Agilent Technologies, Inc. Q4 FY2023 Earnings Call

Ladies and gentlemen, welcome to the Agilent Technologies Q4 2023 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. Please go ahead, sir.

Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. 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 a 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 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 forecasted exchange rates. 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. Before we get into discussing our results and outlook, I want to mention that we're joined today by Padraig McDonnell, President of the Agilent CrossLab Group; and Sam Raha, President of the Agilent Diagnostics and Genomics Group. We're also joined on this call for the first time by Phil Binns, President of the Agilent Life Sciences and Applied Markets Group. Phil’s name may be new to some of you, but he's well-known at Agilent and in the industry. Phil has been with us for more than 13 years, coming over with the Varian acquisition and overseeing our market-leading spectroscopy business. We’re extremely pleased to have someone with Phil’s knowledge, experience, and proven leadership strength heading up our LSAG business. In his short time in the role, we’ve already seen Phil add tremendous value as a member of our senior leadership team. Welcome, Phil. Now onto our fourth quarter results. The Agilent team once again continued to perform well under challenging market conditions. Revenue of $1.69 billion declined 9.7% core after increasing 17.5% last year. This is at the high end of our guidance. Our proactive approach to managing our cost structure in this market environment helped us deliver healthy fourth quarter operating margins of 27.8%. Q4 earnings per share of $1.38 exceeded our guidance. While this was a decline of 10%, it comes against a tough compare last year when EPS grew 26%. While the market continues to be challenging, we believe we are starting to see signs of stabilization. As an encouraging data point, for the quarter, our book-to-bill ratio was 1 for the company and greater than 1 for our LSAG instruments. Let’s take a closer look at our Q4 performance, starting with our regional results. During the quarter, while down year-on-year, we delivered sequential growth except for China, as expected. In China, our business declined 31% year-on-year after growing 44% in Q4 last year. While China was down sequentially, these results were in line with our expectations. The year-on-year monthly performance improved slightly as the quarter progressed. In addition, orders were slightly higher than revenue for the quarter. While it is too early to call these two data points a trend, we see this as an encouraging sign of potential stabilization. In late September, I traveled to China for the first time since the COVID outbreak to meet with the Agilent team, key customers, and government officials. I was reminded of both the sheer size of the Chinese economy and our market there. I saw first-hand the work being done to bolster economic activity in the near term and create an environment that will support continued growth into the future. I remain convinced China will continue to play an important role in life sciences and I’m confident that the China market will return to growth. In looking at our largest end market, pharma declined 14% driven by continued caution among customers on capital expenditures for new instruments. Within pharma, biopharma performed better than small molecule. Geographically, our biopharma business outside of China grew high-single digits. Looking at our performance by business unit, the Life Sciences and Applied Markets Group delivered revenue of $928 million, down 18% core versus a tough compare last year of up 22%. Customers continue to hold off on capital expenditures, particularly in the pharma segment of LSAG’s business, which declined in the high 20% range. This is against growth in the low 20s last year. On the other hand, we continue to see strong customer demand and growth in our PFAS solutions, as well as continued strength in the advanced materials segment. These are two secular trends we’ve highlighted before and we remain optimistic about future growth in these market segments. While the market environment remains challenged, we continue to innovate and provide unique solutions for our customers. The new products we launched in June at ASMS, in particular the 6595 LC triple quad, which is focused on key applications like PFAS, continue to generate positive customer interest and new orders. We’re also bringing innovative new solutions for customers across the biopharma value chain. We have installed a number of our online UHPLC systems with large biopharma companies. The systems are easy-to-use, reliable, and deliver significant value by providing fully automated analysis of critical quality attributes and allowing real-time decision making outside the lab. The Agilent CrossLab Group posted revenue of $404 million, up 4% core and 6% on a reported basis. ACG delivered growth across all end markets, and in all regions except China. The contract services business was up double digits, offset by the services associated with new instrument placements. Our strategy of increasing the connect rate continues to pay off. In the quarter, the contract services business represented 65% of ACG revenue, a number that has grown nicely over the years. The Diagnostics and Genomics Group delivered revenue of $356 million, flat on a core basis and up 1% reported. DGG’s results were led by the pathology and NASD businesses, which both delivered low double-digit growth. These strong results were offset by the continued market challenges in genomics in both consumables and instruments. Our NASD portfolio and capacity expansion are continuing as planned. We’re confident in the long-term growth prospects for the markets we serve. Before I finish covering DGG, I want to thank Sam Raha for his contributions over the years and for helping us build a strong foundation for the DGG business. I wish Sam well. In addition to