Agilent Technologies, Inc A CEO Mike McMullen on Q1 2020 Results

Thanks, Ankur, and thanks everyone for joining our call today. I'd like to start today's call with a reminder that Mark Toke, ACG group, has already turned in his Bay first while Mark and his wife are currently doing a long-planned vacation and he's not able to join us today. I would be remiss in not taking the opportunity to recognize the outstanding accomplishments Mark has made in his stellar 38-year career. His track record results speak for itself. Thank you, Mark. We have very strong bench at Agilent and I've already named Mark's successor, Poorer McDonald. Pork knows a business well, he's been on Mark's staff for several years, and currently runs our chemistry and supplies division. Pork and Mark are already working on transition activities as Pork prepares to take the helm of the HCG business at the start of fiscal Q3. Our congratulations to both Mark and Pork. And now on to the quarterly results. Agilent delivered a strong start to 2020. Q1 revenues are above our expectations as business grew in all regions and markets. Total revenues of 1.36 billion are up 5.7 percent year-over-year on a reported basis and 2.4 percent on a core basis. We continue to translate our top-line growth into strong bottom-line earnings. Our EPS of 81 cents is up 7 percent and 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 we are building the buying strategy of investing in fast-growing markets continue to deliver growth and help us create a more resilient business. First, I want to talk about our most recent acquisition, BioTek. This was the first quarter with the BioTek 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 BioTek continues the strong momentum that originated and got us interested in bringing them into Agilent. The BioTek leadership team with Justin Santa Clara were here for a few days of planned meetings and they are very energized and excited about the future possibilities, making a great business even stronger as part of Agilent. The resilience 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 remotely supporting our customers as a number of them gradually resume operations. We've also restored our in-country production activities and are shipping product to customers in China and internationally, albeit at a reduced rate. On the business side, given our first quarter ended January 31st, 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 extension of the Lunar New Year holiday affected our customers' ability to transact and accept shipments during the last days of the quarter. This reduced our reported revenue by approximately 10 million in total for the quarter, primarily in our LS AG instrument business. We have since recognized that 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 slow uptake of consumables and services. The slow 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 that while we foresee a cash impact to our Q2 business, our full-year outlook for total Agilent revenues and EPS remains unchanged. Our business outside of China remains on 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 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 is responding to do our part to help our Agilent team, exactly 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 disease 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 the traditional details of our quarterly results. Agilent's growth is broad-based as our business grew across all regions and end markets. Our overall 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 led by strong growth in the biopharma and environment and forensics markets. Now taking a closer look at how the individual business units performed: LS AG revenues grew 5% on a reported basis driven by strong performance in our biopharma and cell analysis business. On a core basis, LS AG's revenues were down 2 percent against a tough comp 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 continued 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 solid growth in the quarter against a difficult 12% growth comp. We're experiencing continuation of positive trends we shared in our core pathology business and seen strength in our NGS QA/QC franchise. We continue to be pleased with the revenue ramp at our new Agilent 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 SureSelect XT HS2 DNA kit. This, along with the recently launched automated sample prep platform Magnis, further strengthens our leadership position in the NGS sample prep market. In addition, industry publications honored the Agilent InfinityLab LC/MS D-iQ system with 2019 Innovation Awards. The award-winning mass spectrometer, introduced last June, incorporates intelligent design and innovation such as embedded sensors that monitor instrument health. And finally, earlier this month, Barron's named Agilent number one in the list of the 2019 most sustainable companies in America. We're very proud of this recognition. Sustainability is a critical topic that's gained 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 a reminder of our 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 from 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, optimizing our infrastructure and operations, and investing in the future of Agilent both organically and inorganically. We do all this while maintaining a keen 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 maintain our growth and earnings outlook for the year. Thank you for joining the call, and I look forward to answering your questions. I will now hand off the call to Bob.

