Agilent Technologies, inc (A) Q3 2021 Earnings Call Transcript

Agilent Technologies, inc (A 1.24%)
Q3 2021 Earnings Call
Aug 17, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Agilent Technologies Third Quarter Earnings Conference Call. [Operator Instructions]

And now I'd like to introduce you to the host for today's conference, Parmeet Ahuja, Vice President of Investor Relations. Sir, please go ahead.

Parmeet Ahuja -- Vice President, Investor Relations

Thank you Paul, and welcome everyone to Agilent's third quarter conference call for fiscal year 2021. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob and Mike's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group.

This presentation is being webcast live. The news release, investor presentation and information to supplement today's discussion, along with a recording of this webcast are made available on our website at www.investor.agilent.com.

Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31.

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 -- President and Chief Executive Officer

Thanks, Parmeet, and welcome to your first Agilent's earnings call as our new Vice President of Investor Relations. And thanks everyone for joining our call today.

Before covering our third quarter financial results, I want to acknowledge the recent passing of Dr. Tachi Yamada, a giant in our industry and a former Agilent Board member. Tachi was much more than a knowledgeable, deeply involved Agilent Board member for nine years. As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others. I know that the Agilent team is not alone and recognize that Tachi Yamada will be greatly missed and we extend our deepest sympathies to Tachi's family.

Now, on to the third quarter review and our updated outlook for the year. In Q3, the very strong broad based momentum in our business continues. The Agilent team delivered another outstanding quarter, exceeding our expectations. Q3 revenue of $1.59 billion is up a reported 26% and is up 21% core. This is against the mass decline of 3% in Q3 of last year, so we are well above fiscal year 2019 pre-pandemic levels. In addition, as other positive sign of continued momentum, orders outpaced revenue during the quarter. Our growth is broad based across all business groups, markets and geographies. The combination of strong top line performance and execution translated into excellent growth and profitability and earnings per share. Our Q3 operating margin is 26%, this is up 230 basis points from last year.

EPS is $1.10, up 41% year-over-year. Agilent's success continues to be driven by our build and buy growth strategy and execution prowess. We are developing market-leading products and services, investing in fast growing businesses while delivering outstanding customer service and continue to drive profitability. Since the onset of the pandemic, we have taken actions to ensure Agilent emerged even stronger as a company. While we have yet to leave COVID-19 in the rearview mirror, our Q3 results are another indicator our actions are delivering the intended results.

Bob will provide more details on end markets and geographies, but I want to briefly highlight our performance in our two largest end markets, pharma and chemical energy. We continue to perform extremely well in pharma, our largest market growing 27% with strength in both small and large molecule segments. Our large molecule business grew roughly 52% in the quarter and now represents 36% of our overall pharma revenue, up from the mid 20s just a few years ago. In chemical energy, our business is recovering faster than expected, expanding 23% in the quarter. This is an acceleration of the momentum we achieved in the first half and our order funnel continues to strengthen.

Looking at our performance by business unit, The Life Sciences and Applied Markets Group generated revenue of $680 million. LSAG is up 22% on a reported basis, this is up 18% core, off just a 4% decline last year. LSAG's growth is broad based across all end markets. Our performance is led by strength in pharma, which is up 22% and chemical energy up 31%. All businesses delivered strong growth led by Cell Analysis at 38% growth and our LC and LCMS businesses, which grew 22%. We continue to strengthen our position in the fast growing large molecule market segment. During the quarter, the LSAG team launched three InfinityLab Bio LC systems at the well attended InfinityLab LC Virtual Conference in June. These new products further extend our LC leadership position.

In addition, building on our already strong pharma offerings, we launched new compliance ready LC/Q-TOF and LC/TOF solution to our portfolio in the quarter. The Agilent CrossLab Group posted revenue of $560 million, this is up a reported 21% and up 15% on a core basis. These results are on top of 1% growth last year. The business is benefiting from increased activity and customer labs and instrument connect rates. This is leading to more contracted services, on-demand services and consumables consumption across all end markets. All end markets grew mid teens or higher with the exception of environmental and forensics, but still grew 9%.

The pandemic has shown ACG to be our most durable business, with ACG grown each quarter since COVID-19 first emerged. Our customer-focused approach and digital investments continue to pay dividends. Looking forward, instrument placements and demand bode well with continued strong performance by ACG as we drive attachment rates and increased customer lifetime value.

The Diagnostics and Genomics Group produced revenue of $346 million, up 44% reported and up 37% core, compared to an 8% decline last year. The growth was broad based across product lines and regions and was led by our NASD GMP oligo business. The ramp of our facility in Frederick, Colorado continues to go very well. The quarterly results exceeded our expectations, easily surpassing the $30 million revenue milestone, while one quarter does not make a trend, our team has done a tremendous job increasing the output in a high quality manner. This gives us increased confidence in our ability to exceed the $200 million annual run rate of revenue with existing capacity.

In addition, the Train B manufacturing line expansion is well underway and on schedule. Our genomics instrumentation and consumables businesses rebounded strongly in the quarter as did our pathology-related businesses. For the first time in several quarters, we saw a diagnostic testing above pre-pandemic levels. While we are watching Delta variant very closely, to date we have not seen a meaningful negative impact on testing volumes.

I also want to highlight our performance in China. While still less than 10% of DGG revenue, our China business grew 50% in the quarter. We continue to see tangible progress in building a stronger China market position. In Q3, we signed our first ever companion diagnostic development services agreement with a China based biopharma company. Earlier this month, we also announced the initiation of in-country manufacturing for our SureSelect product line. We are very bullish about long-term growth prospects in China for our DGG product and services offerings.

In addition, the integration of Resolution Bioscience team is going well and we are very pleased to enter and expand our participation in the fast growing NGS based cancer diagnostic market. It was a busy quarter at Agilent. So, I have a few other achievements I'd like to share with you. Last month, we published Agilent's 21st Annual Corporate Social Responsibility Report. At a time when some are just starting to look at issues like sustainability and societal impact, this has always been a key part of who we are as a company. We've been addressing these issues since our founding more than two decades ago. I would encourage you to review our report on the Agilent website.

