Agilent Technologies, Inc. (A) Q1 2022 Earnings Report, Transcript and Summary

Hello. And welcome to the Q1 2022 Agilent Technologies Earnings Conference Call. My name is Emily, and I will be coordinating the call today. During the presentation you will have the opportunity to ask a question [Audio Gap] [Operator Instructions] I now have the pleasure [Technical Difficulty]

[Technical Difficulty] 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 Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our Q1 financial results, investor presentation and information to supplement today’s discussion, along with a 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 January 31. 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. 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. Our momentum continues. The Agilent team delivered a strong start to 2022 in Q1, exceeding the expectation of both the top and bottomline. Our Q1 revenues are $1.67 billion. This is up 9% core and up 8% reported. This is on top of growing 11% core in Q1 a year ago. Excluding COVID-19-related revenues, our core growth is even better at 10% this quarter. We continue to see strength in our order book with robust order intake throughout the quarter. In fact, Q1 orders grew roughly twice as fast as revenues. Q1 operating margins are a healthy 26.3%, up 80 basis points from last year. Earnings per share of $1.21 are up 14%. The EPS increases versus a tough comparison of 31% growth in the first quarter of 2021. These strong results have been achieved in a very dynamic environment. I could not be more proud of the Agilent team’s ability to execute and deliver. Let’s take a closer look at some of what’s driving our strong results. Bob will go into more details later in the call, but our two largest markets continued strong double-digit growth. Our Pharma business, Agilent’s largest market, continues to lead the way for us, growing 17%. Global end market demand for our products and services remains very strong. Biopharma grew 32% while small molecule growth came in about at a robust 9%. The momentum in our Chemical and Energy business also continues, delivering 15% growth in the quarter. This was driven by mid-teens revenue increases in Chemicals and Advanced Materials. PMIs remain positive, along with our overall outlook in the Chemicals, Energy and Advanced Materials markets. On a geographic basis, our results led by 13% growth in the Americas. This is on top of 13% growth in Q1 a year ago. China grew 3% on top of 25% growth in Q1 of last year and was impacted by the timing of Lunar New Year, as noted in our November call. Demand in China remained strong as orders grew high-teens in the first quarter. We continue to invest in China for China to further strengthen our ability to serve our customers. We recently announced a $20 million expansion of our Shanghai manufacturing center to meet growing demand for our locally made liquor chromatography, spectroscopy and mass spec systems. Looking at our performance by business unit, the Life Science and Applied Markets Group generated revenue of $976 million, an increase of 7% on a core basis. This is versus a 10% core growth in Q1 of 2021. LSAG’s growth was led by strength in the Pharma and Chemical and Energy markets. From a platform perspective, customer interest and purchases of our chromatography systems and mass spec offerings are very robust. Our chemistries and supplies business, which moved over from ACG this year, continue to do very well, delivering double-digit growth. We also continue to invest and strategically partner for future growth. Late last week, we announced the acquisition of very exciting artificial intelligence technology that will be integrated into our industry-leading chromatography businesses. This technology has the potential to significantly improve lab growth productivity and accuracy by automating manual interpretational chromatography data. We believe that this capability will be very well received by the high throughput labs Agilent serves around the world. This acquisition is an example of our build and buy growth strategy, as a complement to work, our internal R&D teams are going to develop these types of capabilities for other Agilent platforms. During the quarter, we also announced a partnership with Lonza to integrate Agilent’s analytics technologies and techniques into Lonza’s Cocoon Platform cell therapy manufacturing workflow. The collaboration has the potential to transform the way personalized cell therapies are manufactured. In addition, to ensure we can meet the strong and growing demand for our cell analysis offerings, we also recently announced plans to invest more than $30 million for the construction of a new manufacturing site in Chicopee, Massachusetts. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core against a 11% Q1 2021 core growth compare. This growth is broad-based with strength in service contracts, preventive maintenance, compliance, education and informatic enterprise services. Our focus on providing a differentiated customer experience that leverages our large-scale and talented customer support team continues to pay off. Our connect rates continue to improve and our installed base continues to expand, both boding well for continued strength in our services business. The Diagnostics and Genomics Group delivered revenue of $339 million, up 14% core versus Q1 2021 core growth of 15%. Our excellent growth is broad-based across pathology, genomics and NASD. Our Pathology business grew roughly 10% with strength across all regions. Our core genomics business grew low-teens, with strength in target enrichment and our genomics quality control product lines. The NASD team continues to deliver, driving 45% plus growth in the quarter. Meanwhile, the additional capacity expansion at our Frederick GMP oligo manufacturing facility continues to proceed as planned. We continue to expect this capacity to come on line by the end of calendar year 2022. Our Resolution Bioscience team achieved a major milestone in the first quarter by completing the pre-market approval submission for the Resolution ctDx FIRST liquid biopsy assay as a companion diagnostic. This was done in conjunction with Mirati Therapeutics for non-small cell lung cancer and is currently under review by the FDA. It is the first of what we hope will be several indications for liquid biopsy assays. I am pleased with how we have started the year. Building on our Q1 results, continued order strength and execution prowess, we are increasing our full year financial guidance. We are raising our core growth guidance to a range of 7% to 8%, up 125 basis points at the mid-point from our prior guidance. Fiscal year 2022 non-GAAP EPS guidance is increased to a range of $4.80 per share to 4.90 per share, growing 11% to 13% over last year. Bob will be providing the Q2 outlook along with more detail on our improved full year guidance. We are very pleased with our Q1 results and looking forward to another strong quarter and year ahead. I am also very confident in our team and our ability to execute and deliver for our customers and shareholders, no matter what the challenge. Thank you for being on the call today and I look forward to taking your questions later. However, for right now, 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, take you through the income statement and some other key financial metrics. I will then finish up with our improved outlook for the full year and our guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted very strong results in Q1 and exceeded expectations. Revenue was $1.6 billion -- $1.67 billion, up a reported 8.1%. Core growth was even better at 8.9% as we overcame a greater than expected negative exchange rate impact of 1.3 points, while M&A added 0.5 point to growth. Q1 core growth was 170 basis points higher than the top end of our guidance. In addition, after adjusting for the 1-point headwind due to COVID-19 revenues, our core growth outside of COVID was roughly 10%, and as Mike said, order growth was even better. Again, a very strong start to the year. Now moving to our end-market performance, our results were driven by a continuation of strong growth in Pharma, led by Biopharma, while momentum in Chemical and Energy and strong results in Diagnostics and Clinical also led the way for us in Q1. Our largest market, Pharma grew 17% during the quarter, on top of 20% growth last year. The small molecule subsegment delivered high single-digit growth, while large molecule continued its strong performance growing 32%. We are seeing our ongoing investments in biopharma paying off as demand was strong throughout the quarter. We continue to believe in the long-term growth potential of the Pharma market and that our business will drive above market growth. Chemical and Energy continued to show strength, growing 15% during the quarter. Growth in Chemicals and Advanced Materials led the way, and we expect continued growth in this business. Diagnostics and Clinical grew 11% on top of 9% growth last year, with all three business groups again expanding revenues nicely during the quarter. Our expansion of LC/MS equipment into the clinical space continues to do well. And our growth in China was particularly strong, increasing more than 30% as we continue to penetrate this market. The academia and government market was flat in Q1. The business remained resilient despite omicron impacts in the U.S. as some universities delayed in-person learning in the period following the holiday break in December and reduced lab activity in January. We have seen lab activity improve into February and believe the funding environment remains positive. The Food segment declined low-single digits against a very strong 22% growth comparison from last year. The Americas were a bright spot for us, growing in the mid-teens, while Europe was flat and China down due to difficult comparisons and Lunar New Year timing. Closing out on the performance of the markets, environmental and forensics, our smallest market was down 11%. For Agilent overall on a geographic basis, all regions again grew in Q1, led by the Americas at 13% and Europe at 6%. China grew 3% on top of 25% in Q1 last year, in addition to the effect of Lunar New Year timing, which should benefit us in Q2. Now turning to the rest of the P&L, first quarter gross margin was 56.1%, up 30 basis points from a year ago. Our team has done a good job increasing productivity and pricing has helped offset higher input and logistics costs. Operating margins of 26.3% increased 80 basis points even as we have increased our R&D investments. Our investments in digital technology for our internal operations also continue to pay off as we leverage our infrastructure across the company using our One Agilent approach. Our tax rate of 14.25% came in as expected and we had 303 million diluted shares outstanding, slightly lower than projected. Putting it all together, we delivered EPS of $1.21, up 14% versus last year after growing 31% in Q1 of fiscal 2021. We continued to produce strong operating cash flow, generating $255 million in the quarter, beating our forecast, while we also invested $75 million in capital expenditures during Q1. And during the quarter, we took advantage of market volatility to repurchase $447 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $510 million to shareholders. Our balance sheet remains very healthy with a net leverage ratio of 0.9 times and given current market conditions, we expect to continue to be aggressive in deploying capital. Now, let’s move on to our improved full year guidance and our outlook for the second quarter. As Mike indicated, we are raising our full year core revenue growth to an expected range of 7% to 8%, up from our initial guide in November of 5.5% to 7%. Excluding the COVID related 0.5-point headwind this year, this results in core growth of 7.5% to 8.5%. The new guidance takes into account our strong Q1 results and an improved outlook for the rest of the year on a core basis. While we have increased our core growth expectations, the dollar has strengthened considerably, doubling the estimated exchange rate headwinds from our initial guide to $110 million for the year, while the M&A impact remains relatively unchanged. Putting it all together, we are expecting full year revenues to be between $6.67 billion and $6.73 billion. In addition, we have increased our EPS guidance for the full year to $4.80 per share to $4.90 per share, up from the previous range of $4.76 per share to $4.86 per share and representing 11% to 13% growth versus fiscal year 2021. For Q2, we are expecting revenue to range from $1.595 billion to $1.625 billion. This represents core growth between 7% and 9% after adjusting for an expected 0.5-point impact related to COVID year-on-year and we expect reported growth in the range of 4.6% to 6.6%. Exchange rates are expected to have a negative impact of about 2.3% in the quarter while M&A is expected to contribute 0.3 points to growth. And closing out our Q2 guidance, non-GAAP EPS is expected to be in the range of $1.10 to $1.12, up 13% to 15% versus the prior year. This is based on a 14.25% tax rate and 303 million diluted shares outstanding. Again, the Agilent team performed extremely well in Q1 and with the solid growth we are seeing in orders and the team’s willingness and ability to take on every challenge that comes their way, I am confident that Q2 and our full year results will also be strong. With that, Parmeet, back to you for Q&A.

