Agilent - Earnings Call - Q1 2020

Transcript

Speaker 0

Good afternoon, and welcome to the Agilent Technologies First Quarter twenty twenty Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. And now, I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations.

Sir, please go ahead. Thanks.

Speaker 1

Thank you, Julian. Welcome everyone to Agilent's conference call for the 2020. With me are Mike McMullen, Agilent's President and CEO and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q and A after Bob's comments will be Jacob Tyson, President of Agilent's Life Science and Applied Markets Group and Sam Roha, President of Agilent's Diagnostics and Genomics Group. Due to certain personal engagements, Mark Doak, President of the Agilent CrossLab Group, is unable to join us today.

You can find the press release, investor presentation, and information to supplement today's discussion on our website at 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. Revenue growth will be referred to on either reported or core basis.

Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past twelve months. Guidance is based on exchange rates as of January 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 would like to turn the call over to Mike.

Speaker 2

Thanks Ankur, and thanks everyone for joining our call today. I'd like to start today's call with a reminder that Mark Doak, ACG Group President will retire on May 1. While Mark and his wife are currently enjoying a long planned vacation and he's not able to join us today, I would be remiss in in not taking the opportunity to recognize the outstanding accomplishments Mark has made in his stellar thirty eight year career. His track record of results speak for itself. Thank you, Mark.

We have a very strong bench at Agilent and have already named Mark's successor, Porek McDonnell. Porek knows the business well. He's been on Mark's staff for several years and is currently running our chemistries and supplies division. Porek and Mark are already working on transition activities as Porrick prepares to take the helm of the ACG business at the start of fiscal Q3. Mark congratulates both Mark and Porrick.

And now on to the quarterly results. The Agilent team delivered a strong start to 2020. Q1 revenues are above our expectations as business grew in all regions and markets. Total revenues of $1,360,000,000 are up 5.7% year over year on a reported basis and 2.4% on a core basis. We continue to translate our top line growth into strong bottom line earnings.

Our EPS of $0.81 is up 7%, is at the high end of our guidance. Before going into business unit market details of our quarterly results, I want to speak about two specific areas to highlight how our Building the Buying strategy investing in fast growing markets continues to deliver growth and helps us create a more resilient business. First, I want to talk about our most recent acquisition, Biotech. This was the first quarter with the Biotech team on board and the business is off to a very strong start with revenue growth above our expectations. We continue to be very enthusiastic about the cell analysis space and Biotech continues the strong momentum that really got us interested in bringing them into Agilent.

The biotech leadership team was just in Santa Clara for a few days of planned meetings. And they are very energized and excited about the future possibilities of making a great business even stronger as part of Agilent. Second, the resiliency of our business model is on full display this quarter. As Agilent delivered strong growth and earnings in the face of a negative Q1 impact from the coronavirus outbreak in China. As this has dominated headlines, let me add a few additional comments regarding the coronavirus and its impact on Agilent.

Most importantly, our thoughts go out to all those affected by the coronavirus. On the Agilent front, our team fortunately has not had any direct health impact and many returned to work last week. We are remote, remotely supporting our customers as a number of them gradually resume operations. We've also restarted our in country production activities and are shipping product to customers within China and internationally, albeit at a reduced rate. On the business side, given that our first quarter ended January 31, we are seeing business impact across both fiscal quarters, Q1 and Q2.

In Q1, our revenues were running ahead of expectations right up to Lunar New Year holiday. However, the extensive Lunar New Year holiday affect our customers' ability to transact and accept shipments during the last days of the quarter. This reduced our reported revenue by approximately $10,000,000 in total for the quarter, primarily in our LSAG instrument business. We have since recognized the bulk of this revenue now in Q2. Looking ahead, we are projecting that coronavirus will continue to impact our China business throughout Q2.

Bob will share additional details, but we are anticipating delays in new equipment purchases and slower uptake of consumables and services. The slower uptake is due to the reduced number of selling days resulting from the extension of Lunar New Year along with customer and logistics operations that are ramping but not yet fully operational. It's important to note, while we're forecasting the impact to our Q2 business, our full year outlook for total Agilent revenues and EPS remains unchanged. Our business outside of China remains on a solid footing. And we believe a large portion of our China business that's currently being impacted by the coronavirus is not lost, but rather is delayed.

As you know, the coronavirus outbreak is unfortunately impacting the health and safety of tens of thousands of people. I'm very proud of how the Agilent team has responded to do our part to help. Our Agilent China team is actively supporting those customers doing crucial research into the virus. We have donated instruments and supplies to four clinical and research institutions based in China to support research and drug development efforts. We continue to closely monitor events in China and are prepared to act quickly to help wherever possible.

Now, on to additional details of our quarterly results. Agilent's growth is broad based as our business grew across all regions and end markets. Regional performance was led by The Americas posting 5% core growth with America coming in with low single digit results and Asia holding steady. Despite the timing of the Lunar New Year and the coronavirus impact late in the quarter, our China business grew low single digits. While all end markets grew, our results were led by strong growth in the biopharma and environmental forensics markets.

Now taking a closer look at how the individual business units performed. LSAG revenues grew 5% on a reported basis, driven by strong performance in our biopharma and cell analysis business. On a core basis, LSAG's revenues were down 2% against a tough compare and inclusive of the unexpected Q1 impact from the coronavirus. With the exception of China, all regions and end markets performed in line with expectations. The ACG business continues to deliver strong results, posting 7% core growth even with reduced selling days in China.

