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CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page1of22
AgilentTechnologies(A)EarningsReport:Q22016ConferenceCallTranscriptThefollowingAgilentTechnologiesconferencecalltookplaceonMay16,2016,04:30PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
AliciaRodriguez;AgilentTechnologies,Inc;InvestorRelationsMikeMcMullen;AgilentTechnologies,Inc;President&CEODidierHirsch;AgilentTechnologies,Inc;CFOPatrickKaltenbach;AgilentTechnologies,Inc;President-LifeSciences&AppliedMarketsGroupJacobThaysen;AgilentTechnologies,Inc;President-Diagnostics&GenomicsGroupMarkDoak;AgilentTechnologies,Inc;President-AgilentCrossLabGroup
OtherPart icipants
DanLeonard;LeerinkPartners;AnalystJonathanGroberg;UBS;AnalystTychoPeterson;JPMorgan;AnalystJackMeehan;BarclaysCapital;AnalystBrandonCouillard;JefferiesLLC;AnalystRossMuken;EvercoreISI;AnalystPaulKnight;JanneyMontgomeryScott;AnalystTimEvans;WellsFargoSecurities,LLC;AnalystIsaacRo;GoldmanSachs;AnalystDerikdeBruin;BoAMerrillLynch;AnalystDanArias;Citibank;AnalystDougSchenkel;CowenandCompany;AnalystMiroslavaMinkova;StifelNicolaus;AnalystSteveBeuchaw;MorganStanley;AnalystJeffElliott;RobertW.Baird&Co;AnalystDaneLeone;BTIG;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheQ22016AgilentTechnologiesIncorporatedearningsconferencecall.
(OperatorInstructions)
Asareminder,thiscallisbeingrecorded.
IwouldnowliketoturntheconferenceovertoAliciaRodriguez,VicePresidentofInvestorRelations.Pleasegoahead.
AliciaRodriguez (InvestorRelations):
Thankyou,Operator.Welcome,everyone,toAgilent'ssecond-quarterconferencecallforFY16.
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page2of22
WithmeareMikeMcMullen,Agilent'sPresidentandCEO;andDidierHirsch,Agilent'sSeniorVicePresidentandCFO.
JoiningintheQ&AafterDidier'scommentswillbePatrickKaltenbach,PresidentofAgilent'sLifeSciencesandAppliedMarketsGroup;JacobThaysen,PresidentofAgilent'sDiagnosticsandGenomicsGroup;andMarkDoak,PresidentoftheAgilentCrossLabGroup.
Youcanfindthepressreleaseandinformationtosupplementtoday'sdiscussiononourwebsiteatwww.investor.Agilent.com.
Whilethere,pleaseclickonthelinkforfinancialresults,underthefinancialinformationtab.You'llfindaninvestorpresentation,alongwithrevenuebreakoutsandcurrencyimpacts,businesssegmentresults,andhistoricalfinancialsforAgilent'soperations.Wewillalsopostacopyofthepreparedremarksfollowingthiscall.
Today'scommentsbyMikeandDidierwillrefertonon-GAAPfinancialmeasures.Youwillfindthemostdirectly-comparableGAAPfinancialmetricsandreconciliationsonourwebsite.Pleasenotethatwewillrefertocorerevenuegrowth,whichexcludestheimpactofcurrency,theNMRbusiness,andacquisitionsanddivestitureswithinthepast12months.
Unlessotherwisenoted,allreferencestoincreasesordecreasesinfinancialmetricsareyear-over-year.Guidanceisbasedonexchangeratesasofthelastdayofthereportedquarter.
Wewillalsomakeforward-lookingstatementsaboutthefinancialperformanceofthecompany.Thesestatementsaresubjecttorisksanduncertainties,andareonlyvalidasoftoday.
Thecompanyassumesnoobligationtoupdatethem.Pleaselookatthecompany'srecentSECfilings,foramorecompletepictureofourrisksandotherfactors.
BeforeturningthingsovertoMike,I'dliketoremindyouthatAgilentwillhostitsanalystandinvestormeetinginNewYorkCityonMay25.DetailsaboutthemeetingandwebcastareavailableontheAgilentInvestorRelationswebsite.
Now,letmeturnthecallovertoMike.
MikeMcMullen (President&CEO):
Thanks,Alicia.Helloeveryone.Thankyouforjoiningusontoday'scall.TheAgilentteamdeliveredanotherstrongquarter.BothQ2revenueandearningswereabovethehighendofourguidance.
Letmehighlightthreekeyresults;First,revenuegrowthwasupmorethan8%onacorebasis.Second,wedeliveredadjustedoperatingmarginof19.4%,anincreaseof110basispointsfromayearago.Finally,EPSof$0.44wasup16%overlastyear.
BeforemovingontoareviewofourQ2results,Idowanttoaddressouryear-over-yearquarterlycomparisons,whichreflectunusualeventfromlastyear.The8%coregrowththatweareannouncingtoday,about1.5percentagepoints,isduetoashiftofrevenuelastyearfromQ22015intoQ32015.Inthesecondquarterayearago,weexperienced$15millionofshipmentdelaysduetostart-upchallengeswithournewUSlogisticscenter.
Inaddition,ourprocessimprovementeffortsoverthepastfewquarterstoconvertincomingordersmorequicklytorevenuehavepaidoff.Wehavereducedourordertorevenuecycletimes,particularlyinChina.Consequently,someshipmentsinitiallyforecastforQ3ofthisyearweredeliveredinQ2.
Agilent'sstrongQ2resultswereledbydouble-digitcoregrowthinpharmaandfoodmarkets.Wealso
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page3of22
experiencedcontinuedstrengthinacademiaandgovernment,environmental,anddiagnosticandclinicalmarkets.Allendmarketsgrew,exceptchemicalandenergy.Growthwasbroad-basedacrossmostofourportfolio.Geographically,allregionsgrewexceptJapan,ledbyverystronggrowthinChina.
LetmehighlightourQ2resultsbybusinessgroup.TheLifeScienceandAppliedMarketsGroupdeliveredcorerevenuegrowthof8%,ledbystrongdemandinthepharmaandfoodmarkets.About3percentagepointsofthe8%increasewasthankstoasoftercompare,duetothetimingissuesmentionedearlierfromlastyear'sUSlogisticscenterstartup.
Thecombinationofstrongtop-linegrowth,expensemanagementandgrossmarginimprovements--partlyduetotheNMRexit--droveLSAG'soperatingmarginto19%,up320basispointsfromayearago.
LSAGcontinuestostrengthenitsportfolio.InQ2AgilentintroducedVistaFluxsoftware.Thisnewsoftwarespeedsupclinicalresearchdataanalysis,soscientistscanmorequicklyunderstandtheunderlyingcausesofdiseases,suchascancer.VistaFluxstrengthensAgilent'sleadershippositioninmetabolomics.
Lastweek,WeannouncedanewAgilent1260InfinityIILCattheAnalyticatradeshow.Thisinstrumentprovidesbest-in-classlabefficiency,andimprovestheperformanceoffullbackwardcompatibility.
Next,theAgilentCrossLabGroupcontinuedtodeliverconsistentlystrongrevenueresults.CorerevenuegrowthinQ2was10%,ledbystrengthincontractservices,LCcolumns,andlabsupplies.ExpansionandpenetrationintoAsiacontinuedtobestrongcontributorstoourgrowth.Operatingmarginwasflatversusayearagoat21.5%.
CrossLabrepresentsastrategictransformationofourservicesandconsumablesbusiness.I'mpleasedtoreportthatAgilentwasrecognizedwiththe2016ReviewersChoiceawardforcustomerservice.ThisawardisfromSelectScience,anindependent,expert-ledscientificreview.ThisisthesecondyearinarowthatscientistsinNorthAmericahavejudgedAgilent'scustomerservicetobethebestinthelaboratoryproductsindustry.
Finally,theDiagnosticsandGenomicsGroupdelivered5%coregrowthinQ2,againstadifficultcompare.Thepathologybusinesscontinuesonitssteadytrajectorybacktomarketgrowthrates.HighlightedbystrongdemandforournewPDL1companion,andcomplementarydiagnostictest.Genomicsshowedstrongmarketperformance,ledbyourSureSelectTargetEnrichment,andourArrayCGHofferings.
DGG'soperatingmarginwasflatversusayearago,at15%.InQ2,Agilentannouncedan$80millioninvestmentinLasergen,anemergingbiotechnologycompanywithinnovativenext-gensequencingtechnology.OurtwocompanieswillcollaborateonbuildinganNGSworkflowforclinicalapplications.
