I guess we'll start in a minute or two early here. Great. Day two of the TD Cowen Global Healthcare Conference. I'm Dan Brennan. I follow tools and diagnostics here for the firm. Really pleased to be joined with me on stage here, the senior management team of Agilent. At the far right, we have Bob McMahon, who's Chief Financial Officer, and to my immediate right, we have Padraig McDonnell, who is the Chief Executive Officer. So, gentlemen, welcome, and thank you for being here.
Thanks, Dan.
Thank you.
Padraig, I thought I'd start with some high-level questions, as you might imagine. You've been here, took over from Mike McMullen. You've been in the seat, I think, about 10 months or so. You previously were head of the ACG Group. Would love to have you kind of reflect on your first 10 months in the CEO seat, speak a little bit about how things have played out versus expectations, and then we can move from there.
Yeah. So thanks, Dan. And 10 months, it's been we've achieved a huge amount in that time. And when you look at the first thing that we really looked at was our strategy, our enterprise strategy. And that really laid us out in kind of four pillars around how we're going to increase our pace of innovation, how we're going to attach to faster-growing segments, automation and productivity being really core to all our markets, and lastly, informatics. And underpinning that, our commercial organization, our digital capabilities, Ignite Transformation, and of course, the team. So that was one of the key things that we started off on. And as a company, we serve $80 billion markets. We have a great position in those markets. We have this really incredible connection with our customers. So we have a lot of opportunity going forward on us.
And when you think about what are the next phase for Agilent, and what we looked at was really looking at how we can re-accelerate or grow through innovation with that customer's connection. So I think the first thing, getting the leadership team in place, new presidents, everybody has seen them, so really working well together on this new strategy, creating a new group structure because of the strategy. It wasn't just pulled out of a hat. We looked at the strategy. How do we get this new group structure? We deployed $1 billion of capital with BioVectra and CDMO business. So that was based on strategy as well. So very happy with how that's going. And we've invested quite a bit back in digital.
Last but not least, I think on the journey in the 10 months is that we've really kicked off a really ambitious transformation agenda with Ignite Transformation, which is really looking at how we could become more effective as a company. How do we really become more nimble, and how do we have more investment into key areas? I will talk about the four quick wins on that one. First of all, pricing. We have an enterprise pricing capability now. You might say, well, what's different? I think it's less bottoms-up by every product line. Now it's centrally managed, and we expect that's going to provide a lot of value over time. Secondly, procurement in one area, so direct and indirect procurement. We see a lot of opportunity there.
We've reinvested quite heavily back in digital in two areas, our website and also CRM and new CRM for the salesforce. So that's part of our reinvestment. Last but not least, organizational health, looking at management layers, looking at effectiveness across our product lines. So I would say a huge amount achieved. The thing that I'm extremely proud of is how the Agilent team has embraced that change. It's a lot of change, but I think the team are really embracing that.
Just one point on Ignite. You talked about on just the recent earnings call, I think you led off discussing the first initiative on pricing. Seemed like you were really enthused on whether some of the early traction or just really the opportunity ahead. Maybe you could just elaborate a little bit on what's the pricing dynamic initiative within Ignite, kind of what's the opportunity over the next few years?
Yeah. So when you have 29 product lines each doing pricing from the bottoms up, sometimes you can miss that whole product solution about how products fit together. So looking centrally at that, we have an ability to say where we can move price for the value our products create. And we've really priced that out in terms of the next few years. And we see significant improvement that can be done. And I'll give you a really good example. If you look at some of the early wins that we've seen, is that we have a number of product lines that were below pricing norms on it, so able to move those up, particularly when we're selling bundled systems and a complete product workflow. So very excited about it. I think we'll be able to talk about the progression over the next few quarters.
Yeah. Hey, Dan, and maybe to put some numbers to that, historically, we had had anywhere from 50-75 basis points of price per year. That was pre-COVID. Obviously, with the inflationary numbers that came in higher than that, last year was about 50% or 50 basis points. Q1 was 150 basis points. So a real example of some of the benefits that Padraig was just talking about.
