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Operator
Ladies and gentlemen, welcome to the Agilent Technologies Q4 2022 earnings conference call. My name is Beau, and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I will now hand you over to your host, Parmeet Ahuja, Vice President of Investor Relations. Mr. Ahuja, please go ahead.
Beau
Thank you, Beau, and welcome everyone to Agilent's conference call for the fourth quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Tyson, President of the Agilent Life Science and Applied Markets Group, Sam Raha, President of the Agilent Diagnostics and Genomics Group, and Poring McDonald, President of the Agilent Cross Lab Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31st. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. Please note that we have changed the name of the chemical and energy end market to the chemicals and advanced materials end market. This change better reflects the mix of business in this market. It does not affect financial reporting in this quarter or prior quarters. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike.
Beau
Thanks Parmeet, and thanks everyone for joining our call today. In the fourth quarter, the Agile team continued a strong performance. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenue of $1.85 billion is up more than 17% core. Our strong top line performance helped deliver fourth quarter operating margins of 29.1%. Operating margins continue to expand despite the inflationary environment and the strengthening dollar, and are up 260 basis points from last year. Earnings per share of $1.53 are up 26%. These Q4 results mark an outstanding finish to another strong year for Agile in fiscal 2022. With full-year revenue of $6.85 billion, we delivered core revenue growth of 12%. This is on top of core revenue growth of 15% in 2021. Our operating margins continue to increase and are 27.1% for the year, up 160 basis points. Earnings per share of $5.22 per share are up 20% for the year. Our exit results this year highlight the ongoing strength of our diversified business and shine a light on the multiple growth drivers we've put in place over the years. They also continue to demonstrate the outstanding execution capabilities of the Agilent team. Throughout the year, we navigated market uncertainties, inflation, COVID-related shutdowns, and supply chain and logistics constraints. Our strength is broad-based, with all three business groups growing double digits for the year. All major geographies and regions grew double digits in FY22 after adjusting from our exit from Russia. This was highlighted by China leading the way, growing 18%. From an end market perspective, all markets expanded, led by excellent growth in our two largest markets, pharma and chemical and advanced materials. All in all, it was an extremely good year for Agilent. Let's now take a closer look at our fourth quarter performance, starting with end market highlights. During Q4, our performance led by 20% plus growth in three of our six end markets. Pharma, our largest market, posted 20% growth on top of 21% in Q4 last year. The chemical and advanced materials business grew 27%. We saw robust demand in chemicals along with secular growth in semiconductors, batteries, and other advanced materials. The food market also grew 20% on strong end-of-year demand in China that had been previously delayed by COVID-related shutdowns. On a regional basis, China led the way for us with stellar 44% growth as demand remained strong. Business activity continued to recover, and the Agile team worked quickly and effectively to start working down the backlog, including delivering main shipments deferred due to the Shanghai COVID-related shutdown in Q2. Europe also exceeded expectations by delivering double-digit growth in the quarter, coming in 14% higher than a year ago with broad strength across our markets, highlighted by low 20s growth in pharma. Looking at our performance by business unit, the Life Science and Applied Markets Group continued its outstanding performance and posted revenue of $1.12 billion. This represents growth of 22%, with the instrument business growing 24%, and our consumers and suppliers business growing 15%. We also saw excellent low 30s growth in our LCMS instruments business, as our solutions continue to resonate with customers. LSEG was able to build our leadership-implied markets with spectroscopy growing in the low 20s and the GC and GC-MS business growing in the low 30s. In addition, Agilent is doing its part to help customers monitor and manage microplastics in the environment as we release the latest version of the 8700 LDIR chemical imaging system. This unique system has been optimized specifically for the analysis of microplastics and environmental samples. The Ashland Cross-Site Group posted revenue of $381 million in Q4. This is a 14% core with broad-based strength across our entire portfolio of offerings. Pharma and chemicals and advanced materials both grew mid-teens for ACG. On a regional basis, China led the way with high 20s growth as business continued to recover. ACG also delivered double-digit growth in Americas. ACG has delivered double-digit growth for us every quarter of this year, and our engagement with large enterprise customers continues to accelerate. Through its deep understanding and insights into lab operations, the ACG team continues to build strategic partnerships and long-term relationships that maximize customer value and provide ongoing demand for services and support. The Diagnostic and Genomics Group delivered revenue of $352 million, up 8% core. TGG's results were led by strong growth in the low 20s for NASD. As expected, our NASD business delivered high quarterly revenue on a sequential basis given the planned shutdown last quarter. Our genomics portfolio also posted solid results, growing low teens, and pathology grew mid-single digits. On a regional basis, DGJ also delivered mid-20s growth in China. In addition to these business group highlights, during Q4, Agile was recognized by the World Economic Forum Global Lighthouse Network as a world leader in advanced manufacturing. Agile's manufacturing facility in Singapore received its recognition for deploying innovative technologies at scale in the manufacture of scientific instruments driving productivity while advancing sustainability. Also, we are extremely pleased to announce a new multi-million dollar partnership with Delaware State University, a leading historically black university. The work we will do together at DSU is geared towards increasing the number of underrepresented students entering STEM fields. In addition, ASL is certified as a Great Place to Work by the Great Place to Work Institute in more than 20 countries and regions around the world during the quarter. This recognition distinguishes Agilent as a top employer based on an independent survey of its global workforce. Recap in 2022, we had another very successful year, not only on delivering excellent financial results, but building for the future. We continue to drive innovation, focus on supporting our customers and executing our build and buy strategy to outgrow the market. The Agilent team continues to deliver. We have built a resilient company with multiple drivers for growth and targeted investments focused on high growth areas. We have an unstoppable One Agilent team that can take on any challenge and execute at an extremely high level. As we look ahead to 2023, we believe these qualities are a winning formula for continuing to deliver in an increasingly uncertain economic environment. Bob will now share more detail on the quarter and the year, along with our initial view and expectations for fiscal year 2023. After his remarks, I will rejoin to add some final comments and perspective. Thank you for joining us today. And now, Bob, over to you.