InQ2,AgilentalsoannouncedthatcommercialavailabilityhasexpandedtotheEUforournewPD-L1diagnostictestfornon-squamousnon-smallcelllungcancer.ThisdiagnosticwasdevelopedthroughacollaborationwithBristol-MeyersSquibb,themakerofOPDIVO.
NowI'llprovideanoverviewofAgilent'scorerevenuesbyendmarket.LifeSciencesandDiagnosticsmarketssawacontinuationofourfirst-quarterperformance,withstrengthacrossallendmarkets.Pharmagrew14%,fueledbytechnologyrefreshdeals,newproductuptake,andsustainedgrowthintheaftermarket.Thisisthefifthconsecutivequarterofgreaterthanmidtohighdouble-digitgrowthinpharma.
Academiaandgovernmentgrew7%,drivenbystrongdemandinChina,andanuptickintheUS.Clinicalanddiagnosticsalsogrew7%,withstrengthingenomicsledbyTargetEnrichmentandArrayCGH.
Appliedendmarketperformancewasmixed.Fluwasup25%,withstrongsalesinChinaandtheAmericas.Chinaalsodrove6%worldwidegrowthinenvironmentalandforensics.Chemicalandenergydeclined3%,reflectingcontinuedmacroeconomicconcerns,andtheeffectsofloweroilprices.
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page4of22
NowI'llturntoanupdateonouroperatingmarginimprovementinitiative.Q2marksthefifthconsecutivequarterofyear-over-yearoperatingmarginimprovement,deliveredbythenewAgilentteam.Thisisaresultofourabilitytooutgrowthemarket,whiledrivingoperationalefficiencyimprovements.
Ourmulti-yearAgileAgilentprogramcontinuestosimplifytheCompany,makingusmorenimbleandloweringourcosts.OurexecutionofCompany-widestreamliningoforganizations,processesandsystemscontinuestobeontracktodeliverincrementalsavingsin2017.Forexample,inQ3,wewilltakeamajorstepforwardinsimplifyingtheCompany'ssystemsinfrastructurewithallofourfinancialsystemsnowonSAP.
Onthecapitaldeploymentfront,wepaid$37millionindividends,repurchased$94millionofAgilentstock,andinvested$80milliontoenableourNGSworkflowstrategy.Finally,ourOneAgilentinitiativeisdrivingawell-receivedculturaltransformationtoimprovecross-Companycollaborationanddeliveryofresults.Atlastyear'sanalystandInvestorDay,IdescribedtheshareholdervaluecreationmodelforAgilenttobedrivenbyoutgrowingthemarket,expandingoperatingmargins,andabalancedcapitalallocationpolicy.
I'dliketotakeaminutetopositiontheQ2resultsinthecontextofourlongertermgoals.Afterdeliveringourhighestannualcorerevenuegrowthsince2011of6.4%in2015,wehavenowhadtwostrongquarterstostart2016,includingthisquarter's8%corerevenuegrowth.
SincethenewAgilentleadershipteamwasputinplace,theteamhasdeliveredyear-over-yearoperatingmarginimprovementseveryquarter.Wehavecompletelyoffsettheinitial$40millionofdyssynergiesfromtheCompany'ssplit.InFY15,wereturned$400milliontoshareholders,and$370millionyear-to-datein2016throughcashdividendsandsharerepurchase.
From2015untilnow,wehavealsoinvestedabout$400millioninnewbusinessviaM&Aandequityinvestments.Didierwillsharemorespecificslater,butweareraisingourfull-year2016outlookforcoregrowth,operatingmargin,EPS,andcashflow.
Letmenowtalkaboutoursecond-half2016forecast,inlightofwhatwehavealreadyachievedin2016,andwhatweplantodeliverin2017.Whenwelookattoday'soverallmarketenvironment,whilewefaceincreasinglytoughcompares,weexpectstrengthinpharmatocontinueinthesecondhalfof2016andinto2017.Chinaisalsoexpectedtoremainstronginsecondhalf2016and2017.
Takingacloserlookatthechemicalandenergymarket,wehavebeenexperiencingamoreprolongedandsteeperslowdownthaninitiallyanticipated.Wearenowforecastingoveralllowsingledigitmarketdeclinesfortheyear,versusourinitialflatguidanceassumptions.Theoilexplorationsegmentofthismarkethasbeendownsignificantlyforsometime,witharecentwellreportedspilloverintotherefiningsegment.
Thereareinitialindications,however,ofabottoming,withincreaseddealactivityinthelargechemicalsegmentofthemarket.Weareprojectinganimprovedchemicalandenergymarketenvironmentin2017.Weareassumingwewillcontinuetofaceheadwindsinthismarketfortheremainderof2016.
Wearecurrentlymodeling2017withanabovemarketcorerevenuegrowthof4.5%atthemidpoint.Thisisinlinewithourprojectedfull-year2016coregrowthrates,buthigherthanourexpectedcoregrowthrateinthesecondhalfof2016.Therearetworeasonsforthisincrease.
First,weexpecttohaveaverystrongnewproductintroductioninthesecondhalfofFY16,whichwilldriverevenuegrowthinFY17.Second,ontheendmarketfront,weexpectchemicalenergytohavebottomedoutbyyear-end,accompaniedbycontinuingsolidconditionsinallofourotherendmarkets,andinChina.Overall,weremainontrackwithour2017goaltooutgrowthemarket,andimproveour
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page5of22
operatingmarginsto22%.
LookinginsidetheCompany,IcansharewithyoutodaythattheOneAgilentteamisworkingwelltogether,andisdriventowininthemarketplace.Ilookforwardtoseeingmanyofyouatouranalystandinvestorday,whereI'llshareourprogressversusourcommitments,howwewillsustainourimprovedperformance,andthelongertermoutlookfortheCompany.
Thankyouforbeingonthecalltoday.
IwillnowturnitovertoDidier,whowillprovideadditionalinsightsonourfinancialresultsandguidanceforthethirdquarterandfullyear2016.
Didier?
DidierHirsch (CFO):
Thankyou,Mike.Helloeveryone.
AsMikestated,wedeliveredstrongperformancethisquarter,again.8%corerevenuegrowth,110basispointsofoperatingmarginexpansion,and$256millioninoperatingcashflow.Afteradjustingforlastyear's$15millionslippageinrevenuefromQ2toQ3,aswelaunchedournewUSlogisticscenter,ourcorerevenuegrowthof6.5%remainedwellabovemarket.
Duringthequarterweboughtback$94millionofstockandpaid$37millionindividends.Finally,onMaythethirdwesuccessfullymovedallfinanceapplicationsfromOracletoSAP,whichisourmainERP.ThiswillresultinsignificantsimplificationsofourfinanceandIToperations.
I'llnowturntotheguidanceforourthirdquarter.WeexpectQ3revenuesof$1.03billionto$1.05billion,andEPSof$0.45to$0.47.Atmidpoint,revenuewillgrow1.3%onacorebasis,orcloseto3%adjustingforlastyear's$15millionimpactfromtheUSlogisticscenter.Andturningtosharerepurchase,weexpecttobuyback$93millionthisQ3.
NowtotheguidanceforFY16.Weareraisingthemidpointofourrevenueguidanceby$60million,including$50millionduetocurrency.Asaresult,we'reincreasingourcorerevenuegrowthguidanceatmidpointfrom4.25%to4.50%.We'realsoraisingthemidpointofourEPSguidanceby$0.06,including$0.03comingfromcurrency,and$0.03fromoperationalperformance.
Andoneimportantnote.Afterfurtherreview,weandourauditorshaveconcludedtoaccountfortheLasergeninvestmentusingthecostmethodofaccounting.Thismeansthatwe'llnotbookourshareofLasergenlossaspreviouslycommunicated.
Finally,weareraisingouroperatingcashflowguidancefrom$650millionto$740million,andthereisnochangetoourCapExguidanceof$140million.Withthat,I'llturnitovertoAliciafortheQ&A.
AliciaRodriguez (InvestorRelations):
Operator,willyoupleasegivetheinstructionsfortheQ&A?
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
AndourfirstquestioncomesfromthelineofDanLeonardofLeerinkPartners.
