Q3 2020 Agilent Technologies Inc Earnings Call
[music].
Technologies third quarter earnings conference call all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question press. The pound key thank you and now I'd like to introduce you to the host for today's conference.
On current didn't grow Vice President of Investor Relations. Sir. Please go ahead.
Thank you Robert and welcome everyone to Agilents conference call for the third quarter fiscal year Twentytwenty My hope that all of you and your families safe and healthy.
On the webcast today, Mike Mcmillan, Agilents, President and CEO, and Bob Mic Mohan didn't senior Vice President and CFO.
Joining for the Q any pocket Bob's comments, we wouldn't be Jacobs Tyson president of ads Lin slight signs and applied markets Scoop, Sandra president of dozens diagnostics and genomics group and ported Mcdonald.
President of Agilent Crosslab group.
You can find the press release.
Our presentation and information to supplement today's discussion on our website at Investor day on tied to then dot com.
Today's comments by Mike and Bob when you refer to non-GAAP financial measures.
We will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Unless otherwise noted all references to increases or decreases in financial metrics are year over year and revenue growth will be there for do on a core basis.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
We've been also make forward looking statements about the financial performance of the company.
These statements are subject to risks and uncertainties and out only valid as of today.
The company assumes no obligation to update them.
Look at the company's recent SEC filings for a more complete picture of our risks and other factors.
And now I would like to turn the call over to Mike.
Thanks, operator, thanks, everyone for joining us on our call today.
The Ashland team delivered excellent results in the third quarter in the midst of historic global pandemic.
Against this backdrop.
Badlands performance once again highlights the strength.
And resiliency of our team and our business.
Ashland's Q3 revenues are 1.26 billion.
Our relatives of down just 1% on a reported basis, despite covert 19 headwinds.
But we expect to be the years most challenging quarter.
On a quarter basis revenues are down 3%.
These results demonstrate the strong resilience, we have built into our business over the past several years.
EPS of 78 cents per share this is a 3% year over year increase.
Operating margin improved 90 basis points over last year to 23.7%.
Our Q3 results are further evidence of the success of our profitable build and by growth strategy.
We continue to build a more resilient growth oriented business.
Last quarter I talk to you about the four key priorities, we're focused on during the cobot 19 pandemic.
Protecting our people.
For business for our customers, taking decisive action deliver a PNM and balance sheet and unwavering commitment to growth.
Staying focused on these priorities as helped us navigate through the coated 19 effects on our team customers and business.
Our customers continue to respond very favorably to our teams engagement in our enhanced digital capabilities.
In fact Q3 customer satisfaction rankings on an all time highs.
In all regions, we're seeing improvements in lab access for our customers.
An increase non coal bid 19 testing volumes.
There are however, regional and end market differences in the pacing of improvement.
Lab access improve through the quarter, although still not at pre cobot 19 levels globally lab access remains limited in academia, Noncovered 19 research and testing labs.
We're also seeing continued limited access to some private sector research labs in Europe in the United States.
Similarly, Noncovered 19 diagnostic testing volumes improved do look throughout the quarter, but remained down from prior year levels.
Hospital access in Europe, and the U.S. is improving although disrupted at times by virus flare up.
While there are indications of improvement in economic growth at varying degrees across the globe caution remains at customer capital expenditure decisions.
Consistent with our thinking coming into the quarter the patient recovery varied by region.
As expected, China led the way for us and exceeded our expectations with revenues up 11%.
China's growth in the quarter is broad based across all end markets and for all business groups.
While improving the rate of recovery in Europe in the Americas lags China.
Given the timing when these regions first felt the brunt of the pandemic.
European revenues are down 5%.
The Americas market conditions Trail, both China and Europe.
With revenues declining 10%, however, as we exited the quarter.
We are seeing signs of improvement in service activity consumables and diagnostic testing volumes.
On a total company basis, we exited July with modest growth across all major markets now, let's talk about our performance by business groups.
Our life Science and apply markets group grew 2% on reported basis and declined 4%.
Our team is focused and determined to gain market share despite a constrained capital environment.
The strength of our portfolio, coupled with an energized and stable sales team is paying dividends.
I'm also very proud the contributions are selling us technologies are making encoded 19 virus research.
Our M&A strategy is working and making a difference in the pandemic fight.
Our Crosslab group revenues grew 1%.
Increasing customer activity led to increased sales of consumables and an uptake of on demand services.
The Crosslab team continues to win large multi year contracts for enterprise Laboratory management that will benefit us benefit us moving forward.
We are continually increased our competitiveness in this space.
Our diagnostics and on the scope revenues declined 8%.
While our overall pathology and genomics businesses are down for the quarter.
We did see gradual improvement in diagnostic testing volumes and non co bid 19 lab openings.
Partially offsetting this our nucleic acid solutions business delivered another strong quarter.
Growing almost 25%.
We are very excited about the future NSP business.
As we announced earlier today, we plan to more than double oligo manufacturing capacity and our new Frederic Colorado site.
This expansion helps us may significantly increasing customer demand.
We are growing double digit and expect to continue this rate of growth in the coming years.
We continue to best in our portfolio across all our businesses highlights during the quarter included LS AG launching two new L. CMS products, the agile and 64 70 be triple Quad.
And the agile and rapid fire 400 systems.
Both products are aimed at high throughput labs, driving productivity and superior resolution.
We launched our Crosslab asset monitoring service, which is a new subscription service using instrument sensor technologies provide data driven usage insights.
This helps drive improved customer economics and lab productivity productivity.
While early we are seeing strong interest from customers in this service.
During the quarter, our PDL one assay was approved by the FDA for expanding use in non small cell lung cancer.
