A - Agilent Technologies Inc. (A) Evercore ISI HealthCONx Conference 2023 Transcript
2023-11-29 14:55:24 ET
Agilent Technologies, Inc. (A)
Evercore ISI HealthCONx Conference 2023
November 29, 2023, 10:50 AM ET
Company Participants
Mike McMullen - President and Chief Executive Officer
Bob McMahon - Chief Financial Officer
Conference Call Participants
Vijay Kumar - Evercore ISI
Presentation
Vijay Kumar
Thanks everyone for joining us this morning. I’m Vijay Kumar. I cover Life Science and MedTech here at Evercore. Pleasure to have with us, Agilent Technologies this morning. From the company we have CEO, Mike McMullen; CFO, Bob McMahon. Mike and Bob, thanks for taking the time to be with us.
Mike McMullen
Thank you, Vijay. It’s a real pleasure to be here, particularly in this year’s warmer venue as we were talking earlier. But I think it’s really great to be here. The timing is wonderful. We just finished off closing out a very challenging 2023 with better than expected Q4 results. And as I mentioned in our earnings call, very proud of the Agilent team in terms of how they pivoted and really went after the market. And we’re able to deliver leverage earnings for our shareholders while really continue to stay very close to our customers. And I think we’ll probably get into it a bit today, Vijay, but also a view that we can get back to growth in 2024, so again, happy to be here with Bob.
Vijay Kumar
Fantastic. I almost expected you to come out with the one Agilent t-shirt, but…
Mike McMullen
That’s our secret sauce.
Vijay Kumar
So you did bring up Q4 came in slightly above despite China being down in the 30s pharma is down in the mid-teens, when you think about those different buckets pharma China in a non-pharma. So what business came in above, which drove the, I guess slightly better performance versus guidance?
Bob McMahon
I think obviously China has been a big source of discussion and variability on outlook throughout the year. We saw the results come in about where we had expected.
Mike McMullen
So we’re very pleased with that kind of as we said in our call, signs of potential stabilization. But to your question, I think it was really the U.S.-based business that really drove again the better than planned performance on the revenue side.
Bob McMahon
Yeah. I would say China was within kind of our expectations a little better, but still down, it was down 31%. We were expecting it to be kind of down mid-30s, but the big outlier was really the performance as Mike said in the Americas which performed better than we expected.
Mike McMullen
And then as you know, we had EPS beat and that really I think we’re really pleased with the impact and results of some of the work we’ve been doing relative to the cost structure of the company as well.
Vijay Kumar
Historically, I think typically Agilent has seen as being a more conservative company, Mike, I think your comments on book-to-bill, it really, I think it created some noise in the group, if you will, and everyone has their views. But I’m curious when you made those comments on book-to-bill, talk about how the queue progressed, do you see month-on-month improvements?
Mike McMullen
Yes sure. So I’m not sure conservative is the right term for us, but what I will tell you is we call it like we see it. And we do our best to be transparent to the investor community. And we thought, kind of if I was in the investment world, I’d say there’s a lot of different noise out in the barn what really is going on in the marketplace. So we thought it was very important to talk about something we typically don’t talk about, which is the order book. And because, as Bob can attest, we have been really eating in the backlog for several quarters and we thought it was really important to highlight to the outside world that, hey, in the fourth quarter, we actually saw what we saw encouraging signs of potential stabilization because we had more instrument orders than we had shipments. So we built backlog and we had a book-to-bill over one for the first time. What, Bob in several quarters, I think.
Bob McMahon
In several quarters, yes, what we saw was a kind of a trough in Q2, it still started with 0.9, and then a sequential improvement in Q3 and Q4 was the first time, and as Mike said, several quarters, that it was above one. And we thought that that was to be very clear. Orders are still down year-on-year, but obviously not down as much as revenue was. And we see that as a good sign of potential stabilization in the marketplace. And that was not just in overall instrumentation. It was also the same situation in China, which I know has been a topic of conversation, let’s say.
Vijay Kumar
And just on those trends that you mentioned, how book-to-bill progressed from 2Q bottom to sequential step up, maybe a little bit more color on Q4. Was Q4 month-on-month did things improve? Is that what’s giving us the signs of…?