Pharma
Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year, as well as take you through the income statement and other key financial metrics. I'll then finish up with our guidance for fiscal year 2023 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q4 performance and finished the year on a very strong note, exceeding our expectations on both revenue and earnings per share. Q4 revenue was $1.85 billion, up 17.5% core and 11.4% on a reported basis. During the quarter, we saw the dollar continue to strengthen. Currency exchange rates were a 6.2-point headwind to growth, or $103 million. The contribution from M&A was as expected, adding one-tenth of a point to reported growth. Our performance was again broad-based, as all end markets and regions grew during the quarter. Orders also grew again during the quarter, while outstanding execution from our order fulfillment and supply chain teams enabled us to start working down our record backlog. As we enter FY23, our backlog is still elevated and helps provide good visibility and confidence in our outlook going forward. Now I'd like to share additional details on our end markets. Results in our largest market, Pharma, were very strong. This market represents 37% of Agilent's revenue and grew 20% in the quarter. Biopharma grew 18% and small molecule was up 21%. Looking forward, we expect the pharma end market to grow high single digits in FY23. Chemicals and advanced materials led growth for us during the quarter at 27%. This compares with 11% growth in Q4 of last year. All three submarkets, chemicals, advanced materials, and energy, had strong growth in the quarter. All regions grew as well, led by China. Demand continues to be driven by investments in advanced materials, driving secular growth opportunities in batteries, alternative energy, and semiconductors. While not immune to macro uncertainties, we believe these secular drivers in advanced materials will continue, helping to drive mid-single-digit growth for this market next year. We delivered growth of 20% in the food market. led by China as our results continue to benefit from the recovery of revenue delays due to COVID-related shutdowns in Q2. During FY23, we expect the food market to normalize and grow in the low single digits after two years of very strong growth. The environmental and forensics market posted 18% growth with particular strength in the Americas. This result was driven by increased governmental spending helping to drive technology refresh for newer applications like PFAS testing. Europe and China also posted impressive double-digit growth in the quarter. We see PFAS-related funding and demand continuing to be a driver for this end market and expect mid-single-digit growth next year. Our business in the diagnostics and clinical market grew 6% against an 11% compare last year. Growth was led by Europe and China while America's grew low single digits. We also expect to see mid single digit growth in this market in FY23. The academia and government market grew 3% led by continued strength in our service business. This market grew 3% overall for the year as well and looking forward, we expect similar growth in 2023. On a geographic basis, China led the way with phenomenal 44% growth in Q4, driven by underlying demand across multiple end markets and our continued ability to quickly recover deferred revenue from Q2. As we've discussed the last two quarters, the COVID-related lockdowns in China earlier this year deferred an estimated $50 to $55 million in revenue from Q2 into future quarters, This recovery started last quarter, and our team in China continued their outstanding work to ramp production and shipments quickly in Q4. We've now fully worked through this deferred revenue a full quarter earlier than originally anticipated back in Q2, a true testament to the entire team. We estimate this recovery had a mid-single-digit positive impact to China's Q4 growth. So even excluding this, our business performance in Q4 was very strong. Now, looking ahead to next year, we expect China will continue to be a key growth driver for us. And as Mike mentioned, Europe grew a very solid 14%, which exceeded our expectations. We also posted 8% growth in the Americas, driven by pharma, chemicals and advanced materials, and strong growth in the environmental and forensics market, partially offset by academia and government. And lastly, the rest of Asia grew 12%. Now turning to the rest of the P&L, our team continues to execute at a very high level. Fourth quarter gross margin was 56.3%, up 40 basis points from a year ago. Volume leverage, along with pricing, helped overcome continued inflationary pressures and higher logistics costs. Our operating margin was 29.1% in Q4, up 260 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 298 million diluted shares outstanding. Putting it all together, earnings per share were $1.53 for the quarter, up 26% from a year ago, as Mike mentioned. So in summary, Q4 ended with 17% core top-line growth and 26% EPS growth, a very strong finish to the year where we had revenue growth at 12%, and EPS growth of 20%. Now some metrics on our cash flow and balance sheet. In Q4, we generated operating cash flow of $448 million while investing $70 million in capital expenditures. The CapEx spending is driven by our continued scale-up of TrainV for our NASD expansion. And in the quarter, we also paid out $62 million in dividends and repurchased shares valued at $135 million. For the year, we returned almost $1.4 billion to shareholders through $250 million in dividends and a bit more than $1.1 billion in share repurchases. And as we've indicated before, given the ongoing strength of the business, we believe these share repurchases represent a very good long-term investment. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.8. Now let's move to our outlook for the upcoming fiscal year and first quarter. Now looking forward to 2023, we enter the year with business momentum and a very healthy backlog. We also acknowledge the increasingly uncertain macro environment, rising interest rates and currency headwinds, and have reflected that in our thinking based on what we know today. For fiscal year 2023, we expect revenue in the range of $6.9 to $7 billion, as we have significantly greater currency headwinds since the last we spoke. Core growth is expected to be in the range of 5% to 6.5%, in line with our long-range goals. Currency will negatively affect reported growth by 430 basis points, or roughly $295 million during the year, based on fiscal year-end rates. And to help with your modeling at a business group level, this revenue guidance assumes mid-single-digit core growth for LSIG, mid-to-high single-digit growth for DGG, and high single-digit growth for ACG. And despite the ongoing currency headwinds and a continued inflationary environment, we are expecting operating margin expansion for FY23. Now, below the line, we expect $40 million to $50 million of net expense. a tax rate of 13.75%, which is slightly below this year, and 297 million shares outstanding. Fiscal 2023 non-GAAP EPS is expected to be in the range of $5.61 to $5.69. This range represents a growth rate of 7.5% to 9% versus the prior year and incorporates an estimated 4 percentage point headwind due to currency net of our hedging activities. We are also expecting $1.4 to $1.5 billion in operating cash next year and capex of roughly $300 million based on currently approved expansion projects, primarily Train B for NASD. We have also announced raising our dividend 7%, providing our shareholders with another source of value. And finally, for Q1 2023, we expect revenue in the range of $1.68 to $1.70 billion, Core growth is expected to be in the range of 6.8% to 8%, while currency will be a 6.6-point headwind to reported growth. This outlook for the quarter incorporates the impact of the timing of Lunar New Year this year. First quarter 2023 non-gap earnings per share expected to be between $1.29 and $1.31. Mike will speak to this further in just a minute, but our diversified business model and the strength of our team are key assets for Agilent. These two elements produced an outstanding Q4 and a full year 2022, and they have put us in an excellent position to again deliver strong results in the coming year. And now I will turn the floor back over to Mike for some closing comments. Mike?
