Earnings Call Transcript
Agilent Technologies, Inc. (A)
Earnings Call Transcript - A Q3 2021
Ruben DiRador, VP of Investor Relations
Thank you, Paul. And welcome everyone to Agilent's Third Quarter Conference Call for the Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO, and Bob McMahon, Agilent's Senior Vice President and CFO. Joining the Q&A after Bob and Mike'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 is made available on our website at www.investor.agilent.com. Today's comments by Mike and Bob were prepared from non-GAAP financial measures. We 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, excluding the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 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, Barney, and welcome to your first Agilent's earnings call as our new Vice President of Investor Relations. And thanks to everyone for joining our call today. Before covering our Third Quarter financial results, I want to acknowledge the recent passing of Dr. Tachi Yamada, a giant in our industry, and a former Agilent board member. Tachi was much more than a knowledgeable, deeply involved Agilent board member for nine years. As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others. I know that the Agilent team is not alone in recognizing that Tachi Yamada will be greatly missed. And we extend our deepest sympathies to Tachi's family. Now, on the Third Quarter Review and our updated outlook for the year. In Q3, the very strong, broad-based momentum in our business continues. The Agilent team delivered another outstanding quarter, exceeding our expectations. Q3 revenue of $1.59 billion is up a reported 26% and is up 21% core. This is against a modest decline of 3% in Q3 of last year. So, we are well above the Fiscal Year 2019 pre-pandemic levels. In addition, like other positive signs of continued momentum, orders outpaced revenue during the quarter. Our growth is broad-based across all business groups, markets, and geographies. The combination of strong top-line performance and execution translated to excellent growth and profitability and earnings per share. Our Q3 operating margin is 26%. This is up 230 basis points from last year. EPS is $1.10, up 41% year-over-year. Agilent's success continues to be driven by our build and buy growth strategy and execution prowess. We're developing market-leading products and services, investing in fast-growing businesses, while delivering outstanding customer service, and continue to drive profitability. Since the onset of the pandemic, we have taken actions to ensure Agilent emerges even stronger as a Company. While we have yet to leave COVID-19 in the rearview mirror, our Q3 results are another indicator our actions are delivering the intended results. Bob will provide more details on end markets and geographies, But I want to briefly highlight our performance in our two largest end markets, Pharma and Chemical & Energy. We continue to perform extremely well in Pharma, our largest market, growing 27% with strength in both small and large molecule segments. Our large molecule business grew roughly 52% in the quarter and now represents 36% of our overall Pharma revenue, up from the mid-20s, just a few years ago. In chemical energy, our business is recovering faster than expected, expanding 23% in the quarter. This is an acceleration of the momentum we achieved in the first half, and our order funnel continues to strengthen. Looking at our performance by business unit, the Life Science Applied Markets Group generated revenue of 680 million. LSAG is up 22% on a reported basis, this is up 18% core of just a 4% decline last year. LSAG's growth is broad-based across all end markets. Our performance was led by strength in Pharma, which is up 22%, and chemical energy up 31%. All businesses delivered strong growth led by cell analysis at 38% growth, and our LC and LCMS businesses, which grew 22%. We continue to strengthen our position in the fast-growing Large Molecule market segment. During the quarter, the LSAG team launched 3 InfinityLab Bio - LC Systems at the well-attended InfinityLab LC Virtual Conference in June. These new products further extend our LC leadership position. In addition, building on our already strong Pharma offerings, we launched new compliance-ready LC/Q - TOF and LC - TOF solutions to our portfolio in the quarter. The Agilent CrossLab Group posted a revenue of $560 million. This is up a reported 21% and up 15% on a core basis. These results are on top of 1% growth last year. The business is benefiting from increased activity in laboratories and instrument connect rates. This led to more contractive services, on-demand services, and consumables consumption across all end markets. All end markets grew mid-teens or higher, with exception of environmental which still grew 9%,. The pandemic has shown ACG to be our most durable business with ACG growing each quarter since COVID-19 first emerged. Our customer-focused approach and digital investments continue to pay dividends. Looking forward, instrument placements and demand as well, reflecting strong performance by ACG, as we drive attractive rates and increased costs for lifetime value. The diagnostic genomics group produced revenue of $346 million, up 44% reported, and up 37% core, compared to an 8% decline last year. The growth was broad-based across product lines and regions and was led by our NASD GMP Alago business. The ramp of our facility in Frederick, Colorado continues to go very well. The quarterly results exceeded our expectations, easily surpassing the $50 million revenue milestone. While one quarter does not make a trend, our team has done a tremendous job increasing output in a high-quality manner. This gives us increased confidence in our ability to exceed the $200 million annual run rate in revenue with existing capacity. In addition, the trained manufacturing line expense is well underway and on schedule. Our Genomics Instrumentation and Consumables businesses rebounded strongly in the quarter, as did our pathology-related businesses. For the first time in several quarters, we saw diagnostic testing above pre-pandemic levels. While we are watching the Delta variant very closely, to