Helping guide physician in selecting treatments unit specific immunotherapies.
Our team is very proud of rolled our company is playing in the global Cobot 19 fight.
We are supporting Cobot, 19 research testing and therapeutic vaccine development.
Our efforts in the global fight against the virus delivered two percentage points of reported growth.
We are accelerating efforts to make a difference in the battle against co bid 19, NAV mobilize across agile and team to maximize customer support.
Let me close a few comments on our outlook in the coming quarter.
While there's still significant uncertainty regarding the continued pace of recovery.
We expect the July trends, a gradual improvement in our business to continue into Q4.
By region, China will continue to be a positive story for us and lead the returned to growth.
Europe is starting to trend upward.
The Americas are also expected to improve but a lower rate than China in Europe.
Globally improved lab access increasing non coated 19 testing and is slowly recovering global economies are all positive signs.
I remain absolutely convinced as Lynn will emerge from this pandemic with a stronger position in the marketplace.
Our continued focus action, our four priorities protected team support our customers preserve our PNM and balance sheet and our unwavering investment in growth are delivering.
Entering Q4, we are operating from position of strength and with momentum.
Yes, this pandemic remains unpredictable.
However, I am cautiously optimistic about our continued gradual recovery and returned to growth.
Before I hand, the call over to Bob I'd like to pause and chairman I Hope that you and your loved ones are staying safe and healthy.
Thanks for being on the call I look forward to take your question after Bobs remarks, and now Bob will review.
Thank you, Mike and good afternoon, everyone.
Today, I will provide some additional detail on revenue.
Walk through the third quarter income statement and some other key financial metrics.
And then I'll finish up with a framework for thinking about Q4.
As with last quarter, there are still too many unknowns. So we're not going to provide formal for forward looking guidance today.
However, we will provide a framework for how we see things potentially playing out in Q4.
Unless otherwise noted my remarks will focus on non-GAAP results.
As Mike mentioned, our revenue for the quarter was 1.26 billion down 1% on a reported basis.
On a core basis revenue declined 3.1% in the quarter.
Currency negatively affected revenue by 1.3 percentage points, while acquisitions added 3.4 percentage points to growth.
As Mike talked about the regional performance I'll speak to the end market performance.
In terms of our end markets.
Pharma grew 2% in Q3.
Three against a very strong comparison of 13% from last year.
Both small and large molecule applications grew.
And biopharma improved throughout the quarter as drug development labs increased production and access.
We experienced softness in diagnostics and clinical as anticipated.
Revenues declined 10%, primarily due to conditions in the us driven by cobot 19 related disruptions to patient visits and diagnostic labs opportunities.
Encouragingly, we did see an improvement in routine testing throughout the quarter, especially in China and Europe, while the U.S lagged.
Chemical and energy was down 10% consistent with our thank you.
Revenues were generally flat sequentially with conditions largely similar to what we saw in Q2.
As we've talked about previously we expect this segment to ramp more slowly than others.
The food segment was a bright spot up 8%.
We are seeing ongoing signals that the market in China has stabilized with the transition of more testing by commercial labs, but.
The food market with just one of several bright spots that contributed to double digit growth in China, including growth in the low teens for our pharma business.
Our environmental and forensics business declined mid single digits against a double digit compare.
And the academic and government segment declined mid single digits, while improving on a sequential basis in Q3.
Strength in cell analysis, and liquid handling for viral research, partially offset the widespread impact of the ongoing academic lap closures.
Now, let's turn to the rest of the PML.
Im extremely proud of how the agile team has responded to the challenging environment.
During the quarter, we continue to focus on managing expenses, while ensuring we continue to invest in our key growth opportunities.
This expense management actions, we initiated last quarter were on full display in Q3.
In addition, our customer engagement model using digital tools continue to gain traction while also delivering savings and SGN a.
As a result operating margins of 23.7% improved 90 basis points over last year on declining revenue.
Gross margin at 55.1% was down 130 basis points versus the prior year, largely due to mix and higher logistics costs.
However, strong cost management and operating expenses more than offset the decline in gross margin.
This combination of factors resulted in non-GAAP EPS for the quarter coming in at 78 cents per share up nearly 3% from the number we posted a year ago.
Now from a balance sheet perspective, we generated $290 million in operating cash flow during the quarter.
Which is 48 million dollar improvement over last year.
In terms of capital spending we spent $25 million lower than last year.
And in line with our revised look in Q2.
We ended the quarter in a strong position with $2.3 billion and available liquidity, including $1.36 billion in cash.
Also during the quarter, we took advantage of low interest rates and refinanced half a billion dollars and short term debt with a 10 year bond and a 2.1% coupon.
The lowest coupon in our portfolio.
As you know, we pause share buybacks in Q2 pending improvement in business conditions.
In Q2 in Q3, our visibility into business trends and cash flow improved and we resumed anti dilutive share repurchases late in the quarter.
In the quarter in total, we repurchased 360000 shares for $33 million.
Going forward, we intend to resume our normal pattern of regular anti dilutive repurchases along with additional opportunistic buying.
Our overall capital deployment approach remains balanced with the primary focus on growth M&A opportunities.
While also returning cash to shareholders via dividends and buybacks.
As we look to Q4 business and trends have gradually improved a significant uncertainty remains around the evolution of this pandemic.
However, let me provide a framework for how we see a range of possible revenue growth to scenarios in the coming quarter.
We generally expect the trajectory of gradual improvement in business results to continue across all regions.
Areas, where we see a broader range of scenarios include research spending both in academia and other markets non cobot diagnostic testing, especially in the us and the general Capex environment.
The combination of these factors could result in scenarios, where our revenue performance could range from a 4% declined to 1% core growth.
