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{
"speaker": "Operator",
"content": "Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agilent Technologies Inc. Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, again, press star one. Thank you. Parmeet Ahuja, you may begin your conference."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thank you, and welcome everyone to Agilent's conference call for the fourth quarter of fiscal year 2024. I am sure you have seen our press release earlier today regarding our new market-focused organizational structure, which we will talk about in more detail. These changes have no impact on our company's consolidated financial statements. All financial metrics and guidance during this call will be shared under our historical structure. We will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. Now onto our quarterly results. With me are Padraig McDonnell, Agilent President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the former Life Sciences and Applied Markets Group, Simon May, President of the newly formed Life Sciences and Diagnostic Markets Group, and Angelica Riemann, President of the expanded Agilent CrossLab Group. Also joining the call is Mike Zhang, President of the newly formed Applied Markets Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at investors.agilent.com. Today's comments 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, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past twelve months. Guidance is based on forecasted exchange rates. During this call, 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 risk and other factors. And now I would like to turn the call over to Padraig."
},
{
"speaker": "Padraig McDonnell",
"content": "Great. Thank you, Parmeet. Hello, everyone, and thank you for joining today's call. Before I begin, I would like to welcome new AMG President, Mike Zhang. While Mike is new to this role, he is not new to Agilent. Mike joined Agilent more than twenty years ago as a manufacturing engineer in China and most recently was Vice President and General Manager of the GC and GCMS business. Within our former Life Sciences and Applied Markets Group, with his broad experience in both manufacturing and into the business, Mike will be an incredible asset in this role. Very much looking forward to him moving AMG and Agilent forward. I also want to take a moment to wish Phil Binns a wonderful retirement in advance of him leaving Agilent. Phil joined Agilent with the Varian acquisition in 2010. All told, Phil is celebrating just over forty years of service with Agilent and Varian. Although Phil is retiring from the business president role, he has graciously agreed to serve as a special adviser through April 2025. All of us at Agilent wish Phil the very best and look forward to working with him during the last five months at Agilent. Now onto our high-level Q4 results. I am happy to share not only our solid fourth quarter results that point to continued steady market recovery, but also our outlook and drivers for the 2025 fiscal year. I am especially excited to talk about Agilent's customer-first strategy evolution and our aggressive transformation ambition that led to the news you read ahead of the call. The new market-focused organizational structure to become a nimbler, even more customer-centric company to accelerate our performance. In the fourth quarter, the Agilent team delivered revenue of $1.701 billion, roughly one percent reported growth with a flat core growth. This represents a sequential improvement of over four hundred basis points from Q3. In addition, our total company book-to-bill was greater than one. This points to a steady market improvement we are seeing and we expect it to continue in 2025. We also gained share in all our geographies. Evidence that even in challenging CapEx environment, customers trust Agilent. As we evolve, we are confident this will only accelerate. Bob will provide deeper details on our Q4 results and our outlook for Q1 and FY 2025. Now I would like to spend some time talking about our new organization structure we announced earlier today. Our new market-focused organization structure is a result of our customer-centric market force strategy and an important step in our organizational transformation work, which we have named Ignite. This is a product of our enterprise focus strategy that drives our evolution to become a nimbler, even more customer-centric company to accelerate our performance. The new market-focused organization structure is one of the most significant changes Agilent has seen in a decade and continues the work we did creating our commercial organization three years ago. The commercial organization doubled down on our customer-first approach in the field and it's a critical competitive advantage in supporting our customers. At that time, we started by creating a singular commercial leadership structure. We then created a foundational infrastructure and intensified our focus on digital capabilities, accelerated and end-to-end customer experience, and ensured sales channels were customer and market-centric. So changes you see today are part of the successful journey we started three years ago. With the new structure, we are aligning business units to our markets facilitating close collaboration among the businesses like never before and enabling better execution and cross-division customer-first priorities. We are combining the strength of our three businesses as well as our portfolios so that we can offer end-to-end solutions and workflows revolve around our customers and markets. The Life Sciences and Diagnostics Markets Group's or LDG represents $2.5 billion in annual revenue and is primarily focused on our pharma, biopharma, and clinical diagnostic end markets. LDG provides a comprehensive portfolio of leading technology platforms and solutions to serve Agilent's customers' value chain, including research and discovery, development and scale-up, production of therapeutics, and development of critical cancer diagnostics. LDG includes LC and LCMS, cell analysis as well as CDMO capabilities which include NESD and BioVectra. The business also includes pathology, companion diagnostics, and genomics. Simon May will serve as president of LDG prior to joining Agilent earlier this year at Bio-Rad Laboratories. Simon was Executive Vice President and President of Life Science Group. The Applied Markets Group or AMG represents $1.3 billion in annual revenue and is focused on food, environmental, forensics, chemicals, and advanced materials markets. AMG includes GC and GCMS spectroscopy, vacuum technology platforms, and certified pre-owned business. AMG will focus on growing its agile and strong leadership in these markets and accelerating growth in new areas of the market. Mike Zhang, a twenty-two-year veteran of Agilent, has been promoted to president of AMG. Most recently, Mike was Vice President and General Manager of our GC and GCMS product lines. The Agilent CrossLab Group or ACG represents $2.7 billion in annual revenue and is focused on supporting our customers in all our end markets. The group is uniquely positioned to leverage its comprehensive portfolio and capabilities to further enhance the installed base of instruments with targeted workflows and applications that drive critical outcomes and productivity in labs. ACG includes services, software and informatics, automation, and consumables. This business will accelerate and strengthen customer relationships across all end markets. Angelica Riemann, a twenty-five-year veteran of Agilent, will continue to serve as president of ACG. Prior to her current role, she served as Vice President and General Manager of the ACG services business. This change is one of the many that demonstrate how we are becoming nimbler and accelerating the pace of innovation. And you can see that with the Q4 launch of the exciting Agilent Infinity 3 LC series that harnesses our fifty years of LC expertise and leadership. The Infinity 3 series has advanced automation that simplifies our customers' daily routines and is compatible with previous generation, which allows for seamless upgrades and technology refreshes. And Agilent Infinity Lab LC solutions are certified by MyGreenLab. These instruments optimize lab space, and they reduce water, solvent, and energy consumption while also minimizing waste. While just launched in October, early traction from customers has been very positive. Also in Q4, we closed our acquisition of BioVectra, demonstrating our commitment to providing customers the most advanced capabilities to accelerate our therapeutic programs. With BioVectra now being part of Agilent, we expand our portfolio of CDMO services beyond our market-leading oligonucleotide production at NASD. Adding more rapidly growing therapeutic modalities like peptide synthesis, a market expected to continue to expand rapidly over the coming years. And bringing world-class capability to support gene editing therapies. Just last month, my leadership team and I visited BioVectra to welcome our new team members to Agilent, and we became even more accelerated by the capabilities we would be able to harness. Plus both Agilent and BioVectra's focus on putting customer first and accelerating the pace of innovation so we can add to and capitalize on opportunities was abundantly clear as I spoke to dozens of BioVectra employees. Separately, during the quarter, we hit another important milestone. For the full year, we passed the $1 billion mark in digital orders, for the first time across the company. This is a result of our investment in our digital ecosystem to ensure our customers can do business with us in ways that meet their needs. To reinforce what I have stated in previous calls, we are sharply focused on key growth factors such as BioPharma, PFAS, and advanced materials. And the Agilent team has mobilized to accelerate value creation through our Ignite transformation program. The objective of Ignite is to drive revenue growth and margin expansion by increasing our execution capabilities."