date, we have not seen a meaningful negative impact in testing volumes. I also want to highlight our performance in China. While still less than 10% of DGG revenue, our China business grew 50% in the quarter. We continue to see tangible progress in building a stronger China market position. In Q3, we signed our first-ever companion diagnostic development services agreement with a China-based BioPharma Company. Earlier this month, we also announced the initiation of in-country manufacturing for our SureSelect product line. We are very bullish about long-term growth prospects in China for our DGG Product and Services offerings. In addition, the integration of the Resolution Bioscience team is going well. And we are very pleased to enter and expand our participation in the fast-growing NGS-based cancer diagnostic market. It was a busy quarter at Agilent, so I have a few other achievements I'd like to share with you. Last month we published Agilent's 21st Annual Corporate Social Responsibility report. At a time when some are just starting to look at issues like sustainability and societal impact, this has always been a key part of who we are as a Company. We've been addressing these issues since our founding more than 2 decades ago. I would encourage you to review our report on the Agilent website. We're also very pleased to receive recognition as a great place to work in the U.S. by the Great Place to Work Institute. This resulted from just one more example of us having a highly engaged and energized team. And as you know, teams with high engagement win in the market. Looking ahead, building on another excellent quarter and the momentum we're seeing, we expect the business to continue to perform well as we close out what we believe will be an outstanding fiscal year 2021. As a result, we are once again raising our full-year revenue and earnings guidance. Bob will share more details, but we're expecting a continuation of our excellent top-line growth and earnings generation. While the world has yet to fully emerge from a global pandemic, Agilent is well-positioned to deliver excellent results again in the fourth quarter. I remain very proud of the Agilent team's ability to consistently deliver for our customers and 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 Q3 revenue, and take you through the income statement and some other key financial metrics. I'll then finish up with our updated outlook for the fourth quarter and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had an excellent result in the Third Quarter. Revenue was $1.59 billion, reflecting reported growth of 26%. Core revenue growth was 21%. Currency added 4.5% for the quarter, and M&A added 0.5%. In addition, COVID-related revenues were in line with the prior year. All end markets performed well with Pharma and Chemical & Energy as standouts versus our expectations. Our largest market Pharma grew 27% during the quarter, after growing 2% last year. The performance was led by the continued strength in our large molecule business, growing 52%, while our Small Molecule business grew mid-teens. And all regions in the pharma market grew double-digits. Our Large Molecule business was driven by our NASD division and demand for LC and Mass Spec instrumentation and solutions, while our Small Molecule business was primarily driven by QA/QC refresh. Chemical & Energy also performed well this quarter, with 23% growth. Even after accounting for the comparison against the 10% decline last year, this was clearly our best quarter since the onset of the pandemic. This result was driven by increasing momentum and demand for advanced materials and the general global economic growth. Our view is that the Chemical and Energy market still has additional room to grow moving forward. The diagnostics and clinical, we're very encouraged with the continued recovery in the market as our genomics and pathology businesses saw very good growth. On a regional basis, all regions grew with China up 41% and America delivering 38% growth. In academia, in the government market, we delivered 12% growth as most research labs continue to open globally and expand capacity. On a regional basis, Europe led the way. The Food market continued its double-digit performance, growing 12% on top of growing 1% last year. Food manufacturers continue to invest in increased testing to ensure quality and authenticity. A developing cannabis testing market, primarily in the U.S. also contributed to the growth in this market. And regionally, the food market was led by the Americas and Europe. Rounding out our key markets, environmental and forensics came in with 5% growth. On a geographic basis, all regions demonstrated solid growth led by the Americas at 32% and Europe at 23%, both exceeding our expectations. The performance was broad-based across all markets. And as expected, China was up 8% on top of 11% growth last year. All 3 business groups grew in China during the quarter. Pharma, Chemical & Energy, and Diagnostics were the key drivers. Now, turning to the rest of the P&L. Third Quarter gross margin was 55.9% up 80 basis points from a year ago, despite roughly 40 basis points of headwind from currency. Our strong top-line, some positive product mix, coupled with the strong execution from our operations team, drove the year-over-year improvement. And our supply chain team is doing a tremendous job getting our products to customers despite the increase in demand. Gross margin improvement in performance, along with continued operating expense leverage, resulted in operating margin for the third quarter of 26%, improving 230 basis points over last year. Putting it all together, we delivered EPS of $1.10 up 41% versus last year. Our tax rate was 14.75% and the share count was 306 million shares as expected. We delivered $334 million in operating cash flow during the quarter, showing a strong conversion from net income and up more than 15% from last year. During the quarter, we returned $172 million to our shareholders, paying out $59 million in dividends, and repurchasing roughly 800,000 shares for $113 million. Year-to-date, we've returned $829 million to shareholders in the forms of dividends and share