Agilent Technologies, Inc.

Good afternoon and welcome to the Agilent Technologies second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers mark there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd 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, Jodi. And welcome everyone to Agilent's conference call for the second quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO, and Bob McMahan, Agilent's Senior Vice President and CFO. Joining for the Q&A after prepared remarks will be Jacob Tyson, President of Agilent's Life Sciences and Applied Markets Group, and Sam Raha, President of Agilent's Diagnostics and Genomics Group, along with Porig McDonald, President of Agilent's CrossLab Group. You can find the press release, investor presentation, and information to supplement today's discussion on our website at .agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of 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 obligations 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 want to add my best wishes as well and hope that you and your families are safe and healthy. I'm pleased to have Porig McDonald, our president of the Agilent CrossLab Group, joining us for the first time today. As I mentioned last quarter, Mark Doak has retired from the company and Porig is now leading ACG. I know you enjoy getting to know Porig better in his new role. I'm glad he can be here with us on the call. Last quarter, Agilent was among the first to discuss the business impacts of COVID-19. Since then, much has changed as COVID-19 is now a global pandemic. The world is a very different place than it was back in February, but what hasn't changed is the attitude and execution of the Agilent team and our unwavering focus in four key areas. Let me first talk about how we are protecting our people. Our top priority is ensuring the health and safety of the Agilent team. Early on, we entered a global work from home policy and severely restricted travel. We implemented new work practices and safety protocols for our manufacturing teams and service engineers visiting customer laboratories. The team is really stepping up. True to the Agilent mission, our response to COVID-19 is driven by our commitment to our people and our customers. It should be no surprise then that our secondary focus is an unwavering commitment to our customers. We are and have been open for business. From the early stage of the pandemic, we took decisive action to secure our global business operations. We are using innovative and more efficient ways to support our customers. From leveraging our digital capabilities, promote technical assistance, to urgently delivering bravo liquid handler systems for their COVID-19 test, or providing live online guidance to keep labs functioning. We're doubling down on reference to support our customers. This is especially true as there's needs change and evolve. Our third focus area is taking quick and decisive action to preserve a strong P&L and balance sheet. When we experienced significant disruption to business activity in March, we made change in our supply chain, logistics, and business operations. This ensured continuity of order intake and our ability to deliver products and services to our customers. We also didn't shy away from taking swift action to reduce expenses. We quickly put in place a cost management program while reprioritizing and sustaining our growth investments. As we continue to sharpen our plans, we will not put our future growth opportunities at risk. Bob will share more details, but the top priority is monitoring our liquidity and cash flow. We have taken actions to ensure a strong balance sheet and financial flexibility. The positive impact of our approach shows in our Q2 results. In the midst of the spread of the global pandemic, the Agilem team delivered Q2 revenues of $1.24 billion. This is flat on a basis. Our Q2 operating margins of .4% are up 50 basis points. We posted earnings per share of 71 cents during the quarter, flat versus our results a year ago. Before covering additional Q2 detail, a few comments on our fourth key area of focus, our continued prioritization on growth. Our building and buying growth strategy remains firmly in place while we are taking decisive action on our cost structure to respond to the COVID-19 impact. We are continuing to prioritize investments in fast growing markets such as Bio Pharma that deliver incremental growth and help us create a more resilient business. When we all come out of this on the other side, Agilem will be poised for growth. Our Q2 Pharma growth is being driven by the strength of our Bio Pharma business. This is a direct result of our building and buying strategy in action. Our approach to investing for growth continues to serve us well and will be a major factor in helping us emerge in the current environment stronger than ever. An example of our approach to continually assessing our growth investments is the decision we made regarding our cancer diagnostic strategy and the laser gen sequencer development program. Given change in the marketplace, we believe we can now capture future growth in the NGS diagnostic space without the need for our own sequencer platform. As a result, we made the decision to shutter our sequencer development program. We are redirecting our investments with the valuable intellectual property we've created into areas of higher interest. Despite this program change, we remain optimistic about continued growth in NGS cancer diagnostics. Let's now take a closer look at the quarter as well as the future outlook in today's COVID-19 world. Last quarter, our attention and revised outlook was focused on our China team, customers and business. As COVID-19 spread to other parts of the world in the second quarter, the situation changed. During February and March, our overall business was up about 1 percent. However, late March, we faced significant disruption in business activity as Europe and the Americas restricted access to facilities. Our China business is recovering better than forecasted. We posted 4 percent core growth in China with increasing strength throughout the quarter. In fact, in April, China posted strong growth while all other geographies experienced declines. We expect that China growth recovery to continue throughout the year as lab operations and investments continue to resume. The near-term outlook in Europe and the U.S., however, remains challenging, particularly for new equipment purchases across most end markets and -COVID-19 diagnostic testing. Some quick highlights across our businesses. Both DGG and ACG delivered core growth. DGG's 5 percent growth is driven by NASD, up 35 percent as the ramp of that business continues as planned. ACG was up 1 percent. Our LSAG business declined 7 percent as customers curtailed equipment purchases, although we did have pockets of growth in biopharma, cell analysis, and COVID-19 testing and research. From an end market perspective, pharma grew 5 percent in the quarter, followed by 4 percent growth in diagnostics and clinical. The food market continues recovery with modest 1 percent growth driven by China. Our environmental forensic business is down 1 percent for the quarter. In Q2, academia and chemical energy are the end markets that are most impacted, down 16 percent and 10 percent respectively. We expect continued pressure on these markets throughout the rest of the year, although we are seeing some pockets of growth in chemical production regionally as some customers shift supply chains. Looking forward, we expect Q3 to be the most challenging quarter of the year, with gradual improvement during the course of the quarter and continuing into Q4. As a key player in the life science industry, ASN also has an important role to play in the fight against COVID-19. Before closing, I'd like to share a few thoughts on our COVID-19 offerings. While the COVID-19 virus is negatively affecting our overall growth at this time, ASN is supporting several aspects of COVID-19 research and testing, along with therapeutic and vaccine development. In Q2, this resulted in a one-point tailwind of growth, primarily in providing instrumentation. There is potential that this will become a more meaningful tailwind in future quarters. To address this, we have mobilized a cross-agilent team to maximize support to customers around the globe fighting the virus. These offerings range from instrumentation, such as automation, PCR and microplay testing, to consumables and components necessary for testing, as well as lab support to these customers. As we enter Q3, I want you to know that the global ASN Agilent team is energized and remains focused on supporting our customers and driving growth. We have taken swift and decisive actions to ensure a continued strong P&L and balance sheet. We remain a diversified, resilient company with a bias for speed, execution and growth. Thank you for being on the call. I will have a few closing comments after Bob speaks, and then we look forward to taking your questions. And now, Bob, you're up.

