Agilent Technologies, Inc.

Good day, ladies and gentlemen, and welcome to Agilent Technologies, first quarter of 2019 earnings conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be provided at that time. Should anyone require operator assistance during today's conference, please press star and zero when you're touched on telephone.

And as

a reminder, today's conference is being recorded. I now like to hand the conference over to Ankur Dhingra, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome everyone to Agilent's first quarter conference call for fiscal year 2019. With me are Mike McMullen, Agilent's President and CEO, and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob'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 Mark Doak, President of Agilent Cross Lab Group. You can find the press release, investor presentation, and information to supplement today's discussion on our website at .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 on year. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31st. 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.

Thanks, Ankur, and thanks for joining us on our call today. I'd like to start by welcoming Ankur to his first earnings call as our Vice President of Investor Relations. While Ankur is new to this role, he is not new to Aspen. He excelled in senior-level finance roles for over 16 years. I believe many of you on this call have already met Ankur, but in case you have not, I want to reiterate a key theme he is sharing. We remain committed to sustaining excellence in our IR team and maintaining a strong relationship with you, the investment community. We miss Alicia, but are very pleased to have such a capable successor in Ankur. Now, onto the Q1 results. 2019 is off to a strong start. The Agilent team continues to deliver excellent results with both revenues and earnings exceeding our guidance. Q1 revenues totaled $1.28 billion. This represents .1% core growth against a tough Q1 2018 compare. Our performance is highlighted by double-digit growth in both our Agilent cross lab and diagnostics and genomics group. From an end-market perspective, our results led by double-digit growth in the pharma, clinical and diagnostics, and environmental and forensics markets. Our Q1 operating margin is 23.1%, an increase of 120 basis points from last year. Our Agile Agilent programs are driving process and productivity improvements while we also continue to invest for the future. This is our 16th consecutive quarter of the Agilent team improving -over-year operating margins. Our Q1 adjusted EPS of 76 cents is up 15%. This is three cents above the high end of our guidance. The combination of strong top-line growth and increased margins is driving continued double-digit growth in our EPS. Now, looking at results across our businesses. Our life sciences imply markets grew 1% on a core basis against a very tough compare of 11% growth last year. Demand remains strong in the pharma and environmental forensics markets. We continue bringing to the market innovative new offerings to fuel future growth. Earlier this month in Japan, we strengthened our leadership position in gas chromatography with the global launch of two innovative new instruments. Our new 8890GC replaced our flagship 789GC offering and an all-new mid-range 8860GC. In addition to leading analytic performance, reliability and robustness, these two smart connected instruments offer several compelling new digital capabilities including remote connectivity. Customers can now remotely control the instrument, monitor the status and perform diagnostic tests providing a new level of convenience for busy lab managers and chemists. With our intelligent predictive technology, we can also provide our customers with system health alerts or autonomous monitoring of instrument performance allowing them to avoid unscheduled downtime and maximize laboratory productivity. These are just great examples of our digital lab strategy in action. Complimenting the introduction of the Intuvo GC in 2016, we now have the most complete and compelling gas chromatography portfolio in the industry. While early in the global launch of these two new offerings, customer response is very positive. We continue to strengthen our fast-growing cell analysis business. Building from our beachhead acquisition of Seahorse Bioscience in 2015, we acquired Luxo Biosciences last year adding new cell assay capability. We continue to invest in the fast-growing cell analysis market space. Earlier this quarter, we opened a -the-art cell assay development facility in Cork, Ireland. We also acquired a CEO Bioscience in Q1 adding highly complimentary new products to our cell analysis portfolio. The acquisition of the CEO Bioscience increases the relevance and impact we can have with our customers in this quickly evolving space. LSAG's innovation leadership again receive external recognition as we drive for increased market share in molecular spectroscopy. The analytical scientists rank the excellent 8700 LDIR system as a 2018 top innovation. This groundbreaking imaging spectroscopy system takes a new approach of chemical imaging for customers in the pharmaceutical, biomedical, food, and material science markets. The system delivers greater speed and clarity enabling faster, more informed decisions for customers. These new products from our LSAG further strengthen an already impressive lineup of instrumentation software. We are very well positioned for continuing market share gains. Our Agile and CrossLab group delivered excellent results growing 10% on a core basis in Q1. The MAM is broad-based across all end markets and regions which speaks to the strength of our customer value proposition. Our ACG team continues to expand our digital capability to the lab and improve the customer experience. We introduce e-subscriptions to allow customers set up recurring consumer orders online. This provides customers the ease and convenience of not having to place repeated orders. We also launched a smart alert subscription service for the GC install base providing lab manager with alerts on instrument maintenance needs based on our actual applications and sample volume. Over the past several years ACG has worked diligently on the expansion of our portfolio building outcome-oriented solutions and enabling our online business. Our Q1 results are reflective of all the ACG team work to date to bring these capabilities to market and set us up well for continued growth in the future. The Diagnostic Genomics Group delivered exceptionally strong results this quarter with 12% core revenue growth. The MAM is strong across all businesses and regions. Our pathology related businesses which comprise roughly half the Diagnostic Genomics

Group,

grew low double digits in the quarter. Importantly, we continue to partner with our customers in efforts to fight cancer. This quarter we expanded our portfolio in high-volume cancer diagnostic testing. In Europe, we launched the first PD-L1 Pharma DX kit on the Dock-O Omnis automated platform. We are also working on bringing this PD-L1 assay on Omnis to the U.S. and other markets. Our NGS-related business again grew double digits this quarter. The NASD business is also very strong. Our plans to bring the second facility online to expand production remain on track. We anticipate the initial production of GMP-grade APIs by the end of fiscal 2019 with a tiered revenue contribution to NFY 20. Looking at ASL's performance on a geographic basis, the Americas led with high single-digit growth and we saw low single-digit growth in Europe and China. As we expected, China's Q1 growth rate is lower than our expectations for full-year growth. This is owing to an extremely tough compare versus a 19% core growth last year. As you know, there's been a lot of conversation about the China market. While there are some puts and takes within the markets we serve, our view is that the overall market demand remains solid. Now, turning to the company outlook, the total company outlook. Our Q1 results coupled with our current view of market conditions and Ashland's strong execution capabilities helped deliver a strong 2019.