repurchases, a leverage ratio of 0.8. Accounting for our Q3 performance and improved outlook in the fourth quarter, we are again raising our full-year projections for both revenue and earnings per share. We are increasing our full-year revenue projection to a range of $6.29 to $6.32 billion, up $125 million at the midpoint from previous guidance, and representing reported growth of 17.8% to 18.4%, in core growth of 14.5% to 15%. Included is roughly three points of impact from currency and a small amount from M&A. In addition, we're on track to deliver roughly $100 million in COVID-related revenue in fiscal 2021, in line with our expectations from the beginning of the year and flat to last year. We expect to continue our strong operating leverage, and so we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.28 to $4.31 per share, up 30% to 31% for the year. This translates to fourth-quarter revenue ranging from $1.63 billion to $1.66 billion. This represents reported growth of 10% to 12%, and core growth of 8.5% to 10%, on top of the 6% growth in Q4 of last year when we started to see early signs of recovery from the strict lockdowns. In addition, while COVID revenue was roughly flat year-on-year for the full year, last year's fiscal fourth quarter represented the high-water mark in our COVID-related revenue. And as a result, we expect to see roughly a 1-point headwind due to COVID revenue in the quarter. So, our core growth, excluding COVID, would be comparable to 9.5% to 11%. We are forecasting higher expenses in the fourth quarter as we invest to maintain our strong momentum, but we expect continued operating leverage in excess of 100 basis points. Non-GAAP EPS is expected to be between $1.15 and $1.18 with a growth of 17% to 20%. Now before opening the call for questions, I want to reiterate that we continue to see good demand in our end markets, have solid momentum in all our businesses, and expect to close the year extremely well. We believe our strategies are the right ones for Agilent, but we couldn't achieve these results without the excellent execution by the team. With that, Barney, back to you for Q&A.
Operator, Operator
Thanks, Bob. Paul, if you could please provide instructions for the Q&A now.
Operator, Operator
Definitely, sir. We will now begin the question-and-answer session. However, if your question has been answered and you wish to remove yourself from the queue, please stand by while we compile the Q&A roster. Your first question is from Tycho Peterson with JPMorgan.
Tycho Peterson, Analyst
Hey, good afternoon. Congrats on the quarter. Mike, I want to start with the China outlook. I know in China, there's been a fair amount of noise about companies being able to do products in-country, shutdown internal shutdown. So, can you maybe just talk to some of the near-term dynamics in China? And it sounds like trade tension's also getting worse with the buy China policy. How do you think about that over the next couple of quarters?
Mike McMullen, CEO
Sure. Thanks for the congratulatory comments, Tycho, and we really, actually continue to feel quite good about our performance in China, as Bob and I mentioned in the call script, I think 8% up on 11% last year, and I think our stack growth is around 19% Q2. It's actually up over our stack growth of 17 Q2. We're seeing this good, strong Pharma and C&E demand in China. Now, the funnels really remain quite robust. And I think, now getting to your specific question, we're not seeing any significant changes in terms of ability to get the product in. I mean, there's been a lot of noise for years, I have to say, between the U.S and China, yet the business seems to somehow get transacted. So, Bob, I think we're not really overly concerned about those dynamics. We did have somewhat of a little bit of shipment interruption as some of our Academia government customers were – had our VAP tax exemption change. But I think that was a relatively minor impact on the P&L. But clearly, we're monitoring those developments and you have to continue to work to make sure you've got the logistics of flowing through the country, but we've always been able to find a way and are not overly concerned about it at this point.
Bob McMahon, CFO
Yes. I would say, Tycho. We continue to invest in China as we mentioned in the call. And there are always bumps here and there, but long-term we feel very good about the business in China.
Mike McMullen, CEO
Yes, that's having one other thought here, Tycho, is relative logistics. We have divested into a number of forward-looking stocking locations over the last few years, which really has paid us dividends, because we are less dependent on stuff coming directly into the port because we have a lot of in-country inventory.
Tycho Peterson, Analyst
Okay. That's helpful. And then it sounds like you've got a lot of underlying momentum. I know you don't like to talk about the order book, but any preliminary comments you can make on '22 at this point, you know, Street has you are up about 6.5%, curious if you think that's a reasonable bar and any comments on where you think margins may go next year?
Mike McMullen, CEO
Yes. Thanks. Those specifics, but what I can tell you is that we feel really good about the momentum of the business, the order book is continuing to be strong and that's as of today, where we got the latest view of the early orders through August, so all the momentum remains there. As I mentioned on our prior earnings call, we feel a really good ability to meet and exceed those long-term growth goals we put out, and the margin goals. I think that's where we stand right now, is we'll get to that in November, but we're feeling good about the trajectory of the business momentum we built here.
Tycho Peterson, Analyst
Okay. Thanks a lot.
Operator, Operator
Your next question is from Brandon Couillard with Jefferies.
Brandon Couillard, Analyst
Many thanks. Good afternoon.
Mike McMullen, CEO
Good afternoon, Brandon.
Brandon Couillard, Analyst
Maybe to start with the Biopharma business. I mean, 50% growth in Large Molecules is pretty impressive. Used to elaborate, given the sources of growth there, and what that would look like if you back out the NASD contribution.
