Agilent Technologies Q1 2024 Earnings Call Transcript

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Provided by Quartr
February 27, 2024

There are 21 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Agilent Technologies Q1 2024 Earnings Call. My name is Regina, and I will be coordinating your call today. I will now hand you over to your host, Parmit Ahuja to begin. Please go ahead.

Speaker 1

Thank you, Regina, and welcome everyone to Agilent's conference call for the Q1 of fiscal year 2024. With me are Mike McMullen, Agilent President and CEO Parekh McDonnell, Agilent Chief Operating Officer and CEO Elect and Bob McMahon, Agilent's Senior Vice President and CFO and Acting President of the Diagnostics and Genomics Group. Joining in the Q and A will be Phil Binns, President of the Agilent Life Science and Applied Markets Group and Angelica Reiman, our newly named President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our Q1 financial results, investor presentation and information to supplement today's discussion, along with the recording of this webcast are available on our website at www.investor.

Speaker 1

Agilent.com. Today's comments will refer to non GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months.

Speaker 1

Guidance is based on forecasted exchange rates. As previously announced beginning in the Q1 of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our Cell Analysis business from LSAG into DGG. We have recashed our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward looking statements about the financial performance of the company.

Speaker 1

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

Speaker 2

call over to Mike. Thanks, Paramit, and thanks, everyone, for joining our call. Before I review our Q1 results, I want to first acknowledge our news last week that we'll be retiring at the end of the fiscal year and that Porter McDonald is Agile's new Chief Operating Officer and will become CEO on May 1. It was a difficult decision to retire After almost 40 great years with this special company and in a role that I love, I will miss working with the 1 Agilent team. However, I must say it's a great feeling and quite gratifying to be handing over the CEO reins to a tremendously capable successor in PORIG.

Speaker 2

With Agilent operating from a position of strength and with a very promising long term outlook. I've known Porg for more than 20 years and worked closely with him during that time. He has always been completely committed to our customers and Agilent's success. He is a product of our culture, knows our company, team and markets and knows how to develop compelling business strategies, build winning teams and deliver exceptional results. Porg has a strong track record result at every position he has held during his 26 year career at Agilent.

Speaker 2

I know he has the knowledge, leadership skills and customer focus that will be key to Agile's success moving forward. I look forward to all of you seeing firsthand what a capable, results driven leader we have in Puerig. Puerig, would you like to say a few words?

Speaker 3

Thank you, Mike. I'm honored to be able to follow you as Agilent's next CEO and I'm grateful for your support throughout my career and during this transition. You have made a significant impact on Agilent, our customers and our team. I'd also like to welcome Angelica Ryman to this call. After leading our services division for the last two and a half years, I can tell you she has the experience and the skill set to continue evolving ACG to align with the growing opportunities that the business has demonstrated in supporting the broad installed base and our enterprise customers.

Speaker 3

Expect to see continued great things ahead from Angelica and ACG. I've had the pleasure of meeting some of you on this call and I look forward to meeting and working with you all in the future. Agilent has a compelling story to tell and I'm excited by the possibilities that lie in front of us as we help our customers bring great science to life.

Speaker 2

Thanks, Parekh. For today's call, I will take Lee covering the overview of our financial results, while next quarter, Parekh will take on these duties as the new CEO. Now, on to the Q1 results. We are pleased with the start of the year. The Agilent team continues its strong execution in a challenging market environment.

Speaker 2

The Q1 provided further evidence of our team's capabilities with revenue coming in better than expected at $1,660,000,000 This represents a decline of 6.4% against a tough compare of 10% growth in Q1 of last year. The better than expected top line results and disciplined cost management drove higher than expected earnings per share of 1 $0.29 down 6% from Q1 last year. Given the solid Q1 results and our continued view of slow, but steady recovery throughout the year, we are maintaining our full year outlook that we shared with you in November. Key to our Q1 performance was the ongoing sequential stabilization we experienced in China and secular growth drivers in applied markets globally. From an end market perspective, our total pharma business is down 12%, which was in line with our expectations.

Speaker 2

This follows 11% increase in the Q1 last year. While declining overall against a very strong Q1 of last year, our applied end markets were more resilient than expected and showed sequential growth from the Q4. In these markets, PFAS solutions and advanced materials, including batteries and semiconductors were highlights for us. Geographically, both China and Europe finished Q1 better than expected, while revenue for the Americas was in line with expectations. Looking at our performance by business unit, the Life Science and Applied Markets Group delivered revenues of $846,000,000 down 11%.

Speaker 2

This is against a difficult compare of 10% growth last year. While still too early to call an overall market recovery, results were better than expected. Our diversified portfolio and broad end market coverage helped drive the performance. We continue to experience a conservative environment for capital spending, but our better than expected Q1 results were driven by consumables, which grew mid single digits, China and a better than expected performance in applied markets. During the quarter, we also completed expansion of our Shanghai manufacturing facility as we continue to take steps to ensure long term leadership in China.

Speaker 2

We also made our first customer shipments for Astra's newly released LC MS offerings. Our latest highest sensitivity triple quad, the 6,495D enables expanded and enhanced workflows, including for PFAS. This is in addition to Revenant, the first of a new generation of LC Q TOF systems that combine a new architecture with enhanced instrument intelligence for maximized operation time and productivity. The Agilent Crosstab Group posted revenue of $405,000,000 This is up 5% with growth across all regions except China. Our contracts business led the way with double digit growth overall, led by strength in enterprise service contracts.

Speaker 2

This performance highlights the continued strength and resiliency of our business. Connect rates for both services and consumables continue to improve. This is a result of our focused strategy to deliver end to end customer value while also building a larger recurring revenue business. The Diagnostic Genomics Group delivered revenue of $407,000,000 down 6% core. Our pathology related businesses and our NGS QC portfolio grew mid single digits, which was more than offset by declines in NGS chemistries and NASD.