Also as a reminder of the biotech acquisition closed midway through Q4 of last year. So the M&A impacting Q4 will be smaller than in previous quarters, roughly one point of growth.
And currency is forecasted to be positive in the quarter.
The low end of this range range envisions cobot 19 flare ups occurring in the fall in various geographies limiting and in some cases reversing the recovery gains we've seen in a period of time.
In this scenario one might expect to see slower stalled improvements in research academia and other markets.
Has continued tight cash management, leading to lower capex spending in the us in Europe.
We hope this bottom end of the range is overly conservative, but we wanted to let you know we have plans in place in case this happens.
The higher ended the range assumes continued recovery by region building on what we have seen in July with the biggest impact coming from the U.S.
This would include a continual increase in elective medical procedures, such as cancer screenings as well as continued lab openings.
This view would also include continued to China momentum along with the continued improvement in Europe and other areas in the Americas.
Again, this is not guidance, but should provide a sense for some of the variables we see for Q4.
Overall I feel we are very well positioned to deal with this challenging environment.
Accelerate market share gains, we come out even stronger as the global economy continues its path to recovery.
With that ill turn over things to offer to direct acuity. Okay. Thanks, Bob Robert if he can provide instructions for queuing up. Please certainly as a reminder to ask your question you will need to press Star then the number one on your telephone keep on your telephone to withdraw your question press the pound key.
Please standby, while we compile the culinary roster.
Yes.
Your first question comes from the line of Delek Shankar with Cowen Your line is open.
Hey, good afternoon guys.
Doug head on.
I'm doing well nice work had tough environment.
Thank you start with a clean up question right.
Okay.
Paired remarks.
I don't think you quantified Kogut 19, tailwinds in the quarter.
Again, I mean at but if that would be helpful get faster we could turn.
Yes, sure Doug I touched on briefly in my comments, but as two points of our reported growth in Q3.
Okay, that's great and there.
On China.
Just just.
Helpful. Im just curious if you its share of the exit rate and we look ahead I know you're not guiding I'm. Just wondering if you think based on what you're seeing.
If you think that double digit growth can be sustained arm from here at least term and then I think on.
That's great to see that returned to solid for our Simon I left for six unstable veteran last or Ken and the high single digit growth rate you saw this quarter features and going forward given favorable bulk to your parents. Thank you.
Hey, Doug. Thanks, Thanks, as both questions. So just make sure it came through the audience. The question was about our view on the on the growth rate of China for the rest of year as well as can that high single digit growth rate in food.
Be sustained we think the answer is yes on both were really pleased with our performance.
In China. It was broad based I tried to really essentially data in my comments, we solve basically double digit growth across all end markets.
In China, and we think that.
A double digit growth rate is within the realm of possibility for for Q4 in China and I have to say, Doug. It's it's wonderful to be talking about China food from a different factor. We've been we've been talking about probably last 18 24 months of a one that would return to growth. We saw some early indications in Q2 and we saw strong.
On our Q3, and we think that that are all numbers, probably sustainable wall for the rest of this year. When you say so Bob Yes, I would just side that Doug to add I mean, one of things that was very very positive about China.
Was it was pretty consistent across the across the.
Across the quarter and in fact exited slightly higher than that overall, 11%, but we saw solid growth all three months.
Great. Thank you again.
Mhm.
Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.
Hey, guys.
Hey, guys.
Thanks for taking the question now.
And Michael Bob.
Maybe on the guidance here and if I step back up.
The third quarter guidance out down mid teens down mid teens.
Down low singles was up in it came in well above.
Expectations I would say.
That's not surprising tiers, but.
Nonetheless.
Solid excuses.
The Q4 winds down.
For the plus one place you know declines.
What is causing declines just given in light of seasonal performance.
He's got that minus four and below one is I'm, assuming that July trends just sustain in those new.
Yes, and how you're thinking.
Yes, BJ. This is Bob I'll take that and as I as I mentioned in the prepared remarks, we hope that that is overly conservative on what that would imply is actually a retrenchment and when coated cobot 19 flare ups here in the US as we go back as we move into the fall and you start seeing some elements of shutdown. So we serve.
Really.
We hope that we would do better than that.
But we wanted to provide hey, that's within the realm of kind of how we're thinking about our spending and so forth.
Our July results or exit rate of the quarter was was much higher than yes, and so.
So.
We're aiming to do better.
But theres still uncertainty in the.
In the world with the with the pedantic people going back to class school in and so forth. So.
And by I think it's probably fair to say the wildcard in United States right, absolutely and we were encouraged by the move in and PMI. So you probably noticed that but let's see how that translates into to business in the upcoming quarter and again, we have that as Rick keep in mind ourselves as pleased as we are with resolve it is delivered theres still a lot of uncertainty out there because the viruses.
Unpredictable at times, Yes, Thats right, Mike I mean, if you looked at our each one of the major markets. Each one of the major markets got better in Q3 versus Q2 with the exception of the us, which we expected given kind of the state of the state of affairs with the pandemic.
That's helpful.
Perspective, so the minus four imply that things get worse at wasn't July flattish are positive and I'm curious might guy you mentioned that in a doubling up on ago I know its return back to page out lever doubling capacity.
As this now versus six months of quadrupling capacity versus where we work last last or is that the right way to think about revenues going from 100 200 grew up perhaps 400 as a math here.
No it's slightly different math I think we've been I think we've been consistent with our view of needing to double our capacity.
What we end up doing is actually triggering the decision to initiate the expansion earlier than we had thought.
Even just given the robust nature of the end market.
And as well as.
We have worked our way to be able to in the same space, we challenge ourselves to find ways to.