Mike McMullen, CEO
Yes. Sure. And then I'm actually going to invite Bob and I will also want to have Jacob make a few comments on some of those new introductions here. I think I used the word broad-based, at least 5 or 6 times, maybe 10 times in my prepared remarks and we're seeing that in the biopharma. So, we've got across the board, double-digit growth happening here. Cell Analysis LC, LCMS, other platforms that go into Biopharma, along with our consumables and services. And then to your point, really outstanding growth in NASD. But while NASD was a big contributor, it was an Agilent-wide life story. And Bob, maybe you can just answer the specifics on the numbers?
Bob McMahon, CFO
Yeah. And Brandon, to your point, the total in Large Molecules was 52% as I mentioned before. But even if you back out the NASD businesses still grew in excess of 40%. So very strong business on NASD, but it shows that the rest of the business, both instrumentations, as well as the consumables pieces and the other elements on the Pharma associated revenue in Diagnostics and Genomics also, very strong business in it.
Mike McMullen, CEO
And Brandon, I just wanted to maybe have Jacob jump in very quickly because we have a continued drumbeat of new introductions into this space as well, which has been the focus and prioritization of our R&D pipeline. Jacob, I know we had 2 big introductions in Q3 as well.
Jacob Thaysen, President of Life Science and Applied Markets Group
Thank you for that, Mike. As the analyst mentioned, we've previously discussed that around 70% of our portfolio is focused on Biopharma, so I'm thrilled to see the momentum we currently have. Additionally, I'm very pleased with the bio-LC portfolio. We recently hosted a virtual conference with over 1,000 customers and more than 25 external scientific speakers, which I believe is the best turnout we've ever had. This introduction is generating significant momentum, allowing us to expand into both the biocompatible space and Mass Spec. Compliance is also critical; the informatics needed for FDA compliance is essential for Biopharma companies to do business with us. We have invested in ensuring data integrity, audit readiness, and secure data storage. Currently, our offerings support both our LC and all major marketable Mass Spec instruments, as well as our recent announcement in Q2 regarding spectroscopy informatics solutions. Overall, we have a robust portfolio that truly drives our growth.
Mike McMullen, CEO
Well, I can continue talking about the cell analysis, but I will bounce it back to Brandon. Hey Brandon, thanks for allowing us to do an advertisement on the Agilent portfolio strength. But, back to you. Do you have any additional questions?
Brandon Couillard, Analyst
Yeah, I think just touched on maybe if we could just elaborate on the Small Molecule market. You mentioned QA/QC refresh, curious where we might be in there and what you think the market is kind of growing for Small Molecule relative to your big team.
Mike McMullen, CEO
There is always a replacement market in the Small Molecule space, and at times, it tends to increase slightly. I believe we are currently in that phase. It's not a significant acceleration, but it is steady and likely experiencing notable changes.
Jacob Thaysen, President of Life Science and Applied Markets Group
Yeah, I was going to say, Brandon, as we think about this prior to the pandemic, we were probably slower growth than normal where some of the QA, QC refresh was probably elongated. And now we're starting to see that pick back up, and that typically is an 18 to 24 months kind of cycle. And I would say we're still at the beginning of that. And so, feel good about the continued performance of the refresh cycle going forward.
Brandon Couillard, Analyst
Great. Thank you.
Vijay Kumar, Analyst
Hey guys, congrats on the strong print this afternoon.
Mike McMullen, CEO
Thanks, Vijay.
Vijay Kumar, Analyst
Mike, maybe on my first question here, Resolution Bio, that deal that you guys did, did that come in line with expectations? I'm just curious. The 50-basis points contribution seems a little light. Is there some ramp-up phase here that's in log and not? Maybe just talk about what the deal does to you and how it adds to the corporate growth rates here.
Mike McMullen, CEO
The growth rate reported is about half a point. Compared to Q3, it might be slightly behind the revenue as we gain more insight into this business and some aspects of global variability. However, we feel optimistic about how our business will conclude, and we anticipate significant developments in the Fourth Quarter. This represents ongoing growth acceleration into 2022 and beyond, and we are thrilled with the early signs of enthusiasm from the teams at Agilent. We are also focusing on scaling this business, which currently accounts for a relatively small portion of Agilent's total revenue, approximately $50 million. Nonetheless, we foresee substantial growth rates in the upcoming years, and we feel we are off to an excellent start with this team. Interactions with Mark Li, co-founder of Resolution Bio, indicate he is pleased with the capabilities we are delivering to enhance his business's growth. Although it is still early, we are feeling quite positive about our progress.
Bob McMahon, CFO
Yeah, I was just going to say the other thing is, obviously, we're just now having more and more conversations with our existing CDx customers and the power of being able to have our established CDx business on the companion diagnostic side coupled with NGS-based technology, I think is going to be a real significant competitive advantage for us going forward. So very excited about this business going forward.
