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

Good morning, good afternoon, everyone. I'm Matt Sykes, senior life science tools and diagnostics analyst at Goldman Sachs, and I have the pleasure of welcoming the team from Agilent here today, Mike McMullen, the CEO and President; and Bob McMahon, Senior VP and CFO. Mike, Bob, Happy New Year. Thanks for joining us.

Matt, Happy New Year to you and your clients as well. And from Bob and I's perspective, it's real pleasure to be here. On the heels of our closing off is a record year for Agilent. As you may know, Matt, we added almost $1 billion of revenue in 2021, 15% core on top of a growth the prior year, 1% core, so it wasn't just an easy comparatory for us. All our business groups grew 10% or greater, operating margin up 200 basis points and EPS up 32%. So -- and then specific to the fourth quarter, we entered 2022 with momentum. I sure we'll talk more about this, but when I say momentum, it's really broad-based growth across all end markets, all geographies. So we feel really good about how we closed off the year, 11% core, margins up, EPS up 23%, going into '22 with a really strong backlog and really a real positive view of outlook for end markets. So and Bob and perhaps you have a few comments you'd like to make as well? I sort jumped into some of the numbers.

No, that's quite all right. You're excited as we are. And Matt, it's a pleasure to be here as well. And why don't we just jump right in?

Great. So let's start with -- you put out your fiscal '22 growth guidance, which was 5.5% to 7%. And I know this includes negative impact from COVID in the Chinese New Year, so it's going to be a bit higher than that. But how should we think about sort of what you guys term, what I like to term the Agilent prudence as you looked into 2022? And kind of what areas of upside could there be in certain end markets that you think the market might be underappreciating at this stage?

Yes. Thanks, Matt. It looks like that word prudent has been coined relative to our initial guide for the year. And I'll make a few comments, and Bob and I will tag team on this. But I think really the upside sits with our 2 largest end markets of pharma and chemical and energy for different reasons. The -- we had toward growth in '21, I think, north of 24% or so, I think, for the year, if I remember correctly. And we still see really strong fundamentals in the end market for pharma, particularly the biopharma segment of that market. We thought it was just good to go out with may be a high single kind of number for pharma for the year, positioning that as upside. Again, it's still early. We're still in a pandemic. And then C&E, which is we saw -- really start to see some signs of life in that market in '22 -- '21. And I think the momentum that we're seeing is going to -- we believe, is going to carry forward. But again, we took a prudent initial guide in that end market as well. So I think the upside really sits with the 2 largest end markets that Agilent has. And Bob, perhaps you want to add some commentary on there as well?

Yes. I think you're absolutely right, Mike. And if we think about that 5.5% to 7%, you did have some headwinds associated with it. But if you look at our kind of core business, it's closer to 6% to 7.5%, which is very robust, and we believe faster than the market. And as Mike said, when we look at the fundamentals in pharma, there's 2 elements to it. Obviously, the small molecule replacement cycle and we'll probably get into that. That we're seeing very strong demand for LC and LC/MS, and we expect that to continue. It's off a very strong base of last year, as Mike talked about, 24 overall. And then biopharma, the funding environment continues to be very strong there. And that business is now about 35% of our overall pharma business and has been growing double digit and it grew in excess of 30% last year. And so we think we're set up really well for the pharma business. And as Mike said, the C&E business, if you look at PMIs and the economic recovery that's going on around the world. The beauty of that business is, I think we're best positioned. When that market grows, we are the market leader. And what we're seeing is very strong growth now. We started -- it's early in the year, so high single digits on both of those, but those would be the 2 areas of, I think, upside if they continue to perform the way that they have over the course of this last year.

Hey, Matt, and maybe just to share with the audience before we started the call today, we are also indicating that the funding environment in pharma has nothing to do with Federal Reserve does in interest rates.

Very true. I agree with you. I think that we're seeing that today in the market. But if -- unfortunately, 2 years on, we're still talking about COVID. So I'm going to ask my COVID question. I hope is next year when we're sitting here, I don't have to ask any of these questions anymore. But let me just ask on Omicron and any impact you're seeing in terms of lab access or any other issues at this stage?

Yes, Matt, maybe 2 dimensions to the response here. One, let's talk about what's going on with our customers in the end markets. For better or worse, I think our customers have found a way to navigate their way through these flare-ups of right now with the Omicron, as you mentioned. We've not seen any impact at all in terms of our end market demand. And we've also, through a lot of our digital capabilities have been able to find ways to continue to support our customers in a digital fashion, which really puts our customers at ease because they want to really limit the number of outsiders coming into the lab. So I think from an end market perspective and customer demand, we're really not seeing any impact at all from the Omicron. Now the second part of my story is what does it mean for Agilent's operations. I think it's more about the psyche of our organization, which is we have to really make sure that we keep our teams energized and excited because I think as we mentioned in our comments before the call, I think many of us have thought we'd be back in the office by now, and we're still operating the way we did almost 2 years ago with 15% of our workforce on site. And we -- the health and safety of our team is number one. We're prioritizing the safety of our team. So a very limited site access. So we're finding a way. But I think that's one thing the challenge for the leadership team here at Agilent. Just to make sure that we could keep our teams energized. And as you've seen from the results that we're delivering our team is answering the call.