As a result, pre-star full-year guidance. Share the specifics, but before I hand it over to Bob, let me close with a few comments. First, I remain optimistic, cautious as we observe macro conversations about U.S.-China trade discussions and about the health of China and European economies, and optimistic

as we continue to see solid demand in most end markets and geographies, as we continue to successfully build a high-growth, high-margin, recurring revenue business, G and DG groups, and strengthen and expand our software portfolio. The Ashland team is living on its commitments to drive superior revenue and earnings, but it has never been stronger. The increase reflects our confidence in the strength of the Ashland business and our one Ashland team. Thank you for being on the call today. Thank you for the transmission difficulties, and I look forward to addressing your questions. Now, I'll hand off the call to Bob.

Thank

you, Mike.

Hold on just one second. Thank you, Mike, and good afternoon, everyone. In my remarks today, I will provide some revenue details, walk through the first quarter income statement and some other key financial metrics, and then I'll finish up with our updated guidance for Q2 in the full year. Unless otherwise noted, my remarks will focus on non-GAAP results, and percentage changes will be on a -over-year basis. As Mike mentioned, we delivered a strong Q1, so a good start to the fiscal year. Revenue for the quarter was $1.28 billion, with core revenue growth of 6.1%, exceeding our guidance. Reported growth was also 6%, as currency negatively impacted growth by 220 basis points, and was offset by M&A contributing 210 basis points of growth. Mike spoke to the business group's performance for the quarter, so I will provide some additional details around their end markets and regional performance. Pharma, our largest end market, delivered 10% core growth. Growth was broad-based across all business groups. We are seeing traditional strengths in biopharma, but also in newer strategic focus areas, such as cell analysis. We are excited about the addition of the Sea of Biosciences, which expands our portfolio in this fast-growing segment of the market. In addition, a strong performance at NASD contributed to the results. Chemical and energy core growth was 2% against a very strong comparison of 13% last year, and was in line with expectations. Instrument sales were effectively flat versus mid-teen gains last year, while services and consumables delivered solid -single-digit growth. Environmental and forensics was up 10%, even as we faced a tough low-teens compare last year. Double-digit growth in ACG and high single-digit growth in LSAG were driven by strength in GCMS, GC, atomic spectroscopy, consumables, and services. And wrapping up our end markets, diagnostics and clinical core revenue grew 11%, while both academia and government and food were effectively flat. Geographically, as Mike mentioned, we saw growth in all markets. The Americas region delivered high single-digit core growth, as our commercial team continues to execute at a high level, while Asia outside of China grew low double digits. Both Europe and China grew low single digits against difficult compares of 9% and 19%, respectively. Now, before I leave revenue, I want to mention we continue to be pleased with our evolving revenue mix, as non-instrument revenue contributed 57% of total sales in the quarter. This revenue has been higher growth and historically less cyclical revenue. Its contribution this quarter is more than one percentage point higher than Q1 of last year. We expect this trend to continue as we leverage our large and growing installed base and provide value-added services and solutions for our customers. Now, let's turn to the rest of the P&L. Q1 gross margin was .9% and increased 10 basis points compared to the prior year. Our teams have been able to offset the higher cost of tariffs with productivity improvements. Operating margin was 23.1%, up 120 basis points, mainly due to top-line leverage on operating expenses, even as we invested more in R&D. Now, before I leave operating margin, I want to remind you this fiscal year we adopted the new pension accounting standard and have restated prior years for comparison purposes. As a reminder, there is no net impact to our non-GAAP earnings per share. Consistent with our guidance, our Q1 tax rate was 17%, down a point versus a year ago, and average diluted shares were $322 million. All of this led to non-GAAP earnings per share of 76 cents in the first quarter, an increase of 15% compared to the prior year. Now, before moving on to FY19 guidance, I want to touch on a few additional metrics on cash flow and the balance sheet. Our free cash flow for the quarter was $174 million, up 12% from $155 million last year. We deployed $375 million in capital with $248 in M&A associated with the CIA. We returned $52 million to shareholders and dividends and purchased $1.1 million shares for $175 million. Lastly, we ended the quarter with $2.1 billion in cash and $1.8 billion in debt. Now, let's turn our non-GAAP financial guidance for the second quarter of 2019. For Q2, we are expecting revenue to range from $1.255 billion to $1.27 billion, representing reported growth of 4.1 to .3% and core growth of 5 to 6%. Currency is estimated to be a headwind of 290 basis points, partially offset by M&A, contributing roughly 200 to 220 basis points of growth. Second quarter 2019, non-GAAP earnings are expected to be in the range of 70 cents to 72 cents per share, which is .7% to .8% reported growth. And based on the strong first quarter and updated exchange rates, we are also updating our full year guidance in both revenue and EPS. We are updating our full year revenue guidance to a range of $5.15 billion to $5.19 billion, up $20 million on both low end and high end of the range, and representing .8% to .6% reported growth. This reflects our Q1 performance as well as a benefit from our prior guidance associated with currency, although it is still roughly 180 basis point headwind for the year. As a result, we're still expecting core revenue growth in line with 5 to 5.5%. In addition, we are raising our full year earnings per share guidance to a range of $3.03 to $3.07, representing growth excluding currency of roughly 10 to 11% and reported growth of .6% to 10%, up a full point from previous guidance. Consistent with Q1, this is based on a 17% tax rate for the full year and full year average diluted shares of $322 million. As we mentioned at the beginning of the year, this guidance includes both upsides and downsides, so I would encourage you to model at the midpoint of guidance at this stage. Before opening the call for questions, let me conclude by saying we are very pleased with our Q1 results. Our start to the year and our continued hard work and focus of the Agilent team puts us in a strong position to achieve our goals for the year. With that, I will turn it back to Ankur for a Q&A.

