Agilent Technologies, Inc. (NYSE:A) Goldman Sachs 43rd Annual Global Healthcare Conference June 15, 2022 1:00 PM ET
Company Participants
Mike McMullen – Chief Executive Officer
Bob McMahon – Chief Financial Officer
Conference Call Participants
Matt Sykes – Goldman Sachs
Matt Sykes
Okay. Great. Welcome, everybody. Good morning. I’m Matt Sykes, Life Science Tools and Diagnostics analyst at Goldman Sachs. I have the pleasure of welcoming Agilent this morning. Mike McMullen, Chief Executive Officer; and Bob McMahon, Chief Financial Officer. Mike, Bob, thanks for coming.
Mike McMullen
Thanks for having us.
Bob McMahon
Our pleasure. Thanks for having us.
Matt Sykes
Great. I think, Mike, we could probably spend the next 20, 30 minutes on Philadelphia Eagles, but I don’t think anyone wants to hear that.
Mike McMullen
I got those in my Walkman song Fly Eagles Fly.
Question-and-Answer Session
Q – Matt Sykes
But as you said we’ll get to business. So maybe you could help set the stage for us today and talk about the most recent quarter, which we thought was really impressive, given some of the headwinds that you guys are facing, also sort of the trends that you’re seeing across your businesses and kind of the outlook for the year.
Mike McMullen
Yes. Thanks for that commentary, Matt. And we’re also quite pleased with performance. In fact, I think the timing of this conversation is really quite good. We’ve just come off Q2 where I think we once again demonstrated the resilience of the Agilent team but also the Agilent business model. We’ve been working really hard to transform the company over the last six to seven years.
And you see we had a lot to deal with in the macro environment, yet it was EPS fee and core growth and EPS rates for the full year. And that’s with a conflict in Europe, that’s with inflationary pressure we haven’t seen in decades as well as the much publicized shutdown with COVID-19.
And our order book continued to be very strong, double-digit growth for the quarter, outpacing revenue growth. As you know, we’ve had a level of revenue deferral in China because of a shutdown. That’s going to be in the P&L in the coming quarters. End markets are strong, and we feel really good about the health of the business.
Matt Sykes
Great. I mean you just talked a little bit about it, but I think just given the guidance raise before in Q1 from seven to eight, eight to nine. Again, despite what we consider significant headwinds. I always kind of teased you about the Agilent prudence.
Mike McMullen
Prudence.
Matt Sykes
Prudence, conservatism. But as we look through ’22 areas of upside that you would maybe point out in terms of over the course of this year?
Mike McMullen
Yes, sure. And I’ll tag team with Bob on this. So I think I’d first point to our two largest end markets, pharma and biopharma, and we posted some pretty impressive Q2 print, double-digit — pharma growth on top of like the double-digit print the prior year. So those end markets remain quite healthy. And particularly the biopharma pieces, we think, is actually inherently higher, long-term growth rate that we’ve seen prepandemic.
So really, really excited about the opportunities in pharma. So I’d point to pharma and also the C&E business, which is which is we’ve been trying to communicate is a much different profile of business. Historically, people view that as a very cyclical aspect of Agilent’s business. There’s perhaps an element that is tied to particularly the energy piece, but that’s only about 15% the total 25%.
We’re seeing a lot of really interesting secular drivers in our materials segment, which is about 30% of that total, things such as meeting the demand for semiconductors, explosion of lithium battery technology and investments in battery technologies for EVs as well as new types of materials. So a lot of really good things happen in the — those two big end markets. I’d probably point to those two as the source of upside for us.
Bob McMahon
Absolutely. I think one of the things that we have seen is continued strong order momentum across the entire end markets, but in particular, those two end markets. And as you were saying about the cyclicality, I think the Agilent of today is very different than Agilent of our fathers, so to speak, of the previous recession in a couple of fundamentally different ways in terms of, one, the amount of recurring revenue that we have is now about 60% of the company. Previous — in ’08, ’09, that was probably about 40% of the Agilent today.
Obviously, we spun off the Keysight business, which was much more cyclical than the business today. And of that 60%, a large component of that actually is on service contracts, which continues. And then even within the instrument side of the business, the contribution of the pharma side of the business and our diagnostics side of the business, is significantly higher than it was before.
