Agilent Technologies, Inc.

Good afternoon and welcome to the Agilent Technologies first quarter 2020 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. Thanks.

Thank you, Julian. Welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2020. With me are Mike McMullen, Agilent's president and CEO, and Bob McMahon, Agilent's senior vice president and CFO. Joining in the Q&A after Bob's comments will be Jacob Tyson, president of Agilent's Life Science and Applied Markets Group, and Sam Raha, president of Agilent's Diagnostics and Genomics Group. Due to certain personal engagements, Mark Doak, President of the Agilent CrossLab Group, is unable to join us today. You can find the press release investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Revenue growth will be referred to on either reported or core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 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, everyone, for joining our call today. I'd like to start today's call with a reminder that Mark Doe ACG Group President will retire on May 1st. While Mark and his wife are currently enjoying a long-planned vacation and he's not able to join us today, I would be remiss in not taking the opportunity to recognize the outstanding accomplishments Mark has made in his stellar 38-year career. His track record of results speak for itself. Thank you, Mark. We have a very strong bench at Agilent, and I've already named Mark's successor, Pork McDonald. Pork knows the business well. He has been on MARC's staff for several years and currently runs our Chemistries and Supplies Division. Porek and Marc are already working on transition activities as Porek prepares to take the helm of the HCD business at the start of fiscal Q3. Marc congratulates both Marc and Porek. And now on to the quarterly results. The Agilent team delivered a strong start to 2020. Q1 revenues are above our expectations as business grew in all regions and markets. Total revenues of $1.36 billion are up 5.7% year-over-year on a reported basis and 2.4% on a core basis. We continue to translate our top-line growth into strong bottom-line earnings. Our EPS of 81 cents is up 7% and is at the high end of our guidance. Before going into business unit and market details of our quarterly results, I want to speak about two specific areas to highlight how our building and buying strategy investing in fast-growing markets continues to deliver growth and help us create a more resilient business. First, I want to talk about our most recent acquisition, biotech. This was the first quarter with the biotech team on board, and the business is off to a very strong start with revenue growth above our expectations. We continue to be very enthusiastic about the cell analysis space. and biotech continues a strong momentum that really got us interested in bringing them into Agilent. The biotech leadership team was just in Santa Clara for a few days of planned meetings, and they are very energized and excited about the future possibilities of making a great business even stronger as part of Agilent. Second, the resiliency of our business model is on full display this quarter, as Agilent delivers strong growth and earnings in the face of a negative Q1 impact from the coronavirus outbreak in China. As this has dominated headlines, let me add a few additional comments regarding the coronavirus and its impact on Agilent. Most importantly, our thoughts go out to all those affected by the coronavirus. On the Agilent front, our team fortunately has not had any direct health impact, and many returned to work last week. We are remotely supporting our customers as a number of them gradually resume operations. We've also restarted our in-country production activities and are shipping products to customers in China and internationally, albeit at a reduced rate. On the business side, given that our first quarter ended January 31st, we are seeing business impact across both fiscal quarters, Q1 and Q2. In Q1, our revenues were running ahead of expectations right up to Lunar New Year holiday. However, the extensive Lunar New Year holiday affected our customers' ability to transact and accept shipments during the last days of the quarter. This reduced our reported revenue by approximately $10 million in total for the quarter, primarily in our LSAG instrument business. We have since recognized the bulk of this revenue now in Q2. Looking ahead, we are projecting that coronavirus will continue to impact our China business throughout Q2. Bob will share additional details, but we are anticipating delays in new equipment purchases and slower uptake of consumables and services. The slower uptake is due to the reduced number of selling days resulting from the extension of the new year, along with customer and logistics operations that are ramping but not yet fully operational. It's important to note, while we're forecasting the impact to our Q2 business, our full-year outlook for total Agilent revenues