Speaker 2

NASD declined low double digits as expected. This is against a very tough compare of 22% growth driven by significant volume last year from a single commercial program. We continue to be encouraged about our long term prospects due to the increasing number of programs across a range of indications, many of them targeting large patient populations. The DGG team continues to innovate and deliver differentiated solutions for our customers. In the quarter, we introduced a new proteo analyzer system.

Speaker 2

The new platform simplifies and improves the efficiency of analyzing complex protein mixtures, a process central to analytic workflows across the pharma, biotech, food analysis and academia sectors. From an overall Agilent perspective, we recently achieved World Economic Forum recognition for operations of Walbrand, Germany. This site was named a global lighthouse for implementing innovations that boost productivity, output and quality. This marks the 2nd Global Lighthouse Award for us after receiving recognition for our Singapore facility 2 years ago. Agilent is the only life science tools company to be recognized as a global lighthouse.

Speaker 2

Agilent recently achieved a top 5 ranking in the Barron's list of 100 Most Sustainable Companies. In addition, we are included in the Dow Jones Sustainability Index globally and in North America for the 9th year in a row. Looking ahead, we expect the current market environment to persist through the first half. We expect a slow and steady improvement in the second half of the year. We will continue taking actions that will make us stronger and position us well for the future.

Speaker 2

We will maintain our approach to prioritize investing for growth with a focus on execution and driving productivity. Our better than expected Q1 results and my confidence that the Agilent team reinforce our view for the full year. Bob will now provide the details on our results as well as our outlook for Q2. After Bob's comments, I will be joined for some closing remarks. And now, Bob, over to you.

Speaker 2

Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter as

Speaker 4

well as take you through the income statement and other key financial metrics. I'll then finish up with our Q2 guidance. Q1 revenue was $1,660,000,000 a decline of 6.4% core. On a reported basis, currency added 0.9 percentage points, while M and A had a negative impact of 0.1% resulting in a reported decline of 5.6%. And overall, orders were greater than revenue in Q1 as expected.

Speaker 4

As Mike mentioned, pharma, our largest end market declined 12%. Within pharma, biopharma declined low single digits, but grew low single digits outside China bolstered by strength in services and consumables. Small molecule was down high teens in the quarter with softness globally. The chemical and advanced materials market was down 4% off a very tough comparison of 14% growth last year. We saw broad resilience in Advanced Materials with a low single digit increase year on year as well as growth sequentially.

Speaker 4

Given the extremely tough compare of high 20s growth last year, these are impressive results. As expected, the chemical side saw a decline. The academia and government market was up 2%. The growth in this market reflects the stability of academic funding and lab activity. Our business in the Diagnostics and Clinical market declined 5%.

Speaker 4

Mid single digit growth in pathology was more than offset by continued headwinds in genomics, cell analysis and LC and LC MS. The environmental and forensics market declined 1% after growing 12% in Q1 of last year. We continue to see new regulations around the world driving PFAS testing. Europe grew mid single digits, while China and the Americas were down low single digits. Americas faced a difficult compare of low 30s growth last year.

Speaker 4

The food market declined 3%, but was up low single digits excluding China. On a geographic basis, as Mike mentioned, both China and Europe exceeded our expectations, while the Americas were in line with our expectations. China was down 9% and showed a sequential increase over last quarter, which was much better than expectations. China benefited from continued stabilization and a bigger than expected Lunar New Year impact as some customers pulled forward incremental demand from Q2. Even adjusting for this impact, China outperformed.

Speaker 4

Europe was down 4% year on year after growing 10% last year and was up mid single digits sequentially. This was driven by continued strong demand for our ACG services, offset by muted demand in pharma and expected softness in chemicals. In the Americas, revenue was down 8% due to declines in pharma and the softness in NASD and NGS chemistries. Moving down the P and L. 1st quarter gross margin was 56.0%, down 50 basis points from a year ago as productivity and cost savings were offset by lower demand and mix.

Speaker 4

Our operating margin of 25.8% was down year over year as expected. Our ongoing cost savings initiatives are delivering as planned. Below the line, we benefited from greater than expected interest income in the quarter driven by nice work from our treasury team coupled with very strong cash flow. Our tax rate was 13.5 percent and we had 294,000,000 diluted shares outstanding. Putting it all together, Q1 earnings per share were $1.29 down 6% from a year ago and ahead of our expectations.

Speaker 4

Now let me turn to cash flow and the balance sheet. I continue to be very pleased with our cash flow generation. Operating cash flow was $485,000,000 in the quarter, significantly above last year. In Q1, we invested $90,000,000 in capital expenditures as we continue our planned NASD expansion. And during the quarter, we returned $69,000,000 to shareholders through dividends.

Speaker 4

Although no shares were repurchased during the quarter, we expect to catch up on our anti dilutive share repurchasing for the remainder of the year. In Q2, we expect a minimum of $180,000,000 to be repurchased. All in all, we had a good start to the year and as Mike mentioned, it reinforces our confidence in the full year guide we provided in November. Now to our guidance for the Q2. We expect Q2 revenue will be in the range of $1,560,000,000 to $1,590,000,000 This represents a decline of 9.1 percent to 7.4 percent on a reported basis and a decline of 8.4% to 6.7% on a core basis against 9% growth last year.

Speaker 4

Currency and M and A combined are a headwind of 70 basis points. Our Q2 guidance also reflects the $15,000,000 impact of the Q1 pull forward in China I mentioned earlier. 2nd quarter non GAAP earnings per share expected to be between $1.17 $1.20 Before turning back over to Mike, I just want to express my thanks to Mike and to congratulate Porid. Mike, it's been a real pleasure to work with you. While there have been many ups and downs in the markets these past few years, one thing I knew I could always count on is your steady leadership and strong partnership.

Speaker 4

Emporic, congratulations again. I'm really looking forward to working with you. And now I'll turn things back over to Mike. Mike? Thanks, Bob.

Speaker 4

Today marks my 37th and final earnings call

Speaker 2

with all of you. Time does truly fly by. I want to first thank you for your support and engagement over the years. I have to say it has been a tremendous honor to serve as Agilent's CEO and represent the achievements of the 1 Agilent team to all of you and the broader investor community. In 2015, we launched the then new Agilent with a goal to transform Agilent into a leading life science and diagnostics company.

