Agilent Technologies, Inc. (A) Earnings Call Transcript & Summary

All right. Great. Welcome, everyone. I'm Puneet Souda, SVB Leerink's tools and diagnostic analyst here. And it's my pleasure to have Agilent management team's CFO, Bob McMahon, joining us; and Head of Investor Relations, Ankur Dhingra, also joining us. Welcome, guys. Glad to have you at our conference.

Thanks, Puneet. And it certainly is a pleasure to talk to you and have an opportunity to talk about Agilent. We posted a strong start to the year, and I'm sure we'll get into it, with revenues of a little over $1.5 billion, with 14% reported growth and 11% core. And the great news about that was it was really broad-based across all 3 of our business groups. All 3 of our business groups grew double digits. And that strong top line translated into 31% earnings per share growth for the quarter. And as a result of the strong quarter and the solid momentum that we have going into the year, we're actually -- we raised our guidance by over $200 million and are now at 6.5% to 8% top line growth and solid double-digit bottom line growth. So truly, just an outstanding start to the year and really excited about the products and the services and, more importantly, the team and the execution that we see. And I can't wait to talk to you about it. So...

That's excellent. Thanks, Bob. So obviously impressive core growth here. What I took away from the call was pharma in China were contributing strongly. But maybe just characterize for us what you expected going into the quarter and what emerged out of the quarter, some of the -- what were the key drivers. Maybe just give us a sense of that.

At the beginning of the quarter, we started seeing some very strong momentum moving in our Q4. And I expected that momentum to continue into our first quarter across all the end markets in recovery at different paces. But the beauty is, really, most of our end markets exceeded our expectations. As you mentioned, pharma was extraordinarily strong at growing 20%. And -- but also our food end market in China led the way. China has been -- it's about 20% of our revenue and has really led the way in terms of the recovery. And so when we think about our initial expectations, almost every one of our end markets exceeded our expectations. None actually performed lower than our expectations. But we actually felt so good about the quarter that we actually preannounced kind of mid-January that we saw very strong performance and actually exceeded that expectation on the top line coming into February. So very good across all. Pharma, certainly our biggest market and no signs of slowing down there from a standpoint of performance. And it's really been across all regions. And then China, China has been very strong across all of the end markets. But really, what we saw is broad-based across our regions as well. So just a really, really strong quarter across almost all of our end markets.

That's great to see. In terms of the full year guide versus what you presented at the Analyst Day, at Analyst Day, you had 5% to 7% revenue growth outlook for the longer term. At the top end of your -- I mean, current guide, it's 6.5% to 8%, is obviously ahead of that. So I appreciate the pandemic is making for easy compares, but should we assume a higher end of that 5% to 7%, at least going forward in a more reasonable outlook for Agilent and longer-term?

Yes. Yes, Puneet. It -- we certainly feel very good about that and probably would be at the higher end of the range. If we looked at some of the things we highlighted back in our Investor Day, back in early December, it was really some of the key drivers that really have helped transform Agilent into a much faster-growing company. And I'm sure we'll talk about some of those areas. But those things continued into Q1, and our expectation is they would continue to drive the growth of Agilent going forward. And we feel very good about the top end of that range long term. We're certainly ahead of that right now. And as Mike would say, we're not letting the foot off the gas.

Great. Okay. And in terms of pharma, obviously, that was strong in the quarter. You pointed out liquid chromatography and mass spec as being one of the components. And obviously, the nucleic acid business is contributing strongly there, too. So maybe just parse out for us what changed on liquid chromatography and mass spec. You grew strongly in both small molecules and large molecules. So just elaborate a little bit there. And maybe then you can talk about the NASD as well.

Sure. Yes. So why don't we, as you said, kind of parse out? Our pharma market represents over 1/3 of the overall business. And as I mentioned, it grew 20%. Now our NASD business, I'll put that to a side, but that contributed about 4 points of that 20% growth in the quarter. But the beauty is both our small molecule business and our large molecule business grew double digits. Our small molecule business, which is roughly about 70%, if you take out the NASD business, grew mid-teens. And our large molecule business ex NASD actually grew 20%. So we actually had broad-based strength across all of our core platforms. And when you look at -- our core end market. And when you look at it from a platform perspective, to your point, we've had -- we've seen strong growth in our LC/MS or mass spec business. But what was really encouraging is our continued recovery in the LC business. And we actually grew double digits in LC. And I think it's a strength -- a testament to the portfolio. We are seeing recovery. There was some stronger-than-expected budget flush or year-end spending from some of the pharma customers, but we saw even before that strength in that. And I think what we see is a combination of our instrumentation, coupled with the refreshed software, and our focus on consumables and services has really driven increased win rates across that business and allowed us to grow what we believe is faster than the market.

Got it. That's very helpful. One of the striking things in the last 2 quarters and, obviously, in the current quarter was food, really strong. You have a meaningful position there in -- with analytical instruments and LCs and other products in the food. Would you walk us through what is working for you in the food business and maybe especially in China? Maybe with that, if you could just give us a refresher on what were the forces that impacted early and what's driving this growth now?