We're also very pleased to receive recognition of the Great Place to Work in United States by the Great Place to Work Institute. This result is just one more example of Agilent having a highly engaged and energized team, and as you know, teams with high engagement win in the market. Looking ahead, building on another excellent quarter and the momentum we're seeing, we expect the business to continue to perform well as we close out what we believe will be an outstanding fiscal year 2021. As a result, we are once again raising our full-year revenue and earnings guidance. I will share more details, but we are expecting a continuation of our excellent top line growth and earnings generation. While the world has yet to fully emerge from a global pandemic, Agilent is well positioned to deliver excellent results again in the fourth quarter. I remain very proud of the Agilent team's ability to consistently deliver for our customers and shareholders.

Thank you for being on the call today and look forward to your questions. I will now hand the call off to Bob. Bob?

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Thanks, Mike, and good afternoon everyone. In my remarks today, I will provide some additional details on Q3 revenue and take you through the income statement and some other key financial metrics. I'll then finish up with our updated outlook for the fourth quarter and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results.

As Mike mentioned, we had an excellent result in the third quarter. Revenue was $1.59 billion, reflecting reported growth of 26%, core revenue growth was 21%. Currency added 4.5% for the quarter and M&A added 0.5 point. In addition, COVID-related revenues were in line with the prior year. All end markets performed well with pharma and chemical and energy as standouts versus our expectations. Our largest market pharma grew 27% during the quarter, after growing 2% last year. The performance was led by the continued strength in our Large Molecule business growing 52%, while our Small Molecule business grew mid teens, and all regions in the pharma market grew double-digits.

Our Large Molecule business was driven by our NASD division and demand for LC and Mass Spec instrumentation and solutions, while our Small Molecule business was primarily driven by QA-QC refresh. Chemical and energy also performed well this quarter with 23% growth. Even after accounting for the comparison against the 10% decline last year, this was clearly our best quarter since the onset of the pandemic. This result was driven by increasing momentum in demand for advanced materials and the general global economic growth. Our view is that the chemical and energy market still has additional room to grow moving forward.

The diagnostics and clinical market grew 28% against the decline of 10% a year ago, our softest quarter last year. We are very encouraged with the continued recovery in the market as our genomics and pathology businesses saw very good growth. On a regional basis, all regions grew with China up 41% and Americas delivering 38% growth. In the academia and government market, we delivered 12% growth as most research labs continue to open globally and expand capacity. On a regional basis, Europe led the way. The food market continued its double-digit performance growing 12% on top of growing 1% last year. Food manufacturers continue to invest in increased testing to ensure quality and authenticity.

A developing cannabis testing market, primarily in the U.S. also contributed to growth in this market and regionally the food market was led by the Americas and Europe. Rounding out our key markets, environmental and forensics came in with 5% growth. On a geographic basis, all regions demonstrated solid growth led by the Americas at 32% and Europe at 23%, both exceeding our expectations. The performance was broad-based across all markets. And as expected, China was up 8% on top of 11% growth last year. All three business groups grew in China during the quarter. Pharma, chemical and energy and diagnostics were the key drivers.

Now turning to the rest of the P&L, third-quarter gross margin was 55.9%, up 80 basis points from a year ago despite roughly 40 basis points of headwind from currency. Our strong top line, some positive product mix, coupled with the strong execution from our operations team drove the year-on-year improvement. And our supply team is doing a tremendous job getting our products to customers, despite the increase in demand. Gross margin improvement -- performance along with continued operating expense leverage resulted in operating margin for the third quarter of 26%, improving 230 basis points over last year. Putting it all together, we delivered EPS of $1.10, up 41% versus last year. Our tax rate was 14.75% and share count was 306 million shares, as expected.

We delivered $334 million in operating cash flow during the quarter, showing a strong conversion from net income and up more than 15% from last year while crossing the $1 billion mark in nine months. During the quarter, we returned $172 million to our shareholders, paying out $59 million in dividends and repurchasing roughly 800,000 shares for $113 million. Year-to-date, we've returned $829 million to shareholders in the forms of dividends and share repurchases. And we ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 0.8. Accounting for our Q3 performance and improved outlook in the fourth quarter, we are again raising our full-year projections for both revenue and earnings per share. We are increasing our full-year revenue projection to a range of $6.29 billion to $6.32 billion, up $125 million at the midpoint from previous guidance and representing reported growth of 17.8% to 18.4% and core growth of 14.5% to 15%. Included is roughly three points of impact from currency and a small amount from M&A.

In addition, we are on track to deliver roughly $100 million in COVID-related revenue in fiscal 2021, in line with our expectations from the beginning of the year and flat to last year. We expect to continue our strong operating leverage, and so we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.28 to $4.31 per share, up 30% to 31% for the year. This translates the fourth quarter revenue ranging from $1.63 billion to $1.66 billion. This represents reported growth of 10% to 12% and core growth of 8.5% to 10% on top of the 6% growth in Q4 of last year when we started to see early signs of recovery from the strict lockdowns.

In addition, while COVID revenue was roughly flat year-on-year for the full year, last year's fiscal fourth quarter represented the high watermark in our COVID related revenue. And as a result, we expect to see roughly a one point headwind due to COVID revenue in the quarter. So, our core growth excluding COVID would be comparable to 9.5% to 11%. We are forecasting higher expenses in the fourth quarter as we invest to maintain our strong momentum, but expect continued operating leverage in excess of 100 basis points. Non-GAAP EPS is expected to be between $1.15 and $1.18 with growth of 17% to 20%.

Now, before opening the call for questions, I want to reiterate that we continue to see good demand in our end markets, have solid momentum in all our businesses and expect to close the year extremely well. We believe our strategy is the right ones for Agilent, but we couldn't achieve these results we’ve been producing without the excellent execution by the team.