Beau
Thanks, Bob. Today's results are a strong indication that Agen has the right growth strategies, the right team, and right culture to continue delivering strong results. Our customers know we are reliable, resilient, and extremely quick in reacting to meet their needs. The Agile team continues to work hard to earn their trust. Looking ahead, we are all seeing increasing economic uncertainty. However, this company and team are built to successfully navigate any economic challenges we may encounter. Throughout the pandemic, we have stated that Agile will emerge as a stronger company. Today's results are yet another proof point that we are well on our way in this journey, and we're not done yet. We continue to prioritize investments and growth. We are a resilient company with multiple growth drivers and unmatched execution capabilities. I'm quite confident we will continue to react quickly to changing conditions and deliver at a high level. Thanks for being on the call, and now I will turn things back over to Parmeet as we take your questions. Parmeet?
Beau
Thanks, Mike. Bo, if you could please provide instructions for the Q&A now.
Operator
Thank you, Mr. Ahuja. Ladies and gentlemen, at this time, any questions, simply press star one. And if you are joining us today using your speaker phone, please pick up your handset before pressing star one. And we'll take our first question this afternoon from Vijay Kumar of Evercore ISI.
Ahuja
Hey, guys. Congratulations on a really impressive finish to the year here. Thanks, Vijay. Mike or Bob, maybe if I could start with a high-level fiscal 23 guidance question. You know, five to six and a half, organic for the year. That's coming off of some tough comps. Maybe just talk about your assumptions for end markets, what you're expecting for pharma, chemicals and advanced materials, etc. Just given your commentary on orders and backlog, it looks like the start, five to six and a half, it seems reasonably conservative.
Pharma
yeah why don't you take that yeah hey vj yeah i appreciate uh the uh comments on the uh the end of the year and uh as as we mentioned we're moving into fy 23 with momentum and and really what we've seen across our our business in fy 22 we are expecting continue into fy 23 you know broad-based business uh business results really led by our two largest markets pharma and chemicals and advanced materials and when we think about those Those are both in the mid to high single-digit growth range and, you know, with growth in the other areas as well. We're expecting all of our markets to grow and really given some of the secular drivers that we've seen this year and continued strength in the pharma business.
Beau
Hey, Bob, I would just add, too, you know, this is our initial guide for the year. You know, we're at the top end of our long-growth model in terms of the long-term growth of aspirations we laid out at our last AID coming off two straight years of double-digit growth. And, you know, it's initial guide of the year, Vijay, and you should probably hear a few times they were being prudent, you know, giving the increasing economic uncertainty out there. But I would point out that if you look at the core growth rate assumptions, the Q122 guide is actually higher than the full year number.
Ahuja
Ain't need, Mike, appreciate the prudent comment. And if I could just one follow-up on that. I was waiting for it, waiting for it.
Beau
It took about two minutes into the call, Vijay.
Ahuja
Yes. On margins, that EPS guide came in about street models. Despite FX headwinds, it looks like coming in about street models. What do you assume for pricing inflation and what's implied from margin expansion in the guide?
Pharma
You want to take that, Bob? Yeah. Yeah. So we ended Q4 in a very good position here with a little over 4%. And that has ramped throughout the year. And we're forecasting roughly about a little over 3% in price next year across our book of business. And we are assuming margin expansion, Vijay, next year. And when we look at that 7.5% to 9%, you know, what we are seeing is kind of unprecedented strength in currency. And we do hedge, but our hedges become less effective over time. And, you know, that's absorbing a four-point headwind. So if you added that back in, it would be closer to 11.5% to 13% EPS growth. Understood.
Bob
Thanks, guys. You're welcome. Thank you. We'll go next now to Matt Fleiss of Goldman Sachs.
Matt Fleiss
Hey, good afternoon, Mike and Bob. Thanks for taking my questions. Appreciate it. Sure, Matt. It's been a strong year. Maybe I just want to dig a little bit more into the margins. You guys mentioned operating margin expansion expectations for next year, but maybe talk a little bit about where you see those drivers coming from, maybe on a segment basis or an end market basis. Where do you feel there's most upside to expand those margins at the group level and where the impact will be felt?
Pharma
Yeah, I think what you would see is a continuation of what we've been able to do this year. And, you know, what we've been able to do is cover the increasing costs associated with the inflation through the pricing activities, but then really leveraging our operating expenses. And you saw that in full display here in Q4, where we did have operating gross margin expansion But you also saw a majority of the margin expansion in the operating expense. And I think that that's one of the benefits that we have through the investments that we've been making in digital over time, as Mike mentioned, as well as the continued effort around the one Agilent focus. So I would expect us to continue to see that. I do think that the scale that we have across our businesses will continue to provide benefits next year, certainly as we drive more business into our service organization. I do think that we will continue to be able to leverage that footprint. And then if you look at the higher growth areas that we've been investing in in the instrumentation side of the business, those are our more profitable businesses. And, you know, we are also looking to continue to attach, you know, increase our attach rates both on the services but then also consumables, which are one of our highest profit. And I would say in diagnostics, the DGG business, you know, we are facing kind of some of the startup costs with our train B next year. But if you peeled the onion, I would say fundamentally our business is performing very well there as well in 23. And I would expect margin improvement there. outside of kind of some one-time startup costs that we would have in bringing that train up and running in the second half of the year.
