Q4 2022 Agilent Technologies Inc Earnings Call
[music].
Please standby were about to begin.
Ladies and gentlemen, welcome to the agile and technologies Q4, 2022 earnings Conference call. My name is <unk> and I'll be coordinating your call today, if you would like to ask a question. During the presentation. You may do so by pressing star one on your telephone keypad I will now hand, you over to your host pardon me, a Hoosier Vice President of Investor Relations Mr. <unk>.
Please go ahead.
Thank you Bo and welcome everyone to <unk> conference call for the fourth quarter of fiscal year 2022.
With me are Mike Mcmillan, Adjuvant, President and CEO , and Bob Mcmahon, <unk> Senior Vice President and CFO .
Joining in the Q&A after Mike and Bob's comments will be Jacob Tyson President of <unk> life Science and applied markets Group Sam.
Uh-huh president of the adjuvant diagnostics and genomics group importing Mcdonald president of the agile and cross Lab group.
This presentation is being webcast live.
The news release for our fourth quarter financial results Investor presentation, and information to supplement today's discussion along with a recording of this webcast are available on our website at www Dot investor Dot adjuvant Dot com.
Today's comments by Mike and Bob will refer to non-GAAP financial measures.
You'll find the most directly comparable GAAP financial metrics and reconciliations on our website.
Unless otherwise noted all references to increases or decreases in financial metrics are year over year and references to revenue growth are on a core basis.
Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months.
Guidance is based on exchange rates as of October 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.
Please note that we have changed the name of the chemical and energy end market to the chemicals and advanced materials end market.
This change better reflects the mix of business in this market.
It does not affect financial reporting in this quarter or prior quarters.
We will also make forward looking statements about the financial performance of the company.
These statements are subject to risks and uncertainties and are only valid as of today.
The company assumes no obligation to update them.
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, Paul and thanks, everyone for joining our call today.
In the fourth quarter, the agile team continued its strong performance.
We delivered an excellent quarter.
<unk> seen in our revenue and earnings expectations.
Revenue of $1 85 billion is up more than 17% core.
Our strong top line performance helped deliver fourth quarter operating margins of 29, 1%.
Operating margins continue to expand despite the inflationary environment and the strengthening dollar and are up 260 basis points from last year.
Earnings per share of $1 53 are up 26%.
These Q4 results Mark an outstanding finish.
To another strong year for <unk> in fiscal 2022.
The full year revenue of $6 $85 billion, we delivered core revenue growth of 12%.
This is on top of core revenue growth of 15% in 2021.
Our operating margin continue to increase.
27, 1% for the year.
Up 160 basis points.
Earnings per share of $5 22 per share up 20% for the year.
Our actual results this year highlight the ongoing strength of our diversified business and shine a light on the multiple growth drivers we put in place over the years.
They also continue to demonstrate the outstanding execution capabilities of the Ashland team.
Throughout the year, we navigated market uncertainties inflation, COVID-19 related shutdowns and supply chain and logistics constraints.
Our strength is broad based with all three business groups growing double digits for the year.
All major geographies and regions grew double digits in FY 'twenty two after adjusting from our exit from Russia.
This was highlighted by China, leading the way growing 18% front.
From an end market perspective, all markets expand it led by excellent growth in our two largest markets pharma and chemical and advanced materials.
All in all divisions.
It was an extremely good year for Ashland.
Let's now take a closer look at our fourth quarter performance, starting with end market highlights.
During Q4, our performance led by 20% plus growth in three of our six end markets.
Pharma, our largest market posted a 20% growth on top of 29% in Q4 of last year.
The chemicals in advanced materials business grew 27%, we saw robust demand in chemicals, along with secular growth in semiconductors batteries and other advanced materials.
The food market also grew 20% on strong end of year demand in China.
That had been previously delayed by Covid related shutdowns.
On a regional basis, China led the way for us with stellar 44% growth as demand remained strong.
Business activity continued to recover.
And the agile team, we're quickly and effectively to start working down the backlog, including delivering main shipments deferred due to the Shanghai COVID-19 related shutdown in Q2.
Europe also exceeded expectations by delivering double digit growth in the quarter.
Coming in at 14% higher than a year ago.
With broad strength across our markets highly by low twenty's growth in pharma.
Looking at our performance by business unit, the life Science and applied markets Group continued its outstanding performance.
And posted revenue of $1 2 billion.
This represents growth of 22% with the instrument business growing 24%.
In our consumables and supplies business growing 15%.
We also saw excellent low 30 as growth in our LC LC Ms instruments business as our solutions continue to resonate with customers.
<unk> was able to build on our leadership imply markets with spectroscopy growing in the low twenties and the <unk> business growing in the low thirties.
In addition, asthma is doing its part to help customers monitor.
And manage micro plastics in the environment.
As we released the latest version of the 8700, LD IR chemical imaging system.
This unique system has been optimized specifically for the analysis of micro plastics and environmental samples.
The asset cross that group posted revenue of $381 million in Q4. This is up 14% core with broad based strength across our entire portfolio of offerings.
Pharma and chemicals and advanced materials, both to a mid teens for ACG.
On a regional basis, China led the way with high Twenty's growth as business continued to recover.
ACG also delivered double digit growth in the Americas.
ACG has delivered double digit growth for us every quarter of this year.
And our engagement large enterprise customers continues to accelerate.
Through its deep understanding and insights into lab operation. The ACG team continues to build strategic partnerships and long term relationships that maximize customer value and provide ongoing demand for services and support.
The diagnostic genomics group delivered revenue of $352 million up 8% Corp.
<unk> results were led by strong growth in the low twenties for NASD.
As expected our NASD business delivered high quality revenue on a sequential basis, given the planned shutdown last quarter.
Our genomics portfolio also posted solid results growing low teens in both LNG grew mid single digits.
On a regional basis <unk> also delivered mid Twenty's growth in China.
In addition to these business group highlights during Q4.