Add drive as much revenue in the same physical space. So we are investing a little bit more capital than we initially had thought but we're also building from something slightly different than our first train which is going to give is actually more volume than our current trained train a vessel with so really we thought as early positive signal and Thats why were you sent out the press release. This morning, because we're we're super excited about.
Our prospects here yen VJ, let me, let me kind of frame into kind of the numbers. What we were talking about is the Frederic site has the potential of roughly $100 million worth of revenue and we added capacity that more than doubles that $100 million to give you a frame of.
The numbers. So it's not 100 200, 400, it's 100 200 and more than 300.
Got to give you a sense and in terms of July we actually came in with growth across all three groups.
In exiting July.
That's helpful guys. Thank you.
Your next question comes from the line of Tyco Peterson with Jpmorgan. Your line is open.
Hey, thanks.
Hello, Nicola co pay authority coated commentary I guess, if I go back to last quarter. There are some talk about launching a strategy cash you guys. Obviously have installed base of real time PCR estimates. We've got the question Thats why you haven't launched a PCR test. So can you talk a little bit about.
Do you think about those tailwinds going forward on how you think about your capabilities on the diagnostic side.
Yes, Tyco I'll make some initial comments and then the group president can acquire today solve I'll pull salmon here as well divided perspective, but we think that there is still tailwinds in front of us.
And.
About two points of growth and we think we can sustain at a minimum that's why I try to put fairly bullish comments about our stepped up efforts across the company.
Some of these things from take a little bit longer we think there's still room for our own test on quality tests with some.
Different features but I think what maybe a few comments there Sam for your perspective.
Yes, sure Mike Hi, Taco.
As you think unit.
We've seen a good pickup in terms of our Q PCR instruments, which our audio systems as well as are our bar reagents related can CCR reverse transcriptase master mixes.
The antibody side, we definitely also seen an increase in.
I'd IBG.
Well the antibodies.
In terms of our own tests, we are very actively exploring the possibility of developing those so.
We're more to share in due course.
And Tech getaway. This close off there is a broad based nature of our portfolio is allowing us to play in multiple aspects of this Tobin 19 suddenly things may take a little bit longer to actually turn into revenue right. So if you're working with.
Say, a pharma partner on something in the therapeutic area. It may take awhile for that to come to come to market. So we think these tailwinds are here to stay for some time in and we're stepping up our efforts here because it plays right into the broad nature of our portfolio.
I guess, that's a good segue on the and I asked the expansion, we measure up to what degree thats tied to the coated vaccine and any update from year end on capabilities on a.
Finally, our ethanol vaccines.
Yes.
You can take down with Michael Yes, sure sure no problem.
Tyco I'd start by reiterating a little bit of what Mike and Bob We're talking about it's interesting that it was just last summer last June that we did the ribbon cutting and starting of the new credit Colorado facility.
Quite frankly, we've seen demand that exceeded our expectation.
12 month ago. So.
Building really.
The new manufacturing line that we're building you can consider it.
As we call it train a on steroids are gena.
What.
But it is very differentiated both improved but in the molecules that it can do which is a segue to youre a little bit of your question that we are we're able to do multiple iterations or types of.
Hi, R&D or Arnie.
We're also actively looking at other.
Different versions of molecules that are oligo base.
Although I can't.
Reveal the detailed we have had.
A lot of interest related to cobot 19.
All of those use for Eagle totaled 19 related therapeutic for even.
For for vaccines so.
I can say that we have started to work on.
Some of those programs now.
Yes.
Maybe Sam to add.
That being said the cap capacity expansion isn't tied to cope with 19, we have plenty of demand outside of Covanta therapeutics and vaccines and and so this is a broad based capacity expansion.
Yes, Thank you Bob and then.
And then just last one I know, we don't give official guidance that there's a framework for the quarter.
Quarter as we think about CNN and then also pharma biotech should we expect any kind of material change neither of those end markets for for the coming quarter. I know you've talked about you know on restructuring activities are slowly I wasn't sure if that would maybe.
We will prevent trajectory there thanks.
Yes, probably.
See any is probably the one that I would expect it to be pretty stable and that down tenish percent.
8% to 10% in the range, we do expect.
Pharma to continue to improve so that 2%.
Certainly to even in the low scenario would would stay there and then on the high scenario would accelerate yet which is consistent with the trends we've seen throughout the quarter about Q3, and the tanker the supply chain consideration discussion. So happened then it gets out of the level of stability, albeit down to this into this.
Base and again as you look look ahead for the future. Adam This is an area, where eventually so come back and Mercy and again too early to call and but.
I'd say, we're pretty confident about the improvement rating pharma, yes, the way to think about those re re shoring is those are opportunities discussions that could happen through the order book and then will happen actually and 21 and beyond <unk> terms of enters the investments are being made so this is with debt that's more future looking yep. Thanks, Bob.
Okay. Thank you.
Your next question comes from the line of Twentyth Outta with Leerink. Your line is open.
You had like Bob.
Protect.
Thanks, Mike.
So.
First question is on just any ask it's obviously a strong in the quarter, but.
That would imply darko and clinical business, obviously pointed that out because it was it was down in the quarter, but that's a significant decline maybe just could you parse that out for us what is it's a cobot impact for sure but is there anything beyond that in terms of the weight market is fundamentally.
Potentially shifting air to Ngs, maybe if you could just maybe elaborate a little bit of that.
Clarified thanks, Yeah happy to do so so it's all market.
It's all access to collapse and patients.
Going further diagnostics tests, so its relevance real all market I think we're seeing different.
