Agilent - Earnings Call - Q3 2020

Transcript

Speaker 0

Good afternoon, and welcome to the Allogene Technologies Third Quarter 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.

Speaker 1

Thank you, Robert, and welcome everyone to Agilent's conference call for the 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q and A after Bob's comments will be Jacob Tyson, President of Agilent's Life Science and Applied Markets Group Sam Raha, President of Agilent's Diagnostics and Genomics Group and Porek McDonough, President of Agilent CrossLab Group. 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 and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past twelve months. 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

Speaker 2

to turn the call over to Mike. Thanks, Ankur, and thanks everyone for joining us on our call today. The Agilent team delivered excellent results in the third quarter in the midst of a historic global pandemic. Against this backdrop, Agilent's performance once again highlights the strength and resiliency of our team and our business. Agilent's Q3 revenues are $1,260,000,000 Our revenues are down just 1% on a reported basis despite COVID-nineteen headwinds in what we expect to be the year's most challenging quarter.

On a core basis, revenues are down 3%. These results demonstrate the strong resilience we have built into our business over the past several years. EPS is $0.78 per share. This is a 3% year over year increase. Operating margin improved 90 basis points over last year to 23.7%.

Our Q3 results are further evidence of the success of our profitable Build and Buy growth strategy. We continue to build a more resilient growth oriented business. Last quarter, I talked to you about the four key priorities we're focused on during the COVID-nineteen pandemic, protecting our people, being open for business for our customers, taking decisive action to observe our P and L and balance sheet and unwavering commitment to growth. Staying focused on these priorities has helped us navigate through the COVID-nineteen effects on our team, customers and business. Our customers continue to respond very favorably to our team's engagement and our enhanced digital capabilities.

In fact, Q3 customer satisfaction rankings are at all time highs. In all regions, we're seeing improvements in lab access for our customers and increased non COVID-nineteen testing volumes. There are however regional and end market differences in the pacing of improvement. Lab access improved through the quarter, although it's still not at pre COVID-nineteen levels. Globally, lab access remains limited in academia, non COVID-nineteen research and testing labs.

We're also seeing continued limited access to some private sector research labs in Europe and The United States. Similarly, non COVID-nineteen diagnostic testing volumes improved throughout the quarter, but remained down from prior year levels. Hospital access in Europe and The US is improving, although disrupted at times by virus flare ups. While there are indications of improvement in economic growth at varying degrees across the globe, caution remains a customer capital expenditure decisions. Consistent with our thinking coming into the quarter, the pace of recovery varied by region.

As expected, China led the way for us and exceeded our expectations with revenues up 11%. China's

Speaker 3

growth in

Speaker 2

the quarter is broad based across all end markets and for all business groups. While improving the rate of recovery in Europe and The Americas lags China, given the timing when these regions first felt the brunt of the pandemic, European revenues are down 5%. America's market conditions trailed both China and Europe with revenues declining 10%. However, as we exited the quarter, we are seeing signs of improvement in service activity, consumables and diagnostic testing volumes. On a total company basis, we exited July with modest growth across all major markets.

Now, let's talk about our performance by business groups. Our Life Science and Applied Markets Group grew 2% on a reported basis and declined 4%. Our team is focused and determined to gain market share despite a constrained capital environment. The strength of our portfolio coupled with an energized and stable sales team is paying dividends. I'm also very proud of the contributions our Cell Analysis Technologies are making in COVID-nineteen virus research.

Our M and A strategy is working and making a difference in the pandemic fight. Our cross site group revenues grew 1%. Increase in customer activity led to increased sales of consumables and an uptake of on demand services. The CrossLab team continues to win large multi year contracts for enterprise laboratory management that will benefit us moving forward. We're continually increasing our competitiveness in this space.

Our diagnostic genomics group revenues declined 8%. While our overall pathology and genomics businesses are down for the quarter, we did see gradual improvement in diagnostic testing volumes and non COVID-nineteen lab openings. Partially offsetting this, our Nucleic Acid Solutions business delivered another strong quarter growing almost 25%. We are very excited about the future of our NASD business. As we announced earlier today, we plan to more than double oligo manufacturing capacity at our new Frederick, Colorado site.

This expansion helps us meet significantly increasing customer demand. We are growing double digit and expect to continue this rate of growth in the coming years. We continue to invest in our portfolio across all our businesses. Highlights during the quarter included LSAG launching two new LCMS products, the Agilent6470B Triple Quad and the Agilent RapidFire 400 systems. Both products are aimed at high throughput labs driving productivity and superior resolution.

We launched our CrossLab asset monitoring service, which is a new subscription service using instrument sensor technologies to provide data driven usage insights. This helps drive improved customer economics and lab productivity. While early, we are seeing strong interest from customers in this service. During the quarter, our PD L1 assay was approved by the FDA for expanded use in non small cell lung cancer, helping guide physicians in selecting treatments using specific immunotherapies. Our team is very proud of the role their company is playing in the global COVID-nineteen fight.

We are supporting COVID-nineteen research, testing and therapeutic of vaccine development. Our efforts in the global fight against the virus delivered two percentage points of reported growth. We are accelerating efforts to make a difference in the battle against COVID-nineteen and have mobilized across Agilent team to maximize customer support. Let me close with few comments on our outlook in the coming quarter. While there's still significant uncertainty regarding the continued pace of recovery, we expect the July trend of gradual improvement in our business to continue into Q4.

By region, China will continue to be a positive story for us and lead the return to growth. Europe is starting to trend upward. The Americas are also expected to improve at a lower rate than China and Europe. Globally, improved lab access, increasing non COVID-nineteen testing, and a slowly recovering global economy are all positive signs. I remain absolutely convinced Agilent will emerge from this pandemic with a stronger position in the marketplace.