Got it. Mike and Bob, let's turn to end markets. You mentioned C&E. That market, as you mentioned, has begun to recover. We think that market is probably likely to do for some catch-up CapEx spend due to a few years of relative underinvestment in that space. But I'd be curious to hear from you about any of the drivers in this market that might sustain that recovery. I mean we've heard from some companies in your space that one potential driver maybe the increased spend on product development side as it relates to chemicals for making products like paint, more sustainable, environmentally friendly. So this seems to be kind of starting in Europe, where you have ESG regulations, a little bit more forward relative to the rest of the world. But do you think this is an area of growth that you're experiencing as well, not just on the ESG spend, but just on C&E specifically and what could actually drive this market beyond what just might be catch-up CapEx spend?

Yes, Matt, great question. And as you mentioned earlier, our customers in the C&E space, particularly the chemical customers, are thinking much more confidently about the future. The PMIs, as Bob mentioned, an expansionary space, and they're investing. And a lot of it has been deferred investment. So that's been driving a lot of the core growth that you've seen over the last several quarters. That being said, there's other things going on in this end market because we use this term C&E, but there's really a lot going on in this space. And you're going to hear us also talk a lot more about advanced materials because what's -- fossil fuels continue to be the primary source of energy, but our customers also investing in alternative sources -- alternative energy sources. And things such as new battery technology, for example, new semiconductor, new advanced materials, these are all foundational technologies for that continuation of the move to alternative energies. So Agilent has a really strong play here, as Bob mentioned earlier, both from the -- through the research to the manufacturing continuum. And then you're also seeing governments willing to fund this, which is whether it be the infrastructure play here in the U.S. There's a Europe Go Green funding initiative, we've seen one in India. So there's also in addition to the private sector funding. You're also seeing coming from the public as well. Now the specific example, you asked me earlier about the paints. We're not seeing a lot of materiality yet in terms of that driving a lot of new growth for us in that particular application area. But I think it's just indicative of the fact that there is a push to invest in more sustainable types of products, new source of energy. And I think this will give some additional tails of growth in the coming years in this space as well. So I think the story, as I think maybe alluded to, Matt, is bigger than just a return to growth in catch-up. There are some new things happening in these end markets that there's a lot more going on in C&E than oil and chemical production.

Got it. And maybe a big picture question on this end market. From a broad sort of portfolio management standpoint, as you look at the overall business, your ability to kind of weather through a few years of weaker end market spend in C&E and to have it come back and be positioned the way you are today, how is that, if at all, kind of changed your view of sticking with and investing in businesses that are more cyclical?

It's very interesting because when you think about -- let's put the technology or platform dimension on top of the end market, because we look at C&E as a pure leverage play for the company because you're investing in liquid chromatography, primary market is pharmaceutical market, but there's also demand for that in C&E. Same in the gas chromatography, mass spec, spectroscopy. So what we're able to do is we're able to invest in our core technology platforms and then leverage those into the C&E space. And listen, we compete with everybody here, whether it be a Thermo or Shimadzu or Waters, but Agilent is by far the undisputed leader in this space. So we get outsized growth when that market is returning to growth, as you're just seeing right now. And also, I think we're in a really great position to benefit from some of these new emerging growth trends we talked about earlier. So this is a space that you don't have to put a lot of incremental money in it to get it growing -- the growth going. We're very well established. We have very strong customer relationships and this is a really important business for us as it moves forward in terms of our ability to leverage those technology platforms across a broader set of end markets. And Bob, I know you've looked at this as well and anything you'd add to that?

No, I think you're spot on, Mike. I think if you looked at our R&D pipeline and where the R&D dollars are focused, it's around applications and digital solutions, primarily focused on the highest growth areas, pharma, cell analysis in some of those areas. But as Mike said, what we're able to do is with small incrementals is actually leverage that into our core tech -- some of the core end markets like a C&E and so forth. So it is where I think our growth is long term, continues to be in those faster-growing markets. And actually, you've seen over the last 5 years an increased exposure to places like pharma and specifically biopharma. But when these markets come back, we are very well positioned to be able to do it. So I think it is exactly as Mike talked about, a leverage play that helps drive productivity and profitability across the entire enterprise.