Mike McMullen
Yes, so I think one of the things is, we kept an eye on was how is the flow of business throughout the quarter, and the business improved each month through the quarter, albeit down, if you will the degree of impact was lower as we went throughout the quarter. We actually finished fairly strongly in the month of October, which is, as you know, in Agilent. That’s the end of our fiscal 2023. So I think you were looking at on the growth rates each month versus prior year.
Vijay Kumar
Yes, exactly. When you look at those exit rates on instrumentation orders, I’m curious, what is your instrument revenue CAGR versus pre-pandemic levels? I think there’s been some noise about perhaps customers or spend during the pandemic years. Is that all out of the system? Are we at a normalized level?
Mike McMullen
So I’ll leave the actual number to Bob. I think you may have it in your notes. But while he’s looking through his notes, what I say is a couple of things. First of all, customers don’t stock instruments. They don’t buy instruments before they need them. What we have been seeing during the last several years, and something we’ve talked about in prior calls is there’s been an accelerated catch up in deferred fleet upgrades, if you will, during the QA/QC environment. And I think that’s been a big part of the story for Agilent and for the industry, which was we had been foreshadowing this likelihood, which was, hey, we’ve been seeing 20%, 25% growth rates in core small molecule. That’s more of a mid-single-digit marketplace.
What we hadn’t anticipated was both the steepness of the ramp, but also the steepness of the decline we’ve seen over the last several quarters. That being said, we know that customers will continue to want to invest over time to keep their fleet up to date so they can support their QA/QC efforts around the production of pharmaceuticals. So again, we think that’s a mid singles. We don’t think it’s a double digit decline market either, which is what we’re experiencing right now.
Bob McMahon
And Mike mentioned this on the call a few weeks back. If you looked at our four year compounded annual growth rate as a company, it was at 7%, which is at the high end of our long range plan. And if you kind of double click on that and say what was instrumentation in that? It was mid-single-digits as Mike just talked about.
Mike McMullen
And that’s always been our thesis of our long term growth outlook for Agilent, which was the core instrumentation business, which is just one, it’s a big part of the company, but not the only part of our company’s business and portfolios is a mid-single-digit kind of market environment. So we think we’re right there. Obviously there’s been some variation around that mean last several years.
Vijay Kumar
And Mike, I think in the past you’ve mentioned qualitatively Agilent’s order book is different versus peers. Just remind us on how you define orders, because I guess that book-to-bill, it matters for some companies, it doesn’t matter for some companies. I think we’re all trying to figure out how important is that metric?
Mike McMullen
Yeah, I can’t speak to the order booking policies of other companies, but when we book orders, we book orders that can only be shipped within the next six months. So expectation is with our order acceptance policy, is it’s going to be revenue within the next six months? So what I also can tell you is clean orders is a really big part of what we want to do here, because we don’t want to have a situation where oh, your salespeople have a great year to close off the year, get paid their conversation and then come November, December, you have a bunch of order cancellations.
So we’re very diligent about making sure these are real orders, they have all the right documentation. So when it’s in our order book, it’s a real order. We have very few cancellations and I think that’s why we have a lot of confidence about our ability to have an outlook, at least for the next quarter or so of what revenue looks like, because we can count on that order book to be real.
Vijay Kumar
And would have been cancellation trends, I think you’ve also sort of hinted, look, even before cancellation, sometimes a pause or push out of customer deliveries could be an indication. I’m curious.
Mike McMullen
Yes. So, Bob, I know that’s narrative.
Bob McMahon
Yes, that’s great question. We watch both of those. And one, we haven’t had any increase in cancellations above trend, and it’s extremely low for the pieces that Mike just talked about. And then even kind of the second question around extended delivery dates or taking dates and delivering later. We haven’t seen any push outs of deliveries either. So that gives us confidence that people are that’s usually kind of an early indicator that potentially they could cancel them. And we haven’t seen any of that as well. So the fidelity of our backlog, we feel, is very strong.
Mike McMullen
Maybe just to kind of build on Bob’s response when we think about kind of the longer term outlook for the company. This really gets back to what’s in the deal funnel, right? The not yet orders, but the potential orders. And we’re not seeing deals come out of the funnel either. So that would also be a precursor to a slowdown, more significant slowdown if active deals were actually going and this being canceled, and we’re not seeing that.