Speaker 2

We had ambitious goal to drive long term shareholder value creation with significantly stepped up financial results delivered by an unmatched one Agilent team working together in a truly differentiated and compelling company culture. I couldn't be proud of the Agilent team and what we've accomplished together over the last 9 years. While current market conditions remain challenging, the long term promise of growth remains with end markets powered by investments to improve the human condition. On the Agilent front, we've never been in a stronger position to continue to capitalize on opportunities to serve our customers, win in the market and deliver differentiated financial results. It's been a pleasure to work with all of you over the years.

Speaker 2

I will miss it. While at the same time, I know that you'll enjoy working with PORIC in the years ahead. Like me, I know you'll be impressed with Porick's knowledge of our industry and our business. As I noted earlier, he knows how to develop compelling business strategies, build winning teams and deliver exceptional results. His track record success during his agile leadership journey speaks for itself and have no doubt it will continue in his new role.

Speaker 2

While this is my last earnings call with you, I'm certain that the best is yet to come for Agilent. Thank you. And now to you, Parmit, for the Q and A.

Speaker 1

Thanks, Mike. Regina, if you could please provide instructions for Q and A now.

Operator

Our first question comes from the line of Derik De Bruin with Bank of America. Please go ahead.

Speaker 5

Hi, good afternoon.

Speaker 2

Good afternoon, Derik.

Speaker 5

Congratulations, Mike. It's been fun and good

Speaker 6

luck. Thank you very much.

Speaker 5

So, the first question, we've been getting a lot of incomings on the NASD business and just because the growth trajectory is not doing what I think what people had thought it was going to do this year. I just have a couple of questions. It's like, look, there's been some push outs in some clinical readouts from like Alnylam with their HELIOS B trial. There has been some other sort of like developments in the market. I guess the question is like, are you still confident that, that segment can grow this year, NAST can grow this year?

Speaker 5

And I just is there any risk at all that there's like an overcapacity situation because as the market is it just taking longer for things to catch up? Just sort of your thoughts on that please.

Speaker 2

Yes. Thanks for that Derek and it has been fun and thank you again. I'll tag team with Bob on this. So as you saw in our prepared remarks, Q1 came in as expected for the NASD business. And we are in a situation where we've had, I think, the broadest number of clinical programs and such.

Speaker 2

So we're very active. The volume is less commercial this year, as we pointed out in the script as well versus clinical. And Bob, I know we've been talking a lot with the team about the outlook for the year, particularly with some of our customers who are re sequencing some of the clinical programs into 2025.

Speaker 4

And as you're talking about, we remain very optimistic about the future of NASD. Our forecast for trained C and D remains intact terms of building out the expansion. I would say that as we're talking about things, you mentioned one of the clinical trials that's an important element of one of our customers. We are seeing some potential push outs into FY 2025. And as they are looking at revisiting their clinical trial programs and timelines, and it's probably closer to flat this year based on that, although we're not giving up hope, but that's built into kind of keeping our guide the way it is.

Speaker 4

But I think if you look at the number of commercial programs or excuse me, clinical programs that we have, we're very excited about the future.

Speaker 2

And Bob, I think it's also fair to say that this is not a byproduct of overcapacity in the industry or significant change in in sourcing. That's really how some of our customers are reacting to really the IRA Act.

Speaker 7

That's right.

Speaker 5

Well, that takes me that's a great segue into my next question, which is what's sort of the latest on pharma? It doesn't sound like you're ready to call an inflection point, but it does sound like things will work sounded a little bit better. Can you just sort of give your thoughts on what budget releases are, sort of timing around that, any sort of like notable developments? I mean, when do you are you seeing any sort of like signs of life that you sort of the signs of budgets could start to be released in the Q2?

Speaker 2

Yes. Great question, Derek. Obviously, top of mind within the Agilent, as we mentioned, the Q1 came in where we thought it would, but what's the outlook? And Toric, I know you've been spending a lot of time with your team and customers talking about this exact question.

Speaker 3

Yes. Thanks, Mike. And I think customers continue to be cautious globally. I think we're as stable. What we're seeing is stability, but no material improvement versus what we saw in the last half of last year.

Speaker 3

And then in terms of the capital budget cycle in 2024, this is the time we see it. It's pretty early in that cycle. But we've heard move in both directions, positive and negative, but fewer customers expecting negative budgets. So we're watching and seeing how that goes. Yes.

Speaker 2

I think what you were sharing with me earlier, Porg, was the tone was more negative at this time last year. It's still not super positive yet and still a lot of caution, but we're not seeing anything to cause us to change our outlook for the year.

Speaker 5

Great. Thank you. Happy trails.

Speaker 2

I think Bob, thanks. Thank you very much. I think Bob you had one. Yes. I was just going to

Speaker 4

say one of the things that we see is very strong performance in our services and consumables business in the pharma sector, which actually speaks to lab activity. And so while we've seen a depressed capital cycle here, we're optimistic about that turning around in the second half of the year.

Operator

Our next question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead.

Speaker 7

Hi, good afternoon. Thanks for taking my questions. Congratulations, Mike, on the retirement and good luck. And, Park, congratulations on the new role. Look forward to working with you more closely.

Speaker 2

Thanks, Matt.

Speaker 7

Maybe just to start out, maybe bigger picture in China, it sounded like you made some comments about sequential improvement. It sounds like it's informing some of your confidence for back half. What are the risks that China just simply doesn't get worse and just kind of bounces along the bottom? And what kind of catalysts are you looking for in China for the back half for some level of improvement? I know it's not necessarily baked into your guide, but you did make some comments about some sort of nascent optimism there potentially.

Speaker 2

Yes, sure. Thanks for the question, Matt. And as we had a really, I think, nice print to start off the year, A big part of that was the performance in China. Yes, we had a bit of a pull in from Q2 from Lunar New Year, but the business overall was better than we expected. And to answer your question, we now have several quarters of real orders, real revenue and the sequential growth.

