All right. Good afternoon, everyone. I'm Matt Sykes, the life sciences tools and diagnostics analyst at Goldman Sachs. Today, we have the pleasure of kicking off the new year with Agilent. Mike McMullen, CEO, and Bob McMahon, CFO. Mike, Bob, thanks for joining us today.
Thanks, Matt. It's happy New Year to you and to your clients. I must say it's great to be here in a face-to-face environment again.
Certainly is. It certainly is. Maybe we'll start off just kind of I'll let you guys set the stage a little bit and talk about the most recent quarter you had, your fiscal fourth quarter, and some of the trends you're seeing across your businesses, particularly how you ended the year, just given the way your fiscal year shapes up, would be, I think, interesting to know and kind of how you see 2023 shaping up.
Yeah, no, the timing to have this conversation is just great coming off, you know, great close to 2022. If you look at our performance, 2021 was a great year for the company. We topped it off with even stronger year the following year with, you know, double digit growth, 12% core, margins up 160 basis points, earnings per share of 20%. I like to say that because, you know, there's momentum in the business, and we felt really good about how the team has continued to deliver for our shareholders and our customers, and we felt we exited the year with good momentum.
You know, obviously, there's question marks about, you know, the long-term outlook for the economy in 2023, we felt like we had a reasonable look, particularly at the first half of 2023 because of the strength of our backlog. You may recall some of our conversations, Matt, where we're really kind of really keeping our eye on how would the order picture look like for the rest of the calendar year, because you mentioned earlier, we've got this October 31 fiscal, but we're also keeping an eye on how we finish the calendar year business. It's as expected. That gave us a real sense of confidence that we had kind of a good beat of what was happening in the marketplace.
Great. Maybe we dig into the guide a little bit. I mean, if we look at what your kind of guide implies for the full year relative to what you guided for Q1, it seems it's very a front-end loaded guide for the year, so implying a slowdown in the back half of the year. Clearly, there's a lot of unknowns about the back half of the year. We'd love to kind of get your view as to the level of Agilent prudence in the back half versus things that you're actually seeing in the market based on conversation with.
Hey, it looks like that adjective is gonna stick with us.
Exactly.
Bob and I will tag team on this. I think there's a high level of prudence in the guide because of the uncertainty. Not anything that we know. What we know is that we've got the strength in of business we can expect from the backlog. We've got the on target year-end orders. We've got a very resilient services business. We've got some other things, great things happening in our NASD business. We have a lot of confidence about the you know, first couple quarters. There's just a lot of uncertainty about the back half of the year. I think that what you're thinking, Bob.
Yeah. Absolutely.
You know, we came into this year as Mike, you just mentioned, with strong momentum. Actually, Q4 was our strongest quarter within the fiscal year. We ended with elevated backlogs. We have really good visibility into the first half of the year, and we'll see how things play out in the second half of the year. We're gonna go up against tougher comps, which plays into that. I think it is an element of that prudence. And we'll know more in, you know, in a few quarters.
Yeah. I think under the guise of we will know more, I think, you know, we've got indications from our large customers that they are planning to have increases in their budgets.
Budgets, yep.
We just don't know what they've actually settled out to, and it probably will be a couple of months before we know for sure.
Got it. Maybe there's been a lot of discussion around instrument growth over the past year. 2022 and 2021 were exceptional years for instruments. If I look at your commentary on the Q4 call about your backlog.
Mm-hmm
Your guidance for mid-single digits for instrument growth for the full year, that again implies a high visibility and strong first half with an uncertain back half. Maybe talk a little bit about things that you're seeing within the instrument market.
Yeah.
Maybe break it down. I know we've talked before about small mol versus large molecule, and kind of what you're seeing in the instrument market to kind of give people a little bit more clarity as to how to think about the full year.
Sure. Sure, Matt. You know, when we talk about uncertainty, really it was uncertainty around CapEx purchases, right? Instrument purchases. When you look at the two largest markets for Agilent, pharma and our chemical advanced materials market, what we're looking at is how long can this accelerated replacement cycle for liquid chromatography in small molecule pharma continue? Listen, we've enjoyed the growth rates of 20%-30% growth rates in liquid chromatography over the last two years. I just don't think there's been a structural change in the market. We think we're kind of in, if you will, baseball terminologies, or maybe we're talking earlier, football. We're in the fourth quarter here, going down for the two-minute drive. We would expect a moderation of growth in small molecule replacement.
