Agilent Technologies, Inc.

Good afternoon and welcome to the Agilent Technologies fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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.

Thank you, Mike, and welcome everyone to Agilent's fourth quarter and full year 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 the 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. 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 October 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, everyone, for joining us on our call today. You know, when I became CEO, I knew we had the opportunity to become a growth company. We would do this by investing in fast-growing markets with a building and buying approach. We also set out to create a more resilient company business model capable of delivering strong earnings in a variety of market conditions. To accomplish this, we developed a broader base of growth and more flexible and efficient cost structure. As you know, transforming a decades-old company is not an easy task, but I believe in the strength and determination of the Agilent team. The fourth quarter and full-year results I will share today are a testament to the commitment of the Agilent team and their ability to step up to meet this challenge. We strongly close our fiscal 2019 with fourth quarter results exceeding our expectations. Agilent's Q4 revenue of $1.37 billion is up 4% on a core basis against a 9% compare. And we have momentum going into 2020 as orders outpace revenue. EPS of $0.89 is up 10% for the quarter. Both our top line revenue and EPS are above the high end of our fourth quarter guidance. Operating margin of 25.1% is up 50 basis points over last year. Q4 marks the 19th consecutive quarter of adjusted operating margin expansion delivered by the Agilent team. Our higher than expected top line is led by 10% core growth from our Agilent cross lab group. Business is also strong for our diagnosing genomics group, delivering 7% core growth. Our life sciences and applied markets revenues are in line with expectations down 2% against a 9% growth compare. The pharma, diagnostics and clinical, and the environmental and forensics markets continue to lead our growth. High single-digit U.S. growth is stronger than forecasted, with other regions coming in as expected. Growth in China declined low single digits as expected. Ashland's growth strategy of building and buying in fast-growing markets is on full display in Q4. During the quarter, we closed the acquisition of Biotech. This is our largest acquisition since the launch of the new Agilent 2015. Biotech brings a superb team and an excellent high-growth, highly profitable business to Agilent. The acquisition of Biotech complements our earlier acquisition this year of ASEO Biosciences. Both acquisitions are part of our growing cell analysis business, serving biopharma and academic research customers. Agilent's selling out business now generates more than $250 million in annual revenue, about 5% of company revenues, and is growing at a double-digit rate. We are also continuing to invest internally to drive new organic growth. In Q4, we recognized the first revenue from a new Alago API manufacturing site in Frederick, Colorado. The high-quality GMP-grade oligos produced at this site are key to a new class of drugs being developed by biopharma customers. Investing in this facility is part of our overall strategy to build a larger biopharma business. We are expecting continued strong growth in this business as we ramp volume throughout the coming year. Finally, in October, I traveled to the UK to open a new state-of-the-art facility at the Harwell Science Innovation Campus. The site will be a major R&D hub for laser spectroscopy and will also incorporate Agilent's Raman spectroscopy business. Our recent acquisitions and these capital investments in Colorado and the U.K. are very visible examples of our continued and relentless focus on investing for growth. Hey, let's now shift gears and look at our full year of fiscal 2019 results. We had a very solid year, generating $5.2 billion in revenue, representing 5% core growth. Strength in the pharma, clinical and diagnostics, and the environmental forensics markets led the way. Recently, the U.S. set the pace, growing in the highest single digits. The U.S. was followed by mid-single-digit growth in Asia outside of China. Europe and China grew at low single digits for the year. Full-year earnings per share grew 11% to $3.11. The result is another year of double-digit earnings per share growth. The full-year operating margin of 23.3% is up 80 basis points over 2018, despite a full year of tariff-related duties. Our investments to ACG continue to yield dividends. ACG grew a stellar 10% for the year. We are helping customers transform their analytical lab operations by anticipating and meeting their evolving needs. DGD is also delivering very strong results with 9% core growth for the year. We're capturing market share in our pathology business, expanding our presence in next-gen sequencing, and further building our oligo API business. During the year, DGD crossed the billion-dollar revenue threshold and now represents approximately 20% of Agilent's business. LSAG revenues declined 1% on a core basis as we faced some market headwinds. We remain committed to investing for future LSAG growth and market share gains. Our new product development pipeline remains full. During the year, we introduced a number of innovative new products, including the launch of a new family of groundbreaking gas chromatographs and molecular spectroscopy instruments. At this year's ASMS conference, we introduced several new differentiated LCMS offerings, including the 6546 LC QTOF and 6495C LC Triple Quad systems. As we head into 2020, our LSHG product portfolio and go-to-customer field team have never been stronger. As it continues to operate from a position of strength, we are well-positioned to capture market share. Before I turn the call over to Bob, I want to remind you of the Agilent Shareholder Value Creation Model. Deliver above-market growth, while expanding operating margins along with a balanced deployment of capital with a priority on investing for growth. The result, delivery of superior earnings per share growth. In driving value creation, we built a broader base of growth and a more resilient business model. You know, we were attested to this year with economic and political uncertainties, leading to subdued demand for new instrument purchases. Yet, we delivered 5% core growth, operating margins that improved 80 basis points, and deliver another year of double-digit EPS growth. We deployed more than $1.5 billion in M&A and growth-focused capital investments. On the M&A front, we're very pleased with the performance to date of biotech and the CEO of bioscience. We remain on the hunt for similar types of growth opportunities. I'm increasingly confident in the Agilent team's ability to pursue larger-scale acquisitions and deliver on value creation synergies. we continue to view potential acquisitions as part of our building and buying growth strategy. Now, more than ever, I'm convinced we're in an exceptionally strong position for the future. This is particularly relevant as we move into 2020, a milestone for us at Agilent, as we celebrate 20 years as an independent company. While uncertainty is persistent, some end markets, if we start fiscal year 2020, we're operating from a position of strength. We have built and will sustain our track and record of delivering results working as one Agilent on behalf of our customers and shareholders. I'm very proud of the results the Agilent team delivered in the fourth quarter and throughout the year. I know you've heard me say this before, but I truly believe the best is yet to come for Agilent, our customers, and our investors. Thank you for being on the call today, and I look forward to your questions. I will now hand the call off to Bill. That was a Freudian flip. I'll now hand the call off to Bob. We don't have a new CEO, CFO.

