Agilent Technologies, Inc. (A) Q4 2022 Earnings Call Transcript

Ladies and gentlemen, welcome to the Agilent Technologies Q4 2022 Earnings Conference Call. My name is Bo and I will be coordinating your call today. I will now hand you over to your host, Parmeet Ahuja, Vice President of Investor Relations. Mr. Ahuja, please go ahead.

Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation, and information to supplement today's discussion along with the recording of this webcast are available on our website at www.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 any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. Please note that we have changed the name of the Chemical & Energy end market to the Chemicals & Advanced Materials end market. This change better reflects the mix of business in this market. It does not affect financial reporting in this quarter or prior quarters. 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.

Thanks, Parmeet. And thanks, everyone, for joining our call today. In the fourth quarter, the Agilent team continued its strong performance. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenue of $1.85 billion is up more than 17% core. Our strong top line performance helped deliver fourth quarter operating margins of 29.1%. The operating margins continue to expand despite the inflationary environment and the strengthening dollar and are up 260 basis points from last year. Earnings per share of $1.53 were up 26%. These Q4 results mark an outstanding finish to another strong year for Agilent’s fiscal 2022. The full year revenue of $6.85 billion, we delivered core revenue growth of 12%. This is on top of core revenue growth of 15% in 2021. Our operating margin continued to increase and a 27.1% for the year, up 160 basis points. Earnings per share of $5.22 per share, up 20% for the year. Our results this year highlight the ongoing strength of our diversified business and shine a light on the multiple growth drivers we put in place over the years. They also continue to demonstrate the outstanding execution capabilities of the Agilent team. Throughout the year, we navigated market uncertainties, inflation, COVID-related shutdowns, and supply chain and logistics constraints. Our strength is broad-based with all three business groups growing double digits for the year. All major geographies and regions grew double digits in FY '22 after adjusting for our exit from Russia. This was highlighted by China leading the way, growing 18%. From an end market perspective, all markets expanded, led by excellent growth in our two largest markets, Pharma and Chemicals & Advanced Materials. All in all, it was an extremely good year for Agilent. Let's now take a closer look at our fourth quarter performance, starting with end market highlights. During Q4, our performance led by 20%-plus growth in three of our six end markets. Pharma, our largest market, posted 20% growth on top of 21% in Q4 last year. The Chemicals & Advanced Materials business grew 27%. We saw robust demand in chemicals, along with secular growth in semiconductors, batteries, and other advanced materials. The food market also grew 20% on a strong end-of-year demand in China that had been previously delayed by COVID-related shutdowns. On a regional basis, China led the way for us with stellar 44% growth as demand remained strong. Business activity continued to recover, and the Agilent team worked quickly and effectively to start working down the backlog including delivering remaining shipments deferred due to the Shanghai COVID-related shutdown in Q2. Europe also exceeded expectations by delivering double-digit growth in the quarter, coming in 14% higher than a year ago, with broad strength across our markets, highlighted by low 20s growth in pharma. Looking at our performance by business unit, the Life Science and Applied Markets Group continued its outstanding performance and posted revenue of $1.12 billion. This represents growth of 22% with the instrument business growing 24% and our Consumers and Applied business growing 15%. We also saw excellent low 30s growth in our LC/MS instruments business as our solutions continue to resonate with customers. LSAG was able to build our leadership in applied markets with spectroscopy growing in the low 20s and the GC and GC/MS business growing in the low 30s. In addition, Agilent is doing its part to help customers monitor and manage microplastics in the environment as we released the latest version of the 8700 LDIR chemical imaging system. This unique system has been optimized specifically for the analysis of microplastics in environmental samples. The ads on Agilent CrossLab Group posted revenue of $381 million in Q4. This is up 14% core with broad-based strength across our entire portfolio of offerings. Pharma and Chemicals & Advanced Materials both grew mid-teens for ACG. On a regional basis, China led the way with high 20s growth as business continued to recover. ACG also delivered double-digit growth in the Americas. ACG has delivered double-digit growth for us every quarter this year, and our engagement with large enterprise customers continues to accelerate. Through its deep understanding and insights into lab operations, the ACG team continues to build strategic partnerships and long-term relationships that maximize customer value and provide ongoing demand for services and support. The Diagnostics and Genomics Group delivered revenue of $352 million, up 8% core. DGG's results were led by strong growth in the low 20s for NASD. As expected, our NASD business delivered high quarterly revenue on a sequential basis given the plant shutdown last quarter. Our genomics portfolio also posted solid results, growing low teens, and pathology grew mid-single digits. On a regional basis, DGG also delivered mid-20s growth in China. In addition to these business group highlights, during Q4, Agilent was recognized by the World Economic Forum Global Lighthouse Network as a world leader in advanced manufacturing. Agilent's manufacturing facility in Singapore received this recognition for deploying innovative technologies at scale in the manufacture of scientific instruments, driving productivity while advancing sustainability. Also, we are extremely pleased to announce a new multimillion-dollar partnership with Delaware State University, a leading historically black university. The work we will do together with DSU is geared towards increasing the number of underrepresented students entering STEM fields. In addition, Agilent is certified as a great place to work by the Great Place to Work Institute in more than 20 countries and regions around the world during the quarter. This recognition distinguishes Agilent as a top employer based on an independent survey of its global workforce. In recap of 2022, we had another very successful year, not only in delivering excellent financial results but in building for the future. We continue to drive innovation focused on supporting our customers and executing our Build and Buy strategy to outgrow the market. The Agilent team continues to deliver. We have built a resilient company with multiple drivers for growth and target investments focused on high-growth areas. We have an unstoppable One Agilent team that can take on any challenge and execute at an extremely high level. As we look ahead to 2023, we believe these qualities are a winning formula for continuing to deliver in an increasingly uncertain economic environment. Bob will now share more detail on the quarter and the year along with our initial view on expectations for fiscal year 2023. After his remarks, I will rejoin to add some final comments and perspective. Thank you for joining us today. And now, Bob, over to you.

Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year, as well as take you through the income statement and other key financial metrics. I'll then finish up with our guidance for fiscal year 2023 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q4 performance and finished the year on a very strong note, exceeding our expectations on both revenue and earnings per share. Q4 revenue was $1.85 billion, up 17.5% core and 11.4% on a reported basis. During the quarter, we saw the dollar continue to strengthen. Currency exchange rates were a 6.2 point headwind to growth or $103 million. The contribution from M&A was as expected, adding 0.1 point to reported growth. Our performance was again broad-based as all end markets and regions grew during the quarter. Orders also grew again during the quarter, while outstanding execution from our order fulfillment and supply chain teams enabled us to start working down our record backlog. As we enter FY '23, our backlog is still elevated and helps provide good visibility and confidence in our outlook going forward. Now I'd like to share additional details on our end markets. Results in our largest market Pharma were very strong. This market represents 37% of Agilent's revenue and grew 20% in the quarter. Biopharma grew 18% and small molecule was up 21%. Looking forward, we expect the pharma end market to grow high single digits in FY '23. Chemicals and Advanced Materials led growth for us during the quarter at 27%. This compares with 11% growth in Q4 of last year. All three submarkets, Chemicals, Advanced Materials, and Energy had strong growth in the quarter. All regions grew as well, led by China. Demand continues to be driven by investments in advanced materials, driving secular growth opportunities in batteries, alternative energy, and semiconductors. While not immune to macro uncertainties, we believe these secular drivers in Advanced Materials will continue, helping to drive mid-single-digit growth for this market next year. We delivered growth of 20% in the food market led by China as our results continue to benefit from the recovery of revenue delays due to COVID-related shutdowns in Q2. During FY '23, we expect the food market to normalize and grow in the low single digits after two years of very strong growth. The Environmental & Forensics market posted 18% growth with particular strength in the Americas. This result was driven by increased governmental spending helping to drive technology refresh for newer applications like PFAS testing. Europe and China also posted impressive double-digit growth in the quarter. We see PFAS-related funding and demand continuing to be a driver for this end market and expect mid-single-digit growth next year. Our business in the diagnostics and clinical market grew 6% against an 11% compare last year. Growth was led by Europe and China, while Americas grew low single digits. We also expect to see mid-single-digit growth in this market in FY '23. The Academia & Government market grew 3%, led by continued strength in our service business. This market grew 3% overall for the year as well; and looking forward, we expect similar growth in 2023. On a geographic basis, China led the way with phenomenal 44% growth in Q4, driven by underlying demand across multiple end markets and our continued ability to quickly recover deferred revenue from Q2. As we have discussed the last two quarters, the COVID-related lockdowns in China earlier this year deferred an estimated $50 million to $55 million in revenue from Q2 into future quarters. This recovery started last quarter, and our team in China continued their outstanding work to ramp production and shipments quickly in Q4. We've now fully worked through this deferred revenue a full quarter earlier than originally anticipated back in Q2, a true testament to the entire team. We estimate this recovery had a mid-single-digit positive impact on China's Q4 growth. So even excluding this, our business performance in Q4 was very strong. Now looking ahead to next year, we expect China will continue to be a key growth driver for us. And as Mike mentioned, Europe grew a very solid 14%, which exceeded our expectations. We also posted 8% growth in the Americas, driven by Pharma, Chemicals & Advanced Materials, and strong growth in the Environmental & Forensics market, partially offset by Academia & Government. And lastly, the rest of Asia grew 12%. Now turning to the rest of the P&L. Our team continues to execute at a very high level. Fourth quarter gross margin was 56.3%, up 40 basis points from a year ago. Volume leverage, along with pricing, helped overcome continued inflationary pressures and higher logistics costs. Our operating margin was 29.1% in Q4, up 260 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 298 million diluted shares outstanding. Putting it all together, earnings per share were $1.53 for the quarter, up 26% from a year ago, as Mike mentioned. So in summary, Q4 ended with 17% core top line growth and 26% EPS growth, a very strong finish to the year, where we had revenue growth of 12% and EPS growth of 20%. Now some metrics on our cash flow and balance sheet. In Q4, we generated operating cash flow of $448 million, while investing $70 million in capital expenditures. The CapEx spending is driven by our continued scale-up of Train B for our NASD expansion. And in the quarter, we also paid out $62 million in dividends and repurchased shares valued at $135 million. For the year, we returned almost $1.4 billion to shareholders through $250 million in dividends and a bit more than $1.1 billion in share repurchases. And as we've indicated before, given the ongoing strength of the business, we believe these share repurchases represent a very good long-term investment. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.8. Now let's move to our outlook for the upcoming fiscal year and first quarter. Looking forward to 2023, we entered the year with business momentum and a very healthy backlog. We also acknowledge the increasingly uncertain macro environment, rising interest rates, and currency headwinds and have reflected that in our thinking based on what we know today. For fiscal year 2023, we expect revenue in the range of $6.9 billion to $7 billion as we have significantly greater currency headwinds since the last we spoke. Core growth is expected to be in the range of 5% to 6.5%, in line with our long-range goals. Currency will negatively affect reported growth by 430 basis points or roughly $295 million during the year based on fiscal year-end rates. And to help with your modeling at a business group level, this revenue guidance assumes mid-single-digit core growth for LSAG, mid- to high single-digit growth for DGG, and high single-digit growth for ACG. And despite the ongoing currency headwinds and a continued inflationary environment, we are expecting operating margin expansion for FY '23. Now below the line, we expect $40 million to $50 million of net expense, a tax rate of 13.75%, which is slightly below this year, and 297 million shares outstanding. Fiscal 2023 non-GAAP EPS is expected to be in the range of $5.61 to $5.69. This range represents a growth rate of 7.5% to 9% versus the prior year and incorporates an estimated 4 percentage point headwind due to currency net of our hedging activities. We are also expecting $1.4 billion to $1.5 billion in operating cash next year and CapEx of roughly $300 million based on currently approved expansion projects, primarily Train B for NASD. We have also announced raising our dividend by 7%, providing our shareholders with another source of value. And finally, for Q1 2023, we expect revenue in the range of $1.68 billion to $1.70 billion. Core growth is expected to be in the range of 6.8% to 8%, while currency will be a 6.6 point headwind to reported growth. This outlook for the quarter incorporates the impact of the timing of Lunar New Year this year. First quarter 2023 non-GAAP earnings per share expected to be between $1.29 and $1.31. Mike will speak to this further in just a minute, but our diversified business model and the strength of our team are key assets for Agilent. These two elements produced an outstanding Q4 and a full year 2022 and they have put us in an excellent position to again deliver strong results in the coming year. And now I will turn the floor back over to Mike for some closing comments.

