Good afternoon, everybody. Luke Sergott, I cover the life science tools and diagnostics here at Barclays. Good thing I got that part right. Today, I have Bob McMahon with me, CFO of Agilent. It's great to have you here again. To start off, the key question from all the investors right now is kind of there's been a lot of confusion on how the book of business trended, particularly in LSAG throughout the quarter. If you wanna dive in there and talk about the trends that you're seeing and ultimately how the backlog built or did not.
First of all, it's great to be here, and particularly coming from California, where it's never-ending rain. It's good to see you, although today is cloudy, but certainly appreciate you having the opportunity to talk to you, Luke Sergott, and talk to you. What I would say is, we're pleased with the first quarter performance that we've had. It was really broad-based across all of our end markets in all of our groups. If I looked at, we ended up posting a 10% core growth in revenue across the company, really led by our LSAG business that grew 11% in our services business. You know, which are, were nice complements to each other at 13%.
Very good start to the year, and that translated into some outperformance relative to our expectations and a nice start on the EPS side as well. Now to your point around orders, as we mentioned on the call, actually our overall orders were greater than revenue for the company. We actually built backlog, but it was on the back of our ACG and NASD businesses. The business that we have within diagnostics and genomics. We talked about our LSAG business actually eating into our elevated. That's consistent with what we saw in Q4 and consistent with the ability for us to see our supply delivery times coming down. That is a positive thing.
Orders were less than revenue in LSAG in the quarter as a result of that, but still posted, you know, the 11% growth.
Okay. can you give us a sense of the magnitude of the decline in orders, like just frame it and how?
Here's what I would say. If I, if I looked at our backlogs for Q1, we exited Q1 with still elevated backlog. While we ate into it's still higher than what we've had historically. If you think about our backlog, I'm talking specifically LSAG backlog here, you know, we have bigger backlogs still at ACG. That's the way, and I would say it was pretty consistent throughout the course of the quarter. You know, what I would say, you know, our quarters end, our first quarter ended at the end of January, we do have a dynamic of the Chinese New Year impacting impacting our order book year on year. We were able to pull through that and actually drive 13% growth in China, across the company.
That's what I would say.
Okay. on the Chinese New Year, I mean, it was longer than normal, right?
Yeah.
It was, what, three weeks. Give us a sense of how the rebound or the recovery has been trending within that or within China as the quarters progressed.
Yeah. I mean, our team in China has done a phenomenal job of executing through what we saw a pretty challenging time with COVID. We actually thought the elimination of the zero-COVID policy is a good thing. It created some near-term disruption, but we were able to work through that. Our performance was pretty consistent throughout the quarter.
I see.
We're expecting, you know, during February, the performance and the activity is bouncing back as we expected.
Okay. You also count, I mean, you guys on the first quarter, you conservative rate accounts for a lot with the macro.
Yeah.
You know, how much of China factors into that? Give us a sense of what else is going on.
Yeah, it's a great question. You know, one of the things that we're, you know, I think we're acknowledging is the, you know, the macro volatility that we're seeing, and we're kind of taking our forecasting and guidance kind of one quarter at a time. You know, we've put up 10%. Actually, our second quarter is also, our growth rate for the second quarter is higher than our full year guide, it's really a second half commentary. Unlike maybe some other competitors that are back-ended loaded, ours is front-end loaded. That's not to say that our expectation is the business is slowing, it's just we don't know what's going, you know, what is gonna happen in the macro, and we'd rather be conservative around that.
If things end up being better, that's a good thing for us. China plays into that to a certain extent. You know, again, I would expect us to have a stronger first half than second half. Now, some of that is comparisons. We had a very strong second half of the year last year as we were able to recover from the Shanghai shutdown last year, and then not only recovered that faster than we anticipated, we actually able to take down some of our backlog there, which was at historic levels. There's a comp issue there. I think if I think about the macro forecast for China, I actually see it improving throughout the course of the year.
The elimination of the zero-COVID policy, we've gone through the waves of infections. I think with stimulus and economic output, I think it will continue to improve. As I'm sure we'll probably get into the stimulus, we haven't built any incremental business into our forecast for that. That would be, you know, when and if it comes, it would be upside to our forecast. We hadn't seen it in Q1 and still delivered a full percentage growth.
Regardless if that, if and when that comes, how quickly can they turn on that spigot for you?
Yeah. It China has the ability to disperse funds faster than I think any place around the world. When it happens, it usually happens pretty. Obviously, it has to flow through our order book first before-
Yeah.
