Q1 2020 Earnings Call
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Ask a question during this time simply press star followed by the number one on your telephone keypad.
He would like to withdraw your question that's the kind of Keith Thank you.
Now I'd like to introduce you to the host for today's conference anchored in Graff, Vice President Investor Relations. Sir. Please go ahead.
Thank you Andrea.
Welcome everyone to Agilents conference call for the first quarter fiscal year Twentytwenty.
With me on Mike Mcmillan, Agilents, President and CEO, and Bob Mcmahon, Agilent Senior Vice President and CFO.
Joining into Q any often bob's comments will be Jacob Tyson 'cause it enough excellence Lifesize and applied markets group.
And same <unk> president of excellence diagnostics and genomics group.
Due to certain parts not engagements Mark Doke President of the Agilent Crosslab group is unable to join us today.
You can find the press release in restaurant in the Investor presentation and information to supplement today's discussion on our website at Investor day agile in Dot com.
His comments by Mike and Bob when 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 audio what are your.
Revenue growth will be referred to on either reported or core basis.
Core revenue growth excludes the impact of currency.
And the acquisitions and divestitures completed within the past 12 months.
Guidance is based on exchange rate as of January 31st.
We will also make forward looking statements about the financial performance of the company.
These statements are subject to risks and uncertainties and not 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 afford risks and other factors.
And now I would like to open the call over to Mike.
Soccer and thanks, everyone for joining our call today.
I'd like to start todays call their mind or that Mark though.
TG group has a return of may 1st.
Mark and his wife are currently doing a long plan vacation and he is not able to join US today I'd be remiss in not taking the opportunity to recognize the outstanding accomplishments Mark has made it a stellar 38 your career his track record of results speak for itself. Thank you Mark.
We are very strong bench it adds one I've already made mark successor poor Mcdonald.
He knows the business well.
He has been a more extended for several years, it's probably one or chemistries and supplies division.
Okay, Mark already working on transition activities, that's port for parents take the home of the AC do business at the start of fiscal Q3.
Market graduates, both mark and pork.
Now onto the quarterly result.
The Ashland clean delivered a strong start to 2020.
Q1 revenues are above our expectations as business grew in all regions end markets.
Total revenues of 1.36 billion are up 5.7% year over year on reported basis and 2.4% on core basis.
We continue to translate our topline growth into strong bottom line earnings.
EPS of 81 cents is up 7% is at the high end of our guidance.
Before going into business student market details or a quarterly results I want to speak about two specific areas. The highlight how are building the buying strategy investing in fast growing markets continues to deliver growth.
It helps us create a more resilient business.
First I want to talk at our most recent acquisition biotech. This was the first quarter with the biotech team on board and the business is off to a very strong start with revenue growth above our expectations.
We continue to be very enthusiastic about the cell analysis space and biotech continues a strong momentum that really gone is interested in bringing them into Ashland.
The biotech leadership team was just in Santa Clara fee for a few days a plan meanings.
And they're very energized and excited about the future possibilities and make it a great business, even stronger as part of Ashland.
Second the resilience of religion resiliency of our business model is on full display this quarter.
As agile delivered strong growth and earnings in the phase one negative queuing impact from the krona virus outbreak in China.
At this has dominated headlines let me out a few additional comments regarding the krona virus and its impact on average Lynn.
Most importantly, our thoughts go out to all those affected by the krona virus.
On the Ashland front, our team Fortunately has not had any direct health impact in many returned to work last week.
We are remote remotely supporting our customers a number of them gradually resume operations.
We've also reduced order in country production activities, there should be product to customers in China and internationally, albeit at a reduced rate.
On the business side, given that our first quarter ended January 31st we are seeing business impact across both fiscal quarters Q1 and Q2.
In Q1 revenue is running ahead of expectations right up to lunar new year holiday.
However, the extensive lunar new year holiday affect our customers' ability to transact except shipments during the last days of the quarter.
This reduce our reported revenue by approximately 10 million in total for the quarter.
Primarily in our LS AG instrument business.
We have a sense recognize the bulk of this revenue now in Q2.
Looking ahead, we are projecting that Kona virus will continue to impact our China business throughout Q2.
Bob will share additional details, but we are anticipating blaze, a new equipment purchases.
And slower uptake of consumables and services the slower uptake is due to reduced number of selling days, resulting from the extension lunar new year.
Along with customer and logistics operations that are ramping but not yet fully operational.
It's important to note, while we are forecasting the impact to our Q2 business our full year outlook for total Ashland revenues and EPS remains unchanged.
Our business outside of China remains on the solid footing.
And we believe a large portion of our China business. That's currently being impacted by the cone of ours is not loss, but rather is delayed.
As you know the Kona virus outbreak is unfortunately impact in health and safety of tens of thousands of people.
I'm very proud of how the agile team has responded do our part to help.
Our Ashland, China team is actively supporting those customers doing cruiser restarts into the virus.
We have donate instruments and supplies to four clinical and research institutions based in China to sport disease research and drug development efforts.
We continue to closely monitor events in China and apparent that quickly to help wherever possible now onto additional details our quarterly results.
Ashland's growth is broad based as our business grew across all regions and end markets.
We will performance was led by the Americas, posting 5% core growth with America coming in with low single digit resolved and Asia holding steady.
Despite the timing of the lunar new year, and the cone of our impact quarter last impact later in the quarter, our China business grew low single digits.
Well all end markets grew our results led by strong growth in the bio pharma and environment or forensics markets.
