positive updates to come there. Can you talk about your stomach to invest in that business? And the reason I ask is it does seem like a driver of success in that space is a willingness to absorb losses for long periods of time. So can you talk about how you plan to invest in the business and how that fits your overall operating model?

Yes. I'm not sure I set the premise that you need to have huge operating losses to have this business. It depends on the type of play you're trying to make here. And Bob and Sam, you guys keep me honest here as well. But in a pharma services business model we have where we can leverage a lot of investments that we've already made around our ISC-based CDx business, we're not in the same division to increment perhaps maybe a start-up or somebody brand-new entering the space. So we have something to build from. So I think our expense structure may look -- perhaps look different than others in this space.

We do plan to invest aggressively on the R&D side as well kind of building out additional commercial relationships. But we think our plan has been to absorb it within the overall operating model. So there wasn't an asterisk when we put our long-term goals out and said no, well, without Res Bio. I think we believe that we can manage this in our overall operating model.

And I think given where we're starting from, which is we're not starting from 0 in this business, we have something to build from, from our acquisition a number of years ago from Dako, I think that puts us in a different -- perhaps a different place. Anything else to add?

Next question will come from Derik De Bruin of Bank of America.

I had the mute on. Sorry about that. So can you talk a little bit more about the LC/MS growth and just sort of what's going on there? And a couple of questions on that one. First of all, I've asked this question about are you seeing an accelerated replacement cycle in that market or any of your markets? Basically, are people feeling good about budget? They're spending a little bit more than they had? So that's a general question.

And I guess one of your competitors has been talking about some new LC platforms, particularly targeting the biologics area. I'm just sort of wondering what your sort of competitive response and product offerings are to sort of go against that? And then I've got one follow-up.

Yes. It's maybe their competitive response. But I'm going to pass it over to Jacob because we're in the conference room here, and I'm looking at him on the screen, and he's filing. He'd loved to be able to answer your question, Derik. I'm going to pass it over to you, Jacob.

Yes. Thanks, Mike. And Derik, this is a great question. So thanks for that. First of all, the -- what the growth you're seeing, both in our LC and LC/MS space is certainly not a coincidence. It's something we have invested in for quite some years. If you really think about our mass spec portfolio, we have really invested and innovated around the lines of robot [reliable] and the team. And we really see our customers, especially in our single and triple quad, have really taken off here in the last period of time. I think we heard before in the food space where we see a lot of upgrades to triple quad. But clearly, in the pharma and the biopharma space, we have doubled and tripled down on that. Really, we can see that there's great opportunities there.

So when you move from small molecules into large molecules, we're also seeing that the customer base is changing and the customers or the users of the mass spec is changing, and hence, they are looking for a different experience. And we have invested quite a lot into our software platforms, first of all, to level up to the expectation from a regulatory perspective, but also from a usability. So that's a big part of our success and what we see. And I truly believe there's a lot more to come in that area.

If you look at LC, investing into bio is a part of the game. We have had out our bio LC, high-end bio LC for quite a while now and it's doing very well. We can compete about against everyone in the space. And you will see us come out -- continue to come out with new products in that space. So we feel very good where we are, and we'll continue to invest to continue to keep -- take market share in this very important market for us.

And Derik, if I can just add on to it. I think it's fair to say, Jacob, we're seeing both market expansion but also some acceleration of replacement market as well, particularly in small molecule.

Absolutely.

Great. And then I'm going to ask you an unfair question, but what the hell. So -- and part of it goes like -- this is like all the tools companies have put up really strong results. They're coming off of easier comps, and that's great. But I think that everyone's sort of focused on the next fiscal year and the ability to grow earnings. I'm just sort of thought -- can you sort of generally share any thoughts on sort of earnings growth next year? And will it be into the double-digit range? Just sort of your general thoughts right now as people are going to start worrying about the tough comps. Not the COVID tough comps, the other core tough comps.

So Bob and I haven't actually compared notes on this, so I'll start with a few comments, and then I think we'll probably be end of line. Let's set potential U.S. tax reform aside, our model has been to be able to deliver double-digit EPS growth, and I'm not seeing a need to deviate from that in '22.

Agreed.

Your next question will come from Matt Sykes of Goldman Sachs.

Just maybe in the category of too early, but just looking at the growth rate that you guys have been showing in cell analysis, just wondering if you can kind of give us an idea of contribution from that, just given it's been integrated and growing at a pretty good clip. And then also just sort of what you're seeing in terms of customers? Is it largely new customers, deepening relationships with existing customers? Just a little more color on cell analysis.

