Agilent Technologies Inc (A) Q2 2021 Earnings Call Transcript

Agilent Technologies Inc (NYSE:A) Q2 2021 earnings call dated May. 25, 2021.

Corporate Participants:

Ruben DiRado — Director, Investor Relations

Mike McMullen — President and Chief Executive Officer

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Sam Raha — Senior Vice President, President, Diagnostics and Genomics Group

Jacob Thaysen — Senior Vice President, President Life Sciences and Applied Markets Group

Analysts:

Vijay Kumar — Evercore ISI — Analyst

Tycho Peterson — JPMorgan — Analyst

Doug Schenkel — Cowen — Analyst

Dan Leonard — Wells Fargo — Analyst

Derik de Bruin — Bank of America — Analyst

Matt Sykes — Goldman Sachs — Analyst

Puneet Souda — Leerink Partners — Analyst

Brandon Couillard — Jefferies — Analyst

Patrick Donnelly — Citi — Analyst

Nathan — UBS — Analyst

Presentation:

Operator

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, Investor Relations. Please go ahead, sir.

Ruben DiRado — Director, Investor Relations

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?

Mike McMullen — President and Chief Executive Officer

Thanks Ruben, and thanks everyone for joining our call today. Before I get into the detail — into the quarterly details, I want to start by recognize our Agilent India team. Despite the challenging COVID-19 situation, our India team is working closely with our cause of do while we can to help in this time of extreme need. In addition our Agilent India customer support, finance and IT teams have worked tiredlessly 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 recovering 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 are also expanding 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 contributes about 1 point to our overall growth. Our revenue growth is not a one quarter or easy compare story, but one that sustained above market growth. For example, our Q2 revenues are up more than 17% core from two 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, continued our investments in high-growth markets in bringing outstanding talent into Agilent. Like our recent acquisitions in Cell Analysis, Resolution Bioscience an example of our build and buy growth strategy in action. The Agilent story remains the same. It is a story of one team outpacing the market to deliver strong broad-based growth in an environment of continuing market recovery.

Moving onto our end market highlights, we do strongly in all markets. Our growth is led by 29% growth in pharma and 22% in food. We are seeing improving growth in the chemical and energy market with 14% growth. We also posted low-teens growth in diagnostics and over 20% growth in academia and government. Lastly, environmental forensics grew 8%. Bob will provide 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 30% growth in China is on top of 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 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 LCMS 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 contribute to our long-term company-wide focus on sustainability in advance and 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 non-profit organization dedicated to improve the sustainability of the scientific research. LSAG products will also receive two 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 C10 Confocal Imaging Reader, a multi-functional 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 leader and expands our reach in the 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 Cross Lab Group posted revenues of $536 million. This is up a reported 19% and up 15% on the core basis versus a 1% increase last year. ACG’s growth is driven by demand for consumables and services across the portfolio as lab actively continues to increase for our customers. This is leading to more on-demand services and parts consumption. Revenues from our contract business continues to drive strong growth due to the high level of contract renewals seen in the previous quarter. Our strong instrument placements and the increase in installed base will benefit the ACG business going forward. At the same time our digital investments continue to pay off with continued strong customer uptake and consumables and our digitally enabled services offerings.

Our LSAG and ACG businesses come together in the iLab. 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 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 remains strong and our capacity expansion plans for a high-growth NASD business remain on track.

We’re very pleased with the acquisition of Resolution Bioscience during the quarter with our liquid biopsy technology, Resolution Bioscience is the key player in a very exciting area of cancer diagnostics. We are very glad to have them on the Agilent team. I’m confident 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 capabilities of the one Agilent team. Our build and buy growth strategy is delivering as intended of above market growth. Over the last year, I’ve often said, that Agilent’s focused on coming out of the pandemic even stronger as a company. I believe you’re seeing the impact of this approach in our current results. As we look ahead we do so with a sense about 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 expect that a continuation of excellent top line growth. We also expect to compare this 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 on customer service and continue to exceed customer expectations in providing industry-leading products and services. While we are yet to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence.

Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob?

Robert W. McMahon — Senior Vice President, Chief Financial Officer

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 three 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 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 level. The chemical and energy market continues to recover as we grew 14% of 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 at Atomic Spectroscopy.

On a geographic basis, all regions grew led by the Americas at 27%, the 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 three 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 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 1 time.

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 in all of our businesses. As a result, we are again increasing our full year projections for both revenue and earnings per share. This reflects our strong Q2 results an 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 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. End 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 are 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 and put us in a great position to continue to drive strong results for the remainder of the year.

With that Ruben back to you for Q&A.

Ruben DiRado — Director, Investor Relations

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

Questions and Answers:

Operator

Absolutely. [Operator Instructions] First question will come from Vijay Kumar of Evercore ISI. Please go ahead.

Vijay Kumar — Evercore ISI — Analyst

Hey guys, thanks for taking my question and congrats on a pretty impressive half year. I did want to start on pharma BioTek. It accelerated sequentially the number, it’s really impressive, 35 on large molecule plus 28 in 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 growing. Is this a market acceleration? Are you guys gaining share and how much of this is incremental contribution for NASD? I think the prior assumption was $200 million in the fiscal coming in about?

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Yes, there was a lot to unpack there Vijay.

Mike McMullen — President and Chief Executive Officer

I’ll take the — congratulations Vijay and I’ll pass the line. No. Yes, we’re extremely pleased with the results that we’ve seen in the pharma business really across all three of our end business groups. I think it shows the investments in 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 three of our business groups in that business, and certainly we are benefiting from the investments to expand capacity and 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 was in the high 30s and we are still on track to that $200 million that you talked about. And feel very good about that business going forward.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

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

Vijay Kumar — Evercore ISI — Analyst

That’s helpful comments there. Mike one question on perhaps the 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 COVID diagnostics has been [Technical Issues] I think you guys are one of the cleanest stories here in the group. But 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 etc should be sustainable? Maybe some product line on that, how to think about the plus and the minuses?

Mike McMullen — President and Chief Executive Officer

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

Vijay Kumar — Evercore ISI — Analyst

Understood. Thanks guys.

Operator

Your next question will come from Tycho Peterson of JPMorgan. Please go ahead.

Tycho Peterson — JPMorgan — Analyst

Hey, good afternoon. I wanted to actually start with the M&A question just on Resolution. Their obviously a CLIA lab but have a distributed model as well. Can you just talk about those two 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?

Mike McMullen — President and Chief Executive Officer

Yes. Tycho thanks for the question and good afternoon. I’ll make a few comments here and I’ll pass it over to Sam. So my comments are going to be, we’re very excited about having Resolution Bioscience team as part of Agilent. And Sam, I think we were even becoming 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 of our — because made perhaps your first face to face business trip and well over the years, but with that lead in why don’t I pass over to you and answer Tycho’s question.

Sam Raha — Senior Vice President, President, Diagnostics and Genomics Group

Yes. Thanks, Mike. Thanks for the question, Tycho. Yes, it was very exciting to finally get out and see real human beings again and very exciting to the enthusiasm of the team there. And first-hand what is now part of our company and Tycho the specific answer is both parts are important, the 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 will ultimately block [Phonetic] the market. There is some testing that’s done in the CLIA lab as you mentioned, there is 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 former 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 months – 24 months will continue to be some pharma services revenue.

Mike McMullen — President and Chief Executive Officer

That’s the focus.

Tycho Peterson — JPMorgan — Analyst

Okay. And then on the quarter. Two 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 growth sustainably. So can you just talk about whether there is 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?

Mike McMullen — President and Chief Executive Officer

Yes, sure. You’re close study on the numbers, I can see it Tycho, but thanks for two good questions. So, while we’re super pleased with the overall growth rate of food, it’s been our 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 are expecting continued strength throughout this year, probably not at that same level. And Bob, I think it’s really a clinical that 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 exact…

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Yes, that’s right.

