Earnings Call Transcript - A Q2 2022

Operator, Moderator

Good afternoon and thank you for attending Agilent Technologies Inc.'s Q2 2022 Earnings Conference Call. My name is Selena, and I will be your moderator. All lines will be muted during the presentation, with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Parmeet Ahuja, Vice President of Investor Relations. Please go ahead.

Parmeet Ahuja, Vice President of Investor Relations

Thank you, Selena, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Sciences and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30th. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our Company's consolidated financial statements. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. 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 McMullen, President and CEO

Thanks Parmeet, and thanks to everyone for joining our call today. In Q2, the Agilent team again demonstrated the resilience and strength of our business model. We delivered core revenue growth in line with our forecast, expanded operating margins, and exceeded our EPS expectations. We did this while navigating a dynamic macro environment, including the conflict in Ukraine and COVID-related lockdowns in China. Our Q2 revenues are $1.61 billion. This is up 7% core and is on top of growing 19% in Q2 a year ago. Order performance was even stronger growing double digits on a core basis. Second quarter operating margins at 25.3% continued to expand, up 140 basis points from last year. Earnings per share of $1.13 are up 16%. We achieved these results despite the COVID-related lockdowns that closed our operations in Shanghai, starting in late March and continuing through the entire month of April. We estimate that this is roughly a 350-basis point headwind to our core revenue growth for the quarter. As Bob will indicate when he takes you through the details, this business is not lost and is expected to be recovered through the rest of the calendar year. Most importantly, our team in China is safe, and we restarted limited operations in May at our GC factory and logistics center in Shanghai. From an end-market perspective, the pharma and chemical and energy markets again led the way for us. Our pharma business, Agilent’s largest market, grew 13%, led by biopharma growing high 20s. This represents our seventh consecutive quarter of double-digit growth in the pharma market. It also builds on top of a stellar 29% growth rate last year. The momentum in our chemical and energy business also continued this quarter, delivering 9% growth in line with expectations and overcoming the shutdown of our primary GC production facility in Shanghai and the conflict in Ukraine. Growth was driven by advanced materials and chemicals. On a geographic basis, the Americas again led the way with 13% growth built on top of 27% growth a year ago. Europe also performed well with growth coming in at 7% following 16% growth last year. China revenues were on track with our expectations through March, but we exited the quarter down 3% given the COVID-related lockdowns. While revenues were affected by the temporary shutdowns in the quarter, overall demand in China remains very robust. In fact, China was the fastest growing region in Q2 from an order perspective, up about 20%. We remain very confident about the ongoing strength of our business in China. Looking at performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $896 million, an increase of 4% on a core basis. Given our manufacturing footprint and relative strength in China, LSAG was disproportionately impacted by the COVID-related shutdowns there. To provide some additional perspective, all major product lines, excluding GC related products, grew solidly in the quarter, led by strong performance in our cell analysis business growing in the mid-teens. Orders for LC and LC/MS continued to be strong. Orders grew mid-20s globally with particularly high adoption of our two new Bio-LC products. On the LC/MS front, we look forward to announcing several exciting new offerings at the upcoming ASMS conference that will expand our portfolio. Our value proposition continues to resonate with our customers and LSAG exited the quarter with a record backlog. The Agilent CrossLab Group posted services revenues of $353 million. This is up 10% core. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education, and informatic enterprise services. The scale of our ACG business and breadth of portfolio continued to drive growth and margin expansion even in the face of inflationary pressures. Q2 marked the sixth straight quarter we’ve delivered growth across all markets and regions. The Diagnostics and Genomics Group delivered revenue of $358 million, up 15% core versus 16% last year. Our excellent growth was led by NASD and genomics. The NASD team delivered yet another strong quarter, generating record revenue and profitability. During the quarter, I had a chance to visit our team in Colorado and see firsthand the excellent progress that’s being made meeting current customer needs and also the work underway in continuing to build for future growth with our Train B expansion. We remain extremely bullish about NASD’s future and with Train B coming online in 2023, we’re adding yet another $150 million plus in capacity. Looking across the company, our One Agilent approach and focus on our customers has never been stronger. During the quarter, we were ranked number one in our industry and number two overall in customer satisfaction in The Management 250 ranking, developed by the Drucker Institute. In addition, the new Agilent Commercial organization is already resonating well and delivering successfully for our customers. Agilent’s Q2 results are yet another proof point for how we build a resilient company that can quickly adjust to a changing environment and still post strong results. Given our results to date, along with our backlog and continued order strength, we are again raising our full year core revenue growth and EPS guidance. For the year, we are now expecting 8% to 9% core revenue growth and EPS of $4.86 to $4.93. Bob will provide more detail on our Q3 outlook along with more information on what we expect for the rest of the year. After Bob’s comments and before we take your questions, I will be rejoining the call for some concluding remarks. Thank you for being on the call today, and now I will hand the call off to Bob.

