Q3 2019 Earnings Call
Good afternoon, and welcome to the Agilent technologies third quarter earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you and now I would like to introduce you to the host for today's conference.
<unk> Vice President of Investor Relations Sir Please go ahead.
Thank you, Mike and welcome everyone to Agilents current quarter conference call for fiscal year 2019.
With me are Mike Mcmullan, Agilents, President and CEO and Bob Mcmahon.
Lynn Senior Vice President and CFO .
Joining into Q any after Bob's comment will be G. Kum Tyson 'cause it end up Ashland's life Science and applied markets Group Sambre Hawk, President of Dylan's diagnostics, and genomics group and Mark Doak President of Dylan's Crosslab group.
You can find the press release Investor presentation, and information to supplement today's discussion on our website at Investor day agile in Dot com.
Today's comments by Mike and Bob wouldn't 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 are year over year references to revenue growth on a quarter basis.
<unk> revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
Guidance is based on exchange rates as of July 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 of our risks and other factors.
And now I would love to like to turn the call over to Mike.
Thanks, operator, and thanks, everyone for joining our call today.
Our Q3 results exceeded our expectations.
Yeah, I didn't seem delivered total revenues of 1.27 billion.
Up 6% on a core basis.
Our EPS of 76 cents is up 13%.
Both our top line revenue and he P.S. or above the high end of our guidance range. This marks our 18th consecutive quarter of adjusted operating margin expansion.
In July we also announced the pending acquisition of biotech, which would be our largest acquisition since the 2015 launch of the new Ashland.
We continue to batch for growth even amid market uncertainty.
At the same time, our Appalachia business system continues to drive operational improvements.
Our excellent overall company growth is being driven by two factors first strengthen the global pharma market in both small molecule and bio pharma secondly, geographic strength in the U.S. across most end market segments.
China growth was generally in line with expectations.
Business unit performance is led by double digit growth in our Ashland, Crosslab and diagnostic genomics group.
Let's take a closer look at the performance of all three of our business groups.
I will start with a C.G.R. Ashland Crosslab group.
The AC GE business continues its trajectory of consistently strong results with 11% core growth.
This growth was broad based across all market segments and regions. Our service business grew at a double digit rate.
As we continue to see higher demand for our expanding portfolio, both from current and new customers.
We see a continued secular trend of customers seeking to drive increased productivity and to outsource noncore services in the lab.
Our services offering puts us in a leadership position to benefit from that trend.
Mark the schools business also grew double digit we continue to introduce highly differentiated consumables that address important customer challenges and significant improve the user experience, especially in high growth markets like bio pharma.
I'm very pleased with the continued positive impact on total company results from the absence Crosslab strategy, our consistent results speak to the strong execution from the Ashland team and the value bring to our customers. We're meeting you ever increasing demand from our customers and we see the attach rates to our installed base of instruments consistently improving.
Now turning to D G. Our diagnostic their dummies group business.
D. these growth momentum continues with strong 13% core growth.
The growth is broad based across pathology genomics and I know you asked the businesses, let me share a few additional comments on or any SD business any SD turned in a very strong third quarter.
As we can see increasing demand from our customers clinical trials.
As a reminder, in June we opened our second production facility located in Frederick Colorado, We remain on track to start commercial shipments this quarter.
We also announced that we purchased our previously leased site in Boulder, Colorado.
These two facilities enable ASLAN to meet the growing demand for development of Barney based therapeutics and continued to be a partner of choice to both pharmaceutical and biotech companies.
Now moving to onto our let's say Gee <unk> life Sciences imply markets group business.
Now lets say geez revenue is flat year over year on a core basis and in line with our expectations.
Strength in the pharma.
Environmental and forensics markets was offset by chemical energy declining.
Against a very tough, 12% compare and expected weakness in the China food market.
As you know in Q2, we discuss three areas that impacted LLC. These growth rates. Let me give you an update first starting with the four plus seven initiative in China, We saw sequential improvement in demand from generics manufacturers. This is driven by business coming from the winners are the first four plus seven pilot.
Resulting in growth in our instruments business.
We have deep relationships in history with these customers.
While the program is expected to expand over the rest of the calendar year, we see incremental regulatory clarity ultimately drive an increased production volumes and a favorable long term investment environment.
Second the China food market conditions remain the same as last quarter and in line with our expectations with revenues flat to Q2, the business from government own labs remains muted while commercial testing labs activity is increasing.
We are expecting similar overall market conditions, this coming quarter as well.
Finally, the global small molecule pharma business outside of China saw improvement in demand relative to Q2, we saw budgets free up and LCB placements taking place in some of our large accounts as well as the addition of new customers.
Well macro economic and political conditions aren't creating market uncertainty for capital investments.
I am quite confident in our ability to take market share in whatever market environment, we encounter.
We have an industry, leading portfolio and are not sitting still we continue to invest in new offerings end markets.
One of these new market investments is the pending acquisition of biotech as I mentioned earlier this quarter, we announced our intent to acquire biotech a global leader in design.
Manufacture and distribution of innovative cell analysis instrumentation.
I'm very excited by the significant step forward in strengthening our leadership position in the fast growing cell analysis space.
Our strategic focus is there I began with the purchase of Seahorse bio science in 2015.
It was followed by the acquisitions of Luxel Bio Sciences, and the seal bio sciences in 2018.
By combining biotechs offering with Atlanta, we will create a business.
With revenues are greater than 250 billion per year.
Oh from zero four years ago, this business of growing double digit today.
Looking ahead, we will now be able to deliver a breadth of differentiated workflows.
Enabling customers to obtain deeper more reliably insights across a variety of cell analysis applications.