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page6of22
DanLeonard (Analyst-LeerinkPartners):
Thankyou.Twoquestions.Firstoff,canyouelaborateonthebusinesstrendsyou'reseeinginEurope?Andsecondlyonthepharmaendmarket,canyoutalkaboutwhatgivesyouconfidenceintheFY17outlookthatyouhaveyetanotherstrongyearinpharma,followingtwoyearsthenoftoughcompsincapitalmarkets,whichhavebeenmoreorlessshut?Thankyou.
MikeMcMullen (President&CEO):
Thanks,Dan.IthinkI'mactuallygoingtopassthatovertoPatrickwhoisjustbackfromatriptoEurope,andmaybecanprovidesomeinsightonwhat'sgoingoninEurope,andthenalsocouldpickupthequestiononpharmaaswell.
PatrickKaltenbach (President-LifeSciences&AppliedMarketsGroup):
Sure,I'mhappyto.SoletmestartfirstgivingyousomeinsightsonEurope.WehaveseenactuallysomedecentgrowthincentralEurope.WehadseensomeweaknessonwhatwecalltheIDRstates,EasternEuropeandthat'smainlydrivenbythechemicalandenergymarket,ortheenergymarketonthatside.
IncentralEurope,there'sdefinitelystrengthinGermanyandotherstatesaroundthat.Westillseesomeissuesontheacademiaandgovernmentside.Itisratherflat.Butpharma,forexample,isalsoverystronginEurope.
Foryourpharmaquestion,overall,weareconfidentthatwewillcontinuetoseeprettyhighgrowthinpharmafortheremainderofthisyear.Wetargetlowdouble-digitgrowthforpharma,andlookinginto2017,wethinkthepharmamarketwillcontinuetobestrongforus,drivenbytwofactors.Weseeacontinueddemandinthereplacementbusiness,andasyouprobablyknow,wejustlaunchedattheAnalyticaconference,welaunchedournew1260InfinityLCseriesasanexample,togetherwiththeInfinityLabconsumablesandservice,andwethinkthatwilldrive--continuetodrivealotofgoodreplacementbusinessforusinpharma.Andthenweseealsocontinueddemandinthebiopharmaspace,thatarelookingfornewsolutionshelpingwiththesemorecomplexmoleculesintermsofanalysis,andwehaveverycomprehensiveofferingforthatspace,aswell.
MikeMcMullen (President&CEO):
Thanks,Patrick.
DanLeonard (Analyst-LeerinkPartners):
Great.Thankyou.
Operator :
JonathanGrobergofUBS.
JonathanGroberg (Analyst-UBS):
Congratulationsonanothergreatquarter,Mike.
MikeMcMullen (President&CEO):
Thankyou,Jonathan.
JonathanGroberg (Analyst-UBS):
Canyoumaybeelaboratealittleon--Ithinkyousaidcoreguidance,andifI'mlookingatyour
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page7of22
presentation,corerevenuegrowthguidanceinthethirdquarterisprettypreciseat1.3%.IthinkIjustheardyoustillexpectpharmatogrowlowdoubledigits.Couldyougivealittleinsightastowhatyou'reseeinginthethirdquarter?
MikeMcMullen (President&CEO):
Whatwelookedatwas,what'sourgrowthratethatwe'vehadoverthefirsthalfofthisyear,andaswelookedintoQ3andQ4.AndwhatIwouldpointtoisacouplethings,Jonathan.Firstofall,toughcompares,andthisisinclusiveofafewone-timemovesbetweenquarters,whichactuallyweredrivenbyimprovementsinoveralloperations.
SoasDidiermentioned,wehadthis$15millionshiftinQ2oflastyearintoQ3,whichwhenwehadourstartupissueswithournewlogisticscenter.Ifyouadjustforthat,thatgetsyouabout3%growth.TheotherthingwesawhappeninQ2was,wewereworkingreallyhardtoimprovetheoverallcycletime,fromthetimeacustomerplacesanordertoactuallyinstall,andwecanrecognizetherevenue.
InQ2,weactuallyexceededourexpectations,anditgottherealotfasterthanwehadthought.Andwhatthatmeantwaswehadasignificantamountofrevenue,probably$20millionto$25millionthatcamefromQ3intoQ2,whereweinitiallyhadforecastedintothesecond,thirdquarter.Allinall,ifyoutakeintoaccountthosethings,you'vegotmoreofaconsistentgrowthscenariobetweenQ2andQ3.
Iwouldtellyou,though,thechemicalandenergyisstilllookingforabottom,andthat'swhywehavethatoutlookfortheyear,whichbasicallyit'sdown,it'sgoingtostaydownfortherestoftheyear.Therearesomesignsitcouldbegettingbetter,butwearenotconvincedyetwe'veseenthebottomonchemicalandenergy.Thecombinationofthosetoughcompares,aswellasouroutlookonchemicalenergyiswhat'sdrivingtheoverallguidanceforthesecondhalf.
JonathanGroberg (Analyst-UBS):
Okay.That'shelpful.Andthen,Iguessjustonemore.Arethereany--sometimeswhenweseeshiftsontooneplatform,likeOracletoSAP,isthereanythingatall,anywiggleroomyou'veleftthere,intermsofhiccupsinthequarter,ormaybejust--?
MikeMcMullen (President&CEO):
You'reexactlyright,Jonathan.Thewiggleroomweleftwas,wemadesurewewentlivethefirstmonthofthequarter,andDidier'sintheconferenceroomheresmiling.Idon'tknowifyouwanttoaddanyadditionalcoloronhowit'sgoingsofar?
DidierHirsch (CFO):
It'sgoingverywell,themigrationsandthestartupoftheoperation,therewaszerodisruption.Obviously,weexpecttohavetodealwithsomestabilizationactivitiesthroughoutthequarter.We'lldotwoclosebeforewedothequarterlyclose,soeverythingis--wecouldn'tbehappierabouthowitwent.
Andyou'recorrect,itisaverycomplexendeavor,onethatweareprettyusedto.We'vedoneafewofthoseinthepast.Butstill,itremainsaverycomplexendeavor,andwearereallyhappyhowsmoothlyitwent.
MikeMcMullen (President&CEO):
Jonathan,asIpointedoutinmyscript,thisisoneoftheAgileAgilentinitiatives,whichyou'llstarttoseepayoffinourcoststructureaswemoveinto2017.
JonathanGroberg (Analyst-UBS):
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page8of22
Great.Thanksalot.
Operator :
TychoPetersonofJPMorgan.
T ychoPeterson (Analyst-JPMorgan):
JustfollowinguponthatlastpointontheSAPmargins,canyoumaybe--onthemarginimpact.Canyoumaybequantifyhowmuchthatcouldplayonmarginsforthisyear?
MikeMcMullen (President&CEO):
For2016Ithinkitwouldbeverylimitedatbest,Tycho,becausewe'llberunningsomeduplicatebackupsystems,andthentheotheraspectsofourspendreallydon'tcomeoutuntil2017.I'dreallypositionthat,andI'daskyoutothinkaboutthismoreasa2017impactbutaproofpointofwhywethinkwe'regoingtobeabletoimproveourmarginsagainin2017.
T ychoPeterson (Analyst-JPMorgan):
Andthenacademic,7%,canyoumaybejusttalkastowhetheryou'reseeinganaccelerationthere?Whatyousawthisquarter?
MikeMcMullen (President&CEO):
WhatwesawinthelastquarterisreallystrongperformanceinChina,andsomeincreasedsignsoflifeintheUSsideofthings.That'swhatwepointedtoanuptick.NotalotofsignificantmovesontheEuropeanside.It'smainlyaChinastory,andIthinkiftherewouldbeupsidetoit,itwouldcomefromtheUS,ishowwe'rethinkingaboutit.
T ychoPeterson (Analyst-JPMorgan):
Okay.Andthenlastly,justintermsofpharma,obviouslythat'sbeenanicedriver.CanyoumaybetalkaboutwhereyouthinkweareintheLCMSupgradecycle,andhowmuchyourgrowthgoingforwardisgoingtobecontingentonR&Dbudgetexpandingversustheupgradecycle?
MikeMcMullen (President&CEO):
Sure,Tycho.Greatquestion.Patrick,Iknowyoulookedatthisprettyclosely.What'stheupdatedviewonthat?
PatrickKaltenbach (President-LifeSciences&AppliedMarketsGroup):
Ithinktherearetwocycleswe'relookingat.ThefirstcyclewewentthroughwastheupgradecyclefromsellHPLCtoUHPLC,whichisstillongoingbutaconsiderablepartofthatprobablyhasbeendone.Whenyoulookattheinstalledbaseofinstrumentation,itstilldealswithcoreLC,andthisiswherewearetargetingwiththeInfinityIIseriesrightnow.There'sstillalotofreplacementpendingoutthere.