Our continued focus action on our four priorities, protect the team, support our customers, preserve our P and L and balance sheet and our unwavering investment in growth are delivering. Entering Q4, we are operating from a position of strength and with momentum. Yes, this pandemic remains unpredictable. However, I am cautiously optimistic about our continued gradual recovery and return to growth. Before I hand the call over to Bob, I'd like to pause and share my hope that you and your loved ones are staying safe and healthy.

Thanks for being on the call. I look

Speaker 3

forward to taking your questions after Bob's remarks. And now, over to you. Thank you, Mike, and good afternoon, everyone. Today, will provide some additional detail on revenue, walk through the third quarter income statement and some other key financial metrics, and then I'll finish up with a framework for thinking about Q4. As with last quarter, there are still too many unknowns, so we're not going to provide formal forward looking guidance today.

However, we will provide a framework for how we see things potentially playing out in Q4. Unless otherwise noted, my remarks will focus on non GAAP results. As Mike mentioned, our revenue for the quarter was $1,260,000,000 down 1% on a reported basis. On a core basis, revenue declined 3.1% in the quarter. Currency negatively affected revenue by 1.3 percentage points, while acquisitions added 3.4 percentage points to growth.

As Mike talked about the regional performance, I'll speak to the end market performance. In terms of our end markets, pharma grew 2% in Q3 against a very strong comparison of 13% from last year. Both small and large molecule applications grew and biopharma improved throughout the quarter as drug development labs increased production and access. We experienced softness in diagnostics and clinical as anticipated. Revenues declined 10% primarily due to conditions in The U.

S. Driven by COVID-nineteen related disruptions to patient visits and diagnostic labs opportunities. Encouragingly, we did see an improvement in routine testing throughout the quarter, especially in China and Europe, while The U. S. Lagged.

Chemical and Energy was down 10%, consistent with our thinking. Revenues were generally flat sequentially with conditions largely similar to what we saw in Q2. As we've talked about previously, we expect this segment to ramp more slowly than others. The Food segment was a bright spot, up 8%. We are seeing ongoing signals that the market in China has stabilized with the transition of more testing by commercial labs.

The food market was just one of several bright spots that contributed to double digit growth in China, including growth in the low teens for our pharma business. Our Environmental and Forensics business declined mid single digits against a double digit compare. And the Academic and Government segment declined mid single digits while improving on a sequential basis in Q3. Strength in cell analysis and liquid handling for viral research partially offset the widespread impact of the ongoing academic lab closures. Now let's turn to the rest of the P and L.

I'm extremely proud of how the Agilent team has responded to the challenging environment. During the quarter, we continued our focus on managing expenses while ensuring we continue to invest in our key growth opportunities. This expense management actions we initiated last quarter were on full display in Q3. In addition, our customer engagement model using digital tools continue to gain traction while also delivering savings in SG and A. As a result, operating margins of 23.7% improved 90 basis points over last year on declining revenue.

Gross margin at 55.1% was down 130 basis points versus the prior year, largely due to mix and higher logistics costs. However, strong cost management and operating expenses more than offset the decline in gross margin. This combination of factors resulted in non GAAP EPS for the quarter coming in at $0.78 per share, up nearly 3% from the

Speaker 0

number we posted a

Speaker 3

year ago. Zero Now from a balance sheet perspective, we generated $290,000,000 in operating cash flow during the quarter, which is $48,000,000 improvement over last year. In terms of capital spending, we spent $25,000,000 lower than last year and in line with our revised look in Q2. We ended the quarter in a strong position with 2,300,000,000 in available liquidity, including $1,360,000,000 in cash. Also during the quarter, we took advantage of low interest rates and refinanced $05,000,000,000 in short term debt with a ten year bond and a 2.1% coupon, the lowest coupon in our portfolio.

As you know, we paused share buybacks in Q2 pending improvement in business conditions. In Q3, our visibility into business trends and cash flow improved and we resumed anti dilutive share repurchases late in the quarter. In the quarter, in total, we repurchased 360,000 shares for $33,000,000 Going forward, we intend to resume our normal pattern of regular anti dilutive repurchases along with additional opportunistic buying. Our overall capital deployment approach remains balanced with the primary focus on growth M and A opportunities while also returning the cash to shareholders via dividends and buybacks. As we look to Q4, business and trends have gradually improved, but significant uncertainty remains around the evolution of this pandemic.

However, let me provide a framework for how we see a range of possible revenue growth scenarios in the coming quarter. We generally expect the trajectory of gradual improvement in business results to continue across all regions. Areas where we see a broader range of scenarios include research spending, both in academia and other markets, non COVID diagnostic testing, especially in The U. S. And the general CapEx environment.

A combination of these factors could result in scenarios where our revenue performance could range from a 4% decline to 1% core growth. Also as a reminder, the BioTek acquisition closed midway through Q4 of last year, So the M and A impact in Q4 will be smaller than in previous quarters, roughly one point of growth. And currency is forecasted to be positive in the quarter. The low end of this range envisions COVID-nineteen flare ups occurring in the fall in various geographies, limiting and in some cases, reversing the recovery gains we've seen in a period of time. In this scenario, one might expect to see slower or stalled improvements in research, academia and other markets as continued tight cash management leading to lower CapEx spending in The U.

S. And Europe. We hope this bottom end of the range is overly conservative, but we wanted to let you know we have plans in place in case this happens. The higher end of the range assumes continued recovery by region building on what we have seen in July with the biggest impact coming from The U. S.

This would include a continual increase in elective medical procedures such as cancer screenings, as well as continued lab openings. This view would also include continued China momentum along with the continued improvement in Europe and other areas in The Americas. Again, this is not guidance, but should provide a sense for some of the variables we see for Q4. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy continues its path to recovery. And with that, I'll turn over things to Ankur to direct the Q and A.

Ankur? Thanks, Bob. Robert, if you

Speaker 1

can provide the instructions for the Q and A, please.

Speaker 0

Your first question comes from the line of Belich Schenkel with Cowen. Your line is open.

Speaker 3

Hey, good afternoon guys.