This growth was broad based across all major market segments and regions. These results continue to demonstrate the strength of our ACG cross lab strategy and how we are leading the transformation of the analytical lab. DGG is also posting 7% growth in the quarter against a difficult 12% growth compare. We are experiencing a continuation of positive trends, winning share in our core pathology business and seeing strength in our NGS QAQC franchise. We continue to be pleased with the revenue ramp at our new oligo manufacturing facility in Frederick, Colorado.

In addition to driving strong financial results, I want to highlight some other notable events that took place during the quarter. We continue to bring differentiated new products to the market, gaining strong customer and external recognition. We just introduced the Agilent SOURCELLect XT HS2 DNA kit. This, along with our recently launched automated sample prep platform, Magnus, further strengthens our leadership position in the NGS sample prep market. In addition, two industry publications honored the Agilent Infinity Lab LC MSD IQ System with twenty nineteen Innovation Awards.

The award winning mass spectrometer introduced last June incorporates intelligence, design, and innovation such as embedded sensors that monitor instrument health. And finally, early this month, Barron's named Agilent number one in the list of the twenty nineteen most sustainable companies in America. We're very proud of this recognition. Sustainability is a critical topic that's gaining increased interest from customers, employees and investors. More importantly, we believe focusing on sustainability is simply the right thing to do.

Before passing the call on to Bob, I'd like to close with reminder of Agilent's resilience and our shareholder value creation model. Delivering above market growth, expanding operating margin and a balanced deployment of capital. We are able to thrive by focusing on platforms with multiple large end markets and long term growth opportunities. We're also driving growth in the aftermarket, increasing our focus on faster growing end markets, streamline our infrastructure and operations, and invest in the future of Agilent, both organically and inorganically. We do all this while maintaining acute focus on delivering EPS growth with superior quality of earnings and driving shareholder value creation.

Despite the temporary business uncertainty created by the coronavirus in China, I remain confident about the longer term growth prospects of the China market, our China growth strategy, and most importantly, our team. I'm very proud and confident in the strength and resiliency of our China team and their ability to overcome any near term challenges that come our way. When I look at our global team and our business, our growth prospects and team have never been stronger. We are laser focused on driving revenue and earnings growth. I'm pleased to tell you that all these factors allow us to maintain our growth and earnings outlook for the year.

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

Speaker 3

Thank you, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional detail on revenue, walk through the first quarter income statement and some other key financial metrics, and then finish up with our updated guidance for Q2 and the full year. Unless otherwise noted, my remarks will focus on non GAAP results. Our first quarter results were very good as we had strong execution across all regions and markets. Revenue for the quarter was $1,360,000,000 with reported revenue growth of 5.7%.

Currency negatively impacted revenue by 0.4 percentage points, and acquisitions added 3.7 percentage points to growth. Our core growth was 2.4% in the quarter. As Mike indicated, our performance was impacted by the extension of the Lunar New Year holiday due to the coronavirus. This reduced the number of shipping days in China, and we estimate shifted $10,000,000 in revenue out of Q1. If not for the reduced shipping days in Q1, our performance would have been stronger, with the shift affecting our core revenue growth by roughly 70 basis points.

In terms of end markets, we saw growth across all of our six end market segments: Pharma, Environmental and Forensics, and Diagnostics and Clinical led the way for us in the first quarter. During the quarter, Pharma grew 3%. Double digit growth in DDG and high single digit growth in ACG offset a mid single digit decline for LSAG. Within pharma, our biopharma, or large molecule segment, grew high single digits. And on a geographic basis, our pharma business experienced high single digit growth in The Americas and mid single digit growth in Europe.

This was partially offset by a mid single digit decline in China, largely associated with the timing of the Lunar New Year and to a lesser extent, the execution of the four plus seven program. The four plus seven program is playing out as we expected, with the third round completed in January and multiple winners per drug. We continue to believe that this is a long term positive for the industry as drug quality improves and access to health care increases. Our environmental and forensics business grew 4% against a very tough compare last year of 10%. During the quarter, we saw balanced growth between instruments and aftermarket sales.

In Diagnostics and Clinical, revenue grew 3% against a strong 11% compare last year. Mid single digit growth in DGG, driven by continued share gains in our pathology business, were partially offset by declines in LSAG and ACG, with both only having small businesses in this segment. Chemical and energy revenue grew 2%. Services and consumables grew mid single digits, offset by flat instrument sales. Academia and government grew 1%, with services and consumables growing mid single digits, partially offset by flat instrument sales.

Mid single digit growth in The Americas was partially offset by flat to low single digit declines in the other regions. And finally, food returned to modest growth, up 1%. Low teens growth in services and consumables was partially offset by declines in instrumentation. While one quarter does not make a trend, we are pleased with the continual progress in this market. On a geographic basis, we saw growth in all regions led by Americas growing mid single digits, Europe grew 2%, in line with our expectations, And as Mike mentioned, our business in China was running ahead of expectations through the first two months of fiscal twenty twenty.

As mentioned earlier, despite the shift of the $10,000,000 China still grew 1%. If not for the extension of the Lunar New Year, our core growth in China would have been solidly mid single digits. Now let's turn to the rest of the P and L. Gross margin was 55.7%, down 120 basis points versus the prior year. This is a result of the planned startup costs for our new NAST facility as well as product mix and some negative pricing effects on our instrumentation business.

We offset 90 basis points as we leveraged our cost basis and operating expenses. And as a result, our operating margin was 22.9%, down slightly from 23.1% in the first quarter of last year. Adjusting for the $10,000,000 coronavirus impact on revenue, operating margins would have increased versus the prior year, and so we feel good about our continued opportunity to expand operating margins. We were also able to lower our tax rate slightly to 15.5% and expect that rate to continue for the rest of the year. This resulted in non GAAP EPS for the quarter coming in at $0.81 at the top end of our guidance and representing 7% growth.