Since you brought that up, does the next three quarters imply 150 basis points or something more subtle on that?
Yeah, I think it probably will. Right now, we're not modeling that. That would be upside. We had assumed roughly 100 basis points, so we're ahead of schedule. What I would say is that we're on track, and there's nothing to suggest that it wouldn't be that way. But right now, we've still embedded 100 basis points guidance.
Great. OK. So we'd love to start out on one of your smaller businesses, but one that gets a lot of attention right now, academic and government. It's less than 10% of sales. U.S., I believe, is about 4%, academic and government, and that zip code NIH is a smaller portion of that, and overall, that segment was down 7% in your most recent quarter. China was a worse factor given Chinese New Year timing, but I think the U.S. was still down 6%, so even though a small part of the business, there's obviously a lot of investor interest and concern, if you will, just given the uncertainty on NIH funding, so could you just give us a sense of how the quarter played out? Your quarter ends January 31, so I think the potential freeze was only looking to be enacted towards the end of January.
So wondering, did you see a really sharp slowdown at the end of the quarter? But anything you can kind of unpack on that end market and kind of what happened in the U.S.?
Yeah. First of all, I'd say about the academia and government market, it's a low- to mid-single-digit in normal times. Sometimes it's below that, sometimes it's above that, and clearly, we had the NIH situation, which, of course, created a lot of questions about indirect and direct funding. I will say about it at a macro level, from talking to the customers and talking to, of course, areas within the government, is that this is a reallocation of R&D budgets. So we really feel it's a transitory thing over a quarter on us, and people are wondering, are my existing grants going to be affected? You have to put yourself in the professor's shoes. Are my existing grants going to be affected, or are my future grants going to be affected? And that creates a little bit of pause, I would say.
But overall, we're holding guide for the year. And I think certainly, if you're talking specifically about January, we did see a slight slowdown up to the build-up to that announcement because people were expecting something. It's in the news every day. But we feel we can manage it throughout the year.
OK. Right. And you just said your guidance for U.S. academic implied in the overall academic, I guess, didn't change after the first quarter. You maintained that.
Correct.
OK. Staying on the macro, if you don't mind, before we get into the better parts of the things, exposure to tariffs. You talked about it on the recent earnings call, that the risk is pretty material the way you characterize it. Just kind of remind us, just given the news today with the Mexico and Canadian tariffs going into place and then the reciprocal tariffs from China being implemented, not specifically on tools, but more broadly. Just wondering if you can elaborate a bit on what's Agilent's exposure to all these tariff potential noise.
Yeah. So I think from the Canadian and Mexican side, probably negligible. Very little to mitigate on that. And on the China side, you saw, of course, a 10% increase that's going to come in April. Probably $5 million. We thought that's probably $10 million or $11 million now. But we think probably most of that is mitigatable. And why do we know that? Because in 2018, we had the same circumstance with tariffs. We have a very diverse supply chain with Singapore, America. So we were able to reconfigure that pretty quickly. So what I would say is that we feel we're very well mitigated on the tariff story.
And in terms of China, they basically implemented some targeted tariffs on different products. I didn't see life science tools implicated in that. But how do we think about if China were to come back and say, we're going to put an across-the-board tariff on imports from the U.S.? What's Agilent's relative position there?
Yeah, that's a good question. That would affect obviously all tools companies. I think given our supply chain, we have a pretty diverse supply chain. Not a lot of that actually comes out of the U.S. into China. Actually, most of our products that are in China are either in China for China. That's one of the big benefits that we had with the stimulus program or sold through our businesses outside of the U.S. So I would say it would impact us, but probably less so than maybe some others.
OK. And maybe just on the second quarter guide that you provided, I think, Bob and Padraig, the 2.5%-5% was noted to be wider than normal to account for macro volatility. Just, is there a variety of these things that you just kind of included in that guide? Or just wondering kind of what was the implicit wider range accounting for?
Yeah. Look, I think we're holding guide for the year. We can walk through that. I think it was a case of a lot of things going on. So it was a case of being prudent around that, not just one thing.