It's hard to say when that's going to happen. We're kind of assuming, if you will, in our guide that some of it will be in the second half of next year. At the same point in time, there's also other positive puts that we haven't seen, actually, in my career. You're seeing new secular drivers in the advanced materials space, which, as you may know, is roughly a third of our CAM space, about 30%-35% of our business. We think that's growing 10%, double-digit growth rates. Onshoring of critical components, investment in semicon, and the whole revolution that's going on in auto build industry with battery technology for electric cars.
Then the other one we've been talking a lot about today, Bob, has been the PFAS market.
Yes.
While there's some kind of maybe a potential slowing of demand in liquid chromatography in the small molecule, we will see continued strength in the biopharma side of that market. But we're also seeing new drivers of growth in chromatography, both LC and GC, in these other areas.
Yeah. I think it's important to add on the small molecule side, our view is that it's gonna revert to the mean.
Yeah.
It's still growing. You know, as we think about how we were building the guide for, FY 2023, we still expect, you know, very solid growth in our pharma end market.
Mm.
which represents about, you know, a little over a third of the business, 35% of our overall. Two-thirds of that or 40% of that's large molecule, which we expect to grow high single digits to double digit growth. The 60%, which is the small molecule element, still expecting to see, you know, mid-single digit growth there. Still very good growth, but not at that 20% level.
Yeah. Our commentary shouldn't be interpreted of any concerns on the competitive nature relative to our portfolio. In fact, we know via the objective industry stats, we've been continuing to gain market share in core liquid chromatography. It's more about, you know, based on what we've seen historically in these markets, you know, they will revert to the mean over time.
Got it. Maybe one more on instruments. We often get the question of sort of replacement versus sort of greenfield demand.
Yeah.
I think some of that has to do with the end markets, 'cause you think about some of the areas in advanced materials within CAM, there's actually some of the greenfield opportunities, whether it's PFAS or lithium batteries, et cetera. Maybe kind of help us understand maybe the split over the past few years in terms of replacement versus greenfield and where you could see that over the course of 2023 changing, if at all.
I think maybe when we think about this, so we kind of take it by end market. If you go, let's go pharma first, I'd say probably 60/40. kind of reflective of the mix between small molecule and large molecule. The 60 being more of a replacement side of the market and about 40% in new demand. Even in small molecule, you know, China's an expansionary territory. It's more a commentary around US and Europe.
Yeah. I would say in terms of the chemical and advanced material, that has historically been a replacement market.
Yeah.
Some of these new secular areas such as reshoring and some of these newer technologies such as the research behind lithium batteries, the semiconductor, that's all greenfield. What we're seeing is I would expect to see more greenfield in 2023 and 2024 than what we actually saw in 2022. I actually think that that's a positive because there will continue to be a refresh of the existing business. In both of those categories, it's not replacing existing capacity.
Mm.
It's adding to the overall capacity. I think in those areas, you know, we gain more than our fair share of the existing market share.
Yeah. You know, Bob's making a very important distinction here, which was historically, I think people have thought of that space as almost all replacement business.
Yes.
It's not the case at all anymore. Like I said, there's some new, nice new growth drivers for us on the secular side.
Got it. Yeah, we'll get into that in a little bit maybe. Just shifting a little bit, Bob, just on operating margin expansion. You know, we read our strategist reports and other strategist reports, which are basically calling for a challenging year overall for the market for, margin expansion. How are you viewing your margin expansion opportunities in 2023, and how important is continued high growth in instruments to that margin expansion strategy?
Certainly, you know, growth cures all.
Yeah.
You know, I think we've demonstrated both in very high growth as well as moderate growth or even low growth, we've been able to expand margins. It is important, but we're not reliant on instrument growth to drive our overall business. If you look at what we did just in 2022 as an example, you know, a lot of our operating margin leverage was actually in operating expense, which goes across. The investments we've been making in the digital applications, how we go to customer and how we support customers, I think, you know, will continue to be a lever for us.
In the instrument side this last year, you know, we were dealing with higher input costs with chips and other raw materials and so forth, and we're being able to offset some of that, you know, through recovering that through cost. You look at our overall gross margin, it didn't change that much.
Yeah.
I think, you know, next year I would expect it to be in similar kind of fashion. I do think that gross margin, if you look at it ex mix, you know, will probably be a little better this year than it was next year just because of some of the reduction in some of the pricing or cost pressures.
Mm-hmm.
You know, as our business in ACG grows faster, that pushes down that mix. If you look at it, on a, you know, group by group. I think you'll actually see some improvement, there. I still think that our ability to leverage the One Agilent kind of culture that we have and the digital efforts will drive the majority of it in the operating expense.