Bob, you want to take it from here? Thanks, Mike. And good afternoon, everyone. In my remarks today, I'll provide some additional revenue detail and take you through the fourth quarter income statement and some other key financial metrics. I'll then finish up with our guidance for 2020 in the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike indicated, our fourth quarter results were very good, with strong execution throughout the P&L. For the quarter, revenue was $1.37 billion, reflecting core revenue growth of 4%. Reported growth was stronger at 6%. Currency negatively impacted revenue by roughly two points, while acquisitions added four points to overall revenue, reflecting the impact of a partial quarter of revenue from the biotech acquisition in addition to earlier acquisitions. From an end market perspective, pharma, our largest market, had 7% core growth in the quarter, especially impressive off a tough 14% comparison from last year. Our large molecule biopharma business and the cross lab strength continue to drive strong results. Geographically, All regions grew with the strongest growth in Americas and China. And speaking of China, despite the debate regarding the pharma market and the 4 plus 7 program, our pharma business in China grew double digits for the year. Continuing, revenue in the environmental and forensics market grew 9% in the quarter. This is against a very tough compare of 17% growth last year. Growth was balanced between LSAG and ACG and continues to be driven by evolving regulations, especially concerning opioids. Diagnostics and clinical revenue grew 7% during Q4, led by strength in our pathology and companion diagnostics businesses. Within pathology, continued expansion of our PD-L1 business was a key highlight. Revenue from the chemical and energy end market came in as expected with 1% growth. Decline in instruments were offset by strength in the Cross Labs business. Academia and government declined 4% against the tough compare of 10% growth last year. We still see the funding environments in academia and government remaining stable, though. And finally, consistent with expectations, food revenue declined about 5% due to the China food market. Despite the year-over-year declines, we were encouraged that for the third quarter in a row, the run rate in China continues to be stable. On a geographic basis, the Americas came in stronger than expected with 9% growth during the quarter, led by strong results in the pharma, diagnostics, and environmental markets. Europe modestly exceeded our expectations, delivering a 4% growth rate with balanced strength across most markets and groups. China came in as expected. declining in the low single digits against a very strong compare of 16% growth last year. Excluding food, China was up slightly. And wrapping up, Asia, ex-China declined low single digits. Now turning to the rest of the P&L, fourth quarter gross margin was 56.5%. This was down 120 basis points year over year, primarily driven by product mix and LSAG, the startup costs at our Frederick, Colorado site, and a higher revenue mix from ACG. It's important to remember that while ACG's gross margin is lower than the company average due to the services component, the ACG business has done a fantastic job of driving strong operating margin leverage. In fact, ACG's operating margin led the company for the quarter and the year. So ACG is not only helping drive our recurring revenues, It's doing so at a very accretive pace. In terms of operating margin, our fourth quarter margin was 25.1%, up 50 basis points driven by operating expense leverage and strong expense management. The quarter also capped off full-year operating margin of 23.3%, an increase of 80 basis points over the prior year. Now, wrapping up the income statement, our non-GAAP EPS for the quarter came in at 89 cents, up 10% versus last year, and 3 cents higher than the top end of our guidance. And as Mike mentioned, our full year earnings per share of $3.11 increased 11% versus last year. Now turning to some other financial metrics, for the quarter, we generated $314 million in operating cash flow, acquired biotech for $1.165 billion, and returned $100 million to shareholders via dividends and share repurchases. Lastly in the quarter, we took advantage of market conditions and refinanced $500 million of senior notes early, reducing our future interest costs. All in all, a very active quarter. Now before moving to next year's guidance, I want to recap how we have deployed capital this year. As we mentioned at the beginning of the year, we plan to focus our capital deployment towards growth-oriented assets and driving returns to our shareholders. To that end, we've deployed over $2.3 billion this year, $1.4 billion in M&A for biotech and ASEA, and more than $900 million in share repurchases and dividends. And we ended the year with a very healthy balance sheet, allowing plenty of capacity for further capital deployment. Now let's turn to our non-GAAP financial guidance for the 2020 fiscal year, beginning with the full-year guidance. For the full year, we are expecting revenue to range from $5.50 to $5.55 billion, representing core growth of 4% to 5% and reported growth of 6.5% to 7.5%. Currency is estimated to negatively impact growth by 0.3 percentage points, with M&A contributing roughly 2.7 to 2.9 percentage points of growth for the full year. From a group perspective, We expect ACG to sustain the momentum and deliver high single-digit growth driven by broad-based strength. The DDG business is expected to grow at a high single-digit to low double-digit rate, with our NASD furniture facility ramping throughout the year. And we anticipate a modest recovery for LSAG, roughly flat on a core basis. Now, moving down to P&L, we expect modest operating leverage. And also embedded in our forecast, is we expect the other income and expense line to be roughly $40 to $45 million in net expense, with year-over-year change driven largely by the interest expense as we enter the year in a net debt position. We expect our tax rate to improve by 50 basis points to slightly above 16%, and our full-year diluted shares outstanding to be approximately $312 million, essentially flat to Q4 of this year and reflecting only anti-dilutive share repurchases throughout the year. All this translates to non-GAAP EPS expected to be between $3.38 and $3.43 per share, resulting in 9% to 10% growth on a reported basis. Finally, we expect operating cash flow of approximately $775 to $800 million. This includes a one-time tax outflow of roughly $230 million in the first quarter to transfer certain intangibles related to prior acquisitions. This tax will reduce our U.S. transition tax dollar for dollar and will provide us with operational and tax benefits in the future. We've also announced raising our dividend by 10%, continuing a streak of double-digit increases, and providing another source of value to our shareholders. Now turning to Q1 guidance. For Q1, we're expecting revenue to range from $1.34 to $1.355 billion. representing reported growth of 4.3% to 5.5% and core growth of 2.5% to 3.5%. The lower organic growth in Q1 reflects the impact of the timing of the Lunar New Year, which this year falls into our fiscal first quarter. We anticipate this adversely affecting the growth rate in the first quarter by roughly one point. In addition, the growth rate takes into account the Frederick site ramp that will occur over the year. First quarter 2020 non-GAAP earnings are expected to be in the range of 80 to 81 cents per share, representing reported growth of 5% to 7%. EPS growth in Q1 is lower than the full year based on the revenue growth, the Frederick startup costs, and certain share-based compensation costs that are expensed in the first quarter. Now, before opening the call for questions, let me conclude by saying we are very pleased with the results our Agilent team was able to achieve this past year. while continuing to focus on taking full advantage of the opportunities in front of us. We are positioning our business towards stronger secular growth markets and driving higher recurring revenue streams. We clearly saw the results of this in 2019, and we enter 2020 with a strong portfolio and with momentum. With that, Ankur, back to you for the Q&A.

