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

Good afternoon, everybody. My name is Luke Sergott. I cover life sciences tools and diagnostics at Barclays. It's my pleasure to introduce Bob McMahon from Agilent. We're just going to kind of dive in here, but if you want to give a couple of points and then we can go into the questions.

Yes, sure. So it's great to see people in person after a long respite. So -- but -- the good news is Agilent continues to have a very strong business. And we just finished our first quarter with strong double-digit growth. And actually, our orders grew faster than our revenues. And so we see continued business momentum and are excited about our prospects going forward. I'm sure we'll talk about some of the growth drivers that we have as we continue to transition our business to more of those faster-growing areas. And so let's jump right in.

All right. Let's go through the macro. So give us a sense of the Eastern European exposure here, and where this is primarily impacted? Is it mostly your C&E business? Or is it -- I know it's still a small portion of your revenue base, but just trying to get a sense of where we should see any of the headwinds?

Sure. It certainly is a terrible situation there. And from an impact perspective for us, revenues in that area are less than 1% of our overall revenues. It is as you surmised a higher penetration into chemical and energy than our overall business. But we don't have any major factories in the area or major direct suppliers, and we haven't seen any impact outside the direct Russia, Ukraine, Belarus area in terms of change in demand. .

Okay. And so when you're thinking about the overall guide, what was your assumption for C&E growth? And has that changed at all?

Yes. So we were assuming for the full year high single digits for that business, and we haven't materially changed that. A lot has changed in the world. But given the backlog that we have and the strength and the momentum around the rest of the business, we haven't -- we are still within about our guidance.

Okay. And so -- and lastly, on -- so you're talking about -- you guys -- or you said last week about having roughly 5% exposed to spot prices, right? So is the rest of the business that in the C&E or any of that exposure to the energy side, is that from the overall supply chain? Or is that -- give us a sense of where the actual C&E exposure is on from the energy side.

In Eastern Europe or where?

Yes, Eastern Europe.

So most of that area is in the energy side, as you would expect, given kind of where that is. If I think about our C&E business more globally, we're much more diversified in places like chemical, petrochemicals and Advanced Materials. And if we think about some of the growth drivers there, certainly, we're in an expansionary cycle in terms of the replacement for a period of underinvestment around the world, and we're seeing that nice pickup in the kind of the refresh cycle, but some of the other areas around advanced materials in things like lithium batteries, EV or electric vehicles and the like, we think have an opportunity to continue the growth trajectory. These are things that are going to happen not just this year, but in the several years from now. And then you're seeing the semiconductor companies where we also have a leadership position in some of the instrumentation there, also investing heavily in kind of globalizing or regionalizing some of the wafer fabrication facilities and so forth. And so there's some things that are happening that haven't happened in the past that I think have opportunities to grow the C&E business outside of kind of the traditional energy vector.

All right. And then so it's a great segue to the semi side. So when you're -- give us a sense of the exposure there and how it shakes out differently from the actual discovery and the 5 Nm and below chip and more of the -- more secure?

That's a good question. What I would say is if we think about our C&E business today is roughly 20% of our revenues between our instrumentation and our service. Advanced Materials, which is semiconductors is a subsegment of that, it is about 25% of that. And I would say, it's primarily in the ongoing manufacturing and capacity as opposed to in the research side. So it is -- once these facilities are built and given the demand, that's where we would see our products being purchased and deployed.

Okay. And from a demand perspective? And what are you seeing there as the chip shortages continue, supply chain and logistics. Like how is that impacting the order rate in the backlog there?

Yes. So it's -- our order rate in that area has been extremely strong. As people are trying to build more capacity or develop more capacity even within existing facilities. And it has been accelerating over the last, I would say, months. Now on the flip side, we are dealing with also supply -- higher supply costs, but that's a relatively small piece of our overall raw material costs. But certainly, that has helped drive revenue and orders in the Advanced Materials area.