Before turning to second quarter guidance, I want to touch on a few other financial metrics. Our operating cash flow was an outflow of $59,000,000 in line with expectations as we incurred the one time tax outflow of $226,000,000 related to the transfer of intangibles as noted last quarter. We also paid out $56,000,000 in dividends and purchased 726,000 shares for $60,000,000 We ended the quarter in a net debt position and a net leverage ratio of 0.9x. Now let's turn to our non GAAP financial guidance for Q2. We are anticipating revenues in the range of $1,280,000,000 to $1,320,000,000 in the second quarter.

This range is larger than we've traditionally provided as we've intended to estimate an impact of the coronavirus on our business in the second quarter. As this is a fluid situation, we thought it would be helpful to detail out our assumptions, particularly as we've seen impact across both Q1 and Q2. Our guidance contemplates a $25,000,000 to $50,000,000 impact in our first half of our fiscal year, which translates to roughly to a one point five to three week impact on China revenues. Of this, we saw $10,000,000 in Q1, and we are estimating a net 15,000,000 to $40,000,000 incremental impact in Q2. The Q2 revenue range of $1,280,000,000 to $1,320,000,000 translates into reported growth of 3.4% to 6.6% with core growth of 1% to 4%.

Currency is expected to have a negative 1.1% impact, while M and A is expected to contribute 3.5% to 3.7% in the quarter. We are estimating the coronavirus to negatively impact our Q2 core growth by one to three points. Our revenue outlook translates Q2 earnings in the range of $0.72 to $0.76 per share, or 1.4% to 7% growth versus last year. Importantly, as Mike mentioned, we believe the majority of this business is not lost, rather delayed as customers and the government ramp and recover. In addition, our business outside China remains strong.

As such, we expect a larger second half of the year and are not changing our full year guidance for revenue or EPS. So before starting up the call for questions, I want to conclude by saying we have a very solid start to the year that shows the strength and breadth of our portfolio. It is that portfolio, coupled with the strength of the Agilent team, that despite the uncertainty caused by the coronavirus, we are maintaining our full year outlook. With that, Ankur, back to you for the Q and A.

Speaker 1

Thanks, Bob. For Q and A, I would like to request to limit to one question and maybe one quick follow-up. So, Julianne, if you can please provide instructions for Q and A.

Speaker 0

Certainly. Your first question comes from Tycho Peterson from JPMorgan. Your line is open.

Speaker 4

Hey, thanks. Appreciate you guys quantifying the corona impact. I guess a couple of things. I mean you'd previously talked about mid single digit China expectations for the full year. So should we assume that's still the case just more back end loaded?

And then Mike, as we think about collateral damage within China, how should we think about, you know, the C and E market, just given that the broader, you know, economic activity in China is slowing? So should we think about some impact on C and E as well?

Speaker 2

Sure, Tycho. I think I'll handle both questions. And Bob, correct me if I go off script here. But I think we still think that the mid single digit number is doable for the year in China. What we're seeing already on ground from our team we're on the phone today with our team in China.

We're still able to transact and orders are actually coming in as forecast. I think that we think a lot of the procurement is going to occur a little bit later in the year. I think a lot of it's recoverable with the exception of probably some aspects of our service business where customers really are looking for service people to arrive on their sites. I think we feel pretty good about how we're thinking about China throughout the rest of the year, albeit being a very fluid situation. And we really haven't seen any kind of transitory or connected impact on C and E.

In fact, C and E actually did better than we were thinking in the first quarter. It's too early to call a trend, but some of the PMIs are actually inching up, would maybe give an indication of perhaps a better outlook. And initial noise with some of our major accounts about thinking on procurement. But we still remain cautious in terms of the outlook for C and E. But we're encouraged by the Q1 results.

And again, we're not really seeing significant movements around in that area on a global basis. And we think back to the first comment on China, we weren't expecting a lot in C and E this year in China anyway. So I think we're in pretty solid shape relative to the outlook there as well.

Speaker 4

And then a follow-up on biopharma. You grew 3% on a 10% comp. Last quarter, it was 7% on a 14% comp. So was that a pull forward last quarter? If so, can you No, maybe just talk to that

Speaker 2

I think the big story there is China, right?

Speaker 3

Yeah, that's exactly right, Mike. There's two elements there. One is the shifting of the Lunar New Year from Q1 into Q2, well as the impact, Q2 into Q1, excuse me, as well as the extension of the Lunar New Year holiday. So those are the

Speaker 2

two primary pieces. And then within the pharma numbers, Tycho, the biopharma segment really was strong for us again this quarter as well. And then we think as the four plus seven initiative rolls out in the latter part of this year, then we'll see the growth in the small molecule side of that space. And then we have really strong growth in NASD and the ACG business is strong in pharma. We're feeling pretty good about pharma.

Okay. Thank you. Thank you, Tycho. Your

Speaker 0

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

Speaker 1

Hey, Doug.

Speaker 5

Hi. This is Ryan on for Doug. Thanks taking my questions.

Speaker 1

How are Ryan?

Speaker 5

Maybe just to round out the China dynamic quickly. Can you provide some more color on your supply chain exposure? Within China, it sounds like the operating environment is improving, but how should we think about your direct and indirect supply chain exposure? And do you see any risk to your ability to fulfill demand within and outside of China over the course of this year?

Speaker 2

Yeah, sure, Ryan. Thanks for that question. So as I touched briefly on in my call script, we actually have resumed production and are in a really solid position right now to not only ship a product to our customers in China, but also products that are manufactured in China to have them exported into the global market environment. And as we have a very diversified global footprint in terms of supply chain and manufacturing capabilities, we think for the near term we're in pretty solid shape relative to the ability to meet our commitments from a shipment perspective. And then you also may recall that starting with the initiation of The US based tariffs, we actually had initiated a movement of a lot of our supply chain out of China.