Thank you, Bob. Mike, if you can please provide instructions for the Q&A.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Doug Schenkel from Cowan.

Hey, good afternoon, guys, and thank you for taking my questions. So maybe first with just a cleanup question, did fiscal 2019 NASD revenue come in around $100 million as expected? And can you give us more detail on what you're assuming for NASD revenue in 2020? I know you said you expect it to ramp over the course of the year, but if you actually gave a number, I might have missed that.

I'll pass that to Bob. Okay. It's Bob. Yeah. Thanks, Doug. Yeah. It came in, generally, online a little better than that, and we are expecting very significant growth in FY20.

Okay. So, recognizing we don't have a specific number, but just talking about it qualitatively and maybe taking everything up a level, You set the low end of 2020 core revenue growth guidance at 4%, and this would be, I think, the lowest core growth rate since at least 2011. And whatever that tailwind is from NASD, it makes setting guidance at those levels even more notable. Based on what you guys just did in the quarter and the way you sound, it seems like you're really just setting the bar at a level that embeds some pretty conservative assumptions on the low end. So I guess specifically, would you guys be willing to talk about what conditions would need to exist for this scenario to become reality? Things like at 4%, What are you assuming for China food? What are you assuming for 4 plus 7 in terms of the downside risk there? Is there something you're factoring in that would suggest there's a scenario where things actually get worse in terms of overall global capital equipment demand?

Yeah, thanks, Doug. And Bob, Phil, jump in on this. I think we don't want to overthink this one, so it's just our initial guide for the year. And you're right, it would represent, if in fact that was an actual growth number, our lowest growth rate in a number of years. But it's just an initial guide. As you heard earlier, you heard a lot of words, as expected, with upside. So we want to position our initial guide with room for upside on the plan for the year.

Yeah, I would say, Doug, to build on what Mike was saying, you know, I think we were taking kind of an approved approach to guidance. Obviously, if we were at that level, we'd be disappointed in something would happen in the macroeconomic environment that we're not expecting. We're not seeing anything right now that would suggest that the market conditions are getting any worse. That would suggest that market conditions probably would get worse and, you know, LSAG would not come back and it would continue to decline. But we're, again, we're We're at the beginning of the year. I think we're prudent here, but we like to believe that there's a lot of opportunities for growth going forward.

Okay. That's super helpful. Thanks for taking my questions.

Thanks, Doug. Your next question comes from the line of Tycho Peterson from J.P. Morgan.

Hey, thanks. Question on the small molecule business. Hey, good afternoon. Wondering if you could talk on small molecule performance in the quarter. I know earlier in the year you talked about a slowing global pharma business. Just curious how you're thinking about the replacement cycle, and would any of the instruments slow down on the pharma side?

No, in fact, Tycho, I think you're – Tycho, happy to jump in on this one, and feel free, Jacob, to add your comments as well. But, you know, in Q2, we called out what seemed to be a slowing replacement level in the generic side or small molecule side of the pharma segment. We really haven't seen any evidence of that in the third and fourth quarter. And as Bob mentioned in the script, you know, we had double-digit growth in pharma. 4 plus 7 initiative, which is heavily focused on small molecule, is not impacting our business. We put up really solid numbers, and I think we're seeing – you know, the growth in small molecule fairly healthy along with, you know, higher levels in the biopharma side. The real pressure on the instrument side really on a growth rate perspective has really come in the food segment primarily in China as well as the global chemical and energy market. Jake, I don't know if you have anything else you'd like to add there?

Mike, I think you covered a lot of it. The only thing to add there is that we, as you mentioned, but that we do see the growth in the QAQC environment, maybe less in the discovery for small molecules. But we continue to expect that volume will be there and continue to increase in the small molecules going forward also.

Okay. And then, Mike, for your commentary on C&E, for instruments, are you assuming any recovery next year on the instrument side?

