Earnings Call Transcript
Agilent Technologies, Inc. (A)
Earnings Call Transcript - A Q1 2022
Operator, Operator
Hello. And welcome to the Q1 2022 Agilent Technologies Earnings Conference Call. My name is Emily, and I will be coordinating the call today. During the presentation you will have the opportunity to ask a question. I now have the pleasure to introduce Parmeet Ahuja.
Parmeet Ahuja, President and CEO
Agilent's President and CEO, along with the Senior Vice President and CFO, will be discussing the company's financial results. Joining the Q&A session after their comments will be the Presidents of various divisions within Agilent. This presentation is being streamed live, and additional resources such as the news release for our Q1 financial results and the investor presentation can be found on our website. Today's remarks will reference non-GAAP financial measures, with the corresponding GAAP metrics available on our site. Changes in financial metrics refer to year-over-year comparisons, and revenue growth is calculated on a core basis, which excludes currency impacts and recent acquisitions or divestitures. Guidance is based on exchange rates as of January 31. As previously mentioned, we've made some changes to our segment reporting structure since the first quarter of fiscal 2022, and we have adjusted our historical segment information accordingly, though these changes do not affect our consolidated financial statements. We will also provide forward-looking statements regarding our company's financial performance, which are subject to risks and uncertainties, and are accurate only as of today. The company is not obliged to update these statements. For a comprehensive view of our risks and other factors, please refer to our recent SEC filings. Now, I will hand the call over to Mike.
Mike McMullen, CEO
Thanks, Parmeet, and thanks everyone for joining our call today. Our momentum continues. The Agilent team delivered a strong start to 2022 in Q1, exceeding the expectation of both the top and bottom line. Our Q1 revenues are $1.67 billion. This is up 9% core and up 8% reported. This is on top of growing 11% core in Q1 a year ago. Excluding COVID-19-related revenues, our core growth is even better at 10% this quarter. We continue to see strength in our order book with robust order intake throughout the quarter. In fact, Q1 orders grew roughly twice as fast as revenues. Q1 operating margins are a healthy 26.3%, up 80 basis points from last year. Earnings per share of $1.21 are up 14%. The EPS increases versus a tough comparison of 31% growth in the first quarter of 2021. These strong results have been achieved in a very dynamic environment. I could not be more proud of the Agilent team’s ability to execute and deliver. Let’s take a closer look at some of what’s driving our strong results. Bob will go into more details later in the call, but our two largest markets continued strong double-digit growth. Our Pharma business, Agilent’s largest market, continues to lead the way for us, growing 17%. Global end market demand for our products and services remains very strong. Biopharma grew 32% while small molecule growth came in about at a robust 9%. The momentum in our Chemical and Energy business also continues, delivering 15% growth in the quarter. This was driven by mid-teens revenue increases in Chemicals and Advanced Materials. PMIs remain positive, along with our overall outlook in the Chemicals, Energy and Advanced Materials markets. On a geographic basis, our results led by 13% growth in the Americas. This is on top of 13% growth in Q1 a year ago. China grew 3% on top of 25% growth in Q1 of last year and was impacted by the timing of Lunar New Year, as noted in our November call. Demand in China remained strong as orders grew high teens in the first quarter. We continue to invest in China for China to further strengthen our ability to serve our customers. We recently announced a $20 million expansion of our Shanghai manufacturing center to meet growing demand for our locally made liquid chromatography, spectroscopy and mass spec systems. Looking at our performance by business unit, the Life Science and Applied Markets Group generated revenue of $976 million, an increase of 7% on a core basis. This is versus a 10% core growth in Q1 of 2021. LSAG’s growth was led by strength in the Pharma and Chemical and Energy markets. From a platform perspective, customer interest and purchases of our chromatography systems and mass spec offerings are very robust. Our chemistries and supplies business, which moved over from ACG this year, continue to do very well, delivering double-digit growth. We also continue to invest and strategically partner for future growth. Late last week, we announced the acquisition of very exciting artificial intelligence technology that will be integrated into our industry-leading chromatography businesses. This technology has the potential to significantly improve lab growth productivity and accuracy by automating manual interpretation of chromatography data. We believe that this capability will be very well received by the high throughput labs Agilent serves around the world. This acquisition is an example of our build and buy growth strategy, as a complement to work, our internal R&D teams are going to develop these types of capabilities for other Agilent platforms. During the quarter, we also announced a partnership with Lonza to integrate Agilent’s analytics technologies and techniques into Lonza’s Cocoon Platform cell therapy manufacturing workflow. The collaboration has the potential to transform the way personalized cell therapies are manufactured. In addition, to ensure we can meet the strong and growing demand for our cell analysis offerings, we also recently announced plans to invest more than $30 million for the construction of a new manufacturing site in Chicopee, Massachusetts. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core against an 11% Q1 2021 core growth compare. This growth is broad-based with strength in service contracts, preventive maintenance, compliance, education and informatics enterprise services. Our focus on providing a differentiated customer experience that leverages our large-scale and talented customer support team continues to pay off. Our connect rates continue to improve and our installed base continues to expand, both boding well for continued strength in our services business. The Diagnostics and Genomics Group delivered revenue of $339 million, up 14% core versus Q1 2021 core growth of 15%. Our excellent growth is broad-based across pathology, genomics and NASD. Our Pathology business grew roughly 10% with strength across all regions. Our core genomics business grew low-teens, with strength in target enrichment and our genomics quality control product lines. The NASD team continues to deliver, driving over 45% growth in the quarter. Meanwhile, the additional capacity expansion at our Frederick GMP oligo manufacturing facility continues to proceed as planned. We continue to expect this capacity to come online by the end of calendar year 2022. Our Resolution Bioscience team achieved a major milestone in the first quarter by completing the pre-market approval submission for the Resolution ctDx FIRST liquid biopsy assay as a companion diagnostic. This was done in