Mike McMullen — President and Chief Executive Officer

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

Robert W. McMahon — Senior Vice President, Chief Financial Officer

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 a 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…

Mike McMullen — President and Chief Executive Officer

Bob I just want to add one thing. Additional thought in 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.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Yes, thanks. Thanks, Mike. And I think what you’re seeing in the ACG business Tycho, is a combination of two 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 is 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.

Mike McMullen — President and Chief Executive Officer

But long-term, we feel very good about our ACG business and continued ability to scale that business going forward.

Tycho Peterson — JPMorgan — Analyst

Okay, thank you.

Mike McMullen — President and Chief Executive Officer

You’re welcome.

Operator

Your next question will come from Doug Schenkel with Cowen. Please go ahead.

Doug Schenkel — Cowen — Analyst

Good afternoon, guys. Thanks for taking my questions. I’m just doing some math here, and Bob I’m trying to make us 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 move 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, one of your bigger markets, you don’t have a Lunar New Year in that period. And then we’re kind of back into the Q4 implied number, there is 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 with all that you’ve got more M&A in there. And then, I listened to what you’re seeing 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?

Robert W. McMahon — Senior Vice President, Chief Financial Officer

No, I think you are reading the numbers very well, Doug. And what I would say is, certainly, we feel very good about Q3 and that’s where we have most of our visibility. We still are in a 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.

Doug Schenkel — Cowen — Analyst

Okay, all right, that’s helpful. And then again doing math on the fly. So hopefully, I’m not messing up anything.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

But your math on the fly is pretty good Doug.

Doug Schenkel — Cowen — Analyst

I am doing okay so far. Thank you. 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 second — in the first half of the year?

Robert W. McMahon — Senior Vice President, Chief Financial Officer

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 Bioscience 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 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 the momentum going forward, whether it’d 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.

Doug Schenkel — Cowen — Analyst

Okay, super helpful. Thanks guys.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Yes, thanks Doug. Appreciate the comments.

Operator

Next question will come from Dan Leonard of Wells Fargo. Please go ahead.

Dan Leonard — Wells Fargo — Analyst

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

Mike McMullen — President and Chief Executive Officer

Dan. Hey, thanks for the question. Not yet. We’ve talked about it with you in prior quarters and we still think it’s a area of interest of our customers in terms of future investment, but nothing material yet. This is the 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 passive and fairly cautious about in terms of calling it, but the trends are positive now.

Dan Leonard — Wells Fargo — Analyst

Okay. And Mike, I want to ask a follow-up on Resolution Bio, you kind of assume this a build the future positive updates to come there. Can you talk about to invest in that business. And the reason I ask is, it does seem like a driver of success in that space is it 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? Thank you.

Mike McMullen — President and Chief Executive Officer

Yeah, I’m not sure I accept the premise that do you need to have huge operating losses to have the business depend on the type of play you’re trying to make here. And Bob and Sam you guys, keep me honest here as well, but pharma services business model we have where we can leverage a lot of investments that we’ve already made around our IHC base CDx business, we’re not in the same position increment there perhaps maybe start up some of it brand new and win the space. 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, building out additional commercial relationships. But we think our plan has been to absorb within the overall operating model. So there wasn’t any asterisk when we put our long-term goals out and said well without Res Bio, so I think we believe that we can manage within our overall operating model and I think given where we’re starting from, which is we’re not starting from zero in this business. We have something to build from our acquisition, a number of years ago from Darko. I think that puts us in a different perhaps a different place. Anything else add to that…

Dan Leonard — Wells Fargo — Analyst

I appreciate the color. Okay, thank you.

Mike McMullen — President and Chief Executive Officer

You’re welcome.

Operator

Next question comes from Derik de Bruin of Bank of America. Please go ahead.

Derik de Bruin — Bank of America — Analyst

Hi, sorry, had the mute on, sorry about that. So can you talk a little bit more about the LCMS growth and the service 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 budgets. You’re spending a little bit more than they had so that general question. And I guess one of your competitors has been talking about new LC platforms, particularly targeting the biologics area. I’m just sort of wondering what your sort of competitive response and product offerings are this will going against that? And then I’ve got one follow-up.