Matt Fleiss
Got it. Thanks. Thanks for that, Bob. Then maybe a question on the chemicals and advanced materials. You guys made a comment in the slide deck about increased demand in the energy business during Q4. Could you talk about the drivers behind that and what your expectations are specifically for the energy market as we move through 2023?
Beau
Yeah, so we really wanted to make sure that it was clear that across all three segments of the CAM segment, you know, we saw growth. And what you're seeing going on here is a lot of investments in the HPI industry, you know, given the strength of their businesses. So, and I'll have Jacob jump on this as well, the strength of their businesses with the ability to invest. And they had a lot of deferred investments over the years, but also a lot of new money going into renewable and green energy initiatives as well.
Jacob
Yeah, I think you're right, Mike. I think we're seeing, as you mentioned, there's been some pause in their capital equipment investment over the years, and we're definitely seeing that coming back. So, and both in the HPI, but also in the renewable energy, we continue to see a lot of strength, and we believe that will continue for a while. Yeah, we're expecting that strength to continue into 23. Got it.
Beau
Thanks, Mike. Thanks, Jacob. Appreciate it.
Operator
You're welcome. Thank you, Mr. Sykes. Ladies and gentlemen, we go next now to Puneet Suda of FCD Securities.
Sykes
Yeah. Hi, Mike. Thanks for taking the question. I mean, to say this is impressive as a quarter is an understatement in these sort of uncertain times. So first of all, congrats on the quarter. Thank you, Penny. Maybe on... Mike, so on China, impressive results there. Can you just parse that out a bit? I know you talked about gas chromatography delays were there, and those are, you know, it looks like they're fully booked in this quarter. And the revenues booked there. Food is also impressive. Could you maybe talk about the order book visibility you have in China and your growth expectations there going forward despite the lunar year?
Beau
um and also you know what is the longer term expectation for for overall growth and china just given these multiple end markets that are working so well for you in the quarter yeah sure uh happy to happy to respond and about i probably kind of tag team on this but again thanks for your earlier comments brought a lot of smiles in the room here um yeah we were quite pleased with the uh results for china not only in the quarter but for the year and i think it's important to know that the The 44% print we had in Q4 wasn't just about catch up from deferred revenue due to the COVID. And again, the shutdowns. And again, it points to the fact that when you do see those types of things happen, eventually the business does materialize. We didn't lose any business. I think the strength of the business continues to be there across multiple end markets, really been led by pharma, chemical. And then we think that the food market will probably normalize to kind of the traditional growth rates in China. But expecting pharma and the chem marketplace to be strong, in particular, we expect a lot of business on the renewable energy and HPI side in China. as well. So that advanced materials segment we've been talking a lot about, we think is going to sustain the growth in China in 2023. But I think we're kind of looking at maybe high singles for China for next year is our initial thinking.
Pharma
Yeah, that's right. And, Puneet, I would say, you know, the strength that we saw in Q4 in China was really across the board, across all the major technology platforms within the instrument business. The consumables business was incredibly strong as well. And then the services business, if you recall, back in Q3, we said that activity hadn't fully come back. It was fully back in Q4. And so we saw very strong there. And not to forget DGG. You know, we had double-digit growth in our diagnostics and genomics business as well. So it was really broad-based. And you talked about visibility. You know, our orders continue to grow in China, and we have very good visibility, you know, certainly into the first half of this year. And as we think about the secular growth drivers, those are still in place. You know, if you think about the investments that are made in technologies around, you know, the biotechnology areas, but increasingly actually in advanced materials and some of the secular drivers around batteries and lithium ion production and so forth. And we would expect that to continue into next year for sure.
Beau
Hey, Bob, I just have to think, too, of your comment about the DGG business. Just a reminder, Puneet, as we came in this year, we created a unique structure as part of our one commercialization to have all of our China businesses reporting to one single leader. Really, the idea was to add scale to the parts of our business which we felt were underrepresented, and you saw the payoff already starting to happen with the growth rate in DGG, for example.
Sykes
That's great. Thanks for all the color. Just one quick one on pharma. I mean, this is the first quarter in a long time when I saw small molecules growing faster than biomolecules. Can you elaborate a bit what's behind the dynamics? Thank you.
Beau
Yeah, I thought it was really good news, Brent, because we've been talking later about that while we still continue to believe that biofarmer large molecules will have the inherently higher growth rate, we've also been pointing to the fact that the small molecule will continue to have growth. And I think it speaks to some of the strength of particularly our LC and LC-MS business in small molecule. And Jacob, I'll have you add a few comments here in a second. I wouldn't overread too much in that particular quarter. It's just one quarter. I think we would expect to continue to see over time a differentiation in the growth rates between biopharm and small molecule. But small molecule by no means is dead, and it's an opportunity for growth. And I think we've got a great portfolio there, Jacob.
Bob
You're absolutely right, Micah. And Mr. Sata, anything further, sir?
Jacob
Oh, sorry, I was on mute here. So, sorry, this was Jacob coming with some comments. But you're absolutely right, Mike. We continue to see the small molecule being, while it's still the largest part of our business, of course, we see biopharma as a great opportunity, but we take the small molecule business very seriously and continue to build full workflow solutions for that, particularly for the LC and LC-MS space. And, you know, that's where the growth is coming from.
Bob
Thanks, Jacob. Mr. Sauter, anything further, sir? No, I think we're good to move forward. Thank you.
Operator
We'll go next now to Brandon Culliard of Jefferies.
Brandon Culliard
Hey, thanks. Good afternoon. Mike or Bob, I can't remember, you mentioned the PFAS market several times in prepared remarks. Can you just give us a ballpark size of how big that market is right now? relative growth rates and whether it's primarily a U.S.-centric market or if it's developing in other parts of the world as well.
