Earnings Call Transcript - A Q4 2021

Operator, Operator

Good afternoon and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. My name is Bethany, and I will be the operator for today’s call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. Now I'd like to introduce you to the host for today's call, Parmeet Ahuja, Vice President of Investor Relations. Sir, please go ahead.

Parmeet Ahuja, Vice President of Investor Relations

Thank you, Bethany, and welcome everyone to Agilent's Fourth Quarter Conference Call for Fiscal Year 2021. With me are Mike McMullen, Agilent's 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 Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast are made 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 the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. 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.

Mike McMullen, CEO

Thanks, Parmeet, and thanks everyone for joining our call today. The Agilent team delivered another excellent quarter to close out an outstanding, record-setting 2021. At $6.32 billion for fiscal 2021, revenues are almost $1 billion higher than last year. Full year core growth is up 15% on top of growing 1% last year. The strength is broad-based with our three business units all growing more than 10% core for the year. Our full year operating margins are up 200 basis points. Earnings per share of $4.34 are up 32%. Let’s now take a closer look at our strong finish to 2021 and review Q4 results. Our momentum continues as orders increased faster than revenue in Q4 and at the same time, we delivered our fourth straight quarter of double-digit revenue growth. At $1.66 billion, revenues are up 12% on a reported basis. Our core revenues grew 11%, exceeding our expectations. This is on top of 6% core growth last year. Our Q4 operating margin is 26.5%. This is up 160 basis points from last year. EPS is $1.21, up 23% year-over-year. Our earnings growth also exceeded our expectations. We continue to perform extremely well in pharma, our largest market growing 21%, driven by our biopharma business. Total pharma now represents 36% of our overall revenue. This compares to 31% of our revenues just two years ago. The strong growth in our chemical and energy business continues, as we delivered 11% growth in the quarter. This is on top of growing 3% in Q4 of last year. PMI numbers are positive and we expect that chemical and energy will continue its strong growth trajectory into fiscal 2022. In diagnostics and clinical, revenues grew 11% on top of growing 1% last year, as testing volumes started to recover. On a geographic basis, our results were led by a strong performance in the Americas and China. Our business in the Americas grew 15% on top of 5% last year. China grew 8% core on top of strong 13% growth in Q4 of last year. China order growth outpaced revenue growth for the third quarter in a row. Now, looking at our performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $747 million. LSAG is up 11% on both a reported and a core basis. LSAG’s growth was broad-based and led by strength in liquid chromatography and cell analysis. The pharma and chemical and energy markets were particularly strong for new instrument purchases. Our cell analysis business crossed the $100 million revenue mark in the quarter for the first time. During the quarter, the LSAG team announced a new Ion Mobility LC/Q-TOF and enhancements to our VWorks automation software suite. These new, well-received offerings are used to improve the analysis of proteins and peptides to speed development of new protein-based therapeutics. The Agilent CrossLab Group posted revenue of $572 million. This is up a reported 10% and 9% core. Growth is broad-based driven by strength in service contracts and on-demand services, as well as for chemistries and supplies. Our focus on increasing connect rates continues to pay off for us. The strong expansion of our installed base in 2021 and increasing connect rates bodes well for continued strength in our ACG business moving forward. Our ability to drive growth and leverage our scale produced operating margins of roughly 30%, up more than 200 basis points from the prior year. The Diagnostics and Genomics Group delivered revenue of $341 million, up 16% reported and up 13% core. Our NASD oligo business led the way with robust double-digit growth in the quarter and achieved full-year revenues exceeding $225 million. We expect another year of strong double-digit growth as the team continues to do a great job of increasing throughput with the existing capacity. The additional expansion of our Train B oligo manufacturing facility in Frederick, Colorado is proceeding as planned. We expect this additional capacity to come online by the end of calendar year 2022. Moving on from our other business group updates, there were several other significant developments for Agilent this quarter. We announced our commitment to achieving net zero greenhouse gas emissions by 2050. We believe our approach delivers the same rigor to sustainability that we apply to everything else we do. We also believe these actions are not only the right thing to do, but fundamental to achieving long-term success. Our sustainability leadership continues to be prominently recognized. You may have seen that Investors’ Business Daily recently named Agilent to its Top 100 ESG Companies list. We are also a company where diversity and inclusion represent a company priority and is a core element of our culture. During the quarter, we achieved recognition by Forbes as one of the World’s Best Employers and as a Best Workplace for Women. While the Agilent team has a strong track record of delivering above-market growth and leading customer satisfaction, we are always looking to do more. To further accelerate growth and strengthen our focus on customers, we are implementing a new One Agilent Commercial organization, combining, for the first time, all customer-facing activities under one leader. The new organization brings together and strengthens our sales, marketing, digital channel, and services team. The new enterprise-level commercial organization is led by Padraig McDonnell. Padraig will continue to lead the Agilent CrossLab Group as Business Group President, as well as serve as Agilent’s first-ever Chief Commercial Officer. The way I like to characterize this move is to say we are doubling down on the success we’ve achieved with ACG, applying a holistic, customer-focused approach to all aspects of our business. We are also moving the Chemistries and Supplies Division to LSAG. This closer organizational alignment between instrument and chemistries development will further accelerate our progress on instrument connect rates for chemistries and consumables. We believe that structure follows strategy and that this new organizational structure will further enhance our customer focus and the execution of our growth strategies. Looking ahead to the coming year, we are in a strong position to continue to deliver on our build and buy growth strategy. Agilent’s business remains strong. We enter the New Year with a robust backlog and have multiple growth drivers, coupled with the proven execution excellence of the Agilent team. A year ago, during our Agilent Investor Day, we raised our long-term annual growth outlook to the 5% to 7% range, while reaffirming our commitment to annual operating margin improvement and double-digit EPS growth. We are now one year in and well on our way to achieving these long-term goals. Bob will provide more details, but for fiscal 2022 our initial full-year guidance calls for core growth in a range of 5.5% to 7%. We expect to continue our top-line growth as we launch market-leading products and services, invest in fast-growing businesses, and deliver outstanding customer service. My confidence in the unstoppable One Agilent team and our ability to execute and deliver remains firmly intact. This is our formula for delivering solid financial results, outstanding shareholder returns, and continued strong growth. We are very pleased with our performance in 2021, but not satisfied. As I tell the Agilent team: The best is yet to come, for our customers, our team, and our shareholders. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob.

