$re = '/^([^a-z]+):(.*(?:(?!\n[^a-z]+:)[\r\n].*)*)/m';
$str = ' FD (Fair Disclosure) Wire
November 19, 2018 Monday
Q4 2018 Agilent Technologies Inc Earnings Call - Final
LENGTH: 11673 words
Corporate Participants
* Alicia Rodriguez
Agilent Technologies, Inc. - VP of IR
* Jacob Thaysen
Agilent Technologies, Inc. - Senior VP and President of Life Sciences & Applied
Markets Group
* Michael R. McMullen
Agilent Technologies, Inc. - CEO, President & Director
* Robert W. McMahon
Agilent Technologies, Inc. - Senior VP & CFO
* Samraat Raha
Agilent Technologies, Inc. - Senior VP and President of Diagnostics & Genomics
Group
Conference Call Participants
* Brandon Couillard
Jefferies LLC, Research Division - Equity Analyst
* Catherine Walden Ramsey Schulte
Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
* Daniel Anthony Arias
Citigroup Inc, Research Division - VP and Senior Analyst
* Daniel Louis Leonard
Deutsche Bank AG, Research Division - Research Analyst
* Derik De Bruin
BofA Merrill Lynch, Research Division - MD of Equity Research
* Doug Schenkel
Cowen and Company, LLC, Research Division - MD & Senior Research Analyst
* Jack Meehan
Barclays Bank PLC, Research Division - VP & Senior Research Analyst
* Patrick B. Donnelly
Goldman Sachs Group Inc., Research Division - Equity Analyst
* Paul Richard Knight
Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research
& Senior Equity Research Analyst
* Puneet Souda
Leerink Partners LLC, Research Division - Director, Life Science Tools and
Diagnostics
* Ross Jordan Muken
Evercore ISI Institutional Equities, Research Division - Senior MD and Head of
Healthcare Services & Technology
* Stephen Barr Willoughby
Cleveland Research Company - Senior Research Analyst
* Stephen Christopher Beuchaw
Morgan Stanley, Research Division - Equity Analyst
* Tycho W. Peterson
JP Morgan Chase & Co, Research Division - Senior Analyst
Presentation
OPERATOR: Good day, ladies and gentlemen, and welcome to Agilent Technologies
Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) And as a
reminder, this conference is being recorded for replay purposes. I would now
like to hand the conference over to Alicia Rodriguez, Vice President of Investor
Relations. Please go ahead.
ALICIA RODRIGUEZ, VP OF IR, AGILENT TECHNOLOGIES, INC.: Thank you, James, and
welcome, everyone, to Agilent\'s Fourth Quarter Conference Call for Fiscal Year
2018. With me are Mike McMullen, Agilent\'s President and CEO; and Bob McMahon,
Agilent\'s Senior Vice President and CFO. Joining in the Q&A after Bob\'s comments
will be Jacob Thaysen, President of Agilent\'s Life Science and Applied Markets
Group; Sam Raha, President of Agilent\'s Diagnostics and Genomics Group; and Mark
Doak, President of the Agilent CrossLab Group.
You can find the press release and information to supplement today\'s discussion
on our website at www.investor.agilent.com. While there, please click on the
link for Financial Results under the Financial Information tab. You will find an
investor presentation along with revenue breakouts and currency impacts,
business segment results and historical financials for Agilent\'s operations. We
will also post a copy of the prepared remarks following this call.
Today\'s comments by Mike and Bob will refer to non-GAAP financial measures. You
will find the most directly comparable GAAP financial metrics and
reconciliations on our website. Unless otherwise noted, all references to
increases or decreases in financial metrics are year-over-year. References to
revenue growth are on a core basis. Core revenue growth excludes the impact of
currency and acquisitions and divestitures within the past 12 months. Guidance
is based on exchange rates as of October 31. We will also make forward-looking
statements about the financial performance of the company. These statements are
subject to risks and uncertainties and are 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.
Before I turn the call over to Mike, I would also like to share my plans to
retire at the end of January, making this my last conference call as Agilent\'s
Vice President of Investor Relations. I have enjoyed working with many of you
over the years, but as Mike says, the best is yet to come and so it is also true
for IR.
And now, I\'d like to turn the call over to Mike.
MICHAEL R. MCMULLEN, CEO, PRESIDENT & DIRECTOR, AGILENT TECHNOLOGIES, INC.:
Well, thanks, Alicia, and hello, everyone. Thank you for joining us today.
Before I cover our financial results, I want to thank Alicia for her years of
service and wish her the best in her retirement. Alicia has superbly led
Agilent\'s IR team for the past 8 years. She has set a high standard for her
professionalism, integrity and transparency in her engagement with the
investment community. Thank you, Alicia. You are the best and you will be missed
by me. You can see, this has been an emotional day for all of us and our Agilent
team and I\'m sure, by everyone that\'s on today\'s call.
This quarter, we reported our strongest quarterly results since the 2015 launch
of the new Agilent. We\'re ending the year with a terrific quarter. Our revenues,
profitability and earnings per share are significantly ahead of expectations.
Now, some of the specifics. Q4 revenues grew 9% on a core basis to $1.29
billion. This exceeded the high end of our guidance by more than $30 million.
Double-digit end-market growth in pharma, environmental and forensics along with
the continued strength of our Chemical & Energy business are driving results.
Geographically, our China business is up sharply, with 16% growth for the
quarter. For the year, the Agilent China team delivered double-digit growth and
achieved a major milestone, crossing over 1 billion in business for the first
time.
Q4 adjusted operating margin is 25.2%, up 190 basis points from last year. This
is our 15th consecutive quarter of the Agilent team improving year-over-year
operating margins.
Q4 adjusted EPS of $0.81 is $0.07 above the high end of our guidance. Compared
to last year, this is an increase of 21%. In addition, we took advantage of
marketing conditions to purchase $86 million in stock during the quarter. For
the full year, stock repurchases stand at $422 million, underscoring the
confidence we have in our future performance.
I am also pleased to report that the Agilent board has just approved a new $1.75
billion share repurchase plan. This quarter more than caps off an excellent
2018. Our strong quarterly performance translates in the full year core growth
of 7.1%, our highest annual growth rate since the launch of the new Agilent.
Total reported revenues grew to $4.9 billion. We continue to deliver improved
profitability while investing for growth. For the year, adjusted operating
margin is 23.1%, up 110 basis points over last year. Our earnings per share are
up 18% for the year to $2.79. The numbers tell the story, a strong team
delivering yet another stellar annual performance.
Let\'s now look at the quarter by business groups. Core revenue grew a healthy 9%
for LSAG, our Life Science and Applied Markets Group. Product strength is
broad-based, driven by mass spec, chromatography and cell analysis. We continue
to introduce innovative new products. We are strengthening our molecular
spectroscopy portfolio with the launch of the Agilent 8700 Laser Direct Infrared
Chemical Imaging System. This is a breakthrough in both chemical imaging and
spectral analysis.
We also introduced the Cary 3500 UV-Vis system, the first significant
advancement in UV-Vis architecture in decades. We continue to build out our cell
analysis business. We just closed the acquisition of ACEA Biosciences. ACEA is a
provider of cutting-edge cell analysis instruments and will expand our cell
analysis portfolio. The Agilent CrossLab Group delivered strong 9% core revenue
growth. Demand was excellent across both services and consumables. We continue
to invest in our portfolio and extend our customer reach. We completed the
acquisition of ProZyme, expanding our offering to the biopharma marketplace. We
also acquired our South Korean distributor. This acquisition expands our direct
customer engagement and it further builds out ACG\'s service business in the
market.