Okay. So next, I guess when we talk about inflation. So ability to pass on pricing, is there any customer set that you haven't been able to pass it on? Is there some type of contract agreement where it's a little more difficult to master service agreement? Or just give us a sense there where?

Yes. I think we've -- at the beginning of the year, we talked about having roughly 1% price realization with our list price being higher than that. And through the first quarter, we were ahead of schedule in terms of being able to recover cost. Now what we had done in our pricing is to look to cover our costs, not to be greater than that. Now if we think about, there are always going to be certain contracted agreements that have already been set up. We have that same thing on our raw materials, right? So when you see spot prices increase, that doesn't necessarily mean automatically 100% of your raw materials increase because you've got multiyear agreements. And so we have that as well. But that 1% kind of reflects all of that -- or factors all of that in. And like I said, through Q1, we were ahead of that schedule.

Okay. And then on China, with lifting a lot of the COVID restrictions. Give us a sense of what you're seeing as that really opens up and how that's factored into your guidance?

Yes. We continue to be very positive on the demand in China. Last year, we had very strong growth in China. Our first quarter grew 3%, but that was against some of the changes in Lunar New Year. But if we looked at our order book, our order book actually grew 19%, so high teens. And so the demand continues to be there, it continues to be strong. If we look at the next 5-year plan, our products and services actually help advance many of the priorities that the Chinese government is looking to do, and so we feel good about that. And in fact, we announced back in December an expansion of our Shanghai facility that we could produce more products there in China for China. And I think we're looking at this year to be another strong grower, growing faster than the overall company for the full year.

And from -- is that continuing to be going to be a source of upside for the year? Or how is that really shaking out versus your expectations?

Yes. So it's still early in the year. Certainly, the order book exceeded our expectations. Revenue was generally in line. Eventually, that order book will flow through into revenue. And so we feel pretty good about it. It has the potential. Obviously, there are -- right now, they're dealing with some flare up to COVID. That hasn't impacted our business at all. And so if things continue the way they do, at least from a demand perspective, that would portend potential upside.

Because you come out a little conservative at the start of the year. That's helpful. So let's turn to the biopharma. It's become a larger portion of the book here. And so when you think about -- can you remind us the exposure to the large and small molecule manufacturing, and then also on the discovery side.

Yes. So if I think about our pharma market, the pharma end market, it's our largest market that represents roughly 35% of our total revenue. And that 35% is roughly split 2/3, 1/3. 2/3 small molecule, 1/3 large molecule. And of the large molecule, that business has historically been growing much faster and has really been driving our growth. In fact, in Q1, it grew 32%. And that was on the back of strong 20-plus percent growth all of last year. That is primarily in the development side, less on the discovery side. And is a combination of both our NASD business, which comes out of our Diagnostics business, but also the instrumentation and services. And we've talked a lot about our growth in LC and LC/MS. The LC/MS side has really been helping drive that strong growth in the biopharma side.

And so you guys are uniquely positioned on the back end, mostly QA/QC on the production. And you've seen the COVID vaccines roll through the system. How are you guys modeling that rolling off going forward? Or how are you thinking about it?

Yes. A couple of thoughts there. I mean if we think about just the biopharma market in general, we still see very strong and robust growth. And so it's not dependent on any one type of therapeutic or one technology such as RNA. I also think that RNA has additional opportunities beyond COVID, different therapy areas. And so I don't see that the capacity out there is fully built out yet. In addition, I think there's opportunities for us to continue to expand our portfolio into multiple different therapeutic areas. We've been very successful in our cell analysis business as an example, which is really focused on cell and gene therapy. Primarily, again, in the development side as these products and techniques are going through the clinical [indiscernible]. Down the road, I think there's an opportunity to -- that's a different manufacturing than RNA-based manufacturing, for sure. But I think there's an opportunity where we can play in those down the road. So we think that this is an area that we continue to invest very heavily in, and there's faster growth coming out of COVID than there was going into COVID.