With that Parmeet, back to you for Q&A.

Parmeet Ahuja -- Vice President, Investor Relations

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

Questions and Answers:

Operator

Definitely, sir. We will now begin the question-and-answer session. [Operator Instructions] Your first question is from Tycho Peterson with JP Morgan.

Tycho Peterson -- JP Morgan -- Analyst

Hey, good afternoon. Congrats on the quarter. Mike, I want to start with the...

Mike McMullen -- President and Chief Executive Officer

Thanks, Tycho.

Tycho Peterson -- JP Morgan -- Analyst

Kind of outlook. I know in China, there's been a fair amount of noise about companies being able to do products in-country -- ports being shutdown, terminal shutdown. So, can you maybe just talk to some of the near-term dynamics in China? And it sounds like trade tension's also getting worse with the buy China policy. How do you think about that over the next couple of quarters?

Mike McMullen -- President and Chief Executive Officer

Yeah, sure. Thanks for the congratulatory comments, Tycho. And we really -- actually continue to feel quite good about our performance in China. As Bob and I mentioned in the call script, I think 8% up on a 11% last year, and I think our stack growth is around 19% Q3. It's actually up over our stack growth of 17% Q2. We're seeing this good, strong, Pharma and C&E demand in China. Now, the funnels really remain quite robust. And I think now getting to your specific question, we're not seeing any significant changes in terms of ability to get product in. I mean, there's been a lot of noise for years, I have to say, between United States and China, yet the business seems to somehow get transacted. So, Bob, I think we're not really overly concerned about those dynamics. We did have somewhat of a little bit of shipment interruption as some of our Academia government customers were -- had to work through a VAT tax exemption change, but I think that was relatively minor impact on the P&L. So clearly we're monitoring those developments and you have to continue to work to make sure you've got the logistics flowing through the country. But we've always been able to find a way and they're not overly concerned about it at this point.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah, I would say, Tycho. We continue to invest in China as we mentioned in the call and there are always bumps here and there, but long-term, we feel very good about the business in China.

Mike McMullen -- President and Chief Executive Officer

Yeah, that's having one other thought here, Tycho is relative to logistics. We have divested into a number of forward-looking stocking locations over the last few years, not really has paid us dividend, because we are less dependent on stuff coming directly into the – via the port because we have a lot of in-country inventory.

Tycho Peterson -- JP Morgan -- Analyst

Okay. That's helpful. And then it sounds like you've got a lot of underlying momentum. I know you don't like to talk about the order book, but any preliminary comments you can make on '22 at this point. You know, Street has you up about 6.5%. Curious if you think that's a reasonable bar and any comments on where you think margins may go next year?

Mike McMullen -- President and Chief Executive Officer

Yeah, thanks, Tycho. So, as you might imagine, I'll probably sidestep that question a little bit in terms of specifics. But what I can tell you is that we feel really good about the momentum of the business, the order book is continue to be strong and that's as of today, where we got the latest view of early orders through August. So, order momentum remains there. As I mentioned in our prior earnings call, we feel really good ability to meet and exceed those long-term growth goals we put out the margin goals. I think that's where we stand right now is. We will get to that in November, but we're feeling good about the trajectory of the business momentum we built here.

Tycho Peterson -- JP Morgan -- Analyst

Okay, thanks. I’ll let others hop in.

Mike McMullen -- President and Chief Executive Officer

Yeah.

Operator

Your next question is from Brandon Couillard with Jefferies.

Brandon Couillard -- Jefferies -- Analyst

Hey, thanks. Good afternoon.

Mike McMullen -- President and Chief Executive Officer

Good afternoon, Brandon.

Brandon Couillard -- Jefferies -- Analyst

Maybe to start with the Biopharma business. I mean, 50% growth in Large Molecules is pretty impressive. Can you just elaborate, given the sources of growth there, and what that would look like if you back out the NASD contribution?

Mike McMullen -- President and Chief Executive Officer

Yes. Sure. And then I'm actually going to invite Bob and I will also want to have Jacob make a few comments on some of those new introductions here. So I think I used the word broad-based, at least five or six times, maybe 10 times in my prepared remarks and we're seeing that in the biopharma. So we had across the board double-digit growth happening here, Cell Analysis, LC, LCMS, other platforms are going to biopharma along with our consumables and services. And then to your point, really outstanding growth in NASD. But while NASD was a big contributor, it was an Agilentwide life story. And Bob, maybe you can just answer the specifics on the numbers?

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah. And Brandon, to your point, the total in Large Molecules was 52% as I mentioned before. But even if you back out the NASD businesses still grew in excess of 40%. So very strong business on NASD, but it shows that the rest of the business, both instrumentations, as well as the consumables pieces and the other elements on the Pharma associated revenue in Diagnostics and Genomics also, very strong business in it.

Mike McMullen -- President and Chief Executive Officer

New introductions into this space as well, which has been the focus and prioritization of our R&D pipeline. Jacob, I know we had two big introductions in Q3 as well.

Jacob Thaysen -- Senior Vice President, President Life Sciences and Applied Markets Group

Yeah, thanks for that, Mike. And as I said at the Analyst Day, I think we talked about in [Indescipherable] that 70% of our portfolio above that was really focused on Biopharma, so I'm really happy to see that momentum we have right now. And as you also mentioned in the prepared remarks, you know, I'm very pleased what we did with the Bio-LC portfolio. In fact, we had and -- one of the [Indescipherable] of our momentum is that with that Bio-LC that we introduced here a few months ago. And we had a virtual conference with more than 1,000 customers participating, and we had more than 25 external scientific speakers, which I would actually say I know it's the best in in the industry by far. So that introduction is actually creating quite a lot of momentum and it allows us to play for all the BioMed, biocompatible space for the 2D-LC, but clearly, also into the Mass Spec, with the Mass Spec at the end of it. And we also mentioned compliance. The FDA part 11 informatics compliances is another very important part that most of the Biopharma sees as a requirement to do business with them. And we have invested in this for quite a while, so we ensure that data integrity, the audit readiness, and storage of data is the level of security. And right now, we have the offering both supporting our LC, but also all our major marketable Mass Spec instruments. And also, in spectroscopy, with the recent announcement here off the top in the Q2 informatics solutions. So right now, we are -- we have a very strong portfolio and that truly drives our growth. Well, I can continue talking about the Cell Analysis, but I will...