Bob McMahon, Senior Vice President and CFO

Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our guidance for the third quarter and the fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted solid topline results in Q2 while overcoming some difficult macro challenges in the business environment. Revenue was $1.61 billion, up a reported 5.4%. In the current quarter, currency was a headwind of 2.1 points while M&A added 20 basis points of growth. Core growth was up 7.3%, in line with expectations despite the COVID-related lockdowns in China, which primarily affected us in April. We estimate the lockdowns deferred $50 million to $55 million of revenue into future quarters, impacting growth in Q2 by roughly 350 basis points. In addition, COVID testing-related revenues were roughly a one-point headwind in the quarter. Our largest market, pharma, grew 13% during the quarter, on top of 29% growth last year. Biopharma continued to be the main driver of results, growing 27% year-on-year, led by NASD. Investments in R&D programs and demand for instrumentation, consumables and critical components remained strong. Pharma represented 37% of our overall revenues this quarter. To put that in perspective, in Q2 2019, effectively one year before the pandemic started, pharma represented just 30% of our business. This not only highlights the strength and resilience of this market, but it also demonstrates how our innovation and investments in higher growth markets continue to pay off. Chemical and energy continued its strong trend of positive results, growing 9% during the quarter despite the impact of the COVID-related lockdowns in China and the conflict in Ukraine. Results were led by strong double-digit growth in advanced materials and specialty chemicals. We expect strong demand to continue in these areas, particularly in semiconductors and battery and clean energy technologies as industry-wide capacity expands. Diagnostics and clinical grew 5% on top of 13% growth last year as year-on-year declines in COVID-related revenues and the temporary shutdowns in China muted our results. The academia and government market was a nice surprise for us, growing 5% in Q2 on top of 21% growth last year. We saw an increase in spending in this market as more university labs opened up and students returned to on-campus learning. In addition, sales activity and the funding environment continues to be healthy. In the food segment, we saw growth across all regions except for China due to the shutdowns. The higher concentration of food business in China drove the food segment to decline low single digits against a very strong comparison of 22% growth last year. And rounding out our end-markets, environmental and forensics grew 1% versus an 8% growth last year. On a geographic basis, the Americas grew 13%, Europe grew 7%, Asia, excluding China grew 8%, while China declined 3% in the quarter as the lockdowns affected our manufacturing and logistics operations for over a month. Regarding China, I’d like to provide some additional detail on how the quarter evolved and how we expect to see the recovery progress. First, as Mike said, demand remains strong with the order growth of about 20%, despite the temporary COVID lockdowns. Second, our business in China was tracking very well with our expectations through late March when production and our main logistics hub in Shanghai were shut down and remained closed throughout April. We were able to partially reduce the impact of the lockdown by shifting production to other factories where possible and adjusting the shipping routes into and out of China. We expect the $50 million to $55 million in revenue to be recovered throughout the rest of the calendar year, so it is deferred, not lost. In terms of phasing, we expect to continue to ramp our operations and anticipate modest recovery of the Q2 impact in Q3. We expect the majority of the recovery to occur in fiscal Q4 with some spillover into November and December, which is our first fiscal quarter of 2023. This phasing is baked into our updated guidance. Now turning to the P&L. The team continues to execute at a very high level. Second quarter gross margin was 55.7%, up 30 basis points from a year ago as pricing actions and productivity helped offset inflationary pressures tied to ongoing supply chain constraints and higher logistics costs. Operating expense leverage and strong cost management helped drive very healthy incremental improvements as we delivered an operating margin of 25.3%, up 140 basis points from last year. Our tax rate for the quarter was 50 basis points better than forecast, helping us deliver earnings per share of $1.13, up 16% versus last year, and exceeding our expectations. Looking at cash flow and our balance sheet, we generated operating cash flow of $283 million in the quarter while investing in $64 million in capital expenditures during Q2, with the year-on-year increase primarily related to the NASD expansion. Cash flow in the quarter was impacted by the transitory impact of COVID-related lockdowns in China as well as increased inventory to fulfill strong demand in a challenging supply chain and logistics environment, as expected. We are still on track to deliver our cash flow forecast for the year. During the quarter, we again took advantage of market volatility to repurchase $234 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $297 million to shareholders. Our balance sheet continues to be healthy with a net leverage ratio of 0.9 times. And earlier this month, we refinanced $600 million in senior notes opportunistically, and now have no long-term debt maturing until 2025. As we stated last quarter, our approach given current market conditions is to continue to be aggressive in deploying our capital. Given our strong balance sheet and confidence in the future, we intend to deploy another $250 million in opportunistic share repurchases in Q3 while continuing to actively look at M&A opportunities. Now, let’s move to our improved full year guidance and our outlook for the third quarter. Given the strong business performance in the first half of the year and order backlog, we are raising our full year core revenue growth to an expected range of 8% to 9%, up a full point from our previous guide. This core revenue takes into account the recovery phasing in China, as well as a $35 million, or 55 basis-point headwind due to the conflict in Ukraine. While we’ve increased our core growth expectations, the dollar has again strengthened considerably since our last guide, resulting in estimated currency headwinds of $170 million for the year, up $60 million since our last guide. And the impact of M&A remains unchanged. This results in us maintaining our full year reported revenue guidance range of $6.67 billion to $6.73 billion for the full year. We have also increased our EPS guidance for the full year to $4.86 to $4.93 per share. This is up from the previous range of $4.80 to $4.90 per share, and now represents 12% to 14% growth versus fiscal year 2021. For Q3, we’re expecting revenue to range from $1.625 billion to $1.650 billion. This represents core growth between 7% and 9%. We expect operations in China to ramp and be fully operational before the end of the quarter and continue to accelerate into Q4. Given the strengthening of the dollar, exchange rates are expected to have a negative impact of about 4.7 points on the reported growth in the quarter. Closing out our guidance, in Q3 non-GAAP EPS is expected to be in the range of $1.20 to $1.22, up 9% to 11% versus the prior year. The Agilent team once again performed extremely well in Q2 under some very challenging circumstances. At the same time, our business remains strong, and I’m confident we will continue to deliver strong results in Q3 and through the rest of the year. With that, Mike, I will turn it over to you for some concluding comments.