In fact, if you would go visit one of our sites in the U.S. or Europe or Asia, you’d see they’re fully booked for customer demos. So Bob and I are always getting requests for more demo equipment and more lab space. So there’s a lot of activity out there in the market environment, but obviously not yet releasing. And listen, we don’t want to get too far down on our skis here, so to speak, because the market still is challenged. And we expect, at least from an agile perspective, we expect the first half of 2024 to look a lot like the second half of 2023.
That being said, we really wanted to communicate our perspective that we’re seeing signs of stabilization, and we can dig into some details later on where that’s coming from so that we’re not anticipating a significantly worse market environment as we go into 2024.
Vijay Kumar
Understood. And I did have some questions on the cadence, what the guidance is implied. But before we get there, Mike, I think you were in China recently.
Mike McMullen
Yes.
Vijay Kumar
Just maybe on the ground, sort of what are customers telling you? Why are we seeing some dramatic…
Mike McMullen
Yes, so, thanks for the opportunity to talk about the recent trip to Shanghai. As you may recall, it’s a pretty regular travel to China. I haven’t lived in Asia for a number of years and used to be there multiple times during my tenure, CEO. But I hadn’t been there since October 2019. I made my first trip this past September. And you immediately get off the plane. You’re like, wow. You’re reminded of the sheer size of the country, the economy, the market and lots of things going on in the streets, lots of new electric vehicles. The country is even more green.
So you can see there’s a lot of things that happened in the four years that I’ve been there. But I think the one constant I saw, or a constant I saw, really was the commitment to their initiatives around the 14 th five-year plan. We heard that directly from government officials who we met with, as well as our key government customers. And despite a lot of the political tension that may be existing with the two countries on the ground with our customers, they really want to continue to work with companies like Agilent, and specifically Agilent, where we’re the leader in the space. We had a number of MUO signings.
But I will tell you is though, you’re going to have to compete different in the marketplace. So my view is that the life sciences market of China will still remain important to the industry in the coming years. It will return to growth. We’re not calling for that return to growth in 2024. We expect the market still to be down in 2024. But we do think that market will return to growth. But as we’re seeing in many other countries, there’s a real push towards regionalization in country sourcing. So you may be familiar with Made in China 2025. We think that’s a real initiative that we think we’re ahead and we’re doing the right things here. We’re in the process of actually incrementally investing in China, made in China for China.
So the market, I think, has remained bust, customer relationships remain strong. And I have to say, after 16 or 17 quarterly zoom calls with our China team, it was just great to actually be there and talk to them, see what’s really going on. You really find out how the team is feeling about the market? What are they seeing in terms of macro issues? One of the things we talked about was the whole anticorruption campaign that’s really been focused in the healthcare industry.
Our teams, although it had a limited impact on our direct business, because we don’t have a lot of business directly in hospitals, the message basically was it sort of caused a lot of people to be cautious. Oh, and by the way, Mike, a lot of that’s passed know they really have done a lot of the actions against officials who they felt were doing the right things. And I also would say that I think this anticorruption effort by the government is really a long-term plus for the industry, because if you’ve ever looked at a P&L for some of the Chinese-based pharma companies, a lot of money is going into marketing.
And maybe over time, some of that money will go into R&D, and you could see that happening in the outer years. And then Agilent in particular, we have an impeccable relationship in terms of how we do business, high integrity. And I think that bodes well for our ability to continue to be a leader in China. So I got to say, it was really fun to be back after so many years and things just changed very rapidly in the country and kind of gave me a renewed sense of just the sheer size of the economy, the sheer size of the market. But obviously, they’re working through some challenges as well.
Vijay Kumar
And off of those comments, I think China down in the 30s in Q4, what was pharma versus non-pharma? Can you give a sense of what your exposure in China is?
Mike McMullen
Well, Bob’s looking for the numbers. Two numbers that stick with me are Q4 last year, we grew 44%. And in the chemical and advanced materials market, we grew 70%. So we had some really, really tough compares we were gone up against in Q4.
Bob McMahon
Yes. And if you think about that, down 31%, Pharma was the largest decliner it was down 44%. Everything else was better than that decline of 31%, so followed by chem, which was down 27%. But as Mike mentioned, we were up 70% the year before and so some of this was a function of comps. Actually, if you look at sequential in China, in chem. as an example, it actually increased Q3 to Q4 and so forth. So it really has impacted the broader market, but it’s centered in pharma.