Got it. In relays to this, can we talk a little bit about price? I mean, last year was a pretty exceptional year across the sector in terms of price. I mean, you did about 400 basis points last year. You're looking for another 300 basis points this year. talk about sort of the customer environment today to price increases, and then obviously it's impossible to model, but the impact of lower levels of inflation moving through the year, with the level of price that you expect this year and what that impact could actually have on margins going forward.
You know, while it's never an easy conversation to have with customers about, you know, we need to, you know, move on price, they've been understanding and supportive of the changes. They understand what's been happening relative to supply chain costs, labor costs and such. I think as inflation starts to moderate, which hopefully is what some of the additional data we're seeing actually holds, I think they're gonna be less accepting to have multiple increases in a particular year. In fact, we're not assuming that. Yeah. In our guide. Now, that also assumes that there is a moderation of inflation. I think the right now the environment is still supportive, but I think you're not gonna be able to play out, at least from my view, 2023 like you played out 2022. Yeah.
You actually have in that backlog, though, you do have prices.
Yeah, yeah.
-for the next few years.
That's right. We haven't seen it all yet.
There's still some price realization to come through based on prior actions.
That's correct. Yeah. I mean, in 2022, we had to take in order to cover some of the increased costs that we saw, which were higher than, you know, at the beginning of the year, You know, we took multiple price increases. What we're seeing right now is, you know, a plan to have our annual price increase just the one. As you say, you know, we still have in our order backlog, you know, the pricing increases. So we still see some of that, you know, kind of anniversary-ing itself into 2023.
Yeah.
We've seen, as you know, we talked a bit about, Bob mentioned ACG in terms of their service business, in terms of how it has a different structural model in terms of gross margin, but overall, you know, healthy profitability. This is also where customers understand that in a very labor-intensive market, they understand, 'cause they're dealing with their own labor force, so they understand and are accepting of change there. You just have to be viewed as doing what's reasonable. We've gone out, as Bob mentioned earlier in his comments, we didn't try to recover all of our costs.
You know, I think, we believe that's gonna serve us well in terms of our long-term relationships with customers, because we never wanted to be viewed as taking advantage of the situation, particularly in a period of time when everybody was desperate to get product and such. We didn't wanna play that game.
Yeah. I think there's sometimes some confusion is that price hikes will actually lead to operating leverage. If you're simply covering your costs, it flatters the top line, but doesn't help the operating-
Exactly.
doesn't really give you the operating leverage. However, if inflation were to come down meaningfully over the course of this year, then the operating leverage kicks in.
That's right.
I don't think that's something that you would bake in because it's based on-
That's right.
-inflation forecast, it's highly uncertain, but that still could be an upside for margins by the end of this year, depending on that.
That's right. That's right. That's the right way to think about it. Yeah, you know, some of the recent changes we've seen in terms of commodity prices coming down are incrementally positive developments. Yeah.
Plus currency.
Now, yeah, as we mentioned earlier, you know, the currency headwinds aren't as severe as we had anticipated.
Got it. You mentioned ACG. As you know-
you have a dynamic talk about that.
I'm a big fan of the business. I still think it's significantly underestimated part of the business and what you guys do, just, you know, leveraging your large installed base, developing deep relationships with customers, and actually getting competitive intelligence-
Mm-hmm.
within the market. You've had really durable growth, margin expansion. Could you maybe talk a little bit about what some of the drivers are over the longer term to continue that growth over time and that margin expansion for ACG?
Yeah. You know, that was a. I appreciate the support, Matt. I mean, that was a big strategic bet we made back in 2015 to go after, big time, the services marketplace, and where we redefined in our own minds what was the addressable market and why we were doing, why we wanted to get out this business, because, as it historically had been a sort of all about the box. If you look it from a customer experience standpoint, that service experience was crucial to them. We thought that we could really do a good job in there. We also were anticipating, this really gets to the root of your question of why we think this is durable, is the market continues to expand.
This is not simply me trying to take a service share gain from somebody else. We are growing share in an expanding market. What's going on here? First of all, it's starting with pharma, and I think you'll start to see it in other end markets as well, is they really want to make sure their teams are being as productive as possible, offloading to they wanna outsource to a company like Agilent, things that their technical teams were doing, like asset management, support help, all these kind of things. The market itself is expanding. And also the nature of what customers define as services is expanding as well. The whole area of digital services is now a new business for us. Our customers know a tremendous amount about the scientific data that's coming off their instrumentation.