This is yet another example of how we're investing in new high growth markets, where we can leverage core asthma capabilities and our one Ashland culture.
The culture and portfolio fit with the biotech are extremely well the line we share the same core values and have very similar cultures with a genuine focus on our customers and teams.
I look forward to Bachmann, the biotech team into the agile and family we expect the acquisition to close later this fiscal quarter.
We also continue to bring new and innovative offerings to the market across all of our businesses.
These new offerings are consistently drilling very strong interest from both new and existing customers.
For example earlier this year, we launched major updates to our gas chromatography spectroscopy and genomics portfolio.
In addition in Q3, we had an excellent showing at the a H S. Emmis conference highlighted by the launch of the new Ashland, They shouldn't be lab L.C.M.C.I.Q. system. This new system incorporates designed in smart features software and hardware developed specifically for chemists in chromatography shares.
Our new L.C.M.S.D. I Q system is a single quad mass spec.
Built on the Revolution, all T., the L.C. Triple Quad core technology platform.
We also launched a brand new Atlanta, 60, 546 that will see Q tof system that provides analyst's ability to simultaneously acquire high resident data across an unprecedent dynamic range.
In addition, during the quarter, we introduced the new Ashland, 60, 495 C Triple Quad L CMS system.
That provides industry leading precision in complex major sees.
And finally, we introduced a new Ashland Bravo sample prep system for a metabolic analysis of human plasma samples.
This new offering further strengthens our leading position in minimal loan mix.
We also brought to market the first outcome of our joint development work well the newly combined is Ashland is see a teams.
At the site to 2019 conference we introduced the Novus site Advancion flow Cytometer.
This new offering addresses today's high end and increasingly sophisticated multi color flow cytometry assays.
It provides unsurpassed sensitivity resolution detection speed and flexibility of progressing channel.
In addition, the number of indications from our PDL one diagnostic assay continue to expand in Q3, we received FDA approval for two new indications.
Our PDL one diagnostic may now be used as an aid in identifying patients for treatment with keytruda in a total of six cancer types.
While making all these investments and launching new products. We continue our trajectory of margin expansion by 90 basis points versus last year, our <unk>, our Atlas system of continuous process improvement.
And disciplined cost management keeps the team focused on finding and executing on new opportunities.
A few closing comments on our Q3 results and company transformation has been underway for several years.
Looking ahead, we continue to see uncertainty in a challenging market environment in some end markets for capital equipment purchases. This quarter's results again demonstrate as much ongoing transformation towards higher growth markets in an increasingly resilient business model with a higher mix of recurring revenue streams.
Given our Q3 results and outlook, we are raising our full year guidance for earnings as well as revenue growth at the midpoint of guidance Bob will describe this in more detail.
Before I turn it over to Bob I'd like to leave you with a few.
A couple of thoughts here at the close of our Q2 call I commented that great companies do not just react to market conditions, they see market opportunity.
That adds Lynn, we will continue to invest for growth and take market share in whatever market conditions, we encounter.
We're continuing to drive productivity and we're doubling down on our efforts to be more agile company.
We will continue to leverage our strong balance sheet to invest in the business.
And return capital to our shareholders.
I'm quite confident that our company has never been stronger and there we are well positioned to drive continued growth and earnings expansion in an increasingly uncertain global economy.
Thank you for being on the call and I look forward to answering your questions I'll now hand off the call to Bob Bob.
Thanks, Mike and good afternoon, everyone in my remarks today I'll provide some additional detail on revenue walk through the third quarter income statement and some other key financial metrics ended this status our capital deployment during the quarter.
I'll, then finish up with our updated guidance for Q4 and full year unless otherwise noted my remarks will focus on non-GAAP results.
As Mike said, our third quarter results were very good as we had strong execution across a number of fronts.
Revenue for the quarter was 1.27 billion with core revenue growth of 6.2% reported growth was 5.8% with currency negatively impacting revenue by 1.9 points and the acquisitions, adding one and a half points to growth.
In terms of end markets pharma diagnostics, and clinical and environmental and forensics led the way for us in the third quarter.
Pharma, our largest market grew 13%.
Strength was broad based across to instruments services and consumables as well as any estee.
Our biopharma business continues to grow at double digit rates and we saw good growth in the small molecule business as well both in instruments and recurring revenues.
Our environmental and forensics business grew 15% on a core basis in the third quarter, albeit on an easier compare.
As with the second quarter, our forensic strength is tied to demand for expanded lab capabilities.
This is a result of the ongoing global opioid crisis, which is driving increased sample testing and broader screening requirements.
Our environmental business grew high single digits again, driven by the ongoing expansion of testing in China.
Diagnostics and clinical core revenue grew 7% during the quarter driven by strength of our pathology and genomics businesses.
Chemical and energy revenue grew 1% against a very tough compare a 12% growth from Q3 of last year.
Results were driven by continued strength in services and consumables.
Academia and government declined 5% largely due to order timing and rounding out the discussion of end markets food revenue declined 3% driven by China coming in as we expected and as Mike discussed.
On a geographic basis, we again saw growth in all regions led by the U.S. growing at double digit rates with strength across all three businesses.
China grew 1% generally in line with our expectations, primarily due to the weakness in food.
If you exclude food growth in China was 6%.
Asia outside of China also grew at a double digit rate driven by growth in Japan, and South Korea.
Europe grew 3%.
In line with our expectations as the market environment remains subdued.
Now turning to the rest of the PML third quarter gross margin was 56.4% essentially flat year over year with terrorists impacting gross margin adversely by 30 basis points weve been able to mitigate the impact of tariffs through disciplined cost management and the ongoing focus on efficiency.
Our operating margin was 22.8% up 90 basis points as revenue growth outpaced growth in operating expenses.