Justasareminder,wehadprobablyabout150,000systemsoutthere,basedonthe1100,1200platform,whichovertimewillbeupforreplacement.Wearepositionedextremelywellwithourplatforms,becauseit's100%backwardscompatible,andwearealsoable,forexample,toemulatesomeofourcompetitors'systemsonourplatformswiththetechnologywecallISET,IntelligentSystemEmulationTechnology,andthatactuallycomparesverynicelywithourcustomers,andgivesusauniqueadvantageinthemarket.
MikeMcMullen (President&CEO):
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page9of22
Ithinkweseeboththosehavinglegsthrough2017.
PatrickKaltenbach (President-LifeSciences&AppliedMarketsGroup):
Absolutely.Ithinkthisgoesoninto2017,combinedagainwiththe(dryerPC)comingoutofbiopharma.
T ychoPeterson (Analyst-JPMorgan):
Thankyou.
Operator :
JackMeehanofBarclays.
JackMeehan (Analyst-BarclaysCapital):
Ijustwantedtostart,thebetter--atleastrelativetowhatIwaslookingfor,lookedlikeyouhadbettergrossmarginsintheLSAGsegment,nowtwoquartersinarow.Canyoutalkaboutwhatsomeofthenotablechangesthereare?Isthereanythingwithproductmixthat'sdriventheimprovement,ordoyouthinkthisisthenewnormtolookfor?
MikeMcMullen (President&CEO):
LetmemakesomeinitialcommentsandthenDidierorPatrick,ifyoucanbuildtoit.Intermsofproductmix,partofwhatyou'reseeingisthefactthatwearewindingdownthroughourP&LtheimpactoftheNMRbusiness.IthinkyoucanseethebenefitofthatexitdecisionontheP&L,becauseitreallyhasbeencontributingtotheimprovedgrossmargins.That'snotthewholestory.
Theotherstoryisobviouslythestrongdemandfortheproducts,andthevolumebenefitswe'regetting,aswellasthefocusontakingcostoutofourmaterial,costsoutofourbusiness.Aswellaswetalkedalotaboutlogisticslastyear.Wecanalsotalkaboutlogisticsthisyear,whichiswe'redoingamuchbetterjobintermsofoveralllogisticsoperations.That'sblowingthroughontheP&Laswell.SoDidier,I'mnotsureifImissedanythingelse.
DidierHirsch (CFO):
Youcovereditall.Thankyou.
JackMeehan (Analyst-BarclaysCapital):
Justonemorefortheadoptionofthecompaniondiagnostics,nowafewquartersintothelaunch.Areyouinaposition,couldyoumaybehelpussizewhattakebusinessistoday,orjustinthemarket,whatyouthinkyouholdintermsofmarketshare?Thanks.
MikeMcMullen (President&CEO):
Whydon'tyoutakethat,Jacob?
JacobT haysen (President-Diagnostics&GenomicsGroup):
Thanksforthatquestion.AndwearedefinitelypleasedwiththepickupofthePD-L1,andthiscontinuesduringthelast--basicallyit'snowthreequarters.Themarketisstillveryearly.WestillreallyonlyinUS,wehavehadafewpressreleaseshere.Lately,also,we'rereenteringintoEurope,butwe'rejustscratchingthesurfaceinEurope.
Furthermore,it'sstillasecondline--it'sstilladdressingthesecondlinetreatment,andifthatalsogoes
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
©2014TheStreet,Inc.Al l R ightsReserved Page10of22
tothefirstlinetreatment,themarketwillbecomesignificantlylarger.Atthispointintime,it'sstillsmallrevenueinthebiggerschemeofthings,butIdobelievethatthePD-L1hasanopportunitytobeasbigastheHER2market.However,Iwillalsoremindyouthereareatleastfour,probablyfivedifferentpotentialdrugandcompaniondiagnosticsouttherethathastosharethatmarket.Sostillearlydays,butagreatopportunity.
Operator :
BrandonCouillardofJefferies.
BrandonCouillard (Analyst-JefferiesLLC):
MikeorDidier,couldyougiveustheChinagrowthrate,thepercentagechangeinthequarter,andifyoucouldspeaktodemandinthefoodareaoutsideofChinaandAsia,thatwouldbehelpful?
MikeMcMullen (President&CEO):
IntheChinaresultforQ2,whatwe'vebeenpointingtoisstrongdouble-digitgrowth.Soitwasavery,verystrongquarterforusinChina.Iwouldremindyouthough,partofthestronggrowthwasnotonlythestrengthinthemarket,butthatthoseoperationalefficiencyimprovementsItalkedabout,wherewereallyhadshortenedtheimprovedcycletimefromorderstoinstall,thatwasreallydramaticinChina.
Sotheoverallbusinessisgoingtobequitestrongthroughtheyear.Youshouldnotexpectstrongdouble-digitgrowtheveryquarter,though,forQ3andQ4.Butoverall,Chinais,tocompletethestoryhere,whenwecameintothisyear,wethoughtthattheoverallperformanceforAgilentinChinamightbehighsingledigits.We'renowlookingatlowdouble-digitgrowthinChinaforthefullyear.
BrandonCouillard (Analyst-JefferiesLLC):
Thanks.OnemoreforDidier.Inoticeyoubumpedtheoperatingcashflowguidanceofabout$90million.Howmuchofanimpactdoesthe--Inoticedthetaxrefundbenefit.Ifyoucouldquantifythat,andjusthelpusbridgethedeltabetweenpriorversusnew?
DidierHirsch (CFO):
Theoveralltaxoutlaysforecastedforthisyearwere,Ithink,about$10millionlessthanwhatwehadanticipatedinourinitialguidance,$10millionor$15million,andtherestisreallyoperationalperformance,improvementsinourworkingcapital,management,andFX,andthenjustouroperatingprofits.
BrandonCouillard (Analyst-JefferiesLLC):
Super.Thankyou.
Operator :
RossMukenofEvercore.
RossMuken (Analyst-EvercoreISI):
Mike,sincetakingoverit'sobviouslybeenaprettyhecticjourney,andyourmessagingfromthebeginninghasbeenprettyconsistentaroundgrowthinmarginsandreturns.Obviously,thelastfewquartersyoustarteddevelopacadence,lastquarterresultsweregood,butwehadthechallengesonFX.
Doyoufeellikethisisthefirstquarterwhereyoufeellikeyougottodeliverthefullbag,whereyouwere
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
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abletodropthroughthetoplineoutperformance,whichisclearlybetterthanmarket,youdrovethemargins,you'rebuyingstock,thereturnsareup,thecashflow'sgood,thatyouwerefinallyabletoshowthemarketthatthebusinessmodel'sworking,andthatfeeds,Iguess,intoyourconfidencealso,Iwouldassume,on2017?
MikeMcMullen (President&CEO):
Icouldn'thavesaiditbettermyself.Thanks,Ross,forthequestion.Ithinkthatwe'vebeenworkingreallyhardoverthelastfourorfivequarterswiththenewleadershipteam,andasyoulookat--everythingcametogetherthisquarter.We'vehadstronggrowth.
We'vehadimprovementinouroperatingmarginasIpointedoutin2015,butallthevectorsreallycametogethernicelyinthesecondquarter.AndIwasparticularlypleasedonsomeofthemoreoperationalactivitieswe'vebeenworkinginsidetheCompany.Thatmaynotalwaysbesoapparentinitiallyontheoutsideworld,butyoustarttoseeitintheresults.Thefactwe'veaddressedourlogisticschallenges.
Ihavetotalkaboutyear-over-yearcompares,butit'sfixed,andactually,nowit'scontributingtoimprovedresults.Yes,wehadtotalkabouttheshortenedcycletimefororderstorevenueandhavebroughtinsomerevenuesweinitiallyhadplannedforthethirdquarter,butwemadetheseoperationalimprovements,thecycletimesareshorter,andthisisnowthenewnormal.
SoIguessthatwouldbetheclosingcomments,whichisyes,we'reinanewnormalfortheCompany.We'vegotalotofconfidenceabout2017.Perhapsstealalittlebitofmythunderfortheanalystmeetingnextweek,butstillhopeeveryoneattends.Butwhenyoustarthavingtheseproofpoints,quarterinandquarterout,Ithinkitstartstoshowyoutheteamisdelivering,andIthinktheresultsarenowstartingtobeappreciatedandbelieved.