Thank you, Mike, and good afternoon, everyone. Before I begin, I want to repeat what Mike and Ankur said in hoping that you are doing well and staying safe. Looking forward, I for one am confident we will get through this and look forward to the day when we can follow up these calls with -to-face meetings again. In my remarks today, I will provide some additional detail on revenue, walk through the second quarter income statement and some other key financial metrics, and then finish up with a framework for thinking about Q3. Given the current volatility and uncertainty that exists, we're not going to be providing specific forward-looking guidance today. That said, in the spirit of trying to be helpful and transparent, we will provide a glimpse into the evolution of our business during the second quarter and our thought process and how things may play out in the coming quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Reported revenue for the quarter was $1.24 billion, which was flat versus last year on a reported basis. Currency negatively impacted revenue by 1.6 percentage points, and acquisitions added 3.3 percentage points to growth. On a core basis, revenue declined .7% in the quarter. The pacing of revenue during the quarter varied significantly by region, driven by where each region was in the cycle of precautionary measures being taken to slow the spread of the virus. As we previously disclosed, we saw overall business activity slow in late March, driven by the U.S. and Europe. The -at-home measures in those regions reduced lab operations and limited lab access and our ability to install equipment. This lower level of business activity carried through the month of April, resulting in double-digit declines for the month in those regions. On the other hand, and as we had anticipated, business activity picked up throughout the quarter in China as restrictions were slowly lifted. We saw strong growth in China in April, partially due to catch-up from lower business volumes in February and March. Overall, China grew 4% for the quarter, exceeding our initial expectations at the start of Q2. In total for Q2, quarter to date results through March were up 1%, while April was down roughly 6.5%, resulting in the .7% core decline. Before getting into some additional group details, it's also important to note while we have seen some order push-outs, we have not seen increased order cancellations. While there are always some level of cancellations, in both March and April, cancellations were actually lower than the previous year. Our resilient business model was extremely important to us as we navigated the effects of a challenging environment. As Mike mentioned, DGG and ACG both grew on a core basis, while LSAG instrument business declined. LSAG declined 7% core in the quarter, but did see some bright spots with growth in large molecule pharma, cell analysis, and COVID-19 testing and research. In addition, as Mike mentioned, we had modest growth in the food market. For LSAG, the impact of COVID-19 related closures was most pronounced in the academia and government and chemical and energy markets. ACG grew 1%, with China growing in the high single digits. Our ACG results were negatively affected by delays in installations and lab closures in Europe and the Americas during the quarter. I'm pleased to say that our DGG business delivered 5% growth during Q2 and was on track for double digit growth prior to the slowdown in U.S. and Europe. We saw sequential growth in genomics boosted by products used to develop testing capabilities and for vaccine research into COVID-19. As Mike mentioned, our NASD ramp remains on track and delivered excellent growth this quarter as well. The pathology business grew in all regions except for the U.S. where the effects of delayed and -COVID-19 related medical procedures was more pronounced in April. On a geographic basis, all regions ranged from flat to down 4% for the quarter, with Europe down 4%, America down 1%, and Asia Pacific flat. And within Asia, as we mentioned, China grew 4%. Now let's turn to the rest of the P&L. As the expanded impact of the pandemic became apparent, we moved quickly and decisively to adjust our cost trucker through targeted discretionary spending program reductions. We continue to invest in our key growth opportunities and capabilities such as digital. For example, we leverage digital and virtual reality investments for our field service engineers to continue to support our customers when we did not have physical lab access. While we took actions across the P&L, we focused most of our effort on SG&A. R&D investments as a percentage of revenue were largely unchanged from the prior year. As a result, operating margins of .4% improved 50 basis points over last year on flat revenue. Gross margin at .4% was down 60 basis points versus the prior year, mostly due to volume and the revenue mix shifting more towards services. In addition, we saw higher logistics costs as moving goods internationally became more expensive. This combination of factors resulted in non-GAP EPS for the quarter coming in at 71 cents per share, flat with the number we posted a year ago. Now in terms of the balance sheet, we were in the market early in the quarter, repurchasing 1.66 million shares for $126 million. In late March, however, we suspended all share repurchases to maximize our liquidity and financial position. While not in our current plans for Q3, we continue to monitor and evaluate when repurchases will resume. We generated $313 million in operating cash flow during the quarter, which is a $61 million improvement over last year, despite building some raw material inventory to assure supply. Additionally, we've taken steps to reduce our capital spending by roughly one-third for the year. In addition, we ended the quarter in a strong position with $2.1 billion in available liquidity, including $1.3 billion in cash and roughly $800 million available under our revolving credit facility. Our net leverage ratio as defined by net debt to EBITDA was 0.9 times. Given our cash flows and our strong financial position, there is no change to our dividend. As you may recall, we withdrew our 2020 guidance in mid-April due to the uncertainty surrounding the duration and severity of the global COVID-19 pandemic and the impact on the global economic environment. While various countries have started working towards reopening, the pace and effect of global reopening efforts is still unknown, so we won't be providing guidance for Q3 for the full year. However, we did want to provide a framework and a range of possibilities for how our business could unfold in the coming quarter. When we look at Q3, we expect May to be very similar and the business activity, very similar to April, and the business activity we've seen in the first few weeks of the month confirm that. We anticipate that China will remain ahead of the curve in terms of economic recovery relative to the rest of the world. We expect pharma and our services, particularly contracted services, which make up the majority of our service revenue, to remain resilient, and we will be following the consumables business very closely to monitor early signs of recovery and demand patterns. A combination of these factors could result in our revenues being down between five and six. At the lower end of the decline, we assume activity in June and July will continue to improve. With the COVID-19 offerings Mike mentioned, having a more significant impact in the 1% contribution in Q2. Now, on the higher end of the decline, we're building in the assumption that there would be no significant improvement throughout the course of the quarter in the U.S. and Europe, that -COVID-19 testing would not recover and China would plateau. While this is a wide range, there's still significant uncertainty in the pace of recovery as the U.S. and Europe are currently lifting restrictions. We hope that the 15% decline proves very conservative, but wanted to provide you with some of the assumptions we're using to manage going forward. In Q3, we expect a two-point headwind due to exchange rates, and M&A should be a three-point tailwind. Again, this is not formal guidance, but should give you a sense for some of the variables we're looking at within the business and believe this is the best way to view third quarter given the uncertainties that exist. As Mike said, we also believe that Q2 is a year as the world works through reopening the economy. Overall, I feel very, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains, and come out even stronger as the global economy reopens. Before I turn the call back over to Mike, I want to conclude by saying Agilent's performance for the first two quarters truly shows the resilience of our company. I also want to thank the Agilent team for remaining focused on supporting our customers during this time, and I'd be remiss without a shout out to the finance team for being able to close the books in such a professional manner with everyone working from home. We've taken actions that will serve us incredibly well through the rest of 2020 and into the future. And with that, I believe Mike, you'd like to share some final thoughts before we move