As always recognized by the World Economic Forum Global Lighthouse network as a world leader in advanced manufacturing.
<unk> manufacturing facility in Singapore received this recognition for deploying innovative technologies at scale and the manufacturer scientific instruments driving productivity, while advancing sustainability.
Also we are extremely pleased to announce a new multimillion dollars partnership with Delaware State University, a leading historically black University.
The work, we will do together with <unk> is geared towards increase in number of underrepresented students entering stem fields.
In addition, as of a certified as a great place to work by the great place to work Institute in more than 20 countries and regions around the world during the quarter.
This recognition distinguishes Ashland as a top employer based on an independent survey of its global workforce.
Recap in 2022, we had another very successful year.
Not only on delivering excellent financial results, but building for the future.
We continue to drive innovation.
Focused on supporting our customers and executing on our build and buy strategy to outgrow the market.
The Ashland team continues to deliver.
We have built a resilient company with multiple drivers for growth and targeted investments focused on high growth areas.
We have an unstoppable one agile team that can take on any challenge and execute at an extremely high level.
As we look ahead to 2023, we believe these qualities are winning formula for continuing to deliver in an increasingly uncertain economic environment.
Bob will now share more detail on the quarter and the year along with our initial view on expectations for fiscal year 2023.
After his remarks I will rejoin data some final comments and perspective. Thank you for joining us today and now Bob over to you. Thanks, Mike and good afternoon, everyone. In my remarks today I will provide some additional details on revenue in the quarter and the year.
As well as take you through the income statement and other key financial metrics.
Then finish up with our guidance for fiscal year 2023, and the first quarter.
Unless otherwise noted my remarks will focus on non-GAAP results.
We are extremely pleased with our Q4 performance and finished the year on a very strong note exceeding our expectations on both revenue and earnings per share.
Q4 revenue was $1 85 billion.
Up 17, 5% core and 11, 4% on a reported basis.
During the quarter, we saw the dollar continued to strengthen current.
Currency exchange rates were $6, two point headwind to growth or $103 million.
Contribution from M&A was as expected, adding 110th of a point to reported growth.
Our performance was again broad based as all end markets and regions grew during the quarter.
Orders also grew again during the quarter, while outstanding execution from our order fulfillment and supply chain teams enabled us to start working down our record backlog as.
As we enter FY 'twenty three our backlog is still elevated and helps provide good visibility and confidence in our outlook going forward.
Now I'd like to share additional details on our end markets.
Results in our largest market pharma were very strong.
This market represents 37% of <unk> revenue and grew 20% in the quarter bio.
Biopharma grew 18% and small molecule was up 21%.
Looking forward, we expect the pharma end market to grow high single digits in FY 'twenty three.
Chemicals and advanced materials led growth for us during the quarter at 27%.
This compares with 11% growth in Q4 of last year all.
All three submarkets chemicals advanced materials, and energy had strong growth in the quarter.
All regions grew as well led by China.
Demand continues to be driven by investments in advanced materials, driving secular growth opportunities in batteries alternative energy and semiconductors.
While not immune to macro uncertainties. We believe these secular drivers in advanced materials will continue helping to drive mid single digit growth for this market next year.
We delivered growth of 20% in the food market led by China as our results continue to benefit from the recovery of revenue delays due to COVID-19 related shutdowns in Q2.
During FY 'twenty three we expect the food market to normalize and grow in the low single digits. After two years of very strong growth.
The environmental and forensics market posted 18% growth with particular strength in the Americas.
This result was driven by increased governmental spending helping to drive technology refresh for newer applications like P fast testing.
Europe , and China also posted impressive double digit growth in the quarter.
We see P fast related funding and demand continuing to be a driver for this end market and expect mid single digit growth next year, our business in the diagnostics and clinical market grew 6% against an 11% compare last year.
<unk> was led by Europe and China.
While Americas grew low single digits.
We also expect to see mid single digit growth in this market in FY 'twenty three.
The academia and government market grew 3% led by continued strength in our service business.
This market grew 3% overall for the year as well and looking forward, we expect similar growth in 2023.
On a geographic basis, China led the way with phenomenal 44% growth in Q4, driven.
Driven by underlying demand across multiple end markets and our continued ability to quickly recover deferred revenue from Q2.
As we've discussed the last two quarters, the COVID-19 related Lockdowns in China earlier, this year deferred an estimate of $50 to $55 million in revenue from Q2 into future quarters.
This recovery started last quarter and our team in China continued their outstanding work to ramp production shipments quickly in Q4.
We've now fully worked through this deferred revenue a full quarter earlier than originally anticipated back in Q2.
A true testament to the entire team.
We estimate this recovery had a mid single digit positive impact to China's Q4 growth.
So even excluding this our business performance in Q4 was very strong now.
Now looking ahead to next year, we expect China will continue to be a key growth driver for us.
And as Mike mentioned, Europe grew a very solid 14%, which exceeded our expectations.
We also posted 8% growth in the Americas, driven by pharma chemicals in advanced materials and strong growth in the environmental and forensics market, partially offset by academia and government.
And lastly, the rest of Asia grew 12%.
Now turning to the rest of the P&L our team continues to execute at a very high level.
Fourth quarter gross margin was 56, 3% up 40 basis.
<unk> points from a year ago.
Volume leverage along with pricing helped to overcome continued inflationary pressures and higher logistics costs.
Our operating margin was 29, 1% in Q4 up 260 basis points from last year.
Below the line our tax rate was 14% for the quarter as expected and we had 298 million diluted shares outstanding.
Putting it altogether earnings per share were $1 53 for the quarter up 26% from a year ago as Mike mentioned.
So in summary.
Q4 ended with 17% core topline growth and 26% EPS growth.
A very strong finish to the year, where we had revenue growth of 12% and EPS growth of 20%.
Now some metrics on our cash flow and balance sheet.
In Q4, we generated operating cash flow of $448 million, while investing $70 million in capital expenditures.
