Q4 2023 Agilent Technologies Inc Earnings Call
Please standby were about to begin.
Ladies and gentlemen, and welcome to the Agila Technologies Q4, 2023 earnings Conference call.
As Bo and I will be coordinating your call today, if you would like to ask a question. Following the presentation you may do so by pressing star one on your telephone.
Now I'll hand, you over to your host pardon Me Boucher Vice President Investor Relations. Please go ahead, sir thank.
Thank you Bo and welcome everyone to accidents conference call for the fourth quarter of fiscal year 2023, with me are Mike Mcmillan accident, President and CEO and Bob Mcmahon <unk> Senior Vice President and CFO.
This presentation is being webcast live.
The news release for our fourth quarter financial results Investor presentation, and information to supplement today's discussion.
Along with the recording of this webcast are available on our website at Www Dot investor got accident Dot 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 forecasted exchange rates.
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, Bob and thanks, everyone for joining our call today.
Before I get into discussing our results and outlook I want to mention that we are joined today by poorer Mcdonald.
Presently the Ashford trusts that group in San Bruno.
The diagnostics and genomics group.
We're also joined this call for the first time I fill bids.
Isn't the asset life science and applied markets group Phil.
Phil's name may be new to some of you, but he's well known to the Ashland and in the industry.
I have been with us for more than 13 years.
Over the Varian acquisition, and overseeing our market leading spectroscopy business.
We're extremely pleased to have someone fills knowledge experience and proven leadership strength heading up our LSA tool business.
In a short time and the role we've already seen Phil at tremendous value.
As a member of our senior leadership team welcome Phil.
Now onto our fourth quarter results.
As a team once again continued to perform well under challenging market conditions.
Revenue of $1 69 billion declined nine 7% core after increasing 17, 5% last year.
This is at the high end of our guidance.
Our proactive approach to manage our cost structure in this market environment helped us deliver healthy fourth quarter operating margins of 27, 8%.
Q4 earnings per share of $1 38 exceeded our guidance.
While this was a decline of 10% it comes against a tough comparable last year when EPS grew 26%.
While the market continues to be challenging.
Believe we are starting to see signs of stabilization.
As the currency data point for the quarter, our book to Bill ratio was one for the company and greater than one for our <unk> instruments.
Let's now take a closer look at our Q4 performance starting with our regional results.
During the quarter, while down year on year, we delivered sequential growth except for China as expected.
In China, our business declined 31% year on year after growing 44% of Q4 last year.
While China was down sequentially. These results are very much in line with our expectations.
And the year on year monthly performance improved slightly as the quarter progressed.
In addition.
Others are slightly higher than revenue for the quarter.
While it is too early to call. These two data points that trend. We see this is occurring to sign a potential stabilization.
In late September I travelled to China for the first time since the Covid outbreak to me with the agile team key customers and government officials.
How is the amount of both the sheer size of the Chinese economy in our market there.
I saw firsthand the work being done to bolster economic activity in the near term and create an environment that will support continued growth into the future.
Main convinced China will continue to play an important role in life Sciences, and I am confident that the China market will return to growth.
And looking at our largest end market pharma declined 14% driven by continued caution among customers on capital expenditures for new instruments.
Within pharma Biopharma performed better than small molecule.
Geographically, our biopharm business outside China grew high single digits.
Looking at performance by business unit, the life Science and applied markets group delivered revenue of $928 million.
Down, 18% core versus a tough comparable last year up 22%.
Customers continue to follow up on capital expenditures, particularly in the pharma segment of LSA jeans business, which declined in the high 20% range.
This is against growth in the low twenties last year.
On the other hand, we could even see strong customer demand and growth of our Pic based solutions as well as continued strength in the advanced materials segment.
These are two secular trends with either before and we remain optimistic about future growth in these market segments.
While the market environment remains challenging we continue to innovate and provide unique solutions for our customers.
The new products, we launched in June at ASML in particular, the $65 95, LC Triple Quad, which is focused on key applications like PFS Katrina.
Continue to generate positive customer interest and new orders.
We're also bringing innovative new solutions for customers across the biopharma value chain.
We just saw a number of our online U HPLC systems, but large biopharma companies.
The systems are easy to use and reliable and deliver significant value.
<unk> fully automated analysis of critical quality attributes, allowing real time decision, making outside the lab.
The asset class side group posted revenue of $404 million up.
4% core and 6% on a reported basis.
ACG delivered growth across all end markets and in all regions, except China.
The contract services business was up double digits offset by the services associated with new instrument placements are.
Our strategy of increasing connect rate continues to pay off in the quarter. Our contract services business represented 65% of ACG revenue a number that has grown nicely over the years.
The diagnostic and genomics group delivered revenue of $356 million flat on a core basis and up 1% reported.
<unk> results were led by the pathology NASD businesses, which both delivered low double digit growth.
These strong results were offset by the continued market challenges in genomics, both consumables and instruments.
And I guess the portfolio and capacity expansion are continuing as planned.
Confident in our long term growth prospects for the markets we serve.
Before I finish covering D. G G I want to thank Sam Rob for his contributions over the years and helped us to build a strong foundation for the <unk> business I wish them well.
In addition to these business group highlights during the quarter, we were recognized for our commitment to sustainability.
As you'll see our long term targets for reaching net zero greenhouse gas emissions have been approved by the Hollywood.
Science based targets initiative.
A year ago, we entered 2023 sharing our view of economic and industry uncertainty as.
As we got it for moderating growth in the second half of 2023.
We had not anticipated however, the significance of the market headwinds the industry eventually face, particularly in the pharma market in China.