RossMuken (Analyst-EvercoreISI):
Great.AndmaybequicklyjustonSeahorse,canyoujustgiveusanupdateonhowthatbusinessisperformingrelativetoyourexpectations,andhowit'spluggedin,andwhereyou'reseeingmaybetheearlyfruitsandsomecross-synergywiththeexistingbusiness?
MikeMcMullen (President&CEO):
Yes,infact,verytimelyquestion,Ross.Wejusthadour180-dayreviewthismorningandPatrick,whydon'tyougoaheadandshareacouplehighlightsfromthatsession?
PatrickKaltenbach (President-LifeSciences&AppliedMarketsGroup):
Sure,absolutely.WhatIreallywouldliketohighlightishowseamlesslytheintegrationofSeahorsewent.Wearenowsixmonthsinintegration,andwewouldsaywe'retargetingfullintegrationbyJune,whichmeansbasicallywehaveimplementedallofthesystems,whichisaprettyfastpace.
Atthesametime,weareseeingthepositioningofSeahorsewithinourportfolioreallyworksout.We'reseeingnicedealsandcombinedsalesofLCMSandSeahorseinareaslikediseaseresearchanddiseasediscoverythatisactuallyexactlywherewethought,it'scomplimentingourstrengthinmetabolomicswiththelifecellmetabolismwhichSeahorsebringstothetable.Thisisaverynicestorythatresonatesverywellwithourcustomers.Again,ontheintegrationside,we'reverypleasedwithwherewestand,andwe'relookingforwardtoaverysuccessfulsecondhalf.
MikeMcMullen (President&CEO):
Ross,I'djustaddtwothings
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
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RossMuken (Analyst-EvercoreISI):
Excellent.Thanks.
Operator :
PaulKnightofJanneyMontgomeryScott.
PaulKnight (Analyst-JanneyMontgomeryScott):
Mike,themoveyoumadetocreatesCrossLabseemstobegainingtraction.CanyougiveusalittlebackgroundonCrossLab,intermsofwhodoyouthinkistaking--it'stakingsharefromsomebodyatthatgrowthrate.CouldyougiveusmorecoloronCrossLab?
MikeMcMullen (President&CEO):
Asyoumentioned,thatwasamajorstrategicmovewherewhenwesetuptheCompany,weestablishedtheAgilentCrossLabGroup.Wehadthisvisionabouthowwecouldreallyattackandgoaftertheenterprise-wideservicesandconsumablesopportunity.Andasyousee,Markandtheteamhavereallybeendelivering.WeknowthatthecustomersarerespondingtothevaluepropositionthatAgilentoffers,bothintermsofhowourservicecapabilityisviewed,andthat'swhyImentionedinmyscriptabouttheexternalrecognitionwerecentlyreceived.
Buttheyalsoappreciatethefactthatwe'reabletogivetheminsights,intermsofactuallyhelpingthemimprovetheirbusinessoperations,andwe'reseeingarealstrongdemandforthisinthepharma,andgrowinginterestinotherpartsoftheappliedmarkets.Soweknowthatwe'regrowingfasterthansomeofourcompetitorsinthisspace.Wealsoknowthatthere'sonlyafewcompaniesreallytryingtogoafterthistypeofbusiness.
Ibelievethisiswherethemarketisalreadygoingto,andIthinkyouwanttobeaplayerhere.I'llleaveittoyouguystofigureoutwho'slosingshare.Asyoucansee,allIcantellyouiswe'regrowingclosetodouble-digitinthisspace.Soit'sanattractivemoveforus.
Operator :
TimEvansofWellsFargoSecurities.
T imEvans (Analyst-WellsFargoSecurities,LLC):
Congratulationsonagoodquarter.IjustwantedtomakesureIunderstandthevarianceinthequarterrelativetowhatyouwereexpecting.Ibelieveyouhadcalledlastquarterfor4%coregrowth,andwesaw8%thisquarter.Ihearyou,thatitsoundslikeabouthalfofthatvariance,about200basispoints,wasfromthebetterbookbacklogtorevenueconversionthisquarter.
AndIknowyoualsocalledoutthecomparerelativetolastyear.Butthatcompareshouldhavealreadybeenknown.SoIjustwanttounderstandwhat'stheother200basispoints,thatreallysurprisedyouinthequarter?
MikeMcMullen (President&CEO):
Sure,Tim.HowaboutifI--again,thanksforyourcomment.Icangiveyouafewdollarnumbersofrevenueimpact,thewaywe'vebeenlookingatit,andyoucandoperhapsthemathontheimpactonthegrowthrates.
Butwhatwesawrelativetoourinitialexpectationsforthequarterwerereally--firstofall,itstartswith
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themarket.Theoverallmarketdemandcamein,aswepredicted.Wesawgoodgrowthacrosstheentireportfolio,ledbypharmaandfoodmarkets,andChina,asyouheardearlier.
ButI'daskyoutolookattwothings:oneisthishigherconversionoforderstorevenuethanforecast.Sobasicallywhatwe'vedoneiswereducedthecycletime,andbyourestimates,ithappenedalotfasterthanwehadthought,whichIthinkisgoodnewsfromthestandpointofouroperationalefficiency.Itdidcreatesomeforecastingchallenges.Butprobably$20millionto$25millioncamefromQ3intoQ2.
TheotherthingIthinkyoushouldtakealookatistheFXassumption.Soaround$9millionorso,Didier,Ithinkwasthenumber.SoFXaddedaboutanother$9million.Sobetweenthecycletimeimprovements,theFXassumptions,andjustthefactthatthemarketcontinues--we'regettingourfairshareofmarkets,wherethey'regrowing,Ithinkthosecombinationofthosethreefacts,Ithinkwillhelpyoubridgethedifferencebetweenourguidedgrowthandwhatactuallyoccurred.
T imEvans (Analyst-WellsFargoSecurities,LLC):
Okay.Justarealquicksimilarquestiononthemarginside.Obviouslyalittlebitofthemargininthequarterwasthedrop-through,butitlookslikeyouprobablydidbetterthanyouwereexpectingonanabsolutedollarbasisontheSG&A,aswell.Canyouhelpmeunderstandmaybewhatisgoingalittlefastertherethanyouanticipated?
MikeMcMullen (President&CEO):
IthinkontheSG&Afront,we'vegotacoupleofourprogramsinsidetheAgileAgilent,alittlebitaheadofplan,and--butDidier,Idon'tknowifthere'sanythingelse.
DidierHirsch (CFO):
Mostoftheimpactwasvolumedriven,andobviouslytheFX.Buttherewas--versustheinitialguidance.
MikeMcMullen (President&CEO):
Iwilltellyou,thefieldstructurethatweputinplacelastyearreallystableddown.Ithinkit'sdelivering,helpingusonthegrowthside,andalsoontheSG&Afront,asamoreefficientgo-to-marketchannel.
T imEvans (Analyst-WellsFargoSecurities,LLC):
Thankyou.
Operator :
IsaacRoofGoldmanSachs.
IsaacRo (Analyst-GoldmanSachs):
Ihadaquestiononmargins,aswell.Onthegrossmarginside,Iwascuriousifweshouldexpectmaybeanotherwaveofimprovement,nowthatyouhavetheERPintegrationdone.Andontheopmarginside,curioushowsatisfiedyouarewiththesalesforcerealignment,andwhetherornotthere'sstillmoresynergiestobehadthereaswell?
MikeMcMullen (President&CEO):
Acouplecommentshere,thenI'llbounceitovertoDidier,incasehe'dliketoaddafewthingshere.Intermsofthesalesforceintegrationandgo-to-market,wecouldn'tbehappier.Thatwasamajormovewemadelastyear,wherewebasicallywentfromfivesalesforcesintotwosalesforces,onefocusedontheanalyticallaboratorymarketplace,andtheotheronefocusedontheregulateddiagnosticmarketplace.
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AtthetimeIremembersharingwithyou,we'remakingabigchangehere,anditcouldaffectthetoplineintheshortrun.Thatdidn'thappen.Andinfact,Isubmitthataswegooutinto2016and2017,we'renowputtingmoreresourcesofspecialization,academia,andbiopharma,soIthinkyou'regoingtoseethechangespayingoffintermsofourlonger-termgrowth.Sowe'rereallyhappywithboththefactthatwe'vegotitallbehindus,it'ssettleddown,andIthinkit'sstartingtopayoffontheinitialbenefitsthatweenvisionedwhenwecreatedthatstructure.
