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

Hi. Good morning. Dan Brennan here from the Cowen life science tools and diagnostics team. Welcome, day 2 of the Cowen health care conference. Hopefully, everyone is having a productive set of meetings. Really pleased to be joined with me here on the virtual stage with Bob McMahon, Chief Financial Officer of Agilent. Terrific that we can have them at the conference. So Bob, I just want to say welcome.

Thanks, Dan. It's a pleasure to be here and have a chance to talk about Agilent and its business.

Awesome. Well, feel free, everyone who's listening or watching, to post a question or 2 if you'd want on the video chat board. And I'll certainly try to take a look at it during the conversation as we go forward. So I have a series of kind of introductory high-level comments to go through. And then we'll dig into the business and then go through maybe income statement, balance sheet, cash flow and kind of then on some strategic stuff.

Okay.

So maybe to kick it off, Bob. Back at the 2020 Investor Day, the company laid out kind of a 5% to 7%, 3- to 5-year growth rate. And if I look back at the growth ex COVID, the average growth ex COVID over the course of 2021 and now your guide this year reflects a little bit north of -- a little bit above that, maybe 7.5%. So as well the 7% to 8% organic growth in fiscal '22 is above that level. And the stack is really high as well if you think about it on a 2-year stack basis. So maybe a long introductory way of saying is that 5% to 7% still the right way to think about your growth profile. Or has there been a shift up given your increasing mix from higher-growth areas and execution?

Yes, the -- it's a great question and something that we're really proud about, the performance that we've had over the last several years. And really it's been a journey to moving our business into faster-growing end markets; pharma, I'm sure we'll talk about that segment, which is now the largest market. And it continues to grow double digit for us. And then continuing to invest in even subsegments of that which we're growing faster. And so I'm not ready to call a number, but certainly our aspiration, I would say, is higher than that. And if you look at what we've been able to do over the last couple of years, it has been above that 5% to 7% and certainly on track to doing that this year as well, so we feel very good about it. And certainly our aspiration is to do more.

Great, okay. And maybe kind of flipping gears a little bit over to pricing just given the inflationary environment. You talk about realizing, I believe, 1% price in fiscal '22. It's about double what you normally get. Still it's below some of your peers who I think are getting some 2%, 3%, even 4% by some, so what areas are you able to achieve kind of this pricing leverage in, number one, I guess? Number two, could there be more of an opportunity here? Or is there a need to go higher just given the surge in commodity prices following the awful events that are transpiring over in Europe?

Yes, yes, it's a great question. And as you said, we guided to a point which was higher than kind of the historical numbers. I would say, through Q1, we were tracking ahead of schedule there, which is actually very good news. And our pricing actually has -- our list pricing has increased more than that, and so it's really about price realization and so forth. And we're covering our costs. We've got a series of additional activities that are coming in. We had a price increase in January as well. And so we feel very good about the trajectory there, Dan. I'm not going to predict, but there is probably more upside than downside there in terms of the ability to kind of realize that price, certainly if Q1 is any indication. If we look at across. It's across primarily the analytical lab. We've taken price across all of our businesses. We typically do that to try to recover the increased costs, but if I think about where our cost increases have, we've been trying to be very conscious about putting price increases in where we've actually seen the raw material inputs increase. And that's primarily in our instrumentation business, along the lines of kind of the raw materials, plastics, integrated circuits or chips and then logistics fees and then on the labor side. So our services organization. And what I've -- what we've seen to date is actually a very good understanding from our customers. We're not trying to take advantage of the situation here but also -- trying to make sure that we recover the costs that we have. And we're watching the horrible events. It just makes all of us saddened, seeing the tragedy that's playing out. And we're keeping a close eye on whether or not that would require us to do more throughout the course of the year. We haven't made any determinations here, though.