conjunction with Mirati Therapeutics for non-small cell lung cancer and is currently under review by the FDA. It is the first of what we hope will be several indications for liquid biopsy assays. I am pleased with how we have started the year. Building on our Q1 results, continued order strength and execution prowess, we are increasing our full year financial guidance. We are raising our core growth guidance to a range of 7% to 8%, up 125 basis points at the mid-point from our prior guidance. Fiscal year 2022 non-GAAP EPS guidance is increased to a range of $4.80 per share to $4.90 per share, growing 11% to 13% over last year. Bob will be providing the Q2 outlook along with more detail on our improved full year guidance. We are very pleased with our Q1 results and looking forward to another strong quarter and year ahead. I am also very confident in our team and our ability to execute and deliver for our customers and shareholders, no matter what the challenge. Thank you for being on the call today and I look forward to taking your questions later. However, for right now, 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, take you through the income statement and some other key financial metrics. I will then finish up with our improved outlook for the full year and our guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted very strong results in Q1 and exceeded expectations. Revenue was $1.67 billion, up a reported 8.1%. Core growth was even better at 8.9% as we overcame a greater than expected negative exchange rate impact of 1.3 points, while M&A added 0.5 points to growth. Q1 core growth was 170 basis points higher than the top end of our guidance. In addition, after adjusting for the 1-point headwind due to COVID-19 revenues, our core growth outside of COVID was roughly 10%, and as Mike said, order growth was even better. Again, a very strong start to the year. Now moving to our end-market performance, our results were driven by a continuation of strong growth in Pharma, led by Biopharma, while momentum in Chemical and Energy and strong results in Diagnostics and Clinical also led the way for us in Q1. Our largest market, Pharma grew 17% during the quarter, on top of 20% growth last year. The small molecule subsegment delivered high single-digit growth, while large molecule continued its strong performance growing 32%. We are seeing our ongoing investments in biopharma paying off as demand was strong throughout the quarter. We continue to believe in the long-term growth potential of the Pharma market and that our business will drive above market growth. Chemical and Energy continued to show strength, growing 15% during the quarter. Growth in Chemicals and Advanced Materials led the way, and we expect continued growth in this business. Diagnostics and Clinical grew 11% on top of 9% growth last year, with all three business groups again expanding revenues nicely during the quarter. Our expansion of LC/MS equipment into the clinical space continues to do well. And our growth in China was particularly strong, increasing more than 30% as we continue to penetrate this market. The academia and government market was flat in Q1. The business remained resilient despite omicron impacts in the U.S. as some universities delayed in-person learning in the period following the holiday break in December and reduced lab activity in January. We have seen lab activity improve into February and believe the funding environment remains positive. The Food segment declined low-single digits against a very strong 22% growth comparison from last year. The Americas were a bright spot for us, growing in the mid-teens, while Europe was flat and China down due to difficult comparisons and Lunar New Year timing. Closing out on the performance of the markets, environmental and forensics, our smallest market was down 11%. For Agilent overall on a geographic basis, all regions again grew in Q1, led by the Americas at 13% and Europe at 6%. China grew 3% on top of 25% in Q1 last year, in addition to the effect of Lunar New Year timing, which should benefit us in Q2. Now turning to the rest of the P&L, first quarter gross margin was 56.1%, up 30 basis points from a year ago. Our team has done a good job increasing productivity and pricing has helped offset higher input and logistics costs. Operating margins of 26.3% increased 80 basis points even as we have increased our R&D investments. Our investments in digital technology for our internal operations also continue to pay off as we leverage our infrastructure across the company using our One Agilent approach. Our tax rate of 14.25% came in as expected and we had 303 million diluted shares outstanding, slightly lower than projected. Putting it all together, we delivered EPS of $1.21, up 14% versus last year after growing 31% in Q1 of fiscal 2021. We continued to produce strong operating cash flow, generating $255 million in the quarter, beating our forecast, while we also invested $75 million in capital expenditures during Q1. And during the quarter, we took advantage of market volatility to repurchase $447 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $510 million to shareholders. Our balance sheet remains very healthy with a net leverage ratio of 0.9 times and given current market conditions, we expect to continue to be aggressive in deploying capital. Now, let’s move on to our improved full year guidance and our outlook for the second quarter. As Mike indicated, we are raising our full year core revenue growth to an expected range of 7% to 8%, up from our initial guidance in November of 5.5% to 7%. Excluding the COVID-related 0.5-point headwind this year, this results in core growth of 7.5% to 8.5%. The new guidance takes into account our strong Q1 results and an improved outlook for the rest of the year on a core basis. While we have increased our core growth expectations, the dollar has strengthened considerably, doubling the estimated exchange rate headwinds from our initial guidance to $110 million for the year, while the M&A impact remains relatively unchanged. Putting it all together, we are expecting full year revenues to be between $6.67 billion and $6.73 billion. In addition, we have increased our EPS guidance for the full year to $4.80 per share to $4.90 per share, up from the previous range of $4.76 per share to $4.86 per share and representing 11% to 13% growth versus fiscal year 2021. For Q2, we are expecting revenue to range from $1.595 billion to $1.625 billion. This represents core growth between 7% and 9% after adjusting for an expected 0.5-point impact related to COVID year-on-year and we expect reported growth in the range of 4.6% to 6.6%. Exchange rates are expected to have a negative impact of about 2.3% in the quarter, while M&A is expected to contribute 0.3 points to growth. And closing out our Q2 guidance, non-GAAP EPS is expected to be in the range of $1.10 to $1.12, up 13% to 15% versus the prior year. This is based on a 14.25% tax rate and 303 million diluted shares outstanding. Again, the Agilent team performed extremely well in Q1 and with the solid growth we are seeing in orders and the team’s willingness and ability to take on every challenge that comes their way, I am confident that Q2 and our full year results will also be strong. With that, Parmeet, back to you for Q&A.
