Agilent Technologies Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2022

There are 15 speakers on the call.

Operator

Afternoon. Thank you for attending today's Agilent Technologies Q3 'twenty two Earnings Call. My name is Hannah, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Paramit Ahuja with Agilent.

Operator

Please go ahead.

Speaker 1

Thank you, Hannah, and welcome, everyone, to Agilent's conference call for the Q3 of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q and A after Mike and Bob's comments will be Jacob Tyson, President of the Agilent Life Science and Applied Markets Group Sam Raha, President of the Agilent Diagnostics and Genomics Group and Parekh McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our Q3 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.agilent.com.

Speaker 1

Today's comments by Mike and Bob will refer to non GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31.

Speaker 1

As previously announced, beginning in the Q1 of fiscal 2022, We implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. We will also make forward looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today.

Speaker 1

The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risk and other factors. And now, I'd like to turn the call over to Mike.

Speaker 2

Thanks, Parmit, and thanks, everyone, for joining our call today. In the Q3, we once again demonstrated the strength of our diversified business and the unstoppable One Agilent team. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenues of 1,720,000,000 Our 13% core. This is on top of 21% core growth in Q3 of 2021.

Speaker 2

3rd quarter operating margins are 27.5%. Operating margins continue to expand and are up 150 basis points from last year. Earnings per share were $1.34 up 22%. Our strong results in Q3, coupled with orders continue to outpace revenues, highlight The ongoing strength of our diversified business. The momentum in our business continues and we're once again raising our outlook for the year.

Speaker 2

Let's take a closer look at our Q3 results. From an end market perspective, our results were once again led by strength in our 2 largest markets, Pharma and Chemical Energy. Our largest market, pharma, grew 16% versus 27% a year ago. Within pharma, both the biopharma and small molecule segments grew double digits. The momentum in our C and E market segment continues The Q3 growth of 22%, this is on top of 23% growth a year ago.

Speaker 2

The C and E market is being fueled by demand in chemicals Along with strong secular demand and ongoing investment within the Advanced Materials space, we're also very pleased to achieve double digit growth In the food and environmental and forensic markets, with both markets growing 11%. In our last call, I shared our that the business impact for the Shanghai COVID-nineteen lockdown would be transitory. I also expressed that we remain confident About the ongoing strength of our business in China. In Q3, the China team delivered 29% growth. These stellar results are driven by continued strong end market demand coupled with a faster than expected recovery in production and shipment activity following the end of the Shanghai area lockdown.

Speaker 2

We are also very pleased with this results, which highlights the customer focus, drive and outstanding execution of the Agilent China team. Strength in Americas continued as we post another quarter of double digit growth on top of 32% growth last year. Our European business grew 6% against a 23% last year despite a 2 point headwind for the curtailment of our operations in Russia. Up 18% on a core basis. Growth was broad based, but continued strong demand for our LC and LC MS offerings, We posted high 20s growth.

Speaker 2

Our spectroscopy business grew low 30s, driven by strength in advanced materials market. Chemistries and Consumables, Cell Analysis and our GSE business each delivered double digit growth in the quarter. LSAG's end market growth is broad based With particular strength in the pharma and chemical engine markets, our pharma results are driven by strength in the biopharma segment, which grew more than 20%. We had an excellent showing at the recent ASMS conference introducing several important LCMS and GCMS instruments And Biopharma Workflow Solutions. These innovative and intelligent LCMS and GCMS systems have been designed to make the lives of our customers easier.

Speaker 2

The building instrument intelligence and a higher level instrument diagnostics helped maximize system uptime and improve lab productivity by allowing operators to focus on their analysis rather than on their instruments. In addition, we introduced an industry first hydro inert source for GC single quad And GC Triple Quad Instruments, enabling customers to seamlessly migrate from helium as they supply our gas to lower cost hydrogen. And rounding out the list of new products announced at ASMS, we introduced the Mass Hunter BioConfirm 12.0 software, An integrated compliant workflow targeted at the fast growing oligo based therapeutics development market. These new products have already been well received by customers and represent the latest Dan has a history of leadership in mass spectrometry. Our LSAG business also won some important awards during the quarter, Including the 6560 C IMOBILITY LC QTOL system winning the Scientist's Choice Award for Best New Spectroscopy Product.

Speaker 2

Early this month, we also strengthened and broadened our Advanced Materials and Biopharma portfolio with the acquisition of PSS, Polymer Standard Service, a leader in polymer characterization. We're extremely pleased to welcome the PSS team and their technology to the Agilent family. The Agilent CrossLab Group posted services revenue of $359,000,000 This is up 10% core. We grew 10% core even As lab activity continues to ramp in China, growth in services was again broad based across services, contracts, Preventive maintenance, compliance, education and Informatics Enterprise Services. Strong instrument placements and increased connect rates Continue to be a driver for our service business as customers continue to see value in our ACG offerings.

Speaker 2

Another critical important factor in our results It's the scale and execution capability of Agilent's world class global service delivery organization and serving our customers to meet their needs. Agilent is the trusted company to work with among our global customers. The diagnostic genomics will deliver revenue of 340,000,000 Up 3% core. This is the first I compare of 37% growth last year. The solid results in our clinical cancer testing NGS businesses were partially offset by COVID testing headwinds in our qPCR portfolio.

Speaker 2

In addition, the DDD business in China Continues to ramp from the COVID related shutdowns there. NASD revenues were up modestly in line with expectations. As we noted last quarter, Q3 included the impact of planned shutdown for our obligate manufacturing line in Frederick, Colorado. The shutdown of Frederick was for both routine maintenance and development of key elements of our Train B. Our new manufacturing line have increased our capacity $150,000,000 plus when fully ramped.