Despite the challenging market conditions, we delivered full year revenue of $6 $83 billion.
One 5% core.
Our full year growth is lower than initially expected, we met or exceeded every quarterly guidance range we provided.
A solid testament to the team's execution ability.
Include in FY2023 results.
Our four year compound annual growth rate of 7%.
This is at the high end of our long term growth guidance.
In FY2023 we delivered operating margin of 27, 4%. This is up 30 basis points this year and up more than 400 basis points at last four years.
Alright, so with share of $5 44 or up 4%.
Being leveraged earnings growth for the year.
Our four year compound annual growth rate for EPS is 15%.
Looking back 2023 was a challenging year.
What I'm, particularly proud of is the adjuvant team's ability to quickly pivot and take action to address these challenges while staying with length of stay focused on our customers.
While we work to significantly reduce expenses Athens customer satisfaction ratings remain at all time highs.
At the same time, our employee engagement continues to be excellent as we achieved a number of best employer awards over the last year.
All this helped us deliver another year of <unk>.
But your earnings in an extremely difficult market environment.
Before I turn it over Bob for more detail I Wonder if I had some high level perspective on FY 'twenty four and beyond.
For 2024, we anticipate a slow but steady recovery throughout the year.
Our initial outlook at the height of our guidance, we expect revenues to return to growth.
At the same time, our range for EPS in the year ahead.
Again, delivering leverage EPS growth.
As we look ahead, we remain convinced the market challenges being faced by the industry today are transient.
Our end markets are powered by investments in improving the human condition.
The pace of science innovation, and discovery continues to increase which will fuel further growth.
We remain focused on winning in the marketplace.
Our differentiated products services and most importantly, our one Ashland team are all essential to the success of our customers.
We are well positioned for long term growth.
Bob will now share more detail on the quarter and the year.
Along with more specifics on our initial view for fiscal 2024 and Q1.
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.
And then finish up with our guidance for fiscal year 2024, and the first quarter.
Otherwise noted my remarks will focus on non-GAAP results.
<unk> finished the fourth quarter with core growth at the top end of guidance and EPS exceeding our expectations as we executed well against challenging macroeconomic conditions.
Q4 revenue was 169 billion.
Down nine 7% core and eight 7% on a reported basis. This.
This is after growing 17, 5% in Q4 of last year, when we benefited from the recovery from the Shanghai shutdown in Q2 of last year.
This created an estimated one point of headwind in the year on year results this quarter.
As expected, we saw weakness in capital purchases and LSA G with the biggest impact in our China business.
Now I'd like to share additional detail on our end markets for the quarter.
Revenue in our largest markets pharma declined 14% versus 20% growth in Q4 of last year.
Biopharma declined 2%, while small molecule was down 23%.
However, biopharma ex China was up 7% in the quarter and grew solidly for the year.
And while small molecule was down the decline was most pronounced in China.
Outside China small molecule was up sequentially in the quarter.
Chemicals, and advanced materials declined 11% versus growth of 27% last year, while flat sequentially.
Our chemicals and energy sub segments were down 15%, while advanced materials were down roughly 2% globally.
<unk>, 4% in the Americas and Europe combined.
The food market was down low double digits against the tough 20% growth comparison last year high.
High single digit growth in the Americas was offset by declines in all other regions.
In the Americas PFS testing is emerging as an important growth area and food testing, helping drive the high single digit growth.
We expect testing for PFS chemicals will continue to be a growth driver across multiple end markets over time.
The environmental and forensics market declined 3% versus 18% growth last year.
Similar to the food market the Americas region continues to experience strong growth up double digits driven by PFS.
This strong performance was primarily offset by softness in China, which was down year on year.
Up slightly on a sequential basis.
Our business in the diagnostics and clinical market declined 4%.
While we delivered low double digit growth at our pathology related businesses. It was more than offset by continued weakness in genomics.
The academia and government market was down low single digits with strength in the Americas driven by government funding.
Offset by weakness in China and Europe.
Results were pressured across all geographies in the quarter.
Mike mentioned, China was down 31% year on year after growing 44% in Q4 of last year.
In line with our expectations coming into the quarter.
The rest of Asia was down mid single digits in both Americas, and Europe declined low single digits in the quarter.
Before turning to the rest of the P&L I'd like to quickly summarize our full year highlights by end market and geography.
From an end market perspective, all markets grew low to mid single digits for the year, except for pharma, which was down 2% globally.
And in addition, all geographies grew except China, which was down 5%.
Now back to the P&L for the quarter.
Despite the revenue declines our team continues to execute at a very high level.
Fourth quarter gross margin was 55, 8% and our operating margin was a healthy 27, 8% in Q4, which was slightly better than our internal expectations.
Below the line, we benefited from stronger than expected cash flow generating incremental interest income in the quarter.
Our tax rate was 13, 75% and we had 293 million diluted shares outstanding both as expected.
Putting it altogether earnings per share were $1 38 for the quarter exceeding our expectations, albeit down 10% from a year ago when EPS grew 26%.
As Mike mentioned, our Q4 results capped a year, where we grew one 5% for on the topline.
Increased operating margins by 30 basis points and grew by 4%, while overcoming a couple of points of currency headwinds.
This is a real statement on the team's ability to quickly adapt to market changes, while still delivering leveraged earnings growth.
Turning to cash flow and the balance sheet.
I'm incredibly proud of the agile team as Q4 continued to strength of very strong quarterly cash flow results.
In Q4.
We generated operating cash flow of $516 million well over 100% of adjusted net income.
And invested $84 million in capital expenditures Capex.
Capex spending is driven by our ongoing NASD capacity expansion, which remains on track.