Thanks, Bob. Today's results are a strong indication that Agilent has the right growth strategies, the right team, and right culture to continue delivering strong results. Our customers know we are reliable, resilient, and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. Looking ahead, we are all seeing increasing economic uncertainty. However, this company and team have built to successfully navigate any economic challenges we may encounter. Throughout the pandemic, we have stated that Agilent will emerge as a stronger company. Today's results are yet another proof point that we are well on our way in this journey, and we're not done yet. We continue to prioritize investments in growth. We are a resilient company with multiple growth drivers and unmatched execution capabilities. I'm quite confident we will continue to react quickly to changing conditions and deliver at a high level. Thanks for being on the call. And now I will turn things back over to Parmeet as we take your questions.

Thanks, Mike. Bo, if you could please provide instructions for the Q&A now?

And we'll take our first question this afternoon from Vijay Kumar of Evercore ISI.

Congratulations on a really impressive finish to the year here. Mike or Bob, maybe if I could start with the high-level fiscal '23 guidance question. 5% to 6.5% organic for the year, that's coming off of some tough comps. Maybe just talk about your assumptions for end markets which you're expecting for pharma, chemicals, and advanced materials, et cetera. Just given your commentary on orders and backlog, it looks like the start 5% to 6.5%, it seems reasonably conservative.

Why don't you take that?

Yes, Vijay, yes, I appreciate the comments on the end of the year. And as we mentioned, we're moving into FY '23 with momentum. And really, what we've seen across our business in FY '22, we are expecting to continue into FY '23. Broad-based business results really led by our two largest markets, Pharma and Chemicals & Advanced Materials. And when we think about those, those are both in the mid- to high single-digit growth range and with growth in the other areas as well. We're expecting all of our markets to grow and really given some of the secular drivers that we've seen this year and continued strength in the pharma business.

