U.S. markets close in 5 hours 19 minutes

Edited Transcript of A earnings conference call or presentation 18-Feb-20 9:30pm GMT

Q1 2020 Agilent Technologies Inc Earnings Call

SANTA CLARA Feb 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Agilent Technologies Inc earnings conference call or presentation Tuesday, February 18, 2020 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ankur Dhingra

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 S. Raha

Agilent Technologies, Inc. - SVP

================================================================================

Conference Call Participants

================================================================================

* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Daniel Anthony Arias

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Daniel Louis Leonard

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Jack Meehan

Barclays Bank PLC, Research Division - VP & Senior Research Analyst

* Jesse Klink

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

* Ryan Blicker

Cowen and Company, LLC, Research Division - VP of Healthcare

* Stephen Christopher Beuchaw

Wolfe Research, LLC - Director of Equity Research

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

* Vijay Muniyappa Kumar

Evercore ISI Institutional Equities, Research Division - MD

* William Robert Quirk

Piper Sandler & Co., Research Division - MD and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and welcome to the Agilent Technologies First Quarter 2020 Earnings Conference call. (Operator Instructions)

And now I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Thanks.

--------------------------------------------------------------------------------

Ankur Dhingra, Agilent Technologies, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, Julienne. Welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2020. 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; and Sam Raha, President of Agilent's Diagnostics and Genomics Group. Due to certain personal engagements, Mark Doak, President of the Agilent CrossLab Group, is unable to join us today.

You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com.

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. Revenue growth will be referred to on either reported or core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 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.

And now I would like to turn the call over to Mike.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thanks, Ankur, and thanks, everyone, for joining our call today. I'd like to start today's call with a reminder that Mark Doak, ACG Group, will retire on May 1. While Mark and his wife are currently enjoying a long-planned vacation and he's not able to join us today, I would be remiss in not taking the opportunity to recognize the outstanding accomplishments Mark has made in his stellar 38-year career. His track record of results speak for itself. Thank you, Mark.

We have a very strong bench at Agilent and have already named Mark's successor, Padraig McDonnell. Padraig knows the business well. He's been on Mark's staff for several years. He's currently run our Chemistries and Supplies division. Padraig and Mark already worked on transition activities as Padraig prepares to take helm of the ACG business at the start of fiscal Q3. I congratulate both Mark and Padraig.

And now on to the quarterly results. The Agilent team delivered a strong start to 2020. Q1 revenues are above our expectations as business grew in all regions and markets. Total revenues of $1.36 billion are up 5.7% year-over-year on a reported basis and 2.4% on a core basis. We continue to translate our top line growth into strong bottom line earnings. Our EPS of $0.81 is up 7% and is at the high end of our guidance.

Before going into business unit market details and our quarterly results, I want to speak about 2 specific areas that highlight how our building-and-buying strategy investing in fast-growing markets continue to deliver growth and help us create a more resilient business. First, I want to talk at our most recent acquisition, BioTek. This was the first quarter with the BioTek team onboard, and the business is off to a very strong start with revenue growth above our expectations. We continue to be very enthusiastic about the cell analysis space, and BioTek continues a strong momentum that really got us interested in bringing them into Agilent. The BioTek leadership team was just in Santa Clara for a few days of planned meetings, and they are very energized and excited about the future possibilities in making a great business even stronger as part of Agilent.

Second, the resiliency of our business model is on full display this quarter as Agilent delivered strong growth earnings in the face of a negative Q1 impact from the coronavirus outbreak in China. As this has dominated headlines, let me add a few additional comments regarding the coronavirus and its impact on Agilent. Most importantly, our thoughts go out to all those affected by the coronavirus.

On the Agilent front, our team fortunately has not had any direct health impact, and many returned to work last week. We are remotely supporting our customers as a number of them barely resumed operations. We have also restarted our in-country production activities and are shipping product to customers within China and internationally, albeit at a reduced rate.

On the business side, given that our first quarter ended January 31, we are seeing business impact across both fiscal quarters, Q1 and Q2. In Q1, our revenues are running ahead of expectations right up to Lunar New Year holiday. However, the extension of Lunar New Year holiday affect our customers' ability to transact and accept shipments during the last days of the quarter. This reduced our reported revenue by approximately $10 million in total for the quarter, primarily in our LSAG instrument business. We have since recognized the bulk of this revenue now in Q2.

Looking ahead, we are projecting that coronavirus will continue to impact our China business throughout Q2. Bob will share additional details, but we are anticipating delays in new equipment purchases and slower uptake of consumables and services. This slower uptake is due to the reduced number of selling days resulting from the extension of Lunar New Year, along with customer and logistics operations that are ramping but not yet fully operational.

It's important to note, while we're forecasting impact to our Q2 business, our full year outlook for total Agilent revenues and EPS remains unchanged. Our business outside of China remains on a solid footing, and we believe a large portion of our China business that is currently being impacted by the coronavirus is not lost, but rather is delayed.

As you know, the coronavirus outbreak is unfortunately impacting the health and safety of tens of thousands of people. I'm very proud of how the Agilent team has responded to do our part to help. Our Agilent China team is exactly supporting those customers doing crucial research into the virus. We have donated instruments and supplies for clinical and research institutions based in China to support disease research and drug development efforts. We continue to closely monitor events in China and are prepared to act quickly to help wherever possible.

Now on to additional details of our quarterly results. Agilent's growth is broad-based as our business grew across all regions and end markets. Business performance was led by the Americas posting 5% core growth, with [Europe] (corrected by company after the call) coming in with low single-digit results and Asia holding steady. Despite the timing of the Lunar New Year and the coronavirus impact late in the quarter, our China business grew low single digits, while all end markets grew our results led by strong growth in the biopharma and environmental forensics markets.

Now taking a closer look at how the individual business units performed. LSAG revenues grew 5% reported basis driven by strong performance in our biopharma and cell analysis business. On a core basis, LSAG's revenues were down 2% against a tough compare and inclusive of the unexpected Q1 impact from the coronavirus. With the exception of China, all regions and end markets performed in line with expectations.

The ACG business continues to deliver strong results, posting 7% core growth even with reduced selling days in China. This growth is broad-based across all major market segments and regions. These results continue to demonstrate the strength of our ACG CrossLab strategy and how we are leading the transformation of the analytical lab.