OK. Just on China, obviously, in the quarter, you saw a really nice stimulus orders, $35 million. You talked about a greater than 50% win rate. I guess the question is that was heavily related to the food testing market, and you said you expect maybe there could be more to come later in the year, but you're not assuming anything in the guide. Just kind of zoom out and kind of this opportunity for China stimulus since you have such a big presence there. Kind of what are the stimulus programs that you were kind of exposed to, and kind of what's the future opportunity?
Yeah. I think we were super happy with our performance in the stimulus. It was about $70 million. We worked $135 million. Of that, probably half of that was run rate incremental business. Half of, or sorry, run rate business, half of it was incremental. So if you looked at the list of equipment, it was actually most of our portfolio. So we did extremely well in that. And of course, we shipped and we delivered and we installed in the quarter. So fantastic performance by the team. There's actually a meeting in China today, tomorrow, around future stimulus from the central parliament inside. So we're waiting to see what comes out of that. The initial story that we're hearing that it's actually bigger. It's probably 90% applied, 10% pharma, and in applied consumer products, applied materials, markets, et cetera.
We expect that we'll know more about that in the coming months and for a summertime kind of process. Then we'll bid on that. Why were we so successful on the initial stimulus, and why do we think we're going to be successful going forward? As Bob said, made in China for China, the ability to manufacture everything in China is the trick where you can actually tender for the business. Secondly, just having such a strong technical team to get the products up and running on it, so we're very excited about that. I will say on the China business, though, it's pretty stable. If you look at outside stimulus, it's a very stable business. I don't see there's any huge portion of improvement. The stimulus definitely creates momentum for us when it comes out.
Got it. And then maybe just zooming out on China for a minute, the business was down or the country was down low teens for you last year. And then you had a 4% decline in fiscal first quarter. But that was heavily influenced by, I believe, the timing of Chinese New Year. So actually was better than you initially expected, as you discussed on the call. Just could you walk through how the different customer groups did in first quarter for you? And kind of what does the guide imply for the trends? You just mentioned stability. Just be interested to get more color there.
Yeah. So we were certainly pleased with the performance that we had in China. One of the things that we have in China for Q1 is the impact of the Lunar New Year. So some of the numbers look a little off, but that would cover in Q2. The big outperformance was, in fact, the stimulus that showed up in food. Food actually grew 33% in Q1, so a very strong performance. I would say also kind of where we expected was pharma, which was down high single digit. Again, some of that is impacted by the timing of the Lunar New Year. Academia and government was down mid-teens, also affected because a lot of it. So I would say if you looked at it, generally speaking, it was at or above our expectations relative to the beginning of the quarter. Underlying is that stability that Padraig talked about.
We're actually expecting better performance here in Q2 with the benefit of that timing of Lunar New Year helping us here in our February, March, April time frame. So all said, good progress to date and still on track for steady improvement throughout the course of the rest of the year in China.
OK. So maybe just switching over to kind of customer groups. So pharma, biotech, a third of your revenues, plus or minus actually a little higher than that. I think it was flat in the first quarter, which, as you articulated, was a bit better than you expected. You were pretty constructive, I thought, in commentary, particularly for LC instruments. Maybe just high level, how is this group? How did demand there fare in the fiscal first quarter? How do we think about the outlook this year, and are the drags, as I think you mentioned on the call from the IRA and pipeline reprioritization, really behind us now?
Yeah. So look, we've seen the sequential improvements, particularly in pharma and biotech over the last few quarters. And that's what we predicted. So 2024 was a year of improvement. And that really played out as we expected on it. If you look at what we're hearing from customers, starting at the end of your question, I do think it's behind us. I think the portfolio reevaluations have been done. R&D spend is kind of up here. If there's molecules in, there's a lot of really good molecules in it. So overall, I think we're past it. And it's in a better position. In the biotech side, if you have funding and you have a molecule, you're in good shape. If you're at the very height where you don't have a molecule, you don't have the funding, you're not in good shape.
