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

Okay. Thanks, everyone, for joining us this afternoon. A pleasure to have with us the team from Agilent. We have CEO, Mike McMullen; CFO, Bob McMahon; from Investor Relations, we have Parmeet Ahuja and Mark [indiscernible] in the background.

So maybe you could kick got things off, Mike. It's been a remarkable 2 years not just for Agilent, but the spaces in being general. But I didn't think that Agilent was really, really strong. I mean, you've gone from strength to strength. If you could just recap what's happened, what surprised you? And then we can enter Q&A.

Sure, Vijay. First of all, I just want to say it's a real pleasure to be here today with you and your clients today, so thank you for the invitation. And as you mentioned, it's been a remarkable 2 years. Last year, we put up 15% core growth, margin expansion, and I think 32% EPS growth. And somebody have said, well, maybe we're just kind of a 1-year wonder, coming off of the 2020 was a business. But we've finished off just as you noticed recently, a very strong quarter to this excellent -- another excellent year for Agilent, 12% core for the year on top of the 15% growth rate the prior year. EPS up 20% on top of the 32% prior year, and margins continue to expand, in fact, in an inflationary environment. And I think this all really points to the execution capabilities of the Agilent team. We've always talked before, Vijay, which is you have to have the right strategy, the right team and the right environment. And I really believe we've got that right team that's executing superbly. You see the -- in the ability to deliver these kind of financial results. And as has been noted, the ability for this team to continue to deliver above peer growth. Yes, it's been a healthy market environment for the industry itself, but we're getting more than our fair share, outgrowing our peers and picking up market share across our core platforms. And as we look ahead to 2023, I'm sure we'll talk about that. But business is strong. In fact, I just finished up -- Today, we had our manager call, which we do right after the quarter. And I said, listen. As we look towards 2023, this company, this team have never been stronger, with multiple -- passed multiple shots on goal, maybe that's an appropriate term. Today in the World Cup environment, we've got multiple shots on goal for continued growth. As you know, we have different growth factors. Inclusive of what I'm sure we'll get into is our big play with NASD. It's just one of the stories we have going forward in terms of growth. So perhaps I'll just pause there. Enough of the advertisement for the Agilent team, and I'll go back to you, Vijay, to see if there's any questions your clients may have for us.

I thought the T-shirt was..

Yes, absolutely.

No, thanks for those opening remarks, Mike. And I didn't know you were a soccer fan, but building off of those comments here on this execution over the last 2 years. And for me, Q4 was really a stand out, right, at a [ 17% ] growth. This is well above your guidance, right? Clearly, when execution is part of it, it also feels like maybe a business momentum is picking up. What surprised you in the quarter as fourth quarter [indiscernible]?

Yes. I'm going to invite Bob on this as well, in case I forget some of the details. But as Bob put in his script, the actual growth rate was 17.5% around with the 17.5% core. This -- it really exceeded our expectations. I mean, we finished the -- we didn't limp across the finish line, so to speak, as we finish up the year. We finished very strongly. And I think it really speaks to not only the recovery we saw in our business in China, and we had all the deferred revenue from the prior quarter. We booked in the fourth quarter, but it was even a bigger story than that. I think the standouts for me were really the growth rate in Chemical and Materials, and I'm sure we'll talk about that. I mean, opposed to the 27% growth rate. And it really speaks to the -- what we're seeing is secular growth trends and aspects of our Materials business, which I'm sure we'll get into. Continued strength in the Pharma space and in the Food. I think we were surprised by the -- just the overall growth in Chemical and Advanced Materials. We knew there would be a strong growth, but even exceeded our expectations. Europe came in at 14%, not bad. And then it's hard to top a 44% growth rate in China. And Bob, I don't know what else you'd add to that -- the narrative on that?

No, I think you hit it well, Mike. I think the key was this was really broad-based strength across our business. Multiple end markets growing 20-plus percent really driven by, as you said, geography-wise, China and Europe. . But I think it's one of the things that I think sets Agilent apart is we do have these multiple growth drivers across multiple end markets. And certainly, when we're seeing some of the secular growth drivers, we're expecting these things to continue into '23 and beyond.