For the year, we delivered $1 5 billion and free cash flow an increase of 44% over last year.
Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.6 times.
With the current challenges in the market.
It is great to be a company with a fortress balance sheet and strong cash flow.
In the quarter, we paid out $66 million in dividends and spent $80 million to repurchase shares.
And for the year, we returned $840 million to shareholders through $265 million in dividends and $575 million in share repurchases.
Looking forward you may have also seen that we recently announced a 5% increase in our quarterly dividend, providing another source of value to our shareholders.
Worth, noting that we've increased our dividend every year since we first began issuing them in 2012.
Now, let's move on to our outlook for the upcoming fiscal year and first quarter.
As Mike stated, we expect to see a slow but steady recovery throughout fiscal 2024. However.
However, we also acknowledge the continued market uncertainty high interest rates volatile exchange rates and depressed capital spending.
Like several of our peers, we expect the markets to be down slightly for the year, while we expect to perform better.
Given the expected slower market conditions, we've taken additional steps to adjust our cost structure.
Incorporated into our guidance is roughly $175 million of cost savings.
Given the significance I want to provide a little more detail on these actions.
Roughly 30% of the savings are related to portfolio optimization decisions, we've taken in DG.
<unk>, which was the exit of the resolution Biosciences business.
Another 25% is related to material and logistics cost savings as well as optimizing our real estate footprint with.
With the remaining savings tied to continued reductions in discretionary spend and optimizing our workforce.
Along with these actions, we've taken a $46 million charge for restructuring and other related costs in our Q4 GAAP results.
These reductions while difficult.
Are necessary to ensure we continue to fund our most critical investments as well as fund the variable compensation resets from this year.
These actions help ensure the company delivers leveraged earnings growth in FY 'twenty for.
And will enable us to emerge even stronger when our markets inevitably return to their long term growth rates.
As Mike noted earlier, we exited Q4 with some potential signs of stabilization with a book to Bill ratio of one for the company and greater than one for LSA instruments.
While this is positive we're going to be prudent in our initial guidance.
For the full year guide, we expect revenue in the range of $6 71 to $6 eight 1 billion.
This represents a core growth range from a slight decline of <unk>, 5% at the low end to one point of growth at the high end.
Currency is a headwind of one two points.
While M&A is also a slight headwind of 10 basis points related to resolution bioscience.
On a reported basis, we are expecting a decline in the range of one 8% to 0.3% year on year.
From a geographic perspective, we expect modest growth in the Americas and Europe.
And while we expect to see recovery during the year in China. Our initial view is it will still decline for the full year.
From a business group perspective, we expect growth in both DG and ACG Wow <unk> instruments will still be pressured.
And in terms of phasing, we expect the first half of FY 'twenty four to look similar to the second half of FY2023 with growth in the second half of next year.
We are projecting modest operating margin expansion for the year.
And below the line, we expect interest income and expense to offset each other a tax rate of 13, 5% and 293 million shares outstanding.
Fiscal 2024, non-GAAP EPS is expected to be in a range of $5 44.
To $5 55.
This range represents flat to 2% growth versus FY2023.
From a cash flow perspective, we expect another robust year.
We are expecting roughly one 6 billion in operating cash flow and $400 million in capex spending increases on NASD train C&D expansions.
Looking to Q1 2024, we expect revenue in the range of one 555 to 160 $5 billion. This.
<unk>, a core decline of 11, 3% to eight 5%.
With currency and M&A, having a minimal impact.
The midpoint, we are expecting growth that resembles what we just delivered in Q4 and assumes no significant budget flush during the end of this calendar year.
This is against another difficult comp of 10% growth in Q1 of last year.
<unk> first quarter 2024, non-GAAP earnings per share expected to be between $1 20, and $1 23, as a cost savings fully ramped through the quarter.
As Mike indicated while we're expecting low growth in 2024, we remain optimistic about the future of our markets and our long term growth prospects are.
Our business remains very profitable and healthy and I know, we will come out stronger as a company when market growth returns.
And now I will turn the floor back over to <unk> for your questions for me.
Thanks, Bob.
So if you could please provide instructions for the Q&A now.
Thank you Mr. Hu, ladies and gentlemen, if you would like to ask you. A question that please press star followed by one on your telephone now and if you change your mind. Please press star followed by one again to withdraw your question when preparing to ask your questions. Please ensure your phone is on mute it locally will.
We'll go first this afternoon to Vijay Kumar Evercore ISI.
Hi, guys.
Thanks for taking my question.
Some helpful comments there Mike.
Maybe starting with those book to Bill comments there.
All company, one turn <unk> instrumentation looks like its turn.
I'm curious what this book to Bill numbers for ex China.
Instrumentation is churn.
That Q1 guidance in our comps get easier.
Why is Q1, assuming no benefit from this turn in.
<unk>.
Yeah, Hey, Vijay let me take that.
Yes, I think if you look at the book to Bill ratio.
For <unk> instruments, it's actually very similar both.
Including China, and excluding China, China was actually slightly.
Positive as well so.
A good sign and as we mentioned in the prepared remarks, we're taking a prudent approach.
To our first quarter.
And certainly we see this as a positive we.
We did have.
Some we typically do have seasonality from Q4 to Q1.
But.
We're taking it kind of one quarter at a time and I think part of the story to Vijay is the 10% comp.
From last year as well.
But as we've said this on the call that we were.
It was.
Encouraging to see some initial signs of stabilization with that kind of book to bill on the instrument side.
I'm glad to hear prudency and right off the back share.
We got that into the script Vijay.
Okay.
Just one more layer on guidance here.
Are you assuming for NASD in China for Ralph fiscal 'twenty four.