Now taking a closer look at how the individual business units performed.
Now, let's say GE revenues grew 5% of reported basis, driven by strong performance in our Biopharma and cell analysis business.
On a core basis, let's say geez revenues were down 2% against a tough compare and inclusive of the unexpected queuing impact from the krona virus.
With the exception of China, all regions and end markets perform in line with expectations.
The hcg business continues to deliver strong result, poking, 7% core growth, even with reduced selling days in China.
This growth was broad based across all major market segments and regions.
These results continue to demonstrate the strength of our hcg Crosslab strategy and how we are leading the transformation of the analytical lab.
DGD is also posted 7% growth in the quarter against a difficult 12% growth compare.
We are experienced a continuation of positive trends.
We ensure on a corporate technology business and seen strengthen our ngs Q a QC franchise.
We continue to be pleased with the revenue ramp and our new only go manufacturing facility in Frederick Colorado.
In addition to driving strong financial results I want to some other notable events that took place during the quarter.
We continue to bring differential new product to the market gaining strong customer and external recognition.
We just introduced the advent source, let XT Hs to DNA kit. This along with our recently launched automated sample prep platform Magnus further strengthens our leadership position in the Ngs sample prep market.
In addition to industry publication on of the Ashland's affinity lab LC MST I Q system with 2019 Innovation Awards.
The award winning mass spectrometer induced last June incorporates intelligent design and innovation such as embedded sensors that monitor instrument health.
And finally early this month barron's named as one number one in list of the 2019, most sustainable companies in America.
We're very proud this recognition sustainability is a critical topic is gaining increased interest from customers employees and investors.
More importantly, we believe focusing on sustainability is simply the right thing to do.
Before I pass the call on to Bob I'd like to close the reminder of added resilience and our shareholder value creation model delivering above market growth expanding operating margin in a balanced deployment of capital.
We are able to thrive by focusing on platforms with multiple large end markets and long term growth opportunities.
We're also driving growth in the aftermarket.
Increase in our focus on faster growing end markets.
Streamlined on infrastructure and operations and invest in the future of Ashland, both organically and Inorganically.
We do all this while maintaining an acute focused on delivering EPS growth with superior quality of earnings and driving shareholder value creation.
Despite the temporary business uncertainty created by the krona virus in China.
I remain confident about the longer term growth prospects of the China market.
Our China growth strategy and most importantly, our team.
I'm very proud of common in the strength the resiliency of our China team.
And their ability to overcome any near term challenges to come our way.
When you look at our global team and our business our growth prospects and team have never been stronger.
We are laser focused on driving revenue and earnings growth.
I'm pleased to tell you that all these factors allow us to maintain our growth and earnings outlook for the year.
Thank you we on the call and look forward to answer your questions I'll now hand off the call to Bob Bob.
Thank you, Mike and good afternoon, everyone.
In my remarks today I will provide some additional detail on revenue walk through the first quarter income statement and some other key financial metrics and then finish up with our updated guidance for Q2 and the full year.
Unless otherwise noted my remarks will focus on non-GAAP results.
Our first quarter results were very good as we had strong execution across all regions in markets revenue for the quarter was 1.36 billion with reported revenue growth of 5.7%.
Currency negatively impacted revenue by 0.4 percentage points and acquisitions added 3.7 percentage points to growth.
Our core growth was 2.4% in the quarter.
As Mike indicated our performance was impacted by the extension of the lunar new year holiday due to the Corona virus.
This reduced the number of shipping days in China, and we estimate shifted $10 million in revenue out of Q1.
If not for the reduced shipping days in Q1, our performance would have been stronger with the shift affecting our core revenue growth by roughly 70 basis points.
In terms of end markets, we saw growth across all of our six end market segments.
Pharma, environmental and forensics and diagnostics and clinical led the way for us in the first quarter.
During the quarter pharma grew 3%.
Double digit growth than DDG and high single digit growth in ESG offset a mid single digit decline for LS AG.
Within pharma, our Biopharma were large molecule segment grew high single digits.
And on a geographic basis, our pharma business experienced high single digit growth in the Americas and mid single digit growth in Europe.
This was partially offset by a mid single digit decline in China, largely associated with the tie timing of the lunar new year and to a lesser extend the execution of the four plus seven program.
The four plus seven program is playing out as we expected.
With the third round completed in January and multiple winners prodrug.
We continue to believe that this is a long term positive for the industry as drug quality improves and access to healthcare increases.
Our environmental in forensics business grew 4% against a very tough compare last year of 10%.
During the quarter, we saw a balanced growth between instruments and aftermarket sales.
And diagnostics and clinical revenue grew 3% against a strong 11% compare last year.
Mid single digit growth and DDG driven by continued share gains in our pathology business were partially offset by declines in LNG and LPG with both only having small businesses in this segment.
Chemical and energy revenue grew 2%.
Services and consumables grew mid single digits offset by flat instrument sales.
Academia and government grew 1% with services in consumables growing mid single digits, partially offset by flat instrument sales.
Mid single digit growth in the Americas was partially offset by flat to low single digit declines in the other regions.
And finally food returned to modest growth up 1%.
Low teens growth insert services and consumables was partially offset by declines and instrumentation.
Well one quarter does not make a trend we are pleased with a continual progress in this market.
On a geographic basis, we saw growth in all regions led by Americas growing mid single digits, Europe grew 2% inline with our expectations.
And as Mike mentioned, our business in China was running ahead of expectations through the first two months of fiscal 2020.