Thank you, Bob. James, will you now open the lines for Q&A and provide the instructions,

please? Of course. Ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from queue, you may also press the pound key. As well, we do ask that you please place your line on mute once your question has been stated to prevent any background noise during response. Once again, that is star then one to ask a question. Our first question comes from the line of Patrick Donnelly with Golden Saks. Your line is now open.

Great, thanks, guys. Maybe just to start on the LSAC growth. It came in a little below where we were expecting. I certainly understand the tough comp from last year. Can you just talk through how that tracked relative to your internal expectations, then also the go-forward? Clearly, the comp and 2Q quite a bit easier in that segment. Maybe just help us think about the quarter and then the go-forward there.

Yeah, Patrick, a great question. Before I go to the answer, I just want to extend my apologies all on the phone. I understand we had some transmission difficulties earlier in the call, so hopefully it's not coming through loud and clear, but we'll make sure that we address all your questions in case we weren't clear throughout the call. Relative to the LSAC growth, I think you hit on one of the themes right off the bat, which is the tough compare. We were expecting growth to moderate to low single digits versus this tough compare. I would point out that we had good pockets of strength in pharma and environmental forensics. I would say there was some noise in the quarter, particularly in January with the U.S. shutdown and some China trade rhetoric. There's probably some transitory impact. It was really hard to tell exactly how much, but I think the look-forward is probably perhaps the most interesting thing, which is we see good underlying business demand. I hope that came through in the scratchiness of my narrative. We're expecting our growth rates to rebound in Q2. Not only because the comps get easier, but you've got this underlying strong business demand. We have a number of very new, exciting launches underway. These launches will be delivering revenue in the second quarter.

Okay, that's helpful. Then maybe just staying on the 2Q guide, maybe one for Bob. Just given that the comp eases by, I think, 500 bips quarter over one Q, the guidance calling for only 5 to 6 percent growth. Can you maybe just talk through some of the moving pieces there, why we shouldn't see an uptick in growth if some conservatism baked in on your part?

Yeah, hey Patrick, thanks for the question. I think you hit the nail on the head in terms of, as Mike mentioned, we're kind of cautiously optimistic. We do have an easier comp in Q2. We've also reflected a higher guide at the midpoint for Q2 relative to what we had guided to in Q1. As we think about it, we're still expecting performance in ACG and DGG. LSAG we do expect to improve in Q2. We're being cautious a bit on some of the forecast. When we think about things like chemical energy, those are areas that we potentially have upside going into not only Q2 but Q3 and Q4 as well.

Yeah, but I think this is probably the highest quarterly Q2 growth guide we've ever given in our history. So while there may be an element of conservatism relative to historical guides, this is the highest we've ever guided.

Yeah, that's helpful. Thanks guys.

Thank you. Our next question comes from the line of Ross Muechen with Evercore. Your line is now open. Hey, Mike.

Hey, Ross. Thanks for the color. Good to hear your voice not in sort of funny tone.

So maybe

just picking off your comment on China, you know, obviously, there's a lot of things at stake in sort of getting this trade deal done and it seems like it's trending in the right direction, but maybe it's a bit later than what they had foreshadowed. I guess, how are you thinking in general about what parts of the business could see maybe on the cap equipment side? Is it sensitivity and, you know, help explain maybe a little bit more, tease out what you saw in January? It's always tough with you guys because it's sort of a nontraditional quarter end is sort of extrapolate, but help us understand sort of what you're expecting over the next quarter and then against that sort of the underlying strength that still seems to sort of exist in most parts of the business in that region given, you know, sort of the commitments they've made on the environmental side, et cetera. And then lastly, remind us of where we are in sort of recovery in the food business.

Yeah, absolutely, Ross. A great question and I'm glad to hear we're coming through much more clear and do appreciate the recognition of the kind of unusual timing of when we report relative to others in the industry. But, you know, specific to China and then maybe I'll just give you kind of overall narrative on China and get to your specific question. So when we were guiding for this quarter, we expect our growth to moderate to low-signature digits, you know, really given these tough compares in our 19% growth last year. And we continue to see really strong demand in pharma and environmental. And I think that environmental demand really speaks to your commentary about the continued funding that in China relative to their national priorities. And this as I mentioned here, I will cover a minute C&E, but last year our C&E business grew, I think, 34%. That's right. Relative to food, I would say, and I use the word puts and takes, I think, in my narrative, but we are seeing a slower rebound than anticipated in the food market. But we do expect our business to return to growth later this year. We can dig around in some of the details later if you like on that one. You know, but I think really the outlook is really the most important point here again, which is we're expecting a stronger Q2 growth rate, which was our assumption all along in terms of our guide, because the good underlying demand is there. And as the comp sees as we move into Q2, you may recall our Q2 results last year. And then in the similar narrative around, you know, whether there are fundamental changes in our business in China, which turned out not to be the case. We're living over double-digit growth last year. But I think if you look at Q2, you've got the comp easing, you've got the continued strong underlying demand, and we have new product launches that are going to turn into revenue in Q2. I do think that, you know, the continued drag out, if you will, of the China tariff discussions between the U.S. and China, you know, puts a level of uncertainty in the marketplace. And perhaps those customers who have more export-driven activities, which is relatively smaller part of business, might be holding back a bit. I think that, you know, eliminating that cloud of uncertainty would certainly help. But despite that, we still see really good demand in China.

I think on that, Ross, just to add, you know, I think both on the ACG side as well as the DGG side, you know, those businesses continue to remain robust, really leveraging that installed base. And so, you know, I think when we think about China, we think that long-term, the growth is certainly there. We're continuing to invest in China and expect growth, you know, in excess of the total company average over the course of the year.

Yeah, hey, Bob, thanks for jumping in on the answer as well, because you may recall in some of our earlier discussions, we specifically highlighted the underrepresentation we have in our ACG and DGG business in China and the view that they were really poised to have a lot of, sort of long runway if you will, in terms of exceptional growth. And we've seen that through this year so far.