},
{
"speaker": "Operator",
"content": "The world is moving faster than ever,"
},
{
"speaker": "Padraig McDonnell",
"content": "and so are we. That is exactly why we introduced our new market-focused organization structure. We are laser-focused on winning in the marketplace and adding value to our customers and shareholders. We will dive more deeply into these details including our evolved strategy and the Ignite transformation, that will help us execute on that strategy. At our investor day on December seventeenth in New York."
},
{
"speaker": "Bob McMahon",
"content": "We"
},
{
"speaker": "Padraig McDonnell",
"content": "Bob would now provide the details of the results as well as our outlook for the fiscal year of 2025 and the first quarter. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob."
},
{
"speaker": "Bob McMahon",
"content": "Thank you, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on fourth quarter revenue and take you through the income statement and other key financial metrics. I will then cover our guidance for fiscal year 2025 and the first quarter of 2025. Unless otherwise noted, my remarks will focus on non-GAAP results. As Padraig said, we are pleased with our Q4 results. Agilent finished the fourth quarter, with core growth in line with our expectations while EPS exceeded our expectations as we executed well against a challenging albeit improving market. Q4 revenue was $1.701 billion, a decline of 0.3% core but a sequential improvement of over four hundred basis points. On a reported basis, our revenues were up 0.8% as we benefited from fifty basis points of currency and BioVectra contributed sixty basis points. Looking at our Q4 performance by business unit, the Life Sciences and Applied Markets Group reported $833 million in revenue. That represents a 1% decline as instrument volumes continue to be constrained, by conservative customer CapEx spending while consumables grew mid-single digits. Having said that, for our instruments business, our orders grew year on year and for the third consecutive quarter, our book-to-bill was once again greater than one. We see this as positive evidence of an ongoing steady instrument recovery. Moving on to Agilent CrossLab Group, the business delivered revenue of $426 million for the quarter, 5%. ACG grew in every market and in every region except China, where it was flat year over year but up sequentially. The contracts business including our fast-growing enterprise services business, double digits again in Q4 as it has every quarter this year. Our largest customers continue to maximize utilization of their assets, right-size their operations, and leverage OpEx budgets to deliver on their productivity goals and outcomes. We recently received a top supplier award from one of our largest strategic customers in the applied markets as a recognition of our long-standing and beneficial partnership throughout the years. The Diagnostics and Genomics Group posted $442 million in revenue, representing a 3% decline that was slightly above expectations. Pathology saw solid growth globally, and was offset by expected softness in NESD and cell analysis instruments. Now looking at our end markets and geographies, our largest end market, pharma, declined 1%, slightly better than what we expected. Within pharma, biopharma declined mid-single digits while small molecule grew low single digits. Encouragingly, all regions except for the Americas, grew in the quarter. The Americas region was pressured by the expected decline of NASD. We expect both the Americas region and NASD to return to growth in fiscal year 2025. In chemicals and advanced materials, revenue grew 1% with our advanced materials submarket growing mid-single digits driven by our business in the semiconductor market. Our business in the diagnostics and clinical end market performed strongly growing 7% driven by pathology, and improved performance in genomics."
},
{
"speaker": "Operator",
"content": "In environmental and forensics,"
},
{
"speaker": "Bob McMahon",
"content": "we declined 6% although dollars were roughly flat sequentially. All regions grew except for the US, related to timing of orders. That being said, we continue to see very strong growth in PFAS solutions. With our business growing more than 40% in Q4 across multiple end markets. Now wrapping up our end markets, food was down 3% versus last year. While our academia and government market was down 1%. Geographically, Asia ex-China high single digits and Europe grew low single digits in the quarter while the Americas and China declined as expected. China was down only 3% and exceeded our expectations. We also booked our first China stimulus orders in October and anticipate much more in fiscal year 2025. Now let's move to the rest of the P&L. Gross margin was 55.1% in the quarter, down seventy basis points versus last year driven by lower volume and mix. Our operating margin was 27.4% as our productivity initiatives and the cost actions we took earlier in the year were fully recognized this quarter. The annualization of these savings coupled with the market recovery and the initial returns from the Ignite transformation, give us confidence in driving EPS growth in fiscal year 2025. In addition, we continue to look for ways to drive EPS growth below the line. Our net interest income was in line while we benefited from a lower tax rate in the quarter and our share count was 287 million diluted shares outstanding. Now putting it all together, Q4 earnings per share was $1.46, that was ahead of our expectations and up 6% from a year ago. Now let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $481 million in the quarter, and we invested $93 million in capital expenditures. For the year, we well exceeded our operating cash flow expectations. With operating cash flow of $1.75 billion during the quarter, we returned over $400 million to shareholders, consisting of $335 million in share repurchases, and $68 million in dividends. For the year, we returned over $1.4 billion to shareholders, through repurchasing shares and dividends. Looking forward, you may have also seen recently we announced a 5% increase in our quarterly dividend. Marking another year of increases advancing our industry-leading dividend. We ended the quarter with a net leverage ratio of 1.1, a very strong number even as we acquired BioVectra in the quarter. Our strong cash flow and healthy balance sheet provide us with plenty of opportunity to invest in the business going forward. In summary, we performed well and saw steady market improvement in the quarter. We are executing well, staying disciplined, and investing in high-growth opportunities. Now let's move on to our outlook for the upcoming fiscal year and first quarter. We expect the recovery that we have seen the past few quarters to continue throughout fiscal 2025. While we expect the market to grow slower than historical rates for the full year, we expect improvement throughout the year with the second half of the year returning to more traditional levels of growth. We expect our results to mirror that cadence of improvement on a core basis. As Padraig noted earlier, we exited Q4 with a book-to-bill ratio over one for the company, and greater than one for instruments. In addition, Q4 was the first quarter in 2024 that instrument orders grew year on year. While one quarter does not a trend make, it is certainly encouraging. For the full year guide, we expect revenue in the range of $6.79 to $6.87 billion. This represents a reported growth range of 4.3% to 5.5%. Currency is a slight headwind of 0.2 points while M&A related to BioVectra contributes 2% at the low end and 2.2% at the high end. This translates to a core growth of 2.5% to 3.5%. To start the year, we think this is a prudent way to plan given the near-term dynamics in the US. From a geographic perspective, we expect modest growth in the Americas and Europe. While we see funnel activity increasing in China, we are taking a conservative approach on the timing of revenue associated with the stimulus. We expect to see recovery over the course of the year in China, resulting in slightly positive growth for the full year. From a business group perspective, we expect to return to growth in all three groups led by ACG. As a note, this statement is true under the new structure as well. As Parmeet mentioned earlier, we will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. In terms of phasing, we expect improvement throughout the year with more normalized growth expected in the second half of the year. We are projecting roughly fifty to seventy basis points of operating margin expansion for the year. Below the line, we expect net interest expense of $25 million due to the financing of BioVectra versus the net interest income this year. In addition, we expect a tax rate of 13% and 286 million shares outstanding. Fiscal 2025 non-GAAP EPS is expected to be in the range of $5.54 to $5.61 and incorporates the planned five cents year one dilution from BioVectra. This range represents a 5% to 6% growth rate if excluding the BioVectra dilution, a growth rate of 6% to 7% year on year. We expect cash flow to remain strong in fiscal year 2025. We are expecting roughly $1.65 billion in operating cash flow and $450 million in CapEx as 2025 is the peak spending year for the NASD expansion. Looking to Q1, we expect revenue in the range of $1.65 billion to $1.68 billion. Our forecast assumes no significant budget flush during the end of this calendar year. This represents a reported decline of 0.5% to growth of 1.3%. Currency is a thirty basis point headwind while M&A is expected to contribute 1.8 points of growth. We are expecting core growth between a decline of 2% to flat at the upper end. It's important to note that we estimate our projected Q1 year-over-year results will be negatively impacted this year by roughly two percentage points due to timing of the Lunar New Year which occurs in late January, versus February of last year. This includes the additional $15 million in revenue pull forward we communicated in Q1 of last year. Adjusting for the Lunar New Year impact, we are expecting continued sequential growth improvement. First quarter 2025 non-GAAP earnings per share are expected to be between $1.25 and $1.28. Lower than the full year growth rate due to the Lunar New Year timing. Looking into 2025 and beyond, we remain incredibly optimistic about the future of our markets and our long-term prospects. We are confident in our new market-focused approach and the Ignite transformation will propel us to accelerated growth and we will become a stronger company. With that, I'll turn it back over to Padraig for some closing comments."