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

Of course. [Operator Instructions] Our first question for the call today comes from Tycho Peterson from JPMorgan. Tycho, your line is open.

Great. Hi. This is Rachel on for Tycho. Thanks for taking the question. So, first off, great to hear the…

Hi, Rachel.

… about companion diagnostic package for FDA review. So can you just give us the expected time line for when you think you will get that back and if anything is expected in contribution for this guide for 2022?

Rachel, thanks for that question. I am going to pass it over to Sam.

Yeah. Rachel, thank you very much for the question. We are very excited about having completed all the modules and made the submission for the companion diagnostic related to Mirati’s adagrasib. As you know now, we have done what we need to and we will engage with the FDA as they come back with questions. We can’t -- we don’t exactly are able to control the time line, and as you likely know, the actual approval would be very much tied to the approval of the drug itself, which of course, we have no control over either. But we are very excited about the progress.

Yeah. I would say, Rachel…

Okay. And then…

…to the following question.

Rachel, I think, Bob had to build on that.

Yeah. Just to build on that as…

Yeah.

As was recently disclosed, the PDUFA date is scheduled for the end of this fiscal -- calendar year. So there’s not any material revenue associated with this built into our fiscal year guide, but we are very excited about the opportunity in 2023 and beyond.

Noted. And then, for the updated guide, can you just give us a rundown on the updated outlook by end market for what’s assumed in the new guide?

For the full year or second quarter, Rachel?

Both would actually be great.

Yeah. I am going to let the witness, Bob.

Yeah. So, I think very similar to what we had talked about at the very beginning of the year. The two strongest markets will continue to be our Pharma and Chemical and Energy market. I think, as we look at those, certainly, both of them performed better than we expected in Q1 and our expectation is that, those will continue to be the driver of growth for the full year, with Pharma probably at a roughly double-digit growth and Chemical and Energy about that high single-digit, double-digit growth as well, and then, followed very closely by Diagnostics in -- at high single-digits. And then food, environmental and academia and government are probably in the low-to-mid single digits, which is pretty consistent with our expectations at the beginning of the year. And it’s slightly different, but same directional for Q2 with Pharma probably being a little stronger.

Got it. And then, for Chemical and Energy, can you just talk about if you see any risk coming from Russia and Ukraine, and then also, if you could just touch on that decline 11% this quarter in environmental. How much of a headwind with COVID for that segment or is there anything else underlying in that market that’s really changed relative to your prior expectation?

Yeah. I would say, for Chemical and Energy, as you know, I mean, our business is really globally based. And so as of right now, we don’t see any material impact to the Chemical and Energy market or our forecast going forward. Obviously, we are watching that closely. And then, I think for environmental and forensics, it’s our smallest market and can be lumpy. There was some impact associated with Chinese Lunar or Lunar New Year in China. But we haven’t seen any impact there. What I would say is we are starting to see some of the disbursements more in our order funnel than in revenue associated with the Infrastructure Initial Bill here in the United States. So I wouldn’t read anything into it in terms of changing in fundamental demand.

Great. Thanks for taking my questions.

You are very welcome.

Our next question today comes from Matthew Sykes from Goldman Sachs. Matthew, your line is open.

Hey guys. This is Dave on for Matt. It was great to see the strength in biopharma end market. It’s impressive given the challenging funding market for these biotech firms. Any additional color you can give on what you are seeing in the biotech end market and productivity there?

Yeah. Dave, first of all, thanks for the recognition. We are really pleased with that 32% growth print and we see the underlying demand remaining strong. And Bob, I think, it’s fair to say, we haven’t release any impact at all from …

No.

…what maybe happened in the biotech funding arena.

Yeah. We are very excited about our portfolio and how it plays into that space and are believing that that strong growth will continue going forward.

Fantastic. And any additional color on the drivers of the strong margin expansion in LSAG and how sustainable is this margin expansion over the rest of the year?

