Agilent Technologies, Inc.

Good afternoon and welcome to the Allegiant Technologies Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'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, Robert. And welcome, everyone, to Agilent's conference call for the third 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 Bob's comments will be Jacob Theisen, President of Agilent's Life Science and Applied Markets Group, Sam Raha, President of Agilent's Diagnostics and Genomics Group, and Porig McDonald, President of Agilent 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 currency and the acquisitions and divestitures completed within the past 12 months. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I would like to turn the call over to Mike. Thanks,

Ankur, and thanks everyone for joining us on our call today. The Agilent team delivered excellent results in the third quarter in the midst of a historic global pandemic. Against this backdrop, Agilent's performance once again highlights the strength and resiliency of our team and our business. Agilent's Q3 revenues are 1.26 billion. Our revenues are down just 1% on a reported basis despite COVID-19 headwinds in what we expect to be the year's most challenging quarter. On a core basis, revenues are down 3%. These results demonstrate the strong resilience we have built into our business over the past several years. EPS is 78 cents per share. This is a 3% -over-year increase. Operating margin proved 90 basis points over last year to 23.7%. Our Q3 results are further evidence of the success of our profitable build and buy growth strategy. We continue to build a more resilient, growth-oriented business. Last quarter, I talked to you about the four key priorities we're focused on during the COVID-19 pandemic. Protecting our people, being open for business for our customers, taking decisive action to preserve our P&L and balance sheet, and unwavering commitment to growth. Staying focused on these priorities has helped us navigate through the COVID-19 effects on our team, customers, and business. Our customers continue to respond very favorably to our team's engagement and our enhanced digital capabilities. In fact, Q3 customer satisfaction rankings are at all-time highs. In all regions, we're seeing improvements in lab access for our customers and increased -COVID-19 testing volumes. There are, however, regional and end-market differences in the pacing of improvement. Lab access improved through the quarter, although it's still not at -COVID-19 levels. Globally, lab access remains limited in academia, -COVID-19 research, and testing labs. We're also seeing continual limited access to some private sector research labs in Europe and the United States. Similarly, -COVID-19 diagnostic testing volumes improved throughout the quarter, but remain down from prior year levels. Hospital access in Europe and the U.S. is improving, although disrupted at times by virus flare-ups. While there are indications of improvement in economic growth at varying degrees across the globe, caution remains in customer capital expenditure decisions. Consistent with our thinking coming into the quarter, the pace of recovery varied by region. As expected, China led the way for us and exceeded our expectations with revenues up 11%. China's growth in the quarter is broad-based across all end markets and for all business groups. While improving, the rate of recovery in Europe and the Americas lags China, given the timing when these regions first felt the brunt of the pandemic. European revenues are down 5%. America's market conditions trails both China and Europe, with revenues declining 10%. However, as we exit the quarter, we are seeing signs of improvement in service activity, consumables, and diagnostic testing volumes. On a total company basis, we exit July with modest growth across all major markets. Now, let's talk about our performance by business groups. Our life signs in applied markets grew 2% on a reported basis and declined 4%. Our team is focused and determined to gain market share despite a constrained capital environment. The strength of our portfolio coupled with an energized and stable sales team is paying dividends. I'm also very proud of contributions our cell analysis technologies are making in COVID-19 virus research. Our M&A strategy is working and making a difference in the pandemic fight. Our cross lab group revenues grew 1%. Increase in customer activity led to increased sales of consumables and an uptake of on-demand services. The cross lab team continues to win large, multi-year contracts for enterprise laboratory management that will benefit us moving forward. We're continually increasing our competitiveness in this space. Our diagnostic genomics group revenues declined 8%. While our overall pathology and genomics businesses are down for the quarter, we did see gradual improvement in diagnostic testing volumes and -COVID-19 lab openings. Partially offsetting this, our nucleic acid solutions business delivered another strong quarter growing almost 25%. We are very excited about the future of our NASD business. As we announced earlier today, we plan to more than double our legal manufacturing capacity at our new Frederick, Colorado site. This expansion helps us meet significantly increasing customer demand. We are growing double digit and expect to continue this rate of growth in the coming years. We continue to invest in our portfolio across all our businesses. Highlights during the quarter included LSAG launching two new LCMS products, the Agilent 6470B Triple Quad and the Agilent RapidFire 400 systems. Both products are aimed at high throughput labs driving productivity and superior resolution. We launched our cross lab asset monitoring service, which is a new subscription service using instrument sensor technologies to provide data-driven usage insights. This helps drive improved customer economics and lab productivity. While early, we are seeing strong interest from customers in this service. During the quarter, our PD-L1 assay was approved by the FDA for expanded use of non-small cell lung cancer, helping guide physicians in selecting treatments using specific immunotherapies. Our team is very proud of the role their company is playing in the global COVID-19 fight. We are supporting COVID-19 research, testing and therapeutic vaccine development. Our efforts in the global fight against the virus delivered two percentage points of reported growth. We are accelerating efforts to make a difference in the battle against COVID-19 and have mobilized across Agilent teams to maximize customer support. Let me close with a few comments on our outlook in the coming quarter. While there's still significant uncertainty regarding the continued pace of recovery, we expect the July trend of gradual improvement in our business to continue into Q4. By region, China will continue to be a positive story for us and lead the return to growth. Europe is starting to trend upward. The Americas are also expected to improve at a lower rate than China and Europe. Globally, improved lab access, increasing -COVID-19 testing and a slowly recovering global economy are all positive signs. I remain absolutely convinced Agilent will emerge from this pandemic with a stronger position in the marketplace. Our continued focus action on our four priorities, protect the team, support our customers, preserve our P&L and balance sheet and our unwavering investment and growth are delivering. Entering Q4, we are operating from a position of strength and with momentum. Yes, this pandemic remains unpredictable. However, I am cautiously optimistic about our continued gradual recovery and return to growth. Before I hand the call over to Bob, I'd like to pause and share my hope that you and your loved ones are staying safe and healthy. Thank you for being on the call. I look forward to taking your question after Bob's remarks. And now, Bob, over to you.