Vijay Kumar, Analyst
That's helpful, Mike. And Bob, one for you on expenses. In the year-to-date operating expense as a percentage of revenues, you guys have remained below 31%, which is well below your historical level. I guess my question is, is this all just associated with the volume leverage rate given the strong organic performance year-to-date, or are there some timing elements on expenses, that could be pushing that, and how should we think about those factors coming back in '22?
Bob McMahon, CFO
Yeah, Vijay, it's a great question. And I think if you remember, maybe a year ago we talked about some of these expenses that were going down, and our goal was not to have them come back to the same levels that they had. And these would be in areas around travel, but also leveraging our digital capabilities, and what we've been able to do is be very successful. Certainly, volume is our friend. And the leverage that we've been able to drive across all three of our business groups has really helped. But if you look at our year-over-year elements around travel and costs associated with marketing programs and digital investments. Our digital investments have gone up, but the actual return on those investments has actually gone up. And in fact, Jacob just highlighted one of the programs that we had. So our goals are for those to continue. They will continue to ramp next year to come back, but not near the level that they had come prior to the pandemic. So, we do think that there's a fundamental margin improvement associated with these expenses. And that's why Mike talked about our long-term margin expansion story is intact. It's not going to be 200+ basis points like it were this last quarter, but certainly feel good about our continued ability to drive margin expansion.
Mike McMullen, CEO
And Vijay, this is Mike, if I can just add one additional comment too, and I hopefully came out in my prepared remarks, but we're not holding back on investing for growth. So, we're quite pleased with the margin performance, but it didn't come at the expense of our ability to grow down the road.
Doug Schenkel, Analyst
Good afternoon, everyone. I would like to follow up on the last question. While I understand you won’t provide guidance for 2022 today, I’m curious if we should expect that incremental margin will be somewhat lower than usual next year, particularly if we anticipate a return to normal activity levels post-pandemic. I appreciate your comments about areas where investment may be reduced, but I also recognize you are investing in growth. Just from a mathematical perspective, should we expect the incremental margin to be lower than typical next year?
Mike McMullen, CEO
Yes. We're still building our plan. But our intent is to still be able to drive that margin expansion. I will say that we are having our new train B in NASD come online, which will add a little pressure to it. But, I think, we've been very good about being able to do 30% to 40% incremental and sometimes even higher than that when the margin comes in. And I don't see any reason why we shouldn't be able to continue to do that, Doug.
Bob McMahon, CFO
Inflationary pressures and related activities may be at the heart of your question, but I would say we haven’t experienced any significant impact. There are some effects, but we are planning to manage them going forward.
Doug Schenkel, Analyst
Yeah, that's in audits. It's supply constraints, it's inflation or refreshers. It's the hope that we're traveling a little bit more and there are real conferences and real site visits, things like that. So that's the spirit of the question. Just making sure that the capture of those dynamics, we don't have to think about something other than that 30 to 40 traditional range. So that's helpful, Bob.
Mike McMullen, CEO
I would just add. We're under 22 now. Sorry to interrupt there, but I'd just say that some of our programs, and such are really geared towards making sure we can manage our way through this in '22, so we're on this already.
Doug Schenkel, Analyst
Got it. Okay, regarding the full-year guidance, as has been mentioned several times, you raised the outlook by more than the magnitude of the Q3 B. I'm curious about what gives you confidence in this change. Is it based on backlog data? Is it about pacing throughout the quarter? Is it related to activities in the first month of the quarter? Perhaps it's a combination of all these factors, and maybe more importantly, real conferences and actual site visits are part of the equation. That's the essence of my question. I want to ensure that we accurately capture those dynamics and don't need to consider anything beyond the traditional range of 30 to 40. That's useful, Bob. I would just add that we're already under 22. I apologize for the interruption, but I want to emphasize that some of our programs are really focused on helping us navigate through this in '22, so we are already working on it.
Mike McMullen, CEO
I believe we can confidently say we have addressed all three of those points you mentioned.
Doug Schenkel, Analyst
Okay. And then throughout the year, you've consistently beaten your own targets pretty maturely, and it definitely makes sense to skew the error bars a bit more conservatively when you set your targets, given the state of the world. That said, given how well you performed relative to those targets, and recognizing we're not out of the pandemic, but we've got a little more experience with it at this point. Is it fair to say that you're at the point where you could adjust the philosophy a little bit and maybe change the positioning of those error bars as you set guidance moving ahead?
Mike McMullen, CEO
I believe that's a reasonable observation. We've aimed to establish cautious guidance, as we've previously discussed. As both we and our customers adapt to the realities of the COVID environment, there are fewer uncertainties to navigate. Looking at our increased guidance from Q2 to Q3, and now for Q4, it's clear our visibility has improved. You should consider everything you've mentioned, including the momentum we're experiencing and the overall economic recovery. However, as you pointed out, the Delta variant still poses a risk, and while we haven't felt its effects yet, we understand that could change during the quarter. We are striving to factor in all these elements while also providing pragmatic guidance for the future.
