Business Breakdowns
· 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?
· Mark de Vos
[00:00:00] S1: I think just talking about pharmaceuticals, there should be growth really in pharmaceutical R&D spend over the long term. We expect to see growth there driven by increasing demand for healthcare. Whether that's aging populations. I know the World Health Organization has population over 60, nearly doubling to 2050. Things like that are just going to drive healthcare spend, in our opinion, in one direction. And that's a tailwind for Agilent. The reality in the short term is that if an instrument is six years old, they could of course run it until it's eight years. There's nothing. It doesn't stop working. The parts are still available. They definitely could. What the drives are for that upgrade tend to be these instruments are operating at high temperature with sometimes nasty chemicals inside them. All components in them will eventually wear out. You've got the consumables which are designed to be replaced, but you can think of all the valves, the heaters, everything else will just start to break more after a long period of time. And lab downtime is problematic for these pharmaceutical companies. They'll want to be getting rid of these instruments before they start to see a fair amount of downtime, which will naturally happen as they become older instruments. They'll just be looking to upgrade. The other thing is there are typically reasonably significant upgrades to the platform every three years or so. After six years, you're probably two years, maybe eight years. Three upgrade cycles in and there should be a meaningful upgrade in terms of either resolution or throughput, which should help justify the upgrade spend effectively.
· Matt Reustle, Mark de Vos
[00:00:00] S0: With the competition, you mentioned that service is a major driver of the decision making there when it comes to innovation. Has there been a historical trend line for Agilent or maybe a competitor where innovation has really driven market share gains or someone moving up the chain in terms of what they've captured of the market? [00:00:00] S1: I don't think so. We talk to the companies a fair bit and they talk about reasonably stable market shares overall. I think if you do a really good product launch after a couple of years, you might gain a percentage point of market share. These are very entrenched, stable market shares. Waters actually had a chart in one of their investor days which showed sales of a specific type of column over time. We're talking over decades. And it was basically a flat line. And this was because of that point around it being tied into drug certifications. And once it's tied in, people just use the instruments again and again and again. If it works and they're getting good service, they generally don't change it. So that's why that service component is so key. [00:00:00] S0: You mentioned there's stable market shares. Do those tend to be stable with the same existing customer base? Is there a lack of switching? That tends to happen.