Speaker 2

Hey, Doug. How are doing?

Speaker 4

I'm doing well. Nice work in a tough environment. Steve, just to with a cleanup question right off the bat, and I'll try the best prepared remarks. I don't think you quantified COVID-nineteen tailwinds in the quarter. Again, I may

Speaker 1

have missed that, but if it would

Speaker 4

be helpful to get that so we could try to normalize or can.

Speaker 2

Yes. Sure, Doug. I touched on it briefly in my comments, but it was two points of reported growth in Q3.

Speaker 4

Okay. That's great. And then on China, just a couple. I'm just curious if you would share the exit rate. And as we look ahead, I know you're not guiding.

I'm just wondering if you if you think based on what you're seeing, if you if you think that double digit growth can be sustained from from here, at least return? And then specific on food, you know, it's great to see this return to solid growth first time in the after seeing some stable events last quarter. Can the high single digit growth rate you saw this quarter be sustained moving forward given favorable multiyear comparisons? Thank you.

Speaker 2

Hey, Doug. Thanks for those both questions. So just to make sure it came through the audience, the question was about our view on growth rate of China for the rest of the year as well as can that high single digit growth rate in food be sustained? We think the answer is yes on both. We're really pleased with our performance in China.

It was broad based. Tried to really accentuate that in my comments. We saw basically double digit growth across all end markets in China. And we think that a double digit growth rate is within the realm of possibility for Q4 in China. And I have to say, Doug, it's wonderful to be talking about China food from a different factor.

We've been talking about probably the last eighteen to twenty four months of one that would return to growth. We saw some early indications in Q2. We saw a strong Q3 and we think that a roll number is probably sustainable for the rest of this year. Wouldn't you say so, Bob?

Speaker 3

Yeah. I would just say that, Doug, to add, I mean, one of the things that was very, very positive about China, was it was pretty consistent across the quarter. And in fact, exited slightly higher than that overall 11%, but we saw solid growth all three months. Great. Thank you again.

Speaker 0

Your next question comes from the line of Vijay Kumar with Evercore Your line is open.

Speaker 2

Hey, guys.

Speaker 5

For taking the question. Mike or Bob, just maybe on the guidance here. If I step back, you know, the third quarter guidance up, you know, we're down mid singles, we're down mid teens. You know, this down low singles was up, you know, came well above expectations, I would say. Perhaps not surprising given peers, but, you know, nonetheless, you know, solid execution.

The the q four, you know, down, you know, four to plus one implies, you know, declines. What what would cause the declines just given in in light of that simple performance? Is that minus four at the low end? Is that assuming that July trends just sustain and there's no improvement on this year? And how are you thinking in Q2?

Speaker 3

Yes. Vijay, this is Bob. I'll take that. And, as I as I mentioned in in the prepared remarks, we hope that that is overly conservative. What that would imply is actually a retrenchment, and you know, when COVID-nineteen flare ups, here in The U.

As we go back, you know, as we move into the fall and you start seeing some elements of shutdown. So we certainly, would hope that we would do better than that. But we wanted to provide, hey, that's within the realm of kind of how we're thinking about our spending and so forth. Our July results, or our exit rate of the quarter much higher than that. And, so, we're aiming to do better.

But, there's still uncertainty, in the, you know, in the world with pandemic, people going back to school and so forth.

Speaker 2

Bob, I think it's probably fair to say the wildcard is in The United States, right? Yes, absolutely. And we were encouraged by the movement in PMIs. You probably noticed that, but let's see how that translates into business in the upcoming quarter. Again, we have to keep reminding ourselves as pleased as we are with the results we just delivered, there's still a lot of uncertainty out there because the virus is unpredictable at times.

Speaker 3

Yes. Right, Mike. You looked at each one of the major markets, each one of the major markets got better in q three versus q two with the exception of The US, which we expected given kind of the state of the state of affairs with the pandemic.

Speaker 5

That's a helpful, perspective. So the minus four implies, I think, get worse. Would July have been flattish or positive? I'm curious, Mike, you mentioned NAFDA doubling up oligo. I know, you know, if you turn back the page, we were doubling capacity.

So is this now, you know, versus six months of a quadrupling capacity versus where we were last year? Is that the right way to think about, you know, revenues going from 100 to 200 to perhaps 400? Is that the math here?

Speaker 2

No. It's slightly different math. I think we've been we've been consistent with our view of needing to double our capacity. What we end up doing is actually triggering the decision to initiate the expansion earlier than we had thought, just given the robust nature of the end market. And as well as we have worked our way to be able to, in the same space, we challenged ourselves to find ways to drive as much revenue in the same physical space.

We are investing a little bit more in capital than we initiate thought, but we're also building something slightly different than our first train, which is going to give us actually more volume than our current train A. So it's a really, we thought it was really positive signal and that's why we sent out the press release this morning because super excited about our prospects here.

Speaker 3

Yes. And Vijay, let me kind of frame in the kind of the numbers. What we were talking about is the Frederick site has the potential of roughly 100,000,000 worth of revenue and we added capacity that more than doubles that $100,000,000 to give you a frame of, you know, the numbers. So it's not 100, 200, 400, it's 100, 200 and more than 300, to kind of give you a sense. And in terms of July, we actually came in, with growth across all three groups in exiting July.

Speaker 5

That's helpful guys. Thank you.

Speaker 0

Your next question comes from the line of Tycho Peterson with JPMorgan. Your line is open.

Speaker 6

Hey, thanks. I'll start with the COVID commentary. I guess if I go back to last quarter, there was some talk about launching a serology test. You guys obviously have an installed base of real time PCR instruments. We've gotten questions as to why you haven't launched a PCR test.

Can you just talk a little bit about how you think about those tailwinds going forward and how you think about your capabilities on the diagnostic side?

