Q2 2020 Earnings Call
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Good afternoon, and welcome to the quarter earnings Conference call all lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question press the pound Keane. Thank you and now I'd like to introduce you to the host for today's conference awkward then Graff Vice President of Investor Relations. Sir. Please go ahead.
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Thank you Judy and welcome everyone to Agilents conference call for the second quarter fiscal year Twentytwenty.
I hope that all of you and your families safe and healthy.
On the webcast today, Mike Mcmillan, Agilents, President and CEO and Bob Mcmahon.
Didn't senior Vice President and CFO.
Joining for the Q any after prepared remarks wouldn't be Jacob Tyson President of accidents life Sciences, and applied markets group and same Rahul President of Abdomens diagnostics and genomics group Longwood parting Mcdonnell president of Agilent Crosslab group.
You can find the press release Investor presentation, and information to supplement today's discussion on our website at Investor Day I didn't dotcom.
Today's comments by Mike and Bob will refer to non-GAAP financial measures.
You will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Unless otherwise noted all references to increases or decreases in financial metrics, our year over year and revenue growth will be there for do on a quarter basis.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
We will also make forward looking statement about the financial performance off the company.
These statements are subject to risks and uncertainties and only valid as of today.
The company assumes no obligations to update them.
Please look at the company's recent SEC filings for a more complete picture off our risks and other factors and now I would like to turn the call over to Mike.
Thanks Oscar.
Thanks, everyone for joining our call today.
I would add my best wishes as well.
I hope that you and your families are safe and healthy.
I'm pleased to have poor Mcdonald, our president of the Iceland Crosslab group join us for the first time today.
As I mentioned last quarter marked okaz retirement company importantly, without leaving the AC Jade.
I know your joint getting as though pork better in his new role I'm glad he can be here with us on the call.
Last quarter agile is among the first discuss the business impacts of covert 19 since then.
Just changes Cobot 19 has now global pandemic.
The world's very different place than it was back in February.
What hasn't change is the attitude and execution of the Ashland team.
And our unwavering unwavering focus in four key areas.
Let me first talk about how we're protecting our people.
Our top priority is ensuring the health and safety the agile and team.
Early on we entered the global work from home policy and severely restricted travel.
We are able to new work practices and safety protocols for our manufacturing teams and service engineers visiting customer laboratories.
The team is really stepping up to the agile admission our response to covert 19 is driven by our commitment to our people and our customers.
It should be no surprise, then that our second area of focus is unwavering commitment to our customers.
We are.
And have been open for business.
From the early stage of the pandemic, we took decisive action to secure a global up business operations.
We are gives an innovative and more efficient way to support our customers.
From leveraging our digital capabilities promote technical assistance.
Too early delivering Bravo liquid handling systems for their cobot 19 test.
We're providing live online guidance to keep labs functioning.
We're doubling down on reference to support our customers.
This is expected sure there's needs chains and evolve.
Our third focus areas, taking quick and decisive action to preserve a strong piano and balance sheet.
We experienced significant disruption to business activity in late March we made changes our supply chain logistics and business operations.
This insured continent of order intake and our ability to deliver products and services to our customers.
We also didn't shy away from taking Swift Swift action to reduce expenses.
We quickly put in place at cost management program.
While reprioritize have stated our growth investments.
As we continue to sharpen our plans, we will not put our future growth opportunities at risk.
Bob will share more details.
The top priorities monitoring our liquidity and cash flow.
We have taken actions ensure a strong balance sheet and financial flexibility.
The positive impact of our approach shows our Q2 results.
In the midst of the spread the global pandemic. The ads on team delivered Q2 revenues of 1.24 billion.
This is flat on a reported basis.
And down a little less than 2% on a core basis.
Our Q2 operating margin of 22.4% are up 50 basis points.
We posted earnings per share a 71 cents during the quarter flat versus our results a year ago.
Before covering additional Q2 detail a few comments on our fourth key area of frustration on growth.