Relativetogrossmargin,theERP,justkeepinmindthatwhatwe'vebeentalkingaboutisthefinancialsystems,whichreallygointotheSG&Aline.Soitreallywon'taffectthegrossmargin.Thatbeingsaid,wedothinkwecandomoreongrossmargins,aswemoveforwardin2016,into2017.I'lltalkalittleaboutitmoreindetailnextweekaswegotoNewYork.
Butasyoumayknow,onourinitial400basispointsofimprovement,whenIcameonboard,wesaidhalfwouldcomethroughOpExandotheroperationalcostsandothersthroughgrowth,andthegrowthpiecewouldbe--alotwouldbedrivenbyourabilitytocapturethegrossmarginimprovementsonincreasedvolume.Sowethinkwestillhaveroomtoimproveourmaterialcost,andwethinkthatwe'vegotroomtocontinuetobringdownourlogisticscosts.
IsaacRo (Analyst-GoldmanSachs):
That'sveryhelpful.Maybejustafollow-up,justtoclarifyontwotopics,oneonbiopharma,andtheotheroneonthecommentsyoumadearoundChina.Onbiopharma,couldyoujustcomparethegrowthratesyou'reseeingintheQA/QCsettingversusR&D,andtheninChina,justcurious,howmuchofyourimprovedoutlookthereisbasedonthevisibilityyouhavewithgovernmentfundingversusendmarketsthataremoreontheprivateindustryside?Thankyou.
MikeMcMullen (President&CEO):
Ithinkthatonthe--toyourquestion,we'renotseeingsignificantdifferencesingrowthratesacrossthesegmentsyoudescribedinpharma.Idothinkifyougooutacoupleyearsdowntheroad,Ithinkwe'dexpectthegrowthrateinthebiopharmapiecetobehigherthanthesmallmolecule,butthat'snotatallthecaserightnow.AsyouheardearlierfromPatrick,weexpectthattocontinuethrough2017.
We'regettingmoreclarityaboutwhat'sgoingoninChina.Ithinktherewasalotofconcernsatonepointintimeontheprivatesectorsideofthebusiness,butobviouslyasyouknow,Isaac,thegovernmentdrivesthemarkettheretoalargeextent.Andwe'regettingmoreclarityonwhat'shappeninginfunding.Sothat'swhywehaveincreasedconfidenceinouroutlookforourbusinessinChina.
IsaacRo (Analyst-GoldmanSachs):
Gotit,thankssomuch.Seeyounextweek.
Operator :
OurnextquestioncomesfromthelineofDerikdeBruinofBankofAmerica.
DerikdeBruin (Analyst-BoAMerrillLynch):
Justwantedtoclarify.DidIhearyoucorrectly,thatyousaidyourinitialflashforcoregrowthguidanceforFY17was4.5%atthemidpoint?
MikeMcMullen (President&CEO):
Yes.
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
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DerikdeBruin (Analyst-BoAMerrillLynch):
Okay.Andsocanyoulikeflankthatintermsofwhatyou'rethinkingforthechemicalandenergymarketthere?Imean,justwhatyou'reexpectingintermsofrebound?Couldyouhelpusframethatcommentalittlebitmore,intermsofsomeoftheputsandtakes.
MikeMcMullen (President&CEO):
Sure,I'dbehappyto.Sometimesyoucanusecolorfullanguage,itdoesn'treallygiveyoutheinsightyouneed.Letmetrytoclarifyhere.
Whatwesaidwasinthisyear,wethoughtourperformancewouldbeflatfortheentireyear.Well,infact,it'sgoingtobedown.Weprobablythinkintherangeof2.5%fortheyear,fortheentireyear,andthatisachangefromourassumptionscomingintothisyear,andthatwastheassumptionbeingmadeatthetimeofourinitialguidance,whichmakesourrevenueresultsevenmuchmore--we'rereallypleasedwiththeresults,giventhefactthatthechemicalenergymarkethasnotdevelopedthewayweinitiallyhadthought.
Thatbeingsaid,in2017,weactuallythinkitwillbeimproved,whichmeansitwon'tbedeclining,andinfact,willprobablybeflatormaybelowsingledigits.Andwhydowebelievethat?Ifyoulookathowourbusinessbreaksdowninthatsegment,wehaveoftentalkedabouttheoilside,but15%ofourbusinesshistoricallyhasbeenintheexploration,another35%hasbeenintherefining.
Theotherhalf,whichisbyfarthebiggest,biggestindividualsegmentisthechemicalside,andthey'rebenefitingbylowerfeedstockcost.They'vegotpent-upinvestmentdemands,andwe'restartingtoseeincreaseddealactivity.Soinfact,PatrickandIweretalkingaboutthis,thismorning,itremindsmeofpharmaafewyearsago.
Basically,we'regoingtohavetwoyearsofshrinkingperformanceinthismarketplace.Alotofpent-updemand,solongstoryshort,ourgrowthassumptionfornextyearassumeslowsingledigitchemicalenergygrowthfortheyear.Again,westillbelievewe'researchingforthebottom,so,andit'sstillearlyintheyearof2016.Butthat'sourbasicassumptionfor2017,whichisanimprovedenvironment.Notdramatic,butimprovedfromwhatwe'veseenoverthelast24months.
DerikdeBruin (Analyst-BoAMerrillLynch):
Justasaquickfollow-uponthechemicalscomment.You'renotworriedthatsomeoftheactivitybetweenDowandDuPont,andlooksliketheremaybeMonsantoandsomeoftheseothercompaniesthataredancingaround,areyouworriedthatcouldstymieinvestment,ifyou'reusingthepharmaanalogyofcombinationsofthosecompanies,istheresomepotentialheadwindsfromthechemicalsmarket?
MikeMcMullen (President&CEO):
Derik,that'sagreatquestion.Welookedatthisprettycloselywhentheannouncementwasfirstmade,andalthoughDowandDuPontareveryimportantcustomerstous,thatparticulardealactivityreallyisimmaterialtothetotalCompany'sperformance.Andwedidn'tnecessarilyseeitasasignofanaccelerationofM&A,andconsolidationsgoingoninthisspace.
Soofcourse,therewouldbesomepauseifwewouldseemorethanthat,butwe'renotoverlyconcernedaboutthat.AndIguessthebeautyofthisbusinesshasbeenjustthebroad-basednatureofourcustomerbase.Sowe'renotoverlydependentonanyonesinglecustomer.
DerikdeBruin (Analyst-BoAMerrillLynch):
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
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Thankyouverymuch.I'llgetbackinthequeue.
Operator :
DanAriasofCitigroup.
DanArias (Analyst-Citibank):
Mike,canyoutouchonJapanandthingsthatyousawduringthequarterintermsoftrends,andmaybewhatyou'relookingforatthispointontheyear?
MikeMcMullen (President&CEO):
Yes.Dan,toanswerthatquestion,andifyouknowalittleofmyhistory,IspentfiveyearsinJapan,soIhavealwaysbeenabigsupporterofJapan,intermsofthelong-termviewofthemarket,andI'daskyoutotakealong-termviewofthemarketinJapan.Thatwastheonlymarketthatactuallywasdownforusinthesecondquarter,andweareexpectingcontinuedsubduedperformanceinJapan.Sowe'renotexpectingmuchintermsofimprovementintheoverallmarketenvironmentinJapan.
Wedothinkitcouldbeamarketwhichoftenwillrespondtonewtechnologies,andinnovativenewproducts.Sowedohope--wedoholdouthopethatwecouldtakesomeshare,someofournewintroscomingoutinthesecondpartofthisyear.Butfromanoverallmarketperspective,weareexpectingtoremainsubdued.Andourinternalforecastsarenotbasedonanytypeofmaterialimprovementatall,inourperformanceinJapan.
DanArias (Analyst-Citibank):
Thanksforthatcolor.Andyouteasedsomenewproductintroductionsinthebackhalf,thatshouldbemeaningfultogrowth.I'msureyoudon'twanttogiveawayanysecrets.Couldyousortofhelpuswithwhatpartofthebusinessyou'reanticipatingseeingtheboostin2017?
MikeMcMullen (President&CEO):
Thanksforthecaveatonyourquestion.SowhatwecanpointtowithgreatconfidenceandclarityistherecentintroductionwemadeatAnalytica.WhatIwouldsaytoyou,youwillseebroad-basedintroductionsacrosstheentireportfolio,andcoregrowthiscentraltoourbusinessplan.Asyouknow,whenIcameinlastyear,wespentalotoftimereorganizingourR&Dstructure,andalsoreallocatingwhereweputmoney.