Sometimes the operational data is not always clear. If they did have it was kind of in a very fragmented way. What we're now able, through sort of digital services, be able to show the customers, hey, back to the competitive intelligence as well, here's what's going on in entirety of your lab and labs. You know, here's the instruments, the uptime, the maintenance history, the age of the equipment, a lot of operational data that was missing. This is a whole new set of services as well. Then I think we're doing really well on the share side as well. I think this market, this overall service business has lots of legs still in front of us.
We've had a series of strategies where we've been driving, we call it connect rates. I think we're in a really unique position here to be the undisputed leader here because of, well, the fact that we have the most instrumentation placed in the marketplace already. If you go to the labs, everybody's got equipment from Agilent. We already had a relationship with customers, and now we're just taking more of their operations under our leadership. We're really excited about the business. You saw, I think another double-digit growth from ACG in 2022. The business is durable. It's competitive intelligence. It also leads to ultimately more on the instrument side. I think there's a lot to like here.
Bob, I've been chatting about this all day. I'm sure I left something out.
No, no. I think you're right. I mean, and I the only thing I would add is we firmly believe there's a lot more runway in this business. When we think about that attach rate, we just crossed over the 30% attach rate in Q4, a milestone, but we're clearly not done yet. We think that we easily can get into the 40 and 50, you know, up to 50% depending on technology, over time. So this has been a strategy that's paying off. If you think about the number of instruments that we've placed over the last two years, it's been fantastic. Those are coming off of warranty.
Yeah.
Now it's a big opportunity for us to increase, you know, that service attach. I think is, Mike, the only thing I would add is we see this continuing because the instruments continue to be more sophisticated. The more sophisticated the instrument, the harder it is to self-maintain. You couple that with the drive to productivity for scientists and researchers. They don't want the researchers to be calibrating instruments. They want them to be running experiments. I see this as a continuation and, you know, really has the opportunity to go across all of our end markets over time.
Yep.
As we were talking earlier today, Matt, in terms of the use of digital capabilities to provide support to your customers, you know, pre-COVID, we were kind of pushing some of the concepts onto customers.
Yeah.
Now it's been a pull. To be able to support a customer remotely through digital, because often, sometimes maybe as much as one-third of your service interaction are what they call no part calls, which are the customer not sure exactly how, you know, have some questions about how to operate the instrument, for example. The fact that we can do things digitally, they love it because, A, uptime is a critical importance to laboratory operations. Even today, the customers really don't want a lot of people traipsing around the laboratory. A, that gives advantage to Agilent. One is we can support them digitally, but if we do need to go, to the customer lab, we can take care of the entire lab.
Yeah.
You don't have multiple people coming either.
Yeah.
I think maybe just one last thing on this because that's intangible, but I think extremely important because this is a strong competitive advantage for us. Having a trusted advisor that know when you call, let's say, an instrument goes down, and you can go and fix that instrument, that's very sticky business.
Mm-hmm.
I like to think about it as a mechanic or a plumber. If you have a plumber or a mechanic that you know you'll take your car to each and every time something needs to be done, that's hard to displace. The more instruments we have under contract, I think the better it is and the more sticky that customer is, and actually creates, you know, opportunities not only to improve our products, but also get more competitive wins because you use them as benchmarks for the next, you know, next customer and so forth. I think it's a real competitive advantage for us.
Got it. You kind of addressed already some my questions on the growth side, but on the margin side for ACG specifically, it did about 25.5% EBIT margins in fiscal 2022. We've always thought about this business as sort of a long-term potential of, like, a 30% EBIT margin business. Maybe help us understand sort of the drivers behind further operating margin expansion as it relates to ACG. Is 30% a realistic target? Is it attach rate? Is it geographic expansion? Like, what are some of the drivers for ACG margin specifically?
You want me to take that, Mike?
Yeah, yeah.
Yeah. I think the bottom line, I still think that 30% is achievable. I think it's a combination of a couple of things. Attach rate will really drive that. You think about this. It's attach rate and digital capabilities.
Yeah.
If you think about attach rates, the more you have attach rate, what's the number one cost or the number one expense? An unscheduled service call.
Mm-hmm.
Somebody who has to go out to a system. If you have predictive capabilities to understand or you are able to actually service more instruments with that service call, you get tremendous scale. I think so the more instruments we have under contract, the more scale you're gonna have to be because you don't have to add more people. You couple that with the digital capabilities. Mike talked about this. The more you can actually solve without having somebody go out and get our you know, our customers comfortable with, you know, chatting with somebody online.