Our building and buying growth strategy remains firm decisive action on our cost structure.
We're continuing to prioritize investments and fast growing markets, such as Biopharma that deliver income up on our growth and help us create a more resilient business.
When we all come at us on the other side as well be poised for growth.
Our Q2 pharma.
Growth is being driven by the strength of our Biopharma business.
This is a direct result of our building them buying strategy inaction.
Our approach investing for growth continued to serve us well.
And we'll be a major factor and help us emerged in the current environment stronger than ever.
An example of our approach to continually assessing our growth investments.
As a decision we made regarding our cancer diagnostic strategy and the laser Gen Sequencer development program.
Given changes in the marketplace. We believe we can now to capture future growth.
In the Ngs diagnostics space without the need for own sequencer platform.
As a result, we made a decision to shutter our sequencer development program.
We're redirecting our investments with the valuable intellectual property, we've created into areas of higher interest.
Despite this program change we remain optimistic about continued growth in ngs cancer diagnostics.
Let's now take a closer look at the quarter as well as the future outlook in today's cobot 19 world.
Last quarter, our attention and revised outlook is focused on our China team customers in business.
As cobot 19 spread to other parts of world in the second quarter the situation changed.
During February and March our overall business was up about 1%. However in late March we face significant disruption business activity as Europe, and the Americas restrict access to facilities.
Our China business is recovering better than forecasted.
We posted 4% core growth in China, with increasing strength throughout the quarter.
In fact in April China posted strong growth, while all other geographies experienced declines.
We expect that China growth recovered to continue throughout the year as lab operations investments continue to resume.
The near term outlook in Europe, and the US however remains challenging, particularly for new equipment purchases across most end markets and non cobot 19 diagnostic testing.
Some quick highlights across our businesses, both dengue and hcg delivered core growth.
TDD is 5% growth is driven by NSC and ASP up 35% as a ramp of that business continues as planned.
He was up 1%.
Our LS AG business declined 7% as customers curtailed equipment purchases, although we did have pockets of growth in biopharma.
Cell analysis, and cobot 19 testing and research.
From an end market perspective pharma grew 5% in the quarter, followed by 4% growth in diagnostics and clinical.
The food market continues recovery with a modest 1% growth driven by China.
Our environmental forensic business is down 1% for the quarter.
In Q2, academia, and chemical and energy or the end markets that are most impacted down 16% and 10% respectively.
We expect continued pressure on these markets throughout the rest of year.
Although we are seeing some pockets of growth in chemical production regionally.
Some customers shift supply chains.
Looking forward, we expect Q3 to be the most challenging quarter of the year with gradual improvement during the course of the quarter and continuing into Q4.
As a key player in the life science industry as an also has an important role to play in the fight against Cobot 19.
Before closing I would like to share a few thoughts on October 19 offerings.
While the cobot 19 viruses negatively impact affecting our overall growth at this time.
Ashland is supporting several aspects of cobot 19 research and testing.
Along with therapeutic vaccine development.
In Q2.
This result in a one point tailwind of growth primarily in providing instrumentation.
There is potential that this will become a more meaningful tailwind in future quarters.
To address this we have mobilized across as one team to maximize support to customers around the globe fighting the virus.
These offerings ransom instrumentation, such as automation.
PCR and marketplace testing to consumables and components necessary for testing.
As well as lab support these customers.
As we enter Q3 I want you to know that the global agile and team is energized and remains focused on supporting our customers and driving growth.
We have taken Swift and decisive actions in short continue strong PNM and balance sheet.
We remain a diversified resilient company with a bias for speed.
Execution and growth.
Thank you are being on the call I will have to closing comments. After Bob speaks and then we look forward to taking your questions and now Bob Europe.
Thank you, Mike and good afternoon, everyone.
Before I begin I want to repeat what Mike an anchor said and hoping that you are doing well and staying safe.
Looking forward I for one and confident we will get through this and look forward to the day. When we can follow up these calls with face to face meetings again.