Thank you, Mike, and good afternoon, everyone. Today, I will provide some additional detail on revenue, walk through the third quarter income statement and some other key financial metrics. And then I'll finish up with a framework for thinking about Q4. As with last quarter, there are still too many unknowns. So we're not gonna provide formal forward looking guidance today. However, we will provide a framework for how we see things potentially playing out in Q4. Unless otherwise noted, my remarks will focus on non-GAF results. As Mike mentioned, our revenue for the quarter was 1.26 billion, down 1% on a reported basis. On a core basis, revenue declined .1% in the quarter. Currency negatively affected revenue by 1.3 percentage points while acquisitions added 3.4 percentage points to growth. As Mike talked about the regional performance, I'll speak to the end market performance. In terms of our end markets, Pharma grew 2% in Q3 against a very strong comparison of 13% from last year. Both small and large molecule applications grew and BioPharma improved throughout the quarter as drug development labs increased production and access. We experienced softness in diagnosis and clinical as anticipated. Revenues declined 10%, primarily due to conditions in the US driven by COVID-19 related disruptions to patient visits and diagnostic labs opportunities. Encouragingly, we did see an improvement in routine testing throughout the quarter, especially in China and Europe, while the US lagged. Chemical and energy was down 10% consistent with our thinking. Revenues were generally flat sequentially with conditions largely similar to what we saw in Q2. As we've talked about previously, we expect this segment to ramp more slowly than others. The food segment was a bright spot of 8%. We're seeing ongoing signals that the market in China has stabilized with the transition of more testing by commercial labs. The food market was just one of several bright spots that contributed to double digit growth in China, including growth in the low teams for our Pharma business. Our environmental and forensics business declined mid single digits against a double digit compare and the academic and government segment declined mid single digits while improving on a sequential basis in Q3. Strength in cell analysis and liquid handling for viral research partially offset the widespread impact of the ongoing academic lab closures. Now let's turn to the rest of the P&L. I'm extremely proud of how the Agilent team has responded to the challenging environment. During the quarter, we continued our focus on managing expenses while ensuring we continue to invest in our key growth opportunities. This expense management actions we initiated last quarter were on full display in Q3. In addition, our customer engagement model using digital tools continue to gain traction while also delivering savings in SG&A. As a result, operating margins of .7% improved 90 basis points over last year on declining revenue. Growth margin at .1% was down 130 basis points versus the prior year, largely due to mix and higher logistics costs. However, strong cost management and operating expenses more than offset the decline in gross margin. This combination of factors resulted in non-GAAP DPS for the quarter coming in at 78 cents per share up nearly 3% from the number we posted a year ago. Now from a balance sheet perspective, we generated $290 million in operating cashflow during the quarter, which is $48 million improvement over last year. In terms of capital spending, we spent $25 million lower than last year and in line with our revised look in Q2. We ended the quarter in a strong position with $2.3 billion in available liquidity, including $1.36 billion in cash. Also during the quarter, we took advantage of low interest rates and refinanced half a billion dollars in short-term debt with a 10-year bond and a .1% coupon, the lowest coupon in our portfolio. As you know, we pause share buybacks in Q2 pending improvement in business conditions. In Q3, our visibility in the business trends and cashflow improved, and we resumed anti-dilutive share repurchases late in the quarter. In the quarter in total, we repurchased 360,000 shares for $33 million. Going forward, we intend to resume our normal pattern of regular anti-dilutive repurchases along with additional opportunistic buying. Our overall capital deployment approach remains balanced with the primary focus on growth M&A opportunities while also returning the cash to shareholders via dividends and buybacks. As we look to Q4, business and trends have gradually improved, but significant uncertainty remains around the evolution of this pandemic. However, let me provide a framework for how we see a range of possible revenue growth scenarios in the coming quarter. We generally expect the trajectory of gradual improvement in business results to continue across all regions. Areas where we see a broader range of scenarios include research spending, both in academia and other markets, non-COVID diagnostic testing, especially in the US, and the general capex environment. A combination of these factors could result in scenarios where our revenue performance could range from a 4% decline to 1% core growth. Also as a reminder, the biotech acquisition closed midway through Q4 of last year, so the M&A impact in Q4 will be smaller than in previous quarters, roughly one point of growth, and currency is forecasted to be positive in the quarter. The low end of this range envisions COVID-19 flare-ups occurring in the fall in various geographies, limiting and in some cases reversing the recovery gains we've seen in a period of time. In this scenario, one might expect to see slower or stalled improvements in research, academia and other markets, as continued tight cash management leading to lower capex spending in the US and Europe. We hope this bottom end of the range is overly conservative, but we wanted to let you know we have plans in place in case this happens. The higher end of the range assumes continued recovery by region, building on what we have seen in July, with the biggest impact coming from the US. This would include a continual increase in elective medical procedures, such as cancer screenings, as well as continued lab openings. This view would also include continued China momentum, along with the continued improvement in Europe and other areas in the Americas. Again, this is not guidance, but should provide a sense for some of the variables we see for Q4. Overall, 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 continues its path to recovery. And with that, I'll turn over things to Ankur to direct the Q&A.