Vijay Kumar
I can imagine it’s really hard to follow right, with all these significant quarterly quarter variations for a lot of external events such as the Shanghai shutdown and other things that we worked on last year.
Mike McMullen
And, Vijay, maybe it’s helpful given China is such a topical point that we can kind of walk through the cadence of how the business went in Q4 because I think it’s really helpful. For one, we had a book-to-bill that was greater than one in China, which was positive. And we saw at the end of Q3 a real challenging July and I think in our Q3 results, we mentioned that July was down 35%. And that’s kind of what we had forecasted Q4 to be. And there was all kinds of questions about, well, why is it not going to get worse?
And so if we look at it, I’ll give you two frames. The first is year-on-year growth by month. So July or August was very similar to July, so down in the mid-30s. September was better than or August was better or the same as July excuse me, I’m getting my fiscal and calendar year. September was better. And then we exited October in the mid-20s decline. And that’s kind of what we’re forecasting for Q1 if you think about our Q1 guide.
But when you look at the dollars, the dollars have been fairly consistent on a month-to-month basis in terms of revenue. And so what we’re seeing is a stabilization of the dollars, a book-to-bill that’s greater than one and the improving is a function of comps as well. And so that’s kind of how we’re thinking about this and we’re expecting 2024 to kind of mirror what Q4 of 2023 look like. So if you take Q4 2024 multiply by four, assuming kind of a book-to-bill of kind of one- ish that gets you kind of how we’re thinking about the full year – obviously with Q1 being lower than that, given kind of some of the seasonality.
Vijay Kumar
And similar to the Q4 dynamics of pharma versus non-pharma.
Mike McMullen
Same, everything while I was talking about the business in aggregate, what you saw in, I would say, the end markets followed that same pattern where things got progressively better on a growth rate perspective month-on-month.
Vijay Kumar
Mike, I think in the past you’ve made some comments about these cycles, how long last in China, maybe some hints about a stimulus in China. Any thoughts on if we do see a stimulus, whether that’s going to be meaningful for life science companies?
Mike McMullen
Yes, so maybe there are two questions here. So one might be what have we seen historically, not only in China, but globally in these replacement cycle aspects of our business? We’re primarily talking about the small molecule segment of pharma. And as you know, those instrumentations that fill up, if you will, at QA/QC labs are just crucial for the ongoing production of safe on market drugs. And there’s always a replacement cycle going on in the pharma space as our customers really try to keep their fleets up to date and modernized.
Because if you allow your fleet to get too aged, you start to have issues not only in terms of the support costs, but also most importantly, your ability to have uptime in the lab, so where this is whole heading is that we’ve seen these cycles before, which is now not with this degree of variation, but we’ve seen the cycles before 2018, 2019 customers withheld replacing their QA/QC equipment so they could put more money into biopharma R&D. And then what you saw in 2021 and 2022, right, was this big catch up, which is driving growth of north of 20% for LCs.
So those type cycles tend to be like 18 months or so, 18 months to 24 months. When I say cycle, we start to get back going back to what we believe the long term inherent growth rate of this market is, which is become a mid singles. And we think we’re probably, what, maybe nine months, nine months into it, so based on what we’ve seen in the order book. So that’s one of the aspects of why we think there’ll be a level of modest recovery in the second half of next year.
Now, in regards of China stimulus, I love to see it, but we’ve been pretty contrarian on this view, which is we’re not expecting we didn’t expect any stimulus in 2023 and we’re not expecting any stimulus in 2024. We don’t hear any rumblings about it.
Bob McMahon
To add to what Mike’s saying, if there is, that would be upside to us.
Mike McMullen
Be upside. We’re not against it. We’re not against it, but we’re not just hoping for it either. And as Bob mentioned, that would be good news for us upside to our outlook.
Vijay Kumar
Fantastic. When you look at pharma down 14%, assuming a lot of this is overlap with China, but ex-China, did instrument purchases by global pharma customers increase? I’m just trying to parse out what is China versus non-China within pharma?