As mentioned earlier, despite the shift of the $10 million, China still grew 1%.
If not for the extension of the lunar new year or core growth in China would have been solidly mid single digits.
Now, let's turn to the rest of the personnel.
Gross margin was 55.7% down a 120 basis points versus the prior year.
This is a result at the plant startup cost for a new NSP facility as well as product mix and some negative pricing effects on our instrumentation business.
We offset 90 basis points as we leverage our cost basis in operating expenses.
And as a result, our operating margin was 22.9% down slightly from 23.1% in the first quarter of last year.
Adjusting for the $10 million Corona virus impact on revenue operating margins would have increased versus the prior year and so we feel good about our continued opportunity to expand operating margins.
We're also able to lower our tax rate slightly to 15.5% and expect that rate to continue for the rest of the year.
This resulted in non-GAAP EPS for the quarter coming in at 81 cents at the top end of our guidance and representing 7% growth.
Before turning to second quarter guidance I want to touch on a few other financial metrics.
Our operating cash flow was an outflow of $59 million.
Inline with expectations as we incurred the onetime tax outflow of $226 million related to the transfer of intangibles as noted last quarter.
We also paid out $56 million in dividends and purchased 726000 shares for $60 million.
We ended the quarter in a net debt position and a net leverage ratio of 0.9 times.
Now, let's turn to our non-GAAP financial guidance for Q2.
We are anticipating revenues in the range of 1.28 billion to 1.32 billion in the second quarter.
This range is larger than we've traditionally provided as we've been tend to end estimate and the impact of the Corona virus on our business in the second quarter.
As this is a fluid situation, we thought it would be helpful to detail out our assumptions.
Particularly as we've seen impact across both Q1 and Q2.
Our guidance contemplates a 25 million to 50 million dollar impact in our first half of our fiscal year, which translates to roughly to a one and a half to three week impact on China revenues.
Of this we saw $10 million in Q1, and we are estimating a net $15 million to $40 million incremental impact in Q2.
The Q2 revenue range of 1.28 billion to 1.32 billion translates into reported growth of 3.4% to 6.6% with core growth of 1% to 4%.
Currency is expected to have a negative 1.1% impact.
M&A is expected to contribute 3.5% to 3.7% in the quarter.
We are estimating the corona virus to negatively impact our Q2 core growth by one to three points.
Our revenue outlook translates Q2 earnings in the range of 72 cents to 76 cents per share grew 1.4% to 7% growth versus last year.
Importantly, as Mike mentioned, we believe the majority of this business is not lost.
Rather delayed as customers and the government ramp and recover.
In addition, our business outside of China remains strong as such we expect a larger second half of the year and are not changing our full year guidance for revenue or EPS.
So before starting up the call for questions I want to conclude by saying we have a very solid start to the year that shows the strength and breadth of our portfolio.
It is that portfolio, coupled with the strength of the agile and team that despite the uncertainty caused by the Corona buyers, we're maintaining our full year outlook.
With that bunker back to you for the Q1 day.
Thanks, Bob.
I would like to request to limit to one question and maybe one quick follow up Julianne. If you can please provide instructions for queuing.
Certainly as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile accuen a roster.
Your first question comes from Taco Peterson from Jpmorgan. Your line is open.
Hey, Thanks, I appreciate you guys quantifying the krona impact I guess.
Couple of things I mean, you've previously talked about mid single digit China expectations for the full year. So should we assume that's still the case just more back end loaded and then Mike as we think about collateral damage with within China, How should we think about the CD market just given that the broader.
Economic activity in China slowing so should we think about some impacts on sandy as well.
Sure Tyco I think I handle both questions and Bob Correct me if I go off script here, but I think we still think that the mid single digit number isn't isn't is doable for the year in China.
What we're seeing already on ground from our team that we just on the phone today with our team in China were still able to to transact and and orders are actually come in as forecast I think that we think a lot of that procurements can occur a little bit later in the year I think a lot of its recoverable with exception of probably some aspects of our of our service business where customers really our will.
Looking for service people to arrive on the sites I think we feel pretty good about how we're thinking about the China throughout the rest of the year, albeit being a very fluid situation.
We really haven't seen any kind of.
Transitory or connected impact on seen vaccine he actually did better than we were thinking in the first quarter. It's too early to call a trend, but some of the PM eyes are actually engine up which would maybe give an indication of perhaps a better outlook and some initial noise with some of our major accounts about thinking the on on procurement, but we still remain cautious.
In terms of the outlook for foresee any but we're encouraged by the Q1 results and again, we're not really seen.
No significant movements around in that area on a global basis, and we think back to the first comment on.
China, we weren't expecting a lot and see any this year in China Anyways, I think we're in pretty solid shape relative the outlook there as well.
And then a follow up on Biopharma, you grew 3% on a 10% comp last quarter. It was 7% on a 14% comp so was that a pull forward last quarter.
So maybe just talk to that dynamic.
No I think the Big story, there is China right.
Yes, that's exactly right Mike there's two elements there one is the shifting of the lunar new year from.
Q1 into Q2 as well as the impact Q2 into Q1, excuse me as well as the extension.
Of the.
Lunar new year holiday so those are the.
Two primary pieces and then within the bias that within the pharma numbers Tyco the bio pharma segment really the strong for US again this quarter as well and then we think as the four plus seven issue rolls out and the latter part of this year then we'll see the growth in the small molecule side of that space and then we have really strong growth in any SD and IQ.
This is strongest pharma, so we're feeling pretty good about pharma.
Okay. Thank you.
