Business Breakdowns
· Matt Reustle, Mark de Vos
[00:00:00] S0: My next natural question was going to be what governs the decision for a lab to buy another piece of equipment, another Agilent system? Do you see labs with multiple on their assembly line or is there typically just one associated with each drug? I'm trying to understand whether it's capacity constraints or what drives that. [00:00:00] S1: Typically in a production center you'd have a lab attached to it and they would have several instruments as part of that. And generally they will choose a single primary supplier. They may have a sort of secondary supplier there as well, but just for simplicity in terms of having spare parts on site, ongoing service and support, it's generally just easier to have one instrument. When they're considering going from that fourth to that fifth machine, they're considering the service they've received. I think most customers would probably highlight service as the primary driver of their decision. It's worth saying the machines are complex, there is a technical capability, so it's not like there's 500 options out there. It's a reasonably small group that you've got to choose from. But Agilent's this one stop shop where you can get your instrument, you can get your consumables, you can get your servicing all in one, one package. [00:00:00] S0: Talk a little bit about the competition you mentioned. There's one other competitor that can actually service third party machines as well. What does the competition look like? Maybe we can start just in the equipment segment and branch out from there.
· Matt Reustle, Mark de Vos
[00:00:00] S0: Talk a little bit about the competition you mentioned. There's one other competitor that can actually service third party machines as well. What does the competition look like? Maybe we can start just in the equipment segment and branch out from there. [00:00:00] S1: Generally they're competing, I'd say, against two main businesses. There are others, but two main ones. One being a company called Waters and another called Thermo Fisher Scientific. Waters is a strong competitor in liquid chromatography but it's more narrowly focused on the pharmaceutical markets. So around 60% of their sales are from pharmaceutical customers. They're also smaller business. So revenue for Waters is about half that of Agilent's, around $3 billion. Agilent's just above 6. Thermo Fisher is almost the opposite. It's a huge business, $43 billion of revenue built largely through acquisitions. And if you open a Thermo Fisher Scientific catalog, you would see there's a much broader array of products. So they sell everything: lab fridges, test tubes, hot plates, centrifuges, lab shakers, water baths, etc. As well as the chromatography instruments that actually compete with Agilent. So maybe a bit less of a specialist in that sense. What drew us to Agilent was its diversified exposure by end market, but also its focus on niches where it has high market share. [00:00:00] S0: Can you talk a little bit about those niches? If you take a Waters who's entirely focused on pharma, what would be the other categories or niches within those categories that would be highlights for an Agilent?
· Matt Reustle, Mark de Vos
[00:00:00] S0: Can you talk a little bit about those niches? If you take a Waters who's entirely focused on pharma, what would be the other categories or niches within those categories that would be highlights for an Agilent? [00:00:00] S1: Gas chromatography is the golden business within Agilent. That's obviously where it came from. So F&M Scientific originally that HP bought, they were a gas chromatography specialist. Agilent is still by far the market leader in gas chromatography. They're probably two-thirds of the global market for those instruments. They really dominate there. The difference between gas and liquid is predominantly driven by the sample. So gas, unsurprisingly, you're testing a gas. The way you get it to a gas is you heat it or you burn it. If you're a pharmaceutical company and you're testing a complex protein or something, you can't heat it up because you'll destroy it in the process. So therefore you have to test it as a liquid. So generally, gas chromatography skews what we'll call applied markets. So you can think of that as battery testing, environmental testing for contaminants and pollutants and things like that. They're really uniquely strong, I would say, in applied markets for gas chromatography. [00:00:00] S0: These examples, they're reminding me of refineries from oil and gas just in the way that they can handle this input and turn it into many bright products or outputs. There's a lot of differences, but it's interesting how much similarity there is.
· Matt Reustle, Mark de Vos
[00:00:00] S0: These examples, they're reminding me of refineries from oil and gas just in the way that they can handle this input and turn it into many bright products or outputs. There's a lot of differences, but it's interesting how much similarity there is. [00:00:00] S1: One of their customers is testing the outputs of refineries, basically. There are other areas as well where they're pretty strong so liquid chromatography is the other one. They're probably about a third of the market. Waters probably has about a third of that market as well. And then the balance is smaller players and Thermo Fisher Scientific. They're also pretty strong in spectroscopy. So that's 40, 50% of the market. I'd say that gas chromatography and applied is a poster child market. [00:00:00] S0: I would assume that a lot of the consumables and maintenance has somewhat of a reoccurring or straightforward measurement from year to year. The new equipment sales, you have this six to eight year useful life. Are there major cycles boom bust oriented that don't just revolve around customer losses from an industry perspective? Have there been tailwinds or headwinds that have resulted in shocks over time?
· Mark de Vos
[00:00:00] S1: In short, yes. Agilent's obviously pretty diversified by end market which has meant when there's been cycles in some of their smaller markets they've kind of been able to weather it. One end market's a bit weaker and other markets doing a bit better. Generally they struggle when their largest pharmaceutical companies when that's doing badly, which we've just hopefully seeing the other side of now. They're just coming out of a sort of downturn there. Effectively what happened was you obviously had the COVID-19 pandemic. There was a lot of investment from pharmaceutical companies into building out lab capacity and spending on R&D and they bought well above the normal level of instruments. So you saw this boom in instrument sales growth and then of course the CFO turns around and goes we've got lots of instruments, we don't need to buy any more for a couple of years. You see the other side of that. It looks like we're just returning back towards normal purchase levels now. So hopefully that's behind them. The other notable area is China. So China is about 18% of group sales. It's half of that Asia Pacific region. Obviously there's been challenges in China. It's a market that's led quite heavily by government grants as well to local companies that then go on and buy Agilent pieces of equipment. Basically we've been through a sort of down cycle there. Again it looks like that's improving at the moment.
· Matt Reustle
[00:00:00] S0: For something like the COVID shock where you had this major investment. When you think about the useful life of that equipment and at some point towards the end of the decade you'll come up on that six to eight years, is the expectation that there would be renewals? Do pharmaceuticals tend to take capacity offline? If it's related to something which has a shorter life cycle, how does that work, just in terms of the visibility that you might have on the six to eight years and the replacement cycles coming through and showing up in revenue?