these business group highlights, during the quarter we were recognized for our commitment to sustainability. Agilent’s near and long-term targets for reaching net-zero greenhouse gas emissions have been approved by the highly regarded Science Based Targets initiative. A year ago, we entered 2023 sharing a view of economic and industry uncertainty, as we guided for moderating growth in the second half of 2023. We had not anticipated, however, the significance of the market headwinds the industry eventually faced, particularly in the pharma market and China. Despite the challenging market conditions, we delivered full year revenue of $6.83 billion, growing 1.5% core. While our full-year growth was lower than initially expected, we met or exceeded every quarterly guidance range we provided, a solid testament to the team’s execution ability. Including FY23 results, our four-year compound annual growth rate is 7%. This is at the high end of our long-term growth guidance. In FY23, we delivered operating margins of 27.4%. This is up 30 basis points this year and up more than 400 basis points in the last four years. Earnings per share of $5.44 are up 4%, delivering leveraged earnings growth for the year. Our four-year compound annual growth rate for EPS is 15%. Looking back, 2023 was a challenging year. What I’m particularly proud of is the Agilent team’s ability to quickly pivot and take action to address these challenges while staying relentlessly focused on our customers. While we’ve worked to significantly reduce expenses, Agilent’s customer satisfaction ratings remain at all-time highs. At the same time, our employee engagement continues to be excellent as we achieved a number of best employer awards over the last year. All of this helped us deliver another year of leveraged earnings in an extremely difficult market environment. Before turning it over to Bob for more details, I want to provide some high-level perspective on FY24 and beyond. For 2024, we anticipate a slow, but steady recovery, throughout the year. In our initial outlook, at the high end of our guidance we expect revenues to return to growth. At the same time, our range for EPS in the year ahead has us again delivering leveraged EPS growth. As we look ahead, we remain convinced the market challenges being faced by the industry today are transient. Our end markets are powered by investments in improving the human condition. The pace of science, innovation, and discovery continues to increase, which will fuel further growth. We remain focused on winning in the marketplace. Our differentiated products, services, and most importantly our One Agilent team, are all essential to the success of our customers. We are well-positioned for long-term growth. Bob will now share more detail on the quarter and the year, along with more specifics on our initial view for fiscal 2024 and Q1. 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 2024 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Agilent finished the fourth quarter with core growth at the top end of guidance and EPS exceeding our expectations as we executed well against challenging macroeconomic conditions. Q4 revenue was $1.69 billion, down 9.7% core and 8.7% on a reported basis. This follows after growing 17.5% in Q4 last year, when we benefitted from the recovery from the Shanghai shutdown in Q2 of last year. This created an estimated 1 point of headwind in the year-on-year results this quarter. As expected, we saw weakness in capital purchases in LSAG, with the biggest impact in our China business. Now, I’d like to share additional detail on our end markets for the quarter. Revenue in our largest market, pharma, declined 14%, versus 20% growth in Q4 last year. Biopharma declined 2% while small molecule was down 23%. However, biopharma ex-China was up 7% in the quarter and grew solidly for the year. And while small molecule was down, the decline was most pronounced in China. Outside China, small molecule was up sequentially in the quarter. Chemicals and advanced materials declined 11% versus growth of 27% last year, while flat sequentially. Our chemicals and energy subsegments were down 15% while advanced materials were down roughly 2% globally and up 4% in the Americas and Europe combined. The food market was down low double digits against a tough 20% growth comparison last year. High single-digit growth in the Americas was offset by declines in all other regions. In the Americas, PFAS testing is emerging as an important growth area in food testing, helping drive the high single-digit growth. We expect testing for PFAS chemicals will continue to be a growth driver across multiple end markets over time. The environmental and forensics market declined 3% versus 18% growth last year. Similar to the food market, the Americas region continues to experience strong growth, up double digits driven by PFAS. This strong performance was primarily offset by softness in China, which was down year-on-year, but up slightly on a sequential basis. Our business in the diagnostics and clinical market declined 4%. While we delivered low double-digit growth in our pathology-related businesses, it was more than offset by continued weakness in genomics. The academia and government market was down low single digits with strength in the Americas, driven by government funding, offset by weakness in China and Europe. Results were pressured across all geographies in the quarter. As Mike mentioned, China was down 31% year-on-year after growing 44% in Q4 of last year, in line with our expectations coming into the quarter. The rest of Asia was down mid-single digits, and both the Americas and Europe declined low single digits in the quarter. Before turning to the rest of the P&L, I’d like to quickly summarize some full-year highlights by end market and geography. From an end market perspective, all markets grew low to mid-single digits for the year except for pharma, which was down 2% globally. In addition, all geographies grew, except China which was down 5%. Back to the P&L for the quarter. Despite the revenue declines, our team continues