That's helpful. And maybe just, you know, tease out for us kind of how to think about DGG over the course of the year. Obviously, NSAD very late in the year could ramp, but it feels like underlying, given some of the acquisitions you've done there, given some share that feels like is going in your direction, that business could remain elevated, maybe not at this exact level every quarter, but certainly for a lot of the year. Just help us sort of understand kind of your expectations for how that business will trend and how it did versus your internal plan, because this feels like a very good print for the DGG folks.

Yeah, Ross, you're spot on. Your characterization of what's going on is I'd have to wholeheartedly agree to it. We've got good momentum in our core pathology business, and, you know, we could see some of the momentum building in the latter part of 2018 across the three dimensions of Sam's business. And we see the good momentum of in our pathology piece. We've been highlighting to the audience, you know, our continued strength in our NGS business, which, and you can see we've been bringing in pieces to complement that through acquisition, plus also the continued organic investors we have in our genomics business. And then I think the NASD story is fairly well known already, but you can see why we were so anxious to continue to invest in this business, and we're seeing growth now, and we're feeling pretty good about where this business is going. Sam, anything perhaps I missed?

No, Mike, I think you hit the nail on the head. We have a positive momentum going, and, you know, the inorganic parts are well known, but, you know, I think I also chaired last year's Analyst and Investor Day, and excited that upcoming next week at the AGBT conference will be, you know, formally unveiling the Magnus NGS Library Prep sample prep system. So there's a number of good things happening in DGG. So we are talking about that. Yes, well, we are

talking about that. Okay. Ross, does that get to your question?

That was awesome, guys. Thank you so much.

All right, thanks.

Thank you. Our next question comes from Tycho Peterson with JP Morgan. Your line is now open.

Hey, thanks. Maybe just a follow-up on a couple of those on China. You know, C&E strength you've talked about for a while there. How much of the strength in China for C&E do you think can kind of offset, you know, broader C&E softness? And then can you kind of quantify the food ministry catch-up you're expecting this year from the issues last year?

Yeah, Tycho, always good to hear from you, and happy to address both questions. So just to clarify, the C&E business for Q1, actually China was not a very strong contributor to the growth in Q1 that we saw in C&E. What I was referring to was a strong growth rate last year, 34%. That being said, as you know, we remain very bullish on the prospects of the chemical and energy business in China. And all I would just say there is just all about the comps. And perhaps waiting for this new product to hit the market. So as you know, the 8890GC, and perhaps I'll have you share a few comments about that a minute, Jacob, but the 8890GC is primarily targeted at the chemical and energy space. So we expect in the latter part of this year, the China chemical and energy business, we think there's really a secular trend that's going on here to be fundamentally strong. So I would not overreact to the first quarter. It's really a story of tough comps. And the story in the food market is, you may recall last year we had talked about, hey, we think this organization is going to take probably nine months or so to kind of go through the system. I think we got that part of it right, which was they were going through a process of consolidating into one set of industries, from multiple agencies into one singular agency. So that has happened. Pretty much that's essentially complete with most, but not all the leaders in place. What I think has taken a little bit longer is their internal review of elimination of redundancies across their multiple labs. So that's really leading to slower new instrument purchases in the, if you will, the central government segment of that market. So this is really affecting the China central lab purchases. While the private sector piece of it, the contract testing lab side of the market continues to grow. And we do expect the entire food business, inclusive of the central agencies, to be back growing again later this year. And Janka, maybe just a little bit of color on the 88-90 since I mentioned it. Or the Zyborod GC launch.

Yeah, absolutely.

And back on the chemical energy, you're absolutely right, Mike, that we continue to see a lot of big programs in place and projects in place in China. So we expect a lot of opportunities in that space, also going forward, as I also mentioned last time. But we are, of course, very excited about the new 88 series. Not only is it what we call the smart connected, and really we put a new class in of smart connected instrument, which is a key component now. This is a lab strategy. But what it also gives us now is a great opportunity for the huge installed base we have out there with the 7080 to have a very strong story card and refresh the installed base. Now everybody would like to upgrade to an even better solution. It is well-known technology, so you can very easily transfer your methods from the 7080 over to the 8080, but there's a lot of new features we have added into this. All the technology we invested in in Tubo is now coming to full effect here. And all the smart connected we've talked about, first of all, you can have the remote monitoring. But there is really, we have built in a dual core processor. And what it does, what it does really is it allows you to continuously, having one processor, continues to monitor the health of the instrument, which allows you to really understand what is going on, give the smart alerts, so you can really upfront understand what's happening. You can reduce your unscheduled downtime. And this is a huge opportunity for the labs out there. So we're really excited. And I can tell you our customers is at least as excited as we are right now.

We see a lot of demand for it. Yeah. And Tycho, the discussion we're having inside the company is this has been a decade in the making. Yours truly actually was GM when we came out with the 7890 product, which hit the market in 2007. So you can see just the amount of advancements we've made since that time and how we're leveraging the initial investments we made in the Tubo GC platform.

Okay. And then if we think about the current quarter, I appreciate the color you provided on guidance. Any impact from Chinese Lunar New Year? And then you mentioned the government shutdown. We've heard one of your peers talk about ICPMS impact there. Any impact on your business there?

Sure. Happy to talk about both. So for the first time in a number of years, we're not talking about Chinese New Year in our earnings call. So nothing unusual happened this year relative to the dates moving around between quarters. And obviously it moves the numbers around for comparison. So nothing unusual happened relative to the business flow, if you will, as a result of the Chinese New Year. And I mentioned some of the noise around the U.S. government shutdown. I've mentioned two things. First of all, just a reminder, when you look collectively at the entirety of all the U.S. government agencies, the U.S. government is our largest customer. And they were basically out of pocket for a month. And I think what you may be pointing to, Tyco, is some of the products require an export license from the U.S. government. So obviously that didn't happen. And some of that product didn't find its way into China, into Q1, because we didn't have the export license. That's just a transitory thing. We'll see that flow through. And overall, it's really, really immaterial to the company's quarterly results.