Ankur? Thanks, Bob. Robert, if you can provide the instructions for the Q&A,

please. Certainly. As a reminder, to ask a question, you will need to press star and the number one on your telephone key, on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Dallek Shankal with Cowan. Your line is open.

Hey,

good afternoon, guys. Hey,

Doug, how you doing?

I'm doing well. Nice work in a tough environment. Steve, just start with a cleanup question right off the bat, and I'll just prepare tomorrow. I don't think you qualified COVID-19 as a challenge, to maintain tailwinds in the quarter. Again, I made a miss, but it would be helpful to get past so we could try to normalize again.

Yeah, sure, Doug, I touched on it briefly in my comments, but it was two points of reported growth in Q3.

Okay, that's great. And then on China, just a couple. I'm just curious if you would share the exit rate, and as we look ahead, I know you're not guiding. I'm just wondering if you think based on what you're seeing, if you think that double-digit growth can be sustained from here, at least in the term. And then specific on food, it's great to see this return to solid growth first time in the last proceeding, some stable advantage last quarter. Can the high single-digit growth rate you saw this quarter be sustained moving forward, given favorable multi-year comparisons? Thank you.

Hey, Doug, thanks for those both questions. So just to make sure it came through the audience, the question was about our view on the growth rate of China for the rest of the year, as well as can that high single-digit growth rate in food be sustained? We think the answer is yes on both. We're really pleased with our performance in China. It was broad-based. I tried to really accentuate that in my comments. We saw basically double-digit growth across all end markets in China. And we think that a double-digit growth rate is within the realm of possibility for Q4 in China. And I have to say, Doug, it's wonderful to be talking about China food from a different factor. We've been talking about it probably the last 18 to 24 months of when that would return to growth. We saw some early indications in Q2. We saw a strong Q3. And we think that a roll of numbers probably sustainable for the rest of this year. When you say so, Bob?

Yeah, I would just say, Doug, to add, I mean, one of the things that was very positive about China was it was pretty consistent across the quarter. And in fact, exited slightly higher than that overall 11%. But we saw solid growth all three months. Great, thank you again.

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

Hey, guys. Hey, guys. Thanks for taking the question. Mike or Bob, just maybe on the guidance here. If I step back, the third quarter guidance, the down mid signals to down mid teens, the down low signals was, it came in well above expectations, I would say. Perhaps not surprising to the peers, but nonetheless, solid execution. The Q4, down four to plus one in place declines. What's the cause of declines just given in light of the performance? We've got that minus four at the low end. Is that assuming that July trends just sustained and there's new incremental underscores and how you're taking it to a full?

Yeah, Vijay, this is Bob. I'll take that. And as I mentioned in the prepared remarks, we hope that that is overly conservative. What that would imply is actually a retrenchment and COVID-19 flare ups here in the US as we go back, as we move into the fall and you start seeing some elements of shutdown. So we certainly would hope that we would do better than that. But we wanted to provide, hey, that's within the realm of kind of how we're thinking about our spending and so forth. Our July results or exit rate of the quarter was much higher than that. And so we're aiming to do better, but there's still uncertainty in the world with the pandemic, people going back to school and so forth. So, yeah. And Bob, I think it's probably fair

to say the wild card is the United States, right? Yeah, absolutely. And we were encouraged by the movement in PMIs. You probably noticed that, but let's see how that translates into business in the upcoming quarter. And again, we have to keep in mind ourselves as pleased as we are with the results we just delivered. There's still a lot of uncertainty out there because the virus is unpredictable at times.

Yeah, that's right, Mike. I mean, if you looked at each one of the major markets, each one of the major markets got better in Q3 versus Q2 with the exception of the US, which we expected given kind of the state of affairs with the pandemic.

That's a helpful perspective. So the minus four implies that things get worse. What's July in the flat is you're positive. And here's Mike, you mentioned that NASD doubling up on it. I know, if you turn back the page, we were doubling capacity. So is this now versus six months of a quadrupling capacity versus where we were last year, is that the right way to think about revenues going from 100 to 200 to perhaps 400? Is that the map here?

No, it's slightly different map. I think we've been consistent with our view of needing to double our capacity. What we ended up doing was actually triggering the decision to initiate the expansion earlier than we had thought, just given the robust nature of the end market. And as well as we have worked our way to be able to in the same space, we challenged ourselves to find ways to drive as much revenue in the same physical space. So we are investing a little bit more in capital than we initially had thought, but we're also building something slightly different than our first train, which is gonna give us actually more volume than our current train A. So we thought it was a really positive signal and that's why we sent out the press release this morning because we're super excited about our prospects here.

Yeah, and Vijay, let me kind of frame in the kind of the numbers. What we were talking about is the Frederick site has the potential of roughly $100 million worth of revenue and we added capacity that more than doubles that $100 million to give you a frame of the number. So it's not 100, 200, 400, it's 100, 200, and more than 300

to

kind of give you a sense. And in terms of July, we actually came in with growth across all three groups in exiting July.

That's helpful,

Vijay, thank you.