Mike McMullen -- President and Chief Executive Officer

I'm going to bounce it back to Brandon. Hey Brandon, thanks for allowing us to do an advertisement on the Agilent portfolio strength. But, back to you, to see if you have any additional questions?

Brandon Couillard -- Jefferies -- Analyst

Yeah, I think just touched on maybe if we could just elaborate on the Small Molecule market. You mentioned kind of QA-QC refresh, curious what we might be in there and what you think the market is kind of growing for Small Molecule relative to your mid teens.

Mike McMullen -- President and Chief Executive Officer

It's our view that there is always a replacement market going on in the Small Molecule space, and sometimes, it picks up a bit more. But then -- and I think we're in that phase right now. I wouldn't say it's a huge acceleration, it's just the solid and probably high single.

Jacob Thaysen -- Senior Vice President, President Life Sciences and Applied Markets Group

Yeah, I was going to say, Brandon as we think about this prior to the pandemic, we were probably slower growth than normal were some of the QA-QC refresh was probably elongated. And now we're starting to see that pick back up, and that typically is an 18 to 24 months kind of cycle. And I would say we're still at the beginning of that. And so, feel good about the continued performance of the refresh cycle going forward.

Brandon Couillard -- Jefferies -- Analyst

Great, thank you.

Operator

Your next question is from Vijay Kumar with Evercore ISI.

Vijay Kumar -- Evercore ISI -- Analyst

Hey guys, congrats on the strong print this afternoon.

Mike McMullen -- President and Chief Executive Officer

Thanks, Vijay.

Vijay Kumar -- Evercore ISI -- Analyst

Maybe. Mike, maybe on my first question here, Resolution Bio, the deal that you guys did, did that come in line with expectations? I'm just curious. The 50-basis points contribution seems a little light. Is there some ramp-up phase here that's involved and not? Maybe just talk about what the deal does to you and how it adds to the corporate growth rates here?

Mike McMullen -- President and Chief Executive Officer

Yeah. So, you do some very good math. So, it's about half-a-point of reported growth rate, Bob. And I'd say relative to Q3, probably a little bit behind though revenue as we learn more about this business or some elements of this global lumpiness, so we're feeling pretty good about how our business will finish, but we're expecting a lot in the fourth quarter. I think this is a story of continued acceleration of growth in '22 and beyond. Aand we're just super delighted by the early days of how the teams feel about being part of Agilent.

And then we're really building scale around this business. So, I think it's still a relatively small part of the overall revenue picture today for Agilent and we knew that going in, I think is roughly 50-ish kind of million, but we would expect really strong growth rates in the coming years and again, we really feel like we're off to a great start with this team. Just interacting with Mark Li, who is the founder -- co-founder of Resolution Bio. He is really happy about the capabilities that we're bringing to his business to further scale it. So early days, but feeling good -- pretty good about things and Bob, I don’t know if you’re...

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah, I was just going to say the other thing is, obviously, we're just now having more and more conversations with our existing CDx customers and the power of being able to have our established CDx business on the [Phonetic] HD side coupled with NGS-based technology, I think is going to be a real significant competitive advantage for us going forward. So very excited about this business going forward.

Vijay Kumar -- Evercore ISI -- Analyst

That's helpful, Mike. And Bob, one for you on expenses. In the year-to-date operating expense as a percentage of revenues, you guys were in the low 30s, sub 31%, that's well below your historical level. I guess my question is, is this all just associated with the volume leverage rate given the strong organic performance year-to-date, or are there some timing elements on expenses, that’s aiding you, and how should we -- if there are how should we think about those factors coming back in '22?

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah, Vijay, it's a great question. And I think if you remember, maybe a year ago we talked about some of these expenses that were going down, and our goal was not to have them come back to the same levels that they had. And these would be in areas around travel, but also leveraging our digital capabilities, and what we've been able to do is be very successful. Certainly, volume is our friend. And the leverage that we've been able to drive across all three of our business groups has really helped. But if you look at our year-over-year elements around travel and costs associated with marketing programs and digital investments, our digitals investments have gone up, but the actual return on those investments has actually gone up. And in fact, Jacob just highlighted one of the programs that we had. And so those are our goals are for those to continue. They will continue to ramp next year to come back, but not near the level that they had come prior to the pandemic.

So, we do think that there's a fundamental margin improvement associated with these expenses. And that's why Mike talked about kind of our long-term margin expansion story is intact. It's not going to be 200 plus basis points like it was this last quarter, but certainly feel good about our continued ability to drive margin expansion.

Mike McMullen -- President and Chief Executive Officer

Hey, Vijay, this is Mike. If I can just add one additional comment too, and I hopefully came out in my prepared remarks, but we're not holding back on investing for growth. So, we're quite pleased with the margin performance, but it didn't come at the expense of our ability to grow down the road.

Vijay Kumar -- Evercore ISI -- Analyst

That's extremely helpful, Mike. Congrats again. Thank you.

Mike McMullen -- President and Chief Executive Officer

Thank you.

Operator

Your next question is from Doug Schenkel with Cowen. Your line is open.

Doug Schenkel -- Cowen -- Analyst

Hey, guys. Good afternoon. Could I -- actually could I just build off of that last question with a quick follow-up. Again, acknowledging and recognizing you're not going to guide on 2022 today. I'm just wondering though at high levels, should we assume that incremental margin is going to be a little bit lower than normal next year, if we're assuming a normalization of activity in the post-pandemic world? I heard what you said about areas where you're not going to need to invest as much, but at the same time, you are investing in growth. Just mathematically, does the incremental need to be a little bit lower than normal next year?