Thank you. Thank you.
Your next question comes from Doug Schenkel from Cowen Your line is open.
Hey, Doug.
Ryan on for Doug. Thanks for Thanks for taking my question.
All right I mean.
Maybe just to round out the trying to dynamic quickly can you provide some more color on your supply chain exposure.
Within China, It sounds like the operating environment is improving but how should we think about your direct and indirect supply chain exposure and do you see any risk to your ability to fulfill demand within and outside of China over the course of this year.
Yes sure Ryan. Thanks, Thanks for that question, so as I touched briefly on and my cost grip were actually have resumed production and aren't in a really solid position right now to not only ship product to our customers in China, but also products and manufactured in China to have them exported into the global market environment.
And as we have a very diversified global.
But print in terms of supply chain in manufacturing capabilities, we think for the near term, we're in pretty solid shape relative to ability to.
To meet our commitments from a shipment perspective, and then Im also may recall that starting with the with the initiation of the U.S. space terrorists, we actually had.
Initiated the movement of a lot on our supply chain out of China. So it actually has mitigated our risk here as well.
Yes, Ryan just Bob just a follow up we have.
Twice weekly calls with with our team in China inclusive of logistics as well as our supply chain and obviously, it's quite dynamic, but as a as it currently stands today, we feel like we have the ability to be able to procure not only raw materials, but also produce the finished goods ship them not only within China, but also get product into China.
And and vice versa.
Great.
Maybe just following up with a brief to partner.
Number one on the food market sounds like things were improving a bit prior to this carnivorous dynamic can you talk a little bit more about what you were seeing in the market and if you think that the China.
The China portion of that market, specifically could be poised to return to growth as we get passed as part of Iris dynamic and then specifically for gross margin can you talk about what the timing headwind was for the quarter versus the other dynamics that you called out. Thank you.
I think as well yeah, yeah. So.
Food as I mentioned that we certainly are pleased with the progress. We we have had several quarters of kind of very predictable performance, there and actually Q1. Despite the current a virus that probably had more impact on the pharma side than than in food.
We grew 1% on a global basis, it was down slightly in China, but certainly not to the level that it had been in the past. So we feel good about that it's probably too early to call that it's going to return to growth long term, we do believe it will return to growth but.
Not ready to call that in the in this fiscal year in terms of the timing of the Corona virus that $10 million that was.
And quite a large incremental because we had all the costs so that was probably a.
Higher than normal kind of incremental drop to the bottom line that was probably a little over a penny of impact.
On the full on the full quarter.
Very helpful. Thanks.
Your next question comes from Jack Meehan from Barclays. Your line is open.
Hi, good afternoon.
I was hoping there maybe you could give us hey.
If you give us an update on.
DNA SD rollout at the new Sade and.
How much that contributed to the quarter in both AG and.
Permit and market.
So as a manager get little tighter hearing this from Bob and myself I'm going to pull Sam into this conversation, but as we highlighted in the call script.
You know the any equity business continues to.
Ramp as we'd expect to really pleased with the progress and how we're starting to fill out the factory still not yet it at full full capacity up and in full capacity yet, but it was a contributor to our growth in the first quarter no doubt and Sam anything else you talked out there now Mike you hit the nail and ahead. It is the business is performing as expected we continue to see.
Interest in all the the customers the pharma customers that weve.
Given towards two we are doing work now there for a number of customers.
Not to be boring nothing new to report it is progressing dog are feeling good news right now, yes, I would just add Jack as we as we've talked about this will ramp up and be a more material impact in the second half of the year, it's for direct progressing as as we expected it had.
A slight impact to the DDG and a slight impact to the overall.
Excellent organic core growth and very pleased with the progress about I think is maybe just one more point too I mean look the second half outlook for the business is not all about.
About China recovery on the other elements of the business, including any as the which we know we're going to have a strong second half that's right.
Great.
One follow up on DG.
Core growth of 7% not that Nit picking it too much but was there anything that was a little softer in the quarter in that segment just knowing some of the other growth drivers relative to how the segment was growing last year.
I think it was really this is Mike Jakone and Sam fully jump in on this we have 12% growth last year. So tough compares with solid growth across all elements of that business and throughout outside of again, maybe a China impact for an element of of the business I mean things are firing on all cylinders across the businesses, how I recall, yes, right Mike.
I mean, we had we continue to have good growth with market above market with our overall ngs portfolios and feel good about that.
The low double digits, our pathology business as you heard Mark Mike's opening comments and Bob's as well we believe we continue to gain share their growing in the mid single digits. So and you just heard about any and Steve. So you look at the major parts of DDG, We had I think a really well balanced good quarter has mainly as a comparison square area.
Great. Thank you guys.
No problem.
Your next question comes from Dan Leonard from Wells Fargo. Your line is open.
Thank you. So just a couple of things to circle back to one.
What decelerated in the Americas in the quarter your growth rate in that region had been trending higher than 5% for quite some time.
Yes, Hey, Hey, Dan welcome back and appreciate the question.
Is it really combination of a very tough compare I would say probably the area that was.
A little softer was the instrumentation business had a very the most difficult compare in the first quarter and we would expect that to to improve in Q2 through Q4 as we get to easier compares yes, yes, I know Jack if you were looking into this so yes, and I think the.
Continued depressed PMI certainly impacts to see any business khemka anti business. So we continue to see that in us being.
Performing.
Flat and we would like to see improvement, but I think is to get us to take some time before that's happening.
And I would I would add.
It.