Sure, Matt. I think I'll have Bob kind of give a view on potential overall size of the business and maybe pass to you, Jacob, for some more insights on the customer side.

Yes. I was going to say, Matt, we're extremely pleased with the performance really across all 3 of the major business groups within cell analysis really driving strong growth. And we are well on our way to continue to drive accelerated growth in those areas. And I would say the margin profile of that business is above the Agilent average.

And so I'll let Jacob actually talk about some of the areas where we continue to invest in new products such as the Cytation 10, but also some of the areas around customer acquisition and what we're doing in the marketplace.

Yes. Thanks. That's another great question. And as you can hear, we are super excited about the cell analysis business, particularly our focus on life cell analysis for immuno-oncology and immunology as a whole. And as Bob has also mentioned, we have made some quite some good investments into that space, particularly in also the imaging space, where we have recently come out with the Cytation 10. I think Bob also talked about that, which is a new confocal microscope. And what it really does is that it allows -- we have built it and built it out this way that you can get a relatively good entry-level microscope that really competes very well in the market, and then you can upgrade it and use all the other automation platform and configurations that we already have established in BioTek. So it's really a mix and match that our customers are really delighted about.

And our customer base, of course, we enjoy a very strong installed base from the BioTek acquisition, which we're now leveraging also for our ACEA and Seahorse, but we also see a much stronger push into the biopharma space where some of our businesses have been very exposed to the academia and government. We had a very clear focus areas to move in and that works very well. So we're very excited where we are, but I would say that the main growth comes from the biopharma space. But clearly now with academia and government coming back, that, of course, also thrust the growth.

Yes. And Matt, just one other thing to add to what Jacob was saying. I mean this is an area that if you look at over the last several years, we continue to invest both organically and inorganically. And I would say, given our success and the strength in that marketplace and the strength of our portfolio, those are areas where we continue to look to invest further.

Great. That's very helpful. And then just on Diagnostics. Your comment that you exited the quarter at a stronger run rate. I'm sure some of that's sort of catch-up demand from the COVID period. But just can you talk about the sustainability and your views on diagnostics throughout the rest of the year?

Yes, that's one where we're -- if we think about the opportunities, we're very, very pleased with kind of the progression of that business recovery throughout the course of the year. If you recall, last year, we actually grew in that business and then saw a strong falloff when the pandemic really hit. And we're expecting accelerated growth in Q3, but this is an area where we're watching to say, is there going to be -- how fast is that sustained recovery going?

But all signs right now are very positive from the standpoint of the recovery, not only in our business, but if you look at just the overall testing environment, continues to be very positive on non-COVID testing. So I think people are getting back into the doctors for wellness tests, certainly diagnostic tests like cancer diagnostics and so forth. And I think we're seeing the benefit of that going forward. And then couple that with the addition of the Res Bio business, and I think we've got a very compelling portfolio of opportunities to provide to our customers going forward.

(Operator Instructions) Your next question will come from Puneet Souda of SVB.

Bob, a question for you. First, what are you baking in for pricing expectations for the year? And I think the bigger question here is your ability to take pricing in the market in case there's a rise in raw material prices in line with expectations? And then I have a follow-up for Jacob and Sam.

Yes, that's a great question, Puneet. And what I would say is, first of all, just to shout out to our OFS team, our supply chain organization, who's just done a fantastic job of being able to manage the increased demands on increasingly fragile supply chain or logistics, I would say. And so they've just done a fantastic job of supporting our customers. And as you say, we are starting to see inflationary pressures in these areas. But I would say our contracts are more long term in nature, and the teams have been able to drive with the volume as well as continued discussions, good cost controls there at least in the near term. And on pricing, our pricing hasn't changed. We felt that we had modest price built into our plan. That's what we've seen through the first half of the year, and that's what we're assuming in the second half of the year. It depends on what group. But overall, we hadn't built in any expectation of significant price increase or decreases into our business.

Okay. That's helpful. And then a quick one for Sam first, and then another one for Jacob. Sam, if you could characterize what are your expectations for the pipeline in terms of MRD beyond therapy management for Resolution Biosciences? And if you could also talk a little bit about the regulatory framework. In past, you followed PD-L1 pharmDx assays into FDA -- have been to FDA approvals? How should we think about the new product launches? Are they going to follow a similar path?