Ithinkyou'regoingtostarttoseesomeofthatstartingtopayoff,aswegointothelatterpartof2016.Sowedidwanttoputateaseroutthere,andalsojusttomakesureyouhadconfidence,intermsofwhat'sbehindourviewofimprovedAgilentperformancein2017,offofthesecondhalfofthisyear.ButIthinkyoucanexpecttoseeustalkingaboutactivitiesacrossallthreebusinessgroups.
DanArias (Analyst-Citibank):
Gotit.Okay.Thanksverymuch.
Operator :
DougSchenkelofCowenandCompany.
DougSchenkel(Analyst-CowenandCompany):
Mike,Iwanttogobacktosomeofthecommentsyoumade,oneffortstotightencycletimesfromordertorevenue,whichseemedtobeyieldingbenefitssoonerthanexpected,particularlyinChina.Canyou
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
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provideabitmorebackgroundonthiseffort,andwhyitwasmostimpactfulinChina?
Andthenmaybetalkaboutsimilareffortsunderwayinothergeographies?Andrelatedly,youpositionedthese,inansweringsomequestions,asiftheyweretemporary.Atleastitseemslikeyourguidancedoesn'ttreattheseassustainableimprovements,yeteverythingelseyousaidsuggeststhatthesearetrulysustainableimprovements.SoIwasjusthopingyoucouldhelpusunderstandthatalittlebitbetter.
MikeMcMullen (President&CEO):
Sure,Doug.Ireallyappreciatethequestion.Maybeletmestartwiththelastpartofyourquestion,whichisthetake-awayhere,wedobelievethereissustainableimprovement.Inmymind,orthelanguageIuse,thisisthenewnormal,intermsofourabilitytoconvertorderstorevenue.
AndsoIwouldcharacterizethisasnewnormalofhowwe'regoingtooperate.Sohowdowegethere,andwhydiditlooksosignificantlydifferentinChina?Sofirstofall,itstartswithlookingattheentireprocessfromanend-to-endcustomerperspective,fromthetimeoforderplacementuntilshipmentuntilcustomerinstallationoccurs.
Andasyouknow,whenIrestructuredtheCompanyIwasreallytryingtobreakdownthesilos.Wehadaverysilo-orientedapproachtothisend-to-endprocessfromacustomerperspective.IntheCompany,welookedateachsliceoftheprocess,butnobodywaslookingatthecollectiveprocessend-to-end.Youstartdoingthat,thenyoustartseeingwheretheissuesare,theopportunitiesare.
Sowefoundwaystoimproveourorderlinearity.We'veimprovedthequalityofbookedorders,andthisreallygetstoyourquestionaboutChina.Oftenyou'redealingwithlettersofcreditissues,andothertradeissuesthatinthepasthavedelayedourabilitytoactuallybookthemascleanordersandturnthemintorevenue.Wecallthesedeliverybox.We'vebeenworkingonmakingsurewehadmaterialavailability.
Ithinkwehitoneofourbestquartersever,intermsofhavingmaterialreadyforallofourshipments,soweimprovedourabilitytogetinordersinalinearfashion,makesurethoseordersareclean,andnothavealotofrework,andthenwehaveimprovedourdeliveryperformanceandthenspentalotoftimeimprovingoureffortsbetweenshipmentandinstallation,whichsometimecangoonforseveralweeks.Ithinkitallstartsatlookingatthewholeprocessfromanend-to-endperspective,andtheresulthasbeenasignificantimprovementincycletime,andordersturnedintorevenuemorequicklythaninthepast.
Idothinkthisrepresentsournewwayofoperating.Andagain,asImentionedinmyremarks,itdidcreatesome--itdidhaveimplicationsofhowweguidetheCompanyforthesecondandthirdquarter,butIthinkwe'redelightedtobeabletoactuallyhaveongoingstrongoperationalefficiencyimprovementsinplace,sothatweknowhowtopredicttherevenueevenbetterinthefuture.
DougSchenkel(Analyst-CowenandCompany):
Okay.That'sreallyhelpful,Mike.Butjusttobereallyclear,recognizingthesearewell-learnedsustainableimprovements,it'snotapparentthatthisisfully--theseimprovements,thesustainabilityisfullyreflectedinguidance?Ifthat'sthecase,isthatjustbecauseyouwanttoseethisplayoutforacoupleofquartersbeforeyoustartbakingitin?
DidierHirsch (CFO):
IthinktheconfusionmightbethatwhatwehavestatedisthatthisquarterinQ2wegot$20millionto$25millionofrevenuethatwehadanticipatedtoberecognizedinQ3,aswewerebringingallthoseprogramstofruition,wehadearlierresults,whichisgreat.Fromwherewearenow,theordertorevenuecycletimeissustainable,butwewillnotseefurtherimprovementsthatwillbringQ4revenueintoQ3or
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whateveritis.Sothe$20millionto$25million,that'sone-time.We'vegottothelevelwewantedtobeat,andfromnowon,it'sjustbusinessasusualwithoutanyfundamentalchangeintheordertorevenuecycletime.
DougSchenkel(Analyst-CowenandCompany):
Allright.Thanksforthat,Didier.Justonelastoneforyou.OnthechangeinLasergenaccounting,wasthereanydilutioninthequarter,andbasedontheaccountingchange,shouldwenolongerexpectthistobea$0.02to$0.03dilutivedealfortheyear?
DidierHirsch (CFO):
Correct.You'recorrect.SotherewasnodilutioninQ2,andtherewillnotbeanydilutionfortherestof2016or2017,untilweexerciseourcalloption,andthenwewilljustfullyconsolidate.ifwedothat,obviously,fullyconsolidatetheLasergenrevenues.Sothat'sachangethattherewasalotof--Imean,discussionswiththeauditors,theysurprisedusalittlebitbygoingtonationalstogetspecialistchallengetheaccountingthatwehadanticipatedlocallyamongthetwoteams,andthenweagreedtotherecommendation.And,therefore,nodilutiontoEPScomingfromLasergeninthenexttwoyears.
MikeMcMullen (President&CEO):
Wewerepleasedwewereabletogetthisclosedoffbeforewefinishedthequarter.
DougSchenkel(Analyst-CowenandCompany):
Okay.Great.Thanks.
Operator :
MiroslavaMinkovaofStifel.
MiroslavaMinkova(Analyst-StifelNicolaus):
Congratulations.Onthequarter.MaybeifIcouldfocusonoperatingmarginsagainforasecond.Justhelpus,remindus,there'salotgoingonthere,intermsoftheprogramsyouhaveinplaceandimprovementsyouhavegoingon.Helpus,remindus,thebridgebetweenFY16andFY17,whatgetsyoutothe22%operatingmargin?
MikeMcMullen (President&CEO):
Well,asateaserwe'regoingtogothroughthisinsomedetailnextweek.
DidierHirsch (CFO):
Therewillbeaslideonthetopicnextweek.
MikeMcMullen (President&CEO):
ButwhatIcansharewithyouconceptuallyisthatwewillbecontinuingandcompletingofftheintegrationoftheDakoacquisition.Wehaveaseriesofoperationalprograms.Wetalkedaboutoneofthosealready,whichistheimplicationsoftheERP.Andthecontinuedfocusongrossmarginimprovements,specificallymaterialcostreductionsandlogisticssavings.Ithinkthecombinationofthosethreefactors,pluswiththeoverallcoregrowthassumptionsthatwe'recurrentlymodelingaround4.5%getsustothe22%.
MiroslavaMinkova(Analyst-StifelNicolaus):
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Okay.Great.Andthestrengthinthefoodmarket,wasthisallChina,orareyouseeingstrengthelsewhereaswell?
MikeMcMullen (President&CEO):
Actually,itwasbothinfood--excuseme,thefoodmarketbothinChinaandtheUnitedStates.AsyoumayrecallfromourQ1announcement,thisbusinesstendstobealittlelumpy,whereasIthinktheperformanceinthefoodmarketinChinahasbeensustained.ButwesawanicereboundintheUSinthesecondquarter.
MiroslavaMinkova(Analyst-StifelNicolaus):
Gotyou.Okay.Andmaybefinally,giveusyourviewoftheM&Apipeline.We'veseenyoudoacoupleofdealsjustrecentlyhere.NowthatyouhavemanyoftheoperationalinitiativesforthenewAgilentinplace,shouldweexpectthatyou'remoreactivewiththetuck-insgoingforward?
