Agilent Technologies, Inc. (A) Q4 2021 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. My name is Bethany, and I will be the operator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] And now I'd like to introduce you to the host for today's call, Parmeet Ahuja, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Bethany, and welcome everyone to Agilent's Fourth Quarter Conference Call for Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast are made 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 the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. 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.

Thanks, Parmeet, and thanks everyone for joining our call today. The Agilent team delivered another excellent quarter to close out an outstanding, record-setting 2021. At $6.32 billion for fiscal 2021, revenues are almost $1 billion higher than last year. Full year, core growth is up 15% on top of growing 1% last year. The strength is broad-based with our three business units all growing more than 10% core for the year. Our full year operating margins are up 200 basis points. Earnings per share of $4.34 are up 32%. Let’s now take a closer look at our strong finish to 2021 and review Q4 results. Our momentum continues as orders increased faster than revenue in Q4 and at the same time, we delivered our fourth straight quarter of double-digit revenue growth. At $1.66 billion, revenues are up 12% on a reported basis. Our core revenues grew 11%, exceeding our expectations. This is on top of 6% core growth last year. Our Q4 operating margin is 26.5%. This is up 160 basis points from last year. EPS is $1.21, up 23% year-over-year. Our earnings growth also exceeded our expectations. We continue to perform extremely well in pharma, our largest market growing 21%, driven by our biopharma business. Total pharma now represents 36% of our overall revenue. This compares to 31% of our revenues just two years ago. The strong growth in our chemical and energy business continues, as we delivered 11% growth in the quarter. This is on top of growing 3% in Q4 of last year. PMI numbers are positive and we expect that chemical and energy will continue its strong growth trajectory into fiscal 2022. In diagnostics and clinical, revenues grew 11% on top of growing 1% last year, as testing volumes started to recover. On a geographic basis, our results were led by a strong performance in the Americas and China. Our business in the Americas grew 15% on top of 5% last year. China grew 8% core on top of strong 13% growth in Q4 of last year. China order growth outpaced revenue growth for the third quarter in a row. Now, looking at our performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $747 million. LSAG is up 11% on both a reported and a core basis. LSAG’s growth was broad-based and led by strength in liquid chromatography and cell analysis. The pharma and chemical and energy markets were particularly strong for new instrument purchases. Our cell analysis business crossed the $100 million revenue mark in the quarter for the first time. During the quarter, the LSAG team announced a new Ion Mobility LC/Q-TOF and enhancements to our VWorks automation software suite. These new, well-received offerings are used to improve the analysis of proteins and peptides to speed development of new protein-based therapeutics. The Agilent CrossLab Group posted revenue of $572 million. This is up a reported 10% and 9% core. Growth is broad-based driven by strength in service contracts and on-demand services, as well as for chemistries and supplies. Our focus on increasing connect rates continues to pay off for us. The strong expansion of our installed base in 2021 and increasing connect rates bodes well for continued strength in our ACG business moving forward. Our ability to drive growth and leverage our scale produced operating margins of roughly 30%, up more than 200 basis points from the prior year. The Diagnostics and Genomics Group delivered revenue of $341 million, up 16% reported and up 13% core. Our NASD oligo business led the way with robust double-digit growth in the quarter and achieved full-year revenues exceeding $225 million. We expect another year of strong double-digit growth as the team continues to do a great job of increasing throughput with the existing capacity. The additional expansion of our “Train B” oligo manufacturing facility in Frederick, Colorado is proceeding as planned. We expect this additional capacity to come online by the end of calendar year2022. Moving on from our other business group updates, there were several other significant developments for Agilent this quarter. We announced our commitment to achieving net zero greenhouse gas emissions by 2050. We believe our approach delivers the same rigor to sustainability that we apply to everything else we do. We also believe these actions are not only the right thing to do, but fundamental to achieving long-term success. Our sustainability leadership continues to be prominently recognized, as well. You may have seen that Investors’ Business Daily recently named Agilent to its Top 100 ESG Companies list. We are also a company where diversity and inclusion represent a company priority and is a core element of our culture. During the quarter, we achieved recognition by Forbes as one of the World’s Best Employers, and as a Best Workplace for Women. While the Agilent team has a strong track record of delivering above market growth and leading customer satisfaction, we are always looking to do more. To further accelerate growth and strengthen our focus on customers, we are implementing a new One Agilent Commercial organization, combining, for the first-time, all customer-facing activities under one leader. The new organization brings together and strengthens our sales, marketing, digital channel, and services team. The new enterprise-level commercial organization is led by Padraig McDonnell. Padraig will continue to lead the Agilent CrossLab Group as Business Group President, as well as serve as Agilent’s first-ever Chief Commercial Officer. The way I like to characterize this move is to say we are “doubling-down” on the success we’ve achieved with ACG applying a holistic, customer-focused approach to all aspects of our business. We are also moving the Chemistries and Supplies Division to LSAG. This closer organizational alignment between instrument and chemistries development will further accelerate our progress on instrument connect rates for chemistries and consumables. We believe that “structure follows strategy” and that this new organizational structure will further enhance our customer focus and the execution of our growth strategies. Looking ahead to the coming year, we are in a strong position to continue to deliver on our “build and buy” growth strategy. Agilent’s business remains strong. We enter the New Year with a robust backlog and have multiple growth drivers, coupled with the proven execution excellence of the Agilent team. A year ago, during our Agilent Investor Day, we raised our long-term annual growth outlook to the 5% to 7% range, while reaffirming our commitment to annual operating margin improvement and double-digit EPS growth. We are now one year in and well on our way to achieving these long-term goals. Bob will provide more details, but for fiscal 2022 our initial full-year guide calls for core growth in a range of 5.5% to 7%. We expect to continue our top-line growth as we launch market-leading products and services, invest in fast-growing businesses, and deliver outstanding customer service. My confidence in the unstoppable One Agilent team and our ability to execute and deliver remains firmly intact. This is our formula for delivering solid financial results, outstanding shareholder returns and continued strong growth. We are very pleased with our performance in 2021, but not satisfied. As I tell the Agilent team: The best is yet to come, for our customers, our team, and our shareholders. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob?