You know, one of the benefits that we saw in, you know, during COVID was because you couldn't travel, you know, sometimes these folks are doing highly technical experiments that you have to get a specialist that may not be in the territory. What they ended up doing pre-COVID was they'd fly, you know, take two days. Now you can put them on a Zoom call, instantaneous help supporting the customer. That helps the customer increase, but it also helps us from a cost perspective. I think continuing to invest in these digital tools, WeChat is a great example of that in China. Just building out this scale through the attach rate is gonna help us drive that capability or that scale.
Got it. Maybe pivoting to two kind of exciting areas for your business, NASD and cell analysis. They've been key growth drivers for you, and now they're getting some scale as well.
Yeah.
Maybe talk a little bit about NASD first.
Sure.
When you think about sort of the move from preclinical to commercial and the boost in volumes, and you guys have been building capacity, and that's been the only constraint. It hasn't necessarily been demand. As you think about scale and the need to provide that scale at commercial, for commercial capabilities, how are you thinking about sort of your overall bioproduction, biopharma NASD type business, when you think about sort of expanding outside of siRNA and other areas? How can Agilent play a role in how important scale will be into that?
Yeah. Great, great questions. Just for the audience, when we use the word NASD, we're talking about our GMP grade oligonucleotide business. Right now, we are the leader in siRNA, and all the oligo drugs on the market that are used in siRNA all are being supported by Agilent. You're right. It's been mainly a capacity constraint.
As we continue to build out capacity, we've got another production line coming online later this year. Maybe we can talk more about that. That business I think crossed over $300 million or so last year, and we're gonna be bringing on another $150 or so of capacity. We won't see a lot in 2023. We also have a really special capabilities around GMP-grade guides for CRISPRs. We're really capacity constrained. We think there's opportunities for us to not only continue to meet the increasing demand for siRNA, but to play more broadly across that space, into antisense, into GMP-grade CRISPRs.
I think there's a real role here for Agilent play because of the reputation we have in the marketplace, which is, how are we able to overtake and become number one in our space, which was, not only that we have these great state-of-the-art facilities, but we have a great technical team. The way this marketplace works from our perspective is not simply the customer handing over a recipe to us and saying, "Go make this." We're actually intimately involved in their development activities. And, we've got a reputation in the marketplace of a company that's customer-oriented, easy to work with, highly technical and really there to ensure the customer success. I think that's the kind of things that get us really excited about this space because
The market itself is just continuing to grow. When we first started in this business a number of years ago, there was questions about would the science actually prove out to.
Yeah.
We're seeing really good indications from our pharma partners about therapies that come on market that are gonna service even broader population, patient populations. You know.
Yeah, I was gonna say, I think that that's where, you know, we get really excited, is when we look at the targeted disease states.
Mm-hmm
developed right now, they're much larger targeted populations than the current products that are on market. I think that helps us because people you hear about oligos production and so forth, you know, and many people make them, but they don't make them at scale.
Yeah.
Our ability to make these in kilogram scales, you know, commercial volumes, I think is best in the industry. And I think our continuing to push that envelope and i nvest, gives us a, you know, a bigger.
Yeah.
You know, big opportunity as the disease, therapeutic areas continue to be larger and larger. And yo u know, it's one thing to do oligos for research, another thing to do it for GMP.
Yeah.
You have to have the right systems and capabilities around regulatory. As Bob just mentioned, one of our competitive advantages is being able to produce at scale in the GMP side. We're feeling pretty good about our position in the marketplace. We're also feeling increasingly confident about the, you know, the uptake of Train B when it'll come online for us. As you may know, we had some challenges relative to COVID where, you know, a lot of the skilled tradesmen were, we just couldn't get them. They just weren't available because they were ill. Supply chain issues, that's all behind us. We still have work to do, but as Bob and I have been saying today, it's under our control.
Yeah. Yeah.
I know this question's been asked a lot this morning in other meetings, but just k inda remind us on, at a $300 million run rate as you exited, your fiscal year, and you're bringing on Train B at $150 million, how should we think about the phasing in of that new capacity as it relates to the run rate for FY 2023?
Yeah.
On the cost side, how should we think about the cost side?
Yeah, that's a good question.
Yeah.
You know, our expectation is by the end of the fiscal year, we will be at, you know, kind of the capacity run rate. I think if you thought about that in a $150 million run rate and, you know, created a third of that's probably a good number for FY 2023. We're assuming double-digit growth happening, and then obviously the full complement happening in 2024. Going on a $450-plus million, you know, book of business in 2024. We are gonna expect to see startup costs, you know, probably to the tune of $10 million-$15 million in 2023. That's built into it, you know, it's baked into our guide. Probably starts in the second quarter as we're training, you know, bringing on folks for training on the floor.