Hey, Bob, I would just add, too. This is our initial guide for the year. We're at the top end of our long growth model in terms of the long-term growth aspirations we laid out at our last presentation coming off two straight years of double-digit growth. And its initial guide of the year, Vijay. And you probably hear a few times they were being prudent given the increasing economic uncertainty out there. But I would point out that if you look at the core growth rate assumptions, the Q1 '22 guide is actually higher than the full year number.

Mike, I appreciate the prudent comment. And if I could just have one follow-up on margins, that EPS guide came in about Street models despite FX headwinds, it looks like coming in about Street models. What are you assuming for pricing inflation? And what's implied from margin expansion in the guide?

You want to take that, Bob?

Yes. Yes. So we ended Q4 in a very good position here with a little over 4% and that has ramped throughout the year, and we're forecasting roughly about a little over 3% in price next year across our book of business. And we are assuming margin expansion, Vijay, next year. And when we look at that 7.5% to 9%, what we are seeing is kind of unprecedented strength in currency. And we do hedge, but our hedges become less effective over time. And that's absorbing a 4-point headwind. So if you added that back in, it would be closer to 11.5% to 13% EPS growth.

We'll go next now to Matt Life with Goldman Sachs.

Appreciate it. Maybe I just want to dig a little bit more into the margins. You guys mentioned operating margin expansion expectations for next year. But maybe talk a little bit about where you see those drivers coming from, maybe on a segment basis or an end market basis? Where do you feel there's more upside to expand those margins at the group level and where the impact will be felt?

I anticipate that we will continue the progress we've made this year. We have managed to offset the cost increases associated with inflation through our pricing strategies and by effectively managing our operating expenses. This was evident in our operating gross margin expansion, with a significant portion of that improvement coming from operating expenses. Our ongoing investments in digital initiatives, as well as our focus on the One Agilent strategy, are key factors in this success. I expect this trend to persist, as our scale across various business areas should continue providing advantages next year, especially as we integrate more business into our service organization. We will also leverage our existing infrastructure. Additionally, in the instrumentation sector, where we have invested for growth, we are focusing on increasing our attachment rates for services and consumables, which are among our highest profit drivers. In Diagnostics, particularly with the DGG business, we are encountering some startup costs related to our Train B next year. However, if we look closely, our core business is performing strongly in 2023, and I anticipate margin improvement despite these one-time startup costs as we aim to have that train operational by the second half of the year.

Got it. Then maybe a question on the Chemicals & Advanced Materials. You guys made a comment in the slide deck about increased demand in the energy business during Q4. Could you talk about the drivers behind that? And what your expectations are, specifically for the energy market as we move through '23?

Yes, we wanted to emphasize that we observed growth in all three segments of the CAM segment. There are significant investments being made in the HPI industry, reflecting the strength of their businesses. I’ll let Jacob elaborate on this, but their businesses have the capacity to invest and have accumulated a number of deferred investments over the years, in addition to new funding being directed towards renewable and green energy initiatives.

Yes, I think you're right, Mike. We are noticing a pause in capital equipment investment over the years, but we are definitely seeing it come back. Both in the HPI and in renewable energy, we continue to observe a lot of strength, and we believe this trend will persist moving forward.

Yes, we're expecting that trend to continue into '23.

Ladies and gentlemen, we'll go next now to Puneet Souda of SVB Securities.

Mike, Bob, thank you for taking the question. Calling this quarter impressive is an understatement in these uncertain times. First of all, congratulations on the quarter. Mike, the results from China are impressive. Could you provide some more detail? I know there were delays in gas chromatography, but it looks like they're fully booked this quarter, and the revenue from food is also significant. Can you discuss the order book visibility you have in China and your growth expectations there moving forward despite the Lunar New Year? Additionally, what are your long-term growth expectations for China, considering the various end markets that performed well for you this quarter?

Yes, Puneet. I'm happy to respond, and Bob and I can collaborate on this. I appreciate your earlier comments; they brought a lot of positivity to the room. We are very pleased with the results from China, not only for the quarter but for the entire year. It's important to note that the 44% growth we saw in Q4 wasn't solely due to catching up on deferred revenue from COVID-related shutdowns. This highlights that when such events occur, business eventually recovers. We didn't lose any business, and the strength remains across various end markets, particularly driven by pharma and chemicals. We anticipate that the food market will return to traditional growth rates in China. However, we expect strong performance in the pharma and CAM sectors, especially in renewable energy and HPI markets in China. The Advanced Materials segment we've discussed is expected to support growth in China throughout 2023. Initially, we are thinking of aiming for high single-digit growth for China next year.