Mike McMullen, President and CEO

Thanks Bob. Before we take your questions, I would like to share some thoughts with you on the current environment. As you know, we’re living in very dynamic times. However, our end markets remain strong. Our build and buy growth strategy is working. What is also very clear is the ability of the Agilent team to continue to deliver in a challenging external environment. We have built a resourceful, quick-moving team and a resilient business model that has shown again and again, time after time, that we can successfully address any challenges or obstacles that come our way. We delivered inline growth, increased margins by 140 basis points and exceeded our EPS expectations during a time of rapidly growing inflation, continued supply chain challenges and the effects of a COVID-related lockdown in a key market. In times like this, our customers want to work with people and companies they can rely on. This works to our advantage, and I remain confident in our growth strategy continuing to deliver, and in the power of the unstoppable One Agilent team. Our growth drivers remain intact, and our business prospects remain strong now, and into the future. Thank you. And now, back to Parmeet as we take your questions.

Parmeet Ahuja, Vice President of Investor Relations

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

Operator, Moderator

The first question comes from Vijay Kumar with Evercore ISI.

Vijay Kumar, Analyst

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

Mike McMullen, President and CEO

Yes. Vijay, thanks for the comments. We're really pleased with the performance given all the teams we're dealing with in the external environment. So, we're going to tag team the response here with myself and Jacob. So, the story is our instrument business is doing very well. And in the call, we highlighted a few areas where we received outstanding order growth. We talked about the cell analysis business, LC and LC/MS, particularly on the bio side, and I'll have Jacob add some specifics. And absolutely, as I tried to pull out in remarks, I think Jacob's business was disproportionately impacted by the shutdowns that we experienced of a COVID nature in China. So, we're very bullish about the strength of our LSAG business, exiting the quarter with record, record backlog. And Jacob, why don't you talk about what's been going on and why you're excited about the future?

Jacob Thaysen, President of Life Sciences and Applied Markets Group

Yes, the quarter was indeed challenging due to the Shanghai lockdown. However, we are still experiencing strong order growth, especially in our LC and LC/MS business, which Mike mentioned earlier, along with some of the new product introductions from about a year ago in the LC sector. Coupled with our solid position in mass spectrometry, we’re seeing significant growth in that area. While GC and GC/MS faced challenges in China this quarter due to current conditions, overall orders remain robust, which is reassuring. Additionally, we’re seeing strong performance in our spectroscopy business, particularly in material science, leading to solid overall performance across the portfolio.