Speaker 2

While we continue to make good progress in the construction of Train B, we have seen some supply chain related delays We are now targeting mid year 2023 go live, a slight delay. We see continued strong demand for oligo based therapies As the number of approved drugs continues to increase and the pipeline of drugs in development are targeting disease states with larger patient populations. We are more confident than ever in the long term trajectory of the market and our business. In addition to these Highlights, I'd like to also point to the recent release of Ashland's 2021 ESG report. While we've always published our progress in sustainability In addressing societal needs, this year we've taken our approach to the next level.

Speaker 2

We addressed these issues in a new format that for the first time I'll look specifically at our progress in the areas of environmental, social and governance issues. We hope you have a chance to review our progress in ESG by checking out the report On the Agilent website, learning more about how we're executing our mission to advance the quality of life. Agilent's Q3 results again point to the strength of our diversified business and the outstanding execution ability of the Agilent team. We continue to bring innovative, differentiated new offerings in the marketplace. Acceleration in digital orders growth continues As well as new customer acquisition.

Speaker 2

In addition, as we started 2022, we undertook a bold move Created one Agilent commercial organization to further drive customer focus and growth. The strength of our portfolio and the continued strong execution Fire 1 Agilent commercial organization make a powerful combination and you see the results we're delivering. Customer satisfaction hit another all time high this quarter. We continue to outgrow the market. As a result of our strong Q3 performance And continue momentum.

Speaker 2

We're once again raising our full year revenue and EPS guidance. Bob will share more of the specifics. It's an exciting time in Ashland with the best yet to come. Thank you for being on the call today. And now, I will hand the call off to Bob.

Speaker 3

Bob? Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter and take you through the income statement and other key financial metrics. I'll then finish up with our guidance for the Q4 fiscal year. Unless otherwise noted, My remarks will focus on non GAAP results.

Speaker 3

We are extremely pleased with our Q3 performance. Results were above expectations and we expect that strength to continue in the Q4. Q3 revenues were $1,720,000,000 Up 8.4% on a reported basis and up 13.2% core. FX was a 4.8 Point headwind to growth were $76,000,000 Pricing for the quarter contributed over 3 points of growth year on year And improved sequentially. The performance was broad based as all end markets and regions grew during the quarter.

Speaker 3

As we mentioned last quarter, the COVID related lockdowns in China deferred an estimated $50,000,000 to $55,000,000 in revenue from Q2, And we forecasted that revenue would be recovered during the rest of the calendar year. Our team in China did a fantastic job ramping production and shipments faster than Following the shutdowns, we estimate over half of that deferred total was delivered in Q3, exceeding our expectations. Given the strong performance, we now expect the remainder will be delivered in Q4, which is an acceleration from our thinking from last quarter. The acceleration of the COVID related shutdown recovery in China contributed to an already strong Q3 for the company. For perspective, we estimate the total business grew double digits excluding the accelerated recovery.

Speaker 3

As Mike mentioned, earnings per share of $1.34 were up 22% from a year ago, representing strong incremental flow through Of the better than expected revenue growth. This performance is against our most difficult comparison of the year as EPS grew 41% in Q3 of last Now let me dive a little deeper into the end markets. Our largest market, pharma, was up 16%, Exceeding our expectations, biopharma grew 18% and small molecule was up 14%. Biopharma is a focus area for us and now represents 38% of our overall pharma business. We expect that ratio to continue to climb over time.

Speaker 3

In addition, all three business groups grew double digits in the Pharma segment. And our LC portfolio continues to perform very well, growing 25% in this important market for us. Chemicals, Coal and Energy continued to show strength growing 22% during the quarter, driven by the Chemicals and Advanced Materials segments of this market. We saw strengths in plastics and packaging for chemicals and ongoing demand in advanced materials coming from the markets for semiconductors and batteries. In the Food segment, we achieved growth of 11% on top of 12% growth a year ago.

Speaker 3

Strength in the food market was led by the Americas and China. Our environmental and forensics market also grew 11% during the quarter, driven by the Americas and China. In the Americas, we saw increased funding to support PFAS testing, while China experienced faster than expected recovery post the Shanghai shutdowns for GCs and CMS. The academia and government market grew 5% on top of a 12% comparison last year, in line with expectations. And rounding out the review of our end markets, our business in the diagnostics and clinical market grew 2% against a very strong 28% compare versus last year.

Speaker 3

While not material at the Agilent level, this market did experience some headwinds associated with COVID related revenues being lower than last year. Excluding this, the growth would have been mid single digits in this quarter. On a geographic basis, China led the way with 29% growth, Driven by underlying demand and a faster than expected recovery following the COVID related lockdowns. And looking forward, Demand in China continues to be very strong. The Americas grew 11%, another strong showing And Europe grew 6%, which exceeded expectations.

Speaker 3

Now turning to the rest of the P and L. Our team continues to execute at a very high level. 3rd quarter gross margin was 56.4%, up 50 basis points from a year ago as pricing actions, volume and productivity Helped offset inflationary pressures tied to ongoing supply chain challenges and higher logistics costs. Operating expense leverage Driven by the strong top line and continued attention to cost management helped deliver very healthy margin improvements. Our operating margin was 27.5%, up 150 basis points from last year.

Speaker 3

Below the line, our tax rate was 14% for the quarter as expected, and we had 299,000,000 diluted shares outstanding. Looking at cash flow and our balance sheet. We generated operating cash flow of $326,000,000 in the quarter, While investing $82,000,000 in capital expenditures during Q3 driven by our NASD expansion. During the quarter, we also repurchased $323,000,000 worth of shares. We paid out $62,000,000 in dividends In Q3, returning a combined total of $385,000,000 to shareholders in the quarter.