Yes, that's right. And Puneet, I would say the strength that we saw in Q4 in China was really across the board, across all the major technology platforms within the instrument business. The consumables business was incredibly strong as well. And then the services business, if you recall back in Q3, we said that activity hadn't fully come back, was fully back in Q4. And so we saw very strong there. And not to forget, DGG. We had double-digit growth in our Diagnostics and Genomics business as well. So it was really broad-based. And you talked about visibility, orders continue to grow in China. And we have very good visibility certainly into the first half of this year. And as we think about the secular growth drivers, those are still in place. If you think about the investments that are made in technologies around the biotechnology areas, but increasingly actually in advanced materials and some of the secular drivers around batteries and lithium-ion production and so forth. And we would expect that to continue into next year for sure.

Bob, I just have to think to your comment about the DGG business. Just a reminder, Puneet, as we came into this year, we created a unique structure as part of our one commercialization to have all of our China businesses we put into one single leader. Really, the idea was to add scale to the parts of our business, which we felt underrepresented, and you saw the payoff already starting to happen with the growth rate in DGG, for example.

That's great. Just quick one on pharma. I mean this was the first quarter in a long time when I saw small molecules growing faster than biomolecules. Can you elaborate a bit on what's behind that dynamic?

I thought it was really good newsprint because we've been talking lately about that while we still continue to believe that biopharma large molecules will have the inherently higher growth rate, we've also been pointing the fact that the small molecule will continue to have growth. And I think it speaks to some of the strength of particularly our LC and LC/MS business in small molecule. And Jacob, I'll have you add a few comments here in a second. I wouldn't overread too much in that particular quarter. It's just one quarter. I think we would expect to continue to see over time a differentiation in the growth rates between biopharma and small molecules, but small molecules by no means is dead and it's an opportunity for growth. And I think we've got a great portfolio there, Jacob.

Yes, Mike. I apologize for being on mute. This is Jacob with some comments. You are absolutely right, Mike. We continue to view the small molecule segment as our largest business, and we see biopharma as a significant opportunity. However, we take the small molecule business very seriously and are focused on developing comprehensive workflow solutions for that area, particularly in the LC and LC/MS segments, which is where our growth is coming from.

Thanks, Jacob.

We go next to now to Brandon Couillard from Jefferies.

Mike or Bob, I can't remember. You mentioned the PFAS market several times in the prepared remarks. Can you just give us a ballpark size of how big that market is right now, maybe relative growth rates and whether it's primarily a U.S.-centric market or if it's developing in other parts of the world as well?

So Jacob, how if you and I tag team on this? We're viewing this, I think, about a $200 million market, growing double digits. We think while there's a lot of the growth is centered in the U.S., there's also going to be very strong growth in the U.S. and perhaps some in China. So we actually see this as a sort of a global story with initial big legs in the U.S. and Europe and the growing interest in China. But let me see if I got that right, Jacob?

Yes, you're absolutely right, Mike. It's a huge market. In fact, over $4 billion has been allocated for infrastructure development related to PFAS testing, not just for analytical instruments, but overall. This presents a significant opportunity for us, especially since it requires high-sensitivity instruments to avoid issues with samples that might not be taken seriously. We are focused on building reliable flow solutions that work consistently. We have developed a solution that complies with all EPA regulations, and our customers appreciate its ease of use—it’s plug and play and effectively meets their sophisticated testing needs. While most opportunities are found in the LC/MS space, we are also beginning to explore GC/MS for testing PFAS molecules in the air and other volatile compounds, which holds great potential for us.

Yes. Thanks, Jacob, for those insights. And this is the first time in my tenure where that we've seen this kind of money coming in, in the U.S. marketplace with the government support. So it's a very encouraging trend, and we think that trend is going to be with us into '23.

That's great. Then a couple for Bob. Just number one, can you just quantify the Lunar New Year impact in the first quarter on a year-over-year basis? And then with supply chain loosening, which it sounds like they are, what are the implications for that in terms of working capital as you move through the balance of the year?

Thank you for the questions, Brandon. The Lunar New Year had a little over a 0.5 point year-on-year impact as a headwind in our first quarter. This year, it started in mid-January compared to the beginning of February last year. We expect some recovery from this in the second quarter. Regarding the supply chain, while we believe it is improving, it has not returned to pre-COVID levels, both in terms of delivering products to customers and sourcing raw materials along with associated costs. We anticipate improvements over time, but I don’t expect any significant changes in the first half of the year, with perhaps some minor adjustments in the latter half. We do see progress, but we've increased our inventory of critical supplies to ensure we can adapt if logistics challenges arise globally.

We'll go next now to Daniel Brennan of Cowen.

Congrats on the quarter. Maybe just the first one, just on LSAG. Another really impressive quarter with 24% growth on the instruments. So the mid-single-digit guide, obviously, you're up against tough comps, but it does reflect the notable slowdown from what you guys have been doing. And maybe just walk through a little bit of what kind of drove the strength this quarter kind of end market versus Agilent specific? And then is there just a healthy degree of conservatism baked in for the guide? Or is it really just tough comps?