Just on that, Bob, was there anything on timing in the quarter? Was this shrink late in the quarter, or was the cadence consistent throughout the quarter? It's really -- 17.5%, that's a big number.

Yes. From a revenue perspective, we continue to have strength throughout the quarter. As we've talked about before, we certainly benefited from the backlog drawdown in the revenue deferral in China that was there. And we talked about this in Q2, started that recovery in Q3 and it continued throughout the course of Q4. And so I would say our strength was pretty consistent across the quarter. Now orders did have a slightly different, and we talked a little bit about that where we actually saw some orders earlier in the quarter than we would normally have. But generally speaking, the order pattern orders grew not as fast as revenue. But we started the quarter very strong and continued that momentum through the year -- or through the quarter, excuse me.

Bob, I think it's also fair to say that the profile of orders is more of a Q1 '23 story. .

That's right, that's right.

So it's not that the orders came in early, we shipped them off in the fourth quarter. And really, it's really a Q1 '23 story as customers were ordering to ensure year-end deliveries.

That's right. As a matter of fact, we ended the year with, as we mentioned, elevated backlog. So certainly, backlog that was higher than kind of historical levels pre-pandemic.

Understood. And maybe off those order comments that, Mike, 30% growth in LC, LC/MS, GC, GC/MS. Some of this, I'm assuming, this is China coming back, right? Is there like a number -- what the underlying was ex this China backorder getting further in the fourth quarter?

Yes, Bob, I think you've done the math on that. And as Bob digs through his notes for the actual number, the story I would tell you is our growth rate is more than just catch up. Yes.

Yes. I mean if you looked at this, certainly, China played a part of that. But if you looked at the U.S. and in Europe, the LC and LC/MS growth was very significant as well. So we firmly believe that we're gaining share in those markets across those businesses. So it wasn't just as Mike just said, a catch-up in China. We did see broad-based strength across all major regions in those 2 technology platforms.

Understood. And if I go back to your second quarter call, Bob, I think China was like a $55 million [indiscernible]. Some of it was recognized in that third quarter, right? How much of it flew through, came through and all?

That's a really good question. We had talked about roughly $55 million being deferred. None of those orders that we had in our books ever got canceled, and that was -- our premise was going to recover through, actually, through the end of the calendar year, and actually to the credit of our OFS or supply chain teams. They did a fantastic job of actually being able to deliver those even earlier than we anticipated. And we had a little about -- a little less than half of that in Q3, and the rest of it, so call it the $25 million to $30-ish million of it being delivered in Q4. So even if you took that number out of the China business, it was still a very strong print and it speaks to the underlying demand there.

Yes. I think in our 44% growth rate, only about a mid-single-digit piece of it was from the catch-up. So take a 35% plus on an apples-to-apples basis. And one thing I wanted to make a comment earlier, Vijay, on the question about market share gains. I think perhaps every CEO will claim that they're gaining market share. But I think we can say with reasonable confidence, we have objective third-party data. It's actually from the industry, and we're talking about the analytical lab industry, all the statistics. And I just shared those with the Board of Directors at our September Board meeting and every core platform across the board was green, both in units and dollars. So I can't speak for the other companies, but I can speak for Agilent. We have a lot of confidence in the strength of our core analytical lab business.

Absolutely. And I do want to dive into that, Mike. But before that, sticking on this China topic. Recent headlines here on unrest and lockdowns here in China. What are you seeing on the ground in China, and what is the guide assuming in fiscal '23 for China outlook?