},
{
"speaker": "Padraig McDonnell",
"content": "I've said it before and I want to say it again. These are exciting times at Agilent. Over the last several months, we've been focused on evolving our strategy, transforming our processes, and empowering our people while continuing to win in the marketplace. Already we've made bold moves that have created momentum. We've developed our future strategy, we've kicked off our Ignite transformation to help execute on that strategy. And along the way, we've made moves to create new growth vectors. We are making acquisitions that will contribute to our growth and we are strengthening our capability to efficiently and effectively integrate those acquisitions that will lay the foundation for future M&A. These initial actions position us well for the journey ahead."
},
{
"speaker": "Bob McMahon",
"content": "They ensure we are building the capability"
},
{
"speaker": "Padraig McDonnell",
"content": "strength, and speed to reinvigorate our culture and enable us to thrive while delivering outstanding results for our customers and for our shareholders. And amid all this change, Fortune magazine this month named Agilent number eleven among the world's best workplaces 2024, a list that only includes twenty-five companies. This is yet another recognition of what we already know internally. The Agilent team is the best in the industry. This is not only a recognition of our outstanding company culture, of the talented professionals we have."
},
{
"speaker": "Bob McMahon",
"content": "Ones who are ambitious,"
},
{
"speaker": "Padraig McDonnell",
"content": "resilient, and high performing. This is exactly the team we need to evolve Agilent. To build an enduring company that sets the standard for excellence with our customers, and creates value for our shareholders. Thank you again for joining today's call. I couldn't be more energized by the momentum we have, the opportunities we will seize, and the history we will make. Now I look forward to answering your questions. Parmeet?"
},
{
"speaker": "Parmeet Ahuja",
"content": "Thanks, Padraig. Operator, if you could please provide instructions for Q&A now."
},
{
"speaker": "Operator",
"content": "And your first question today comes from the line of Patrick Donnelly from Citi. Your line is open."
},
{
"speaker": "Patrick Donnelly",
"content": "Hey, guys. Thanks so much for taking the questions. Padraig, maybe one for you. Just on the instrument side, and I know you guys touched on the book-to-bill over one for three quarters now, a little bit of improved growth on the order side year over year. Can you talk about where we are in the cycle, what your expectations are? As you guys know, there's a debate in the market about what the cycle looks like. Does it overcorrect to the upside as we work our way through the next year or so? Are you guys framing that up? What's the right way to think about this replacement cycle, where we are, and the size of it as we go forward here?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. Thanks, Patrick. Great question. So, you know, clearly, we're seeing a steady recovery in instruments and, you know, our book-to-bill was greater than one, which is really great to see. In terms of replacement cycle, what you would see across the industry is that it's not uniform. It's across different vendors at different speeds and, of course, at different times. But what we do see is that we have we're probably midway through the expected timing on where we expect that replacement cycle to be. We see competitors are probably benefiting from refresh of their own install base with some new systems. But what you would see from our side is our Infinity 3 that we announced last month. We expect to start seeing an increased demand for our solutions, and we're seeing a lot of excitement with our customer base. And we've already seen tens of millions of dollars in orders there. So what we expect in that replacement cycle is to be slow and steady, but really kicking off in Q1."
},
{
"speaker": "Patrick Donnelly",
"content": "Okay. And that's helpful. And then maybe on China, you know, always a focus with you guys. It sounds like slight growth for 2025 is the right way to think about it. Can you just talk about what you guys are seeing there and hearing there? You know, Bob, helpful to hear that you guys got your first orders there in October. What's the expectation as we move forward here? It sounds like a steady recovery. Are you still seeing I know you guys were kinda hovering around that $300 million revenue a quarter stability. It sounds like continued and maybe a little bit of improvements as we work our way through the year. Are there different segments that are maybe picking up a little bit? Would be helpful to talk through. Thank you, guys."
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. Thanks, Patrick. So performance was a bit better than expected, and it was also really encouraging to see lab activity to continue to improve across our services and consumables. So we actually have seen quite dramatic share gains within China, which is also a really good point. So what I would say is it's steadily improving. You know, talking to the teams. And I would say on the stimulus side, you know, we talked in the call about we've already have some stimulus orders in. We expect much more in Q1. That will, of course, translate to revenue. And this is a really, really good sign as we see momentum both from the direct input of more confidence in the market and, of course, getting the dollars in. So steadily improving, and we expect that through the year, Patrick. We expect as we go through the stimulus orders and we go forward, expect that to improve. One area that was really standout for us was PFAS in China. It was the fastest-growing business for us across the globe or region across the globe, and that just goes to show the durable nature of some of these growth factors that are happening where you have the emergent pollutants act moving. And what we've seen in China is that our great technical expertise coupled with our great solutions are already there to pick up the business. So that was one real clear standout."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. Hey, Patrick. Just want to add on to what Padraig is saying. Yeah. You're absolutely right. We ended the quarter with roughly $310 million, $312 to be precise, in China. Which was a nice sequential increase from Q3 and, you know, it was down 3% as I mentioned. In addition to the PFAS, both chemical and advanced materials actually grew in the quarter. We're, you know, we have a leadership position and pharma was flat, which was actually a very nice thing. And we're taking a kind of a conservative approach, as I mentioned, in terms of the stimulus orders, but we've seen quite active funnel from the standpoint of bidding activity here in the first half of this quarter as well as and expect that to continue throughout the course of 2025."
},
{
"speaker": "Patrick Donnelly",
"content": "Okay. That's helpful. Thanks, Bob and Padraig. I appreciate it."
},
{
"speaker": "Padraig McDonnell",
"content": "Thanks, Patrick."
},
{
"speaker": "Operator",
"content": "Next question comes from the line of Matt Sykes from Goldman Sachs. Your line is open."