Parmeet Ahuja, President and CEO
Thanks, Bob. Emily, if you could please provide instructions for the Q&A now.
Operator, Operator
Of course. Our first question for the call today comes from Tycho Peterson from JPMorgan. Tycho, your line is open.
Rachel Vatnsdal, Analyst
Great. Hi. This is Rachel on for Tycho. Thanks for taking the question. So, first off, great to hear about the companion diagnostic package for FDA review. Can you just give us the expected timeline for when you think you will get that back and if anything is expected in contribution for this guide for 2022?
Mike McMullen, CEO
Rachel, thanks for that question. I am going to pass it over to Sam.
Sam Raha, President, Diagnostics and Genomics Group
Thank you, Rachel, for your question. We are very excited to have completed all the modules and submitted the companion diagnostic related to Mirati’s adagrasib. We have taken the necessary steps and will engage with the FDA as they respond with questions. We do not control the timeline, and as you know, the actual approval is closely linked to the approval of the drug itself, which is also beyond our control. Nonetheless, we are very pleased with the progress we have made.
Bob McMahon, CFO
Yeah. I would say, Rachel, as was recently disclosed, the PDUFA date is scheduled for the end of this fiscal year. So there’s not any material revenue associated with this built into our fiscal year guide, but we are very excited about the opportunity in 2023 and beyond.
Rachel Vatnsdal, Analyst
Noted. And then, for the updated guide, can you just give us a rundown on the updated outlook by end market for what’s assumed in the new guide?
Mike McMullen, CEO
For the full year or second quarter, Rachel?
Rachel Vatnsdal, Analyst
Both would actually be great.
Bob McMahon, CFO
I believe, similar to what we discussed at the beginning of the year, the two strongest markets will continue to be Pharma and Chemical and Energy. Both performed better than we anticipated in the first quarter, and we expect them to remain the main drivers of growth throughout the year. Pharma is likely to achieve roughly double-digit growth, while Chemical and Energy should also see high single-digit to double-digit growth. Following closely behind will be Diagnostics, with growth in the high single digits. Food, environmental, academia, and government are expected to be in the low to mid single digits, which aligns with our earlier expectations. This trend is expected to continue into the second quarter, with Pharma likely showing slightly stronger performance.
Rachel Vatnsdal, Analyst
Got it. And then, for Chemical and Energy, can you just talk about if you see any risk coming from Russia and Ukraine, and then also, if you could just touch on that decline of 11% this quarter in environmental. How much of a headwind with COVID for that segment or is there anything else underlying in that market that’s really changed relative to your prior expectation?
Mike McMullen, CEO
Yeah. I would say, for Chemical and Energy, as you know, I mean, our business is really globally based. And so as of right now, we don’t see any material impact to the Chemical and Energy market or our forecast going forward. Obviously, we are watching that closely. And then, I think for environmental and forensics, it’s our smallest market and can be lumpy. There was some impact associated with the Chinese Lunar New Year in China. But we haven’t seen any impact there. What I would say is we are starting to see some of the disbursements more in our order funnel than in revenue associated with the Infrastructure Initial Bill here in the United States. So I wouldn’t read anything into it in terms of changing in fundamental demand.
Rachel Vatnsdal, Analyst
Great. Thanks for taking my questions.
Mike McMullen, CEO
You are very welcome.
Matthew Sykes, Analyst
Hey guys. This is Dave on for Matt. It was great to see the strength in the biopharma end market. It’s impressive given the challenging funding market for these biotech firms. Any additional color you can give on what you are seeing in the biotech end market and productivity there?