Mike McMullen -- President and Chief Executive Officer

Yeah. We're still building our plan. But our intent is to still be able to drive that margin expansion. I will say that we are having our new Train B in NASD come online, which will add a little pressure to it. But, I think, we've been very good about being able to do 30% to 40% incrementals and sometimes even higher than that when the margin comes in. And I don't see any reason why we shouldn't be able to continue to do that, Doug.

Doug Schenkel -- Cowen -- Analyst

Okay. Super helpful.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Maybe what's -- yeah, maybe what's underlying your question is inflationary pressures and activities around that, I would say that we didn't see any material impact. Obviously, there is some but we're planning to manage that going forward.

Doug Schenkel -- Cowen -- Analyst

Yeah, that's in audits. It's supply constraints, it's inflation or refreshers. It's the hope that we're traveling a little bit more and there are real conferences and real site visits, things like that. So that's the spirit of the question. Just making sure that the capture of those dynamics, we don't have to think about something other than that 30 to 40 traditional range. So that's helpful, Bob.

Mike McMullen -- President and Chief Executive Officer

I would just add sort of. [Indecipherable] we're under 22 now. Sorry to interrupt there, but I'd just say that some of our programs, and such are really geared towards making sure we can manage our way through this in '22, so we're on this already.

Doug Schenkel -- Cowen -- Analyst

Got it, okay. In terms of full-year guidance, as it's been noted a few times, you increased the outlook by more than the magnitude of the Q3 beat. I guess I'm just wondering what gives you confidence in this change. Is it backlog data? Is it pacing across the quarter? Is it activity through the first month of the quarter? Maybe it's all of the above and maybe more importantly...

Mike McMullen -- President and Chief Executive Officer

[Indecipherable]

Doug Schenkel -- Cowen -- Analyst

You just checked everyone? Okay. Perfect.

Mike McMullen -- President and Chief Executive Officer

Yeah [Indecipherable]. Bob and I are smiling in the room here, and, I think, we can probably put a checkmark on all, first of those three things you mentioned.

Doug Schenkel -- Cowen -- Analyst

Okay. And then throughout the year, you've consistently beaten your own targets pretty maturely, and it definitely makes sense to skew the error bars a bit more conservatively when you set your targets, given the state of the world. That said, given how well you performed relative to those targets, and recognizing we're not out of the pandemic, but we've got a little more experience with it at this point. Is it fair to say that you're at the point where you could adjust the philosophy a little bit and maybe kind of change the positioning of those error bars as you set guidance moving ahead?

Mike McMullen -- President and Chief Executive Officer

Yeah, I think that that's fair. I think, what we've tried to do is set prudent guidance as we've talked about in the past. But certainly, as we've and our customers, more importantly, the market is getting used to dealing in a COVID world, there are fewer variables to be able to understand. And I would look at just what we did in Q2 to Q3, we dramatically increased our Q3 guidance and then did the same thing here for Q4. So, I think our visibility is improving. You should take that away for all the things that you rattled off. Certainly, the momentum that we're seeing, the general economic improvements, and so forth. But as you mentioned, there's still a Delta variant out there, and so well, as Mike mentioned, we haven't seen any impact of that yet. We also recognize that that could change during the course of the quarter. So, we're trying to take all those kind of factors into account, but also try to provide some realistic guidance going forward.

Doug Schenkel -- Cowen -- Analyst

Okay, all right, thanks again, guys.

Mike McMullen -- President and Chief Executive Officer

Yeah. You're welcome, Doug.

Operator

Your next question is from Derik De Bruin with Bank of America.

Derik de Bruin -- Bank of America -- Analyst

Hello and good afternoon.

Mike McMullen -- President and Chief Executive Officer

Hey, Derik.

Derik de Bruin -- Bank of America -- Analyst

Hey. Can we talk a little about environmental and sort of that? And I I want to dovetail that question to -- I know it's probably a little bit early, but any signs of how we should think about the GC portfolio picking up or you just replaced -- is it just sort of like catch-up spending right now in the industrial or any initial indications that the replacement cycle that you were going -- you were in the midst of prior to the pandemic is likely to restart.

Mike McMullen -- President and Chief Executive Officer

Hey, Derik. I would like take the first one and Bob -- I mean, Bob and Jacob, you may want to add additional comments here. But let me talk about the question around gas chromatography, so we are seeing that, and that's really behind a lot of the fairly bullish comments, if you will, around C&E space. So, we're seeing it in our GC revenue, and we're also seeing it in our GC order book. And I've been very reluctant to call that hey, we think this business is now in a situation of returning to growth, that reluctance has now passed. I think we're now into what looks to be the start of some really good potential business on our GC side, as that replacement cycle turns back on. And Jacob, I know you're a lot closer to the detail. Anything else you could add to that?

Jacob Thaysen -- Senior Vice President, President Life Sciences and Applied Markets Group

Yeah, Mike, you're absolutely right. I think first of all of the -- I think what Bob mentioned that also, the chemicals and engineered materials market is certainly on fire right now, where we see a lot in Semicon and in the mining industry, including lithium for batteries, but we also see the traditional Petrochem markets really start to see some momentum now. And there's a lot of talk about the future of Petrochem, but this market is going to stay for quite a long. And I think that all the analysis shows that there'll be newer cycles here, so we see investments coming into this market right now. And the new market that's also coming along is Renewable Energy, which will also use many of our technologies. And we see a great opportunity there also in the future. They're still in a development phase, but as you know, there's a lot of investments coming in here, so we are participating in that also. So, we see a lot of opportunities in GC and the GC is actually seeing momentum both first in the chemical markets, but now into the energy markets.

Derik de Bruin -- Bank of America -- Analyst

Okay, so following up on that. So, you're feeling good about your more industrial expo experiments, even with some of the choppiness in the Chinese market, some of the data there. So, are you seeing -- is it the U.S. and Europe can start bringing more or is it just that you're seeing turn on in that one? And then where were we -- what remind me in annoying baseball analogies where we were in innings on the GC replacement cycle?