DGG is also posting 7% growth in the quarter against a difficult 12% growth compare. We are experiencing a continuation of positive trends, winning share in our core pathology business and seeing strength in our NGS QA/QC franchise. We continue to be pleased with the revenue ramp at our new oligo manufacturing facility in Frederick, Colorado.

In addition to driving strong financial results, I want to highlight some other notable events that took place during the quarter. We continue to bring differential new products to the market, gaining strong customer and external recognition. We just introduced the Agilent SureSelectXT HS2 DNA Kit. This, along with our recently launched automated sample prep platform, Magnis, further strengthens our leadership position in the NGS sample prep market.

In addition, 2 industry publication on the Agilent InfinityLab LC/MSD IQ system for 2019 innovation awards. The award-winning mass spectrometer introduced last June incorporates intelligent designed-in innovations such as embedded sensors that monitor instrument health.

And finally, early this month, Barron's named Agilent #1 in the list of the 2019 Most Sustainable Companies in America. We're very proud of this recognition. Sustainability is a critical topic that is gaining increased interest from customers, employees and investors. More importantly, we believe focusing on sustainability is simply the right thing to do.

Before I pass the call on to Bob, I'd like to close with the reminder of Agilent's resilience and our shareholder value-creation model, delivering above-market growth, expanding operating margin and a balanced deployment of capital. We are able to thrive by focusing on platforms for the multiple large end markets and long-term growth opportunities. We're also driving growth in the aftermarket, increasing our focus on faster-growing end markets, streamlining our infrastructure and operations and investing in the future of Agilent, both organically and inorganically. We did all this while maintaining acute focus on delivering EPS growth with superior quality of earnings and driving shareholder value creation.

Despite the temporary business uncertainty created by the coronavirus in China, I remain confident about the longer-term growth prospects of the China market, our China growth energy, and most importantly, our team. I'm very proud to comment on the strength and resiliency of our China team and their ability to overcome any near-term challenges that come our way.

When I look at our global team in our business, our growth prospects and team have never been stronger. We're laser-focused on driving revenue and earnings growth. I'm pleased to tell you that all these facts allow us to maintain our growth and earnings outlook for the year.

Thank you for being on the call, and I look forward to answering your questions. I will now hand off the call to Bob. Bob?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional detail on revenue, walk through the first quarter income statement and some other key financial metrics and then finish up with our updated guidance for Q2 and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results.

Our first quarter results were very good as we had strong execution across all regions and markets. Revenue for the quarter was $1.36 billion with reported revenue growth of 5.7%. Currency negatively impacted revenue by 0.4 percentage points, and acquisitions added 3.7 percentage points to growth. Our core growth was 2.4% in the quarter.

As Mike indicated, our performance was impacted by the extension of the Lunar New Year holiday due to the coronavirus. This reduced the number of shipping days in China, and we estimate shifted $10 million in revenue out of Q1. If not for the reduced shipping days in Q1, our performance would have been stronger, with the shift affecting our core revenue growth by roughly 70 basis points.

In terms of end markets, we saw growth across all of our 6 end market segments. Pharma, environmental and forensics and diagnostics and clinical led the way for us in the first quarter. During the quarter, pharma grew 3%. Double-digit growth in DDG and high single-digit growth in ACG offset a mid-single-digit decline for LSAG.

Within pharma, our biopharma or large molecule segment grew high single digits. And on a geographic basis, our pharma business experienced high single-digit growth in the Americas and mid-single-digit growth in Europe. This was partially offset by a mid-single-digit decline in China, largely associated with the timing of the Lunar New Year and, to a lesser extent, the execution of the 4+7 program. The 4+7 program is playing out as we expected, with the third round completed in January and multiple winners per drug. We continue to believe that this is a long-term positive for the industry as drug quality improves, access to health care increases.

Our environmental and forensics business grew 4% against a very tough compare last year of 10%. During the quarter, we saw balanced growth between instruments and aftermarket sales.

In diagnostics and clinical, revenue grew 3% against a strong 11% compared to last year. Mid-single-digit growth in DGG driven by continued share gains in pathology business were partially offset by declines in LSAG and ACG, with both only having small businesses in this segment.

Chemical and energy revenue grew 2%. Services and consumables grew mid-single digits, offset by flat instrument sales. Academia and government grew 1%, with services and consumables growing mid-single digits, partially offset by flat instrument sales. Mid-single-digit growth in the Americas was partially offset by flat to low single-digit declines in the other regions. And finally, food returned to modest growth, up 1%. Low-teens growth in services and consumables was partially offset by declines in instrumentation. While 1 quarter does not make a trend, we are pleased with the continual progress in this market.

On a geographic basis, we saw growth in all regions led by America's growing mid-single digits. Europe grew 2%, in line with our expectations. And as Mike mentioned, our business in China was running ahead of expectations through the first 2 months of fiscal 2020. As mentioned earlier, despite the shift of the $10 million, China still grew 1%. If not for the extension of the Lunar New Year, our core growth in China would have been solidly mid-single digits.

Now let's turn to the rest of the P&L. Gross margin was 55.7%, down 120 basis points versus the prior year. This is a result of the planned start-up cost for our new NASD facility as well as product mix and some negative pricing effects on our instrumentation business. We offset 90 basis points as we leveraged our cost basis and operating expenses. And as a result, our operating margin was 22.9%, down slightly from 23.1% in the first quarter of last year. Adjusting for the $10 million coronavirus impact on revenue, operating margins would have increased versus the prior year, and so we feel good about our continued opportunity to expand operating margins. We were also able to lower our tax rate slightly to 15.5% and expect that rate to continue for the rest of the year. This resulted in non-GAAP EPS for the quarter coming in at $0.81, at the top end of our guidance and representing 7% growth.

Before turning to second quarter guidance, I want to touch on a few other financial metrics. Our operating cash flow was an outflow of $59 million, in line with expectations as we incurred the onetime tax outflow of $226 million related to the transfer of intangibles, as noted last quarter. We also paid out $56 million in dividends and purchased 726,000 shares for $60 million. We ended the quarter in a net debt position and a net leverage ratio of 0.9x.

Now let's turn to our non-GAAP financial guidance for Q2. We are anticipating revenues in the range of $1.28 billion to $1.32 billion in the second quarter. This range is larger than we've traditionally provided as we've intended to estimate an impact of the coronavirus on our business in the second quarter. As this is a fluid situation, we thought it would be helpful to detail out our assumptions, particularly as we've seen impact across both Q1 and Q2.