Okay. And maybe one on Russia, Ukraine, could you just kind of talk to the direct kind of revenue exposure there? And then secondarily, obviously this is taking a toll on the globe. And I'm sure there is a lot of distractions. And maybe business confidence, consumer confidence might be coming down here, so have you seen any knock-on effect towards demand as of this date? Or do you expect to see that going forward in terms of how you're thinking about your fiscal '22 guidance?

Yes, it's a really good question. It's something that's top of mind not only for us but, I'm sure, for all your clients and so forth. And as I said, I mean, it's just been a terrible situation to kind of see how things unfold. Particular to Agilent, our business exposure in Russia and Ukraine is relatively small. It's less than 1% of our overall revenues and didn't see any impact. Obviously we've got the first quarter behind us, so that's really kind of less than that for fiscal '22. We don't have any plants or facilities in either of those countries or even in Eastern Europe that would be disrupted by this or any raw materials that are coming from that. We continue to keep a close eye on the demand. And to date, we haven't seen any cancellations of any of our backlog or any change in ordering patterns of -- either in Europe or around the world from this situation, so...

Great, okay. So shifting over to some of the customer groups and product groups. So starting with biopharma, not surprisingly given the size of the business, 35% of revenues in fiscal '21, obviously a key growth driver. So your guidance this year calls for low double-digit growth, which is certainly very attractive. If we look back the last 4 years, the growth has been slightly above that, I will say. Maybe it's kind of low teens. And with NASD mix continuing to increase, that probably pushes the growth rate up higher, so how do we think about -- like is maybe low to mid-teens a reasonable outlook broadly for your biopharma business given that mix shift? Or just kind of walk us through kind of the top-down view of biopharma growth.

Yes. Dan, as usual, your math is quite good. And what we had guided to is that double-digit growth for the pharma business, but for all those factors that you just talked about, there's probably more bias to the upside. And we've talked about that. It came in, in Q1 better than what we had anticipated. And certainly we're not seeing any slowdown in the marketplace from that standpoint. And so as you said, NASD, which I'm sure we'll probably get a chance to talk about today, but also the biopharma business. So we think about pharma in general. It's about 35% of our total revenues. Of that piece of the pie, 35% of it actually is in biopharma or large molecule. And that has been historically growing much faster than that mid-teens growth. And in fact, in Q1, it grew 32%. And that was on top of a 20-plus-percent growth of last year. And so as our percentage of that business continues to grow, it's going to grow the overall growth rate of our pharma business. That's where most of our investments have been and we're seeing very strong growth. It's not to say that small molecule hasn't been growing, but we certainly feel very good about the performance of our business portfolio and the long-term growth aspects for the pharma business.

Great, yes. So maybe jumping in NASD, nearly 50% growth in fiscal Q1 alone. And we estimate it's been growing [ sort of ] north of 30% the last several years, so question: What's the visibility for filling Train B? I know you've talked about this enabling $100 million to $200 million of additional revenues. I guess the question is are we closer to the lower or the upper end of that. And could this all be filled in fiscal '22?

Yes, it's a really good question. And the team has done -- continues to execute at an extremely high level supporting our customers here. And you're right. We had very strong growth in Q1 and are anticipating strong growth throughout the course of this year. We're already taking orders in -- for '23, so our order book is [ totally filled ] here in FY '22. It's scheduled to come online by the end of calendar of '22, Train B. Train B is $150 million plus, so it's the higher end of that. I wouldn't pencil in $200 million just yet, but I also wouldn't count my -- our team out and how they've been able to drive more volume. I would say that, that probably won't all come in '23, just because of the ramp. I would expect it to ramp very similar to the way we had Train A or the initial ramp of Frederick, but there's no reason that this isn't a $400-plus million run rate business, if not higher than that, by the end of '23. And we're continuing to evaluate whether or not there's more opportunities to continue to add capacity. As Mike has said before, there's more letters in the alphabet than B.