Yeah. I will jump in there. it -- yeah, the team has done a fantastic job really driving margin and if we look at it, it’s a combination of being able to cover our costs from the standpoint of the increased logistics and material costs, as well as very strong management discipline in the operating expenses. So it’s a combination of being successful in our price, which we had talked about before and covering those costs, as well as being able to leverage kind of our infrastructure across all three of the groups.

And Bob, I think, you also called out the digital investments we are making. So that’s in particular showing up through the SG&A line as we leverage digital investments.

Fantastic. Congrats on the quarter, guys.

Thanks, Dave. Most appreciated.

Our next question comes from Vijay Kumar from Evercore ISI. Vijay, please go ahead.

Hey, guys. Congrats on a nice quarter here.

Hey, Vijay.

And thanks for taking my question.

Thank you.

Bob, maybe one near-term question here on the second quarter guide. The 200 basis points range, that’s wider than your normal -- typical range, your annual guidance range is 100 basis points, any reason for a wider branch and it comes to it really hard in 2Q. So I am curious, what’s giving you the confidence to get to that upper end of 8.5%, which would imply sequentially flattish with 1Q trends?

Yeah. So let me take the second part first. As Mike mentioned in the call, our demand continues to be very strong and we actually had order growth that exceeded revenue growth almost 2x and that gives us confidence around the order book going into Q2 really across multiple end markets. And so that gives us the ability to deliver the -- or expected to deliver the high growth in Q2. In regards to the range, there are still uncertainties out there, as Omicron continues to impact, mainly Asia right now and then some other uncertainties. So I think that’s just taking a little wider lens, but we still feel good about the business for the full year.

Yeah. I appreciate the recognition, I think, Bob, what we posted 19% core last year.

Yeah.

So I appreciate that recognition, Vijay. And as Bob mentioned, the book of business is really quite strong, plus also our services business is really strong Diagnostics. So the recurring revenue side of the house is quite strong.

That’s helpful, Mike. And maybe on the comment on the acquisition contribution here in the second quarter, it seems to be sequentially down. Is there any seasonality to that business and what is the guide assuming for -- you didn’t note the strong order book for 2Q? Is the guide assuming perhaps the order book momentum tapers down in the back half?

Yeah. No. It doesn’t. There is an element of getting tougher comps, but the momentum continues. I would say for Q2, it’s more timing than anything else relative to the M&A. It is down slightly sequentially, but I would say, in the overall scheme of things, not material.

Got it. Thanks, guys.

You are very welcome.

Up next we have a question from Brandon Couillard from Jefferies. Brandon, your line is open.

Hey. Good afternoon. Mike, on the…

Hi, Brandon.

…AI acquisition, it sounds interesting. It’s definitely a buzzword. Would you expect to be making incremental investments with this deal and could you just comment on how and why the AI tools are kind of used in the instrumentation today and when you sort of expect this to be, I guess, more of a reality of feature?

Yeah. Brandon, happy to do so. I am going to actually invite Jacob on the response here, because, yeah, we hear a lot about the buzzwords and when the team first came to be and started talking about this opportunity, we said, well, in actuality, there’s a lot more than buzzwords here. We actually have some lighthouse customers using this capability already. And as you hear from Jacob, it really drives productivity for those high volume labs. So we think for certain segments market, this is actually going to be a reality. And Jacob, why don’t you, why don’t you build on my comments there, if you don’t mind?

Yeah. Sure. Thanks for the question, Brandon. I am very excited about this also on bringing the best control team here into Agilent. It might be a buzzword, but we have really seen that it really makes a difference. And first of all, it fits very well into an informatic strategy, where we are all about digitalizing the lab and create that deal inside both scientifically and productivity wise for our customers. Here, the first product realization, which has already been prototype, we are aiming to what a part of the -- that is very prone for AI right now and that is really the manual interpretation of commercial graft, as Mike also mentioned. Usually, labs are spending a highly trained chemist to go out and do manual peak integration, which is tedious process. And you can imagine if you have a high volume lab, there’s a lot of investment going into this area. And active virtual control here have already proven with the customers that they can take a substantial part of that work and actually automate that. So we are very glad about that. We are going after the PCMs business first. We have a substantial installed base and we actually believe that we can implement this here in the second part of fiscal 2022. Now long-term, we do believe there’s a great opportunity to provide those algorithms also across our analytical platforms and also for other applications like QC release and predictive maintenance and all things. So even though it’s the buzzword, there is a lot of real products behind this and I am very excited about it. Mike?

Thanks, Jacob.

Thanks. Just one follow-up for Bob. Just if you could just elaborate a little bit more about the book-to-bill in the first quarter and then a couple just housekeeping, was the Lunar New Year impact kind of in line with the plan, and I think, last quarter you talked about…

Yes.

… $15 million of kind of delayed orders, were all those recouped in the first quarter, just kind of an update on that?