on to Q&A. Yes, thanks, Bob. Before we take your questions, I want to close by saying I couldn't be more proud of our Agilent team. The idea that difficult situations provide the opportunity for organizations and individuals to step up and exhibit strength, leadership, and resiliency has never been more true at Agilent. The team has been tested during this crisis like no other time, and they have not shied away from it. Instead, we have answered a call with world-class execution, an even stronger focus on customer service, and inspired creativity that is second to none. I am absolutely convinced that we will emerge from this pandemic as an even stronger force in the marketplace. And with that, I will turn things over to Ankur so we can take your questions. Thank you.

Jordi, if you can open the line for Q&A,

please. Certainly, as a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please limit yourself to one question and one follow-up. Thank you. Please stand by while we compile the Q&A roster. And our first question comes from the line of Tycho Peterson of JP Morgan. Please go ahead, line is open.

Hey, thanks. I'm going to start by asking about the guide. You know, you said China is plateauing. So what I guess sequentially is getting worse here since you captured April in the prior quarter? Why should things be deteriorating for the upcoming quarter? And then, you know, on the COVID tailwinds, did the 35% growth you called out in NASD, did that capture anything around COVID manufacturing? Or can you maybe just touch on what drove the strength there?

You want to take that?

Thank you, Tycho. And this is Bob. I'll take the question. I'll actually take the second question first around NASD. You know, the NASD growth is on the ramp that we had talked about previously. It actually had nothing to do with COVID-19 testing or research. It's mostly the activities that have continued, you know, in our pipeline of products and clinical testing that were very pleased with the progress there. So that has nothing to do with the COVID-19 testing. On the first question that you had, again, this is in guidance. It's kind of a range of scenarios that we're planning. And we hope that the bottom end of that, of the minus 15, would be very conservative. If you look at, we are expecting May to be very similar to April, which would hopefully be the bottom, and then improvement in June and July. But if there are relapses, if China does relapse or there is a, you know, slowdown in that growth, you know, that would be the bottom end of the range. So it's a wider range than we would normally have, but there's very much a lot of uncertainty around the forecast.