Thanks Mike, and good afternoon everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our initial outlook for the upcoming year and for the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had very strong results in the fourth quarter. Revenue was $1.66 billion, reflecting reported growth of 12%. Before I get into the details, I want to acknowledge our supply chain team, which has been doing a great job managing in a very challenging global environment. Core revenue growth at 11% was a point above our top end guidance range. Currency accounted for 0.8% of growth, while M&A contributed 0.5% of growth during Q4. And as expected, COVID-19 related revenues were roughly flat sequentially and resulted in just over a point headwind to the quarterly core growth. Late in the quarter, we did see transit times that were in certain cases greater than anticipated resulting in some revenues being deferred into Q1. Our results were driven by a continuation of outstanding momentum in pharma, and in biopharma in particular, while chemical and energy and diagnostics and clinical also delivered strong results for us. Our largest market, pharma grew 21% during the quarter against a tough compare of 12% last year. The small molecule segment delivered mid-teens growth, while large molecule grew 31%. Pharma was a standout all year, growing 24% for the full year after growing 6% in 2020. And in FY22, we expect our pharma business to grow in the high-single digits. Chemical and energy continued to show strength, growing 11% with instrument growth in the mid-teens during the quarter. This impressive performance was against a 3% increase last year. The C&E business grew 12% for the year, after declining 3% in 2020. Growth was driven by continued momentum in chemicals and engineered materials and we expect our C&E business to continue to grow solidly next year in the high-single-digits. Diagnostics and clinical grew 11% with all three groups growing nicely during the quarter. While the largest dollar contributor to this market is DGG driven by our pathology-related businesses, the LSAG business continues to penetrate the clinical market and drive growth with strong performances by cell analysis and mass spec. We saw mid-teens growth in the Americas and strong growth in China, albeit off a small base. For the year, the diagnostics and clinical business grew 15% for the year after declining slightly by 1% in 2020. And we expect to continue to grow in the mid- to high-single-digits in 2022. Academia and government, which can be lumpy and represents less than 10% of our business was up 1% in Q4 versus a flat growth last year. Most research labs continue to remain open globally and increase capacity to pre-pandemic levels. China came in at low-single-digits, while the Americas and Europe were roughly flat. For the year, we grew 7% after declining 4% last year. We expect this market will continue to improve slightly in fiscal year 2022 and expect growth of low to mid-single-digits. Food was flat during the quarter against a very tough 16% compare. Europe and the Americas grew while China declined. For the year, food grew 13% after growing 7% in 2020. Looking forward, we expect food to return to historical growth rates in the low-single-digits. And rounding out the markets, environmental and forensics declined 2% in the fourth quarter, off a 5% decline last year, as growth in environmental was overshadowed by a decline in forensics. For the year, we grew 5% off a 2% decline in 2020. And looking forward, like food, we expect environmental and forensics to grow in the low-single-digits in the coming year. For Agilent overall, on a geographic basis, all regions again grew in Q4 led by the Americas at 15%. China grew 8%, and Europe grew 4%. And for the year, Americas led the way with 21% growth, followed by China at 13% and Europe at 12%. Now let’s turn to the rest of the P&L, fourth quarter gross margin was 55.9%, up 90 basis points from a year ago. Gross margin performance, along with continued operating expense leverage, resulted in an operating margin for the fourth quarter of 26.5%, improving 160 basis points over last year. Putting it all together, we delivered EPS of $1.21, up 23% versus last year. And during the quarter, we benefitted from some additional tax savings resulting in a quarterly tax rate of 13% and our full-year tax rate was 14.25%. Our share count was 305 million shares, as expected. And for the year, EPS came in at $4.34, an increase of 32% from 2020. We continued our strong cash flow generation, resulting in $441 million for the quarter, an increase of 17% versus last year. For all of 2021, we generated almost $1.5 billion in operating cash and invested $188 million in capital expenditures. During the quarter, we returned $195 million to our shareholders paying out $59 million in dividends and repurchasing roughly 830,000 shares for $136 million. And for the year, we returned over a $1 billion to shareholders in the forms of dividends and share repurchases. And we ended the year with $1.5 billion in cash and $2.7 billion in outstanding debt and a net leverage ratio of 0.7. All in all, a great end to an outstanding year. Now let’s move on to our outlook for the fiscal 2022. While we are still dealing with the pandemic and we have the additional challenges around logistics and inflationary pressures, we enter the year with strong backlog and momentum. For the full year, we are expecting revenue to range between $6.65 billion and $6.73 billion, representing reported growth of 5% to 6.5% and core growth of 5.5% to 7% consistent with our long range goals. And this incorporates absorbing roughly a half a point headwind associated with COVID-related revenues, with the majority of that impact coming in Q1. We are expecting all three of our businesses to grow, led by DGG. We expect DGG to grow high-single-digits with the continued contribution of NASD and cancer diagnostics. We expect ACG to grow at high-single-digits with both services and our chemistries and supplies businesses growing comparably, while LSAG is expected to grow in mid-single-digits. We expect operating margin expansion of 60 to 80 basis points for the year as we absorb the build out costs of Train B at our Frederick, Colorado NASD site. And in helping you build out your models, we are planning for a tax rate of 14.25%, consistent with current tax policies, and 305 million fully diluted shares outstanding. All this translates to a fiscal 2022 non-GAAP EPS expected to be between $4.76 to $4.86 per share resulting in double-digit growth. And finally, we expect operating cash flow of approximately $1.4 billion to $1.5 billion and capital expenditures of $300 million. This capital investment represents an increase over 2021 as we continue our focus on growth, bringing our NASD Train B expansion online and expanding consumables manufacturing capacity for our cell analysis and genomics businesses. We have also announced raising our dividend by 8% continuing an important streak of dividend increases and providing another source of value to our shareholders. Now, let’s move on to our first quarter guidance, but before I get into the specifics, some additional context. Lunar New Year is February 1st this year, a shift from last year when it was in mid-February. As a result, we expect some Q1 revenue to shift to the second quarter this year as customers shut down ahead of the holiday. In addition, as I mentioned, we do expect to see the largest impact of COVID-related revenue headwinds in the first quarter. We estimate these two factors will impact our base business growth by 2 to 3 points and are roughly equal in impact. For Q1, we are expecting revenue to range from $1.64 billion to $1.66 billion, representing reported and core growth of 5.9% to 7.2%. Adjusting for the timing of Lunar New Year and COVID-related headwinds, core growth would be roughly 8% to 10% in the quarter. First quarter 2022 non-GAAP earnings are expected to be in the range of $1.16 to $1.18. And a couple additional points before opening the call for questions. In conjunction with new One Agilent Commercial organization Mike talked about, we will be reporting under the new structure starting in Q1. In addition, we will be providing a recast of certain LSAG and ACG historical financials to account for the segment changes after the filing of our Annual Report on Form 10-K in December. I am extremely proud of what the Agilent team achieved in 2021 and look forward to another strong performance in 2022. With that, Parmeet, back to you for Q&A.