The Capex spending is driven by our continued scale up of train B for NASD expansion.
And in the quarter, we also paid out $62 million in dividends and repurchased shares valued at a $135 million.
For the year, we returned almost $1 4 billion to shareholders through $250 million in dividends.
More than $1 1 billion in share repurchases.
And as we've indicated before given the ongoing strength of the business. We believe these share repurchases represent a very good long term investment.
Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.8.
Now, let's move to our outlook for the upcoming fiscal year and first quarter.
Now looking forward to 2023, we entered the year with business momentum and a very healthy backlog.
We also acknowledge the increasingly uncertain macro environment rising interest rates and currency headwinds and have reflected that in our thinking based on what we know today.
For fiscal year 2023, we expect revenue in the range of $6 $9 billion to $7 billion.
As we have significantly greater currency headwinds since the last we spoke.
Core growth is expected to be in the range of five to six 5%.
In line with our long range goals.
Currency will negatively affect reported growth by 430 basis points roughly $295 million during the year based on fiscal year end rates.
And to help with your modeling at a business group level. This revenue guidance assumes mid single digit core growth for LSA mid to high single digit growth for DDG and high single digit growth for ACG.
And despite the ongoing currency headwinds and continued inflationary environment, we are expecting operating margin expansion for FY 'twenty three.
Now below the line, we expect $40 million to $50 million of net expense.
A tax rate of 13, 75%, which is slightly below this year and 297 million shares outstanding.
Fiscal 2023, non-GAAP EPS is expected to be in the range of $5 61 to $5 69.
This range represents a growth rate of seven 5% to 9% versus the prior year and incorporates an estimated four percentage point headwind due to currency net of our hedging activities.
We are also expecting one four to $1 5 billion in operating cash next year in capex of roughly $300 million based.
Based on currently approved expansion projects, primarily train B for NASD.
We have also announced raising our dividend, 7%, providing our shareholders with another source of value.
And finally for Q1 2023, we expect revenue in the range of $1 68 to $1 seven zero or $1 billion core.
Core growth is expected to be in the range of six 8% to 8% while currency will be a six six point headwind to reported growth.
This outlook for the quarter incorporates the impact of the timing of lunar new year. This year.
First quarter, 2023, and non-GAAP earnings per share expected to be between $1 29, and $1 31.
Mike will speak to this further in just a minute, but our diversified business model and the strength of our team are key assets for Agila.
These two elements produced an outstanding Q4, and full year 2022, and they have put us in an excellent position to again deliver strong results in the coming year.
And now I will turn the floor back over to Mike for some closing comments Mike.
Thanks, Bob.
Today's results are a strong indication that has the right growth strategies.
The right team and right culture to continue delivering strong results.
Our customers that we are reliable resilient and extremely quick and reacting to meet their needs.
The agile team continues to work hard to earn their trust.
Looking ahead, we are all seeing increasing economic uncertainty. However, this company and team have built to successfully navigate any economic challenges we may encounter.
Throughout the pandemic, we have state of the adds that will emerge as a stronger company.
Today's results are yet another proof point that we are well on our way in this journey and we're not done yet.
We continue to prioritize investments in growth.
We are resilient company with multiple growth drivers and unmatched execution capabilities.
I'm quite confident we will continue to react quickly to changing conditions and deliver at a high level.
Thanks for being on the call and now I will turn things back over to permit as we take your questions pardon me. Thanks.
Thanks, Mike.
If you could please provide instructions for the Q&A now.
Thank you, Sir ladies and gentlemen at this time any questions and compressed star one and if you are joining staging a speakerphone. Please pick up your handset before pressing the star one and we will take our first question is from Vijay Kumar of Evercore ISI.
Hey, guys congratulations on a really impressive finish to the year here.
Thanks for joining Mike or Bob maybe if I could start with a high level fiscal 'twenty three guidance question.
Five years to six five.
Organic for the year, that's coming off of some tough comps.
Maybe just talk about.
Assumptions for end markets, which you are expecting pro forma.
<unk> advanced materials et cetera.
Just given your commentary on orders and backlog it looks like the start five to six and a half it seems reasonably conservative.
Once you've picked up.
Vijay Yes, I appreciate the.
Comments on.
At the end of the year and as we mentioned, we're moving into FY 'twenty, three with momentum and really what we've seen across our business in FY 'twenty. Two we are expecting continue into FY 'twenty three broad base business business results really led by our two largest markets pharma and chemicals and advanced materials.
And when we think about those those are both in the mid to high single digit growth range.
And.
With growth in the other areas as well and we're expecting all of our markets to grow and.
Really given some of the secular drivers that we've seen this year and continued strength in the pharma business, Hey, Bob I would just add too.
This is our initial guide guide for the year.
We're at the top end of our long growth model in terms of the long term growth aspiration, we laid out that I will ask AIB coming off two straight years of double digit growth in its initial guide of the year Vijay and you'll probably hear a few times they were being prudent.
Given your uneconomic.
Increasing economic uncertainty out there, but I would point out that if you look at the core growth rate assumptions. The Q1 'twenty two guide is actually higher than the full year number.
Mike.
Put in common and if I could just one follow up on that.
I was waiting for us.
Waiting for it.
Two minutes into the call Vijay.
Yes.
On margins that EPS guidance came in about street models, despite FX headwinds it looks like op coming in above Street models.
What are you assuming for pricing inflation and what's implied for margin expansion in the guide.
You want to take that Bob Yes, yes, So we ended Q4.
And a very good position here with a little over 4%.
And that is ramp throughout the year and we're forecasting roughly about a little over 3% and price next year across our book of business and we are.
Assuming margin expansion Vijay next year and when we look at that seven 5% to 9%. What we are seeing is kind of unprecedented strength in currency and we do hedge but our hedges become less effective over time and.
We're expecting that's absorbing a four point headwind. So if you added that back in it would be closer to 11, 5% to 13% EPS growth.
Understood. Thanks, guys.
Welcome.