Speaker 2

The numbers are real. So we're not seeing anything on the macro world that would also dramatically change what has continued to be a very challenging economic market in China. So what gives us confidence is the fact we've had a number of quarters now of predictability in the business. The numbers are coming in even slightly better than we had anticipated. But again, I think it's more just the fact that there's ongoing run rate of business that gives us confidence on the outlook.

Speaker 2

And Bob, I know that you and are you going to jump in on this one, Porek?

Speaker 4

Yes. And I think if Matt, as you just mentioned, we aren't assuming any inflection in our guide. That's been consistent. Actually, Q1 ended up being a little better than we anticipated. We kind of putting that money in the bank, so to speak.

Speaker 4

And if you look at it, we'll have now 4 quarters of numbers that are relatively stable, which is a very positive sign. And I think when we look at our funnel, it's also stable, as well as the order funnel order forecast is what Mike just talked about as well.

Speaker 7

Great. And then maybe just on ACG, which had a good quarter. You talked about the contract revenue and specifically enterprise services with that growth. Maybe could you just help kind of size that contract business within ACG? And then maybe talk about what is driving that growth and what kind of contribution can that make to the ACG segment over the course of this year?

Speaker 2

Hey, Matt. Ben, thanks for your support of the ACG business over the years. And I want to use this opportunity to introduce our new ACG Group President. But first, I'd like to maybe have a 2 part response. Probably to involve, I think it's roughly about 65% just to make sure.

Speaker 2

So roughly about 65% of our total services businesses in this contracts arena. And Angelica, maybe you could share your thoughts on really what's been driving the growth we're seeing in that contracts business.

Speaker 8

Yes. Thanks, Mike. As you mentioned, it's about 65% of the total business and a part of that demand has really been driven by the lab wide enterprise services offerings where we're able to help customers as they're navigating their own economic situation, really helping them optimize their entire lab operation. And our portfolio offerings in this space have allowed us to really facilitate that improvement in lab operations, lab efficiencies and that's particularly important to those enterprise customers.

Speaker 2

Yes. Thanks Angelica. And in times of tough economic times and market times, the productivity help and driving productivity in the labs is a well received offering we have.

Speaker 4

Hey, Matt, just one other quick thing on that. One of the great things that Angelica and team have been doing and you hear us talk about this a lot is about the increasing of the attach rate. And that continued to grow at roughly a point again year on year this year. And that kind of locks in that resiliency and that stability in that business. And if you think about a 62 thirds of that business growing double digits, it really helped power the business.

Speaker 4

And when we see the inevitable turnaround of the instrument business, that will be a nice tailwind as well. Absolutely, Bob.

Speaker 7

Got it. Thanks, guys. Appreciate it.

Operator

Your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead.

Speaker 9

Thanks. Good afternoon, Mike. It's been a great run and a pleasure working with you.

Speaker 2

Thanks, Brennan.

Speaker 9

The Chemical and Advanced Materials business, you actually performed a little better than we were expecting. Obviously, you're still seeing some headwinds in the chemical side. Just give us your state of the union there, what you're seeing from a macro perspective and kind of outlook for that business moving into the second half, Mike?

Speaker 2

Yes. So I'll do a tag team on this with Porex. So as you may recall, we've talked earlier this year about these secular growth drivers in the applied markets. And we saw that pretty much across the globe. And I think what we're seeing again is the investments being made in Advanced Materials relative to the semiconductor supply chain and also the fabs driving productivity.

Speaker 2

We're seeing continued investment relative to battery, battery development, QAQC. And I think we continue to see some real nice growth in the PFAS side of our environmental business started in U. S. I think all those applied market secular drivers that we've been pointing to for some time delivered in Q1. And I think our outlook remains the same that we're expecting there'll be a source of positivity for us in the overall CAM market space, albeit the chemical market is expected to remain subdued.

Speaker 3

Yes. That's right, Mike. I think it's really a tale of 2 submarkets. We saw broad resilience in the advanced materials with sequential growth and given the extremely tough compare in high 20s we had last year, it was truly a very impressive result from the teams. The chemical engineering side was we saw a decline, but on a very tough compare of 10%.

Speaker 3

But we did see a sequential improvement versus Q4, 2023. Overall, I think our portfolio is extremely strong in this area. We have ability to cross and upsell across that and of course our strong services offerings help that value proposition.

Speaker 9

Okay. And then Bob, in terms of the guide for the year, I mean, you're sticking with the organic growth range for the year. I know you beat the Q1. The China fall forward then explain all of the upside in the Q1, kind of like the NASD outlook is lower. What other moving parts by end market or geography kind of gets you to the same midpoint?

Speaker 4

Yes. It's a great question, Brandon, and you talked about a couple of them. We feel really good about where we started the year. It's still at the beginning of the year, though. So we're kind of banking some of that.

Speaker 4

What I would say is if you looked across the moving pieces with the NASD being slightly lower, that would be offset by a little better results in the LSAG side of the business. And really that chemical and advanced materials and academia are 2 areas that are probably slightly better than what we had forecast. But overall, we're maintaining the guide and as we are looking here, felt good about really at the start to the year.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead.

Speaker 6

Yes. Hi, thanks, Mike. And really great working with you. And Parekh, welcome to the seat.

Speaker 3

Thanks, Felipe.

Speaker 6

So my first question is really around maybe I think Bob you talked a

Speaker 4

little bit about the book to

Speaker 6

bill orders growing faster than revenue. But maybe could you elaborate a bit on more on the instrumentation side, what you're seeing and what you're seeing with respect to book to bill in China? And a quick question, clarifying question on the 2Q guide. It does look a slight step down versus Q1. And I just want to make sure beyond the Lunar New Year, what else are you baking in there?

Speaker 4

Yes, I'll take that. There are a lot of questions in that one question, but so true to form, Puneet. And

Speaker 2

one of

Speaker 4

the things I'll start with the last one. I mean, we typically do have seasonality. There is that $15,000,000 that gets pushed from 1 quarter to another. That's strictly timing in China because of the Lunar New Year. But Q2 is typically a lower revenue number.