Thanks, Bob. Bethany, if you could please provide instructions for the Q&A now?

[Operator Instructions] The first question comes from the line of Vijay Kumar with Evercore. You may proceed.

Hey guys. Congrats on a nice print here and thanks for taking my question. Maybe as to my first one on…

Thanks, Vijay.

Mike, maybe my first one on the guidance here. A lot of questions around supply chain inflationary environment. The guide of 5.5% to 7% core growth for fiscal 2022, what is that assuming for pricing versus volume? And does it assume any contribution from interest run?

Hey, Vijay, this is Bob. I did get the last part of your question, maybe. Yes, so, on the price, we do have built in roughly a point of price into our plan which is slightly higher than what we had this year, Vijay. And in terms of inclusion, we won’t get into individual customer products, but what I would say is NASD is expecting another year of very strong growth.

And just on that last point, Bob, and maybe, Mike for you,

Sure.

I think the Analyst Day outlook had NASD ramping up quite meaningfully. Has anything changed on NASD it did capacity ramp up by timing change at all and I am curious on just around on anything changed – your response letter to no orders?

Not at all. What I would say, the one big change is the business is doing even better than we had communicated at December of last year. So really appreciate the question. As you know, in my – we’ve been talking about the new capacity coming online and that’s still gone right per schedule, in fact, we distributed earlier last week and that’s still to come on online by the end of calendar 2022. But I think the team has just done a fabulous job, which is we are going to be able to grow double-digit in 2022 even without the new capacity, because they are able to continue to drive process improvements of broader book of business and larger batches. So the business is really on fire. I mean we are very, very happy with it.

Yes. Vijay, if we looked at our order backlog, we are taking orders for 2023 already.

Yes. I have met Bob the other day, Vijay that a year ago we are talking about could we fill out the factory? Could it ramp and we’ve blown right through that.

Yes. That’s fantastic, Mike. And just sorry to clarify post the complete response letter to Nord, there is no change in interest around assumptions for you guys, correct?

No. No.

Fantastic. Thank you, guys.

You are welcome. Appreciate the feedback.

Thank you, Mr. Kumar. The next question comes from the line of Tycho Peterson with JPMorgan. You may proceed.

Tycho? Tycho, I think you are on.

Your line is now open.

Moving to the next in the queue.

Okay. The next question comes from the line – excuse me, of Brandon Couillard with Jefferies. You may proceed.

Hi. Thanks. Good afternoon.

Hey, Brandon.

Mike, maybe just – Mike, maybe just starting with the guide for next year. You just kind of talked through some of the variable upside, downside that you considered when building the outlook. I’d be curious what you’ve embedded for China specifically, as well?

Yes, when I talk about the – what we see is the potential upside in the guide and Bob, maybe you can talk about the – our China assumptions. And by the way, we are – hope we came through, so we are very happy with the momentum we have in China. I think the upside fits with our two largest end-markets, pharma and chemical energy. And as Bob indicated in his script, we are assuming high-singles, I believe, Bob, for the pharma market really coming off just toward growth here in 2021. That high-level growth continues, that would represent upside in our biggest market. And we’ve got a lot of early positive things happened in the pharma side of things. Pharma, let’s say, C&E as well, right, Bob. So we’ve always – I think this is the most bullish language that I’ve had in a call for sometime about the C&E. So you can imagine there has been even some caution about not over plan or too much. But I’d say the two – our two largest end-markets represent the highest – where we think we may have some upside relative to our initial first guide for the year. Bob, can you remind what we had assumed for China?

Yes, Brandon, it’s a good question on China and we continue to be very positive on China. If we look at our backlog, our order growth rate has increased higher than our revenue for the last three quarters. We exited 2021 with a record backlog going into 2022 for China. And our guidance comprehends high-single-digit growth in China. So, both being led by – from a geographic basis, growth will be led by Americas and China going forward.

Okay. And then, Mike, in terms of the new organization structure, why need the COO role now? And then, correct me if I am wrong, are you planning to collapse ACG into the LSAG segment entirely?