MikeMcMullen (President&CEO):
Again,thisisateasernumbertwo,whichiswewilltalkaboutthisalittlemoreindetailnextweek.IdofeelthattheCompany'sfoundationisreallyfirmlyestablished,andasImentionedearlier,Ithinkwe'regettingalotbetterintermsofourspeedtobeabletointegrate.WhatIthinkyoucanexpectustodoisstillremaindisciplinedandfocusedintermsoffindingthoseopportunitiesthatmakesenseforus,andIwouldaskyoutothinkaboutusbeingcomplementaryM&Ainnature.We'regoingtocontinuetolookforthose.Soourbalancesheetisahugeassetforourshareholders,andonewhichweliketodeployrelativetoM&A,butithastobetherighttarget.
MiroslavaMinkova(Analyst-StifelNicolaus):
Okay.Thankyouverymuch.
Operator :
SteveBeuchawofMorganStanley.
SteveBeuchaw(Analyst-MorganStanley):
Goodafternoon.Thanksfortakingthequestions.Justtwoclarificationsonhowyou'rethinkingaboutthe2016,2017progression.ThefirstisactuallyontheNIH.
Towhatextent,ifany,areyouanticipatingapickupintheresearchchannelfromNIHfunding,whenwestarttoseethatgetdisbursedinthesecondhalfoftheyear?Andthensecond,thismaybeevenalongertermquestion,buthowdoyouthinkabouttheevolutionofFSMAregulationsinthefoodspaceintheUS?Isittoosoontostartgettingincrementallyoptimisticabouthowtheycouldcontributetotheoutlook?Thanks.
MikeMcMullen (President&CEO):
Thanks.Gladtoaddressbothofyourquestions.OntheNIHfront,IthinkwhenwetalkedabouttheuptickandourimprovedconfidenceaboutthespendsinacademiaandgovernmentintheUS,IthinkwedothinkthattheNIHstuffwillstarttoflowthroughtoourbusiness.
Relativetosomeinourspace,wedon'thaveashighapercentageofourbusinesstiedtotheNIH,butitwillbeapositiveforus.AndIthink,again,onemorefactpattern,whichpointstocontinuedviewthatthismarketwillbesolidforusaswemoveinto2017.IthinkI'dhavetoagreewiththecomment,whichis,IthinkitreallyistoosoontogetoverlyexcitedaboutthisfromaUSspending.I'veseenthisbefore,where
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
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thelegislationisannounced,andthere'salotoffanfareaboutit,butwedon'talwaysseeitbackedupbyinvestments.
Weareseeingsome--lookslikesomemaybemorefriendlygovernmentalallocationstothisagency,unlikewe'veseentotheEPA.Sowe'renotexpectinganythingdramatictooccurdifferentlyinthemarket,becauseofthis.Butifitwould,thatwouldbeclearlygoodnewsforus.
SteveBeuchaw(Analyst-MorganStanley):
Thanksforalltheperspective,Mike.
Operator :
JeffElliottofRobertW.Baird.
Jef f Elliott (Analyst-RobertW.Baird&Co):
Thanksforthequestion.Mike,onthemargins,overallareallygoodquarter.ThenwhenyoulookatthemarginsinDGGandCrossLab,basicallyflatyear-over-year.Iguess,isthatwhatyouwereexpecting?Anythingthatyoucouldcalloutinthequarter?Iknowthere'ssomemovingpiecesinthattopline.
MikeMcMullen (President&CEO):
Whydon'tyoutakethisone,Didier?
DidierHirsch (CFO):
It'sagreatquestionandtheanswerisyes,it'spreciselywhatwehadexpected.Oneoftheobviously,fromonequartertothenext,therecouldbesomeonetimeadd-insthataddsalittlebitofvolatility.Forexample,lastyearbothACGandDGGhadveryfavorablehedginggains,whichhavegoneaway,forthewholeCompany,thehedginggainlastyearinQ2wasover$7million,andthisQ2wasabout$1.5million,somethinglikethat.
SoitwasmostlyinACGandDDG.Theyarewereotheronetimeitemsincludingregardingtheallocationofoursharedservicesamongthedifferentbusinesses,whichexplain.Butbothbusinessesareontheirwaytocontributetotheoperatingmarginexpansion,andthe22%thatwe'recommittingto.
MikeMcMullen (President&CEO):
Didier,maybeI'dalsoaskMarktoo.Wetalkedaboutthisearlierthis--lastweekaswellabouttheoperationalefficiencyimprovementsthatunderlyingwhatlookstobeflatmargins.Peelbacktheonion,thehedginggainsandotherthings,there'sactuallyrealoperationalstuffgoingonthere.
MarkDoak(President-AgilentCrossLabGroup):
Thanks,MikeandDidier.AsDidierhadsaid,therewereseveralthingsthatwerefactoredinlastyear,thatdidn'tcomeintoplaythisyear.We'reworkingonalotofthingsintermsofimprovements.Themixissomewhatfavorableinthecontextofwhatwe'reselling.Butoverall,whenwelookatourplansforthefirsthalf,we'reup70basispointsinthefirsthalfoverlastyear.Soourabilitytoactuallydothemarginimprovements,whenyoupullbackandlookatinthefirsthalf,regardlessofallthesethings,isquitepositive.
MikeMcMullen (President&CEO):
Andit'sourfastest-growingbusiness,he'sbeenpickingupmoreofthecorporatecostsofsharedservices.
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
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Jef f Elliott (Analyst-RobertW.Baird&Co):
Thanks,guys.
MikeMcMullen (President&CEO):
Hopethatwashelpful.
Jef f Elliott (Analyst-RobertW.Baird&Co):
Yes.Itwas.Thanks.
Operator :
Thankyou.AndourfinalquestioncomesfromthelineofDaneLeoneofBTIG.
DaneLeone (Analyst-BTIG):
Justhadaquickclarificationfromearlier.Soyouweretalkingaboutthereplacementcycleinbiopharmaandquoted150,000LCsystems,basedonthe1100,1200platform.Canyouclarifyifthat'swhatyouthinktheopportunityisaheadofyou,orthat'stheopportunityinprogress?Andifso,what--howfarareyouintothat?
PatrickKaltenbach (President-LifeSciences&AppliedMarketsGroup):
ThisisPatrick.Letmeanswerthesequestions.Firstandforemost,thisisnotbiopharmaatall.Thisispharmaandbiopharmacombined.
WhenItalkabout150,000systemsoutthere,it'stheinstalledbaseofLCsystemsinallmarkets.Soit'snotonlyinpharma,biopharma.Butwethinkthebiggestpushisactuallyrightnowcomingfrompharmaandbiopharma.AndIwouldstillsayweareinthemidstofareplacementcycle.
Wedon'tseethattobeoverinthenextcoupleofquarters.There'shealthydemand,andweareinnegotiationwithalotofourcorecustomersonupcomingreplacements,andhowweplacethesesystems,andhowweplanitoutforthem,soitworksforthem.
MikeMcMullen (President&CEO):
Dane,ifIcouldaddoneothercommenttoPatrick'sresponse.We'vebeenfocusedalotintoday'scallonpharma,biopharmabutkeepinmindthatthereplacementcyclehasbeenvery,verysubduedontheappliedmarketsside,inliquidchromatography,sowehaveseveral--wehavetensofthousandsofsystemsonthatsideofthehouse,aswell.Again,thisiswhywelookoutinto2017and2018,wethinkthatourgrowthratesaresustainable.
DaneLeone (Analyst-BTIG):
Anywayyoucouldhandicap,usingabaseballanalogyorsomethinglikethat,whatinningyouthinkyou'rein?
DidierHirsch (CFO):
Don'taskaGermanaboutabaseballanalogy.
MikeMcMullen (President&CEO):
I'dsayonthepharmaside,you'reprobablyinningfiveorsix.Twothirdsofthewaythrough,maybetwo-
CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices
EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94
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thirds.MypointwouldbethatIthinktheballgameisjustgettingstarted.Wemaybeinthefirstinning,wehopetobeinthefirstinningsoonofthatcycle,ontheappliedmarketside.
DaneLeone (Analyst-BTIG):
Thankyouverymuch.
Operator :
Thankyou.AndI'mshowingnofurtherhequestionsatthistime.I'dnowliketoturntheconferencebacktoAliciaRodriguezforclosingremarks.
AliciaRodriguez (InvestorRelations):
Operator :
Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.
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