Speaker 2

Yes, Tycho, I'll make some initial comments and then the group president has been kind of quiet today. I'll pull Sam in here as well to provide his perspective. We think that there's still tailwinds in front of us and not two points of growth. We think we can sustain that at a minimum. That's why I try to put fairly bullish comments about our stepped up efforts across the company.

Some of these things are going take a little bit longer. We think there's still room for our own test, a quality test with some different features. I think maybe a few comments there, Sam, from your perspective.

Speaker 7

Yeah. Sure, Mike. Hi, Tycho. Know, as you I think you'd have seen a good pickup in terms of our qPCR instruments, which are ARIA systems, as well as our our bioreagents related to qPCR, both reverse transcriptase and master mixes. On the antibody side, we we've definitely also seen, an increase in, you know, IgA, IgG, and those antibodies.

You know, in terms of our own tests, we are very actively exploring the possibilities of developing those. So, you know, more to share in due course.

Speaker 2

In And Tycho, guess what I'd just close off here is the broad based nature of our portfolio is allowing us to play in multiple aspects of this COVID-nineteen. Some of these things may take a little bit longer to actually turn into revenue, right? So if you're working with, say, a pharma partner on something in the therapeutic area, it may take a while for that to come market. So we think these tailwinds are here to stay for some time, we're stepping up our efforts here because it plays right into the broad nature of our portfolio.

Speaker 6

I guess that's a good segue on on the NASD expansion. Can you maybe talk to, you know, what degree that's tied to the the COVID vaccine? And any update, you know, from your end on capabilities on APIs for mRNA or siRNA vaccines?

Speaker 1

Yeah. You wanna take that one now?

Speaker 7

Yeah. Sure. Sure. No problem. You know you know, Tycho, I I'd start by, you know, reiterating a little bit of what Mike and Bob were talking about.

You know, it's interesting that it was just last some last June that we did the ribbon cutting and starting of, the new Frederick, Colorado facility. And, you know, quite frankly, we've seen, demand that exceeded our expectations, just, you know, twelve months ago. So the building really, sorry. The new manufacturing line that we're building, you can consider it, as we call it, training on steroids is our general but it is very differentiated both in throughput, and the molecules that it can do, which is a segue to, you know, your, a little bit of your question that we are we're able to do, multiple iterations or types of, siRNA or RNA. We're also, you know, actively looking at other, you know, different versions of molecules that are oligo based.

You know, though I can't reveal the details, have had a lot of interest related to COVID nineteen, all of those used for either COVID nineteen related therapeutics or even, for for vaccines. So, I I can't say that we we have started the work on on, some of those programs now.

Speaker 3

Yeah. And and maybe, Sam, to add. That being said, the the cap capacity expansion isn't tied to COVID nineteen. We have plenty of demand outside of COVID nineteen therapeutics and and vaccines. And and, so this is a broad based capacity expansion.

Speaker 7

Yeah. Thank you, Bob. Okay. And

Speaker 6

then just last one, I know we don't have official guidance, but there's

Speaker 7

a framework for the quarter, for the fourth quarter.

Speaker 6

As we think about C and E and then also pharma biotech, should we expect any kind of material change in either of those end markets for the coming quarter? I know you talked about reshoring activities for C and E. I wasn't sure if that would maybe cause an improvement in trajectory there. Thanks.

Speaker 3

Yes, probably, know, C and E is probably the one that's I would expect it to be pretty stable in that down 10 ish percent, you know, 8% to 10%, in the range. We do expect pharma to continue to improve. That 2%, you know, certainly even in the low scenario would stay there and then on the high scenario would accelerate,

Speaker 2

which is consistent with the trends we've seen, throughout the quarter of Q3. Yeah. And Tycho, the supply chain consideration discussions still happen and it gets out of the level of stability, albeit down to this, into the space. And again, as you look ahead for the future ads, and this is an area where eventually it will come back. And again, too early to call.

But I'd say we're pretty confident about the improvement rating in pharma.

Speaker 3

Yeah, the way to think about those reassuring is those are opportunities and discussions that could happen through the order book and then will happen actually in 2021 and beyond in terms of as the investments are being made. This is that's more future looking. Yes. Thanks, Bob.

Speaker 7

Okay. Thank you.

Speaker 0

Your next question comes from the line of Puneet Souda with Leerink. Your line is open.

Speaker 3

Yes. Hi, Mike. Bob, thanks, thanks So for taking first question is on just NAFD is obviously strong in the quarter, but that would imply DACO and clinical business. Obviously, you pointed that out, it was down in the quarter, but that's a significant decline. Maybe just could you parse that out for us?

What is you know, it's a COVID impact for sure, but is there anything beyond that in terms of the way market is fundamentally potentially shifting here to NGS maybe? And if you could just maybe elaborate a little bit of and clarify. Thanks.

Speaker 2

Yes, happy to do so. So it's all market. It's all access to labs and patients going for their diagnostic tests. So it's real all market. I think we're seeing different pace of pacing throughout the quarter.

All of our geographies on the diagnostic testing front ended up with positive growth in July, but it was down sharply in May and June, particularly in The US. Keep in mind also, of our business in our genomics front is ShortSelect into NGS based diagnostic labs and for genetic disorders, for example, and those tests aren't getting done either. So it's really all market.

Speaker 3

Yeah, was going to say Puneet, actually if you bifurcate those two and look at our performance, actually pathology performed better than NGS testing for You know, given what Mike was just talking about as well as some of the academic institutions.

Speaker 2

Yeah, that's a good point, Bob. Thanks.

Speaker 3

Thanks for that. And if you could, know you quantified last quarter Bravo contribution. I'm wondering if

Speaker 2

you can provide that for Bravo Magnus liquid handling systems or how much of that contribution happened in the quarter? Yes, that's part of the story for our COVID-nineteen tailwinds. And I think probably the biggest contribution this quarter actually came from biotech, Bob, if I remember correctly.

Speaker 3

Yes, between biotech and

Speaker 4

Bravo.