Ended where we expected it to be yet.
Yes, sure and then it related question, Bob you mentioned when discussing the gross margin dynamics. There were some negative pricing effects on the instrument business could you elaborate on that or are you pulling maybe the pricing lever to drive more demand in instrument business. After four quarters in a row soft demand it let's say.
Hey, Hey, Dan and I, just can't help but the jumping on this one and I think that question, maybe close to our competitors.
Because we saw a particularly as we finished the calendar year, we saw some very aggressive pricing by some of competitors, but particularly in the liquid chromatography and mass spectrometry platforms.
And on it.
Adding to that Jake no I think it's fair to say that we continue to be premium priced.
But they certainly some competition in the market space right now and GAAP surveys of price pressure, we don't play the price game here I mean, that's not how we want to win.
Okay appreciate that color. Thank you.
[music].
Your next question comes from Patrick Donnelly from Citi. Your line is open.
Hi, Thanks, Jess Yan for Patrick.
Let's just wanted to touch on.
Hey.
The China impacts Kevin you guys had laid out about 1%.
Impact the core growth from that just wanted to understand how that.
Kind of compare to your expectation that if corona virus.
Made that a lot worse than anticipated.
Yes, maybe maybe just to be crystal clear here, we saw roughly a 70 basis point impact in Q1, we had product that was getting ready it was staged and getting ready to ship in country. In the last couple of days of January and with the extension of the lunar new the formal holiday there was no one there.
To pick that up so we know that.
Was what's clearly an impact in Q1 in terms of Q2, what we're expecting between the the first half of our year, it's roughly a one and a half.
Three week impact as we're ramping up and most of that's happening in Q2.
We're expecting in Q2 that the Corona virus has roughly a one to three point impact to our growth in Q2, roughly $15 million to $40 million in the first half its $25 million to $50 million and we'll expect to get that back in the second half of the our fiscal year.
Okay. That's helpful. And then just maybe one on bought a biotech acquisition just wondering how that business.
Performed relative to expectations, and just kind of how the customers sections Ben.
So far as you've kind of brought in that portfolio offering there.
It just happens to get that write up and then.
Relative to expectations. It's ahead of our expectations. It really has been just tremendous addition to the at the to the company and we were talking about this the other day inside the company typically when you put together at a deal scenario.
It's often out of the gate you don't see team, beating the revenue numbers all the time and is that actually what we saw auto in the case of biotech in the first full quarter as part of Ashland, and Jake I know you've been talking to customers and how they're thinking about the biotech being part of Ashland, Yeah again I just want on this call once again that we've been very pleased with the.
Formats of biotech or white been here in Atlanta, but not only biotech the wholesale analysis business is doing very well have you posting double digit growth for the whole business. So we're very pleased with that and we actually believe there's going to continue for quite quite an quite a long time BCC life settle now if this is going to be a key driver fond of saying the immune system and immuno.
On quality and with the now the sea horses.
And biotech and lock sell combined we have a very unique value proposition and that that is really bought what excites us and but also is the big signing for customers said when we combine those technologies are these techniques together, we can create more insights for the resources and the biopharma customers that nobody else in the industry can do so this is Bob.
Exciting and we just getting started.
Your next question comes from Puneet Souda SBB.
Thank you your line is open.
Hi, Thanks, Mike. So first question on Europe appointed 2% growth there was hoping to get a view from you on outlook and what you're baking in the guidance here. Thanks.
It's about 100 is talking about a performance and you can maybe comment on the outlook. So came in right. It expected I think you know that.
Europe accident difficult economic environment, and we think our team is really doing well there relative to what's going on in the market environment. So we're we're actually quite pleased with how Q1 came out for us in Europe and.
Bob in terms of the outlook yeah, yeah, So puneet good afternoon.
As Mike said, we were pleased with the outlook of being to 2% and Thats kind of what we're forecasting in Q2 and the rest of the year end and so certainly the team.
Is is doing a really great job.
Being able to to deliver in a tough environment, but.
It kind of hit where we expected and that's kind of what we're expecting for the rest of the year as well.
Okay, that's very helpful to.
If I could.
Touching back on on China, I know shoring covered quite a bit but if I.
You know really appreciate your thoughts there given one of the strongest legacy positions in that country for for agile and.
As the recovery happens here are there certain segments, which you think where you will see more acceleration more faster recovery certain product lines of certain segments, where are you seeing recovery faster horses.
Others, and then of sort of also surprised with the growth you are seeing in hcg, just cross lapse continues to deliver.
Was trying to understand what sort of exposure you had there and in China and.
Given the travel restrictions and everything.
Are you still able to ship products and service instruments.
Seeing big seeing the growth and cross labs here or was that how much was the impact in cross love If you could quantify thank you.
Yes.
Let me take there was a lot into that question. So let me try to try to hit them.
In terms of recovery, we would expect that obviously, the the instrumentation portion would recover with and within that probably pharma forgot.
And so where we would expect that.
The prioritized over some of the other markets.
In terms of VCG.
We continue to be pleased by the broad based strength, there actually even in China.
Despite kind of the reduced selling days it grew 11%.
We do expect probably a slower ramp up there less on the consumable side as is the factories are getting back to production.
But more on the services side as you can imagine having our folks getting into labs right now is fairly difficult and theres a portion of that would be on demand for servicing equipment.
And so we would see that probably ramp up a little slower in Q2.
But then ramp back up to normal.
Latter half of Q2 in into Q3 in Q4 at least that's our current assumption.