to execute at a very high level. Fourth quarter gross margin was 55.8%, and our operating margin was a healthy 27.8% in Q4, which was slightly better than our internal expectations. Below the line, we benefitted from stronger than expected cash flow generating incremental interest income in the quarter. Our tax rate was 13.75% and we had 293 million diluted shares outstanding, both as expected. Putting it all together, earnings per share were $1.38 for the quarter, exceeding our expectations, albeit down 10% from a year ago when EPS grew 26%. As Mike mentioned, our Q4 results capped a year where we grew 1.5% core on the top line, increased operating margins by 30 basis points, and grew EPS by 4%, while overcoming a couple of points of currency headwinds. This is a real statement on the team’s ability to quickly adapt to market changes while still delivering leveraged earnings growth. Turning to cash flow and the balance sheet, I’m incredibly proud of the Agilent team as Q4 continued a string of very strong quarterly cash flow results. In Q4, we generated operating cash flow of $516 million, well over 100% of adjusted net income, and invested $84 million in capital expenditures. CapEx spending is driven by our ongoing NASD capacity expansion, which remains on track. For the year, we delivered $1.5 billion in free cash flow, an increase of 44% over last year. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.6 times. With the current challenges in the market, it is great to be a company with a fortress balance sheet and strong cash flow. In the quarter, we paid out $66 million in dividends and spent $80 million to repurchase shares. And for the year, we returned $840 million to shareholders through $265 million in dividends and $575 million in share repurchases. Looking forward, you may have also seen that we recently announced a 5% increase in our quarterly dividend providing another source of value to our shareholders. It’s worth noting that we have increased our dividend every year since we first began issuing them in 2012. Now, let’s move on to our outlook for the upcoming fiscal year and first quarter. As Mike stated, we expect to see a slow but steady recovery throughout fiscal 2024. However, we also acknowledge the continued market uncertainty, high interest rates, volatile exchange rates, and depressed capital spending. Like several of our peers, we expect the markets to be down slightly for the year, while we expect to perform better. Given the expected slower market conditions, we have taken additional steps to adjust our cost structure. Incorporated into our guidance is roughly $175 million of cost savings. Given the significance, I want to provide a little more detail on these actions. Roughly 30% of the savings are related to portfolio optimization decisions we have taken in DGG, the largest of which was the exit of the Resolution Biosciences business. Another 25% is related to materials and logistics cost savings as well as optimizing our real estate footprint, with the remaining savings tied to continued reductions in discretionary spend and optimizing our workforce. Along with these actions, we have taken a $46 million charge for restructuring and other related costs in our Q4 GAAP results. These reductions, while difficult, are necessary to ensure we continue to fund our most critical investments as well as fund the variable compensation resets from this year. These actions help ensure the company delivers leveraged earnings growth in FY24 and will enable us to emerge even stronger when our markets inevitably return to their long-term growth rates. As Mike noted earlier, we exited Q4 with some potential signs of stabilization with a book-to-bill ratio of 1 for the company and greater than 1 for LSAG instruments. While this is positive, we are going to be prudent in our initial guidance. For the full year guide, we expect revenue in the range of $6.71 billion to $6.81 billion. This represents a core growth range from a slight decline of 0.5% at the low end to 1 point of growth at the high end. Currency is a headwind of 1.2 points while M&A is also a slight headwind of 10 basis points related to Resolution Bioscience. On a reported basis, we are expecting a decline in the range of 1.8% to 0.3% year-on-year. From a geographic perspective, we expect modest growth in the Americas and Europe. While we expect to see recovery during the year in China, our initial view is it will still decline for the full year. From a business group perspective, we expect growth in both DGG and ACG, while LSAG instruments will still be pressured. In terms of phasing, we expect the first half of FY24 to look similar to the second half of FY23, with growth in the second half of next year. We are projecting modest operating margin expansion for the year. Below the line, we expect interest income and expense to offset each other, a tax rate of 13.5%, and 293 million shares outstanding. Fiscal 2024 non-GAAP EPS is expected to be in the range of $5.44 to $5.55. This range represents flat to 2% growth versus FY23. From a cash flow perspective, we expect another robust year. We are expecting roughly $1.6 billion in operating cash flow and $400 million in CapEx as spending increases on NASD’s Train C and D expansions. Looking to Q1 2024, we expect revenue in the range of $1.555 billion to $1.605 billion. This represents a core decline of 11.3% to 8.5% with currency and M&A having a minimal impact. At the midpoint, we are expecting growth that resembles what we just delivered in Q4 and assumes no significant budget flush during the end of this calendar year. This is against another difficult comp of 10% growth in Q1 of last year. First quarter 2024 non-GAAP earnings per share are expected to be between $1.20 and $1.23 as the cost savings fully ramp through the quarter. As Mike indicated, while we are expecting low growth in 2024, we remain optimistic about the future of our markets and our long-term prospects. Our business remains very profitable and healthy, and I know we will come out stronger as a company when market growth returns.