Got it. Got it. And maybe shifting over to biopharma. It's been a significant source of growth for Agilent, as you guys have mentioned, and for the overall sector and funding remains high, innovation continues. Maybe talk a little bit about the sustainability of that growth? And more specifically, much of that growth is coming from newer biotech companies? And how do you develop early and deep relationships with these companies and grow with them, particularly when you're serving really large biopharma customers as well with maybe some different needs. How do you balance that? Because I think developing these early relationships with the biotech companies helps kind of solve that sustainability question in terms of the growth going forward. So I'd love to hear how you guys balance that when you're working with each of these types of customers.

Matt, great question. And overall, the macro view is we're very bullish on the long-term growth prospects in biopharma, albeit, as you just mentioned, the customer mix is really evolving as well. So not only do we need to do the right thing relative to supporting our large existing biopharma customers, with a lot of new start-ups out there. You want to get in there early and really build those relationships. So I think you really hit on a really key point in your question, Matt, which was different needs. So what we're out there doing is, first of all, often they have to -- they have a different set of financing needs, not only technology needs, but a business model. This is where things such as a subscription service come in, where maybe a new start-up can't afford the latest capital investment in an LC/MS, but they can afford to subscribe to a subscription service to that equipment. We also have really expanded our ability to reach our customers, both in terms of, if you will, more feet on the street in the biopharma space, but also through digital means. So we really expanded our coverage model from a channel perspective. And I think maybe we'll get into a little bit later on, and that was one of the big drivers behind a reorganization we announced in our last earnings call, the creation of our one commercial origination. So broaden our customer reach and really tailoring our offerings, both from a technology perspective but also from a business model -- business financing perspective, if you will, to really understand -- really help on those unique needs. We also have a lot of relationships between our Agilent labs teams and start-up companies. So I think there's a multi-dimensional facet to this play. And you're also going to see us talk about the continuum of university to biotech to large pharma. And we kind of see that as a very linked continuum, and we have a very -- we really stepped up our investments, I'd say, and focus on the academia side as well. So I think all those things kind of play together, which is some of your start-up biopharma companies are coming out of academia. So I think really understanding what's happening in the market and recognizing that there's an evolving new set of customers, I think, has been one of the reasons why Agilent has been successful over the last several years and why we think this growth is sustainable as we move forward.

Got it. Got it. And maybe moving on to some -- you mentioned the NASD, cell analysis business, 2 very exciting areas of growth for Agilent. When you think about the NASD business, specifically and the type of demand you're already seeing, and with the fact that we haven't really come close to commercial stage production from any of these therapies that they're still going to need your materials and services. What's the potential for NASD do you see? Where do -- do you think in 3 to 5 years' time, that scale will be a key differentiator in this market? And how is Agilent set to gain share in that potential environment where scale is actually going to matter?

Yes. Thanks, Matt. And this is an area where we're very bullish on as well. It's been an area of significant capital investment and corresponding growth. So we believe that scale does matter here, but it's also scale tied with expertise. So we've been growing faster than our competitors in this space because we've been aggressively adding scale. We talked about Train A, Train B. We know we built the Frederick site and we're close to adding another production line in 2022, what we call Train B. And as I maybe mentioned to you earlier, Matt, there's more letters than the alphabet beyond B, so stay tuned. So we do believe that this industry -- this particular segment of the market doesn't have enough capacity right now. So you want to build scale so the customers know that you're going to be there when their product comes on market on commercial. But I can't emphasize enough, it's not just about the ability to have a factory that produce high-volume GMP-grade oligos, it's also how do you work with your customers in the earlier phase of their development process. Do they trust you? Do you have the technical expertise? So I think it's really this winning combination of knowing our ability to build and scale the business and give us the cost advantages and quality advantages that our customers need, but also how do we build those customer relationships with these companies. I think that kind of too forward approach is why Agilent has been so successful so far in this space and why we're very, very bullish about our prospects moving forward.

Yes, it kind of leads to my second question, which you kind of answered a little bit, but you talked recently about the synergies that you see in your RUO and GMP businesses within kind of bioproduction. And maybe talk about how you're cultivating these relationships within RUO and R&D setting. You talked a little bit about university going to the biotech startup. But what kind of competitive advantage do you think that brings you? And as your NASD business grows, how is your offering going to be differentiated to maintain those customer relationships as you move from RUO or GMP?

Yes. Great questions, once again, and I'll tag team a bit on this with Bob. But what I'm really -- what I was referring to in my earlier comments was really all around the area of CRISPR Therapeutics. And right now -- and I really wanted to make sure that we started to talk about how our RUO and GMP-grade business is actually very linked together because our strategy is that we want to be this full service provider to company developing CRISPR-based therapeutics. And our thinking is that -- and I'll talk specifically about our capabilities. But if you're there with -- from there, from the early-stage research to development and ultimately into full-scale manufacturing, that's a much more efficient process, a trustworthy process for our customers. So the idea is if we have capabilities, unique capabilities along that continuum, you can work with customers from the very beginning of the ideas about a particular therapeutic all the way to on-market GMP-grade production support. And what we've been doing, we have some business here already in our NASD business, for example, we have what we call our clean guide, which is really some unique technology we have that gives us some advantages in terms of how we work with the single guide RNAs. And then we also have some of the very unique position on the RUO side with what we call our SureGuide offerings as well. So we're not kind of avoiding getting to all the detail of the technology, we think our ability to -- we have some unique capabilities as it relates to single-guide RNA, both in GMP setting as well as RUO setting and then by being able to present that whole continuum to the customer, that allows us to be there for them all the way through all the processes of therapeutic development. We think it's a much more efficient process for them as well as one they know they can trust when they get to the end. And Bob, I know this is one, it'll be helpful to add to that.