And, you know, on the uncertainty, chemical and energy, you mentioned, you know, customer shifting supply chains. Can you maybe just talk about how much of the, you know, sequential step down here is C&E and given the volatility in oil prices, how much of a factor that is?

Sure. Yeah, I'll take that one. So I think for C&E for Q3, basically, we're assuming it kind of looks like Q2. And with the potential, the investments that we're starting to see, inclinations of a regional approach to this pandemic has really caused many parts of the world to rethink their supply chains. So we're seeing early indications of moving, of ensuring certain types of critical chemical components in certain geographies. So that could represent some upside to our thinking. But basically, we're assuming kind of current situation continues into Q3.

Yeah, Tycho, if you look, if you, if we took our chemical and energy end market and looked at the first two months versus April, they were roughly the same. So we said it was down 10% in the quarter. It didn't have a material change in April. One of the businesses that did was academia and government. And so academia and government with the lab closures and so forth was worse in April than it was in other markets. But chemical and energy was pretty steady throughout the quarter, now albeit down.

Yeah.

Okay. And it's important to keep in mind that about 70% of that segment is actually chemicals, including material testing.

And then one clarification before I hop off on laser, Jan, it sounds like this is a full write down. Is that correct? You're kind of abandoning the project. That seems a little bit different than what you talked about back at our conference in January. So can you clarify what changed there?

Yeah. Well, actually, you reference your conference. A lot changed after the conference where we saw a number of new announcements indicating there were some changes in terms of how certain competitors in the space were thinking about access to the platform. So that caused us to rethink our current investments. And we had an opportunity to really move our program forward without needing to invest directly in a sequencer platform of our own. And Bob, I'll let you comment on the financial side of that.

Yeah, it is a full shutdown and we will have a write off in Q2. Yeah. Thank you.

And our next question comes from the line of Steve Wuchaw of Wolf Research. Please go ahead. Your line is open.

Hi. Thanks for the time here. I wanted to ask first of all on strategic activity in the space. One thing that we've seen across tools and devices is this upwelling of interest in capital raise in part with a view that there is an opportunity for accelerated capital deployment given the potential for opportunity here. You guys have a uniquely strong balance sheet comparatively, certainly plenty of liquidity. I wonder if you could speak to how you think about capital deployment and the intensity of capital deployment in the next year. And then I have two follow ups.

Thanks. Yeah, I think from an agile perspective, our overall thesis of building and buying still stays intact where we'd like to deploy capital in M&A that makes sense for the company. And we've talked about our criteria around in markets that we know where companies that we require and have higher levels of growth in the overall company average creative. So that formula remains relatively unchanged. We have noticed that some of these moves as well. So I think that speaks to a continued robust interest in the M&A pipeline across the industry. I'd also tell you the valuations haven't moved much. So this is not a buyer's market and you can buy things on the cheap. So you really have to be think through what you're looking at and does it make sense for the company. Anything else you'd add to that, Bob? Yep. Steve, do you have a follow up or?

Yeah, sorry. I thought Bob might chime in there. But I had two follow ups. One is I wonder if you could speak to activity on a month to month basis and the extent to which you think there might have been any sort of April snapback. You commented on it specifically in China, but any snapback activity in other parts of the world, the extent to which people might be trying to ramp quickly and how that might reflect not just in China, but on growth as a trend line prospectively for non-China regions. And then just a quick one. I'm curious how you guys are thinking about planning for growth in cross lab, given that cross lab has historically been a very strong grower and some component of the cross lab growth story has been penetration into new categories. Is that penetration story still active in the current environment? Thanks

a bunch. Yeah, I'll take the first question in terms of the pacing, Steve. And you're right. What we have seen is the pacing by region really follows kind of how the pandemic spread and then how the countries are coming back. And so what we saw was a more pronounced, obviously in China, that has, I wouldn't call it a snapback, but it's recovery. And we're actually seeing the same thing in Europe where Europe, you know, we felt more of the pain and it's actually coming back faster, you know, than the U.S. And now we're starting to see some of the U.S. It's still very early days in the U.S. But you are seeing kind of that kind of wave of recovery happening throughout the course of each one of the regions. And I'll turn it over to Porig to give a chance to talk about the cross labs business. But we remain incredibly bullish about that business. And I think even more so now given some of the proof points that we have in terms of being able to support our customers both directly and through our digital means. Porig?

Yeah,

thanks,

Bob. And I think, yeah, very, very strong demand. We're seeing, for example, in our service business, a lot of strong tracks which really help our customers be productive and help with startup services and actually achieve, you know, a critical in the services. On the consumable side, we certainly saw a strong demand in China, a big snapback on in terms of demand for our products that are really supporting workflows. And we see this continue, especially around a lot of the digital capabilities that we've developed and our way of interacting with customers. The last thing I would mention is that also our productivity story in cross lab about our lab enterprise business is doing extremely well. And also, we really show that the customer need for productivity in these times and beyond going forward is going to be very strong.

And Stephen, let me ask just one other thing in the case, you know, obviously, ACG grew 1%. It would have been stronger, several points stronger. We did have some deferrals because we couldn't install the equipment and we recognize a portion of the price for the service, the training and installation and so forth. And so that is revenue that is on the balance sheet today and will come back to us in the course of, you know, Q3 and Q4.

Yep. Okay, so Q3 this particular quarter was not a good indicator. Much appreciated. Thank you very much.