Bob McMahon, Senior Vice President and CFO

Yes. And hey, Vijay, this is Bob. To clarify the impact we mention as disproportionate, approximately 80 to 85% of the effect from the COVID lockdowns was related to LSAG.

Vijay Kumar, Analyst

That's helpful, Bob. Can you provide an update on the impact of lockdowns in China? The guidance suggests that $50 million to $75 million will return in the second half. What gives you confidence that this will happen? Also, what is the current status in China? Have the markets reopened? Is your production facility operational? I am aware of your GC manufacturing facility, and there have been concerns about potential impacts on GC shipments from China.

Mike McMullen, President and CEO

Vijay, I'll start the response here. This relates to our confidence in the outlook. We are operational again in Shanghai, though at limited capacity. Our logistics and production facilities are now functioning at 25%. We've also begun some limited international and domestic shipments, so product is beginning to flow. We believe that the lockdown measures will start to ease in the coming weeks, and we expect to be fully operational by the end of the quarter. However, we want to remain cautious, which is why Bob will outline a relatively modest recovery assumption for Q2. I also want to take a moment to recognize our team in Shanghai, who are working at the factory, living there voluntarily. My confidence in the outlook is strengthened by knowing what this team is capable of.

Bob McMahon, Senior Vice President and CFO

Yes. And to build on that point, Vijay, a couple of thoughts. I mean, we've watched the order backlog very closely. We haven't seen any cancellations associated with this. And as we're ramping up the factory in Shanghai, we also have dual manufacturing capabilities, and we continue to ramp up the factory here in the United States to be able to also provide GC and GC/MS. So, we are expecting, as Mike said, a very modest recovery of that $50 million to $55 million in Q3, the majority of it being in Q4 and then spilling over a little into November and December, but given the backlog and the fact that we haven't seen any of those orders canceled, we feel like we definitely will get the product back. And if we go back to what happened in the initial phases of COVID, China dropped down pretty substantially and then came back fairly quickly, so.

Operator, Moderator

The next question comes from Matt Sykes with Goldman Sachs.

Matt Sykes, Analyst

Congrats on a quarter in a tough environment. Maybe kind of following up on the instrument question, just dig a little bit more into C&E. Another good quarter there. And a couple of things you called out in terms of advanced materials, battery, semis. I mean, I think traditionally this has been looked at as sort of a highly cyclical sector, but when you're seeing sort of the secular growth drivers within those subsegments, it just seems less cyclical. Could you maybe kind of help us size that sort of cyclicality versus non-cyclicality within C&E? And what could be actually far more durable from an instrument growth standpoint in that segment over the course of this year and into next year?

Mike McMullen, President and CEO

I'm going to start with this point and then collaborate again with Jacob and Bob. We completely agree with your question's premise. You might remember from our earlier presentations that there are aspects of the C&E segment that aren't fully recognized, driven by capacity expansion for supply chain issues, a shift to new materials, and investments in semiconductor batteries. Just look at what's happening in the entire automobile industry; we are part of that trend. It's also essential to remind everyone about our three segments. Advanced materials grew in the mid-20s for us, while the chemical side saw growth in the high teens. We experienced a downturn in the energy segment, which has historically been more cyclical. However, it's important to remember that this segment accounts for less than 3% of Agilent's total revenues. I'll now pass it over to Bob and Jacob to provide some insights on the relative sizes of those segments.

Jacob Thaysen, President of Life Sciences and Applied Markets Group

Yes. I can also mention that Agilent has actually historically been very strong in material science. So, we have a very strong market presence both in the semicon industry, especially with our IC-PMS portfolio, but also with the GC, and generally speaking, in materials, in batteries and other renewable energy with our GC business. So I think we see a great potential in that.

Bob McMahon, Senior Vice President and CFO

Yes. There are a few things to note. Energy was down, and that sector was particularly affected in China. This was a temporary situation. Additionally, China also influenced the chemicals and advanced materials sectors, which still experienced growth. This highlights the strength of those markets. It's worth mentioning that China is our second-largest market, and we have a significant presence there. We're just at the beginning of this opportunity. For instance, considering the demand for lithium-ion batteries, we have only tapped into a small fraction of the required capacity. These markets are likely worth over $100 million today and have significant potential for growth, particularly with automotive developments. This presents a substantial opportunity for us moving forward, and we are clearly positioned as the leader in this area.