Yes. I would say at the beginning, Dan, we're at the beginning of the year, there are uncertainties out there, as I'd repeat what Mike said, it's beginning of the year and that's a prudent guide. I would say that there's an element of tough comps, particularly in the second half of the year as we have been building taking down the backlog certainly in China, which was China just a deferral from Q2 into the second half of the year. But I would say, fundamentally, the demand is still strong. And I think across the end markets, our expectation is that the Pharma and Chemical & Advanced Materials markets will continue to lead the way for us with faster-than-expected growth, I think, in Environmental & Forensics for that PFAS testing.

I would like to add a couple of points here. We are continuing to see an increase in our market share, with the latest industry statistics showing positive results across all platforms. This should put any discussion about whether we are gaining share to rest. However, it’s important to note that we have been in an extraordinary environment for several consecutive quarters, experiencing instrument growth rates in the 20s and 30s. We have been open about the fact that part of this growth is linked to an accelerated replacement cycle in specific end markets and technologies. As we prepare our guidance for 2023, we should expect a return to more typical replacement rates in some end markets, although we anticipate growth, it may not occur at the same pace we've experienced recently. Jacob, do you have any additional insights on this?

No, I think we’re good, Mike.

And then maybe a follow-up. I know you've already discussed in the Chemical & Advanced Materials, a really strong quarter. And then on the outlook. I'm just wondering for the mid-single-digit guide obviously, the Advanced Material portion is like 1/3 of that business. It sounds like that's expected to grow really strong. Maybe just give us a flavor for how you're thinking about the three subcomponents in the '23. And like is there anything baked in on the chemical side of the energy side that would reflect some kind of impact from a selling economy? Or just kind of how should we think about that mid-single digit.

I'm going to invite Padraig to join this discussion as he is working closely with his team on it. We are maintaining a cautious outlook regarding the chemical industry in Europe, which I want to distinguish from the potential impacts related to HPI and renewable energies. In the base chemical business, our major clients are managing increased production input costs. Therefore, we are projecting a cautious outlook for that segment in Europe. Padraig, since you are from that region and have been in conversation with our team about this, do you have anything to add?

Yes. No, I think it's cautious, Mike. And I think what we're seeing is that there's additional scrutiny being played on converting quotes to orders that we're seeing across, particularly in Europe. And of course, there's quite a lot of macroeconomic pressures there as well. So I think you're spot-on on that one.

The only thing I would add, Dan, is that this area could have potential upside. If the current trends continue, there may be an opportunity for growth in this market due to the strength we're observing.

Absolutely, Bob.

And we'll go next now to Rachel Vatnsdal at JPMorgan.

So first up on Train B. Last quarter, you guys said that there were some supply chain delays as you guys were building up that manufacturing line. So can you just give us the latest on timing if you're still on track for that to come online mid-fiscal year? And then thinking about beyond Train B, you guys have hinted at potential capacity expansions beyond this. So can you give us the latest on your thinking on those capacity expansions and when we could hear an update there?

Yes. It sounds good. Rachel, thank you for the question, and happy to report there haven't been any changes since we last spoke about Train B and timing. We're on track to go live in the middle of the calendar year coming up in 2023.

And at the risk of being repetitive, Rachel, we're on record saying that there's more letters than the alphabets in A&B. So we're focused on getting Train B up and running and have it generating revenue in '23. But at the same time, we continue to explore possible expansion plans, and nothing yet to announce yet, but stay tuned.

Great. And then just one more follow-up on food. So food grew 20% this quarter. It sounds like some of that was from that China recovery and pull forward there. But all in, you're guiding to low single digits next year off of that two year stacked tough comps. So can you just walk us through how should we be thinking about the food market going forward? Do you think in 2024, it's going to normalize more at a low single digit? Or is this market really accelerated and the guide this year is just more on that typical comp?

Yes, that's a great question. This is Bob. I believe it wasn't a pull forward, but rather a catch-up in the growth rate. As you know, China plays a larger role in the food market, and we've experienced two years of strong performance there, which has resulted in challenging comparisons. I think we are seeing an upward trend due to ongoing investments in the region. However, we still anticipate growth in the low to mid-single digits.

I think just to kind of reinforce our ability to hit that mid-single or low to mid-single-digit growth rates, we also see continued strength in the U.S., for example, where our cannabis testing business is part of what we reported, so, right Jacob?

Yes, correct. And the cannabis business continues to do very well, and we see a lot of lab owners that are looking for us to come in and help them to equip the full laboratories. So that's a big opportunity for us. But also the alternative protein space is really picking up, both here in the U.S., but particularly also in Asia. So I do believe that is going to continue to be a secular growth driver for us in food.