Your next question comes from the line of Tycho Peterson with JP Morgan, your line is open.

Hey, thanks. I'll start with the COVID commentary. I guess if I go back to last quarter, there was some talk about launching the serology test. You guys obviously have installed base of real-time PCR experiments. We've gotten questions that's why you haven't launched a PCR test, so can you just talk a little bit about how you think about those tailwinds going forward and how you think about your capabilities on the diagnostic side?

Yeah, Tycho, I'll make some initial comments and then the group president's been kind of quiet today, so I'll pull Sam in here as well to provide his perspective, but we think that there's still tailwinds in front of us and about two points of growth, and we think we can sustain that at a minimum. That's why I try to put fairly bullish comments about our stepped-up efforts across the company. Some of these things are gonna take a little bit longer. We think there's still room for our own test, a quality test with some different features, but I think maybe a few comments there, Sam, for your perspective.

Yeah, sure, Mike. Hi, Tycho. As you, I think you've seen a good pick up in terms of our QPCR instruments, which are ARIA systems, as well as our bioreagents related to QPCR, both reverse transcriptase and master mixers. On the antibody side, we've definitely also seen an increase in IgA, IgG, and those antibodies. In terms of our own tests, we are very actively exploring the possibilities of developing those, so more to share in due course.

Yeah, and Tycho, I guess why I just close off here is the broad-based nature of our portfolio is allowing us to play in multiple aspects of this COVID-19. Some of these things may take a little bit longer to actually turn into revenue, right? So if you're working with, say, a pharma partner on something in the therapeutic area, it may take a while for that to come to market. So we think these tailwinds are here to stay for some time, and we're stepping up our efforts here because it plays right into the broad nature of our portfolio.

I guess that's a good segue on the NASD expansion. Can you maybe drop to what degree that's tied to the COVID vaccine and any update from your end on capabilities on APIs for mRNA or SIRNA vaccines?

You wanna take that one, Sam?

Yeah, sure, sure, no problem. Tycho, I'd start by reiterating a little bit of what Mike and Bob were talking about. It's interesting that it was just last June that we did the ribbon cutting and starting of the new Frederick, Colorado facility. And quite frankly, we've seen demand that's exceeded our expectation just 12 months ago. So building really, sorry, the new manufacturing line that we're building, you can consider it, as we call it, training on steroids, but it is very differentiated both in throughput and the molecules it can do, which is a segue to a little bit of your question that we're able to do multiple iterations or types of SIRNA or RNA. We're also actively looking at other different versions of molecules that are oligo-based. Though I can't reveal the details, we have had a lot of interest related to COVID-19, oligos used for either COVID-19 related therapeutics or even for vaccines. So I can say that we have started the work on some of those programs now.

Yeah, and maybe Sam to add. That being said, the capacity expansion isn't tied to COVID-19. We have plenty of demand outside of COVID-19 therapeutics and vaccines. And so this is a broad-based capacity expansion.

Yeah, thank you, Bob. Okay, and then just last one, I know we don't have official guidance, but there's a framework for the fourth quarter. As we think about C&E and then also PharmaBioTech, should we expect any kind of material change in either of those end markets for the coming quarter? I know you talked about reshoring activities for C&E. I wasn't sure if that would maybe cause an improvement in trajectory there. Thanks.

Yeah, probably C&E is probably the one that I would expect it to be pretty stable in that down 10-ish percent, eight to 10% in the range. We do expect Pharma to continue to improve. So that 2%, certainly even in the low scenario would stay there and then on the high scenario would accelerate, which is consistent with the trends we've seen throughout the quarter of Q3.

Yeah, and in tech, the supply chain consideration and discussion is still happening. It gets out of the level of stability, albeit down into this space. And again, as you look ahead for the future, I imagine this is an area where eventually this will come back and again, too early to call. But I'd say we're pretty confident about the improvement rate in Pharma.

Yeah, the way to think about those reshoring is those are opportunities and discussions that could happen through the order book and then will happen actually in 21 and beyond in terms of as the investments are being made. So that's more future looking. Yep, thanks, Bob.

Okay, thank you.

Your next question comes from the line of Kunit Sauda with Lerank. Your line is open.

Yeah, hi, Mike. Bob, thanks for taking... Thanks, Mike. So first question is on, NASD is obviously strong in the quarter, but that would imply Daco and clinical business obviously pointed that out. It was down in the quarter, but that's a significant decline. Maybe just could you parse that out for us? What is, it's a COVID impact for sure, but is there anything beyond that in terms of the way market is fundamentally potentially shifting here to NGS maybe? And if you could just maybe elaborate a little bit of that, clarify, thanks.

Yeah, happy to do so. So it's all market. It's all access to labs and patients, going for their diagnostic tests. So it's real all market. I think we're seeing different pace of pacing throughout the quarter. All of our geographies in the diagnostic testing front ended up with positive growth in July, but it was down sharply in May, in June, particularly in the US. And keep in mind also, part of our business in our genomics front is short select into NGS based diagnostic labs and for genetic disorders, for example, and those tests aren't getting done either. So it's really all market. Yeah,

I was gonna say Punita, actually if you bifurcate those two and look at our performance, actually pathology performed better than NGS testing from Williams, given what Mike was just talking about as well as some of the academic institutions. That's a good point, Bob, thanks. Yeah, thanks for that. And if you could, I know you quantified last quarter Bravo contribution, I'm wondering if you can provide that for Bravo Magnus liquid handling systems or how much of that contribution happened in the quarter?