Speaker 3

Year to date, we have purchased over $1,000,000,000 of shares. Given the ongoing strength of the business, we believe this is a very good investment. Our balance sheet continues to remain healthy with a net leverage ratio of 1. Now let's move to our outlook for the full year and the Q4. We now expect revenues for the full year to be in the range of 6.75 to $6,775,000,000 This takes into account our Q3 results and an improved outlook in Q4, Partially offset by an additional $40,000,000 headwind associated with the strengthening of the dollar.

Speaker 3

This represents Core revenue growth of between 9.9% 10.3%. We are also raising our EPS guidance for the year to a range of $5.06 To $5.08 representing 17% growth year on year. This translates Q4 revenue in the range of $1,750,000,000 to $1,775,000,000 Core growth is expected to be in the range of 10.3% to 11.8%, while exchange rates will be a 5 point headwind and M and A will contribute 0.1 points. And closing out our Q4 guidance, non GAAP EPS is expected to be in the range of $1.38 to 1 0.40 14% to 16% versus the prior year. This is based on a 14% tax rate and 299,000,000 diluted shares outstanding.

Speaker 3

The Agilent team once again performed extremely well in Q3, delivering strong results, driving excellent execution And building a strong foundation for the future. Our diversified business and most importantly our team have put us in an excellent position to again deliver strong results in Q4. And now back to Parmit as we take your questions. Parmit?

Speaker 1

Thanks, Bob. Hannah, if you could please provide instructions for the Q and A now.

Operator

Remember to pick up your handset before asking your questions. The first question is from the line of Matt Sykes with Goldman Sachs. Please proceed.

Speaker 4

Hey, good afternoon, Mike and Bob. Congrats on the quarter.

Speaker 5

Thanks for

Speaker 1

taking my questions.

Speaker 2

Good afternoon, Matt.

Speaker 4

Sure. Maybe just starting on LSAG, we had a really good quarter. Just interested to know, 1, what drove the Operating margin expansion in the quarter relative to your expectations in last year. And then specifically, I know it was broad based strength across instrument categories, but was there 1 or 2 areas Really surprised you to the upside where you feel is either underappreciated or could see continued momentum in the back half of the calendar year?

Speaker 2

Yes. So I'll take the first part of that and we'll jump in and have Bob and Jacob add their thoughts here as well. So I think relative to the strength and why the operating margin is so high is, one is, I think we've been we've really Benefited from the leverage impact of having those higher than expected revenues. But more importantly, we've been working on the pricing side And really ensuring that we are receiving the value for our offerings. And Bob, I think we are well over 3 points of price appreciation overall for the portfolio in LSAG, I believe.

Speaker 3

That's correct.

Speaker 2

That's correct. And we are as you may have picked up in my script, it was across the board great quarter for LSAG and That's all product categories. But, Jacob, I think a couple really stood out for you, don't they? Yes.

Speaker 6

I think as we know, we continue to do really well in the LC MS space, But this quarter is really spectroscopy that was standing out. We have especially in our atomic spectroscopy field, we have really seen a lot of momentum Based of course on the dynamics in the markets, but also the innovations that has been created over the past years. And I think we really see The impact of that piece. Yes, I think it was

Speaker 2

a real race to see who had the highest growth rate spectroscopy or LC and LC MS, they both did extremely well.

Speaker 4

Great. And then maybe just a follow-up.

Speaker 2

Did I get

Speaker 4

a follow-up? I know Europe. Sure. Yes. I could just say for a follow-up.

Speaker 4

Can you hear me?

Speaker 2

Yes, yes, yes.

Speaker 4

Yes, sorry. Just for a follow-up on Europe, 6% growth, I think getting a lot of questions on just the spend environment in that region. What are you seeing there? And are there any kind of concerns you might have in terms of demand either from the currency fluctuations or just overall demand in certain end markets within Europe?

Speaker 2

Yes, sure, Matt. So we posted a 6% growth rate core growth in the Q3, albeit there was actually 2 points of headwind For the curtailment of our Russia operations, so it really was high single digits 8% on a restated basis. And Europe clearly is a watch area for us, but we haven't seen any Significant signals of movement to the downside.

Speaker 3

Yes, I think Matt, to build on what Mike is saying, I think in particular, we continue to see very strong growth Our pharma business, and that really is a global phenomenon. And but we also saw very nice Growth in our chemical and energy businesses as well. And so, as Mike mentioned, it is a watch area, but the demand From what we're seeing in the health of the order funnel continues to be there.

Speaker 4

Great. Thanks very much.

Operator

Thank you. The next question is from the line of Brandon Couillard with Jefferies. Please proceed.

Speaker 3

Hey, thanks. Good

Speaker 4

afternoon. Hey, Barry. Mike, could you elaborate just on the core order growth that you saw in the Q3? And Given the strength of order momentum over the last several periods, how does that inform kind of your initial thoughts On 23, I mean should we still think about 5% to 7% still being relevant? And then Bob, should we expect normal 30% to 40% incremental next year.

Speaker 4

Any headwinds to consider maybe the new NASD line?

Speaker 2

Hey, Brandon, We're probably not ready to talk about 23, but I will leave you with a couple of thoughts here, which is very clearly the business has momentum. And Even though we had the highest revenue quarter ever for Agilent in this recent Q3, we still build backlog, Both globally and also in China. So our orders exceeded our revenues in those. So it sets us up nicely I think for 2023, But we'll get to 23 guide when we get there.