Bob McMahon, CFO

Thanks Mike, and good afternoon everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our initial outlook for the upcoming year and for the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had very strong results in the fourth quarter. Revenue was $1.66 billion, reflecting reported growth of 12%. Before I get into the details, I want to acknowledge our supply chain team, which has been doing a great job managing in a very challenging global environment. Core revenue growth at 11% was a point above our top-end guidance range. Currency accounted for 0.8% of growth, while M&A contributed 0.5% of growth during Q4. And as expected, COVID-19 related revenues were roughly flat sequentially and resulted in just over a point headwind to the quarterly core growth. Late in the quarter, we did see transit times that were in certain cases greater than anticipated resulting in some revenues being deferred into Q1. Our results were driven by a continuation of outstanding momentum in pharma, and in biopharma in particular, while chemical and energy and diagnostics and clinical also delivered strong results for us. Our largest market, pharma, grew 21% during the quarter against a tough compare of 12% last year. The small molecule segment delivered mid-teens growth, while large molecule grew 31%. Pharma was a standout all year, growing 24% for the full year after growing 6% in 2020. And in FY22, we expect our pharma business to grow in the high-single digits. Chemical and energy continued to show strength, growing 11% with instrument growth in the mid-teens during the quarter. This impressive performance was against a 3% increase last year. The C&E business grew 12% for the year after declining 3% in 2020. Growth was driven by continued momentum in chemicals and engineered materials and we expect our C&E business to continue to grow solidly next year in the high-single-digits. Diagnostics and clinical grew 11% with all three groups growing nicely during the quarter. While the largest dollar contributor to this market is DGG driven by our pathology-related businesses, the LSAG business continues to penetrate the clinical market and drive growth with strong performances by cell analysis and mass spec. We saw mid-teens growth in the Americas and strong growth in China, albeit off a small base. For the year, the diagnostics and clinical business grew 15% for the year after declining slightly by 1% in 2020. And we expect to continue to grow in the mid- to high-single-digits in 2022. Academia and government, which can be lumpy and represents less than 10% of our business, was up 1% in Q4 versus flat growth last year. Most research labs continue to remain open globally and increase capacity to pre-pandemic levels. China came in at low-single-digits, while the Americas and Europe were roughly flat. For the year, we grew 7% after declining 4% last year. We expect this market will continue to improve slightly in fiscal year 2022 and expect growth of low to mid-single-digits. Food was flat during the quarter against a very tough 16% compare. Europe and the Americas grew, while China declined. For the year, food grew 13% after growing 7% in 2020. Looking forward, we expect food to return to historical growth rates in the low-single-digits. And rounding out the markets, environmental and forensics declined 2% in the fourth quarter, off a 5% decline last year, as growth in environmental was overshadowed by a decline in forensics. For the year, we grew 5% off a 2% decline in 2020. And looking forward, like food, we expect environmental and forensics to grow in the low-single-digits in the coming year. For Agilent overall, on a geographic basis, all regions again grew in Q4 led by the Americas at 15%. China grew 8%, and Europe grew 4%. And for the year, Americas led the way with 21% growth, followed by China at 13% and Europe at 12%. Now let’s turn to the rest of the P&L, fourth quarter gross margin was 55.9%, up 90 basis points from a year ago. Gross margin performance, along with continued operating expense leverage, resulted in an operating margin for the fourth quarter of 26.5%, improving 160 basis points over last year. Putting it all together, we delivered EPS of $1.21, up 23% versus last year. And during the quarter, we