Matt Sykes, Analyst

Great. Thanks very much. I appreciate the color. And then just secondly, on the pricing side. Bob, you mentioned that some of the offsets on the gross margin pressure coming from pricing. Can you just kind of remind us of what your expectations are for pricing this year? And then, in terms of some of the actions you did last year, how quickly are you realizing some of those higher prices that you put in place?

Bob McMahon, Senior Vice President and CFO

Yes, that's a great question. We are pleased with how our value proposition is being recognized in the market, allowing for higher prices than at the start of the year. If you remember, we mentioned a roughly 1-point year-on-year price realization. In Q1, we exceeded that expectation, and in Q2, we accelerated further. Most of the pricing we are realizing now stems from actions we took mainly in the fall of last year, and we are starting to see the effects of actions from January of this year due to the strength of our backlog. Overall, we feel optimistic about exceeding the 1% mark in our new guidance. This was particularly true in Q2, which was necessary given our rising costs, especially in logistics due to oil prices and shipping expenses. However, we feel confident in our ability to manage these challenges across our entire portfolio.

Mike McMullen, President and CEO

Bob, I think it's also very well. We feel really pleased about the net price realization that's occurred. We also continue to drive productivity as well. So, it's a combination of pricing and productivity improvements we're having across the Company.

Operator, Moderator

The next question comes from Brandon Couillard with Jefferies.

Brandon Couillard, Analyst

Mike, biotech end market, very strong again in the second quarter. Just talk about sustainability of trends there and perhaps the impact of NASD specifically on the biotech segment growth.

Mike McMullen, President and CEO

Yes. So, I'll have you call that out, Bob. I know that's in our notes. And I think what you'll hear from Bob is it's a broad-based biopharma story with really strong growth in both sides of the market, the analytical lab and NASD. We remain quite bullish on the outlook in biopharma. In fact, we continue to actually gain new business. And actually, I'll have Padraig talk about in a second. We've actually expanded the number of accounts we're serving in the biopharma space. So we're feeling really good about the long-term growth aspects of biopharma as well as the impact it's having on the business right now. You heard me crow about a few of our growth numbers in the prepared remarks. And Bob, before I pass it over to Padraig for some comments, can you remind me what it was?

Bob McMahon, Senior Vice President and CFO

Yes. Our biopharma sector continues to represent a larger share of the overall pharmaceutical market. We are not only growing at a faster rate in the pharmaceutical space, but this market is also expanding significantly. It grew by 27%, and even without NASD, that figure remains at 19%. This indicates that we are experiencing strong growth, and our backlog has increased. I feel very positive about our offerings, both in instrumentation and across our entire product and solution portfolio.

Mike McMullen, President and CEO

Yes. Thanks, Bob. And I thought given the start of this fiscal year of our one commercial organization, maybe Padraig, you think some comments of how us helping to gain further penetration in the biopharma space.

Padraig McDonnell, President of Agilent CrossLab Group

Yes, Mike, we are definitely placing a greater emphasis on the smaller biopharma accounts along with the larger ones. Our strong focus on application support in biopharma is enhancing our attach rate in that sector. This is positively impacting the trend of our instruments alongside that attach rate. Overall, I believe that both our services and consumer offerings have been significant advantages, allowing us greater access to biopharma accounts.

Brandon Couillard, Analyst

Got you. That's helpful. And then, the DGG gross margin at 56% are quite strong. Is that a mix dynamic or pricing? And should we think about mid-50s as sustainable for this business going forward now?

Mike McMullen, President and CEO

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

Bob McMahon, Senior Vice President and CFO

Yes, we definitely saw significant benefits from an exceptionally strong performance in that area. Sam and the team have been effective at enhancing productivity within the business. Although we experienced a favorable mix, I would be cautious about relying on that figure for the third and fourth quarters. As you may remember, we are beginning to incur start-up costs for Train B at our NASD facility in the latter half of the year, which will impact our gross margin. However, this investment will pay off in 2023 with the additional capacity exceeding $150 million. Thus, while the team has indeed benefited from the mix and is focused on productivity, we might encounter some pressure in the second half of the year due to those start-up costs.

Sam Raha, President of Diagnostics and Genomics Group

Bob, I completely agree with everything you said. It is about the mix and volume. Additionally, I want to emphasize that we have benefited from pricing. We hold some leadership positions in the market that we are actively pursuing. Although we expect continued good performance, as you mentioned, the outlook will be a bit more challenging with NASD Train B launching.