Mike McMullen — President and Chief Executive Officer

It’s maybe there are competitive response. But I’m going to pass over to Jacob, because we’re in the conference room here and I’m looking at him on the screen and he is finally loved to be able to answer your question. Derik. So I’m going to pass it over to you, Jacob.

Jacob Thaysen — Senior Vice President, President Life Sciences and Applied Markets Group

Yes. Thanks, Mike. And, Derik this is great questions. So thanks for that. First of all the — what the growth you’re seeing both in our LC and LC Mass Spec, is sharply not a coincidence, it is 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 robust reliable on the team and we really see our customers especially on our single and triple Quads have really taken off here in the last period of time. I think even before in the food space, where we see a lot of upgrades into triple quads, but clearly in the pharma and 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 molecule things, the last molecule, we are 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 live up to the expectation from a regulatory perspective, but also from a usability. So that’s a big part of our success in what we see and I truly believe there is a lot more to come in that area.

If you look at the LC [Phonetic], investing into bio is a part of the game. We have had out at bio LC high end high LC for quite a while now and it is doing very well. We can compete about against everyone in this space and you will see us come out — continuously 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 tech market standards very important market for us.

Mike McMullen — President and Chief Executive Officer

And Derik, if I could just add on to that, 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 pharma molecule.

Jacob Thaysen — Senior Vice President, President Life Sciences and Applied Markets Group

Absolutely.

Derik de Bruin — Bank of America — Analyst

Great, thanks. And then I’m going to ask you an unfair question, but what the hell. And part of it goes like it is, like all the tools companies that put up really strong results, they’re coming off of easier comps and that’s great. But I think that everyone sort of focus on the next fiscal year. And the ability to grow earnings. I’m just sort of talk, can you sort of generally share any thoughts on sort of earnings growth next year and will it be in the double-digit range, just your general thoughts right now as people are going to start worrying about the tough comps. Not the COVID tough comps and then other [Indecipherable].

Mike McMullen — President and Chief Executive Officer

So Bob and I haven’t actually compared notes on this. I’ll start with a few comments. And then I think we’ll probably been in the line that said, potential US tax reformer side, 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.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Agreed.

Derik de Bruin — Bank of America — Analyst

Okay. I appreciate it. Have a great day.

Operator

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

Matt Sykes — Goldman Sachs — Analyst

Hey, thanks for taking my questions. Just maybe in the category its too early, but just look at the growth rate that you guys have been showing in Cell Analysis. I’m 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 customer is largely new customers deepening relationships with existing customers. Just more color on Cell Analysis? Thanks.

Mike McMullen — President and Chief Executive Officer

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

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Yeah, I was going to say, Matt, we’re extremely pleased with the performance really across all three 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 C10, but also some of the areas around customer acquisition and what we’re doing in the marketplace.

Jacob Thaysen — Senior Vice President, President Life Sciences and Applied Markets Group

Yes, thanks it’s great — another great question. And as you can hear we are super excited about the Cell Analysis business, particularly I’ll focus on live Cell Analysis by immuno-oncology and urology immunology at the Howard. 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 build it and build it out this way that you can get a relatively good entry level microscope that will compete based on 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 is a really mixed unmatched stat 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 are now leveraging also for our 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 government and we had a very clear focus there has to move in that and that works very well. So we are excited where we are but I would say that the main growth comes from the biopharma space, but clearly now with the academia government coming back that of course also across the growth.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

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

Matt Sykes — Goldman Sachs — Analyst

Great. Thanks for that. That’s very helpful. And then just on Diagnostics. Your comment that you exit the quarter is stronger run rate. I’m sure some of that sort of catch-up demand from the COVID period, but just can you talk about the sustainability and your views on diagnostics throughout the rest of the year?