Interesting, so maybe talk about a little bit of the oligo demand impact when we go from a clinical program to a commercial program. Like if we look out 3 years, given current pipelines, like, how many siRNA approvals could we have? And what does this mean for the business?

Yes. So it's a really good question. It's hard for me to predict how many approvals, but the more, the better. And then what we've seen is actually continuation of approvals over the course of this -- these last couple of years. To rewind the clock: Maybe 18 months ago, almost all of the demand was still on the clinical side. It still is the majority of our volume is clinical, as opposed to production, but what we're seeing is actually a shift towards larger targeted-population therapeutics. So the first couple of drugs were rare and orphan diseases. And so when you think about the clinical to commercial, there's not that much of a jump up. There is because the target population is in the thousands or tens of thousands around the world, but inclisiran, which is the raw material for the Leqvio Novartis drug, is -- has potential opportunities for millions of patients. These are for patient -- statin-resistant cholesterol. And so the more of these broader-based therapeutics, the bigger the step-up is in terms of kind of the move from clinical to commercial. Our business is a mix between kind of these targeted therapeutics or targeted areas as well as increasingly looking at the broader indications, which is making us feel very good about not only the quantity of programs that we have but also the types of programs. And that's why we're looking at Train B, which is largely a production or a commercial train [ that can ] drive more capacity through it. We're building it to actually have less ability [ to turn over ] in terms of shifts and so forth and higher volume and so forth. So we feel very good about this business. And if you look at what's in the clinic today, just the number of therapeutics across siRNA or just RNA therapeutics, I mean, it's just exploding.

Interesting. So from a competitive standpoint, like discuss your position in the market for supplying RUO and DNP oligos for these therapies.

Yes. I would say it's -- let's take it in 2 buckets. So the benefit that we have for NASD, which we're just talking about, is we provide GMP-grade oligos at scale. And so that is a very different model than some of the others that produce oligo, RUO oligos which are in the gram, sometimes even microgram, quantities. We have the ability to produce GMP grade at the kilogram quantities and hundreds of kilograms. And so we actually worked very closely with our pharma partners in the development process during that clinical trial. We're part of the dossier and then are able to scale with the existing equipment that we have. We're not changing process when we ultimately go to manufacturing and that's a big benefit for our customers. On the RUO side, we do have RUO through our genomics business, but our ability in the NASD business is actually working closely with our pharma partners at the time of developing the program and not in research but in development and then all the way through the clinical trial to production. And we've had tremendous success been -- being able to do that.

Interesting, okay. Okay, good. Let's -- we can always come back. I have a few more on that, but I think [ we should come on it ], kind of push forward. So maybe still staying in biopharma, just a question that came up around 4Q with some companies pointing to emerging biopharma, maybe [ a risk with some demand ] just given capital markets being closed. We posed this question to some of your large-cap peers. I'm just wondering. What's your exposure if you define it that way? And are you seeing any degradation in demand there just given capital markets?

Yes, let me answer the last one first because that's what probably the ultimate question is. We're not seeing any degradation in demand. Our exposure to small -- or to biotech -- small-company biotech is relatively small across the continuum, but we are not seeing any slowing in demand. We're not seeing any delays in placing purchase orders or RFPs or orders. We're not seeing any cancellations. And our view is that the funding environment continues to be very strong across the continuum of companies in the biotech space. And our belief is, if the science continues to show promise, it will get funding. It may not get funding in the public space. It will get funding somewhere else. And so we're extremely optimistic about the continued strength of the biopharma business.

Great. And then maybe one more on biopharma. So the cell analysis business which you've put together, I believe it's almost $400 million in revenues, so 6% or so of revenues. I think that grew mid-20s in fiscal '21. I [ need to go back ] and look at what the comp was, but still very impressive, well ahead of the 10% TAM growth that you guys had outlined. Like, a, what level of growth is sustainable for this business? And kind of what's driving this outsized growth versus the addressable market?

