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

Terrific. Great. Welcome, Day 2 of the TD Cowen Global Healthcare Conference, 46th Annual. I'm Dan Brennan. I follow Tools and Diagnostics. Pleased to be joined here on the stage with the management team of Agilent. To my immediate left, I have Adam Elinoff, who's the Chief Financial Officer; and to his left, Tejas Savant, who's VP of IR. Gentlemen, welcome. Thank you. Great. I'm going to turn it over to Adam for a brief introduction, and then we'll dive into Q&A.

Sure. So first of all, thank you for having us. Really excited to be here. We had a solid start to the year with high single-digit growth in our three largest end markets, which translated to Q1 4.4% core growth, which unfortunately was impacted by winter weather in the U.S., and that was during the last week of the quarter. Adjusted for the weather, core revenue growth, operating margins and EPS all would have been above the midpoint of our guide. And so as I mentioned, our three largest markets had strong growth, and that's Pharma, CAM and Clinical & Diagnostics, all with favorable secular tailwinds. And so in Pharma, you have MFN Clarity, you have GLP-1s ramping, as everybody knows, siRNA modality taking off and then the reshoring, which we have coming in 2027. Clinical & Diagnostics, we have an aging population and then unfortunately, increasing incidence of cancer, which drives test volumes. And then on CAM, we see strength in the semis. And that's really driven by AI and memory shortage driving -- which is driving the current semi demand and then also there's reshoring happening there. The next thing I talk about is our innovations, which are really resonating with our customers. That's the Infinity III, the Pro iQ LC/MS, Altura Bio-inert columns, and they're all driving share gains across our business. So per the ALDA data, Infinity III is driving gains in LC across all major geographies. The GC platform is a definitive leader, and that's just starting its replacement cycle. So that's exciting. And then the Altura columns are getting a fantastic response from our customers. And then, of course, we're the market leaders in siRNA, and we have our unique capabilities at BIOVECTRA. So all-in-all, I just want to highlight here is that we're really set up for success. We have our innovative products and services, which I've already mentioned, plus more to come this year. We have a superior commercial team with strong connections to customers, which is a unique advantage for us. And then we have solid financial discipline, which persists. And lastly, the Ignite Operating System, which really brings it all together. So I continue to be very confident, we're going to be able to deliver our full year guide, which is 4% to 6% core revenue growth, 75 bps margin expansion at the midpoint, 10% operating profit growth and then EPS growth of 6% to 8%, which would be 9% to 11%, excluding the tax-related changes that happened this year. So overall, we're in a good place and very excited.

Terrific. All right. Well, good intro. So maybe just kicking off with the growth outlook, 4% to 6%. I think, you've talked about on the fiscal 1Q call, excuse me, that you've got the same view of the end markets, but there is a kind of underlying growth acceleration, at least when you do like a stacked growth analysis in the back half. So what kind of drives that growth acceleration?

Yes, it's interesting that everyone called that on the call. And there's the positive business factors, which I just talked about in the preamble. But it's also very -- it's in line with our historical cadence through the year. So if you look at this year, we're about 49%, 51% first half, second half, and that's aligned with our historical bias. And that's really just a function of how fiscal calendars and the spend patterns of our customers.

In Wall Street and...

What I'd say there, Dan is, in the last 10 years, there's only been one occasion where the second half was lower than the first half for us. So this is really very typical sort of revenue split, if you will, between the first and the second half of the year.

Okay. So I was going to say Wall Street kind of intoxicated on beats, right, momentum, upside surprise, obviously. So when you think about the guide, which customer groups or product areas would offer the big swing factors to the guide, do you think?