Speaker 4

So we're building in that normal seasonality. In terms of book to bill in China, actually book to bill was greater than 1 in China, so continued stabilization. And in terms of book to bill for our instruments, it was below 1 kind of expected. Now some of that was a result of the China pull forward where the orders came in and we were expecting that revenue to be shipped in Q2. So there's some element of timing there.

Speaker 4

But all in all, a positive start to

Speaker 2

the year. Bob, if I could put a headline on that too, I'd just say that Q2 seasonality is as normal and the Q1 book to bill results are as our normal pattern. So again, we've been talking a lot about normalization of business flow and I think we're seeing it in terms of the seasonality of patterns and book to revenue situations.

Speaker 6

Got it. That's super helpful. And then just a high level question, a simple question. Could you maybe elaborate a bit on the pharma side, where you're seeing more traction, more growth? Is it the large pharma, small biotechs, CRO, CDMOs?

Speaker 6

Maybe just talk a little bit that. Thank

Speaker 4

you. Yes, I'll take that Puneet. If we look at across our business, the relative strength was actually in our biopharma, so large molecule and our business is skewed to the larger midsize and large cap companies. The standout has been the ACG business and our consumables on that. So it actually speaks to activity in the lab.

Speaker 4

We are starting to see I don't want to call it a trend, but certainly a stabilization on the emerging biotech side of it. The instruments were still down, but that is where we're starting to see the relative strength in the pharma business. And that speaks to kind of the long term growth drivers, I think, in that market. And I would expect that to continue throughout the course of the year as our business gets stronger and the markets get stronger and quite honestly we have more favorable comps.

Speaker 2

Hey Bob, when I think I recall correctly outside of China our biopharm business actually grew in the quarter. That's right. Got it. Super. Thanks, guys.

Operator

Your next question comes from the line of Rachel Badenstahl with JPMorgan. Please go ahead.

Speaker 10

Hi, thanks for taking the question. Hi, Rachel. Congratulations, Mike and Poregg on your new role as well. So first up, I just want to follow-up there on the comments around book to bill. So you mentioned that book to bill for instrumentation was below 1 for the quarter and some of that was really timing related.

Speaker 10

So I guess can you just break that down for us a little bit further? What trends were you seeing in liquid chromatography versus mass spec for example? And then is there any dynamics or trends to call out from geography on the instrumentation business as well?

Speaker 2

I don't think there's any new trends here. I think without going into the details about product line, the small molecule side has really been an area where we've talked about the year on year challenges there for the LC side. But Phil, I don't know if you want to jump in with any thoughts here. I don't think there's any real outstanding new trends here with perhaps the better than expected trends we saw in the applied markets, particularly on Advanced Materials. But maybe have something else you want to add?

Speaker 11

Yes. Sure, Mike. I think that's pretty much the case similar to Q1 around how the market is performing. We're seeing some bright spots around some of the secular areas in the applied markets in the instrumentation, which is driving the business forward, but just support your comments there.

Speaker 4

Hey, Rachel, just one other thing to build on what Mike and Phil were just talking about. When we look at our LSAG business, it was down 11%, which was better than what we expected. The piece that's really been driving that down is the pharma market, which is what we'd be expecting. If we looked at the rest of the markets, they were much better than those down 11% with the exception of the diagnostic and clinical, which is

Speaker 2

a small number. Right. And to your question, Rachel, that dynamic in the pharma really speaks to pressure on the LC business.

Speaker 10

Helpful. And then I just want to ask about monthly trends. Some of your peers have talked how spending has been a little bit slow out of the gate in January and then into early February. So I guess since you guys have a few more weeks of visibility here, can you walk us through, were you seeing similar trends on just slower spending to start the year? And has any of that started to come back?

Speaker 10

Any color there as we enter fiscal 2Q will be helpful. Thanks.

Speaker 2

Well, I've been in as you know, I've been in this business for a while, and it's always slow in January. And that's why we have the seasonality we talked about relative to Q2. So I don't think we're seeing any significant different trends that we've seen historically. Porg, I know that you're closer than I am, but Yes.

Speaker 3

No, I think That's right, Mike. I think on the ACG side, we see a number of service our service contract business comes in strong on the ACG side, but on the capital side, we're not seeing much.

Speaker 4

Yes. And to build just a final put a finer point on that, January came in as we expected.

Operator

Our next question will come from the line of Vijay Kumar with Evercore ISI. Please go ahead.

Speaker 12

Hey, this is Jordan on for Vijay.

Speaker 2

Okay.

Speaker 13

Hey, Mike. This is Jordan. Thanks for taking my question.

Speaker 2

Sure.

Speaker 13

Maybe one follow-up on the China side. Have you seen any hints of stimulus to start the year? And if we do see a stimulus, do

Speaker 12

you have any foresight to what implications that will have on Agilent?

Speaker 2

Both, Porc and I in the conference were shaking our head no. We've not heard anything about any potential stimulus. And what I can tell you is if it does happen, it's upside to our outlook.

Speaker 13

Understood. And then maybe one more for me. Can you talk about how pricing has trended in the quarter? And any updates to your expectations for the remainder of the year?

Speaker 2

Bob, do you want to take that one? Yes.

Speaker 4

We were pleased with the results. It was between 1% 2%. So but in line with kind of the seasonality and the mix that we saw, we would expect to see in Q1. So right now, it's on track. As we've talked about, our consumables business and ACG business have the greatest price realization, followed by, generally speaking, actually we had a very good result in diagnostics and genomics in the quarter.

Speaker 4

And then we did see some mix, but not anything out of the ordinary instrumentation side. So all in, we're on track for what we expected for the full year.

Speaker 12

Understood. Thank you.

Operator

Your next question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Speaker 7

Hey guys, thanks for taking

Speaker 9

the questions. And yes, Mike, I'll second the congratulations on the retirement. Bob, maybe one for you first. Just in terms of the EPS guide, it looks like you guys got an additional $20,000,000 on the kind of net interest other income. Can you just kind of flag if that's rolling through, does that core earnings number move a little lower?

