Agilent Technologies, Inc. (A) Earnings Call Transcript & Summary

Yes, sure. Sure, Dan. I always like to say, every CEO you talk to tells you that they're gaining market share, but I look at some of the numbers we're putting up in our, if you will, analytical laboratory instrument business and they're much better than our peers in the same space. So we've got to be gaining share. And I think I focused my comments on mass spec. And I think this is coming really from 2 things. One is a lot of hard work over the years to really revamp and extend our mass spec portfolio, some very innovative products. So for example, the Ultivo LC/MS Triple Quad. We also have been really doing well on the high end with the Q-TOF. So we've got this whole NPI processes going. We had a really good ASMS. So the strength of our portfolio, but that's only a part of the story, Dan. I think it also would go back to 1 of the 4 priorities we had with -- for Agilent from the very beginning. We took a risk very early consistent with our core values to guarantee employment for our team. And our competitors have furloughed sales people, service people, have reduced their pay. So my team is not worried about their -- losing their livelihood. They're worried about winning in the marketplace. So I think the fact that we have a really strong portfolio and a very aggressive customer-focused competitive win sales force is paying dividends for us, backed up by the Agilent service organization. So I think it's a combination of strength of portfolio, and I'd like to believe it's partly due to how our team is responding to the overall approach we're taking to manage the company through the COVID-19. I'd say we're also picking up some on the chromatography space as well. So I think it's really our core instrumentation business, the mass spec and chromatography, have really been the drivers here. And Bob, anything else you'd add to that on the share story?

No, I think that those are the big key areas when you look at it relative to some of the results that we've been able to post.

Yes. And just think about Bob's story about the attachment rate, right? So not only do we have really strong LSAG, better-than-expected performance in the third quarter, you're placing more instruments, right? So back to your -- back to the -- you asked me earlier, Dan, about the ACG business. So the more business that we can get in terms of instrumentation, it just expands our installed base, give us an opportunity to expand our presence in the service and consumables area as well. So there's kind of a nice one-two punch here, so to speak, which is you get the initial sale. And then people have been asking me, since I became CEO, when is the ACG business going to slow down? And I say, "Why should it?" And for the last 5 years, it hasn't. Obviously, the -- we hadn't put a pandemic in our calculus, but we could see a path back to high-single-digit growth for ACG.

Okay. Great color. So I want to move along to the DGG business for a moment. First off, on NASD, which is one of the few segments there. Can you elaborate on the recent strength you're seeing in NASD? And also regarding the capacity expansion announcement you made, can you clarify, are you adding new capabilities with that planned expansion? Are you scaling existing capabilities or any further color you could offer?

Yes. So I think we'll do a one-two on this. I'll lead, Bob, and then I know you really dug into a lot of details, so feel free to augment my comments here. But we're very delighted with what's happening for the NASD business. And again, just a reminder to the audience, what we're doing here is providing a GMP-grade oligonucleotides for RNA-based therapeutics to pharmaceutical companies, for example, Alnylam or The Medicines Company. By the way, that's not our complete list of customers. But they're the 2 customers that I can speak publicly about our relationship. So as you may recall, about a year ago, we were talking to you, Dan, about the initiation of revenue coming from that new site. So the history here was we had a site in Boulder, Colorado. We were maxed out on capacity, so we made an investment to build a brand-new second site in Frederick, Colorado. That came on online in the latter part of Q4 of last year. And then this year, we've been very successfully ramping the capacity in that site, which had one production line built in the new site, but we have space for a second one. And this gets to your second part of your question, which is -- so first of all, the new capacity we added and came online last year is ramping just as we had thought it would and hoped it would be. And I think, Bob, we posted 24% growth in this business in the third quarter. And then what we also announced the day of our earnings call was a further expansion of that site. So within that site, we're now going to add a second production line, which actually is going to be, as our General Manager likes to call, this is going to be train A, which is how we refer to these production lines. Train A was the first one built. The newborn building is train B, which our general manager there has described as is train A on steroids. The idea being is we're actually going to be able to get, with the capital investment, more revenue out of train B than out of train A. So I think this just speaks to the overall strength in this end market. And our current thinking is that it's more of a late '22 event, where this additional new capacity will be online. And Bob, you may want to take them through some of the ramps and other assumptions we made for this year.