Beau
So, Jacob, how have you and I tag team on this? We're viewing this, I think, about a $200 million market, growing double-digit. We think while a lot of the growth is centered in the U.S., there's also going to be very strong growth in the U.S. and perhaps some in China. So we actually see this as sort of a global story with initial big legs in U.S. and Europe and the growing interest in China. But at least let me know if I got that right, Jacob.
Jacob
Yeah, you're absolutely right, Mike. It's a huge market. And in fact, there was more than $4 billion put aside in the infrastructure bill for PFAS testing, not only for analytical instrument, obviously, but overall for PFAS testing. So this is a great opportunity. And it's particularly a great opportunity for us, as this requires very high sensitivity instruments you need. And you run very easily into issues in your sample prep. You don't take that very seriously. so really building out the full solutions and have something that that works every time we spend a lot of energy on that and in fact we have a solution now that that lives up to all the epa regulations and our customers just love it because it's just plug and play and it works very well for them for very sophisticated ways of doing business here. And on top of that, while most of the opportunity sits in the LC-MS space, we're also starting to see the GC-MS as an opportunity to look at testing of PFAS molecules in the air and all the volatile. So, which speaks extremely well to our opportunity here.
Beau
Yeah, thanks, Jacob, for those build. And, you know, this is the first time in my tenure where that we've seen this kind of money coming in in the U.S. marketplace with the government support. So it's a very encouraging trend, and we think that trend is going to be with us into 23.
Bob
That's great. A couple for Bob.
Brandon Culliard
Just number one, you just quantified the Lunar New Year impact in the first quarter on a year-over-year basis. And then with supply chains loosening, which it sounds like they are, what are the implications for that in terms of working capital as you move through the balance of the year?
Pharma
Yeah, Brandon, thanks for the questions. Yeah, the Lunar New Year is roughly a little over half a point impact year-on-year for headwind in our first quarter. It, you know, starts in mid-January this year versus the first of February last year. And for those, you know, that will come back to us in the second quarter. and then i think um you know in terms of supply chain it is it is uh we think it is improving but it's not back to kind of pre-covered levels um both on the standpoint of being able to to get product to customers but then also procuring raw materials and and the cost associated with that we do think that that's going to improve over time i would say i wouldn't expect any changes uh any material changes certainly in the first half of the year and then maybe some slight changes as we get uh into the back half of the year um But we do think it is improving, but, you know, we've increased our stocks of critical supplies, and I don't think it will go back to pre-COVID levels in terms of how we're running that just to ensure that we have the ability to flex when we need to, you know, if there are challenges around logistics across the world.
Bob
Gotcha. Thank you. Thank you. We'll go next now to Daniel Brennan of Cowen.
Daniel Brennan
Great, thank you. Thanks for taking the questions, guys. Congrats on the quarter. Thanks, Dan. Maybe just the first one, just on LSAC, another really impressive quarter with 24% growth on the instruments. So the mid-single-digit guide, obviously you're up against tough comps, but it does reflect a notable slowdown from what you guys have been doing. Maybe just walk through a little bit of what kind of drove the strength this quarter, kind of end market versus Agilent-specific, and then Is there just a healthy degree of conservatism baked in for the guide, or is it really just tough comps?
Pharma
Yeah, I would say at the beginning, Dan, we're at the beginning of the year. There are uncertainties out there. I'd repeat what Mike said. It's beginning of the year, and it's a prudent guide. I would say that there's an element of tough comps, particularly in the second half of the year, as we have been building – taking down the backlog certainly in China, you know, which was China just a deferral from Q2 into the second half of the year. But I would say fundamentally the demand is still strong. And, you know, I think across the end markets, our expectation is that the pharma and chemical and advanced materials markets will continue to lead the way for us with faster than expected growth, I think, in environmental and forensics for that PFAS testing.
Beau
Yeah, maybe just a couple additional comments here, Bob. Maybe, Jacob, you have thoughts as well. But, you know, we continue to see improving market share. So the latest industry stats from Aldo showed us all green across all platforms. So that should bring to debate and any kind of debate on whether or not we're picking up share. But I also think it's kind of also recognized we've been in kind of an unprecedented environment here for, you know, a number of quarters in a row where we've seen, you know, instrument growth rates in 20s plus, 30s plus. A lot of it, and we've been very transparent about this in all our calls, that there's an element of that that's tied to an accelerated replacement cycle in some end markets, in some technologies. So, you know, we're thinking, as we set up the guide for 23, we should assume some return to more normalized replacement rates in certain end markets, but there's going to be growth there, but perhaps not at the same rate we've seen. And I don't know if you have any additional thoughts there, Jacob. I think we're good, Mike. Okay, cool. I got it right. I'm two for two today.
Daniel Brennan
And then maybe just to follow up, I know you've already discussed the chemical and advanced material, a really strong quarter. And then on the outlook, I'm just wondering, for the mid-single-digit guide, obviously the advanced material portion is like a third of that business. Sounds like that's expected to grow really strong. Maybe just give us a flavor for how you're thinking about the three subcomponents in the 23. And is there anything baked in on the chemical side or the energy side that would reflect some kind of impact from a solar economy or just kind of how should we think about that?
Beau
I'm going to invite Poor again on this, too, because he's working with his team very closely on this, but we're taking a cautious outlook as it relates to the chemical industry in Europe, particularly, and I want to separate that from what maybe happened relative to the HVI and renewable energies, but in the base chemical business, our large customers are having to work through higher input costs to their production. So we're assuming a cautious outlook from that particular segment in Europe. And Parag, I know you're from that part of the world, and I know that you've been talking to your team about this as well. Anything you'd add?
Porek
Yeah, no, I think it's cautious, Mike. And I think what we're seeing is that there's additional scrutiny being played on converting quotes to orders that we're seeing across, particularly in Europe. And of course, there's quite a lot of macroeconomic pressures there as well. So I think you're spot on on that one.