The Diagnostics and Genomics Group grew 5% on a core basis. Strength in our NASD
and Genomics businesses drove the quarterly results. In a significant win,
Agilent has been selected by Unilab to be a preferred partner for their
pathology business. Unilab is one of the largest European diagnostic testing lab
providers. This announcement is another strong testament to the advantage of
Agilent\'s expanding workflow solutions.
Before I leave DGG, I want to provide an update on the construction of our new
NASD API production facility. We remain on track for the initial production of
GMP-grade APIs by the end of fiscal year 2019 with material revenue
contributions in FY \'20. Overall, it was a great quarter, capping off an
excellent year delivered by the Agilent team.
A few final comments before I turn the call over to Bob.
Agilent\'s shareholder value-creation model is fully activated. First, we are
executing on an innovation-driven growth strategy that is delivering. Second, we
continue to focus on improving profitability with our Agile Agilent initiatives.
Finally, we are actively leveraging our balance sheet to drive acquisitions of
fast-growing, innovative companies while also returning cash directly to
shareholders. We have transformed Agilent into a growth company and are focused
on delivering superior earnings growth. We just delivered our highest growth and
profitability since the launch of the new Agilent. Since then, our adjusted CAGR
EPS is up 17%. Our business is also less cyclical today, with non-instrument
sales making up over 56% of our total company revenue. If economic challenges
would arise, our business is now less dependent on capital equipment purchases.
Looking ahead to 2019, while acknowledging current trade discussions, we are
expecting market conditions to remain solid. The Agilent team is laser-focused
on sustaining our strong growth into 2019 and beyond. We have momentum. I keep
telling the Agilent team: the best is yet to come. Thanks for being on the call
and we look forward to answering your questions. I\'ll now hand off the call to
Bob. Bob?
ROBERT W. MCMAHON, SENIOR VP & CFO, AGILENT TECHNOLOGIES, INC.: Thank you, Mike,
and good afternoon, everyone. I am very pleased to be talking with you today on
my first earnings call as Agilent\'s CFO.
Before I get started, I want to echo the comments Mike made and say thank you to
Alicia. In my time here, she has been a great partner to me, and I truly wish
her the best in retirement. She will be missed.
Now moving onto the financials. In my remarks, I\'m going to provide some
additional detail on revenue, walk through the fourth quarter income statement,
touch on a few other key financial metrics and then I\'ll finish with our
financial guidance for 2019. Unless otherwise noted, my remarks will focus on
non-GAAP results, and percentage changes will be on a year-over-year basis.
As Mike mentioned, we delivered a very strong fourth quarter to finish an
excellent fiscal year. Revenue for the quarter was $1.29 billion, with core
revenue growth of 9%, exceeding both our guidance and expectations. For the full
fiscal year, our core revenue growth was 7.1%, a very strong performance.
As Mike spoke to the group\'s performance for the quarter, I will provide some
additional details around our end-market and regional performance. Overall, the
market environment is positive. And based on our channel reach and product
offerings, we saw broad strength across most end markets.
Pharma, our largest end market, was up 14%, with double digit contribution from
all business groups. Both the small molecule and biopharma segments performed
well. Traditional areas of strength as well as newer areas of strategic focus
such as cell analysis and a strong performance at NASD contributed to the
results.
Chemical & Energy grew an impressive 7% against a very strong comparison of 15%
core growth last year. We continue to see positive ongoing market investment in
this area. Balanced gains in both LSAG and ACG were driven by strength in
spectroscopy, LC/MS, supplies and services. Demand from materials
characterization applications continue to drive robust ICP-MS growth.
Environmental and forensics grew 17%, ahead of expectations with good demand
across major regions. Growth was balanced across both end markets. Forensics saw
a notable demand for cobalt Raman spectroscopy and environmental for LC/MS and
ICP-MS.
Academia and government reported 10% growth as funding environment stabilized
while diagnostics and clinical grew 1%, and food was flat as expected against a
tough 10% comparison.
Geographically, we also saw broad-based strength. China grew by 16%,
accelerating from the 10% core growth we saw in Q3, and as Mike mentioned,
passed the $1 billion mark in sales for the year in the fourth quarter.
Other Asia and Japan grew by 12%, and Europe and the Americas had solid
mid-single-digit growth.
In addition, we continue to be pleased with the revenue composition as
non-instrument revenue contributed 56% of the total in Q4. Looking forward, we
see non-instrument revenue growth outpacing instrumentation, driving in an
increasingly recurring revenue stream.
Now turning to the rest of the P&L. Q4 gross margin of 57.8% increased 170 basis
points compared to the prior year. This was due to product mix and volume as
well as our order fulfillment and supply chain organization continuing to do an
outstanding job driving cost savings using our Agile Agilent approach.
Operating margin, including adjusting for the key site billings, was 25.2%, up
190 basis points due to higher gross margins and top line leverage on operating
expenses, even as we invested more in R&D. This led to non-GAAP earnings per
share of $0.81 in the fourth quarter, an increase of 21% compared to the prior
year and more than double the rate of revenue growth.
Now before moving to FY \'19 guidance, I want to touch on a few additional
financial metrics. We continue to generate very strong cash flow. This quarter,
free cash flow was $336 million, and for the year, we generated over $900
million in free cash, exceeding our commitment.
In Q4, we returned $133 million to shareholders, buying back 1.3 million shares
for $86 million and paying out $47 million in dividends. We also completed the
ProZyme and Young In acquisitions. With Young In, we expanded our direct sales
and service capabilities in South Korea. For the fiscal year, we returned $613
million to shareholders, buying back 6.4 million shares for $422 million and
paying out $191 million in dividends. As Mike mentioned, we closed a record
number of acquisitions in 2018, deploying $516 million.
We ended the year with $2.2 billion in cash and $1.8 billion in debt, and we
just closed on a ACEA Biosciences last week, so we\'re starting 2019 where we
left off in 2018. All in all, we entered 2019 with healthy end markets, good
momentum in the business and a very strong balance sheet.
Now let\'s turn to our non-GAAP financial results guidance for the full year and
first quarter of 2019, beginning with our full year guidance. We expect 2019 to
be a strong year overall. But before I get into the actual numbers, let me
mention a few important points.
First, we anticipate currency will be a headwind in 2019. Based on exchange
rates as of the end of October, we expect currency will reduce reported sales
growth in 2019 by roughly 220 basis points, translating into roughly a $110
million negative impact for the full year. For comparison, our 2018 reported
sales growth benefited by 210 basis points from currency. Now partially
offsetting the currency impact will be a larger contribution from recent M&A,
including the recently closed ACEA Biosciences acquisition. And in addition,
starting in fiscal 2019, we adopt a new accounting standard, which changes how
we present pension expenses and benefits on the income statement. In effect, we
are reclassifying certain amounts to other income and expense. While this has no
impact to net income, we do expect this will reduce forecasted operating margins
in FY \'19 by roughly 40 basis points. As we move through the year, we will
provide a restated 2018 to provide an apples-to-apples comparison.
And lastly, we are taking a different approach in setting guidance ranges that
include both upsides and downsides, so I\'d encourage you to model to the
midpoint of guidance at this stage.
Now for the full year, we are expecting revenue to range from $5.13 billion to
$5.17 billion in fiscal 2019, representing core growth of 5% to 5.5% and
associated reported growth of 4.4% to 5.2%. Currency is estimated to negatively
impact growth by 2.2 percentage points, with M&A contributing roughly 1.6 to 1.9
percentage points of growth for the full year.
Now onto our EPS guidance. For the full year, we are forecasting a range of $3
to $3.05 per share. Adjusting for the negative currency, this translates to 9%
to 11% growth in EPS and 7.5% to 9.3% on a reported basis. Included in this
guidance is roughly $4 million per quarter in tariffs. This is slightly higher
than the estimate we provided last quarter and is related to List 3.
