The operator welcomes participants to the Agilent Technologies Q4 2023 Earnings Conference Call and introduces Parmeet Ahuja, Vice President of Investor Relations. The presentation will be webcasted and non-GAAP financial measures will be discussed. Mike McMullen, President and CEO, and Bob McMahon, Senior Vice President and CFO, will be presenting. The company's website has the necessary information for the call and guidance will be based on forecasted exchange rates. Forward-looking statements will be made and the company's recent SEC filings should be consulted for a better understanding of risks and other factors. Mike McMullen then takes over to begin the call.

The fourth quarter results for Agilent were discussed, with the company's revenue declining but still meeting expectations. The team performed well despite challenging market conditions and proactive cost management. The company's book-to-bill ratio was positive and there were signs of stabilization in the market. Regional results were down year-on-year, except for China which had a decline after strong growth in the previous year.

The results from China for the quarter were in line with expectations and showed a slight improvement in performance compared to the previous year. Orders were slightly higher than revenue, indicating a potential stabilization. The CEO visited China in September and remains confident in the country's role in the life sciences market. The pharma market declined due to customers being cautious about capital expenditures, but the biopharma business outside of China saw growth. The Life Sciences and Applied Markets Group saw a decline in revenue due to the decline in pharma, but there was growth in PFAS solutions and advanced materials. Despite the challenging market environment, the company continues to innovate and provide unique solutions for customers.

In June, Agilent launched new products at ASMS that have generated positive customer interest and new orders, particularly the 6595 LC triple quad for key applications like PFAS. The company has also installed online UHPLC systems with large biopharma companies, and the Agilent CrossLab Group saw revenue growth across all end-markets except China. The Diagnostics and Genomics Group had flat revenue, with strong results in pathology and NASD businesses but challenges in genomics. The company was also recognized for their commitment to sustainability.

In 2023, the company faced unexpected market headwinds, leading to lower than expected growth. However, they met or exceeded their quarterly guidance and delivered solid financial results. The company's compound annual growth rate and operating margins have improved over the past four years, and they have received high customer satisfaction ratings and employee engagement. Looking ahead to 2024, the company anticipates a slow but steady recovery, with potential for revenue growth and leveraged EPS growth.

In the fourth quarter, Agilent's revenue was $1.69 billion, with core growth at the top end of guidance and EPS exceeding expectations. The decline in revenue was due to weakness in capital purchases in LSAG, particularly in China. However, the company remains confident in the long-term growth potential of its end markets, which are driven by investments in improving the human condition. In the quarter, pharma revenue declined by 14%, with biopharma down 2% and small molecule down 23%. However, biopharma revenue outside of China grew by 7% in the quarter and for the year.

In the third quarter, small molecule was down globally, with the greatest decline seen in China. However, outside of China, small molecule showed growth. Chemicals and advanced materials also declined, with the food market experiencing a significant decline due to tough comparisons from last year. PFAS testing in the Americas drove growth in this market. The environmental and forensics market also declined, with the Americas showing strong growth due to PFAS testing. In the diagnostics and clinical market, low double-digit growth in pathology-related businesses was offset by weakness in genomics. The academia and government market declined, with strength in the Americas offset by weakness in China and Europe. Overall, results were down in all geographies, with China experiencing a significant decline after strong growth in the previous quarter.

In the fourth quarter, all markets except for pharma and China saw growth, with gross margin at 55.8% and operating margin at 27.8%. Interest income and a low tax rate contributed to a higher-than-expected EPS of $1.38. Overall, the company grew 1.5% in core revenue, increased operating margins, and grew EPS by 4% despite currency headwinds. The company also generated strong cash flow and maintained a healthy balance sheet, with a net leverage ratio of 0.6 times. $66 million was paid out in dividends and $80 million was spent on share repurchases.

In the previous fiscal year, the company returned $840 million to shareholders through dividends and share repurchases. They have also announced a 5% increase in quarterly dividends, which they have consistently done since 2012. The company expects a slow but steady recovery in the upcoming fiscal year, but also acknowledges market uncertainty and has taken steps to adjust their cost structure. This includes portfolio optimization, cost savings in materials and logistics, and workforce optimization. The company has also taken a charge for restructuring and other costs in their Q4 results. These actions will help the company deliver leveraged earnings growth in the upcoming fiscal year.