Yes so.
For Port China, we're thinking.
Mid single digit decline.
For the full year, so very similar.
Two two this year and then for NASD right now, we're expecting low single digit mid single digit growth angles here.
Fantastic Thanks, guys.
Sure.
Okay.
Okay.
Thank you we'll go next to Patrick Donnelly at Citi.
Hey, guys. Thanks for taking the questions and Mike.
Maybe kind of a follow up on the <unk> guide it seems like again, the orders encouraging maybe a little bit a little bit prudent on the guide as you said I guess when you think about just the implication for the ramp <unk> to <unk> is it is.
Is it optimism in the market based on some of those order trends.
Is it obviously the comps get easier in the second half as you work through it and can you just talk about the visibility into the recovery and kind of what gives you the confidence in the ramp as the year progresses here, yes, sure Patrick Havent finally about Bob that you can add any additional comments you like to make here, but.
When you think about the comments around the web we've probably describe it as a gradual recovery in growth I think is first of all important to remind the audience that we do expect the first half of the year to be very much like what we saw in the second half of 'twenty three but looking forward why do we think that things are going to be different in the second half.
As you know.
So its initial and still early there are some early signs of potential stabilization are you seeing in the order book. The fact that book to Bill for the company was above one. The fact that we had the same result in their instrument business, which has been the most pressured part of the company and listened while it's too early for customers to be confirming their 2024 budgets with US let's go back to.
The sales funnel, which is a predictor of potential growth right. So our sales funnel is continuing to show a lot of interest from customers.
And we know that at some point in time, those things will start to release.
The funnel is all remain healthy and listen environment like this we've seen these things before which was healthy and capital spending has been constrained. So some release can be expected and we here.
I don't want get too far down my skis on this but we hear customers talking about some new focused investments I think we're not clause, we're not calling for a big broad based market recovery, but certain segments of the market are going to be better you know, we're talking about some investments in R&D tools, but whats going to P. Fast testing capacity expansion plans, we're hearing from our customers advanced materials and then as you.
<unk> earlier, Patrick you know there is an easier compare in second half 'twenty four as well so.
So we do expect this return to growth and I think as it's not it's not simply about hope we've got some information that kind of backup are thinking there and again, we'll know a lot better about how things look when we get to the budgeting phase that customers that in early 2024.
Again, right now the markets for capital.
Instruments still remain quite challenged.
As I mentioned, we are seeing encouraging signs of potential stabilization I was going to be a journey for a return to growth and I think our guide got guide reflects that.
Again, I think we're we've got a high degree of comfort that this is what the back half will look like yes, Hey, and Patrick you asked about Q1.
Yes.
As I mentioned in the prepared remarks, I think we're taking a prudent approach here, but we're also going up against last year, where we did have a budget flush it happened earlier in the year, but for delivery in November and December and we're assuming that we're not seeing that are building that into our into our estimates so if that happens.
And then there would be that would be a nice thing for all of us absolutely Bob.
No. That's helpful. I appreciate that Bob and maybe Bob just on the margin side helpful to hear you talk through a few of the different moving pieces. It sounds like some cost savings and <unk> among others. I guess can you just give a bit more color on kind of the moving pieces, where you're pulling some levers the ability to take out.
Some additional cost to hit these margin numbers, obviously, you talked about margins being up a bit.
I think there are some headwinds like incentive comp things like that so maybe talk about the gives and takes there and confidence in terms of some of the cost outs.
Yes, that's a great.
A great insight there Patrick yes.
Because we do have some add backs.
So don't take that $175 million and dropped to the bottom line because we have some resets I would say roughly half of that.
Is kind of a reset between our sales comp and variable pay.
If we think about it is really across the P&L.
The biggest piece actually isn't DDG with the exit of the <unk> business, but we've also taken some tough decisions in other product lines to streamline the portfolio, there and I would say roughly.
A little over 30% of that is associated with that the other the other 25% is really within our Cogs.
Our Oss team has done a phenomenal job of of really kind of leaning into reducing our costs around logistics and material costs and then I talked about the site consolidation as well, which will show up and down the P&L. So we've we've taken a.
Look at our real estate footprint and have actually closed.
Several smaller sites.
<unk>.
Around the World really and then the final piece is really kind of infrastructure optimization, which would be discretionary spend but then also head count reductions that would be focused on areas, where we have right sized it to the demand and Patrick This is Mike sorry about the confidence about the growth.
Recovery I think when it comes to hitting the 175 high degree of confidence we control is 100% we will deliver on this.
Very helpful. Thanks, Mike and Bob I appreciate it.
Thank you the next Matthew Matt sites Goldman Sachs.
Hey, good afternoon, Thanks, taking my questions sure.
Maybe just on NASD.
I know, it's just over the past call it year and a half.
Kind of gone from high double digits to low double digits next year mid single digits, which is probably just some level of normalization.
You ramp capacity, but just given the step up in Capex or got into next year is there. Some wiggle room in terms of how you guys lay that capacity out.
Or is the confidence in that end market growth enough to keep investing in that area next year.
Yeah I'll jump in on that one so I tried to make that come out in the script, but.
Our plans to continue to divest for the future long term growth as business remained remains high.
Going full steam ahead on the on the capital expansions and they are tracking according to plan in fact, I think we'll probably do a little bit better on the cost side, when all said and done relative to the capex.
And Bob maybe you can talk a little bit about some of the things we're seeing relative I mean, I think we've commented on this before but what are we seeing in the marketplace relative to.
224 relative to NASD, Yes, I think Matt it's a great question and so if we look at the details of kind of the mix actually I would say we have the most healthy mix of portfolio in NASD and 24 than we've had so.