Yeah, that's part of the story for our COVID-19 tailwinds. And I think probably the biggest contribution this quarter actually came from biotech, Bob, if I remember correctly. Between biotech and liquid

hands and Bravo.

So it's kind of now we have like a one, two punch kind of going there on the core instrumentation that also reminds you of the Bravo platform becomes an ongoing revenue stream associated with the tips that go with those liquid handlers.

Okay, and last one on just APG, I mean, could you just elaborate on in these times, you mentioned there are some larger contracts that sort of contracts and likes that you're getting into. Sort of what are those sort of COVID-driven? What is behind those? And maybe if you can elaborate on geography there.

Yeah, Puneet happy to have Porig jump in on here and provide his perspective on that. So Porig in the cost script, I talked a bit about the large enterprise deals you guys won. So why don't you talk about that in a little more detail.

Yeah, so thanks Mike. We launched our cross lab asset monitoring service, which has seen a big uptake. And what we're seeing from customers is a large demand for sourcing from one vendor. And because of our capabilities in terms of the asset monitoring capability, relocation services and our core delivery services, which are extremely in strong demand, we're seeing a big uptake from large customers. And we expect that to continue as we go through the quarter, next quarter.

Yeah, and I was gonna say that in the geography, Puneet is largely in the US, but there are some global opportunities as well.

It's really non COVID-19 related. I mean, this is part of the core growth strategy for Porig's business to continue to expand our market share on the enterprise service front. And we're really delighted with some big farmer deals.

That's great, thanks very helpful.

Your next question comes from the lineup, Derek DeBrun with Bank of America. Your line is open.

Hi, good afternoon. Hey Derek. Hey, so a couple of questions. Very impressive margin expansion in the third quarter. How should we think about the operating margin into Q4? And then I guess, how much of these costs are permanent removals versus what has to come back in 21?

Yeah, let me take that Derek, it's great questions and certainly are very pleased with how the team has responded as I mentioned before. As we've talked about, a large amount of the costs, we have not done things like furloughs. We stabilize the team, we have not reduced base pay and things like that. So these are discretionary expenses that, a lot of them we think have the opportunity to stay away would be travel and things like that, which our digital tools have enabled us to really continue to support our customers. And so there aren't any kind of one time things that happened in the quarter. In terms of going forward to Q4, we are looking at probably less of a margin, incremental margin improvement because we are looking for ways to continue to invest to drive growth as the economy recovers. We also have some startup costs in the NASD new facility as well. So it's probably less than what we've had historically had, which is call it 30 to 40% incrementals, but it's really to drive growth.

Hey, Bob, I guess maybe add a comment on the first remark. So this is really Derek all about a new way of working in Agilent. So I'm preparing for a manager's call later this week. And what we're talking to our team about is more digital, less travel. And we're really gonna make sure that when we get on the other side of this COVID-19 pandemic, that we don't revert to our old ways of traveling. And we know from our customer satisfaction scores, they love the responses that we have now with our digital platforms.

Great. And in two questions on LASG, I guess the first question is, if you look at your numbers in China versus some of your major peers in that area, I mean, you really outshone in China. Can you talk about just shared dynamics there that are going on? I mean, as I said, there was a pretty stark comparison between you and your main LC competitor there. And I guess also on those lines, can you talk about potentially, any sign of a budget flush and just sort of thinking about for QTrans, what are you hearing in terms of people with budgets and are they gonna be allowed to roll things over and to, or are they gonna have to use it or lose it? Just some dynamics in terms of growth on fourth quarter and just sort of do your general thoughts on where customer spending habits are.

Yeah, thanks, Eric. I'm gonna have Jacob handle the first question and Jacob, you can pass it back to Bob and I for the second question. And I know Jacob would be just delighted to talk about the shared dynamics in China, which we think are very positive for Agilent.

Yeah, truly, thanks for that. And the numbers speak for itself. It's clear that both in China, but I think actually globally that we are, this right now will be taken care of and this doesn't come by coincidence. I think we have been executing our strategy between LSD and ACD over the past year and the customers are really buying into our value proposition. We are playing a game where we are leveraging our whole portfolio, not going after one product line versus each other and the customer really likes to be outcome-based. So that's what is happening right now and we see here in the crisis that not only are they excited about what the investments we have done for portfolio over the past year, but also as Mike talked about in the digital world, into the world, we have been very, our team has just been super responsive. They have taken up the digital, we've taken talent very, very good and the customers have responded very, very positive to it. They know that when they work with Agilent that we are there for them in this crisis. So actually Mike.

Yeah, so and then on the other question, Derek, what we're hearing from our customers, particularly in the public sector and we're seeing it in our order book and Bob, from my perspective here and feel free to build on my comments here, but there's a real sense of making sure they commit to their budgets. So we're seeing it both in our order book as well as order activity where there's a lot of uncertainty what's gonna happen post-election as they go into 2021. So they wanna commit those funds and it's actually quite amazing the amount of deal activity that can occur without visiting the customer face to face. So Bob, I don't know what you're hearing from the field. The

only thing I would add is just to reiterate what Jacob was saying, cause it's not just China. I think when you look at our LSAG portfolio, I think what people don't fully appreciate is it's how we've actually changed the portfolio, the technology platforms, probably in the best shape they have been in probably five years in terms of new products and so forth. And I think you're seeing that across the globe. And when we think about where we ended up in Q3, LSAG was certainly the standout relative to where we thought they were gonna be in a capital constrained environment only down 4% on a core basis really speaks to our, I think our response to this to customers. Great, thanks.