Pharma
The only thing I would say, Dan, this is Bob, to add is this is an area sometimes people ask us, this would be an area of potential upside. If things continue the way that they are, there would be an opportunity for upside in this end market, given the strength that we're seeing.
Bob
Absolutely, Bob. Awesome. Thanks, guys. Thank you. And we'll go next now to Rachel Baxdall at JPMorgan.
Bob
Hey, guys. Thanks for taking the questions, and congrats again on the quarter. So first up on Train B, last quarter you guys said that there were some supply chain delays as you guys were building up that manufacturing line. So can you just give us the latest on timing and if you're still on track for that to come online mid-fiscal year? And then thinking about beyond Train B, you guys have hinted at potential capacity expansions beyond this. So can you give us the latest on your thinking on those capacity expansions and when we could hear an update there?
Beau
Yeah, so Sam, why don't you take the first part and I'll close with the second part.
Sam
Yeah, it sounds good. Rachel, thank you for the question and you know, happy report. There haven't been any changes since we last spoke about train being timing where we're on track to go live in the middle middle of the calendar year coming up in 2023.
Beau
And at the risk of being repetitive, Rachel, you know, we're on record saying that there's more letters in the output than A and B, so we're clearly focused on getting Train B up and running and have it generating revenue in 23. At the same time, we continue to explore possible expansion plans. Nothing yet to announce yet, but stay tuned.
Bob
Great. And then just one more follow-up on food. So food grew 20% this quarter. Sounds like some of that was from that China recovery and pull forward there. But all in, you're guiding to low single digits next year off of that three-year staff tough comp. So can you just walk us through, how should we be thinking about this food market going forward? Do you think in 2024, it's going to normalize more at a low single digit, or is this market really accelerated? And the guide this year is just more on that difficult comp. Thanks.
Pharma
Yeah, it's a good question. And This is Bob. And I would say it wasn't pull forward. It was catch up in terms of the growth rate here because it was, as you know, Rachel, China has got a bigger proportion of the food market. And I would say it is a function of having two years of very strong performance there and so difficult comps. And I do think it is trending up with some of the investments that are being made there. But this still is a low to mid-single-digit grower.
Beau
I think just to kind of reinforce our ability to hit that mid-single or low to mid-single-digit growth rate, we also see them continue to strengthen the U.S., for example, where our cannabis testing business is part of what we report as food, right, Jacob?
Jacob
Yeah, correct. And Canada's business continues to do very well. And we see a lot of lab owners that is looking for us to come and help them to equip the full laboratories. So that's a big opportunity for us. But also the alternative protein space is really picking up, both here in U.S., but particularly also in Asia. So I do believe that it's going to continue to be a secular growth driver for us in food.
Beau
Right. And I really wanted to make sure that we highlight those new secular growth drivers because a lot of the growth historically has come from China. We're seeing actually a much more diversified mix of business as we move forward.
Bob
Yeah. Thank you. We go next now to Derek DeBruin of Bank of America.
Derek DeBruin
Hi, good afternoon. And then Derek. Hey. So, Mike, you said it, an unprecedented environment for instrument demand and such. We've been covering these markets a long time, you and I, and looking at these, and these are just numbers which are really just amazing instrumentation numbers. So what's embedded for instrument growth in your 2023 guide and how much of this is already covered by your backlog versus what's going to be newer as you have to get in through the year?
Beau
Yeah, so, yeah, thanks, Derek. And you and I have been in this business for a while and, you know, eye-popping growth rates. That's why we love them. We've really been enjoying these growth rates. I do think there's elements of the market that actually have – increase the long-term growth rates relative to what we've seen in the past. But I think it's also fair to assume that, you know, some of these accelerated replacement cycles we've seen will start to moderate over time. You know, that being said, Bob, I think we're looking at LSAG, whether the mid-singles. That's correct.
Pharma
know i'll let you pick the second part of the question yeah yeah so so it is mid single digits what i would say derek is we're not going to disclose um the the amount of contribution for our backlog in there but you can imagine that that healthy backlog that we just talked about is primarily on the instrument side uh just the way that we book business and we have pretty good visibility into the first first half of the year just given the way our order trends have happened got it can we
Derek DeBruin
Talk a little bit about the academic market and what you're seeing there. Low single-digit there in the quarter, low single-digit demand. You know, how is that sort of like tracking relative to your expectations? I mean, I know you don't have a huge academic footprint, but I know your genomics business was actually quite strong in the quarter. So I'm just wondering if you could sort of like talk through what's going on in that market and sort of are you seeing any pressures there?
Beau
Yeah, it's about maybe we can tag team on this, and I'll start. So, you know, first of all, this is the one market that we always, coming out of COVID, said would be the slowest to recover, and that's still proven to be the case. We saw really, really good demand in China in academia and government, and also good demand for certain aspects of our portfolio. But at the same point in time, a level of cautiousness around CapEx, NIH funding is not as robust as people had hoped. So we've tempered our outlook for 23 as kind of just a continuation of more of the same. Yeah.
Pharma
And I would say, Derek, you know, the growth that we had met our expectations. Right down the line, you know, and as Mike said, stronger in places like China. and less so in the U.S. But it met our overall expectations, and that's kind of how we're expecting it in FY23 as well.
Derek DeBruin
And I have to ask the obligatory M&A question.
Beau
Sure.
Derek DeBruin
Buying your shares, obviously a good choice right now, but anything peaking your interest, valuations starting to come in on some of the stragglers in the markets?
Beau
Yeah, so thanks for that, Derek. And as you know, we've got this build-and-buy growth strategy, and one aspect of it is to look for opportunities for us to add great new businesses and teams to Agilent via the use of our balance sheet. And as you may recall, some of our calls in the early part of 22, wow, and finished off one of these valuations were really out of sight. We saw that both in the public but also in the private space. and things are starting to actually moderate down. So, you know, nothing at all to announce, but I'd say that the activities are, we are very active here, and we're getting to places where you can see deals happening that would work for shareholders.
