Agilent Technologies, Inc. (A)

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Agilent Technologies Inc. (A)

March 08, 2012 10:00 am ET

Executives

Alicia Rodriguez -

William P. Sullivan - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Didier Hirsch - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Ronald S. Nersesian - Chief Operating Officer and Executive Vice President

Guy Sene - Senior Vice President and President Electronic Measurement Group

Nicolas H. Roelofs - Senior Vice President and President of Life Sciences Group

Michael R. McMullen - Senior Vice President and President of Chemical Analysis Group

Soon Chai Gooi - Senior Vice President of Order Fulfillment and Supply Chain

Rodney Gonsalves - Director of Investor Relations

Analysts

Unknown Analyst

Presentation

Alicia Rodriguez

I think we should probably get started. I'd like to welcome you all, and thank you for coming today to Agilent's 2012 Investor and Analyst Day.

This is our Safe Harbor Statement. I know you are all familiar with it, but just quickly, included in there are our comments about forward-looking statements, also about risks. And if you have any questions whatsoever, please ask me or refer to our 10-K, 10-Q for further elaboration.

Okay. We plan to get you out of here by 2:00. So if we're successful, we're going to start with Bill and Didier giving an overview of our strategic and our financial update. We'll end at about 11:30 and break for lunch after that. Lunch will be here. Didier and Bill will have a Q&A session immediately following their 2 presentations. We'll start back up after lunch at about 12:00, just wanted to be sure on that. And then Ron, our Chief Operating Officer, will give an update on operational, different initiatives that you'll see. And then, we will go into each of the group presidents for EMG, CAG and LSG will give their updates, and we'll follow up with Soon Chai, who's our new order fulfillment manager, who is directing all of the order fulfillment operations for us. And I think this is something that's very exciting that you'll see. Last, but not least, we'll end with a panel Q&A for all of the different group presidents and our -- and Soon Chai, who I think will be able to offer you a lot of different answers to the questions that you'll have regarding what's going on with our markets, our operations and our plans going forward.

And finally, after that, Bill will close and then we'll all be off and it should be 2:00. So hopefully, we'll have a good day. And if you have any questions, just please let me or Elena know. We're both at the back of the room. Thank you.

William P. Sullivan

Good morning. Thank you all very, very much for meeting with us today. As you may recall a year ago, I was quite negative on the economic environment in the U.S. and Europe. Many of you in the room said that I was too pessimistic on the outlook, and I'm sure you all saw this morning that Europe will have negative growth. I wish I could say that I am any more optimistic in the U.S. or European economy than I was last year, we're not. We're also well aware of the macro environment in the emerging markets. And that's why our approach to the year, after coming after 2 very strong years, has been conservative, focused and really believe both our outward reach through our organic growth rate and our internal efforts to continue to drive our manufacturing cost down will allow us to navigate a very uncertain 2012.

Before I start though, I will ask the first question that I'm sure Didier and I will get and that is how were the orders in February? The -- I can share with you, the orders in February were off to a solid start for the year. We're not changing our -- or excuse me, for the quarter, we're not changing our guidance whatsoever. But again, the good news, as we stand here, is that the February orders were solid for the start of our Q2. In the area of Communications, we believe the Communications growth in the quarter year-over-year will grow. There has not been an improvement to date in the components, semiconductor component modules. For base stations, however, we will see growth in the handsets year-over-year. So that is sort of the recap as we've gone through 1/3 of Q2.

This is the organization chart that we have. Since the last time we have met, we have created the job of a COO, and again, Ron Nersesian. I think a lot of you know, but maybe Ron, if you could just stand. Ron now is responsible for the overall day-to-day operation of the company with particular focus on emerging market and to continue to drive our manufacturing cost, and of course, delivering ever better market-leading products moving forward. No stranger going from your right to left is Nick Roelofs in Life Science. Nick continues to do Life Science. And again, a very, very solid year last year. Mike McMullen, and again, that you've known from last year. And again, Guy Sene, who replaced Ron in terms of our Electronic Measurement Group. Guy used to manage the largest division in the company, our Sources and Spectrum Analyzer and our mobile testing. And Gooi Soon Chai, order fulfillment. All of the order fulfillment in the company now is consolidated, and again, to take the next step forward to be able to drive efficiencies across the company. Because at the end of the day, our manufacturing capability is really our secret sauce that allows us to make the R&D investment, allows us to make the investment in our sales and support organization moving forward. We are atypical. We own our manufacturing facilities around the world. Yes, we have partners in outsourcing, such things as PC board assembly, but we really do control our manufacture -- manufacturing throughput. We've done a good job. I know we can do an even better job moving forward.