Operator, Moderator

The next question comes from Puneet Souda with SVB Securities.

Puneet Souda, Analyst

So, first, we see strong performance in pharmaceuticals, particularly in North America. Is there any reason we shouldn't expect to see this continue in the second half as well? The question focuses on instrumentation, noting that competitors are experiencing very high growth rates in U.S. pharmaceuticals. I'm curious if there’s any indication of an accelerated demand in this area and if we should anticipate sustained growth when considering North America and U.S. pharmaceuticals.

Mike McMullen, President and CEO

Puneet, happy to answer that question. We're seeing the same phenomena. Pharma remains very, very strong in the U.S., and our outlook remains very bullish for the remainder of this year.

Bob McMahon, Senior Vice President and CFO

Our Americas business in pharma has grown at double the rate of the overall pharma market. While we anticipate some comparisons in NASD that may not show as strong a performance due to capacity ramping up, Train B will help us address this. However, we are still experiencing excellent performance, especially in instrumentation, which has been particularly noteworthy.

Puneet Souda, Analyst

Okay, great. And just briefly on the smaller segment of academic and government, that performed well this quarter. Could you elaborate on what's driving that? What elements of growth should we expect to see throughout the year? Thank you.

Mike McMullen, President and CEO

Yes, this is Mike. That was a pleasant surprise for us. We came off a 21% comparison and still achieved 5% growth. We are witnessing some positive trends. The funding environment appears to be quite robust. Even though we faced some COVID-related challenges in the academia segment in China, that area showed strength as well. We believe the funding environment remains healthy. The challenges posed by COVID over the past few years have underscored the significance of funding in these areas. Additionally, we are observing a return to labs and increased access for students and others engaged in lab activities. Thus, it's a combination of a strong funding environment and improved lab access.

Bob McMahon, Senior Vice President and CFO

Yes. I believe, Puneet, to expand on what Mike mentioned, if you refer back to our first quarter results, January marked the beginning of that quarter and coincided with the peak of the Omicron wave. We anticipated an uptick in activity starting in February, particularly as children returned to school. This trend persisted throughout our second quarter, demonstrating widespread improvement. Notably, our cell analysis business experienced one of the strongest recoveries following the initial Omicron wave, highlighting the value proposition we offer in that area.

Operator, Moderator

The next question comes from Derik De Bruin with Bank of America.

Derik De Bruin, Analyst

Hey, it's Derik. Thanks for taking my questions. I wanted to follow up on some points Puneet raised. We’ve been getting numerous inquiries from investors about whether the trends we're seeing in the instrumentation sector represent a pull-forward of budget allocations from earlier in the year, as customers may be concerned about potential delays in product availability and supply chains. Are you noticing any unusual order patterns? Or could there still be some catch-up orders from 2021 that were not shipped this year? The instrumentation numbers have been exceptionally strong across the group.

Mike McMullen, President and CEO

No, we haven't seen any indication of that. The supply chain challenges remain stable, neither improving nor worsening. Therefore, there’s nothing from a supply chain perspective that encourages customers to rush their orders. We're not observing that trend. However, we do believe that some markets, particularly pharma and biopharma, have experienced an increase in their inherent long-term growth rate. In fact, we think some of the challenges posed by COVID that I mentioned earlier have contributed to a more favorable funding environment in certain areas of our marketplace. Bob, do you have any thoughts on this as well?

Bob McMahon, Senior Vice President and CFO

Yes. From the perspective of order growth, it only matters if the product is actually delivered. Looking at the situation, the order growth is increasing at a rate faster than revenue, which indicates that there isn't necessarily a pull-forward but rather strong demand.

Derik De Bruin, Analyst

Got it. So, no sign of over-ordering, for example, that you can see? Okay. And I guess another question...

Bob McMahon, Senior Vice President and CFO

Yes, just one more thing quickly on that. We continue to evaluate the situation not only in China but also on a regional and global scale. The order cancellations are lower year-on-year compared to last year, and last year's rates were also lower than the previous year. So, we are observing a very minimal amount of cancellations. It seems that some customers are placing orders with multiple vendors, and the vendor that can deliver first gets the business. This trend appears to be consistent across the industry, as we are experiencing very strong demand.

Operator, Moderator

The next question comes from Patrick Donnelly with Citi.