Doug Schenkel, Analyst
Okay. Thanks again, guys.
Operator, Operator
Your next question is from Derik de Bruin with Bank of America.
Derik de Bruin, Analyst
Hello, and good afternoon.
Mike McMullen, CEO
Hey, Derik.
Derik de Bruin, Analyst
Can we discuss environmental and forensics? I'd like Doug to address this as well. I realize it may be somewhat early, but do you have any insights on the potential for the GC portfolio to rebound, or is the current spending primarily catch-up in the industrial sector? Are there any early signs that the replacement cycle, which was underway before the pandemic, is set to resume?
Mike McMullen, CEO
Hey, Derik. Regarding the question about gas chromatography, we have observed that it's contributing to our positive outlook in the C&E space. We're noticing this in both our GC revenue and our GC order book. I've been hesitant to say that this business is returning to growth, but I believe we're now beginning to see promising potential for our GC segment as the replacement cycle resumes. Jacob, since you're closer to the details, is there anything else you would like to add?
Jacob Thaysen, President of Life Science and Applied Markets Group
Yes, Mike, you are completely correct. First of all, Bob pointed out that the chemicals and engineered materials market is very strong right now, particularly in the semiconductor and mining sectors, including battery lease terms. Additionally, we are noticing that traditional petrochemical markets are gaining momentum as well. There is a lot of discussion about the future of petrochemicals, but this market is expected to remain profitable for a long time. All analyses indicate that renewable energy will also utilize many of our technologies, presenting a significant opportunity for us in the future. While these developments are still in the early stages, substantial investments are being made, and we are actively participating in that. Therefore, we see many opportunities in our GC segment, which is experiencing growth initially in the chemical markets and now extending into the energy markets.
Derik de Bruin, Analyst
Following up on that, you're optimistic about your industrial experiments despite some volatility in the Chinese market. Are the U.S. and Europe still leading the way, or is there a shift happening? Also, could you remind me where we stand in the GC replacement cycle, using your baseball analogies?
Bob McMahon, CFO
Yes. So, Bob, I think it's fair to say that there really is no difference across the regions. I mean, China actually was the area of strength for us in C&E, and I think we're seeing good strength globally, which I think points to the importance of global economic outlook for this segment. And I'd say we're probably earlier middle innings on what paused there for a while because we got rate run going with the new portfolio, but a pause. I'd say we're early innings, middle innings.
Mike McMullen, CEO
I would say, Derik, that China was more than twice the overall C&E growth rate we observed.
Dan Leonard, Analyst
Thank you. And good afternoon.
Mike McMullen, CEO
Good afternoon.
Dan Leonard, Analyst
I was hoping you could address the 5% to 7% core revenue growth model that you introduced in December. Is that still relevant? Do you think something has fundamentally changed in the markets since that time?
Mike McMullen, CEO
I believe it's relevant until we decide to update it. I'm not prepared to revise our long-term growth outlook on the spot. However, as mentioned in our December outlook, we suggested that we would be more towards the higher end of that range. It seems reasonable to assert that the Pharma market, particularly the Biopharma sector, remains very strong, but for now, we are maintaining those long-term growth targets.
Bob McMahon, CFO
I would like to expand on what Mike mentioned, especially regarding the pharma market. We believe that this market, as Mike highlighted in his remarks, positions us as a stronger company. The pharma market, particularly in the Large Molecule segment, is growing faster now as we emerge from the pandemic compared to before. If we analyze our investments and the performance we've seen in Large Molecule, it indicates that this sector is driving our long-term growth rate higher than what we experienced previously, which is beneficial since it is our largest market. I'll stop there.
Mike McMullen, CEO
Yes, I'm going to invite Sam on this call. He hasn't had a chance to work today in this call. So, Sam, your thoughts of what's been going on in China, I was doing a little bragging on your growth rate there.
Sam Raha, President of Diagnostics and Genomics Group
I'm happy to provide more insight on China. We had a strong quarter across all our business groups within DGG. Specifically, we are experiencing significant momentum in clinical diagnostic testing, especially in pathology. Our PD-L1 and companion diagnostics have seen a great increase as we continue to train more pathologists in their use. Genomics also performed exceptionally well, particularly in consumables. Additionally, we recently launched our new V8 Xome, which is being positively received both in China and globally. One of our key strengths in China, as well as elsewhere, remains our core NGS and Genomics QC portfolio. All these factors, along with the recent signing of our first companion diagnostic development agreement with a biopharma in China, suggest a promising future for DGG in that market.
Mike McMullen, CEO
And just to build on Sam's comments, I mean, we've been working really hard the last several years putting in the right foundational capabilities, building the right commercial channel, the right ability to handle diagnostics products ourselves, and it's really great to actually see those investment starting to pay off in year term growth.
Patrick Donnelly, Analyst
Hey, thanks for taking the question, guys.
Mike McMullen, CEO
Sure.