Mike McMullen
Yeah. So if you looked at total pharma, pharma was down 14% globally in Q4. China was down much more significantly than that. But ex-China, we were down 4%. So it was down year-on-year. I think what you may be referring to, which was a positive sign, was if you look at biopharma or the large molecule business that actually grew 7% ex-China in the quarter. And by the way, it grew both ex -China and including China globally for the full year. And so while people have talked about biopharma and having challenges, it still grew 7% for the full year inclusive with China for us.
Bob McMahon
They were down two globally, the total pharma business, but up seven globally, including China for Biopharma.
Vijay Kumar
That's the full year. Was it up in Q4?
Mike McMullen
It was ex-China.
Vijay Kumar
That large molecule. Is that because I think there's been some noise about stocking dynamics, destocking. I'm not sure if that's relevant for you guys like what’s.
Mike McMullen
I think you stock and destock consumables. I don't think you stock instruments. I mean, I've never seen in my career where people buy instrumentation and just put it in the closet itself.
Vijay Kumar
That seems reasonable to me Mike.
Mike McMullen
Well, I mean because if you're trying to manage your P&L, as soon as you get it, you start depreciating. And particularly in the biopharma space, which is often a lot of the spends are being driven by R&D. You always want to be have access to the latest technology. So I don't think you would buy something and then say, well, maybe I'll use it in a year. And this doesn't make now, I think a different dynamic may be on the consumable side, for example, where at one point in time a lot of concerns about supply chain issues, so customers would maybe buy and hold called consumables so they could support their ongoing operations. But I think that thesis doesn't apply to instrumentation.
Vijay Kumar
Yes. And this spend in R&D by in a large molecule customers, is that a sustainable trend or was that perhaps some yearend phenomena which drove those numbers?
Bob McMahon
No, we don't believe it's a yearend phenomenon. We would have called that out if we did. I mean it’s been pretty consistent across throughout the course of the year and there is always some seasonality there. But I think one of the areas of strength has been our services business in biopharma as well. And so these are higher end instruments that typically have a higher connect rate of services and so even if they're not purchasing new equipment at the same rate that they had, they still need the service of the existing equipment. We're seeing a strongness or strength there. But our view is not that this was kind of a one quarter phenomenon or a onetime phenomenon in Q4.
Vijay Kumar
And I think the point that Bob makes around services not only speaks to the growth factor we have, but also lab activity. So when the service business is robust, it also says the labs are running, those labs are running and activity is high.
Bob McMahon
Your overall guide for fiscal 2024 at the corporate level, it's almost flattish at the midpoint. Is a pharma expected to be flattish? If so, then is large molecule expected to be like positive or any dynamics within those different pharma buckets.
Mike McMullen
Yeah, so maybe to kind of parse out pharma, which is our largest end market, roughly 35% of our revenue last year or FY 2023, it was down 2%. First time it's ever been down with, as I mentioned, Biopharma was up 7%, small molecule was down 8%. To get you to that minus two for FY 2024 we're expecting kind of modest improvement. So low single digit growth with both of them improving and we don't expect two years of down high single digits in small molecule. But our expectation is it will still be down but improving throughout the course of the year and again, modest improvement from the 7% here in Biopharma for FY 2024.
Bob McMahon
That’s as Mike said, we're not expecting a kind of immediate snapback but the slow and steady kind of recovery throughout the course of the year benefiting from not only, I think this cycle that Mike talked about, but we also benefit from easier compares in the back half of next year as well.
Vijay Kumar
In a pharma that's your largest end market, that's up low singles. What are the offsets here, which is dragging it back to flaggish corporate?
Bob McMahon
Yes, so we are expecting probably more moderate growth in our chemicals and advanced materials market. So that grew 3% this year, all in with the advanced materials side, which is about 35% of that. And we've talked about this is where the lithium-ion batteries Semicon was growing double digits and the chemical and advanced materials market roughly flat. We are expecting that to be more moderate next year, probably down low single digits. We're taking a more measured approach to that, particularly in Europe with some of our large chemical companies. And so that's one of the offsets, probably the biggest offset. We hope we're wrong.
Vijay Kumar
Yeah, indeed, Mike related to that, I think we've seen some headlines about Ford scaling back on their battery, new battery manufacturing plant. Is that relevant for Ashland? Does it matter?