Agilent Laboratories under Darlene Solomon continues. Again, we're one of the few companies that still has a central research lab. And I know Nick will talk about this, but our oFISH launch this week, what we call essentially SureFISH, that has gone out with an outcome of development from our central research labs. And of course, Didier is here from finance, which you know. Our HR and Legal, Marie Huber, where's Marie? Marie is right there, is our -- head of our General Counsel. Again, the corporate facilities and we continue to have centralized IT support and our real estate workplace services to get leverage across our worldwide organization moving forward. And again, our results in 2011, we felt were pretty good.

Last year when I was here, I talked to you about the transformation of the company. And if you had said that it was going to take 6 years to be able to complete the transformation, to be able to divest our semiconductor-related businesses, focus on measurement science, complete the largest acquisition in our history, Varian, I said it shouldn't have taken that long. We do have the excuse of a recession, economic correction in the middle of that, but it's been a lot of hard work. The message here, of course, for now is that we have had 2 outstanding years in a row, 2010, 2011. And in fact, 2011 was the best year in the history of the company moving forward.

In terms of the capital deployment, just like to remind you that since 2005, we have repurchased $8.6 billion worth of stock. Our share count is down almost 200 million shares. We've made about $2.3 billion of acquisitions in this period of time. And of course, in January, announced the first dividend in our history. The announcement of the dividend is actually very, very straightforward. We believe in this environment, an environment of very low interest rates, that people are wanting to have more return that was coming directly back to them. As you know, in the last 10 years, the S&P 500 has not done well. 70% of the gain in the S&P 500 in the last 10 years has been through dividends. And by us making this announcement, we are essentially able to broaden our investor base. And to date, and again, the date is preliminary, but today, I think it has been favorably received to do that. It's another avenue in our commitment to return cash.

Didier is going to talk into this, but we do still have a very fundamental problem of having enormous amount of cash trapped outside the United States. Last year, I was hopeful that there would be some sort of change in U.S. tax policy. That has not happened. The likelihood of that happening in 2012, I believe, is 0. And all I can say is please write your congressperson to see if common sense can prevail in Washington. The Silicon Valley has been very, very vocal on this with the enormous amount of cash that's trapped outside the United States with essentially the only alternative is to sit doing nothing or to invest in other countries other than ours.

This is a brief summary of the accomplishments in 2011. And again, financially, we are very, very proud in terms of our organic growth, our record EPS and our cash flow generation, as you can see on this slide. What I'm also particularly proud of is that even though that we have gone through essentially 2 years of 20% growth, we have not changed our fixed variable cost model. And I think that's a big takeaway and you're going to see that inside of Didier's presentation. Our commitment to make sure that we have flexibility to be able to manage through economic slowdowns, economic corrections moving forward. A lot of times, when a company goes through such fast growth, it is easy to add a lot of fixed cost. We were not able to do that. I believe that the team, the team that you're going to hear from today, is very, very disciplined on allocating resources to where opportunities are. So often in good times, you want to do something extra. You want to grow faster in Brazil. We want to grow faster in China. We want to do one more R&D project. It's just an add-on expense. And what you have seen and you will hear is that we are very, very disciplined in terms of reallocating resources to where there is opportunity.

Secondly, we continue through our global IT systems and our global real estate management systems to be able to drive efficiency across the company to ensure that we can, in fact, meet our incrementals, and again, Didier is going to give you an update on that.

I don't want to steal any thunder from each of the 3 groups. I will have a couple of comments. Electronic Measurement, again, has really been the big takeaway. And I talked about that several years ago, that under Ron's leadership, our Electronic Measurement Group made a fundamental change. We reset our operating profits at the bottom of the correction to 12% versus 0% in 2009. And you saw that happen. Not only were we able to drive the highest profits in the history of the company and the business moving forward, we also were able to drive growth. In that growth, particularly proud of the continued progress we have made in the oscilloscope market or time domain. As you know, that in frequency domain, our RF microwave business, we have been a leader for decades and decades and decades. We have not been a leader in the time domain regime. And we continue to make enormous progress.

The second thing I was particularly proud of the team is that we now have a very concentrated effort in module instrumentation. Quite honestly, we've been in module instrumentation for 30 years, but it has not been the focus of the group. The focus of the group has been feature-rich instruments that effectively have their own computer, have enormous amount of flexibility. And the reality is, is that the world does want, in fact, to have more flexibility with modular instrumentation. This will be a long-term, multiyear effort moving forward, but we're off to a great start and very, very proud of that.

In terms of the Chemical Analysis area, and this is where really is the story of emerging markets, where Mike's organization has just nailed emerging markets. Our ability to help out environmental testing, Petrochemical, Food Safety testing, as well as continue to maintain our market share and grow our solutions in slower growth markets in Europe and the U.S. is really a testament to the team moving forward and have just done an outstanding job while, by the way, integrating the vast majority of the Varian product lines. And we're starting to see the traction of our Spectroscopy portfolio that we have, and again, continue to be very, very excited as the team redesigns products and starts to have truly differentiable products in new product areas.