And so we feel we’re better positioned as best we can for the future going into the second half of this year but certainly into ’23 as well.
Mike McMullen
Matt, I love to talk about our ACG business, and that’s been a big part of this building of the recurring revenue business as well as a high-growth business. And as Bob mentioned, we have over 10% of the total company revenues under contract. It’s because we’re really adding value to what customers need today, which is not only great scientific outcomes or laboratory, but particularly in this inflationary environment, help on the economics and productivity side, which is really where this ACG value prop play. And I think we delivered a 10% core number last quarter as well.
Matt Sykes
Well, definitely, we’ll get to ACG a little bit, it is my favorite topic, too.
Mike McMullen
I was always trying to lead you down the path and talk about that.
Matt Sykes
You are getting ahead of yourself. I think maybe on C&E. I do think there’s this perception of almost knee-jerk reaction to think cyclical and think Agilent I think that perception needs to change. But even within C&E, there are some secular growth drivers that you mentioned. You talked about batteries in the past. But I also think on the polymer side, there’s an interesting secular driver from environmental regulations changing.
So maybe talk about and to the extent you can talk about sort of the sizing for people just to have them understand, but talk about sort of those subcomponents within C&E in addition to polymer and battery, but also the underinvestment within the energy space even still. We’ve had almost a decade of sort of lower CapEx, like could we be seeing it turning in that.
So I guess to frame the question, like, is it as cyclical as we think it is at this point?
Mike McMullen
Yes. So a couple of things. I think, first of all, just kind of frame the breakdown of it, the three large segments. I went through that fairly quickly in my opening comments. But if you look at the C&E space, for Agilent, and I’m actually using another word C&E and Materials, but that’s an increasingly larger percentage of the pie.
We have about 15% tied directly to energy, both production, exploration and refining. And that’s probably, if you will, historically the area that’s been the most cyclical. That area is really due for a reinvestment. We haven’t yet seen it. Yet we’re seeing really solid margins with our customers in the refining space. And I think we think the audience probably knows quite well, the price of gasoline. So that would kind of point to ability for our customers in this segment to invest.
55% of that business is in chemicals and petrochemicals and then another 30% is in the materials segment, which we think really is being driven by the secular drivers. For example, we talked about the investments in new supply chain capabilities, new expansion of capacity in the semiconductor space, sustainable materials. And to your point about polymers, what’s the secular driver there?
Regulations, it’s really being driven out of the EU right now, but we could see that happening across the globe. So I really appreciate the opportunity to talk about this because this business is not all cyclical. There’s — clearly, there’s — that’s not completely immune to economic moves, but it’s a much smaller portion of total historically people think about relative to Agilent’s business here.
Bob, anything on…
Bob McMahon
Yes. The only thing I would add is these are emerging technologies that are going to be here for what we believe is at least a decade. If you think about lithium battery production and a capacity expansion there, every single major car manufacturer is talking about switching from gasoline to electric. And so the opportunities here to be able to be part of that research side and then ultimately into those technologies are certainly here today, but certainly going forward.
And I think that’s different than what we’ve ever seen in this area — in this space. And then I think to your point around the polymers, again, increasing regulation, sustainability, those activities are driving for more sustainable types of materials. And then you layer on your favorite topic, ACG. And so ACG, the service component of this, it’s been led by our pharma end market.
But increasingly, you’re seeing more and more of that service component going into the chemical and energy space as well.
Mike McMullen
And not only do we see these very attractive secular end market drivers, we think this segment is probably growing strong double digits today in the end market. We have an outsized right to win here. This is a historic area of strength. We have the breadth of portfolio to meet all the customers’ application needs here. So we’re very bullish about the opportunities here for not only next quarter but for many years to come.
Matt Sykes
Got it. That’s great. Maybe moving on to biopharma. You’ve spent the last number of years increasing that exposure there, and you’ve been able to benefit from that. We’re obviously going through a period of funding for some of the emerging biotech. It’s been more challenging. Maybe talk a little bit about the diversity of your customer base within biopharma as it relates to emerging biopharma versus sort of large-cap pharma. How you’re spread across that? Because I just get the sense that on the emerging biopharma side from a revenue standpoint, given a lot of the work that’s done, it’s less material from a revenue standpoint than the large-cap pharma.