Mike McMullen -- President and Chief Executive Officer

Yeah. So Bob, I think it's fair to say that there really is no difference across the regions. I mean, China actually was area of strength for us in C&E, and I think we're seeing good strength globally, which I think points to the importance of global economic outlook for this segment. And I'd say we're probably early or middle innings on the -- going to pause there for a while because we got rate run going with the new portfolio, but a pause. I'd say we're like early innings, middle innings.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah. I would say Derik just to give you a frame, China was more than twice the China C&E market was -- was in line with the overall, C&E growth rate that we saw.

Mike McMullen -- President and Chief Executive Officer

Thanks. Thanks for your question.

Operator

Your next question is from Dan Leonard with Wells Fargo. Your line is open.

Dan Leonard -- Wells Fargo -- Analyst

Yeah. Thank you and good afternoon. I was hoping you could -- Mike, I was hoping you could address the 5% to 7% core revenue growth model that you've introduced in December. Is that still relevant or do you think something has fundamentally changed in the markets from that time period.

Mike McMullen -- President and Chief Executive Officer

I'd say it's relevant till we change it. So I'm not ready to on the fly here, revise our long-term growth. But as you may recall, in our December outlook, we said, think about us being more of the high range in that area. And I think, I've together the tougher, so I put a 7 out there in any type of long-term growth guidance. I think what's changing is the nature of our portfolio, which is we continue to build very quickly, much bigger positions in faster-growing segments. And I think it's probably fair to say that the Pharma market, in particular, the Biopharma market is -- remains very robust, but again, we're sticking with those long-term growth goals at this point in time.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah, I would say, Dan, to build on what Mike is saying, particularly the pharma market. We do feel that that market, and in fact, Mike talked about it in his prepared remarks that we're emerging as a stronger company. We do think that the pharma market, really driven by that Large Molecule area, is a faster-growing market coming out of the pandemic than going into it. And I think if we look at where our investments are and the performance that we've had in particularly the Large Molecule, now again, Small Molecule has been doing very well. That, in and of itself, would elevate that overall long-term growth rate to be faster than what we saw going in, which certainly helps us, given that is -- that's our largest market. So, I'll leave it at that

Dan Leonard -- Wells Fargo -- Analyst

Okay. That's a helpful clarification. And just a follow-up on China, could you elaborate further on the drivers of that 50% growth rate you called out for DGG in China?

Mike McMullen -- President and Chief Executive Officer

Yeah, I'm going to invite Sam on this call. He hasn't had a chance to work today in this call. So, Sam, your thoughts of what's been going on in China, I was doing a little bragging on your growth rate there.

Sam Raha -- Senior Vice President, President, Diagnostics and Genomics Group

Yeah. Mike, happy to give more perspective on China. We actually had a good quarter across the board for all of our business groups within DGG. Specifically, we continue to see real momentum in clinical diagnostic testing, led in pathology. We've seen really good pick up of our PD-L1, and our diagnostic -- or companion diagnostic there, as we've continued to train more pathologists there in the use and so forth. Genomics also had a really, really, good quarter, both on the consumable side. And we've also just recently announced within the quarter, the launch of our new V8 Xome, which is being well received in China and globally. And I will tell you one of our absolute strengths in China as it is elsewhere, remain our core NGS and Genomics QC portfolio. So, all of those elements, along with Mike, as you mentioned now, the signing of our first companion diagnostic development agreement with the Biopharma there, I think foretell a continued story of strength in China for DGG.

Mike McMullen -- President and Chief Executive Officer

And just to build on Sam's comments, I mean, we've been working really hard the last several years putting in the right foundational capabilities, building the right commercial channel, the right ability to handle diagnostics products ourselves, and it's really great to actually see those investment starting to pay off in near term growth.

Dan Leonard -- Wells Fargo -- Analyst

Appreciate all that color. Thanks, everyone.

Operator

Your next question is from Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly -- Citi -- Analyst

Hey, thanks for taking the question, guys.

Mike McMullen -- President and Chief Executive Officer

Sure.

Patrick Donnelly -- Citi -- Analyst

Mike, maybe one on the Chemical & Energy side to follow up on some of the earlier questions. I know that's one where you pretty closely keep an eye on the order book and your confidence goes with that. Are you getting more visibility as the order book builds there? I'm just trying to compare it to pre-pandemic mid-pandemic, I know you guys had a pretty short leash on in terms of how you would guide for that segment, how comfortable you would allow yourselves to get. Just wondering how the order book is looking there relative to some of the past quarters and how you're feeling about that segment. Certainly, seems like the tone is pretty positive here.

Mike McMullen -- President and Chief Executive Officer

Yeah. Now I'm glad you picked up on that. We really want that to come through in the call. And I think the confidence is coming from not only the revenues that we've reported, but as Bob mentioned in general, and I think it also holds for C&E, we just have much better visibility into our funnel. And you may have recalled I was talking a lot of -- in prior calls, I talked a lot about a conversation we're having with customers and we knew there was activity, but now that conversation is turning into orders. So, we're feeling much better about the trajectory of the C&E space. Historically I've been very cautious to give any real kind of positive trends in this area. But I think we've seen enough over the last few quarters and what we're seeing with our customers and the order book is really the basis for this confidence.

And again, it's tied to not only the pent-up demand they've had in terms of even replacing aged equipment in their laboratories, but they are also -- what we hear from our customers, they are much more confident about where the global economy is going. So, they're willing to make investments. Another couple of positives here and there and there will be some ups and downs because of outbreaks here and there of COVID, but in general, the trend remains very positive, I think as Bob mentioned earlier, our customers have learned to deal with this. So, Bob, I know this is -- we've talked a lot about this, anything I missed there?

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

No.

Mike McMullen -- President and Chief Executive Officer

Okay.

