A Stock | Agilent Technologies Inc Q3 2021 Earnings Call

Good afternoon and welcome to the Agilent Technologies third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. And now I'd like to introduce you to the host for today's conference, Parmar, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Paul, and welcome everyone to Agilent's third quarter conference call for fiscal year 2021. With me I'm Mike McMullen, Agilent's President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Bob and Mike's comments will be Jacob Tyson, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Porg McDonald, President of the Agilent Cross Lab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are made available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risk 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 risk and other factors. And now I'd like to turn the call over to Mike.

Thanks, Parmar, and welcome to your first Agilent earnings call as our new Vice President of Investor Relations. And thanks everyone for joining our call today. Before covering our third quarter financial results, I want to acknowledge the recent passing of Dr. Tachi Yamada, a giant in our industry and a former Agilent board member. Tachi was much more than a knowledgeable, deeply involved as a board member for nine years. As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others. I know that the Agilent team is not alone in recognizing that Tachi Yamada will be greatly missed, and extend our deepest sympathies to Tachi's family. Now, on to third quarter review and updated outlook for the year. In Q3, the very strong broad-based momentum in our business continues. The Agilent team delivered another outstanding quarter, exceeding our expectations. Q3 revenue of $1.59 billion is up a reported 26% and is up 21% core. This is against a modest decline of 3% in Q3 of last year, so we are well above fiscal year 2019 pre-pandemic levels. In addition, as another positive sign of continued momentum, orders outpaced revenue during the quarter. Our growth is broad-based across all business groups, markets, and geographies. The combination of strong top-line performance and execution translated into excellent growth in profitability and earnings per share. Our Q3 operating margin is 26%, up 230 basis points from last year. EPS is $1.10, up 41% year over year. Agilent's success continues to be driven by our build and buy growth strategy and execution prowess. We are developing market leading products and services, investing in fast growing businesses, while delivering outstanding customer service and continuing to drive profitability. Since the onset of the pandemic, we have taken action to ensure Agilent emerges even stronger as a company. While we have yet to leave COVID-19 in the rearview mirror, our Q3 results are another indicator our actions are delivering the intended results. Bob will provide more details on end markets and geographies, but I want to briefly highlight our performance in our two largest end markets: pharma and chemical energy. We continue to perform extremely well in pharma, our largest market, growing 27% with strength in both small and large molecule segments. Our large molecule business grew roughly 52% in the quarter and now represents 36% of our overall pharma revenue, up from the mid-20s just a few years ago. In chemical energy, our business is recovering faster than expected, expanding 23% in the quarter. This is an acceleration of the momentum we achieved in the first half and our order funnel continues to strengthen. Looking at performance by business unit: The Life Science and Applied Markets Group generated revenue of $680 million. LSAG is up 22% on a reported basis, up 18% core against a 4% decline last year. LSAG's growth is broad-based across all end markets. Our performance is led by strength in pharma which is up 22% and chemical energy up 31%. All businesses delivered strong growth, led by cell analysis at 38% growth and our LC and LCMS businesses which grew 22%. We continue to strengthen our position in the fast-growing large molecule market segment. During the quarter, the LSAG team launched three InfinityLab Bio LC systems at the well-attended InfinityLab LC Virtual Conference in June. These new products further extend our LC leadership position. In addition, to further strengthen our already strong pharma offerings, we launched new compliance-ready LC-QTOF and LC-TOF solutions to our portfolio in the quarter. The Agilent Cross Lab Group posted revenue of $560 million, up a reported 21% and 15% on a core basis. These results are on top of 1% growth last year. The business is benefiting from increased activity in customer labs and instrument connect rates, leading to more contracted services, on-demand services, and consumables consumption across all end markets. All end markets grew mid-teens or higher, with the exception of environmental forensics which still grew 9%. The pandemic has shown ACG to be our most durable business, with ACG growing each quarter since COVID first emerged. Our customer-focused approach and digital investments continue to pay dividends. Looking forward, instrument placements and demand bode well for continued strong performance by ACG as we drive higher attach rates and increase customer lifetime value. The Diagnostics and Genomics Group produced revenue of $346 million, up 44% reported and 37% core, compared to an 8% decline last year. The growth is broad-based across product lines and regions, and was led by our NASD GMP oligo business. The ramp of our facility in Frederick, Colorado continues to go very well. The quarter's results exceeded our expectations, easily surpassing the $50 million revenue milestone. While one quarter does not make a trend, our team has done a tremendous job increasing output in a high-quality manner. This gives us increased confidence in our ability to exceed the $200 million annual run rate revenue with existing capacity. In addition, the train B manufacturing line expansion is well underway and on schedule. Our genomics instrumentation and consumables businesses rebounded strongly in the quarter, as did our pathology-related businesses. For the first time in several quarters, we saw diagnostic testing above pre-pandemic levels. While we are watching the Delta variant very closely, to date we have not seen a meaningful negative impact in testing volumes. I also want to highlight our performance in China. While still less than 10% of DGG revenue, our China business grew 50% in the quarter. We continue to see tangible progress in building a stronger China market position. In Q3, we signed our first ever companion diagnostic development services agreement with a China-based biopharma company. Earlier this month, we also announced the initiation of in-country manufacturing for our SureSelect product line. We are very bullish about long-term growth prospects in China for our DGG product and services offerings. In addition, the integration of Resolution Bioscience team is going well, and we are very pleased to enter and expand our participation in the fast growing NGS-based cancer diagnostic market. It was a busy quarter at Agilent, so I have a few other achievements I'd like to share with you. Last month, we published Agilent's 21st annual Corporate Social Responsibility report. At a time when some are just starting to look at issues like sustainability and societal impact, this has always been a key part of who we are as a company. We've been addressing these issues since our founding more than two decades ago. I would encourage you to review our report on the Agilent website. We're also very pleased to receive recognition as a Great Place to Work in the United States by the Great Place to Work Institute. This result is just one more example of Agilent having a highly engaged and energized team. And as you know, teams with high engagement win in the market. Looking ahead, building on another excellent quarter and the momentum we're seeing, we expect the business to continue to perform well as we close out what we believe will be an outstanding fiscal year 2021. As a result, we are once again raising our full year revenue and earnings guidance. Bob will share more details, but we're expecting a continuation of our excellent top line growth and earnings generation. While the world has yet to fully emerge from the global pandemic, Agilent is well positioned to deliver excellent results again in the fourth quarter. I remain very proud of the Agilent team's ability to consistently deliver for our customers and shareholders. Thanks for being on the call today and look forward to your questions. I will now hand the call off to Bob.