As Mike mentioned, we've been in close contact with our teams in China and had been watching the order flow and the order flow to date is across both DCG and Ellis AG.
As well as our DG business, which is a smaller piece.
Tracking to our expectations.
Okay, and any sense on terms of the exposure that you have.
In China and could that mix change given the.
In the next quarter so.
No I I don't I don't anticipate a major shift.
We've largely got a instrument heavy business in China relative to the rest of the business anyway, but our opportunity really lies in the consumables and service overtime. So I don't see a dramatic change in Q2 or in the back half of the year, yes.
Great. Thank you.
Quite welcome Tony.
Your next question comes from Dan area.
Welcome to your line is open.
Good afternoon, guys. Thanks, Mike just back to tight as Biopharma question, Hey, Mike.
Next quarter I think the comp goes way down to low singles for that customer segments. So where are you feeling like biopharma growth heads in twoq as we just think about.
Momentum in the favorable comparison, but also China can that be more mid singles, we net out the moving parts there.
And then I think thats, a reasonable expectation so when I was asking earlier about the covenant pharmacy, we remain confident about our ability to grow in pharma I know part of its going to be the pickup and continued growth that we're going to have an or any SD business.
We also know there were getting too.
Some of the easier compares relative the LSG instron business, because as you move.
All recall that Q2 is when we started seeing the slowdown.
As China went through this whole looking out there.
The current practices around the generics. So we think theres lot lot of good reason to be.
Positive about the ability to have a higher growth rate in the outer quarters, and we did in Q1 in our pharma business.
And we're expecting.
Faster growth in Q2, yes.
Okay.
And then maybe one again for you, Mike or maybe even Sam it feels like one Q is always a good time ask this question just given that some of those are heading down to HBT any update you can give us on laser Gen product development, how much of a focus is that at this point and then maybe what are you looking at in terms of.
The change in total investment there if we compare 20 to 29 team.
So I think Sam year, Youre getting your backpack, maybe at least on your teams getting backpacks add to that.
You are staying home Thats right. Okay, maybe just a few comments on this so yes.
Overall thing so the question Dan.
If you would have heard my comments already from JP Morgan, we're making progress on a number of fronts related to the development work, we're doing on the lasers in sequencer, particularly as it comes to the technical specs on on our read length.
Quality and so forth. So we're continuing to make that progress we think about AGBT of course, it's not just about sequencers. It's about the overall ngs workflow, it's about really looking at beyond Ngs overall genomics. So.
We are excited about Magnus, which we introduced not too long ago. We are seeing sorry to remind you Magnus is this really walkaway automation for taking the any libraries are actually putting DNA in and being able to.
Come back and just low that directly onto your NGL sequencer.
We've seen some really good interest in that.
In Europe in America, and in China. So we're going to continue sharing the message there and sharing some data from a number of customers.
We also as you would have heard US talk about we have launched a new.
Sure select XT Hs to the any reagent kit, which allows us to look at even lower starting amounts down to 10 nanograms of DNA for FSP, which is very important for cancer also allows on alumina Sequencers you know, it's very important be able to use molecular barcodes, we have that going on as well.
And we have a number of.
Partnerships that we're working on with with a number of customers and collaborator. So stay tuned I think it's going to be an exciting AGBT can Dan Taylor part of question of was.
Ill divestment outlook and yes, so our just quickly our our spending forecast in 2018 20.
2020 is the same as 2019, so we're not expecting any ramp up.
Okay. Appreciate it thank you.
Mhm.
Your next question comes from Derik Debruin from Bank of America. Your line is open.
Hey, good morning, good afternoon.
Number of gotten number questions.
Sure first one is.
I guess just on the gross margin outlook for.
2020 can you sort of walk it through the next couple of quarters in terms of of how that looks.
Yeah, we talked about at the beginning of the year. Our guide was contemplating roughly a flattish gross margin across the company and that hasn't changed. So we've always said that the first half of the year, what's Q1 being the hardest if comparison because of the startup costs in and then HST and you can see that kind of in our numbers.
We also were affected a little as we mentioned before and LSG, we would expect that to recover as we get through the course of the year. So.
And at a high level Derrick I would expect our gross margins still to be within that range roughly flat year over year, and where are getting our operating leverage is really in the opex expense line and Bob I think we're also looking to see a maybe a more favorable mix in our instrument business has yet as we move forward and and I made some comments about the the pricing.
Pressure that we saw in more of more of a calendar year and kind of phenomenon with with the price in more stabilizing as we started the 2020, yes.
Well, great that segways into my next question on instruments, and so I think you had said last quarter you are expecting maybe flattish instruments for the full year is that still sort of your expectation and then at that leaves into a.
Any idea of sort of what what pent up demand could be I mean, do you sense from customers pretty clean see any if there is people waiting on the sidelines volume in the budgets gets better I'm just trying to get a sense is or what the instrument dynamic like.
Yeah, Hey, Derek this Bob.
I think short answer on your first question is yes, we're still in that range of of roughly flat actually if you looked at Q1, we were down 2% core, but if you adjusted for the Corona virus. It would have been bed down about 1% on the most difficult comp that we had.
To your point around see any there were and there have been shoots of life, you know and some of our customers looking at things now what I would say is the current advisors kind of throws some of that into two question.
I would say Thats still intact right now I don't know Jay Jacobs as you have anything I'd.
Overall, I do think that base, some pushed out pent up demand tier and eventually will be it take refresh and we have invested over the past period to quite a lot into our instrument placement portfolio on really refreshed across the whole portfolio. So when that pent up demand is coming forward.