Speaker 3

Yes. And I think Brandon on your core incrementals, I mean, I think that If you look at historically, that's where we've been. Obviously, we do have some start up costs in 2023 for NASD and We'll spell those out when we get to the numbers, but I don't think that there's going to be anything fundamentally different on an incremental basis going forward.

Speaker 4

Okay. That's helpful. And then on the NASD Train B line, like you said, it's pushed out a little bit in terms of The launch timeline, is that like 1 or 2 months? I thought the plan was already mid next year. And could you elaborate a little more specifically on kind of where the supply chain issues, Exactly what those are that are pushing the delay.

Speaker 2

Yes. I think you have the right time frame in there, which is a month or 2. It's really been sort of Specialized steel that's required. So I actually had a chance to see it myself where you go into a room where The steel pipe fitters are working and getting to the area ready, and they can't close things off because they're missing one valve or something. So we've had Bits and pieces that have been missing that actually caused us certain delays.

Speaker 2

I mean, the team has been all over. I think the global supply chains are pretty well publicized, but We thought it was we thought we should, in the spirit of transparency, let you know we're still on track for revenue coming out of the facility in 2023, but maybe a month or 2 later than we

Speaker 3

thought initially. Yes. And I think Brandon, there is one more important piece. I think based on what we know today, we still expect To be at capacity at the exit of FY2023 as well in terms of a ramp up.

Speaker 6

Great. Thank you.

Operator

Thank you. The next question is from the line of Vijay Kumar with Evercore ISI. Please proceed.

Speaker 7

Hey, guys. Congrats on a really strong quarter here. Hi, Mike.

Speaker 2

Thank you.

Speaker 7

Congrats on the trend. And One maybe on the guidance here. Q4 at the midpoint is 11% organic. You guys just hit 13%. The comps do get easier for Q4.

Speaker 7

I'm curious sequentially when you think about it, is the change Just because of the cadence of how the China deferred revenues were recognized more in 3Q versus Q4, can you just talk about the sequential Assumptions here for the 4Q guidance?

Speaker 2

Sure, Vijay. And again, we are very, very pleased with the print. So thanks for the feedback. And We didn't use it in our script, but I think the word prudent may apply to our Q4 guide as well? That's right.

Speaker 3

Yes, I think, Vijay, If you think about kind of the moving pieces within China, what we did was we pulled forward some of the revenue that was deferred into Q3, but we also pulled Q1 revenue into Q4. So Q4, I would say, we didn't have a material change one way or another. We actually feel very good that we're going to Realize that full $50,000,000 to $55,000,000 here in the fiscal year versus having it bleed a little into Q1. As Mike said, I mean, we're not out of the woods certainly in supply chain challenges and in COVID situations. And so we thought at this point in time, A double digit core growth is very good, but also prudent as Mike said.

Speaker 7

I love that for Prudent. Maybe one on some of the moving parts for 23, Mike, and I'm not asking for a guidance, but if I look at pricing contribution, I think we started the year at 100 basis points. We're running at 300 basis points. I think that pricing should continue until it annualizes until mid of next year. You did mention orders coming in about revenues.

Speaker 7

What is the backlog conversion? That a 3 month or 6 month or 12 month visibility that you have from backlog, any impact from NASD and sorry, on CNE Very strong, but obviously with the macro, should we perhaps be prudent for 2023?

Speaker 2

Yes. So, great question, Vijay. So I think I'd like to the headline here was, as the way Bob closed off his prepared remarks, we're building a strong foundation for the future. So we've got we had record revenues in Q3, yet we still build backlog. And some of that backlog, obviously, will carry into 'twenty three.

Speaker 2

And we it's probably a 3 to 6 month visibility for sure on the revenue coming from the backlog. And Bob, I don't see that. And we agree with your thesis around pricing and impact it will have on our 2023 business as well. And Bob, maybe you want to add 2 more color?

Speaker 3

Yes. The only thing I think you're Spot on, Vijay, I would say there's not a material change right now in terms of how we're thinking about NASD. And If I think about the various pieces there, they certainly set us up for a good momentum going into FY 2023. Now there's still some unknowns in terms of kind of the But we're expecting to have stronger than normal backlog. We certainly have that right now and are expecting to continue that into 'twenty three.

Speaker 3

And then obviously pricing is Continuing to anniversary and I would expect it to be a higher contributor to growth next year, all things being equal.

Speaker 7

Understood. Thank you, guys.

Speaker 2

Thanks, Vijay.

Operator

Thank you. The next question is from the line of Puneet Souda with SVP. Please proceed.

Speaker 8

Hi, Mike, Bob. Thanks for taking the questions. So first one, just LSAG, obviously, Very strong quarter. I mean, obviously, congrats on the quarter here. When you look at the 25% growth you're seeing in LC overall, the order book being strong.

Speaker 8

Can you maybe just characterize sort of from an end market perspective, Seems like biopharma continues to do well, but geographically, can you just characterize this contribution from biopharma China in the quarter and how should we think about the sort of order book? Can you maybe characterize the order book more geographically? And do you expect this again in line with sort of some of the other questions is that sort of how should we think about this order book flow through and Flowing through into 2023?

Speaker 3

Puneet, you packed in a lot in that one question. We'll try to address it. Sorry, Mike.

Speaker 4

I was going to say maybe you want to

Speaker 2

handle that, Bob. But I think the answer was really across the board. I mean, Both, I mean, clearly biopharma and pharma, our portfolio is doing really, really well there. And as I mentioned to the team the other day, We just got the most recent auto report, which shows market share movements. And as my Danish colleagues like to say, it was green as a Danish forest.