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

We'll go first this afternoon to Vijay Kumar at Evercore ISI.

And some helpful comments here. Mike, maybe starting with those book-to-bill comments here. Overall company 1 turn LSAG instrumentation looks like it's turned. Curious what those book-to-bill numbers for ex-China? And if instrumentation has turned, that Q1 guidance, comps get easier. Why is Q1 assuming no benefit from this turn in instrumentation?

Yes, Vijay. Let me address that. The book-to-bill ratio for LSAG instruments is quite similar whether we include China or not. In fact, China showed a slight positive as well, which is encouraging. As we noted earlier, we're adopting a cautious approach for our first quarter, and we view this as a positive development. While we usually experience some seasonality from Q4 to Q1, we're focusing on one quarter at a time.

Yes, I believe a key part of the overall context is the 10% comparison to last year. As we mentioned during the call, it was encouraging to observe some early signs of stabilization in the book-to-bill ratio for the instrument sector.

Understood. I'm glad to hear prudency and right off the bat here. On a related note regarding guidance, what are your assumptions for NASD in China for fiscal '24?

For China, we anticipate a mid-single-digit decline for the full year, similar to this year. For NASD, we are currently expecting low to mid-single-digit growth.

Mid-singles. Yes.

We go next now to Patrick Donnelly at Citi.

Maybe kind of a follow-up on the 1Q guide. It seems like, again, the orders encouraging. Maybe a little bit prudent on the guide, as you said, I guess when you think about just the implication for the ramp 2Q to 4Q, is it optimism in the market based on some of those order trends is that obviously the comps get easier in the second half as you work through it. And can you just talk about the visibility into the recovery and kind of what gives you the confidence in the ramp as the year progresses here?

Certainly, Patrick. I'll start, and then Bob can provide any additional insights he wants to share. When we discuss the comparisons related to our anticipated gradual recovery and growth, it's important to note that we expect the first half of the year to mirror the trends we observed in the second half of 2023. As for why we believe the second half will be different, there are some initial signs of potential stabilization in our order book. For example, our book-to-bill ratio was above 1, and the same holds true for our instrument business, which has faced significant pressure. While it's still early for customers to finalize their 2024 budgets, our sales funnels indicate a strong interest from customers, and we anticipate that eventually, this will lead to a release in activity. These funnels are looking healthy. In challenging environments like this, we've witnessed such trends before where capital spending was constrained, and we do expect some release to occur. Customers are speaking about new focused investments, and while we’re not predicting a widespread market recovery, we believe certain segments will perform better. This includes investments in R&D tools and PFAS testing capacity expansion that we are hearing from our customers in Advanced Materials. Additionally, as you pointed out, Patrick, the comparisons will be easier in the second half of 2024. So, we are expecting a return to growth. This is not just based on hope; we have information to support our views. We will gain clearer insights once we enter our customers' budgeting phases in early 2024. Currently, the markets for instruments remain quite challenging, but we are seeing promising signs of stabilization. It's going to be a gradual journey back to growth, and our guidance reflects this. We are confident about how the second half of the year will unfold.

Yes. Patrick, regarding Q1, as I mentioned in my prepared remarks, we are taking a cautious approach. However, we are also comparing it to last year when we had a budget flush earlier in the year for deliveries in November and December, and we are not factoring that into our estimates this time. If that situation does occur again, it would certainly be a positive outcome for all of us.

Yes, absolutely, Bob.

That's helpful, Bob. And maybe, Bob, just on the margin side, helpful to hear you talk through a few of the different moving pieces. It sounds like some cost savings in DGG, among others. I guess can you just give a bit more color on kind of the moving pieces, where you're pulling levers, the ability to take out some additional costs to hit these margin numbers. Obviously, you talked about margins being up a bit. I think there are some headwinds like incentive comp, things like that. So maybe just talk about the gives and takes there and confidence in terms of some of the cost outs.

Yes, that's a good observation, Patrick. It's important to note that we have some adjustments, so we shouldn't take that $175 million and directly apply it to the bottom line, as about half of it relates to adjustments in our sales compensation and variable pay. The most significant factor affecting our profit and loss statement comes from DGG due to the exit from the Res Bio business, but we've also made some difficult decisions across other product lines to streamline our portfolio. I would estimate that a little over 30% of the adjustments are linked to that. Additionally, 25% pertains to our cost of goods sold. Our OFS team has excelled at reducing costs related to logistics and materials. I've also mentioned site consolidation, which will impact our profit and loss statement. We have reassessed our real estate holdings and have closed several smaller locations globally. Lastly, there's also an aspect of infrastructure optimization involving discretionary spending and headcount reductions focused on areas we've adjusted to meet demand.

And Patrick, this is Mike, I stated about the confidence about the growth recovery. I think when it comes to hitting the $175 million, high degree of confidence, we control this 100%, and we'll deliver on this.

Maybe just on NASD, I noticed just over the past, call it 1.5 years, we've kind of gone from high double digits, low double digits next year, mid-single digits, which it's probably just some level of normalization as you ramp capacity. But just given the step up in CapEx you're guiding to next year, is there some wiggle room in terms of how you guys lay that capacity out? Or is the confidence in that market growth enough to keep investing in that area next year?