A significant increase in the number of programs that we are going to have being going through now it's a bigger component of clinical volume versus.
Commercial volume, which I actually think bodes very well for the future going forward we have seen.
Some.
I would say some pausing of certain customers as they associated with IRR, but we think that that's transitory. So as Mike said, we're not at all concerned about.
Long term growth prospects of this market and in fact, many of the programs that we're seeing come into into our.
Portfolio are actually as what we had talked about in previous calls.
Much larger targeted patient populations, which really speaks well to the volume and then as Mike mentioned, we're actually expanding our portfolio of technologies and so it's not just <unk>, but we're having the ability to continue to grow our.
Christopher GMP grade CRISPR business as well as anti sense. So we're continuing to do that as well.
Sam I know.
This will be our last call, but I thought it might be interesting for you to jump in here for a second.
As part of your transition you have been talking to a lot of our key customers and I think we're hearing the same story from them about long term growth continued investment here, yes, absolutely Mike I'll, just add a couple of things to your in Bob's comments.
One we are now on contract with more major pharma.
Than we ever have been and it's very promising if you look at publicly the percentage of their overall R&D budgets that they're now spending on therapeutic oligos and we are in the driver's seat.
The windows opportunities in just in the last couple of weeks alone I spoken with a number of our lead pharma partners and they've reaffirmed so there is a slight navigation through the IRI as Bob mentioned the conviction on their end of the market potential remains unchanged and we are in a leadership position to pursue that thanks Tim.
Got it.
Great great amount of detail. Thank you.
Maybe just Bob for you just on pricing.
Kind of what's embedded for next year as you think about pricing and how is pricing kind of trended over the course of this year, we back to sort of normalized levels of pricing that you guys have historically achieved or is there still some.
Pricing gains to see sort of as we move into next year and certain areas of your business.
Yeah, Hey, Matt that's a great question and we.
We ended the Q4, it just a little under 3% and actually for the full year was greater than that so it actually continues to be hold off hold up very well what we are building into our plan for next year is it's roughly two percentage points of price, which as you know is greater than our historical kind of pre COVID-19 levels.
So what we've been able to do I think is really speaks to the value of the value proposition that we have as well as the emerging mix of our businesses.
As well.
Okay. Thank you.
Thank you we'll go next to Rachel that install as J P. Morgan.
Great Good afternoon, and thanks for taking the question.
I just wanted to ask on China, you mentioned that the region was down 30%. This quarter that was in line with your expectations Youre expecting it to decline mid singles again next year. So I guess just how much of a function is that really gives you some of the comps and starting to lap.
Easier comps.
Late into next year versus is there any is there anything structurally wrong with that market and how do you expect China to continue to grow on that medium to long term.
You want to take the first part Bob I think it's yes, yes.
Well I think from the standpoint of.
The comps what we would see is obviously if you looked at what we did in the first half of this this year, we had very strong growth and then we're going up against extremely difficult comparisons this year.
As I mentioned, we were down 40 up 44% in Q4 of last year, So down 31%. This year, we're still up.
Over the two years and as we think about this.
Similar to the rest of the kind of the guide we're expecting kind of.
Declines in the mid <unk> in Q1, and getting better from there and some of that it will be an easier comp in <unk>.
Sure, Mike will talk a little bit more about this but we don't see anything structurally changing in the in the Chinese marketplace for life Science tools, Yes, absolutely Bob why don't I wanted to pick up from there. So I made a few comments about this in the <unk>.
Our prepared remarks, but I made my first trip to China since.
Our 2019 that one we're there for the <unk> show and what did I say first of all I saw just remind how quickly things can happen in China.
Electric vehicles everywhere a lot more green digital digital adoption was this amazing I don't think anybody uses cash there anymore. And then you also in mind that as you travel around the country, just how big a country is how big the economy is and how big Big markets are for life Sciences, but to your specific question here is what I was hearing from some customers that my team.
But what I've seen as well, which was why do we think this market eventually will return to growth.
All the things that have been driving this market of the years, which is primarily the Chinese government's 14 five year plan. Please.
We're still on it.
Pointing to long term growth.
Improving the quality of life in China, We're hearing stories of new environmental regs coming from <unk>.
The anti corruption impacts that we've seen in the health and pharma. The pharma space look to May have peaked but a lot of the actions occurring which could ultimately long term lead to more R&D investments because there'll be less money being spent in the SG&A area, but.
I don't want to be too.
Short term optimistic about this expansion of growth because the business is bouncing along at a certain level.
And that's why we call it stabilization in our in our <unk>.
Prepared remarks, so what we're seeing what we're forecasting what what we're hearing is from our teams and our customers don't expect any significant new near term improvements I don't expect any significant near term deterioration either.
And I think that's why when you look at the year to year numbers in terms of growth rate, Bob was primarily accomplished compare compare issue, but we've.
We've had a couple of months now of the <unk>.
Business run at a certain level and that gives us the sense that.
Well I think we used where potential signs of stabilization. So that's wrong.
Hope that helps.
Yeah, No. That's helpful color and then I just wanted to dig a little bit more on your comments around next year. So you mentioned that you expect the first half to be similar to what youre seeing in the back half of this year I guess can you just walk us through in a little bit more detail what exactly you mean by that should we be expecting similarities from inorganic growth perspective or are you really talking about more from a revenue dollar store.
Endpoint and then thank you have a question on the trajectory of the rebound on margins and EPS next year should we expect kind of that similar ramp given that dynamic as well.
Yes, I think.
I'll try to answer all of them.
All of that.
In short order Rachel as we think about the first <unk>.
First half of the year, we think that we do we look at our business.