Mike McMullen
I think if the whole industry there may be some particular issues or actions relative to one particular competitor in that space. But we think the long-term secular trends towards more vehicles being battery powered fact that people still aren't satisfied with the capabilities of batteries today.
These are long-term secular drivers. And I was just traveling for a family vacation through the Carolinas and I saw one of the new battery plants being expanded. So I think that something to look at, but it didn't change our thesis about long-term outlook.
Bob McMahon
Yeah, our 2024 forecast has no bearing on whether or not Ford builds that plant.
Mike McMullen
Yeah, exactly. A good point, yes.
Vijay Kumar
Just to round out the Cam discussion, Bob. So we're expecting some of these secular drivers to still be positive Kelvin in 2024 with perhaps chemicals being down.
Bob McMahon
Yes. And what are we assuming for oil and gas? I know there's some exposure on that side.
Mike McMullen
Yeah. That's less than 10% of that segment. So it's a relatively small piece. And we're expecting that to be kind of in line with the chemical side. Down slightly.
Bob McMahon
Yes by 2% to 3% of Agilent revenues, relatively small number. The chemicals ones will drive it one way or another.
Vijay Kumar
Got it. In NASD Mike, I think your business has been unique just given the scale, GMP scale that you provide within a very niche segment of the market. But I think the question I get from investors is, isn't that all exposed to cell and gene therapy in Agilent expanded capacity? Is there an issue of excess capacity in the industry? I think your guide con [indiscernible] mid singles growth for NASD. So is there any risk to the NASD outlook? Why is NASD slowing down?
Mike McMullen
Yeah, we don't think it's going to slow down long term. What you're seeing in the 2024 outlook is really a change in our mix of business for 2024. So in 2023, we had more of our business being commercial in 2024, which we actually think is a very good news. Long term, more of our business is going to be clinical. So I think we're gone from, what, 30 to 50 programs?
Bob McMahon
Yes, in the 30s to in the 50s.
Mike McMullen
Yes in the 30s to in the 50s. Thanks, Bob. Thanks. And why is this important? Because this is a precursor to what and by the way, I think we also need very clear who are we working with? We're working with well capitalized, large pharma companies, very broad based customer base who have a number of really significant and expanding programs in this space. Because the view is there's going to be a time when you're going to have a number of new therapeutics on market with larger population, patient population size than we have today. So we think what's going to happen in 2024 really sets ourselves up for really significant long term growth on the commercial side, hence why we're staying with our expansion plans.
Bob McMahon
Yes. Vijay, you mentioned something or you referenced cell and gene therapy. And I want to be clear; this is a different market than that. So this doesn't have any of those dynamics around whether or not it's going to get approved and so forth. So I think if you look at the number of products that are going through, the clinic continues to increase collectively. And these would be cell and gene therapy typically are tuned either to individual patient or very small patient populations.
So the volumes and quantities are small. The difference here is actually what our customers are going after are actually larger patient populations, so broader expansion, and so it requires more volume. And so that's actually one of the things that's I think something that we're very excited about going forward.
And all you have to do is either look at the number of clinical trials or even go and look at some of the major pharma companies today and where they're putting their R&D efforts. And increasingly they're doing RNA type therapies. Not necessarily not just siRNA, which is where we play, but across you’re seeing, you're know, multiple companies kind of looking and placing bets in this area, not just emerging biotech.
Mike McMullen
Right. As Bob mentioned, we have kind of two data points. Right. We know what we're learning and what our customers are committing to. On the NASD front, we're also seeing our LCMS business where oligonucleotide workflows have been a real source of strength and growth for us as our customers are investing in these areas, within their pipeline.
Vijay Kumar
And in that customer segment, NASD, I think in the past you made some comments about capacity being booked well in advance. Like are we still at the [indiscernible] capacity utilization? Close to 100% capacity utilization.
Bob McMahon
Yeah. What I would say is our capacity is fully utilized. What we had said is before we had more demand than we had capacity.
That's not the case now. I mean, I think we're able to fill the factory, which is exactly what we want, is to be able to recognize that opportunity.
Vijay Kumar
Sure. And then switching gears to DGG Mike was flattish in Q4, I thought diagnostic volumes overall. The implication was genomics was down like high singles, doubles.
Mike McMullen
Yes. If you look at the overall print for our diagnostics let me -- DGG segment, you're exactly right. We had strong double digit growth in the diagnostics piece…
Bob McMahon
In pathology. Really?