Okay. I appreciate it.

Thanks. Thank you. Our next question comes from Dan Leonard with Deutsche Bank. Your line is now open.

Thank you. Another question on geography. Can you comment on how the results in Europe arrived versus your internal expectations?

Yeah, Dan. Always good to hear from you. Right where we thought we'd be. As we came into this year, we were expecting low single-digit growth in Europe. And I think it's really been on that pace as well. So I don't think really anything unusual there. Obviously, we'd love to see some resolution on some of the political uncertainty. But I think the numbers basically came in as planned, Bob. No,

that's right. That's right. It was low single-digit stand, and that's kind of what we were expecting.

Okay. And then for my follow-up, I appreciate all the color on the new gas chromatography launches. Can you help us understand the anticipated adoption curve there? Is this something similar to the Intuvo, where it's very slow and steady at the outset, bell curve shaped? Or is this something where we could see a more immediate impact within the scope of 2019? Thank you.

Dan, I'm so glad you asked that question. So this is actually a much different scenario. We can expect a quicker ramp of orders here. And in fact, Jacob, I think we're actually starting to

ship, right? Yeah, we did start to ship this week here. So this is happening. As I mentioned before, it's based on our proven technology, and so it's very easy to transfer methods. Actually, you don't have to do anything. So you would actually expect most customers, I was looking for 70-80, probably pretty quickly move over to 80-80. We do see some customers that are conservative, that it's a production, that want to wait maybe a few months, but this

would be

fine.

Yeah, and we still have a lot of conviction on the game-changer Intuvo GC, but we do see the adoption rate to be here much more quickly than the Intuvo ramp because it is really a direct replacement with new capabilities for our 70-80 and 70-80 offerings.

Appreciate the color.

Thank you.

Thank you. Our next question comes from Brandon Collier with Jeffreys. Your line is now open.

Thanks, good afternoon. Mike, can you speak to the services growth in the first quarter and perhaps some of the traction you might be seeing with the multi-vendor services in China?

Yeah, so I'm going to make a few comments here. Then I'm going to invite Mark to join in on the call to sort of take a take a bow in front of the investment community. So we're seeing great traction in the overall ICG business and services and in China in particular. So I think I use all regions and across entire portfolios. So this has been the results of a lot of work over the last years really to provide to the marketplace a set of offerings that really helps them with running their operations in the lab and also with the great science they're doing. So we think we've got momentum. We think this wasn't just a one-quarter phenomena and our outlook is pretty positive here. So Mark, anything else you'd add to that?

Now thanks Mike and I'll add a couple things. As you suggested, we've seen strong growth not just in what we've talked about in our enterprise or multi-vendor arena, but in our instrument services business both of them were double-digit growers in this particular quarter. And maybe a bit nuanced about the portfolio expansion, so as Mike talked, the value-added services that now are more formulated around specific end markets in Jacob's business in particular. And the extension of a lot of the capabilities we actually talked to and aid in terms of how we're going to introduce an expanding portfolio around our cross lab connect and asset monitoring utilization services. As far as China's concerned, I'm extremely bullish about China still. I think we're, I know you like to talk about which innings we're in. I still think we're in the early innings in China in the enterprise phase and it's really ripe in the sense that they're looking for many of the same things we've seen across our global accounts and they have the size and scale of the assets in lab now to do things with it. So very encouraging in China and I think we'll see, you know, foreseeable future, we'll see strong growth there.

Thanks

Mark.

Thanks and

quick

follow-up for Bob, can you just help us bridge the core incremental operating margin year over year in the first quarter in terms of the impact M&A tariffs on the incremental zero year? Thank you.

Yeah, so yeah, let me give you a couple of data points there. So the majority of the operating margin expansion was through our operating expense. The tariffs were about roughly $4 million in the quarter which was in line with what we had expected so year over year that's a $4 million kind of headwind. M&A, if you include the LaserGen was about $3 or $4 million all in, you know, a reduction year over year as well. And then, you know, the tariffs were offset by productivity enhancements and gross margin and you saw that and then the R&D, we actually spent more in R&D but we're able to offset that through productivity savings in our SG&A through Agile Agilent programs. And so that hopefully gives you a sense for the 120 basis points improvement. It was really on the strength of the top line driving, you know, leverage in our core operating expenses as well as being able to offset that tariffs and the investments that we're making in R&D and the new businesses really driving more efficiencies in the G&A areas. Super, thank

you. Thank you. Our next question comes from Derek De Bruyne with Bank of America. Your line is now open.

Hey, good afternoon. Hey, Bob, you did a little bit of -by-back activity in the quarter, just sort of some commentary on maybe being a little bit more aggressive on that given your strong cash position and just sort of some general thoughts on capital deployment at this moment in

the quarter. Yeah, so, you know, I've been with the company now for about six months and, you know, as I think about that we were active in the quarter, I can see us between M&A, which is our primary focus of utilization of capital in the back half of the year. Between M&A and or share repurchase, I would expect us to be probably a little more active. That's not built into the side, Derek. We prefer to use that cash in the strong balance sheet that we have on growth assets as we did over the course of the last 18 months. But, you know, we do not see ourselves continuing to, you know, hold a significant cash balance.

And I guess along those lines, I mean, you've done a number of deals in the genomic space recently, in the cell biology space. I guess, you know, when you look at the portfolio, are there any other, you know, target areas, things we're underrated? I mean, you, I've asked this question in the past and I'll ask another version of it, but it's like you are relatively underweight versus some of your peers in the academic and government market. And just wondering, you know, if that's a primary focus of your M&A activity.

Yeah, Derek, I'll jump in on this one. So actually, you know, some of the deals we've done have been really targeted at academic, whether it be CIGOR's, Bioscience, you know, the iLab. So we like that space, but I'd say it's more from a collective end market, market view. And so I think you hit on a couple areas that we're interested in, you know, the genomics and the cell analysis. Cell engineering is an area of interest for us. We also think there's things we can do on the ACG consumables portfolio and also remain very interested in informatics as well. So we think there's a lot, a lot to be, a lot still out there that kind of fits our model of companies that are primarily in the private space that really would welcome being part of the Agilent culture. And any update on leadership?