It's kind of a tale of two cities on that. But overall, improving on it. And what we really saw was that the Infinity III system, which is a real litmus test for us, were customers going to release budgets to start our installed base refresh? And we've had over $100 million of orders in the Infinity III. So customers were releasing funds to do it. And I think that just goes to show that pharma is going to continually steadily improve. And so we're expecting this year to continue that improvement.
Yeah. Hey, Dan, another area where when we talk about having kind of the pipeline reprioritization behind us, we have that we work directly with customers in our NASD business. And so we know that extremely well. And NASD is on that track to recover. It hit our expectations. But more importantly, in Q1, more importantly, the order growth actually exceeded our expectations in Q1 for NASD. And so we're increasingly optimistic about that. And certainly, that high single digit striving for low double digits that we talked about on the call is certainly within reach and then accelerated growth into 2026.
OK. Maybe just digging in a little on LC cycle and spending. I guess could you speak to what's first question would be just what's so unique or different or kind of what gets customer excited about that Infinity III line?
First of all, we have a huge install base. We have 1100s, 1260s, Infinity II, 1290s. You've heard those names over the years. For us, the Infinity III is backwards compatible with all of those. So it can get really up and running quickly. I would say if you talk about the value proposition, what we've measured and what we're seeing with customers is a 10%-20% productivity improvement in labs using Infinity III. And you remember I talked about our strategy with productivity right up there. No matter what market you're in, and particularly in pharma, productivity is key. Also, the Infinity Assist, where people can walk away from the system, make sure it's all set up and predict when failures may come, is really resonating with customers. So I think it's one of those products where it's really resonating at the right time.
With our installed base, it's just hitting it in the right areas.
You just talked about the install base. You talked about it on the call, the potential upgrade cycle. Just typically, upgrade cycles in LCs, I think, are over maybe like five or seven years. Is there something unique now that you're seeing these orders uptake? The customers just delay too long? Is it the timing of when Infinity III came to market? Just speak to the pace of this upgrade cycle and kind of what that could mean for this business.
Yeah. It's a mix of all those things. First of all, you look at our older systems, the 1100. We have thousands of those, and they're out for over a decade. A lot of those systems are coming to end of support, so we can't support them because of electronics, et cetera. So there are obvious upgrades. The rest of it is people with pent up demand on budgets saying, well, we need to refresh our lab. This is the time to do it, and we're going to vote for the Infinity III. And it's easier for them to, I think, position that internally in pharma companies when you have these productivity gains, and people are looking at that. So I think those are the two key areas on it, and also, again, just the general sentiment in pharma is just generally more positive.
Budgets that were restricted before are now being released.
Is it possible to, within your pharma guide, and we'll get to instruments at the end, but what is the LC business expected to grow at given this momentum that you have Infinity III? Is it possible to tease that out?
Yeah. We haven't spoken about that directly, but what I would say is we're cautiously optimistic about certainly the Q1 uptake. Our instruments were roughly flat, but LC, LC/MS, which is what we're talking about here, was high single digit and exceeded our expectations. And actually, order growth exceeded our revenue growth. And so it actually speaks to a positive momentum continuing to go. And so I think that there's a bias towards the upside in our guide for the instrumentation, particularly on the refresh cycle for LC and LC/MS. We mentioned in the call that our book-to-bill ratio for instruments in Q1 was greater than one. Historically, seasonality would suggest that it's usually below one. So again, that's another proof point that it's really resonating with customers. And we're well beyond kind of the normal ebbs and flows of the refresh cycle here.
I mean, our instruments, when we look at the median age of our instruments, they're much older than they would normally be, and you would kind of expect that given the last two years of dampened demand. But if you look at, these instruments are still being used in the lab, and so it's only a matter of time before they get refreshed, and to Padraig's point, the productivity message, as well as a new instrumentation and having it to be backward compatible, is really resonating with our customers.