},
{
"speaker": "Matt Sykes",
"content": "Hi, good afternoon. Thanks for taking my questions. Maybe the first one just on DGG, which has been sort of weighing on growth over the course of the year, but noticeably strong quarter. You had called out CancerDx as well as genomics. Could you just provide a little bit more color on what's driving that growth? And how sustainable do you think that growth is, particularly in genomics as we move through 2025?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. I just said start off, and I'll kick it over to Simon. You know, as we really are seeing nice growth in our pathology business, which grew high single digits in Q4 and is slightly ahead of expectations. A highly durable business in any markets. What we're seeing in genomics, while it's a still challenging market, we posted low single-digit growth, which was also ahead of expectations. But, Simon, I don't know if you want to add some color."
},
{
"speaker": "Simon May",
"content": "Yeah. Just a quick couple of quick points to add. As Padraig mentioned, we were pretty pleased with the high single-digit growth that we saw in pathology in the quarter. And in particular, the blend and the mix between instruments and consumables there, we continue to be really healthy. With our instrument placements, and we think that sees us quite nicely going into 2025. On the genomic side, it was really notable because it's the first time that we've seen growth in genomics for quite a while now. I'd say we've had a bit of a pivot in our strategy there to really double down on the growth drivers that we see in genomics, where we've got clearly differentiated value propositions and in particular, our Magnus automated NGS library prep continues to see fantastic traction. We're also very encouraged by the pipeline that we're seeing for our Aveda NGS chemistry. And, again, this gives us a lot of hope going into FY 2025. And as I think about pathology and genomics and these growth factors that we see here, we do believe that they're durable given the macro conditions and the competitive position that we enjoy."
},
{
"speaker": "Matt Sykes",
"content": "Great. Thanks. And maybe just for my follow-up, a high-level question for you, Padraig. On the resegmentation, it makes sense from a go-to-market strategy for some of these segments to put them together. I'm wondering from an R&D development and new product innovation, how this might help. I mean, you referenced the LC replacement cycle accelerating faster for competitors as they refresh their installed base. Should we start to see a faster cycle of new product introductions due to the resegmentation, or is it gonna be similar to the pace that we've seen in the past and resegmentation really doesn't necessarily inform R&D direction?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. Well, look, I think we're refocusing the groups really for a few reasons. We want to be closer to customers, but also understanding where do we want to make our biggest investment or most asymmetric that are going to accelerate innovation in key areas. And when I talk about focus, it's really three things. You know, it's the energy to time, but also the capital allocation. And what you will see from this refocusing of our segments, we're gonna be able to do that. You're gonna see programs accelerate. But also, we don't want to be two inches deep across the company. We want to be focused on our key growth factors and making sure we accelerate. We have a huge amount of product lines and, of course, we can have incremental additions to product lines across the board. But from this new structure, you're gonna see an acceleration of R&D. No doubt about it."
},
{
"speaker": "Matt Sykes",
"content": "Thank you."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Rachael Raycroft with Your line is open."
},
{
"speaker": "Rachael Raycroft",
"content": "Perfect. Thank you for taking the questions, you guys, and good afternoon. So I wanted to follow-up on Patrick's question on China. Appreciate that it's early days, but how are you guys thinking about the risk of potential tariffs on Agilent's business at this point in China and in the rest of the world? Is there anything embedded in guidance currently from a tariff standpoint? And then can you remind us what was the tariff impact on Agilent in the first Trump administration?"
},
{
"speaker": "Bob McMahon",
"content": "Yeah. Hey, Rachael. This is Bob. I'll take that question. As you can imagine, there's been a fair amount of work that we've been doing on this exact question. What I would take it if I took it into two chunks, actually, we've been working on diversifying our supply chain particularly within China, you know, China, back in eighteen, nineteen when the first tariffs came and then, obviously, double down on that resiliency with COVID. And so it is ten to fifteen million dollars existing today. And we think that the future potential magnitude of this is certainly manageable with us with additional mitigation activities. Obviously, with something that would be more broad-based than that, it would be more material. But to just give you a frame of reference, roughly two-thirds of our business in the US comes from product that's sourced in the US."
},
{
"speaker": "Rachael Raycroft",
"content": "Great. That's helpful. And then just for my follow-up, you mentioned that chemical and advanced materials grew 1% this quarter. Was wondering, could you just break down some of the trends that you saw within? You mentioned that semiconductors drove some of the performance that you saw on the advanced materials side. We actually had one of your peers call out some weakness in semi this quarter. So just talk to us about what you're seeing from an underlying perspective on that side. And then again, just tell me business as well. Thanks."
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. So in the chemical advance materials, we grew 1% and we sold 4% of materials, and that's driven, you know, a lot by our battery business that we have and, of course, semiconductor. We saw a slight decline in chemical and energy. But overall, we're very happy with the growth that we've seen in Asia ex-China, by the way, was driven and also low single digits in China. So the one thing that I would note about this industry is that we've got the broadest platform and solutions around it. And it's the CAM is returning to positive year on year growth for the first time since Q2 in 2023, so that really bodes well for the future."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. Hey, Rachael. And maybe just for the benefit of you and the rest of the folks on the call, I talked about guidance. If you look at it by end market, just to kinda give everyone a frame, you know, for the full year FY 2025, we're expecting pharma to return to growth. So low to mid-single-digit growth there. Academia government roughly flat. Actually, expect the diagnosis and clinical that Simon just talked about to continue and be the highest growth end market, at least to start off the year here in FY 2025 at mid-single digits. CAM also low to mid, given the work and the discussion that Padraig just gave. And then food and environmental, both low single digits with pockets of very strong growth. And really, you know, food, there was a potential where the actually could accelerate throughout the course of the year given some of the potential changes in the administration coming up."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open."
},
{
"speaker": "Vijay Kumar",
"content": "Hey, guys. Thanks for taking my question. Maybe building off of the last question here on the drivers of fiscal 2025. When you look at the first half versus second half, it does assume a back half step up. We're just curious. Is that being driven by end markets normalizing? Maybe if you could just walk us through from first half versus back half dynamics in fiscal 2025?"
},
{
"speaker": "Bob McMahon",
"content": "Yeah, Vijay. That's exactly right. So, you know, obviously, our first quarter is what I would call artificially depressed just because of the way of the nature of our timing of our fiscal year relative to Lunar New Year. But if you looked at first half versus second half, we're expecting this continued recovery throughout the course of the year. And with a more normalized growth in the back half of the year. And so where does that show up? It shows up in a couple of areas. Obviously, with the potential for China getting better throughout the course of the year. As Padraig mentioned, certainly, stimulus can help that. We've taken a conservative approach on that and not fully baked in with all the activity that we talked about. We'll see how that plays out, but certainly early days are very positive from that standpoint. And then also from a pharma perspective, we're also expecting to see that recovery particularly on the back of Infinity 3 as Padraig just mentioned, and that replacement cycle accelerating. So you're actually seeing those that would be the two biggest and then, you know, continued biotech recovery on the small biotech side as well throughout the course of next year."