Let me just add something real quick, Derek. I think the beauty of it is, I think as we look at our portfolio of funnel of opportunities, it's really across all three of our business groups, not just, you know, focused either on the genomic side or other places. And I think you've seen that through what we've been able to do, really leveraging the strength of Agilent, as you said. And I guess your next question is around LaserGen.

Yeah,

I just want to say, with AGVT coming up and just sort of thinking about the sequencing space, can you give us an, can you give us an update on what's going on at LaserGen and when we can expect to see some first data?

Yeah, sure. I mean, just, I'll start with a reminder, LaserGen is important to us, but it's one of many R&D programs, both, you know, within Agilent, even within DGG. We are, we are, we're on track. We're meeting our internal expectations. We're really pleased with the progress that the team is making. You know, you won't hear anything specific that we'll talk about at AGVT. You know, we're, we're, we're tracking along and more to come, you know, in the course of the coming years.

Great.

Thank

you very

much. Thanks, Derek.

Our next question comes from Jack Nehan with Barclays. Your line's now open.

Hi, good afternoon. I wanted to, I wanted to keep it going on DGG, the growth there in the quarter, which is great. You know, the first factor you laid out was that NASD was the largest year of your contributor. So I'm curious where you're finding incremental capacity at the old site and just updates on the timing related to the new capacity at the new site.

Yeah, so I say if you don't mind, I'll just go ahead and handle this one. You can jump in on it, but, you know, we brought in a new general manager probably what, about 24 months ago and really came in and looked at our existing facility and saw opportunities from, we call it our Agile Agilent program, but from a process of improvements, we said, hey, there's more that we can garner in terms of growth out of the existing facility by really changing some aspects of how we conducted the, the manufacturing. I think we've been able to actually, if you will, squeeze more out of the facility. Relative to the status, which is, Sam, I think we're still on track for bringing this online by the end of this fiscal year in terms of producing GMP grade material. You know, the site construction is essentially finished. We're now in the midst of validation, which is really quite a task, you know, given the scale of what we've constructed here, but still looking good. Yeah,

Mike, you said it all. We, operational excellence was in, I think, full order in Q1, and we're making really good progress for opening of our second facility.

Great. And just to follow up, I guess on the second factor, which was the pathology business, so double digit growth seems like a nice acceleration there. Can you talk about what you're seeing on the competitive environment and utilization of the instruments that are on the field? And maybe just finally, you know, where do you think you stand with the quest rollout? Did that help in the quarter? I'm going

to pass this directly

to you,

Sam. You got it, Mike. You know, overall, the combination of our pathology-related businesses, you know, our core business that we have, which is our systems, our consumables to go along with it, including companion diagnostics, including, we call it reagent partnership, all together, you know, a very, very strong quarter that we had. To answer some more of your specifics, we're seeing, you know, really good performance related to our advanced staining portfolio. And as you indicated, a lot of that we are seeing increased pull through on our core systems or on this platform is doing well. And you alluded to that we have seen the adoption and growing utilization at Quest, but, you know, there's also similar effect that we're seeing at other major centers. And we continue to see goodness from PD-L1, too, you know, in partnership that we have with a number of the pharma partners that you're aware of, including Merck and BMS. So, you know, it's not just one thing, but there's general strength across our pathology business that we're pleased with. Great.

Yeah, I think that was, you know, Jack, I think that was the thing that was probably one of the most gratifying was it was really across all of the business lines within DGG. It wasn't being driven by one or, you know, just a handful. It was really across. It was a nice performance.

Thank you,

Bob. Thank you. Our next question comes from Katherine Shull with Baird. Your line is now open.

Hey, guys. Thanks for the questions.

Just curious,

what did, you know, what did China grow, excluding the food headwinds? And then what are you expecting for China growth for the rest of the year?

So I think the growth for outlook for total China is the same as it was at the beginning of the year, which was above the overall corporate hours. I think high single digits is what we've been looking at.

Yeah, and I would say we'll get the exact number, but it would have been mid single digits ex food.

Okay. And then as we approach the Brexit deadline and given you'll have a month of that impact in your second quarter, if the timeline holds, can you just remind us of your exposure to the UK and any areas of your business that could be impacted by the exit?

I think about, if I recall, it's about 4% of our total businesses in the UK from our discussion last year. And the main flow through would be, you know, getting product into, major impact would be getting product into the UK, to our UK based customers. And we actually have a series of contingency plans we're actually already executing on, which assumes a hard Brexit. So we're planning for worst case scenario, which means making sure we have in country stocks and other things to help our customers with potential challenges getting product through customs. We do have a relatively small factory in the UK for our ramen spectroscopy business, but we're in the midst of transforming that product into Malaysia. So I think from the outbound export side, I think it's probably be not a concern, right, Jacob? Yeah.

So I think the bottom line there is I think we've got good plans in place. We're not expecting to have a material impact in the quarter.

Great.

Thanks. Thank you. Our next question comes from Steve Wellaby with Cleveland Research. Your line is now open.

Hi. Good afternoon. Two questions for you. First, I guess just as it relates to tariffs, I heard you say you saw a $4 million impact in the quarter. I was just wondering if you were assuming the tariff to step up to 25% in your initial guidance there, what you're thinking about tariffs as of right now over the remainder of the year. And then I have a follow-up question related to some products.

Yeah, just a minute. Yeah, yeah, great. Thanks, Steve. Yeah, so we are assuming that it will ramp back up to 25% at the end of March and then for the rest of the year. And so we built that into our guidance. So if something happens there, such a trade either gets delayed, that would be a potential upside for us. I think more importantly, just removing the uncertainty of what that looks like I think will free the market just in general. It's probably less about the dollars associated with the tariffs and more associated with just kind of clarity about what path we're going to be going forward.

