Agilent Technologies, Inc. (NYSE:A) Q1 2024 Earnings Call Transcript
Agilent Technologies, Inc. (NYSE:A) Q1 2024 Earnings Call Transcript February 27, 2024
Agilent Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q1 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead.
Parmeet Ahuja: Thank you, Regina and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2024. With me are Mike McMullen, Agilent's President and CEO; Padraig McDonnell, Agilent Chief Operating Officer and CEO-elect; and Bob McMahon, Agilent's Senior Vice President and CFO and acting President of the Diagnostics and Genomics Group. Joining in the Q&A will be Phil Binns, President of the Agilent Life Science and Applied Markets Group; and Angelica Riemann, our newly named President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com.
Today's comments 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. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes.
These changes have no impact on our company's consolidated financial statements. During this call, 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.
Mike McMullen: Thanks, Parmeet and thanks, everyone, for joining our call. Before I review our first quarter results, I want to first acknowledge our news last week that I will be retiring at the end of the fiscal year and that Padraig McDonnell is Agilent's new Chief Operating Officer and will become CEO on May 1. It was a difficult decision to retire after almost 40 great years with this special company and in the role that I love, I will miss working with the One Agilent team. However, I must say it's a great feeling and quite gratifying to be handing over the CEO reins to a tremendously capable successor in Padraig. With Agilent operating from a position of strength and with a very promising long-term outlook. I have known Padraig for more than 20 years.
I've worked closely with him during that time. He has always been completely committed to our customers and Agilent's success. He is a product of our culture, knows our company, team and markets and those have developed compelling business strategies, build winning teams and deliver exceptional results. Padraig has a strong track record result at every position he has held during his 26-year career at Agilent. I know he has the knowledge, leadership skills and customer focus that will be key to Agilent's success moving forward. I look forward to all of you seeing first-hand what a capable result driven leader we have in Padraig. Padraig would you like to say a few words?
Padraig McDonnell: Thank you, Mike. I'm honored to be able to follow you as Agilent's next CEO and I'm grateful for your support throughout my career and during this transition. You have made a significant impact on Agilent, our customers and our team. I'd also like to welcome Angelica Riemann to this call. After leading our services division for the last 2.5 years, I can tell you she has the experience and the skill set to continue evolving ACG to align with the growing opportunities that the business has demonstrated in supporting the broad installed base and our enterprise customers. Expect to see continued great things ahead from Angelica and ACG. I've had the pleasure of meeting some of you on this call and I look forward to meeting and working with you all in the future. Agilent has a compelling story to tell and I'm excited by the possibilities that lie in front of us as we help our customers bring great signs to life.
Mike McMullen: Thanks, Padraig. For today's call, I will take lead, covering the overview of our financial results, while next quarter, Padraig will take on these duties as the new CEO. Now, on to the Q1 results. We are pleased with the start of the year. The Agilent team continues its strong execution in a challenging market environment. The first quarter provided further evidence of our team's capabilities with revenue coming in better than expected at $1.66 billion. This represents a decline of 6.4% against a tough compare of 10% growth in Q1 of last year. The better-than-expected top line results and disciplined cost management drove higher-than-expected earnings per share of $1.29 down 6% from Q1 last year. Given the solid Q1 results and our continued view is slow but steady recovery throughout the year, we are maintaining our full year outlook that we shared with you in November.
Key to our Q1 performance was the ongoing sequential stabilization we experienced in China and secular growth drivers in applied markets globally. From an end market perspective, our total pharma business is down 12% which was in line with our expectations. This falls 11% increase in the first quarter last year. While declining overall against a very strong Q1 of last year, our applied end markets were more resilient than expected and show sequential growth from the fourth quarter. In these markets, PFAS Solutions and Advanced Materials, including batteries and semiconductors were high bits for us. Geographically, both China and Europe finished Q1 better than expected, while revenue for the Americas was in line with expectations. Looking at performance by business unit, the Life Sciences and Applied Markets Group delivered revenues of $846 million and down 11%.