Patrick Donnelly, Analyst

Bob, following up on that point, I wanted to discuss the guidance. You are usually quite conservative, so it’s great to see that 100 basis point increase for the year. Can you explain what led to this confidence? It suggests a strong ramp in the fourth quarter. Is this related to the order growth and China’s recovery, as you mentioned? I’d appreciate it if you could elaborate on the confidence level, especially considering your typically conservative approach. That 100 basis point increase following a steady quarter raises some questions, so I’d love to hear more about it. Thank you.

Bob McMahon, Senior Vice President and CFO

Yes. No, you're spot on, Patrick. You hit on the two key points. One is the continued strength in our order book globally, where our orders continue to outpace our revenue. And then you build on that fact we have a strong conviction that the revenue deferred from China we will recover. And so, you see that in both, Q3 and really Q4. You see that step-up because of the strength. I would say our visibility remains high, particularly in the instrument side of the business with record backlogs across all of our technology stacks.

Patrick Donnelly, Analyst

Okay, great. And then, Mike, maybe following up on one of the earlier questions on cyclicality.

Mike McMullen, President and CEO

Sure.

Patrick Donnelly, Analyst

We get a lot of questions about recession sensitivity and thoughts about if there is a recession where the companies look like. You guys have obviously transformed the portfolio quite a bit since the last time we saw a real pullback. Can you just talk about the resiliency of the portfolio broadly, how you would think about, what this would look like into a recession? And then again, maybe just expand a little bit on what's cyclical, what's not across the entire portfolio there. And then similarly, Bob, just the levers on the cost side, if things were to slow.

Mike McMullen, President and CEO

I will begin with a few opening remarks. Bob has been developing a helpful model and has some slides to provide more detailed insights. It’s essential to emphasize the concept of resiliency in our discussion because Agilent's business model and portfolio are significantly different from what we experienced during previous recessions. For instance, our service business has just achieved another 10% core revenue growth, and over 10% of our total revenue is now generated from service contracts. Additionally, our consumables and NASD businesses are performing well, reflecting the changes we’ve made and our deeper market penetration in areas like pharmaceuticals and biopharma, which are typically less impacted by recessionary conditions. Bob, I know you have a strong understanding of this, and we are eager to share more insights.

Bob McMahon, Senior Vice President and CFO

Thank you, Mike. You’re revealing all my secrets. Patrick, regarding your point, the portfolio has significantly evolved. If we look back to around 2008-2009 during the financial crisis, our business relied heavily on capital and instruments. Back then, our services and consumables made up around 30%, while today, it’s closer to 60%. Additionally, our pharmaceutical and clinical sectors, which are more resilient in recessions, now represent over 50% of our company. Previously, our growth closely mirrored GDP. During the shock of COVID in 2020, we still managed to grow by 1%. This indicates that our business model is now more resilient, focusing on faster-growing markets like diagnostics and pharmaceuticals. We have a greater proportion of services, many of which are on contract, and consumables also form a larger part of our business than before. Even in areas traditionally seen as cyclical, there are long-term growth factors at play. For example, the transition from gas-powered vehicles to electric cars continues, and there’s a push to regionalize semiconductor investments to bring them closer to market and diversify supply chains. These trends weren’t present in 2008-2009. Overall, we’re benefiting from favorable market conditions, and our business composition is noticeably different now.

Operator, Moderator

The next question comes from Rachel Vatnsdal with JP Morgan.

Rachel Vatnsdal, Analyst

So, another question around biopharma. Biotech funding slowdowns have obviously been an area of concern. So, could you just talk about if you've seen any slowdown from customers related to funding concerns at all? And then, have you had any concern amongst challenging therapy customers? Or is that business really operating as expected as well?

Mike McMullen, President and CEO

Yes. So, let me leave with some thoughts on the biopharma, and maybe you want to jump in on the cell and gene therapy, Jacob. But no, we haven't seen it. We've seen some of the publicized concerns, but it's not showing up in our discussions with customers or in our order book or order funnel. In fact, that's why I pulled Padraig into the conversation earlier because we're actually expanding our penetration in there. So, the funding environment still remains strong for the products and services looking from Agilent. And then, I know that you've got something going on with Lonza right now already on the cell...

Jacob Thaysen, President of Life Sciences and Applied Markets Group

Yes. Overall, the cell analysis business is performing well, and we have a significant presence in biopharma. One area where we previously had lower penetration was in Seahorse, which leaned more towards academia. Recently, we launched a new product that is gaining traction in biopharma, particularly in the gene and cell therapy sector, effectively doubling our presence there. Similarly, our LC/MS business has a strong position in oligos, and we expect to enhance that further in the near future. We see a lot of strength continuing in this area. As Mike mentioned, we are also focused on partnerships, particularly with Lonza, who have developed a new platform that functions as a bioreactor for hospital settings. We are collaborating with them to integrate quality control methodologies based on our cell analysis technology. We remain very optimistic in this space.