No, just basically flat, you know, basically flat conditions. And, you know, back to the question Doug asked earlier, you know, if we see some improvement in the chemical energy, that would really represent upside to our initial guide. So we're assuming kind of continued conditions. They've been challenged this year, so we're assuming they continue into FY20, no change there. But if it would change to the positive, that would be upside to our current plan. That's right. And I think the resilience of our model really showed in this past quarter and full year, which is while chemical energy is down on the instrument side, we actually had, you know, some modest growth there with the aftermarket side of our business.

Okay, and one quick one for Bob, just to close on the M&A comments. Can you just remind us their framework? Are you still assuming, you know, a billion-dollar-ish type deal would be the ceiling? We're obviously getting the question a lot, as are other analysts.

No, I mean, let me take that one. If it wasn't clear in the script, I actually explicitly said that we are increasingly confident in our ability to take on larger scale acquisitions and deliver on value creation initiatives. I would not put a ceiling like that on our appetite for deals.

Are you able to talk about ceiling on leverage or where you would go?

Yeah, go ahead, Bob. Yeah, we are still committed to being investment grade. Obviously, ending the year at roughly a little less than one time net debt levered, that gives us a lot of opportunity to, if the right deal were there, to kind of lever up with a commitment to kind of paying back down. Now, again, we're going to remain financially disciplined and focused on returns, but we do have a a fair amount of room there.

Okay, thank you.

You're welcome. Your next question comes from the line of Brandon Collier from Jefferies.

Hey, thanks. Good afternoon. Good afternoon, Brandon. Mike or Bob, could you give us any color in terms of what you've penciled in for China for fiscal 20 and to sort of speak to your level of visibility in the food business and perhaps some early traction that you might be getting with some of those private labs?

Yeah, yeah, I'll start and then Mike or, you know, perhaps Jacob, if you wanted to add anything. We are expecting a modest recovery in China next year. You know, we ended this year at roughly 1%, a large part of that being, you know, the headwinds that we're seeing in food. We're expecting that China to become kind of low single digits to mid-high or mid-single digits, depending on kind of that food recovery. We have some – the good news is over the last three quarters, we've been roughly averaging this $40 million per quarter that we've talked about. So we're on this trajectory of, you know, in China being, you know, $160 million kind of run rate. And, you know, our expectation is that you know, we'll continue to, we're not going to expect growth there, but be at that level next year, which will, you know, help, you know, the rest of the business grow, because we won't have that headwind.

Yeah, I think it's really important that we define what do we mean by recovery, which mainly means continue at the flat level that's been running for the last three quarters, about $40 million a quarter. And just to put a number on this, I believe, Bob, about four points of our growth in China this year was impacted by inflation. The food market. That's correct. So fast forward, you know, you could do the math and said, okay, it just stays flat with what we've seen for the last three quarters. You'd expect that we would grow above what we've grown this year in China. And then to your question about the contract testing side. Jacob, I think it's high single-digit growth there. So really you're doing quite well there.

Yeah, I was actually recently here in China, and clearly the private labs are doing quite well. We see strong growth now from a different base than where we are in the government labs. But even with the government labs and certain types there are, there are certainly some investments going in, but not to the level that we've seen before. So that's why, you know, we don't see a lot of movements right now. Okay.

Thanks, and a follow-up for Bob. Could you just elaborate a little more, Culler, on the tax hit, the one-time tax hit on the cash flow line you expect in the first quarter and kind of the mechanics of what it relates to in terms of the intangibles, reclassification, and any implications it might have for the tax rate beyond next year?

Thanks. Yeah, so it is a one-time opportunity that we have afforded ourselves. We're moving some intangible property out of – one of our acquisitions into our tax model, it's going to require us to pay, you know, the $230 million up front in taxes, but that's going to be creditable to our already existing liability for our U.S. transition tax. And so it's effectively a one-for-one kind of credit there, so it's not an incremental cost to us over time. And what it allows us to do by putting this – it's related to the DACO acquisition – It allows us to streamline our operational activities as well as over time generate some tax benefits. That will likely happen, you know, in 2021 and beyond. So it's part of our kind of multi-year tax planning initiatives that we've been talking about.

Very good. Thank you.

Your next question comes from the line of Vijay Kumar from Evercore ISI.

Hey, guys. Thanks for taking my question. Mike, maybe a big picture question. I just, you know, if I think about where PMIs are, I think PMIs are bottoming out. But from your commentary, I guess what you're saying is you're still expecting whatever trends we saw for 2019 as a base case, you're assuming, you know, those trends continue to next year. I'm just curious if PMIs are bottoming out, why is that a reasonable assumption going forward?

I want to see the orders first. And, you know, getting back to the earlier question about Guy, that's why we went into the level we did, which was, you know, if you go back and look at Agilent's overall results for 2019, they really were quite strong. But the growth came from different parts of the businesses than we had expected. And, you know, we were sitting in Q2 and Q1 last year. PMIs started dropping. You saw a level of conservatism in our customer buying behavior. So we said, okay. There is reason to believe, to your point, that it could actually be a different environment in 2020. Let's not guide assuming that. Let's see it happen, and then we'll take up the guide appropriately and take the orders in business.

Yeah, I think, Vijay, this is Bob, just to add on to what Mike's saying. I mean, what we're trying to do, like everyone else, is kind of read the tea leaves, and our best view is that, you know, until we start seeing something different, that it's going to remain the same as it is today. And if it does rebound, that would be good. We would like that.