This is against a difficult compare of 10% growth last year. While still too early to call an overall market recovery, results were better than expected. Our diversified portfolio and broad end market coverage helped drive the performance. We continue to experience a conservative environment for capital spending. But are better than expected, Q1 results were driven by consumables which grew mid-single digits, China and a better-than-expected performance in applied markets. During the quarter, we also completed the expansion of our Shanghai manufacturing facility as we continue to take steps to ensure our long-term leadership in China. We also made our first customer shipments for Agilent's newly released LC/MS offerings. Our latest highest sensitivity triple quad, the 6495D enables expanded and enhanced workflows, including for PFAS.
This, in addition to Revident, the first of a new generation of LC/Q-TOF systems that combine a new architecture with enhanced instrument intelligence for maximize operation time and productivity. The Agilent CrossLab Group posted revenue of $405 million. This is up 5% with growth across all regions except China. Our contracts business led the way with double-digit growth overall, led by strength in enterprise service contracts. This performance highlights the continued strength and resiliency of our business. Connect rates for both services and consumables continue to improve. This is a result of our focused strategy to deliver end-to-end customer value while also building a larger recurring revenue business. The Diagnostics and Genomics Group delivered revenue of $407 million, down 6% core.
Our pathology-related businesses and our NGS QC portfolio grew mid-single digits which was more than offset by declines in NGS chemistries and NASD. NASD declined low double digits as expected. This is because a very tough compare of 22% growth driven by significant volume last year from a single commercial program. We continue to be encouraged with our long-term prospects due to the increasing number of programs across a range of indications many of them target large patient populations. The DGG team continues to innovate and deliver differentiated solutions for our customers. In the quarter, we induced a new ProteoAnalyzer system. The new platform simplifies and improves the efficiency of analyzing complex protein mixtures. And processes that are central to analytical workflows across the pharma, biotech, food analysis and academia sectors.
From an overall Agilent perspective, we recently achieved World Economic Forum recognition for operations of Waldbronn, Germany. This site was named a Global Lighthouse for implementing innovation that boost productivity, output and quality. This marks the second Global Lighthouse award for us after seeing the recognition for our Singapore facility two years ago. Agilent is the only life science tools company to be recognized as a Global Lighthouse. Agilent recently achieved a top 5 ranking in the Barron's list of 100 most sustainable companies. In addition, we are included in the Dow Jones Sustainability Index globally and in North America for the ninth year in a row. Looking ahead, we expect the current market environment to persist through the first half, we expect a slow and steady improvement in the second half of the year.
We will continue taking actions that will make us stronger and position us well for the future. We will maintain our approach to prioritize investing for growth with a focus on execution and driving productivity. Our better-than-expected Q1 results and my confidence the Agilent team reinforced our view for the full year. Bob will now provide the details on our results as well as our outlook for Q2. After Bob's comments, I will rejoin for some closing remarks. And now, Bob, over to you.
Robert McMahon: Thanks, Mike and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then finish up with our second quarter guidance. Q1 revenue was $1.66 billion, a decline of 6.4% core. On a reported basis, currency added 0.9 percentage points, while M&A had a negative impact of 0.1%, resulting in a reported decline of 5.6%. And overall, orders were greater than revenue in Q1 as expected. As Mike mentioned, pharma, our largest end market declined 12%. Within pharma, biopharma declined low single digits but grew low single digits outside China, bolstered by strength in services and consumables.
Small molecule was down high teens in the quarter with softness globally. The chemical and advanced materials market was down 4% off a very tough comparison of 14% growth last year. We saw broad resilience in advanced materials with a low single-digit increase year-on-year as well as growth sequentially. Given the extremely tough compare of high 20s growth last year, these are impressive results. As expected, the chemical side saw a decline. The academia and government market was up 2%. The growth in this market reflects the stability of academic funding and lab activity. Our business in the diagnostics and clinical market declined 5%, mid-single-digit growth in pathology was more than offset by continued headwinds in genomics, cell analysis and LC and LC/MS.
The environmental and forensics market declined 1% after growing 12% in Q1 of last year. We continue to see new regulations around the world driving PFAS testing. Europe grew mid-single digits, while China and the Americas were down low single digits. Americas faced a difficult compare of low 30s growth last year. The food market declined 3% but was up low single digits, excluding China. On a geographic basis, as Mike mentioned, both China and Europe exceeded our expectations while the Americas were in line with our expectations. China was down 9% and showed a sequential increase over last quarter which was much better than expectations. China benefited from continued stabilization and a bigger-than-expected Lunar New Year impact as some customers pulled forward incremental demand from Q2.