Sam Raha — Senior Vice President, President, Diagnostics and Genomics Group

Yes, that’s one where we are — if we think about the opportunities, we’re very, very pleased with kind of the progression of that business recovery throughout the course of the year. If you recall last year, we actually grew in that business and then saw a strong fall off when the pandemic really hit and we’re expecting accelerated growth in Q3, but this is an area where we’re watching to say, is there going to be sustained — how fast is that sustained recovery going. But all signs right now are very positive from the standpoint of the 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.

Matt Sykes — Goldman Sachs — Analyst

Great, thank you very much.

Operator

[Operator Instructions] Your next question comes from Puneet Souda of SVBL. Please go ahead.

Puneet Souda — Leerink Partners — Analyst

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

Robert W. McMahon — Senior Vice President, Chief Financial Officer

That’s a great question, Puneet, and what I would say is, first of all, just a shout out to our OFS team, our supply chain organization, you’ve just done a fantastic job of being able to manage the increased demands on a 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 any expectation of significant price increase or decreases into our business.

Puneet Souda — Leerink Partners — Analyst

Okay, that’s helpful. And then a quick one for Sam first and then other one for Jacob. Sam, if you could characterize what are your expectations with 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 PDL1 pharmDx assays into FDA accruals. 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 Open Lab 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 1100 and 1200 LCs has done well, but I just want to get a sense of Open Lab. Thank you very much and congrats again on the quarter.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Yeah, thank you for the question on the Resolution Bio, I think [Speech Overlap]

Mike McMullen — President and Chief Executive Officer

How many questions in there?

Sam Raha — Senior Vice President, President, Diagnostics and Genomics Group

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 clientele that are coming into our pipeline as well. Now the fundamental technology is, we do believe the minimal to more applications including minimum residual disease and monitoring, but once again our primary focus remains therapy selection.

Now in terms of the model, I think you asked about that. It is what we can do before which is we believe as Agilent, we’ve got a capability set, which we’ve used for PDL1 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 a specific indication specific drugs. So that is our model and ultimately our vision is to have IVD kitted NGS solutions that are near to patients that are distributable, but of course as you 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 PDL1 model that we have today, because that’s the nature of NGS based diagnostic testing, but our interest and long-term focus remains an IVD kitted diagnostic test. Jacob, over to you.

Jacob Thaysen — Senior Vice President, President Life Sciences and Applied Markets Group

Yeah. Thank you and let me just start by saying that Informatics and Open Lab is key to our strategy. So, though we like to talk about our instrument, it’s always connect — our most unconnected within a very strong position in Informatics, and we continue to invest in Open Lab, in fact, we believe that is the lab, where we connect all our instruments into an ecosystem in a cloud setup where can you also track your samples and in the end also connect into an e-commerce set up is going to be the future, and with Agilent’s broad portfolio we can very quickly, 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 few months decided to further invest into these areas to further accelerate our presence here.

Puneet Souda — Leerink Partners — Analyst

That’s great. I appreciate you guys taking that extra questions. Thanks guys.

Mike McMullen — President and Chief Executive Officer

Sure not a problem.

Operator

Your next question will come from Brandon Couillard of Jefferies. Please go ahead.

Brandon Couillard — Jefferies — Analyst

Thanks, good afternoon. Bob or Mike in terms of the chemical energy business, could you break out instruments versus aftermarket in the quarter? I suspect it’s probably the first quarter in a while that you’ve seen solid instrument growth. Just wanted to confirm that’s the case. And then what’s embedded in terms of the updated full year guide for that end markets specifically?

Mike McMullen — President and Chief Executive Officer

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

Robert W. McMahon — Senior Vice President, Chief Financial Officer

Yes, I was going to say, Brandon to your point of that 40% LSAG or the instrument business is 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 it kind of going forward, our assumption for Q3 is somewhat similar to Q2 in terms of continued recovery of a weak base. It was down 10% again last year — last Q3 and then we started seeing recovery. And so I think about it — we’re thinking about it in roughly the same kind of terms in Q3 that we saw in Q2.