Speaker 2

Did I get that right, Jacob? So That's right. That's right, Mike. It was across the board, I think it but I think it's the same story holds geographically well. So really is A nice global story, but I think it's more than just pharma.

Speaker 2

I know you're getting some good C and E growth, right, for in the Advanced Materials, LC MS. We posted some really good numbers in food and the environmental market, which also are big users of LC and LC MS. I think it was really A broad based story there, if I remember correctly, Jacob? Yes, correct, Mike. I think we're really seeing good performance across

Speaker 6

the board, as you're saying, Mike. And we are also seeing

Speaker 5

That the

Speaker 6

customers are really interested in our full solutions. I think PFAS is a good example of where we see a lot of interest right now, Both right now, but also what we see some of the big bills that is coming through in U. S. Where PFAS have a prominent Exposure, so we expect to continue to see momentum in that trade.

Speaker 3

I think, Puneet, just to build on what Mike And Jake, we're saying, I think one of the things you're really seeing come out in Q3 is just the strength and breadth of our portfolio. And Why we haven't talked about spectroscopy a lot in the past, it continues to be a very important part of our portfolio in And I think it fits nicely across multiple end markets. And we see the LC and LC MS get a lot of headlines, But we're more than just an LC and LC MS business.

Speaker 8

Got it. Thanks for that. And then just I'll keep it simple from a follow-up. Polymer Standards acquisition, can you characterize Sort of what's the contribution this year and how does that enhance your offering for columns and sort of biomolecules And how should we think about that overall acquisition, overall fitting into the LSAG Group?

Speaker 1

You want to take

Speaker 2

the first piece of that?

Speaker 3

Yes. Yes. I'll it's not a material business. We estimate that's less than $10,000,000 annualized Today, that's the 0.1% that we built into our guide for Q4. But more importantly, I think strategically, I'll let Jacob, talk about the merits of the portfolio and how we think it's going to continue to drive growth for us.

Speaker 6

Yes. Thanks for that. And We have a long standing relationship with PSS, so we knew exactly their strength, and we've been very impressed with what they've done in the polymer business For a long period of time. And particularly our interest was intrigued when we also see polymer science going from advanced material into biopharma We see a lot of opportunities. And PSS have done a wonderful job using our instrumentation together with their columns and also an informatics pack they have built to really go after a segment of the market and also the expertise in the field.

Speaker 6

They have more than 500 application nodes within this field. So we can really leverage that with the strong presence we have across the globe to really Accelerate that business opportunity that have built up over the past decades really.

Speaker 8

Got it. Okay, great. Thanks guys. Congrats again.

Speaker 2

Thank you. Appreciate

Operator

it. Thank you. The next question is from the line of Rachel Vatnesael with JPMorgan. Please proceed.

Speaker 9

Hi, and thanks for taking the questions and congrats on the nice quarter.

Speaker 2

Hi, Rachel.

Speaker 10

So first up on China, great to hear that some of

Speaker 9

that catch up in China was pulled forward there and You also pointed to double digit growth in the region for that ex acceleration recovery. So first off, can you just walk us through specifically what drove that pull forward on the And are you seeing an acceleration of demand as catch up in China? And then second, how are you thinking about that longer

Speaker 2

Great. So I'll start Bob here. So I'd have to say It was an extraordinary effort of our team in China. I mean, people sacrificed and worked tremendously hard. We had people coming into our factories And living at the factories.

Speaker 2

They slept and worked at the factories for entire period of when before you couldn't really get out beyond back to Your local community, so they did that for several weeks, both in our logistics operations as well as our factories and that allowed us to get Our global GC production going as well as the import export of our product as well. So I have to say really it was extraordinary effort to the team that made that happen. And We're very optimistic about our ability to continue to grow well in China. In Q2, I think we talked about a greater than 20% order rate. We posted a number of 29% growth in Q3, yet we still build backlog in the Q3 in China.

Speaker 2

So I think we're well positioned for the Q4 and Bob I'd say it probably does represent a level of upside potentially with things continue to Develop as we hope. The wildcards from my perspective are how much money could come into the segment from Government stimulus, I know they're talking about some of the things we haven't seen in specifics. So that would be something that would Be there on a positive, but again, our demand really is coming from the core private sector, commercial sector around pharma and C and A, and we think those things are sustainable.

Speaker 3

Yes, exactly. Mike, I think you mentioned Q2 kind of order growth rate and Q3 was in that same range. And so we're seeing very strong demand And been able to do a fantastic job of ramping up that And we expect that to continue into Q4.

Speaker 9

Great to hear. And then last one for me just on the C and E segment. So 22% growth is quite impressive and that growth is really continued to accelerate in recent quarters on that end market. So how should we be thinking about that longer term outlook for C&E, especially given some of the macro dependence on that portfolio.

Speaker 2

Well, we think that the Structure of this market has changed over the last few years. And yes, there's still a segment that's tied directly to What happens to the global GDP situation? But we've highlighted in my comments, There's secular demand happening here, particularly in Advanced Materials when there's investments being made in battery technology, more sustainable materials, Semiconductors on shoring of production. So we think those trends are here for a number of years. I think Our view is the sector has probably got a higher growth rate than we viewed it having a couple of years ago because of the secular aspect of growth in C and A.

Speaker 2

And Bob, what else might you add there?

Speaker 3

Yes. I think as you said, I think one of the things that I think is really important, don't take 22 and take that and build it into your model because we don't think that that growth Great. It's going to continue. We certainly are pleased with it. But I think the other more important piece is We have a very strong right to win in the C and E business.