Speaker 9

Is there any moving pieces there? And then secondarily, just on the margin piece, you guys have that cost savings plan. Can you just talk about how that paces as the year goes would be helpful?

Speaker 4

Yes. Thanks, Patrick. Great question. And what I would say is a couple of things. Yes, we are on track to have more interest income than what we anticipated at the beginning of the year, that $20,000,000 and saw some of that in the Q1 as well.

Speaker 4

And that's really a result of actually having better than expected cash flow in the Q1 and great work by that treasury team. I would say that on the savings we're on track for the savings targets for the full year. And as I think about the year, it's still very early in the year and this provides us what I would say is more confidence in the guide.

Speaker 9

Okay. That's helpful. And then maybe just on kind of the book to bill, how are you guys thinking about I think in last quarter you said the book to bill for the year would be above 1, but you'd have quarters kind of in and out on the instrument side, obviously we're seeing this quarter. How are you thinking about just the order trends and the book to bill trends on the instrument side as we work our way through the year, given what you're seeing today?

Speaker 4

Yes, no change to what we said back in November. Q1 is a proof point for what we said.

Speaker 7

All right. Fair enough. Thank you, guys. All right.

Operator

Your next question comes from the line of Dan Brennan with TD Cowen. Please go ahead.

Speaker 14

Thank you. Mike, it's been great working with you over the last 9 years. So congrats and

Speaker 2

for Agua Lipfro to working with you as well. Thanks, Dan.

Speaker 14

Maybe just don't want to beat the dead horse, but just for the instruments, did you guys say, I know in the Q, you usually put out what the instrument number actually was. What did actually instrument do in the quarter? And then given how much easier comps go as we get through the year, can you just kind of give us a sense of pacing like what should we expect on Q2 in instruments and then we can kind of how about the back half

Speaker 7

of the year?

Speaker 2

I know the team did a calculation on that because LSAG was down 11%, but that includes our consumables business which was up. Yes.

Speaker 4

I would say we typically don't give all that information, but it was down we were down 11%. It was down plus 20% in the quarter as but that was better than expected offset by 6% growth in our consumables business. If we look at the LSAG thinking for Q2, it's down low teens. So and a lot of that has to do with some of the timing associated with that $15,000,000 shift. That's almost all capital equipment from Q1 or from Q2 back into Q1.

Speaker 4

So if you look at it, it is in line with where we expect it

Speaker 2

to be. And then we go into more favorable compares in Q3, Q4. Correct.

Speaker 14

Got it. Okay. And then I know there's been a handful of questions already on China, but can you just would you mind spending a bit more color on kind of what maybe by segment pharma applied? Any color you can give us kind of what you're seeing within the different businesses in China? And is down mid single still with China for the full year?

Speaker 14

Or is there a chance you can kind of see some upside to that number? Thank you.

Speaker 7

I think we've

Speaker 2

Bob, I think we've we have raised it up a bit. It's still down.

Speaker 4

Yes, yes. I think we're cautiously optimistic there. I'd say it's still within a range that we had before. So I don't want to call an inflection. But if you looked at the markets, we were down that 9% was roughly down 20 ish percent in pharma.

Speaker 4

So that continues to be the area of really around the globe, but China is no different. The great thing is many of the other markets perform much better. So even when you think about like academia and government that grew, so did our chem and advanced material business now grew very low single digits. And then our forensics and environmental was down low single digits. So you're actually starting to see this stable continued stabilization and then you'll get into very much easier compares in the back half of the year in China because that down 22% was down compared to up 12% last year.

Speaker 4

We had another strong compare in Q2 and then we actually started seeing the pretty significant declines year on year. And so there's reasons to be optimistic about that continued stabilization that Mike talked about, but we're not ready yet to call an inflection. But when it happens, we'll take it. And Bart, I think

Speaker 2

you want to jump in on this one.

Speaker 3

Yes. And I think what we see is also consumers and services continue to outperform expectations in China. So that's going to we expect that to continue.

Speaker 2

Yes. I think the story is a great build, Porg. And I think the story really was in pharma Q1, the instrument, the CapEx side of things. But we're pleased with the start there.

Speaker 7

Great. Thank you.

Operator

Your next question comes from the line of Catherine Schulte with Baird. Please go ahead.

Speaker 15

Hey, guys. Thanks for the questions. Maybe first, the eN Pharma was down 12% in the quarter. I think you said biopharma was up 2% ex China. What was small molecule performance ex China and maybe the outlook for biopharma versus small molecule for the rest of the year?

Speaker 4

So small molecule on a global basis was down roughly 18% and it was ex China was down 20% and down roughly 14% for China. So pretty consistent across the globe, I would say, in China. The big area in China that has been impacted is on the small molecule side where we'll start to see better comps going forward after Q2.

Speaker 15

Okay. And then maybe on consumables, great to see a return to growth there this quarter. Can you talk to what you saw outside of China on the consumable side?

Speaker 4

Our consumables business was pretty consistent across the globe in terms of growth.

Speaker 2

Robust. So anything else you want to jump in on with?

Speaker 11

Yes. Probably just one item there, Mike. I think we are seeing really good traction around our workflow development. So end to end solutions, which obviously is also drives our services business as well. But around the consumables, the in most of our end markets, we've been pretty heavily focused on developing workflows and making our customers' lives easier and more integrated in their labs.

Speaker 11

And that's showing some really good traction and that's reflected in solid connect and attach rates in the consumable space.

Speaker 2

Yes. Thanks, Phil. I'm really glad you closed with the comments about connect rates. We talked about that relative to our services business. We're also seeing a very strong positive trend on consumables as well, which bodes well to our future in terms of recurring revenue business growth.

Speaker 15

All right, great. Thanks and congrats on the retirement, Mike.

Speaker 2

Thank you very much. Most appreciated.

Operator

Your next question comes from the line of Jack Meehan with Nephron Research. Please go ahead.

Speaker 16

Thank you. Good afternoon. And Mike, again, it's been a pleasure working with you. Just had a couple of follow ups. The first one was, can you just talk about what you're seeing in the genomics business within DGG?