Pace of pacing throughout the quarter all of our geographies and the diagnostic testing front ended up with positive growth in July but it was down sharply in may in June, particularly in the U.S.
And and keep in mind also recently part of our business in our genomics front is to is.
Sure select into.
Ngs based.
Diagnostic labs, and China for genetic disorders. For example in those tests aren't getting done either so its really all market, yes, it's going to say two needed to actually if you. If you bifurcate those two and look at our performance actually pathology performed better than Ngs.
Testing from Williams.
Yeah.
Given what Mike was just talking about as well as some of the academic institutions.
Yes, good point Bob Thanks.
Yes. Thanks, Thanks for that and if you could I know you've quantified last quarter Bravo contribution I was wondering if you can provide that for Bravo Magnus liquid handling systems or how much of that contribution happen in the quarter.
Yes, Thats part of part of the story for our co bid 19 Tailwinds.
And I think probably the biggest contribution this quarter actually came from from biotech Bob If I remember correctly here between biotech and.
I would have been braava and Braava. So it's kind of and now we have like a one two punch kind of going there on the Koreans instrumentation that also reminded with the Braava platform comes in ongoing revenue stream associated with the tips that that go with those and those are liquid handling.
Okay and last one on just a HPG I mean that.
Could you just elaborate on in these times you mentioned there are some larger contracts that service contracts and.
Lights that you're getting into.
Sort of what are those are covered driven what what is what's behind those and maybe if you can elaborate on geography there.
Printed happy to have poor again jump in on here and provide his perspective on that so for can occur in the cost script I talked a bit about the large enterprise deals you guys. One so why don't you talked about that with a more detail.
Thanks, Mike we launched our.
Crosslab asset monitoring service, which has seen a big uptick and what we're seeing from customers as a large demand for.
And for first sourcing from one vendor.
Because of our capabilities in terms of the asset monitoring capability relocations services under our core delivery services, which are you are extremely strong demand, we're seeing a big uptick from large corporations and dot we expect that to continue.
As we go through the quarter next quarter.
Yes, now is going to say the ended geography puneet is largely in the us but there are some global opportunities as well as it's really non cobot 19 related I mean this is this as this is part of the core growth strategy for imports business to continue to expand our market share on the enterprise service front and we're really delighted that in some big pharma deals.
That's great. Thanks very helpful.
Your next question comes from the lineup Derik de Bruin with Bank of America. Your line is open.
Hi, good afternoon.
And Eric.
Hey, so couple of questions.
Very impressive margin expansion in the third quarter, how should we think about the operating margin into Q4.
And then I guess, how much of these costs are permanent removals versus what has to come back in 21.
Yes, let me let me let me take that Derek is great questions and certainly we're very pleased with how the team has responded as I mentioned before.
As we've talked about.
A large amount of the costs, we have not done things like furloughs, we stabilize the team we have not reduced.
Based pay and things like that so these are discretionary expenses that.
A lot of them, we think have the opportunity to stay way would be travel and things like that which.
Our digital tools have have enabled us to to really continue to support our customers and so there aren't any kind of onetime.
Things that happened in the quarter.
In terms of going forward to Q4, we are looking at probably less of a margin incremental margin improvement because we are looking for ways to continue to invest to drive growth as the as the economy recovers. We also have some startup some some startup costs in the in HST new facility as well, so it's probably less than what you see.
What we've had historically had which is call it 30% to 40% Incrementals.
But it's really to drive growth.
Bob I guess, maybe add a covenant on year on the first remarks. So this is really Derrick all about a new way working in an agile and so on preparing for a managers call. Later this week and what we're talking to our team about is more digital less travel and we're really to make sure that when we get on the other sides Cobot 19 pandemic that we don't Lubert two are always.
While traveling and we know from our customer satisfaction scores a low the response of the sponsors and we have now with our digital platforms.
Great.
In two questions on LSG I guess the first question is.
If you look at your numbers in China versus.
Some of your major peers in that area I mean, you release out showing in China.
Can you talk about just share dynamics, there that are going on I mean is the said there is pretty stark comparison between you and.
Your mate your main LC competitor, there and I guess also along those lines.
You can you talk about potentially.
Any sign of a budget any signs of budget flush and just sort of thinking about foresee trends. What are you hearing in terms of people with budgets and and are they going to be allowed ROE means over and too or are they going to have to use it or lose that just some some dynamics in terms of growth on fourth quarter.
And just sort of junior general thoughts on a more customer spending habits are.
Yes, Thanks, Derek I'm Gonna have Jacob handled the first question then Jacobs you can answer back to bottom line for the second question.
And I know jacobson, but to be delighted to talk about.
The share dynamics in China, which we think are very positive for agile.
Yes, thanks for that and numbers speak for itself.
At the both in China.
Global is that.
Right now, we'll be taking yes, and and discussing comp by coincidence, we have been executing our strategy between the DNA to deal with the top yet and the cost and with the renewed buying into our value proposition and we are planning again beverage.
Everything out or you're not going up to one product line.
Other and the cost will be like that the outcome based so that's what is happening right now and NBP here in the prices that not only are they excited about what the investments we have done in Paul.
Yes, but also as Mike talked about in the did it because well into the most all of you have been Barry our team has just been super rich unfair taking off the digital.
Kevin very very good end to end the customers responded very.
Very positive commit they know that when they work with accident that we call them into this crisis go back to Mike.
Yeah, So and then.
On the other question Derek on what we're hearing from our customers, particularly in the the public sector and were seen in our order book and Bob I'll offer my perspectives here and feel free to build in my comments here, but.
There's a real sense of of making sure they commit to their budgets. So we're seeing it both in our order book as well as order activity, where the lot of uncertainty what's going to happen post elections.