Patrick Donnelly -- Citi -- Analyst

That's helpful. I appreciate it, Mike. And then on the diagnostic side and just given commentary that you guys are above pre-pandemic levels, can you just talk about the pace of the recovery in the quarter and then expectations for the further ramp from here. And I just want to clarify and make sure you haven't seen any impact in Delta up until I guess this week. I just want to make sure I have that clear. Thank you.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah. I mean, we saw continued recovery. I think we mentioned at the beginning -- at the end of Q2 that we were at pre-pandemic, we exited there. The average was still below. And that steady improvement across our business, across really across all of the regions continued into Q3. And by the end of Q3, we were above. And Patrick, to your specific question about Delta, we have not seen any impact to date associated with that.

Patrick Donnelly -- Citi -- Analyst

Great. Thanks, Bob.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah.

Operator

Your next question is from Matt Sykes with Goldman Sachs. Your line is open.

Matt Sykes -- Goldman Sachs -- Analyst

Hello. Hey guys, thanks for taking my questions, congrats on the quarter.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Sure.

Mike McMullen -- President and Chief Executive Officer

Thank you.

Matt Sykes -- Goldman Sachs -- Analyst

Just on ACG, you guys had a pretty impressive operating margin, over 29% for the quarter. I'm just wondering what you feel about the sustainability of those margins and then any progress that you've made on attachment rates in that business? I know you mentioned a little bit in your prepared remarks, but any additional color on that would be helpful.

Mike McMullen -- President and Chief Executive Officer

I think I'll pass it on to Padraig, who can provide some additional color to the ACG and answer your questions. Go ahead, Padraig.

Padraig McDonnell -- Senior Vice President, President, Agilent CrossLab Group

Yeah. Great. Thanks, Mike. And we're getting back to more normalized service support with our customers, which is more cost associated, of course, with travel, but we're starting to see an accretive margin in Q3 and we're seeing that come through to improve in Q4. So very, very strong in that. In terms of attach rate, we're seeing increased attach on our services and consumables and of course, with the larger install base, this bodes really well for the future, as more attach rates for services and consumers will be available. So very strong outlook.

Mike McMullen -- President and Chief Executive Officer

Yeah. Hey Matt, maybe just to build on what Padraig is saying in terms of sustainability, we feel very good about the ability to continue to sustain those levels of margin. It gets back to the work that our service engineers do in servicing our customers. It's mission-critical for our customers, keeping those labs and those instruments up. And our ability to continue to invest in digital, as well as, be there on-site on the labs or with the labs is really important. One piece that I would add is we continue to invest in that digital as I mentioned before, and our online orders actually grew faster -- our revenue grew faster than the overall ACG business, which actually speaks to our continued relevance in that space. And obviously, that's good for our customers in terms of either doing business with Agilent, but it also helps from that margin perspective as well.

Matt Sykes -- Goldman Sachs -- Analyst

Great. Thanks for that color, it's very helpful. And then just one more on C&E. I know you've answered a lot of questions already, but I'm just wondering how the competitive landscape might have changed. Obviously, it had a challenging time during COVID. It took a while for it to recover, and now, it's certainly in recovery mode. I'm just wondering, as you look out of the competitive landscape, have you seen some competitor's slow investment; and therefore, there are some share gain opportunities in that growth that you're seeing?

Mike McMullen -- President and Chief Executive Officer

I don't know where they slowed. I'm not sure they're investing for that segment. So, and we're not seeing much happen on the competitive side. We're by far this is -- we're the clear leader in this space, we've continued to invest in our core portfolio pre and throughout the pandemic. So as you can tell, I'm pretty bullish about our ability to outgrow the competition in this space.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah, let me add. It seems like a long time ago, but we have launched two new GCs back in 2019, both at the high end and a mid-range GC. And we talked about one of the reasons that we did that is we've got a leadership position in the GC market. But when you look at it, we're over-indexed to the high-end, and so the ability for us to be able to have this mid -- mid-range, what I think was really critical, and we're starting to see that benefit. And maybe Jacob wants to jump in that conversation. Yeah.

Jacob Thaysen -- Senior Vice President, President Life Sciences and Applied Markets Group

Yeah. Exactly. You're actually right, Bob, on the GC and our strength in our GC, but I think we should also mention our spectroscopy business and the ICP-MS, where we have done a lot of work also ICP, OES, and MS, where we’ve done a lot of work that is -- that has a very strong market share for the material science. And we continue to take market share in that space also. So, I think you'll see us being very strong here. And we have also a site that we will continue to invest into this market going forward. So that's a lot more there for the costumers going forward.

Matt Sykes -- Goldman Sachs -- Analyst

Great, thanks very much.

Operator

Your next question is from Josh Waldman with Cleveland Research. Your line is open.

Josh Waldman -- Cleveland Research Company -- Analyst

Hi, thanks for taking my questions, just two for you. Mike, you mentioned overall orders outpaced sales in the quarter, and it sounds like book-to-bill in the LSAG business was likely positive. Just wondered if you could provide us with your assumptions for core growth in the LSAG business in the fourth quarter.

And then as we look beyond FY21, given the broad-based strength you've spoken about on the call today, I guess, is it fair to assume that as we look to FY '22, this business should likely grow something above kind of low to mid-single-digit longer-term average?

Mike McMullen -- President and Chief Executive Officer

Yeah. Let me talk about the fourth quarter and I'm not sure we're going to answer the last one just yet as we're going through our plan, but...

Josh Waldman -- Cleveland Research Company -- Analyst

Had to try.

Mike McMullen -- President and Chief Executive Officer

Yeah, that was a good try. But I would say for Q4, you're accurate in the belief that our book-to-bill was positive for the quarter, and if you think about Q4, our guidance comprehends high single-digit, low double-digit growth for the LSAG business core growth. And so, I'll leave it at that.

Josh Waldman -- Cleveland Research Company -- Analyst

Got it. And then it seems like year-to-date, Pharma has outperformed what you expected coming into the year. I just wondered if you could comment on any current thoughts you have around the potential magnitude of any year-end budget flush, I guess, given -- it seems like investments from these customers has -- have been fairly consistent and strong throughout the year. Does that deflate any year-end spending?