And finally, in Life Science. I've been very, very clear, Life Science has been the growth opportunity for the company that we have moving forward. If you went back, at 2005 we did not have a credible story in Life Science. Yes, we were very strong in QA/QC and Pharma, but other than that, we really didn't have the building blocks in genomics, proteomics, metabolomics and I'm very excited of the progress that has been made in that area. We continue to grow through acquisition, as well as organic effort. And for the first time, Nick will talk about our diagnostics effort. It actually will slightly show up on the radar screen. But again, we -- the big, adjacent market for all instrument companies in this space is the diagnostics market, the molecular diagnostics market. And again, we'll talk about that today.

However, as we move forward, again, the message, I'm sure every CEO tells you this, we're not resting our laurels. We're raising the bars. We went into 2012. The first one is that we raised our return on invested capital target from 21% to 25%. And again, this is a big deal, not only in just the mathematics of how it's calculated. Again, it's a pro forma calculation. It does not include our cash in there because it’s very hard for the team itself. Corporate basically decides what to do with the cash. But by doing this is twofold: one, it raises the bar to make sure that we continue to drive efficiencies in the Varian product lines that we have incurred, but every employee in the company's variable pay is tied to this number. So we have -- effectively have raised the bar for all 18,700 employees moving forward. And in fact, that factors into our cost model, both on the upside, as well as in the downside. Secondly, as I alluded to, and Didier is going to talk about that, this variable cost model that we were able to flex in 2009 and say $400 million is still there today. And again and again, Didier will go through that. And finally, in terms of acquisitions, I had talked about these $2.3 billion of acquisitions that we have made today, which has generated about $1 billion of revenue, and obviously, a little bit less than 70% of that is in Varian. But the message here is, and again, this is probably one of most go confusing things and the hardest things to understand how Agilent does acquisitions. There is only one brand, and that's Agilent. So when we buy a company, we buy a Varian; it gets integrated, all the same IT systems, many of you joke that on every one of our iPhones or BlackBerrys every morning, you get all the orders, you get all the revenue, by product line, completely automated. And we, in fact, do that. All employees are treated the same thing. All the Varian employees get a 10% raise because they're part of the Agilent Variable Pay program. And so we integrate them -- we integrate these product lines and the result of that is next to impossible to do what I say, measure the substitutions and the pull-throughs. And in terms of substitutions, we'll go in there, 2 products look the same, this one's gone; this is the one we're going to bet, shut it down and merge. So obviously, if that product kept it in the Agilent side, it looks like an Agilent growth. It doesn't look like the acquisition growth.

The pull-throughs are when you can put integrated solutions together or integrated service offerings. And what you're going to see in Mike's presentation is our service and support in the analytical space. Now that we have such a broad portfolio of analytical instruments, yes, we're in the process of redesigning a lot of them from the Varian side, now we can service all labs. And so what you're going to see in Mike's presentation is our services and support business is growing 17% because we have a different portfolio to be able to share with the customer. That's what I mean by pull-through. In terms of substitutions and how we work to integrate these integrations, again, Nick will go into a lot of detail of what we're doing, that only in the Life Science with the acquisitions that we have made on our organic growth rate but, as well as the diagnostics effort that we have made in the recent announcement that we have made. So again, we are still inherently an organic growth company. We do a very good job of integrating technology into the company, but it is quickly lost inside the one brand of Agilent as we go forward.

So in terms of our strategic focus, really hasn't changed from last year at all. Emerging markets, and again, I know that the issue of emerging markets, you’ll have lots of questions about that. In terms of the megatrends that we're focusing on, they're exactly the same. And you see them everywhere in the paper. We've talked about this for years. Again, the whole area of: healthcare, Food Safety, energy, environment and Communications. That is the story. And again, I think companies, particularly a company that is organically-oriented, organically growth-oriented, if we in fact are more clever, had better solutions that we believe we can continue to outpace the competition if we're more clever, and in fact, give better solutions and better customer support than the competition. So as a result of that, we're continuing to -- continue our huge investment in research and development. We will spend over $700 million this year in research and development. We have well over 6,500 people in our sales and support organization to provide the #1 service to our customers moving forward. And coupled with that, with our continued focus on gross margin, I believe that this is -- continues to be a winning play.

In terms of acquisitions, our position has not changed. We continue to look for value-added acquisitions that we have made. You can see that today, we paid roughly, in aggregate of about 2.3x revenue for those acquisitions. The environment for acquisitions in a lot of our spaces continues to be quite rich, but we continue to be absolutely dedicated to be able to protect our shareholders' equity and shareholder cash, and we'll continue to make decisions that are consistent to our operating model and the consistence of returning value to our shareholders moving forward.

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