The company is showing signs of stabilization, with a book to bill ratio of 1 for the company and greater than 1 for LSAG instruments. Prudent guidance is being given for the full year, with expected revenue in the range of $6.71 billion to $6.81 billion. This represents a core growth range of -0.5% to 1%, with currency and M&A being headwinds. The Americas and Europe are expected to see modest growth, while China may still decline. DGG and ACG are expected to grow, while LSAG instruments will continue to be pressured. Modest operating margin expansion is projected for the year, with non-GAAP EPS expected to be flat to 2% growth. A robust year is expected for cash flow, with $1.6 billion in operating cash flow and $400 million in CapEx. For Q1 2024, revenue is expected to decline by 11.3% to 8.5%, with minimal impact from currency and M&A.

The company is expecting growth similar to Q4 in the midpoint of the year, with a difficult comp from last year. First quarter 2024 non-GAAP earnings per share are expected to be between $1.20 and $1.23 as cost savings ramp up. The company remains optimistic about the future and expects to come out stronger when market growth returns. The book-to-bill ratio for LSAG instrumentation has turned positive, but the company is taking a prudent approach to first quarter guidance, with a 10% comp from last year.

The speaker discusses the company's encouraging initial signs of stabilization and book-to-bill ratio in the instrument side. They also mention their prudence in their guidance and state that they expect a mid-single-digit decline in China and mid-single-digit growth in NASD for the full year. The speaker then addresses a question about the company's first quarter guidance and explains that they are being cautious due to the gradual recovery and growth expected in the first half of the year, but they are optimistic for a better second half based on early signs of stabilization in their order book.

The company's book-to-bill ratio was above 1, indicating potential growth in the future. The sales funnels show interest from customers, and there is potential for certain segments of the market to see growth. The company expects a return to growth in the second half of 2024, but the market for capital instruments remains challenging. The company is taking a cautious approach in the first quarter.

The company is facing a tough year due to a lack of budget flush and is not factoring it into their estimates. However, if it happens, it would be beneficial. The CFO discusses the different moving pieces and levers they are pulling to hit their margin numbers, including cost savings in DGG and resetting sales comp and variable pay. Roughly half of the $175 million cost savings will not drop to the bottom line due to resets in various areas of the P&L. The company has also taken tough decisions to streamline their portfolio and reduce costs in COGS through logistics and material costs. They have also closed several smaller sites around the world as part of their site consolidation efforts.

The final piece of the company's plan involves optimizing infrastructure and reducing headcount in areas where demand has been right-sized. The CEO, Mike McMullen, has a high degree of confidence in the growth recovery and is committed to hitting the $175 million target. The company plans to continue investing in the future growth of the business, with a focus on NASD. The mix of programs in NASD for 2024 is healthy and there has been a significant increase in the number of programs.

The company's clinical volume is increasing and they are not concerned about the long-term growth prospects. They are seeing larger patient populations and expanding their portfolio to include CRISPR and antisense technologies. The company has contracts with more major pharma companies and is in a good position to win opportunities. The company's leadership remains confident in the market potential, despite some pausing from customers due to IRA. The company's pricing strategy is not mentioned in this paragraph.

The speaker is discussing the company's pricing trends and projections for next year. They mention that they ended the fourth quarter with a 3% increase in pricing, which is higher than pre-COVID levels. They also expect to see a 2% increase in pricing next year. The speaker attributes this to the company's value proposition and the changing mix of their businesses. The next question is about China, which saw a 30% decline in the fourth quarter and is expected to decline in the mid-single digits next year. This is largely due to difficult comparisons with the previous year, but the speaker believes the market will continue to grow in the long term.

The company is expecting declines in the Chinese marketplace for life science tools in the first quarter of the year, but they believe it will improve as the year progresses. They do not see any structural changes in the market and believe that long-term growth will be driven by the Chinese government's 14th 5-year plan and other factors such as environmental regulations and reduced corruption. However, they do not want to be overly optimistic as the business is currently stable at a certain level.