Yes. So Bob, I think we'll start with the guide assumption. I think we're looking at high singles? And then with some impact in Q1 '23 headwind from the earlier occurrence of Lunar New Year. I've always said, Vijay, that I'd love to have a call one time where I'm not talking about Lunar New Year in Q1, but we just can't avoid it because in this year, it will actually be a headwind. So high single digits. What are we seeing on ground? Is this more of the same? Our teams have been through this. And what I will tell you is from an Agilent perspective, we've been able to given some of the experience we had over the last 2 years. We have a lot more shipping channels available to us within the country, as well we had invested in a lot of forward stocking locations. Now we'll get into that relative to working capital, but we have more in-country inventory. And then what that does, it gives us a lot more flexibility. Because as you know, when these lockdowns do occur, they're often in certain particular cities or parts of a city even. And then we have ways to navigate around that by these multiple channels. So obviously, it is something we're watching very closely. But I have to say, unfortunately, it's just more of the same of what we've seen over the last 2 years. So we've gotten kind of used to dealing with it. In fact, I think we've actually got better to deal with it, and we are hopeful that over time, there is a moderation in terms of the government's policies, but that's not my call at all. That's their call, so.

Understood. And back on the order trends, I think the cadence in the quarter was slightly different versus prior quarters. Was there any reason that drove the order cadence in the Q4?

Yes, because we told our customers order by September 15. One of them, I mean -- I mean, that -- I mean, it's that simple. If you want your product by the end of December, be sure to order by September 15, so I think it's that straightforward. I wouldn't want to put any kind of market dynamics tied to that, though. It's really how we communicated to our customers in terms of, hey, our supply chain, we've got record levels of backlog. Our supply chain team is second to none. But if you really 100% wanted to be there by the end of the calendar year, get it in by mid-September. .

Got you. And those year-end budget dynamics, Mike, is that -- should that benefit here in Q1 as well?

Yes, absolutely. Yes. So again, that really -- it's really all about a Q1 story. So had -- that earlier order pattern had limited or no impact on the Q4 '22 revenue print. It's all about Q1 '23 revenue. And one of the reasons why when Bob and I set the guide for the first quarter, you notice that the growth rate assumed there, even with this China Lunar New Year headwind, our core growth rate assumption is higher in Q1 '23. That's for the full year.

On the net order trends here, what -- you said orders through healthily, but I guess the growth rate was at below revenues. Can you give us some qualitative comments here, Mike, on how to think about orders versus backlogs? What is a backlog? What is an order? And how much visibility do you have?

Yes, happy to do so, and I know Bob will help me on this one as well. So first, I'd say that our backlog, the words we use is -- are elevated. So we go into '23 with higher levels of backlog than we historically have had as a company in terms of how we operate. I'd also say the quality of the backlog continues to remain very high, and that's very important. And how do we assess that? We -- are we getting any types of order cancellations? Very, very small levels, low levels of order cancellations. And our customers now asking for pushing deliveries out. We're not seeing that either. So we have an elevated -- we have a high-quality elevated backlog. So I'd start with that. And then typically, we have in the backlog of the product that's going to ship within the next 3 to 6 months. So it gives us good visibility to what the next 3 to 4, 5 months look like relative to how much revenue can we expect to get from this -- the current backlog. And with the elevated levels of backlog, our team's continued excellence in terms of being able to run down supply chain challenges because they're still there. It's, I would say, no better, no worse, but they're still there. But yet, we continue to find ways to make the revenue happen for -- I mean, the shipments happen for our customers, and you see it in our revenue results. And Bob, I don't know if you have anything else you'd add to that?

The only thing I would say is I totally agree with what you're saying, Mike. And I think actually, it's a testament to our team where we were able to -- I view being able to take some of that backlog down as a good thing, because it doesn't give our customers a reason to go elsewhere. And I think we've been able to show our ability to deliver actually faster than what we anticipated, particularly here in China to recover that deferred revenue faster than we anticipated. And to your point around the orders, the orders continue to grow and our backlog is higher than historical numbers as a percent of revenue. So it's not just looking at an absolute dollar amount, it's actually looking at it to the growth rates that we have today or the growth that we have in our business.

Understood. And Bob, maybe just to put some numbers around this, have you ever quantified on what the order growth was? And I guess I'll give you the context on that, why I'm asking. Clearly, instrumentation has been strong across the group. So there's been some share -- is this customers getting nervous about supply chain and perhaps pre-ordering? So that would [indiscernible].