So that actually has mitigated our risk here as well.

Speaker 3

Yeah. Ryan, Just a follow-up. We have twice weekly calls with our team in China inclusive of logistics as well as our supply chain. And obviously, it's quite dynamic.

But as it currently stands today, we feel like we have the ability to be able to procure not only raw materials but also produce the finished goods and ship them not only within China but also get product into China and vice versa.

Speaker 5

Great. Then maybe just following up with a brief two parter. Number one on the food market, it sounds like things were improving a bit prior to this coronavirus dynamic. Can you talk a little bit more about what you were seeing in the market And if you think that the China portion of that market specifically could be poised to return to growth as we get past this coronavirus dynamic? And then specifically for gross margin, can you talk about what the timing headwind was for the quarter versus the other dynamics that you called out?

Thank you.

Speaker 1

You want to take this, Bob?

Speaker 3

Yes. So on food, as I mentioned, we certainly are pleased with the progress. Have had several quarters of very predictable performance there. Actually Q1, despite the coronavirus, it probably had more impact on the pharma side than in food, grew 1% on a global basis. It was down slightly in China, but certainly not to the level that it had been in the past.

So we feel good about that. It's probably too early to call that it's going to return to growth long term. We do believe it will return to growth, but not ready to call that in this fiscal year. In terms of the timing of the coronavirus, that $10,000,000 that was quite a large incremental because we had all the costs. So that was probably a higher than normal kind of incremental drop to the bottom line.

That was probably a little over a penny of impact on the full quarter.

Speaker 6

Very helpful. Thank you.

Speaker 0

Your next question comes from Jack Meehan from Barclays. Your line is open.

Speaker 6

Hi, good afternoon. I was hoping can maybe you could give

Speaker 2

you give us

Speaker 6

an update on the NASD rollout at the new site and how much that contributed to the quarter in both DGG and the pharma end market?

Speaker 2

So as I imagine, you may get a little tired of hearing this from Bob and myself. I'm going to pull Sam into this conversation. But as we highlighted in the call script, the NASD business continues to ramp as we'd expect. Really pleased with the progress and how we're starting to fill out the factory. Still not yet at full capacity, operating at full capacity yet, but it was a contributor to our growth in the first quarter, no doubt.

And Sam, anything else you'd like to add there?

Speaker 7

No, Mike. You hit the nail on the head. The business is performing as we've expected. We continue to see interest in all the customers, the pharma customers that we've given tours to. We're doing work now there for a number of customers.

Not to be boring, nothing new to report. It is progressing. A It's

Speaker 2

all good news right now.

Speaker 3

Yeah, would just add, Jack. As we had talked about, this will ramp up and be a more material impact in the second half of the year. It's progressing as we expected. It had a slight impact to the DDG and a slight impact to the overall Agilent organic core growth. But we're very pleased with the progress.

Speaker 2

And Bob, think just maybe just one more point too. When we look at the second half outlook for the business, it's not all about China recovery, other elements of the business, including NASD, which we know we're going to have a strong second half.

Speaker 8

That's right.

Speaker 6

Great. One follow-up on DGG, the core growth of 7%, not to nitpick it too much, but was there anything that was a little softer in the quarter in that segment, just knowing some of the other growth drivers relative to how the segment was growing last year?

Speaker 2

I think it was really this is Mike, Jack, and Sam, feel free to jump in on this. We had 12% growth last year, so tough compares. We solid growth across all elements of that business. And outside of, again, maybe a China impact for an element of the business, mean, things were firing on all cylinders across the business is how I recall.

Speaker 7

Yes, that's right, Mike. I mean, we continue to have good growth with market, above market with our overall NGS portfolio. So feel good about that. And the low double digits, our pathology business, as you heard in Mike's opening comments and Bob's as well. We believe we'll continue to gain share there, growing in the mid single digits.

So, and you just heard about NASD. So, you look at the major parts of DGG, we had, I think, a really well balanced good quarter. It's mainly just to compare the scoring.

Speaker 6

Great, thank you guys. No problem.

Speaker 0

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

Speaker 6

Thank you. So just a couple of things to circle back to. One, what decelerated in The Americas in the quarter? Your growth rate in that region had been trending higher than 5% for quite some time.

Speaker 3

Yeah. Hey, Dan. Welcome back. And appreciate the question. It was really a combination of a very tough compare.

I would say probably the area that was a little softer was the instrumentation business. They had the most difficult compare in the first quarter and we would expect that to improve in Q2 through Q4 as we get to easier compares.

Speaker 2

Yes. I know, Jacob, you were looking into this, so Yes.

Speaker 9

And I think the continued depressed PMI certainly impacts the C and E business, Chemical and Energy business. So we continue to see that in US being performing at least flat, we would like to see improvement. But I think it's still going to take some time before that

Speaker 3

is happening. Yeah. And I would add that, you know, it ended where we expected it to be.

Speaker 6

Sure. And then a related question, Bob, you mentioned when discussing the gross margin dynamics that there were some negative pricing effects on the instrument business. Could you elaborate on that? Are you pulling maybe the pricing lever to drive more demand in the instrument business after four quarters in a row of soft demand at LSAG?

Speaker 2

Hey, Dan. I just can't help but to jump in on this one. I think that question may be posed to our competitors we saw, particularly as we finished the calendar year, we saw some very aggressive pricing by some of our competitors, particularly in the liquid chromatography and mass spectrometry platforms. And I don't know if want add anything to that, Jacob. No, think it's fair to say that

Speaker 9

we continue to be premium priced. But there is certainly some competition in the market space right now. And yeah, so there is a price pressure.