Year to date, our margins continue to expand as our teams have executed strong expense discipline.
And as a result, non-GAAP EPS for the quarter came in at 76 cents three cents higher than the top end of our guidance and representing 13% growth.
In addition to our operating performance, we were very active in deploying capital during the quarter in Q3.
We returned $600 million to shareholders.
We bought back shares were $549 million totaling 8 million shares and paid $51 million in dividends.
As Mike mentioned, we also signed a definitive agreement to acquire biotech instruments and expect the deal to close by the end of our current fiscal fourth quarter.
So year to date, including biotech we've committed to deploying over $2.2 billion in capital this year.
Of that 1.4 billion was spent and growth acquisitions with the CN biotech expanding our cell analysis franchise.
We have also returned over $800 million through dividends and share buybacks.
Our balance sheet today remains healthy and we continue to look for opportunities to add growth assets to our portfolio.
Now turning to the cash flow, we generated $242 million in operating cash flow and ended the quarter and into effectively cash neutral position.
Now, let's turn to our non-GAAP financial guidance for the year fiscal year.
As Mike mentioned with the strong results in Q3, and our outlook for the fourth quarter, we are raising our full year revenue and EPS guidance.
Please note that our guidance does not include any impact from the expected biotech acquisition.
For the full year revenue guidance.
We are increasing the lower end of our range.
Thereby increasing the mid point, resulting in a new range of $5.105 billion to $5.125 billion, representing 3.9% to 4.3% reported growth.
Currency is expected to be a headwind of roughly 200 basis points, partially offset by M&A contributing 150 basis points.
As a result, we're now expecting core revenue growth in the range of 4.4% to 4.8% for the full year.
With the strong execution, we've seen in terms of our business strategies, we are raising our full year earnings per share guidance to a range of $3.07 to $3.09. This represents growth of 10% to 10.8% for the year.
And now turning to the fourth quarter, we're expecting revenue in the range of 1.31 billion to 1.33 billion representing reported growth of 1.2% to 2.8% in core growth of 1.5% to 3% currency is estimated to be a headwind of roughly 100 basis points, partially offset by M&A contributing roughly 70 to 80 basis points of growth.
Fourth quarter non-GAAP earnings are expected to be in the range of 84 to 86 cents per share.
Which is 3.7% to 6.2% reported growth versus a year ago.
Also of note the newly announced tariffs on the additional $300 billion of U.S. imports from China is not expected to be material for us.
And the share count for Q4 expense is expected to be 313 million shares.
Now before opening up the call for questions I'd like to conclude by saying that agile and resilient business model is built for the long term. We believe we are focused on the right strategies that will continue to serve us well and ensure solid shareholder value long into the future.
And with that I'll turn it back to you for the QNX. Thank you Bob.
Mike If you can please provide instructions for queuing.
At this time I would like to remind everyone in order to ask a question press star one on your telephone keypad to withdraw your question press the pound key.
In order to allow everyone time for questions. We ask that you. Please limit yourself to one question.
And we'll pause for a moment to compile the Q and a roster.
Your first question comes from Derik de Bruin from Bank of America Merrill Lynch.
Hi, good afternoon.
Good afternoon Derik.
Hey.
Mike and team.
Can you talk a little bit more obviously, the the China numbers before for seven Tailwinds hit seem to be a little less than a quarter can you talk a little bit more.
You mentioned spending and I guess, it's like how are you sort of thinking about spending pattern is now the second wave kicks and just a little bit more color anything there and then as a corollary question.
There is.
There is obviously a lot of changes going on the drug manufacturing space right now with some consolidation going on obviously, some M&A and sort of what it's like how you sort of thinking about some of the changes going on in the bigger generic players some consolidation in the space I guess, how are you positioned in those markets.
Yes, sure let me I'll take the first one and Jacob you can pass the second one to you. So first of all as we've talked in the last call. We had seen a pause in the in our second quarter as it related to the roll out of the four plus seven.
This should have been at the time, we said listen we've actually is a good thing long term and eventually will lead to increased investments. Once we started to sort out who the winners are so and that actually is how the quarter developed for us where we actually saw the winters starting to invest.
And we think that level investment relative to weigh one will continue through our fiscal year as it relates to the core of your question, which is how about round two.
Our view is that they'll do gone through a process of doing the.
Bidding and sorting out the winners over the latter part of this year and the impact on the business is more an F Y 2020 kind of impact in terms of what we're going to see in China, but again at this point to we think these are are good long term developments for our business here because of the strength of our relationships and their real emphasis on productivity and compliance and the Jack up your thoughts around the questions about the industry consolidations in generics Yeah, I think that that's a that's a really Reverend question on clearly with some of the weakness coming off now in China. I think we will see some consolidation I think I said it will be in a very good position in that space, both in China and in general Thus, we have very strong relationships with many of the larger and awareness in the generic space. So when this happened which is the part of the normal Pharmacyclics, we are ready to support them and make them successful and Derica December put Uh huh.
Appeared on this one which is whether the generic consolidation is happening in the in China or in other parts of the world. We think overall the productivity message and real value we can.
Deliberate to this second the market really really resonates with them.
Great. Thanks, very much I'll get back in queue.
Your next question comes from Ross Muken from Evercore ISI.
Good afternoon, guys I guess, maybe just digging in a bit on DDG right I think the performance there was kinda, notably strong and so you know you called it a couple of things, including as I say name, which seems like it's starting to ramp and also a bit on opioids and then on the sort of array side, but but academic was we just give us a little bit of a picture kind of the magnitude maybe if somebody outperformance in some of these pieces and then how to think about that cadence maybe into the context of sort of the fourth quarter guide.