And I think there’s a difference between the two when we think about sort of defensibility of those revenue streams. So maybe talk a little bit about biopharma and then the demand picture that you’re seeing?
Mike McMullen
Yes, sure, Matt. So I think we completely agree with your thesis. So if you look at our book of business from, say, the small biotechs to the large biopharma companies, the actual amount of businesses are skewed towards the larger and larger companies. That being said, we see the smaller bio start-up companies has a really great opportunities for the long term.
So in fact, I think, Bob, we added more accounts, new accounts in the first half of this year than we did last year, 700 new. So we want to be with those customers when they make their first instrument purchase. And we also have various financing models, business models are attractive and then we want to grow with them. So we’re building a future book of business, but I’d say right now, the bulk of the business is with the larger firms.
We’re really happy with our performance here. So let’s set aside one aspect of our biopharma, which is our NASD GMP oligonucleotide business, we’ll talk about later. But if we’re talking about our core analytical lab business, our LSAG team has just done a great job working with our chemistries and services team to build workflow solutions around our mass spec products and there’s a real drive for LCMS in the biopharma space around workflow.
So — and in fact, we have a nice introduction. We’ve seen ASMS in this area. So we see the market requirements, what customers looking for in this space are a lot different than the small molecule side. It really is a workflow game, which we think really plays well to our ability to have these integrated solutions around easy-to-use robust platforms.
Matt Sykes
And maybe within biopharma and overall, but just with biopharma, you’ve talked about backlog growth being stronger than revenues. And I think there’s some — a lot of questions as to maybe potential pulling forward of demand or stockpiling. Maybe talk about the complexion of that backlog and what it looks like.
Mike McMullen
Yes. That’s a question that has come up and it’s something we keep asking ourselves as well. And what do we look at? We look at the fact that it’s been going on for several quarters, so it’s not a new phenomenon, but we also watch very closely what’s happening with order cancellations.
So why do I say we look at that because that would be an indication of whether customers ordering multiple instruments and then whoever gets the product first, we’ll go with that vendor, that’s not all happening. We also know that we only book orders out to six months. So it’s not like people are placing orders for things way down the road in the order book that I’ve been talking to you about.
So we’ve seen no indication that actually is happening. Because again, what’s — and Bob, you may want to elaborate a bit more on this because we’re actually seeing, as the audience probably knows already the emergence of new therapeutic development that really is fueling this. So there’s a demand for instrumentation to fuel a lot of the research in one of these new areas.
Bob McMahon
Yes. That’s exactly right. And many of these instruments are customized or built for purpose. And so you don’t see people buying a several hundred thousand dollar instruments to put it on the shelf. So they are typically buying it when they need it. So we have good visibility, as Mike says, and we feel very good about the continued momentum across multiple end platforms, particularly in pharma.
Matt Sykes
Got it. And then maybe something we talked about earlier this morning about the potential cost consciousness of some of the customers and how you can be flexible, whether it’s subscription services or things like that, how you can actually help them with those decisions. And I think ACG is a big lever. We’ll talk more about that later, but that’s a big lever about actually adapting to the environment and helping the customers.
Mike McMullen
Yes, absolutely. So the inflationary environment obviously puts challenges on a company like Agilent and we make sure we manage our cost structure and pricing appropriately with our customers. But at the same point, it creates challenges of our customers, also new opportunities for Agilent. So, we’ve talked earlier about our customers are not only into the great scientific outcomes from the laboratories but they also have — they’re very worried about the economics of the operational side of the laboratory operations.
And particularly, as you start to see the cost of labor continuing to go up at rates we haven’t seen in decades, it becomes even more imperative for our customers. So this is where not only do we have the instrumentation and workflows that can drive productivity. But if they’re not able to do the capital purchase side of things, we can go in with our services capability, our analytics and really point to where there are opportunities for customers to improve their lab productivity. And then for perhaps some of the more cost-conscious customers, we actually have a certified pre-owned business, which also gives them avenues for other access to Agilent instrumentation, albeit not maybe the most recent generation.