Our next question comes from the line of Patrick Donnelly of Citi. Please go ahead. Your line is open.

Great. Thanks, guys. Mike, can I do one for you on the C&E segment? Certainly encouraging to hear there was no real deterioration in April. Can you just talk through the exposure there? Obviously, E&P pretty correlated to oil prices. Maybe on the refining side, how has that reacted to the oil decline? I know typically, low oil could actually be a positive if it's over supply. It feels like at least part of what's going on now is low demand. Maybe just talk through what you're seeing there and the expectations going forward.

Yeah, that's a great question. And what we also try to think through what's really behind the lower oil price. And I think this time you got two things going on, right? Which was over supply and then really driven by obviously the COVID-19 and the slower growth in the economy and demand for those services. But I'm really glad to get a chance to on the mix of our business because that segment is pretty subdued right now. But over the years, we've continued to have more and more of our business move into the chemical side of that. So roughly about 70% of our business in C&E is in the chemical side and really saw much different dynamics in April, actually almost all through all Q2, where the energy segment was pretty subdued where limited investment there. Mainly business was carried forward through our ACG business, really not a lot of demand on instruments, different kind of scenario on the chemical side.

Okay. And then maybe on the other side of COVID, obviously academic labs closing during this, understandable that they should snap back quickly. How do you feel about the C&E segment? Does this feel different where, again, labs reopening, demand comes back quickly? Do you think this will linger because of the oil prices? What's your outlook maybe again, not asking for any changes, but in the next six to 12 months, does this have the potential to linger versus some of the other ones that should snap back?

In my prepared remarks, we basically said we expect this segment to be subdued for the foreseeable future. So it really is tied to events that I'm just not smart enough to figure out myself, which is when does global growth start to get solidified and when does it start to turn? I think what we wanted to point out, there actually are some little glimmers of positive aspects of C&E business, particularly the COVID-19 has exposed the fragility of the world's supply chain. And we're seeing many customers and many governments, they want certain critical components made in their country and made in their region. So we are seeing indications across multiple industries of unsharing initiatives actually starting, which would speak to some longer term growth prospects in this space. But don't get too excited. I would just say let's assume that it's going to stay subdued for a while as we're thinking about it right now. Hence the reason why we withdrew the guidance in Q2, because some of these things are just too difficult to predict the timing of transition.

Yeah, and I would say, Patrick, just on that, obviously the more subdued piece is the instrumentation. Yeah, yeah, yeah, yeah, absolutely. And we will see the snapback or the improvement first in the ACG business. Absolutely.

That's really helpful. And then a very quick cleanup on NASD following up Tyco's question there. Do you guys have capacity to increase the addressed demand from COVID or you already kind of maxed out in terms of the build out and just as you build out capacity, it's kind of addressing?

We are not capacity constrained. And as you know, we're continuing to build out the new facility in Frederick as well as optimizing our boulder facility. And while I can't share specific names, I can tell you that there are programs underway that aren't in the revenue yet right now that are related to COVID-19 work. Great. Thanks a lot, Mike. You're quite welcome.

Our next question comes from the line of Derek De Bruyne of Bank of America. Please go ahead. Your line is open.

Hey, Derek. Hello. Good afternoon. Hi. A couple of questions. Just a couple of cleanups. The NASD base now, INC2Q, what's that? What's that? Where are we in terms of revenues? It was up 35%. I'm just curious on the base.

Yeah, it's tracking well to the number we talked about at the, or what people have estimated, you know, ramping up to $150 million kind of run rate. It's tracking well to that.

Great. And what are you going to do with the, are you reinvesting the LaserGen money into the business or is that going to drop through? Are you going to, and can you remind us on what you were spending on that? I think it was around $50-ish million?

Yeah, no, it was about $30 million a year. That was what was kind of forecasted this year. We've spent basically half of that. You know, so the second half of the year, that will be a combination of reinvesting where appropriate and, you know, also managing the dynamic situation that we're in in terms of COVID-19.

Hey, Bob, I think we had the full cost of the program in our Q2 results and our exported results. And there's some real talent in that team and there's some really great intellectual property that we think we can really deploy in other programs. So we're looking to go forward that combo approach as Bob mentioned.

So you mentioned that you're seeing some of your chemical customers think about their supply chains and move around. What about the pharmaceutical customers? I mean, obviously there's a push at looking about bringing API manufacturing back and

you're a big

player there. And this also sort of dovetails with another question on geopolitical tensions and are you, you know, are you worried about the longer-term impacts of what's happening now between the U.S. and China in terms of your China business? I'll take the second one. Yeah.

Hey, Derek, this is Bob. Yeah, I'll take the first one and I'll leave the second one to Mike. You know, I think on the pharmaceutical one, we're actually watching that very closely. It's different than the chemical side because I think the chemical side can probably move a little faster than this. Obviously there's regulations, but you are seeing discussions about that even as recently as earlier this week about the U.S. providing a contract here in the U.S. for some APIs and so forth. So we actually think we're watching that closely and we think that that could be an opportunity for us as those new labs or capacity come out, you know, because our offering here is, I think, second to and so more to come there. It's probably not as fast moving, but we certainly is on our radar screen.