Speaker 2

But we don't play the price game here. I mean, that's not how we want to win.

Speaker 6

Okay. Appreciate the color. Thank you.

Speaker 0

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

Speaker 10

Hi, thanks. This is Jesse on for Patrick. Just wanted to touch on the China impact. I think you guys had laid out about 1% impact to core growth from that. Just wanted to understand how that kind of compared to your expectations and if coronavirus made that a lot worse than anticipated.

Speaker 3

Yes. Maybe just to be crystal clear here, we saw roughly a 70 basis point impact in Q1. We had product that was getting ready it was staged and getting ready to ship on the last couple of days of January and with the extension of the formal holiday, there was no one there to pick that up. So we know that was clearly an impact in Q1. In terms of Q2, what we're expecting between the first half of our year, it's roughly a one and a half to three week impact as we're ramping up.

And most of that's happening in Q2. We're expecting in Q2 that the coronavirus has roughly a one to three point impact to our growth in Q2, roughly 15,000,000 to $40,000,000 In the first half, it's $25,000,000 to $50,000,000 and we'll expect to get that back in the second half of the our fiscal year.

Speaker 10

Okay. That's helpful. And then just maybe one on the biotech acquisition. Just wondering how that business performed relative to expectations and just kind of how the customer reception has so far as you've kind of brought in the portfolio offering there?

Speaker 2

Yes, Jesse, happy to hit that right up. And then relative to expectations, it's ahead of our expectations. It really has been just a tremendous addition to the company. And we were talking about this the other day inside the company. Typically, you put together a deal scenario, it's often out of the gate.

You don't see a team beating the revenue numbers all the time. And is that actually what we saw in the case of biotech in the first full quarter as part of Agilent? And Jacob, know you've been talking with customers. And how are they thinking about biotech being part of Agilent?

Speaker 9

Yeah. Again, I just want to underscore once again that we've been very pleased with the performance of biotech while I've been here in Agilent. But not only biotech, the whole cell analysis business is doing very well and we are posting double digit growth for the whole business. So we're very pleased with that and we actually believe this is going to continue for quite a long time. We see life cell analysis is going to be a key driver for understanding the immune system and immuno oncology.

And with now the seahorses, ASEA, and biotech and lock cell combined, we have a very unique value proposition. And that is really what excites us and what also is very exciting for customers is that when we combine those technologies or these techniques together, we can create more insights for the researchers and the biopharma customers than nobody else in the industry can do. So, this is very exciting and we're just getting started.

Speaker 0

Your next question comes from Puneet Souda from SVB Leerink. Your line is open.

Speaker 3

Yeah, hi. Thanks, Mike. So, first question on Europe. You pointed 2% growth there. I was hoping to get a view from you on outlook and what you're baking in the guidance here.

Thanks.

Speaker 2

Thanks, Bob. Why don't I just talk about our performance and you can maybe comment on the outlook. So came in right as expected. I think that Europe's in a difficult economic environment. And we think our team is really doing well there relative to what's going on in the market environment.

So we were actually quite pleased with how Q1 came out for us in Europe. Bob, in terms of the outlook?

Speaker 3

Yeah, yeah. So Puneet, good afternoon. As Mike said, we were pleased with the outlook of being 2% and that's kind of what we're forecasting in Q2 and the rest of the year. And certainly the team is doing a really great job being able to deliver in a tough environment. But it kind of hit where we expected and that's kind of what we're expecting for the rest of the year as well.

Okay, that's very helpful. If I could touch back on China, I know you've been covered quite a bit. But if I really appreciate your thought there given one of the strongest legacy positions in that country for Agilent. As the recovery happens here, are there certain segments which you think where you will see more acceleration, more faster recovery, certain product lines or certain segments where you see recovery faster versus others? And then I was sort of also surprised with the growth you were seeing in ACG, just CrossLab continues to deliver.

Was trying to understand what sort of exposure you had there in China and given the travel restrictions and everything, are you still able to ship products and service instruments seeing the growth in CrossLab here? Or was that a how much was the impact in CrossLab, if you could quantify? Thank you. Yeah. Puneet, let me take there was a lot into that question, so let me try to hit them.

You know, in terms of recovery, we would expect that obviously the instrumentation portion would recover and within that, probably pharma first. And so we would expect that to be prioritized over some of the other markets. In terms of ACG, we continue to be pleased by the broad based strength there. Actually, even in China, despite kind of the reduced selling days, it grew 11%. We do expect probably a slower ramp up there, less on the consumable side as the factories are getting back to production, but more on the services side.

As you can imagine, having our folks getting into labs right now is fairly difficult and there's a portion of that would be on demand for servicing equipment. And so we would see that probably ramp up a little slower in Q2, but then ramp back up to normal latter half of Q2 and into Q3 and Q4. At least that's our current assumption. As Mike mentioned, we've been in close contact with our teams in China and have been watching the order flow. And the order flow to date is across both ACG and LSAG as well as our DGG business, which is a smaller piece, tracking to our expectations.

Okay. And any sense in terms of the exposure that you have in China? And could that mix change given the in the next quarter or so? No, I don't anticipate a major shift. We've largely got an instrument heavy business in China relative to the rest of the business anyway.

But our opportunity really lies in the consumables and service over time. So I don't see a dramatic change in Q2 or in the back half of the year. Great. Thank you.

Speaker 2

You're welcome, Puneet.

Speaker 0

Your next question comes from Dan Arias from Stifel. Your line is open.