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

Definitely, sir. We will now begin the question and answer session. If you would like to ask a question, please do so by pressing star one on your telephone keypad. Again, that's star one on your telephone keypad. However, if your question has been answered and you wish to remove yourself from the queue, please press the pound key. Please stand by while we compile the Q&A roster. Your first question is from Tycho Peterson with JPMorgan.

Hey, good afternoon. Congrats on the quarter. Mike, I want to start with China outlook. I know there's been fair amount of noise about companies being able to get products in country, ports being shut down, terminals shut down. Can you maybe just talk to some of the near current dynamics in China? It sounds like trade attention is also getting worse with the Buy China policy. How do you think about that in the next couple of quarters?

Yeah, sure. Thanks for the congratulatory comments, Tycho. We really actually continue to feel quite good about our performance in China. As Bob and I mentioned in the call script, 8% up from 11% last year, and I think our stack growth rate is around 19%. Q3 is actually up over our stack growth of 17% in Q2. We're seeing good strong pharma and C&E demand in China now, and the funnels really remain quite robust. And getting to your specific question, we're not seeing any significant changes in terms of ability to get product in. I mean, there's been a lot of noise for years, I have to say, between the United States and China, yet the business seems to somehow get transacted. So Bob, I think we're not really overly concerned about those dynamics. And we did have a little bit of shipment interruption as some of our academia government customers had to work through a VAT tax exemption change, but I think that was relatively minor impact on the P&L. But clearly, we're monitoring those developments and have to continue to work to make sure we've got our logistics flowing through the country, but we've always been able to find a way and are not overly concerned about it at this point.

Yeah, let me have one other thought here, Tycho. On relative logistics, we invested in a number of forward-looking stocking locations over the last few years that really has paid us dividends because we're less dependent on stuff coming directly in via the port because we have a lot of in-country inventory.