Our guidance contemplates a $25 million to $50 million impact in our first half of our fiscal year, which translates to roughly to a 1.5- to 3-week impact on China revenues. Of this, we saw $10 million in Q1, and we are estimating a net $15 million to $40 million incremental impact in Q2.

The Q2 revenue range of $1.28 billion to $1.32 billion translates into reported growth of 3.4% to 6.6% with core growth of 1% to 4%. Currency is expected to have a negative 1.1% impact, while M&A is expected to contribute 3.5% to 3.7% in the quarter. We are estimating the coronavirus to negatively impact our Q2 core growth by 1 to 3 points.

Our revenue outlook translates Q2 earnings in the range of $0.72 to $0.76 per share or 1.4% to 7% growth versus last year. Importantly, as Mike mentioned, we believe the majority of this business is not lost, rather delayed as customers and the government ramp and recover. In addition, our business outside of China remained strong. As such, we expect a larger second half of the year and are not changing our full year guidance for revenue or EPS.

So before starting up the call for questions, I want to conclude by saying we have a very solid start to the year that shows the strength and breadth of our portfolio. It is that portfolio, coupled with the strength of the Agilent team, that despite the uncertainty caused by the coronavirus, we are maintaining our full year outlook.

With that, Ankur, back to you for the Q&A.

--------------------------------------------------------------------------------

Ankur Dhingra, Agilent Technologies, Inc. - VP of IR [5]

--------------------------------------------------------------------------------

Thanks, Bob. (Operator Instructions)

Julienne, if you can please provide instructions for Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Tycho Peterson from JPMorgan.

--------------------------------------------------------------------------------

Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

I appreciate you guys quantifying the corona impact. I guess a couple of things. I mean you've previously talked about mid-single-digit China expectations for the full year. So should we assume that's still the case, just more back-end loaded?

And then, Mike, as we think about collateral damage within China, how should we think about the C&E market, just given that the broader economic activity in China is slowing? So should we think about some impact on C&E as well?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Sure, Tycho. I think I'll handle both questions. And Bob, correct me if I go off script here, but I think we still think that the mid-single-digit number is doable for the year in China. What we're seeing already on ground from our team, we're just on the phone today with our team in China, we're still able to transact, and orders are actually coming in as forecast. I think that -- we think a lot of the procurement is going to occur a little bit later in the year. I think a lot of it's recoverable with the exception of probably some aspects of our service business, where customers really are looking for service people to arrive on their sites. I think we feel pretty good about how we're thinking about China throughout the rest of the year, albeit being a very fluid situation.

And we really haven't seen any kind of transitory or connected impact on C&E. In fact, C&E actually did better than we were thinking in the first quarter. It's too early to call a trend, but some of the PMIs are actually inching up, which would maybe give an indication of perhaps a better outlook and some initial noise with some of our major accounts about thinking on procurement. But we still remain cautious in terms of the outlook for C&E, but we're encouraged by the Q1 results. And again, we're not really seeing any significant movements around in that area on a global basis. And we think, back to the first comment on China, we weren't expecting a lot in C&E this year in China, anyway. So I think we're in pretty solid shape relative to the outlook there as well.

--------------------------------------------------------------------------------

Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

And then a follow-up on biopharma. You grew 3% on a 10% comp. Last quarter, it was 7% on a 14% comp. So was that a pull-forward last quarter? And if so, can you maybe talk to that dynamic?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [5]

--------------------------------------------------------------------------------

No. I think the big story there is China, right?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [6]

--------------------------------------------------------------------------------

Yes. That's exactly right, Mike. There's 2 elements there. One is the shifting of the Lunar New Year from Q1 into Q2 as well as the impact -- Q2 into Q1, excuse me, as well as the extension of the Lunar New Year holiday. So those are the 2 primary pieces.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [7]

--------------------------------------------------------------------------------

Yes. And then within the pharma numbers, Tycho, the biopharma segment really was strong for us again this quarter as well. And then we think as the 4+7 initiative rolls out in the latter part of this year, then we'll see the growth in the small molecule side of that space. And then we have really strong growth in NASD and the ACG business, strong in pharma. So we're feeling pretty good about pharma.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from Doug Schenkel from Cowen.

--------------------------------------------------------------------------------

Ryan Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [9]

--------------------------------------------------------------------------------

This is Ryan on for Doug. Maybe just to round out the China dynamic quickly, can you provide some more color on your supply chain exposure within China? It sounds like the operating environment is improving. But how should we think about your direct and indirect supply chain exposure? And do you see any risk to your ability to fulfill demand within and outside of China over the course of this year?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [10]

--------------------------------------------------------------------------------

Yes. Sure, Ryan. Thanks for that question. So as I touched briefly onto my call script, we actually have resumed production and are in a really solid position right now to, not only ship a product to our customers in China, but also products that are manufactured in China to have them exported into the global market environment.

And as we have a very diversified global footprint in terms of supply chain and manufacturing capabilities, we think for the near term, we're in pretty solid shape relative to ability to meet our commitments from a shipment perspective. And then you also may recall that starting with the initiation of the U.S.-based tariffs, we actually had initiated a movement of a lot of our supply chain out of China. So it actually has mitigated our risk here as well.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [11]

--------------------------------------------------------------------------------

Yes. Ryan, this is Bob. Just to follow up. We have twice-weekly calls with our team in China, inclusive of logistics as well as our supply chain. And obviously, it's quite dynamic. But as it currently stands today, we feel like we have the ability to be able to procure, not only raw materials, but also produce the finished goods and ship them, not only within China, but also get product into China and vice versa.

--------------------------------------------------------------------------------

Ryan Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [12]

--------------------------------------------------------------------------------

Great. And then maybe just following up with a brief 2-parter. Number one, on the food market, it sounds like things were improving a bit prior to this coronavirus dynamic. Can you talk a little bit more about what you were seeing in the market? And if you think that the China portion of that market specifically could be poised to return to growth as we get past this coronavirus dynamic?