Yes, no, thanks for that clarifying question. So, let me handle the second part of your question first, which is the ACG group will be 100% services in 2022 and then we are moving over the CSD, the chemistry and supplies portion of that business over to Jacob, for two reasons. One is, just the breadth of responsibility that product would have as we had made that change. But we think that’s going to be a driver of growth and I ask Jacob to make a comment on that here in a second, because I think they have these teams even closer together. We are going to be able to even further accelerate our connect rates on instruments for our chemistry products. Why the change? Hey, it’s best to make, when things are going really well, it’s really time to put down the hammer and really go as hard as you can and that’s what we are doing here. So, as you may know, when I first came in as CEO, I had five sales forces. I collapsed those into two. This is next evolution of that overall transformation of the company with this One Agilent culture behind it. The real belief is that the segmentation of our markets really calls for a much more of a customer orientation as opposed to product-centric view of how we want to sell and reach our customers. And you think about the scale as you get with the digital platforms, digital infrastructure, our services organization, this makes sense to do this volume on top of your game. So, all things are going well, we thought it was really time to pit the seller down even further. And Jacob, you wouldn’t mind just to comment to what you are thinking about your new responsibilities?

Yes. Thanks for that, Mike and I am sure that things got with now that you see the consumables product where it is, so we can truly build out end-to-end solutions that will really drive customer expectations and I think Padraig and the team have over the past few years in fact shown that the design end consumables can really drive a tremendous connect rates. So I think that already shown the path forward and now all being completely into LSAG, we can really accelerate that.

And, hey, thanks for that Jacob. And then, maybe just to close off this line of response, any thoughts about your additional new responsibilities?

Yes. Thanks, Mike. First of all, really excited about the new role and I think the unified commercial strategy and organization will really continue to strengthen Agilent’s customer focus and help us to align capabilities for the future where we are going to kind of maximize the connect rate and customer lifetime value. And also, I think accelerate execution of our digital ambitions for both delivering near-term growth and strategically invest for the future. So, very excited and already building on what is a great capability in the company.

Okay. That’s helpful. Thank you.

Thanks, Brandon, appreciate the questions.

Thank you, Mr. Couillard. The next question comes from the line of Derik de Bruin with Bank of America. You may proceed.

Hi. Good afternoon.

Hey, Derik.

Hey. Just maybe – so, a couple of questions. I guess, can you talk a little bit about the market expansion 68 at this point is and just repeat that out. You got some inflationary pressures. You got some FX. You’ve got some COVID headwinds coming off. Can you just provide what’s the underlying market expansion is just sort of normalizes, you have obviously the capacity coming on car rails. Just how should we think about the margins and just the different pieces?

Bob, do you want to take that?

Yes. Yes. Thanks, Derik. It’s a great question. And what we’ve been able to do even in this last quarter in the phase of inflationary pressures is be able to drive pretty significant margin expansion across our businesses. And so, as we think about the 60 to 80 basis points to put kind of as perspective, we are anticipating roughly 15 basis point headwind associated with that train B build up and that’s hiring the people and getting the product coming online and so forth. And so, if we think about that, that’s closer to 75 to close to that 100 basis points. A lot of that’s going to come through SG&A operating leverage and the activities associated with just not growing our business expenses as fast as the top-line. And we are going to be looking to cover some of the inflationary pressures on the top-line with that price that I talked about before which we didn’t really have any significant price in 2021. We have started to see that. We took quick action earlier this year to reflect that and so a combination of it. Most if it being in OpEx leverage, but there will be some small operating leverage at the top-line as well, if you take out the – excuse me, at the gross margin, if you take out the NASD expenses as a result of covering our cost through pricing increases.

Thanks. And then just a couple of quick follow-ups. Any evidence of stocking transportation supply chains degree on the consumable side and just an update on ResBio, that looks like it so lagging its largest rotations? Thank you.

Hey, Derik, a follow-up on those two questions and so, and I have Sam coming on the second question. So, we’ve not seen any real evidence of stocking on the consumables. So, I think that’s pretty interesting, right, Bob?

That’s great.

Yes. Yes. And then, what you are going to hear from Sam in a minute he will provide a little bit of color, we remain very, very bullish about the long-term prospects with ResBio and a lot of the work has been done to develop new opportunities with our pharma partners. But we are already on the short-term as well. Sam?

Yes. Hey. Thanks, Mike. In terms of Q4, whereas the revenue came in a little bit below expectations and that’s driven in part by COVID-19 related delays in clinical trial enrollment. Overall, the interest that we are seeing both from our existing customers on the pharma side that we’ve been doing I see work with, as well as new customers that’s very, very real. In fact, we’ve now signed an agreement which is our first with a large existing customer giving evidence to the interest that’s there in terms of the work that we are doing on the PMAs. These are approvals related to existing agreements with our Resolution Bioscience business. We are making good progress on that. And so, lot of the momentum in a number of areas. So, very pleased to have them as part of our business to really bring together the strategy we’ve had which is to be the companion diagnostic development and commercialization partner leveraging multiple modalities including immunohistochemistry and next-generation sequencing.

Thanks, Sam.

Thank you, Mr. de Bruin. The next question comes from the line of Tycho Peterson. I do apologize. The next question comes from the line of Dan Leonard with Wells Fargo. You may proceed.

Hi, good afternoon.

Good afternoon, Dan.

Hey, Dan.

So my first question relates to the 2022 guide. What are some of the factors that might pull performance back down to the mid-single digit range, specifically, something that would start with the five handle?

Yes. I think, what I would say is, first of all, I think our guidance is prudent given the beginning of the year. If we saw continued, greater than expected disruptions in the supply chain that may impact demand, particularly in some of the applied markets that could do it. Although we haven’t seen that, to be very clear, Dan. We feel very good about where we are given our forecast and backlog. So we are – I would say are, we have bias towards the upside in our forecast as opposed to bias towards the downside.