Bob
Great. Thank you very much. Thank you. We go next now to Jack Meehan of Nefron.
Jack Meehan
Thank you. Good afternoon. One of the keep going on the instrument side and was wondering if you could comment on cancellation trends. So just in context to the broader macro uncertainty, is that showing up anywhere in your instrument backlog?
Beau
Yeah, Jack, thanks for that question because one of the reasons why we have the confidence we have with the outlook we've guided to, and when Bob talks about elevated backlogs, it's a healthy backlog in that We have no significant change. There's no significant order cancellations. They remain very low. So the orders we have in backlog will ship. And we feel really good about the, if you will, the quality of our backlog.
Pharma
Yeah, Jack, just to build on that, you know, the other piece, the first piece of that would be our orders being pushed out. And we're not even seeing that either. So we're not seeing any push out of orders as well as any cancellations.
Jack Meehan
Awesome. Okay. And then kind of the other pressure area we've been Monitoring is more in the bioprocessing side, just stocking trends at customers. I know you compete sort of adjacent to some of these markets and large molecule. Are you seeing any destocking activity in any of the markets that you serve?
Beau
No, no, thanks for that question, Jack, because, you know, we've been reading some of the print as well, and we're saying, well, that's really not what at all we're seeing with our business. So you saw Jacob posted, what, double-digit 15% growth in CSD. We saw, you know, low teens growth in the genomics area, which would be the area you might see those things. And so it's not a concern for our ongoing business.
Bob
Great. Thank you. Thank you. We go next now to Patrick Donnelly of Citi. Hey, guys.
Patrick Donnelly
Thank you for taking the questions. Maybe following up another one on the instrument side. You know, I know you aren't going to give a hard number on the backlog. You did mention it was still elevated, Mike, and obviously gives you some good visibility into next year. I mean, any way you can frame kind of what it looks like today going into kind of a year compared to historicals? And then just on the order growth, what did that look like in the quarter? Obviously, the past few quarters you called out, you know, outgrew revenue nicely. I'm just trying to get a feel for that. Maybe if you have it on a geographic basis as well, that would be helpful.
Beau
Yeah, sure. So I think, you know, backlog remains up over historic exit levels. And that's why... We very carefully chose the word elevated in our text to make sure that you know there's more gas still left in the tank. While I won't give you a specific growth rate, I will tell you that we, again, grew our orders in Q4 off a prior double-digit compare. I do think it's also worth pointing out, though, we did see a different trend within the quarter. And I think this speaks to our confidence around the year-end revenues because customers were ordering earlier in the quarter. in like august and through september really to make sure they got product by by by the fiscal year so that was probably the only thing that we saw a little bit different than historical patterns i remember correctly bob yep and then i think i think the story was pretty much across the board geographically yeah correct yeah correct yeah same story that's helpful yep and then maybe sticking on the geographic point can you just talk about europe what you're seeing there i mean there's been concerns about
Patrick Donnelly
tightening capital spend, just given the geopolitical environment, the energy side, maybe what you're seeing there. And then maybe a second one on the order side, just the budget flush. You guys tend to have a decent look at it at this point. I know it's still a little bit away, but any early indications there would be helpful. Thank you guys.
Beau
Yeah, so relative to Europe, I think I just remind you we had a 14% print in the quarter. So we've really, really good about, you know, our performance relative to the competition in that part of the world. But it is an area, a watch area for us. You know, a lot of the economic, future economic concerns are really centered around what may happen to the European economy, particularly with the energy prices that they're having to deal with and what does it mean for demand and ability for our customers to have the profitable revenue streams they want for the business. So that's an area that we're watching, and that's why we've taken, you know, this prudent guide in, for example, assuming what would happen to the chemical side of Europe.
Pharma
Yeah, I was going to say, there's really nothing, you know, it's an area, as Mike, you said, it's an area that we're watching. We haven't seen any material change in the way things are operating there. You know, Just to add on, you know, that 14% was against, you know, a year ago that we did have, you know, revenue in Russia. And so that 14% was even higher than that if you looked at it on a pro forma basis, so.
Bob
Great, thank you. And any quick thoughts on the budget flush would be helpful. I appreciate that.
Pharma
Oh, yeah. Yeah, stay tuned. You know, what I would say is, I mean, we have, as Mike said, I think we did see some of that in our order book in Q4, given some of the extended delivery times that are still out there between us and the rest of the market. But we're not assuming any greater than kind of normal budget flush for the end of the year.
Bob
Correct. Very helpful. Thank you, guys. You're welcome. We go next now to Josh Waldman at Cleveland Research.
Josh Waldman
Hey, thanks for taking my questions. A couple for you. First, Mike, yeah, hey, Mike, a lot of questions on instrumentation, so I'll ask on CrossLab. A nice quarter here. Wondered if you could talk through the drivers to the acceleration, anything beyond just the comps. I mean, are you guys – seeing signs of higher adoption of contracted service, share benefits? Is this a category where maybe price is just now starting to come into the mix?
Beau
Yeah, absolutely. So I'm going to tag team with PORG on this one. But I think all those factors are hitting. And we're going to talk about services, but I think it's important to know that between services and consumables, we actually crossed over the 30% connect rate for the first time in the fourth quarter. So we've been talking about the importance of connect rates going forward. And on the services side, which is where your question is centered, is we've seen an acceleration of growth. We hit it at some of the places we were doing really well at the big enterprise level. But, Porek, why don't you add some thoughts on here, because this is your business and a lot of good things happening here.