And then specifically for gross margin, can you talk about what the timing headwind was for the quarter versus the other dynamics that you called out?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [13]

--------------------------------------------------------------------------------

Do you want to take this one?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [14]

--------------------------------------------------------------------------------

Yes, yes. So on food, as I mentioned, we certainly are pleased with the progress. We have had several quarters of kind of very predictable performance there and actually Q1 despite the coronavirus. It probably had more impact on the pharma side than in food, grew 1% on a global basis. It was down slightly in China, but certainly not to the level that it had been in the past. So we feel good about that. It's probably too early to call that it's going to return to growth long term. We do believe it will return to growth, but not ready to call that in this fiscal year.

In terms of the timing of the coronavirus, that $10 million, that was quite a large incremental because we had all the costs. So that was probably a higher-than-normal kind of incremental drop to the bottom line. That was probably a little over $0.01 of impact on the full quarter.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Your next question comes from Jack Meehan from Barclays.

--------------------------------------------------------------------------------

Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [16]

--------------------------------------------------------------------------------

I was hoping maybe you could give us -- can you give us an update on the NASD rollout at the new site? And how much that contributed to the quarter in both DGG and the pharma end market?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [17]

--------------------------------------------------------------------------------

So as I imagine, you may get a little tighter here in just from Bob and myself. I'm going to pull Sam into this conversation. But as we highlighted in the call script, the NASD business continues to ramp as we'd expect. Really pleased with the progress on how we're starting to fill up that factory. Still not yet at full capacity, operating at full capacity yet, but it was a contributor to our growth in the first quarter, no doubt. And Sam, anything else you'd like to add there?

--------------------------------------------------------------------------------

Samraat S. Raha, Agilent Technologies, Inc. - SVP [18]

--------------------------------------------------------------------------------

No. Mike, you hit the nail on the head. It is that the business is performing as we've expected. We continue to see interest in all the customers, the pharma customers that we've given tours to. We're doing work now there for a number of customers. Not to be boring, nothing new to report. It is progressing.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [19]

--------------------------------------------------------------------------------

It's all good news right now.

--------------------------------------------------------------------------------

Samraat S. Raha, Agilent Technologies, Inc. - SVP [20]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [21]

--------------------------------------------------------------------------------

Yes. I would just add, Jack. As we had talked about, this will ramp up and be a more material impact in the second half of the year, it's progressing as we expected. It had a slight impact to the DDG and a slight impact to the overall Agilent organic core growth, and we're very pleased with the progress.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [22]

--------------------------------------------------------------------------------

Yes. Bob, I think as maybe just one more point, too. I mean look at the second half outlook for the business, it's not all about China recovery. The other elements of the business, including NASD, which we know we're going to have a strong second half.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [23]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [24]

--------------------------------------------------------------------------------

Great. One follow-up on DGG. The core growth of 7%, not to nitpick it too much, but was there anything that was a little softer in the quarter in that segment? Just knowing some of the other growth drivers relative to how the segment was growing last year.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [25]

--------------------------------------------------------------------------------

I think it was really -- this is Mike, Jack. And Sam, feel free to jump in on this. We had 12% growth last year. So a tough compare. We had solid growth across all elements of that business. And outside of again maybe a China impact for an element of the business, I mean things are firing on all cylinders across the business, is how I recall.

--------------------------------------------------------------------------------

Samraat S. Raha, Agilent Technologies, Inc. - SVP [26]

--------------------------------------------------------------------------------

Yes. That's right, Mike. I mean we had -- we continue to have good growth with market, above market, with our overall NGS portfolio. So we feel good about that in the low double digits. Our pathology business, as you heard in Mike's opening comments and Bob's as well, we believe we'll continue to gain share there, growing in the mid-single digits. So -- and you just heard about NASD. So you look at the major parts of DGG, we had, I think, a really well balanced good quarter.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [27]

--------------------------------------------------------------------------------

It's mainly just a [comparator].

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from Dan Leonard from Wells Fargo.

--------------------------------------------------------------------------------

Daniel Louis Leonard, Wells Fargo Securities, LLC, Research Division - Senior Analyst [29]

--------------------------------------------------------------------------------

So just a couple of things to go back to. One, what decelerated in the Americas in the quarter? Your growth rate in that region had been trending higher than 5% for quite some time.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [30]

--------------------------------------------------------------------------------

Yes. Dan, welcome back, and I appreciate the question. It's really a combination of a very tough compare. I would say probably the area that was a little softer was the instrumentation business. They had a very -- the most difficult compare in the first quarter, and we would expect that to improve in Q2 through Q4 as we get to easier compares.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [31]

--------------------------------------------------------------------------------

Yes. I know, Jacob, you were looking into this. So...

--------------------------------------------------------------------------------

Jacob Thaysen, Agilent Technologies, Inc. - Senior VP and President of Life Sciences & Applied Markets Group [32]

--------------------------------------------------------------------------------

Yes. And I think the continued depressed PMI certainly impacts the C&E business, chemical and energy business. So we continue to see that in U.S. being performing at least flat, and we would like to see improvement. But I think that's still -- going to still take some time before that is happening.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [33]

--------------------------------------------------------------------------------

Yes. And I would add that it ended where we expected it to be.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [34]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jacob Thaysen, Agilent Technologies, Inc. - Senior VP and President of Life Sciences & Applied Markets Group [35]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Daniel Louis Leonard, Wells Fargo Securities, LLC, Research Division - Senior Analyst [36]

--------------------------------------------------------------------------------

Sure. And then a related question, Bob, you mentioned when discussing the gross margin dynamics that there were some negative pricing effects on the instrument business. Could you elaborate on that? Or are you pulling maybe the pricing lever to drive more demand in the instrument business after 4 quarters in a row of soft demand in LSAG?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [37]

--------------------------------------------------------------------------------

Dan, I just can't help but to jump in on this one. And I think that question would be posed to our competitors because we saw -- particularly as we finished the calendar year, we saw some very aggressive pricing by some of our competitors, particularly in the litho chromatography and mass spectrometry platforms. And I don't know if you want to add in to that, Jacob?

--------------------------------------------------------------------------------

Jacob Thaysen, Agilent Technologies, Inc. - Senior VP and President of Life Sciences & Applied Markets Group [38]

--------------------------------------------------------------------------------

No. I think it's fair to say that we continue to be premium-priced, but there is certainly some competition in the market space right now. And yes, so there is a price pressure.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [39]

--------------------------------------------------------------------------------

But we don't play the price game here. I mean that's not how we want to win.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Your next question comes from Patrick Donnelly from Citi.