Speaker 3

We're a leader in this space and feel good about our portfolio. And as Mike said, This is an area that we are seeing kind of a renewed sense in some of these areas that we do think that has many years to come in terms of investment. I'm going to use

Speaker 2

the word undisputed leader in this space. I won't disagree. Thanks for the question, Rachel.

Operator

Great. Thank you. Thank you. The next question is from the line of Derik De Bruin with Bank of America. Please proceed.

Speaker 5

Great. Thanks for taking the question. This is Mike Ryskin on for Derek.

Speaker 2

I want to

Speaker 5

follow-up on your comments on price. You sort of indicated that price Continues to sort of grow as you go through the year. Is that a factor of the timing of when orders Converted to revenues and when you're recognizing those revenues, so is this just more of A dynamic of that or is this an incremental price increase that you're building in as you go through the year? And just alongside that, any comments you could take in terms of reception to price? Any pushback on any particular areas you able to take more versus the last to sort of give us an update on the pricing dynamic as you go through the year?

Speaker 3

Yes. Hey, Mike, this is Bob. I'll take That Nir, it's the former. And so when we take price, it takes some time to get through the backlog and so we're seeing the Price realization from the orders that the price increase that we took back in the beginning of the calendar year and Really what we're trying to do is cover our costs and we're seeing increased logistics costs and increased material costs. And so We've taken it across the board, but also recognizing where the costs are higher, we've taken those prices up higher.

Speaker 3

We haven't really heard any pushback, I think as evidenced by our strong order growth and then also we look very closely Cancellations are within our order book, and that continues to be very low. And so I think Our customers understand why we're having to raise prices because of the inflationary environment. And I think to date, we've been able to actually generate more price than I think we anticipated at the beginning of the year.

Speaker 5

Okay, great. And then for the follow-up, you commented on the balance sheet as you're getting the leverage lower and lower. I've done a couple of deals here and there in the past couple of years, but they definitely tend to be on the much smaller side. So could you talk about your willingness To lever up a little bit and put a little bit more of that capital to work. And if so, what are the types of assets you're looking for?

Speaker 5

Sort of are sellers willing To engage in this market or is the how are things proceeding on that front on the BD front? Thanks.

Speaker 3

Yes. I think we've been public about being willing to take on bigger deals than what we have had historically. I think we're still we have the benefit of having a very strong balance sheet. We're going to first invest in our business. We think that that's the greatest opportunity, but we're always out On the lookout for M and A.

Speaker 3

And as you said, I would say the pipeline continues to be healthy. The dynamic has certainly changed in the last 9 months, Particularly on the public market side, and I think there's some good assets out there. It's probably taken a little longer on the private market side, which is where We tend to focus our efforts, but I can tell you that we have the Beauty of our model is that we have organic growth first and M and A is kind of an adder on top of that. And so It is something that we're continuing to look at and would be not uncomfortable levering up a little higher than where we are today For the right deal and if the economics work. Absolutely, Bob.

Speaker 5

Is that a 3 to 4 times lever or?

Speaker 3

I'm not that's pretty rich. But I think it all depends on what the right Asset and what it looks like.

Speaker 5

Got it. Thanks.

Operator

Thank you. Next question is from the line of Josh Waldman with Cleveland Research. Please proceed.

Speaker 11

Hey, Josh. Hey, thanks for Just two for you guys. First, Mike, I wondered if you could provide more context on the supply chain situation, how Supply and cost to track versus your expectations over the last 90 days. Have you seen any relief on supply? And then it sounds like You build backlog in Q3.

Speaker 11

Curious whether your 4th quarter guide assumes any work down in the backlog given recent order rates?

Speaker 2

Yes. So I'll let Bob handle the second question and I'll start with the first one. Supply chain challenges are still out there, but our team continues to do an excellent job navigating them, Getting the material that we need for our customers, we continue to have very, very low order cancellation rates, it's something we watch like a hawk. And I think we're managing the price changes. So I think in the early days of things, we were kind of surprised at what things would cost On the market for chips and others, but I think we've now found ways to work that and then offset that with some of the pricing actions that we I mentioned earlier, so I think if anything it's probably trending in a more positive direction, albeit it's still challenging out there.

Speaker 6

Yes. And I

Speaker 3

would say on the second question, Josh, I would say 1st and foremost demand continues to be very strong in our marketplace. And so We're expecting order growth to continue into our Q4. As you know, that typically is one of the larger quarters that we For our sales organization and certainly for our customers as well. That being said, I would expect maybe Some slight degradation in backlog just given again the deferral that we're talking about within China, But don't interpret that as us seeing anything slowing in the marketplace.

Speaker 11

Got it. Then kind of along those lines, wondered if the group has any Thoughts on pharma budget flushing this year given the strength in orders from these accounts, curious at this point if you're getting any indication that And maybe the strength in the order book is reflecting the pull forward or just not seeing that yet?

Speaker 2

Yes, Josh, I'm going to pass this call over to Parekh. He's He's the closest to what's going on. As you know, he heads up our 1 commercialization in addition to running our ACG Services business support. What's your thoughts on that?

Speaker 6

Yes. No, I think it's pretty steady, Mike. We're not seeing any pull forward at this point. And of course, the team are very focused on key Key and marketing workflows where we have the best chance to meet the customer needs. So we're seeing a very steady stage order rate with and how much pull forwards.

Speaker 11

Got it. Appreciate it.

Speaker 3

Very welcome.

Operator

Thank you. The next question is from the line of Jack Meehan with Nephron Research. Please proceed.

Speaker 12

Thank you. Good afternoon.

Speaker 2

Good afternoon, Jack.

Speaker 4

So I

Speaker 12

wanted to ask about the chemical and energy good afternoon. So the chemical and energy acceleration. My first question is on the chemicals customers. So your commentary sounds pretty bullish. There's certainly been some headlines from some of the big European chemical players that have been a little bit more mixed though.