Thank you next to Matt <unk> with Goldman Sachs.
Hey, good afternoon, Michael Bob Thanks for taking my questions I appreciate it.
A strong year.
Maybe I just wanted to dig a little bit more into the margins you guys mentioned the operating margin expansion expectations for next year, but maybe you could talk a little bit about where you see those drivers coming from maybe on a segment basis or an end market basis, where do you feel theres most upside to expand those margins at the group level and where the impact will be felt.
Yes, I think what you would see is a continuation of what we've been able to do this year and what we've been able to do is.
Cover the increasing costs associated with the inflation through the through the pricing activities, but then really leveraging our operating expenses and you saw that in full display here in Q4, where we did have operating.
Gross margin expansion, but you also saw a majority of the margin expansion in the operating expense and I think that that's one of the benefits that we have two of the investments that we've been making in digital over time as Mike mentioned as well as the continued effort or around the one adjuvant focused so I would expect us to continue to see that I do think.
The scale that we have.
Across our businesses will continue to provide benefits next year certainly as we.
Drive.
More business into our service organization I do think that we will continue to be able to leverage that.
That footprint and then if you look at the higher growth areas that we've been investing in the instrumentation side of the business those are our more profitable businesses.
<unk>.
We are also looking to continue to attach increase our attach rates both on the services, but then also consumables, which are one of our highest profit and I would say in diagnostics the DDG business.
We are facing kind of some of the startup costs with our train B next year, but if you Peel the onion I would say fundamentally our business is performing very well there as well in 'twenty, three and I would expect margin improvement outside of kind of some one time startup costs that we would have in bringing that train up and running in the second half of the year.
Thanks, Thanks for that Bob.
And then maybe a question on the chemicals advanced materials, you guys made a comment in the slide deck about increased demand in the energy business. During Q4 could you talk about the drivers behind that and what your expectations are specifically for the energy market as we move through 'twenty three.
Okay.
Yes, so we really wanted to make sure that.
It's clear that across all three segments of the Cam segment, we saw solid growth in what Youre seeing going on here is a lot of investments in the HVAC industry, given given the strength of their businesses, So and I'll have Jacob jump on this as well.
Their businesses with the ability to invest in that they have a lot of deferred investments over the years, but also a lot of new money gone into renewable and green energy initiatives as well, yes, I think youre right. Mike I think we are seeing as you mentioned that's been some pulse in the capital equipment investment over the years can be definitely seeing that coming back so.
And both <unk>, but also in the renewable energy continues to CLR strength, and we believe that will continue farmer and we're expecting that strength to continue into 'twenty three.
Got it thanks, Mark Thanks, Greg appreciate it Youre welcome.
Thank you Mr. Jim Lico next now to Clinique.
<unk> Securities.
Yes, Hi, Mike Bob Thanks for taking the question I mean to say this is impressive.
<unk> is an understatement and b sort of uncertain times.
First of all congrats on the quarter.
Thank you Ben maybe on that Anthony.
Thanks, Mike.
On.
China impressive result, there.
Can you just parse that out a bit I know you talked about gas chromatography delays were there and those are.
It looks like they are fully booked in this quarter.
And the.
Revenues booked their fluid is also impressive could you maybe talk about the order book.
The ability you have in China, and your growth expectations, there going forward despite the lunar year.
And also what does the longer term expectation or for overall growth in China, just given the multiple end markets that are working so well for you in the quarter.
Yes, sure Puneet and happy to happy to respond in the about I, probably kind of tag team on this but again thanks for your earlier comments, but a lot of smiles in the room here yes.
Yes, we were quite pleased with the results for China alone in the quarter, but for the year and I think it is important to note that the.
44%, we had in Q4 wasn't just about catch up from deferred revenue due to the Covid and again.
And again it points to the fact that when you do see those types of things happened essentially the business does does materialize, we didn't lose any business.
The strength of the business continues to be there across multiple end markets really been led by by pharma Chemical and then we think that the food the food market will probably normalize to kind of traditional growth rates in <unk>.
And China, but expecting.
And I'm expecting pharma and.
The <unk> marketplace to be strong in particular, a lot of lot of.
We expect a lot of business on the renewable energy and <unk> side in China as well. So the advanced materials segment have been talking a lot about we think is going to sustain sustain the growth in China in.
In 2003, but I think we're kind of looking at maybe high singles for for China for next year is our initial thinking yes, that's right and Puneet I would say the strength that we saw in Q4 in China was really across the board across.
All the major technology platforms within the instrument business.
<unk> business was incredibly strong as well and then the services business. If you recall back in Q3, we said that activity hadn't fully come back it was fully back in Q4, and so we saw very strong there and not to forget DDG, we had double digit growth in our diagnostics and genomics business as well. So it was really broad based and you.
About visibility.
Our orders continue to grow in in China and.
We have very good visibility.
Yes.
And certainly into the first half of this year and as we think about the secular growth drivers those are still in place. If you think about the investments that are made in technologies around the biotechnology areas, but increasingly actually in advanced materials and some of the secular drivers around batteries in lithium ion <unk>.
<unk> and so forth and we would expect that to continue into next year for sure Hey, Bob I, just don't think to your comment about the <unk> business. Just a reminder, puneet as we came into this year, we created a unique structure as part of our one commercialization to have all of our China businesses and put into one single leader really the idea was to add scale to the parts of it.
Business, which we felt were underrepresented and you saw the payoff already starting to happen with the growth rate in DDG for example.
That's great. Thanks for all the color.
Just one quick one on pharma I mean this is the first quarter in a long time, when I saw small molecules growing faster than by a molecule can you elaborate a bit.
What's behind that dynamic.
I thought I thought it was really good news print because we've been we've been talking about that while we still continue to believe that biopharma large large molecules will have the inherently higher growth rate. We've also been pointing the fact that the small molecule will continue to have growth and I think it speaks to some of the strength of our particularly our LC and LC Ms business.