I'll jump right into that one. I tried to convey this in the script. Our commitment to invest in the long-term growth of the business remains strong. We are making significant progress on our capital expansion plans, and everything is on track. In fact, I believe we may perform slightly better on costs when everything is finalized compared to the capital expenditures expected. Bob, could you elaborate on some of the observations we've made regarding the marketplace as we look ahead to 2024 and NASD?

Yes, that’s a great question, Matt. If we examine the details of the mix, I would say we have the healthiest portfolio mix in NASD for 2024 that we’ve ever had. There’s a significant increase in the number of programs we are going to process. Clinical volume has become a larger portion compared to commercial volume, which I believe is a positive sign for the future. We have noticed some customers pausing due to IRA, but we see that as temporary. As Mike mentioned, we are not concerned about the long-term growth potential of this market at all. Many new programs entering our portfolio involve much larger targeted patient populations, which is promising for volume. Additionally, we are expanding our portfolio and technologies, not only focusing on siRNA but also growing our GMP grade CRISPR business as well as antisense, and we are continuing this expansion.

Yes. Absolutely, Mike. I'll just add a couple of things to your and Bob's comments. One, we are now on contract with more major pharma than we ever have been. And it's very promising. If you look at publicly the percentage of their overall R&D budgets that they're now spending on therapeutic oligos, and we are in the driver's seat to win those opportunities. And just in the last couple of weeks alone, I've spoken with a number of our lead pharma partners, and they've reaffirmed. So there is a slight navigation through the IRA, as Bob mentioned, the conviction on their end of the market potential remains unchanged and in the leadership position to pursue that.

Got it. That's a great amount of detail. Maybe just, Bob, for you, just on pricing. Kind of what's embedded for next year as you think about pricing? And how has pricing kind of trended over the course of this year? Are we back to sort of normalized levels of pricing that you guys have historically achieved? Or is there still some pricing gains to see sort of as we move into next year in certain areas of your business?

Yes. Matt, that's a great question. And we ended the Q4 at just a little under 3% and actually, for the full year was greater than that. So it actually continues to hold up very well. What we're building into our plan for next year is roughly 2 percentage points of price, which, as you know, is greater than our historical kind of pre-COVID levels. And so what we've been able to do, I think, really speaks to the value proposition that we have as well as the emerging mix of our businesses as well.

So first off, I just want to ask on China. You mentioned that the region is down 30% this quarter. That was in line with your expectations. You're expecting it to decline mid-singles again next year. So I guess, just how much of a function is that really due to some of the comps and starting to lap the easier comp late into next year versus is there anything structurally wrong with that market? And how do you expect China to continue to grow on that medium to long term?

Do you want to take the first part, Bob, I think it's...

Yes, from the perspective of the comparisons, we experienced very strong growth in the first half of this year, but we are now facing challenging comparisons. Last year, we were up 44% in Q4, and this year we’re down 31%, although we're still seeing growth over the two-year period. For Q1, we expect declines in the mid-20s, but improvement is anticipated thereafter as the comparisons become easier. I believe Mike will provide more details, but we don't anticipate any structural changes in the Chinese marketplace for life science tools.

Absolutely, Bob. Why don't you pick up from there? I made a few comments about this in the prepared remarks, but this is my first trip to China since October 2019 when we were there for the BCIA show. What did I see? First of all, let me remind you how quickly things can change in China. Electric vehicles are everywhere, the environment is getting greener, and digital adoption is astonishing. It seems like nobody uses cash there anymore. Traveling around the country also highlights the vastness of China, its economy, and the significant markets for Life Sciences. To address your specific question, here's what I was hearing from our customers and my team: we believe this market will eventually return to growth due to the driving factors we've seen over the years, mainly the Chinese government's 14th Five-Year Plan, which is still in effect. They're focusing on long-term growth and improving the quality of life in China. We are also hearing about new environmental regulations related to PFAS. The anticorruption impacts we've observed in the health and pharma sectors might have peaked, which could lead to more R&D investments in the long run, as less money will likely be spent in the SG&A area. However, I don't want to sound overly optimistic about the short-term growth potential, as the business is currently stabilizing at a certain level. That's why we referred to it as stabilization in our prepared remarks. What we are seeing, forecasting, and hearing from our teams and customers suggests that we shouldn't expect any significant improvements in the near term, but we also shouldn't anticipate significant deterioration either. When you look at the year-to-year growth rate numbers, Bob, it seems to be more of a comp issue. We've had a couple of months operating at a certain level, which indicates what we believe are signs of stabilization. I hope that helps.

Yes. No, that's helpful color. And then I just want to dig a little bit more on your comments around next year. So you mentioned that you expect the first half to be similar to what you're seeing in the back half of this year. So I guess, can you just walk us through in a little bit more detail what exactly you mean by that? Should we be expecting similarities from an organic growth perspective? Or are you really talking about more from a revenue dollar standpoint? And then same type of question on the trajectory of the rebound on margins and EPS next year. Should we expect kind of that similar ramp given the cost dynamic as well?