That's helpful, guys. And, Bob, one quick question on operating leverage. It looks like the guide is contemplating modest operating leverage, maybe 30, 35 basis points for next year. I mean, that Q4 performance, this was really impressive, what you guys did on the OPEC side. Any thoughts on why maybe leverage for next year, Rob, you know, moderates a little bit. Is that maybe a little bit more spent on the growth initiatives you guys have?

Yes, some of it is that, and we have a full year of the Frederick costs that are going to be built into the results in 2020 that we didn't have. We really just had that in Q4, and obviously Q4 is one of our strongest years, our strongest quarter, so we get a lot of leverage there. But we feel pretty good about that, and You know, I think we've demonstrated this year an ability to manage our operating expenses to continue to drive double-digit growth on the earnings side and continue to drive operating margin leverage. So I think, you know, you should feel confident that we'll continue to do that going forward.

Thanks, guys. You're welcome. Your next question comes from the line of Steve Vocha from Wolf Research.

Hi, good afternoon, and thanks for the time here. Hi, Mike. Thanks for the time here again. Just a few things I'd like to tie up. Mike, I wonder if, first, you might elaborate a little bit on a point that you made in your prepared remarks when you said that orders in the quarter actually grew, I believe, faster than revenue. I wonder if you could talk about where you're seeing acceleration and to what extent, if any particular region, maybe Japan, was a driver there, knowing there were some tax incentives in Japan.

Thanks for doing that. We thought it was really important to give the audience a view of the order activity in the quarter. We typically don't comment on that, but given the Q1 guide and some of the nuances around Lunar New Year and such, we wanted to let the audience know that we ended the year in a strong backlog position with orders really exceeding the amount of revenue for the quarter. And I'd say the quarter in orders was very similar to quarter in terms of the revenues that you saw, which was, you know, strength in the Americas, you know, strength in pharma from an end market, very strong results in ACG, DDG, cell analysis. And then the environmental side continues to put up really great numbers off of, you know, double-digit compares. So I think the Q4 order book was very similar in terms of pattern and areas of strength that we saw on the revenue side that I commented in my script.

Yeah, I was going to say, I was just going to be – For the bill. Yeah. Steve, more specifically to your question on Japan, we did not see any one-time build there. That was at the end of the fiscal year. Our fiscal quarter actually was across that timeframe. So we saw normal growth in Japan, which actually speaks to kind of the broad-based strength that – That Mike was just talking about.

Okay, great. Very helpful. And then just let's see, two very quick points to tie up the model. I guess one on NASD, I know you don't want to give a specific number as it relates to what the contribution on the revenues might be for fiscal 20, but could you spend a minute just on how close you are to getting capacity there booked up? And when you think, whether it's 21 or 22, we might see the Frederick location running, you know, closer to that incremental capacity. And then, actually, I'll tie it up right there. Thanks again for all the help.

Bob, I think you've been drilling into those same questions with Sam. Yeah, yeah, yeah. You and I both.

Yeah, why don't I start? You know, from the question earlier in the Q&A, we felt very good about kind of where we ended up the year. We had very strong growth and We ended up, as I mentioned, slightly above the $100 million. And as we had talked about before, there was $100 million of capacity that would be ramping up over the course of the year. Many folks have modeled kind of a $50 million number, and that's in the ballpark. And the ramp is really dependent upon how the clinical trials go and so forth. you know, maybe I'll turn it over to Sam to talk about kind of some of the dynamics, but obviously some very positive things that happened in the market just recently.

Yeah, Bob, I think you've already laid the groundwork. Steve, how are you? We continue to be, you know, excited about the NASD business and, you know, Boulder, just to remind you, is an ongoing important part of our NASD capacity capability there. And, you know, there have been some announcements recently you might have seen, but they just really reaffirm what's in our plan, the ability to grow and support the growing demand in the market for our customers. So, you know, Bob, I don't have a lot to add to what you already said. We expect by the time we exit the year, we are running 50 and more.

I think it's fair to say, you know, we're not running into challenges to fill up the site. That's right. I mean, just kind of leave it at that. Yep.

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

Hey, Dan. Hey, Dan.

So, Mike, maybe just on China, if you don't mind. I know you said pharma grew double digits in the quarter in China, but could you just spike out the generic issue there and kind of how did generic specifically do in the quarter and maybe kind of what's assumed in 2020 versus what you achieved in 2019 with generics there?

Yeah, how about if I use the word 4 plus 7 and that whole segment, excuse me, that whole segment of small molecule, I think it was up double digit for us.

Yeah, I mean, as Mike mentioned, you know, we, after the first 4 plus 7 round and the winners were announced, we have certainly also see, we are a market leader in that space and thereby we have access to many of those customers out there. So we have, of course, seen demand from those customers also. That would be more 4 plus 7 or more activities where you feel that we have quite good predictability in that market now?

Yeah, Dan, I think it actually played out the way we had thought during the year. You know, once the initial announcements were done and tendering process started, you know, the whole market paused for us for at least a good quarter. And then as we had thought what happened is once the winners were announced and we were actually over-indexed in those accounts, so we had already pre-existing strong relationship to those customers, then we would see this return to growth. And we saw it in Q3, and we saw it in Q4, and we think that momentum is with us as we move into 2020.

Yeah, I think, Dan, this is Bob. Just to build on what Mike and Jacob were saying, I think what we've seen is kind of the notion of the higher quality, higher volumes, and our ability to provide not only instrumentation but the the consumables and the software associated with that to keep up time in the lab is really resonating with our customers. And so I think, you know, the combination of both the LSAG business and the ACG business is a true, what we would think is a competitive differentiator across this, and this is a proof point for us.