Speaker 12

So it would just be great to get your perspective on How you feel about the durability of that customer class and kind of squaring your view versus what we might be hearing from others in the market?

Speaker 2

Yes, that may be more regionally specific to Europe, where we did see a level of growth a little bit slower than we've seen in the Americas and China. So I'd say that's probably more regionally specific. And as we mentioned earlier in our call, Europe remains sort of a watch area for us because of obviously Challenges in that region right now. But I think we think it's pretty durable right now. I mean, I think it's remember the chemical piece is going into some of these supply chains as Fabs go up and other things.

Speaker 2

So it's fueling some of the efforts in the Advanced Materials area. And I know that you and Jacob looked at this a little more closely, I don't know if there's anything else you'd add to that.

Speaker 3

No, I think you're spot on, Mike. I mean, if we looked across the all regions Screw in C and E, as Mike, you were saying, but Europe was below the And so but I think over time that investment in some of these areas we think is ongoing demand.

Speaker 12

Great. And then it was only a week ago, the Chips and Science Act got signed into law. I'm not sure if you have any early perspectives as to what this might mean for Agilent, if you could call out kind of the businesses that you think Could benefit from some of the funding that's going in, and can you just maybe call out what did the Advanced Materials business For this quarter? Thanks.

Speaker 2

Yes. So I'm going to I'll let Bob handle the second question. He's got more numbers on the pages than I do in front of him. But Relative to the recent enactment by Congress, we see some real upside for us. And we actually were just talking about that before this call, I think the big debate is when is it actually going to release.

Speaker 2

But Jacob mentioned earlier, PFAS, there's what we can see, there There's some funding in there for PFAS, which will help our LCMS and GCMS business and then tied to the chips, both the upstream and downstream side of semiconductor fabs Play right in the spectroscopy strength that we mentioned as well. And Jacob, perhaps you want to

Speaker 5

add a

Speaker 2

few other thoughts? Yes.

Speaker 6

I think, I mean, Even though spectroscopy and GC are the big winners in the related to the CHIPS Act, We actually see across the board, it's both the mass spec business, also the LC and LC MS that Mike was mentioning and then, of course, a lot of For our consumables also. So we see a lot of opportunities here. I think both the CHIP Act, but also the other bill, the what's it called? The Inflation bill and the inflation bill here, all of them are driving some of our technologies. So we see a lot of opportunities in that now.

Speaker 6

It all comes down to timing here. Yes.

Speaker 5

Yes.

Speaker 3

And the answer to your last question, it was above 30%.

Speaker 12

Thanks. Okay, super. Thank you guys.

Speaker 2

You're welcome, Jack.

Operator

Thank you. The next question is from the line of Elizabeth Garcia with UBS. Please proceed. Hey, guys. Thanks so much for taking the question.

Speaker 10

Yes. Congrats on that.

Speaker 2

Sure, Elizabeth. No problem. Thank you very much.

Speaker 10

Yes, great. So maybe I just didn't catch it, but I know there was the planned shutdown this quarter for NAS, but just thinking about kind of how we should think about kind of quote this quarter and then maybe sequentially as we head into the Quarter and 4Q?

Speaker 4

Bob, you and Sam are the tag team

Speaker 3

on this one? Yes. So, yes, we had a planned shutdown this quarter, Expect return to strong growth in Q4 for NASD.

Speaker 4

And Sam, I don't know if you want to

Speaker 2

add some comments about what you're seeing on the market as well?

Speaker 13

Yes, yes. Thanks, Mike, and thanks for the question. I mean, listen, it was a good We had the planned shutdown you already heard about, but I want to note that we are very pleased with the trend that we're seeing that increasingly These very therapeutic oligos that we're working on that the treatment modalities beyond the more rare indications are expanding into diseases For larger populations, for example, you might have seen just recent news from Alnylam that reported favorable results on their Phase 3 study for patisiran And this is for patients with ATTR for cardiomyopathy. And as Alnylam supplier For the API and patisiran, we're of course excited. We also think this is indicative of just generally the trend that we're starting to see in the promise of therapeutic oligos.

Speaker 13

And Our book of business remains strong as we go into the quarter and as we will go into next year.

Speaker 2

Yes. Hey, thanks Sam. I wanted to elaborate a little more Elizabeth on the routine. I think it's also important to understand why we were shutting down, right, as both for routine maintenance, But also the critical milestone in the construction of Train B, so we tied the infrastructure together. So that's why we're speaking with confidence about our ability To get revenue in 23.

Speaker 10

Great, great news. And I guess just one more for me, staying on the theme of kind of Biopharma, so you've kind of announced the collaboration with APC for real time process monitoring. You also had an announcement with Merck's Around Downshoo PAT, it would be great to kind of get your thoughts around the space and kind of the work you're doing here.

Speaker 2

Yes. I'll make some high level comments and then JV, you want to provide some specific as well. So we love this space, And we've been putting a lot of our investments over the last several years. It's targeted at the biopharma space and you see it reflected now And the growth rates and actually how we're shifting the mix of our pharma business both in the lab but also plays outside the lab. And Jake, I know you got a lot of interesting things happening there.

Speaker 6

Yes. Thanks for that, Mike. And we are very interesting in the bioprocessing Especially from the analytical instruments perspective where we truly believe that the that instruments will start to move into the manufacturing. Historically, We've had in the small molecule space the QAQC sitting in a different lab and now we see the opportunity to bring ADLion Online LC and LCMS Technologies into the bioprocessing space itself or manufacturing space itself. And hence, we have decided and we have made collaborations with leaders in that Base Merck being one of them, where we're developing, of course, based on our individual strength, new solutions to address that.