Yes. I think that the important element here or one of the important elements is also our ability to actually scale. And we talked about scale before. There's a couple of dimensions of scale. One is capacity, but it's also being able to provide the same therapeutic or molecule at grams to kilogram capabilities. And a lot of the RUO is much smaller quantities. And as you want to scale, you want to also have that same quality going to the GMP-grade kilograms. And so what we've been able to do in our 2 factories, specifically at NASD, has worked with the development teams early on. And that is part of their protocol in dossier that goes into the clinical trial and then ultimately to the health authorities. And then what they've been able -- what we've been able to demonstrate is that scale for grams or small quantities into kilogram quantities, which now the exciting thing about NASD and some of the therapeutic areas, as you mentioned, still today, about 90% of our business has been in clinical trial demand. But what we're seeing is, and in fact, and just got approval for inclisiran in the U.S. over the holiday break, much broader patient population opportunities. And so the ability to be able to scale to kilogram demand is really important. And what we're seeing in our pipeline is many other areas that companies are looking at -- our clients are looking at in much larger targeted populations. And so what this says really exciting for us is the ability to actually work with them very early on and then throughout that regulatory or clinical process and then stay with us because we have the capability and demonstrated that capability through much larger quantities because they don't want to have to switch the suppliers. And so I think that that's a key differentiator for us as we think about that kind of continuum.

Thanks, Bob, for that. And Matt, as you know, it's no trivial task to scale to kilograms. And we're very hopeful that at some point in time, we can host you to actually visit our Frederick site. You really see firsthand the sophistication and the investments required to actually scale to kilograms in a GMP-compliant environment. So it's one thing to do the smaller batches, it's one thing to produce at scale.

Got it. No, I hope to visit before you get to Train P, someday. We've got a couple of questions from the audience. And so a couple on China, which we'll address in a little bit. But just one on supply chain, specifically what you've been seeing very recently in the supply chain. There's -- we had some commentary earlier this morning that things might have gotten a little bit easier, but I'm just wondering what you're seeing in the supply chain and how you're looking to kind of mitigate that on a continual basis.

Yes. So first of all, I couldn't be prouder of how the Agilent team has been navigating -- working on the supply chain, both in terms of in-sourcing the components we need, but also dealing with all logistics challenges of getting product to customers as well as getting our parts into the company. So we found a way. And I think that we -- I think the challenges in the supply chain are fairly well known globally. But as Bob and I have expressed in the last several quarters, a lot of comps our teams would find a way to navigate through that in terms of how we work with suppliers, et cetera, et cetera, how we work with our customers. And we've not made any commentary at all that it had a material negative impact on the business. So we feel really good about actually how we manage it to date. And I would say there's some inkling that it's getting a little bit better, particularly on some of the component side, albeit I think it's still too early to declare victory there. We're still running into some issues of sort of last mile kind of transit times to the customers. And that seems to be getting a little bit better as well, but still early. So there's some glimmers of hope, but I'd say we're still in the throes of a challenging environment right now.

Got it. Maybe we'll shift to my favorite topic, which is ACG.

My favorite one. I've been talking about that. That's my baby.

Yes, yes. We've been big fans of this business and the ability for you to kind of leverage your large installed base, develop deep relationship with customers and also drive some competitive intelligence for a business that actually has shown very durable and above growth and margin expansion is impressive. But when you look at the long-term opportunities for this segment, is there a theoretical limit on margins and growth? Meaning, are there factors like size, customer penetration or attachment rates that might limit the potential for this business?