Appreciate that. And then, a follow-up on the shift in chemicals and supplies from ACG to LSAG. Is the logic behind the move is to increase the connect rate? Can you remind me where is the connect rate today and where you want it to be over some period of time?

Yes. It’s a great question and the team continues to do a great job under Padraig’s leadership here to do that both at the purchase and then on the ongoing aftermarket. What I would say is, right now, if you look at the overall attach rate, it’s probably in the mid-20s right now. And if you look at the attach rates year-on-year, we saw very nice growth on the new placements. So, all the new instruments that Jacob and team have been able to sell, that’s why we feel very good about the ACG business going forward. So, we still have a long way to go there in terms of opportunity across both the services as well as the consumables. Some of our competitors are higher than that and so we’ve got aspirations that are well above that mid 20s. And Dan, I just like to make sure this clear, we are not making this change because we were dissatisfied with the improvements in that connect rates. This is icing on top of the cake before that accelerated as we look to balance span of control and business responsibilities with the real driver was the one commercial – creation of the one commercial organization. And I think this is a nice secondary benefit that we are actually going to get, we think even more focus and header alignment between our product development groups on the CSD side and instrument side.

Helpful clarification, Mike. Thank you.

You are welcome.

Thank you, Mr. Leonard. The next question comes from the line of Puneet Souda with SVB Leerink. You may proceed.

Yes. Hi, Mike. Thanks for taking the question.

Sure, Puneet.

Bob, thanks. So, first one is on environmental. I mean, you have a leading position there with a number of products across the LSAG product line. Maybe just could you elaborate a bit more for us what’s going on there? Specifically, related to China, the timing in China, is that just Lunar New Year? Is there something more that we need to consider?

Yes. I think this is – let me start, Bob, you can jump in on this. So, I think when we talk about environmental and forensics, I think it’s a tale of two cities. So, buried in that number is a decline in forensics and I think that’s probably really tied to governments prioritizing other investments in this COVID-19 world. The demand is not there. I think relative to China, it’s been more about priorities. Right now, they are shifting some of their priorities towards the pharma and other COVID-19 related type investments. So, I think that’s probably, I mean…

Yes, the only thing I would add on that Mike is, there is some shift, but it’s also timing.

Yes. Yes.

There are some…

Something…

Yes, yes, there is some budget that we’ve seen that has shifted into our fiscal first quarter and into FY 2022 in particular in China. I think long-term, we still see the importance of the environmental testing in China and around the world remains to be seen or is still intact, Puneet. And it’s more a function of timing than anything.

And thanks for jumping in on that, Bob, because we still are very, very confident about our ability to grow environment builds in China I think it’s well known the government’s real emphasis on continuing to make improvements in the quality of life of citizens.

Got it. And then, just on the liquid chromatography, just staying on that point, I’d really appreciate your comments on the chemistry columns and consumables now being part of LSAG, but when we look at the business overall today, you obviously have a strong 1200 series offering. We are also seeing pickup from another competitor in the market space that had lost some share over the last few years and there seems like they are gaining some back. But just wondering what you are seeing in the field and in terms of further competition in this side of the market, we’ll appreciate any thoughts. Thank you.

Yes, hey Jacob. I lead off on here and I mean, I first want to say is the key competitors in the LC market remain unchanged. Nobody new in the market and what I can tell you is that, we are very, very happy with where we are in liquid chromatography. So we are not playing any kind of catch-up game at all here. We delivered high-teens growth in the quarter and exited the year with record backlog and our growth rate in orders were significantly higher than our revenue growth rate. And I think, Jacob, it’s fair to say that the strength is both on the large and small molecule size with the real standout of China geographically. And I think you exited the year, but we see as record backlog. So we are really bullish on our LC business and maybe you want to have some additional comments?

Yes. Thanks, Mike. It’s something to be proud of and I am – I feel really good where we are right now. As you said, we are growing very strongly. As I can see, when I look into the market, we are in a very strong position versus our competition also. And just a reminder, we - a few quarters ago, we did announced that we have expanded our Bio LC portfolio substantially. So we really have the full range of Bio LCs out there. But we also have 2D-LCs and also online LCs to really drive growth in that area. So a Bio LC really came timely with all the investment that goes into large molecules right now. So I truly believe we have momentum and we’ll continue with that over the next period of time.

Great. Thanks, guys.

Thanks, Jacob.

Thank you, Mr. Souda. The next question comes from the line of Patrick Donnelly with Citi. You may proceed.

Hey, guys. Thanks for taking the questions.

Hello, Patrick.

Bob, maybe one for you to start, just on the margin side. I know you talked about 60 to 80 BPS of expansion. It sounds like the NASD facility might be a little bit of a headwind. Can you just talk through the moving pieces there? I know you called out price a little bit, as well. Can you just talk about the levers and how much of an offset the facility is, as we can kind of think about the underlying number as well?

Yes. So, I would say, maybe on NASD, if I look at it and I break it into two components. If I look at it with the existing capacity, that team not only has driven top-line growth, but if we looked at the margin, it actually is accretive to the overall Agilent margin. So that team has done a fabulous job ramping up.

It’s accretive, right?

Accretive, yes, very nicely. And so, we are making the investment on Train B. It’s roughly 15 basis points. That’s inclusive of that 60 to 80. So it’s a roughly $10 million to $15 million of incremental cost associated with the training and investments as the lines come on board. And so, we are seeing that and take that to a side because those are kind of discrete. And if I look at the business, what we are seeing is the faster growing areas. We actually are seeing a benefit of mix. And so, we talked a little bit about cell analysis but also cell analysis in LSAG has been very accretive both on the gross margin, as well as the operating profit side. And so, we’ve got these faster growing businesses that are helping with mix and then we are adding on the incremental price to cover the inflationary pressures that we are seeing and so forth. But we’ve also got productivity measures in place and this is where I think the One Agilent approach to our systems and our infrastructure really pays dividends, because we are able to leverage those costs across a larger base and because a lot of that is internal, we don’t have that same level of pressure on cost as we are seeing in some other areas. And so, it’s a combination of product mix, that price. I talked about 1% price and then leverage in the operating expense side.