Yes. I'll try to answer that quickly, Rachel. As we consider the first half of the year, we believe that we have reached our lowest point in Q2. Q3, as we've mentioned, was a bit better, although still below 1, and we expect Q4 to show further improvement. We anticipate this trend will continue. However, we are facing challenging comparisons as we significantly reduced our inventory in Q1 and Q2 of last year. Therefore, I expect that Q1 of 2024 will be our lowest point, with Q2 showing slight improvement and then growth as we experience easier comparisons. I expect our financial performance and earnings per share to reflect this pattern. In Q1, we will have implemented most of our cost-saving measures, but they won't be fully reflected until Q2 through Q4. As our business improves, we will benefit from increased leverage on our bottom line.

Moving on now to Derik De Bruin at Bank of America.

So can we talk a little bit about pharma? That market was up and down all year, not a lot of visibility. Are you seeing some of the orders that were sort of stuck in the funnel starting to come loose, right? I mean, how are you sort of looking at the pharma market going forward?

Yes, I think the answer is the deal funnel still remain elongated.

Yes, I believe that our deal funnels are expanding, but the speed of closing deals from the funnel stage to order remains unchanged and somewhat prolonged.

Yes. And Derik, I think if we think about the pharma end market, we're assuming very low single-digit growth for next year. And some of that is actually getting past the tougher comps in China. If we looked at actually our pharma business ex-China, we grew in FY23. And actually, our biopharma business grew in total. And we think about small molecule was the area that was dragging the pharma business down as you know very well, that typically has a replacement cycle. We are well into that replacement cycle. We were up very high. We kept calling it. And we've seen that be very depressed, and our expectation is that will start coming back in earnest in '24, but probably in the back half of '24.

I'm sorry to keep reiterating this, but your situation in China is declining. In pharmaceuticals, you mentioned that you don't have much visibility, and I hope things improve. I'm curious why you can't provide a bit more buffer in your guidance. It still feels like the numbers are heavily weighted toward the back end, especially considering where we are in the cycle.

Yes, as mentioned earlier, Derik, we believe there are positive indicators for the second half. Customers are showing interest in our products. We are not expecting a dramatic recovery in 2024, but we see that smaller markets are continuing to decline significantly this year. This is where the pressure has been the greatest. However, in biopharma, there is a need for R&D tools, and replacement cycles can't be postponed indefinitely. We have confidence in our sales funnel, even though deals are currently not emerging from it. While we are focusing on the pharmaceutical sector in this discussion, there is also robust performance in other growth markets, particularly in applied markets, which provides good diversification in our instruments. Bob, do you have any additional insights regarding the pharmaceutical sector?

No.

I have one last question. What were the bookings like? I know you mentioned the book-to-bill ratio was over 1, but I'm interested in the actual bookings. Do you typically experience a spike in bookings in Q4? I'm trying to gauge whether what you observed was a temporary fluctuation or if there's genuine demand here.

Yes, we won't provide exact dollar figures, but I can say that it was greater than 1, approximately 1 for the overall company, and the instruments were higher. We generally observe this trend, and it ties back to our historical performance where orders tend to be a bit elevated, especially with October included in our results. Last year was somewhat of an anomaly as we worked through the backlog, and now we are returning to our usual process.

Yes. And through the quarter, Derik, we saw a normal seasonality. So there wasn't anything unusual about the order pattern to kind of say, is this a head fake or not. So I think that also is one of the reasons why we say, okay, early signs of some stabilization here. Again, not huge growth. We're seeing stabilization.

We'll go next now to Jack Meehan at Nephron Research.

So I wanted to dig a little bit more into LSAG in the quarter. Can you break down the growth between instruments and consumables and just any commentary across product lines?

Everything I would say for the quarter was pressured, although consumables performed better than the instrumentation. Our consumables business was down kind of low single digits and against a very tough comp of almost 9%, 10%. And if you looked at it ex-China, that was largely influenced by China, we grew low single digits in consumables.

Okay. And so does that imply instruments may be down over 20% in the quarter?

They were down, yes.

I would like to follow up on Derik's question. Everyone is trying to interpret the book-to-bill commentary, so could you provide any additional insight on the extent to which orders decreased in the quarter? I'm trying to understand whether there was an easier or tougher comparison for revenue and if orders experienced less volatility. Mathematically, it should have been over 1, correct?

Yes. The orders decreased year-on-year, but the decline was not as steep as the revenue drop. This suggests a stabilization since we experienced substantial revenue last year due to the recovery following the initial Shanghai shutdown. We believe this approach is the best way to assess the situation moving forward because we no longer have the backlog influencing the numbers. When we analyze it on a quarterly basis, we have observed a consistent upward trend returning to historical figures.