Great. Maybe just one more on pharma. So BioVectra, Padraig, you mentioned. And it came up on the call. It was a bit below plan in the first quarter. But there was a lot of confidence that the integration, however that occurred in the first quarter, you guys feel really good about maintaining the full year guide. Can you just speak again to the outlook for BioVectra, kind of why you're excited about that and kind of what was the issue in the first quarter?
Yeah. So look, when you acquire a new company and you have a CDMO capability with NASD, you have to bring it up to the same standards. So there was a lot of work there in the first quarter, which really, I think, created a little bit of a softness. But I have to say for the full year, we're absolutely clear on the guide. We're going to hit the guide. And in BioVectra, it really is in a sweet spot of capacity constraints. You're thinking about GLP-1 peptides. You're thinking about ADCs and some of our microbial fermentation capability. We're right in a constrained environment. And we have a lot of significant customers working on commercial product inside that will, or sorry, in clinical that will move to commercial.
And so very bullish about it, not only this year but the years beyond and what we're seeing on the demand. So the demand is extremely strong. Coupled with the capability in NASD and the ability to cross-sell and have customers do both on both sides is also another multiplier that we're seeing.
Yeah. I was going to jump into PFAS, but since you brought up GLP-1s, are your LCs specced in any of the GLP-1s? What's the opportunity there? Is that part of the growth initiative?
Yeah, so we have two sides of our GLP-1 business. First, we have it in the analytical side where we're in a lot of the sites around some of the key companies. And we continue to be very successful there, and then on the BioVectra side, we're actually involved in two of the biggest GLP-1 precursors and also next generation GLP-1, so on that side, we see a lot of runway on both sides of our business.
Exciting. So, PFAS that was one of the certainly the stars. It's been a star for you over the last few quarters and certainly in fiscal Q1, up 70% after, I think, being up 50% in 4Q. I think it added 75 basis points to the total company growth rate. So where are we? I mean, we sized it, I think, somewhere $120 million-$125 million runway. You've talked about, I think, a $300 million or $350 million revenue opportunity. What kind of growth? What are you seeing in PFAS testing? Why are you winning? And what kind of growth could continue for the rest of the year?
Yeah. I'd certainly hand it over to Bob. I think if you look at the dynamics, there's really three things going on. You see the long and short chain PFAS analytes are changing. So what we're testing is changing through regulations. You also have a lot of litigation out there in PFAS that is driving testing and public concern with that, right? So it's a huge topic of public concern. And the third area is the geographic expansion. Last quarter, Europe was number one, AFO behind it. And then you had China third. And the previous quarter, China was first. So you have this kind of multiple vectors of a market that's growing over time. And why are we so successful in it? I think two reasons. First of all, the 6495D is a critically important platform that's highly sensitive, has the right detection limits.
Now, as PFAS moves into food, our GC triple quads are coming into place. Having that portfolio allows us to test on both sides. By the way, testing labs need our platforms to do it on both sides of it. All in all, and then what I talked about in our strategy, the wrapper around our customer service, getting our technical capabilities up and running with our customers is really, really resonating as these modalities change. All in all, it's a really exciting market. I don't know if you want to talk about it.
Yeah. Just we are super excited about this. We think we're in the very early innings still of testing PFAS chemicals. There's thousands of these. And right now, we're only characterizing maybe less than 10. And so not to say that all 1,000 are going to be tested for ongoing. But it certainly speaks to the opportunity here. Started in environmental. And it has spread to food. It's even in pharma right now. There's some requirements from FDA actually detailing out how much PFAS would be in some of the products and so forth. So you're actually seeing it expand to all the end markets. And so we think that this could be a, it's $350 million market here. Within five years, it could be a $1 billion market opportunity. And we are the market leader there. So very excited about that.
I wouldn't put 70% for the rest of the year. We think the market's growing 15%-20%. And our expectation is certainly that we'll grow faster than that given the strength of our product portfolio and our technical expertise, as Padraig just mentioned.
So great. Chemical and Advanced Materials, I think last year declined 3% or so after growing 3% in fiscal 2023. I believe the guide this year is low single, mid-single. First quarter was down a bit. Just kind of wondering if coming off that first quarter being down a bit, is low single, mid-single the right zip code? Or help us think about what the outlook is here. And then maybe could you separate it into the applied versus more cyclical side of the business?