I think I can 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 the ground from our team — we just spoke 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 we think a lot of the procurement is going to occur a little bit later in the year. I think a lot of it is 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 it being a very fluid situation. And we really haven't seen any kind of transitory or connected impact on CNE. In fact, CNE 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, which would maybe give an indication of perhaps a better outlook, and some initial noise with some of our major accounts about thinking on the current, but we still remain cautious in terms of the outlook for Frisian, but we are encouraged by the Q1 results. And again, we're not really seeing any significant movements in that area on a global basis. And going back to the first comment on China, we weren't expecting a lot in CNE in China anyway, so I think we're in pretty solid shape relative to the outlook there as well.

No, I think the big story is China, right? That's exactly right. Mike, you know, there are two elements: one is the shifting of the Lunar New Year from Q1 into Q2, as well as the impact of the extension of the Lunar New Year holiday. So those are the two primary pieces. And within the biopharma segment, the biopharma segment really was strong for us again this quarter. And then we think as the 4+7 issue rolls out in the latter part of this year, then we'll see growth in the small molecule side of that space. And we have really strong growth in NGS and the ACG, which is stronger pharma, so we're feeling pretty good about pharma.

Yeah, sure, Ryan. Thanks for that question. So as I touched briefly on in my opening remarks, we have actually resumed production and are in a really solid position right now to not only ship product to our customers in China, but also products that are manufactured in China to be exported into the global market environment. And as we have a very diversified global footprint in terms of the supply chain and manufacturing capabilities, we think in the near term we're in pretty solid shape relative to the ability to meet our commitments from a shipment perspective. And they 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 it actually has mitigated our risk here as well.

You can take it as well. Yeah, yeah, so on food, as I mentioned, we certainly are pleased with the progress. We have had several quarters of very predictable performance there. And actually Q1, despite the coronavirus, it probably had more impact on the pharma side than on food. 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 million that was quite a large incremental because we had all the costs, so that was probably a higher than normal incremental drop to the bottom line. That was probably a little over a penny of impact on the full quarter.

As you imagine, you maybe 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 NGS 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 at full capacity yet, but it was a contributor to our growth in the first quarter, no doubt. Sam, anything else you'd like to add there?

I think it was really this is Mike, and Sam feel free to jump on this. We had 12% growth last year, so tough comp. We had solid growth across all elements of that business and throughout, outside of maybe a China impact for an element of the business. Things were firing on all cylinders across the business, as I recall.

Yeah, hey Dan, welcome back and appreciate the question. It's 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 easier compares. Jacob, you were looking into this, so yeah.

Hey Danny, I just can't help but to jump in on this one. I think that question ladies posed to our competitors because we saw, particularly as we finish the calendar year, some very aggressive pricing by some of our competitors, particularly in the liquid chromatography and mass spectrometry platforms. And if you're adding to that, Jake, no I think it's fair to say that we continue to be premium priced, but there's certainly some competition in the market space right now. And yeah, so they surprised. Privately we don't play the price game here. I mean, that's not how we want to win.

Yeah, 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, landed in on the last couple of days of January, and with the extension of the Lunar New Year 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 to 40 million dollars. In the first half, it's 25 to 50 million dollars, and we'll expect to get that back in the second half of our fiscal year.

It just happened to hit that right up and relative to expectations, it's ahead of our expectations. It really has been just a tremendous addition to the company. We were talking about this the other day inside the company. Typically when you put together a deal scenario, you know, it's often out of the gate you don't see a team beating the revenue numbers all the time, and that's actually what we saw in the case of BioTek in its first full quarter as part of Agilent. And Jacob, I know you've been talking with customers about how they're thinking about BioTek being part of Agilent.

It's about what I just talked about, performance. You can leave a comment on the outlook. So it came in right at expected. I think you know that Europe is 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. And Bob, in terms of the outlook?

I don't anticipate a major shift. You know, we've largely got an instrument-heavy business in China relative to the rest of the business anyway. But our opportunity really lies in consumables and services over time, so I don't see a dramatic change in Q2 or in the back half of the year.

Dan, I think there's a reasonable expectation. So when I was asked earlier about pharma, you know, we remain confident about our ability to grow in pharma. Part of it is going to be the continuing growth we're going to have in our NASD business. We also know that we're getting to some of the easier compares, relatively speaking, on the LS AG instrument business, because as you may all recall, Q2 is when we started seeing the slowdown as China went through this review of their pricing and malpractice practices around 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. And we saw Q1 in our pharma business, yeah, and we're expecting faster growth in Q2.