You know, we'll have The incrementals look very good, but you've got a fixed cost of turning on the lights, so to speak. You know, going into 2024, then you would have that run rate, you know, being very accretive to the overall company.
Got it. Just on the cell analysis business, a similar question. I mean, you've built this business over a series of transactions.
Mm-hmm.
Over sort of the last, call it seven years, which built it into about a $375 million business growing around 25% plus. As you think about scaling that business as well and competing in that business, how do you think about Agilent's position today versus where it could be? How do you think about investments b oth organic and inorganic?
Thanks for that question, Matt. In fact, we're real delighted. This is an example of our buy side of our growth strategy. Through a series of really targeted acquisitions, I think we built a nice business. I think it, first of all, starts with the kind of view of our portfolio, right? We have some of more traditional tools in the cell analysis, you know, like plate readers, but we also have leading cutting edge where nobody else has these, the live cell analysis, for example, some of the imaging platforms.
Yeah.
We think we have the scale to compete. What we're after and where we're gonna be driving and why we're gonna continue to win is to be able to integrate these tools in common data formats, to be able to have integrated data analysis. 'Cause what you would find as you go into these laboratories is they were using different equipment from different vendors. We're now gonna have integrated workflows. That being said, this would be an area that we could see not only increased organic investments, but there are other things we can do inorganically here as well. You know, that's an area that we'll continue to look at for opportunities. I think probably the same thing holds.
I mean, I didn't mention earlier when you were talking about the NASD business, there could be inorganic plays there as well.
Got it. Just shifting a little bit to the risk side of the business as we see them at least, and we'd love to get your view on it. Europe is kind of still high on our list given the energy situation over there. You've called it out over the last couple of quarters as being sort of on your watch list.
Right.
You grew 14% in fiscal Q4 in Europe, it hasn't shown up yet. It's something that you've obviously talked about and is a concern of yours. How do you see sort of Europe, the best of your ability, playing out over the course of this year, particularly if we get a mild winter? Has there been some sort of subdued spending from some of the customers over there we could see return in the back half? How are you thinking about it?
Yeah, no, so great question. I mentioned earlier, you know, that we've now been able to see how the business finished through calendar year 2022, and haven't seen it yet. Would be the same statement around Europe. I think we still have to be cautious there because there's just so much macro noise around the economic impacts and the customer's ability to invest when they're dealing with higher energy input costs. That being said, if things do continue in terms of a more mild winter, if energy prices aren't at the escalated levels that people had anticipated, that could be a net positive for us. We're not ready to call it.
Yeah
But if that situation would develop, we sort of started as we set up the company, you know, for 2023, what we knew was pointing to slowness in Europe.
Yeah.
We haven't seen it yet, but, you know, those macro headwinds that people have been concerned about haven't also dissipated either.
Yeah. Got it. In regards to China, obviously some big policy changes there.
Yeah
When it comes to COVID, which given the disruptions you saw earlier this year.
Mm-hmm
Which I have to say, you probably had one of the most significant disruption during Q.
Yeah.
During calendar Q2.
Yeah.
You still beat numbers, so it was very impressive. We're probably not gonna see that from a government policy standpoint. However, there still probably will be disruptions because of COVID in China. How are you thinking about the opportunities in China under this sort of the new non-zero COVID policy?
Mm-hmm
What you've learned this past year in terms of how to adapt to that environment?
Thanks, Max. First of all, re-thanks for the recognition on how we handled 2022. I think sometimes what may get lost in the quarter-to-quarter variation, was we did 18% growth for the year in China. As you mentioned earlier, in our second quarter, we pretty much were shut down in Shanghai for a large part of the quarter, all of April and a good part of March. The team did find a way. The business was never lost. It was always deferred, et cetera. In terms of learning, and I'll get to the impacts of how we see the change in policy. In terms of learning, what we've done since then is really made sure we opened up multiple entry points into the country.
What we saw was if there was a lockdown, it would be in one particular area. We'll be over-indexed to Shanghai. What we've done is we've opened up a lot more importation routes into the country through different ports of entry. We've also put more, and you've probably saw this a little bit in our working capital, we've put a little bit more in terms of consumables and support parts in what we call forward stocking locations, so that you weren't dependent on a support part coming in from the U.S. or Germany or someplace to get to our service engineers. That's the kind of things we've done to sort of mitigate the risk.
We relative to the change in policy, we were really delighted to see that because if now the situation is more under control, we've actually already weathered one of those storms already without any impact. We saw the wave kind of go through as a large percentage of the workforce was hit with COVID. They're all back to work now. Fortunately, we haven't seen high degrees of real severity of illness. And we've learned, back to learning, we've actually learned to work remotely. Because a lot of people were still working remotely even ahead from COVID. Long story short, we've already experienced, you know, some of the waves on our workforce in 2023.