Speaker 11

Good afternoon, guys. Thanks. Mike, just back to Tycho's biopharma question. Hey, Mike. Next quarter, I think the comp goes way down to low singles for that customer segment.

So where are you feeling like biopharma growth heads in 2Q as we just think about the momentum and the favorable comparison, but also China? Can that be more mid singles when we net out the moving parts there?

Speaker 2

Hey, Dan, I think that's a reasonable expectation. So when I was asking earlier about the comment to pharma, I said, we remain confident about our ability to grow in pharma. Part of it's going to be the pickup and the continued growth that we're going to have in our NASD business. We also know that we're getting to some of the easier compares relative to the LSAG instrument business because as you all recall, Q2 is when we started seeing the slowdown as China went through this whole looking at their procurement practices around the generics. So we think there's a lot of good reason to be positive about the ability to have a higher growth rate in the outer quarters than we did in Q1 in our pharma business.

Speaker 3

Yes. We're expecting a faster growth in Q2.

Speaker 1

Okay.

Speaker 11

And then maybe one again for you, Mike, or maybe even Sam. Feels like 1Q is always a good time to ask this question given that some of us are heading down to AGBT. Any update you can give us on laser gen product development? How much of a focus is that at this point? And then maybe what are you looking at in terms of the change in total investment there if we compare 2020 to 2019?

Speaker 2

So, I think, Sam, you're getting your bags packed. Maybe at least all your team is getting your bags packed to head to You're staying home. That's right. Okay. Maybe just a few comments on this.

Yeah.

Speaker 7

Overall, thanks for the question, Dan. If you would have heard my comments already from JPMorgan, we're making progress on a number of fronts related to the development work we're doing on the laser gen sequencer, particularly as it comes to the technical specs on our read length, on our quality, and so forth. So we're continuing to make that progress. When you think about AGBT, of course, it's not just about sequencers. It's about the overall NGS workflow.

It's about really looking at beyond NGS, overall genomics. So we are excited about Magnus which we introduced not too long ago. Sorry to remind you, Magnus is this really walk away automation for taking DNA libraries or actually putting DNA in and being able to come back and just load that directly onto your NGS sequencer. We've seen some really good interest in that in Europe, in America, and in China. So 're going to continue sharing the message there and sharing some data from a number of customers.

We also, as you would have heard us talk about, we have launched a new SureSelect XTHS2 DNA reagent kit which allows us to look at even lower starting amounts down to 10 nanograms of DNA for FFPE which is very important for cancer. On Illumina sequencers, it's very important to be able to use molecular barcodes. We have that going on as well. And we have a number of partnerships that we're working on with a number of customers and collaborators. So stay tuned.

Speaker 2

I think it's going to be an exciting AGBT. And Dan, the other part of your question was investment outlook.

Speaker 3

Yeah. Just quickly, our spending forecast in 2020 is the same as 2019. So we're not expecting any ramp up.

Speaker 11

Okay. Appreciate it. Thank you.

Speaker 2

Your

Speaker 0

next question comes from Derik De Bruin from Bank of America. Your line is open.

Speaker 12

Hey, good morning. Good afternoon. I have a number of got a number of questions. Sure. The first one is, I guess, just on the gross margin outlook for 2020, can you sort of walk it through the next couple of quarters in terms of how that looks?

Speaker 3

Yes. We talked about at the beginning of the year, our guide was contemplating roughly a flattish gross margin across the company, and that hasn't changed. So we've always said that the first half of the year, with Q1 being the hardest comparison because of the startup costs in NASD, and you can see that kind of in our numbers. We also were affected a little as we mentioned before in LSAG. We would expect that to recover as we get through the course of the year.

So at a high level, Derek, I would expect our gross margins still to be within that range, roughly flat year over year and we're getting our operating leverage is really in the OpEx expense line.

Speaker 2

And Bob, I think we're also looking to see maybe a more favorable mix in our instrument business as And we move I made some comments about the pricing pressure that we saw more of a calendar year end kind of phenomena with pricing more stabilizing as we started the 2020. Yes.

Speaker 12

Well, great. That segues into my next question on instruments. And so I think you had said last quarter, you were expecting maybe flattish instruments for the full year. Is that still sort of your expectation? And then that leads into a any idea of sort of what pent up demand could be?

Mean, do you sense from customers, particularly in C and E, there's people waiting on the sidelines to buy when the budgets gets better? I'm just trying to get a sense of sort of what the instrument dynamic looks Yes.

Speaker 3

Derek, this is Bob. I think the short answer on your first question is yes. We're still in that range of roughly flat. Actually, you looked at Q1, we were down two percent core. But if you adjusted for the coronavirus, it would have been down about 1% on the most difficult comp that we had.

To your point around C and E, there have been shoots of life and some of our customers looking at things. Now, what I would say is the coronavirus kind of throws some of that into question. But I would say that's still intact right now. I don't know, Jacob, if you have anything.

Speaker 9

No, overall, I do think that there is some pushed out pent up demand here. And eventually, there will be a tech refresh. And we have invested over the past period quite a lot into our instrument portfolio and really refreshed across the whole portfolio. So when that pent up demand is coming forward, we ready. But we just can't call it right now exactly when that's gonna happen.

Yeah. Jacob, I'd

Speaker 2

just add one thing. On in my tenure, we had a similar kind of slowdown in C and E. The difference here is that at that time, a lot of our platforms are rather aged. This time, we have a completely refreshed platform. So it also is a great productivity message there to customers.

And our lab managers actually have the ability to go to their management and say, listen, there is something new out there. I'm not buying this. I'm not replacing like for like.