--------------------------------------------------------------------------------

Jesse Klink, [41]

--------------------------------------------------------------------------------

This is Jesse on for Patrick. First, just wanted to touch on the China impact, and I think you guys had laid out about 1% impact to core growth from that. I just wanted to understand how that kind of compared to your expectations that if coronavirus -- made that a lot worse than anticipated.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [42]

--------------------------------------------------------------------------------

Yes. Maybe just to be crystal clear here. We saw roughly a 70 basis point impact in Q1. We had product that was getting ready. It was staged and getting ready to ship.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [43]

--------------------------------------------------------------------------------

In the country.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [44]

--------------------------------------------------------------------------------

And on the last couple of days of January and with the extension of the Lunar New -- the formal holiday, there was no one there to pick that up. So we know that was clearly an impact in Q1.

In terms of Q2, what we're expecting between the -- the first half of our year, it's roughly a 1.5- to 3-week impact as we're ramping up. Most of that's happening in Q2. We're expecting in Q2 that the coronavirus has roughly a 1- to 3-point impact to our growth in Q2, roughly $15 million to $40 million. In the first half, it's $25 million to $50 million, and we'll expect to get that back in the second half of the -- our fiscal year.

--------------------------------------------------------------------------------

Jesse Klink, [45]

--------------------------------------------------------------------------------

Okay. That's helpful. And then just maybe one on the BioTek acquisition, just wondering how that business performed relative to expectations and just kind of how the customer reception has been so far as you've kind of broaden the portfolio offering there.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [46]

--------------------------------------------------------------------------------

Yes. Jesse, I happen to hit that right up, and relative to expectations, that's ahead of our expectations. It really has been just a tremendous addition to the company. And we were talking about this the other day inside the company. Typically, when you put together a deal scenario, it's often out of the gate. You don't see a team beating the revenue numbers all the time, and that is actually what we saw in the case of BioTek in the first full quarter as part of Agilent.

And Jacob, I know you've been talking with customers. And how are you thinking about the BioTek being part of Agilent?

--------------------------------------------------------------------------------

Jacob Thaysen, Agilent Technologies, Inc. - Senior VP and President of Life Sciences & Applied Markets Group [47]

--------------------------------------------------------------------------------

Yes. Again, I just want to underscore once again that we've been very pleased with the performance of BioTek while it's been here in Agilent. But not only BioTek, the wholesale analysis business is doing very well, and we are posting double-digit growth for the whole business. So we're very pleased with that, and we actually believe this is going to continue for quite a long time.

We see lifestyle analysis is going to be a key driver for understanding the immune system and immuno-oncology. And with -- and all the Seahorse, ACEA and BioTek and Luxcel combined, we have a very unique value proposition. And that is really what excites us. And what also is very exciting for customers is that when we combine those technologies, these techniques together, we can create more insights for the researchers and the biopharma customers that nobody else in the industry can do. So this is very exciting, and we're just getting started.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Your next question comes from Puneet Souda from SVB Leerink.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [49]

--------------------------------------------------------------------------------

So first question on Europe. You pointed 2% growth there. I was hoping to get a view from you on outlook and what you're baking in the guidance here.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [50]

--------------------------------------------------------------------------------

I guess, Bob, why don't I just talk about the performance, and you can maybe comment on the outlook. So came in right as expected. And I think that Europe is in a difficult economic environment, and we think our team is really doing well there relative to what's going on in the market environment. So we were actually quite pleased with how Q1 came out for us in Europe. And Bob, in terms of the outlook?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [51]

--------------------------------------------------------------------------------

Yes, yes. So Puneet, as Mike said, we were pleased with the outlook of being 2%, and that's kind of what we're forecasting in Q2 and the rest of the year. And so certainly, the team is doing a really great job being able to deliver in a tough environment. But it kind of hit where we expect, and that's kind of what we're expecting for the rest of the year as well.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [52]

--------------------------------------------------------------------------------

Okay. That's very helpful. If I could touch back on China, I know you covered quite a bit. But if I -- really appreciate your thoughts there given one of the strongest legacy positions in that country for Agilent. As the recovery happens here, are there certain segments which you think where you will see more acceleration, more faster recovery, certain product lines or certain segments where you see recovery faster versus others?

And then I was sort of also surprised with the growth you were seeing in ACG, just CrossLabs continues to deliver. Was trying to understand what sort of exposure you had there in China. And given the travel restrictions and everything, are you still able to ship products and service instruments, seeing the growth in CrossLabs here? Or was that -- how much was the impact in CrossLab, if you could quantify it.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [53]

--------------------------------------------------------------------------------

Yes. Puneet, let me take -- there was a lot into that question. So let me try to hit them. In terms of recovery, we would expect that, obviously, the instrumentation portion would recover within that -- probably pharma first, and so we would expect that to be prioritized over some of the other markets.

In terms of ACG, we continue to be pleased by the broad-based strength there actually. Even in China, despite kind of the reduced selling days, it grew 11%. We do expect probably a slower ramp-up there, less on the consumable side as the factories are getting back to production, but more on the services side. As you can imagine, having our folks getting into labs right now is fairly difficult, and there's a portion of that would be on demand for servicing equipment. And so we would see that probably ramp up a little slower in Q2, but then ramp back up to normal latter half of Q2 and into Q3 and Q4, at least that's our current assumption.

As Mike mentioned, we've been in close contact with our teams in China and have been watching the order flow, and the order flow to date is across both ACG and LSAG as well as our DGG business, which is a smaller piece, tracking to our expectations.

--------------------------------------------------------------------------------

Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [54]

--------------------------------------------------------------------------------

Okay. And any sense on terms of the exposure that you have in China? And could that mix change given the -- in the next quarter or so?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [55]

--------------------------------------------------------------------------------

No. I don't anticipate a major shift. We've largely got a instrument-heavy business in China relative to the rest of the business anyway. But our opportunity really lies in the consumables and service over time. So I don't see a dramatic change in Q2 or in the back half of the year.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [56]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Your next question comes from Dan Arias from Stifel.