Yes, yes. So we haven't -- and we typically haven't given kind of order growth rates unless there was kind of an acute reason. And what I would say is this is not a one quarter phenomenon where we saw kind of if you're going around, hey, customers are either pulling forward orders or we're seeing some sort of demand dynamic. We've seen this play out for the last 3 or 5 quarters, and so this is not a new situation for us in terms of having very strong demand that we're seeing from the marketplace. And nothing has materially changed in Q4 that would suggest otherwise.

Understood. And maybe one last question on this topic, Mike. Since you bought share gains, what some of your peers have said is, look, don't look at any single quarter, look at the 3-year CAGR. If the industry growth was mid-singles, you add some pricing and perhaps share gains or end market healthiness, and that's the right way to think -- frame this trend. Don't look at any single quarter. So what's been the instrument 3-year CAGR for Agilent? I don't know if you have those numbers, but if you don't, that's okay. [indiscernible].

I can tell you they're very favorable to Agilent. And Bob, I know Mark had put that summary together. I don't have it in front of me right now, but we're happy to look at it at the quarter. When I quoted the market share gains of [indiscernible], that's a rolling 4-quarter average which speaks to not being a one quarter phenomenon. And we decided not to put it in the earnings call script, that people seem to be moving away from this concept of stack growth. But our 3-year stack growth looks very, very favorable relative to our peers.

Yes, absolutely.

Yes. Understood. And I think there has been some chatter about Agilent, perhaps commenting on replacement cycles or pharma budget cycles, maybe slowing down, I don't know if slowing down is the right term. Maybe if you could just clarify what you meant with what you said?

Yes, absolutely. So I'll be on record saying the same thing. I've been in this industry for 30-plus years, and I would say that on a small molecule liquor chromatography side, we've been in an accelerated replacement cycle. And at some time, it will start to move towards normalization back to kind of the inherent long-term growth rate of that replacement cycle, which is probably a 5% or 6% kind of growth market. So it's not going to fall off the map. But at the same point in time, you have to remember, go back to -- in leasing cycles. 2018, 2019, we were talking about very low growth rates in small molecule because pharma had pushed a lot of its investments toward biopharma. Then I think they use -- they've been doing an accelerated replacement. So I'm not calling a transition, but I'm just saying that you should not expect 30% growth rates in LC to continue in 2023.

That's a fair comment. And then switching over to Q1 guidance here. It's interesting for -- when I look at your annual guidance, 5% to 6.5% in Q1 of 6.8% to 8%, it's a very front-end loaded guidance, so the annual seems fairly [indiscernible]. But my question is, is Q1 itself conservative, right? Because you guys just did 17%, 17.5%. Let's not ignore the decimal off of 11% comp. And I think the Q1 guide here, high singles off of high singles comps. Like what changed sequentially for Agilent?

I think I'll go back to how you did the write-up after our most recent Mr. Prudent. So we thought that was a prudent first guide for the year. I think that we do need to factor in a couple of things. The -- we have -- in the first quarter, we do have a headwind in China, which as you know is an important market for us. We still have in our first quarter compared with prior year, our Russia business. As you know, it's probably $50 million, $55 million headwind for a full year, but most of that occurred in the back half, second, third and fourth quarter of this year. So we got that kind of element of a tough compare. And I think there's this -- a view that we want to have a prudent first guide. I mean, let's go back to some of the conversations we were just having, right? All the COVID-19 lockdowns are not done in China yet. There's still lots of questions about what levels of budgets customers will set for FY '23. So there's -- I'm listening to power right now before this call talk about the economy and inflation. So there's still a lot of uncertainty about the overall macro environment. And I think we just wanted to make sure we didn't get too far down on our ski, so to speak. We know we can deliver these numbers and perhaps better. And if the environment is better than the back half that many people are projecting from a macro basis, that's all upside for our investors. And I would just say our business has never been stronger, and our team has never been stronger. And Bob, I think maybe I'll pass the deal. I think the other thing to point out is -- we haven't even talked about it yet is the 14% core growth rate of ACG services in Q4. As a meaningful part of our company's revenue, and if you think about predictability of revenue in '23, a lot of that revenue we know is going to be there because it's already under contract. And how do you [indiscernible] spend a lot of time on this talking about the [indiscernible].