Speaker 16

I know it's still been a bit of a drag. Just when do you think that's going to start to turn?

Speaker 2

Yes. Thanks for your kind comments, Jack. And I think I'll invite Bob in on this one, but I think it's been sort of a tale of 2 cities. When we talk about our genomics business, there's really 2 pieces to it. Half of it's in QAQC activities for NGS workflows and we're seeing really solid growth in the consumables and that side of things as well as starting to see signs of life on the CapEx not in the current cause call turn there yet, but that's in a reasonably good shape.

Speaker 2

I think we've seen really in our U. S.-based genomics business some early market challenges have been hitting us. And Bob, maybe you can elaborate on that.

Speaker 4

Yes. That's right. Thanks, Mike. And as you said, our NGS QC portfolio from an instrument and consumable side actually grew mid single digits in the quarter, which was very nice. The genomics chemistry side that we referenced in the prepared remarks was down.

Speaker 4

We faced some very difficult comps. We had a couple of companies that reorganized and exited some businesses. They had some lifetime buys at the end of Q1. I would expect that the performance of that to improve starting in the second half of the year.

Speaker 16

Great. And also wanted to ask about the academic end market. I know that's been very stable for you guys, But just what you're seeing in the U. S. Here with the continuing resolution for the NIH, just thoughts on the durability moving forward?

Speaker 16

Thank you.

Speaker 2

Yes, Jack, thanks for noticing that. That was a real bright spot for us. We actually grew, I think, 2% in the quarter. And this is we've been working on this thing for some time to really build out our portfolio and really change our market position in academia research. And I think it's starting to show up in the numbers.

Speaker 2

I think stabilization really is what we're seeing, which is the funding is there. And NIH is a relatively really small part of Agile's business, so really is immaterial. But we're seeing universities have increasingly been funded through private sector. So the money is there and even so we saw money in China as well. So it was really a nice global story for us and we're fairly optimistic that that kind of stabilization can be there for us for the rest of the year.

Operator

Your next question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead.

Speaker 17

Well, Mike and Bora, congrats to both of you. And Mike, as everyone said, you'll be missed. I hope this means more time

Speaker 2

on the beach, but we'll miss you. Absolutely. I'll be listening.

Speaker 17

Yes. Yes. I hope not too much. But anyway, on I want to ask a question on guidance and then a

Speaker 2

question on capital deployment. Sure. Absolutely. Go ahead, Doug.

Speaker 17

So for the year, on one hand around 48% of sales is in the first half, at least that's how you guided, I believe. Yes, that's lower than last year, but it's not outside the norm for the last several years. On the other hand, just given some math, your guidance for the first half embeds the assumption that revenue declines around 7% organically and then improves 7% to 9 positive percent organic in the second half.

Speaker 2

Can you do that just as a

Speaker 17

function of the comps or do you actually really need to see improvement in certain geographies or certain end markets or categories? And then again, just a math question, does guidance assume Q4 revenue kind of exiting around like $1,800,000,000

Speaker 4

Hey, Doug, this is I'll take that last one. We'll tell you when we get to Q4. And what I would say, but your math is in all seriousness, your math is spot on as usual. I think one of the things that we look at is we look at it a couple of different ways. I think the way to look at it is that first half, second half kind of looking at seasonality.

Speaker 4

That's probably more instructive given kind of the changes in the growth rates. And when you look at it, as you noticed, as you mentioned, it is in line with our historical seasonality. And when you look at the growth rates, you are you're right, we are expecting growth in the back half of the year. A lot of that is in fact the easier the compares. And when we actually look at what I would ask you to take a look at also is a 2 year basis relative to implied Q1 and Q1 first half and second half.

Speaker 4

And what you would see there is a much more smooth number that we also looked at as well. So as usual, you spot on there.

Speaker 2

Bob, I think that's why we really emphasize in the script, the word stabilization because as things have continuity of stabilization, we're going to get a lift on the growth rate despite the comps as we go.

Speaker 17

That's super helpful. Yes, I know there's a lot of focus on how much improvement is necessary to get there. So if a lot of this is stability and just math that I think obviously makes people more comfortable. I know I'm picking up a lot of airtime already. Real quick, capital deployment, the cash flow remains robust.

Speaker 17

The balance sheet is super clean. Can you just talk about your thinking right now on capital deployment and what the environment looks like right now?

Speaker 2

Yes. I think we remain very interested in deploying capital in a balanced way, which is inclusive of investing for in the business. And that speaks directly to our interest in M and A. It's our build and buy growth strategy. I just have to say that the funnel pipeline is more robust than I've seen in a number of years and nothing to obviously announce, but we're very much engaged.

Speaker 17

Great. Thanks again.

Operator

Your next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead.

Speaker 18

Hey, thanks for taking my questions and congratulations Mike and Ford.

Speaker 7

Thank you. Yes.

Speaker 18

Yes. Just a couple on my end and maybe Bob starting with you. First a follow-up on the guide. Can you comment a bit more on how Q2 guide moved versus the framework in the initial outlook? I assume core outlook came down a bit, but just wanted to confirm the moving pieces there.

Speaker 18

And then does the guide, the core guide reflect any changes in Q3 or Q4? Or is it really just reflecting an update on H1?

Speaker 4

Yes, that's a good question. It's a little of both, Josh. So Q2 is relatively intact for what we had originally thought, with the exception of that small movement of the China business. That's roughly a point of core growth from Q1 and Q2 switching. What I would say is Q1 also had a beat into it and what we're taking is some of that out of the second half of the year.

Speaker 4

And so the takeaway is Q2 is spot on from where we expected it to be absent that kind of shifting the timing shift of China. And then beat really helps us in the second half of the year. Okay.

Speaker 18

And then Mike, can you talk about how visibility in

Speaker 6

the business has evolved over

Speaker 18

the last 3 months? Has there been any improvement in the ability of the funnel to predict near term sales or still seeing an elongation of kind of opportunity in quoting flipping to orders? You're curious total company and then also what you're seeing in pharma specifically?