Mike McMullen -- President and Chief Executive Officer

Yeah. We'll address that in the Q1 call. But to your point, we've been pleasantly surprised, and it has continued to be more stronger than what we've anticipated throughout the first three quarters. And what I would say is we don't expect that to slow down any in Q4 either.

Josh Waldman -- Cleveland Research Company -- Analyst

Got it. Thank you.

Operator

And your last question is from Jack Meehan with Nephron Research. Your line is open.

Jack Meehan -- Nephron Research. -- Analyst

Thanks, good afternoon. You talked about the job that your team is doing, managing the supply chain. Was wondering if you can elaborate on a hotspot you're seeing in terms of inputs, shipping, or labor. And when you look at the fourth-quarter guidance, is that -- are you taking any more prudent or conservative type approach based on what's going on in the supply chains?

Mike McMullen -- President and Chief Executive Officer

Yes, I mean, this has been a lot of discussion on that. I think everybody is talking about the supply chain constraints on a global basis. It's been a challenge for us, but as Bob noted in this call script, our team has just done a tremendous job getting the Agilent products to our customers. And we're really good at this about managing situations. So, we will work on a number of commodity areas for some time. And we also have done things as identifying a chain in alternatives source supply, so we've been able to do that.

We've had a last-minute changes to notification from logistics suppliers that they won't pick up our boxes, and so we switched to another supplier.

So, we've been able to manage our way through that. And it was conspicuous, it was absent in our call script a lot of details because while we continue to monitor it, we don't believe there’s a material risk to the company at this time, and we still likely factored all that into our guide for the fourth quarter. And Bob, I know that you've done a close study of this as well, anything else you'd add to that?

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah. The only thing I would say is it's the usual suspects that other folks have called out, things like resins and chips and our team has done to date an outstanding job of being able to continue to satisfy demand here.

And our expectation is that that's going to continue to happen into Q4. And we've got a continuous improvement program that continues to drive productivity and efficiency gains and we're expecting that to combat some of these inflationary pressures as well as continuing to deliver to our customers and we will continue to do that into '22 as well.

Jack Meehan -- Nephron Research. -- Analyst

Great. And then one other follow-up is on COVID.

Mike McMullen -- President and Chief Executive Officer

Sure.

Jack Meehan -- Nephron Research. -- Analyst

So, the fourth-quarter guidance assumes it's a 1-point headwind, though we're obviously in the middle of another Delta wave here. So, I was curious what you're seeing on the ground or whether your products are just starting to wane in general and any preliminary thoughts around how, you have 100 million this year, just how you're going to guide as you go into 2022 related to that?

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah. What I would say, Jack, it's a good question. And our products are directly tied to the testing. We didn't see the dramatic increase, but also didn't see the dramatic decline with the testing there. Ours is more around expanding capacity both in, in testing and over this course of this last year, we've actually seen it migrate to more therapeutic capacity or excuse me, vaccine capacity in demand there. And so, we don't see it spiking up or not building that into Q4. I think it's a little too early to tell for FY22. It's been reasonably steady the last couple of quarters and we do expect contribution in '22 and we'll provide more color as we get through our planning process, but we don't see it dramatically dropping off.

Jack Meehan -- Nephron Research. -- Analyst

Sounds good. Thanks, Bob.

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Yeah.

Operator

I do apologize. But we do have an additional question, the last question is from Dan Arias with Stifel. Your line is open.

Dan Arias -- Stifel -- Analyst

Yeah. Hi, guys. Thanks for getting me in here at the end. Hi, Mike?

Mike McMullen -- President and Chief Executive Officer

No problem.

Dan Arias -- Stifel -- Analyst

Just one for me. Just Bob, maybe a high-level question. Just sort of to the idea of getting to a post-COVID world whenever that might be. I'm wondering which of the three segments you think might stand the best chance of maybe rebasing at a higher level of the up-margin line, just by virtue of some of the success that you're having, and then to your point, some of the fundamental changes that might come to the expense structure. Is that something you think is possible? And if so, would you be willing to help us with which one is looking most promising there?

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

I do think it's possible. I'm not going to call out because I'm not going to let -- if I call out one, I'm not going to let the other two Division Presidents off the hook. They must have paid you. I think we could continue to do it across the board. Certainly, we are making investments across all three of the businesses to continue to grow. But we certainly feel like we have opportunities to continue to drive margin enhancement across all three of our business groups. Sorry guys.

Dan Arias -- Stifel -- Analyst

Okay. Thanks so much.

Mike McMullen -- President and Chief Executive Officer

Thanks, Dan.

Operator

And that concludes the question-and-answer session for this conference call, I will now turn the conference back to Parmeet Ahuja for closing remarks.

Parmeet Ahuja -- Vice President, Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Parmeet Ahuja -- Vice President, Investor Relations

Mike McMullen -- President and Chief Executive Officer

Robert W. McMahon -- Senior Vice President, Chief Financial Officer

Jacob Thaysen -- Senior Vice President, President Life Sciences and Applied Markets Group

Sam Raha -- Senior Vice President, President, Diagnostics and Genomics Group

Padraig McDonnell -- Senior Vice President, President, Agilent CrossLab Group.

Tycho Peterson -- JP Morgan -- Analyst

Brandon Couillard -- Jefferies -- Analyst

Vijay Kumar -- Evercore ISI -- Analyst

Doug Schenkel -- Cowen -- Analyst

Derik de Bruin -- Bank of America -- Analyst

Dan Leonard -- Wells Fargo -- Analyst

Patrick Donnelly -- Citi -- Analyst

Matt Sykes -- Goldman Sachs -- Analyst

Josh Waldman -- Cleveland Research Company -- Analyst

Jack Meehan -- Nephron Research. -- Analyst

Dan Arias -- Stifel -- Analyst

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