Speaker 2

So it's kind of now we have like a one, two punch kind of going there on the core instrumentation. But also remind you with the Bravo platform comes an ongoing, revenue stream associated with the tips that that go with those in those liquid handlers.

Speaker 3

Okay. And last one on just, APG. I mean, could you just elaborate on in these times, you mentioned there are some larger contracts that, service contracts and, likes that you're getting into. Sort of what are those sort of COVID driven? What's behind those?

Speaker 2

And maybe if you can elaborate on geography there? Yeah, Puneet, happy to have Pork jump in on here and provide his perspective on that. So Pourg in the cost script, I talked a bit about large enterprise deals you guys won. So why don't you talk about that a little more detail? Yes.

Speaker 8

So thanks, Mike. We launched our CrossLab asset monitoring service, which has seen a big uptick. And what we're seeing from customers is a large demand for sourcing from one vendor. And because of our capabilities in terms of the asset monitoring capability, relocation services and our core delivery services, which are extremely in strong demand, we're seeing a big uptick from large customers and that we expect that to continue as we go through the quarter next quarter.

Speaker 3

Yeah. And I was gonna say the in the geography, Puneet is largely in The US, but there are some global, opportunities as well.

Speaker 2

It's it's really non COVID nineteen related. I mean, this is this is this is part of the core growth strategy for for, PORX business to continue to expand our market share on the enterprise service front and we're really delighted in some big pharma deals.

Speaker 3

That's great. Thanks. Very helpful.

Speaker 0

Your next question comes from the line of Derek De Bruin with Bank of America. Your line is open.

Speaker 9

Hi, good afternoon.

Speaker 0

Hey, Derik.

Speaker 9

Hey. So a couple of questions. Very impressive margin expansion in the third quarter. How should we think about the operating margin into Q4? And then I guess how much of these costs are permanent removals versus what tests have come back in 2021?

Speaker 3

Yes, let take that, Derek. It's great questions and certainly are very pleased with how the team has responded, as I mentioned before. You know, as we've talked about, you know, a large amount of the costs, we have not done things like furloughs. We stabilized the team. We have not reduced, base pay and things like that.

So these are discretionary expenses that, you know, a lot of them we think have the opportunity to stay away. It would be travel and things like that, which, you know, our digital tools have enabled us to really continue to support our customers. And so there aren't any kind of one time, things that happened in the quarter. In terms of going forward to Q4, you know, we are looking at probably less of a margin, incremental margin improvement because we are looking for ways to continue to invest to drive growth as economy recovers. We also have some startup costs in the NASD, new facility as well.

So it's probably less than what we've had historically had, which is, you know, call it 30% to 40% incrementals, but it's really to drive growth. Hey Bob,

Speaker 2

I guess maybe add a comment on your, on the first remark. So this is really, Derek, all about a new way of working in in Agilent. So I'm preparing for a manager's call later this week. And what we're talking to our team about is more digital, less travel. And, you know, we're really gonna make sure that when we get on the other side of this COVID nineteen pandemic, that we don't revert to our old ways of traveling.

And we know from our customer satisfaction scores, they love the responses that we have now with our digital platforms.

Speaker 9

Great. And two questions on LASG. I guess the first question is, you know, if you look at your numbers in China versus, some of your major peers in that area, I mean, you really out shown in China. Can you talk about just share dynamics there that are going on? I mean, as I said, there was a pretty stark comparison between you and your main LC competitor there.

And I guess also along those lines, can you talk about potentially, you know, sign of a budget, you know, any sign of a budget flush and just sort of thinking about 4Q trends, what are you hearing in terms of people with budgets? And are they going to be allowed to roll things over and to or are they going to have to use it or lose it? Just some dynamics in terms of growth on the fourth quarter, and just sort of your general thoughts on where customer spending habits are.

Speaker 2

Yes. Thanks, Eric. I'm going to have Jacob handle the first question. Then Jacob, you can pass it back to Bob and I for the second question. And I know Jacob would be just delighted to talk about the share dynamics in China, which we think are very positive for Agilent.

Speaker 10

Yes, absolutely. Thanks for that. And the number speaks for itself. It's clear that both in China, but I think actually globally that we are right now will be taking care. And this doesn't come by coincidence.

I think we have been executing our strategy between LCD and ACD over the past years. And the customers are really buying into our value proposition. We are playing a game where we are leveraging our whole portfolio, not going after one product line versus each other. And the customer really likes to be outcome based. So that's what is happening right now.

And we see here in the crisis that not only are they excited about what the investments we have done in portfolio over the past years, but also, as Mike talked about, in the digital world, into the mobile world, we have been very our team has just been super responsive. They have taken off the digital, they challenge very, very good and the customers have responded very, very positive to it. They know that when they work with Accident that we are there for them in this crisis. Actually, Mike.

Speaker 2

Yeah. And then on the other question, Derek, what we're hearing from our customers, particularly in the public sector, and we're seeing it in our order book and Bob, from my perspective here and feel free to build on my comments here, but there's a real sense of making sure they commit to their budgets. So we're seeing it both in our order book as well as order activity where there's a lot of uncertainty what's going to happen post elections as we go into 2021. So they to commit those funds. Actually quite amazing amount of deal activity that can occur without business and customer face to face.

So Bob, I don't know what you're hearing from the The

Speaker 3

only thing I would add is just to reiterate what Jacob was saying, because it's not just China. Think when you look at our LSAG portfolio, I think what people don't fully appreciate is how we've actually changed the portfolio to technology platforms. They're probably the best in the best shape they have been in probably five years in terms of new products and so forth. And I think you're seeing that across the globe. And when we think about where we ended up, in Q3, LSAG was certainly the standout relative to where we thought they were going to be in a capital constrained environment, only down 4% on a core basis really speaks to our, I think, our responsiveness to customers.

Speaker 0

Great. Thanks. Your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead.

Speaker 11

Hey, good afternoon.