That’s helpful. Thanks, Bob. And then, Mike maybe one for you on C&E. I know, in the script, you kind of called out maybe having the most positive tone you’ve had in a little while here on that segment. Obviously the end-market health seems pretty high from the customers. And can you just talk about, I guess, the conversations you’re having there, visibility, again, guiding to high single for next year off a pretty strong 2021 is encouraging. So maybe just your confidence and then again, it sounds like maybe there’s even some upside to that number?

Yes. Sure, Patrick. So, yes, so we are seeing really good end market demand for and I think Bob highlighted a lot of those like the advanced materials or chemicals. It really speaks to the overall recovery economically on a global basis and the fact that this in particular, this customer base had deferred a lot of investments for some period of time. So, they are in a reinvestment mode and we have pretty good visibility to the funnel. So, I think we probably got at least a six month lead view on what’s coming down on instrument purchases. So, we are feeling really good about the C&E business as well as there is the ACG story here as well of where we are continuing to increase services in this segment, which has historically been more of a self-maintainer kind of market, as well as the chemistries and consumables side. So, I think we’ve got pretty good visibility, given our confidence and be able to put this kind of number out there in a full year guide at this point in time. Bob, anything else you’d add to that? I know we spend a lot of time talking about this.

No, I think you got it. You said it well.

Great. Thanks, Mike.

You are quite welcome.

Thank you, Mr. Donnelly. The next question comes from the line of Josh Waldman with Cleveland Research. You may proceed.

Hi. Thanks for taking my questions. Wanted to start with a quick follow-up on supply chain.

Sure, sure.

Yes. Hey, Bob. Wanted to start with a quick follow-up on supply chain. I wondered if you could give us the magnitude of the push-outs you referenced and is this all LSAG?

Well, I am going to pass it to Bob here in a second, but let me really clear in terms of our language. When I use supply chain, that means material constraints and then we have logistics. I think, of the issues that Bob, the transit times was really logistics issue. In terms of our ability to get product to customers and get the raw materials, we feel pretty good about what’s been going on there so.

Yes, exactly. So it was more just longer delivery times and Josh, it was in the LSAG business, as you would expect. It was roughly a point in the quarter.

Okay. And given the transient nature, it sounds like you are assuming this all hits in the first quarter. Is that kind of what’s embedded in your guide?

We are assuming that it will get better over the course of the first half of next year or first half of the fiscal year. So not all of it will come back in Q1.

Got it, okay. And then, I wanted to follow-up on your comments within the LC/MS franchise. I believe, in your prepared remarks, you highlighted stronger install rates in this franchise in the fourth quarter. Just wondered if you could provide any additional color on that, maybe what’s driving it? Is it higher or faster kind of accelerated refresh levels at legacy accounts? Or maybe you’re seeing kind of increased win rates at new accounts?

I am going to – great question. I am going to pass that to our expert on this topic. Jacob, maybe you want to talk about what’s going on in the LC/MS front.

Yes. Certainly, Mike and as you mentioned, we had great success with our new Ion Mobility, 6560C that we launched here at ASMS and we had a fantastic worker and user meeting also that was rally all subscribed. But as you also speak to, we had tremendous traction on our triple core and single cord businesses. And particularly in the biopharma space, we see a lot of smaller accounts also coming live, small mid-sized accounts that are starting to build up their capabilities within the analytical instruments business. So we see a lot of tremendous momentum there. But obviously, also the big accounts that is more in the refresh mode.

Yes. So, I think part of the story, Josh, is new customers, right, particularly on the biopharma side and also doing very well on the refresh side with existing customers.

Got it. Yes. Really appreciate it guys.

You are quite welcome.

Thank you, Mr. Waldman. [Operator Instructions] Our next question comes from the line of Michael Gokay with KeyBanc Capital Markets.

Hey, Mike. It’s Paul Knight. Thanks for the time.

Hey, Paul. How are you doing?

Good, good. On the Avantor agreement, is there any way you can talk about - does that give you another 5% of addressable market? What are your thoughts around that deal?

Yes. Hey, thanks for noticing that we had worked with Michael’s team and have a real agreement we are really excited about. And I’m actually going to pass it over to Agilent’s new Commercial Officer to his view on that question. Go ahead, Padraig.

Yes. I think, yes, thanks, Mike. I think we see that it’s a really mutual beneficial arrangement that we are going to see not only different customers, but at different spaces within customers and it also helps with overall the addressable market and coverage. So, the Agilent team and the Avantor team will be able to share leads and so on so we’ll be able to cover the market better. We’ll also be able to use our digital capabilities to be able to find new customers and also increase the wallet share and customer side. So all around, a very positive development.

And Paul, it’s hard to put an exact percentage on the question. But we wouldn’t be doing it if it was on the margin.

Yeah. And I was going to say, Paul, this is Bob. Just to add, I mean, we didn’t really see any revenue. That’s all future opportunity for us. And I think one of the areas that Avantor is strong is in the research area, Academia and Government, and this will help us even cover that market even broader than we do today.

Yes. Absolutely.

Thank you.

Thank you. The next question comes from the line of Dan Brennan with Cowen. You may proceed.

Hey, Mike. Hey, Bob. How are you guys doing?

All right, Dan. How about yourself?

Thank you. Thank you. Doing well, doing well. Maybe first question on NASD, maybe I missed it. Did you guys give a number for 2022, what’s implied?