benefitted from some additional tax savings resulting in a quarterly tax rate of 13% and our full-year tax rate was 14.25%. Our share count was 305 million shares, as expected. And for the year, EPS came in at $4.34, an increase of 32% from 2020. We continued our strong cash flow generation, resulting in $441 million for the quarter, an increase of 17% versus last year. For all of 2021, we generated almost $1.5 billion in operating cash and invested $188 million in capital expenditures. During the quarter, we returned $195 million to our shareholders, paying out $59 million in dividends and repurchasing roughly 830,000 shares for $136 million. And for the year, we returned over $1 billion to shareholders in the forms of dividends and share repurchases. And we ended the year with $1.5 billion in cash and $2.7 billion in outstanding debt and a net leverage ratio of 0.7. All in all, a great end to an outstanding year. Now let’s move on to our outlook for fiscal 2022. While we are still dealing with the pandemic and we have the additional challenges around logistics and inflationary pressures, we enter the year with strong backlog and momentum. For the full year, we are expecting revenue to range between $6.65 billion and $6.73 billion, representing reported growth of 5% to 6.5% and core growth of 5.5% to 7% consistent with our long-range goals. And this incorporates absorbing roughly a half a point headwind associated with COVID-related revenues, with the majority of that impact coming in Q1. We are expecting all three of our businesses to grow, led by DGG. We expect DGG to grow high-single-digits with the continued contribution of NASD and cancer diagnostics. We expect ACG to grow at high-single-digits with both services and our chemistries and supplies businesses growing comparably, while LSAG is expected to grow in mid-single-digits. We expect operating margin expansion of 60 to 80 basis points for the year as we absorb the build-out costs of Train B at our Frederick, Colorado NASD site. And in helping you build out your models, we are planning for a tax rate of 14.25%, consistent with current tax policies, and 305 million fully diluted shares outstanding. All this translates to a fiscal 2022 non-GAAP EPS expected to be between $4.76 to $4.86 per share resulting in double-digit growth. And finally, we expect operating cash flow of approximately $1.4 billion to $1.5 billion and capital expenditures of $300 million. This capital investment represents an increase over 2021 as we continue our focus on growth, bringing our NASD Train B expansion online and expanding consumables manufacturing capacity for our cell analysis and genomics businesses. We have also announced raising our dividend by 8%, continuing an important streak of dividend increases and providing another source of value to our shareholders. Now, let’s move on to our first quarter guidance, but before I get into the specifics, some additional context. Lunar New Year is February 1st this year, a shift from last year when it was in mid-February. As a result, we expect some Q1 revenue to shift to the second quarter this year as customers shut down ahead of the holiday. In addition, as I mentioned, we do expect to see the largest impact of COVID-related revenue headwinds in the first quarter. We estimate these two factors will impact our base business growth by 2 to 3 points and are roughly equal in impact. For Q1, we are expecting revenue to range from $1.64 billion to $1.66 billion, representing reported and core growth of 5.9% to 7.2%. Adjusting for the timing of Lunar New Year and COVID-related headwinds, core growth would be roughly 8% to 10% in the quarter. First quarter 2022 non-GAAP earnings are expected to be in the range of $1.16 to $1.18. And a couple additional points before opening the call for questions. In conjunction with the new One Agilent Commercial organization Mike talked about, we will be reporting under the new structure starting in Q1. In addition, we will be providing a recast of certain LSAG and ACG historical financials to account for the segment changes after the filing of our Annual Report on Form 10-K in December. I am extremely proud of what the Agilent team achieved in 2021 and look forward to another strong performance in 2022.