Well, if you go out 20, 30, 40 years, maybe. But in a number of years in front of us, we don't see that at all. In fact, I can remember -- and again, as I mentioned earlier, when I came out of Agilent's third CEO, this is a big move for us, the creation of the ACG group. And as you know, Matt, we started posting some pretty nice growth numbers, high singles and people kept saying to me, hey, when is this going to stop? And why would it? And I'll make sure that Bob jumps into this conversation here in a second because things such as attachment rates, while we very much have enjoyed an improvement of our attachment rate, there is still a lot more room -- headroom for us here as it relates to best-in-class with some of our competitors. We talked earlier about the chemical energy space, right? So a lot of the ACG business, particularly in the services, has been coming from the pharmaceutical marketplace. But increasingly, we're seeing our contract lab customers and our C&E customers on end market also starting to take an interest in what we have to offer in terms of services. So we think that there's a lot of headroom for continued strong durable growth here on the ACG business, both in services as well as consumables. On the consumable side, you really tied into workflow as you make sure you pick the right end applications that go after like biopharma, develop a set of consumables and chemistries around that application space so you can enjoy really outsized growth on the chemistries and consumables side. So we're very bullish about our ability to continue to grow the top line as well as the margins as well. Particularly as you push more and more of the business through the consumables side, I mean, I think you just get a natural margin lift from that as well because of the inherent higher margins of that business. And Bob, I think when we put together the guide for '22, we actually had assumed a higher growth rate in our ACG business relative to instruments. And why don't you add your commentary on here because I know that -- you can talk about some of the attach rates on some of the things we've been doing and why we're so darn excited about this business moving forward.

Yes, I think it's -- thanks, Mike, and Matt, this is one, as you can tell. I mean, we've got -- I think we believe we have a long runway of growth here, both on the top line and bottom line and to put together a couple of data points for the audience. Our attach rates have been moving up 1 point, 1.5 points per year, still in the mid-20s. We think that there's no reason that some of our competitors have been in closer to 40% to 50%. So it kind of gives you a sense for the dimension of opportunity for us. And this is also, if we think about some of the trends in the marketplace, the instrumentation is becoming much more complex, more sophisticated and the customers are looking for driving productivity through their lab. And how do they do that? By letting the experts maintain the instrumentation. And so what we're seeing across not all end markets are created equal, I would say, pharma is ahead of the curve in terms of being able to leverage this. But we're seeing it across all of our end markets. And one of the things that I think is a unique competitive advantage for us is, if you look at the technology that we play, the technologies that we have, we are a broad-based supplier and leader in these. We're either #1 or #2 in all these technology spaces in the labs. And so we have a great position already in all of these labs to be able to continue to drive that attach rate. And so as Mike said, there probably is a theoretical limit, but it's a ways away for sure.

Yes. Yes. And Bob, I think one point of attach rate is about $30 million incremental revenue, and it's a gift that keeps on giving. If you're providing the right support and customer experience, you get that durability of business there as well. So a major push for us and thanks for recognition, Matt.

Yes. No problem, that's very helpful, and I appreciate the color on that. Maybe still kind of staying on a similar topic. Maybe talk about how the success of ACG is kind of informed other parts of your business. I mean your One Agilent Group initiative comes to mind. So maybe talk about what the long-term goals are for One Agilent Group and how bringing together your commercial efforts could drive growth across the group from an investor standpoint as they look at Agilent.

Yes. Thanks for that, Matt. As I mentioned in my Q4 earnings call, I call the creation of the One Agilent Commercial Group doubling down on CrossLab because what we saw was, by taking a holistic view of what was going on in terms of the laboratory from an end-to-end perspective, it leads to a new set of opportunities for us and ability to meet an emerging set of new customer needs as well. And so what I decided to do was we had really 2 sales forces calling on our customers and then our service organization was distinct from that. So what I decided to do was very consistent with the One Agilent culture that we've been driving for a number of years within Agilent. So let's put all of our customer-facing activities from, if you will, cradle to grave from the earlier days in terms of their marketing to our customers, the sales process and the ongoing support, have it all under one continuum, under one leader. We think that allow us to move faster. We think it will allow us to leverage our digital investments more easily across the continuum. And then around the table, you have the leader of the service organization and the leader of the commercial sales organization and leader of the digital marketing, all working together to really understand holistically what's going on a laboratory environment. We think that, by that way holds not only for the analytical lab, which has been a big part of the CrossLab story to date, but also our diagnostic customers as well. So by putting this all together under a very capable leader in Padraig McDonald, we think that this will give us this capability to really be with the customer through the entirety of their experience with Agilent. We think there's real customer benefit for that -- from that kind of set of interactions as well as we think there's obviously a benefit in terms of ability to grow and deliver profitable growth.

Mike, let me just add on something because I think just to build on what you're talking about, when we think about this cradle to the grave approach, think about an instrument. An instrument last 7 to 10 years, sometimes longer, sometimes shorter, depending on kind of the type of it. And so the number of touch points that you actually have are critical in the field service engineer. And that individual has the trust of the lab director or the technician because they're with them throughout that 7 to 10 years, whereas the commercial teams, they'll touch but not as often. And so we actually have had and we don't talk about -- we haven't talked about it, the field service actually provides leads back into the commercial based on talking to them on a regular basis, and this is why it's important to have those ongoing service contracts in the maintenance to say, hey, how are things going? We also can talk about the uptime of our productivity within our instrumentation relative to maybe some other instruments in the lab, but also what are the applications that they're doing that we can then drive back to our application specialists that they can create that kind of continuum of continued customer support and satisfaction throughout the life of the instrument. And so actually, by bringing these organizations together, it just tightens that. And I think that, that is a unique value proposition for us. One customer satisfaction -- one of the number one dissatisfaction is if an instrument is down. And so being able to actually have proactive maintenance and work with them as part of that service contract, but then also being able to understand their needs and then providing them with tailored solutions is something that we're thinking -- we think that this will only accentuate going forward.