A few other metrics as you build your models. Embedded in our forecast is modest
operating leverage after accounting for the pension adjustment. We are also
expecting the total of interest income, interest expense and OI&E to be $10
million to $15 million in net expense, inclusive of pension and key site
billings. Guidance is based on a full year tax rate of 17%, down 1 point from
2018, and diluted shares outstanding were approximately $322 million, flat to Q4
of this year.
We expect operating cash flow of between $1.1 billion to $1.15 billion and
capital expenditures of roughly $175 million. As previously mentioned, the
Agilent board has authorized a $1.75 billion repurchase program, and we plan at
a minimum, to offset dilution throughout the year. We will also continue to look
for M&A like ACEA and other recent tuck-ins and have the financial flexibility
to be opportunistic in share buybacks as well.
And finally, we have announced raising our dividend by 10%, continuing a streak
of double-digit increases, providing another source of value to our
shareholders.
Now turning to Q1 guidance. For Q1, we\'re expecting revenue to range from $1.265
billion to $1.28 billion, representing reported growth of 4.4% to 5.7% and core
growth of 4.5% to 5.5%. Please remember that we are going up against a very
tough Q1 comp last year where we grew 10% core.
First quarter 2019 non-GAAP earnings are expected to be in the range of $0.71 to
$0.73 per share, which is roughly 9% to 12% x currency and 7.6% to 10.6%
reported growth.
Now before opening the call for questions, let me conclude by saying we are very
pleased with the financial results and the continued hard work and focus of the
Agilent team laying the groundwork for future growth and as we enter 2019 with
strong momentum.
With that, I will turn it back to Alicia for Q&A.
ALICIA RODRIGUEZ: Thank you, Bob. James, will you now open the phone lines for
the Q&A and provide the instructions?
Questions and Answers
OPERATOR: (Operator Instructions) Our first question comes from Tycho Peterson
with JPMorgan.
TYCHO W. PETERSON, SENIOR ANALYST, JP MORGAN CHASE & CO, RESEARCH DIVISION: I\'ll
be the first to congratulate Alicia. It\'s been great working with you. I guess
for either Mike or Bob, I\'m wondering if you can maybe help us put some
parameters around the guidance for next year, either by end market or segment.
Can you maybe just talk to whether like, for example, Food can get back to
growth post the China restructuring? And how should we think about C&E? It
moderated a bit against tougher comps, but how do you think about the setup for
that next year?
MICHAEL R. MCMULLEN: Tycho, I\'m in the room. This is Mike, and Alicia really
appreciates your remarks. And Bob, I think maybe you can provide a little bit of
color on Tycho\'s question.
ROBERT W. MCMAHON: Yes. Thanks, Tycho, and a pleasure to speak with you. In
terms of the end markets, I think we still see nice end market growth across all
the markets. When we think about the various markets, pharma, we would expect,
leads the way, probably faster than the overall company growth. But we are
expecting growth throughout all of the end markets. So we expect a return to
growth in Food for sure, but also continued performance across all of the
businesses or all the end markets. And really, we expect kind of broad-based
growth across the end markets as well as our divisions.
TYCHO W. PETERSON: And is there any implications on your lab deal on DGG for
next year? Or how did that flow through?
MICHAEL R. MCMULLEN: Yes, Tycho. I think there\'s just one more proof point that
we think we can continue to grow the business, both in terms of winning some big
deals but also as the PD-L1 expands in terms of various cancer states being able
to be treated by the KEYTRUDAs and OPDIVOs of the world. So it was just more of
a proof point. This is why we have confidence we can continue that growth
trajectory.
TYCHO W. PETERSON: Okay. And then just lastly, can you comment on the cell
analysis portfolio today with the CNT course? I\'m just wondering whether there
are kind of revenue synergy opportunities here? Or how do we think about the
portfolio and the ability to kind of penetrate the single cell market a little
bit further?
MICHAEL R. MCMULLEN: Yes. Tycho, I\'m going to make a few opening comments here
and then pass it over to Jacob. But as you know, we made our first foray into
cell analysis with the Seahorse acquisition, and we really were attracted by the
growth in this space as well as what Agilent can bring to really accelerate the
growth of acquired assets in this space. And we\'re super pleased to have ACEA
and the ACEA team as part of Agilent, but I\'m going to turn it over to Jacob and
you can share your perspective as well.
JACOB THAYSEN, SENIOR VP AND PRESIDENT OF LIFE SCIENCES & APPLIED MARKETS GROUP,
AGILENT TECHNOLOGIES, INC.: Yes. Absolutely, Mike, and I\'m as excited as you
are, perhaps even more even since this is in my business. So as you say, we
started into the cell analysis business with the Seahorse acquisition followed
by Luxcel and now here recently with ACEA. And all acquisitions gives us a very
differentiated position in the cell analysis business, where Seahorse is really
a technology that allows for measuring the up and down regulation of metabolism
based on oxygen consumption. We now have ACEA flow, the flow cytometry, which is
a great way and a very easy way of doing cell characterization, identification
based on the genotype and what -- where this will position the market is that is
very ease-of-use and re-allow many different labs that today feel it\'s very
difficult to work with flow cytometry to really start to get their hands around
that. And finally, the ACEA has the xCELLigence platform, which is a great way
of measuring cell survival viability through impedance measurement. So those 3
different modalities really gives us a strong position, especially in the
immuno-oncology and CAR-T where basically bring the ability to measure live
cells and how they operate under different conditions is going to be key to --
for the entire CAR-T and immuno-oncology. So you will see us continue to invest
into this business, but I\'m very pleased where we are today.
MICHAEL R. MCMULLEN: And Tycho, you can see the excitement we have on these
products playing out in the cell analysis business. And I think this is a
perfect example of how a company coming into Agilent with this great innovative
new product can really benefit via the scale of Agilent.
OPERATOR: Our next question comes from Ross Muken with Evercore.
ROSS JORDAN MUKEN, SENIOR MD AND HEAD OF HEALTHCARE SERVICES & TECHNOLOGY,
EVERCORE ISI INSTITUTIONAL EQUITIES, RESEARCH DIVISION: Congrats, guys, and
Alicia, it\'s always been a pleasure. Maybe let\'s talk China. So if I look at
some of the color you gave on a segment basis, it seems like not only did the
segment outperform, but it was pretty broad-based. I mean, you called that, I
think, in the presentation, academic as well as some of the more traditional
pieces of when we think about your China business being. So maybe just give us a
feel for the cadence in that business for next year and sort of the underlying
assumptions, and how you\'re thinking through some of the macro noise in whether
or not tariff or anything else will impact the sort of demand curve on maybe the
nonlife science business next year.
MICHAEL R. MCMULLEN: Yes, happy to do so, Ross. I think you anticipated some of
my response, which really was broad-based. I mean, we are delighted with the
numbers, 16% double digit for the entire year, but we saw strong growth in
pharma, academia, which is really, the China government\'s really focused on
doubling the number of their -- what they call the first class universities, so
a very robust funding environment. You saw the overall numbers for environmental
forensics. I mean, a lot of those being driven by investments in the
environmental space by the Chinese government. We\'re seeing a strong growth in
the aftermarket, continued strength in chemical energy and finds a return to
growth in the Food segment. So the overall view of China was very positive for
the quarter. And as we look at next year, I think Bob and I were talking about
this earlier, we\'re guiding -- embedded in our guidance assumptions is high
single-digit growth in China for next year. And despite all the noise that\'s out
there, what\'s really happening on the ground is a lot different. Chinese
customers want to buy the most innovative tools for their work. They want to
support the government-led initiatives, and areas such as investments relative
to healthcare for the citizens are getting funding, and we are one of the
preferred choices for those customers. So despite the noise in the environment,
the environment remains solid.