and EPS remains unchanged. Our business outside of China remains on a solid footing, and we believe a large portion of our China business that is currently being impacted by the coronavirus is not lost, but rather is delayed. As you know, the coronavirus outbreak is unfortunately impacting the health and safety of tens of thousands of people. I'm very proud of how the Agilent team has responded to our part to help. Our Agilent China team is actively supporting those customers doing crucial research into the virus. We have donated instruments and supplies to four clinical and research institutions based in China to support disease research and drug development efforts. We continue to closely monitor events in China and prepare to act quickly to help wherever possible. Now, onto additional details of our quarterly results. Agilent's growth is broad-based as our business grew across all regions and end markets. Regional performance was led by the Americas posting 5% core growth with America coming in with low single-digit results and Asia holding steady. Despite the timing of the Lunar New Year and the coronavirus impact late in the quarter, our China business grew low single digits. While all end markets grew, our results led by strong growth in the biopharma and environmental forensics markets. Now taking a closer look at how the individual business units performed, LSAG revenues grew 5% on a reported basis, driven by strong performance in our biopharma and cell analysis business. On a core basis, LSAG's revenues were down 2% against a tough compare and inclusive of the unexpected Q1 impact from the coronavirus. With the exception of China, all regions and end markets performed in line with expectations. The ACG business continues to deliver strong results, posting 7% core growth even with reduced selling days in China. This growth was broad-based across all major market segments and regions. These results continue to demonstrate the strength of our ACG cross-lab strategy and how we are leading the transformation of the analytical lab. The EGG is also posting 7% growth in the quarter against a difficult 12% growth compare. We are experiencing a continuation of positive trends. winning share in our core pathology business, and seeing strength in our NGS QAQC franchise. We continue to be pleased with the revenue ramp at our new Aligo manufacturing facility in Frederick, Colorado. In addition to driving strong financial results, I want to highlight some other notable events that took place during the quarter. We continue to bring differential new products to the market, gaining strong customer and external recognition. We just introduced the Agilent Source Select XT HS2 DNA Kit. This, along with our recently launched automated sample prep platform, MAGNUS, further strengthens our leadership position in the NGS sample prep market. In addition, two industry publications honor the Ashland Infinity Lab LC-MSD IQ system with 2019 innovation awards. The award-winning mass spectrometer introduced last June incorporates intelligent design and innovation such as embedded sensors that monitor instrument health. And finally, earlier this month, Barron's named Agilent number one in the list of the 2019 most sustainable companies in America. We're very proud of this recognition. Sustainability is a critical topic that is gaining increased interest from customers, employees, and investors. More importantly, we believe focusing on sustainability is simply the right thing to do. Before passing the call on to Bob, I'd like to close with a reminder of Agilent's resilience and our shareholder value creation model. delivering above-market growth, expanding operating margin, and a balanced deployment of capital. We are able to thrive by focusing on platforms with multiple large end markets and long-term growth opportunities. We're also driving growth in the aftermarket, increasing our focus on faster-growing end markets, streamlining on infrastructure and operations, and investing in the future of Agilent, both organically and inorganically. We do all this while maintaining an acute focus on delivering EPS growth with superior quality of earnings and driving shareholder value creation. Despite the temporary business uncertainty created by the coronavirus in China, I remain confident about the longer-term growth prospects of the China market, our China growth strategy, and most importantly, our team. I'm very proud and confident in the strength and resiliency of our China team and their ability to overcome any near-term challenges that come our way. When I look at our global team and our business, our growth prospects and team have never been stronger. We are laser focused on driving revenue and earnings growth. I'm pleased to tell you that all these factors allow us to maintain our growth and earnings outlook for the year. Thank you for being on the call, and I look forward to answering your questions. I will now hand off the call to Bob. Bob?