So I think Sam, you're getting your backpack maybe released now? Your teams are getting a backpack? He said that, okay. Maybe just a few comments on this. So yeah, overall, thanks for the question, Dan. You know, 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-based sequencer, particularly as it comes to the technical specs, our read length, 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 Magnis, which we introduced not too long ago. Magnis 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, America, and China. So we're going to continue sharing the message there and sharing data from a number of customers. We also, as you would have heard us talk about, have launched a new SureSelect XT HS 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. It also allows 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. I think it's going to be an exciting AGBT. And then the other part of the question was what the spend looks like. Just quickly, our R&D spending forecast in 2020 is the same as 2019, so we're not expecting any ramp-up.

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

Yeah, and Jacob, I just had one thing. Early on in my tenure, we had a similar kind of slowdown. The difference here is that at that time, a lot of our platforms were rather aged. This time we have a completely refreshed platform. So there's a great productivity message to customers and lab managers obviously have the ability to go to their management and say, listen, there is something new out there, I'm not replacing like for like.

Yeah, so first of all, just a few comments on the settlement. We're very pleased with the agreement that was reached with Twist. You know, we think it's in the best interest of our shareholders to rigorously protect our IP. And not only did we receive a payment from Twist, they also had to curtail a license for us for certain aspects of our oligo synthesis technology. And as a company, we're committed to innovation in the right way. So really pleased with how the settlement went. And relative to the treatment of the legal expenses and outlook for the rest of the year, I think we had that in our pro forma? Yeah, we will pro forma that. So you see both the settlement come in, Brandon, as well as the costs associated with that against our Q2 results.

Yeah, it's a great question. So as I mentioned in my prepared remarks, 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. 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. I'm going to have several European customers visiting in the next month, and they want to hear about our sustainability plans. When you talk to them about how we're reducing the footprint, the electrical consumption, that some of our products don't even use gases — in gas chromatography we've eliminated the use of gases, or in the case of LC/MS — and we're reducing the size of packaging, and by the way, that also comes with a benefit to Agilent as well. So it's really helping in terms of our customer relationships and ability to drive sales into those accounts. It also is really quite helpful for recruiting 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 with the environment, our views on diversity and inclusion. 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 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, great things happen in the marketplace or on the field. I think that really is one of the major benefits here: what it does for your team. There really is a multitude of impacts for the company, and something we really believe in.

I 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, whether you have any insight?

Yeah, so I'm in the conference room zooming out right now. Great question. I think that's how we thought about the full-year guide, and I'll leave it to you to prescribe the proper adjective. 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. We were actually tracking well in the first quarter where it would have been a beat on both revenue and EPS for the quarter, albeit the impact of the much talked about today, 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 doing extremely well outside of China — whether the NASD or ACG business, the compares and the strength of our LS AG instrument portfolio, that's going on with NGS, and then back to cell analysis. So we have a lot of confidence. You know, I wasn't called the middle of the fairway right now, but I would say, Steve, one thing: obviously 90 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, pay in the first half of the year, we're expecting a $25 to $50 million impact that we're going to make up in the second half of the year. Now the question is how fast, and we hope for everyone's sake that it 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.

I think the statement I made on the last quarterly call remains, which is we think deploying our capital towards growth and earnings drivers on the M&A front makes a lot of sense. We're focused on deals that make sense for us in markets that we know, where we can really leverage the scale of the company. And we did a large deal — BioTek — past quarter, and as you heard earlier, that's off to a really good start. I think we often get the question, how large are you willing to go? The way Bob and I have 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 BioTek. So I'm not saying BioTek is the max level, but it's probably multiples of that, as opposed to something of another magnitude size. Yeah, and as you can appreciate, timing is always very difficult to understand. We're going to remain disciplined, and if there isn't anything out there that meets our financial criteria, we're not going to do it. We don't need to do M&A to make our model work. But certainly you see in the first quarter the benefit that we've seen with BioTek, really building scale in cell analysis, which we think has a long-term growth opportunity for us, not only in LS AG but across the business.

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