Great. Thank you for that. And then maybe back on CNA, I know I think to Tycho's question, Bob, Mike, excuse me, I think you discussed instruments maybe flat as the way to think about the outlook from here conservatively. Can you just maybe speak to kind of what the interest level is like from the Intuva and then the two larger instrument platforms today and kind of what are the guideposts towards when maybe we could see that instrument demand pick up? Because I assume there has to be some good latent demand for the new instruments.

Yeah, in fact, we're already seeing that. So it's actually when you dig into the details on the order book and the revenue results, in fact, we just had a review last week with Jacob on his ramp to volume, and he knew the new 8890 and 8860 GCs are actually on the dashboard it shows green being ahead of our internal ramp to volume forecast. So we think that it's already happening. Other parts of the instrument portfolio that sell in chemical energy aren't seeing the same type of demand. But this shows you when you come out with a new set of offerings to the marketplace that have a clear value proposition to customers that drives productivity, even in a market environment where capital is a little bit tighter, you can get the order. And, Jacob, I know you've been out with some customers recently, but if you could –

Anything else you'd like to add to that? Yeah, absolutely. I think the 88 series really resonates with the customer base, and even though it is a muted environment, we do see that there is interest, and we do see, as you say, that we have a really strong ramp to value. What the customer really likes about it is that We continue with the highest quality and highest performance in the market, but now also with a lot of what we call smart performance in the instruments, a lot of intelligence so the instrument actually knows what it's doing and it can put predictive maintenance in. In fact, we put out something that's called Smart Alerts now that customers are really excited about, that they can get an overview over their labs and get access to what is actually happening in the instruments so they can be predictive in their expectations.

And that also creates an ongoing revenue stream for us as well. Absolutely.

great excellent thanks a lot and congrats your next question comes from derek de brun from bank of america um hi good afternoon good afternoon derek hey um so actually i wanted to follow on with that question um you know thinking about the gc cycles and um the upgrade how much do you estimate about how much of your install base was was was upgraded over the last few years. You've got a very big GC platform installed globally. Just curious in terms of where we are in that cycle once it picks up again.

I think Jacob's raising his hand. He'd love to answer this question.

Yeah, generally speaking, when we look into our refresh cycle, we do see that the market is looking at approximately 10% per year of refresh. So that also means that our instrument is out there for quite a long time. We are actively looking into that. We actually believe that we are in the middle of a refresh cycle. It has been challenged with the overall market conditions. So we do believe actually when the market is coming back, when the PMI are starting to turn, that we would see an acceleration in that refresh cycle.

I think it's fair to say too, Jacob, there's always, if you will, a replacement going on, just how much is actually going to be replaced. And I think we can continue to see fairly high levels of aging in the installed base, which would point to perhaps somewhat of an acceleration of the replacement rate, assuming the market environment would improve.

Yeah, hey, Derek, one other thing that I think is probably pertinent here, it's still early days, but if you recall, the launch is both at the high end and the mid-range. And what we were really excited about was the potential to have a really compelling offering at the mid-range where we had not as much penetration as we did at the high end. And while Mike was talking about our ramp to volume, Mike and Jacob were talking about our ramp to volume being green for the business, if you kind of parsed them out, I would say the mid-priced or the mid-value range is dark green.

Which is a good thing, I think.

Which is a good thing.

And so once the China food business starts to snap back or comes to pick up again, I guess, you know, especially when you think about that business, I mean, you know, is there going to be a V-shaped curve in terms of rebound? Is there latent demand there? Or is that market going to be a little bit less than it had grown in the past just given some of the new organizations in that market? Yeah.

I think we won't see the type of double-digit declines we saw this year. As Jacob mentioned, on the actual volume side, the number of samples being run is up double-digit. The money has been down sharply at the central government level. We don't expect that that's going to be the long-term situation. So right now for 2020, again, we're just saying it's going to be flat with the level we've seen for the last three quarters. That being said, our internal view is that this is kind of a mid-single-digit kind of grower. It's going to – I mean, the China market itself is going to be, you know, at least 6% to 8% growth rate, and this is probably about where this business could be. It won't be at the toward double-digit growth that it's seen for the past decade. That being said, you won't see these double-digit climbs that we see. experience in 2019. That's why when we talk about a modest recovery in China, you know, really is, we're just talking about lapping, you know, the compare from the food business.

One final question. I mean, you've done a lot of acquisitions in the cell biology space recently, and admittedly, I'm a molecular biologist by training, not a cell biologist. So, can you help me understand what your offering that's novel in terms of how you fit all these pieces together and just sort of what are you bringing to market to customers that hasn't been brought there before? I'm just trying to get a better understanding of sort of like the opportunity here. And along those lines, do you need a broader molecular biology portfolio to continue to drive into that market? Thank you.

Yeah, happy to do that, Derek. So I want to make some initial comments. And, you know, Jacob's knee-deep into this business, and he can share with you some of the things that really differentiate ourselves here. So, you know, I think when we first got started down this journey with the acquisition of Seahorse Bioscience, we really felt that was a really good first point with the differentiated offering, with novel, unique technology that nobody had. But we also felt that we needed to have some more scale to be, you know, much more formal in the space. You know, after the recent acquisition of a CEO of Bioscience and the, you know, the acquisition of Biotech at $250 million plus, we think we've got the scale. And we're also very selective in terms of the types of companies we look at, the teams, the profile, the portfolio. So we think we've got something really special here that's differentiated. And Jake, I wanted to talk about what we're doing with the workflows and some other things.