We did not, but what we did say is, we would expect strong double-digit growth. I’ll leave it at that. Yes, what I can tell you is we exited at a run rate that was higher than the - if you took our $225 million that we talked about and divided by four, our runrate was higher than that.

Right.

So we continue to ramp.

Yes, thanks for that question. It was hard to explain it in the call narrative. But as Bob mentioned, our Q4 exit rate is higher than the full year number.

And maybe could you give a little color there. I think, Bob, you mentioned in the prepared remarks or in Q&A that you’re taking in orders to 2023. Could you just give us a sense like what the utilization is today of your capacity that’s available and any color about demand trends book of business things of that nature?

Yes. In short, we are running 24/7 at both our Frederick facility, as well as our Boulder facility, which was a legacy facility. And we are – I feel very good about our ability to continue to expand capacity. What Brian and team have been able to do is increase both throughput, as well as yield. And so, that’s really helped us drive additional capacity with the existing footprint or the existing manufacturing facility. And the Train B, as we talked about has the opportunity to add more than $100 million of incremental volume coming online starting at the end of this - our fiscal - our calendar 2022.

Got it. And then, maybe on the One Agilent, Mike, could you just give us, I know, Mike, when you got there, you made some changes to the sales force that have made under your predecessor, now you are going further. So how should we see this manifest from the outside over the next, I don’t know, one to two years? Does this – could this lead to stronger growth? Is it going to lead to more better margins, more durable growth? Just obviously the customers are going to see something, but how will that manifest in reported results, do you think?

I think it’s a check for each one of the things you listed there. But the number one reason why we are doing is to drive more growth. And it’s just a natural evolution of the transformation in the sales force. I started a number of years ago. And it really points to the fact that we have this broad-based portfolio that’s selling into the same customer base. And why have two separate sales forces and have to go do the coordination between across sales forces, and then the big push that we made over the last several years in terms of digital, this allow us, I believe, to even go faster on realizing our digital ambitions. And then you’ve got the voice of the customer will be right in the CEO’s staff and on Padraig’s table, the Head of the service delivery organization. So, everything relative to the customer facing that we do in this company will be under one leader. We just think it’s going to find ways to accelerate our growth, increase our customer satisfaction, and I think as we push more and more of our business because customers want to buy that way through digital, it will have a natural knock-on effect of efficiency gains in the P&L.

Great. And then, maybe one more, obviously, balance sheet is in great shape. So, the proverbial question about M&A, just wondering what does the funnel look like? Any update on the strategy? I know you’ve been pretty cognizant of not wanting to go too big here and kind of not disrupt what you built there. But just give us a sense of what the needs are today? And what is the outlook for M&A in 2022?

Yes. Sure, Dan. So I’ve used - been using this order the last several years of the build and buy growth strategy. So, we are still very interested on the buy element of fueling future growth and for example, in this past year, we did the Res Bio acquisition really got us into liquid biopsy and really allows us to play to our strengths that we already have from our CDx and IHC business. So, we are going to look for continued opportunities such as those where you are in higher growth markets than the total company average, where they can really benefit by being part of Agilent and where they have differentiated technology and differentiated teams. We will stay in our lane, so to speak, on valuations. Let’s - I’d say, the - you know that’s better than I do, perhaps, Dan. The market is still very robust. We are very active. And we just want to make sure that the deal works for our shareholders. But deploying capital for M&A is part of our story going forward and it’s all upgrade.

Thanks, guys. Excellent. Great. Thank you.

Thank you, Mr. Brennan. The next question comes from the line of Jack Meehan with Nephron Research. You may proceed.

Thanks. Good afternoon. Hey. I want to dig in a little bit more on Cell Analysis. So, heard cleared $100 million in the quarter. What was the 2021 contribution? And similar to the line of questioning on ASP, what’s the target there for 2022 growth?

Yes. So, I’ll start with the cell analysis business and I’ll bring in Jacob here, because it has just done a fantastic job and it’s really continued the momentum that we saw at the beginning - throughout 2020. So, it ended just short of $400 million for the full year and it grew in the mid-20s. And I would expect us to looking forward if we think about where the market is headed and the fundamental demand there, that will be growing double-digits for sure going forward. And as I mentioned before, the beauty of that business is, it’s right ingrained with where the research and technologies are going and where a lot of money is being put in. But it’s also an extremely well run and profitable business for us.

And Jacob, maybe you can give some insights in terms of where are the end-markets you think that are driving - been driving the growth and where we think it’s going to come from in the future?

Yes, thanks for that. It’s a really good question. Obviously it’s something I’d really like talk about. The cell analysis business has been super successful in the past years and our focus on the immuno-oncology space has really paid off. We continue to see opportunities there and we continue to see that our portfolio of being able to measure live cells is required to really drive the research forward. So where we really see the opportunities is, is in the - between biopharma and also the academic markets there, that’s where we see the biggest and the biggest momentum going forward. While we have seen here in the past period of time also that the diagnostic business, particularly with our flow cytometry is picking up good speed, but, I would say, the main opportunity sits in the biopharma space.

And did you ask a question about NASD?

No.

Okay.

Can you down that line just from the comparison?

Okay. All right. You are right, Bob.

My follow-up was going to be, a lot of discussion obviously around driving growth. I was hoping to just get your philosophy on CapEx. So, I think the guidance implies about 4.5% of sales for 2022. That’d be higher than you’ve done in the last few years. Do you expect this is going to remain elevated more kind of in the medium-term? Or is this just kind of some of the near-term opportunities coming through?

Yes. Jack, that’s a great question and what I would say is, if we look at where our there is different kinds of CapEx, and it’s not all created equal. But the reason that it’s being increased is really to fund that growth and capacity expansion, whether that be Train B and NASD or the capacity expansions in places like genomics and cell analysis and I would say, given our growth trajectory in those areas, I would expect us to continue at probably an elevated level to incorporate that growth. As Mike said, we’ve got this buy and build strategy and that’s part of the build strategy and it has paid off in spades with NASD. And what I would say is, we are not – there is more letters in the alphabet than B. It doesn’t end at B. But what I would say is, there is - we are going to be prudent about it, but also be aggressive about going forward.