In my remarks today I will provide some additional detail on revenue walk through the second quarter income statement and some other key financial metrics and then finish up with a framework for thinking about Q3.
Given the current volatility and uncertainty that exists we're not going to be providing specific forward looking guidance today.
That said in the spirit of trying to be helpful and transparent we will provide a glimpse into the evolution of our business during the second quarter and our thought process and how things may play out in the coming quarter.
Unless otherwise noted my remarks will focus on non-GAAP results.
Reported revenue for the quarter was $1.24 billion, which was flat versus last year on a reported basis.
Currency negatively impacted revenue by 1.6 percentage points and acquisitions added 3.3 percentage points to growth.
On a core basis revenue declined 1.7% in the quarter.
The pacing of revenue during the quarter varied significantly by region.
Driven by where each region was in the cycle of precautionary measures being taken to slow their spread of the virus.
As we previously disclosed we saw overall business activity slow in late March driven by the us in Europe.
To stay at home measures in those regions reduce lab operations and limited lab access and our ability to install equipment.
This lower level of that business activity carried through the month of April resulting in double digit declines for the month in those regions.
On the other hand, and as we as had anticipated business activity picked up throughout the quarter in China as restrictions were slowly lifted.
We still saw strong growth in China in April partially due to catch up from lower business volumes in February and March.
Overall, China grew 4% for the quarter exceeding our initial expectations at the start of Q2.
In total for Q2 quarter to date results through March were up 1%, while April was down roughly 6.5%, resulting in the 1.7%.
Core decline.
Before getting into some additional group details. It's also important to note. While we have seen some order push outs, we have not seen increased order cancellations.
While there are always some level of cancellations and both March and April cancellations were actually lower than the previous year.
Our resilient business model was extremely important to us as we navigated the effects of the challenging environment.
As Mike mentioned, DG and hcg, both grew on a core basis, while unless AG instrument business declined.
Now, let's say Gee declined 7% core in the quarter, but did see some bright spots with growth in large molecule pharma cell analysis.
And cobot 19 testing in research and.
In addition, as Mike mentioned, we had modest growth in the food market.
For LSG the impact of Cobot 19 related closures was most pronounced in the academia and government and chemical and energy markets.
Hcg grew 1% with China growing in the high single digits.
Our hcg results were negatively affected by delays and installations and lab closures in Europe and the Americas during the quarter.
And I'm pleased to say that our DDG business delivered 5% growth during Q2.
And it was on track for double digit growth prior to the slowdown in use in Europe.
We saw sequential growth in genomics boosted by products used to develop testing capabilities and for vaccine research into cobot 19.
And as Mike mentioned, our any SD ramp remains on track and delivered excellent growth this quarter as well.
The pathology business grew in all regions, except for the us where the effects of delayed and non cobot 19 related medical procedures was more pronounced in April.
On a geographic basis, all regions ranged from flat to down 4% for the quarter with Europe down, 4% America's down 1% in Asia Pacific flat.
And within Asia, as we mentioned China grew 4%.
Now, let's turn to the rest of the piano.
As the expanded impact to the pandemic became apparent we move quickly and decisively to adjust our cost trucker through targeted discretionary spending program reductions.
We continue to invest in our key growth opportunities in important capabilities such as digital.
For example, we leveraged digital and virtual reality investments for our field service engineers to continue to support our customers, where we did not have physical lab access.
While we took actions across the PML, we focus most of our effort on SGN a.
R&D investments as a percentage of revenue or largely unchanged from the prior year.
As a result operating margins of 22.4% improved 50 basis points over last year on flat revenue.
Gross margin at 55.4% was down 60 basis points prior to the versus the prior year.
Mostly due to volume and the revenue mix shifting more towards services.
In addition, we saw higher logistics costs as moving goods internationally became more expenses.
This combination of factors resulted in non-GAAP EPS for the quarter coming in at 71 cents per share.
Flat with the number we posted a year ago.