You won't hear us talk about it in a quarter, quarterly call. We're feeling that it's gonna be more of a, if you will, normal cadence of business in China. Hopefully this also leads to, you know, improvements in the overall economic growth in the country, which I think is really part of the reasons behind some of the changes. We're also hearing some indications that there may be some stimulus coming the way in 2023. Still early days. I'd say right now there's more net positives than net negatives relative to what's happening in China.
Yeah. maybe address that stimulus, 'cause, you know, we were talking about it earlier about it could actually represent an upside.
Yeah
for the back half of the year, particularly in the academic channel within China. Maybe talk about the dynamics of actually the stimulus money translating to spend in China relative than what people expect to see in the U.S.
I know. You know, sometimes it's a little opaque in terms of what's going on, but once a decision is made, it gets implemented very quickly. We're hearing indications that there's gonna be money going into, particularly life science research, academic research. We think once those plans get finalized, they'll get implemented really quickly. On the flip side is, you know, the CHIPS Act in the U.S. was implemented with a lot of, was announced with a lot of fanfare. It's taken some time to actually get to the point of the money being there. The good news is we're actually starting to have conversations with customers about what this means for their new facilities, so it's starting to happen, in the U.S. I'd say we think from announcement to implementation in China, we can expect that to happen more quickly.
Yeah.
Perhaps there's a scenario that says, "Hey, you know, after they come back from Lunar New Year, we know, get some more clarity, and maybe it's, maybe it's even as early as the second half.
Yeah, second half of 2023.
We haven't assumed any of that.
This, yeah, this is not in your guide.
No.
Just so you know.
No. No.
Got it. moving to the newly renamed CAM segment.
Yes.
It's obviously had a great couple of years, you've talked a little bit about some of these secular drivers, semis, lithium battery, material sciences. Kind of how are you managing these end markets in terms of capacity, spend, and focus? Do you feel that the overall CAM segment is significantly less cyclical than it has been in the past? I do wanna follow up this question with sort of overall commentary on resilience of Agilent and how the perception of Agilent isn't necessarily lined up with the reality of Agilent today when it comes to the resilience. I think the CAM segment is actually a key part of understanding that.
Yeah, I'm not looking at your questions, but I'm so glad you asked that question. Because it's going to be the part of our storyboard, which is a much more resilient company. The CAM segment is one. We purposely changed the name because I've got a support contracts business, which is roughly 10% of all Agilent. I've got an energy business which is less than 2%, and that's what everybody always wanted to talk about. Why are we talking about such a small piece of our business?
By the way, when we talk about this chemical and advanced materials segment, just to kind of frame it for the audience, about 35% of that is what we call advanced materials, about 55% is chemicals, and about 10% is energy-related.
It's 20% of the overall business.
20% of the CAM segment.
Yeah.
20% of the total company. Then this advanced materials thing, we think there really is secular drivers behind it. What are we talking about? What we're talking about is the revolution that's occurring in the automobile industry, where we're moving to electric vehicles, which require batteries. And there's a lot of investments happening in terms of not only production of batteries, but making them better. And a lot of that's centered in places like China. And that's also a concern from many people's perspective. Nobody wants to have a concentration of key supply chains components anywhere in the world. We're seeing both investments in China as well as in the U.S. in particular in this area.
We talked a bit about this already, you know, the onshoring that's going relative to initially it was about key ingredients for the pharmaceutical value chain, but now it's really focused on semiconductor chips. We think there's new, if you will, secular drivers in the CAM space, which make this market less cyclical. There's still a level of cyclicality there, but not like it was historic. I think Bob and I are going to put in together some material to kind of show this to everybody.
I think maybe just to put a couple of numbers to that, so that the area that is probably the most cyclical is that energy side.
Yeah, 10%.
You said 10%. Five years ago, that was about 30% of the overall market. You can see over this last period of five years a, you know, dramatic shift, then you couple that with, you know, more and more services being built into kind of the CAM market as well as part of ACG's expansion, you get this more resilient business. I think these investments in semiconductors, you know, reshoring and then the lithium-ion batteries, those are things that I think are strategic to countries and industries that are not gonna, you know, change in the near term.
I think that, you know, we see those as, you know, secular growth drivers that are gonna, you know, be able to power through, you know, maybe some short-term kind of changes in the macro.