And we're serious about customer focus and customer satisfaction at Agilent. And Matt, you may have seen recently Wall Street Journal poll that had Agilent, #2 of all U.S. publicly traded companies in terms of customer satisfaction. So we believe that if we work as one team on behalf of our customers, good things happen for our customers and good things happen for our investors as well.

Got it. Got it. And then maybe shifting back a little bit to supply chain, one of the questions that I had was just more on pricing. I mean Agilent seen as a premium brand in the market. Do you think you'll be able to continue to increase prices and inflation push costs up and still maintain good relationship with customers? Or is there a point where customers might push back, meaning, is there like a limit to mitigating factors of price increases if we continue to see rising costs and other issues with supply chain?

Yes, I think you hit on a really important point, which is I think customers will support changes in price if they're understandable, if they're reasonable. So I think -- because they're also facing those same challenges themselves, right? So when we talk to our -- and we're very transparent with our customers. So we do think there's ability to recover a level of inflation that we're seeing in our cost structure because they're seeing it in their business well. So you talk to customers, listen, our logistics costs are going up. So -- and that is the reason why we need to move a price point here. So I think as long as what you're doing is viewed as reasonable by your customers, that you're not taking advantage of the situation, they're not using your position with them right now in an unfair way, they're very support of it. So we've not gotten any pushback at all what we need to do in pricing because they understand it. We've had a very sort of transparent discussions. Now I can tell you, we've had some experiences on our supply chain, where we know we've been taking advantage of. And we'll remember that, right? So we have to deal with those suppliers right now, but things will change down the road. So we're very conscious of making sure that we do the right thing relative to maintaining the integrity of the company's business in terms of the ability to drive profitable growth. At the same point in time, we don't want to take advantage of the environment as well with our customers. So I think as long as we're -- what we've been doing is viewed it as fair and reasonable and understandable, customer has been very supportive because they want us to be here for long term for them as well. And Bob, I know you're supposed to...

Yes, I was just going to say, I think, Matt, just to build on what Mike is talking about, I think one of the things that we have a benefit is, is the benefit of scale. We talked about scale at the beginning of this conversation. And so when you think about the analytical lab, we are the leader in the analytical lab. And so our ability to kind of leverage our manufacturing footprint, the logistics and supply chain, to be able to have product on time where it needs to be at a cost-efficient price, I think we are in a better position than many of our other competitors. And then if you think about kind of our culture of continuous improvement, we've talked about the Agile Agilent approach where we continue to drive productivity activities within the company. That hasn't changed. In fact, it's continued to drive a really increased sense of urgency given where we are. And so I think we're doing our part also to drive efficiencies out. I mean you look at what even last year, we drove 200 basis points, obviously, the top line is a big benefit there. But also, we're able to drive this One Agilent approach, which drives efficiencies by having one ERP system, a number of things that are driving the OpEx. And we think that, that serves us really well in this type of environment.

Got it. And then, Bob, maybe one for you and Mike can certainly chime in. Just on the margin side. You guys have been extremely consistent in your margin improvement over the years. ACG, which we talked about has been a big driver of that. But as you look into '22, where are the areas that you feel further margin upside can come from? I imagine some of it is from the digital investments that you've made and we'll likely see some operating leverage within the LSAG division. But I'm just curious how you think about sources of margin upside as you look at the overall business.

Yes, you're spot on. And that's probably the biggest opportunity that we have, not only in terms of biggest investment that we've been making, but also the biggest opportunity for us, which is leveraging that digital infrastructure that we have, but then also being able to tailor the marketing programs and efficiency to actually drive better ROI going through. And so this is one of the big areas, I think we have an opportunity. And then on the digital side, we talked about the investments that we've been making, actually interacting with our customers, which actually helps provide even a better scale within that ACG business as we think about the more products that we have under contract and the better visibility that we have, that will drive just productivity within that. So it's -- digital is kind of the foundation, both on the kind of operational aspect, but then also on the customer experience side.

Got it. Yes, I think the market is trying to figure out what will be sticky in terms of digital investments you made and the engagement that you've had with customers. I mean you've always invested in this area, but it wasn't until COVID where the customers were basically forced to utilize it and then probably realized it was pretty good. And so I think understanding better what areas will remain sticky of those digital investments and engagement going forward and what that impact would have been to margins will be interesting.