... it gets delivered. If, if it happens, it would happen within our fiscal year.
All right. On the backlog, you talked about burning that down and then getting to more healthy levels and that being a good thing. Talk about what you meant there. You know, are your customers starting to push back on the actual delivery times? Like-
No. I think, if we think about when I say healthy, obviously probably more historical levels.
Mm-hmm.
It's always good to have a backlog.
Yeah.
What I would say is the delivery times are getting back to kind of pre-pandemic levels. We had, you know, extended supply chains, both from a logistics standpoint, but also, some products that were, constrained, particularly on the chip side. You know, we were able to continue to satisfy demand for our customers. In Q1 in particular, it was really important to be able to deliver to our customers who many have a calendar year-end.
Yeah.
You know, for calendar year-end shipments, we were able to do that. We actually think we're doing it as well or better than anyone else in the marketplace. We didn't have any cancellations as a result of inability to deliver. I think what we wanna have is the ability to actually meet our customers' needs going back to the way that they were used to versus this extended time.
Yeah. Just more normalcy. I mean, it's all tied together, right? The instrument growth has continued to be strong. You stated, LC/MS was up 16%.
Yes.
Spectroscopy up 20%. Talk about the ability in these key businesses for you guys, underlying drivers and duration of, you know, kind of what they can guide for you?
Yeah. It's a really good question. You know, our team, you know, we don't often talk about spectroscopy, but, you know, that's a fantastic business for us. We're certainly one of the leaders there, and it actually speaks to the breadth and depth of our technology portfolio. A lot of people always like to talk about LC, and then LC/MS, but we're broader than that. I'll start with that one first. I mean, that business has seen accelerated growth throughout the course of last year and continued very strong growth here in the first quarter. That's really because of these new, you know, growth drivers that we're seeing, particularly in our chemical and advanced materials business.
That, that fits squarely into supporting the semiconductor industry and lithium batteries or the electrification of cars and so forth. That, we still see that as a growth driver for the rest of the year. Then, on the LC and LC/MS, that's both on the large molecules side of our business. That, that has been a growth driver in the pharma side for a number of years. Now, what we're seeing is increasing opportunities in environmental and forensics. LC/MS, and in fact, just yesterday, the U.S. EPA issued some guidelines on PFAS testing. That's one of the major technologies that goes into PFAS testing. We've been talking about this for the last several quarters of an opportunity for us in its early stages.
I think that that will continue to grow. If I think about it, for the full year, those two markets will be faster growing than LSAG. Our growth rate embedded in our guide is roughly mid-single digits. Those two technologies will be faster than that.
Mm-hmm.
If things continue the way that they are, then we would have the opportunity to do better than that.
Yeah. especially so let's talk a little bit about PFAS testing.
Mm-hmm.
That opportunity for you guys. Right now, the model is it's basically just there's municipalities over 10,000 need to do the testing. They're setting up labs to do that. Have all those instruments been deployed? I mean, are you meeting most of that demand? Like, 'cause it's supposed to be done by 2024, right?
Yeah. I would say there's still a long ways to go. We have started seeing some of that funding come through the Infrastructure Act back about a year ago now. I would say that there is still a number of opportunities to continue to replace or place instruments. You know, what this allows us to do is actually, to your point, it was being done state by state or municipality to municipality, and there were varying degrees of regulatory requirements. Now, with the, with the EPA coming out, there's a clear standard across which I think will accelerate adoption. These are customers that we already work with. These are the major contract testing labs. We are a leader in those applied markets. These aren't new labs necessarily that are coming up.
It's actually the existing labs that are adding new capabilities. We think that there's more to run here for sure.
All right. Yeah, that's gonna run through 2024, and they're placing the boxes there. Is there a big pull-through component on that side or?
Not as much. There is some on LC, you know, and LC/MS. I think as we go through this, I think there's an opportunity to actually attach, you know, our strategy around attaching our services, as well. That'll come down the road, right?
Yeah.
Because the new instruments typically have a warranty. Once that instrument goes off warranty is when you start seeing the revenue of the services. Actually, that's one of the reasons that our services business has been so strong the last couple of years. We've placed record number of instruments. Our strategy of increasing our attach rate has allowed us to, you know, continue that annuity and as those instruments come off of standard warranty, the extended warranties come on, and that's really helped power our ACG business.