--------------------------------------------------------------------------------

Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [58]

--------------------------------------------------------------------------------

Mike, just back to Tycho's biopharma question, Mike. Next quarter, I think the comp goes way down to low singles for that customer segment. So where are you feeling like biopharma growth heads in 2Q as we just think about the momentum and the favorable comparison but also China? Can that be more mid-singles when we net out the moving parts there?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [59]

--------------------------------------------------------------------------------

Dan, I think that's a reasonable expectation. So when I was asking earlier about the pharma, we remain confident about our ability to grow in pharma. Part of it's going to be the pickup and the continued growth that we're going to have in our NASD business. We also know that we're getting to some of the easier compares relative to the LSAG instrument business. Because as you will all recall, that's -- the Q2 is when we started seeing the slowdown as China went through this whole -- looking at their procurement practices around the generics. So we think there's a lot of good reason to be positive about the ability to have a higher growth rate in the outer quarters than we did in Q1 in our pharma business.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [60]

--------------------------------------------------------------------------------

Yes. And we're expecting a faster growth in Q2.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [61]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [62]

--------------------------------------------------------------------------------

Okay. And then maybe one again for you, Mike, or maybe even Sam. It feels like 1Q is always a good time to ask this question, just given that some of us are heading down to HBT. Any update you can give us on Lasergen product development? How much of a focus is that at this point? And then maybe what are you looking at in terms of the change in total investment there if we compare 2020 to 2019?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [63]

--------------------------------------------------------------------------------

So -- and I think, Sam, you're getting your bags packed, maybe your team is getting their bags packed to head to that...

--------------------------------------------------------------------------------

Samraat S. Raha, Agilent Technologies, Inc. - SVP [64]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [65]

--------------------------------------------------------------------------------

You're staying home. That's right. Okay. Maybe just a few comments on this. So...

--------------------------------------------------------------------------------

Samraat S. Raha, Agilent Technologies, Inc. - SVP [66]

--------------------------------------------------------------------------------

Yes. Overall -- thanks for the question, Dan. If you would have heard my comments already from JPMorgan, we're making progress on a number of fronts related to the development work we're doing on the lasers and sequencer, particularly as it comes to the technical specs on our read length, on our quality and so forth. So we're continuing to make that progress.

When you think about AGBT, of course, it's not just about sequencers, it's about the overall NGS workflow, it's about really looking at things beyond NGS' overall genomics. So we are excited about Magnis, which we introduced not too long ago. We are seeing -- sorry, to remind you, Magnis is this really walk-away automation for taking DNA libraries or actually putting DNA in and being able to come back and just load that directly onto your NGS sequencer. We've seen some really good interest in that in Europe, in America and in China. So we're going to continue sharing the message there and sharing some data from a number of customers.

We also, as you would have heard, as talked about, we have launched a new SureSelectXT HS2 DNA reagent Kit, which allows us to look at even lower starting amounts down to 10 nanograms of DNA from FFPE, which is very important for cancer. Also allows on Illumina sequencers. It's very important to be able to use molecular bar codes. We have that going on as well. And we have a number of partnerships that we're working on with a number of customers and collaborators. So stay tuned. I think it's going to be an exciting AGBT.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [67]

--------------------------------------------------------------------------------

And Dan, the other part of your question was...

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [68]

--------------------------------------------------------------------------------

Yes, I'll take that.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [69]

--------------------------------------------------------------------------------

Investment outlook and...

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [70]

--------------------------------------------------------------------------------

Yes. So just quickly, our spending forecast in 2018 or...

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [71]

--------------------------------------------------------------------------------

2020.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [72]

--------------------------------------------------------------------------------

2020 is the same as 2019. So we're not expecting any ramp-up.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

Your next question comes from Derik De Bruin from Bank of America.

--------------------------------------------------------------------------------

Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [74]

--------------------------------------------------------------------------------

I have a number of -- we got a number of questions. So the first one is, I guess, just on the gross margin outlook for 2020. Can you sort of walk us through the next couple of quarters in terms of how that looks?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [75]

--------------------------------------------------------------------------------

Yes. We talked about -- at the beginning of the year, our guide was contemplating roughly a flattish gross margin across the company, and that hasn't changed. So we've always said that the first half of the year with Q1 being the hardest comparison because of the start-up costs in NASD, and you can see that kind of in our numbers. We also were affected a little, as we mentioned before, in LSE. We would expect that to recover as we get through the course of the year.

So in -- at a high level, Derik, I would expect our gross margins still to be within that range, roughly flat year-over-year. And where we're getting our operating leverage is really in the OpEx expense line.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [76]

--------------------------------------------------------------------------------

And Bob, I think we're also looking to see maybe a more favorable mix in our instrument business as we move forward. And I made some comments about the pricing pressure that we saw more of a calendar year in kind of phenomena with pricing more stabilizing as we started the 2020.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [77]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [78]

--------------------------------------------------------------------------------

Well, great. That segues into my next question on instruments. And so I think you had said last quarter, you were expecting maybe flattish instruments for the full year. Is that still sort of your expectation? And then that lead into a -- any idea of sort of what pent-up demand could be? I mean do you sense from customers, particularly in C&E, there's people waiting on the sidelines to buy when the budget gets better? I'm just trying to get a sense of sort of what the instrument dynamic look like.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [79]

--------------------------------------------------------------------------------

Yes. Derik, this is Bob. I think short answer on your first question is yes. We're still in that range of roughly flat. Actually, if you looked at Q1, we were down 2% core. But if you adjusted for the coronavirus, it would have been down about 1% on the most difficult comp that we had.

To your point around C&E, there were -- there have been shoots of life, and some of our customers looking at things now. What I would say is the coronavirus kind of throws some of that into question. But I would say that's still intact right now. I don't know, Jacob, if you have anything.

--------------------------------------------------------------------------------

Jacob Thaysen, Agilent Technologies, Inc. - Senior VP and President of Life Sciences & Applied Markets Group [80]

--------------------------------------------------------------------------------

No. Overall, I do think that there is some pushed out pent-up demand here. And eventually, there will be a tech refresh, and we have invested over the past period quite a lot into our instrument portfolio and really refreshed across the whole portfolio. So when that pent-up demand is coming forward, we're ready, but we just can't call it right now exactly when that's going to happen.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [81]

--------------------------------------------------------------------------------

Yes. And Jacob, I'd just add one thing. Early on in my tenure, we had a similar kind of slowdown in C&E. The difference here is that, at that time, a lot of our platforms are rather aged. This time, we have a completely refreshed platform. So it also is a great productivity message there to customers. And our lab managers obviously have the ability to go to their management and say, "Listen, there is something new out there. I'm not buying this. I'm not replacing like-for-like."