Sure sure Ross I'll make some initial comments here then Sam you can jump in and correct me if I'm if of them off target here, but one of the message that we were trying to convey an earnings call, which is while the Guinea SD growth was very strong in the quarter that wasn't the only bright spot in DDG. It really was across the board whether be in our pathology business and we think we're putting up numbers that are growing faster than the market whether it be because of the increased acceptance or automation platform. The omnis. The continued utilization of an expansion of the PDL one assay on the economic side, we saw good growth in our Ngs related business, Sam I think that was probably double digit for us for the quarter and then led for.
You know DNA as these strength, which we think is here to stay.
Looking into the into the fourth quarter were kind of thinking something like high single digits I think for for this business.
And and Sam anything else you want to add there because of the billings will mess when unit costs was broad based strength.
I think Mike you, you, you really outlined where the businesses and.
You know pathology, it's a business that that's built overtime right. It's not just about a single quarter, but it is the combination of the assets that we have the increasing number of indications PD L. One related that we announced two of them approval from the FDA, but it's also the ongoing growth in our installed base be it have on this piece of our other platforms.
And our companion diagnostic business, which a lot of it feeds into that is also you know it's performing in a really healthy way.
The genomics business also as you said you don't performed well, but that's that's broad based around the world. So we're we're pleased to see that both in terms of genomics related instruments like.
The platforms that we have for tape station bio analyzer, the T.I. product categories. So.
You know we feel good about the performance in the coming quarter too.
Thanks Sam.
And then maybe.
Just on the CD side, I mean, obviously, you called out a tough comp, but a lot of macro volatility. The last few weeks a lot of things happening on the trade side I guess, how are you trying to interpret it sort of all the tea leaves a in that sub segment as you know you've had some good underlying product cycle.
But obviously there is some stability and just just broadly and so how do you how do you feel like aside from sort of competing well in whatever market. There is about sort of what that actual end market environment is going to look like for the next quarter or two.
Yes, a great question Ross is something we've spent a lot of time here inside the company talking about and you know kind of entering into this year. We had some concerns about the chemical energy market is in terms of the lot of the macro noise, even coming into our fiscal year. So I think we got it like kind of low singles.
Coming in the year, but as as you may recall in our first guide. After you raised the Guy was hey, this could be a source of upside will clearly that is not happening so.
It's we're still assuming kind of low single digits, probably negative growth in instruments, because even though the product cycles are really strong I think we're well positioned to women money's there, but we're still going to assume for the at least the rest of this this fiscal year that will be growth in chemical energy, but overall that will be driven by the strength of our AC GE business and we expect the demand to be pretty pretty pretty muted. If you will in the CNH and Bob maybe taking a quick look at this I mean, a deep look at this while they have some quick comments, yeah, I think I think thats right, Mike Yeah, and Ross. Thanks for the question. If you look at our Q4 I think we're trying to be prudent in our forecast to certainly with strict continued strength in our DCG and DGD businesses, but the let's say GE or the capital business is going to continue to have slow slow growth and capital.
In the CNS area is one of those one of those markets that we're looking at and certainly with PMI is the way that they are and as you say that the uncertainty in the market certainly isn't helping and so we think we've tried to take that into account for our fourth quarter.
The new products that Mike mentioned didn't have a material impact on on the quarter, but the ones that weve launched the gas chromatographs and so forth continue to have very positive uptake, but it's you know the market is slower kind of as and that's kind of playing out the way we expected at the very beginning of the I guess or if there is one silver lining in terms of which is the again back to this productivity message and the fact that we now have a fleet of really great new products and there is a real productivity benefit to the customer they're in a stronger position to go to their management and get support from investment because it doesn't really help their piano.
Perfect. Thanks, Mike.
Youre not quite welcome Ross.
Your next question comes from Heiko Peterson from JP Morgan.
Okay. Thanks.
Mike can you talk a little bit about the global pharma picture you cited delays last quarter, now, you're saying kind of budget to freed up so how much of the 13% growth. You saw was just kind of catch up from last quarter and how you feel about sustainability of that going forward.
So I'll, let Bob do a little math on the catch up but let me let me make some macro comments, while you're doing your mental math.
But.
As we pointed out in Q2, we said hey in Q2, Biopharma really is quite strong by the way is strong and even stronger this quarter, but we said hey, we saw a pause in the small molecule side outside of China, and we've talked a lot about the four plus seven but it really was kind of curious where some saying what was going on within our large accounts in U.S. in Europe , and I think they were just being prudent in their budgeting process than we saw a release of funds.
In the Q in our third quarter and were expecting that to continue so we don't see that as being a one quarter on quarter phenomena.
I'll be at that that's why we tried to use the words.
In some end markets were expecting some pretty challenging market condition. So farm actually we think is going to continue to be a source of growth on the LSAG instruments side, while we expect some markets to actually be down year over year, and and Bob I don't know, how we can catch up I think tyco the way I would talk about it is as I mentioned, the pharma business grew 13% in the quarter and if you look at small molecule.
It was mid single digits. So there was there was probably some catch up but I wouldn't I wouldn't say it was material that that mid single digits is kind of where it has been historically over the last several quarters. So I think it.
What we have said in kind of the hypothesis has been that's primarily a replacement cycle. They can hold off for a number of quarters, but they can't do that forever. If they want to keep their manufacturing processes in place and so we think we.
Are in that it wasn't a snap back so there wasn't more in Q3 than what we saw.
But I think it was now they're getting further and in the fiscal year and they're actually spending that might have sort of sort of back to historical run rates for the agreed Jacob yeah, and I think that's that's correct, but we do see that the larger accounts still I still a very conservative and ER into procurement, while some small pharma actually is investing these days. So thats, what we actually see some of that growth coming from also and we are taking good care of them. Yeah. Thanks for the build there because in my narrative I talked about the business coming not only from existing customers, but new customers and we've been very aggressive in that regards as well.