How long before that when you place an instrument, is it like two years essentially where-- after the warranty, and then you guys start seeing that higher-
It's typically one year. You know, a standard warranty would typically be one year. In some cases, depending on the size of the deal and so forth, they can be extended, but it's more one year. It's quick, one year typically.
Yeah. Talk about your attach rate and how that's gone.
It's a great question. Our attach rate is in Q4, our fiscal Q4 hit a milestone to be over 30%. For reference, five years ago, it was in the mid-20s, and it's been growing a point and a half per year. Each point is roughly worth an annualized $30 million of incremental revenue, a combination of services as well as consumables. Our strategy of continuing to increase that really helped us drive that accelerated growth. If you look at ACG has always been, you know, one of the more resilient parts of our business because it is got that attach rate. It was growing at 8%, 9%.
In the last couple of years, it's now been growing double digits, the beauty of it is twofold, is one is the areas that we've been focusing on, biotech, of, you know, large molecule and some of these faster-growing markets, as well as the technologies, the more sophisticated instruments have almost by definition, a higher attach rate because they're more sophisticated. It actually, not only is our strategy playing, the technology focus that we have is also helping with the mix profile.
Okay. That's the services drop through it all are pretty healthy margins.
Yeah. You know, we've, if you look at it, in fact we, our services business in Q1 was right at the been the fastest with accretive growth rate and improvements over the last five, six years. The beauty of that is the, the scale is our a real competitive advantage. If you go into a laboratory or whether you do one instrument or two instruments or three, incremental costs as long as you're in there and it's a scheduled repair, it doesn't cost us that much incrementally.
The ability for us to have our teams that are out in the field coupled with our digital capabilities that we really accelerated during COVID, the beauty of that is you can solve some of the problems for a customer without having a service engineer go to the site and actually do it faster. That's better for the customer. It's actually more profitable for us. The most expensive trip for us would be an unscheduled service call. It's also the highest customer dissatisfactor, in fact, if in fact a system is down. That scale, I think, plays to our advantage in two ways. One is not only the end markets we serve, but the technology that we have.
We are able to leverage that service engineer base across multiple end markets as well as multiple technologies. I think, you know, there's not too many people who can do that.
All right. To change gears here, excuse me. Let's talk about. In guidance, you talked about, when you talked about the puts and takes on the quarter, you continued to highlighted that genomics will be-
Yeah.
...headwind for you guys. What's going on there? Give us, you know, what's your.
That's a great question. You know, that was one of the areas that, you know, we delivered at 10% quarter growth in Q1, but our genomics business, and it's really the consumables side of our genomics business, was down year-on-year. Maybe for the, for the audience's benefit, overall, we have about a half a billion dollar genomics business. Half of it is instrumentation that, you know, performed well. The other half is roughly consumables. What we saw there is, you know, in the genomics mark-- you know, we got caught up in some of the macro situation with some of our customers.
Many of these customers are smaller customers, with a higher cost of capital, but now focused on profitability, also focused on the balance sheet, which they hadn't in the past. What we're seeing is a more focus on working capital. They can only hold a certain amount of inventory to start with because this has a relatively short shelf life. It wasn't that they were overstocked, but they're actually trying to lean their inventories. We saw that in one, our expectations that will continue into Q2. It will kind of right-size itself. The good news is we haven't seen volumes of testing going down at any customer. It's really these, you know, these companies more focused on the P&L and profitability to extend their cash runway.
Our expectation is Q1, Q2, it's kind of a function of kind of the macro, situation. In the second half of the year, actually we're starting to expect a recovery in that space.
Okay. On the instrument side, one of your peers here yesterday was talking about I mean, they've been placing instruments, very strong growth. Are you guys starting to see the market maybe get a little saturated? Are you seeing any of that? You know, where do you see kind of green shoots for that business?
I wouldn't say that. We haven't seen saturation. I think, you know, we are a leader in the QA/QC sample prep side of NGS. The next competitor is a distant second. I think we have two opportunities. One is to continue to expand. I, you know, I think it's important to say that our view is genomics long term is a good business to be in. I think the science will continue to drive that, and there will be more applications, particularly in cancer diagnostics, that will need NGS-based assays and technologies. We think that the market will continue to expand. In addition, you know, we also have a nice installed base of instruments out there that need to be replaced.
We have not only, Which some other customers, you know, that are first placing orders, they may not have that opportunity. We have not only research but also the clinical diagnostic side for our prep. Our consumables business for genomics goes into not only research, but also the clinical side in LDTs and so forth.