Thank you, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional detail on revenue, walk through the first quarter income statement, and some other key financial metrics, and then finish up with our updated guidance for Q2 in the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. Our first quarter results were very good as we had strong execution across all regions and markets. Revenue for the quarter was $1.36 billion, with reported revenue growth of 5.7%. Currency negatively impacted revenue by 0.4 percentage points, and acquisitions added 3.7 percentage points to growth. Our core growth was 2.4% in the quarter. As Mike indicated, our performance was impacted by the extension of the Lunar New Year holiday due to the coronavirus. This reduced the number of shipping days in China, and we estimate shifted $10 million in revenue out of Q1. If not for the reduced shipping days in Q1, our performance would have been stronger, with the shift affecting our core revenue growth by roughly 70 basis points. In terms of end markets, we saw growth across all of our six end market segments. Pharma, environmental and forensics, and diagnostics and clinical led the way for us in the first quarter. During the quarter, pharma grew 3%. Double-digit growth in DDG and high single-digit growth in ACG offset a mid-single-digit decline for LSAG. Within pharma, our biopharma, or large molecule segment, grew high single digits. And on a geographic basis, our pharma business experienced high single-digit growth in the Americas and mid-single-digit growth in Europe. This was partially offset by a mid-single-digit decline in China, largely associated with the timing of the Lunar New Year and, to a lesser extent, the execution of the 4-plus-7 program. The 4-plus-7 program is playing out as we expected, with the third round completed in January and multiple winners per drug. We continue to believe that this is a long-term positive for the industry as drug quality improves and access to healthcare increases. Our environmental and forensics business grew 4% against a very tough compare last year of 10%. During the quarter, we saw balanced growth between instruments and aftermarket sales. And diagnostics and clinical revenue grew 3% against a strong 11% compare last year. Mid-single-digit growth in DGG, driven by continued share gains in our pathology business, were partially offset by declines in LSAG and ACG, with both only having small businesses in this segment. Chemical and energy revenue grew 2%. Services and consumables grew mid-single digits, offset by flat instrument sales. Academia and government grew 1%, with services and consumables growing mid-single digits, partially offset by flat instrument sales. Mid-single digit growth in the Americas was partially offset by flat to low single digit declines in the other regions. And finally, food returned a modest growth of 1%. Loteen's growth in services and consumables was partially offset by declines in instrumentation. While one quarter does not make a trend, we are pleased with the continual progress in this market. On a geographic basis, we saw growth in all regions led by America's growing mid-single digits. Europe grew 2% in line with our expectations. And as Mike mentioned, our business in China was running ahead of expectations through the first two months of fiscal 2020. As mentioned earlier, despite the shift of the $10 million, China still grew 1%. If not for the extension of the Lunar New Year, our core growth in China would have been solidly mid-single digits. Now let's turn to the rest of the P&L. Gross margin was 55.7%, down 120 basis points versus the prior year. This is a result of the planned startup costs for our new NASD facility, as well as product mix and some negative pricing effects on our instrumentation business. We offset 90 basis points as we leveraged our cost basis and operating expenses. And as a result, our operating margin was 22.9%, down slightly from 23.1% in the first quarter of last year. Adjusting for the $10 million coronavirus impact on revenue, operating margins would have increased versus the prior year, and so we feel good about our continued opportunity to expand operating margins. We were also able to lower our tax rate slightly to 15.5% and expect that rate to continue for the rest of the year. This resulted in non-GAAP EPS for the quarter coming in at 81 cents, at the top end of our guidance and representing 7% growth. Before turning to second quarter guidance, I want to touch on a few other financial metrics. Our operating cash flow was an outflow of $59 million, in line with expectations as we incurred the one-time tax outflow of $226 million related to the transfer of intangibles as noted last quarter. We also paid out $56 million in dividends and purchased 726,000 shares for $60 million. We ended the quarter in a net debt position and a net leverage ratio of 0.9 times. Now let's turn to our non-GAAP financial guidance for Q2. We are anticipating revenues in the range of $1.28 billion to $1.32 billion in the second quarter. This range is larger than we've traditionally provided, as we've intended to estimate an impact of the coronavirus on our business in the second quarter. As this is a fluid situation, we thought it would be helpful to detail out our assumptions, particularly as we've seen impact across both Q1 and Q2. Our guidance contemplates a $25 million to $50 million impact in our first half of our fiscal year, which translates to roughly to a one and a half to three week impact on China revenues. Of this, we saw $10 million in Q1, and we are estimating a net $15 to $40 million incremental impact in Q2. The Q2 revenue range of $1.28 billion to $1.32 billion translates into reported growth of 3.4% to 6.6%, with core growth of 1% to 4%. Currency is expected to have a negative 1.1% impact while M&A is expected to contribute 3.5 to 3.7% in the quarter. We're estimating the coronavirus to negatively impact our Q2 core growth by one to three points. Our revenue outlook translates Q2 earnings in the range of 72 cents to 76 cents per share, with 1.4% to 7% growth versus last year. Importantly, as Mike mentioned, we believe the majority of this business is not lost. rather delayed as customers and the government ramp and recover. In addition, our business out of China remains strong. As such, we expect a larger second half of the year and are not changing our full-year guidance for revenue or EPS. So before starting up the call for questions, I want to conclude by saying we have a very solid start to the year that shows the strength and breadth of our portfolio. It is that portfolio, coupled with the strength of the Agilent team, that despite the uncertainty caused by the coronavirus, we are maintaining our full-year outlook. With that, Ankur, back to you for the Q&A.