Yes, it's a great question. And the team has done a fantastic job. I wouldn't pencil in 25% ongoing, but certainly several points ahead of the market is what our expectation is. And really what we're seeing is a couple of things. One is the market continues to be robust. Market demand of 10% plus is -- speaks to the -- where science is going. And our products are critical to helping interrogate cells across whether it be cell therapies; and some of these other, newer and emerging sciences. And we're primarily still in the academia and research area, so we still think that there's opportunities to move through into ultimately in -- production. There's probably a couple of areas that continue to drive this. You're right. We made this through a series of acquisitions, and so we've got -- we've had over the time a number of new product introductions. We actually have a flow cytometry business that continues to be very strong. A lot of attention gets made on biotech, but that business, we acquired several years ago. We now have a benchtop kind of clinical flow cytometry product as well as research, and so the ability to be able to be very flexible, I think, is resonating very well. And then a large part of that business is the biotech business, and that continues to be able to add additional portfolio to our existing customers. And then we're actually bringing together some of these through software to be able to actually track samples across the various product lines. And then I think, over time, the ability to penetrate international markets, particularly for our biotech business, is going to be a big opportunity for us because it was primarily a U.S.-based business. And for us, that was one of the appeals, and then also the service opportunity. And our service -- we just moved the service organization into our ACG business in November. And when we look at the connect rates, there's a tremendous opportunity, untapped opportunity, to leverage our scale that we have within our ACG business to provide value-added services and support to the existing customer base as well as increase the attach rate of our service contracts there for biotech. So that's something that is just early days to be able to -- and that -- as -- we love to talk about our ACG business because -- and we think that that's a sustainable competitive advantage for us just given the size and scale that we have in that business.

Excellent, okay. Well, let's shift over to C&E, which has been a great story here. It grew 15% in Q1, better than expected. You raised your guidance for this year at a high single, low double, which implies like a low double digit to your average stack. I think you talked about -- on the last call, the question was towards about higher oil prices. And I believe you kind of talked about the 15% or so of the business that might be in E&P and refining maybe that's most impacted but net-net the rest of the portfolio. So maybe just [ let's point assume ] again high up given what's -- where oil has gone and where commodity prices have gone. Just how do we think about the overall impact on your C&E business from what's happening with commodity prices?

Yes. I would say, if you think about our C&E business, it's a little over 20% of the total company. And if I break that into 3 components: Chemicals actually represents the biggest component. It's a little over 60%. Then you have advanced materials, which is about 25%. And then the remaining is that E&P that you talk about, or energy and exploration, and so forth. And so oil prices have a impact across all 3 of those. I would say the chemical piece and -- has impact there but also PMIs and overall consumer demand. And what we're seeing there is continued demand across multiple vectors, whether it be consumer demand, but just factory output PMIs continue to be very positive across the globe. And so our expectation is that's going to continue to grow. The advanced material part is slightly different, but this is really around all of the supply chain. We're hearing about all the chips and capacity constraints for integrated circuits and so forth. And that advanced material goes into the -- making those. And so if we think about kind of longer term, there's a tremendous amount of capacity expansion that's trying to happen here both from a diversity of facilities -- so they're not singly focused, but if you think about what -- every product, almost, nowadays has a chip in it. And so our products actually go into kind of helping that. And then the oil price ultimately is most impacting on the exploration, but [ they also have to ] make sure that the demand is there. And right now the demand has continued to be strong across the globe. Hopefully, that kind of gives a flavor.

Yes, yes. No, for sure. No, that's great. So maybe on the chemical part, the 60%. I think that grew. Basically what's kind of driving? Is it really just the global economy? And like you're [ saying ] factory output PMIs. I know you launched a bunch of new products pre COVID, which kind of got lost in the shuffle, I think, from the investor standpoint, but just give us a sense of -- that growth is at a pretty high rate. Is it -- like if we were to draw some kind of map and look at factory output PMIs and look at the demand here over time, would it be lined up directly? Or is there something that you're doing different here or better that's driving the growth?