And then for Jacob, briefly, could you update us briefly on the OpenLAB efforts and your position in pharma there? Obviously, with your competitor now being focused again on the -- very much on the core LC position, I'm wondering if you're seeing any changes in the market. And I totally appreciate your 1,100 and 1,200 LCs have done well, but I just wanted to get a sense of the OpenLAB. Congrats again on the quarter.

Thank you for the question on Resolution Bio...

I think that's a record -- how many questions in there.

A quick response for you. Our primary focus remains therapy selection. And that's where the programs that we have contracted and the continued significant interest we're seeing both from our existing pharma partners on the Agilent side as well as the resolution bio clientele that are coming into our pipeline as well. Now the fundamental technology is, we do believe, amenable to more applications, including minimum residual disease and monitoring. But once again, our primary focus remains through the selection.

Now in terms of the model, I think you asked about that. It is what we conveyed before, which is we believe is Agilent, we've got a capability set, which we've used for PD-L1, where we work specifically with pharma partners to work on companion diagnostics, meaning to develop, register and then commercialize those companion diagnostics as they come to market and are approved tied to specific indication-specific drugs. So that is our model. And ultimately, our vision is to have IVD kitted NGS solutions that are nearer to patients that are distributable. But of course, as you've heard even earlier, we've got a CLIA lab, and there's diagnostic testing that will happen along the way. And that's a little bit different than the PD-L1 model that we have today because that's the nature of NGS-based diagnostic testing. But our interest and long-term focus remains on IVD kitted diagnostic tests. Jacob, over to you.

Yes. Thank you. And let me just start by saying that informatics and OpenLAB is key to our strategy. So though we like to talk about our instruments. It's always connected or most connected with a very strong position in informatics, and we continue to invest in to OpenLAB. In fact, we believe that the digital lab, where we connect all our instruments into an ecosystem in a cloud setup, where you can also track your samples, and in the end, also connect into an e-commerce setup, is going to be the future. And with Agilent's broad portfolio, we can very quickly and we can very well do this. So I'm very excited about that, and we continue to invest. In fact, we have, over the last 2 months, decided to further invest into these areas to further accelerate our presence here.

Our next question will come from Brandon Couillard of Jefferies.

Bob or Mike, in terms of the chemical and energy business, could you break down instruments versus aftermarket in the quarter? I suspect this is probably the first quarter in a while that you've seen solid instrument growth. Just want to confirm that's the case. And then what's embedded in terms of the full year guide from that end market specifically?

Yes, Bob. I know that the instrument business was strong for us in C&E. I can't remember the actual relative ratios of -- Brandon, we're looking through our notes here right now to answer your question. And going into Q3, it's probably our easiest compare in C&E. We're still looking for that stack growth to kind of move up a bit on us. But Bob?

Yes. I was going to say, Brandon, to your point, of that 14% LSAG, the instrument business was slightly higher than that and LSAG was slightly lower than that, but both double-digit growth. And as we think about where we are going forward in terms of the guide for the third quarter and kind of going forward, our assumption for Q3 is somewhat similar to Q2. In terms of continued recovery off a weak base, it was down 10% again last Q3, and then we started seeing recovery. And so think about it, we're thinking about it in roughly the same kind of terms in Q3 that we saw in Q2.

I think right now, we're taking it quarter by quarter, Bob. But I think overall, we said it's trending to be more upside than downside.

That's right.

Got you. And then just 1 more. It doesn't sound like, based on your prepared remarks today, but to what extent, if at all, are you seeing any supply constraints, be it printed circuit boards or other market materials?

I just would echo what Bob mentioned earlier, our OFS team has done a spectacular job. So in our remarks you heard, we talked about some strong orders -- order growth higher in China and C&E, but that was not at all tied to any supply chain constraints. So we've been able to get product. We've been able to ship product. And listen, it's not easy, but the teams are finding a way to make it happen. So I think Bob, it's relatively immaterial at all to the quarter and we think it's manageable moving forward as well.

That's right.

Our next question will come from Patrick Donnelly of Citi.

Maybe just following up -- maybe following up on Brandon's question on C&E there. Can you just talk through what you're seeing there a bit more? Obviously, the order book growth is encouraging, coming in higher than revenue. Was that enough to give you confidence that this won't kind of turn quickly on you? I know you've noted historically, you've been a bit hesitant to bake in too much growth there. I mean this is among the most positive tone I've heard from you guys over the past couple of years. So can you just talk through that? And then I guess, was that segment the biggest piece of kind of the back half guidance raise feeling a bit more comfortable about the sustainability there?