Yes. We've been really pleased with the recovery of our food business. It far exceeded our expectations in the quarter, and we're expecting continued strong growth for the year. It grew 22% in the market and really led by China. And if we rewind the clock, a little painful, rewind the clock about a couple of years ago, we saw some reorganization of the food ministries or food organization in China. We are the leader there, by far and away, where testing was decentralized into the commercial labs. And as that process happened, we saw less capital spending on the government side, continued testing and volume in the commercial labs, but that was -- we're under-indexed there. Over the last couple of years, we've really put in a lot of work and effort to actually increase our penetration into the commercial labs, and we saw that stabilize last year. In this last couple of quarters, we've actually seen very strong recovery there, coupled with the recovery in the market. And so going forward, we see the benefit of actually CapEx spending increasing, both in the commercial labs and a resumption in the government labs as well as that continued testing volume. This is an area that is a key strategic area for investment in the China plant food safety. And I think we actually are starting to see kind of a halo effect around the world because this isn't just a China phenomenon. We're seeing food being strong in Europe as well as in the Americas. And this halo effect around just being more sensitive around impurities in food and food safety, not directly COVID testing but just a general awareness of ensuring that the food supply is safe. And so we've actually seen the beauty of that was -- certainly, China led it, but we saw strong growth in Europe and Americas, too. And we are the leader there and felt very good about that. And we expect that growth. Now I wouldn't book 20% there every quarter, but certainly, high single digits is kind of what we're looking at for the rest of the year. And that's a significant expect -- improvement over where we expected the business to be just a few months ago. So really pleased with the performance of the team and the recovery in the market. And I think our services and portfolio is really resonating.

Okay. No, that's excellent. In terms of China, maybe just give us a sense of -- because you are -- you have a legacy position in China, you are well-entrenched there. Just walk us through, as we go into this post-pandemic timing for China, how should we think about the outlook for Agilent in China there longer term. And correct me if I'm wrong, that's about 20% of your revenue there now.

Yes. Puneet, you're spot on. It's about 20% of our revenue, second-largest market behind the U.S. And we expect China -- we've always said this, we expect -- China is in a strategically important market for us, has been and will continue to be. We expect it to be growing faster than the overall company, really through some of the areas that the government and the economies are focused on there, whether it be energy independence, biotechnology and pharmaceutical, food safety and improving the environment. And so our footprint there is large. We have over 2,000 employees in China and have been there for decades, just going back to HP. And we saw China come out of the pandemic first, and we're really starting to see that recovery really start. It's almost been -- it's hard to believe it's about a 1-year anniversary to when we started seeing some of the initial impacts of our business, first in China and so forth. But really, what we're seeing is a strong growth. And we're expecting -- we expected kind of high single digits growth in China at the beginning of the year, and now we're expecting double digits. And long-term, we would expect China to be -- continue to be an extraordinarily meaningful part of our business. It's an area where we continue to put investment in and grow above that long-term growth rate for the company.

Yes. The only thing I would add to that would be, as Bob was saying, the -- when you look at the 5-year plan of China, the next one, and then you look at the priority that they are giving to specific areas, whether around food and environmental safety as well as development of their pharma supply chain, our core markets have historically remained very closely indexed to the priorities that China has, and that continues to remain. So we see increase in investments driven by that 5-year plan in China. So reasonably favorable outlook there.

Thanks, Ankur. That's a great add.

Great. Thank you. On NASD, obviously, you have a unique position in that market with another competitor. And maybe just give us a view as to -- you've obviously done a remarkable job ramping up production at your Frederick site. And maybe just give us a sense of where that business stands currently. What's your visibility for that business? How far out of the visibility did you have? And what sort of contribution we could expect from NASD in this year?

Yes. It's a great question, Puneet. And maybe before we dive right into the details here, maybe we take a step back and say what is our NASD business. So it's oligonucleotide manufacturing. So we supply RNA-based raw materials to pharma partners. And when we think about this market, we really think we're in the early innings. The market that we've seen to date has largely been clinical trial demand. And as we look through the next 5 to 10 years, we really expect this to be a significant growth driver for the company as those products get through the clinic and then, ultimately, into the market from a commercial standpoint. We've seen a couple of them. They're orphan indications right now, so they got smaller populations. But as we look at the pipeline of drugs, the larger population of opportunities are coming down. So we're super excited about this business. It is a business where we continue to invest in. It -- last year, a little over 12 months ago, we had our newest facility, the Frederick facility, which was an expansion, come online. And we had a fantastic quarter. Throughout last year, despite the pandemic, that team had done a fantastic job of ramping up that facility and actually in Q1, now what was against the easiest comp, grew significantly. And we're on a $200 million run rate now. So we had the first tranche of capacity of that first facility was about $100 million. It was really tapped out. Now what we've done is built this new facility. It's already ramped up to kind of that first train. About 6 months ago, we announced the expansion to add in an additional line or manufacturing train, as we call them, which will add even more capacity by the end of 2022, and we're looking at adding even more. So we're on that strong path to about a $200 million run rate. We're also -- and the team has done a great job of actually optimizing. We're looking at optimizing yields, getting bigger batch sizes. And we think we could potentially even get more out of the existing capacity today. So I wouldn't -- I'm not ready to say, "Hey, the $200 million is the top." But then we add on that additional capacity. And we think that this business could be, in 5 years, a $0.5 billion opportunity for us. And so super excited about that. We're investing aggressively behind that. I think the beauty of what we offer is it's not only GMP-grade material at scale, which not everyone can do. But it's also the R&D consulting services. So we're working with our pharma customers throughout the clinical process. And so when a product actually gets approved, we're in the dossier. And so it ties us real nicely to our pharma partners there. And in terms of visibility, which you asked about, we have very good visibility. We're effectively taking orders for 2022 already. So we've got strong visibility for the rest of the year and feel extremely good about where we're going with that business and have designs to continue to invest aggressively behind it.

Yes. That's great. And it's great to see the spec and nature of these molecules. So shifting gears a little bit to another segment, which is cell analysis, you've done obviously a great job there in terms of acquiring the right assets. I see Seahorse, BioTek within the cell analysis business. Obviously, this business has come up meaningfully over the last year. So maybe just -- could you give us a bit of, on the growth outlook for that business, where you're positioned right now and where it could be maybe related to cell therapy longer term?