ROSS JORDAN MUKEN: And maybe on the margin side. Obviously, all of the volume
absorption in the quarter, just given how much you beat the revenue piece by
obviously, health. But it feels like still underlying a lot of what you\'ve been
doing across the business is flowing through on both the gross margin and OpEx
side. And so maybe give us a feel for how much you think of sort of the margin
outperformance kind of came from maybe just the underlying revenue streams
versus maybe some of the other actions you\'re doing in that in the context of
some of the investments obviously, that you\'ll be making next year into
Lasergen.
MICHAEL R. MCMULLEN: Yes, Ross, as you know, it\'s more than just volume that
drove the margin expansion as you noted. And just leaning over to Bob, my guess
is it\'s probably 2/3 volume, 1/3 OpEx and specific gross margin initiatives. So
as I noted in my call script, we have a whole series of what I call the Agile
Agilent initiative, which continues to drive efficiency and much more
effectiveness inside the company. A lot has been focused on the gross margins of
late, but also we\'re going to apply a lot this in -- we\'ve been aligning this to
our OpEx as well. And again, I would underline just the importance of our
digital transformation on there really is going to continue to allow us to drive
improvements here. So when I came into the role a couple of years ago, I wanted
my margin expansion not to come just from volume, and that\'s been our mantra and
our formula since we started the new Agilent 4 years ago, and it will continue
to be our approach as we move forward. Bob, anything else you\'d add? Maybe you
want to get your mic here.
ROBERT W. MCMAHON: Yes, I was going to say I think the other thing is if you
look at the various groups, each one of the groups actually improved their
profitability in the quarter, which is nice broad-based performance. And so,
it\'s not just 1 business or 1 product that\'s driving the profitability, it
really is across Agilent.
MICHAEL R. MCMULLEN: That\'s a great build, Bob. And one of the things that we
noted to our board last week when we had the board meeting was what we\'ve been
doing on the gross margins of our service business as well, which is we often
think about the margins being relatively stable and flat there. Since it\'s such
a high labor content in terms of delivery, the marketing team has really been
driving efficiency with new tools and approaches. So it really is broad-based
improvement across all 3 groups.
OPERATOR: Our next question comes from Jack Meehan with Barclays.
JACK MEEHAN, VP & SENIOR RESEARCH ANALYST, BARCLAYS BANK PLC, RESEARCH DIVISION:
I\'d reiterate as well, good luck, Alicia. I enjoyed working together. As the --
just as my first question, I want to dig in a little bit more on the LSAG
performance. I know one of the products that was flagged out was LC/MS. I was
curious if you can give as an update on the Ultivo launch there and just where
you think you\'re seeing that resonate in the market.
MICHAEL R. MCMULLEN: Jacob, I think I\'ll let you answer this question since it\'s
one of those good news answers. So why don\'t I pass it over to you, Jacob.
JACOB THAYSEN: Yes, absolutely. Thanks for that question. And I mean, it\'s kind
of a very straightforward story, is that Ultivo continues to outperform our
expectations. We see our customers, especially where we started out here by
building applications in the food and environmental, and they have been very
happy with what they see. In the end, you can actually -- with the size of it
and the performance, you can actually place 3 in the 3. Ultivo in the same place
as you previously could do with 1 mass spec, which gives a lot of opportunities
in many of the labs that actually are lacking space. But on top of that, we have
done a lot to simplify and improve the software and also the usability as such.
We start to see now also the pharma accounts are really interested in taking on
Ultivo. But the mass spec story and the performance is beyond Ultivo, and we see
a lot also in our 6545XT BioConfirm where we now see on the biopharma side, that
we start to see a very strong uptake on that. So it\'s really broad-based that we
see that our robust reliable instrumentation is picking up in the market, very
excited about the mass spec. But there\'s a lot of the elements into the overall
LSAG business. The ICP-MS is also doing strong. LC continues to come back with
great momentum. So overall, we are really right now firing on all cylinders.
JACK MEEHAN: Great. Appreciate all that feedback. Just as a follow up, I wanted
to get a status update on the Colorado facility. Just help if you could parse
out some of the language from the prepared remarks a little bit more. Are you
assuming the revenue would start more in fiscal \'20 at this point? And then just
on the CapEx side, how much is within the $175 million guide is being attributed
to the facility there?
MICHAEL R. MCMULLEN: Yes. Jack, happy to answer the question. I\'ll take the
first one and then pass the second one to Bob. So the language in the script was
just to reaffirm to the audience that we\'re on track as planned, and the
construction is actually complete. We\'re now in the process of validation. We
just had a review late last week on the status. And we will get revenue in 2019,
but what we were just showing was the big pop-up when you get the full year is
going to be 2020.
ROBERT W. MCMAHON: Hey, Jack. This is Bob on the capital side and just to build
on what Mike was saying. Yes, that\'s -- we do expect some revenue contribution
here. But as we\'ve said consistently, the big revenue uptick is in 2020. And in
terms of the capital, of the $175 million, most of the capital has been spent at
the Frederick site already. There is some additional but most of that has come
down and the $175 million is -- the majority of that is still actually the base
business. Now recall, that\'s higher than perhaps it would have been earlier
because of the acquisitions that we\'ve acquired. So we\'ve acquired some capital
associated in plans -- expansion plans there.
MICHAEL R. MCMULLEN: By the way, Bob, I probably also should mention the
specific to our second site or our original site, which is Boulder, we actually
have found some ways to work the efficiency of our efforts there and we\'re
actually planning to get more volume out of there in 2019 and in 2018.
ROBERT W. MCMAHON: That\'s right.
MICHAEL R. MCMULLEN: So our growth in NASD is not only -- is not solely
dependent on the Frederick site.
ROBERT W. MCMAHON: That\'s right.
OPERATOR: Our next question comes from Steve Willoughby with Cleveland Research.
STEPHEN BARR WILLOUGHBY, SENIOR RESEARCH ANALYST, CLEVELAND RESEARCH COMPANY: I
guess, a couple of things. First, just on tariffs, Mike. You made a comment
about $4 million a quarter, just being up slightly. I was just wondering, is
that including any impacts from pricing or supply chain that you\'re doing as a
potential offset? And then I have one follow-up.
MICHAEL R. MCMULLEN: Oh, yes, hey Steve, thanks for the clarifying question. And
Bob, I\'m going to go ahead and take a shot at this. And if I -- if you need to
course correct me, please go ahead. But what we\'re trying to quantify was the
actual impact of incremental duties after all the mitigation efforts. That does
not include anything else we may be doing relative to pricing. So that\'s not a
complete drag on the P&L and it\'s all baked into the guide for next year. But
we\'ve also instituted some other broad-based actions to mitigate that as well.
But that was just trying to isolate the specific amount of the net incremental
duties to the company.
ROBERT W. MCMAHON: You got it.
MICHAEL R. MCMULLEN: Did I get it right, Bob?
ROBERT W. MCMAHON: You got it right.
MICHAEL R. MCMULLEN: Okay, all right. Thanks.
STEPHEN BARR WILLOUGHBY: Sure. And then just, Bob, just a quick follow-up
question. I guess, just another clarification, I guess, 2 things really. Within
the 5% to 5.5% core growth guidance you\'re providing, what is your assumption
for the incremental revenue from the NASD business in Colorado? And then just
making sure I heard you correctly in terms of operating margins, including this
pension accounting change, what is your assumption for operating margin
expansion next year x this 40 basis point headwind?