We estimate the pull-forward impact to be roughly $15 million or 5% of China's revenue in the quarter. Even adjusting for this impact, China outperformed. Europe was down 4% year-on-year after growing 10% last year and was up mid-single digits sequentially. This was driven by continued strong demand for our ACG services, offset by muted demand in pharma and expected softness in chemicals. In the Americas, revenue was down 8% due to declines in pharma and the softness in NASD and NGS chemistries. Moving down the P&L. First quarter gross margin was 56.0% down 50 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.8% was down year-over-year as expected. Our ongoing cost savings initiatives are delivering as planned.
Below the line, we benefited from greater-than-expected interest income in the quarter, driven by nice work from our treasury team, coupled with very strong cash flow. Our tax rate was 13.5% and we had 294 million diluted shares outstanding. Putting it all together, Q1 earnings per share were $1.29, down 6% from a year ago and ahead of our expectations. Now, let me turn to cash flow and the balance sheet. I continue to be very pleased with our cash flow generation. Operating cash flow was $485 million in the quarter, significantly above last year. In Q1, we invested $90 million in capital expenditures as we continue our planned NASD expansion. And during the quarter, we returned $69 million to shareholders through dividends. Although no shares were repurchased during the quarter, we expect to catch up on our anti-dilutive share repurchasing for the remainder of the year.
In Q2, we expect a minimum of $180 million to be repurchased. All in all, we had a good start to the year. And as Mike mentioned, it reinforces our confidence in the full year guide we provided in November. Now, to our guidance for the second quarter. We expect Q2 revenue will be in the range of $1.56 billion to $1.59 billion. This represents a decline of 9.1% to 7.4% on a reported basis and a decline of 8.4% to 6.7% on a core basis against 9% growth last year. Currency and M&A combined are a headwind of 70 basis points. Our Q2 guidance also reflects the $15 million impact of the Q1 pull forward in China I mentioned earlier. Second quarter non-GAAP earnings per share expected to be between $1.17 and $1.20. Before turning back over to Mike, I just want to express my thanks to Mike and to congratulate Padraig.
Mike, it has been a real pleasure to work with you. While there have been many ups and downs in the markets these past few years, one thing I knew I could always count on is your steady leadership and strong partnership. And Padraig, congratulations again. I'm really looking forward to working with you. And now, I'll turn things back over to Mike. Mike?
Mike McMullen: Thanks, Bob. Today marks my 37th and final earnings call with all of you. Time does truly fly by. I want to first thank you for your support and engagement over the years. I have to say it has been a tremendous honor serving as Agilent's CEO and represent the achievements of the One Agilent team to all of you and the broader investor community. In 2015, we launched the then new Agilent with a goal to transform Agilent into a leading life science and diagnostics company. We had ambitious goals to drive long-term shareholder value creation with significantly stepped up financial results delivered by an unmatched One Agilent team working together in a truly differentiated and compelling company culture. I couldn't be proud of the Agilent team and what we've accomplished together over the last 9 years.
While current market conditions remain challenging, the long-term promise of growth remains with end markets power buying investments to improve the human condition. On the Agilent front, we've never been in a stronger position to continue to capitalize on opportunities to serve our customers within the market and deliver differentiated financial results. It's been a pleasure to work with all of you over the years. I will miss it. While at the same time, I know that you will enjoy working with Padraig in the years ahead. Like me, I know you'll be impressed with Padraig's knowledge of our industry and our business. As I noted earlier, he knows how to develop compelling business strategies, build winning teams and deliver exceptional results.
His track record of success during his Agilent leadership journey speaks for itself and have no doubt, it will continue in his new role. While this is my last earnings call with you, I'm certain that the best is yet to come for Agilent. Thank you. And now over to you, Parmeet for the Q&A.
Parmeet Ahuja: Thanks, Mike. Regina, if you could please provide instructions for Q&A now.
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