Your next question comes from the line of Brandon Kolar with Jeffreys, please go ahead.

Hey, good afternoon. Bob on the gross margin line, you mentioned a higher logistics cost in the third quarter. Is that a new trend? And then can you help us just think through some of the puts and takes, whether it's logistics costs or mix and how those puts and takes might evolve in the fourth quarter?

Yeah, sure, sure. We're hoping it's not a trend that's gonna be around for a while, but it certainly was exacerbated in the Q3. That being said, I would say three quarters of that was probably mixed when you look at the various businesses across each one of the groups. But where we saw logistics challenges are, lower capacity and air capacity, but we would expect that. And we actually saw that through the quarter to kind of relax. And I think as you're starting to see more intercontinental travel, both from a passenger standpoint as well as freight standpoint, we would expect that to kind of relax over time.

Okay, and then Bob or Mike, you're not quite giving formal forward-looking guidance yet, but you do feel comfortable enough to restart the buyback program. Just what are your latest thoughts just around the comfort in far as capital deployment goes and maybe your appetite for M&A right now and what the funnel might look like there?

Yeah, sure, sure, sure, Brandon. And I'll start off here and Bob, feel free to jump in. But we felt quite comfortable resuming our share repurchase program on the end dilutive perspective and we'll be looking at opportunistic as well. The cashflow remains strong. We felt for some time that the third quarter of this year would be the toughest quarter for us for the year. We're through that knot now and the third quarter actually was significantly better than we had thought. And we saw positive growth across all of our businesses in July. So we think, okay, barring some kind of major flare up, we should be able to continue to see this gradual improvement of growth into the fourth quarters, sort of our message. So we have the confidence, we also narrowed the framework that we provided that is more narrow than it was in Q3. But again, I think we need to keep in mind ourselves that there's still a lot of uncertainty associated with the pandemic. I think our capital deployment approach remains unchanged, which is we've said we wanted a balanced approach to capital deployment across dividends, cash, share repos and with the prioritization of investing in business. We just made a significant commitment in capital with our new NASD expansion. And we're still on the hunt for deals that look that makes sense for Agilent. So our approach to capital deployment really fundamentally remains unchanged. We paused a bit in the second quarter just because on the share repo because of the, and in the early part of the third quarter, given what was going on in the environment outside of Agilent. But we feel pretty good about where we are right now and have reasonable level of confidence that there's decent level of stability about the business. Yep, Bob, anything you'd like to add? Great, thanks.

Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open. Thank you. So maybe just to circle back. Hi, Mike. So maybe this is a question for Bob to talk again about the Q4 framework. So if your business grew in July and the world improves month to month through October, wouldn't that imply then the high end should be above that 1% organic growth number?

It could be. I'll just leave it at that. There's still a lot of uncertainty and so forth. But certainly we wouldn't complain if it was better than that.

Okay, and then my follow-up, whoever wants to take it on the NASD business, can you elaborate on what's the lead time for that announced expansion? Is it something that would take a year or multiple years to put in the new line or is it a quicker turn? And can you comment on your willingness to commit capital inorganically in that business in addition to your organic commitments? Thank you.

I'll take the first one just real quick and then Mike, if you wanna add something on the second one. We announced that we would make that $150 million investment and that we would expect it to go live towards the end of 2022. So it's taking a little longer than just a regular train. Sam mentioned, train A on steroids, so it's bigger and probably taking a little more capital. And obviously with COVID-19, there's some activities there in terms of a little long lead time. But we feel like we have the capacity to be able to manage us through that time and then that will come online at the end of 2020. Yeah,

I think that are pressing the end of 22. And, you know, don't specifically talk about specific targets or areas of focus necessarily, but it's not out of the realm of reason that would say, why wouldn't we wanna further expand this business both inorganically as well? So that's, it's not out of the realm. I'm not signaling anything near term happening, but we think we're operating from position of strength here in this business. We had to first get our new factory open running and build from that. So we now think we have a, if you want, beachhead to build from both organically and inorganically. Okay, thank you.

Your next question comes from the line of Catherine Schulte with Bear. Your line is open.

Hey guys, thanks for the questions. I guess first, despite the relatively good LSAD results in the quarter, it sounds like the outlook on the capital equipment side is still a bit uncertain. Can you just talk to how the services and consumer will set up the business trended in July and what your expectations are for instrumentation trends in the coming quarter?

Yeah, I think as Catherine, this is Bob, all three of our businesses actually performed better in July than they did in May and June, which was very positive. The ACG business actually led the charge in terms of that, as you would expect, given the resumption of activities. There was some catch up there in terms of, we saw that kind of phenomenon actually in China in April, but ultimately ACG was there. I think LSAG capital is gonna continue to be constrained, but I think what we've seen in our business is, we've talked about this in the past, kind of this plight to quality. And with our instrumentation and the reputation that we have, I think in a capital constrained environment, those dollars are precious and we think our positioning is very good B to B the market.

Yeah, I tried to hit that in my remarks, which is really say, listen, we know we're picking up share in a tight market. And I think you saw that on C&E, right? Which is, if the C&E capital purchase is going down, it's coming to Adzone's way. So, and that's why the overall market is still cautious, but you see PMI starting to creep up a bit.