Yes. So there's three. And we've been highlighting since the beginning of the year. One, improvement in spend on the SMID-cap biotech; two, our A&G customers; and then three, China. And so I'll just walk you through those on the dynamics we're seeing in the market right now. So in small and mid-cap biotech, we have relatively small exposure, but we're encouraged by what we see in the marketplace. And now that has to translate into customers actually spending. But if you look at it, the total biopharma financings were $11 billion in January, which is a record. It's a 2-year high. We have a looming patent cliff, which is driving M&A in large-cap pharma. And those factors should start to drive a ramp in SMID-cap spend. That said, that hasn't happened yet, but we have the green shoots there and the underlying drivers are there. A&G growth could come in better than our low single-digit decline. And that's really going to be driven by a couple of things. And what gives me hope there is the NIH budgets. So if you look at that, that came in in-line with the Street expectations, which were flat. So that came in as expected. And then there was the NIH -- or excuse me, the court case with the 15% capital struck down. And so that should also help drive incremental spend in A&G. What we're seeing in the marketplace is that has yet to filter through as the labs are continuing to be conservative in their spend, really focused on kind of continuing core operations before making incremental investments. That said, we anticipate that, that would change over time and that would drive some upside. The last piece is China. And so we saw strong results in China in the first quarter. So that was 6% year-over-year growth. Part of that is driven by the Lunar New Year timing. But the other piece that excites me is, there was a small GACC stimulus that happened, and we won an outsized share of that, and we're the leader in multinational companies. And so that factor there, is a good sign. But then if you think about the SAMR stimulus, if that comes later in the year, we believe we're well positioned to win more than our share.

Okay. Maybe moving over to capital deployment. Obviously, a question you got on the call, and I'm sure you get meetings. Your balance sheet is in great shape. Padraig and the management team have been focused on a willingness to go bigger and an interest in doing deals, right, automation, informatics, two of the areas of automation software. But this idea of a large transformative deal has caught certainly investors' attention just to understand kind of how big you guys would go and what the financial implications would be. I know, Adam, on the call, you talked about being very, very disciplined.

Yes.

Which there, there was a debate, great, that makes sense. They're really not going to take a big swing. But at the same time, you guys could be very, very, very disciplined and do a big deal and you think it's the right deal. So long way of saying, how do we think about M&A, the size of the deal and the financial discipline?

Sure. That's a great question, and we've been getting it a lot. So the first piece is, and I always start here because it's really important, is our capital allocation priorities aren't changing. So we're going to prioritize investments in growth through internal innovation, M&A and then strategic capacity expansion. And then, we're going to continue to return excess capital to shareholders, and that's in the form of a growing dividend as well as share repurchases. So the other piece I called out in the call was we like our organic business, and we don't require a transformative deal to achieve our growth ambitions. That hasn't changed. We recognize that transformative deals come with their own unique complexities, including more challenging integrations, which drives an even higher bar. So, while we have a wide aperture, transformative deals are very few and very far between, and we're not currently prioritizing that type of opportunity, okay? And then what I would say, though, is as we look at M&A, we're going to continue to maintain our disciplined approach. We're going to make sure anything we do is aligned to our enterprise strategy. We're going to focus on growth opportunities where we have the right to win, where we can successfully integrate them and that we pay the right price, which what that means is we're delivering cash-on-cash returns above our hurdle rate and then it's adding incremental value to shareholders. And then I can just go a little bit further, if you don't mind, the types of M&A targets we're looking at. So we're really focusing on increasing our services and our recurring revenue mix, so software, automation, specialty CDMO niches we're looking at as well as high-growth adjacencies. And then we have a strong platform. And so this focus on M&A is not about just doing something to get bigger is we have that strong platform. We want to -- we know that we can leverage it to drive incremental growth for shareholders and add incremental value for customers if we use that platform. And then I'd just conclude with we're also making incremental investments in our internal growth and innovation, driving productivity, and that's really around digital capabilities, AI, expanding our CDMO capacity. So we have Train C and D coming online next -- early next year in Colorado and then our consumables manufacturing capacity. And then we continue with all of this to, in turn, return excess capital to shareholders. So it's not a must-do. It's, we believe we're the right buyer and we have the right platform to make acquisitions, but we're going to be very, very thoughtful about it.

Terrific. And maybe just one more was -- is the initial interest or kind of commentary around interest in a big deal or willingness to do a big deal like does that emanate from -- I know when I spent time with Padraig traveling Ignite, and he felt really good about what Ignite allowed Agilent to do. I mean, you guys are in a good position. A devil's advocate would say, "Oh, things are wrong with the base business or they're not feeling as confident about the next 5 years and they need to do a big deal." Just maybe just the genesis of the interest in a big deal, kind of how you would characterize that?