In small molecule and Jacob I'll have you add a few comments here in a second I wouldn't overreact too much and in that particular quarter is just one quarter I think we would expect to continue to see over time, a differentiation in the growth rates between <unk>.
So pharma small molecule small molecule by no means is dead and it's an opportunity for growth and I think we've got a great portfolio there Jacob.
Michael.
And Mr. Simon anything further sir.
Okay.
Sorry, I was on mute here. So sorry this is Paul.
Some comments.
Youre absolutely right Mike.
To see the small molecule being while it is still the largest part of our business of course, we see biopharma.
Right opportunity, but we take the small molecule business very seriously and continue to build full workflow solution for that particularly for the <unk> space and that's where the growth is coming from bill. Thanks Jacob.
Okay.
Anything further sir.
I think we're good to move forward.
Thank you we'll go next to Matthew Brandon Couillard of Jefferies.
Hey, Thanks, good afternoon.
Mike or Bob.
You mentioned you mentioned the PFS market several times in the prepared remarks can you just give us a ballpark size of how big that market is right now maybe relative growth rates and whether it's primarily a U S centric market or it's developing in other parts of the world as well.
So Jacob <unk> of United Tag team on this.
We're viewing as I think about a $200 million market growing growing double digit.
Think while there's a lot of the growth is centered in the U S. Theres also can be very strong growth in U S and perhaps some some in China. So we actually see this as a sort of a global story with the initial big legs in U S and Europe and the growing interest in China, but let me just let me if I got that right Jacob Yes, you're absolutely right Mike.
It's a huge market and in fact that there was more than $4 billion put aside in the infrastructure Bill fall for PFS testing not only for analytical instrument, obviously, but overall for <unk> testing. So this is a great opportunity and particularly a great opportunity for us as this requires its very high sensitivity instruments, you need and you have.
Run very easily into issues in December perhaps you don't take that very seriously. So really building out the full solution and have something that works every time, we've spent a lot of energy on that and in fact, we have a solution now that that looks after all the EPA regulations and our customers just love it because it's just plug and play and it works very well for them.
Very sophisticated.
Ways of doing business here and on top of that while most most of the opportunity sits in the CMS space. We're also starting to see the dcms essent opportunity to look at testing a P fast molecules into yet another volatile, so which speaks extremely well to our opportunity here, yes. Thanks Jacob for those built in.
This is the first time in my tenure.
That we've seen this kind of money coming in in the U S marketplace with the government support so.
So very encouraging trend and we think that trend is going to be with us into 'twenty three.
That's right.
A couple for Bob just number one can you just quantify the lunar new year impact in the first quarter and year over year basis, and then with supply chain loosening, which it sounds like they are what are the implications for that in terms of working capital as you move through the balance of the year.
Yeah, Brandon Thanks, and thanks for the questions.
The the lunar new year is roughly a little over half a point impact year on year headwind headwind.
In our first quarter.
Starts in mid <unk>.
Mid January this year versus the first of February last year and so.
And for those.
That will come back to us in the second second second quarter, and then I think.
In terms of supply chain. It is it is.
It is improving but it's not back to pre COVID-19 levels, both on the standpoint of being able to to get product to customers, but it also procuring raw materials and the costs associated with that we do think that that's going to improve over time I would say I wouldn't expect any changes any material changes certainly in the first half of the year and then maybe some slight change.
As we get into the back half of the year.
But we do think it is improving but.
We've increased our stocks of critical supplies.
Don't think it will go back to pre Covid levels in terms of how we are running that just to ensure that we have the ability to flex when we need to.
There are challenges around logistics across the world.
Thank you.
Thank you and the next now to Daniel Brennan of Cowen.
Great. Thank you thanks for taking the questions guys congrats on the quarter.
Thanks, and maybe just the first one just on <unk>.
Another really impressive quarter with 24% growth on the instruments.
The mid single digit guide, obviously, you're up against tough comps, but it does reflect a notable slowdown from what you guys have been doing.
Can you just walk through a little bit.
What kind of drove the strength this quarter.
Kind of end market versus agile and specific and then is there just a housekeeping of conservatism baked in for the guide or is it really just tough comps.
Yes, I would say at the beginning.
Dan we're at the beginning of the year there are.
Uncertainties out there.
Repeat what Mike said, it's beginning of the year and Thats, a prudent guide I would say that there is an element of tough comps, particularly in the second half of the year as you know.
We have been building.
Hello.
Taking down the backlog certainly in China, which was China, just a deferral from from Q2 into the second half of the year.
But I would say fundamentally the demand is still strong and.
Across the end markets, our expectation is that.
The pharma and chemical and advanced materials markets will continue to lead the way for us with faster than expected growth I think in an environmental and forensics for that PFS testing yeah, maybe just some additional comments here, Bob maybe check you haven't thought so but.
We continue to see improving market share. So the latest industry stats from all of those showed us all green across all platforms. So.
That should bring to debate.
Debate on whether or not we're picking up share, but I also think is kind of also recognize we've been in kind of an unprecedented environment here for a number of quarters in a row, where we've seen.
Instrument growth rates in <unk>, plus <unk>, plus a lot of it and we've been very transparent about this and all our calls that there's an element of that is tied to an accelerated replacement cycle in some end markets in some technology. So we're thinking that as we set up the guide for 'twenty three we should assume some some returned to a more normalized replacement rates in certain.
End markets, but theres going to be growth, there, but perhaps not at the same rate. We've seen in I don't know if you have additional thoughts here Jacob I think we're good Mike Okay, I got it right up to four to today.
And then maybe just a follow up I know you've already discussed.
The chemical advanced materials, a really strong quarter.
And then on the outlook I'm just wondering if in the mid single digit guide obviously the advanced material portion is like a third of that business sounds like that's expected to grow really strong maybe just give us a flavor for how youre thinking about the three sub components in the 'twenty three and like.
Is there anything baked in on the chemical side of the energy side that would reflect some kind of impact from a slowing economy or just kind of how should we think about that mid single digit.