And can you provide a little more color on the academic order timing that drove the that the decline in academic.
You know Bob I'm not sure we have much more insight into this that that business tends to be lumpy for us right and yes. Its you know as as you know it's a it's a relatively it's the smallest piece of our business and if it goes up and down and so we're not going to call out any one particular order orders across the business.
But we feel good about our position there going forward and.
We're expecting that to return to growth in the fourth quarter and I will also say back on the on the pharma business you know when we look at our ability I think one of the things that speaks well to our value proposition with our customers is when you look year over year, our our pricing actually has has held up pretty a pretty well.
Or pricing is roughly it's slightly above on the LSG business. So I think that speaks to the.
The value that we are able to bring from a productivity standpoint to customers Hey, Bob I also back on academia and government, maybe just share a discussion we are having inside the company, which was we're not overly concerned about this because we still see the funding environment has actually been quite.
Strong and stable. So it's just a timing issue. So we don't see anything happening materially different in the marketplace.
Okay, if I could ask one last clarification before hopping off on China for plus seven do you expect the impact to be the same magnitude next year as it is this year given that it's different rules for round two.
I wasn't sure from your comments, so [laughter], so take up of the I'm going to resist the temptation.
To do an F.I. 20, guy, but I would say directionally, it's going to be an increase.
Okay. Thank you.
Right.
Your next question comes from Brandon Couillard from Jefferies.
Hey, Thanks, good afternoon.
Hey, Brandon.
Mike just starting with the China food business can you sort of give us an update on where you stand as far as building out some of your commercial teams to go after that private lab channel in China.
Sort of your general visibility now today relative to maybe where you were three months ago, Yeah happy to do so so we're fully built out so we've been working this probably well over a year 15 months because I think the first time I started talking about this was Q2 18.
Call. So from a channel reach tenant perspective were there both in terms of.
Our direct reach but also through some of our digital enablement of customers. So we feel really good about our channel reach and relationships with the commercial accounts and were seen in the numbers. So we're seeing really it's really a tale of two cities and and Jacob I'll have you jump in on this one as well. The second is I know youve been digging into this but sort of tell two cities. We're getting good growth on the commercial there's just no real new investment happening on the on the government lab side of things. So that's that's true my going we do see double digit growth and on the contract laughs these days, but but coming from a smaller base and while so we have a very large market share in the into government accounts. So clearly when to catch up is happening I have to believe it will have very strong growth in this business again again.
Right, if there's any silver lining.
It would be as the Q3 was as we expected so we weren't surprised by the number.
Albeit down yet as we're thinking about Q4, we're expecting Q4 to be kind of play out the way Q2, and Q3 did in terms of roughly.
Flat at that 40 ish million dollar revenue run rate right, which you know looking at are we I think we clocked a 16% growth overall in China Q4 last year, So obviously up against a tough compare.
And then maybe one more for Mark Doak.
Gross margins in the Crosslab business are up.
Pretty substantially year over year, I think the new high at 62% sort of speak to the drivers of that gross margin improvement and sort of where you are what you see is the mid term runway.
Mid term opportunity for gross margins. Thanks.
Sure I'd be glad to and if you pull the spec it's several things contributing to it.
They overtime mix has been a play in terms of our consumables business being.
From a margin perspective, north of the company average, but also a lot of work. We're doing is relative to some of the agile excellent programs specifically looking it.
Delivery efficiencies in our services team, we've been able to add a lot more revenue without a lot of proportional cost of that and that comes to really what we are seeing increasing is a big factor in our margin expansion is scale and we're in that position now where we can invest Mike had talked about some of our digital capabilities. Both in the channel, but also in the back office areas and it starts to fuel these efficiencies and we can reinvest some of those profits to building is more strength in the area. So it's really.
Feeding off itself, if you will and.
Yeah, when you pull it all together.
Between a portfolio mix continued move towards scale and driving efficiencies through these these digital capabilities. This is probably the big drivers behind it.
Very good thank you.
Thanks Mark.
Your next question comes from for needs from SVB Leerink.
Yeah, Hey, Mike Thanks for the question.
Thanks, So first one on the cell analysis market I mean, but your recent acquisition of biotech and.
Obviously, we've added Seahorse enough yeah before.
Do you think you have enough pieces here to sort of ultimately serve this.
Growing and expected to be even further growing a cell therapy deleverage on the market.
And or do you see more room for further a capital deployment here and I should say that this did increase your biologics exposure in some ways and that's unlikely to increase that so just wanted to get a sense of what you have currently and should we expect more here.
Yes, So let me start this off and then take a feel free to chime in as well. So we think now at $250 million, we have a business with scale and I think thats really important to say, we think really compete.
And really we are really bullish on this space and I think our investment stream started several years ago. So whilst we are still in the process of digesting what we've just recently acquired and and then we have to bring the Ashland into the asthma family. The new biotech team. So we think we have a lot of really good scale. When we once we close with the biotech acquisition, but that being said I think we have further aspirations to continue to build out in that space as well.
And building on that I think first of all we clearly have to scale. This two day Budweiser what is very important here is that the strategy have you started out something some years ago. Four years ago now was not just to build scale in into someone else's business, but built.
Differentiated components that could build together into workflows that would really do differentiate who really provide differentiating information fall customers. So not only half flow off against flow and and you know some plate, we'd all get paid to be of a combined them together with a particularly important immune oncology space and especially here in the car T space and we've seen that already happening so before actually the acquisition of biotech we used to see holes and the biotech and collaborated between the two companies to provide a workload that combined those two technologies together in the same software and to say micro type of pipe and we saw that that actually grew the market opportunity significantly. So now combining the seahorse aasiya biotech and Auxel together I think we have a really really strong differentiated position, but it also allows us to add more work flows into into that space going forward, but our main priority right now is to integrate them be successful biotech.