Sure. That's helpful. And then secondly, just on products, could you provide a your GC portfolio now and with these new 88 systems, kind of where the Intuvo fits versus these newer systems? And then also just with this new Magnus system, maybe how that fits into your existing genomic portfolio and what you're expecting out of that product over the rest of the year?

Sure, Steve. Happy to do so. Jake, why don't you take the GC question and Sam, Magnus?

Yeah, that's a good question. And now we really have three main solutions in the GC space. We have the Intuvo, which really goes after the ultimate ease of use with the hyperactivity, especially combined with mass spec. So that's a great area for the routine use, right? We say routine use for the Intuvo. Then we have the 8860, which is focusing more of also routine application, which is more the standard ones, but also demands some type of ease of use and allows also to play in the mid-range space. And then the 8890, which is the high, where we have customers requiring high flexibility and performance that needs very high requirements and performance in the space, which is really the HPI space and other elements that where it's more complex. So these are really the three areas we play. It's all now based on the same core technology with the smart connectivity and remote access and all those built-in health monitoring capabilities. So it fits very well together and the same ease of use platform.

Sam? Yeah, with respect to the Magnus, thank you for the question. Well, first of all, what we're going to be providing the system is something that we don't have. And actually, there's very few solutions like it on the market. Specifically, a customer is going to be able to start with shared DNA. And this is what they put into our automated prep system. And what they get the other end is a fully prepared library that's ready to go that they can load. And so what that means specifically is we're doing both the library preparation and the target enrichment fully in an automated fashion in our Magnus system. Like I mentioned before, we're going to formally launch this next week at the AGBT Conference. And we'll start taking orders immediately thereafter. But our shipments will be in a deliberate fashion starting in the June-July timeframe, making sure for our first set of customers, we really give it a lot of care to ensure the success that they would expect and that we'd expect. So it is targeted to clinical labs and other NGS testing labs. And I think we'll definitely see some impact of installs by the end of this year, but really a bigger impact on 2020.

Okay. Thanks very much. Bye bye, Steve.

Thank you. Our next question comes from Puneet Suda with SVB Lerink. Your line is now open.

Yeah. Hi, Mike. Thanks for squeezing me in.

So...

Sure,

Puneet. No problem. The question I have is, you know, I get the strong compare on chemical energy, but I just wanted to get a sense. Wondering if you saw any impact from customers waiting and knowing about ADA at 90 and ADA at 60 and holding back those purchases and having any impact in the quarter. And then also, I have a follow-up for Bob on margins. Thank you.

So Puneet, I think you must have been listening very carefully to my comments. The fight, the scratching is coming through. So I kind of alluded to that, which is... And it's hard to put a quantitative number on it, but we clearly think that happened, which is, you know, this product has been 10 years in the making, a decade in the making, as I like to say. And, of course, our customers knew it was coming. And I think some may choose, as Jacob mentioned, to go with the 70-80 right now because they still want to see that it works, the new product. But we think that there's going to be a quick uptake in 80-90. So I think that is part of the story. Can't quantitate it, but also, again, one of the reasons why we were optimistic about our ability to get some good growth and back to growth in the chemical energy beyond what we saw in Q1. So I think there's more to the story than the tough compares.

And just for our respect for our lead team, it didn't take 10 years to build it. Yeah.

So we should expect this to come in into the next quarter now that you're shipping this out.

Yeah, yeah. In fact, Jacob just dropped me a note the other day and we started shipping this week.

Okay, great. And then, Bob, I wanted to get a sense from you on you coming at about 57% being KZULs recurring, moving up by a point and sort of gross-mars in contribution there. I wanted to understand, now that you have had some time to look at the overall portfolio and new products and altavos and intavos in the 88-90s, what's your sort of gross margin expectations sort of longer term? Obviously, these are, you know, they have improving margin profiles. I'm just trying to get a sort of a high-level corporate view that you are seeing in gross margin improvement longer term. Thank you.

Yeah, I mean, I think if you look over the course of the last couple of years, we've had significant gross margin improvement really through the great work that the operations team has been able to drive and then also, you know, the pricing discipline that the commercial teams have been able to do as well as positive mix. You know, this quarter, you saw that moderate really because of the tariffs. And, you know, if it weren't for tariffs, we would have had, you know, I think some very good gross margin improvement. I think once we anniversary gross margin, you know, the tariffs this year, which would be in Q4, you'll start to see gross margins go back up for the things that you talked about as well as just the ongoing operational improvements that we have. You know, we had guided to, you know, call it modest, you know, call it 50 to 70 bips on a restated basis operating margin improvement, you know, combination of both gross margin and operating expense improvements for the full year. In Q1, we were ahead of the game, which is good news. And, you know, a lot of that came through the operating expenses. But I would expect us to probably be about this range and probably be a little stronger in the back half of the year as we anniversary the tariffs on gross margin. But going forward, I would see us really focus on growth driving margin expansion and that 50 to 70 basis points being kind of evenly split between the gross margin and operating expense line.

Got it. Thanks so much, Good. You're quite welcome.

Thank you. Our next question comes from Doug Schenkel with COUN. Your line is now open.

Hi, this is Ryan for Doug. Thanks for taking my questions. Another great farmer quarter. Can you remind us what proportion of your farmer revenues are now to large molecule customers? And contrary to recent quarters, you didn't call out small molecule growth within pharma. Can you talk about what you're seeing from those customers? And is LC growth within the small molecule segment finally slowing down a bit or is that a little premature?

Yeah, Ryan, so a great observation. So the ratios have changed somewhat over the last three years. I think it really speaks to, you know, the strength of not only the biopharma space but how we've been picking up share. But to answer your question, it's an 80-20 mix, about 80 percent small molecule, 20 percent is the biopharma space. And the slowdown in LC, that's already happened. We saw that in 2018. And as you know, we've been talking about the breadth of our portfolio and how a lot of our analysis has moved. It's not that there isn't demand for LCs, but it's not the double-digit growth we saw for a while. There's strong demand on the mass spec side. You may recall that was one of the reasons why we had such a blowout to Q1 last year. We had a strong finish to prior year in LC-MS. So I think the breadth of the instrument portfolio, what's going on in the ACG business in terms of our enterprise business, as well as this is where a lot of our NASD growth shows up. And by the way, I think you also had some new solutions come out in this space as well, Jacob, right?