ROBERT W. MCMAHON: Yes. So on the NASD, what I would look at -- what I would
think about that is looking at NASD in total and the total growth rate is still
there. So rather than looking at it discreet because we\'ve actually found
incremental volume out of the existing plant, so we are expecting growth in NASD
next year, consistent with what we shared back in the summer. And in terms of
margins, what I would say...
MICHAEL R. MCMULLEN: Bob, I\'d also say that\'s also been very customer-driven
because customers who have 1 batch at the 1 site would put us to kind of finish
the work there as opposed to going midterm into the other sites.
ROBERT W. MCMAHON: That\'s right. That\'s right. And then in terms of the
operating margin expansion, what I would say is after adjusting for the 40 basis
point reduction, we are still expecting some modest improvement in operating
margins. So what that would tell you is it\'s greater than 40 basis points.
OPERATOR: Our next question is from Paul Knight with Janney.
PAUL RICHARD KNIGHT, MD, HEAD OF HEALTHCARE RESEARCH & SENIOR EQUITY RESEARCH
ANALYST, JANNEY MONTGOMERY SCOTT LLC, RESEARCH DIVISION: Could you talk about as
we -- as you think about that January Lunar New Year and the -- with the effects
you expect out of the way holidays are rolling out, how we should think about
the first quarter specifically? I know there\'s usually been a little bit of
noise around how calendars lay out.
MICHAEL R. MCMULLEN: Paul, thanks for the question. So it\'s my hope 1 year as
CEO not to be talking about the Chinese Lunar New Year, and 2019 may actually be
that year. So as you know, in 2018, it caused a lot of seasonality swings
between quarters and also prior year compares. The way it\'s playing out this
year, it\'s happening at the same period of time as it happened in 2018. So Bob,
I think we\'re not really expecting anything unusual this year from the timing of
the Chinese Lunar New Year.
ROBERT W. MCMAHON: That is correct.
PAUL RICHARD KNIGHT: And then lastly, I don\'t know if this question was put in.
But how should we think about tax this year and also going forward even beyond
FY \'19?
MICHAEL R. MCMULLEN: I think Bob\'s got a really good story here. So why don\'t
you talk to him about what\'s going to happen in \'19?
ROBERT W. MCMAHON: Yes. Thanks, Paul. And so this year in FY \'18, we ended the
year roughly at 18% effective tax rate. We\'re guiding to 17% in FY \'19, and
we\'re working on plans to continue to improve that going forward.
OPERATOR: Our next question comes from Patrick Donnelly with Goldman Sachs.
PATRICK B. DONNELLY, EQUITY ANALYST, GOLDMAN SACHS GROUP INC., RESEARCH
DIVISION: Mike, maybe one for you. We\'ve seen continued news flow on some of the
bigger buildouts from chemical companies in China. Can you just talk through the
market demand there? I know chemical and energy is an area you\'ve been pretty
bullish on historically in that region. So where are we in the process of some
of those bigger projects building out capacity in GC, some of the other areas
you act as a supplier in?
MICHAEL R. MCMULLEN: Yes, Patrick, happy to share my insights here. So I have
been bullish on the growth prospects of China as it relates to the chemical and
energy market for, I think, good reason because we have some pretty good insight
in terms of the projects that are underway. And as I mentioned I think in a
prior call, a lot of this is not only to support their economic growth but also
as what they view as an element of national security to continue to invest in
the colder chemical plants to really reduce their dependency on natural --
imported natural gas, for example. So we\'ve seen the project. They have a
multiyear program. I think we\'re probably in the third or fourth inning of what
looks to be a multiyear buildout of planned capacity. And this is really
important for our GC business as you mentioned, Patrick, because that actually
is the tool of choice. And Jacob, I know you just got back from a trip to China.
And are you hearing the same thing from the teams?
JACOB THAYSEN: Yes, certainly, Mike. It\'s really just a repeat that there are
plenty of opportunities in China right now with larger HPI installations coming
in here also in \'19 and \'20. So I think there are great opportunities in front
of us also in that place.
MICHAEL R. MCMULLEN: So I guess the message here, Patrick, is it\'s not over yet.
So we think we\'ve got a few more years of really solid growth in this segment of
the market in China.
ROBERT W. MCMAHON: Yes, and I think -- Patrick, this is Bob. Maybe just to build
on that. Obviously, as Jacob and team laid the groundwork for putting in the
instrumentation, I think Mark and his team around the chemistries and the
supplies business also continue to drive very strong growth in China. So I think
it\'s a multi-phased opportunity for us as we go forward, and so we\'re really
excited about that.
PATRICK B. DONNELLY: Great. And then, Bob, maybe now that you\'ve been on the
seat for a few months, can you just talk through kind of initial impressions,
maybe a particular focus on the margin side? Obviously came in to a nice, clean
balance sheet. We\'ve seen some activity there between the dividend increase and
the bigger share repo than historical trend. But maybe just on the margin side,
given some cost saving initiatives have been in place for a few years, what
opportunities have you seen, confidence level and continued expansion
opportunities going years out?
ROBERT W. MCMAHON: Yes -- no. Thanks, Patrick. I think one of the things that
I\'ve been pleasantly surprised with is the amount of rigor and discipline that
the organization actually comes through. We probably under market the Agilent
approach externally. But I think the teams are very operationally focused, not
just on cost savings at the gross margin line but really through increasing
productivity and efficiency across the organization. What I would say is there
are still several big opportunities as we go forward. Obviously, still focused
on gross margin. But Mike mentioned the digital aspect to this, and this has a
multifaceted approach. Not only does it enable us to actually do business easier
with our customers and actually drive some stickiness. It also is going to be
driving efficiencies in our customer -- cost per order dollar activities and so
forth. And so as we think about that driving, I\'d see multiple layers -- levers
there. And I think there\'s opportunity to continue to do that as well as
continue to reinvest some of those proceeds in R&D. So very excited about the
things going forward.
OPERATOR: Our next question comes from Dan Arias with Citigroup.
DANIEL ANTHONY ARIAS, VP AND SENIOR ANALYST, CITIGROUP INC, RESEARCH DIVISION: I
just wanted to -- Mike, I wanted to follow up on the expectations for growth in
food this year. How far along are you at this point in working through the
government reorganization headwind in China? Have you fully come through on the
other side there? Or are you still working through some things?
MICHAEL R. MCMULLEN: I think you\'re talking specifically to China, yes. So by
the way, one of the things we know -- so when you look at our food numbers,
Europe was relatively flat against the double-digit compares. So I know we\'re
going to -- I know your question was focused on China, but that\'s -- we also saw
some smaller geographic dynamics in the fourth quarter. Albeit said, we think
the business will be growing again in 2019. We think -- you may recall, I think
it was the second quarter I talked about 2 sets of reorganizations. One we
thought would happen faster, which was the environmental one, which is done. And
you can see that popped in some of the growth rates we had. And relative to food
ministries, we expect that to take longer to get that side of the reorganization
done. I think it\'s still holding true to form, which is we\'re anticipating that
kind of taking through the rest of this calendar year. That being said, we also
know some of the money is starting to move to the Tier 3 and Tier 4 cities, and
we\'ve been actively building up our channel there over the last several quarters
to ensure we can capture the growth. So I guess the message here is still
developing as we thought a few quarters ago, not done yet.
ROBERT W. MCMAHON: Yes, I would agree with that, Mike. And what I would also
point to is if you look at the performance of our China business, it\'s
accelerated quarter-on-quarter. So I don\'t want that to be lost after just
posting a 16% year-on-year growth rate for the total company.
MICHAEL R. MCMULLEN: Thanks for the reminder, Bob.