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

Certainly. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Tycho Peterson from JP Morgan. Your line is open.

Hey, thanks. I appreciate you guys quantifying the corona impact. I guess a couple things. I mean, you previously talked about mid-single-digit China expectations for the full year, so should we assume that's still the case, just more back-end loaded? And then, Mike, as we think about collateral damage within China, how should we think about the C&E market, just given that the broader market you know, economic activity in China is slowing. So should we think about some impact on C&E as well?

Sure, Tycho. I think I'll handle both questions. And Bob, correct me if I go off script here, but I think we still think that the single digit number is doable for the year in China. What we're seeing already on ground from our team, we just on the phone today with our team in China, you know, we're still able to transact and orders are actually coming in as forecasted. I think that we think a lot of the procurement is going to occur a little bit later in the year. I think a lot of it's recoverable with the exception of probably some aspects of our service business where, you know, customers really are looking for service people to arrive on their sites. I think we feel pretty good about how we're thinking about China throughout the rest of the year, albeit being a very fluid situation. And, you know, we really haven't seen any kind of – transitory or connected impact on C&E. In fact, C&E actually did better than we were thinking in the first quarter. It's too early to call a trend, but some of the PMIs are actually inching up, which would maybe give an indication of perhaps a better outlook and some initial noise with some of our major accounts about thinking on procurement, but we still remain cautious in terms of the outlook for C&E, but we're encouraged by the Q1 results. And again, we're not really seeing significant movements around in that area on a global basis. And we think back to the first comment on China, we weren't expecting a lot in C&E this year in China anyway, so I think we're in pretty solid shape relative to the outlook there as well.

And then a follow-up on biopharma, you grew 3% on a 10% comp. Last quarter, it was 7% on a 14% comp. So, you know, was that a pull forward last quarter? And if so, can you maybe just talk to that dynamic?

No, I think the big story there is China, right?

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

Yeah, and then within the pharma numbers, Tycho, the biopharma segment really was strong for us again this quarter as well. And then we think as the 4 plus 7 initiative rolls out in the latter part of this year, then we'll see the growth in the small molecule side of that space. And then, you know, we have really strong growth in NASD and the ACG business is strong in pharma. So we're feeling pretty good about pharma.

Okay. Thank you.

Thank you, Tycho.

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

Hey, Doug. Hi, this is Ryan on for Doug. Thanks for taking my questions. All right, Ryan. Maybe just to round out the China dynamic quickly, can you provide some more color on your supply chain exposure? Within China, it sounds like the operating environment is improving, but how should we think about your direct and indirect supply chain exposure, and do you see any risk to your ability to fulfill demand within and outside of China over the course of this year?

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

Yeah, Ryan, this is Bob. Just to follow up, we have twice-weekly calls with our team in China, inclusive of logistics as well as our supply chain, and obviously it's quite dynamic. But as it currently stands today, we feel like we have the ability to be able to procure not only raw materials but also produce the finished goods and ship them not only within China but also get product into China and vice versa. Great.

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

Yeah, so on food, as I mentioned, we certainly are pleased with the progress. We have had several quarters of kind of very predictable performance there, and actually Q1, despite the coronavirus, it probably had more impact on the pharma side than in food. grew 1% on a global basis. It was down slightly in China, but certainly not to the level that it had been in the past. So we feel good about that. It's probably too early to call that it's going to return to growth long-term. We do believe it will return to growth, but not ready to call that in this fiscal year. In terms of the timing of the coronavirus, that $10 million, that was quite a large incremental because we had all the costs. So that was probably a higher-than-normal kind of incremental drop to the bottom line. That was probably a little over a penny of impact on the full quarter.

Very helpful. Thank you.

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

Hi, good afternoon. I was hoping maybe you could give us an update on the NASD rollout at the new site and how much that contributed to the quarter in both PGG and the pharma end market.

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

No, Mike, you hit the nail on the head. The business is performing as we've expected. We continue to see interest in all the customers, the pharma customers that we've given tours to. We're doing work now there for a number of customers. You know, not to be boring, nothing new to report. It is progressing. It's all good news right now.

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

Yeah, Bob, I think this may be just one more point, too, while we look at the second half outlook for the business. It's not all about China recovery. Other elements of the business, including NASD, which we know we're going to have a strong second half. That's right.