Mike McMullen, CEO
Yeah. Dave, first of all, thanks for the recognition. We are really pleased with that 32% growth print and we see the underlying demand remaining strong. And Bob, I think, it’s fair to say, we haven’t released any impact at all from what may have happened in the biotech funding arena.
Bob McMahon, CFO
Yeah. We are very excited about our portfolio and how it plays into that space and are believing that that strong growth will continue going forward.
Unidentified Analyst, Analyst
Fantastic. And any additional color on the drivers of the strong margin expansion in LSAG and how sustainable is this margin expansion over the rest of the year?
Bob McMahon, CFO
Yeah. I will jump in there. The team has done a fantastic job really driving margin and if we look at it, it’s a combination of being able to cover our costs from the standpoint of the increased logistics and material costs, as well as very strong management discipline in the operating expenses. So it’s a combination of being successful in our pricing, which we had talked about before and covering those costs, as well as being able to leverage our infrastructure across all three of the groups.
Mike McMullen, CEO
And Bob, I think you also called out the digital investments we are making. So that’s in particular showing up through the SG&A line as we leverage digital investments.
Unidentified Analyst, Analyst
Fantastic. Congrats on the quarter, guys.
Mike McMullen, CEO
Thanks, Dave. Most appreciated.
Vijay Kumar, Analyst
Hey, guys. Congrats on a nice quarter here.
Mike McMullen, CEO
Hey, Vijay.
Vijay Kumar, Analyst
And thanks for taking my question.
Mike McMullen, CEO
Thank you.
Bob McMahon, CFO
Bob, maybe one near-term question here on the second quarter guide. The 200 basis points range, that’s wider than your typical range. Your annual guidance range is 100 basis points, any reason for a wider branch and it comes to it really hard in 2Q. So I am curious, what’s giving you the confidence to get to that upper end of 8.5%, which would imply sequentially flattish with 1Q trends? Sure. Let me address the second part first. As Mike noted during the call, our demand remains robust, and we experienced order growth that was almost twice as high as our revenue growth. This gives us confidence in our order book as we head into Q2 across various end markets, enabling us to anticipate significant growth in Q2. Regarding the guidance range, there are still uncertainties, particularly due to the ongoing impact of Omicron in Asia and other factors. We are looking at this from a broader perspective, but we are optimistic about the business for the entire year.
Mike McMullen, CEO
Yeah. I appreciate the recognition, I think, Bob, what we posted 19% core last year.
Bob McMahon, CFO
Yeah.
Mike McMullen, CEO
So I appreciate that recognition, Vijay. And as Bob mentioned, the book of business is really quite strong, plus also our services business is really strong Diagnostics. So the recurring revenue side of the house is quite strong.
Vijay Kumar, Analyst
That's helpful, Mike. Regarding the contribution from the acquisition in the second quarter, it appears to be sequentially lower. Is there any seasonality affecting that business, and what does the guidance assume? You didn't mention the strong order book for the second quarter. Does the guidance reflect a potential slowdown in the order book momentum in the latter half of the year?
Bob McMahon, CFO
Yeah. No. It doesn’t. There is an element of getting tougher comps, but the momentum continues. I would say for Q2, it’s more timing than anything else relative to the M&A. It is down slightly sequentially, but I would say, in the overall scheme of things, not material.
Vijay Kumar, Analyst
Got it. Thanks, guys.
Mike McMullen, CEO
You are very welcome.
Brandon Couillard, Analyst
Hey. Good afternoon. Mike, on the AI acquisition, it sounds interesting. It’s definitely a buzzword. Would you expect to be making incremental investments with this deal and could you just comment on how and why the AI tools are kind of used in the instrumentation today and when you sort of expect this to be, I guess, more of a reality feature?
Mike McMullen, CEO
Yeah. Brandon, happy to do so. I am going to actually invite Jacob on the response here, because, yeah, we hear a lot about the buzzwords and when the team first came to be and started talking about this opportunity, we said, well, in actuality, there’s a lot more than buzzwords here. We actually have some lighthouse customers using this capability already.
Jacob Thaysen, President, Life Science and Applied Markets Group
Yeah. Sure. Thanks for the question, Brandon. I am very excited about this also on bringing the best control team here into Agilent. It might be a buzzword, but we have really seen that it really makes a difference. And first of all, it fits very well into an informatics strategy, where we are all about digitalizing the lab and create that deal inside both scientifically and productivity-wise for our customers. Here, the first product realization, which has already been prototyped, we are aiming to what a part of that is very prone for AI right now and that is really the manual interpretation of chromatographic data, as Mike also mentioned. Usually, labs are spending a highly trained chemist to go out and do manual peak integration, which is tedious process. You can imagine if you have a high volume lab, there’s a lot of investment going into this area. Active virtual control here has already proven with the customers that they can take a substantial part of that work and actually automate that. So we are very glad about that. We are going after the PCMs business first. We have a substantial installed base, and we actually believe that we can implement this here in the second part of fiscal 2022. Now long-term, we do believe there’s a great opportunity to provide those algorithms also across our analytical platforms and also for other applications like QC release and predictive maintenance and all things. So even though it’s the buzzword, there is a lot of real products behind this, and I am very excited about it.
Mike McMullen, CEO
Thanks, Jacob.