Right. And I really wanted to make sure that we highlight those new secular growth drivers because a lot of growth historically has come from China. We're seeing actually a much more diversified mix of business as we move forward.

We go next now to Derik De Bruin of Bank of America.

So Mike, you said it’s an unprecedented environment for instrument demand and such. We've been covering these markets a long time, you and I and looking at these, and these are just numbers, which are really just amazing instrumentation numbers. So what's embedded for instrument growth in your 2023 guide? And how much of this is already covered by your backlog versus what's going to be new or have to get in through the year?

Thank you, Derik. You and I have been in this business for a while, and we've really been enjoying these impressive growth rates. I believe there are aspects of the market that have actually raised the long-term growth rates compared to what we've observed in the past. However, it's also reasonable to think that some of these fast replacement cycles will begin to slow down over time. That said, Bob, I think we're looking at LSAG in the mid-singles.

Mid-single. That's correct.

And I'll let you pick the second part of the question there.

Yes, yes. So it is mid-single digits. What I would say, Derik, is we're not going to disclose the amount of contribution for our backlog in there. But you can imagine that, that healthy backlog that we just talked about is primarily on the instrument side. It's just the way that we book business. And we have pretty good visibility into the first half of the year just given the way our order trends happened.

Can we discuss the academic market and your observations there? There's low single-digit demand for the quarter. How does that compare to your expectations? I know your academic presence isn't large, but your genomics business performed quite well in this quarter. Could you explain what's happening in that market and if you're facing any challenges?

Yes. So Bob, maybe we can tag team on this, and I'll start. So first of all, this is the one market that we always coming out of COVID said will be the slowest to recover, and that's still proven to be the case. We saw really, really good demand in China in Academia & Government and also good demand for certain aspects of our portfolio. But at the same point in time, a level of caution is around CapEx. NIH funding is not as robust as people had hoped. So we've tempered our outlook for '23 as kind of just a continuation of more and more of the same.

Yes. And I would say, Derik, the growth that we had met our expectations right down the line; and as Mike said, stronger in places like China, and less so in the U.S. but it met our overall expectations. And that's kind of how we're expecting it in FY '23 as well.

And I have to ask the obligatory M&A question. Your share is obviously a good choice right now, but anything peaking your interest, valuation starting to come in on some of the stragglers in the market?

Thank you for that, Derik. As you know, we have implemented a Build and Buy growth strategy, which involves seeking opportunities to enhance Agilent by acquiring new businesses and teams using our financial resources. As we discussed in some of our calls earlier in 2022, valuations were exceedingly high at that time, both in the public and private sectors. However, we are beginning to see a moderation in those valuations. While there is nothing specific to announce at this moment, I can say that we are actively pursuing opportunities, and we are reaching a point where potential deals that would benefit shareholders are becoming visible.

We'll go next now to Jack Meehan of Nephron.

I wanted to keep going on the instrument side. I was wondering if you could comment on cancellation trends. So just in the context of the broader macro uncertainty, is that showing up anywhere in your instrument backlog?

Yes, Jack, thanks for that question because one of the reasons we have confidence in our outlook is due to the elevated backlogs, which are healthy. We have not seen any significant changes or cancellations, which remain very low. Therefore, the orders in our backlog will be fulfilled, and we are very optimistic about the quality of our backlog.

Yes, Jack, to expand on that, the first aspect is that our orders are not being delayed, and we are not experiencing any cancellations either.

Awesome. Okay. And then kind of the other pressure area we've been monitoring is more in the bioprocessing side, just stocking trends at customers. I know you compete sort of adjacent to some of these markets on large molecule. Are you seeing any destocking activity in any of the markets that you serve?

No, thanks for that question, Jack. We've been reviewing some of the reports as well, and we feel that they don’t accurately reflect our business. We saw a strong 15% growth in CSD and low double-digit growth in the genomics sector. Therefore, we are not worried about any impacts on our ongoing business.

We'll go next now to Patrick Donnelly of Citi.

Maybe following up another one on the instrument side. I know you aren't going to give a hard number on the backlog. You did mention it was still elevated, Mike, and obviously gives us some good visibility into next year. I mean, any way you can frame kind of what it looks like today going into kind of a year compared to historicals? And then just on the order growth, what did that look like in the quarter? Obviously, the past few quarters, you called out outgrew revenue nicely. I'm just trying to get a feel for that, maybe if you have it on a geographic basis as well, that would be helpful?

Yes, certainly. I believe our backlog remains above historic exit levels, which is why we chose to describe it as elevated, indicating there is still potential for growth. While I won't provide a specific growth rate, I can say that we achieved an increase in our orders in Q4 compared to the previous year, which had a double-digit growth. It's important to note that we observed a different trend this quarter, which supports our confidence in year-end revenues. Customers were placing orders earlier in the quarter, specifically in August and September, to ensure they received products by the end of the fiscal year. This was the only notable shift from historical patterns, if I recall correctly. Overall, the positive trends appeared to be consistent across various regions.