Mike McMullen
Pathology as well as NASD, I think, had a double digit print with the genomics being down.
Bob McMahon
Correct.
Vijay Kumar
What’s I guess genomics can mean different things to different customers, obviously Alumina, they've spoken about some macro challenges. Is that what's impacting your genomic business as well?
Mike McMullen
I think there's two, because it may is just worth parsing this out. So we have roughly what, Bob? About a $500 million, what we call genomics business, about half of its instrumentation. We're a leader in the space for QA/QC work around NGS workflows.
The tape station is a leading product in this space, just like we've seen in the LC and GC and Aspect world, very cautious on capital spending. So there's been a slowdown in terms of willingness to buy new instruments in that space, although the consumables piece of that is going well. And then the chemistry side, which is roughly the other half of our Genomics business, this is where we've seen the pressure, particularly in where we are providing, if you will, the ingredients into LDTs [ph] in the diagnostics space. We've seen a lot of disruption in the customer base, particularly in the U.S.
I mean, there's some well publicized situations where companies have either failed or restructuring exiting service. So we've been under a lot of pressure, particularly in the U.S. Relative to the diagnostic segment for LDTs. It's not a share issue. It's really not seems to be there's a restructuring going on in the marketplace right now. If there's anything else you'd add to that. Bob [indiscernible]?
Vijay Kumar
In the genomic business or what signs should we be looking for to look for signs of a bottom here in Genomics?
Mike McMullen
That's a great question. I think the resumption of purchasing of new equipment. So that would be indicative of our customers wanting to expand their capacity to handle more application, more runs, if you will, which, by the way, as we see more indications of the cost of sequencing going down, we think that's a real net positive for our business. So anything will drive more volume.
So I think looking at things such as the pricing of the NGS workflows for us, what we're going to be looking at are what's happening with the capital purchase on the instrumentation side? Is that starting to pick up? And then on the chemistry side, are our major accounts, are they back buying again like they were in the past?
Vijay Kumar
Maybe switching gears to your cadence and guidance assumptions for fiscal 2024 Bob, I think I'm trying to match your book to build commentary rate in Q4. When you look at the dollar revenues for LSEG [ph] implied for Q1, there is a sequential step down. Is that just normal seasonality or?
Bob McMahon
Yes, normal seasonality. That’s when you think about the way that our Q4 or Q1 always happens, it includes a January. January is usually one of the weakest months of the year for instrumentation because everyone's budget is resetting, they're digesting, and people are getting back from the holidays. So that's a normal occurrence that happens every year.
Vijay Kumar
Got you. And when you think about the so for starting Q1 at minus nine, minus 10 to end the year flattish, it would imply, like on a year-on-year basis, some pretty big numbers in the back half sequential step up. And I think this is where I think the streets are struggling a little bit on that sequential cadence and what gives the visibility if the order book is six months or under.
Bob McMahon
Yeah, so I think there's a couple of things. One is I think we use the word prudent in our Q1 guide to make sure that we're getting ourselves off to the right foot. And certainly if things continue the way that we saw in Q1, we'll be in good shape.
And so that will help. And then I think it gets back to this notion around the opportunity in the funnel continuing to grow. And our view is that the deliberation times have started to stabilize as well. So how long it's taken from people to get from kind of an order proposal to an order book had lengthened during the course of this year? It actually continues to be higher than where it had been pre-COVID, but that increase has kind of slowed down.
So if you look at a book-to-bill of one coming out, assuming that we would have a book-to-bill kind of a one for the full year, you will end up getting into easier compares in the back half of the year as well. So well I would say Q1 is prudent and if we are able to continue our momentum, we'll be in good shape for Q1 and that will help for the rest of the year as well.
Vijay Kumar
When you look at how Q4 played out, you saw month on month improvement and I think Q1 is assuming your exit period of I think mid 20s in China. I'm curious, has November played out pretty much in line with expectations or how the macro?
Bob McMahon
Well, we're not done yet, so stay tuned. But nothing would change our the ends or forecast right now.
Vijay Kumar
Good question. I had to ask Mike.
Mike McMullen
Sure. Sure.