Okay, that's helpful. And then it sounds like you've got a lot of underlying momentum. I know you don't like to talk about the order book, but any preliminary comments you can make on '22 at this point? The Street has you up about six and a half percent. Curious if you think that's a reasonable bar and any comments on where you think margins may go next year.

Yeah, thanks, Tycho. As you might imagine, I'll probably sidestep that question a little bit in terms of specifics. But what I can tell you is that we feel really good about the momentum of the business. The order book continues to be strong, and that's as of today where we got the latest view of the early orders through August. So momentum remains. As I mentioned in our prior earnings call, we feel really good about our ability to meet and exceed those long-term growth goals we put out, and margin goals. So I think that's where we stand right now. We'll get to that in November, but we're feeling good about the trajectory of the business momentum we've built here.

Okay, thanks a lot.

Your next question is from Brandon Couillard with Jefferies.

Hey, thanks. Good afternoon. Definitely, maybe just starting with the biopharma business. 50% growth in large molecules, pretty impressive. Can you just elaborate on the sources of growth there and what that would look like if you back out the NASD contribution?

Yeah, sure. And then I'm actually going to invite Bob, and I also want to have Jacob make a few comments on some of his new introductions here. So I think I used the word broad-based at least five or six times, maybe ten times, in my prepared remarks, and we're seeing that in biopharma. So we got across the board double-digit growth happening here. Cell analysis, LC/LCMS, other platforms that go into biopharma, along with our consumables and services. And then, to your point, really outstanding growth in NASD. But while NASD was a big contributor, it was an Agilent-wide growth story. And Bob, maybe you can just answer the specific on the numbers.

Yeah, thanks for that, Mike. And as you said, at the end of the day, I think we talked about that 70% of our portfolio was really focused on biopharma. I'm really happy to see that momentum we have right now. And as you also mentioned in the prepared remarks, I'm very pleased with what we did with the Bio LC portfolio. In fact, we had a virtual conference with more than 1,000 customers participating, and we had more than 25 external scientific speakers, which I would like to say is the best in the industry by far. So that introduction is actually creating quite a lot of momentum and it allows us to play in the biocompatible space for the 2D-LC, but clearly also into mass spec with the backdrop of it. And we also mentioned the compliance, the FDA Part 11 informatics compliance, is another very important part that most biopharma companies see as a requirement to do business with them. We have invested in this for quite a while, so we ensure the data integration, the order readiness, and storage of data has the right level of security. And right now, we have the offering both supporting our LC but also all our major mass spec instruments, and also in spectroscopy with the recent announcement of the TOF and the future of informatics solutions. So right now, we have a very strong portfolio and that truly drives our growth. I could continue talking about the whole house, so I better bounce it back to Brandon.

Hey, Brandon, thanks for allowing us to do a little advertising on the Agilent portfolio strength. But do you see any additional questions?

Yeah, I think just touching on maybe if we can just elaborate on the small molecule market. You mentioned kind of QA/QC refresh. Curious what may be in there and what you think the market is kind of growing for small molecule relative to your bigger theme.

You know, it's our view that there's always a replacement market going on in the small molecule space and sometimes it picks up a bit more. But I think we're in that phase right now. I wouldn't say it's a huge acceleration, it's just solid and probably high singles.

Great, thank you.

Your next question is from Vijay Kumar with Evercore ISI.

Hey guys, congrats on the strong prints this afternoon. Mike, maybe on my first question here: Resolution Bio deal. Did that come in line with expectations? I'm curious, the 50 basis points contribution seems a little light. Is there some ramp-up phase involved? Maybe just talk about what the deal does and how it adds to the corporate growth rate.

Yeah, so you do some very good math. It's about half a point of reported growth. Bob and I say relative to Q3, probably a little bit behind as we learn more about this business or some elements of its lumpiness. So we're feeling pretty good about how the business will finish, but we're expecting a lot in the fourth quarter. I think this is a story of continued acceleration of growth in '22 and beyond. And we're just super delighted by how the teams feel about being part of Agilent in the early days. We're really building scale around this business. So it's still a relatively small part of the overall revenue picture today for Agilent, and we knew that going in. It roughly is $50ish million. But we expect really strong growth rates in the coming years. And again, we really feel like we're off to a great start with this team. We're just interacting with Mark Lee, who is the founder, co-founder of Resolution Bio. He's really happy about the capabilities that we're bringing to his business to further scale it. So early days, but feeling pretty good about things.