Yes. Correct. Correct.

Yes. Same story.

That's helpful. And then maybe sticking on the geographic point. Can you just talk about Europe, what you're seeing there? I mean, there's been concerns about tightening capital spend just given the geopolitical environment, the energy side. Maybe what you're seeing there? And then maybe a second one on the order side. Just the budget flush, you guys tend to have a decent look at it at this point. I know it's still a little bit away, but any early indications there would be helpful?

Yes, regarding Europe, I want to highlight that we experienced a 14% growth in the quarter, which makes us confident in our performance compared to competitors in that region. However, we are cautious about this market due to economic uncertainties, particularly concerning energy prices and their impact on demand. This situation affects our customers' ability to generate the profitable revenue they desire for their businesses. Therefore, we are closely monitoring this area, which is why we've adopted a cautious approach, especially regarding our expectations for the chemical sector in Europe.

Yes, I wanted to mention that there hasn't been any significant change in operations in that area, as Mike pointed out. The 14% figure reflects revenue from a year ago when we did have sales in Russia, and on a pro forma basis, that 14% would be even higher.

Great. And any quick thoughts on the budget flush would be helpful. I appreciate.

Yes, stay tuned. What I would say is, we did see some of that in our order book in Q4 due to the extended delivery times that are still present in the market. However, we are not expecting any significant budget flush at the end of the year.

We will go next to Josh Waldman at Cleveland Research.

A couple for you. First, Mike, a lot of questions on instrumentation, so I'll ask on CrossLab. A nice quarter here. I wondered if you could talk through the drivers to the acceleration? Anything beyond just the comps? I mean are you guys seeing signs of higher adoption of contracted service, share benefit? Is this a category where maybe price is just now starting to come into the mix?

Yes, absolutely. So I'm going to tag team with Padraig on this one, but I think all those factors are hitting, and we're going to talk about services, but I think it's important to know that between services and consumables, we actually crossed over the 30% connect rate for the first time in the fourth quarter. So we've been talking about the importance of connect rates going forward. And on the services side, which is where your question is centered, we've seen an acceleration of growth. We hinted at some of the places we're doing really well at the big enterprise level. But Padraig, why don't you add some of your thoughts on here? Because this is your business and a lot of good things happening here.

Yes. I think, Mike, as you said, touch rates continue to be very strong, and it's much more than a break/fix business and we see our contract rates actually growing at double digits, which is incredibly sticky with customers. And all key offering categories right from enterprise down to some of the preventive maintenance services we do are all very, very strong. We also see that, of course, we have a large installed base and being able to provide different solutions and services for that have been really great. I will close by saying that we had some very big wins in the enterprise service business, and that's where we really look about the productivity of labs and how we help customers with their outcomes, and we're seeing that increase as we go through the quarter and through the year.

Yes, we have observed incremental improvements in the second half of this year, particularly through Q3 and Q4, which allowed us to increase our revenue in Q4. I anticipate this trend will continue into next year, although we are not yet back to normal levels. If improvements do occur, that would be beneficial for us. However, we are planning for a similar level of improvement that we experienced in the latter half of this year as we move into FY '23. While some costs have decreased, we still need to purchase items in the aftermarket to ensure supply and meet customer demands.

Yes, to Josh's question, if we get to a point where we don't have to go into that aspect of the market, that would be upside for us.

We'll go next now to Dan Leonard of Credit Suisse.

Mike, I have a follow-up on Europe. So when you're framing the possibilities for 2023, I hear you on the conservatism for the chemical industry. But what about other end markets? Does the macro uncertainty in Europe bleed into pharma, or academia, government, or anywhere else?

We believe there is an aspect that will also be relevant in the pharmaceutical sector. You are correct that I was specifically discussing the Chemical segment in Europe, but that area is also part of the overall narrative. You can manage large pharmaceutical accounts that are facing rising costs and are considering their options for 2023. Therefore, this is an area we need to monitor closely. Additionally, some of the key trends we mentioned earlier, like investments in renewable energy, are significant, especially with the efforts to make hydrogen a more viable energy source. This aligns well with Agilent's strengths. However, we remain cautious about large accounts in Europe and their potential decisions in 2023 in those two end markets.

Yes. There's really nothing significant to report in that area, as Mike mentioned, it's something we're monitoring. We haven't observed any major changes in operations there. Additionally, the 14% noted was compared to last year when we did have revenue in Russia, making that figure even higher if viewed on a pro forma basis.

We've arrived at the end of our question and answer session. Thank you for your participation. Please proceed with your closing comments.

Thanks, Bo, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day.

Thank you. Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.