It's -- yes. We'd like to think that we're doing better. I mean we are a leader in the chemical and energy market. To your point, prior to COVID, we had just launched 2 brand-new gas chromatographs, which was the first [ new ] products that we'd had in several years, close to 8 to 10 years. And they -- we're by far and away the market leader. We've got 2/3 of that market probably. And the beauty of those was we've got overindexed to the higher end, the high -- the more sophisticated instruments. And what we had in the second product was actually a mid-range product, which allowed us to -- without reducing price on our high end, to actually get more than our fair share or get our fair share of the lower -- the mid range. We've actually seen tremendous [ uptake ] in that. That was masked by the overall downward pressure in the economy, but we're seeing that come back here. And if we think about where this is, it is your traditional chemicals and raw materials that go into other products. And I'd say the best way to think about that is PMIs and global demand. And these are things that go into things like paint but also higher-performance products, petrochemicals and so forth. And what we're seeing is an expansion of capacity there as well as that refresh of instrumentation.

And maybe just one on the instrument refresh. I mean I think a lot of us had done the math and we looked at your installed base. And we said, wow, if you pull forward a year of a 10-year replacement cycle, that's going to be meaningful given the size of this installed base. You could add 1 point, 2, 3 points to the growth rate. So any just kind of second comment on like what percent of the installed base has been upgraded? Could you try to -- is that durable, that kind of upgrade cycle? Because that could be a nice tailwind here for you...

Yes, the way we have thought about this, they do go up in cycles. And we had had a lull prior because of COVID and even before that. And I would say we're probably mid-cycle right now in terms of kind of more of an accelerated piece of acceleration. So they typically last 18 to 24 months. I would say we're probably in that -- all things being equal, roughly halfway through that right now, Dan. So that's why we feel pretty good about kind of our visibility into this market for the rest of the year. We talked in Q1 our order book -- our backlog grew. Our order book was twice the rate of revenue growth. And the 2 biggest areas that we saw that strong order book were in pharma, which I just talked about; and then chemical and energy.

Okay, good, okay. Maybe we'll shift outside of chemical and energy for a moment here. We can always come back to it. So if we think about your other 3 -- other remaining customer segments before we jump in, I want to ask a question on CrossLab's. Which of those -- as you kind of think about the trajectory of the business exiting fiscal '21 and now into '22, where do you see like the most variant view in terms of like, wow, if X and Y went right, this could really go up? Or even on the downside. Just kind of give us a sense of which ones maybe, if we're going to point [ or scope ], we should take a closer look at.

Yes. I would talk about probably 2 of the 3. So the one that we haven't talked about yet, which is actually our third largest, is the diagnostic and clinical business. And that actually, I think, has been incredibly resilient, our pathology business as well as some of the other areas that we go through, our former Dako business. It continues to be very strong. It had an extremely strong first quarter. And I think that, as long as we continue to see kind of COVID behind us, if we take kind of the onetime COVID effect out of that, that has the potential to continue to strengthen throughout the course of this year. It's been fairly resilient because it is cancer diagnostics, but it -- and what we're seeing actually is it's higher than where it was pre pandemic now and continues to grow, so I think that there's opportunity there. I think the one area, on the other side, that's probably a little more sensitive is academia and government. We saw that in Q1 with Omicron. And we've got, I will say, modest expectations of that. It still was resilient, but we did see people going back to remote learning for a period of time coming out of the Christmas holidays here in the western hemisphere. And we saw that activity pick up, but if there is some other disruption there, that could drive it. Now the good news is that's less than 10% of our overall company.

Got it, okay. So instruments. LSAG had a really nice rebound in '21. I believe it was mid-teens [indiscernible] kind of up 6% to 7%. Discuss, kind of give us a sense on the backlog kind of order trends and just that 6% to 7%. What's the range around kind of what could kind of manifest there?