Speaker 10

Good afternoon, Brandon. Bob, on

Speaker 4

the gross margin line, you mentioned higher logistics cost in the third quarter. Is that a new trend? And then can you help us just think through some of the puts and takes, whether it's logistics costs or mix and how those, puts and takes might evolve in the fourth quarter?

Speaker 3

Yes. Sure. You know, we're hoping it's not a trend that's going to be around for a while, but it certainly was, exacerbated in the Q3. That being said, you know, I would say three quarters of that was probably mixed when you look at the various businesses, across each one of the groups. But where we saw logistics challenges are, you know, lower capacity and freight, or or in air air capacity.

But we would expect that. And we actually saw that through through the quarter to kinda, relax. And I think as you're starting to see more inter intercontinental, travel both from a passenger standpoint as well as, freight standpoint, we we would expect that to kinda relax over time.

Speaker 2

Mhmm.

Speaker 4

Okay. And then, Bob or Mike, you're you're not quite giving formal, you know, forward looking guidance yet, you do feel comfortable enough to restart the buyback program.

Speaker 1

Just what are

Speaker 4

your latest thoughts just around your comfort as far as capital deployment goes and maybe your appetite for M and

Speaker 3

A right now and what

Speaker 4

the funnel might look like there? Thanks.

Speaker 2

Yes, sure. Sure, And I'll start off here and Bob, feel free to jump in. But we felt quite comfortable resuming our share repurchase program on the end dilutive perspective and we'll be looking at opportunistic as well. The cash flow remains strong. We felt for some time that the third quarter of this year would be the toughest quarter for us for the year.

We're through that knot now and the third quarter actually was significantly better than we had thought. And we saw positive growth across all of our businesses in July. We think, okay, barring some kind of major flare up, we should be able to continue to see this gradual improvement of growth into the fourth quarter is sort of our message. So we have the confidence, we also narrowed framework that we provided. It's more narrow than it was in Q3.

But again, I think we need to remind ourselves that there's still a lot of uncertainty associated with the pandemic. I think our capital deployment approach remains unchanged, which is we've said we wanted a balanced approach to capital deployment across dividends, cash, share repos and with the prioritization of investment in business. We just made a significant commitment in capital with our new NASD expansion and we're still on the hunt for deals that look that makes sense for asthma. So our approach to capital deployment really fundamentally remains unchanged. We paused a bit in the second quarter just because on the share repo because of the and in the early part of the third quarter, given what was going on in the environment outside of Agilent.

But we feel pretty good about where we are right now and have reasonable level of confidence that there's decent level of stability about the business. Great.

Speaker 12

Thanks.

Speaker 0

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

Speaker 11

You. Maybe just to circle back. Hi, Mike. So maybe this is a question for Bob to talk again about the Q4 framework. So if your business grew in July and the world improves month to month through October, wouldn't that imply then the high end should be above that 1% organic growth number?

Speaker 3

It could be. Yeah. I'll just leave it at that. Yeah. There's still a lot of, you know, there's still a lot of uncertainty and so forth.

And, but, certainly, wouldn't complain if it was better than that.

Speaker 11

Okay. And then my follow-up, whoever wants to take it, on the NASC business, can you elaborate on what's the lead time for that announced expansion? Is it something that would take a year or multiple years to put in the new line? Or is it a quicker turn? And can you comment on your willingness to commit capital inorganically in that business in addition to your organic commitments?

Thank you.

Speaker 3

I'll take the first one just real quick and then, Mike, if you want to add something on the second one. We announced that, you know, we would make that $150,000,000 investment, and then we would expect it to go live towards the 2022. So it's taking a little longer than just a regular, train. You know, Sam mentioned, you know, train A on steroids, so it's bigger and probably taking a little more capital. Obviously with COVID-nineteen, there's some activities there in terms of a little long lead time.

But we feel like we have the capacity to be able to manage us through that time and then that will come online at the

Speaker 2

2022. Yeah, think they're probably 2022. And, you know, don't specifically talk about specific targets or areas of focus necessarily, but it's not out of the realm of reason that would say, why wouldn't we want to further expand this business both inorganically as well? That's not out of the realm. I'm not signaling anything near term happening, but, we think we're operating from a position of strength here in this business.

We had to first get our new factory up and running and build from that. So we now think we have a, if you will, a beachhead to build from both organically and inorganically. Okay.

Speaker 11

Thank you.

Speaker 0

Your next question comes from the line of Kathryn Schulte with Baird. Your line is open.

Speaker 13

Hey guys, thanks for the questions. Guess first, despite the relatively good LSAG results in the quarter, it sounds like the outlook on the capital equipment side is still a bit uncertain. Can you just talk to how the services and consumables side of the business trended in July and what your expectations are for instrumentation trends in the coming quarter?

Speaker 3

Yes. I think as Catherine, this is Bob. All three of our businesses actually performed better in July than they did in May and June, which was very positive. The ACG business, actually led the charge in terms of that, as you would expect, given the resumption of activities. There's some catch up in terms of, you know, we saw that kind of phenomenon actually in China in April.

But ultimately ACG was there. I think LSAG capital is going to continue to be constrained. But I think what we've seen in our business is we've talked about this in the past, kind of despite the quality. And, with our instrumentation and the reputation that we have, I think in a capital constrained environment, those dollars are precious and we think our positioning is very good vis a vis the market.

Speaker 2

Yeah. I tried to hit that in my remarks, which is really say, listen, we know we're picking up share in a in a in a tight market. And and I think you saw that on C and E, right? Which is, if a if a C and E capital purchase is going down, it's coming out on its way. Yeah.

So, and and that's why, you know, overall market is still cautious, but you see PMI starting to creep up a bit.

Speaker 3

Yes. And Catherine, just one last thing to give you maybe a little more color in. If we looked across the groups, we would expect LSAG to still be negative in Q4. I mean, it's probably going to lag given

Speaker 2

Had big fourth quarter last year, Okay. Q2 as

Speaker 13

Very helpful. And then, Mike, you mentioned seeing growth in all regions for the non COVID diagnostics business exiting the quarter. Can you just give us a sense of where those activity levels are in The US versus China and where they bottomed out across the different regions?