Yes. No, it's a great question. I'm really glad you asked that question. So one, I do think we feel confident in the abilities of the company, the ability to integrate through Ignite. But that said, we don't need to do a big deal, number one. And number two, I think what we're doing and what we're saying is we're keeping a wide aperture, because we're looking. And I think as investors and shareholders, you'd want to make sure that we were looking when things came our way. But that said, we don't have a need to do it at all. And like I said, it's not a focus or it's not a priority right now. And so I think while it's been a hot topic, I think just having a wide aperture is what's causing the noise.

And Dan, the other thing I would add is like, look, we both know that it's a highly fragmented industry, and there's pure economies of scale over time, right? So it's really about balancing what makes sense for us at this point versus kind of like being able to be a consolidator in the space over the long term, right? And that's something we are very clear right about. Like Adam just mentioned, I mean, there's pros and cons with every asset that we look at. And so that's really how we want to, sort of, stay disciplined, stay focused with that sort of long-term theme of consolidation.

Okay. So maybe just on some of the segments, maybe Pharma, the LC replacement cycle, Adam, you called out a couple of the momentum that you're seeing with some of the products. still sounded like we're early in that. So how would you characterize the ability to continue to grow high single-digit growth for that LC?

Yes. I mean what I'd say, Dan, is a couple of things, right? So as you mentioned, really good momentum on the LC side, high single-digit growth, outperformed some of our peers out there as well in the quarter. And really, I mean, as we think about the replacement cycle, it's three things, right? I mean, there's an extended period of underinvestment, meaning you have a lot of older fleets out there. The second piece is CapEx conditions are turning more and more favorable as time goes by and normalizing, if you will. And then innovation, right, that comes with our Infinity III. I mean that really kind of like pushes some customers over the edge as a compelling reason to upgrade. And so as those three come together, that's really what drives the cycle for us. Now Padraig, he's not a baseball guy, so he likes to think in rugby terms. So he kind of talked about being in the first quarter. I mean, the baseball analogy would be probably like that third inning. That's kind of where we are. And the way to frame it would be, think of this as 200 to 300 basis points of incremental LC instrument growth relative to that low to mid-single digit, but with an opportunity to be faster than that amount like in the near term here at this stage of the replacement cycle. So there's a long runway to go. And on that point, look, I mean, we also have a GC cycle, which is shallower slope, longer duration. So it's really a dual-pronged exposure to the replacement cycle dynamic here for us.

And maybe just on NASD, Adam, we talked about the upside drivers. You mentioned the three. NASD wasn't mentioned. Just we had a pegged around 10% growth in the first quarter. I know you're talking about mid-teens. Just like what was the number in 1Q? And what's the visibility on that mid-teens growth for this year?

Yes. So we don't split out our CDMO business, but the CDMO business as a whole was low double-digit growth. And then as we think about the year, one, the cadence of the different orders kind of roll through at different times. And so the nature of the two of the NASD facility, that's largely booked through the year, and we're really excited about that and keep getting incremental demand. So we're very excited about where that's going and with the new Train C and D coming online. It was a perfect investment at the perfect time. And then BIOVECTRA, which has more of a clinical SKU ramps through the year. And the cadence of those orders have a different pattern than NASD.

Okay. And then in terms of the sales funnel there, I know when I travel with management, it sounds like the extension of the therapeutic indications that are NASD is being -- or that modality being used for could actually drive a decent potential acceleration in growth in the coming years. How do you think about the sales funnel on NASD as we look out beyond this year?

We're very excited about it. I mean, look at it in the clinical world of the number of siRNAs out there, and we're clearly the leader in that modality. So we're very excited about that funnel. And because we have a leadership position, because we built the extra capacity, we're in a great place to capitalize on it.

Okay. And kind of risks, I know the day that there were some news, I know Tejas and management team sent out like a nice script on enzymatic ligation. But just how would you -- do you still get questions on that? Like how do investors get comfortable with the risk there?