Speaker 2

Yes. No, I'll have Port jump in as well. I think the business remains the same. I don't think it's any better, any worse. And so I think it's the normal kind of cadence of business.

Speaker 2

And that's why, as Bob just mentioned, we're talking about the second half. We banked some of the beat to put against the second half because we've yet to see the second half materialize in terms of the order book, which is typical at this time

Speaker 3

of year. Yes. No, I think that's right, Mike. And I think as far as the quality of orders remains that remain in our backlog, nothing has changed. We've not seen any increase in cancellations and ex China the funnel continues to grow and that's led by the aftermarket business.

Speaker 3

I will say as a continuing team, the deal closure times remain at an elevated levels, but it's definitely stable and deal win rates have been consistent. Yes.

Speaker 2

I think it's really important point made here, elevated, but we're not seeing elongation. So they're stable, but they're longer than they have in the past. Okay. Thanks, guys. Sure.

Operator

Your next question comes from the line of Dan Leonard with UBS.

Speaker 19

My first question just a bit more on China. Are you expecting sequential growth in Q2 in China similar to Q1?

Speaker 4

No. If you looked at the sequential number, it's going to be roughly the same as what we had in Q1.

Speaker 19

All right. Thank you for that. And Mike, congrats on your retirement. I was wondering if you could elaborate on timing. I was surprised, others were surprised.

Speaker 19

I've gotten the question a number of times and we'd just love to hear your thoughts.

Speaker 2

Yes. Thanks for that. So while it's maybe a surprise to many on the call and it was a surprise when I shared the news across the company because the Agilent team just knows how much I love working for this company and work with them. And it really was a hard it was a really difficult decision for me. But I've been contemplating this for a while.

Speaker 2

And I pulled the Board into the discussion, started communicating with them because I really wanted to make sure that they had enough time to really run a thorough and thoughtful selection process in which they were able to do. And in my mind, they came out with the possible choice in selecting pork. But yes, but this is something that I've been contemplating for a while and then engaged trying to engage in the Board about my timing and then really want to make sure they have enough time to really pick the right successor and that's what they did.

Speaker 19

You always seem to be having a lot of fun. So congrats, Ken, and

Speaker 4

it's been good.

Speaker 2

Thank you. It's going to be hard to step away, but I have to say the pull of family was just too strong. We have a 6 month old 18 month old grandson and he will soon have a brother and sister. So there's a lot going on the family side. And there's only one way I could make more time.

Speaker 2

So again, it's been a real pleasure to work with all of you on the call. All

Speaker 19

right. Thanks.

Operator

Your next question comes from the line of Luke Sorgad with Barclays. Please go ahead.

Speaker 12

Great. Thanks guys for squeezing me in. I just want to talk about the margins on the quarter and kind of the step down in DGG and LSAG. And I assume obviously it's probably driven by the volume declines there in the instrument side. But how you guys view the recovery in the margins between DGG and LSAG throughout the year to hit your guide?

Speaker 4

Yes. Hey, Luke, this is Bob. Just real quick. You're right. If I look at DGG, it actually was improvement year over year, but it was down and it was really a result of that margin or the volume.

Speaker 4

I would say also there was an element of mix in LSAG and I would expect that to continue to improve. The cost actions that we took weren't fully actualized all and as expected in Q1, so we'll have the full impact of those as well in Q2 throughout. So I would expect an improvement over the course of the year as volumes grow up in both LSAG and DAG.

Speaker 7

That's what I thought. I just want

Speaker 12

to clear up. And then just for follow-up here from the 2Q guide, can you just help frame what you guys are embedded there by the different segments?

Speaker 4

Yes. If I look at Q2 guide, we're still expecting if I looked at the end market pharma down double digits, academia and government down low single digits, really as a result of some of that timing shift, diagnostics and clinical down mid singles and chemical and advanced materials down high single digits and food about the same. Both of those are as a result of some of the shift also in the China business from Q2 back into Q1 and then environmental and forensics kind of mid single digit decline. Great. Thanks.

Speaker 4

Yes.

Operator

Our final question will come from the line of Paul Knight with KeyBanc. Please go ahead.

Speaker 20

Hey, Mike. Really super to see you doing what you're doing. And I knew you, I don't know, 15 years before you became CEO. So I guess the concluding question I would have at least professionally would be what do you see in terms of 2 things? Number 1, what do you think the kind of market growth rate is for the markets that Agilent participates in?

Speaker 20

And then geographically, where do you see the surprise over the next 5 years? Like will Japan reinvigorate its growth? Will Europe see more insourcing? Would love to have your perspective on those things.

Speaker 2

Yes. Hey, thanks, Paul. Yes, we do go way back, don't we? And it's been great to work with you over those years going way back to the CAG days in our prior role. I think we think this is a 4% to 6 percent kind of growth market mid signals.

Speaker 2

So we think that the kind of market growth that we're not experienced as industry right now is an anomaly and this will be back to that 4% to 6% kind of long term growth rate. Obviously, certain segments within that overall macro number, Big TAM will be growing faster than that and that's always a challenge to make sure that you pick those segments so you can actually beat that number. I think there's going to be some geographic mix. I mean, we've evolved our view of long term growth into China because we actually expect some of the supply chain moves and other things that have been going on that you'll see a growth more growth in Europe, which has been more of a slower grower for us geographically. But we've been continue to be surprised how well we do, our team does in Europe.

Speaker 2

I think you're going to expect to see Japan rejuvenate it, particularly I think you can make the case with the semi industry, which is going to return to some strength in Japan. But that's the beauty of this business is just the diversified nature of both the end markets and geographies. So that would be my last I guess my final projection of long term growth for the market in this role. But thanks, Paul. Appreciate the comments and looking forward to staying in touch.

Operator

I'll now turn the call back over to Parmit Ahuja for closing remarks.

Speaker 1

Thank you, Regina, and thanks everyone for being on the call today. With that, we'd like to close the call. Have a good day, everyone.

Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining.

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Earnings Conference Call
Agilent Technologies Q1 2024
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