Porek
Yeah, I think, Mike, as you said, attach rates continue to be very strong and it's much more than a break-fix business. And we see our contract rates actually growing at double digits, which is incredibly sticky with customers. And all key offering categories, right from enterprise down to some of the preventive maintenance services we do are all very, very strong. We also see that, you know, of course we have a large install base and being able to provide different solutions and services for that have been really great. I will close by saying that we had some very big wins in the enterprise service business, and that's where we really look about productivity of labs and how we help customers with their outcomes. And we're seeing that increase as we go through the quarter and through the year.
Josh Waldman
Thanks, Mark. Got it. Thanks. Then, Bob or Mike, curious to get your updated thoughts on supply chain and what you're seeing from a component availability and cost perspective entering 23. And I guess, you know, whether or not your guide assumes improvement in either of these, or maybe if supply chain improvement could represent upside to the guide.
Pharma
Yeah, I would say we have seen in the second half of this year incremental improvements as we went through Q3 and Q4 that helped us allow us to increase our revenue here in Q4. I would expect that incremental improvement to continue into next year, but it's by no means back to kind of normal. I think if it happens to improve, I do think that that would be a good thing for us, and But we're assuming kind of the same level of improvement that we've seen in the back half of this year moving into FY23. I do think that some of the costs have come down, but we're still having to purchase things in the off market to be able to ensure supply and deliver to customers.
Beau
Yeah, to Josh's question, if we get to a point where we don't have to go into that aspect of the market, that would be upside for us. That's right.
Bob
Got it. Appreciate the time and detail. Yep. You're quite welcome. Thank you. We'll go next now to Dan Leonard of Credit Suisse. Hello. Hello, Dan. Hey, Dan. Hi, Mike.
Dan Leonard
I have a follow-up on Europe. So when you're framing the possibilities for 2023, I hear you on the conservatism for the chemical industry. But what about other end markets? Does the macro uncertainty in Europe bleed into pharma or AcaGov or anywhere else?
Beau
We think there's an element that will also be in pharma as well. So you're right, I was focusing specifically on the chemical segment of Europe, but that's also part of the storyboard as well. You can manage large pharma accounts who are dealing with increased costs, trying to figure out what they want to do in 2023. That's a watch area for us as well. But I will say some of the other secular drivers that we talked about earlier, such as the investments in renewable energy, there's a big push to make hydrogen more of a source of energy. So this plays right in the sweet spot of Agile. But we are cautious about the large accounts in Europe and what they may do in 2023 in those two end markets.
Dan Leonard
And then I have an unrelated follow-up. On the NASD business, can you be specific about what is your outlook for that business in 2023 and what might be your opportunity to expand the service offerings in that business beyond your traditional product offering?
Beau
Yeah, Sam, if you don't mind, I'll just take the lead on that just to kind of, and then have Bob jump in here as well. I mean, we're assuming that our new capacity for Train B comes online, you know, mid-year, calendar year, and starts and will reach a I believe, full capacity by the end of the year. And we do think there's further expansion opportunities, both in terms of what we do already, but broadening the portfolio. But Bob, maybe you want to walk through some of the thoughts on the financial expectations.
Pharma
Yeah, I mean, we ended this year, you know, touching on roughly $300 million for that business. And we've talked about this train B being $150 million plus of capacity when Mike says we're going to be at capacity at that run rate by the end of the fiscal year. And you could imagine that probably less than half of that, you know, is a ramp up. But, you know, we would expect a strong growth here. And I would say train B is primarily SIRNA, although we do have early, you know, some growing business in CRISPR therapeutics out of our existing facilities, and we expect that to continue to grow as well.
Bob
Thank you. Sure. Thank you. We go next now to Dan Arias of Stifle.
Dan Arias
Afternoon, guys. Thanks for the questions here. Hey, Mike. Just a question on GCMS. 30% growth per quarter is pretty robust. For 23, would you expect a little bit of a decoupling from LCMS there, just given that it feels like there's a bit more cyclicality on the GC side, maybe a little bit more farm on the LC side? Or do you think those portfolios track similarly again?
Beau
You know, I think we've always felt, and Jacob feel free to jump in this, we've always felt that long-term we expected LCMS to have higher growth rates than GCMS. And I think we'd expect that to play out in the long run. I'm not sure about 23, because GCMS plays really well in the advanced materials space we've been talking about, you know, some of the secular drivers there. But also, as Jacob mentioned, PFAS is an area too. I don't know if you're going to see that much divergence in 23, but it's a great question. Haven't thought about it.
Jacob
Yeah, thanks, Mike. And we came out with some very nice innovations here at the ASMS on the DCMS side, including the way that you can use hydrogen to measure or to as your carrier gas instead of the helium, which has been really nice pickup in the DCMS space. And as Mike also alluded to, I think we are seeing a lot of opportunity in the advanced material side, particularly in the lithium battery side, where we both see our spectroscopy portfolio combined with the DC-DCMS is completely really addressing some of the challenges there. And actually on top of that, you have LC that is a part of that equation, as you also want to look at electrolytes in batteries. So I think we continue to see a lot of opportunities in advanced materials, but particularly for the DC-DCMS side.
Dan Arias
Yeah, okay, interesting. And then, Bob, maybe just thinking about investments next year in the context of the growth that you're seeing this year, are there areas where you might add resources beyond what might just be expected given the uncertainty that's floating around? It seems like there's an opportunity to sort of improve your positioning at a time of strength. Not sure if you're seeing it that way, though.
Pharma
Yeah, no, we agree. And, you know, I would say it's – We've been doing that over the course of this last year, and I would say one of the areas, obviously, we're building out the capacity in NASD that we've talked about extensively, but we're also significantly investing in places like digital and software. And, you know, we think that that's an area of increasing strength for us and, you know, would look to continue to invest incrementally there as we –
Operator
go into fy 23. yeah okay very good thank you thank you and ladies and gentlemen thank you ladies and gentlemen we have no further questions this afternoon mr i'll turn things back to you for closing comments thanks bo and thanks everyone for joining with that we would like to wrap up the call for today have a great rest of the day thank you ladies and gentlemen that concludes today's call thank you for joining you may now disconnect
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