Brandon, as usual, your notes are quite accurate and so let me address a couple of those things. So the Lunar New Year impact came in kind of as we anticipated, which should come back into Q2. That transit time or that $15 million that came in, but we haven’t seen really the improvement. So that’s still opportunities in the second half of this year. Our end of the quarter coincided with the large snowstorm in the U.S., but the shipments were out and we still were able to deliver. In terms of the first question was about Lunar.

I think on both.

Yeah. Okay. I think on both. Brandon, we missed something?

No. Just if you quantify the book-to-bill, if you are really?

Oh! Yeah. Yeah. Quantify the book-to-bill. Yeah.

You are right.

I knew that there was something else. I was trying to avoid that one on purpose, because we are not going to provide that. But what I can tell you is that, the growth rate of our orders was twice as much as the revenue growth, and I would say, our backlog is the highest it’s ever been.

And Brandon, this is Mike. I would just add one comment. There is one word in my script. I really want to make sure that I emphasize here throughout the quarter. So this wasn’t just a calendar December year end kind of story. We saw this order strength throughout the entirety of our fiscal Q1.

Got it. Thank you.

Our next question comes from Puneet Souda from SVB Leerink. Puneet, your line is open.

Yes. Hi, Mike and Bob. Thanks for taking the question. So, the first one is just a follow-up on the order book. I am wondering if you can quantify that, obviously, that’s been growing strongly. And maybe just help us understand, once said, you have the strong order book, you have confidence in the rest of, I mean, the guide throughout the year based on what you are providing. But maybe just talk to us about the sort of the cadence wise in terms of supply chains. Obviously, we are hearing -- we have a number of questions that we get on supply chains frequently. So just wondering what’s your level of confidence on the supply chain and turning those order books into orders?

Yeah. So, first of all, I’d say, that the supply chain environment continues to be quite challenging. On the other hand, I remain quite confident, because our team has found ways to continue to navigate through those and meeting the expectations of customers terms to delivery times. In fact, if I recall correctly, our order cancellation was actually lower this year than prior year. So while I don’t want to imply that it’s all sunny out there in terms of the supply chain, we have been working on this thing for a while. I mean many quarters ago, we were working on this quarter and the second half of this year. So while the environment remains challenged externally, I remain confident in our ability to actually get product to customers when they need it.

Yeah. Puneet to your first question on the quantification, we are not going to provide that other than what I had answered…

Yeah. That one, Bob. But we did find the 2x order growth rate versus revenue.

Got it. Fair. And in terms of cell analysis, Mike, I mean, that franchise has been growing. You highlighted Lonza, the Cocoon platform, a couple of other capabilities. Maybe can you -- I know at one point, you had sort of quantified that business. I am wondering if you can do that again and what sort of growth rates you are seeing there and what’s the expectation this year given the acceleration you are seeing in overall in biomolecules? Thank you.

Yeah. Thanks for that question. We love to talk about the cell analysis. It’s been a really great addition to the company over the years and we continue to grow and expand that. So, first of all, I’d say, that business remains to be very healthy. We are seeing really good strong end market demand. And Bob I think for the year, we are expecting the double-digit growth out of the cell analysis business. And really excited and the fact that, in addition to the manufacturing expansion we had in Chicopee, that kind of gives you an indication of our confidence in future growth. And I believe we are close to, Bob and Jacob, close a north of $400 million for this business?

This year.

This year. Yeah.

Forecast for this year.

Yeah.

Yeah.

Got it. Super helpful guys. All right. Thank you.

You are very welcome.

Our next question comes from Patrick Donnelly from Citi. Patrick, your line is open.

Hey. Thanks for the questions guys.

Hey, Patrick.

Mike, maybe one on China, between the tough comp…

Sure.

… Lunar New Year, obviously, a few layers there. Can you just talk about, I guess, the core performance is going to stripping that out a little bit, what you are seeing there, what you saw through…

Got it.

… to your point there throughout the quarter, I guess, the cadence and then the expectations going forward there as well, just between the different markets there. Just curious what’s going on?

Yeah. It’s interesting. Sometimes you can get kind of diverted on the headlines out of China, because our business remains quite strong and we are seeing good strength in pharma has really been a key driver for us, which Bob highlighted in the script. But also our Diagnostics business, DDG grew, I think, over 40% in the first quarter, services growth in the mid-teens. So other things that I have talked to you about, which is, in addition to continuing to grow and strengthen our instrumentation portfolio market share in China. We have also been talking about our ability to grow our ACG business in China with that large installed base and the fact that we have historically viewed ourselves of being underpenetrated in Diagnostic and Genomics, and we are really starting to see traction on both of those growth factors. So, again, we feel really confident about the state of the China business, because we don’t have the order book we have, but also these other areas of recurring revenue are really growing, growing well for us and we continue to invest for our customers in China, as I mentioned in my call script. So I think there’s a lot to like about the opportunities in our business in China.