Yeah. So it is the right zip code. So we're confident on that through the year, and of course, we had a Lunar New Year effect with that market in the first quarter. If you think about the CAM market, it's really broken down into two areas. It's the chemical business that's used in refineries, et cetera, with our GC platforms. You can see with some of the changes. You can imagine that the U.S., we're feeling very strong about some of that. If you think about our customer base in the chemical side, about 20% are large companies. The rest is a long tail, and of course, these have huge fleets of GCs that over time need to be replaced. So we're going to see that over time. On the other side of the applied side, you have semiconductor. You have materials.
You have, for example, battery technology. Again, you can see with the shifts, people have to really create their own. You can see with the tariffs in Mexico and China, there's going to be a lot of capital expenditure in those areas. You can see, for example, even in China with the EV modalities that are happening, a lot of potential there. Overall, we feel really strong about the market. Of course, in all these macro changes going on, we think it's going to be net positive for us.
Yeah. OK. So on instruments, you discussed LC/MS, applied single. Just wondering kind of the delta. Kind of walk through the other parts of the instrument portfolio. How are those trending? Are there positive momentum? Are there headwinds there? Just give us a little flavor.
Yeah. I think they're all recovering. They're recovering at different rates, certainly with the new products with LC and LC/MS that's leading, as we talked about before. Our business in our GC and GC mass spec business has also got some new products that are coming down the pipe that are performing well. The life cycle there is a little longer, so that recovery slope is a little less steep, but I feel good about that. That also had a bigger impact given kind of the business in China, so feel really good there. I'd say the area that's probably the slowest to recover is our cell analysis instrumentation, which is focused on kind of the emerging biotech and so forth. It's recovering, but it's still negative in Q1, and we're expecting it to improve throughout the course of the year, so I feel very good.
The fact that we had over one book-to-bill ratio in Q1 speaks to some confidence returning to the marketplace, really behind some of these new products and in the strong performance that we have in our commercial teams.
Great. So the guide, I believe on the EBITDA margin expansions, it was 50 to 70 basis points despite reported top line is about 3%. So really healthy margin expansion. We talked about Ignite early in the discussion. Kind of what drives that level of kind of margin expansion? And just give us a sense of revenues coming better or worse. How much does that margin expansion change?
Yeah. Maybe I could start. I think Ignite is a three-year program, and we're going to see the benefits probably in the back half of the year starting to come in. But of course, we see that in 2026 and 2027. I only mentioned four parts of it, but we actually have probably five more streams that are going to be coming on. And so I think that really, really helps. And of course, we expect the improvement in the market to come in. So if anything happens on the revenue side, we'll appreciate it on the margin side. But I don't know if you want to add.
Yeah. No, I think you hit the nail on the head in terms of kind of where we're seeing. Certainly, if revenues come in better, we have a very nice incremental. So it has an opportunity to exceed that.
Yeah. Maybe last one then for Padraig. I guess maybe two-parter. Kind of M&A, how critical or not is that to the kind of multi-year outlook that you're looking to deploy for Agilent and M&A? What would you say is maybe most misunderstood or underappreciated?
Yeah. So M&A is going to be a bigger part of the puzzle for us. You heard me talk about the strategy about attaching to faster growing segments. We can do innovation inside. But also, of course, we need capabilities from the outside. But the one thing you would see is completely wedded in strategy. And actually, BioVectra was that. So we had that clearly in the strategy. And of course, we'll continue to look at that. I think what is underappreciated about Agilent, I just think it's just the opportunity we have ahead of us both with the strategy and Ignite with the new team. And using our absolute best-in-class customer connection. A lot of companies say that. We know it for a fact through our scores and also how we look after it, after customers and our investment back into digital.
I think we're going to have a significant flywheel over the next few years.
Terrific. Well, thank you both for being here.
Thanks a lot.
Thank you.
Thanks for having me in the audience.