Yes. I think as people sort of digested the news, Dan, like initially, there was a little bit of misunderstanding, if you will, around whether this is a threat for our NASD prospects longer term. Actually, I think it's quite the opposite. Frankly, I mean, what enzymatic ligation does is that it allows Alnylam or other customers eventually to really tap into larger patient populations, right? So this is a good thing for the industry as a whole. And as Adam just mentioned, we are the primary, sort of, CDMO vendor of choice in siRNA. Now part of it is capacity, but part of it is our phenomenal track record in siRNA in terms of just the clinical stuff, but also being able to grow with our customers and help them commercialize successfully. I mean, at this point, we are booking work in '27. I mean Train C will come online and we have a good line of sight to how we're going to fill that up over time as well. In terms of how -- what role we'll play in that enzymatic ligation world, I mean, there's a couple of things to really sort of take into account, right? So the first thing is that for the current, sort of, crop of molecules out there that are already commercial, like enzymatic ligation is not going to supplant like solid-phase synthesis. The second piece is, it's not going to affect any of the manufacturing protocols that Alnylam has in terms of their commercially launched drugs and is only applicable to their future clinical programs. And those are all -- essentially, this is a late '27 and into '28 dynamic. And then probably the most important bit is even when they're doing it via enzymatic ligation, they still need block more manufacturing, which is something that we're going to help them with. Now there have been certain questions over the past couple of months around, well, are the economics the same, right? And the answer to that is there's a couple of things that I would point to. It's still early days, but there is kind of like technical know-how around being able to reduce the cost structure in block more manufacturing. And then the other aspect is if you do it at scale, there is no sort of theoretical limit on how comparable the margins could be on that process. So we feel very confident in our role as a key supplier even in that sort of enzymatic ligation world.

Okay. Maybe just rounding out a couple of questions on Pharma. So GLP-1s, I forget like is that quantified? I know one of your key competitor quantifies the impact. So just remind us the size of that business. And how does the move to orals impact that? We did a big report on GLP-1s, and we would think that would be favorable to you guys.

Yes. I mean, so a couple of things. So just for context, Dan, I mean, GLP-1s last year were about $130 million in revenue for us. Again, dual-pronged exposure there, about half of it is on the analytical tool side. The other half of it is BIOVECTRA on the CDMO side of things. GLP-1s, very solid 50% growth in the first quarter here. And really, I think the way we think about it on a sort of that -- your question on orals versus injectables, we are modality agnostic, right? I mean, if you think about sort of where we play there, I mean, essentially, on the injectable side of things, they rely on our tools for characterization, for QC, for lot release stuff. And you think about sort of on the oral side of things, the impurity analysis, the solution, solid dose QC stability, automated analytics, all of those things play to our strengths. Now I think it's a little bit early to put a finer point on what that steady-state mix will be between orals versus injectables. A little bit of it depends on who you ask. But from our perspective, we are actually well positioned for any combination of orals versus injectables as long as patient populations continue to ramp, right? And I think people forget a little bit in all the noise around this that obesity sort of GLP-1 penetration rates in the obesity indication are still pretty low, right? And the other piece is the labels will also expand over time if the data holds up, right? And as those two things happen, whether it's orals or whether it's injectables, we'll stand to benefit in either scenario.

Okay. Maybe jumping over to the chemical side of the business. You had a solid first quarter, 9% growth. You talked about this Advanced Material 20% growth. And then, Adam, you alluded to the semiconductor business. Just kind of -- this came up on our marketing trip with you last year. A few investors called out. Just kind of walk through a little bit of -- I think this is spectroscopy. Like what are you serving in semis? How meaningful is that? And what kind of a growth driver could that be?

Yes. So just as I said at the beginning, one, we're very excited about it. We have a leadership position. Our spectroscopy and our GCMS tools are critical assets for the semiconductor industry. We're suppliers to ensure the quality of the raw materials, and that helps them drive yields. And then we analyze the fabrication process for chemical variants. So we're important in the manufacturing process. And obviously, as the demand expands and that pushes demand for our products. And then there's the ongoing reshoring, which continues to help us. So as there's a push to localize manufacturing in semis and a push to -- and there's that continued shortage, that helps us, because there's a continued demand for our atomic spectroscopy tools. Over time, we expect it to grow and be a continue -- an important part of our business. And we're the #1 in the CAM market. So once again, we don't guide to our semiconductor growth specifically, but we assume CAM will grow in the mid-single digits for the full year.