Yes, it's a really good question. The team has done a fantastic job. We continue to be very pleased with kind of the order intake and the demand there across all of our end markets. And the order book is -- continues to be extremely strong. The backlog is at the highest levels it's been. When you look at it year-over-year, it's quite a significant increase. And our expectation is the demand will continue to strengthen throughout the second half of this year. Now comps get harder because we started to see some very strong and robust numbers, growth rates last year, but the fundamental demand there is very good. And I think we have pretty good visibility at least for the next several quarters.

Interesting. And then maybe just one more here. Actually I did get a question from the audience which [ goes back ] to the supply chain that we talked about at the onset. I know you talked about supply chain improving on the last call. Just, I mean, has there been -- it sounded pretty confident, the ability to manage through these issues, but just maybe another comment on supply chain, kind of how you feel about any potential issues now with what's happening in Russia and Ukraine?

Yes. It continues to add a level of difficulty, but our team has been able to rise to the occasion in terms of managing it. I don't want to give anyone the impression that it's easy out there because it certainly is not, but it does seem to be getting better. But where our expectation is this is going to be with us through the rest of this year, but we haven't seen any impact to date in terms of inability to meet customer demand and haven't seen any order cancellations as a result of not being able to supply and so forth. So we are seeing higher costs, particularly with logistics now, and now that airline -- air freight is now a little different than it was before given that you can't fly over certain parts of the world and so forth, but the team has been able to kind of manage that.

Great. Maybe one on China: Guidance this year is for high single digits. The risk profile feels higher today than it's -- not just today but recently feels higher than if you look back 3 to 4 years, just given the trade tensions that's ongoing here, maybe the push for China to be more self kind of fulfilling in terms of their own product portfolio. Just what -- have you seen any change in your China business at all? And kind of what's your view on the risk profile and the growth rate that we should be expecting going forward in China?

Yes. I would say we haven't seen any material change. It is -- I would say it is more challenging probably than it was a couple of years ago, but the demand continues to be very strong. And in fact, we continue to make investments in China for China. And we just announced in Q1 an expansion of our facility in Shanghai to make locally sourced products. So you are seeing some of that for a certain part of the market. And what we see is our ability to actually continue to grow faster than the market. If I looked at our demand: Our revenue grew 3% because of the timing of the lunar new year and so forth, but demand -- or order book actually grew mid teens. So demand is still there. I think our products are critical to some of the key strategic imperatives of the 5-year plan, whether it be biotech, technology and some of these other areas around energy independence and so forth. And so -- and there aren't any good substitutes today for the products and services that we provide.

Great. Maybe I'll sneak one final one in just to end it, on cap deployment. I know you and Mike have been certainly pretty constructive on kind of incrementally looking to do more deals but not taking really any big swings that disrupts what's in place, but just give us a flavor. The balance sheet is obviously in great shape. Stock prices are down a lot. Like what's your appetite maybe for something? And what's the M&A funnel look like?

Yes. It continues to be very robust. I would say that expectations haven't moved as fast as valuations have yet, but we continue to be constructive on the opportunities that have the buy part of our build-and-buy strategy and continue to be on the lookout for opportunities to continue to build our portfolio across all of our end markets. We've been very successful. We've talked about an ability to actually maybe do a bigger deal than what we've had historically, but we feel very good about staying in our lane. We don't feel like we need to do a transformational deal or anything like that but certainly adding capability, whether it be consumables or content, in certain areas like biopharma and -- or cell analysis, as an example; or continuing our technology focus in places like next-gen sequencing and so forth. But we'll -- we're excited about continuing to deploy capital, and we'll do it but in a fiscally prudent way.

Awesome. And with that, we're a minute or 2 past but a great conversation, certainly really appreciate Agilent attending the conference. Hopefully, you have a great rest of the day with all the meetings. And same thing to the investors.

Yes. Thanks, Dan. Take care.

Yes, bye-bye.