Yeah, absolutely. So I'm certainly excited about our opportunity in the cell analysis space. And what I think is that two dynamics going on. First of all, with the recent rise of immuno-oncology that we first saw play out in now in the cell analysis also. And then, of course, generally speaking, immunology, that there's a lot of interest in that space right now. And it really requires technologies that allow for live cell analysis, both from an imaging perspective, but also measuring the activity in the lifestyles. And those are the technologies that we are providing between the biotech, the Seahorse, the ASEA, and the LOXEL technologies. So where we really differentiate is, first of all, the Seahorse and ASEA technologies are very differentiated on standing on their own, while biotech have a very broad portfolio, including some very exciting imaging technologies. But we have now bring them together in workflow settings where you can use techniques to look at the cell from many different angles and provide much deeper insight based on one informatics platform that nobody else can do in the market. So I think that's really where we differentiate versus competition.

And, you know, one of the things, Derek, we looked at was we had already been working, for example, the biotech team and the CRS team actually had been working together prior to the acquisition, and we had proof points based on incremental business we had, which was customers really didn't want to have independent instrumentation and data systems that really haven't integrated software integrating these workflows it really was really had a differentiated value to customers and they saw that that was very important to them and they were willing to give us the business as a result your next question comes from Bill Quirk from Piper Jeffery great thanks good afternoon everybody hey Bill hey Bob

First question is, Mike and Bob, you guys have touched on China several times already, but maybe we can talk a little bit about assumptions concerning other geographies in 2020. Are they any different than what you're currently seeing in terms of both current business as well as your order book? Thanks.

You want to take that, Bob? Yeah, yeah. No, that's a great question, Bill. So let me kind of walk you through kind of how we're thinking about the various markets. So we would expect that, you know, the Americas would continue to kind of lead the pace with – you know, kind of high single-digit growth. Europe, probably low single-digit growth going forward, pretty consistent with kind of how we've seen this year kind of play out. And the rest of Asia, excluding China, being in kind of that low to mid single-digit growth. And so that's kind of how we're thinking about China. And China would be low to mid. Okay.

Got it. And then, Mike, you elaborate on an earlier comment that you made about tighter capital. Can you just talk about how broadly you're seeing that?

Oh, I think that comment was related really to the conditions we saw in 2019. And the comment really was even when there's tighter capital, which is what we saw with lower PMIs throughout this year, customers are still willing to invest when you have a solution that helps them with their bottom line, their productivity, as well as their scientific results. So what I'm saying is there's a path forward to getting more business even when capital is tight.

Okay, so you're not suggesting, obviously, then, that there's some sort of lack of availability. It really has to do with if you have the right product, you can find it. Yeah, correct.

Absolutely.

Okay, got it. Thank you.

Your next question comes from the line of Paul Knight from Janie Montgomery.

Hey, Mike. Could you talk about your position in – Biopharma, specifically large molecule, is what portion do you think of the business today, and where would you like that to be, I guess, would be good color? Thank you.

Yeah, happy to do so, Paul. And, you know, as Bob mentioned, we've been having – we have strong pharma results again this quarter. This has been kind of a consistent story for Agile for the last several years. During that period of time, we've been consistently growing our biopharma portion, our large molecule portion of that business double digit. I think a couple years ago it was probably maybe about 15% of our pharma business. Business now it's up to probably north of 20% and we think that rate will continue. It's not because the other side has been shrinking. It's because we think we've been obviously investing very heavily either through new instrument platforms, Mark's done some acquisitions in this area. So while we don't have a specific percentage in mind, I would expect every time I start talking to you through the coming years, you're going to see a higher part of our business in biopharma. In fact, when we come out to, you know, at the conference beginning this year, we'll probably talk more specifically about the entirety of our biopharma business. I dropped a lot of comments today about NASD and some cell analysis. So a lot of stuff ultimately comes into the biopharma end market. We often think about biopharma business just being associated with LC and LC-MS, but there's a lot more to the story.

Okay. And on the academic side, it was soft. What specifically did you see going on in the U.S. market in the quarter?

You know, we dug into this, you know, obviously as we're prepping for the call, and the best we could see really was just about, you know, the strength of business we had last year. I think it was about over 10% growth last year. So nothing really is really changing in that environment. We continue to see, you know, very solid and stable funding environment. Sometimes there's seasonality a bit with that business, but I think that's really all we could really solve on.

That's right. I mean, that business is one of our smaller businesses, and it can be kind of lumpy and so forth, and it had a very strong Q4.

Okay. Thank you. Your next question comes from the line of Punit Sutta from SBB, the ranking.

Hi, Mike. Thanks for the question. So, you know, this appears to be another quarter of growth in CrossLab, so I'm wondering what continues to be the strength there. What's your confidence there longer term? And it's consistently about 8% growth for the, I mean, now last three years. And so should we expect similar expectation here going forward into, and despite LSAC instruments being flat for the year, as you pointed out in your remarks, should we expect cross labs longer term to continue to do well? knowing that some of the instrumentation is being flat and with the consumables and service contracts will continue to grow?

I've been happy to comment on this. This is a real success story, I think, of the new ads, and we architected the strategy a couple years ago. And I can recall getting this question, you know, almost every year when we had an 8% or 9% print, hey, when is it going to end? And we would say it's not going to end. We think that what's going on here is really you have – changing customer needs, and you need to anticipate what's going to happen and provide a new set of services and capabilities to really help them with the economics on the lab in addition to the scientific results. So today I think this, and I hope it came through in the call script, which was we said, you know, we really have demonstrated this new business model this year where, you know, we can have strong growth in ACG, irrespective of whether or not the business in our new instrument side is as strong as we'd like it to be. So as Bob set up the guide for next year, we're quite confident in our ability to continue this high single-digit kind of growth. You know, the services proposition we have and what we offer is really what we're resonating with customers. You heard Jacob commenting a little bit on some of the work that goes on between Mark's team and Jacob's team to develop new capabilities around our instrument platforms, which leads into a set of new revenue streams on our services side. And then on the consumer side, it's been both a story of organic growth but also continuing to add more to the portfolio through acquisitions. So I think we're really quite confident about our ability to continue this high single-digit growth rate, really tied in also to how we're enabling business differently on a digital perspective. So I hope it's coming through that we're highly confident about what we've built and where this business is going to go in the future.