As we go into 2021 so.
They want they want to commit those funds.
And.
It's actually quite amazing amount on deal activity, that's can can occur without business the customer face to face so Bob.
What you're hearing from the only the only thing I would add is just to.
To reiterate what check was saying it because it's not just China I think when you look at Rls AG portfolio I think what people don't fully appreciate is that's how we've actually changed the portfolio to technology platforms.
Maybe the best in the best shape, they have been in probably five years in terms of new products and so forth and I think you're seeing that across.
Across the across the globe and when we think about where we ended up in Q3 Ellis AG was certainly the standout relative to where we thought they were going to be in a capital constrained environment only down 4% on that on a core basis really speaks to two are I think our responsiveness to customers.
Great. Thanks.
Your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead.
Hey, good afternoon.
They have been Bob.
But on the gross margin you mentioned higher logistics cost in the third quarter is that any trend in the help us just being through some of the puts and takes whether its logistics costs or mix.
And how those.
Thanks, Mike default in the fourth quarter.
Yes.
Sure.
We are hoping it's not a.
A trend thats going to be around for for a while but it certainly was exacerbated in the Q3 that being said I would say three three quarters of that was probably mix. When you look at the various businesses.
Across across each one of the groups.
Where we saw logistics.
Challenges are you just lower capacity and frame or in Eric Eric capacity, but we would expect that we actually saw that through through the quarter to kind of route.
Relax and I think as you're starting to see more internal intercontinental.
Travel both from a passenger standpoint, as well as freight standpoint, we would expect that kind of relax overtime.
Okay, and then Bob or Mike, you've got quite giving formal.
Forward looking guidance, yet, but you do feel comfortable enough to restart the buyback program.
What are your latest thoughts just around comfort in Fars capital deployment goes in mid year appetite for M&A right now, but the funnel might look like there. Thanks, Yes, sure sure brand and.
I'll start off here and Bob feel free to jump in but we thought the quite comfortable reserve resuming our share repurchase program and dilutive perspective, and we'll be looking at opportunistic as well and cash flow remained strong we felt.
For some time that Dick the third quarter of this year would be the toughest quarter for us.
The year, we're through that not now and the third quarter actually was significantly better than we had thought.
And we saw positive growth across all our businesses in July so we think okay.
Who knows.
Barring some kind of major flare up we should be able to continue to see this gradual improvement of growth in the fourth quarters sort of sort of our message. We have we have the commonly known as we also narrowed the the framework.
That we provided the as MS narrow more narrow than it was in Q3, but again I think we need to keep in mind ourselves that we still theres still lot of uncertainty associated with the pandemic I think our capital deployment. We approach remain remains unchanged, which is we have 71 at a balanced approach to capital deployment across dividends cash share repos.
And with the prioritization of of investing in business. We just made a significant commitment and capital with our new any SD expansion and we're still on the hunt for deals that look that makes sense for for Adam So our approach to.
Capital deployment really fundamentally remains unchanged, we paused a bit in the second quarter, just because on the share repo.
Because of the in the early part of the third quarter, given given what's going on in the environment outside of agile and but we feel pretty good about where we are right now and have reasonable level of confidence that dinners decent level stability about the business the dominant.
Okay.
Great. Thanks.
Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open.
Thank you so maybe just to circle back highlight so this is a question for Bob did talk again about the Q4 framework. So.
Thank you hit your business grew in July and in the World improves month to month through October when does that imply then the high end should should be above that 1% organic growth number.
It could be.
Ill just leave it at that.
Theres still a lot of theres still lot of uncertainty and so forth and.
But.
Certainly.
We wouldn't complain if it was better than that.
Okay, and then my follow up whoever wants to take it on the NFC business can you elaborate on which to lead time for that announced expansion is it something that would take.
You know a year and multiple years to put in the new line or is it a quicker turn to end can you comment on your willingness to commit capital Inorganically in that business. In addition, here or your organic commitments. Thank you.
I will touch I'll take the first one just real quick and then Mike If you want to add something on the second one.
We announced that we would make that 150 million dollar investment and we would expect it to go live towards the end of 2022, so it's taking a little longer than just a regular train.
Sam mentioned train a on steroids so its bigger.
And probably take a little more capital and obviously with Cobot 19, there is some some activities there in terms of little long lead time, but.
We feel like we have the capacity to be able to manage us through that time, and then that will come online at the end of 2022 things are pressured and a 22 and.
We don't specific always talk about.
Specific targets or areas of focus necessarily but it's not all the realm or reason that would say why would we want to further expand.
This does business, both inorganically as well so that's.
Not out of the ramp.
Not signaling anything near term happening, but we think were operated from position of strength here in this business. We had a first get our new factory opened running the in bills and that's we now think we have a if you a beachhead to build from both organically and Inorganically.
Okay. Thank you.
Your next question comes from the line of Catherine Sheltie with Baird. Your line is open.
Okay. Thanks to the questions I guess insurance and the fight for Spike a relatively good alsac results in the quarter from Frank the outlook on the capital equipment side that uncertain can you just talked for how the service event to fill our final participants candidate in July and what your expectation buyer for instrumentation.
Got it.
Yes, I think as as Catherine this is Bob.
All three of our businesses actually performed better in July than they did and.
In May and June which was very positive.
The AC GE business actually led the charge in terms of that as you would expect given the the resumption of activities. There are some catch up there in terms of.
No.
We saw that kind of phenomenon actually in in China in.
In April.
But but ultimately hcg was there I think Ellis AG capital is going to continue to be constrained, but I think what we've seen in our businesses. We've talked about this in the past kind of this flight to quality and.
With our instrumentation and the reputation that that we have.