Yeah, and Catherine, just one last thing to give you, maybe a little more color in here. If we looked across the groups, we would expect LSAG to still be negative in Q4. I mean, it's probably gonna lag given that. Yeah, they had a big fourth quarter last year as well.

Okay, very helpful. And then Mike, you mentioned seeing growth in all regions for the non-COVID diagnostics business exiting the quarter. Can you just give us a sense of where those activity levels are in the US versus China and where they bottomed out across the different regions?

Yeah, sure. So I think if I'd say China is in the lead position in terms of if you're almost full recovery, Europe is second and the US is trailing. So for the first, throughout the quarter, if I look at Sam's business in the US, for example, the first two months were negative and of diagnostic testing values and pathology, but we saw actually a improvement to growth in July. So I think it's sort of almost the pattern of how the pandemic has flowed around the world. China is back, Europe's on its way, and I'd say the US is still in the early stages of recovery. Yeah,

and I would say in the US, it's probably, and keep me honest, Sam, we're probably still at about 80% of pre-COVID levels from a diagnostics perspective, but improving where it was below that at the beginning of the quarter. So that sound right, Sam? It does,

yeah. All right, great, thank you.

Your next question comes from the line of Steve Willoughby with Cleveland Research. Your line is open.

Hi,

good afternoon. Yeah, Steve. Hi there, Mike. Just one question for you. A lot of my other questions have already been answered. 90 days ago, you made a brief comment about potential on-shoring back to the US. Just wondering if there's any update on that at all. Thank you.

Thanks, Steve, happy to comment that. I think that's still gonna happen. And these things take time, but there's active discussion. And by the way, I wouldn't say it's just confined to the United States. I mean, many geographies are now looking at the security of the supply chain, both in the pharma side, as well as in the chemical marketplace where they're providing precursors into the APIs for the pharma chain. So nothing significant to announce relative to impact on business, but there does seem to be an overall trend in this regard. And I can say also from an agile perspective, we're working hard to make sure that our supply chain is secure as well. So I think that the COVID-19 pandemic has been a real wake-up call to really some vulnerabilities in some aspects of the supply chain. So we're kind of working both sides of it, which are to ensure our own ability to deliver product under multiple scenarios, as well as we do see some market trends underway. Bob, I know you've taken a look at this pretty quickly. Yeah, I was gonna say just

to build on that, we talked a little bit about earlier in the call, which we would expect that to see some of that opportunity show up in our order book. And that's probably more a 21 timeframe for revenue. I wouldn't expect any of that to happen in Q4, just given the kind of timing, but you're seeing it in multiple end markets in multiple regions. We think that since you have a trend that will continue. Thanks for that call, I appreciate it. You're welcome.

Your next question comes from the line of Dan Brennan with UBS, your line is open.

Great, thanks. Hey guys, hope you guys are doing well, Mike and Bob. Sure. Can I ask you a first question just on chemical and energy? Obviously, you've already highlighted a few comments throughout the call, but just wondering if you can kind of walk through a little more color separate trends within that segment by customer chemical, I don't know if it's worth seeing if there's been a big divergence all between chemical and EMT and RNM. And then secondarily, maybe just remind us of how much of that business is tied towards like QAQC versus R&D and kind of what are we looking for to determine whether or not this down 10% begins to improve more readably or if it's gonna save the slow study progress that you've been doing.

Hey Bob, why don't I make some initial comments and then we can check our notes to see if I missed anything. But I think unlike the last quarter, the mix here, I think both the chemical and the energy related side had about the same dynamics where both were down about the same, primarily on the instrument side. And on one hand, the chemical side of the business is really benefiting, continues to benefit from the low oil prices, but some of their end markets are weak, whether it be automotive or some of the other markets that they service are weak. Some of them are getting a little bit of help on COVID-19 related products, but overall I'd say both the chemical side as well as the inner side of that are down about the same, but stable. And I have to say that Bob and I had talked to some length about this in our last call and our prediction at the time was we thought we were gonna be in a kind of a stable situation relative to this, there wasn't gonna get any worse. That was sort of the question we were getting last call. So I think we're really pleased to see that came through this quarter. And then we expect that eventually this thing will start to move back to growth. I think it's probably a 70, 30 mix where most of it's in QAQC. And that's why these facilities are running, albeit maybe not at full volume. So QAQC equipment will be needed as well as the consumer service that go with it. So they can only hold off the B-POS on that side for so long. There is an element of research, but I think in the chemical and energy space, the biggest driver for that is the QAQC side of the business.

Yeah, and I think the thing I would add, Dan, is we would expect this, as you said, kind of steady, slow progress going forward.

Okay, and then maybe one different follow-up. I know a couple of questions on China, but maybe could you just go a little bit more in detail on what you saw in food and generics? Obviously COVID is impacting the globe and the recovery, but you've got some pretty unique issues with food and generics that are maybe a little different. So depending upon the improvement or lack thereof, that could drive notable changes in China. So what did you see there and what's the outlook as we look

forward to those two segments? Thank you. Yeah, I was gonna say, Dan, one of the things we were incredibly proud of in China was all three of the business groups grew and all of our end markets grew, really led by food, which was up over 20%. It's been a while since we've been able to say that. And so we think that we've talked about kind of the move away from the government labs or the central labs into the commercial labs. And we think that that's stabilized and the team has really been able to garner share or our view of capacity in that space. And then in pharma, it continues to perform very well. Actually pharma was up roughly 10% in China, and that's a combination of both large and small molecule. And I think our thesis around that continues to play out, which is that the winners of the four plus seven or the tendering process are customers that where we are over-indexed and we continue to see that positive momentum. We actually saw acceleration from Q2 to Q3 in both food and pharma. And the rest of the businesses were positive as well. So I think it's broad-based.