And Jack, I believe it's fair to say, Bob, that we were aware of the commentary regarding the worsening conditions. As you know, we've been advocating for some time against expecting a year-end budget flush in a constrained capital environment. We entered the year actually anticipating slower growth in the second half. What we aim to convey in today's call reflects what we've been expressing over the past several quarters, and we believed that a proof point was the book-to-bill ratio. While growth isn’t strong, it’s important to note that the situation is not dire either.

The next now to Puneet Souda at Leerink Partners.

First one on CrossLab. Bob, with 65% of your business being a service contracts, could you elaborate on what sort of growth contribution we should expect here for full year? And also, I don't know if you provided the LSAG expectation contribution for 2024 as well?

For ACG, we anticipate mid-single-digit growth, driven by a double-digit increase in contracted services, although there will be some pressure from instrumentation that will moderate that growth. Regarding the LSAG business, we are currently expecting a low single-digit decline, with a more significant drop in the first half of the year, followed by improved performance in the second half.

Got it. Okay. If I could ask about onshoring, which is a topic we haven't focused on in prior calls. I understand you're seeing growth on the PFAS side, but could you provide more details on both onshoring and the environmental benefits you are experiencing? Additionally, why shouldn't these factors contribute more to your instrumentation growth in 2024?

Yes. It has the potential to do that. And as we talked about it, we're at the beginning of the year, and so we want to be prudent there. But there's nothing out there that doesn't say that, that should continue to given the macro-economic environment and the incentives that governments are providing to continue to invest. And actually, what we're seeing is nice business in Southeast Asia as well as India. And I would expect that to continue. That's where we're placing incremental investments to continue to drive and capture that demand. I would expect the same thing in the environmental area as well. But we're not going to build all of that in right now at the beginning of the year.

But I think we saw some trends too that we're starting to see, PFAS is also now driving some testing in the food marketplace as well as every country that we talk to is in the process of further enhancing their own regulations. So we wanted to have some other areas of potential growth for the company beyond the story around pharma.

We'll go next now to Josh Waldman at Cleveland Research.

Maybe one for Bob and then one for Mike. Bob, maybe circling back on Derik's question, I wondered if you could provide more context on the forecasting process this round or the puts and takes that went into the organic guide. Could you take a step back, were there segments in the business that were like decelerating or slowing as you went into the guide or maybe areas where you're still trying to find bottom? And if so, how did you expect that in the guide?

Yes. Obviously, this year has been one for the ages in terms of being able to try to manage the forecasting. And so we've taken a number of different angles at it to look at it. So not only growth rates, which I think is the focus here, but also actually if you looked at it on a sequential basis and look at the actual dollars, I think that that's probably more instructive, particularly as we were looking at the bleeding of the inventory. I would say what we've seen over the last couple of quarters is that signs of stabilization. There are always puts and takes across the various businesses. And we think that we've tried to do that. We've built in feedback based on the field's projections, the funnel that Mike and Padraig talked about and then an assumption around the conversion of those funnels. And we haven't seen the funnels slow down. There's still modest growth, and we're starting to see the slowing of the elongation. I'm not saying that it's stopped or accelerated in terms of the purchase, but we are starting to see that slowing, and you're actually seeing that in that book to bill. And when we look at the orders on a sequential basis, we're starting to see that kind of stabilization as well. And so that's kind of how we're looking at continuing to go forward. If you kind of just built that going into next year, you would start seeing a challenging first half and then better performance in the second half. Hopefully, that gives you some flavor.

Yes, that's helpful. I was going to ask a follow-up question. Bob or Mike, could you quantify where the funnel stands as we enter 2024 compared to where it usually is at the beginning of the year? Additionally, how much do you think this serves as a predictor of near-term demand? Is improved funnel conversion a factor in driving growth as the year progresses?

I think pursuant to Padraig and Bob, kind of the same rates, right, no significant improvement.

Correct. In the first half of this year, we saw longer cycle times. Currently, the situation is not fully stable, but we are not experiencing the same rate of decline or increase that we observed in the first and second quarters of last year. You can begin to notice this trend. Overall, conversion is improving slightly compared to a year ago, although it has not returned to historical levels. We are considering this as we project our forecasts for the future.

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

Great. Maybe just on China. I know you mentioned, I think, in the prepared remarks like month-to-month pacing had improved in the quarter. Just any more color or anything on exit rates in China. And if you could, I'd be entered to get like some more color on the end market trends in China. I know you gave some color on biopharma, but could you discuss pharma overall and any other interesting color from an end market basis?

Sure. Bob and I can address this together. When it comes to the order book, we were slightly above our revenue expectations for the quarter. There wasn't anything unusual in the pacing from China during the quarter. While much of our discussion today has focused on pharma, we've been noting for several quarters that there has been a broad-based slowdown in China. This has been the trend in our business, and it reflects how we finished the year regarding end market performance. We are pleased that our business aligned with our expectations. Overall, we had previously mentioned that the business was performing at a consistent level. Looking ahead, we anticipate revenue from China will still be down for the year, which reflects the current state of our business there.