Vijay Kumar
I didn't want to ask since the last earnings, like how things progressed, just given…
Mike McMullen
That was only 10 days ago, like that.
Vijay Kumar
All right one of your peers brought up this concept about service attached rates and how it's a big opportunity. I'm curious, what is your attached rate for instrumentation? Is there like a big service play for Agilent?
Mike McMullen
Absolutely. So, as when I started my tenure, we made a big bet on ACG and the narrative that connect rates are an opportunity. That's an old story to Agilent. It's something we've been working on for a number of years and you see it reflected in the results.
In fact, we had double digit contract growth rate in our ACG business. In the fourth quarter we announced about a billion five or so business, high margins. And while I say it's an area of focus for us to improve our connect rate and we've methodically been doing that year in, year out, we still have lots of room.
So I would agree with Thesis, which is the connect rates will still continue to grow for Agilent. Probably what, in the low 30s, low 30s. And what I can tell you is our connect rate of new instrument placements going out.
And we define connect rate as if you've got an instrument from Agilent, you're also getting your services from Agilent. And those connect rates on our new instrument placements continues to be much higher than the overall average. Another thing I would point out too is we also our service capabilities go beyond the Agilent install base.
So the whole construct of ACG, Agilent and CrossLab was we take care of the entire lab. We've been doing very, very well on the enterprise service as well. So we've been winning a lot of multi year large engagements where we're going to take care of the entire fleet of the lab.
We're also going to provide a lot of other services in addition to that asset management and other services that our customers increasingly are looking to companies like Agilent to provide. So I'm very bullish, I agree with I'm not sure who you spoke to, but I'm very bullish along with this person that there's a lot of opportunities for service and for us, it's become quite a meaningful business for us.
Vijay Kumar
And so would the thesis be if instrumentation longer term as mid singles given higher attachments ACG should be perhaps high singles.
Mike McMullen
Absolutely. That's how that's math we're using and I think the history would show you that as well. Even though if you look at the last four years of Agilent’s CAGR, over the last four years, core has been around seven, which is at the upper end of our long term growth during that period of time. And instruments I think are close to mid singles have been obviously some ups and downs, but the mid singles is right where we thought we would be then obviously getting more growth in services.
Bob McMahon
And ACG was double digit.
Mike McMullen
Double digit? Yeah.
Bob McMahon
Don't pencil that in. But high single digit is…
Vijay Kumar
And Bob on the margins for fiscal 2024. What is the guidance? I think you announced new cost action. Is pricing still expected to be positive in fiscal 2024?
Bob McMahon
It is, yeah. We ended FY 2023 with a little over 3% pricing, which was kind of right in line with where we expected we would be. We’ve building in. We've contemplated roughly 2% pricing in our FY 2024 numbers, which is again where we kind of expected. We didn't expect to have the same elevated rates just given that inflation has come down and so forth. And that's still above kind of historical rates.
Historically we've had 50 to 75 basis points of price per year. So it's still roughly but double historically or more than double where we have been historically. And what we're expecting kind of is some modest expansion margins to get to that leveraged earnings next year.
Mike McMullen
The overall commitment, as you've probably heard us say a number of times [indiscernible] is what we call leveraged earnings. That's how I opened up my comments. We grew earnings faster than revenue in 2023. Unexpectedly more challenging market environment than we had anticipated. The team can boom very quickly. We've been working on lowering our cost structure for several quarters prior to 2024.
So quite confident ability to deliver on those numbers. And again, the goal here is deliver leverage earnings; grow earnings faster than revenue in 2024. And I would just say as you think about long term margin expansion opportunities for Agilent, some of the things we're doing right now to our cost structure are permanent changes is the cost won't come back.
So you think about rationalization of your real estate footprint. So we've done some additional moves this year cost will come out in 2024 and it won't come back in 2025 or 2026 when the revenues are going to be growing much faster than next year.
Vijay Kumar
Fantastic. I think with that we're almost at the end of time here. Mike and Bob….
Bob McMahon
Is it two seconds left I guess.
Vijay Kumar
I had a five minutes question. I don’t want to ask, but no thank you guys for spending the time.
Mike McMullen
Take care. Welcome Vijay. Thank you.
Question-and-Answer Session
Q -
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Agilent Technologies, Inc. (A) Evercore ISI HealthCONx Conference 2023 Transcript