Yeah, what came out here recently was more for the small molecule market, the QTof. So what we came out a year ago was the QTof for the large molecules, the advanced bio. And we've had a lot of success with that coming out with a full solution. We're now taking that technology and have focused that in to also address small molecules, which is specifically within the food environmental market, but also the research. So the success we had where we started out in the biofarm, and one of the first early movers into the biofarm space, particularly focused on discovery and R&D, we now, we of course will continue to invest into the biofarm space also going

forward. Right, and that was perhaps more of an oversight in terms of calling out specifically the narrative with 10% overall growth rate in pharma, small molecule also was healthy.

Yeah. Very helpful. Thank you. And you noted earlier in the call that you don't expect to maintain a significant cash balance over time. Can you give us a sense for what significant means? How do you think about the minimum cash balance for the business? And when should we expect to hear more on your plans to deploy your current excess cash? Thank you.

Yeah, I would say, you know, later on this year, as I get through kind of the rhythms of the business in terms of as we get a better feel for that, what I would say right now is we're in a net cash position. You know, we actually used more cash than we generated in Q1. I would expect that to continue over time. I don't see us using it all in one quarter, but we would continue to deploy our capital in a growth-oriented way. We continue to drive dividend growth, but I think just as importantly and probably more importantly, investments in faster growing areas to augment our strong portfolio already, and then, you know, couple that with with share buybacks.

Okay. Thank you. Our next question comes from Paul Knight with Jani. Your line is now open.

Hey, Mike, how are you?

All

right, Paul, have yourself. Good. You seem to be doing more M&A. Is that a change in philosophy? Is it a change in markets that you're perceiving? What's behind this activity?

Yes, thanks for the question. So this is a conscious decision I've made, and we started sort of laying the foundation with Sam coming into that role and continuing now with new hire in Eric Gerber. And what I've my view was when I first came in in this role, I really had to get the foundation of this company established. And I think we've got our core operations under control. We've got our pipelines, our R&D roadmaps redone. We've got a whole new way of operating the company and running this company. And you've seen it in the early years in terms of the results we delivered. But we also have this opportunity to use this great balance sheets we have to, as Bob described it, acquire growth assets. So I think the company from a foundational standpoint is in a position to be more acquisitive. I also believe that we have been building the muscles in terms of actually making the acquisitions work for the company. And when we continue to work to get better at this and are very, very active in the market, I think we did our record number of acquisitions last year. And you can start to see that it's paying off in terms of material impact to our growth rate. Again, our model doesn't require M&A, but it's a nice adder. And as Bob mentioned, I just reemphasize this, we're looking to go into markets and acquire businesses where they can leverage the one-agile model of integration and where the acquired companies have something of a differential nature, have a differential team, and are in segments of the market that are growing faster than the overall company. So we passed on opportunities where assets were available and we didn't really see a path to growth. We are a growth company and that's the type of assets that we want to acquire. So it's a conscious decision and I think we plan on continuing to be active in the market.

And lastly, could you give us a refresh on LaserGen? Is that going after the diagnostics market? What will be their position? Thanks very much for the questions.

Yeah, I think I know this one, so I'll go ahead and handle this one. But our strategy here is that right now we're a component supplier into the NGS workflows of some of our major competitors and have built a business in excess of $250 million. Our view is that ultimately we see a view where you need a routine market, that you're going to need to have a turnkey, -to-use workflow solution. We have a lot of the components of that already and you may recall that from Sam's overview at our Anos day back last year. The missing piece was to actually have a sequencer. So our thoughts are not to compete -to-box in the sequencer business, but really try to build the best workflow for the cancer diagnostics marketplace. Okay, thank you very much.

Thank you. You're quite welcome. Our last question comes from Dan Arias with City Group. Your line is open.

Afternoon, guys.

Thanks.

Good

day. Hey, Mike. On chemical and energy, just honing in on your comments on instrumentation, I'm curious where you would put penetration or replacement for the Intuvo at this point and if you'd be willing, what do you think could be the contribution either at the segment level or for the overall business?

Yeah, so I think when you think about the chemical and energy market, I think you want to primarily think around the 88.90 and 88.60 portfolio because that really is the target market for this product and that's why I went to great length in my narrative, which probably nobody was able to hear because of our transmission difficulties, but that this really is right after the mainstream chemical and energy market. Intuvo is really geared towards those high-volume routine labs in food and environmental, you know, really a mass spec-based analysis where the chemical and energy market tends to be more gas, GC-only kind of marketplace. So we're really excited about the product. I won't give you a specific number, but I can tell you this is one of, I believe, the proof points why we believe there perhaps is some upside to our current outlook on chemical energy, which believe, I think, Bob, we've got a low single digit for a fairly year.

Yeah, and I think, you know, Dan, to your question, none of these individually is going to move the needle on the total company, but collectively, the portfolio of new products that are being introduced, not only in LSAG, but across our portfolio, is really what's helping us sustain and feel confident that our growth is going to continue above market levels just because of the value proposition that these are able to provide the market place.

Yeah, okay, thank you. And then, Bob, if I could, on the outmargin forecast, it sounds like you're on track operationally for the NASD build out. I'm just curious if you think the 12-minute or so investment that you targeted last year as the 2019 spend holds.

Yes, in general, that is, that's consistent with, you know, we haven't changed the forecast there relative to what we had said at the beginning of the year.

Okay, thanks a bunch.

Thanks, Dan.

Thank you. That's our final question, so I'd like to turn the call back for closing remarks.

All right, that wraps up the call for today. Thank

you for joining. If you couldn't get to something because of the transmission issues or have any other questions, please reach out to us in the next one. Thanks much.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Everyone have a wonderful day.