A Stock | Agilent Technologies Inc Q3 2021 Earnings Call

Thanks, Parmeet, 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 board member for nine years. As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others. I know that the Agilent team is not alone in recognizing that Tachi Yamada will be greatly missed, and we extend our deepest sympathies to Tachi's family. Now, moving to our third quarter review and 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 26 percent reported and is up 21 percent core. This is against a modest decline of 3 percent 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 percent, up 230 basis points from last year. EPS is $1.10, up 41 percent 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 continue 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 percent on the strength of both small and large molecule segments. Our large molecule business grew roughly 52 percent in the quarter and now represents 36 percent 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 percent 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 percent on a reported basis, up 18 percent core, on just a 4 percent 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 percent, and chemical energy up 31 percent. All businesses delivered strong growth, led by cell analysis at 38 percent growth, and our LC and LCMS businesses which grew 22 percent. 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 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 21 percent reported, 15 percent on a core basis. These results are on top of 1 percent 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 in mid-teens or higher, with the exception of environmental forensics, which still grew 9 percent. 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 connect rates and increase customer lifetime value. The Diagnostics and Genomics Group produced revenue of 346 million, up 44 percent reported, 37 percent core, compared to an 8 percent 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 in 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 percent of DGG revenue, our China business grew 50 percent 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 I look forward to your questions. I will now hand the call off to Bob. Bob.

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

Yeah, sure. Thanks for the congratulatory comments, Tycho. You know, we really actually continue to feel quite good about our performance in China. As Bob and I mentioned in the call script, I think 8 percent growth, up from 11 percent last year. And I think our stack growth rate is around 19 percent, which is actually up over our stack growth of 17 percent in Q2. We're seeing strong pharma and C&E demand in China now, and the funnels really remain quite robust. And now 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 between the United States and China, yet the business seems to somehow get transacted. So I think we're not really overly concerned about those dynamics. And you know, we did have a somewhat of a little bit of shipment interruption as some of our academia and government customers had to work through a VAT tax exemption change, but I think that was relatively minor impact on the P&L. So clearly we're monitoring those developments and we 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 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, since we have a lot of in-country inventory.

Yeah, thanks Tycho. So 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 that 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 our margin goal. 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 built here.

Yeah, sure. And 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 story. And Bob, maybe you can just answer the specific on the numbers.

And Jacob, I know we had two big introductions in Q3 as well.

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

Yeah, I was going to say, you know, Brandon, as we think about this, prior to the pandemic we were probably slower growth than normal where some of the QA/QC refresh was probably elongated. And now we're starting to see that pick back up. And you know that typically is an 18 to 24 month kind of cycle. And I would say we're still in the beginning of that. So feel good about the continued performance of the refresh cycle going forward.

Yeah, so you do some very good math. So it's about half a point of reported growth, right? Bob and I said relative to Q3, probably a little bit behind the revenue as we learn more about this business and some elements of revenue 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 FY22 and beyond. And we're just super delighted by the early days of how the teams feel about being part of Agilent. And then we're really building scale around this business. So I think it's still relatively small part of the overall revenue picture today for Agilent, and we knew that going in. I think it roughly is $50-ish 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's the founder and co-founder of Resolution Bioscience, and 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.

Yeah, Vijay, it's a great question. And I think if you remember maybe a year ago we talked about some of these expenses that were going down, and our goal was not to have them come back to the same levels that they had. And these would be in areas around travel but also leveraging our digital capabilities. And what we've been able to do is be very successful. Certainly volume is our friend, and the leverage that we've been able to drive across all three of our business groups has really helped. But if you look at our year-over-year elements around travel and costs associated with marketing programs and digital investments, our digital investments have gone up but the actual return on those investments has actually gone up. And in fact, Jacob just highlighted one of the programs that we had. And so those are our goals, for those to continue. They will continue to ramp next year to come back, but not near the level that they had come prior to the pandemic. So we do think that there's a fundamental margin improvement associated with these expenses, and that's why Mike talked about our long-term margin expansion story is intact. It's not going to be 200 plus basis points like it was this last quarter, but certainly feel good about our continued ability to drive margin expansion. Hey, Vijay, this might, if I could just add one additional comment too. And I hopefully came out of my prepared remarks, 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.

Thank you.

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.

Yeah, I know 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.

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.

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've, 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 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 could change during the course of the quarter. So we're trying to take all those factors into account, but also try to provide some realistic guidance going forward.

You're welcome, Doug.

Hey, Derek.

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?

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, 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.

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 it's 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 quickly much bigger positions in faster growing segments. And I think it's probably fair to say that the pharma market in particular, the bioformal market, remains very robust. But again, we're sticking with those long-term growth goals at this point in time.

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, 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 C&E, we just have much better visibility into our funnel. And you may recall I was talking a lot in prior calls about conversations 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 C&E space. And I've historically been 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. So Bob, you know this, we talked a lot about, is there anything I missed there?

Yeah, yeah. I mean, we saw continued recovery. I think we mentioned at the beginning at the end of Q2 that we were kind of at pre-pandemic levels, we exited there, the average was still below, and that steady improvement across our business, across really across all of the regions, continued into Q3, and by the end of Q3 we were above. And Patrick, to your specific question about delta, we have not seen any impact to date associated with that.

Thank you.

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

Yeah, hey, and maybe just to build on what Brandon is saying, in terms of sustainability, we feel 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 doing business with Agilent, but it also helps from that margin perspective as well.

I don't know they slowed it, I'm not sure they're reinvesting for that segment. We're not seeing much happen on the competitive flight. 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, 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.

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.

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 the 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?

Yeah, you know what I would say, Jack, it's a good question. Our products aren't directly tied to the testing. We didn't see the dramatic increase but also didn't see the dramatic declines with the testing. Ours is more around expanding capacity both in testing. And over the course of this last year, we've actually seen it migrate to more therapeutic capacity or excuse me, vaccine capacity and demand there. And so we don't see it spiking up. We're not building that into Q4. I think it's a little too early to tell for FY22. It's been reasonably steady the last couple of quarters, and we do expect contribution in 22, and we'll provide more color as we get through our planning process. But we don't see it dramatically dropping off.

Hey, hey, no problem.

[Laughter]

Thanks, Dan.