Yeah. Patrick, just one other thing, we -- while we grew 3% as we mentioned, if we add back in kind of the Lunar New Year estimate, it was high-single digits, which was in our -- in line with what we had expected and our expectation is that, that’s going to be for the full year as well. Now Q2 will be stronger than that, obviously, as it comes back and we also saw mid-teen -- mid-to-high-teens growth in orders in Q1.

Okay. That’s helpful. And then maybe just on the academic government market. You are not alone, obviously, calling that out as being a little sluggish to come back. Maybe just what you saw there in January, Mike, I know you called out the remote learning maybe caused a little more of a pause even as we go into 2022? And then just expectations there going forward, you expect the market to kind of normalize a little bit and what are you hearing from customers on that front?

Yeah. Thanks for that, Patrick. We saw -- we see the Omicron impact is transitory. We saw that in the U.S., for example, and we would expect to, I think, Bob, you called out in the script back to normal kind of levels in February. So we actually expect the environment to improve over the year. I think we are flattish for Q1. But, Bob, I think, we are calling for mid-singles or so growth for the full year. So that would imply a pickup in growth in this segment later on this year.

Yeah. I mean, for everything that we see, Patrick, funding levels continue in activity within our order book continues to be strong. So it not as strong obviously as the Pharma and C&E areas, which are leading the growth in the Diagnostics, but we are not seeing any fundamentally different performance in that market going forward.

That’s helpful. Thank you, guys.

You are very welcome.

Up next we have a question from Jack Meehan from Nephron Research. Jack, your line is open.

Thank you. Good afternoon, guys.

Good afternoon, Jack.

I was hoping you could elaborate on the pricing actions you are taking in the market? How do they compare to kind of normal periods and what areas of the portfolio have you had success when it comes to pricing?

Yeah. I will take that, Jack. And I think we mentioned at the beginning of the year that we were estimating roughly a point of growth associated with that was about half of what we had seen normally to cover the increased costs, and what I would say is, through Q1 we are ahead of schedule, which is good.

Okay. And then, the other area I was hoping you had an update on is NASD, so over 45% growth in the quarter. Maybe just any update to what your guidance is for the full year? It seems like you are tracking ahead of schedule here and just when the new line opens up, just what sort of pace you expect to be able to take advantage of that capacity?

Yeah. I was going to say, we -- the team continues to do a fantastic job and continues to drive even more revenue and product out of the existing capacity and it was a great first quarter and slightly ahead of our expectations. We had expected double-digit growth and that continues to be our expectation before the new train, Train B comes online at the end of this calendar year. And the order book continues to be strong. That team continues to actually build the order book for 2023 and building that demand for that train. So we are extremely excited about that business and are looking forward to not only bringing that up, but also looking for other ways to expand our capacity.

Absolutely.

Thank you, Bob.

Thank you.

Our next question comes from Derik de Bruin from Bank of America. Derik, please go ahead.

Hi. Thanks for taking the questions. This is Mike on for Derik.

Hi, Mike.

I want to ask a little bit on the -- hey -- I want to ask a little bit on the Diagnostics and the Clinical end markets. In particular, you called out sort of the expansion of our CNS [ph] into some of the applications here and you are seeing a new vector of clinical growth here. I was wondering if you could elaborate on that. Just sort of what are the specific drivers you are seeing there and where some of that uptick happening.

Yeah. I am going to pass it over to Jacob for some more details here. But also I would also just remind, we also had a very good print on the pathology side of our Diagnostics business. But I think you will hear from, Jacob, LC/MS is an indication of some future traction, we are already getting some good growth. So, Jacob, your thoughts there?

Yeah. Absolutely. We have closed the year have a good LC/MS Clinical business in U.S. But over the past year, we have also expanded ourselves into China, really good tractions. We both have our own product line there, our direct sales, but we also have an OEM partner. So in that sense we are both addressing the customers that we know, but also a lot of customers that we want to get access to. And that’s been quite successful and hence we are right now looking to expand the portfolio even further. We have the Ultivo, of course, with our LC connected and we are looking to other parts of our portfolio, both within LC/MS, but also beyond LC/MS here over the next period of time. But we do see China as a great opportunity, but here over the next over time, we will also enter into other areas like Europe and other places.

And Jacob, on the Ultivo, what I think the customers love the combination of performance and the size of the footprint really fits nicely into the diagnostic lab.

Yeah. Exactly. We spent a lot of energy of both making it a size that fits very well into the LC stack. But more than that we also made it more easy to work with. So it’s actually an ease-of-use solution. So we are very excited about that and even better the customers are also super excited about that. I do want to mention also that we also have a strong Clinical business within the flow cytometry. With the Ultivo business that continues to drive growth and particularly China, where we see a lot of demand there also. As you might recall, the flow cytometry from the LC business is really focused on decentralized lab also again with ease-of-use and we see a lot of interest in that. And I do expect also that U.S. will be a future market for us here.