I'm going to pour Oregon on this too because he's working with his team very closely on this but.
So we're taking a cautious outlook as it relates to the chemical industry in Europe .
Particularly.
And I wanted to separate that from what maybe happened relative to the HDI in renewable energies, but into the in the base chemical business.
Our large customers are having to work through higher input costs to their their production. So we're assuming a cautious outlook from that particular segment in Europe and <unk>.
From that part of the World and I know that you've been talking to the team about about this as well anything you'd add.
Yes, no I think it's cautious Mike and I think what we're seeing is that there is additional scrutiny being paid on conversion quotes orders that we're seeing across particularly in Europe and of course, there's quite a lot of macro economic pressures there as well. So so I think youre spot on on that one.
Great. Thanks, the only thing I would say Dan this is Bob to add.
Is.
This is an area sometimes people ask us.
This would be an area of potential upside if things continue the way that they are that would be.
An opportunity for upside in this end market given the strength that we're seeing absolutely Bob.
Awesome. Thanks, guys.
Thank you.
And we'll go next now to Rachel Backstop at Jpmorgan.
Hey, guys. Thanks for taking the questions and congrats Sheila Jordan.
So first up I think last quarter, you guys say that there were some supply chain delays that you guys were building up that manufacturing lines and so can you just give us the latest on timing at they are still on track for that will come online in mid fiscal year, and then thinking beyond <unk> you guys had hinted.
That potential capacity expansion beyond that.
Can you give us the latest on your thinking on those capacity expansion can mainly can hear an update there.
Yes, So Sam why don't you take the first part and I'll close with the second part.
Yes, it sounds good Rachel Thank you for the question.
I'm happy to report there haven't been any changes since we last spoke about train B and timing. We are on track to go live in the middle Middle of the calendar year coming up in 2023.
Okay.
And at the risk of being repetitive Rachel.
We are on record, saying that theres more letters of the output in A&P. So we're clearly focused on on.
Getting trained and be up and running and Havent generating revenue in 'twenty three but at the same time, we continue to explore possible.
Expansion plans and nothing yet to announce yet but stay tuned.
Great and then just one more follow up on food.
<unk> grew 20% this quarter it sounds like some of that was from that China recovery and pull forward there.
But all in Youre guiding to low single digit next year off of that from your stacks tough comp. So can you just walk us through how should we be thinking about the market going forward do you think in 2024, it's going to normalize more at a low single digit or is this market really accelerated and the guy that curious with more on that difficult comp.
Yes, it's a good question then.
This is Bob and I would say it wasn't pull forward was catch up in terms of the growth rate here because it was.
As you know Rachel.
China has got a bigger proportion of the FID food market.
I would say it is a function of having two years of very strong performance there.
So difficult comps and I do think it is trending up with with some of the investments that are being made there but this.
Still is a low to mid single digit grower.
Can you reinforce our ability to hit that mid single low to mid single digit growth rates. We also see continued strength in the U S. For example, who are accountable testing business is part of what we reported food right Jacob Yes, correct.
Canada's business continues to do very well and we see a lot of offer lapped bonus that is looking for us to commenting and help them to equip the four laboratories. So thats.
A big opportunity for us, but also the alternative protein space is really picking up both here in U S.
Particularly also in in Asia. So I do believe that it's going to continue to be a secular growth driver for us in food right I really wanted to make sure that we highlight those new secular growth drivers because a lot of it goes historically has come from from from China, We're seeing actually a much more diversified mix of business as we move forward.
Thank you. We'll go next now to Derik de Bruin of Bank of America.
Yeah.
Hi, good afternoon.
Derek.
So Mike you said, it and unprecedented environment.
For instrument demand and such.
We've been covering these markets a long time, you and I and looking at these and these are just numbers, which are really just amazing instrumentation numbers. So what's embedded for instrument growth in year 2023 guide and how much of this is already covered by your backlog versus what.
What's going to be new urgent up again through the year.
Yes, so yes, thanks, thanks Derek.
Ben.
This business for a while and an eye popping growth rates. So that's why we love them.
We've really been joining these growth rates I do think there's elements of the market that actually have increased the long term growth rate at all to what we've seen in the past, but I think it's also fair to assume that some of these accelerated.
A replacement cycle will start to moderate over time that being said, though I think we're looking at <unk> in the mid single mid singles Thats correct.
I'll, let you take the second part of it yeah. Yeah. So it is mid single digits, what I would say Derek is we're not going to disclose.
The amount of contribution for our backlog in there, but you can imagine that that healthy backlog that we just talked about is primarily on the instrument side just the way that we book business and we have pretty good visibility into the first first half of the year, just given the way our order trends.
<unk>.
Got it can we talk a little bit about the academic market and what youre seeing there low single digits.
There in the quarter low single digit demand.
How is that sort of light tracking relative to your expectations. I mean, I know you don't have a huge academic footprint, but for genomics business was actually doing actually did was actually quite strong in the quarter. So just wondering if you could sort of talk through what's going on that market and sort of are you seeing any pressures there.
Yes, so Bob maybe we can tag team on this and I'll start so.
First of all this is the one market that we always coming out of Covid, instead will be the slowest to recover and thats still proving to be the case.
We saw really really good demand in China in academia and government.
And also good demand for certain aspects of our portfolio.
But at the same point in time, a level of cautiousness around cap capex.
NIH funding is not as robust as people had hoped so we.
We've tempered our outlook for 'twenty three is kind of a continuation of a more and more of the same.
Yes, and I would say Derek.
The growth that we had met our expectation.
Break down the line.
And as Mike said stronger in places like China.
And less so in the U S.
But it met our overall expectations and Thats kind of how we're expecting in FY 'twenty three as well.
Yes.
Yeah.
And I have to ask the obligatory M&A question.
Sure buying your shares obviously, a good choice right now but.
Anything, peaking your interest valuation starting to come in on some of the.