Yes. Thanks, Patrick, and I'm glad you remember earlier comments because I always said, once the orders are in my book, I'll start to talk a little bit differently about it. And that's why you're getting a more positive tone.

I would say that we're still in the early phases of the transition. We feel really good about where things are on the chemical materials side of C&E. I would say we're starting to see quoting and some initial order activity on the refining side still relatively light compared to the materials and chemicals segment, which is, as you know, the larger part of that business for us.

But yes, we are -- I am much more positive. I think it's probably the first time in a long time that we've had this kind of view on the trends we're seeing in the C&E space. And yes, we had in prior quarters seen these PMIs, but I wanted to see it in the order book, and I started to see it this quarter.

Yes. And I would say, Patrick, to build on what Mike is saying is we still have -- we're taking it, as he said, kind of one quarter at a time, we built in some of that into Q3. And I would still say there's a bias to the upside in Q4.

Okay. That's helpful. And then just maybe on the M&A landscape, Bob, you mentioned the balance sheet health. Obviously, we saw the resolution deal. You guys touched on that a few times. Should we expect more deals of that nature? Are you still on the hunt for something a bit larger? Mike, maybe if you could talk a little bit about the pipeline activity, any segments you're focused on? And then Bob, if you're willing to talk about where the leverage could go, that would certainly be appreciated.

Yes. So I think our view on M&A remains the same. We see that as a key part of our -- what we've been terming our Build and Buy growth strategy. We've signaled that we'd be willing to do deals in the multiples of BioTek, which to date is our largest deal. And that's still an area of interest for us. We like the kind of growth accretive deals that you're seeing. We're getting great new teams like the Res Bio team, like the BioTek, ACEA. So we're going to maintain our focus on higher-growth segments. We like the areas we're going. We've been going after. We like cell analysis. We like the genomics liquid biopsy space, I think, informatics. So there's -- we have a number of areas that we're continuing to look for growth opportunities.

Again, we don't have to do deals to make our model work. But if we can find great new teams and great businesses to bring into the company, we're quite willing to do that. You just have to remain disciplined in terms of valuation expectations. There's a lot of frothiness in certain segments of the market, but we're going to stay where we've been successful in the private space where company founders often look to ask and say, listen, this will be a great home for my company, my team. But we like how you guys run your company. We like your culture. We like what you stand for in terms of growing the business for the long term. So we're going to stick to our model. It's been working for us, Bob. And I think maybe you can just...

Yes. Just quickly, we're not going to give a specific target around that other than to say that our intent is to maintain investment grade. And we ended the quarter kind of 1x net leverage, and that gives us plenty of flexibility to continue to invest and deals growth accretive deals, as Mike just talked about.

And your last question today will come from Dan Brennan of UBS.

This is Nathan on for Dan. Just a quick question. To what extent has your upgrade cycle been impacted by the pandemic? And now that we're kind of coming out of the pandemic, are you seeing any traction in the acceleration in the upgrade cycle on any of your instruments or end markets?

Yes. I think, to answer your question, I think when the pandemic hit, it really slowed down any kind of replacement cycle, particularly, I would say, in the C&E side of our business. And as we just commented, we're seeing positive indications that, that actually is now trending in a different direction. So I'd say it's mainly been in the C&E space tied to chromatogram and spectroscopy platforms.

Yes. I would say, Nathan, as Mike said, it's still early days, but all the trends are looking forward -- looking positive.

Great. And just if I could switch to pharma, you did mention that you're seeing share gains on top in market growth. Can you just elaborate what is driving share gains for you?

Well as -- if you think about our -- the combination of our LSAG and ACG businesses, where we come into the analytical lab, as Jacob mentioned earlier, and I haven't had a chance to have (inaudible) jump into the call yet, but they've been working very well together for multiple years. And you're seeing it by bringing innovative solutions to the market that have a differentiated value proposition from the competition, a superior service experience. And I think it's -- we've continued to build out our commercial reach as well. So I think it's been the combination of portfolio and then the workflow focus within that portfolio, building the service capability and then building out further commercial REIT. I think it's been a combination of all those factors leading us to do really well in our LSAG and ACG groups. But -- and then obviously, we talked earlier about the play in cell analysis, which is a new addition to the company in biopharma and then our NASD play in Sam's business.

So I think it's been a combination of all those factors. So that's why we keep you using the word broad-based growth because you're seeing it in all parts of the businesses. So we feel really good about the results from the strategy we were working on for a while.

And this concludes today's conference call. Thank you, everyone, for joining us. You may now disconnect.