And pundit decided which is revenue synergies often theoretical when you do an acquisition, we've actually have real proof points already with customers and markets that we can do this and there's real value to customers.
Okay, great. Thanks for the details and.
If I could touch on the NFC business, just demanding darn AD product and the overall.
Long term view of the business. Thank you.
Yeah, but much like wouldn't the temptation to talk about F 20 got off of what attempting to talk about specific details our product line level, but what I can do is give you a directional numbers. So I think we've been talking about this business hitting probably 100 million or so.
This year.
And then.
As we look in the F.Y. 20, we've added at least that much in terms of capacity.
So we hope to be.
Up to a larger number in the <unk> and.
By the end of next year at a sort of a run rate level at a higher number we won't we're not ready to kind of commit to what that number actually is but it's going to be.
Pretty nice step up for us and.
I know you've been doing some modeling this area as well already yeah, I think puneet.
I mean, nothing nothing has changed we had a very very good quarter, we're expecting another very good quarter next year law or next quarter excuse me.
Largely on the back of our existing capacity and the team has just done a fantastic job.
As as Mike said, we're on pace to deliver in that $100 million consistent with what we said really since the beginning of the year and.
We're excited about the new facility coming online and as Mike mentioned, it's it's bringing on a manufacturing facility capacity right now and look forward to 20 and beyond serving our customers and by the way don't and turn my comments as being any less bullish in this space. We just know that as we bring on the new facility you have to time when you actually can start the batches of it a lot of that's being driven by.
Customers timing when they're doing the clinical trial so.
We much more specific when we do our F. wide 20 guide.
Because we'll have a much better handle on the timing of when these new customers will be coming into our new facility I can tell you we've sold a good percentage of that capacity already.
Mike maybe if I could just add one Sam it's your baby [laughter] you know one thing that Weve already stated is the basis of this as the number of clinical trials. The work being done here, we see the supplier opportunity for us going from half a billion dollar market over 750 million over the next several years. So we're going to grow with that and it is a fact to that we are doubling our overall capacity for manufacturing, but I just want to reemphasize, what both Mike and Bob said that you know there is a ramp up process over a number of years. So just because we're doubling our capacity doesn't mean, we're going to double our revenue there just to be explicit about that again, but it will be a very good year one yes.
Exactly in year one.
All right all right. Thanks, Thanks very helpful guys congrats on the quarter.
Thank you.
Your next question comes from Catherine shows he from Baird.
Hi, Thanks for the questions first I was just wondering can you go into a bit more detail on your strong results and environmental and forensics and this is the fourth quarter in a row off of high single digit or double digit growth. There. So I'd just be curious to hear more details on the drivers in that end market.
You want to.
Kevin I think I'm actually on the passes to Jacobs, who is yeah. I mean response here and again it speaks to the portfolio. We built up here over the over the top yes on really robust reliable instrumentation that allow us to really go into of course opioid is a big crisis in U.S.. So so we have actually quite quite a a locks growth in that area. We also see installing in water.
One U.S. with Swiss have have actually driven out of business and the same token China. It's actually continue to have strong growth in both those areas, but specifically the environmental which is heavily regulated so and we are doing very well and regulated spaces and this is driven also the interim insulin forensic this corner, yes, I think it's fair to say because I know there's a good mark I was going to say if I could add to that too in concert with Jacobs, we've been working a lot on the environmental side in terms of end market workflows, and complimentary consumables and services to go along with it. So that's clearly another driver of this this end market for us.
Yep.
Okay, and then we heard one of your peers talk about starting to see a bias against U.S. companies in China tenders are you seeing signs of that dynamic as well.
No Kevin Thanks for asking that question not at all so that's.
Hey, good afternoon guys.
I only have one question, but it has three or four part so.
[laughter] so.
So I know I don't want to disappoint, so I know you're up against a tough comp in Q4, and I'm I'm guessing there is some desire to be a bit more conservative in the current environment that said given the strength of really a CGM DCG in Q3 and really the past few quarters. We would have expected Q4 revenue growth guidance to be a bit higher. So one were there any timing dynamics that benefited Q3 at the expense of Q4. Two did you see any end market conditions weaken over the course of Q3 and if so are you baking in an assumption in the guidance that this continues in the fourth quarter.
Three are you assuming that LSW AG growth is lower in Q4 versus the flat performance in Q3, because it seems like you'd have to unless you're expecting a C.G. and OCTG to moderate.
And for kind of building off of the last one I'm just wondering if any SD is not expected to be a strong in Q4 as Q3, maybe just because things have to pause a little bit as you bring new capacity on thank you.
Yeah, So Doug we've been waiting for this question. So thanks, thanks for putting that out there and I'll start off and then.
Hi, Bob share some our guy philosophy, so I really want to be really clear on this we saw nothing unusual relative to pulling in from the fourth quarter. So.
Our book to Bill is solid and.
So there's nothing unusual have in terms of changing the seasonality business by pulling in from Q4 into Q3.
When we look at our LSW AG business, we actually expected decline.
In in the in Q4 off off that tough compare I think you're in almost 99% last year and now there's two other parts I only got two of the four park, Yes, I wrote them down okay. Thank Doug I'll try to tag team with Mike you know as as Mike said, we didnt see any pull forward or any dynamic that took orders out of out of Q4 into Q3 and as he said our backlog actually did not deteriorate, but that being said.