DANIEL ANTHONY ARIAS: Yes, that\'s helpful. Okay. And then if I could just go
back to the guidance range just to make sure that I have it correct. It looks
like you tightened things up relative to where you were at the Analyst Day. So
I\'m curious if you can just sort of hone in where you feel like you\'re maybe 50
bps better at the low end and then it seems like things are going pretty well,
so I guess -- and you called 6% prudent at the Analyst Day, so why trim 50 bps
at the top of the range?
MICHAEL R. MCMULLEN: Just as a reminder, at the Analyst Day, we actually didn\'t
guide for \'19. We\'re really just trying to illustrate really about what our
margin expansion might look like at different revenue levels. But I think
relative to our guide, Bob, I think we\'re actually feeling very, very positive
about it. I think we came out stronger this year than we did last year. So what
else could you add to that?
ROBERT W. MCMAHON: No, I think that\'s right. I think when we think about core
growth of 5% to 5.5%, that\'s faster than what we are expecting the overall
market growth to be. So we\'re feeling bullish about our ability to continue to
gain share not only through launching new products that we talked a little bit
about but also continued market execution across our businesses. And as we
mentioned, this will probably be led by the pharma in China areas, but we\'re
expecting solid growth across all of our end markets as well as geographies.
OPERATOR: Our next question comes from Dan Leonard with Deutsche Bank.
DANIEL LOUIS LEONARD, RESEARCH ANALYST, DEUTSCHE BANK AG, RESEARCH DIVISION: So
first question, can you elaborate more on time line for the share repurchase and
any target capital structure you have in mind?
ROBERT W. MCMAHON: Dan, this is Bob. I\'ll take that. We are thinking about it in
2 ways. One is obviously, as I mentioned, doing something throughout the course
of the year to maintain our share count at roughly 322 million shares, and then
we\'ll be opportunistic, similar to what we had done in the first quarter. Still
a little early for me to actually come out and give a target in terms of capital
structure, but what I can tell you is I\'d expect us to continue to be very
active in the M&A market. And I think we have an opportunity to optimize the
strong balance sheet more effectively going forward.
DANIEL LOUIS LEONARD: Okay. And then as a follow-up on your forward-looking
commentary on end markets. So how should we think about in regard to pharma
where you expect strength in 2019, how should we think about the sensitivity if
capital markets were to climb up here? Is it all -- would Agilent be sensitive
to that? Or just walk us through you\'re thinking on that front.
MICHAEL R. MCMULLEN: Yes, great question. My view is that what\'s powering the
investments in pharma, it\'s really all about investments to improve the human
condition. It\'s all about investing in new classes of drugs, new therapies,
whether it be the biopharma, whether it be cell therapies, various gene
approaches that are going on there. We see new class of drugs such as the
RNA-based therapeutics. So we think they\'re fairly resilient, if you will, to
those kinds of headwinds -- economic headwinds, the fact that they would occur.
But also I\'d just remind you particularly in our pharma space how much of our
business is noninstrument related. So we have a very large recurring revenue
business, really centered around our ACG business.
OPERATOR: Our next question comes from Derik De Bruin with Bank of America.
DERIK DE BRUIN, MD OF EQUITY RESEARCH, BOFA MERRILL LYNCH, RESEARCH DIVISION:
Alicia, as one of the only other New Mexicans on Wall Street that I know, I\'m
going to miss you. And so a couple of questions. So when you look at your
segments for 2019, the implied sort of organic core growth rate you\'re looking
for is something around 3% to 4% for LSA, mid-single digits for Diagnostics and
7% to 8% for ACG. Is that a good way to sort of look at it?
ROBERT W. MCMAHON: Yes, what I would say is you\'re in the ballpark.
DERIK DE BRUIN: Okay. And one of the key questions we\'re getting from a lot of
investors is obviously the macro has been choppy. There\'s a lot of angst about
how businesses performed during the downturn. I mean, obviously, you\'re a heck
of a lot less cyclical than you once were. But I guess, could you sort of think
about how the current portfolio performed during a steeper recession? Be sort of
like back as to what you\'ve just announced or think about where we\'ve grown in a
tougher time.
MICHAEL R. MCMULLEN: Yes. Sure, Derik. I think you pointed out -- made one very
good point, which is the portfolio of businesses is a lot different than it was
a few years ago. In fact, I sort of anticipated I might get this question,
that\'s why you saw a comment I made in my script, economic headwinds would
occur, it\'s a different company. By the way, we\'re not at all predicting that\'s
in fact going to be the case. And I would say that we\'ll probably follow a
fairly similar pattern than we saw a few years ago, mainly reflecting --
impacting the replacement cycle in certain industries, most likely the chemical
market. But a lot of the areas where there\'s money being spent on research, I
would think it would be fairly resilient. I don\'t remember the exact numbers,
but that would be kind of my top of mind thinking on that.
ROBERT W. MCMAHON: Yes. I think maybe to build on that point, Mike. As I look at
the business and the characterization, obviously, the product portfolio that we
have today is very different than what we had before, and I think it\'s actually
more focused on what customers need in terms of solving their problems. And so
whether that\'s be OpenLAB, where we\'re actually helping productivity and so
forth, or the CrossLab\'s group just in general, I actually -- you could envision
where you may have some impact on the instrumentation. But that potentially
could be offset because you\'d actually have more consumable usage going through
as they\'re looking to keep their instruments longer and so forth or want them
serviced. And so I think we\'re in better position now than we\'ve ever been. And
as we think about where our growth is coming from, it\'s coming from the fastest
part of our business -- or I should say is growing is in fast-growing markets
like cell analysis that we talked about before, which is going to be less
impacted, I think. And now, just because of research and the pace of innovation,
our ACG business and then obviously, our Diagnostics and Genomics Group as well.
DERIK DE BRUIN: Right. I mean just sort of when I was talking about the segment
growth, I\'m just noticing that back in 2015 and \'16, when oil was softer, you
basically were growing LSAG in the 3% to 4% range. So I\'m just assuming that
you\'re already building some sort of -- some conservatism in the numbers, just
given just historically how that -- what the condition of the business at that
time, business growing at size.
MICHAEL R. MCMULLEN: I think the same. Don\'t you think, Bob?
ROBERT W. MCMAHON: Yes.
OPERATOR: Our next question comes from Steve Beuchaw with Morgan Stanley.
STEPHEN CHRISTOPHER BEUCHAW, EQUITY ANALYST, MORGAN STANLEY, RESEARCH DIVISION:
Just a couple of trends, to dig a little deeper on the points that were raised.
I think, first, maybe on margins. Bob, there have been some questions asked
about some of the specific points on the margin progression from \'18 to \'19. But
as I take a step back, there are actually a lot of moving parts when I think
about Lasergen spending, the impact of M&A, spending on NASD, the accounting
change you flagged in FX. Any chance you have a view on what core operating
margin expansion is next year to give people a sense for what a jumping off
point might be for fiscal \'20 because, hey, it\'s never too soon to start
thinking about \'20, right?
ROBERT W. MCMAHON: Yes. Gee, we haven\'t even finished the call for the initial
FY \'19, but I\'ll give it a shot. What I would say is there are a number of
moving pieces. Obviously, we\'ve got a full year of Lasergen built into the plan.
That being said, we\'re still guiding full year operating margins to grow despite
that important investment. And then we\'ve got NASD as well and some of the
headwinds around the FX. But when I look at operating margin incremental, so
this is not necessarily core but this will be just looking at the incrementals.
In FY \'19, they\'re very consistent with kind of how we exited FY \'18. And what I
would say is we\'re focused on continuing to drive operating margins but also,
most importantly, earnings growth.