And look at that kind of book to Bill kind of dropped in Q2 Q3, I think we mentioned actually was a little better it was less than still less than one and then Q4 continued to improve and our expectation is that that kind of performance will continue now we're going up against difficult comps when we were actually bleeding down our inventory.
Particularly happened in Q1, and Q2 of last year as we were talking about it and so I would expect us to have the <unk>.
Trough in Q2.
24, B in Q1, Q2, being a little better and then growing out of that as we benefit from the easier compares.
And I would expect our our P&L in the EPS to look very similar to that.
Q1, we are we've taken most of the actions they will have.
All been taken in the first first first quarter, but they won't have a full quarter and so we will have full quarters of the cost savings in Q through Q2 through Q4, and so as that business kind of kind of improves as the business improves we will get more and more leverage on the bottom line.
Thank you moving on now to Derik de Bruin at Bank of America.
Hi, good afternoon.
Sure.
Derek.
So can we talk a little about pharma.
<unk>.
That market was up and down all year.
Not a lot of visibility are you seeing.
Some of the.
The orders that were sort of stuck in the funnel is starting to come loose right. I mean, how are you sort of looking at the pharma market going forward.
Yes.
The answer I think the answer is the deal funnel still remain elongated. So yes, I think what we see from our formula is that theyre through growing but the velocity and closing deals from from.
From the point of Formula to order is still it's still static comes outside of elongated yes.
Yes, Hey, Derik I think if we think about that.
The pharma end market, we're assuming very low single digit growth for next year.
And.
Some of that is actually.
Getting past the tougher comps in China, if we looked at actually.
Our pharma business ex China, we grew in.
In FY 'twenty, three and actually our Biopharma business grew in total.
And we think about small molecule was the area that.
Was dragging the pharma business down as you know very well.
It typically has a replacement cycle, we are well into that replacement cycle, we were up very high you've kept calling it.
And.
We've seen that be very depressed and our expectation is that we'll start coming back.
In earnest in 'twenty, four but probably in the back half of 'twenty four.
Yes.
So this goes to the eye.
Sorry to beat this up but but youre shiny you've got going down pharma you. Just basically said you've got not you don't have a ton of visibility you hope that things are come back I'm, just not sure I am curious why you can put a little bit more cushion in the guide.
That it just feels like it's still feels like it's a little bit it still feels like it's a little back and well it's a little it's a lot back end heavy given where we are on the cycle.
I think as we said earlier Derik Theres reason to believe that.
Not only do you have the comps working in our favor for the second half there is real.
And we know that.
The customers want and there's interest in the products and I think they've got a step and finally, we are not calling for this miracle snapped back in 2024, but we're also saying that saying that.
<unk> market continue to decline in 2030% kind of numbers, we're seeing this year, particularly that's where the pressure has been but we know we know that.
The biopharma theirs, they need some tools for R&D, we know that.
Eisman cycles, only less can only be held up for so long. So there's there is a confidence relative to what we see in the funnels deals arent coming out of the funnel.
And then although we are focusing here on pharma right now in his commentary there's a lot of other strengths in some of the other secondary markets in the applied markets in particular, which is the which is nice diversification, we have on the instrument side as well and Bob one of if theres any additional thoughts on the pharma story.
Okay.
And just one final one just what were bookings.
The book to Bill was greater than one, but I'm just curious in terms of bookings and do you often see a spike in bookings in Q4, basically I'm just trying to get a sense of like what you saw as the head bake or.
You've got when you think you've got real demand here.
Yes so.
We don't give the absolute dollars other than to say it was greater than one it was one roughly one for the total company and then instruments were higher typically we do see a Q4, where.
It is higher so this kind of goes back to kind of our historical.
Performance where orders.
Or a little higher, particularly because we have October in our in our results.
And so last year was actually.
Hey.
Aberration, so to speak as we're working down the backlog.
And this kind of gets back to our normal process and through the quarter. Derek we saw our normal seasonality. So there wasn't anything unusual about the order order pattern to kind of say is this a head fake or not so I think that also is one of the reasons why.
Okay.
Early signs of some stabilization here again, yes.
Not huge growth, we're seeing stabilization correct.
Great. Thanks.
Sure.
Thank you we'll go next Max use Jacobean Nephron research.
Thank you good afternoon.
Yes.
So wanted to dig a little bit more on the L. Sag in the quarter can you break down the growth between instruments and consumables and just any commentary across product lines.
Everything I would say.
For the quarter was was pressured.
Although consumables performed better than that.
The instrumentation, our consumables business was down.
Kind of.
Low single digits and against a very tough comp.
Almost 9%, 10% and if you looked at it ex China that was largely influenced by China, We grew low single digits and consumables.
Okay. So does that imply instruments may be down over 20% in the quarter.
They were down.
Yes.
Okay, Yes.
Yes, maybe just to follow up on <unk> question I think everybody is trying to think about the right way to interpret this book to Bill commentary, but just.
Is there any additional color you can share on the magnitude were orders down in the quarter I guess, just trying to understand because there isn't easy.
We're a difficult comp on revenue like our orders kind of more.
Don't have a similar level of volatility.
It should have mathematically been over one right.
Yes so.
Orders were down year on year, but obviously down that as much as revenue was down year on year and so when we look at it I think thats kind of shows the stabilization because we had.
Some pretty significant.
Revenue last year because of the.
Recovery in the <unk>.
For Shanghai.
I shut down so I don't think that that we actually think that this is the best way to kind of look at it on a go forward basis, because we don't have the play.