The only other thing I would say is when we think about kind of what's happened in '22, there were a number of end markets that outperformed. The 2 largest being our 2 largest ones, which was Pharma and in Chemical and Energy. And what we've done is taking kind of a prudent approach and said both of those would be mid to high single-digit growers on top of very, very strong growth this year. And so if we think about this, if things continue to progress the way they have, there's, I would say, a big opportunity for upside there, but we want to see how some of these things are playing out. I do believe that there are some secular growth drivers. These aren't recession-resistant or immune, I should say. They are much more resilient end markets. And I would argue that Agilent is also a much more resilient business than it has been ever before, given some of these secular growth drivers in the markets that we play in, but also the business such as what Mike was just talking about, the CrossLab business. Which when you think about that, that's a recurring revenue stream. We've had the strategy of growing our attach rate. We talked about Q4 crossing over that 30% threshold for the first time ever. And if you think about what's happened over the last 2 years, we've placed a lot of instruments in our -- we've got one of the world's largest, if not the largest, installed base in the analytical space. With that strategy of increasing that attach rate, as these instruments come off of kind of their normal warranty, driving that attach rate has an opportunity to actually create even more of a strength for Agilent. And one of our key competitive differentiators is the breadth of our portfolio but also driven by our field service engineers and our support of our customers. And we've seen that play out time and time again, and I have the utmost confidence that we'll continue to be able to support our customers. And that would be a competitive differentiator for us in '23 and beyond.

That's helpful context, Bob. Mike, you did mention the macro. Anything on Europe? A couple of your peers have sounded a little cautious in Europe, a little bit of slowdown, calling out energy prices as a headwind. What is Agilent seeing in Europe, and what is the guide assuming for Europe in '23?

Yes, great question, Vijay. So we've been pretty transparent about this for several quarters. Continuing to signal a cautionary tone from a standpoint of Europe, particularly Western Europe, has been a watch area for us. We were just delighted with how we've actually been able to perform in Europe. And as we mentioned, we had 14% core growth in the fourth quarter. That being said, what we're hearing is a cautionary tone, particularly from some of our larger chemical accounts and pharma accounts who are working through right now their plans for '23 to say, how do I deal with the fact that I need to have -- support my ongoing operations with higher energy prices? So that dynamic is happening right now. At the same point in time, we are seeing some new growth vectors in Europe as well. There's a -- that's a negative side of, if you will, the energy piece, right, which is -- it's putting cost pressure on some of our some of our customers. At the same point in time, there's a lot of new investment going into renewables, alternative sources of energy. You're hearing about the green hydrogen, green valley -- green hydrogen valleys, they use our tools. So as Bob mentioned earlier, so you may see some pressure on larger accounts in terms of how aggressive they would be on replacements. But yet, we're also seeing some level of expansionary. So clearly a watch area for us. And I think that's why we haven't been super, super aggressive for the guide assumption around Europe, which I think, Bob, was maybe mid-singles?

Low single. Low single.

Low single, low singles, yes.

But I do think if we think about kind of the chemical and advanced materials market, some of our products actually are helping improve energy efficiency in the labs, but also the output of the labs. And so what we're seeing here is some of these secular growth drivers. We talked about semiconductors and some of the onshoring or reshoring of some of these key critical infrastructure industries. We're seeing that play out in Europe. But we're also seeing it play out, obviously, in the U.S. as well. And that's a business that we think will continue to play out over the next several years. But to your point, I mean, Europe has been the area that we continue to watch as kind of the first signs, but we accelerated our growth in Q4. We're suggesting a low single digit here just given the tough comps that we're having and being -- recognizing that energy costs are higher there. But I think we feel pretty good about the resiliency of our business in Europe.

Understood. And I do want to dive into your end markets in a while. But before we get there, Mike, just one on pricing and FX, perhaps for Bob on FX. Pricing, is that 300 basis points of pricing contemplating a mid-year price hike? Or is that just the view that we have as of today?