Speaker 2

Yes. Sure. So I think if I'd say China is in the lead position in terms of, if you are, almost full recovery. Europe Europe is second and the The US is trailing. So, for the first for the throughout the quarter, if I look at Sam's business in The US, for example, the first two months were negative, and of diagnostic testing volumes and pathology.

What we saw actually a improvement to growth in July. So I think it's sort of the pattern almost the pattern of how the pandemic has flowed around the world. You know, China is back. Europe's on its way. And I'd say The US is still in the early stages of recovery.

Speaker 3

Yeah. And I would say in The US is probably, keep me honest, Sam, it's, we're probably still at about eighty percent of pre COVID levels, from a diagnostics perspective, but improving where it was below that, you know, at the beginning of

Speaker 2

the quarter. That sound right, Sam? It does. Yes.

Speaker 13

All right, great. Thank you.

Speaker 0

Your next question comes from the line of Steve Willoughby with Cleveland Research. Your line is open.

Speaker 3

Hi, good afternoon. Yes, Steve.

Speaker 9

Hi there, Mike. Just one question for you.

Speaker 3

Lot of my other questions have already

Speaker 0

been answered. Ninety days ago,

Speaker 9

you made a brief comment about the potential of onshoring back to

Speaker 3

The U. S. Just was wondering if there's any update on that at all. Thank you.

Speaker 2

Thanks, Steve. Happy to comment on I think that's still going to happen. And these things take time, but there's active discussion. By the way, I wouldn't say it's just confined to The United States. I mean, many geographies are now looking at the security of the supply chain, both in the pharma side as well as in the chemical marketplace where they're providing precursors into the APIs for the pharma chain.

So nothing significant to announce relative to impact on business, but there does seem to be an overall trend in this regard. I can say also from perspective, we're working hard to make sure that our supply chain is secure as well. So I think that COVID-nineteen pandemic has been a real wake up call to release some vulnerabilities in some aspects of the supply chain. So we're kind of working both sides of it, which are to ensure our own ability to, deliver product under multiple scenarios, as well as we do see some market trends, underway. Bob, know you've taken a look at this pretty quickly.

Speaker 3

Yeah. Was going say just to build on that, we talked a little bit about earlier in the call. Would expect that to see some of that opportunity show up in our order book and that's probably more a 21 time timeframe for revenue. I wouldn't expect any of that to happen in Q4 just given the kind of timing, but you're seeing it in multiple end markets and multiple regions. We think this is a that will continue.

Thanks for that color. Appreciate it.

Speaker 2

You're welcome.

Speaker 0

Your next question comes from the line of Dan Brennan with UBS. Your line is open.

Speaker 7

Great. Thanks. Hey, guys. Hope you guys are doing well, Mike and Bob. Sure.

Speaker 14

Maybe first question on just on chemical and energy. Obviously, you already highlighted a few comments throughout the call. But just wondering if you can kind of walk through a little more color, separate trends within that segment by customer, Chemical. I don't know if it's worth seeing if there's been a big divergence at all between Chemical and A

Speaker 3

and P and R and M.

Speaker 14

And then secondarily, maybe just remind us of how much of that business is tied towards like QAQC versus R and D and kind of what are we looking for to determine whether or not this down 10% begins to improve more ratably or if it's going to save the slow steady progress that you've lived through.

Speaker 2

Hey, Bob, why don't I make some initial comments and then you can check our notes to see if I missed anything. But I think unlike the last quarter, the mix here was I think both the chemical and the energy related side had about the same dynamics, where, you know, both were both were both were down about the same, primarily on the instrument side. And, on one hand, the chemical side of the business is really benefiting, continue to benefit from the lower oil prices, but some of their end markets weak, whether it be automotive or some of the other markets that they service are weak. Some of them are getting a little bit of help on COVID-nineteen But overall, I'd say both the chemical side as well as the inner side of that are down about the same, but stable.

And I have to say that Bob and I had talked at some length about this in our last call and our prediction at the time was we thought we were going to be in a kind of a stable situation relative to this. There wasn't going get any worse. That was sort of the questions we were getting last call. So I think we were really pleased to see that that came through this this quarter. Then we, you know, we expect that, you know, eventually this thing will start to move back to to growth.

I I think it's probably a seventy thirty mix where most of it's in QAQC. And that's why, you know, these these facilities are running, albeit maybe not at at full full volume. So, you know, QAQC equipment, will be needed as well as as well as the consumer service that go with us. They can only hold off the repos on that side for so long. There is an element of research, but I think in the chemical and energy space, biggest driver for that is the QAQC side of the business.

Speaker 3

And I think, Mike, the only thing I would add, Dan, is, we would expect this, as you said, kind of steady slope progress going forward.

Speaker 14

Okay. And then maybe one different follow-up. I know a couple of questions on China, but maybe could you just go a little bit more into detail on what you saw in Food and Generics? Obviously, COVID is impacting the globe and the recovery, but you've got some pretty unique issues with food and generics that are maybe a little different. So dependent upon the improvement or lack thereof that could drive notable changes in China.

So what did you see there and what's the outlook as we look forward to those two segments?

Speaker 7

Thank you. Yes, was going

Speaker 3

say Dan, one of the things we were incredibly proud of in China was all three of the business groups grew and all of our end markets grew, really led by food, which was up over 20%. It's been, you know, a while since we've been able to say that. And so we think that that we've talked about kind of the the move away from the the government labs or the central labs into the commercial labs, and we think that that's stabilized. You know, team has really been, able to to garner share, or or, you know, our our view of capacity capacity in in that that space. And then in pharma, you know, it continues to perform very well.