That's helpful, Mike and Bob. One for you on expenses. In the year-to-date, operating expense as a percentage of revenues, you guys are in the low 30s, sub 31%. That's well below your historical level. I guess my question is, is this all just associated with the volume leverage rate given the strong organic...

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Performance here they did or are there some timing elements on expenses? Uh, you know that's aiding you, and how should we, if there are, how should we think about those factors coming back in that 22?

Hey Vijay, this might if I could just add one additional comment too. And I hopefully came out of my in our prepared marks, but we're not holding back on investing for growth. So we were quite pleased with the margin performance, but it didn't come at the expense of our ability to grow down the road.

That's extremely helpful. Mike, congrats again. Thank you.

Thank you.

Your next question is from Doug Shankle with Cowan. Your line is open.

Hey guys, good afternoon. Can I actually just build off of that last question with a quick follow-up? Again, acknowledging and recognizing you're not going to guide on 2022 today. I'm just wondering though, at a high level, could we assume that incremental margin is going to be a little bit lower than normal next year? You know, if we're assuming a normalization of activity in a post-pandemic world, I heard what you said about areas where you're not going to need to invest as much, but at the same time you are investing in growth. Just mathematically, the incrementals need to be a little bit lower than normal next year.

Yeah, yeah. We're still building our plan, but our intent is to still be able to drive that margin expansion. I will say that we are having our new train be NASD come online, which will add a little pressure to it, but I think we've been very good about being able to do 30 to 40 percent incrementals, and sometimes even higher than that when the margin comes in, and I don't see any reason why we shouldn't be able to continue to do that, Doug.

Okay, obviously super helpful. Maybe what's underlying your question is inflationary pressures and activities around that. And I would say that we didn't see any material impact, obviously there is some, but we're planning to manage that going forward.

Yeah, I know that that's dead on. It's supply constraints, it's inflationary pressures, it's the hope that we're traveling a little bit more and there's real conferences and real site visits, things like that. So that's the spirit of the question, just making sure that to capture those dynamics we don't have to think about something other than that 30 to 40 traditional time range. So that's helpful, Bob.

Got it. Okay. In terms of full year guidance, as it's been noted a few times, you increased the outlook by more than the magnitude of the Q3 beat. I guess I'm just wondering what gives you confidence in this change. Is it backlog data, is it pacing across the corridor, is it activity through the first month of the quarter? Maybe it's all of the above, and maybe more importantly, you checked everyone okay? Perfect.

Yeah, no, we're Bob and I are smiling in the room here, and I think we probably had a check mark on all first of those three things you mentioned.

Okay. And then throughout the year you've consistently beat your own targets pretty materially, and it definitely made sense to skew the error bars a bit more conservatively when you set your targets given the state of the world. That said, given how well you performed relative to those targets, and recognizing we're not out of the pandemic but we got a little more experience with it at this point, is it fair to say that you're at the point where you can adjust the philosophy a little bit and maybe kind of change the positioning of those error bars as you set guidance moving ahead?

Yeah, I think that's fair. I think what we've tried to do is set proven guidance as we've talked about in the past, but certainly as we and our customers, more importantly, the market is getting used to dealing in a covered world, there's fewer variables to be able to understand. And I would look at just what we did in Q2 to Q3. We dramatically improved, increased our Q3 guidance, and then did the same thing here for Q4. So I think our visibility is improving, you should take that away. For all the things that you kind of rattled off, certainly the momentum that we're seeing, the general economic improvements and so forth, but as you mentioned, there's still a delta variant out there, and so while as Mike mentioned we haven't seen any impact of that yet, we also recognize that that could change during the course of the quarter. So we're trying to take all those kind of factors into account but also try to provide some realistic guidance going forward.

Okay, all right. Thanks again, guys.

You're welcome, Doug.

Your next question is from Derek De Bruyne with Bank of America.

Hello and good afternoon.

Hey Derek.

Hey. Can we talk a little about environmental? And through that, if I want to dovetail that question to, I know it's probably a little bit early, but any signs of how we should think about the GC portfolio picking up? Are you just replacing, is it just sort of like catch-up spending right now in the industrial, or any initial indications that the replacement cycle that you were in the midst of prior to the pandemic is likely to restart?