Stragglers in the market.
Yeah, so thanks for that Derek.
Derek and and as you know we've got this building by growth strategy and one aspect of it is to look for opportunities for us to add.
Great new businesses and team to add limp through the use of our balance sheet and.
As you may recall, some of our calls and in the early part of 'twenty two.
And finished at one of these valuations were really at a site we saw that both in the public but also in the private space and things are starting to actually moderate moderate down so.
That also announced I would say that.
The activities are we are very active here.
<unk>.
We're getting to places where.
You can see deals happening that would work for shareholders.
Great. Thank you very much.
Okay.
Thank you well go next to Jack Meehan of Nephron.
Yeah.
Thank you good afternoon.
I wanted to.
Keep going on the instrument side and I was wondering if you could comment on cancellation trends. So just in context of the broader macro uncertainty is that showing up anywhere.
And your instrument.
Yes, Jack Thanks for that question because one of the reasons why we have the confidence we have with the.
The outlook, we've guided to.
And when Bob talks about elevated backlogs, it's a healthy backlog in that we have no significant changes there is no significant order cancellations remains very low so the orders we have in backlog will ship and we feel really good about the if you will the quality of our backlog, yes, Jack just to build on that the other piece to it.
The first piece of that would be our orders being pushed out and we're not even seeing that either so we're not seeing any pushout of orders as well as any cancellations.
Awesome, Okay, and then kind of the other pressure area. We've been monitoring is more on the bio processing side, just stocking trends at customers.
Sort of adjacent to some of these markets on large molecule are you seeing any destocking activity in any of the markets that you serve.
No no. Thanks for that question, Jack because we've been reading some of the print as well and we were saying well that's really not what we're all we're seeing.
With our business. So you saw in.
<unk> posted double digit 15% growth in CSD, we saw.
Low teens growth in the genomics area, which would be the area you might might see those things and so it's not a not a concern for our online business.
Great. Thank you.
Okay.
Okay.
Thank you we'll go next to Patrick Donnelly of Citi.
Yeah.
Hey, guys. Thank you for taking the questions.
Maybe following up on another one on the instrument side.
You are going to.
Given a hard number on the backlog you did mention it was still elevated mic and obviously gives us some good visibility into next year I mean any.
Way you can frame kind of what it looks like today going into kind of a year compared to historical and then just on the order growth what does that look like in the quarter. Obviously, the past few quarters, you've called out outgrew revenue nicely I'm, just trying to get a feel for that maybe if you have it on a geographic basis as well that would be helpful.
Yeah, Yeah sure. So I think backlog remained up over historic.
<unk> levels.
That's why we're carefully chose the word elevated in our tax to make sure that that there's more gas still left in the tank.
While I won't give you a specific growth rate I will tell you that we again grew our orders in Q4 of prior year double digit compare I do think it's also worth pointing out, though we did see a different trend within the quarter. So and I think this speaks to our confidence around the year end revenues because.
Customers were ordering earlier in the quarter in like August and through September really to make sure. They got product by by by the fiscal year. So that was probably the only thing that we saw a little bit different than historical patterns, if I remember correctly, Bob yes.
And then I think I think the story was pretty much across the board geographically correct, Yes, correct, yes.
Alright Thats helpful.
And then maybe just sticking on the geographic point can you just talk about Europe , what you're seeing there I mean, there has been concerns about tight.
Tightening capital spend just given the geopolitical environment the energy side maybe.
Maybe what Youre seeing there and then maybe a second one on the order side just the budget flush you guys tend to have a decent look at it at this point I know, it's still a little bit away, but any early indications there would be helpful. Thank you guys.
Yes, so relative to Europe I think.
I'd just remind you we had a 14%.
Print in the quarter, so we really feel good about.
Our performance relative to competition in that part of the world, but it is an area of watch area for us.
A lot of the economic future economic concerns are really centered around what may happen to the European economy, particularly.
With the energy prices that they are having to deal with what does it mean for demand and ability for.
For our customers to have them.
Profitable revenue streams, they want for their for the business. So that's an area.
That we're watching.
And that's why we've taken a prudent guide.
For example, assuming what happened in the chemical side of Europe .
Okay.
There's really nothing it's in areas like you said, it's an area that we're watching we haven't seen any material change in the way things are operating there.
Just to add on that 14% was against.
A year ago that we did have revenue in Russia, and so that 14% was even higher than that if you looked at it on a pro forma basis. So.
Great. Thank you and any quick thoughts on the budget flush there would be helpful. I appreciate it.
Yes stay tuned.
What I would say is I mean, we have.
As Mike said I think we did see some of that in our order book.
In Q4.
Given some of the extended delivery times that are still out there between us and the rest of the rest of the market.
But we're not assuming any.
Greater than kind of normal budget flush for the end of the year correct.
Very helpful. Thank you guys.
Youre welcome.
We'll go next to Josh Waldron at Cleveland Research.
Hey, Thanks for taking my questions a couple for you guys first Mike.
Mike a lot of questions on instrumentation. So all last call Cross lab, a nice quarter here I wondered if you could talk through the drivers to the acceleration anything beyond just the comps I mean are you guys seeing signs of higher adoption of contracted service share of an asset.
Is this a category where maybe prices just now starting to come into the mix.
Yes, absolutely I'm going to tag team with <unk> on this one but I think all of those factors are hitting and we're going to talk about services, but I think it's important to know that between services and consumables, we actually crossed over the 30% connect rate for the first time in the fourth quarter. So we've been talking about the importance of connect rates going going forward and on the services side, which is where youre.
Question centered is we've seen an acceleration of growth.
We hinted at some of the places, where we're doing really well at the big enterprise level, but.
Why don't you add some thoughts on here because this is your business in a lot of it.
Good things happening here, yes, I think Mike as you said attached touch rates are continue to be very strong and it's much more than a break fix business on when we see our contract rates actually growing at double digits, which is incredibly sticky with customers on all key offering <unk> rights from enterprise.