Matt Sykes
Got it. You talked to NASD and it’s an area that we’ve been really interested in as well. And it’s been a very exciting growth area for you. And it seems like there’s an advantage that Agilent has in terms of scale, in terms of being able to get these trains up and running. You’re bringing on capacity as quickly as you can to serve the demand that you’re seeing.
In terms of the long term for this business, in three to five years’ time, do you think that scale that Agilent has will be a key differentiator for NASD business as it grows?
Mike McMullen
Yes. So I think that’s going to be an element of differentiation. And I’ll tell you the whole story from my perspective. So you often hear companies claim that they can do GMP-grade oligonucleotides but can they do it at scale. We can actually do it at kilograms levels. And when you move from, say, a clinical research environment to on market demand, you need to have that ability to scale and produce product at higher volumes.
And that’s one of the reasons behind the decision we made to make the investments to increase our capacity. But I think it needs to be more than scale. I mean, listen, I hope some time we have an opportunity to actually have you down and see this site to show it off a bit. It really is second to none. There’s nothing like this in the world.
Very sophisticated process manufacturing. But it’s the team around the scale, the investments we’re making, I think, is also part of a differentiation story. How we work with customers upfront, how they trust our work, the dialogues go back and forth. We’re integrally part of their earliest phase of development work.
So I think that’s why we win in the market, which is both the trust that customers have in the Agilent team and our expertise and our ability to work with them in a very flexible way, but also the fact that when their programs go through a clinical trial and then go on market, they know they can be with us the entirety. So that’s where the scale piece comes in. So I think we really need to have both of those pieces. And Bob, do you want to add something else?
Bob McMahon
Yes, just to build on that. I think one of the pieces that’s important here is as we go through the development of the clinical trial phase, we’re spec-ed into the commercial drug. And so it’s not a trivial thing for a company to walk away as well. And so as we think about our pipeline, what we are seeing is still, if you look at the number of therapeutics on market versus in the clinic, it’s still dramatically skewed to things that are still in the clinic.
And so we see this as a long-term opportunity to move them through that and get commercialized. We’re starting to see these drugs in multiple therapeutic indications. The other area around scale that’s important is what we’re also seeing is therapeutic indications that have larger targeted populations. The first couple of products for siRNA therapeutics were in smaller targeted populations in the tens of thousands.
And now what you’re seeing is opportunities for targeted populations in the millions around the world. And so that scale becomes even more important as you’re working through that clinical trial, how you’re doing this but then also working closely with them and then being able to ramp up manufacturing capacity associated with that.
Mike McMullen
Bob, I have to think there may be another story too from a differentiation standpoint. This idea of being able to be with customers through, if you will, the research phase all the way through to clinical trial development then hopefully on market demand, the RUO side of our genomics business. So we’ve got some really interesting and differentiated capability around guide, for example. So we have a SureGuide program, and then that links right into CleanGuide, which is on the GMP side.
So customers really like to be with you throughout their whole entirety of the development process. And I think that’s perhaps a unique part of our story as well. This ability to be with them throughout the entirety of the process and developing the therapeutic. They have a lot of comfort being able to work with the same company, the same team. Obviously, different needs as you go through the phases. So I think that’s also going to be part of our differentiation thesis going forward.
Matt Sykes
Got it. Yes. I mean that was kind of part of my next question is that..
Mike McMullen
You got it in your notes.
Matt Sykes
Exactly. You’ve got both RUO and GMP services. And we did a deep dive on bioprocessing a few weeks ago. And one thing the trend that we noticed is that GMP is being used earlier and earlier in the process. So having both is actually critical because you can see that change and then serve that change. Could you talk a little bit about that dynamic and how Agilent is positioned to benefit from that dynamic?
Mike McMullen
Yes. We agree with your thesis about how this market is developing. And we’ve got some capabilities around the gene editing side, for example, on the CRISPRs. I talked about our guides, for example. And we’re able to — and we work very seamlessly between our genomics R&D team and our GMP team in NASD business. And I think the fact that they — we’ve got some differentiated capability, and we are knowledgeable about GMP needs, it all kind of comes together. And I don’t know if there’s anything else to add.
Bob McMahon
No, we agree with that. I mean we’re seeing that same thing Matt.