Patrick Donnelly, Analyst
Mike, maybe one on the Chemical & Energy side to follow up on some of the earlier questions. I know that's one where you pretty closely keep an eye on the order book and your confidence goes with that. Are you getting more visibility as the order book builds there? I'm just trying to compare it to pre-pandemic mid-pandemic, I know you guys had a pretty short leash on in terms of how you would guide for that segment, how comfortable you would allow yourselves to get. Just wondering how the order book is looking there relative to some of the past quarters and how you're feeling about that segment. Certainly, seems like the tone is pretty positive here.
Mike McMullen, CEO
I'm glad you noticed that. We want that to be clear during the call. Our confidence is derived not only from the revenues we've reported but also, as Bob mentioned, we have better visibility into our funnel, especially for C&E. In previous calls, I often talked about ongoing discussions with customers that indicated activity. Now, those conversations are converting into orders, which gives us a more favorable outlook for the C&E space. Historically, I've been cautious about making optimistic statements in this area, but the trends we've observed over the last few quarters, along with feedback from our customers and the order book, support this confidence. This is connected to the pent-up demand for replacing outdated laboratory equipment, and our customers express increased confidence in the global economy, leading them to invest more. While there may be some fluctuations due to COVID outbreaks, the overall outlook remains very positive. Our customers have adapted to these challenges.
Bob McMahon, CFO
No.
Patrick Donnelly, Analyst
That's helpful. I appreciate it, Mike. And then on the diagnostic side and just given commentary that you guys are above pre-pandemic levels, can you just talk about the pace of the recovery in the quarter and then expectations for the further ramp from here. And I just want to clarify and make sure you haven't seen any impact in Delta up until I guess this week. I just want to make sure I have that clear.
Bob McMahon, CFO
We experienced continued recovery and noted at the end of Q2 that we reached pre-pandemic levels. Although our average was still below that point, we saw steady improvement across our business and all regions, which continued into Q3. By the end of Q3, we had surpassed pre-pandemic levels. Regarding your specific question about Delta, we have not experienced any impact so far.
Matt Sykes, Analyst
Hello. Hey guys, thanks for taking my questions, congrats on the quarter.
Bob McMahon, CFO
Sure.
Mike McMullen, CEO
Thank you.
Matt Sykes, Analyst
Just on ACG, you guys had a pretty impressive operating margin, over 29% for the quarter. I'm just wondering what you feel about the sustainability of those margins and then any progress that you've made on attachment rates in that business? I know you mentioned a little bit in your prepared remarks, but any additional color on that would be helpful.
Mike McMullen, CEO
I think I'll pass it on to Padraig, who can provide some additional color to the ACG and answer your questions. Go ahead, Padraig.
Padraig McDonnell, President of Agilent CrossLab Group
Yeah. Great. Thanks, Mike. And we're getting back to more normalized service support with our customers, which is more cost associated, of course, with travel, but we're starting to see an accretive margin in Q3 and we're seeing that come through to improve in Q4. So very, very strong in that. In terms of touch rate, we're seeing increased touch on our services and consumables and of course, with the larger install base, this bodes really well for the future, as more attach rates for services and consumers will be available to a very strong outlook.
Mike McMullen, CEO
Yes, Matt, to expand on what Padraig mentioned about sustainability, we are confident in our ability to maintain those margin levels. This is largely due to the efforts of our service engineers in supporting our customers, which is critical for keeping their labs and instruments operational. Our ongoing investment in digital capabilities, along with providing on-site support, is essential. Additionally, our digital investments are paying off, as our online orders and revenue have increased at a rate faster than the overall ACG business, highlighting our ongoing relevance in this area. This is beneficial not only for Agilent's relationships with customers but also positively impacts our margins.
Matt Sykes, Analyst
Great. Thanks for that color, it's very helpful. And then just one more on C&E. I know you've answered a lot of questions already, but I'm just wondering how the competitive landscape might have changed. Obviously, it had a challenging time during COVID. It took a while for it to recover, and now, it's certainly in recovery mode. I'm just wondering, as you look out of the competitive landscape, have you seen some competitor's slow investment; and therefore, there are some share gain opportunities in that growth that you're seeing?
Mike McMullen, CEO
I don't know where competitors have slowed down. I'm not convinced they are investing in that segment. We aren't observing much change on the competitive front. We are clearly the leader in this area and have continued to invest in our core portfolio before and during the pandemic. So, as you can see, I'm quite optimistic about our ability to surpass the competition in this sector.
Bob McMahon, CFO
Let me add that it seems like a long time ago, but we launched two new GCs back in 2019, one at the high end and one in the mid-range. We mentioned that one reason for this was our leadership position in the GC market. However, we realized that we're over-indexed to the high-end, so introducing a mid-range option was critical, and we're beginning to see the benefits of that. Maybe Jacob wants to join in on the discussion.