Thank you.

Thank you, Mr. Meehan. The last question is from the line of Catherine Schulte with Baird. You may proceed.

Hey, guys. Thanks for the questions.

Hey, Catherine.

First - first on the LSAG guide for mid-single-digits. I think on the last call, you talked about the GC replacement cycle coming back on, maybe being in the midst of an LC replacement cycle on small molecule. And you’ll now have chemistries in there as well. So, should we think about this as being more towards upper-end of that mid-single-digit range for 2022 or was there some sort of catch-up spend in 2021 that maybe is a headwind as we get into 2022?

Yes. I think you’re spot on, Catherine. It’s the former, not the latter. Think about it as a higher end and that’s where, I would say, if we think about where our opportunities for upside are, are in the instrumentation business and continuing the strong momentum that we’ve seen. Now we are also going up against, I think, a 15% core growth rate year-on-year. But we feel very good about the momentum in that business, particularly in the areas that you just talked about in Chemical and Energy and in Pharma. We continue to believe that the pharma business coming out of COVID is structurally a higher growth market and as we continue to place our focus on the biopharma or the large molecule, if you look at that throughout 2021, that was a much - growing much faster than the overall pharma business. And so, we would expect that - we feel very good about that business going forward.

Okay. And then, maybe one more, you had a lot of success on NASD. Do you have any interest in entering other areas as manufacturing components for biopharma, whether it’s GMP reagents or DNA plasmas or other areas? And is that’s something that you might get into in 2022?

Well, Catherine, we are always looking for new drivers of growth that would make sense for Agilent to be directly involved in. So, nothing to report for 2022. We’ve got a handful of adding different additional letters, if you will to the all that we serve in NASD. But never say never to the thesis of your question.

Okay. Great. Thank you.

Quite welcome.

Thank you, Ms. Schulte. And the last question is from the line of Noah Baron with JPMorgan. You may proceed.

Can you guys hear me?

Yes.

Hey, Tycho.

It’s Tycho. Sorry about the phone issues.

No problem. No problem at all. Sure.

So, Dako, I appreciate the China color. Obviously people are focused on China tenders at the moment. It doesn’t sound like you’re flagging any issues there, specifically for Dako, but can you talk about what you’re kind of seeing on the ground there for China? And then, how big is the CDx business? You mentioned that earlier, Mike, and you obviously had a bunch of press releases during the quarter about new approvals for CDx?

Yes. So, Sam, I know this is something you’ve been talking to your team about relative specifically about what maybe happened in the China diagnostics market and what’s going on there. So, we think we’ve got a pretty good protective position. But why don’t you elaborate a bit more?

Yes, happy to, Mike. Tycho, thanks for the question. We’ve had another, just overall for our pathology business, the former Dako business, if you will, a really good quarter, including in China. And you may be referring, Tycho, to the buy China requirements that we are all aware of that are happening specifically to our former Dako business, if you will. The relative unique position, particularly with PD-L1 and having a minimal number of local competitors really differentiates us. So, we haven’t felt really pressure from the buy China impacting our business. But we have continued to see really good interest not only in PD-L1 companion diagnostics that brought more broadly speaking in China for our diagnostic products.

And Sam, if I recall, you’ve got your PD-L1 registered in China, right?

Yes, we do. I mean, we registered that almost exactly two years ago, becoming the first-ever companion diagnostic in China. And it’s doing well for us there in China. We’ve actually now trained over 400 different pathologists throughout China to utilize our companion diagnostics.

Yes. Hey, and Tycho, maybe just a follow-up, if I looked at our business in China for DGG for the year, it grew in the 30s, and it was actually in excess of that for Q4. So, it had very positive momentum and CDx is roughly $100 million, ex the Res Bio acquisition.

Great. And then, on Cell Analysis, Mike, I know one of the priorities you’ve talked about is moving that portfolio downstream. Can you talk about those efforts how actively you’re looking at kind of pushing that into QA/QC and further downstream?

Yes. So, Jacob, why don’t you follow-up with some thoughts here?

So, Tycho, when you said downstream, can you tell a little more?

More in the bioproduction versus R&D, yes.

On the bioprocessing, yes, we see a big opportunity in the bioprocessing space, both for our Cell Analysis business, but also for our Analytical Instrument business. So, I think that’s something we will continue to invest in going forward.

Yes. I think what we are seeing right now, Tycho, is moving from truly research into the development area. And then, that will then lead into the QA/QC. So, I think you see a multi-step process here and so, as Jacob said, it’s just early days here from that standpoint. And - but making great progress across all three of those kind of sub-businesses and have high hopes for that to continue.

A similar flow that we’ve seen in pharma for years, right, which is starting in our R&D then works its way into QA/QC.

Yes.

And, Tycho, I think we’ve built this great business through a series of acquisitions and the way we integrate into it making one business. And this would be an area of obviously future focus for us on the M&A front, as well.

Great. And just one last one on the new Agilent and I know you’ve got a number of questions on the rollouts there.

Sure.

Are there new services you’re introducing in conjunction with that? Are you broadening the service portfolio?

Not yet, but stay tuned. It’s only just a few weeks old.

Fair enough. Alright. Thanks.

Okay. Thanks a lot, Tycho. Glad you get on the call.

Thank you, Mr. Peterson. There are no additional questions waiting at this time. I would like to pass the conference back to Parmeet Ahuja for any closing remarks.

Thanks, Bethany, and thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day.

That concludes the Agilent Technologies fourth quarter earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.