Mike McMullen
It is still early days in terms of the actual revenue impact.
Bob McMahon
But I think what’s really important in the biologics space or some of these areas is consistency of quality control, right?
Mike McMullen
Yes.
Bob McMahon
And so when you move from an RUO to GMP, there can be some variability there. And so what they’re — our customers are trying to do is learn earlier on, will that — to have that stability across because some of these personalized therapies, it’s targeted at very small population, sometimes even one person. So being able to demonstrate and understand that you have that same efficacy and safety profile from RUO to GMP, we’re seeing that same thing.
Matt Sykes
Got it. And one last question on this. I mean NASD is just one part of sort of the overall bioproduction business overall. But we’ve seen a lot of capital becoming invested in sort of CDMO bioproduction just due to the supply-demand imbalance. As that capital starts coming in, where do you see sort of Agilent as being a key differentiator in this market? And do you think it could pull down returns on margins? Or do you think the supply-demand imbalance will continue to because of the lack of maturity of the pipeline.
Mike McMullen
I’m going to actually cover two thoughts here. One is as it relates to our NASD business, when we think about the CDMO market or we like to call this the contract research and the manufacturing space. What segment are you in? And we are at a very specific segment around siRNA. And we think the barriers to entry are quite high here. You have to have really specialized knowledge to be able to do this. And the margin profile, we think, is going to remain attractive for some time.
So we’re — that was part of the calculus we made a number of years ago when we made those early big investments. And so far, I think it’s playing out. So we’re going to, if you will, stay in our lane relative to the segment of the market we played on the CDMO side. What I will say is we do see other opportunities for Agilent in the overall bioprocessing piece. You may have seen recently, we just announced a collaboration with Merck and Sigma where we’re actually going to take our liquid chromatography platform and integrate it in their offerings in the bioprocessing side. We also do see plays for our analytical lab technologies in this emerging space of bioprocessing with both liquid phase as well as LCMS-based technologies.
Bob McMahon
And I think as we think about this for us, today, the majority of our business, as Mike said, is siRNA. We do have some CRISPR technologies that we’re looking to expand. That’s still a very emerging, as you said, even more so than siRNA. I mean if we think about some of the capacity expansion, more clinical products versus commercial products. And then we’re also looking to say, how can we leverage that technology into things like antisense.
So we are in mRNA, the vaccine manufacturing production, which has been scaled up. We provide instrumentation into that — into those labs. But this is actually a very different dynamic in the business that we’re in.
Mike McMullen
So Bob made a really critical point here, which is we do see opportunities to expand the breadth of our portfolio within that segment.
Matt Sykes
Yes. Got it. So maybe shifting to ACG. And I remember you telling me early on it was like at Agilent no one thought you could expand margins in the services business.
Mike McMullen
Yes, that was an urban legend on Agilent.
Matt Sykes
And yes, you’ve been able to do so. Maybe talk a little bit about sort of the synergies it provides to the rest of the business in terms of deepening the relationship with the customer. I mean, you’re leveraging a very large installed base to kind of get you into that business.
But attachment rates are something that you’re very focused on. So maybe talk about attachment rates, where they are, where you think they can go? And what kind of driver can they be to revenue and margin.
Mike McMullen
Yes, absolutely, we seem anxious to jumping in and start answering your question here, but I think the craze of ACG Group and how we built both the services and consumables business around this construct of a cross lab strategy, I think it’s been a big part of the Agilent transformation over the last several years.
And when we think about the service portion of that story, we’ve been able to build scale. And when you build scale and build account concentration, that helps drive your margin profile. We’ve invested very, very heavily in digital to support this business as well. So, a lot of our service interactions are now done digitally, which has been part of the reason why we see that nice margin profile, but also I think it speaks to the value that we’re finding customers because they see the value in the interaction with Agilent in terms of helping them with their laboratory operations.
So by itself, it’s been a great business and continues to be very strong, but it has so many other ancillary effects to other parts of the Agilent business. And by the way, to your point about the connect rates, we think often the question we get is, when is this going to slow down? How can you continue to have these high-single digit, double-digit kind of growth rates in the space. Well, one is we think the market itself as it continues to expand because. What do we mean by services?