Some of the.
Preventive maintenance services, we do are all very very strong. We also see of course, we have a large installed base.
Being able to provide different solutions and services for that.
Be really graves I will close by saying that we had some very big wins in the enterprise service business and Thats, where we really look about productivity of labs, and how we help customers with their outcomes and we're seeing increases as we go through the quarter.
Year.
Thanks, Barak got it thanks.
Then.
Bob or Mike curious to get your updated thoughts on supply chain and what youre seeing from a component.
And cost perspective, entering 'twenty, three and I guess, whether or not Youre guide assumes a proven improvements in either of these or maybe <unk>.
Why chain improvement could represent upside to the guide.
Yes, I would say we have seen in the second half of this year incremental improvements as we went through Q3 and Q4 that helped us allow us to.
Increase.
Increase our revenue here in Q4, I would expect that incremental improvement to continue into next into next year, but it's by no means back to kind of normal.
I think if it happens too.
Happens to improve I do think that that would be a good thing for us.
But we're not we're assuming kind of the same.
The level of improvement that we've seen in the back half of this year moving into Q2.
Into FY 'twenty, three I do think that.
Some of the costs have have come down.
But there were still having to purchase things in the off market to be able to ensure supply and deliver to customers and to jonathan's question. If we get to a point, where we don't have to go into that aspect of the market that would be upside from that is right.
Yeah.
Got it appreciate the time and detail.
Quite welcome.
Thank you we'll go next to Dan Leonard of Credit Suisse.
Hello, Dan and Dan.
Hi, Mike I have a follow up on Europe , So when you're training the possibilities for 2023 I.
I hear you on the conservatism for the chemical industry.
What about other end markets the macro uncertainty in Europe , bleed into pharma or ACA gov or anywhere else.
We think there is an element that will also be in pharma as well so you're right I was focusing specifically on the on the chemical segment of Europe , but that's also part of the story board as well you can manage large pharma accounts, who are dealing with increased cost trying to figure out what they want to do in 2023.
<unk>.
That's a watch area for us as well, but I will say some of the other secular drivers that we talked about earlier such as the <unk>.
Investments in.
Renewable energy there is a big push to make hydrogen more of a of.
Or a source of energy. So this plays right into the sweet spot of agile. So, but we are we are cautious about the large accounts in Europe and what they may do in 'twenty three in those two end markets.
And then I have an unrelated follow up on the NASD business can you be specific about what is your outlook for that business in 2023, and what might be your opportunity to expand the service offerings in that business beyond your traditional product offering.
No matter how to take the lead on that just to kind of.
We have Bob jump in here as well.
Assuming that our new capacity for train B comes online mid year calendar year and starts and will reach I believe full capacity by the end of <unk>.
End of the year.
And we do think there is a further expansion opportunities.
Both both.
Both in terms of what we do already but broadening the portfolio.
Bob maybe you want to walk through some of the thoughts on the financial expectations. We ended this year.
On roughly $300 million for that.
Is this and we've talked about this.
Train b being a $150 million plus of capacity when Mike says, we're going to be at capacity at that run rate by the end of the count by the end of the fiscal year and you can imagine that it's probably less than half of that is the ramp up but.
We would expect a strong growth here and I would say train B is primarily <unk>, although we do have early.
Some some growing business and CRISPR therapeutics out of our existing facilities and we expect that to continue to grow as well.
Thank you.
Sure.
Thank you we'll go next to Dan areas of stifle.
Good afternoon, guys. Thanks for the questions.
Hey, Mike just a question on gcs, 30% growth for the quarter is pretty robust for 'twenty. Three would you expect a little bit of a decoupling from LC Ms. There just given that it feels like there's more little bit more cyclicality on the juicy side, maybe a little bit more farm on the LC side or do you think those portfolios.
Track Similarly again.
I think we've always felt and Jacobs try to jump in as we've always felt that long term, we expect that CMS to have higher growth rates in gcs.
And I think we would expect that to play out in the long run I'm not sure about 'twenty three because.
Gcm's plays really well in the advanced materials space, we've been talking about some of the secular drivers there, but also as Jacob mentioned P. Fast is an area too. So I don't know if you can see that much divergence in 'twenty three but it's a great question Havent thought about it yes, thanks, Mike and we came out with some very nice innovations here the SMS.
On the <unk> side, including the <unk>.
The way that you can use hydrogen to measure <unk> carrier gas and set up the helium, which has been really nice pickup in the dcms space and as Mike also alluded to I think we are seeing a lot of opportunity in the advanced materials side, particularly in lithium battery side, where we both see a spectroscopy portfolio combined with the with the GCG SMS.
Is completely really.
Addressing some of the channels.
And actually on top of that you have LC that that is a part of that.
Equation as you also want to look at electric lights in batteries. So I think we continue to see a lot of opportunities in advanced materials, but particularly for the <unk> side.
Yeah, Okay interesting.
And then Bob maybe just thinking about investments next year in the context of the growth that youre seeing this year are there areas, where you might add resources beyond what might just be expected given the uncertainty that's floating around it.
It seems like there is an opportunity to sort of improve your positioning at a time of strength not youre seeing it that way now.
Yes, no I agree.
I would say it's.
We've been doing that over the course of this last year and I would say one of the areas. Obviously, we are building out the capacity in NASD that we've talked about extensively but were also significantly investing in places like digital and software and.
We think that that's an area.
Of increasing strength for us and.
Would look to continue to invest incrementally there.
As we.
Go into FY 'twenty three.
Yes, okay very good thank you.
Okay.
Thank you ladies and gentlemen.
Thank you and ladies and gentlemen, we have no further questions. This afternoon, Mr. <unk> I'll turn things back to you for closing comments.
Thanks, <unk> and thanks, everyone for joining with that we would like to wrap up the call for today have a great rest of the day.
Thank you ladies and gentlemen that concludes today's call. Thank you for joining you may now disconnect.
Okay.
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