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

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

Yeah, that's right, Mike. I mean, we continue to have good growth, you know, with market, above market, with our overall NGS portfolio. So feel good about that. The low double digits, our pathology business, as you heard in Mike's opening comments. And Bob's as well. We believe we're continuing to gain share there, growing in the mid-single digits. And you just heard about an ASD. So you look at the major parts of DGG, we had, I think, a really well-balanced good quarter. It's mainly the single-payer who's scoring it.

Great.

Thank you, guys. No problem.

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

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

Yeah, hey, Dan, welcome back and appreciate the question. You know, it was really a combination of a very tough compare. I would say probably the area that was a little softer was the instrumentation business. They had the most difficult compare in the first quarter, and we would expect that to improve in Q2 through Q4 as we get to easier compares.

Yeah, and I know, Jacob, you were looking into this, so. Yeah, and I think the – The continued, you know, depressed PMI certainly impacts the C&E business, chemical and energy business, so we continue to see that in U.S. being performing at least flat, and we would like to see improvement, but I think it's going to still take some time before that is happening.

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

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

Hey, Dan, I just can't help but to jump in on this one. And I think that question needs to be posed to our competitors because we saw, particularly as we finished the calendar year, we saw some very aggressive pricing by some of our competitors, particularly in the liquid chromatography and mass spectrometry platforms.

And I don't know if you want to add anything to that, Jacob. No, I think it's fair to say that we continue to be premium priced, but there is certainly some competition in the market space right now, and yeah, so there is a price pressure.

But we don't play the price game here.

I mean, that's not how we want to win.

Okay. Appreciate the color. Thank you.

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

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

Yeah, maybe just to be crystal clear here, we saw roughly a 70 basis point impact in Q1. We had product that was getting ready. It was staged and getting ready to ship. And on the last couple of days of January and with the extension of the lunar, you know, the formal holiday, there was no one there to pick that up. So we know that. um was was clearly an impact in q1 in terms of q2 what we're expecting you know between the the first half of our year it's roughly a one and a half to three week impact as we're ramping up on most of that's happening in q2 we're expecting in Q2 that the coronavirus has roughly a one to three point impact to our growth in Q2, roughly $15 to $40 million. In the first half, it's $25 to $50 million, and we'll expect to get that back in the second half of our fiscal year.

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

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

Yeah, again, I just want to underscore once again that we've been very pleased with the performance of biotech while I've been here in Agilent. But not only biotech, the whole cell analysis business is doing very well, and we are posting double-digit growth for the whole business. So we're very pleased with that, and we actually believe this is going to continue for quite a long time. We see live cell analysis is going to be a key driver for understanding the immune system and immune oncology. And with now the Seahorse, ASEA, and Biotech and Loxel combined, we have a very unique value proposition. And that is really what excites us and what also is very exciting for customers is that when we combine those technologies or these techniques together, we can create more insights for the researchers and the biopharma customers than nobody else in the industry can do. So this is very exciting, and we're just getting started.

Your next question comes from Punit Sudha from SBB Levering. Your line is open.

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

Bob, why don't I just talk about our performance and you can maybe comment on the outlook. So came in right as expected. I think, you know, that Europe's in a difficult economic environment, and we think our team is really doing well there relative to what's going on in the market environment. So we were actually quite pleased with how Q1 came out for us in Europe. Bob, in terms of the outlook?

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

Okay, that's very helpful. If I could touch back on China, I know it's been covered quite a bit, but I really appreciate your thought there, given one of the strongest legacy positions in that country for Agilent. As the recovery happens here, are there certain segments which you think where you will see more acceleration, more faster recovery, certain product lines or certain segments where you see recovery faster versus... Others, and then I was sort of also surprised with the growth you were seeing in ACG. CrossLabs continues to deliver, was trying to understand what sort of exposure you had there in China, and given the travel restrictions and everything, are you still able to ship products and service instruments there?

um seeing the seeing the growth in cross labs here or was that uh how much uh was the impact in cross lab if you could quantify thank you yeah um let me take uh there was a lot into that question so let me try to try to hit them um you know in terms of recovery we we would expect that obviously the the instrumentation portion would recover with and within that probably pharma first um And so we would expect that to be prioritized over some of the other markets. In terms of ACG, you know, we continue to be pleased by the broad-based strength there. Actually, even in China, despite kind of the reduced selling days, it grew 11%. We do expect probably a slower ramp up there, less on the consumable side as the factories are getting back to production, but more on the services side. As you can imagine, you know, having our folks getting into labs right now is fairly difficult, and there's a portion of that would be on demand for servicing equipment. um and uh so we would see that probably ramp up a little slower in q2 um but then ramp back up to normal um you know latter half of q2 and into q3 and q4 at least that's our current assumption um as mike mentioned you know we we've been in close contact with our teams in china and have been watching the order flow and the order flow to date is uh across both acg and lsag as well as our DGG business, which is a smaller piece, tracking to our expectations.