The company does not expect any significant changes in the near future, but also does not anticipate any major declines. The growth rate has been consistent for a few months, indicating potential stabilization. The first half of next year is expected to be similar to the second half of this year, with improved performance in Q3 and Q4. The company expects to see a trough in Q1 and Q2, followed by growth as they benefit from easier comparisons.

The speaker expects the P&L and EPS to look similar in Q1, with cost savings fully realized in Q2-Q4. The pharma market is expected to have low single-digit growth next year, with the deal funnel still elongated. The company's pharma business in China and biopharma business grew in FY23, but small molecule was dragging it down. The replacement cycle for small molecule is expected to pick up in the back half of '24. There is not much visibility for the pharma market, but the speaker hopes for improvement.

The speaker is questioning why the company's guidance still seems back-end heavy, given the current market conditions. The CEO responds by stating that the company is seeing positive trends in their funnel and in other markets, such as applied markets. The CFO adds that the book-to-bill ratio was greater than 1 and typically sees a spike in bookings in Q4.

The company's historical performance has shown higher orders due to the inclusion of October in the results. Last year's results were abnormal as the company was working through its backlog. However, this quarter showed normal seasonality and signs of stabilization. The LSAG segment saw lower growth, with consumables performing better than instrumentation. Orders were down compared to the previous year, but not as much as revenue.

The speaker discusses the stabilization of revenue for the company, citing a decrease in backlog and a steady increase in quarterly numbers. They also mention that the growth in their CrossLab business is expected to be mid-single digits, with a decline in LSAG business in the first half of the year.

Puneet Souda asks about onshoring and environmental gains contributing to instrumentation growth in 2024. Robert McMahon says it has the potential to do so, but they are being prudent and not building it all in at the beginning of the year. Mike McMullen adds that PFAS is also driving testing in the food marketplace and every country is enhancing their own regulations, providing potential growth for the company beyond pharma. Josh Waldman asks for more context on the forecasting process and the factors that went into the organic guide, such as segments that may be decelerating or areas where they are still trying to find bottom.

Robert McMahon and the team at the company have been trying to manage their forecasting in a year that has been challenging. They have taken different approaches to looking at growth rates and actual dollars, and have seen signs of stabilization in the last few quarters. They have built in feedback from the field's projections and the funnel, and are starting to see a slowing of the elongation and stabilization in orders on a sequential basis. Looking ahead to next year, they expect a challenging first half and better performance in the second half. Josh Waldman asks for more information on the funnel and its correlation to near-term demand.

The company's funnel conversion has not significantly improved, but it is not declining at the same rate as the first and second quarters of last year. The company is still trying to determine how this will affect their forecast going forward. In terms of China, the order book was slightly above revenue for the quarter, but there was no unusual pacing. The overall trend in China has been a broad-based slowdown, but the company was pleased to meet their expectations for the business.

The company is expecting a decline in revenue for the year in China, but there has been a sequential improvement in performance. In the Chemical and Advanced Material segment, there has been a significant decline in C&E due to PFAS, but the Applied Materials side remains strong. The segment can be described as a "tale of two cities" with varying performance in different areas and geographies.

The speaker discusses the company's growth in China and the challenges they face due to a tough year-on-year comparison. They also mention slow growth in the C&E side due to conservative customers and cost control measures. However, there is good growth in Advanced Materials globally, particularly in the batteries market, and the company is focusing on innovation and staying close to their customers in this area.

During a Q&A session, an analyst asks about the decline in revenue from Q4 to Q1 and how much of it is due to seasonality versus other factors. The executives respond by saying that last year's Q1 was also strong, so they are being cautious in their forecast. They also mention that the genomics business will face challenges in Q1 but will improve in Q2 and beyond. They believe in the growth potential of NGS technology, but there may be some slowdown in the market.

The speaker explains that changes were made to the portfolio in order to maintain a healthy P&L and invest in growth. There is a reallocation of R&D funds to focus on areas where they can succeed in genomics. The speaker thanks everyone for joining the call and ends the discussion.

This summary was generated with AI and may contain some inaccuracies.