So Agilent now adds a lot more digitally related services. So it’s not simply just a break and fix kind of environment anymore. But also, we know we have upside in terms of what you call the connect rates, which was — and the connect rate being how many of the Agilent installed base, for example, customers are have their services coming from Agilent are often — get those at the time of instrument sale.
And I think we’re probably in the mid- to upper 20s…
Bob McMahon
In the high 20s right now, and we’ve been adding 1 point, 1.5 points per year. And each point is roughly $30 million of incremental revenue. And we’ve been able to scale that because if you think about the ability to have a service — field service organization that’s out in the field. If they’re able to go to a client and has two service contracts versus one, it doesn’t really cost us anymore from a labor perspective, but it keeps uptime up for our customers so that they see real value in that opportunity, and that’s one of the ways that we can scale in addition to the digital activities that Mike was talking about.
Mike McMullen
So response time is so crucial to customers, which is — you have to remember why does the laboratory exist? It’s there to support a much larger enterprise mission of the company. And the worst thing that could happen is downtime. So the ability for us to respond very quickly by having on-site engineers as quickly as possible, but also engage them digitally. Maybe just to kind of finish the story about the other aspects of the implication for Agilent’s long-term business. Not only is this a key driver for customer satisfaction with the account, our service team is with the client on almost a daily basis, right? So they really have a chance or even have a further deepened relationship.
I mean often what we see is this translates into when they do through a technology refresh, a shift of products to Agilent because based on the customer’s data, they can see what instrumentations had challenges with repairs, uptime. So it’s their own data. It’s not our sales team coming in and telling about how reliable our equipment is and how we’ll always be there to be able to get their — the trust and answer, you have real data to show to the customers. And we’ve seen a transition where you go in with services, and that leads to an expansion of your instrument business over time as well, along with consumables.
Bob McMahon
And Mike and Matt, just — just to help the audience frame in kind of — so okay, 20% to — 25% to 30% what’s the ceiling?
Mike McMullen
So good point. Bob?
Bob McMahon
We know that there’s a tremendous runway here already in the market, some of our competitors are at the 40% to 50% range. And there’s nothing structurally different from our instrumentation and so forth. So that tells you that we’ve got a huge opportunity ahead of us. This is one thing that the legacy Agilent was an instrument-driven company first until we created the ACG business.
And given our installed base, we can go not only forward but also backwards into our installed base, and that’s how we’ve been driving this. So we think that there’s a lot of runway here just based on industry data to continue to drive not and then you have the market dynamics as well.
Mike McMullen
Yes. And I mentioned — referenced earlier urban legend, Bob pointed out to the transformation of the company, which is instrumentation having the best instrumentation is still a crucial part of the Agilent value proposition. But we move from our view that also customers need more than that. And this whole idea of building a services business that really adjusts to customer need is a crucial part of our transformation, as I mentioned earlier.
But there was a view that, oh, you can’t really — it’s not a really good business to be in because services is not a financially attractive business. I think we’ve now put that to rest.
Matt Sykes
Got it. Maybe moving over to pricing. You guys have been successful taking up price. Maybe talk about the runway for price, the timing of the realization of those price increases and how they flow through. And I’ll have a follow-up after that.
Mike McMullen
Yes. So obviously, we’re dealing with a pretty challenging inflationary environment. All of us, both in our professional and personal lives. And that’s why we were very happy with the print we had in Q2, up 140 basis points in this inflationary environment. So clearly, the element of that has been in the pricing side of things, but also continue to drive productivity as we talked earlier this morning. We’ve engaged our customers in a way on a pricing standpoint that — what we’re doing is viewed as reasonable. We don’t want to be trying to take advantage of the situation to try to drive incremental margins.
But we do need to cover our costs. And I think we’ve been pretty good about that so far, as you’ve seen in the P&L. Bob, I do think there’s a timing dynamic that it’s probably worth sharing as well, which is…
Bob McMahon
Yes. To frame in some numbers at the beginning of the year, we had identified roughly one point of price realization. And we were ahead of that in Q1 and actually accelerated in Q2. And so we’re well on our way to probably being double that. But when we think about the price we had taken price in an off-cycle price in September of last year, reflect the increasing costs.