I think in a capital constrained environment.
Those dollars are precious and we think where are our positioning is very good b to b the market.
I tried to hit that in my in my remarks, which isn't really say listen we know we're picking up share in in a tight market and I think you solve it and see any right which is.
At the senior capital purchases going down it's come an add on his way so and Thats why that overall market is still cautious, but you see PMI starting to creep up that so yes, Katherine just one last thing to give you maybe a little more color in here, if we looked across.
The groups.
We would expect LS AG.
Two.
Still be.
Negative in Q4, I mean, it's probably going to lag given the big picture taken by debates fourth quarter last year as active as well.
Okay very helpful. And then Mike you mentioned seeing growth in all regions for that Marinkovic diagnostics business activity in the quarter can you give a professor right as activity levels are in the U.S. versus came on and where they bottomed out across the different region.
Yes, sure. So I think FX had say China is in in lead position in terms of if you almost full recovery.
Europe is second and the use of the trailing so for the first for the throughout the quarter for look at Sam's business in the you asked for example, the first two months were negative.
And diagnostic testing volumes and pathology, what we saw actually a prudent to growth in July so I think that sort of the patent almost a pattern of how the pandemic has slowed around the world.
On his back.
Europe's on its way and I'd say USL still in the early stages of recovery, yet and I would say in the US is probably in thin and keep me honest sandwich, we're probably still about 80% of pre coated levels from a diagnostics perspective, but improving where it was it was below that.
At the beginning of quarter so.
Some right Tim.
It does that.
Okay, great. Thank you.
Your next question comes from the line of Steve Willoughby with Cleveland Research. Your line is open.
Hi, good afternoon.
Dave a lot of right.
Mike just one question for you want to my other questions have already been answered.
Yes, 90 days ago, you made a brief comment about potential onshoring back to you after sort of why if theres any update on our call. Thank you.
Thanks, Steve happy to come and that I think I think thats still going to happen.
And these things take take time, but theres active discussion I by the way I wouldn't say at this current confined to United States I mean.
Many geographies are now looking at the security of the supply chain.
Both both in the pharma side as well as.
In the chemicals chemical marketplace further providing precursors into into into the eyes for the pharma chain. So nothing significant to announce relative to impact on on on business, but there does seem to be an overall trend in this regard and and I can say also from an agile perspective, we're working hard to make.
Sure that our supply chain to secure as well so I.
I think that.
The cobot 19 pandemic has been real wakeup call to release some vulnerabilities in some aspects of supply chain. So we're kind of working both sides of it which are to ensure our own Billy to.
Deliver product under multiple scenarios as well as we do see some some market trends.
Underway, Bob I know you if you take a look at this point again has given that it just to build on that we talked a little bit about earlier in the call what.
We would expect that to see some of that opportunity show been our order book and Thats, probably more at 21 time timeframe for for revenue.
Wouldn't expect any of that to happen in Q4, just given the kind of timing, but you're seeing it in multiple multiple end markets in multiple regions.
We think thats just have a trend that will continue.
Thanks for that color I appreciate it.
You're welcome.
Your next question comes from the line up Dan Brennan with EPS. Your line is open.
Great. Thanks, Hey, guys Hope you guys moving now Michael Jordan.
Maybe first question on just on chemical and energy obviously.
We've already highlighted a few comments throughout the call, but just wondering if you can kind of walk through a little more color separate trends within that.
Segment by by customer chemicals benefits were seeing if there's been a big divergence all between chemical ramping on hand.
Then secondarily, maybe just remind us as you know how much of that business is tied towards our Q HTC Russ R&D and kind of what are we looking for.
Determine whether or not this down 10% begins to improve more ratably or if it's going to say the slow steady progress that youve wins.
Hey, Bob one of my makes initial comments and then.
You can check our notes receive a miss anything but.
I think unlike the last quarter the mix here I think both the chemical and the in energy latest side had about the same dynamics.
Where.
Both both for both were down about the same primarily on the instrument side and on one hand, the chemicals side of the business is really benefiting continue to benefit from the lower oil prices, but some other end markets are weak, whether the automotive or where some of the other markets. They service.
Are we some of them going a little bit of help on on cobot 19 related products, but overall I'd say, both both the chemicals side as well as the inner side of that.
Our down about bout bout the same but stable and I have to say, the Bob and I I talked to some length about this in our last call and our prediction of the time was we thought we were going to be in a kind of stable situation relative to this there wasn't again any worse that was sort of the question you're getting last call. So I think we're really pleased to see that came through.
True.
This this quarter and we expect that they know eventually this thing will start to move back to grow the Nick.
I think it's probably a.
70, 30 mix, where most of its in Q a QC.
And that's why.
These these facilities are running.
Albeit maybe not at full full volume so.
QC equipment will be needed as well as.
As well as a consumer service agoda, so they're going to hold off the repurposed on that side and for so long. There is an element of research, but I think in the chemical and energy space at the biggest.
Driver for that is a kick you see side of the business.
Yes, I think.
Great just anything I would add Dan.
Is.
We would expect this.
As you said kind of steady slow progress Kevin going forward.
Okay, and then maybe one different follow up I know.
A couple of questions on tired, but maybe could you just go a little bit more detail on what you saw in food and generics, obviously Colgate is impacting the globe and the recovery, but you've got some pretty unique issues with food and generic set up maybe a little different so dependent upon the improvement or lack thereof that could drive notable changes in China. So what did you see there and.
What's the outlook as we look forward to those two segments. Thank you take that it's going to say Dan.
One other things we're incredibly proud of in China was all three of the business groups grew and all of our end markets group really led by food.
Which was up over 20% that's been.