--------------------------------------------------------------------------------

Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [82]

--------------------------------------------------------------------------------

Great. And then just one, maybe I missed something, but you did 3.7% contribution from M&A in the first quarter, 3.5% to 3.7% in the second quarter. And then the guide for the full year is 2.8% to 2.9%. Is it something else in the first half of the year besides BioTek? Or -- and if not, are you expecting -- why you're expecting a step-down?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [83]

--------------------------------------------------------------------------------

So you've got very good math, and we're not expecting a step-down. That is the only thing that's in the numbers, and that could be an area of potential opportunity.

--------------------------------------------------------------------------------

Operator [84]

--------------------------------------------------------------------------------

Your next question comes from Brandon Couillard from Jefferies.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [85]

--------------------------------------------------------------------------------

Mike, just on a separate topic, can you just sort of speak to the Twist settlement last week? Why only $25 million? And should we expect any legal savings from having that case out of the way now that you'll reinvest the dollars?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [86]

--------------------------------------------------------------------------------

Yes. So first of all, just a few comments on the settlement. So we're very pleased with the agreement that was reached with Twist. As you know, we think it's in the best interest of our shareholders to rigorously protect our IP. And not only in addition to receiving a payment from Twist, they also had to secure a license for us for certain aspects of our oligo synthesis technology. And we are a company that's committed doing innovation in the right way. So we're really pleased with how the settlement goes. And Bob, relative to the treatment of the legal expenses and outlook for the rest of the year? I think we have that in pro forma, right?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [87]

--------------------------------------------------------------------------------

Yes. We will pro forma that. That's correct.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [88]

--------------------------------------------------------------------------------

So you see both the settlement come in, Brandon, as well as the costs associated with that, I guess, in our Q2 results?

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [89]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [90]

--------------------------------------------------------------------------------

And then maybe one more higher-level question for you, Mike. I mean you mentioned sustainability, debt recognition. Clearly, that's becoming a much bigger focus, I think, for the investment community. Can you just help us contextualize how that focus may help contribute to your growth or cash flow or differentiate you in terms of the customer base?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [91]

--------------------------------------------------------------------------------

Yes. It's a great question. So as I mentioned in my calls, we've been doing these things because we thought it's the right thing to do, and now people are really paying attention to it. So I think it helps on multiple aspects of the business.

So first of all, relative to our new products, which have a very favorable environmental impact, there's a real compelling reason for customers because a lot of our most important customers have their own sustainability initiatives, and they're very interested. I'm going -- I have several European customers I'm visiting next month, and they want to hear about our sustainability plans. So when you talk to them about how we're reducing footprint, the electrical consumption, that some of our products don't even use gases and that we've eliminated the use of gases and gas chromatography or in the case of NPIS. So there's just a really -- and we're reducing the size of the packaging.

And by the way, that also comes with a benefit to Agilent's P&L. So it really helps in terms of our customer relationships and our ability to drive sales into those accounts. It also is really quite helpful for recruiting of new employees into the company. New employees, when they're looking at potentially joining the company, really want to know what Agilent stands for. And we talk to them about our culture and what we do as a company in the local community, what we do for the environment, our views on diversity and inclusion. And I think it really is a powerful message to attract new employees to Agilent, but also for those who are part of the Agilent team to really be proud of the company they work for and be energized about where the company is going forward.

I think we've talked before, I'm a big fan of sports. And if you build a great team, you get great things happen in the marketplace around the field. And I think that really is really one of the major benefits you get here, which is what it does for your team. So really is a multitude of impact for the customers -- I mean for the company, and it's something we really believe in.

--------------------------------------------------------------------------------

Operator [92]

--------------------------------------------------------------------------------

Your next question comes from Vijay Kumar from Evercore ISI.

--------------------------------------------------------------------------------

Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [93]

--------------------------------------------------------------------------------

One maybe on China, Mike. We've heard some sharply possibly development doing -- initiating some sort of stimulus here to kickstart the economy. If that were to be the case, where would that impact fall? Is that in C&E and food? Is that where we would see your China numbers coming up?

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [94]

--------------------------------------------------------------------------------

Well, I have to say I have heard some rumblings of stimulus, but I haven't seen anything around the specifics of where the stimulus would be. I don't know, Bob, or whether you have anything.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [95]

--------------------------------------------------------------------------------

No. But I think your guess is...

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [96]

--------------------------------------------------------------------------------

I think that's a likely area.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [97]

--------------------------------------------------------------------------------

Yes, exactly. I think that's a likely area, that and pharma.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [98]

--------------------------------------------------------------------------------

And also, I'd also expect environmental as well. So that would be my guess because these are major quality-of-life initiatives that the Chinese government has been behind. So my guess is that's where they would put the stimulus. But again, we don't have any specifics. That would just be pure speculation on my part at this point in time.

--------------------------------------------------------------------------------

Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [99]

--------------------------------------------------------------------------------

Understood. And Bob, a quick one on the EPS guidance here. I see that the tax rate ticked down sequentially on the guidance front. Did anything change on the margins at all? Because it looks like for -- the revenue range remain unchanged. So I'm wondering if this is below the line -- or margins, some sort of impact here.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [100]

--------------------------------------------------------------------------------

Yes. Yes, nothing material, Vijay.

--------------------------------------------------------------------------------

Operator [101]

--------------------------------------------------------------------------------

Your next question comes from Steve Beuchaw from Wolfe Research.

--------------------------------------------------------------------------------

Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [102]

--------------------------------------------------------------------------------

I guess, first, I wanted to start with Bob with just a question about one of the underpinnings of the outlook for the year that hasn't been touched on so much just yet, and it's NASD. Maybe a 2-parter on NASD. One is, do you think we feel good about getting to a few dozen million dollars of contribution from NASD? And then can you give us any perspective?

And I guess maybe this is a Sam question. As to how much of the capacity on the new facility in Frederick is now contracted? And then I have one for Mike.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [103]

--------------------------------------------------------------------------------

Sure. Yes. I -- let me make sure I answer your question correctly. What I would say is Q1 came in slightly better than what we expected on the ramp. So we feel very good about that trajectory. Obviously, the second half of the year is going to be significantly greater than the first half of the year as we ramp up that business. And I would say that the order book, we feel very good about, yes.