Ready, but we just can't call. It right now exactly when thats going to happen again, taking I'd just add one thing early on in my tenure you know we had a similar kind of slowdown in see any.
The difference here is that at that time, a lot of our platforms or rather age. This time, we have a completely refreshed platform. So and also there is a great productivity message there to customers and our lab managers, obviously have ability to go to their their management and say listen there is something new out they're not buying this on replacing like for like.
Great and then just one maybe I missed something but you did 3.7% contribution from an M&A to first quarter, 3.5% to 3.7% in the second quarter and then the guide for the full year is 2.8% to 2.9%. It is something else in the first half the year, besides biotech or and if not are you expecting a while you're expecting a step down.
Yes.
So you've got very good math.
And we're not expecting a step down.
It's the only thing thats in the numbers.
And that that could be an area of potential up to opportunity.
Great. Thank you.
Your next question comes from Braden cleared from Jefferies.
Line is open.
My question on a separate topic.
You sort of speak to the twists settlement last week, we only 25 billion and should we expect these legal savings from having a case out of the we now that you reinvest those dollars.
Yes. So first of all just just a few comments on on the.
On the the settlement so we're very pleased.
With the agreement that was reached with the twist.
As you know we think it's in the best sense of our shareholders to no rigorously protect our IP and not only in addition, do.
Receiving a payment from from twist. The they also had to procure a license for us for certain aspects of our August since with this technology and we are real accompanies committed don't innovation in the right way. So we're really pleased with how how the sentiment goes and Bob relative to the treatment of the legal expenses.
And outlook for the rest of the I think we had that in pro forma right, Yes, we will.
Pro forma that's so you see both the settlement come in brand and as well as the costs associated with that I guess not Q2 results that's correct.
Thanks.
Maybe one more higher level question for you might come in you mentioned sustainability.
Recognition, clearly thats, becoming a much bigger focus I think for the investment community you just help us contextualize, how that focus may help contribute to your growth or cash flow or differentiate you in terms of the customer base.
So it's a great question. So as I mentioned in my cost can you know we've been doing these things because we thought as right thing to do and now people are really paying attention to it. So I think it helps on on multiple aspects of the business. So.
First of all relative to our new products, which have a very favorable environmental impact there's real compelling reason for customers because a lot of our.
Most important customers have their own sustainability initiatives and they're very interest I am going I have several European customers I'm visiting.
Next month, and they want to hear about our sustainability plants. So when you talk to them about how we're reducing footprint the electrical consumption that summer products don't even use.
Gases and.
That we've eliminated the use of gases and gas chromatography or in the case the MKS So theres a really.
And we reducing the size of the packaging.
And by the way that also comes with a benefit to Ashland's appeal.
So it's really helps our.
In terms of our customer relationships and ability to drive sales into those accounts.
But also is really quite helpful for recruiting of new employees into the company.
New employees when they're looking at potentially joining the company really want to know what Ashland stands for and we talked some about our culture and what we do as a company in the local community what we do if the environment our views on diversity and inclusion I think it really is a powerful message to to attract.
New employees to Ashland, but also for those who are part of the agile team to really be proud of the company where for be energized about where the company is going forward I think we've talked before I'm, a big fan of sports and if you build a great team you get great things happen in the marketplace run the field I think that really is really one of the major benefits you get here, which is what it does for.
For your team there really is a multitude of impact for the customers I mean for that for the company and something we really believe and.
Okay. Thank you.
Your next question comes from Vijay Kumar from Evercore ISI. Your line is open.
Hey, guys. Thanks for squeezing me anyway.
One that maybe on China, Mike We've heard some chart, possibly the government doing.
Initiating some some sort of stimulus here to kick start the economy.
If that were to be the case, where would that impact fall is that in any and food is that where we would see your China numbers coming up.
Well I have to say I have heard some rumblings of stimulus, but I haven't seen anything.
Around the specifics when the stimulus would be I don't know, Bob or whether you pick up any but I think you've got legs.
Exactly I think thats, a likely area that and pharma and also.
I also expect environmental as well so that would be my guess because these are major quality of life initiatives that the Chinese government has been behind so my guess is that's where they would that's where they have put the stimulus, but again, we don't have any specifics. That's it would just be pure speculation on my part of this point in time.
Understood and that Bob quick one on the on the EPS guidance here.
I see that tax rate ticked down sequentially on the guidance front.
Did anything change on the margins here at all because it looks like for revenue range remains unchanged.
So I'm wondering if this is.
Below the line or margins.
Some sort of impact here.
Yes, yes, nothing nothing material VJ.
All right. Thanks, guys.
You're welcome.
Your next question comes from Steve Beuchaw from Wolfe Research Your line is open.
Hi, and thanks for the time everybody.
Sure Steve I guess first I wanted to start with Bob with just a question about one of the underpinnings of the outlook for the year that hasn't been touched on so much just yet and it's it's NSP maybe a two parter on that SD. One is do you think we feel good about getting to a few dozen millions.
As of contribution from and HST and then can you give us any perspective and I guess, maybe this is Sam question.
As to how much of the capacity on the new facility in Frederick is now contracted and then I have one for Mike.
Sure.
Yes, Hi, I, let me, let me make sure I answer your question correctly I, what I would say is Q1 came in slightly better than what we expected.
On on the ramp so we feel very good about that trajectory obviously, none of the second half of the year is going to be significantly greater than the first half of the year as we ramp up that business and and I would say that the order book.