Yeah, I think, Puneet, hey, this is Bob. Just one other thing as we're talking about this. If you looked at just the attach rates, we've got a number of programs that are driving increased attach rates, we think we have a lot of room to continue to grow there. And I think the one thing that we've seen this year is actually as Mark and team have offered more services and more solutions, we're actually seeing for the instruments that we are placing actually higher value tied to the service offerings. So we're actually being able to create more value on a per box basis given the portfolio that we've been able to derive. There's a lot of opportunity there. Jacob talked about some of the smart alerts and so forth, but we're building this intelligence in. But in addition, we're actually creating more value when an instrument is sold and actually increasing the service component.

Okay, thanks. And if I could check on DACO, could you elaborate the contribution there in the quarter? I don't know if you provided that. And what's your expectation that you're breaking in there for 2020?

Yeah, I think we didn't provide a specific number for you, but if you saw my comments, we talked about gaining market share in pathology, and, you know, we've got a high single-digit growing business in DGG, and though a lot of today's calls have been focused on the growth rate from NASD, pathology is the largest business in that group, and it's doing well.

Okay, and if I could squeeze in a last... question on mike when we look at last couple of years pulling back a little bit higher level in terms of instrument launches you had into altivo 8800 series a number of launches and this would be about the time we would be seeing a benefit from those so is the message here that those instruments continue to gain strong traction in the market and is just the and markets that are sort of challenging you and the government dynamics in China? Or is there anything more that we should be looking into in terms of the instrumentation? And just give us, if you could, take a moment and give us sort of a view into the new instrument, you know, sort of outlook longer term, and how should we think about Agilent in that framework? Thank you.

Thanks for that. I couldn't have said it better myself, which is, you know, our product portfolio has never been stronger. We have had a continuing cadence of products, whether it be liquid chromatography, gas chromatography, LCMS, GCMS, molecular spectroscopy. You know, the story just continues. So if there's been any softness relative to expectations in the LSAG results, it's all been some of the market environment conditions that you've described. And the fact that we've been able to continue to invest, we have invested in our field team as well as I know some of my competitors are pulling back their reins a bit. We think we're capturing share. We think we're well positioned for when some of these end marks start to turn back to growth. We've seen some of these cycles before in the past. And then I made a comment in my script about the product pipeline being full, which is what that was an indication of. We have other projects. So, you know, we're not going to introduce a bunch of instruments and then disappear for, you know, half a decade. You're going to have a continuing cadence of products, new products, upgrades. So we feel like our MPI process is really humming right now.

Our last question comes from the line of Jack Meehan from Barclays.

Thank you. Good afternoon. Hey, Jack. Hey. So, can't believe it got this far in the call, but I wanted to ask, how is the early integration of the biotech acquisition going? And maybe, can you also elaborate on the pacing of the revenue contribution? When I look at the fourth quarter, the acquired growth was about a point better than I was looking for in terms of the incremental growth. And the first quarter is about a point shy of what I was looking for. Was there any movement there?

I'll take that last one, and then I'll turn it over to Jacob for the integration piece. So, yeah, in simple terms, you know, we had talked about $20 million to $25 million worth of revenue. It was slightly better, you know, was better than that in the quarter. Going into Q1, the ASEA Biosciences acquisition moves into core, so that's why it, you know, looks a little lower. It shows up as part of our core growth. In Q4, both ASEA and biotech were in the M&A number.

And as I mentioned in my script, we were very pleased with how the We are on the early days in biotech, and Jacob, maybe just want to add a few comments. We just had a big meeting with the field team a few weeks ago, so.

Yeah, exactly. I think the integration couldn't have gone better so far. I think we are really spending time on learning, of course, biotech, and they're spending time learning us, both from what processes we're using, but also from a cultural perspective. We continue to be very excited about the team that we're getting on board and how they fit well with the Asian culture. So I'm very excited. Obviously, over the next year, we're going to integrate them, but I continue to see a lot of momentum in the combined cell analysis business.

Yeah, our expectation is that business is going to grow double-digit.

Yeah. Okay, thank you. And then I was hoping just to wrap up, get a mark.

One moment, please. Jack Meehan, your line is open. Okay, thank you.

I was talking to myself for a second. Just a follow-up. I was hoping if you could give us a mark-to-market on LaserGen. I think you were expecting first placements in the second half of this year at the last Analyst Day. Just how is the progress going there?

Yeah, so technically, Sam, I think we've really become quite pleased with the progress, and we're not ready to call an intro date for the RUO unit yet.

Yeah, that's right, Mike. We are making good technical progress in terms of, you know, the specifications that are influencing technology, and, you know, we are executing on our development roadmap, and we're not ready to share specifics on a launch date just yet.

I would say, Jack, this is Bob. Our guidance doesn't comprehend any revenue there. And even back in the original guidance, there was no material revenue in 2020.

Okay, Jack. Mike? Yep. Thank you, guys.

And that was our last question at this time. I will turn the call back over to the presenters.

All right. Thank you, everyone. With that, we will wrap today's call. Thanks. Bye.

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