Speaker 12

Great. And then this one, maybe I missed something, but you did 3.7 contribution from M and A in the first quarter, 3.5% to 3.7% in the second quarter. And then the guide for the full year is 2.8 to 2.9%. Is it something else in the first half of the year besides biotech? And if not, are you expecting a why are expecting a step down?

Speaker 3

So you've got very good math, and, we're not expecting a step down. That is the only thing that's in the numbers that

Speaker 1

could

Speaker 3

be an area of potential opportunity.

Speaker 12

Great, thank you.

Speaker 0

Your next question comes from Brandon Couillard from Jefferies. Your line is open.

Speaker 13

Mike, just

Speaker 14

on a separate topic. You just sort of speak to the Twist settlement last week? Why only $25,000,000 And should we expect any legal savings from having that case out of the way now that you'll reinvest those dollars?

Speaker 2

Yeah, so first of all, just a few comments on the settlement. So we're very pleased with the agreement that was reached with Twist. As you know, we think it's in the best interest of our shareholders to rigorously protect our IP. And not only in addition to receiving a payment from Twist, they also had to procure a license for us for certain aspects of our algo synthesis technology. And are a that's committed to an innovation in the right way.

We're really pleased with how the sentiment goes. And Bob, relative to the treatment of the legal expenses and outlook for the rest of year, think we have that in pro form a, right?

Speaker 3

Yeah, will pro form a that.

Speaker 2

That's correct. Yes. So you see both the settlement come in, Brandon, as well as the costs associated with that, I guess, in our Q2 results. That's correct.

Speaker 14

Thanks. And maybe one more higher level question for you, Mike. I mean, you mentioned sustainability, recognition. That's becoming a much bigger focus, I think, for the investment community. Can you just help us contextualize how that, focus may help contribute to your growth or cash flow or differentiate you in terms of the customer base?

Speaker 2

It's a great question. So as I mentioned in my call script, we've been doing these things because we thought it was the right thing to do. And now people are really paying attention to it. So I think it helps on multiple aspects of the business. So first of all, relative to our new products, which have a very favorable environmental impact, there's a real compelling reason for customers because a lot of our most important customers have their own sustainability initiatives.

And they're very interested. Have several European customers I'm visiting next month and they want to hear about our sustainability plans. So when you talk to them about how we're reducing footprint, the electrical consumption, that some of our products don't even use gases and that we've eliminated the use of gases and gas chromatography or in the case of the MPAS. So there's just a really and we're reducing the size of the packaging. And by the way, that also comes with a benefit to Agilent's P and L.

So it really helps in terms of our customer relationships and our ability to drive sales into those accounts. It also is really quite helpful for recruiting of new employees into the company. New employees, when they're looking at potentially joining the company, really want to know what Agilent stands for. We talk to them about our culture and what we do as a company in the local community, what we do for the environment, our views on diversity and inclusion. And I think it really is a powerful message to attract new employees to Agilent, but also for those who are part of the Agilent team to really be proud of the company they work for and be energized about where the company is going forward.

I think we've talked before, I'm a big fan of sports. And if you build a great team, you get great things happen in the marketplace or on the field. And I think that really is one of the major benefits you get here, which is what it does for your team. There really is a multitude of impact for the customer I mean, the company and something we really believe in.

Speaker 11

Very good. Thank you.

Speaker 0

Your next question comes from Vijay Kumar from Evercore ISI. Your line is open.

Speaker 8

Hey, guys. Thanks for squeezing me in. Hey, Vijay. One maybe on China, Mike. We've heard some chatter, possibly the government doing, you know, initiating some sort of stimulus here to kick start the economy.

If that were to be the case, where would that impact fall? Is that in C and E and food? Is that where we would see, you know, your China numbers coming up?

Speaker 2

Well, have to say I have heard some rumblings of stimulus, but I haven't seen anything around the specifics of what the stimulus would be. I don't know, Bob, or whether you've picked No. Up

Speaker 12

But I think you've Probably got a likely area.

Speaker 3

Exactly. I think that's a likely area, that and pharma.

Speaker 2

And also, I'd also expect environmental as well. So that would be my guess because these are major quality of life initiatives that the Chinese government has been behind. So my guess is that's where they would put the stimulus. But again, we don't have any specifics. That would just be pure speculation on my part at this point in time.

Speaker 8

Understood. And Bob, a quick one on EPS guidance here. I see that the tax rate ticked down sequentially on the guidance front. Did anything change on the margins at all? Because it looks like for the revenue range remained unchanged.

So I'm wondering if this is below the line or margins some sort of impact here.

Speaker 3

Yeah, yeah, nothing material, Vijay.

Speaker 8

All right, thanks guys.

Speaker 2

You're welcome.

Speaker 0

Your next question comes from Steve Buchoff from Wolfe Research. Your line is open.

Speaker 13

Hi, and thanks for the time everybody.

Speaker 1

Sure Steve.

Speaker 2

I guess

Speaker 13

first I wanted to start with Bob with just a question about one of the underpinnings of the outlook for the year that hasn't been touched on so much just yet and it's NASD, maybe a two parter on NASD. One is, do you think we feel good about getting to a few dozen million dollars of contribution from NASD? And then can you give us any perspective, and I guess maybe this is a Sam question, as to how much of the capacity on the new facility in Frederick is now contracted? And then I have one for Mike.

Speaker 3

Sure. Yeah, hi. Let me make sure I answer your question correctly. What I would say is Q1 came in slightly better than what we expected on the ramp. So we feel very good about that trajectory.

Obviously, the second half of the year is gonna be significantly greater than the first half of the year as we ramp up that business. I would say that the order book, we feel very good about.