},
{
"speaker": "Vijay Kumar",
"content": "Understood. And then one on that maybe margins, we cash. Pretty impressive free cash execution in fiscal 2024. Just wanna make sure I have the numbers right. Is the guide assuming free cash flow down above it, there's a timing element and on the margin sort of similar cadence question, what is Q1 assuming and what drives the back half step up in margins? Thank you."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. So Q1, so let me answer your question around free cash flow. Yeah. We are expecting a slight slip down really a result of a step up in CapEx spending this year versus last year. As we, you know, finished the heavy levels of spending for the NASD expansion for Trane CND. I don't expect that to continue into 2026 and 2027, so you would see that then step back down. So that free cash flow is really a timing issue. In terms of Q1, profitability with the lower revenue, we typically have higher expenses in Q1 as some of the merit resets. We've got our sales meetings and kickoffs meetings there, and then you've got, you know, some January typically is a very light month, but we have a full amount of expenses in there. And then you then also look at the Ignite transformation that Padraig talked about, many of those activities that we've been kicking off will come into play in the second half of the year, which will generate incremental savings both on the top line and the bottom line. And what you'll hear more about that, some of those details at the Investor Day in mid-December."
},
{
"speaker": "Vijay Kumar",
"content": "And so thank you."
},
{
"speaker": "Operator",
"content": "Next question comes from the line of Jack Meehan from Nephron Research. Your line is open."
},
{
"speaker": "Jack Meehan",
"content": "Thank you. Good afternoon. I was wondering if you could just walk us through for the 2025 guide what this assumes for each of the segments. Not sure if you can provide it under the old method or just the new method, but any color would be great."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. I could do that. So if you think about this at, I'll call it legacy number. So LSAG kinda low single digits with the consumables business being kind of mid-single-digit and slower on the instrument throughout the course of the year. That's probably our area where we've taken a prudent approach as we go through the course of the year. It could be more than that, depending on the uptake of the replacement cycle INFINITY 3, but low single digits there. ACG continued to be very strong with mid to high single digits as the instrumentation recovery and then continued double-digit on the services business. Just continues to be a real stalwart of growth, and we still have a lot of opportunity there around rate. And then for DGG, kind of low to mid-single-digit growth. Going forward, which is a recovery, you know, the continued performance of pathology in the genomics businesses, as Simon mentioned, and then a return to growth really for NESD."
},
{
"speaker": "Jack Meehan",
"content": "Right. Okay. And then wondering if you could just talk a little bit more just what your expectations are for LC, LCMS. I think everybody's trying to benchmark expectations for next year and one of your peers sounds a little bit more bullish as it pertains to the cycle. So I don't know if you have any thoughts as we try and compare and contrast some of these results. Any color would be great. And maybe just off of that, any comments you can share around GLP one contribution I think that might be a factor, but any color would be great. Thank you."
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. So, you know, there's a lot of dynamism in terms of replacement cycle. You know, it doesn't happen at any time, as I said before, any one time, but it's across the board in different industries and different times. From our perspective, you know, our LC and LCMS orders are improving. There's no doubt about that. And we have a huge amount of excitement around our Infinity 3. We have a lot of focus programs with our customers around that. So what you will see next year is I think it's a steady increase in cadence of that replacement cycle. You know, it's a little bit too early to call. Will that be gradual over a number of quarters or a bolus in one quarter or maybe then a slowdown and again on the next quarter? But we're really watching that as we go forward. I think we're being very conservative around what we're seeing on that because of a lot of turbulences everybody has seen in the last few years in the market. But I would say customer sentiment is steadily improving. And on the GLP One side, you know, we had a really fantastic year. We grew 30% in GLP one this year. We're involved in a lot of new site build-outs in QAQC departments and actual getting closer to production as well with systems. So a very, very strong year. And actually one thing that's really interesting is through the acquisition of BioVectra, we, of course, have a healthy pipeline of GLP-one and synthetic peptides within their CDMO capability. We're seeing a lot of requests from both sides of the business about how we can help customers both on the analytical side and on the CDMO side. So we're seeing a huge amount of synergies there. So this is a market that's going to continue very strongly and we're going to be really there to take the business."
},
{
"speaker": "Bob McMahon",
"content": "Hey, Jack. Just to build on what Padraig is saying on the LC replacement cycle, I think one of the things is, you know, we're taking a more conservative approach as Padraig mentioned. And I think if that happens, we will get that business rest assured. I would also say, if we look at the age of our installed base, it is continuing to get old. It is well beyond the median now. And throughout the course of next year. So we would expect that to continue to be able to be replaced. Because when we look at the instrumentation through our consumables business and our services business, the activity continues to be high. So these instruments are being used, and so it's only a matter of time to be able to do that replacement."
},
{
"speaker": "Jack Meehan",
"content": "Awesome. Thank you, guys."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Dan Leonard from UBS. Hi. Thank you. Just to clarify on instruments one last time, is your expectation that instrument growth is flat in 2025?"
},
{
"speaker": "Bob McMahon",
"content": "In aggregate across all platforms, our expectation is that it will grow. Low single digits."
},
{
"speaker": "Dan Leonard",
"content": "Okay. And then my follow-up. You mentioned, I think, something about the administration and changes in your food forecast. Are there any other areas where you think the change in US administration could impact your business? Any other areas that you were sensitive to putting together your forecast for 2025?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. Look, there's a lot of changes that can happen at this time. You know, there's a lot of people expecting a lot of change. We have yet to see what those changes will be. Of course, you can see maybe some changes in the NIH funding, which is very low for us as a percentage of the business. We actually expect the PFAS spending will actually increase as it goes forward on it. The area to watch, I would say, is, of course, tariffs, which Bob talked about. We're ready for that. Ready for any scenario on that side. But also on biopharma, I think, is the IRA is also continues to move forward, the International Pricing Index seeing what happens on biopharma is gonna be really important. So that's why we're taking a kind of conservative and prudent approach. So lots going on. But what I would say is from the strategy work, I would imagine, we're ready for all outcomes."
},
{
"speaker": "Dan Leonard",
"content": "Okay. Thank you."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Puneet Souda from Leerink Partners. Your line is open."
},
{
"speaker": "Puneet Souda",
"content": "Yeah. Hi, Padraig, Bob, thanks for taking my questions. First one, just wanted to clarify on the tariff side. I mean, if there were any retaliatory tariffs could you elaborate on your manufacturing and final assembly positions just globally so we can understand sort of how much of the product is sort of China for China, made in China versus made in other Asian countries and not coming from the US."
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. Maybe I can start off by talking about our, you know, our US supply chain in there. About 60%, as Bob said, is produced in the United States. About 35% is the rest of the world. So it's actually a small percentage that's produced in China. But, of course, we have mitigations and steps there. We have many supply chain areas across the globe that we can move around, and we've done that before since 2018. We expect the impact probably in the quarter of $4 million to $5 million we can probably mitigate that within a few months. So I would say we're waiting to see how that all plays out. But we're already taking steps across potential tariffs. The big question for everybody is that will it be on will it be beyond China? I think everybody's waiting to see what that is, but even in that case, we're ready with mitigations."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. Hey, Puneet. To build on what Padraig is saying, particularly for retaliatory tariffs in China, very little of our revenue now is produced in the US that goes into China. We spent a lot of time and effort building in China for China, and we have a full portfolio of capabilities there. Which is actually really important for us to be able to take full advantage of the stimulus products today. So, and, you know, I think that number will be relatively small. From the standpoint of retaliatory impact from China exports from the US."