Dan, and to build on Mike's point, just a couple of other additional data points. We were down pretty significantly in all end markets in Q4, as you would expect because we were up 44% in Q4 of '22. And so that's probably not as relevant because we were catching up relative to some of the catch-up of the Shanghai shutdown. Another data point, though, is if we looked at kind of year-on-year growth actually, we exited October, the year-on-year performance. It was still a decline, but it was much better than what we saw at the beginning of the quarter. And so we actually saw a sequential improvement. I think Mike mentioned that in his prepared remarks. And then if we looked at kind of absolute dollars, they've been pretty steady month-on-month.

Got it. And then Chemical and Advanced Material was like a tale of 2 cities. It looks like C&E was down 15% in the quarter, you said and you talked a lot about PFAS. And so is there any more color like what you're seeing on kind of both sides of coin there? What's kind of baked in on the core chemical and energy side for the year and just anything on trends there? And then obviously, it sounds like you guys still remain really constructive on the Applied Materials side or Advanced Material side.

Let's have Bob share some insights, and I would also love to hear from Phil about his observations in the Advanced Materials area, where he has significant expertise. The comparison you made to a tale of two cities is very fitting, considering the differences in performance by segment and geography. Last year, we recorded 70% growth in China, which sets a challenging benchmark. We're experiencing continued slowdown in the Chemical and Energy sector, as our main customers are being cautious with their capital expenditures. Many of our largest clients are focused on cost control, and this hesitation is reflected in our numbers, leading us to anticipate a constrained outlook for that segment in the near future. Conversely, the Advanced Materials segment has a different story, and Bob, you noted strong geographic growth outside of China. Phil, your team has been actively working on several initiatives in the applied markets, especially concerning PFAS and Advanced Materials. I believe it would be beneficial for you to share your insights with the audience about our efforts in the applied aspect of Advanced Materials.

Yes. Thanks, Mike. Yes, certainly, we've mentioned you've talked around the activity within labs being ex-China, at least being reasonably robust. But on the applied market side and certainly around Advanced Materials. We're certainly relatively strong in those markets, and we're seeing good really good generation around the batteries market. And of course, we've spoken about the onshoring process around there in the Advanced Materials area. So globally, that obviously comes into the onshoring. And globally, we're in strong positions in those markets and have been historically and continue to innovate strongly around those markets and stay close to those customers.

We go next now to Dan Leonard at UBS.

I wanted to circle back for a moment on the Q1 guide. You spoke about a challenging year-on-year comp a couple of times. But as you're thinking about the Q4 to Q1 sequential ramp in dollars, how much of that decline forecasted is what you chalk up to seasonality versus prudent if you could give us a flavor.

Great question, Bob.

Yes, Dan, that's a great question. Looking at last year, our revenue decreased by about $90 million to $95 million from a very strong Q4. The midpoint of our guidance for this year is a bit over $105 million to $110 million. So, we are considering our previous performance without expecting a particularly strong budget. While I can't provide an exact percentage, this gives you an idea of how we approached the Q1 guidance compared to Q1 of last year.

Appreciate that. And then as a follow-up, can you remind me in 2024, when do we lap the headwinds on the genomics side? And what is your appetite for continued investment in genomics as part of the DGG portfolio?

Yes, I expect us to face a challenging first quarter, but it should start improving from the second quarter onwards, similar to some other businesses. Now, I'll let Mike discuss the investment aspect.

Yes, I think first of all, just to remind the audience, when we talk about the genomics mix business, what are we talking about? We got a $500 million business, probably 50% of it is in QA/QC instrumentation, where we are the undisputed leader here, a lot of appetite to invest here. Our TapeStation product, particularly the consumables business is on fire right now. Capital side is constrained as we've seen across the marketplace. And then I think we all believe in the view that NGS will continue to be a growth market for us. And for the industry, I think that people are dying on back their expectations about how robust it is for a period of time. And I think we're seeing that in our business. So why do we make some of the structure changes we made in the portfolio because we want to ensure that we've got the ability to have a healthy P&L, while at the same point in time invest in growth. So there's a reallocation of R&D dollars happening as a result of some of the changes we made that we talked about over the call. So answer the story is we have a lot of appetite for focused investments in areas where we think we can win in genomics.

And ladies and gentlemen, that is all the time we have for questions this afternoon. I'd like to turn things back to you Mr. Ahuja for any closing comments.

Thanks, Bob, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good day, everyone.

Thank you. Again, ladies and gentlemen, that will conclude the Agilent Technologies Q4 2023 Earnings Call. Again, thanks for joining us, and we wish you all a great evening. Goodbye.