Our typical price increase is in January. And so in Q2, we saw the full effect of our September, but only a portion of the effect of our September given the strength of our backlog. And so we still have an opportunity to see more price realization in our revenues going forward that’s already in our backlog, which gives us some confidence is one of the elements that gave us visibility into increasing our full year core growth rate in the second half or second quarter.
Mike McMullen
Because we know it’s in our backlog. We know the price is in our backlog. And so that’s why we have some view of raised outlook.
Matt Sykes
I mean one thing we talked about this morning is that I think customers are very understanding of price increases because they’re seeing it in their business. But at some point, there might be a level of demand destruction where they just — they know why you’re doing it, they just can’t take that price increase. How do you help mitigate that type of situation? How do you work with your customers?
Mike McMullen
Yes, absolutely. So one is what we — again, we have to be doing and price needs to be viewed as reasonable and I understand we explained when we actually spend time walking that through with our customers. I think depending on the situation, if it would come to that, I think we could offer — I think, again, it comes back to the — they may not be in a position of a capital purchase, but we can help them on the productivity with our ACG offerings.
But also we have a CPO business, certified preowned business. So there are alternatives for people to get access to Agilent instrumentation, albeit perhaps at a lower price point. And Bob, we chat a bit about this…
Bob McMahon
Yes, we also have some alternative business models of subscription services so they can get at perhaps a lower price point. So we have a number of ways for a customer to look at this. But I think the key is having that dialogue, and that’s where the service engineer and that constant interaction with them comes into play and understanding what the pain points are as well as what the needs of our customers are and how we can actually drive more productivity in the lab through our ACG business.
Matt Sykes
And to be clear, that’s not a situation we’re in, but it’s just nice to know there’s that flexibility.
Mike McMullen
No, no, no. So I’m not signaling that’s happening, but I think we have tools we can use to help our customers if need be.
Matt Sykes
Got it. Maybe on China. Obviously, you guys went into great detail, helpful detail in the last quarter on China about the shutdown on the GC plant. Maybe talk a little bit about how you see the trend of recovery in China and your expectations.
Mike McMullen
Happy to do that, Matt. I think we’ll tag team on this. So I think it’s important to share with the audience, there’s actually two implications of our business due to the shutdowns in Shanghai because all our customers were shut down obviously as well. One, we couldn’t produce instrumentation gas chromatographs at our Shanghai factory for the China market, the export dynamics of that business. That was one implication. The other one was the importation of products from outside of China.
It got into the country, customers aren’t there, we can’t have anybody pick up the instrumentation. So we had a kind of a double impact. And that’s why we’re so happy with the overall result of the company given the fact that Shanghai, which has — Shanghai area has a very heavy concentration of pharma customers in particular, yes, we had a beat-and-raise-quarter.
And Bob, I think the overall message here is the recovery is happening as we had forecasted in the Q2 call. We mentioned earlier, we’ve seen this movie before in terms of we know that there won’t be — we have high confidence that there won’t be order cancellations associated with this. And Bob, and maybe it’s worth kind of walking them through the profile of how we handle them.
Bob McMahon
Yes. I think to start, one of the most important pieces is demand continues to be really strong.
Mike McMullen
20% growth.
Bob McMahon
20% growth in order growth in China in Q2 despite five weeks of shutdown or lockdown in Shanghai. So that $50 million to $55 million, which we had sized is deferred. We haven’t seen any cancellations. We’ve ramped up our factory. It’s kind of unplanned.
We had talked about it being full production back by end of June. That’s kind of where we’re on track to seeing that. Our facility — our logistics facility is also back up and running. It’s going to take some time to get some of those products out into customers and then out of the country.
But we have high confidence that, that $50 million to $55 million will come back probably more in Q4, and then some into — bleed into our fiscal Q1. But the underlying demand continues to be there. And we’ve got the folks back and up and running in our — both our logistics and GC facility.
Matt Sykes
Great. Unfortunately, with that, we’re out of time. We’ll skip out on the capital allocation question. We’ll ask that later. Thank you very much.
Mike McMullen
It’s a pleasure to be here. And Fly, Eagles fly, right?
Matt Sykes
Yes. Fly, Eagles Fly. Thank you so much.
Mike McMullen
Thanks, Matt.
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