Right. So even connected to that, you grew 9% in the first quarter. Is it comps? Like what caused the deceleration in the mid-single?

I guess it would be -- there's a couple of things. So -- and I don't know that we're necessarily calling for a deceleration. I think we just had a very strong Q1. Some of that is also related to the Lunar New Year and the timing in China, right? The other piece is just the nature and the timing of when our customers do their buying. So we're going to continue to watch and see how it goes, but we continue to be excited about it.

Yes. I mean I'd say, Dan, a couple of other things, right, just to frame it a little bit for you. I mean, essentially, 2/3 is Chemicals, 1/3 is Advanced Materials. And out of that Advanced Materials, roughly about half is really our semiconductor and related exposure. So on a whole company basis, it's like 3 or 4 points, essentially, give or take. We're seeing a lot of strength there. We are by far the market share leader in that niche. And you have this AI-driven sort of memory chip shortage dynamic. You have the reshoring dynamic helping as well, which we think will -- are durable trends. But then on the other side, to your point on comps, the back half of the year, it is high single digit, right, comps for CAM. And we are baking in a little bit of prudence there. I mean these end markets can be a little bit quick to change versus Pharma or Diagnostics & Clinical, for example. So there's a combination of prudence and tougher comps that sort of as part of our, give or take, like high end of mid-single-digit expectation for the rest of the year.

Okay. Maybe just on margins, just kind of walk through, you got the 75 basis points. You've had performance-based pay, you're have Ignite. Just kind of unpack that 75 basis points and kind of how confident are you in delivering that?

Yes. So we feel confident about delivering it through the year. And there's a couple of pieces. So it will ramp through the year. And the biggest factors in that are, one, the tariffs. So we mitigate the tariffs by the second half of the year, as we've talked about for a long time. And the second thing is the price volume leverage that you see. And then the third is the Ignite savings. So you'll see that starting to roll through even more and increasing through the second half of the year. So we feel very confident about delivering and we're excited about all the pieces are actually in place.

Well, what happened if your guide 4 to 6, what happens did you come in like 6 or 7 or you beat, does that drop through? Do you reinvest the business? Like how much of that would accrete to earnings and upside?

Yes. So I mean, it's -- we're always balancing incremental investments, and we have a lot of great opportunities. But at the same time, we recognize that it's important to return capital to shareholders. So I would say it would be -- we take a balanced approach to that because we have so many great opportunities to invest in, and we're really taking a long-term view of investing in the right innovation. So as you know, our business is driven by the right products, making sure that you have the right innovation, new NPIs coming out. So I want to make sure that we're focused there. And then as Tejas mentioned, AI and digital, there's so much opportunity. We're taking advantage of it now, but you can always do more and go faster. And so that's where if the opportunity arises, we'll take it.

Maybe just zooming back out for a second. I mean, you kind of led off the opening comments, and you mentioned MFN and Pharma and then you highlighted Biotech as maybe an upside driver. But just broadly on Pharma, downstream is pretty stable, right? But you do have some more discovery businesses, too. Just not the part the preclinical business has been really weak. Just kind of MFN pharma, how much of -- like do you think that was a drag last year? How much could it help this year? I mean it's hard to put a finger on it, but you have a big sales force that's out meeting with these customers. Just wondering about Pharma's tone, if you will.

Yes. I mean I think the MFN clearing event was very important. So I think last year, that was a big holdover and everyone was waiting to see because that could have been devastating to the industry. And so as you know, any capital expenses, any expenses and investments pharma companies make or any company makes for that matter, depends on stability. So I think that was a big clearing event for pharma. So -- and what we're seeing is that is actually translating into sales, and we saw in the performance of the first quarter that, that did translate. And so we would anticipate that, that should continue to translate through the year, and we're hearing from our customers that they're feeling good. Once again, where we keep watching is that small and mid-cap because that's another opportunity, and we're always looking to outperform, and that's a place where we can.

Maybe like on instruments, what -- like what have you guys assumed? I know you have the recurring business, consumable service and you have instruments, obviously, is a decent part of the business. Is there a number in kind of that you've laid out for instruments for the year? Or just help us think through because I assume that would be like an important lever of Pharma sort of to feel better, right?