Speaker 6

But we're looking There are multiple partnerships in this space here and we are really bullish around that.

Operator

Great. Thanks so much.

Speaker 2

You're quite welcome. Thank you.

Operator

The next question is from the line of Patrick Donnelly with Citi. Please proceed.

Speaker 4

Hey guys, thanks for taking the questions.

Speaker 2

Hey Patrick. Sure.

Speaker 4

Mike, maybe one for you. Hey, how are you? Sure. Maybe one for you just on China specifically in terms of the linearity in the quarter.

Speaker 5

Can you

Speaker 4

just talk about, I mean, it sounds like things clearly picked up as we went obviously on the supply side and you guys Got back online. Can you talk about the demand environment as well? Obviously, you guys are the only ones who have kind of a full July in the quarter. So just curious what kind of ramp you saw Throughout the quarter and then again as we work our way through August here, I mean it certainly seems like the order growth has been encouraging, but maybe just talk about how things trended there Throughout the quarter? Yes.

Speaker 4

Good. Great. Going into this quarter?

Speaker 2

Great question. Yes, sure. Happy to do so. I think it's a great question. And I'll parse my Response in the two areas, orders and revenue.

Speaker 2

So I think I would say the order intake throughout the quarter was there. It was It's linear, smooth, no, no big lumpiness. In fact, that's what we saw in the Q2 as well. So now as you know, the revenue side has been a different story because the ability to get product in and out of China as well as produced in China was affected by the COVID-nineteen shutdowns. That's where we saw maybe a slower start in the 1st few weeks of Q3, but then the team's efforts really started paying off when When we're able to get back into our facilities.

Speaker 2

So I think the ramp rate of revenue had looked at a little different profile throughout the And Bob, I don't know if you had anything to add? Yes.

Speaker 3

No, that's exactly right. I mean, if you think about the months in our quarters, May was very light. As We talked about we were ramping up and I think we exited May at like 25% capacity. And then the teams really started kicking it in gear as the COVID Restrictions started to ease, and July was very strong, as they not only got The production up to full capacity, but then we're able to not only satisfy existing demand, but also some of that deferral Bring it in.

Speaker 2

And they were really focused on meeting the expectations of our customers who wanted the product. And as I mentioned earlier in my early comments, We had teams working a lot of overtime, working in the factories over the weekend. So really some heroics that got us back on track.

Speaker 4

Yes, it's encouraging to hear. And then Bob, maybe one for you just on the margin side. You talked about I've seen a few times on the call. Can you just talk about, I guess, the flow through to the margin side? You basically said it's offsetting some of the Increasing costs, maybe just talk about the give and take on that front in terms of pricing increases, the cost increases and how we should think about kind of that algorithm going forward on the margin piece?

Speaker 3

Yes, I think if you looked at our 150 basis points year on year, it was roughly 50 basis points in gross margin and then 100 basis Point to leverage on the SG and A OpEx side. And I think if you looked at that, There was some productivity as I mentioned price probably would have kept things flat and then the other 50 basis points were A benefit of some productivity that the OFS team did and then the volume. That's the thing that really, I think, really helped drive A benefit in gross margin is just the amount of product that was able to be produced through the factories. And so that I think Think about pricing is covering our costs and then if those incrementals around better than expected revenues drove The margin improvement on the gross margin side. What I would say is we continue to leverage the OpEx side to drive Our productivity as a company overall.

Speaker 4

Helpful. Thank you, guys.

Speaker 2

You're welcome.

Operator

Thank you. The last question is from the line of Tim Daley with Wells Fargo. Please proceed.

Speaker 14

Hey, everyone. Thanks for the time.

Speaker 1

Sure, Dan.

Speaker 14

Quickly, I wanted to touch back on NASD here. So if we're just thinking about when we're past the Train B build out, things have kind of normalized a bit, you're starting to leverage those investments Upfront costs here. What's a clean run rate margin profile to think about in that business, I guess initially When we get past that capacity build out here?

Speaker 2

Tim, that question brought a smile to Bob's face. I'll let him answer that.

Speaker 3

I would say very good.

Speaker 2

So leave it at that. We've called the company average, right?

Speaker 4

Yes. All right.

Speaker 14

I can work with that. And then just a quick one here on capital allocation. So another strong quarter of buybacks. Just thinking about the go forward outlook, how should we be despising this in our heads? The $1,000,000,000 you've already hit In 2022 with a quarter left to go, is that a good base for the out years?

Speaker 14

Just kind of just general thoughts on the Capital allocation hierarchy as some assets are probably getting a bit cheaper and more attractive here.

Speaker 3

Yes. I mean, I think our methodology really hasn't changed. I think what we do is invest for growth, 1st internally and then we look for Value accruing M and A, but if there isn't anything imminent, we're also not going to keep cash on the books. And if I looked historically, We've generated roughly 2% of earnings per share growth, kind of below the line through Share repurchase and I think that that's probably a fair way to look at it going forward. But in terms of to be very clear, Our priorities are investing for growth internally and then M and A, before we would do Share repurchases and we're also committed to continuing to grow our dividend as well.

Speaker 14

All right, great. That's it for mine. Thank you.

Speaker 2

You're quite welcome.

Operator

There are no additional questions waiting at this time. So I will turn the call back over to Harmit, for closing remarks.

Speaker 1

Thanks, Hannah, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day.

Operator

That concludes today's call. Thank you for your participation. You may now disconnect

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Earnings Conference Call
Agilent Technologies Q3 2022
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