Parmeet Ahuja, Vice President of Investor Relations

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

Operator, Operator

The first question comes from Vijay Kumar with Evercore. You may proceed.

Vijay Kumar, Analyst

Hey guys. Congrats on a nice print here and thanks for taking my question. Maybe as to my first one on…

Mike McMullen, CEO

Thanks, Vijay.

Vijay Kumar, Analyst

Mike, maybe my first one on the guidance here. A lot of questions around supply chain inflationary environment. The guide of 5.5% to 7% core growth for fiscal 2022, what is that assuming for pricing versus volume? And does it assume any contribution from interest run?

Bob McMahon, CFO

Hey, Vijay, this is Bob. I did get the last part of your question, maybe. Yes, so, on the price, we do have built in roughly a point of price into our plan which is slightly higher than what we had this year, Vijay. And in terms of inclusion, we won’t get into individual customer products, but what I would say is NASD is expecting another year of very strong growth.

Vijay Kumar, Analyst

And just on that last point, Bob, and maybe, Mike for you,

Mike McMullen, CEO

Sure.

Vijay Kumar, Analyst

I think the Analyst Day outlook had NASD ramping up quite meaningfully. Has anything changed on NASD? Did capacity ramp up by timing change at all and I am curious on just around on anything changed – your response letter to no orders?

Mike McMullen, CEO

Not at all. What I would say, the one big change is the business is doing even better than we had communicated at December of last year. So really appreciate the question. As you know, in my – we’ve been talking about the new capacity coming online and that’s still gone right per schedule, in fact, we distributed earlier last week and that’s still to come on online by the end of calendar 2022. But I think the team has just done a fabulous job, which is we are going to be able to grow double-digit in 2022 even without the new capacity, because they are able to continue to drive process improvements of broader book of business and larger batches. So the business is really on fire. I mean we are very, very happy with it.

Bob McMahon, CFO

Yes. Vijay, if we looked at our order backlog, we are taking orders for 2023 already.

Mike McMullen, CEO

Yes. I have met Bob the other day, Vijay that a year ago we are talking about could we fill out the factory? Could it ramp and we’ve blown right through that.

Vijay Kumar, Analyst

Yes. That’s fantastic, Mike. And just sorry to clarify post the complete response letter to Nord, there is no change in interest around assumptions for you guys, correct?

Mike McMullen, CEO

No. No.

Vijay Kumar, Analyst

Fantastic. Thank you, guys.

Mike McMullen, CEO

You are welcome. Appreciate the feedback.

Operator, Operator

Thank you, Mr. Kumar. The next question comes from the line of Tycho Peterson with JPMorgan. You may proceed.

Mike McMullen, CEO

Tycho? Tycho, I think you are on.

Operator, Operator

Your line is now open.

Mike McMullen, CEO

Moving to the next in the queue.

Operator, Operator

Okay. The next question comes from the line – excuse me, of Brandon Couillard with Jefferies. You may proceed.

Brandon Couillard, Analyst

Hi. Thanks. Good afternoon.

Mike McMullen, CEO

Hey, Brandon.

Brandon Couillard, Analyst

Mike, maybe just – Mike, maybe just starting with the guide for next year. You just kind of talked through some of the variable upside, downside that you considered when building the outlook. I’d be curious what you’ve embedded for China specifically, as well?

Mike McMullen, CEO

Yes, when I talk about the – what we see is the potential upside in the guide and Bob, maybe you can talk about the – our China assumptions. And by the way, we are – hope we came through, so we are very happy with the momentum we have in China. I think the upside fits with our two largest end-markets, pharma and chemical energy. And as Bob indicated in his script, we are assuming high-singles, I believe, Bob, for the pharma market really coming off just toward growth here in 2021. That high-level growth continues, that would represent upside in our biggest market. And we’ve got a lot of early positive things happened in the pharma side of things. Pharma, let’s say, C&E as well, right, Bob. So we’ve always – I think this is the most bullish language that I’ve had in a call for some time about the C&E. So you can imagine there has been even some caution about not over plan or too much. But I’d say the two – our two largest end-markets represent the highest – where we think we may have some upside relative to our initial first guide for the year. Bob, can you remind what we had assumed for China?

Bob McMahon, CFO

Yes, Brandon, it’s a good question on China and we continue to be very positive on China. If we look at our backlog, our order growth rate has increased higher than our revenue for the last three quarters. We exited 2021 with a record backlog going into 2022 for China. And our guidance comprehends high-single-digit growth in China. So, both being led by – from a geographic basis, growth will be led by Americas and China going forward.