Yes. Just in the interest of time, I think, Dan, you had asked about additional capacity. Is that the additional capabilities or additional capacity? It's primarily additional capacity. It is providing some additional scaling capabilities, but not new technical production. So it's still the same, just more. And I would say our demand here has been extremely robust and feel very good about it. To date, it's only been primarily clinical trial demand, but we're expecting production of commercial materials, and that's kind of what we scaled this second line to be able to do.

Okay. And then elsewhere in DGG, can you elaborate on your COVID testing efforts? I know that you park your PCR products in that segment. You've had some tailwinds from an instrument perspective. Do you think -- is it possible to expand your involvement in COVID testing more broadly? Could you launch your own PCR test? And any further thoughts on that?

Yes. Absolutely. So just as a reminder, actually, we think we can in terms of expand -- further expand our business. But just as a reminder, we have about 2 percentage points of growth for Agilent came in the second and third quarter to do -- due to COVID-19. So some positive tailwinds for us. And across the whole spectrum of virus research, virus testing as well as therapeutic and vaccine development, right now, Dan, most of the business has been coming through our LSAG business through -- we're providing a lot of automation solutions with our Bravo products into PCR workflows, but we're also growing our own PCR business as well as we -- the area of [ Dx ] products. So I'd say, right now, the mix of business -- the results of business have been more skewed towards our LSAG business. But going forward, we expect the mix to change to be more coming from our Diagnostics and Genomics Group. So for example, in the PCR side, we're also working in our NASD business on some therapeutic programs with pharma for COVID-19 therapeutics. And then to your point, we actually have an antibody business. We have automation. We have equipment from our cell analysis business from biotech. So we believe that there's room in the marketplace for some new tests, and we're focused on bringing to market a serology test. No announcements to be made right now, but that's our focus right now. So we're very aggressively going after this space. We believe that, as vaccines come on market, there's going to be a need to understand better the antibody response. And we think that this is -- will be a nice requirement that we can meet with our planned work on our serology test. And Bob, I know you've dug into this a lot as well. So anything else you'd add to that?

I would just add, if you think about our diagnostics, our pathology business, one of the things that Dako has been known for is the antibodies, the quality of the antibodies. And so being able to leverage that capability, coupled with some of the work from biotech with the plate readers and so forth, you can kind of imagine a very good offering there. And so that's some of the things that we're actively working on.

Okay. And Dan, you probably talked -- have heard -- probably hear me talk about this before. This One Agilent Culture we have. That was sort of one of the major moves we made when I first became CEO to really ensure that we worked across the company in a collaborative way. And I think this COVID-19 response is just a perfect example, right? So LSAG has instrumentation. DGG has end-market knowledge and antibodies. And we need to make sure we can bring all those together into one solution for our customer, and we're able to do that because of how we work inside this company.

Okay. Great color. Another -- moving along, another item you flagged is the concept of onshoring across the chemical industry initially, maybe pharmaceutical industry eventually. I think you mentioned, Mike, on the last earnings call, that could materialize into revenue as early as 2021, any tailwinds associated? How can you help investors frame what the opportunity might look like for a vendor like Agilent from the onshoring trend?