Yes, Matt, I would think a lot of this is really sticky because if you zoom back a little bit, and let's talk about the services side, for example. What's the most important thing for a lab manager? Having that lab up and operating. Uptime is mission number one. If you can be very responsive and solve their problem very quickly without having to dispatch an engineer to actually go visit the customer, that's a win-win, right? So that's why all through the pandemic, we've seen really strong growth -- contractual growth for our business in terms of, I think, almost 10% of Agilent revenues now are tied to service contracts. So I think what customers have experienced in terms of responsiveness from Agilent, I think that's sticky. And back to the customer satisfaction story, what we call our ACX scores or how we measure ourselves in terms of customer satisfaction has never been higher. So I think that's very sticky because of the convenience from a service standpoint, but also from an ordering standpoint as well. So being able to push more of our product through e-commerce, for example, easy to order and ready to use cards just to make sure that it's very easy to have repeat buys with Agilent. And we didn't really talk about this earlier, but if you look at our distribution of business online, is very much skewed towards our CSD business, part of classic ACG, whereas it's still early days on our pathology and genomics business. So we think there's going to be a lot of push to have more of our portfolio online as well, which has this advantage of convenience but also lower costs. So I think there's some things that are really, really sticky here because of it's almost -- we knew these trends were here, but they've been accelerated. So I don't think there's anything going back because why did that manager ever want to give up less uptime? I mean, why were they going to go back to that? It just doesn't make any sense.

Got it. Got it. I'm now going to address a couple of questions from the audience. I can't hold them back any longer. But...

Okay. We're ready. We're ready.

Let's move to China. And just curious on your outlook there. Obviously, Omicron's resurgence plus a zero-COVID policy has a lot of people concerned about the growth in that area. There's also been a lot of talk, as you know, about the domesticating your manufacturing and addressing some of those issues there. But could you talk a little bit about what you're seeing in China today and how you're -- what your kind of outlook is?

Yes. Happy to do so, Matt, because it's always very important to kind of parse through the headline as to what's really happening on the ground. And we continue to see very good demand of our business in China. And we have some nuances relative to the first quarter of this year, as you know, with Lunar New Year, and Bob can get into some of the details relative to the guide. But we entered this year with really excellent backlog, good strong order growth. But I think we grew about 13% for the year on top of 8% prior year. So we've had -- we've been growing and continue to grow well in China. We think the Chinese government continues to want to support those industries that really support their company-wide and country-wide initiatives in terms of improving the quality of life for their citizens. We have an underrepresented diagnostics business, which is really starting to accelerate as the Chinese government really can put some more and more money into the health care side of the population. That being said, there's also -- you have to recognize that the situation continues to evolve in terms of relationships with -- between countries. But more importantly, I think COVID really has highlighted the fragility of supply chain. And I think there's a real push in China itself to have things done more locally, where possible. So we started -- and again, back to this whole idea of being more responsive to customers. You saw us last year make some move in terms of our SureSelect product lines being manufactured in China. We have 2 manufacturing sites in China today. And I think you'll continue to see us expand our ability to do more in-country. But we remain very positive on our ability to navigate the COVID challenges as well as some of the political dynamics. And again, I think it's very important to parse through what's a headline macro noise versus what's really happening on the ground in China. And in our industry, there are limited local substitutes for the technologies we offer in those marketplaces. And for call it, at Agilent, we've been there for decades. So we're -- we have 100% of our team is Chinese. There's not a company full of a bunch of expats and they run the business that's run by Chinese. Chinese companies, we have long-standing relationships with customers. We do a lot of partnering there. So we continue to be positive about our ability to grow in China, albeit you have to recognize that, that marketplace continues to evolve very, very rapidly. And Bob, this is a very important market for us and anything you'd add to that?

No, I think you're spot on. I mean the demand continues to be strong. What we've talked about over the last several quarters is our backlog continues to outstrip the revenue. So our backlog continues to grow across multiple end markets. As you said, Q1 will look a little strange because of the timing of Lunar New Year. So the growth rate in Q1 will be depressed, but it's really just a timing issue because last year, it was in our second quarter and this year, it will show up in our first quarter. But fundamentally, the end markets that we're seeing continue to have very solid growth.

Yes, we lose probably what about a week or so of revenue in China. And Matt, I have to think -- I forgot one thing in my earlier comments, back to the comment on ACG. I mean, we often want to think about the China business as being all about new instrument placements. ACG, our service and consumer business, is on fire there. And we have this very large installed base. And historically, there wasn't as much interest in the service offerings. Now as that market is more matured and really the driving of lab productivity, as Bob mentioned earlier, we're seeing that with our Chinese customers as well. So -- and that's a very sticky business. They've made an investment with us in terms of capital investment in the lab. So I think we also need to keep in mind the durability of growth in China that comes from our ACG business as well.