Brandon Couillard, Analyst
Thanks. Just one follow-up for Bob. If you could just elaborate a little bit more about the book-to-bill in the first quarter and then a couple just housekeeping, was the Lunar New Year impact kind of in line with the plan, and I think last quarter you talked about $15 million of kind of delayed orders, were all those recouped in the first quarter, just kind of an update on that?
Bob McMahon, CFO
Brandon, as usual, your notes are quite accurate and so let me address a couple of those things. So the Lunar New Year impact came in kind of as we anticipated, which should come back into Q2. That transit time or that $15 million that came in, but we haven’t seen really the improvement. So that’s still opportunities in the second half of this year. Our end of the quarter coincided with the large snowstorm in the U.S., but the shipments were out and we still were able to deliver. In terms of the first question was about Lunar.
Mike McMullen, CEO
I think on both.
Brandon Couillard, Analyst
No. Just if you quantify the book-to-bill, if you are really?
Bob McMahon, CFO
Oh! Yeah. Yeah. Quantify the book-to-bill. Yeah.
Mike McMullen, CEO
You are right.
Bob McMahon, CFO
I knew that there was something else. I was trying to avoid that. But what I can tell you is that, the growth rate of our orders was twice as much as the revenue growth, and I would say, our backlog is the highest it’s ever been.
Mike McMullen, CEO
And Brandon, this is Mike. I would just add one comment. There is one word in my script. I really want to make sure that I emphasize here throughout the quarter. So this wasn’t just a calendar December year-end kind of story. We saw this order strength throughout the entirety of our fiscal Q1.
Puneet Souda, Analyst
Yes, Mike and Bob, I appreciate you taking the question. Firstly, I would like to follow up on the order book. Can you provide some quantification on that? It's been growing significantly. Given that you have a strong order book, I'm curious about your confidence regarding the guidance you provided for the rest of the year. Additionally, could you elaborate on the cadence related to supply chains? We often receive questions about supply chains, so I'm interested in your level of confidence in converting those order books into actual orders.
Mike McMullen, CEO
Yeah. So, first of all, I’d say that the supply chain environment continues to be quite challenging. On the other hand, I remain quite confident because our team has found ways to continue to navigate through those and meeting the expectations of customers in terms of delivery times. In fact, if I recall correctly, our order cancellation was actually lower this year than the prior year. So while I don’t want to imply that it’s all sunny out there in terms of the supply chain, we have been working on this for a while. I mean, many quarters ago, we were working on this quarter and the second half of this year. So while the environment remains challenged externally, I remain confident in our ability to actually get products to customers when they need it.
Bob McMahon, CFO
Yeah. Puneet to your first question on quantification, we are not going to provide that other than what I had answered earlier. But we did find the 2x order growth rate versus revenue.
Mike McMullen, CEO
Exactly. That one, Bob.
Puneet Souda, Analyst
Got it. Fair. In terms of cell analysis, Mike, that franchise has been growing. You mentioned Lonza, the Cocoon platform, and a few other capabilities. Could you provide an update on that business? I'm curious about the growth rates you're experiencing and your expectations for this year, especially with the acceleration in biomolecules. Thank you.
Mike McMullen, CEO
Yeah. Thanks for that question. We love to talk about the cell analysis. It’s been a really great addition to the company over the years and we continue to grow and expand that. So, first of all, I’d say that business remains to be very healthy. We are seeing really good strong end market demand. And Bob I think for the year, we are expecting the double-digit growth out of the cell analysis business. And really excited and the fact that, in addition to the manufacturing expansion we had in Chicopee, that kind of gives you an indication of our confidence in future growth. And I believe we are close to, Bob and Jacob, close to north of $400 million for this business?
Bob McMahon, CFO
This year.
Mike McMullen, CEO
Yeah.
Puneet Souda, Analyst
Got it. Super helpful, guys. All right. Thank you.
Mike McMullen, CEO
You are very welcome.
Patrick Donnelly, Analyst
Hey. Thanks for the questions guys.
Mike McMullen, CEO
Hey, Patrick.
Patrick Donnelly, Analyst
Mike, maybe one on China, between the tough comp…
Mike McMullen, CEO
Sure.
Patrick Donnelly, Analyst
… Lunar New Year, obviously, a few layers there. Can you just talk about, I guess, the core performance is going to stripping that out a little bit, what you are seeing there, what you saw through… to your point there throughout the quarter, I guess, the cadence and then the expectations going forward there as well, just between the different markets there. Just curious what’s going on?
Mike McMullen, CEO
Yeah. It’s interesting. Sometimes you can get kind of diverted on the headlines out of China, because our business remains quite strong and we are seeing good strength in pharma as really been a key driver for us, which Bob highlighted in the script. But also our Diagnostics business, DDG grew, I think, over 40% in the first quarter, services growth in the mid-teens. So other things that I have talked to you about, which is, in addition to continuing to grow and strengthen our instrumentation portfolio market share in China. We have also been talking about our ability to grow our ACG business in China with that large installed base and the fact that we have historically viewed ourselves as being underpenetrated in Diagnostics and Genomics, and we are really starting to see traction on both of those growth factors. So, again, we feel really confident about the state of the China business, because we don’t have the order book we have, but also these other areas of recurring revenue are really growing well for us and we continue to invest for our customers in China, as I mentioned in my call script. So I think there’s a lot to like about the opportunities in our business in China.