Okay. And any sense in terms of the exposure that you have in China, and could that mix change given the, you know, in the next quarter or so?

No, I don't anticipate a major shift. You know, we've largely got an instrument-heavy business in China relative to the rest of the business anyway. But, you know, our opportunity really lies in the consumables and service over time. So I don't see a dramatic change in Q2 or in the back half of the year.

Great. Thank you.

You're welcome, Donny. Thanks.

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

Good afternoon, guys. Thanks. Mike, just back to Tycho's biopharma question. Hey, Mike. Next quarter, I think the comp goes way down to low singles for that customer segment. So where are you feeling like biopharma growth heads in 2Q as we just think about the momentum and the favorable comparison, but also China? Can that be more mid-singles if we net out the moving parts there?

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

Yeah, and we're expecting a faster growth in Q2. Yeah.

Okay.

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

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

Yeah. You know, overall, thanks for the question, Dan. You know, if you would have heard my comments already from J.P. Morgan, you know, we're making progress on a number of fronts related to the development work we're doing on the LaserGen sequencer, particularly as it comes to the technical specs on our read length, on our quality, and so forth. So, you know, we're continuing to make that progress. When you think about AGBT, of course, it's not just about sequencers. It's about the overall performance. It's about really looking at beyond NGS, overall genomics. So, you know, we are excited about Magnus, which we introduced not too long ago. We are seeing – sorry to remind you, Magnus is this really walk-away automation for taking DNA libraries or actually putting DNA in and being able to come back and just load that directly onto your NGS sequencer. We've seen some really good interest in that in Europe, in America, and in China. So we're going to continue sharing the message there and sharing some data from a number of customers. We also, as you would have heard us talk about, we have launched a new SureSelect XTHS2 DNA reagent kit, which allows us to You know, look at even lower starting amounts down to 10 nanograms of DNA for FFPE, which is, you know, very important for cancer. Also allows on the luminous sequencers, you know, it's very important to be able to use molecular barcodes. We have that going on as well. And, you know, we have a number of partnerships that we're working on with with a number of customers and collaborators. So stay tuned. I think it's going to be, you know, an exciting AGBT.

And, Dan, the other part of your question was investment outlook.

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

Okay, appreciate it. Thank you.

Your next question comes from Derek DeBruin from Bank of America. Your line is open.

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

Yeah, we talked about at the beginning of the year our guide was contemplating roughly a flattish gross margin across the company, and that hasn't changed. So we've always said that the first half of the year, with Q1 being the hardest comparison because of the startup costs in NASD, and you can see that kind of in our numbers, we also were affected a little, as we mentioned before, in LSAG. We would expect that to recover as we get through the course of the year. And at a high level, Derek, I would expect our gross margins still to be within that range, roughly flat year over year, and we're getting our operating leverages really in the OPEX expense line.

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

Well, great. That segues into my next question on instruments. And so I think you had said last quarter you were expecting maybe flattish instruments for the full year. Is that still sort of your expectation? And then that leads into any idea of sort of what pent-up demand could be. I mean, do you sense from customers, particularly in C&E, if there's people waiting on the sidelines to buy when the budget gets better? I'm just trying to get a sense of sort of what the instrument dynamic looks like.

Yeah, Derek, this is Bob. You know, I think a short answer on your first question is yes. We're still in that range of roughly flat. Actually, if you looked at Q1, we were down 2% core, but if you adjusted for the coronavirus, it would have been down about 1% on the most difficult comp that we had. To your point around C&E, there have been shoots of life, you know, and some of our customers looking at things. Now, what I would say is the coronavirus kind of throws some of that into question. But I would say, you know, that's still intact right now. I don't know, Jacob, if you have anything.

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

Yeah, Jacob, I just add one thing. You know, early on in my tenure, you know, we had a similar kind of slowdown in C&E. The difference here is that at that time, a lot of our platforms are rather aged. This time we have a completely refreshed platform. So it also is a great productivity message there to customers. And our lab managers actually have the ability to go to their management and say, listen, there is something new out there. I'm not buying this. I'm not replacing like for like.