},
{
"speaker": "Puneet Souda",
"content": "That's helpful. Thanks. And then, I have a question on Infinity 3 series. Just wondering, given the launch timing, was there any pause that you saw in on the instrumentation? And what is the order book telling you? Do you think this is what's driving, you know, is it a major driver of instrumentation orders in the quarter being positive as you pointed out?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. You know, we had a minimal effect to be honest. We really planned around that and of course, we are very careful with our customers to make sure we bring them through the cycle of replacement. So minimal impact. You know, we're very extremely excited about it. You know, it's a system that not only will be best in class in terms of performance, but also in terms of productivity. And that's what we're hearing loud and clear from our customers. It's about productivity and how it lends their labs to be more productive going forward. We're extremely pleased with the order book that we've seen so far. And we expect that that will continue to ramp and, you know, customers are really voting with their orders on that. So we're excited about that ramp for next year."
},
{
"speaker": "Puneet Souda",
"content": "Okay. Thank you. Look forward to the investor day."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Tycho Peterson from Jefferies. Your line is open."
},
{
"speaker": "Tycho Peterson",
"content": "Hey, thanks. Wanted to probe in a little bit. Are you able to delineate what LC did and what mass spec did in the quarter? And then just thinking a little bit about the new administration, I know you're not guiding for any budget flush here, but is there any risk of kind of pause in spending given all the moving pieces around pharma? What are you hearing from customers at this point?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. Maybe I can start with the second part, Tycho. We're not seeing a pause from pharma validating. We're actually seeing a little bit more activity. So we're not seeing that across the board, and that's about the US and globally. And, of course, that's something we really want to watch with the new administration coming in. And what transpires over the next few weeks. But in terms of the LC and LCMS, Bob, I don't know if you got any color on those."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. Hey, Tycho. Just to give you a couple of different pieces of data. If I look at our pharma business overall, it was down low single digits. Pharma, small molecule was actually up 3% overall with biotech or biopharma being down. If we look at specifically LC, LCMS, within pharma, it was up low single digits."
},
{
"speaker": "Tycho Peterson",
"content": "Okay. That's helpful. And then the follow-up on NASD, I know I think you're talking back to growth in 2025. Can you maybe just talk a little bit about your ability to cross-sell with BioVectra and then how are you thinking about clinical versus commercial customers?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. I'll start off, Tycho, and I'll hand it over to Simon. You know, first of all, we are extremely pleased on the cross-selling ability between the two businesses. It was one of the key sources of value about why we did the BioVectra acquisition that customers were asking us for this capability, a broader range of capability, and we've seen that actually accelerate from both sides. Simon, I don't know if you want to add more color on NESD."
},
{
"speaker": "Simon May",
"content": "Yeah. Just to build on what Padraig said with BioVectra and the NASD cross-pollination, there's been really strong engagement between the teams. In fact, they spent several days together in our Boulder facility last week, and I'd say they came away really energized that the portfolio complementarity fit between businesses is exactly as we expected. In fact, maybe a little bit more so. Then as we think about NASD going into FY 2025, I think as Bob mentioned earlier, we're projecting high single-digit growth for the business. The order book looks really strong in NASD, but it's important to understand the nuances of the mix in that order book. We've got a number of commercialization qualifications going on right now. So in terms of FY 2025 revenue, there's a lot of energy going into that with relatively limited revenue upside, and a lot of that's gonna actually hit towards FY 2026. But, again, the order book overall is very healthy. And as we think about twelve, eighteen, twenty-four months view, we're really bullish about what we're seeing. But once again, high single-digit growth, maybe we'll nudge double-digit in NASD in FY 2025?"
},
{
"speaker": "Tycho Peterson",
"content": "Thank you."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Brandon Couillard from Wells Fargo. Your line is open."
},
{
"speaker": "Brandon Couillard",
"content": "Hey, thanks. Good afternoon. Just on the Infinity 3 launch, can you remind us, you know, when the Infinity 2 I think it's the 1290 system rolled out. And what's the is there an ASP premium? Is there an ASP kicker to this replacement cycle this time as well to the three versus the legacy two system. Thanks."
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. We don't talk about a difference in pricing on it, you know, but I think we've had a number of years, of course, very, very successful years with the Infinity 2 and this builds on success. I will say that the installed base for Agilent is way broader than the Infinity 2. You know, we have 1100s that are very, very prominent out there. We have a lot of labs with 1100s and those are the labs for us, I think, that are gonna be talking about replacement. But we also have seen significant interest from Infinity 2 customers because the CDXTR productivity capability is really going to help them in the lab. So I would say it's not just, you know, one series to the next. It's a broad install base replenishment we're gonna see."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. All I would say is pricing has held up very nicely. Early days."
},
{
"speaker": "Brandon Couillard",
"content": "Okay. And then Bob, how much of the CapEx is in Nexter is tied to the train B and build out for NASD, we expect those to come online, and what does maintenance CapEx look like? In fiscal 2026? Thanks."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. That's a great question. So roughly half is NASD between the continued build-out and the validation activities of that $450 million. If I look at, kinda maintenance CapEx, think about it in, you know, kinda two and a half to three times sales. Range on a go-forward basis."
},
{
"speaker": "Brandon Couillard",
"content": "That's total cover. Thank you."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Doug Schenkel from Wolfe Research. Your line is open."
},
{
"speaker": "Doug Schenkel",
"content": "Good afternoon, guys. Thanks for taking my questions. Just want to start first with a question on guidance philosophy. Just to be clear, it sounds like you're trying to factor in a degree of conservatism on China stimulus, the impact of uncertainty as it relates to the new administration, and conservatism on a potential LC replacement cycle. Hopefully, I'm not missing anything there. But is it fair to say that the error bar around your assumptions are wider than normal heading into a new fiscal year and your intent across the board was to make assumptions that were consistently on the lower end of those error bars?"
},
{
"speaker": "Padraig McDonnell",
"content": "I think you said it well. You know, we were very conservative in that because of those reasons, you know, what is the expected LC replacement cycle recovery? Is it faster? Is it, you know, is it a little bit less than that? The China stimulus, you know, which is very early days, you know, I think we want to make sure that we continue to monitor that. And, of course, whether we see improved conditions or not in terms of sentiment in the US. So all of these things are factoring into this. So it is conservative in what we're guiding, but also I'd say here, the bars are wider than normal."
},
{
"speaker": "Doug Schenkel",
"content": "Okay. Thank you for that. And just as always, correct me if I'm wrong, but I believe in your prepared remarks, you indicated that small molecule was up low single digits while biopharma was down mid-singles. If I have that right, is that comp effect, or are you seeing more of a recovery in demand amongst, you know, small versus large molecule applications, and I guess, finally, if so, why? That seems to be a little contradicting just curious if you could give us a little more there."
},
{
"speaker": "Bob McMahon",
"content": "Yeah, Doug. You know, you heard it right. Our small molecule business was up low single digits across both instruments. You know, it was the combination of instruments and services. And our biotech, our large molecule was down mid-singles. Now if you took out NASD, which shows up in the large molecule, it was down low single digits. So better recovery than the mid-single digits. And it actually speaks to, I think, that continuation of volume in small molecule. You know, if you look at pill count, it continues to go up. And these are, you know, well-capitalized companies. They have probably the older fleet you just think about kind of the replacement versus kind of the biotechs of the world, and so we're expecting that to continue and, it was the first to kind of go down. And so we're, you know, in the cycle, and I think we're expecting it to be the first, you know, moving positive. Now we think there's more upside in biotech than there is in small molecule, but it certainly is a nice leading indicator around the idea around this replacement cycle."