I think this is an underappreciated part of Agilent's business as well, which is, having the strength in the applied markets is a net positive, right? Because I'm investing in core technologies, say, for the pharmaceutical industry, but I can use those technologies in the same end markets as well. We have a legacy of leadership in the space. Customers know us well. We're well-established. So it's a nice leverage play for us as well. While it's not in the CAM space, we're also, you know, as we were talking a bit today, the whole PFAS testing is a new. Oh, I'm not looking at your notes. PFAS testing is also a new secular driver for the business we haven't seen for some time.
Yeah. I mean, PFAS is funny. When we initiated on the sector in 2020, we wrote about PFAS, and no one wanted to talk about it. This was just crickets. I think You guys were probably the first ones to really start talking about PFAS, and I think the technology has now come to the point where it's implementable. The problem, given some of the new regulations that are coming in or will be coming.
Yeah
I think the problem is being recognized. Maybe help us frame the size of the market today, the growth rate, what your share of that market is today, and you know, how do you see this playing out over the next couple of years in terms of future regulatory, EPA getting involved?
Yeah.
How would you think about it?
Yeah. I think the audience is probably already quite familiar with the word PFAS. Again, we're talking about the forever chemicals. You may have seen some recent announcements of large companies getting out of this space because it's very clear that there's some issues relative to health consequences. There's thousands of these. We're seeing indications that there's gonna be certain certain chemicals will be regulated. We think this is early days. I think perhaps part of the reason why we're talking about it is we're the leader in the space. We size the market at roughly $200 million. You know, we're probably half of that right now. We think that this has got multiple years of double-digit growth ahead of us because it's gonna be a regulatory-driven marketplace. The regs themselves are still evolving.
A lot of it's now state by state here in the U.S. You could see, you know, eventually perhaps something happen at the U.S. national level with EPA. I think you'll see regs happen in EU as well as China. And I think there's gonna be continued focus on the research because it's still not clear exactly what. You know, it's everywhere. And, you know, how concerned should we be about all of them or is this a subset of them? I think there's gonna be money in the research. I believe so.
We've really started to seeing it, you know, kind of kickstart with the Infrastructure Act here in the U.S.
Yeah, yeah.
Um, and, uh-
Yep
That you know, speaking of time it took to give money from an act actually down to, you know, companies and states and so forth. I think that that's where we're starting to see that state by state regulation. I think now what you're seeing is potential for EPA to have standards across, you know, water testing in some areas. I think that would be a real growth driver in terms of just the volume of screening that would be required. As you said, you know, the technology continues to advance and the science continues to advance in terms of understanding what these potentially could mean.
We think this is an expansionary play because to do this properly, you need to have the latest technologies. We also know that our customers in environmental labs, they don't have unused equipment to begin with. It's not a matter of just running another application on the existing equipment. We see this as incremental growth.
For the audience, this is a mass spec.
Yeah, yeah.
plus services.
Yeah. Mm-hmm.
around mass spec type.
Yeah. Our claim to fame here is not only to have, you know, the great instrumentation that's required, but the integrated workflow, including the sample prep. Be able to, if you will, soup to nuts, be able to work with a customer on how to do the application.
Okay. In the minute left, we're gonna touch on capital deployment. You've already talked a little bit about it, I think what would be interesting to folks is sort of the sense you're getting from sellers. Has sort of the bid-ask spread narrowed, how are you thinking about private versus public, bolt-on versus larger? Just your view.
Yeah. I think you're talking about the M&A element of our capital deployment. We're also, as you know, gonna be investing on the CapEx side
Yep
as we talked earlier. As Bob mentioned, I think earlier today, it says, we're now in the same room. We weren't even in the same building before, in terms of bid-ask spread. I'd also say that we've historically focused on the private sector, but there now are some interesting things that have us looking in the public space as well. There's some companies out there that have been, you know, kinda beaten down, but maybe unjustifiably so. I mean, there's still gotta kinda you gotta be really careful 'cause some companies, we don't see viability of their businesses. There's, okay, that might be interesting. We're more open to doing public deals. We would do continue, do it on a friendly basis, though.
Got it.
We see the valuation as a net positive this space. We also see, you know, HSR is real. If you're still, if there isn't any overlap, it's an easier path for you to win the deal in terms of approval standpoint. I think you also do quality deals.
Yep.
Because money is no longer free.
Yeah.
Yeah.
All right. Well, with that, we will wrap it up.
Thank you, Matt.
Mike, Bob, thank you very much.
Thank you.
Go Eagles.
I was ready for go Birds.
Yeah, go Birds.
Come on, Birds.
Thank you, Matt.
Yes.