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

So you've got very good math, and we're not expecting a step down. It's the only thing that's in the numbers, and that could be an area of potential opportunities. Great. Thank you.

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

Mike, just on a separate topic, if you just sort of speak to the TWIST settlement last week, why only $25 million, and should we expect any legal savings from having that case out of the way now that you'll reinvest those dollars?

Yeah, so first of all, just a few comments on the settlement. So we're very pleased with the agreement that was reached with Twist. As you know, we think it's in the best interest of our shareholders to rigorously protect our IP. And not only in addition to, you know, receiving a payment from Twist, you know, they also had to procure a license for us for certain aspects of our audio-sensitive technology. And we are a company that's committed to doing innovation in the right way. So we're really pleased with how the sentiment goes. And, Bob, relative to the treatment of the legal expenses involved, and outlook for the rest of the year i think we we had that in pro forma right yeah we will um pro forma that's yeah so you see both the settlement come in uh brandon as well as the cost associated with that i guess in our q2 results that's correct

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

Yeah, it's a great question. So as I mentioned in my call script, you know, we've been doing these things because we thought it was the right thing to do, and now people are really paying attention to it. So I think it helps on multiple aspects of the business. So first of all, relative to our new products, which have a very favorable environmental impact, there's a real compelling reason for customers because a lot of our most important customers have their own sustainability initiatives. And they're very interested. I have several European customers I'm visiting next month, and they want to hear about our sustainability plans. So when you talk to them about how we're reducing, you know, footprint, the electrical consumption, that some of our products don't even use, you know, gases, and, you know, that we've eliminated the use of gases and gas chromatography, or in the case of the MPAS. So there's just a really – and we're reducing the size of the packaging. And, by the way, that also comes with a benefit to Agilent's P&L. So it really helps in terms of our customer relationships and our ability to drive sales into those accounts. It also is really quite helpful for recruiting of new employees into the company. New employees, when they're looking at potentially joining the company, really want to know what Agilent stands for. We talk to them about our culture and what we do as a company in the local community, what we do for the environment, our views on diversity and inclusion. I think it really is a powerful message to attract new employees to Agilent, but also for those who are part of the Agilent team to really be proud of the company they work for and be energized about where the company is going forward. You know, I think we've talked before, I'm a big fan of sports, and if you build a great team, you get great things happen in the marketplace or on the field. And I think that really is really one of the major benefits you get here, which is what it does for your team. There really is a multitude of impact for the customers, I mean, for the company, and it's something we really believe in. Very good. Thank you.

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

Hey guys, thanks for squeezing me in. One, maybe on China, Mike. We've heard some chatter, possibly the government initiating some sort of stimulus here to kickstart the economy. If that were to be the case, where would that impact fall? Is that in C&E and food? Is that where we would see your China numbers coming up?

I have to say, I have heard some rumblings of stimulus, but I haven't seen anything around the specifics of what the stimulus would be. I don't know, Bob, or whether you've picked up anything.

No, but I think you've got... That's probably a likely area. Yeah, exactly. I think that's a likely area, that and pharma.

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

Understood. And Bob, a quick one on the EPS guidance here. I see that the tax rate ticked down sequentially on the guidance front. Did anything change on the margins at all? Because it looks like the revenue range remained unchanged. So I'm wondering if this is below the line or margins, some sort of impact here.

Yeah, yeah, nothing material, Vijay.

All right, thanks, guys. You're welcome.

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

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

Sure. Yeah, let me make sure I answer your question correctly. What I would say is, you know, Q1 came in slightly better than what we expected on the ramp, so we feel very good about that trajectory. Obviously, you know, the second half of the year is going to be significantly greater than the first half of the year as we ramp up that business, and I would say that the order book we feel very good about.

Yeah, and maybe, Steve, you know, to build on what Bob said, You know, we've said that there is a ramp rate that we've been planning all along. That's what we're seeing. So, you know, as you really get into Q4, we'll be much more in the run rate, if you will, of what to expect going into financial year 2021 in terms of the Frederick site in particular. So it's ramping as planned. It is being utilized. We were happy to produce, you know, good product and good revenue from that in this quarter, again, after, you know, starting last quarter. And further to what Bob said, a lot of these programs and projects are long lead, both working with our customers to really lay the groundwork and do the work.

um you know though i can't tell you exactly what percentage i do feel feel good about uh you know the percentage of um programs and projects that we're already lining up going into next year and steve i can just amplify one of the points that sam made it was absolutely crucial that those first batches we we produced for customers met their expectations and um as you know we were very cautious in terms of how we started positioning the ramp here because we just had to get it right And we've gotten it right for those first few customers. And I think that really positions us well when we look at the outlook for the rest of the year. Okay.