Hey, how do I take the first one? And Bob, I mean, Robin and Jacob, you may want to add additional comments here. But let me talk with the question around gas chromatography. So we are seeing that, and that's really behind a lot of the fairly bullish comments if you will around C&E space. So we're seeing it in our GC revenue and we're also seeing it in our GC order book. And I've been very reluctant to call that hey, we think this business is now in a situation of returning to growth. That reluctance has now passed. I think we're now into what looks to be the start of some really good potential business on our GC side as that replacement cycle turns back on. And Jacob, I know you're a lot closer to the details, anything else you'd add to that?

Yeah, Mike, you're absolutely right. I think first of all, Bob mentioned that also the chemicals and engineered materials markets are certainly on fire right now where you see a lot in semicon and in mining industry including for batteries, but we also see the traditional petrochem markets really start to see the momentum now. And there's a lot of talk about the future of petrochem, but this market is gonna stay for quite a long, and I think all the analysis shows that there will be newer cycles here. So we see investments coming into this market right now. And the new market that's also coming along is renewable energy, which will also use many of our technologies, and we see a great opportunity there also in the future. They're still in development based, but there's a lot of investments going in here, so we are participating that also. So we see a lot of opportunities in DC, and the DC is actually seeing momentum both first in the chemical market but now into the energy markets.

So okay, so following up on that, you know you're feeling good about sort of your more industrial experiments even with some of the choppiness in the Chinese market and some of the data there. So are you seeing, is it the US and Europe the surgery anymore, or is it just you're seeing a turn on that one? And then where were we? What remind me in annoying baseball analogies where we were in innings on the GC replacement cycle?

Yes, so Bob, I think it's fair to say that there really is no difference across the regions. I mean China actually was an area of strength for us in C&E, and I think we're seeing good strength globally, which I think points to the importance of global economic outlook for this segment. And I'd say we're probably earlier middle innings on that. Got kind of paused there for a while because we had a great run going with the new portfolio, but it paused, so I'd say we're like early in the middle of innings. Yeah, I would say to Derek, just to give you a frame, China was more than twice the China CNE market was in line with the overall CNE growth rate that we saw.

Thanks, thanks for your question.

Your next question is from Dan Leonard with Wells Fargo. Your line is open.

Yeah, thank you and good afternoon. I was hoping you could, Mike, I was hoping you could address the five to seven percent core revenue growth model that you've introduced in December. Is that still relevant or do you think something's fundamentally changed in the markets from that time period?

I'd say it's relevant till we change it. So I'm not ready to on the fly here revise our long-term growth, but as you may recall in our December outlook we said think about us being more at the high range in that area. And I think I've got the first time I put a seven out there in any type of long-term growth guidance. I think what's changing is the nature of our portfolio, which is we're beginning to build very, very quickly big much bigger positions in faster growing segments. And I think it's probably fair to say that the pharma market in particular, the biopharma market, is remains very robust, but again we're sticking with those long-term growth goals at this point in time.

Okay, that's helpful clarification. And just a follow-up on China, could you elaborate further on the drivers of that 50% growth rate you called out for DGG in China?

Yeah, I'm going to invite Sam on this call. He hasn't had a chance to work today in this call. So Sam, your thoughts on what's been going on in China? I was doing a little bragging on your growth right there.

Yeah, happy to give more perspective on China. You know, we actually had a good quarter across the board for all of our business groups within BGG. Specifically, we've continued to see real momentum in clinical diagnostic testing led in pathology. We've seen really good pick up of our PD-L1 diagnostic companion diagnostic there as we've continued to train more pathologists there in the use and so forth. Genomics also had a really, really good quarter both on the consumable side. And we've also just recently announced within the quarter the launch of our new V8 exome, which is being well received in China and globally. I'll tell you one of our absolute strengths in China, as it is elsewhere, remain our core NDS and genomics QC portfolio. So all of those elements along with, as Mike mentioned, now defining our first companion diagnostic development agreement with the biopharma there, I think foretell a continued story of strength in China for DGG.

And this to build on Sam's comments, I mean we've been working really hard the last several years putting in the right foundational capabilities, building the right commercial channel, the right ability to handle diagnostics products ourselves. So I think it's really great to actually see those investments starting to pay off in near-term growth.

Appreciate all that color. Thanks everyone.