Right now, with all the competition coming across different technologies, you guys are pretty much agnostic. Give us a sense of what you're seeing there from a technology-?
Yeah. That's right. We think more competition is a good thing. As you said, we're agnostic. We have agreements with not only the leader in that space, but also many of the newer entrants that are coming in. I think the more sequencing runs, the lower the cost goes, actually, the more benefit for us.
All right. On the sticking on DGG, the margin dynamic in the first quarter had a little bit of a step down there.
Mm-hmm.
What's going on there, and then kinda how we should expect that to ramp throughout the year?
Yeah, it's a good question. It's a function of two things, what we just talked about. Our genomics business, the consumable side of the business is very profitable. That had a negative mix effect when that business declined. We actually didn't reduce R&D programs and other activities because we think that this is a transitory effect, so we wanna continue to invest behind that business. We also were investing in the commercial side for our NGS business. The Resbio and companion diagnostics business, we, you know, had a approval of our first companion diagnostics, and we're building out the channel.
We announced an agreement with Quest there. We're also, you know, creating demand in the field by hiring sales folks ourselves and so forth. Yeah, those two dynamics. The first one being the majority of the change, the mix shift with genomics and the. Then the second being some of the investments for the long term.
On that Resbio piece, of the CDX, how much were you able to leverage your experience with Dako as one of the first companion diagnostics and getting that out there?
Yeah. One of the original thesis of, buying, or acquiring Resbio was being able to offer multimodality companion diagnostics to customers. We're seeing that play out. You know, typically a customer will, you know, a pharma customer will go to multiple modalities depending on what what cancer they're targeting. We have the ability to actually now not only offer tissue-based, you know, pathology, you know, traditional pathology, but now also NGS. We're actually starting to see that. It's still early days in terms of being able to kind of leverage that, but, I don't think we'll ever be kind of, you know, pharma will never be a one-stop shop.
Mm-hmm.
They'll continue to go around. Having more modalities, I think will help them, us being a preferred partner. I think, you know, our long-term game is being able to take what we do in companion diagnostics or tissue-based is be able to do the test and then distribute it decentralized through the pathology labs. We believe that over time, you know, NGS diagnostics are gonna be the same. So getting a kitted solution out more broadly distributed will help with turnaround time, particularly in cancer, diagnosis, days matter.
Mm.
The there will be a role for central labs, but I also think there will also be a role for decentralized labs and that kit-kitted technology. We think that our ability to be able to do that, is gonna be able to leverage our existing, our existing kit, companion diagnostics.
Yeah. Makes sense. On NASD here, give us a sense of, I mean, the capacity ramp is gonna kick in probably mostly in the back half.
Mm-hmm.
Talk about the progress here, how we should think about that ultimately, doubling up the revenue.
Yeah. We're super excited about that business. That business has continued to perform extremely well through the last, I would say, five years. You know, it's now approaching a $350 million business by the end of this year. It grew over 20% in Q1. It's accretive to the overall margins. Train B, which is the expansion that you're just referencing, is on track to come online mid-calendar year this year. It has $100 million of revenue capacity. Our existing capacity is kinda capped at, like, $300 million.
Mm.
We would expect it ramping up in the back half of the year as one of the nice growth drivers for us in the second half of the year. You know, getting to kind of a $400 million, $450 million kinda runway business with the existing capacity. In January, we just announced an additional expansion of Trains C and D, which would take that $450 million and double it again.
Yeah.
Which is $725 million expansion. It's actually doing two things. It's not only doubling our capacity from a revenue perspective, it's also expanding the technologies that we have. Today we produce primarily siRNA-
Mm-hmm.
... for our clients, customers. With the new technology. We have a pilot line for GMP-grade CRISPRs. With the new expansion, we'll be able to expand to antisense technology, which is a related technology to siRNA, as well as have a GMP-grade commercial line for CRISPR. This will start coming online in 2026, 2027. We're super excited about it. It not only increases our capacity, but it increases the breadth of products and technologies that we can offer to our customers. When we look at the number of products that are in the pipeline, just our existing siRNA, you know, there's still more products in the clinic than there are on market.
Mm.
When you think about the products that are in the clinic, they're going after larger modalities or therapeutic areas. Volume continues to increase in our belief. That's gonna be great for patients, and it's gonna be great for our business as well.
I imagine the margin's pretty healthy on that business as well.
We like that business.
Awesome. All right. Well, that's all the time we have for today.
Great.
Thank you again.
Thanks, Luke.
We'll see you.