Got it. Maybe just a couple more questions before we wrap up here. Again, from the audience, you guys are very popular. Maybe just talk a little bit about some of the areas in the last quarter, they were a little bit more challenging, like environmental, forensic, food, academic and kind of what you're seeing there? And is that sort of waiting for some demand to come back there or any other issues in those specific areas?

Bob, as I recall, it was more big deal kind of driven, particularly in the forensics area and tied to when government funding was going to be released, I think the infrastructure bill for the U.S. was a little bit slow and getting final approvals. We'll probably not really see the implication of that until '22. Nothing unusual in academia. I think the one thing we did see relative to the food market was we are on toward growth in 2020, particularly in China, we saw some shifting in China of some of the government level funding into COVID in biopharma. So that's why you see us tailing down a little bit the growth expectations in food for '22. But outside of the China effect in food, I don't think there's really any fundamentally -- structurally going on that we really wanted to -- we're concerned about. Bob, anything that you'd add to that?

No, I think you're spot on, particularly in food. When we think about it, it was roughly flat in the fourth quarter. But if we look at it across the full year last year, it was up 13%. So it was really just kind sense of timing. And that was off of a very strong recovery in the back half of FY '20 as well. And so if you think about some of the drivers there, cannabis in the U.S. and certain parts of Europe, the alternative food, we think that those are our growth drivers that are going continue to be there. We're just not going to continue to put up those kind of levels just on -- based on the comps, but there's nothing fundamentally that we're seeing that has changed the trajectory of those markets growing -- going forward. Particularly as Mike talked about, academia, the funding continues to be strong there, and we are still seeing lab access and particularly in the universities opening up and capacity continuing to grow, but that's kind of what we had expected.

And I think the inherent lumpiness for that business tend to be a very big deal-driven. But as you may have seen, Matt, also we're very excited about an agreement we signed with Avantor recently. And one of the drivers there was from a consumables perspective, they have a really nice access to academia, which really start to -- will smooth out the growth rates there as well for Agilent and academia.

Got that. Leads perfectly into my last question, which is a sort of a broader M&A question. You announced a couple of partnerships in your latest earnings call, Avantor, which you mentioned, we thought was particularly interesting. But as you think about capital deployment, for this coming year, should we think a little bit more about partnerships going forward and kind of add that to our build and buy assumptions? And then separate to that, but also related from the audience, just are there areas of interest and target deal sizes for M&A? And we've seen a couple of antibody deals happen recently. Is there still an opportunity in that segment? Or anything that you'd like to talk about in terms of size or areas of interest?

Yes. So a few -- a quick comments here. So first of all, this broader idea of both M&A and partnerships is really part of our overall growth strategy. It's that buy side. And whether it be the deal we work with Avantor, we work very closely with Thermo, for example, on our cell analysis business from a distribution standpoint, we just announced a deal with Lonza in terms of our working with them on the cell therapy. We have a nice arrangement in China with Burning Rock with our diagnostics. So I think this idea of partnerships. We also have very active early-stage partnership investment, we do venture investments. So that's also is part of the calculus. So you're going to see us do more and more of those. And we also have -- we call it build and buy for a reason, which is we have a very strong interest in continuing to deploy -- utilize our strong balance sheet from an M&A perspective. And we really feel really good about our track record of being able to deploy capital in a way that makes sense for our shareholders. That's -- it's how we got this $375 million plus cell analysis business, through deployment of capital. And we think there's opportunities out there to further expand our presence and cell analysis to get to the specific question. And so there's been some antibody deals that have been announced and there's still other companies out there. So we're very interested in continuing to find ways to deploy capital in certain spaces. But Bob, what I said is my large deal to date so far has been the biotech deal and in fact, just seen with the prior over the break. We're both very excited about how that's turned out for everyone. And we say, that's not the limit for us. We could do multiples of that deal size. And it really is more contingent on the ability to find something that makes sense for the shareholders. As you and I were talking before, we're joined a large audience. There's been some -- coming back to earth relative to some of the IPOs and SPACs out there. I think that also will maybe take a little bit of the heat off some of the elevated expectations that we saw in terms of purchase prices. So we would like to deploy capital. We deploy capital in '21 with a very exciting acquisition with the Resolution Bioscience team coming in to Agilent to augment our CDx business on the liquid biopsy front. So again, we've got -- we feel very confident about our capabilities to execute. And -- but we will stay disciplined in making sure that what we do deploy makes sense for the shareholders. And Bob, what would you add to that?

You said it perfect.

Okay. This is my first call after the New Year. So I'm just -- this is warming up. So thanks.

Thank you guys for joining us. We are over time, so we're going to end it there. But really appreciate Mike, Bob, both of your time today and your color and your transparency. Really appreciate it, and happy New Year, and we'll talk soon.

Thanks, Matt. I thought we'll close off and go Birds, but...

Go Birds, go Birds. Yes.

All right. Thank you, Matt.

All right. Take care. Bye-bye.