Okay. And so when you're thinking about the -- you're talking about the industry capacity expansion for COVID and as those lines roll off, the demand available to fill that, where do you see that coming from?

I see it coming from a couple of different areas. Cell and gene therapy is certainly one, and we look at our own NASD factory, which is RNA based. It's not mRNA, it's siRNA. But if I use that as an analog based on the feedback that we're getting from customers, just there's additional therapeutic areas that are being investigated for these newer technologies. That will replace first-generation biologics or old traditional small molecule that I think will continue to actually build out the additional capacity, which will allow us to play in those areas.

Okay. And then on biotech funding, this has been something made a lot of noise of on our side of the client and every management team we've talked to this whole week, nobody has seen or heard of anything that's really slowed down.

Well, I'm keeping the streak alive. So we haven't heard anything either or felt anything in our backlog. We -- when that -- one of the things that we do is evaluate our backlog very quickly -- very closely. We haven't seen anyone, haven't had delays in terms of changing from order or the funnel to orders, no RFPs that have been canceled or delayed that we've been a part of and no meaningful cancellations of our order book.

And is that -- is there a dynamic that you're seeing that's really being supported by the private funding side? Or is it -- it's a mix between public and private? .

It's a mix. It's a mix.

Okay. And so how -- as you think about that and you're recalibrating your backlog and you're thinking about it is how much time we have, really, if there's an extended downturn in public and then the private markets turnover as well, how long before you start to see that in your numbers?

Yes. What I would say is it would likely -- by the way, our vision is we don't think that this is going to happen. But if it's a duration question, we would probably see that in the back half of our fiscal year, given the fact.

That's helpful. All right. So let's go -- you continue to lean into cell and gene therapy, right? And the cell analysis business has been growing really well with you guys. You just did the Lonza deal. How big is cell and gene therapy for you? And give us an idea of the breadth of the portfolio. .

Yes. So the portfolio -- so I would say our cell analysis business, we've talked about before is roughly $400 million. And that's a combination of both cell and gene therapy and kind of research activities associated with that as well. Our portfolio continues to expand -- its primarily today instrumentation across a couple of different vectors within that. But we're also providing technologies outside of our cell analysis division to some of the cell and gene therapy companies to high-end [indiscernible] et cetera. But it's primarily on that cell analysis. And one of the things with Lonza is a kind of a collaboration agreement, they have this Cocoon platform that they've talked about, where we're working with them with our -- some of our cell analysis instrumentation to get closer to the manufacturing process. So one of the things that we believe is for cell and gene therapy just given the small manufacturing and it's almost one for one, the ability to move from offline QA/QC to ultimately in line QA/QC is ultimately where it's going to be. Now that's going to take many, many years to get there. So the first piece is how can you get QA/QC outline. And so the partnership with Lonza is to see how we can help support them as they're manufacturing that with their customers and actually help facilitate more -- moving it closer to the manufacturing line.

Okay. And then the NASD business, siRNA and where you plan on taking that or expanding that portfolio and then the capacity expansion coming online, how big can that business get for you from the new capacity bought online?

Yes. So we're really excited about -- this has been a strong growth driver for us for the last several years, really. And the team has done a fantastic job of being able to drive more capacity out of the existing footprint than what we had thought possible, which is great because of the demand that we're seeing. I would say that we ended a little over $200 million of revenue this last year. We've got 2 facilities, the original facility and then the new Frederick facility that you'll hear us talk about. I think we'll -- we've talked about growing double digits on top of that base this year, still on the existing capacity that we have, so call it roughly $250 million. And with Train B, which is the additional, the new line that's coming on by the end of this calendar year, that will add another $150 million worth of capacity to the NASD business. And we're in the process of evaluating expanding beyond that. I think we've talked about our order book for 2022 is already full, and we're taking orders for '23. So the new line already. And I think there's opportunities for us to expand technologies as well as capacity. And so stay tuned.