},
{
"speaker": "Doug Schenkel",
"content": "Okay. Thanks very much."
},
{
"speaker": "Operator",
"content": "Your next question comes from the line of Michael Ryskin from Bank of America. Line is open."
},
{
"speaker": "Michael Ryskin",
"content": "Great. Thanks for taking the question, guys. First, I want to ask a quick follow-up on China stimulus. I know you kinda touched on them in a couple of different questions. But early in the prepared remarks, you did make some comments of, you know, seeing some initial China stimulus orders come in. I think China in the quarter exceeded your expectations. I know there's not a lot embedded directly into the guide. But could you just walk us through sort of, like, how China's stimulus could play out next year? And I'm asking this from a perspective of, you know, gradual ramp as you go through the year. Is it gonna be a trickle? Is it could it be very back-end loaded? It's just trying to think through the various scenarios and what you're looking for there. Once the initial order is clear."
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. Look. I think what we've seen is that it's much broader. The stimulus in terms of range. We spoke about that before. We see it, you know, both on commercial and government accounts. Our first orders have actually come in from government accounts. We've been highly successful in those overall tenders, and we're in the low millions range, low single-digit millions range of orders to bring. We're expecting to close much more this quarter. And one thing that's really playing into our favor is our broad platform capabilities. Including the technical capabilities of our teams up and running. And you couple that with our Made in China initiatives that we really invested over the last year, it puts us in a very, very strong position to capitalize, but it'll be interesting to see how that's launched. Past the first quarter, we don't have great visibility yet, but, of course, a lot of deal activity. But the first quarter is looking very strong in terms of orders."
},
{
"speaker": "Bob McMahon",
"content": "Yeah. Hey, Mike. And just to kind of frame it, kind of how we're thinking about China to your point. If we took Q4 and just divide it by or multiply it by four, that would get you to that low single-digit growth. Now we're expecting a recovery throughout the course of the year, but that kind of gives you a sense for what we put in the initial guide and we'll know a lot more about those timing of the stimulus revenues going forward. You know, once we actually get those awarded and then the delivery dates and so forth. But we do think that that'll occur throughout the course of the year."
},
{
"speaker": "Michael Ryskin",
"content": "Okay. That's helpful. And then, Bob, maybe for you, just on the margin guide for next year, fifty to seventy bps. So really impressive starting point honestly better than I think a lot expected. Especially given, you know, still a little bit of a subdued top-line environment. How much of that can you attribute to Ignite and sort of, you know, maybe some of the transformation or one-time cost savings, how much is just the underlying strength of the business, maybe beside the price or some mix shift next year? Just a little bit of what's going into that margin expansion for next year?"
},
{
"speaker": "Bob McMahon",
"content": "Yeah. What I would say, Mike, is it's a little of all those things. So maybe stay tuned, and we'll give you a little more meat on the bones here come mid-December. But we certainly have some incremental opportunities both in price and, you know, cost efficiencies associated with the Ignite transformation. And those things will start to feather into the second half of this year, as I mentioned before. If you recall, the first half of this year also has the annualization of the savings of the actions that we had to take in the June, July time frame as well. So we're benefiting and then you also have the merit increases and so forth that gets reset. And so you'll actually see this throughout the course of the year through a series of initiatives that have already been kicked off."
},
{
"speaker": "Padraig McDonnell",
"content": "And I would say just following up on that, Bob, we're very excited to meet everybody in December in New York to talk about it. It's an extremely well-thought-out program. It's across the board. It's ultimately gonna help us to invest for growth in key areas as well as margin expansion."
},
{
"speaker": "Michael Ryskin",
"content": "Okay. Thanks a lot, guys."
},
{
"speaker": "Operator",
"content": "And your final question comes from the line of Dan Brennan from TD Cowen. Your line is open."
},
{
"speaker": "Dan Brennan",
"content": "Great. Thanks for taking the questions here. Maybe the first one just on pharma. In the Americas. I think you called that in the prepared remarks Americas Pharma XMASD was kind of maybe a weaker spot. You just unpack a little bit what's happening in, you know, US versus, say, Europe, rest of the world and kind of, you know, what's kind of assumed from what happened in 4Q in 2025?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yeah. I mean, look, we saw a lot of strength in Europe in terms of pharma. I wouldn't read too much into the American numbers. You know, I think there is, of course, companies wondering about their CapEx budgets and that comes at different phases. But we expect, we expect Pharma to continue."
},
{
"speaker": "Dan Brennan",
"content": "Okay. That's helpful. And then maybe just one on if I can just go into the broader market. I know you talked about the period in Mark's, Bob, and a few times it came up like you're expecting a below-trend market. At least it sounds like for the first half of the year, can you just remind us in terms of your kind of growth algorithm maybe, like, what would what is your assumptions based upon for a market growth typically? Kinda what are you assuming? And kind of specifically, is it just pharma that's weaker? Or are there other spots that you're pointing to that are below trend? And, you know, any color on that would be helpful. Thank you."
},
{
"speaker": "Bob McMahon",
"content": "Yeah, Dan, if we looked at the long-term growth rates of our markets, we believe those are mid-single digits, you know, four to when you look at the aggregate across. We're obviously not expecting that for the full year here. We are expecting that we're doing better than the market. If you look at kinda how we exited here roughly flat on a core basis, you know, if you adjust for the timing of Lunar New Year, you know, you had the midpoint one percent, you know, and expect that kind of performance to continue that cadence. And so you would have the second half of the year a more normalized kind of growth rates. And so it's really across the board. We're seeing, you know, some of the industrial or applied markets things like CAM being a little ahead of the curve and certainly our diagnostics and clinical business continues to be strong. It has been throughout the course of this year. Exiting at a very healthy rate, and I would expect that to continue. The big ones are pharma coming in and then, you know, some of the other applied markets as well."
},
{
"speaker": "Operator",
"content": "And this concludes the question and answer session. Mr. Ahuja, I turn the call back over to you."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thanks, Rob, and thanks everyone for joining the call today. Before we sign off, I'd like to wish everyone a happy Thanksgiving. Have a good rest of the day and week everyone."
},
{
"speaker": "Operator",
"content": "This concludes today's conference call. You may now disconnect."
}
] |
a | 2,024 | 3 | [
{
"speaker": "Operator",
"content": "Ladies and gentlemen, welcome to the Agilent Technologies Q3 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thank you and welcome, everyone, to Agilent's conference call for the Third Quarter of Fiscal Year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today's discussion, along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments 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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rate. As a reminder, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our Cell Analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risk 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 risk and other factors. And now, I'd like to turn the call over to Padraig."