Yep. Quinn, thank you, guys. You're quite welcome.

Your next question comes from the line of Patrick Donnelly with Citigroup. Your line is open.

Hey, thanks guys. Hey Patrick. Mike, hey Mike, maybe just one for you on, I know there's been a few questions in July, obviously, but with all the businesses returning to growth, I guess it's safe to assume you guys didn't see too much of a pullback around the second wave here in the US, even the first few weeks of August. Sounds like you're a little more cautious on America's versus other geographies, but just wondering any surprises on an end market basis in the US as you went through July and even early August, given kind of the reoccurrence of the virus?

No, I'll jump in on this. But from our perspective, no real surprises. I mean, we were all, like all of us, we were watching what was happening with the pandemic as it worked its way across throughout the US. And we saw the case numbers go up and lab access was down for the early, pretty sharply, April, May, June, and we started seeing some recovery. So I think no real surprises versus what we thought.

Yeah, I would agree. I mean, Patrick, this Bob, the Americas, as Mike said earlier, is in fact the biggest variable because it's further along in its recovery than both Europe and China. And I think the thing that we're watching is those COVID flare-ups and the potential impact on elective procedures, which would impact our diagnostics business. That's probably got the biggest variability going into Q4 relative to LSAG and ACG. But to Mike's point, we did not see any significant change with these flare-ups in August, or excuse me, in July and early August.

Okay, no, that's helpful. And a bunch of good commentary on the chemical energy and industrial side. I just want to, I guess, clarify, I mean, it certainly seems like the industrial sentiment feels like it might've bottomed. It seems like your tone is a little bit better from three months ago, even though, again, chemical energy is probably gonna be down similar this quarter and then again next quarter. But I guess what are you hearing from customers there on spend plans? Again, it sounds like you're a little more optimistic and talking a little more bullishly about 21. So I'm just wondering, I guess, as we enter into the end of this fiscal year into 21, are you seeing things improve a little bit? Obviously, you'll come up against very easy comps, but it does seem like the tone is a little more positive. So are you hearing from customers that things are trending a little bit better into 21?

Yeah, I think that's a fair assessment of what I was trying to communicate today. First of all, the fact that we do think it's bottomed and that was our thesis when this thing started going down directly down and the pandemic hit. So we do see that. Again, I don't want to get too far ahead and describe some big, dramatic increase in growth in this space, but customers are working on their plans. Chevron actually is making some big investments in Iraq. So capital, these are ongoing concerns and they can hold back their capital for a while, but they're gonna wanna maintain their operations at the highest capability. So we're hopeful that the budget environment will be a little bit different in 21. And I think once we get a little bit more clarity, once our customers get more clarity on their view of where the economy is going, then they can make their decisions a lot more confident. So PMIs are a good view of how sentiment may be changing. So again, don't overinterpret this for a fourth quarter, but it does point to 21 being perhaps a better environment.

Okay, great, thanks Mike. And your last question comes from the line of Jack Nian with Nefron Research, your line is open. Thanks, good afternoon guys. Hey Jack. Hey, so I wanted to go back to the NASD business and just get a little bit more color. Are you working on any of the mRNA based COVID-19 vaccine? You know, I get curious because these trials are moving so quickly. I was curious to get your take if one were to three and into commercial within the next six months, how would you manage the business, deliver on the capacity that a customer might need for that?

Hey, Sam, I'm gonna pass that to you.

Yeah, no problem Mike. So, you know, I can't comment specifically on the molecule or the molecule or the project that we're doing related to COVID-19, but you know, two things I will point out, as Bob indicated earlier, you know, this is business, you know, separate for or, you know, different than the business we're already doing or it's not taking the place of business, if you will. And, you know, we believe we have the capacity and that's, you know, if the demand is there related to certain things playing out related to COVID-19 and the molecules that we happen to be working on, we believe we will be in a position to be able to supply that material at the volume required.

Great. And then one more follow-up on LSAG. I'm just curious, you know, as you're looking at the research labs around the globe, kind of this conversation around deferral versus cancellation, what are customers telling you? You know, is it still mostly deferrals versus cancellations? And on the deferral side, when do you expect these, how far out is it getting pushed? Something that, you know, you think it hits before the end of the year, or probably more likely in calendar 21?

Hey, Jack, happy to answer this question. This is something we've been monitoring pretty closely, deferrals versus cancellations. And we've really been pleased our cancellations are actually lower than last year. And our thesis is they're being pushed and that the funds will be deployed this calendar year.

Yeah, that's what we actually, we saw that, Jack, some of that actually happened in Q3, you know, and as people are going back into the labs physically there, then they can install the instrumentation. But to Mike's point, we've seen no cancelates or lower cancellations than what we would have last year. There's always some level of it. I would say that we've been extraordinarily pleased and I would expect it to happen this calendar year. Great, thank you.

This concludes the allotted time for our question and answer session. I'd now like to turn the call back over to Ankur for any closing remarks.

Yeah, so that concludes the call for today. Thanks everyone for joining in.

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