And without wading in too deeply on the political dimension of things today, what I can tell you is we're actively scenario planning. We, under potential scenarios around changes in trade policies and supply chains, so we don't want to be caught in the reactive mode that we were when tariffs were first announced a few years ago. So our teams are really working through a number of different strategies right now.

And if I can squeeze one more in. Sure, sure. Well, Agilent doesn't do, you know, you don't supply testing products for COVID-19. I mean, obviously, you know, how are you thinking about testing and deploying testing for your employees? And I'm sort of curious about, you know, are your customers demanding that you get tested or people come in? Because there's some very large numbers being thrown around as sort of the size of the testing market. And so I'm just curious in terms of what you're thinking.

Yeah, a couple things right now. So first of all, although we don't provide kits directly ourselves, we provide a lot of the components and ingredients, antibodies and other enzymes that go into testing kits. So we've, I've personally been involved in need to make sure our supply, insurance supply to them. So I think we've got a good feel for the demand that we're seeing out there. Relative to our own employees right now, we're not requiring employees to be tested for returning to the office. This is a reminder about 85% of the employees now are, for Agilent, are working from home. And we're going to be very, very careful on phasing in return to office. So we're thinking this through once more routine testing does become available. That's probably something we're to look at pretty closely. But we're in no hurry right now because our teams are working from home right now. You know, relative, you know, it's funny, we keep asking that question of our, particularly our service teams, and that has not come up yet. So we're continuing to monitor, but right now we're not seeing requests from our customers to have any type of testing done prior to our employees coming onto the site. Clearly we have to follow our safety protocols, and we out, we outfit our team with the right PPE and the right training. But the testing side is not, we've not yet seen that. Thank you very much.

Our next question comes from a line of Dan Leonard of Wells Fargo. Please go ahead. Your line is open.

Thank you. So hate to overanalyze one month, but I want to circle back to the month of April. So six and a half percent down is not so bad for all the news we've seen. Can you, you mentioned strength in China. Can you quantify China? I mean, I was doing some back of the envelope, but it looks like it might have been greater than 20% growth in April in China. Is that in the right ballpark? Yeah. Pretty good math. You're in the ballpark. You're

a pretty good math, Dan.

Okay. And then maybe separately follow up. Mike, it does seem like you don't trust the trend in China. And how much of that is just uncertainty around the virus and its trajectory versus the maybe geopolitical or any other things?

Oh, Dan, thanks for a follow up question. I do trust the trend in China. So I hope that didn't come through that way in my remarks. So we actually- Well, there was the word by toe earlier.

I wasn't sure.

Oh, no, no. That was sort of the worst case scenario that Bob was trying to put together this framework, said, well, you know, we could be wrong. And if it's wrong, this is what the implications would be. We don't think we're wrong, but in case we were wrong, you see that far end of the framework that Bob described. But in fact, Q2 China growth was better than we had expected. And we believe it's going to continue to return to higher levels of growth throughout the quarter. And I hope a few of you noticed that China food also grew in Q2. Great. Thank

you for that clarification. I'm all set. Absolutely.

Our next question comes from a line of Doug Schenkel of Cohen. Please go ahead. Your line is open.

Hey, good afternoon, guys. Hey, Doug,

how you doing?

I'm doing well. Thank you. So maybe a quick follow up to Dan's question, cutting it a different way. Bob, you said May is going to be similar to April, but you acknowledged again in answering the last question that China continues to get better. Logically, I think that means something or somewhere still must be getting worse coming out of out of April into May. Maybe I'm just being a bit too forensic with how you position this, but I'm just wondering, are there areas where you saw and continue to see continued deterioration as we sit here in mid to late May?

Yeah, we haven't seen any continued, you know, again, these are these are one point out of the month, right? But are one point out of a year. But May is trending the way April trended, you know, in total. And so we're not seeing anything that is dramatically off base.

And I think, Bob, it's maybe just worth mentioning that we don't go into a lot of details in order front. Our order forecasts have been tracking well for both April and through this point in time through May. So. Yeah,

that's great. Helpful color. Regarding ACG trends specifically on the consumable side, what did you see in April? And then what was trend into May? Consumable use picking up would be a really great sign that more people are getting into labs. And as you noted, a good leading indicator for future demands. So I'm just wondering, recognizing it's an unusual time, if you'd be willing to go to that level just because it's important for you in the group. And if so, if you'd say anything about specific end markets and geography. Yeah,

I would say generally speaking, you know, our consumables business has started to pick up and I will just leave it at that. Yeah, it's tied directly to the opening up facility. You can draw a parallel where things are opening up. You see the consumables recovering. It's recovering much faster than the instrumentation.

And that's really, you know, Doug, that's why we keep you as word on certainty because, you know, we can't project exactly how, you know, certain facilities will open up. But we know when they opened up in China, we've gotten the business. We know as they've been opening up in Europe, we're getting the business. And then when they slowly been opening up in the US, we're getting the business. But the exception being universities which aren't opening up right now unless you're doing COVID-19 research.

Correct. Okay, super helpful. Last one, cell analysis. Can you talk a bit more about trends in this business in the quarter? You had a good quarter. The business grew year over year. I think on the surface that's a bit surprising just because of the heavy mix, the heavy exposure to academic research. How are you able to pull that off?

Yeah, Doug, thanks for the observations there because there is a big footprint in the business and academia, but the overall business did grow. And I think I'll have to give the opportunity to Jacob to quote a little about what's going on there.