The backlog happening much anymore, and so actually as we look at it on a quarterly basis, we've seen a nice steady progression up back to historical numbers and Jack I think it's fair to say Bob one of the things we were constant with a lot of commentary about how significantly things, we're getting in terms of being worse and as you know we've been out.
For some time, calling for no year end budget flush constrained capital environment BK.
We came into the year actually guiding for a slower growth in the second half. So what we're trying to innovate on the call today is.
Well, we've been same last several quarters exactly what we're seeing right now and I thought we thought a proof point was the book to Bill, which they listen.
It's not great out there in terms of robust growth, but the sky is also not falling either yes.
Okay I appreciate all the color thanks, guys.
Yes.
Yeah.
Thank you the next night to Puneet Suda at Leerink partners.
Yeah, Hi, Mike Thanks for taking the questions.
Yes, so good to have you see it there.
First one cross lab.
Bob.
65% of your business being in service contracts could you elaborate on what sort of growth contribution we should expect here for the full year and also I don't know if you provided.
Ellis AG expectation contribution floor.
2024 as well.
Yes for ACG, we're expecting kind of mid single digit growth as we are.
With the contracted services piece being double digit, but then being pressured by the instrumentation, so that'll be that'll be moderated and four.
The LSA business right now, we're looking at kind of low single digit decline.
Again with a greater decline in the first half of the year and a return to better performance in the second half of the year.
Yes.
Got it okay.
And then on.
If I could ask a little bit.
Semi onshoring that the point that youre pointing.
Not something we are focused on in prior calls and I hear you.
Growing growing on the PFS.
<unk> SaaS side, but I just wanted to could you elaborate a little bit on both.
Onshoring as well as the environmental gains that you are having and why shouldn't that contribute more to your instrumentation growth in 2024.
Yes, it has the potential to do that.
As we talked about it at the beginning of the year and so we want to be prudent there, but theres nothing out there that doesn't say that that should continue given the macro and economic environment and the incentives that governments are providing to continue to invest.
And actually what we're seeing is.
Nice business in southeast Asia, as well as India.
I would expect that to continue that's where we're placing incremental investments to continue to drive and capture that demand I would expect the same thing in the environmental area as well.
But we're not going to build all of that in right now at the beginning of the year. The only thing we saw some trends to that we're starting to see which is G. Fast is also driving some testing in the food food marketplace as well as every country that we talk to is in the process of further enhancing their own rigs so.
We wanted to have some other areas of potential growth for the company beyond the story around pharma.
Got it okay. Thank you guys.
Hmm.
Thank you we'll go next now to Josh Waldman at Cleveland Research.
Hey, Thanks for taking my questions, maybe one for Bob and then one for Mike.
Bob maybe circling back on <unk> question I'm wondering if you could provide more context on the forecasting process. This round or the puts and takes that went into the organic guidance.
You take a step back we are there.
Segments in the business that we're decelerating are slowing as you went into the guidance or maybe areas, where you're still trying to find bottom in.
So how did you reflect that in the geis.
Yes, obviously this year has been one for the ages in terms of being able to try to match.
Manage the forecasting.
And so we've taken a number of different angles at it to look at it so not only growth rates, which I think is the focus here, but also actually.
If you looked at it on a sequential basis.
And looked at the actual dollars I think that that's probably more instructive.
Particularly as we were looking at the <unk>.
The bleeding of the inventory I would say what we've seen over the last couple of quarters.
Is that signs of stabilization there are always puts and takes across across the various businesses.
We think that we've tried to do that we've built in feedback.
Feedback based on the fields' projections to funnel that Mike <unk> talked about and then a assumption around the conversion of those.
Funnels, and we haven't seen the funnels.
Slow down there's still modest growth.
And we're starting to see the slowing of the elongation I'm, not saying that it's stopped or accelerated in terms of the purchase but.
But we are starting to see that slowing and youre actually seeing that in the in that book to Bill and when we look at the orders.
On a sequential basis, we're starting to see that kind of.
Stabilization as well and so that's kind of how we're looking at continuing to go forward. If you kind of just built that going into next year, you would start seeing challenging first half and then better performance in the second half.
Hopefully that gives us.
Yes.
Yes, yes, that's helpful and that was actually going to be my follow up and maybe Bob or Mike. If you want to take a share I was curious if you could maybe quantify where the funnel stands entering 'twenty four versus maybe where it typically is entering a year and just how correlates over al how much do you think it is a predictor.
Near term demand I mean is that is better funnel conversion at all kind of part of what drives the improvement as you progress through the year.
I think right.
<unk> Parekh, and Bob kind of the same same rates right no no significant improvement correct, we're going up against.
The first half of this year actually what you saw was the elongation of those cycle times and so what we're seeing right now is kind of like I said, it's not necessarily fully stable, but it's not declining or increasing at the rate that we saw at the first and second quarters of last year, and so youre starting to see that and so all things being equal that conversion.
Is actually improving slightly versus a year ago.
It's still not back to historical numbers.
And that's what we're trying to handicap here as we look at our forecast going forward.
Okay I appreciate it guys.
Sure. Thanks, Josh.
Thank you we'll go next now to Daniel Brennan as Cowen.
Great. Thanks for taking the questions guys.
Maybe just on China I know you mentioned I think in the prepared remarks like month to month pacing had improved in the quarter, just any more color or anything on exit rates in China, and if you could eventually get like some more color on maybe the end market trends in China. I know you gave some color on.
Biopharma, but could you discuss pharma overall in any other industry color from an end market basis.
Sure Bob maybe we'll tag team on this which was I think the.
Relative to the order book I think we were slightly above revenue for the quarter no really unusual pacing.
Through the quarter from China.
We've been calling I know one of our conversation today has been about pharma, but.