We feel very good about.
Yes.
Maybe Steve.
To build it build on what Bob said.
We've said that there is a ramp rate that we've been planning all along that's what we're seeing so as you really get into Q4 will be much more in the run rate. If you will have what to expect going into.
Financial year 2021 in terms of the Frederic site in particular so.
It's ramping as planned it is being utilized we were happy to produce a good product and good revenue from that in this quarter again after you starting last quarter.
And a further to what Bob said.
A lot of these programs and projects are long lead.
Both working with our customers to two really lay the groundwork and do they do the work so.
So I can't tell you exactly what percentage I do feel feel good about.
The percentage of programs and projects that were already lining up and going into next year and Steve I. Can example, high one of the points as Sam made it was absolutely crucial that those first batches. We we produced for customers met our expectations and as you know we are very cautious in terms of how we started positioning the ramp here because we just had.
To get it right and we've gotten in right for those first few customers I think that really positions us well when we look at the outlook for the rest of the year.
Okay.
Thanks for all the color there and then Mike I Wonder if we could just do the zoom out.
Thing if you will where we think about the the full year. There's so many moving parts right and the current of are certainly makes it more complicated, but if I rewind to 90 days ago or so there was a perspective not necessarily from agile and but certainly in investor conversations that.
The outlook for for fiscal 2008 was really conservative or significantly conservative and I think Weve of course heard from you guys over the years outlook that started at one point you pretty consistently do better than the outlook I Wonder if you could just give us your perspective on the outlook and guidance Felipe.
Just to see now that you know 90 days more.
Thank you did at the time you gave the outlook at the beginning of the year to what extent as this middle the fairway to what extent this conservative and could you talk to your customers and you think about the outlook. How are you feeling and how is that evolve just again really really zooming out. Thanks, so much.
Yes, Steve So I'm I'm in the common from zooming out right now and great question and.
I think that.
Thats, how we thought about the full year guide, which I'll leave it to you to prescribe the first additive either proper additive, but we started this year with a guide that we thought was but relatively the floor of what we can do and talked about areas of potential upside.
For the business and.
We were actually tracking well in the first quarter, where would have been a beat.
Both on the revenue and EPS side for the quarter, albeit the.
The impact of the much talked about today the impact the kroner buyer. So thats why we felt pretty confident about our ability to say listen there are still a lot of puts and takes relative to China in the near term, but there are other aspects of the business are doing extremely well outside of China, whether it be any as the HCV business. The the compares and the strength of our LSG instrument Paul.
Fully that's going on Ngls, we have a lot and and then back to sell analysis. So we have a lot of confidence.
And.
We.
When we call the middle of Fairway right now, but we feel pretty I would say, Steve one thing, obviously 90 days ago, we didnt have.
The epidemic that we're seeing right now which is unprecedented and so what we're trying to do as we're seeing pay in the first half of the year, we're expecting a 25 to 50 million dollar impact that we're going to make up in the second half of the year now the question is how fast and.
We hope for everyone sake that that will ramp up.
Fast.
And we'll get this behind us, but that certainly puts us.
A lot more variability in our focus we feel good about where our forecast is but we certainly didn't anticipate that at the beginning of the year.
Okay I really appreciate the color there thanks for for bearing with make sure I appreciate sort Steve great question.
Your next question comes from Bill Quirk of Piper Sandler Your line is open.
Great. Thanks, good afternoon everybody.
Having better EBITDA.
So I guess bobber or Mike just update on M&A you'd mentioned on the last call even considering looking at larger deals in around $1 billion, just curious with the update us.
I think the the statement I made and last quarterly call remains which is we think that deploying.
Our our capital towards.
Growth in earnings drivers on M&A front makes a lot of sense.
We for our shareholders.
Deals that make sense for us in markets that we know where we can really leverage the scale of the company.
And.
We did a largest deal biotech past quarter and as you heard earlier, that's off to a really good start.
I think we often get the question what how how how large you willing to go and.
Hey, Bob and I described it is listen we could go maybe multiples of that but we're not looking to we're looking to stay in our lane here and not do anything thats magnitudes larger than than a biotech so I'm not saying the biotechs is the max level, but.
Probably multiple to that as opposed to something that have a magnitude size. Yes, bill as you can appreciate timing of there is always very difficult to understand that we're going to remain disciplined and if there isn't anything out there that would meet our financial criteria, we're not going to do it we don't need to do M&A to make our model work, but certainly you see in the first quarter the benefit of that we've seen.
And with biotech and really building scale in cell analysis, which we think has a long term growth opportunity for us not only in Ellis AG, but across the business.
Understood and then just secondly, I guess just bigger picture question about the pacing of Crosslab over the course of the year, we are going to be heading into slightly different more difficult comps for the next couple of quarters.
Yes, the beauty of EUR of Hcg has been it's predictability across the business and.
We are expecting we're not expecting any.
Dramatic change.
And.
In the back half of the year, though with a possible exception of slightly.
Elevated ramp in China.
But that business that Mark and team have built is been just phenomenal in terms of.
Providing.
Stable stable high growth and profitable growth over the course of the last several years and I think that that quite honestly is a great legacy to to what Mark has been able to accomplish and not only that it really speaks to what are what our customers are looking for in terms of productivity in the labs and so for that so we would expect that to continue to kind of chug along.
As we've talked about in the past.
Got it thank you very much.
You're welcome.
Alright, thanks, everyone with that we would like to wrap the call put today have a great guys therapeutic.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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