Yeah, absolutely. Thank you very much. And it is actually a good story. I mean, as you say, Doug, it is a take a two-seat. Clearly, academia and government has been challenged during this period of time while our exposure and biopharma has really picked up here. And furthermore, we have also seen quite some interest for the biotech, ELISA and Rogers in further theology testing. So with that, there is actually quite good demand. We also see the ACA flow which have tremendous growth. We see a lot of the flow instruments being used in the research sector right now to better understand the cytokine that is happening in relates to the COVID-19. So overall, both the biopharma space is seeing strong demand. We've seen demand into the diagnostic testing on the COVID-19. And then obviously, academia and government overall is challenging, but we do see a lot of interest still there. So overall, great performance.

Okay, great. Thanks again. Thanks.

Our next question comes from the line of Puneet Suda of SVB, sorry, SVB Learing. Please go ahead. Your line is open.

Yeah, thanks. Hi, Mike. First one on NASD. Great. Great. Thanks, Mike. So the first one on NASD, great to see the growth there, but just wondering, was there any element of stocking from the biopharma or biotech customers there just given heading into COVID?

Yeah. Sam, I think the answer is no, but I want to, you haven't had a chance to talk today, so why don't you confirm and deny this rumor of mine?

Yeah, yeah. Thank you. No, the answer is no, Mike. And Puneet, that business, it's a long lead business where we both contract with customers, usually several months, sometimes quarters out the work because there's a lot of preparatory work that has to be done in conjunction with them, scheduling all the pre-validation work. So no, there was no stocking work. We've got things scheduled out for months ahead already, so no stocking effect.

Hey, Puneet, this is Bob. Just to add on to what Sam said because there's been a lot of news about clinical trials being put on hold and so forth. We haven't seen any of that in our demand for NASD.

Okay, that's great to hear. So Sam, if I could, and Mike, you as well, if I could ask on cancer diagnostics, obviously a high growth area and expansion into liquid biopsies and other significant market opportunities there. Now with the decision on LaserGen, how are you thinking about the long-term focus for your genomics portfolio and overall market position longer term?

Yeah, I'll make some initial comments and I'll invite Sam to join in here as well. So I think it's first of all important just to remind the audience, we actually do have a cancer-diagnosed business day from an NGS perspective. So we provide a lot of components and sample prep and other instrumentation into these workflows today. We're overall very, we can be very, very bullish about the cancer diagnostics market for NGS-based cancer-based diagnostics. And we think there's a path forward for incremental growth on top of what we're doing that doesn't require a, or having our own sequencer because of some change in the external marketplace. And Sam, but maybe you have some building comments on that?

Yeah, yeah, absolutely, Mike. As you said, we remain the leading provider for library preparation, particularly target enrichment kits that are used as part of NGS-based cancer diagnostics. We have some of the leading workflow elements as it relates to NGS quality control and so forth. And also our combination of our access to clinical diagnostic labs through our pathology franchise, our CDS business, where we work with pharma partners to develop computing diagnostics from, we believe together with what we have in genomics, it still gives us a unique capability set, which we are looking to deploy that capability set by bringing that together. And there's partnering opportunities. So we haven't really changed our thesis. And as Mike said earlier, we just don't believe we need to directly develop the sequencer ourselves. But our commitment to genomics, including arrays, including NGS, continues. And we feel good about

it. Okay, that's very helpful. And if I could squeeze last one in on the Bravo liquid handling robots that you have, obviously are being used widely among the COVID testing community as well and genomics community. So trying to see if that was a meaningful number this quarter, is that something you can you expect to continue? And if you can, if there's something you can quantify or prolong those lines. And I wasn't sure if this is, you know, this is in Sam's bucket, or is this, you know, it's actually in the LSAG bucket?

Yeah, hey, Puneet, it's Bob. I'll tell you, it's in the LSAG bucket. And that was the majority of the instrument of the COVID-19 testing that Mike talked about one point tailwind in Q2 and growing. So that demand has

not peaked. And it comes not only with instrumentation, but an ongoing supply of consumables associated instrumentation.

Okay, that's great. All right. Thank you.

And our next question comes from the line of Vijay Kumar of Evercore ISI. Please go ahead. Your line is open.

Oh, thanks, guys, for squeezing me in here. Sure, Vijay. No problem. Mike, I think I just want to make sure I heard this correctly. Did you guys say April was down 7% because I'm trying to figure out if May is in line with April, six and a half. So if May is, I guess, in line with April, or even I guess if, you know, the next two, you know, four or three months are in line with April, like, how do we get to minus 15? Maybe just help us understand. Yeah, Vijay, you wouldn't.

Vijay, you wouldn't. That would be kind of towards the lower end, right? So what we're saying is if things kind of backtracked, we didn't get any better in the US and Europe. And we didn't really have, you know, there was a, you know, sort of a backtrack in in China. So again, we're saying we don't expect that. We hope that that's very conservative, but things are just now opening up in US and Europe. But if you do the math that you're saying, you don't get there. You get a lot better. Get towards the minus five.

Yeah. Understood. No, that's helpful, Bob. And then I guess on that China topic, I know in the past, you guys have, or I guess some of your peers have spoken about the stimulus, you know, China stimulus. Any details around or thoughts around a potential for stimulus and perhaps how that could benefit you guys?