Yes. So the -- so a couple of things on instruments. So one, it's -- we're in the instrument replacement cycle, which is helping. And that's -- Tejas laid that out in great detail. The other piece is as we think about kind of that reshoring opportunity, that presents another opportunity. And we see that starting to materialize into orders toward the end of the year. So that's another exciting opportunity. And then, Tejas, have we laid out a direction?

I would say, Dan, I mean, we don't guide specifically to instruments. But in the context of this year's guide, there isn't much of a delta between instruments and the rest of the portfolio. They're both like mid-single digit-ish. And that's a little bit better on the instrumentation side because of the replacement cycle point that Adam mentioned. So that's how I would characterize it. Not really much to choose in terms of growth deltas between instruments and the rest of the portfolio [indiscernible]

And maybe just circling back to 1Q. Adam, you mentioned at the beginning, absent the weather, you guys would have come in above the midpoint. Like we just took the $10 million and divide it through by last year's revenue base, and it was basically 60 bps. So you grew 4.4%, would have been 4.4% plus 60 bps, 5%. Great. You hit the midpoint, it appeared, and that's good in quarter-to-quarter. But again, as we started off, like investors the market gets intoxicated, you guide here, you're going to beat. And you've been beating 2 points, 2 points, 2 points every quarter, now it's like more in line. So it just raises , oh, is something change in the demand environment? I don't know. How would you characterize that weather is -- I mean, is that math right, 60 basis points? Or was there a bigger drag on the weather such that maybe the 5%, you guys would have come in above that?

What I would say is this is we've characterized kind of what you see from the weather as the $10 million. There's also services that didn't happen. There's orders that didn't happen, but it's hard to characterize those because you can't prove a negative. So there was more there because people couldn't get to their labs, service visits couldn't happen, be scheduled, things like that. So, there's likely more there. And overall, what I would say is the performance was -- for the year was -- or excuse me, for the quarter was in line with where we guided. We see all of our large markets humming along. And so we continue to be optimistic. And we'll see how the rest of the year goes, but I'm optimistic and excited about where we're going to go.

Okay. And Dan, I mean, just to add a little bit of a finer point there, right? If you just do the math on even the 10% versus where we reported, you get to sort of above the midpoint of our guide. And then you look at sort of the A&G shortfall, if you will, we guided to down mid, we were down 8%. That gets you to essentially at or above the high end of our guide. So that's how I would think about it in terms of that high end versus where we ended up.

And maybe could -- we were chatting earlier, but maybe -- I mean the balance sheet is in great shape. Just speak to like free cash flow, like how you guys think about that right now? I mean, you've got a lot of investments that you're ongoing. But just when you think about your kind of cash flow dynamics this year and next year going forward, like what's the -- where are you guys in that investment cycle, if you will?

Yes. So a couple of things that are unique about this year and last year as well, but continue this year for our free cash flow and our free cash flow conversion is, one, our CapEx as we're investing in Train C and D, and that's our NASD investments. So that's hitting this year's CapEx, and that obviously weighs in on your free cash flow. The second piece I'd point out is we've -- we're undertaking a significant transformation of the company, and that transformation is going to add substantial value, and we've talked about that for a long time. And so, what you're seeing is some of those investments in that transformation as well as some of the restructuring charges associated with generating those -- some of the efficiencies that you'll see in the margin. So overall, the free cash flow is where we would have anticipated it to be. We're in an investment stage right now and transformation requires incremental investments. I want to assure you, we're paying very close attention to it. We're very thoughtful about it. And we're making sure that all of these investments and all of these activities ultimately generate incremental growth and incremental returns.

And Dan, I mean, just one quick point of clarification there. If you look at our typical free cash flow seasonality, 1Q actually was slightly better than expected. Look, I mean, our operating profit is also going to be slightly more back half weighted, very slightly, right? So that will probably be reflected in the free cash flow line as well in terms of a more back half weighting there. But 1Q itself, we actually came in a little bit better versus our typical free cash flow seasonality.

Terrific. Well, with that, we're out of time. But gentlemen, thank you for being here. Hope everyone in the audience benefit and have a great rest of the conference.

Thank you.

Thank you for having us.