You know you are seeing it we saw it today right in the market. There is a tremendous amount of uncertainty the trade resolution is nowhere its no closer now than it was when we when we we had our call back in Q2, and so we're de risking Q Q4, a little bit relative to where we are.
It is a tough comp in there you know there is a little more uncertainty in the marketplace today than there was even three months ago, we're trying to be prudent there that being said we raised the full year werent or you know on the topline and certainly on the bottom line.
And you know.
Feel good about.
Feel good about that to your question about any SD, we are expecting that growth to moderate it had a very strong Q4 of last year.
But when you look at the run rate, we still feel very good about the run rate. So it's less about.
Level loading an invalid manufacturing and it's more about just a comparable is there and.
We are expecting continued to performance in both ABG not necessarily at the double digit rate that would be good but that's not built into our guidance as Mike said, we are expecting.
Flattish to slight down in let's say just given the strong 9% compare that we had in Q4 of last year.
Right I think you hit them all thank you very much great. Thanks, Doug appreciate the question.
Your next question comes from Patrick Donnelly from Goldman Sachs.
Thanks, guys, maybe one on hcg for you, Mike I'm sure Mark chime in but it was right there with the best growth you guys have ever put up in that segment, even while facing a high single digit comp. So how are you guys continuing to drive that segment to these levels of growth I mean, it's been years. Since you had that initial refocus how are we still seeing follow through what's what's really driving the reacceleration yes.
So I'll take the congratulations on behalf of Marc will then pass it on to Mark, but you're exactly right I can remember the early days, we were getting questions about when the loan was is going to stop and we said why would they stop because there's there's a number of things going on and there is also an expanding market.
Underway and as and as Mark pointed out the.
Strength was broad based across consumer services and they really think we're we're playing into and I tried to highlight this in my script that really playing into some real changing.
Customer needs are they really want something that's could help drive their productivity and they also looking for at times vendors to take on some of the work they've been doing inside and then on the consumables front.
They really they really want these integrated workflows.
But I can do the strategy Justice So mark why don't you fill in the pieces that I've missed.
Thanks, Mike and Hi, Patrick, but I guess, it maybe it's a little bit of the past, but also to the future and we're still very bullish about our potential to grow that but some of the drivers made really significant investments in the spin expansion of our portfolios.
And from services, we've got a breadth to now in more of our value added services and.
In the enterprise capabilities that will not only have a rollout over the continuation of this year.
In consumables business, it's an intentional drive to to.
Dry for more complete workflows for targeted end markets and we called out Biopharma in particular high growth market, where we've really been focused around grabbing that so portfolio is a big driver really getting some great results from expanding our reach in our ability to.
And wallet share.
Growth inside of our current accounts to Rechannel. These subscriptions still lot opportunity there.
We still have a significant opportunity to improve our attachment rates to the agile and instruments, but I always like to come back and remind everyone. We view our market not only is the agile and installed base, but also the competitions.
And that that adds a significant size and scale to the market opportunity and not only we can take market share from our competition on the multi vendor perspective, we are so kind of sum it up a lot of work that's been done over the past build a lot of capabilities from the standpoint of portfolio digital working on some fundamental basics around what we can do in the attachment rate from the.
The sales channel and our big market opportunity out there. So hopefully gives you a sense of where we've been a little bit where we're going to.
Yeah, It's wonderful color and then maybe just a quick one for Bob.
On the share repurchase front it was encouraging to see you guys step in and be opportunistic with the $550 million. This quarter, how should we think about going forward. Obviously the market has pulled back a decent value your stock along with it. So maybe just provide some perspective on that front.
Yeah, you know we will thanks, Patrick and I appreciate you acknowledging that and we'll continue to evaluate the market, obviously or our focus is first on growth and.
We'll we'll be dumb closing the biotech acquisition this quarter and our M&A funnel continues to be a strong and we will be looking at that but not afraid to go into the market if a if the.
If the price is right so to speak so I think the way that we are looking at that is first on M&A and and then looking to continue to deploy capital where as I mentioned before cash neutral right now with the acquisition of the biotech, we'll probably be at net debt of roughly a one time and so we still have plenty of capacity there.
Okay. Thank you.
Your next question comes from Steve Willoughby from Cleveland Research.
Hi, good evening.
Hi, most of my questions have been asked just two things for you I guess.
You know first Mike I was just wondering if you could comment a little bit more and provide any more color on some of the new products. You recently launched and how they are being accepted into the market, particularly the new GE sees as well as the new.
Hi, Q system, and then I guess, secondly for Bob or Mike If you want to take it.
Have you are you able to quantify how much you're expecting in terms of revenue in the fourth quarter from the new NSG facility, you're starting up here. Thanks guys.
Yes, so if you don't mind I'll make some summary comments inject we can still and so on the details but last number that's our view on the on our new GC family launch was actually head of where we thought we'd be and I think we're doing well on the I.Q. as well, but maybe you can kind of fill in some details there. Yes, certainly I think we are despite some some challenging market conditions, we actually doing extremely well with the 88 series and in front of our on our own ramp to volume. So I think that is working very well and it's really the combination of what we called the spot the instrument combined with those already proven well proven technology, Tc technology and that really resonates with our customers and the same can actually be set with the with ally Q.
Which is of course a little.
Only was introduced a few weeks ago at the SMS and we start to ship here very soon we have received the first autos, but what I can say there is that it has been very well received where we had been out to the introducing it in for sending it to two customers I think they very much like the ease of use the intuitive goodness of the of the detector itself and also all the self awareness that have so it really helps the customer to be successful not only successfully but also allow them to be you have much more uptime in the laboratory and this really addresses the Kuwait QC lapse, where it's all about being uptime and of course to get that gets into the laboratory. So so it's been really well received but its still early days for the Q. So we have received autos, but we are shipping in this quarter here about you want if you want to take any advice on Steve just on any SD you know, it's going to be as we've said earlier in the year you know, it's not going to be material to the overall number so it's going to be low single millions.