Speaker 7

And maybe, Steve, build on what Bob said, We've said that there is a ramp rate that we've been planning all along. That's what we're seeing. As you really get into Q4, we'll be much more in the run rate, if you will, of what to expect going into financial year 2021 in terms of the Frederick site in particular. So, it's ramping as planned. It is being utilized.

We were happy to produce good product and good revenue from that in this quarter again, after starting last quarter. And further to what Bob said, a lot of these programs and projects are long lead both working with customers to really lay the groundwork and do the work. Though I can't tell you exactly what percentage, I do feel good about the percentage of programs and projects that we're already lining up going And into next Steve, I

Speaker 2

can just amplify one of the points Sam made. It was absolutely crucial that those first batches we produce for customers met their expectations. And as you know, we are very cautious in terms of how we started positioning the ramp here because we just had to get it right. And we've gotten it right for those first few customers. I think that really positions us well when we look at the outlook for the rest of the year.

Speaker 13

Okay. That makes a ton of sense. Thanks for all the color there. And then Mike, I wonder if we could just do the zoom out thing if you will where we think about the full year. I mean there's so many moving parts, right?

And the coronavirus certainly makes it more complicated. But if I rewind to ninety days ago or so, there was a perspective not necessarily from Agilent but certainly in investor conversations that the outlook for fiscal twenty was really conservative or significantly conservative. And I think we've of course heard from you guys over the years outlook that started at one point and you pretty consistently do better than the outlook. I wonder if you could just give us your perspective on the outlook and guidance philosophy now that you know ninety days more than you did at the time you gave the outlook at the beginning of the year. To what extent is this middle of the fairway?

To what extent is this conservative? And as you talk to your customers and you think about the outlook, I mean, are you feeling and how has that evolved? Just, again, really zooming out. Thanks so much.

Speaker 2

Yeah, Steve. So I'm in the conference room zooming out right now. A great question. And I think that that's how we thought about the full year guide, which I'll leave it to you to prescribe the first adjective, I mean, proper adjective. But we started this year with a guide that we thought was relatively the floor of what we could do and talked about areas of potential upside for the business.

And we were actually tracking well in the first quarter where it would have been a beat both on the revenue and EPS side of the quarter, albeit the impact of the much talked about today, the impact of the coronavirus. So that's why we felt pretty confident about our ability to say, listen, there are still a lot of puts and takes relative to China in the near term. But there are other aspects of the business that doing extremely well outside of China, whether it be NASD or ACG business, the compares and the strength of our LSEG instrument portfolio that's going on in NGS. So we have a lot. And then back to cell analysis.

So we have a lot of confidence. We what do we call it, the middle of the fairway right now? But we feel pretty

Speaker 3

good Yeah, would say, Steve, one thing. Obviously, ninety days ago, we didn't have the epidemic that we're seeing right now, which is unprecedented. So what we're trying to do is we're seeing, hey, in the first half of the year, we're expecting a 25,000,000 to $50,000,000 impact that we're gonna make up in the second half of the year. Now the question is how fast and we hope for everyone's sake that that will ramp up fast and we'll get this behind us. But that certainly puts a lot more variability in our forecast.

We feel good about where our forecast is, but we certainly didn't anticipate that at the beginning of the year.

Speaker 13

Okay. I really appreciate the color there. Thanks for bearing with me. Sure.

Speaker 2

I appreciate it. Sure, Steve. Great question.

Speaker 0

Your next question comes from Bill Quirk from Piper Sandler. Your line is open.

Speaker 15

Great. Thanks. Good afternoon, everybody.

Speaker 2

Good afternoon, Bill. Hey, Bill. So I guess, Bob

Speaker 15

or Mike, just update on M and A. You had mentioned on the last call that you'd be considering looking at larger deals in around $1,000,000,000 Just curious what the update is.

Speaker 2

I think the statement I made in last quarterly call remains, which is we think that deploying our capital towards growth and earnings drivers on the M and A front makes a lot of sense. For our shareholders, in deals that make sense for us, in markets that we know where we can really leverage the scale of the company. And we did our largest deal of biotech the past quarter. And as you heard earlier, that's off to a really good start. I think we often get the question, well, how large are you willing to go?

And the way Bob and I described it is, listen, we could go maybe multiples of that, but we're looking to stay in our lane here and not do anything that's magnitudes larger than a biotech. So I'm not saying the biotech is the max level, but probably multiple of that as opposed to something that's of a magnitude size.

Speaker 3

Yeah, Bill, as you can appreciate, timing in there is always very difficult to understand and we're gonna remain disciplined. And if there isn't anything out there that would meet our financial criteria, we're not gonna do it. We don't need to do M and A to make our model work. But certainly, you see in the first quarter the benefit that we've seen with biotech and really building scale in cell analysis, which we think has a long term growth opportunity for us, not only in LSAG, but across the business.

Speaker 15

Understood. And then just secondly, I guess a kind of bigger picture question about the pacing of CrossLab. Over the course of the year, we are gonna be heading into slightly more difficult comps for the next couple of quarters.

Speaker 3

Yeah. You know, the beauty of ACG has been its predictability across the business. And we're not expecting any dramatic change in the back half of the year, with the possible exception of slightly an elevated ramp in China. But that business that Mark and team have built has been just phenomenal in terms of providing stable high growth and profitable growth over the course of the last several years. And I think that that quite honestly is a great legacy to what Mark has been able to accomplish.

And not only that, it really speaks to what our customers are looking for in terms of productivity in the labs and so forth. So we would expect that to continue to kind of chug along as we've talked about in the past.

Speaker 15

Got it. Thank you very much.

Speaker 2

You're welcome.

Speaker 1

All right. Thanks, everyone. With that, we would like to wrap the call for today. Have a great rest of your day.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.