Your next question is from Patrick Donnelly with Citi. Your line is open.

Hey, thanks for taking the questions guys. Mike, maybe one on the chemical and energy side to follow up on some of the earlier questions. I know that's one where you pretty closely keep an eye on the order book and your confidence kind of goes with that. Are you getting more visibility as the order book builds there? I'm just trying to compare it to even pre-pandemic midterm. I know you guys had a pretty short leash on in terms of how you would guide for that segment, how comfortable you would allow yourselves to get. Just wondering how the order book is looking there relative to some of the past quarters and how you're feeling about that segment. It certainly seems like the tone is pretty positive here.

Yeah, now I'm glad you picked up on that. We really want that to come through in the call. And I think the confidence is coming from not only the revenues that we reported, but as Bob mentioned in general, and I think it also holds for CNE, we just have much better visibility into our funnel. And you may recall I was talking a lot in prior calls about conversations having with customers and we knew there was activity, but now that conversation is turning into orders. So we're feeling much better about the trajectory of the CNE space. And I've historically been very, very cautious to give any real kind of positive trends in this area, but I think we've seen enough over the last few quarters and what we're seeing with our customers in the order book is really the basis for this confidence. And again, it's tied to not only dependent demand they've had in terms of needing to replace aged equipment in their laboratories, but they also from what we hear from our customers, they're much more confident about where the global economy is going, so they're willing to make investments. I know there's a couple pauses here and there will be some ups and downs because of outbreaks here and there of COVID, but in general the tone remains very positive. I think as Bob mentioned earlier, our customers have learned to deal with this. Bob, you know this is we talked a lot about, is there anything I missed there?

That's helpful. Appreciate it, Mike. And then on the diagnostic side, just giving commentary that you guys are above pre-pandemic levels. Can you just talk about the pace of recovery in the quarter and then expectations for the further ramp from here? I just wanted to clarify and make sure you haven't seen any impacting delta up until I guess this week. I just want to make sure I had that clear. Thank you.

Great, thanks.

Your next question is from Mai Sikes with Goldman Sachs. Your line is open.

Oh, hey guys, thanks for taking my question. Congrats on the quarter.

Thank you.

Just on ACG, you guys had a pretty impressive operating margin over 29% for the quarter. I'm just wondering what you feel about sustainability of those margins and then any progress that you've made on attachment rates in that business. I know you mentioned a little bit in your prepared remarks, any additional color would be helpful.

Yeah, I think I'll pass it on to Parmar who can provide some additional color on the ACG and answer your questions. Go ahead, Parmar.

Yeah, great, thanks Mike. And we're getting back to more normalized service support with our customers, which is more cost associated of course with travel, but we're starting to see a creative margin in Q3 and we're seeing that and going through improving. Q4s are very, very strong on that. In terms of attach rate, we're seeing increase attach on our services and consumables, and of course with the larger install base this bodes really well for the future as more attach and attach rates for services and consumables will be available to us. So very strong outlook.

Yeah, hey, and maybe just to build on what Parmar is saying, in terms of sustainability we feel very, very, very good about the ability to continue to sustain those levels of margin. It gets back to the work that our service engineers do in servicing our customers is mission critical for our customers, keeping those labs and those instruments up. And our ability to continue to invest in digital as well as be there on site in the labs or with the labs is really important. One piece that I would add is we continue to invest in that digital as I mentioned before, and our online orders actually grew faster than our revenue grew faster than the overall ACG business, which actually speaks to our continued relevance in that space. And obviously that's good for our customers in terms of ease of doing business with Agilent, but it also helps from that margin perspective as well.

Great, thanks for that color. It's very helpful. And then just one more on CNE, I know you've answered a lot of questions on already, but I'm just wondering how the competitive landscape might have changed. I mean obviously it had a challenging time during COVID, it took a while for it to recover, and now it's certainly in recovery mode. I'm just wondering as you look out, the competitive landscape, have you seen some competitors slow investment and therefore there's some share gain opportunities in that growth that you're seeing?

I don't know they slowed it, I'm not sure they're reinvesting for that segment. And we're not seeing much happen on the competitive front. We're by far the clear leader in this space. We've been continuing to invest in our core portfolio pre and throughout the pandemic. So as you can tell, I'm pretty bullish about our ability to outgrow the competition in this space.