And we have time for one more question. The last question comes from Dan Brennan from U B S.
Great. Thanks for thanks for taking the question and congrats on the quarter guys. Thanks, Dan I was hoping to ask a question back on Hey, Mike. So last question back to China.
Can you just provide some color on like what the actual generic business did in the quarter like what the level of revenues was in year over year and then.
Well I appreciate I think to take his question you don't want to give a specific number for 2020, but just given I think the investors and ourselves are just trying to get some frame of reference that directionally is there any help you can provide just as we go to 2020 I know you made a comment that type of or just a little more help if you could directionally on the food in the China generic sort of how to think about that thank you.
Yeah, So I'm happy to let me, let me take the second part of that question first which is when you think about the outlook for 2000 and again, we know I'm going to stay away from percentage changes in growth rates, but I think we have a lot more confidence around where the generic side of that marketplace is going because we already have some proof points. We've already seen which is a thesis was in the second quarter. Hey, We think this is going to lead to ultimately more business in it but there was a pause in business, we actually saw that play out in the third quarter and we think it'll play out in the fourth quarter, where are the winners are going to be buying.
You know the equipment. We think the same thing is going to happen in in Q2, I mean, excuse me F Y 20.
We more UNEV why 20, then in terms of when it impacts the PML because we know what the process. We know what's going to happen. We know the winners who we are where we have deep relationships with are going to invest so I think we're we have a level of confidence about where that market is going I don't think the same thing can be said about the food market because that's why use the word foreseeable future. What we do know is the the commercial side of that segment will continue to grow.
That will continue to grow it's unclear right now what's going to be happening relative to China's desire to invest.
In in the in the government labs as you heard from Jay currently right now they're prioritizing for example investments in environmental and that's why we're seeing strong environmental growth and Bob maybe it's worth just kind of parsing out I was just thinking you know how are how our business is in I can't give a specific number relative generics, but just in terms of.
The size of our pharma business in China, and then roughly how much of it's in the in the in the non Biopharma side, yes. So our you and maybe just a comment on on the food or Dan on the you know in Q4 as I said earlier, we're expecting it to be roughly about $40 million, which will be down year on year pretty consistent with how we you know our results in Q2 and Q3.
And the question is over time, we do think that that business will come back not at the levels that had been in the past just given the different dynamics, but the question is when and we're not ready to call that yet.
On on the pharma side, the business actually did better in Q3 than it did in Q2.
And you know.
Of roughly.
You know.
China is roughly 20% of the overall business.
And pharma is about 30% of that 20%. So it's about six 6% overall and it's roughly 50 50 in terms of consumables and.
Instruments, so it's roughly 2% to 3% of our overall company and you know in Q3.
It it group.
Yeah as.
As Mike mentioned, you know really on the back of the winners of the four plus seven and and just kind of clarity on what this pilot met going forward. So that's probably as much detail as we are going to get into relative to this and.
We'll have another quarter under our belt and for Q4, and then be better prepared to talk about it as things unfold for for the fiscal year next.
And in November .
Great and if I cared since it is the last question just one more Mike obviously, a very strong quarter, you mentioned kind of similar to what you've been talking about obviously, we can see what's going on but continued uncertainty in the marketplace, especially for I think for cap equipment, then Bobby talked about PMI.
Any any but you also talked about good book to bills and you had a good quarter. So any any way to help us think about like as we try to tease out all the noise. That's out there in the marketplace kind of what it means to agile on a go forward basis like.
PMI that we watch that we pay a lot of influence that or just any any any more color about the customer conversations you're having and data and how it relates back in his comments. Thank you yeah.
Happy to do so so the first thing I would do is I would set aside 60% of the business of ads on which is in the recurring revenue side of the business and we've talked a lot about the DG business hcg business and our view that you know we're going to have continued.
Strength strength, there and then what we've been trying to do is positioned the business and listen there is this 40% of the business which has instruments.
And that does.
As predicted by PMI I think you May recall, you don't have a conversation with I think still some of the model still hall, which is the PMI trends do do drive.
To some extent, what's going to happen ultimately in the capital goods side I think we've already seen it.
PMI started dropping early early this year, albeit there are some areas of of Jacobs' business, which are still somewhat independent of that whether it be the the four plus seven initiative. Some policy changes some of the things that are happening in environmental.
Forensics so.
I think it's sort of a it's a mixed model so but I first wanted to start off by just saying, let's set aside six months on a business over here and then start talking about the 40% then parse out the cell analysis piece, which is which is by itself as the is a high growing business driven by certain dynamics, there and then parse out some of the the policy driven stuff and then then you're left with Mitt primarily chemical energy.
Exposure.
So.
But how would you think about no I think you know maybe I'd just leave it here I mean, I think we feel very good about our portfolio, obviously, we can't we can't.
No time, the markets from the standpoint of market growth, but we think that we're able to gain share in any market and I think this quarter proves that our portfolio is strong we continued to invest in areas that are faster growing than the overall company things like cell analysis, and then also our biopharma businesses across all three business groups. So.
I think Mike mentioned it in the prepared remarks that the business.
Is a lot different than it was five years ago, and I think we continue to invest in fast growing areas continuing to transform it and make it a much more resilient model and I think we feel good about that certainly for not only Q4, but going forward.
Great. Thanks, Thanks, again and congrats.
All right. Thank you with that we will conclude today's earnings call. Thank you everyone for joining.
This concludes today's conference call you may now disconnect.