Yes. It's a great question. And it's one of the things we've seen both in terms of our own business, which is '19 has exposed a fragility of the supply chain globally, so -- and many of our large pharma customers and chemical customers saw the same thing. In many parts of the world, it's become a part of sort of your national security to securitize your supply chain. So what I can say is we don't have significant orders in the book yet, but there's clearly trends underfoot here, both in terms of the chemical industry wanting to bring in -- onshoring certain chemical compounds, particularly the fine chemical pieces that would go into precursors into the pharmaceutical value chain. We're also seeing indications from our large pharma customers that over time they'll start bringing some of the manufacturing back to the U.S., for example. So I think it's more of a '22 event. I think the '21 event would be more of we might expect to see some order book. And I'm thinking, right, our reporting cycle is a little bit different than the rest of the world. So when I say 2020, this is the end of October. I think maybe this -- by the end of this calendar year, we would expect to see some level of order activity here. So these are all just conversations that are happening with our sales team and customers. And also, many of the CEOs of large pharma are talking about this as well. And nothing material to report. But I think this is an indicator of the building for Agilent to return to the kind of growth rates we've seen over the years in '22.

But could you venture a guess, like could this -- once it materializes in '22 or whenever, is this another point tailwind? Is there some way to finance how you frame it? Or is that too…

I knew that's where you wanted me to go, but I wasn't willing to go there. So I think it's just really, it's just so hard…

Yes, I was going to say it's too early to kind of size it, Dan. But what I would say is there's 2 vectors. One is actually accelerating tech refresh. So as new capacity would come on board, you actually are not going to take old technologies and move them from one place to another. So you would either accelerate within existing supply -- or within existing market share. Or the second, which would be an opportunity to open it up and compete with incumbents. And what we've seen in China, in places where you have greenfield, we actually win more than our fair share. And so we actually see that in those 2 vectors, and that's the way I would think about it.

Yes. Got it.

And I wasn't trying to be overly coy, Dan. We just haven't quantified it ourselves. But this -- what we're trying to do is impart a level of confidence to why we believe that there's reason for -- to believe that Agilent will be growing more strongly in '22 than we did in '21.

In '21.

Am I wrong?

Yes. Yes, we're still at '20.

I need my second cup of coffee, I think.

Yes. Yes, exactly.

Yes, yes, yes.

And I know we're running short on time. Maybe the final question here on the margin side. So that was another area where you surprised to the upside in the quarter. How do we think about incrementals going forward? With the lower cost base, is this a springboard that you're going to drive incrementals on top of? Or there should be some catch-up spend? Or how do you frame that for folks?

Yes. As we think about -- [indiscernible] that, Bob?

Yes, I was going to say as we think about Q4, we are looking at making some of these incremental investments in things like the COVID testing and some of these other areas to drive and prepare ourselves for FY '21. So the incrementals in Q4 are probably going to be a little lower than historical. Historically, they've been 30% to 40%. But I would expect in Q -- into next year, while we'll have some snapback, we're still committed to improving our operating margins and growing earnings per share. And so I would expect us to get back to more of a kind of the cadence that you've seen us historically.

Okay. And Dan, I'd also just want to say, there's no shortcuts being taken, which is the numbers in the Q3 weren't artificially inflated. And I think what's going on also, is this is a new way of working inside the company with our customers, digital is a big part of the story. And we are committed as we go into '21 that we're going to continue to work this way. So for example, our customer satisfaction scores in the third quarter were the highest on record for the company. We're very responsive in terms of our ability to work with our customer digitally, both on the sales side, but also, more importantly, on the service response side. So we think there's a win-win here, which is customers get a much more responsive Agilent, if you will, and they're very delighted with the support they're getting, and we're able to deliver that capability to our customers at a lower cost point. So let alone the reduction in internal travel costs as well. So I think some of these things that we've experienced on COVID-19 we plan to carry those forward in terms of making sure those best practices in terms of how we work differently inside the company where the customer really sticks.

Great. Well, that's a good place to leave it. We're on -- it's 11:11. Mike, Bob, Ankur, Ruben, thank you all for your time. Thank you, everybody, on the line for your time and attention, and have a great day.

It's our pleasure, Dan. Thank you. Bye-bye.

Thanks, Dan.

Yes, our pleasure. Thanks. Bye-bye.