That's based on a normal pricing cycle that we would expect to implement next year. And we ended this year at a little over 3% for the full year, so this is a fairly consistent number for next year as well. Now what we did this last year in FY '22 is we actually accelerated throughout the course of the year because we were "kind of catching up to some of the costs or the inflationary aspects". And I think we've now gotten into a better cadence. We're kind of anniversarying some of the significant increases that we saw in the inflationary side. So our expectation, our guide incorporates roughly a 3-point tailwind to -- for price to cover our costs.

Understood. And then on FX, I think rates have improved slightly as of the last guide, 400 basis points impact on [indiscernible] line. Does Agilent hedge, or how should we think about that?

Yes. We do hedge. It's a great question. We hedge. We typically have rolling 12-month hedges. We don't have a perfect hedge because we can't hedge all of the -- all of currencies and so forth. You do have a natural hedge, obviously, given our expense base. I would say right now, as we looked at the way that things were rolling off, our -- we're about 25%. We were able to offset about 25% of it. This last year has been about 50%, so you can see kind of the hedges became less effective as they started rolling off. So if the headwinds become less so, that certainly would be a net positive for the company.

Okay. Okay. That's because of how the hedging programs roll off?

Yes. Yes, that's right.

Understood. And then maybe moving over to the segments here, let's start with the biopharma. Mike, really strong, up high teens in fiscal '22. I think Q4 saw some dynamics here, small molecule versus large molecule. But maybe give us a sense on how the year progressed on those 2 different end markets, I would assuming [indiscernible]?

Yes. So -- and I'll tag team with Bob on this. So overall, we were delighted. Pharma has been putting up strong growth rates was for -- double-digit growth rate for a number of quarters in a row. I think we finished -- I think we delivered 20% for quarter and close to that for the year. I think the biopharma piece was the faster-growing portion of that business, probably in the low 20s for sure. And we reported roughly a similar number of small and large molecule into Q4. I wouldn't read anything more into that. I mean, this is one quarter. We -- as I mentioned earlier, we do see small molecules continue to have growth, but we see the large molecule slash what we call biopharma in this conversation will be the faster-growing segment. We've put a lot of effort in terms of building new capabilities in this around our LC and LC/MS platform, but the Agilent story is a lot bigger than that. It's also where we're pointing a lot of our cell analysis product. And then as you know, it's where we report our NASD numbers. So I think we expect the biopharma to be a continued source of growth for the company, and it's a real priority for us for investments for growth. And -- but I think the overall assumption for Pharma was about high singles?

That's right. Yes. And maybe to add, Vijay, some commentary. As Mike was saying, for the full year, Pharma was 16% core. And as Mike said, the biopharma business for the full year was probably in the low 20s. That represents a little over 35% of the market, so you can kind of give a sense for kind of where the small molecule was. It's still very healthy. And as we think about that going forward, that high single-digit growth for next year, fundamentally, we believe that biopharma will continue to be very strong. We're more on the development and downstream area of that, not necessarily in research. Although we have a play there, but most of our business is in development. And we're still assuming high single digit to double digit there. And so we were talking about earlier around the small molecule, that's probably mid-single digit. And this -- we're coming into that normalization of that replacement cycle, but we still expect -- there is always a replacement cycle. And I think if we think about other areas of the business as an example, I think we're earlier stages of replacement cycles. I'd say GC and GC/MS, where I think we are the undisputed leader in those markets through the advanced materials activities that we were talking about earlier.

Understood. And just one more question on this topic. What does that means exposure to a small biotech and CROs?

Fairly small. Actually, throughout the course of '22, we continue to add customers there. And I know there's been a lot of this talk about kind of the funding environment there. We haven't seen any of that dynamic or even some of the stocking dynamics that have been kind of talked about in this business. And typically, these are customers that have a smaller footprint, and so even though they're maybe culling down programs within their pipeline, they are continuing. They still need a [ mass spec ], so -- and so we continue to grow that business. We think it's a nice business, but it's a relatively small piece of our overall biopharma.