Yeah, exactly. You have to provide the thought on the TC and I'll strengthen up GC, but I think we should also mention our spectroscopy business and the ICP-MS where we have done a lot of work also, ICP-OES and MS. So we've done a lot of work that have a very strong market share for the material science and we continue to take market share. That's 8000. So I think you see us being very strong here, and we have also a size that we will continue to invest into this market going forward. So there's a lot more there for the customers going forward.

Great, thanks very much.

Your next question is from Joshua Wildman with Cleveland Research. Your line is open.

Thanks for taking my questions. Just two for you. Mike, you mentioned overall orders outpaced sales in the quarter and it sounds like book-to-bill in the LSAG business was likely positive. I just wondered if you could provide us with your assumptions for core growth in the LSG business in the fourth quarter. And then as we look beyond FY21, given the broad-based strength you've spoken about on the call today, I guess is it fair to assume that as we look to FY22 this business should likely grow something above kind of a low to mid single digit longer term average?

Yeah, let me talk about the fourth quarter. And I'm not sure we're going to answer the last one just yet as we're going through our plan. But I would say for Q4, you are accurate in the belief that our book-to-bill was positive for the quarter. And if we think about Q4, our guidance comprehends high single digit low double digit growth for the LSAG business core growth. So I'll leave it at that.

Got it. And then it seems like year-to-date pharma has outperformed what you expected coming into the year. I guess wondered if you could comment on any kind of current thoughts you have around the potential magnitude of any year-end budget flush, given it seems like investments from these customers have been fairly consistently strong throughout the year. Does that kind of deflate any kind of year-end spending?

Yeah, we'll address that in our Q1 call. But to your point, we've been pleasantly surprised and it has continued to be stronger than what we've anticipated throughout the first three quarters. And what I would say is we don't expect that to slow down in Q4.

Got it. Thank you.

And your last question is from Jack Niehan with Nephron Research. Your line is open.

Thanks, good afternoon. You talk about the job that your team is doing managing the supply chain. Was wondering if you could elaborate on a hot spot you're seeing in terms of inputs, shipping, or labor, and when you look at the fourth quarter guidance, is that you know are you taking any more prudence or conservative type approach based on what's going on in the supply chain?

Yeah, I mean this has been a lot of discussion. I think everybody's talking about supply chain constraints on a global basis, and that's been a challenge for us. But as Bob noted in this call script, our team has just done a tremendous job getting the Agilent products to our customers. And we're really good at managing these situations. So we've been working on these number of commodity areas for some time, and we also have done things such as identifying and changing alternative sources of supply. So we've been able to do that. We've had last minute changes to notification from logistics suppliers that they won't pick up our boxes, and we switched to another supplier. So we've been able to manage our way through that. And it was conspicuous it was absent our call script a lot of details because while we continue to monitor it, we really don't believe there's a material risk to the company this time, and we feel like we factored all that into our guide for the fourth quarter. And Bob, I know that you've been a close study of this as well. Anything else you'd add to that?

Right. And then one other follow-up is on COVID. So the fourth quarter guidance assumes it's a one-point headwind, though we're obviously in the middle of another delta wave here. So was curious what you're seeing on the ground or whether your products are just starting to wane in general, and any preliminary thoughts around how you have 100 million this year, just how you're going to guide it as you go into 2022 related to that.

Sounds good. Thanks, Bob.

I do apologize but we do have an additional question. The last question is from Dan Arias with Stifel. Your line is open.

Yeah, hi guys, thanks for getting me in here at the end.

Hey, hey, no problem.

Just one for me. Just Bob, maybe a high level question. Just sort of to the idea of getting to a post-COVID world whenever that might be, I'm wondering which of the three segments you think might stand the best chance of maybe rebasing at a higher level at the op margin line, just by virtue of some of the success that you're having and to your point some of the fundamental changes that might come to the expense structure. I mean, is that something you think is possible, and if so would you be willing to sort of help us with which one is looking most promising there?

Sorry guys.

Okay, thanks. Sponsored.

Thanks, Dan.

And that concludes the question and answer session for this conference call. I will now turn your conference back to Parmar Ahuja for closing remarks.

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

Ladies and gentlemen, this completes today's conference call. Thank you for joining, and disconnect. Stay safe and well.