Jacob Thaysen, President of Life Science and Applied Markets Group
Yes, you're right about our strength in gas chromatography, but I also want to highlight our spectroscopy business and the ITPMS. We've made significant progress in ITP, OES, and MS, all of which hold a strong market share in material science. We continue to capture more market share in this area as well. You'll see us maintaining a strong position here, and we plan to keep investing in this market moving forward.
Joshua Waldman, Analyst
Hi, thanks for taking my questions, just two for you. Mike, you mentioned overall orders outpaced sales in the quarter, and it sounds like book-to-bill in the LSAG business was slightly positive. Just wondered if you could provide us with your assumptions for core growth in the LSAG business in the fourth quarter. And then as we look beyond FY21, given the broad-based strength you've spoken about on the call today, I guess, is it fair to assume that as we look to FY '22, this business should likely grow something above a low to mid-single-digit longer-term average?
Mike McMullen, CEO
Let me discuss the fourth quarter, but I'm not sure we can answer the last question just yet as we work through our plan.
Joshua Waldman, Analyst
I had to try.
Mike McMullen, CEO
Yes, yes, that was a good try. But I would say for Q4, you're accurate in the belief that our book-to-bill was positive for the quarter, and if you think about Q4, our guidance comprehends high single-digit, low double-digit growth for the LSAG business core growth. And so, I'll leave it at that.
Operator, Operator
And your last question is from Jack Meehan with Nephron Research. Your line is open.
Jack Meehan, Analyst
Thank you. Good afternoon. I would like to know more about the challenges your team is facing with supply chain management, specifically regarding inputs, shipping, or labor. Also, in light of the fourth-quarter guidance, are you adopting a more cautious or conservative approach given the current state of the supply chains?
Mike McMullen, CEO
Yes, there has been a lot of discussion on this topic. Everyone is addressing the global supply chain constraints. It has posed challenges for us, but as Bob mentioned, our team has done an excellent job delivering Agilent products to our customers. We are skilled at managing these situations. We will continue to focus on various commodity areas for some time, and we have taken steps to identify alternative sources of supply. For instance, we received a last-minute notification from logistics suppliers that they would not be able to pick up our boxes, so we switched to another supplier, successfully navigating that challenge. Although we are continuously monitoring these issues, we do not see them as a material risk to the Company at this time, and we have incorporated everything into our guidance for the fourth quarter. Bob, do you have any additional insights to share on this?
Bob McMahon, CFO
Yeah. The only thing I would say is it's the usual suspects that other folks have called out, things like labor and our team has done, to date, an outstanding job of being able to continue to satisfy demand here. And our expectation is that that's going to continue to happen into Q4. And we've got a continuous improvement program that continues to drive productivity and efficiency gains. And we're expecting that, and to combat some of these inflationary pressures as well as continuing to deliver to our customers. And we will continue to do that into '22 as well.
Jack Meehan, Analyst
Great. And then one other follow-up is on COVID.
Mike McMullen, CEO
Sure.
Jack Meehan, Analyst
So, the fourth-quarter guidance assumes it's a 1-point headwind, though we're obviously in the middle of another Delta wave here. So, I was curious what you're seeing on the ground or whether your products are just starting to wane in general and any preliminary thoughts around how, you have $100 million this year, just how you're going to guide as you go into 2022 related to that?
Bob McMahon, CFO
What I would say, Jack, is that our products are not directly linked to the testing. We didn't experience a significant increase or decline related to testing. Instead, we focused on expanding capacity in both testing and over the past year. We've actually seen a shift towards more demand for therapeutic or vaccine capacity. Therefore, we do not anticipate a spike and aren't incorporating that into our fourth-quarter expectations. It might be too early to make a call for fiscal year 2022. The last few quarters have shown steady demand, and we expect to see contributions in 2022. We will provide more details as we move through our planning process, but we do not expect a significant drop-off.
Operator, Operator
I do apologize but we do have an additional question. The last question is from Dan Arias with Stifel. Your line is open.
Dan Arias, Analyst
Yeah. Hi, guys. Thanks for getting me in here at the end. Hi, Mike?
Mike McMullen, CEO
Sure. No problems.
Dan Arias, Analyst
Just one for me. Just Bob, maybe a high-level question. Just to the idea of getting to a post-COVID world, whenever that might be. I'm wondering which of the 3 segments you think might stand the best chance of maybe rebasing at a higher level of the up-margin line, just by virtue of some of the success that you're having, and then to your point, some of the fundamental changes that might come to the expense structure. Is that something you think is possible? And if so, would you be willing to help us with which one is looking most promising there?
Mike McMullen, CEO
I believe it's possible, but I'm not going to single one out because I don’t want to overlook the other two Division Presidents. They must have influenced the results too. I think we can maintain this approach across the board. We are certainly making investments in all three businesses to support growth. Additionally, we see opportunities to enhance margins across all three business groups. I apologize for that.
Operator, Operator
And that concludes the question-and-answer session for this conference call. I will now turn the conference back to Puneet Souda for closing remarks.
Operator, Operator
Thanks, Paul. And thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day.