Bob McMahon, CFO
Certainly. Patrick, just one other thing to note is that while we grew 3%, if we factor in the Lunar New Year estimate, our growth was in the high-single digits, aligning with our expectations. We anticipate this trend will continue for the full year as well. Q2 is expected to show stronger growth, especially as we see mid-to-high-teens growth in orders in Q1.
Patrick Donnelly, Analyst
Okay. That’s helpful. And then maybe just on the academic government market. You are not alone, obviously, calling that out as being a little sluggish to come back. Maybe just what you saw there in January, Mike, I know you called out the remote learning maybe caused a little more of a pause even as we go into 2022? And then just expectations there going forward, you expect the market to kind of normalize a little bit and what are you hearing from customers on that front?
Mike McMullen, CEO
Thanks, Patrick. We view the impact of Omicron as temporary. In the U.S., for instance, we anticipate a return to normal levels by February. Therefore, we expect the environment to improve over the year. While we expect Q1 to remain relatively flat, we are projecting mid-single-digit growth for the full year, suggesting an increase in growth in this segment later this year.
Bob McMahon, CFO
Yeah. I mean, for everything that we see, Patrick, funding levels continue and activity within our order book continues to be strong. So it not as strong obviously as the Pharma and C&E areas, which are leading the growth in the Diagnostics, but we are not seeing any fundamentally different performance in that market going forward.
Patrick Donnelly, Analyst
That’s helpful. Thank you, guys.
Mike McMullen, CEO
You are very welcome.
Jack Meehan, Analyst
Thank you. Good afternoon, guys.
Mike McMullen, CEO
Good afternoon, Jack.
Jack Meehan, Analyst
I was hoping you could elaborate on the pricing actions you are taking in the market? How do they compare to kind of normal periods and what areas of the portfolio have you had success when it comes to pricing?
Bob McMahon, CFO
Yeah. I will take that, Jack. And I think we mentioned at the beginning of the year that we were estimating roughly a point of growth associated with that was about half of what we had seen normally to cover the increased costs, and what I would say is, through Q1 we are ahead of schedule, which is good.
Jack Meehan, Analyst
Okay. And then, the other area I was hoping you had an update on is NASD, so over 45% growth in the quarter. Maybe just any update to what your guidance is for the full year? It seems like you are tracking ahead of schedule here, and just when the new line opens up, just what sort of pace you expect to be able to take advantage of that capacity?
Bob McMahon, CFO
Yeah. I was going to say, the team continues to do a fantastic job and continues to drive even more revenue and product out of the existing capacity and it was a great first quarter and slightly ahead of our expectations. We had expected double-digit growth and that continues to be our expectation before the new train, Train B comes online at the end of this calendar year. The order book continues to be strong. That team continues to actually build the order book for 2023 and building that demand for that train. So we are extremely excited about that business and are looking forward to not only bringing that up, but also looking for other ways to expand our capacity.
Mike McMullen, CEO
Absolutely.
Derik de Bruin, Analyst
Hi. Thanks for taking the questions. This is Mike on for Derik.
Mike McMullen, CEO
Hi, Mike.
Mike Ryskin, Analyst
I want to ask a little bit on the Diagnostics and the Clinical end markets. In particular, you called out sort of the expansion of our CNS into some of the applications here and you are seeing a new vector of clinical growth here. I was wondering if you could elaborate on that. Just sort of what are the specific drivers you are seeing there and where some of that uptick happening.
Mike McMullen, CEO
Yeah. I am going to pass it over to Jacob for some more details here. But also I would also just remind, we also had a very good print on the pathology side of our Diagnostics business. But I think you will hear from Jacob, LC/MS is an indication of some future traction, we are already getting some good growth. So, Jacob, your thoughts there?
Jacob Thaysen, President, Life Science and Applied Markets Group
Yeah. Absolutely. We have closed the year have a good LC/MS Clinical business in U.S. But over the past year, we have also expanded ourselves into China, really good tractions. We both have our own product line there, our direct sales, but we also have an OEM partner. So in that sense we are both addressing the customers that we know, but also a lot of customers that we want to get access to. And that’s been quite successful, and hence we are right now looking to expand the portfolio even further. We have the Ultivo, of course, with our LC connected and we are looking to other parts of our portfolio, both within LC/MS, but also beyond LC/MS here over the next period of time. But we do see China as a great opportunity, but here over the next over time, we will also enter into other areas like Europe and other places.
Mike McMullen, CEO
And Jacob, on the Ultivo, what I think the customers love the combination of performance and the size of the footprint really fits nicely into the diagnostic lab.
Jacob Thaysen, President, Life Science and Applied Markets Group
Yeah. Exactly. We spent a lot of energy both making it a size that fits very well into the LC stack. But more than that, we also made it easier to work with. So it’s actually an ease-of-use solution. So we are very excited about that and even better the customers are also super excited about that. I do want to mention also that we also have a strong Clinical business within the flow cytometry. With the Ultivo business that continues to drive growth and particularly China, where we see a lot of demand there also. As you might recall, the flow cytometry from the LC business is really focused on decentralized labs also again with ease-of-use and we see a lot of interest in that. And I do expect also that U.S. will be a future market for us here.