STEPHEN CHRISTOPHER BEUCHAW: Okay. And then the second thing I wanted to see if
I could get both of you, Mike and Bob, to talk a little bit about was guidance,
policy guidance, practice. You alluded in the prepared remarks to a hope that
people would model at the middle of the guidance range. And I got a sense from
the prepared remarks that you thought that there might have been a change or at
least a need for there to be a perception of change the way you guys went about
constructing the guidance for the year. It would be really helpful to hear you
talk about how you went through that? And why you think the middle of the range
is the right thing. And before I lose the podium here, I will echo the thanks
for Alicia. Thanks for being so helpful for us as we ramp up on the story of the
last few years.
MICHAEL R. MCMULLEN: Well, thanks, Steve. And I know Alicia has been enjoying
all the great feedback from you and others today. So -- and as you heard in my
opening comments, there\'s been mixed feelings about here moving on to her new
role, in terms of being a retired Mexican who used the work on Wall Street.
ALICIA RODRIGUEZ: You still have to answer the question.
MICHAEL R. MCMULLEN: I still have to answer the question. That\'s right. So
Steve, as you can see in our script, we were leading the witness a little bit. I
think you picked up on it. So I want to make some initial comments, and then
turn it over to Bob. So I think it\'s important to go back in time when we
started the new Agilent. And I would dare say, we really lacked credibility in
terms of a company that consistently delivered results relative to expectations.
So Didier and I really set forth a philosophy that really ensured that we are
being reasonable in terms of our outlook, but also that you could count on us to
deliver. And we now have a track record of almost 4 years of doing that. And I
would -- but we do think it\'s time for an evolution of approach because I think
that\'s what Bob has brought to Agilent and perhaps why don\'t you share your
thinking there, Bob?
ROBERT W. MCMAHON: Yes. Thanks, Mike, and I would agree. I mean, I think one of
the things that we want to do is obviously continue to be -- feel comfortable
about our forecast, but also recognize some of the potential upsides that we
have as well as acknowledge some potential downsides and try to shrink the gap.
And that\'s what we\'ve attempted to do here, is to actually provide a little more
color in terms of where we think the business is going in terms of our
performance, particularly when we just come off of some very strong business,
and we\'re forecasting strong end markets. And so as Mike said, it\'s not a
revolution. It\'s more of an evolution of the guidance to help. And we\'ve got a
track record that gives us more confidence in our ability to upgrade that.
OPERATOR: Our next question comes from Catherine Schulte with Baird.
CATHERINE WALDEN RAMSEY SCHULTE, SENIOR RESEARCH ANALYST, ROBERT W. BAIRD & CO.
INCORPORATED, RESEARCH DIVISION: Congratulations and thank you, Alicia. You\'ll
certainly be missed. First for Mike, and maybe Jacob can comment on this as
well. As you think about your innovation pipeline for fiscal \'19, what gets you
most excited? Should we be expecting to see the technology used in Ultivo
applied to some of your other platforms as well?
MICHAEL R. MCMULLEN: So I think we\'re -- just like any parent would be, we\'re
excited by all of the members of our family. So we\'ve got a lot of great new
things coming on. I made a few announcements already of things that are
happening on the molecular side, but I think we\'ve got more coming, right?
Without sharing the specifics, what would you say there, Jacob?
JACOB THAYSEN: Yes, I think I will not go out and destroy Christmas by going out
and telling all the presents we have for you over the next year here. So I\'m not
going to speak directly to what is coming out, but what I can say is that I\'m
very proud and I\'m very excited about \'19 on the NPIs that will come out there.
I think we have already started strong with the 3 NPIs that came out the first
few weeks in the year here between the LDIR and the Cary 3500 and also the
ICP-MS water analysis system and the CSI, so that was at Q4, and there\'s much
more to come. So I\'m pretty pleased, but I won\'t speak to the specifics yet. It
will be positively surprising to see it.
MICHAEL R. MCMULLEN: I would add, Catherine, to your comment about the
technology leverage across our platform. In fact, that is the intent both for
the Intuvo and the Ultivo. In fact, we haven\'t really had an Intuvo question
today, but I would just question that I think we posted 14% unit growth in the
Intuvo this past year as well.
CATHERINE WALDEN RAMSEY SCHULTE: Great. Very helpful. And then, Bob, you
mentioned remaining active on M&A front. So can you and Mike just comment on
your appetite for potentially a larger acquisition and then what your key areas
of focus would be?
MICHAEL R. MCMULLEN: Yes, Catherine, happy to. Just I don\'t think there\'s really
a new story here because what we\'ve been saying for probably the better part of
last year or so is that have we developed our own internal capabilities, and
then I think we\'ve just augmented our capability here with the addition of Eric
Gerber coming over to us from Danaher, we believe that we have the ability to
really deliver for our shareholders value on the M&A we do. And so I\'m much more
confident in our ability to tackle M&A and really make it part of the Agilent
growth story. So we would be willing to take on larger acquisitions. Bob
mentioned in his comments, there\'s plenty of room in the balance sheet. I think
it really is more about having the right opportunities. And we will continue to
be -- remain very disciplined in terms of what we look at, but I think it\'s
really limited -- our actions will be limited by availability of active targets
as opposed to our willingness to engage.
ROBERT W. MCMAHON: Yes. And Catherine, what I would add to what Mike is saying
is when we think about M&A, I think we\'re focused mostly on the 3 groups, the
channels and the strength that we have to be able to leverage as opposed to
creating a new leg.
MICHAEL R. MCMULLEN: Yes, that\'s correct.
OPERATOR: Our next question comes from Brandon Couillard with Jefferies.
BRANDON COUILLARD, EQUITY ANALYST, JEFFERIES LLC, RESEARCH DIVISION: Alicia, I
echo the sentiments here. You\'ll be missed. Quick one for Samraat, if you can
give as an update as to whether you\'re finished with the Dako rollout quest yet,
whether those instruments have been fully transitioned and started scaling? And
then secondly, if there\'s a plan to port the PD-L1 assays over to the Omnis
platform any time soon.
MICHAEL R. MCMULLEN: I\'m going to pass it right over to you, Sam.
SAMRAAT RAHA, SENIOR VP AND PRESIDENT OF DIAGNOSTICS & GENOMICS GROUP, AGILENT
TECHNOLOGIES, INC.: Yes. Thank you very much for the question. We are, as you
know, very pleased to have earned the business of Quest, and we\'re continuing to
ramp. We have a significant percentage of that business where we\'ve made
conversions, but there\'s still work in progress, which is actually good news. It
means increased opportunity for us. And in terms of your second question,
absolutely, we are -- it is in our road map to continue expanding the menu on
this. And having PD-L1 available on this is absolutely something that\'s within
our plan. It\'s something that will happen in 2019.
BRANDON COUILLARD: Now 2 quick ones for Bob. The operating cash flow growth
implies only about 3% growth in fiscal \'19. Anyone timers to point out there?
And then secondly, I think there was an asset impairment in the fourth quarter.
Could you elaborate on where that was?
ROBERT W. MCMAHON: Yes. Thank you. Thanks, Brandon. In terms of cash flow, yes,
I mean, I think it\'s prudent forecast right now at the beginning of the year.
There were no one timers really in the -- in FY \'18 or the fourth quarter other
than tremendous performance that we had, not only on the revenue coming in early
in the early part of the quarter and then also which enabled us to generate
tremendous cash flows with our accounts receivable teams and so forth. So I
think it will evolve as we go forward. In terms of the asset impairment, that\'s
a small business within our DGG business, and we\'re still expecting it to grow
but not at the level that we had forecasted.
OPERATOR: Our next question comes from Doug Schenkel with Cowen.