Mike McMullen — President and Chief Executive Officer

I think right now we’re taking it quarter-by-quarter, Bob. But I think overall we see this trending being more upside than downside.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

That’s right.

Brandon Couillard — Jefferies — Analyst

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

Mike McMullen — President and Chief Executive Officer

Brandon, I just would echo what Bob mentioned earlier, our office team that is on 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 find a way to make it happen. So I think Bob is relatively immaterial at all to the quarter and we think it’s manageable moving forward as well.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

That’s right.

Brandon Couillard — Jefferies — Analyst

Great, thanks.

Operator

Your next question will come from Patrick Donnelly with Citi. Please go ahead.

Patrick Donnelly — Citi — Analyst

Great, thanks for taking the questions guys. Maybe just following-up — maybe following up on Brandon’s question on C&E there. Can you just talk through what you’re seeing in 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 it’s been a bit hesitant to bake into 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 recovering the back half guidance raise doing a bit more comfortable about the sustainability there?

Mike McMullen — President and Chief Executive Officer

Yes. Thanks, Patrick. And I’m glad you remember earlier comments, because I always said once the orders here in my book I’ll start to talk a little bit differently about it and that’s why you’re getting 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 the 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 segments. 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 seamless PMIs but I wanted to see in the order book and I started to see it this quarter.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

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

Patrick Donnelly — Citi — Analyst

Okay, that’s helpful. And then just maybe on the M&A landscape. Bob, you mentioned the balance sheet helped, 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 and the segments you’re focused on and then Bob, if you want to talk about where the leverage could go, that will certainly be appreciated.

Mike McMullen — President and Chief Executive Officer

Yes. So I think our view on M&A remains the same. We see that as a key part of our — we’ve been terming our build and buy growth strategy. We’ve signaled that we would be willing to do deals in the multiples of BioTek which to date is our largest deal. And that’s still a area of interest for us. We like to kind of a growth accretive deals that you’re seeing. We’re getting great new teams like Res Bio team, like the BioTek, ACEA, so we are maintaining our focus on higher growth segments. We like the areas we’re going, we’ve been gone after like cell analysis, we like the genomics look at biopsy space, I think Informatics others, 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 looked at and say listen, this will be a great home for my company my team. We like — we like how you guys run your company, we like your culture, we like to just for in terms of growing the business for the long-term. So we’re going to stick to our models in been working for us Bob and I think we can adjust the question…

Robert W. McMahon — Senior Vice President, Chief Financial Officer

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

Patrick Donnelly — Citi — Analyst

Okay. Thanks, Mike and Bob, really appreciate it.

Mike McMullen — President and Chief Executive Officer

You’re very welcome.

Operator

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

Nathan — UBS — Analyst

Hi 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, any acceleration in the upgrade cycle in any of your instruments or end market?

Mike McMullen — President and Chief Executive Officer

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 turning to different direction. So I’d say it’s been even in the C&E space that are tied to chromatography spectroscopy platforms.

Robert W. McMahon — Senior Vice President, Chief Financial Officer

I would say, Nathan as Mike said, still early days, but all the trends are looking forward — looking positive.

Nathan — UBS — Analyst

Great. And just, if I can switch finally, you did mention that you’re seeing share gains on top end market growth. Can you just elaborate what is driving share gains for you?

Mike McMullen — President and Chief Executive Officer

If you think about our — the combination of our LSAG and ACG businesses where we come in the analytical lab as Jacob mentioned earlier and I haven’t had a chance to have [Indecipherable] the call yet, but we have 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 continue to build out our commercial reach as well. So I think it’s been the combination of portfolio and the workflow focus within that portfolio, building the service capability and then building out further commercial reach. I think it’s been a combination of all those factors helping us to do really well in our LSAG and ACG groups, 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. I think it’s been a combination of all those factors. So that’s why we keep using the word broad-based growth because you see it in all parts of the businesses. So we feel really good about the results from the size we were working on for a while.

Nathan — UBS — Analyst

Great, thanks.

Operator

[Operator Closing Remarks]