Yeah, we haven't heard any specifics on that. So that clearly would be a boost to our view of market demand in the latter part of this year. But that's not at all in our calculus right now when we talk about a recovering China marketplace for us. Perfect.

Thanks, guys.

And our next question comes from a line of Brandon Coulard of Jeffries. Please go ahead. Your line is open.

Thanks. Mike, I was hoping you could just touch on the small molecule farmer trends in the quarter around capital equipment. Any disruption in places like India or other geographies?

No significant disruption, but it's relatively flattish, I think, for the quarter. That's about 70% of our pharma business. About 30% was growing quite strongly in biofarmers. Small molecule is relatively flattish on the instrumentation side.

Yeah. Yeah. We, our business in India is fairly small today.

Okay. Then just want to follow up for you, Bob, just around the P&L. If you sort of speak to the cost structure breakdown between fixed and variable and maybe how we should think about OPEX trends into the third quarter.

Yeah, I would say, I mean, we've been, we were very pleased with our ability to kind of manage, you know, kind of the cost structure here. If you looked at it kind of on a sequential basis, there was about a $35 million kind of reduction. You know, about a third of that, quite honestly, was travel related as we put the breaks on. And I would expect that to be probably even more significant in Q3. Obviously variable and then, you know, discretionary spend. And then we do have some, you know, element of our variable comp that, you know, reduces with performance. But, you know, what I would say is Q3 is going to be more challenging because we are protecting those growth investments, but we are very pleased with our ability to kind of manage our costs.

Yeah, Bob, I could just jump in and, I mean, the fact that we were able to increase margins in the quarter in the midst of a pandemic, we're really quite pleased with that. And we didn't take shortcuts here. So, you know, there was no COVID-19 layoffs within Agilent. And we've got a team that is not worried about their future employment. They're all worried about winning the marketplace and taking care of our customers. Very

good. Thank

you. Thanks.

And our next question comes from the line of Dan Brennan of UBS. Please go ahead. Your line is open.

Great. Thanks for taking the question, guys. Sure, Dan. I was hoping maybe to, hey, Mike, maybe to go back to China for a moment. Could you break it down a little bit more kind of what you're seeing in China? I know you kind of highlighted in the deck that food grew, and I think you've given some other tidbits. But maybe just give a little flavor for your segments in China, and specifically if you could also just address maybe an update on food and generics, which have been two big drags for you guys.

Yes. Yeah, I'll take it. I'll take it, Dan. What I would say is, you know, in the quarter, we were very pleased with the performance. All three business groups grew with DGG, albeit the smallest one growing the fastest, followed by ACG, and LSAG was up a modest percent, which is, you know, a great testament to the team there. Across the groups, all but I think academia and government grew to varying levels, and food, as we talked about, was up in China, and it helped drive the global food being up. So again, very good recovery there, and we've been very pleased with our, you know, our performance in China.

And are we through, Bob? And thank you, Dan.

Yeah, from a generic perspective, you know, pharma was up, really driven by the bio pharma business, but our small molecule was not significantly impacted. You know, as Mike said, our small molecule business was roughly flat globally, and it was not that far off in China as well. Again, we've got the view that, you know, now COVID-19, you know, kind of throws some variables in here, but we continue to have the view that this ultimately is a good thing long term for the industry and ultimately for us, because we continue to see the customers who win disproportionately our customers. And nothing really changed in Q2 from that standpoint.

No, I can add to that, that you have to write the consolidation just continued with the generics, but according to our expectations.

Yep, got it. And then I know there was already a question, I think, that thanks Jacob, and then I know Puneet asked a question, you know, on the diagnostics business, but if you think about the DGGX NASD business, obviously that business should be a lot less sensitive towards discretionary visits, given the nature of what you're selling there. But can you just give us a little flavor for what you are seeing, since there is such a focus on the ability for hospitals to open back up and visit? Maybe I'll jump on that.

Yeah, I think actually, you know, hospital access for and patients willingness to go to the hospital medical care outside of COVID-19 has put a damper on the US business in pathology. So that's one of the areas of quote unquote uncertainty we're looking at is when will those when will patients start to return to hospitals to get those procedures done? We saw that resume, I believe, Bob, in Europe, but we've not yet seen in the pathology US business, and that's somewhat of a that's put a drag on our Q2 results, which were so we were still we were quite pleased to post at 5% core growth in that business despite you know this drag in the US, which we think eventually is going to come back. But you know, again, this is when yeah,

and Dan, that's one of the variables that we were taking into account, you know, with the with the with the framework that we were talking about, if, if in fact, you know, the the large labs continue to focus on COVID-19 testing, or there's not any resumption of, you know, non COVID-19 medical procedures, then that will impact our pathology business, because right now biopsies aren't being done. You know, cancer screening is is being deferred. And you know, then if you have cancer, then you go for a biopsy and so forth. We're hoping that that will resume in, you know, throughout the course of this this quarter, but it's still very early days, you know, ultimately, we see that as, you know, bad for the health care of the of the world, quite honestly. And so we hope not as not just as manufacturers, but as as brothers and sisters and mothers and fathers that that happens. But that's one of the things that is still in front of us. Terrific. Thank you, guys. Welcome.

Thank you. And that's all the time that we have for questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.