DOUG SCHENKEL, MD & SENIOR RESEARCH ANALYST, COWEN AND COMPANY, LLC, RESEARCH
DIVISION: First off, I know it\'s been said a bunch of times already, but thanks
again to Alicia. We\'ll miss you. I want to start with a follow-up on an earlier
chemical and energy question. Broadly, not just in China, what are you seeing
amongst chemical and energy customers given the recent decline in oil prices and
a bit more of an uncertain macroeconomic backdrop? And relatedly, what are you
assuming for growth within fiscal \'19 guidance across the chemical and energy
subsegments, meaning breaking it down by chemical, refining and E&P?
MICHAEL R. MCMULLEN: Doug, thanks. Happy to provide a perspective on that. And
as we\'ve mentioned earlier, the oil price gets a lot of attention, but it really
is the view of global growth that often drives a lot of this market. But we\'re
seeing a couple of things going on here. First of all, we\'re not seeing any
change in customer buying behavior. In fact, we continue to see a lot of demand
for replacement products. So the new generation of equipment tied to our OpenLAB
informatics portfolio really drives productivity. So customers are seeing an
economic benefit of the investments. So even in situations where perhaps the --
there is some uncertainty about oil prices and economic growth, they want to
invest because it helps the P&L by taking costs out of the structure. So we see
no changes in buying behavior. And really, the growth in chemical and energy has
been really broad-based. We talked a bit about China already, but we saw -- and
again, I\'m talking about the CapEx side of things, really broad-based across all
regions. And then again, I would just say that the -- our ACG business continues
to do quite well here as well. And Bob, anything else you\'d add there?
ROBERT W. MCMAHON: Yes. The only thing I would add, Doug, is in terms of your
question around FY \'19, we\'re not going to get to that level of specificity into
the submarkets within the chemical and energy market. But what I would tell you
is if we look at chemical and energy, we\'re expecting that business to grow
slightly lower than what our core guide is.
DOUG SCHENKEL: Okay. That\'s great. And Bob, maybe if I can, just as a follow-up,
sneak in a couple of guidance clarification questions. First, on the buybacks,
which have come up a couple of times. Your stock seems pretty depressed relative
to your strong operational performance and relative to peers on a valuation
basis, and your balance sheet is very pristine. Your guidance assumes a flat
share count in spite of the fact that you have plenty of cash on the balance
sheet to get more aggressive with buybacks and still have room to do more and
bigger M&A. I guess it\'s still unclear to me why you\'re not getting more
aggressive with the pace and size of buybacks. Is this really a function of it
just being pretty early in your tenure? And then, I guess, the second guidance
clarification question would be on just regarding the tax rate. Your cash tax
rate is still a lot lower than 17%. I\'m just wondering if there\'s any
opportunity or chance that ultimately the tax rate goes a lot lower than what
your guidance incorporates.
ROBERT W. MCMAHON: Yes. Thanks, Doug. You hit the nail on the head. I mean, it\'s
still relatively early in my tenure as I\'m trying to figure out all the various
pieces. But what I would tell you is I think there\'s opportunity. Now our
primary use of cash is actually to do M&A after investing in the business and
grow. And I think we\'ve seen that starting with the work that we did in FY \'18
and then just starting here in FY \'19 with closing of C&E and so forth. But I do
think we were opportunistic in Q4, and I think that there will be opportunities
that we will -- if there are opportunities, I should say, we will capitalize on
them in FY \'19. And then in regards to -- what was the second one?
MICHAEL R. MCMULLEN: The second one is cash rate. I love this one, which is,
yes, Doug, there sure is a difference between our cash tax rate and our non-GAAP
tax rate. And I think Bob and team have brought it down a point so far, but I
think you\'re still looking at some things, and we\'re not...
ROBERT W. MCMAHON: Yes, stay tuned. I\'ll tell you, stay tuned on that.
MICHAEL R. MCMULLEN: We\'re not ready to commit, but -- we\'re not done on our
work yet.
OPERATOR: Our next question comes from Puneet Souda with Leerink Partners.
PUNEET SOUDA, DIRECTOR, LIFE SCIENCE TOOLS AND DIAGNOSTICS, LEERINK PARTNERS
LLC, RESEARCH DIVISION: Obviously, Alicia, thanks for all the help, and really
good -- great working with you. So if I could touch, first on just wanted to
clarify how much of a contribution was USP regulation and LSAG? If you could
quantify that. It seemed like in past quarters, we\'d seen some significant
contribution from ICP-MS. I just wanted to make sure we have that number for
this quarter, too.
MICHAEL R. MCMULLEN: Yes. I don\'t think we have that level of granularity in
terms of specific numbers. What I can tell you is that it\'s been part of the
story of our pharma growth, and I think that ICP-MS has double digit kind of
growth.
ROBERT W. MCMAHON: Yes, it was well in excess of -- it was greater than 20%.
JACOB THAYSEN: Yes. We\'ve gotten a tailwind from that regulation. So yes, that
was good.
PUNEET SOUDA: And then what\'s your expectation there of how long of a tail that
could be for USP longer term? Could you give us a sense of how many quarters or
maybe years that this could last?
MICHAEL R. MCMULLEN: Yes. This would be just my guess, but I think it\'s probably
1 year, we\'re not done yet. I think we expect it to continue into \'19.
JACOB THAYSEN: Yes. I think we saw a lot of great performance base on that
regulation in \'18, and we will also see a tail into \'19. But we have a lot of
other things going on in ICP-MS, and we really see that technology being applied
in most spaces now with the water regulations coming out where we have really
made a nice workflow. I think that we can see a lot of opportunities there. But
generally speaking, ICP-MS is just being a tool that will be picked up from many
other opportunities. So I don\'t think that we are dependent on one path and one
workflow, but we will see these great opportunities in \'19.
PUNEET SOUDA: Got it. And then, Mike, on Intuvo, you pointed out the 14% growth,
unit growth here. I just wanted to get a sense of do you want to address broader
applications here? My question is would Intuvo evolve into another set of
product? Or should we expect maybe potentially a next-gen 7890 here, along the
lines that -- what you have produced in the past to address the full market
compared to the GCs that you\'ve had in the past?
MICHAEL R. MCMULLEN: Puneet, thanks for the question. So I was trying to preempt
the audience about it because we\'re really quite pleased with the pick up or
really the double-digit growth, if you will, of the Intuvo products because as
we said for -- since launch, we knew it\'d be a measured adoption by customers
because they really want to put the equipment through the phases, really be
convinced that it actually does work as advertised. And guess what? It does. And
now we\'re starting to see some really nice multiple unit orders coming in,
particularly as it relates to mass spec and at the risk of being Santa Claus or
destroying Christmas, whatever Jacob said earlier, what I can tell you is that
our plan is to leverage a lot of the core technologies that were developed in
the Intuvo product group, potential new versions of gas chromatographs and work
really hard to keep the overall complete portfolio as competitive as possible.
And as you know, the Intuvo covers only about 60% of the application space, so
there\'s work to do on the rest of the portfolio as well.
OPERATOR: I show no further questions in queue, so I\'d like to turn the
conference back over to Ms. Rodriguez for closing remarks.
ALICIA RODRIGUEZ: Thank you, James, and on behalf of myself and the management
team, I\'d like to thank everybody for joining us today. If you have any
questions, feel free to give us a call in IR. Thanks a lot. Bye-bye.
OPERATOR: Thank you. Ladies and gentlemen, that does conclude today\'s
conference. Thank you very much for your participation. You may all disconnect.
Have a wonderful day.
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LOAD-DATE: December 1, 2018
LANGUAGE: ENGLISH
TRANSCRIPT: 111918a12115535.735
PUBLICATION-TYPE: Transcript
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