--------------------------------------------------------------------------------

Samraat S. Raha, Agilent Technologies, Inc. - SVP [104]

--------------------------------------------------------------------------------

And maybe, Steve, to build on what Bob said, we've said that there is a ramp rate that we've been planning all along. That's what we're seeing. So as you really get into Q4, we'll be much more in the run rate, if you will, of what to expect going into financial year 2021 in terms of the Frederick site in particular. So it's ramping as planned. It is being utilized. We were happy to produce good product and good revenue from that in this quarter again after starting last quarter.

And further to what Bob said, a lot of these programs and projects are long lead, both working with our customers to really lay the groundwork and do the work. So though I can't tell you exactly what percentage, I do feel good about the percentage of programs and projects that we're already laying up and going into next year.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [105]

--------------------------------------------------------------------------------

And Steve, if I can just amplify one of the points that Sam made, it was absolutely crucial that those first batches we produce for customers met their expectations. And as you know, we are very cautious in terms of how we started positioning the ramp here because we just had to get it right, and we've gotten it right for those first few customers. I think that really positions us well when we look at the outlook for the rest of the year.

--------------------------------------------------------------------------------

Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [106]

--------------------------------------------------------------------------------

Okay. That makes a ton of sense. And then, Mike, I wonder if we could just do the zoom-out thing you're well aware. We think about the full year, I mean, there are so many moving parts, right? And the coronavirus certainly makes it more complicated. But if I rewind to 90 days ago or so, there was a perspective, not necessarily from Agilent, but certainly in investor conversations that the outlook for fiscal '20 was really conservative or significantly conservative. And I think we've, of course, heard from you guys over the years outlook that started at one point, and you pretty consistently do better than the outlook. I wonder if you could just give us your perspective on the outlook and guidance philosophy now that you know 90 days more than you did at the time you gave the outlook at the beginning of the year. To what extent is this middle of the fairway? To what extent is this conservative? And as you talk to your customers and you think about the outlook, I mean, how are you feeling? How has that evolved? Just, again, really zooming out.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [107]

--------------------------------------------------------------------------------

Yes. Steve, so I'm going to comment from zooming out right now, and great question. And I think that that's how we thought about the full year guide, which I'll leave it to you to prescribe the first adjective -- I mean the proper adjective. But we started this year with a guide that we thought was relatively the floor of what we could do and talked about areas of potential upside for the business. And we were actually tracking well in the first quarter, where it would have been a beat both on the revenue and EPS side of the quarter, albeit the impact of the much talked about today, the impact of the coronavirus.

So that's why we felt pretty confident about our ability to say, "Listen, there are still a lot of puts and takes relative to China in the near term. But there are other aspects of the business that are doing extremely well outside of China, whether it be NASD or ACG business, the compares and the strength of our LSAG instrument portfolio, that's going on NGS." So we have a lot and then back to cell analysis. So we have a lot of confidence.

And we -- what we call the middle of the fairway right now, but we feel pretty...

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [108]

--------------------------------------------------------------------------------

Yes. I would say, Steve, one thing, obviously, 90 days ago, we didn't have the epidemic that we're seeing right now, which is unprecedented. And so what we're trying to do is we're seeing, hey, in the first half of the year, we're expecting a $25 million to $50 million impact that we're going to make up in the second half of the year. Now the question is how fast. And we hope for everyone's sake that, that will ramp up fast, and we'll get this behind us. But that certainly puts a lot more variability in our forecast. We feel good about where our forecast is, but we certainly didn't anticipate that at the beginning of the year.

--------------------------------------------------------------------------------

Operator [109]

--------------------------------------------------------------------------------

Your next question comes from Bill Quirk from Piper Sandler.

--------------------------------------------------------------------------------

William Robert Quirk, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [110]

--------------------------------------------------------------------------------

So I guess, Bob or Mike, just update on M&A. You had mentioned on the last call that you'd be considering looking at larger deals in and around $1 billion. Just curious if you update us.

--------------------------------------------------------------------------------

Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [111]

--------------------------------------------------------------------------------

I think the statement I made in the last quarterly call remains, which is we think that deploying our capital towards growth in earnings drivers on the M&A front makes a lot of sense. We -- for our shareholders in deals. That makes sense for us in markets that we know where we can really leverage the scale of the company. And we did our largest deal, BioTek, the past quarter. And as you heard earlier, that's off to a really good start.

I think we often get the question, "Well, how large are you willing to go?" And the way Bob and I have described it is, "Listen, we could go maybe multiples of that, but we're not looking to -- we're looking to stay in our lane here and not do anything that's magnitudes larger than a BioTek." So I'm not saying that BioTek is the max level, but it'd probably be multiple to that as opposed to something that -- of a magnitude size.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [112]

--------------------------------------------------------------------------------

Yes. And Bill, as you can appreciate, timing there is always very difficult to understand, and we're going to remain disciplined. And if there isn't anything out there that would meet our financial criteria, we're not going to do it. We don't need to do M&A to make our model work. But certainly, you see in the first quarter the benefit that we've seen with BioTek and really building scale and cell analysis, which we think has a long-term growth opportunity for us, not only in LSAG but across the business.

--------------------------------------------------------------------------------

William Robert Quirk, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [113]

--------------------------------------------------------------------------------

Understood. And then just secondly, I guess, a bigger-picture question about the pacing of CrossLab. Over the course of the year, we are going to be heading into slightly more difficult comps for the next couple of quarters.

--------------------------------------------------------------------------------

Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [114]

--------------------------------------------------------------------------------

Yes. The beauty of ACG has been its predictability across the business, and we're expecting -- we're not expecting any dramatic change in the back half of the year with the possible exception of slightly an elevated ramp in China. But that business that Mark and team have built has been just phenomenal in terms of providing stable, high-growth and profitable growth over the course of the last several years. And I think that, that, quite honestly, is a great legacy to what Mark has been able to accomplish. And not only that, it really speaks to what our customers are looking for in terms of productivity in the labs and so forth. So we would expect that to continue to kind of chug along as we've talked about in the past.

--------------------------------------------------------------------------------

Ankur Dhingra, Agilent Technologies, Inc. - VP of IR [115]

--------------------------------------------------------------------------------

All right. Thanks, everyone. With that, we would like to wrap the call for today. Have a great rest of your day.

--------------------------------------------------------------------------------

Operator [116]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.