Great. I appreciate that. Any color you can give us just real quick on sort of how meaningful LC/MS is within that 15% of your exposure? Is it just to give us a sense of the scale of that relative to genomics and cancer diagnostics and pathology things like that?

Bob, do you want to take it or do you want me to?

Yeah. Yeah. I will take it. It is still relatively small but growing very fast, which the market itself is quite large and so the opportunity here is really in front of us going forward.

Great. And if I could ask a quick follow-up on -- just on the capital deployment side…

Sure.

… and on M&A. Obviously, you have done some smaller deals in the last couple of years and you continue to invest in new technologies and you have got some, you have had M&A deployed into sort of Life Science Solutions and cell analysis. You have had things in liquid biopsy and now artificial intelligence. So it’s kind of showcase that you can deploy capital in a variety of different markets. But just looking at where the balance sheet is now, any thought on larger acquisitions and sort of scaling up to do a bigger deal? And what excites you, what markets would you be looking to? What’s -- so how would you go about starting to deploy that capital?

Yeah. Sure. Happy to address that, Mike. So I appreciate, by the way, the recognition of the variety of where we deploy capital. But there’s a consistent theme across where we deploy capital, which is high growth end markets, which will drive increase to the overall core growth of the company in places where we can leverage the scale and the capabilities we have in the company to really make those businesses even more successful. So I think there’s a timing kind of an underlying theme behind all those acquisitions. So that would continue to be our thesis and our approach, as well as staying focused in the private sector, which we think there’s -- really fits well the Agilent model and often the potential acquired companies and leadership teams really find the Agilent culture, a good place to be and they also see how well we have done with previous acquisitions. So we have got a track record as well that they can point to. And I am on record saying that, we wanted to deploy our balance sheet as part of our overall growth story. It’s part of what we have been calling our build and buy growth strategy. And as you may know, the largest deal that we have done to date has been -- was the acquisition of BioTek, but we believe we can do multiples of that deal and be willing to deploy capital if the right opportunity comes along for us.

Okay. Thanks.

Our next question comes from Thomas Peterson from Baird. Thomas, your line is open.

Hi, guys. Thanks for taking my questions.

Sure.

Just wanted to circle back on Pharma and just wanted to know if you had seen any benefit within Pharma from both onshoring activities and manufacturing redundancies and kind of, if so, where has this tailwind been and what are your expectations for any potential durability here?

Great question. So I think this is actually a story both for the Pharma, as well as elements of our Chemical and Energy business. And I’d say right now, not yet material in terms of order book or revenue, but we believe it’s coming. There’s a lot of discussions with customers that are building new capacity. I would say it’s probably more of a 2023 kind of event. But I think it speaks to the durability of growth that we think we have in Agilent’s two largest end markets. So we are hearing lots of discussions about dual sources of critical components, onshoring of previously offshore critical supply chain elements. So I think the continued supply chain challenges that the world is seeing is only putting more emphasis on that direction. So I’d say right now, it’s in the longer term planning phase. As you know, the analytical laboratory instrumentation is often the last thing that’s added when they bring on new capacity, but we believe it’s coming, but it’s not been material yet to the company’s performance.

Great. That’s super helpful. And maybe just to finish for me, just any updated thoughts on the One Agilent commercial organization transition? Anything that surprised you relative to expectations, sort of how is that incorporation gone internally?

Yeah. So I am going to have Padraig jump in here with some additional specifics. As you know, I have asked Padraig to take on this role in addition to his leading the overall Agilent Services business. But we are just delighted with the start of this new structure and I think I always say the proofs in the results and we are off to a good start with the fact that we had such a strong Q1 order book throughout the quarter. And Padraig, I know it’s been just a few months where you have been pulling your team together and but I think you are already starting to work with customers differently and maybe you could share some of your thoughts here.

Yeah. Thanks, Mike. I think we are starting to see the benefit of an enterprise approach to both sales and service, and the associated functions, and of course, selling the complete Agilent solution to customers, which includes instruments, services and consumers with aligned sales approach is really giving us a lot of scale with customers. We are also seeing a doubling down on our investment in our digital interaction with customers and we continue to see strong momentum with accelerating digital growth of about 25%. So great start, Mike, and more to come.

Okay.

Our next question comes from Dan Brennan from Cowen. Dan, your line is open.

Hey, Mike and Bob, thanks for taking the questions. Congrats.

Sure, Dan.

I was hoping to go back to C&E, Mike, could you or Bob...

Sure.

…unpack -- kind of unpack the customers there, Chemical R&M, can you just kind of give us a flavor for what you are seeing? I know the question was asked earlier about the impact of what’s going on. But just wondering, as oil price spikes in the past, kind of what kind of impact have you seen if the oil price spike is sustained?