Bob McMahon, Senior Vice President and CFO

Yes. Hey Rachel, one other thing, it's a question that's come up a number of times. So, we've done a fair amount of analysis. And as Mike and Jacob talked about, we haven't really seen any slowdown in the order book or any significant elongation in the order conversion cycle, in terms of getting from proposal to order. Another point that I think is probably underappreciated is the penetration we have in this market from a services and consumables perspective. We likely have some of the highest attach rates in our biopharma businesses due to the types of instruments purchased and the amount of service uptime required. As long as those customers remain solvent, we will maintain that. We haven't observed any significant write-offs in this area. While people may focus on instruments, there is also a substantial component of services and consumables that will continue to provide ongoing benefits.

Rachel Vatnsdal, Analyst

Great. That's really helpful. And then two more questions from me on C&E. So, last quarter, you listed the C&E guide for the year at high single digits to low double-digit growth. So, can you give us an update on if that outlook has changed at all given the 9% growth this quarter? And then, kind of diving deeper into C&E. So, you and your peers have touched on battery testing being an opportunity in that segment, and it's really starting to get some increasing traction. So can you walk us through that market opportunity and how meaningful that could be over time?

Bob McMahon, Senior Vice President and CFO

Yes, our guidance for C&E remains unchanged. We met expectations for Q3, even with delays in some China-related business. GC and GC/MS continue to have a strong presence in the chemical and energy sector, and we still achieved 9% growth. We anticipate a solid rebound in both Q3 and Q4, especially in Q4 as that business returns, and we are still aiming for double-digit growth.

Mike McMullen, President and CEO

And Bob, I think it's fair to say it wasn't just C&E in China. It also was C&E globally where our product is provided by China for those customers.

Bob McMahon, Senior Vice President and CFO

And I think in terms of the areas around battery and technology and clean energy technology, and I would throw in kind of semiconductor in that and some of the capacity expansion. So on the battery technology, those are emerging areas that we've talked about for the last several quarters here. It's still an emerging technology. There's only a handful of battery manufacturers right now, but they are significantly increasing capacity around the world. And so, it's a several hundred million dollar kind of market opportunity today and growing quite substantially.

Operator, Moderator

The next question comes from Josh Waldman with Cleveland Research.

Josh Waldman, Analyst

I think one for you, Mike, and then one for Bob. Mike, just wanted to keep going on chemical and energy. Just first, how much of the manufacturing headwind was in this end market, maybe versus food or environmental or elsewhere? I'm just guessing the underlying was a lot stronger than the 9% headline for the end market.

Bob McMahon, Senior Vice President and CFO

Yes, Jack, you're correct. We approached this from a technological perspective rather than by specific markets. However, most of the impact was seen in China, which is heavily focused on food, chemical, energy, and pharmaceutical sectors. Those three were the largest markets. While environmental and forensics also play a role, their impact is likely smaller compared to the other three sectors I mentioned.

Mike McMullen, President and CEO

I remember we had some larger orders in Europe for C&E that will be fulfilled later because we couldn't deliver GCs this past quarter.

Operator, Moderator

The next question comes from Jack Meehan with Nephron Research.

Jack Meehan, Analyst

I just wanted to keep going on chemical and energy. Just first, how much of the manufacturing headwind was in this end market, maybe versus food or environmental or elsewhere? I'm just guessing the underlying was a lot stronger than the 9% headline for the end market.

Bob McMahon, Senior Vice President and CFO

Yes, your intuition is correct. We approached this by focusing on technology rather than the end market. Most of the impact was indeed in China, which is a market that heavily emphasizes food, chemicals, energy, and pharmaceuticals. These were the three largest markets. Environmental and forensics also have an impact, but it is likely less significant compared to the other three I mentioned. It's a quarter that reflects the cumulative impact of the situation. As we consider this, the underlying strength of the market remains quite robust despite navigating through macroeconomic challenges, which is the key takeaway.

Operator, Moderator

There are no further questions registered at this time. And that concludes the Q&A session. I'll pass the conference back to Parmeet to conclude the call.

Parmeet Ahuja, Vice President of Investor Relations

Thanks, Selena. And thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day.

Operator, Moderator

That concludes the Agilent Technologies Inc. Q2 2022 earnings conference call. Thank you for your participation. You may now disconnect your line.