A while since we've been able to say that.
So we think that we've talked about kind of the the move away from the government labs are the central labs since the commercial labs, and we think that that stabilized and.
Team has really been.
Able to garner share or our view of capacity in that space and then in pharma.
It continues to perform very well actually pharma was up roughly 10% in in China.
And Thats a combination of both large and small small molecule and I think the our thesis around that continues to play out which is that.
The winners of the four plus seven or the tendering process or our customers.
Customers that where we are over indexed and we continue to see that positive momentum, we actually saw acceleration from Q2 to Q3.
In both food and pharma and the rest of the businesses were positive as well. So I think it's broad based yet.
Great. Thank you guys.
Welcome.
Your next question comes from the line of Patrick Donnelly with Citigroup. Your line is open.
Hey, Thanks, guys get better Mike Hey, Mike maybe just one for you on I know, there's not a few questions in July obviously, but yes with all the business returning to growth I guess safe to assume you guys Didnt see too much of a pullback around the second wave here in the us even the first few weeks of August sounds like you're a little more cautious on them.
Because there is other geography, but just wondering if any surprises on an end market basis in the US as you went through July even early August.
Given kind of anti recurrence of Iris no.
I'll jump in on this.
But from our perspective.
No no real surprises me, we were all like all of US we're watching what has happened into the pandemic has worked its way across.
Ralph to us and we saw the case numbers go up and.
Lab access was was down for the early spring is sharply.
April May June and they started seeing some some recovery. So I think I think no real surprises versus what we what we thought.
Yes.
I would agree I mean, Patrick this Bob.
The Americas as Mike said earlier is in fact, the biggest variable because it's further allow it is further along in its recoveries in both Europe, and China and I think the thing that we're watching is those cobot flare ups and the potential impact on on electric procedures, which would impact our diagnostics business thats, probably get the biggest variability.
Going into Q4 relative to let's say Gee and hcg.
But to Mikes point, we did not see any.
A significant change with these flare ups.
In August or excuse me in July in early August.
Okay. That's helpful.
And a bunch a good commentary on the chemical and energy and industrial side is I.
I guess clarify me it certainly seems like the industrial sentiment feels like it might have bottomed.
It seems like you're talking a little bit better from three months ago, even though again chemical amenities, probably got me down similar this quarter and then again next quarter, but I guess what are you hearing from customers. There on spend plans again, it sounds like you're a little more optimistic on talking a little more bullishly about 21.
Was wondering I guess as we enter into the end of this fiscal year into 21.
Are you seeing things improve a little bit obviously come up against very easy comps, but.
So it seemed like the tone is a little more positive. Some are you hearing from customers that things are trending a little bit better intertwined.
Yes, I think Thats, a fair fair assessment of the what I was trying to communicate today first of all you know the fact, we do think it's bottomed.
And that was our thesis from the thing started going down.
Definitely down depend demick hits, so we do see that again I don't want to get too far ahead and describe some big dramatic increase in in growth in this space, but.
Customers are working on the plans.
Chevron actually making some big investments not Iraq, So capital capital.
These these are ongoing concerns.
They can hold back their capital for awhile, but.
They are going out there, they're going to want to maintain their operations at the highest capability. So we're we're hopeful that they have the budget environment will will be a little bit different and 21 and I think once we get a little bit more clarity once our customers feeling.
More credit when their view of where the economy is gone then they can make their decisions lot more confidence. So NPM eyes are good a good good view of how how cinema, maybe changing so again donor over interpret this for for a fourth quarter, but it doesnt point to 21, and perhaps a better environment.
Okay, great. Thanks, Mike.
And your last question comes from the line of Jack Meehan with Nephron Research. Your line is open.
Thanks, Good afternoon, guys, Hey, Jack Index.
Hey, So I wanted to go back DNA SD business, and just get a little bit more color.
Are you working on any of the marinade based Kogan 19 back.
Yes, I guess.
Curious because these trials are moving so quickly I was curious to get your take if one were three and into commercial within the next six months. How would you managed the business deliver on the capacity that customer might need for that.
Hey, seminal passat to you.
Yes, no problem like.
So.
I can't comment specifically on the the molecule by molecule projects that were doing.
Related to go with 19 five.
Well two things I will point out as Bob indicated earlier.
Yeah.
This is business.
Separate or different than the business, we're already doing or it's not taking the pace of business. If you will.
And we believe we have the capacity in that.
If the demand is there.
Related to certain things playing out related to covert 19, and the molecule that we happen to be working on we believe we will be in a position to be able to supply that material at that the volume required.
Great and then one more follow up on L. fag.
I'm just curious.
As you're looking at the research labs around the globe.
And this conversation around deferral versus cancellation.
What our customers telling you is it still mostly deferrals versus cancellations and.
On the deferral side when do you expect these how far out is it getting pushed something that you think it hits before the end of a year or.
Probably more likely in calendar 21.
Hey, Jack I'm happy to answer. This question. This is something we've been monitoring pretty closely a deferrals versus cancellations and.
We've really been please our cancellations are actually lower than last year.
And our thesis is there being pushed and that the.
Funds will be deployed this calendar year.
Yes, that's what we actually so we said we saw that Jack some of that actually happened in Q3.
And as people are going back into the labs physically there then do they can install.
The instrumentation, but to mikes point, we've seen no no cancellations or or lower cancellations than what we would have last year theres always some level of it I would say that.
We've been extraordinarily pleased and.
I would expect that to happen this calendar year.
Great. Thank you.
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This concludes the a lot of time for our question and answer session I'd now like to turn the call back over to on Kirk for any closing remarks.
Yes, so that concludes the call for today, thanks, everyone for joining.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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