Business Breakdowns
· Matt Reustle, Mark de Vos
[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. [00:00:00] S1: It's pretty rare that a customer will build out a whole new lab. They'll generally be upgrading one section of a lab. There's that incumbency bias. We have seen companies talk about some opportunities where you're getting pharmaceutical companies thinking about maybe reshoring labs. That's one of the few examples where you're getting whole new labs being set up and that's an opportunity where you can kit out a lab. Increasingly, that service part is being folded into the discussion on instruments as well. And this is benefiting those large incumbents. Agilent has 4,000 service technicians that they employ directly. Pretty hard to compete with that. 75% of their technicians hold a degree in chemistry or biochemistry, 25% have a master's or PhD. So these are really skilled, bright people that are out doing two and a half thousand on-site service calls a day. They're trying to fold that into the discussion around instrument sales more I'd say. [00:00:00] S0: The point on the risk associated with switching providers might be the most meaningful thing. I'm curious, do you have any data points or measurement for what the cost of this equipment represents to the end customer? Just in terms of is it a large percentage of the overall cost of production or anything else that represents a large or relatively small piece of that?
· Matt Reustle, Mark de Vos
[00:00:00] S0: The point on the risk associated with switching providers might be the most meaningful thing. I'm curious, do you have any data points or measurement for what the cost of this equipment represents to the end customer? Just in terms of is it a large percentage of the overall cost of production or anything else that represents a large or relatively small piece of that? [00:00:00] S1: We think about a production facility that maybe has five or so of these sorts of instruments, maybe slightly different types over those five instruments. Let's say over an eight-year period they're spending a million dollars on the instruments and servicing and consumables. It's sort of a rounding error in the scale of a pharmaceutical production facility over eight years, both from a revenue generated, profit generated, or the other costs in that business. This is one where obviously the cost of a product failure. So if you're failing to spot a contaminant or a problem or something like that, that cost is almost unquantifiable. The damage alone to the brand would be huge.
· Mark de Vos, Matt Reustle
[00:00:00] S1: We think about a production facility that maybe has five or so of these sorts of instruments, maybe slightly different types over those five instruments. Let's say over an eight-year period they're spending a million dollars on the instruments and servicing and consumables. It's sort of a rounding error in the scale of a pharmaceutical production facility over eight years, both from a revenue generated, profit generated, or the other costs in that business. This is one where obviously the cost of a product failure. So if you're failing to spot a contaminant or a problem or something like that, that cost is almost unquantifiable. The damage alone to the brand would be huge. [00:00:00] S0: One of the main things you will hear in these niche markets that represent a very small percentage of the overall product, but are mission critical is it's a very good spot to be in if you've captured market share in those industries. I'm curious how that impacts the revenue model broadly. We can break it down if possible. You gave us some sense just in terms of volume trends over time. How do they decide on price? And it might be different obviously for new equipment versus service and everything else, but is there a general framework for how you think about pricing as it revolves around the business?
· Matt Reustle, Mark de Vos
[00:00:00] S0: One of the main things you will hear in these niche markets that represent a very small percentage of the overall product, but are mission critical is it's a very good spot to be in if you've captured market share in those industries. I'm curious how that impacts the revenue model broadly. We can break it down if possible. You gave us some sense just in terms of volume trends over time. How do they decide on price? And it might be different obviously for new equipment versus service and everything else, but is there a general framework for how you think about pricing as it revolves around the business? [00:00:00] S1: They don't give a sort of full disclosure on price volume, but from our conversations it seems like they've been reasonably cautious on price. So low single digits in recent years per year kind of number price rises. Certainly not the 10, 15% we've seen in the food companies for example. I think generally they're aware that often they've got relationships with these businesses that have been going on for 30, 40, 50 years and they're much more focused around maintaining that business and that strong relationship. And actually they take a little bit less on price. But maybe the customer takes a service contract or something like that that more than pays for any loss. Pricing generally I'd expect low single digit price growth number with the balance driven by volume.
· Mark de Vos, Matt Reustle
[00:00:00] S1: They don't give a sort of full disclosure on price volume, but from our conversations it seems like they've been reasonably cautious on price. So low single digits in recent years per year kind of number price rises. Certainly not the 10, 15% we've seen in the food companies for example. I think generally they're aware that often they've got relationships with these businesses that have been going on for 30, 40, 50 years and they're much more focused around maintaining that business and that strong relationship. And actually they take a little bit less on price. But maybe the customer takes a service contract or something like that that more than pays for any loss. Pricing generally I'd expect low single digit price growth number with the balance driven by volume. [00:00:00] S0: How has revenue trended? Whatever periods you want to pick, whether it's 3, 5, 10. I know you have various things that impact those. But where does this business tend to grow and industry tend to grow at? [00:00:00] S1: I'll pick nine if that's okay. Not because I'm being selective with my date range. It's the longest that I can go post the Keysight spin. It all gets a bit noisy around that time. Since 2015 or so, sales growth at the business has averaged about 5% organically, about 6% reported. So they've done a little bit of bolt-on M&A. They've had decent margin growth over that period. EPS has grown a fair bit faster, about 13% CAGR over that nine year period.
· Mark de Vos, Matt Reustle
[00:00:00] S1: I'll pick nine if that's okay. Not because I'm being selective with my date range. It's the longest that I can go post the Keysight spin. It all gets a bit noisy around that time. Since 2015 or so, sales growth at the business has averaged about 5% organically, about 6% reported. So they've done a little bit of bolt-on M&A. They've had decent margin growth over that period. EPS has grown a fair bit faster, about 13% CAGR over that nine year period. [00:00:00] S0: We could get into margins a bit. Is there a drastic variance to the extent that they split it between the various segments? Is there a massive variance between equipment sales versus the service and consumables in terms of margin profile? [00:00:00] S1: Yes. Unsurprisingly. Consumables and servicing is a fantastic business. I think the instrument sales is definitely more competitive than the servicing. I think consumables is probably the most competitive. So the instrument sale business depends a bit where they're selling to. Selling to life sciences, they're making around a 20% operating margin. But selling to the applied markets I spoke about a little bit higher sort of 24% or so operating margins. If we think about that consumable and servicing business, that's the 34% margin business. It's grown pretty steadily over time. It's also been amongst the fastest growing divisions.