Mike Ryskin, Analyst
Great. I appreciate that. Any color you can give us just real quick on sort of how meaningful LC/MS is within that 15% of your exposure? Is it just to give us a sense of the scale of that relative to genomics and cancer diagnostics and pathology things like that?
Mike McMullen, CEO
Bob, do you want to take it or do you want me to?
Bob McMahon, CFO
Yeah. Yeah. I will take it. It is still relatively small but growing very fast, which the market itself is quite large and so the opportunity here is really in front of us going forward.
Mike Ryskin, Analyst
Great. Could you provide a quick follow-up on capital deployment and mergers and acquisitions? You've made some smaller deals in recent years and are continuously investing in new technologies, including M&A in areas like Life Science Solutions, cell analysis, liquid biopsy, and now artificial intelligence. This demonstrates your ability to allocate capital across various markets. Considering the current state of the balance sheet, do you have any thoughts on pursuing larger acquisitions or scaling up for bigger deals? What markets excite you, and how would you approach capital deployment?
Mike McMullen, CEO
Yeah. Sure. Happy to address that, Mike. So I appreciate, by the way, the recognition of the variety of where we deploy capital. But there’s a consistent theme across where we deploy capital, which is high growth end markets, which will drive increase to the overall core growth of the company in places where we can leverage the scale and the capabilities we have in the company to really make those businesses even more successful. So I think there’s a timing kind of an underlying theme behind all those acquisitions. So that would continue to be our thesis and our approach, as well as staying focused in the private sector, which we think there’s really fits well the Agilent model and often the potential acquired companies and leadership teams really find the Agilent culture a good place to be and they also see how well we have done with previous acquisitions. So we have got a track record as well that they can point to. And I am on record saying that, we wanted to deploy our balance sheet as part of our overall growth story. It’s part of what we have been calling our build and buy growth strategy. And as you may know, the largest deal that we have done to date was the acquisition of BioTek, but we believe we can do multiples of that deal and be willing to deploy capital if the right opportunity comes along for us.
Mike Ryskin, Analyst
Okay. Thanks.
Thomas Peterson, Analyst
Hi guys. Thanks for taking my questions.
Mike McMullen, CEO
Sure.
Thomas Peterson, Analyst
Just wanted to circle back on Pharma and just wanted to know if you had seen any benefit within Pharma from both onshoring activities and manufacturing redundancies and kind of, if so, where has this tailwind been and what are your expectations for any potential durability here?
Mike McMullen, CEO
Great question. So I think this is actually a story both for the Pharma as well as elements of our Chemical and Energy business. And I’d say right now, not yet material in terms of order book or revenue, but we believe it’s coming. There’s a lot of discussions with customers that are building new capacity. I would say it’s probably more of a 2023 kind of event. But I think it speaks to the durability of growth that we think we have in Agilent’s two largest end markets. So we are hearing lots of discussions about dual sources of critical components, onshoring of previously offshore critical supply chain elements. So I think the continued supply chain challenges that the world is seeing is only putting more emphasis on that direction. So I’d say right now, it’s in the longer term planning phase. As you know, the analytical laboratory instrumentation is often the last thing that’s added when they bring on new capacity, but we believe it’s coming, but it’s not been material yet to the company’s performance.
Thomas Peterson, Analyst
Great. That’s super helpful. And maybe just to finish for me, just any updated thoughts on the One Agilent commercial organization transition? Anything that surprised you relative to expectations, sort of how is that incorporation gone internally?
Mike McMullen, CEO
Yeah. So I am going to have Padraig jump in here with some additional specifics. As you know, I have asked Padraig to take on this role in addition to his leading the overall Agilent Services business. But we are just delighted with the start of this new structure and I think I always say the proof is in the results and we are off to a good start with the fact that we had such a strong Q1 order book throughout the quarter. And Padraig, I know it’s been just a few months where you have been pulling your team together but I think you are already starting to work with customers differently and maybe you could share some of your thoughts here.
Padraig McDonnell, President, CrossLab Group
Yeah. Thanks, Mike. I think we are starting to see the benefit of an enterprise approach to both sales and service, and the associated functions, and of course, selling the complete Agilent solution to customers, which includes instruments, services and consumables with aligned sales approach is really giving us a lot of scale with customers. We are also seeing a doubling down on our investment in our digital interaction with customers and we continue to see strong momentum with accelerating digital growth of about 25%. So great start, Mike, and more to come.
Thomas Peterson, Analyst
Okay.
Dan Brennan, Analyst
Hey, Mike and Bob, thanks for taking the questions. Congrats.
Mike McMullen, CEO
Sure, Dan.
Dan Brennan, Analyst
I was hoping to return to C&E. Mike, could you or Bob provide some insight into the customers there, specifically Chemical R&M? Can you share what you are observing? I know this question was posed earlier regarding the current situation's impact. I'm curious about how sustained spikes in oil prices have influenced your operations based on past experiences.