And Bob, it's really more about the future, right? We'll grow with these companies over time. Relatively small impact on today's current business, but it's really about building future business.

That's right.

Understood. That's helpful. And Mike, maybe switching gears to CAM, this business, clearly, it was an upside driver in fiscal '22. And I think this is the one which historically has been seen a cyclical end market, but I suspect the mix has changed. Can you just give us a sense of what the current mix for this business is versus the last cycle?

Yes, so you're exactly right. And Bob and I have been trying to tell the secular growth story element of the CAM since the early part of this year. And we actually made the change to delete the word energy from it not because there's concern about energy, but it really represents a much smaller piece of the business now where, say 5 years ago, it's probably close to 30%. And now, it's 10% to 13%. So it's a relatively small part. Its still we do there well when they're investing, they're a leader in that space. But what we've seen is the mix really has changed much more to the Chemicals and Advanced Materials. If I was to give you some rough numbers, I'd say it's 10:60:30. 10-ish kind of percent in Energy, 60-ish in Chemicals, about 30% Materials today. Whereas back in FY '18, they were probably close to almost 30% on the Energy piece. So -- and why is that important? Because that has historically been the more cyclical element of the business. And as Bob mentioned earlier, we're not recession or economically cycle-proof, but were more resilient because, in particular, we think this Materials segment, there's a lot of new [indiscernible] drivers there, which is what do you believe about the future of electric vehicles? Well, if you believe in the future of electric vehicles and you think that we're in the midst of a major revolution there, and you can understand why we're so excited about being able to provide tools to lithium battery market in terms of ongoing production, R&D work, et cetera. We talked earlier about all the concerns about the renewable -- I mean the cost of energy. Well, there's a lot more work going into renewable energies in terms of R&D. And then regionalization of supply chain, particularly in the semi space, have become matters of national security and money is being allocated. We've seen some of the first orders start to come our way for the Chips Act. So the companies are investing in both the private sector but also government in terms of regionalization of supply chain, and this plays right into the strength of Agilent. So listen, that segment is not completely recession proof, given my earlier comments about some of our large chemical companies and maybe what they could do in terms of slowing replacement equipment. At the same point in time, there's new drivers that haven't been there in prior cycles, and we think they're real.

Yes. I would just add one other quick plug on that, Mike, because not only has the composition changed within segments, Vijay. Also, this was and it still is a heavy instrument-focused end market. But increasingly, what we're seeing is more of the consumables and services side. And so you're not only moving to some of these secular growth drivers, but you're also adding more of the service component to it to still largely -- it's more developed in the Pharma side. But increasingly, what we're seeing is also that attach rate and the discussion is bearing fruit in the C&E side, CAM side as well.

Understood. And just on the positive drivers for Mike. You mentioned the chips Act. Anywhere to size what the Chips Act means? And what does Agilent in play here? Is this on the R&D side or the material scientists that -- just give us some sense on what it means.

Yes. So it really is focused in both the R&D and process improvement side where customers may be looking to optimize the production out of existing fab, but also eventually, it also goes into the support of the actual chips themselves. We're looking at chip purity and our ICP Triple Quad [indiscernible] in the clean room. I think also the very interesting thing is it's not just about the fab itself as the opportunity. The fab will -- like a TSMC or like Intel will actually -- also, if they select Agilent as their supplier for chip QA/QC work, they're going to -- all the upstream suppliers of chemicals and other things, that elements that go into their production process, that whole upstream piece will be specified on us. So you win the fab, you also win the upside. We haven't yet sized the opportunity. We're still trying to figure that ourselves from a standpoint of how big this could be, but what it does point to is new drivers. And we are seeing, Bob, is -- I think Bob, we already saw some initial orders in our book already.

That's right. That's right. .

Understood. And then maybe here in NASD, and it's part of biopharma. That business, I know Train B is starting here. But when I look at our CapEx, Mike, I mean, CapEx is [indiscernible]. Is that CapEx, $300 million CapEx, assuming that you can see a start-up here? Or how should we think about?