We've been saying for some quarters overall for China, it's been a broad based slowdown.
And that's what the business has been and that's how we ended the year.
The end market performance I will say that.
We were pleased that we were in line with our expectations for for the business. So again, we described earlier that the business was moving along at a certain overall overall level I think we we do have a.
View of China that we will still be down in terms of the revenue for the year.
Reflective of where we are where we're seeing the business right now so.
Hey, Dan and to build on Mike's point, just a couple of other additional data points.
We were down.
Pretty.
Pretty significantly in all end markets in Q4, as you would expect because we were up 44%.
In Q4 of 'twenty two.
And so that's probably not as relevant because we were catching up relative to some of the catch up of the Shanghai shut down.
Another data point, though is if we looked at kind of year on year growth.
Actually we exited October.
Year on year performance, but it was still a decline, but it was much better than what we saw at the beginning of the quarter and so we actually saw sequential improvement I think Mike mentioned that in his prepared remarks, and then if we looked at kind of absolute dollars they've been pretty steady.
Got it thanks for that and then.
Chemical and advanced material, what looks like a tale of two cities. It looks like you know CME was down 15 in the quarter. You said you talked a lot about P fast.
So just any more color like what youre seeing on kind of both sides of the coin there, what's what's kind of baked in on the <unk> on the core chemical and energy side for the year and just anything on trends there and then obviously it sounds like you guys still remain very constructive on the applied materials side or.
Outside excuse me, so how about but as lead here with a few comments and then.
<unk> been dying to pool fulfilling on here as well and maybe talk about some of the some of the things. He is seen on the advanced materials side, which is a real area of expertise for himself, but I think I think you were at a tale of two cities is really quite appropriate both in terms of breakout by segment also by geography, I think we posted 70% growth if I remember correctly.
In China last year, So I mean, that's a tough comp I don't care, who you are.
But we're seeing that.
<unk> slowness on.
On the <unk> side, our major customers here are really conservative in terms of their deployment of capital in many of our largest customers are on cost control.
So thats been Thats, what youre seeing reflected in the numbers and Thats why we said we expect the constraint outlook on that side of the business, while the different story on the advanced materials and I think Bob you pointed to.
Good growth geographically globally outside of China.
And then so.
I know your team got a whole bunch of initiatives around the applied markets, particularly now my piece asked but.
Advanced materials and I thought a good opportunity for me to introduce you to the audience and have you show your perspective of what we're doing on the applied in the advanced materials side.
Yeah. Thanks, Mike.
Yes, certainly we've mentioned you've talked around.
The activity within labs thing.
Ex China or at least staying reasonably robust.
On the pod.
Applaud market side, and certainly around advanced materials.
We're certainly relatively strong in those markets and we're seeing with <unk>.
Good.
Really good generation around the battery market and of course, we've spoken about the onshoring.
Yes around there and in the advanced materials area. So globally that also.
Obviously comes into the <unk>.
The onshore again globally werent strong positions in those markets than had been historically.
<unk> to innovate strongly around.
Those markets and stay close to those customers.
Thanks, Phil and welcome.
Thank you we'll go next to Matthew Dan Leonard at UBS.
Thank you I wanted to circle back for a moment on the Q1 guide you spoke about a challenging year on year comp a couple of times, but as you're thinking about the Q4 to Q1 sequential ramp in dollars.
How much of that decline forecasted is what you'd chalk up to seasonality versus prudent.
Give us a flavor.
Okay.
Yes.
Great question Bob.
Yeah, Dan that's a great question, if you looked at last year.
And.
Sure.
Our revenue went down roughly $90 million $90 million to $95 million.
From an extremely strong Q4 to also a very strong Q1, if you look at the midpoint of the guide its a little over 100 100 $510 million. So there is an element of looking at what we did last year again, not assuming a strong budget.
Want to kind of parse it out to give you.
A percent, but that kind of at least gives you kind of how we were thinking about the Q1 guide relative to what we saw in Q1 of last year.
I appreciate that and then as a follow up can you remind me in 2024, when do we lap the headwinds on the genomics side and what is your appetite for continued investment in genomics as part of the DDG portfolio.
Yes, I would expect us to.
We will have a difficult Q1.
And then starting to get better from Q Q2, and beyond not dissimilar from the rest of.
Some of the businesses.
And then I'll, let Mike talk about the kind of the investment yes, I think it's first of all just to remind the audience. When we talk about the genomics business. What are we talking about kind of $500 million business, probably at 50% of its in QA QC instrumentation, where we are the undisputed leader here a lot of appetite to invest at your tape.
Tape station product, particularly the consumables business is on fire right now capital side is constrained as we've seen across the marketplace and then I think we all believe the.
View that Ngls will continue to be a growth market for us.
For the industry.
There are people, who have dialed back their expectations about how robust. It is for a period of time and I think we're seeing that in our business. So why do we make some of the structure changes we made on our portfolio because we want to ensure that we've got the ability to have a healthy P&L while at the same point in time investing in growth. So there is a reallocation of R&D dollars.
Happening as a result of some of the changes we've made that we talked about on the call. So and so the story is we have a lot of appetite for focused investments in areas, where we think we can win in genomics.
Thank you.
Thank you and ladies and gentlemen that is all the time, we have for questions. This afternoon, I would like to turn things back to you Mr. Hu.
<unk> for any closing comments.
Thanks, Bob and thanks, everyone for joining the call today with that we would like to hand, the call have a good day everyone.
Thank you again, ladies and gentlemen that will conclude the Agila technologies Q4, 2023 earnings call again, thanks for joining us and we wish you all have a great evening.
Goodbye.
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