Yeah. I’d say if you look at the three sub-segments of the C&E marketplace, we often talk about the Chemicals, Energy and Advanced Materials market. I think it’s the Chemicals and Advanced Materials market segments that are driving the growth here. Now theoretically, when -- although, be it now much -- it’s a very small part of the total number these days, higher oil prices would tend to lead to more investment in that Energy segment portion of the whole market segment. But I can’t remember the exact percentage. I know it’s evolved a bit over time. But I think what’s most interest to us is how does the world view global growth were PMI. So, yes, I think, the highest correlation of growth in this segment relate to PMI and the global growth outlook. But we would -- there could be some more money to invest in exploration, perhaps, if oil prices stay high, but it’s really also really driven by the PMI view. That’s why they still remain positive and that’s why we are optimistic about our ability to grow this overall market throughout the rest of this year.

Yeah. Dan, to build on what Mike was saying, if we looked at those three big areas, over 90% or roughly 90% of our C&E business is actually Chemicals and Advanced Materials. And so the Energy piece is an important component, but that demand around new types of Chemicals, Advanced Materials and so forth is really what’s driving it…

Yeah.

And so whether it be batteries and other areas around these is the growth driver today.

Got it. Thanks guys. And then, just related to the Oligo business the MAC business, just can you remind us, at least from the perspective of like basin within your high single-digit growth for Pharma, kind of how many points of growth should we be thinking that business is contributing?

From Pharma, it grew -- it was roughly 2 points to 3 points of growth for pharma in Q1.

And then, for the year, sorry? Yeah. Yeah. Sorry about that, I misspoke. So for the year, I think you are talking low double now for Pharma. So what’s assumed from the Oligo business…

Yeah.

…within that [inaudible] demo?

A point or two.

Yeah. I think the…

Very clear.

… message here is the, yeah, the Pharma growth was strong for the biopharma, NASD, but also across the rest of the company’s portfolio as well.

Yeah.

So it’s an Agilent wide story.

Yeah. Great. And then maybe just one final one to sneak in just the LC market, Mike, it’s always entering here, what’s going on…

Yeah.

… and that’s a big part of your business, what the competitive trends there like in LC?

All I can tell you about is what’s going on in my business, which is its doing very well. So we have got -- we had -- we continue to see very strong business momentum. The market demand is very robust. You may have recall in my script, I tried to call out demand in our chromatography systems remains very robust. We saw double-digit growth again in Q2 -- Q1 2022 off double-digit or the prior year, backlog strong, orders growing faster than revenue. So there’s a lot to like about what’s going on with the LC business.

Great. Thank you guys.

You are very welcome.

Our next question comes from Paul Knight from KeyBanc. Paul, please go ahead.

It’s always tough to ask a good question late in the day, Mike.

Come on, Paul. I know you are up to it. I know you are up to it.

As I look at the 32% biotechnology growth, which seems extraordinarily good, would you attribute this to the cell and gene therapy market, and what specifically biotech instruments? What’s behind that really high growth rate?

Bob, why don’t we tag team on this, but I’d say, it’s really being driven by not only the NASD business we talked about earlier, but our core LC/MS business. I mean there is some contribution from cell and gene therapy, but it really is coming from the LC/MS business along with really strong growth of services and consumables as well. So, I’d say, it’s really a broad-based story, but really around our core instrumentation platforms along with services and consumables.

Yeah. Spot on.

I mean, goes for that.

Okay. Sorry, Bob.

Go ahead, Paul. Sorry.

You have mentioned LC/MS more than, I think, is typical. Is this a result of -- are you seeing a result of benefit yet from the Avantor JV. And in addition, I know CrossLab, you mentioned higher connectivity. I think you are implying you continue to gain some share there, if you can talk to those two topics?

Yeah. Sure. Happy to do. ACG has been what we are doing has been near and dear to our overall growth strategy for a number of years and we are very excited about the new relationship we have with Avantor. I’d say it’s still very early days, so not yet a material contributor to the topline revenue and that really was all according -- so it’s proceeding according to plan. So I’d say there’s more to come in that regard. And then on the connect rate, yeah, in fact, we called that out on purpose to say, we continue to see higher connect rates with our consumables and services business, and we think that bodes well for future growth. And Padraig, maybe you want to just comment a bit on what you are seeing on the services side and the connect rate.

Yeah. Well, overall, the attach rate for both service and consumables in the high 20s, but we believe and we have significant headroom for growth going forward as we target into higher technology spaces. And on the services side, in particular, we have a strong demand for contracts and that’s driving a lot of connect rate with new instruments as well, Mike.

Yeah. I think we had double-digit contract growth and probably more than 10% of Agilent’s revenues now in -- under service contracts.

Okay. Thank you.

Those are all the questions we have time for today. So I will now hand back to Parmeet to conclude today’s call.

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

Thank you everyone for joining our call today. This now concludes our call. Please disconnect your lines.