That makes a ton of sense. Thank you for all the color there. And then, Mike, I wonder if we could just do the zoom out thing, if you will, where we think about the full year. I mean, there's so many moving parts, right? And the coronavirus certainly makes it more complicated. But if I rewind to, you know, 90 days ago or so, there was a perspective that not necessarily from Angeline, but certainly in investor conversations that the outlook for fiscal 20 was really conservative or significantly conservative. And I think we've, of course, heard from you guys over the years outlook that started at one point and you pretty consistently do better than the outlook. I wonder if you could just give us your perspective on the outlook and guidance philosophy now that you know 90 days more than you did at the time you gave the outlook at the beginning of the year. You know, to what extent is this middle of the fairway? To what extent is this conservative? And when you talk to your customers and you think about the outlook, I mean, how are you feeling and how has that evolved? Just, again, really, really zooming out. Thanks a bunch.

Yeah, Steve, so I'm in the conference room zooming out right now, and great question. And, you know, I think that that's how we thought about the full-year guide, which I'll leave it to you to prescribe the first adjective, I mean, the proper adjective. But, you know, we started this year with a guide that we thought was relatively the floor of what we could do and talked about areas of potential upside opportunities. for the business. And we were actually tracking well in the first quarter where it would have been a beat both on the revenue and EPS side of the quarter, albeit the impact of the much talked about today, the impact of the coronavirus. So that's why we felt pretty confident about our ability to say, listen, there are still a lot of puts and takes relative to China in the near term, But there are other aspects of the business that are doing extremely well outside of China, whether it be NASD or ACG business, the compares and the strength of our LSEG instrument portfolio that's going on NGS. So we have a lot, and then back to cell analysis. So we have a lot of confidence. And, you know, we call it a middle of the fairway right now, but we feel pretty confident.

Yeah, I would say, Steve, you know, one thing, obviously, 90 days ago we didn't have the epidemic that we're seeing right now, which is unprecedented. And so what we're trying to do is we're seeing, hey, in the first half of the year, we're expecting a $25 to $50 million impact that we're going to make up in the second half of the year. Now, the question is how fast, and we hope for everyone's sake that that will ramp up fast and and we'll get this behind us. But that certainly puts a lot more variability in our forecast. We feel good about where our forecast is, but we certainly didn't anticipate that at the beginning of the year.

Okay. I really appreciate the color there. Thanks for bearing with me. Sure. Appreciate it. Sure, Steve. Great question.

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

Great. Thanks. Good afternoon, everybody.

Good afternoon, Bill. Hey, Bill.

So I guess, Bob or Mike, just update on M&A. You had mentioned on the last call that you'd be considering looking at larger deals in and around a billion dollars. Just curious what the update is.

I think the statement I made in the last quarterly call remains, which is, you know, we think that deploying our capital towards M&A growth and earnings drivers on the NMA front makes a lot of sense. We, for our shareholders, in deals that make sense for us, in markets that we know where we can really leverage the scale of the company. And, you know, we did our largest deal of biotech in the past quarter. And, you know, as you heard earlier, you know, that's off to a really good start. I think we often get the question, well, how large are you willing to go? And, you know, The way Bob and I have described it is, listen, we could go maybe multiples of that, but we're not looking to stay in our lane here and not do anything that's magnitudes larger than a biotech. So I'm not saying that biotech is the max level, but probably multiples of that as opposed to something of a magnitude size.

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

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

Yeah, you know, the beauty of ACG has been its predictability across the business. And, you know, we're not expecting any dramatic change in the back half of the year, with the possible exception of slightly, you know, an elevated ramp in China. But that business that Mark and team have built has been just phenomenal in terms of providing stable high growth and profitable growth over the course of the last several years. And I think that that, you know, quite honestly is a great legacy to what Mark has been able to accomplish. And not only that, you know, it really speaks to what our customers are looking for in terms of productivity in the labs and so forth. So we would expect that to continue to kind of chug along as we've talked about in the past. Got it. Thank you very much.

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

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