Mike McMullen, CEO
If we examine the three sub-segments of the Chemicals and Energy marketplace, it’s clear that the Chemicals and Advanced Materials segments are driving growth. While higher oil prices typically lead to increased investment in the Energy segment, this currently constitutes a very small part of the overall market. The exact percentage has changed over time, but what stands out is the relationship between global growth and the Purchasing Managers' Index (PMI). The strongest correlation we see regarding growth in this segment is tied to PMI and global growth expectations. There may be additional investment in exploration if oil prices remain high, but it fundamentally hinges on the PMI perspective. This is why we maintain a positive outlook, and we feel optimistic about our growth potential in this market for the remainder of the year.
Bob McMahon, CFO
Yeah. Dan, to build on what Mike was saying, if we looked at those three big areas, over 90% or roughly 90% of our C&E business is actually Chemicals and Advanced Materials. And so the Energy piece is an important component, but that demand around new types of Chemicals, Advanced Materials and so forth is really what’s driving it.
Mike McMullen, CEO
Yeah.
Dan Brennan, Analyst
Got it. Thanks guys. And then, just related to the Oligo business the MAC business, just can you remind us, at least from the perspective of like basin within your high single-digit growth for Pharma, kind of how many points of growth should we be thinking that business is contributing?
Bob McMahon, CFO
Pharma experienced growth of approximately 2 to 3 points in Q1.
Dan Brennan, Analyst
And then, for the year, sorry? Yeah. Yeah. Sorry about that, I misspoke. So for the year, I think you are talking low double now for Pharma. So what’s assumed from the Oligo business within that demo?
Bob McMahon, CFO
Yeah. A point or two.
Mike McMullen, CEO
Yeah. I think the message here is the Pharma growth was strong for the biopharma, NASD, but also across the rest of the company’s portfolio as well.
Dan Brennan, Analyst
Yeah. Great. And then maybe just one final one to sneak in just the LC market, Mike, it’s always entering here, what’s going on…
Mike McMullen, CEO
Yeah.
Dan Brennan, Analyst
… and that’s a big part of your business, what the competitive trends there like in LC?
Mike McMullen, CEO
All I can share is that my business is performing very well. We continue to experience strong momentum. The market demand is quite solid. As I mentioned earlier, the demand for our chromatography systems is very strong. We achieved double-digit growth again in Q2 compared to the prior year, and our backlog is strong with orders increasing faster than our revenue. There is a lot to be optimistic about regarding the LC business.
Dan Brennan, Analyst
Great. Thank you guys.
Patrick Donnelly, Analyst
It’s always tough to ask a good question late in the day, Mike.
Mike McMullen, CEO
Come on, Paul. I know you are up to it. I know you are up to it.
Paul Knight, Analyst
As I look at the 32% biotechnology growth, which seems extraordinarily good, would you attribute this to the cell and gene therapy market, and what specifically biotech instruments? What’s behind that really high growth rate?
Mike McMullen, CEO
Bob, why don’t we tag team on this, but I’d say, it’s really being driven by not only the NASD business we talked about earlier, but our core LC/MS business. I mean there is some contribution from cell and gene therapy, but it really is coming from the LC/MS business along with really strong growth of services and consumables as well. So, I’d say, it’s really a broad-based story, but really around our core instrumentation platforms along with services and consumables.
Bob McMahon, CFO
Yeah. Spot on.
Paul Knight, Analyst
Okay. Sorry, Bob.
Bob McMahon, CFO
Go ahead, Paul.
Paul Knight, Analyst
You have mentioned LC/MS more frequently than what I would consider typical. Is this because you are starting to see benefits from the Avantor joint venture? Additionally, I know you noted increased connectivity with CrossLab. It seems you are suggesting that you are continuing to gain market share there. Could you discuss both of these topics?
Mike McMullen, CEO
ACG has been an important part of our overall growth strategy for several years, and we are very excited about our new partnership with Avantor. It is still early in this relationship, so it has not yet made a significant impact on our topline revenue, but everything is progressing as planned. We expect more developments in the future. Regarding the connect rate, we have intentionally highlighted that we are experiencing higher connect rates within our consumables and services business, which we believe indicates strong potential for future growth. Padraig, would you like to share your insights on what you are observing in terms of services and connect rates?
Padraig McDonnell, President, CrossLab Group
Yeah. Well, overall, the attach rate for both service and consumables is in the high 20s, but we believe that we have significant headroom for growth going forward as we target into higher technology spaces. And on the services side, in particular, we have a strong demand for contracts and that’s driving a lot of connect rate with new instruments as well, Mike.
Mike McMullen, CEO
I believe we experienced double-digit growth in contracts, and probably more than 10% of Agilent’s revenues is now from service contracts.
Operator, Operator
Those are all the questions we have time for today. So I will now hand back to Parmeet to conclude today’s call.
Parmeet Ahuja, President and CEO
Thanks, Emily, and thanks everyone for joining. With that, we would like to wrap up the call for today. Have a great rest of the day everyone.
Operator, Operator
Thank you everyone for joining our call today. This now concludes our call. Please disconnect your lines.