Actually, pharma was up, you know, roughly 10% in, in China, and that's a combination of both large and small small molecule. I think our thesis around that continues to play out, which is that, you know, the winners of the the four plus seven or the the tendering process are our, you know, customers that where we are over indexed, and we continue to see that positive momentum. You know, we actually saw acceleration from q two to q three, in both food and pharma, and the rest of the businesses were, were positive as well.

Speaker 1

So I think it's broad based. Yep.

Speaker 5

Great. Thank you, Zach.

Speaker 2

You're quite welcome.

Speaker 0

Your next question comes from the line of Patrick Donnelly with Citigroup. Your line is open.

Speaker 12

Hey, thanks guys. Hey, Patrick. Hey, Mike. Maybe just one for you Sure. I know there's been a few questions in July, obviously, but, yeah, with all the businesses returning to growth, I guess, it safe to assume you guys didn't see too much of a pullback around the second wave here in The U.

S, even the first few weeks of August? Sounds like you're a little more cautious on Americas versus other geographies, but just wondering any surprises on an end market basis in The US as you went through July and even early August, given kind of the reoccurrence of the virus?

Speaker 2

No. I'll jump in on this. From our perspective, no real surprises. Mean, we were all, like all of us, we were watching what was happening with the pandemic as it worked its way across throughout The US and we saw the case numbers go up and lab access was down for the early, fairly sharply, April, May, June, and we started seeing some recovery. I think no real surprises versus what we thought.

Speaker 3

Yeah, I would agree. I mean, Patrick, this is Bob. The Americas, as Mike said earlier, is in fact the biggest variable because it's further along in its recovery than both Europe and China. I think the thing that we're watching is those COVID flare ups and the potential impact on elective procedures, which would impact our diagnostics business. That's probably got the biggest variability going into Q4 relative to LSAG and ACG.

But to Mike's point, we did not see any significant change with these flare ups in in in August or excuse me, in in July and in early August.

Speaker 12

No. That's helpful. And a bunch of, you know, good commentary on the chemical and energy and industrial side. I just want to, I guess, clarify. I mean, it certainly seems like the industrial sentiment feels like it might have bottomed.

It seems like your tone is a little bit better from three months ago, even though, again, chemical and energy is probably going to be down similar this quarter and then again next quarter. But guess what are you hearing from customers there on spend plans? Again, it sounds like you're a little more optimistic and talking a little more bullishly about 2021. So I'm just wondering, I guess, we enter into the end of this fiscal year into 2021, are you seeing things improve a little bit? Obviously, you'll come up against very easy comps, but it does seem like the tone is a little more positive.

So are you hearing from customers, you know, that things are trending a little bit better into '21?

Speaker 2

Yeah. I I think that's a fair fair assessment of of of the of what I was trying to communicate today. You know, first of all, you know, the fact that we do think it's bottomed, and that was our thesis when the things started going down, directionally down when the pandemic hit. We do see that. Again, I don't want to get too far ahead of it and describe some big dramatic increase in growth in this space, but you know, customers are working on the plans.

Know, Chevron actually is making some big investments, not Iraq. Capital capital, you know, these these are ongoing concerns, and they they can hold back their their capital for a while. But they're going to want to maintain their operations at the highest capability. So we're hopeful that the budget environment will be a little bit different in 2021. I think once we get a little bit more clarity, once our customers feeling, more clarity on their view of where the economy is going, then they can make their decisions a lot more confident.

So the PMIs are a good a good good view of of how how sentiment may be changing. So, again, don't over interpret this for fourth quarter, but it does point to '21 being perhaps a better environment.

Speaker 12

Okay, great. Thanks Mike.

Speaker 0

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

Speaker 11

Thanks. Good afternoon, guys. Hey, Jack. Hey,

Speaker 12

Hey. So I wanted to go back

Speaker 11

to the NASD business and just get a little bit more color. Are you working on any of the mRNA based COVID-nineteen vaccine? And, you know, I guess curious because these trials are moving so quickly. I was curious to get your take if one were to three and then to commercial within the next six months. How would you manage the business, you know, just deliver on the capacity that, you know, customer might need for that?

Speaker 2

Hey. Hey, Sam. I'm pass that to you.

Speaker 7

Yeah. No problem, Mike. So, you know, I can't comment specifically, on the the molecule or the molecule projects that we're doing, related to COVID nineteen. But, you know, two things I will point out. As Bob indicated earlier, you know, this is this is business, you know, separate for or, you know, different than the business we're already doing or it's not taking the place of business, if you will.

And, you know, we believe we we have the capacity in that, you know that if the demand is there. Related to certain things playing out related to covert 19 and the molecules that we happen to be working on we believe we will be in a position to be able to. Supply that material at the at the volume required.

Speaker 11

Great. And then, one more follow-up on LSAG. I'm just curious, you know, as you're looking at the research labs around the globe, kind of this conversation around deferral versus cancellation, what are customers telling you? Is it still mostly deferrals versus cancellations? And on the deferral side, when do you expect these how far out is it getting pushed something that you think it hits before the end of the year or probably more likely in calendar twenty one?

Speaker 2

Hey, Jack. Happy to answer this question. This is something we've been monitoring pretty closely, a deferral versus cancellation. And we've really been pleased. Our cancellations are actually lower than last year.

And our thesis is they're being pushed and and that and that the, funds will be deployed, this calendar year.

Speaker 3

Yeah. That's what we actually we we saw that, Jack. Some of that actually happened in q three. Mhmm. You know?

And and as people are going back into the labs physically there, then they can install, the instrumentation. But to Mike's point, we seen no no cancelation or lower cancellations than what we would have last year. There's always some level of it. I would say that, we've been extraordinarily pleased, and, I would expect it to happen, this calendar year. Great.

Speaker 0

Thank you. This concludes the allotted time for our question and answer session. I'd now like to turn the call back over to Ankur for any closing remarks.

Speaker 1

Yes. So that concludes the call for today. Thanks, everyone, for joining in.

Speaker 0

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