Okay. Give us a sense of what that -- or what the primary driver of that order growth is? Is it just for a particular indication? Is it volume based?

Yes, it's a great question because it's really 2 factors. I mean one, we're seeing just an explosion of additional clinical trials that are happening in this technology. And that's not new to this year, but it just continues to accelerate. And then also, what we're seeing is the technology is going after larger population indications. And so our Train B is going to be scaled to more commercial-sized volumes because what we're seeing is the first products that were approved using siRNA were orphan drugs or smaller -- where you have tens of thousands of potential patients. And so now what you're seeing is larger patients like cardiovascular disease and so forth, that can have millions of potential patients. And so we're seeing both a volume of different number of clinical trials, but also as these products are getting through the funnel, I think the opportunity for larger volumes of capacity is also there as well. And so our facility is, I think, uniquely situated because we have GMP grade, the ability to do GMP-grade materials at the gram level, but at the hundreds of kilogram level as well. Not all in one batch, but kilogram levels of product also at GMP level, and not everyone can do that.

Right. And so we're still nascent on -- like you said, we're still in the clinical development portion of the market and as that goes to commercial. How is the backlog and the order book filling up versus from a volume base by the biotech company? Or is it mostly being filled by a few players?

It's -- we have significant breadth of customers. So no one customer is dominating the revenue. Let me put it this way. We're not building Train -- our Train B for one customer. .

It should be more direct, I guess. Let's change gears here and let's talk a little bit about One Agilent. Any updates here on the commercial organization transition?

Yes. We're really pleased, Padraig McDonnell, who is running, running the One commercial team bringing together the DGG sales organization and our analytical sales organization. It's been -- they've done a fantastic job. I mean, based on the results that we had with our order book, we haven't seen any slowdown. And I think that this is still early days in terms of real upside opportunity. But if we think about what we're trying to do here is to kind of have a vision -- even a tighter view of the entire customer journey. And one of the things that we think is a real customer -- our competitive differentiator is our service organization. That's been growing phenomenally. They're the ones who actually touch the customer more often than the salesperson does. And so being able to have those 2 organizations tied even tighter together really helps us drive this customer lifetime value and this connect rate that we've been talking about. And so that is, I think, a real future upside in terms of being able to really anticipate what the customer needs and thinking about the customers in there, calibrating a machine, asking them, "Oh, hey, what are you doing? What are you looking to do?" Or, "I see you're doing this, maybe you can use this type of product." That closed loop circle is going to happen much, much easier with the One commercial organization and the fact that we believe that customers are going to want fewer people in the lab, more digital interactions. And by having us have this tighter connection between our service organizations and our various sales organizations, we're going to be able to respond to our customers much faster and grow our share of their wallet.

All right. And so when you're thinking about the margin impact of the transition in the long term, how do we think about the contribution here from going more digital and the digitization like is this?

Yes. So we're doing this to accelerate our growth on the top line versus more from an efficiency standpoint, there will be an efficiency play because now what we're able to do is, as an example, our consumables businesses, roughly 60% online today that's touchless. So it doesn't have to touch a sales rep or a customer service rep. And so you can imagine that, that will -- we're going to look for ways to continue to drive that number up, but then also bring in our diagnostics and genomics business into that, which will help drive some efficiencies. But it's more about the top line acceleration as opposed to a cost. We haven't built anything in our models, so that would be upside. .

All right. Got you. That's perfect. Lastly, I just want to sneak one more in here. I got to talk a little bit about the FX. You guys guiding to roughly about 2% to 3% headwind in the quarter. Any update there given the recent moves?

No, it's always dangerous trying to predict which way, that's why I'm in the seat, and not in somebody else's seat. But what I would say is we got natural hedges as well as do cash flow hedging. So if I look at Q1 as an example, it is greater than we had anticipated, but it had a minimal effect on the bottom line. So I would leave with that.

That's helpful, all right. That's all our time. Thank you.

Thank you.