We have nothing to announce, but we're -- we made it very clear that we're interested in adding other letters from the alphabet into our repertoire production lines, and we want to make sure that we don't lose any ground in terms of being able to capitalize on the market. So as you know, we just finished getting the full book of business and up and running on what was Train A 18, 24 months ago. Now we're pretty close to launching our Train B, which will come online, as you mentioned earlier, Vijay, in '23, and then we're working through our expansionary plans right now beyond that.

Yes. And Vijay, to follow on Mike's point, the $300 million that we have today is to finish Train B as well as other capacity expansions that we have within our existing business. So as Mike said, stay tuned on additional capacity, and that would probably be incremental to our forecast.

Yes. I mean, it's really a good point, Bob, because we haven't really talked about, for example, our Genomics business and the NGS business. I mean, one of the things we're doing is bringing on more production capacity for supporting our NGS solutions around TapeStation and our Magnis product, so.

Yes.

Understood. And what is the guidance you made for NASD growth, Mike? Because your capacity constrained for a big chunk of the year, and you just grew high 20s in fiscal '22.

Yes. I don't think we've actually put out a number, Bob?

But I think it's safe to say -- yes, low double digits. And as you can imagine, it's probably more back half loaded as Train B comes online, and -- but we're very optimistic that demand is there. And our expectation is that we would exit the year with Train B effectively at full run rate capacity.

Understood. And then, Mike, one on the oligo part of the market. I know it's a smaller piece for you guys. Some chatter about pricing compared to landscape. Have you seen any change in pricing behavior in that market, on the oligo part of the market?

You mean on the REO side? No. In fact, there's one company out there that's been continuing to be very aggressive on pricing and seems to have a strategy of gaining share via price reduction. So we haven't seen any change in that behavior. .

Understood.

So it's causing some pressure in the market. .

Understood. And how is [indiscernible] managing that, Mike?

Well, we keep continuing to drive efficiencies in our production process, so -- and it's to keep the margins up. So you can see we're -- and then winning deals. And at the end of the day, it's -- this is still a best-in-breed marketplace. And it's not just about the technology, but it's also about your ability to support the customer. And in our case also, when I say support to customer, this also means what do you have to offer in addition to an hour ago? And in our case, we have the automation capabilities that go along with it. So our customers, our high-volume customers, under incredible pressure in their labs. And if we can walk in there with a solution which is highly automated and can lower their cost per analysis, we win. So it really is continuing to drive efficiencies in our production process but also winning more business playing to our strengths, our unique strengths we think we have.

Understood. And maybe one last question here, Mike. Agilent has been acquired on the M&A front. This is -- I mean, this environment, it's quite interesting given where valuations are. How should we think about deal and deal size for Agilent?

Yes. So you probably want to hear anything new from me in terms of the deal size. I mean, we've said we can do multiples of the biotech deal, which is our largest deal to date. It's probably maybe in the $4 billion to $6 billion kind of range. What I would say is we described it inside the company, and I think I've used the word externally, a build-and-buy growth strategy. So a buy is still an enabler for us to get more growth. I would ask you to think about optionality relative to Agilent. We don't have to do it, but when we do it, it really can be a nice value optionality for our investors. We think the environment is more conducive to -- for deals. But on the positive side, there's the valuation expectations have come down. So we remained in our lane last year not willing to overpay for companies, so I think there's obviously been an immediate direction in the public market. Increasingly, private companies are now starting to come to grips with what their company may be worth. The negative though is you've got to -- cash is no longer free, so you got to pay for the money you borrow. But I think what that really points to, it really plays to our strength which is if you do the right deal, high-quality deal, we've got the balance sheet that can support it. We're not talking about having to pay down debt, we're talking about how can we deploy capital. So I think we're operating in a position of strength. We just need to make sure we do the right deals for our shareholders.

Fantastic. I think with that, we're at the end of time. Mike, Bob, thank you so much for spending this afternoon with us.

You're quite welcome. Thanks for the invitation.

Thanks, Vijay. Yes, bye-bye.

Take care.