},
{
"speaker": "Padraig McDonnell",
"content": "Thanks, Parmeet. Good afternoon, everyone and thank you for joining today's call. The Agilent team executed well in the third quarter and posted solid results, delivering better-than-expected revenue and earnings. Revenue of $1.578 billion, declined 4.4%, an improvement of 300 basis points from Q2, reflecting the steady improvement in the market. Operating margin of 27.4% improved sequentially, as the actions we announced last quarter start to deliver. And we remain on-track to deliver the incremental annualized savings of $100 million by the end of the fiscal year. Earnings per share of $1.32 is $0.04 above the high end of guidance. As a result of our strong Q3 performance, we are raising our guidance at the midpoint for both revenue and EPS and we continue to make investments in our most promising growth opportunities that I referenced in our Q2 call. We are investing in our digital ecosystem to further enhance our differentiated customer experience, plus we are mobilizing the organization to accelerate value creation through strategic transformation initiatives, driving margin expansion and growth and increasing our execution capabilities. Separately in the quarter, we were excited to announce two acquisitions that demonstrate our focus on biopharma and our digital ecosystem, which I'll talk about in a moment. As you know well, the pace of change is faster than ever. Our markets, customers and competitors are not standing still, neither are we. We are accelerating our pace of innovation and execution, so we can add to and capitalize on opportunities in front of us. We are sharply focused on key growth vectors, including biopharma, PFAS and Advanced Materials. I continue to meet and connect with employees, customers and shareholders around the globe to listen to their perspectives on how we should build on our strengths and move Agilent forward. The entire Agilent team is clear on what is vital to the company's future, becoming even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. We are evolving our strategy, adapting quickly to market trends and changes, while accelerating our pace of innovation in areas of greatest return for long-term growth. We're excited to announce that you'll hear more about these topics and our transformation at our Investor Day we have planned in New York on December 17th. Now, let's talk further about our Q3 results. All our end markets except academia and government, which is our smallest, ended the quarter better-than-expected. Our largest market pharma declined high-single-digits, slightly better than our expectations and while biopharma continues to be pressured, we are seeing relatively better performance in small molecule. Our leadership in providing workflow solutions for PFAS continued to show strong performance in the environmental markets. Geographically, Europe exceeded expectations led by small-molecule pharma, as well as continued strength in environmental. Our other regions performed roughly in-line with expectations. While capital equipment budgets remain constrained, we continue to see good lab activity in Q3 with services plus consumables growing mid-single digits. When looking at our performance by business unit, the Life Sciences and Applied Markets Group reported $782 million in revenue, down 7%, while the instrument side of the business remains constrained, it was encouraging that our instrument book-to-bill was again greater than one. The group saw a decline across all regions and most end-markets with low single-digit growth in Environmental & Forensics. The Consumables continue to be a bright spot, growing by mid-single digit. The LSAG team also was busy innovating with the introduction of the 8850 GC that helps customers reach their sustainability goals by delivering answers efficiently, while using up to 30% less power than other GC's and has a much smaller footprint. Moving on to the Agilent CrossLab Group, the business delivered revenue of $411 million for the quarter, up mid-single digit. ACG grew in every region except China, where we were down modestly year-on-year, but showed meaningful improvement versus last quarter. Once again, we drove double-digit growth in service contracts, which represented nearly 70% of the total business. And beyond another quarter of solid revenue growth, ACG also delivered a record operating margin of 34%, demonstrating that the resiliency and strength of the recurring revenue business continues despite the constrained capital equipment environment. The continued strength of our business is a testament to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers in helping them reach their productivity goals. The Diagnostics and Genomics Group posted $385 million in revenue, representing an 8% decline. Pathology grew mid-single digits globally and was offset by declines in Cell Analysis, NASD and genomics. NASD stepped down sequentially in Q3 as expected and we are on track for NASD's revenues to step-up sequentially in Q4. In the face of a constrained CapEx environment, the Agilent team has remained consistent in putting our customers first and fostering deeper relationships with them. We continue to execute well and be disciplined, while investing in high-growth opportunities. As I mentioned earlier, we were thrilled to announce two acquisitions, that speak to our focus on biopharma and increasing recurring revenue, as well as on strengthening the digital ecosystem for Agilent customers. In late July, we signed a definitive agreement to acquire BIOVECTRA, a leading specialized contract development and manufacturing organization. The Canada-based company builds on Agilent's capabilities in oligonucleotides and CRISPR therapeutics by expanding our portfolio of services. BIOVECTRA adds rapidly growing modalities in microbial fermentation, antibody-drug conjugates and high-potency active pharmaceutical ingredients. It also brings world-class capabilities that when combined with NASD enables us to deliver customers a complete gene editing solution. The company delivered more than $110 million in revenue during the calendar year 2023 and expects double-digit revenue growth this year. The BIOVECTRA acquisition remains on-track to be closed by the end of the year and we're looking-forward to welcoming the BIOVECTRA team to Agilent. At the end of the quarter, we also announced the acquisition of California-based Sigsense, a start-up that uses artificial intelligence and power monitoring to help customers optimize their lab operations. Sigsense Technology already is available to our customers through CrossLab Connect, a suite of digital applications that improve lab performance. A hearty welcome to the Sigsense team who already is part of Agilent. During the quarter, we released our annual ESG report, which showcases a large and growing portfolio of products that help our customers reach their sustainability goals. Instruments certified with the My GreenLab ACT label now accounts for 40% of all instrument revenue and we continue to regularly release products like the new 8850 GC with environmental benefits. We are also proud that we have recently ranked in the top 20 of Time Magazine's 500 Most Sustainable companies in the world. Bob will now provide the details on our results, as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob."
},
{
"speaker": "Bob McMahon",
"content": "Thanks, Padraig and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then cover our updated full-year and fourth quarter guidance. Q3 revenue was $1.578 billion, a decline of 4.4% core, but a 300 basis-point sequential improvement as Padraig noted. Excluding China, revenue declined low-single digits in the quarter. On a reported basis, currency had a negative impact of 1.1 percentage points, while M&A had a negative impact of 10 basis points, resulting in a reported decline of 5.6%. Our largest end market pharma declined 8%. Biopharma was down low double-digits or down mid-single digits, excluding NASD. Small molecule performed better, down mid-single digits and was led by growth in Europe. Services and pharma continues to perform well, growing high single-digit. In Chemical & Advanced Materials, revenue declined 5%, with growth in Americas offset by softness in China. Our Advanced Materials sub-segment performed better, driven by our business in the semiconductor market. Academia and government, our smallest market, can be lumpy from quarter-to-quarter. We saw a decline of 11% as Europe and China both saw double-digit declines, partially offset by better performance in the Americas region. Our business in the diagnostics and clinical end-market grew 2%, including continued mid-single digit growth in pathology, offset by ongoing softness in genomics. In Environmental & Forensics, we grew 4%, another great quarter for our PFAS testing business. We saw robust business in Europe, led by the new EU Water Directive and in China due to the nationwide emerging pollutants program. Now wrapping up our end-markets, food was down 3% versus last year, but grew sequentially and was led by Asia, ex-China. Moving on to our regional performance, Europe was flat overall, beating our expectations, while we declined 6% in the Americas and declined 1% in Asia, ex-China. China revenue declined 11% with quarterly revenue improving sequentially, driven by growth in services and consumables. This speaks to some increase in lab activity, which is encouraging. Now, let's move on to the rest of the P&L. Gross margin was 56.0% in the quarter, down slightly versus a year-ago, but up 40 basis points sequentially. Our operating margin of 27.4% improved sequentially and was better-than-expected. Despite the dampened demand, we continue to make good progress in driving our productivity initiatives and continuing to manage the cost structure very well, while investing for growth. As Padraig mentioned, we are on track to deliver the $100 million in incremental annualized cost-savings by the end of the fiscal year. Below the line, our net interest income was in line as was our tax rate of 13% and we had $291 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.32. That was ahead of our expectations, but down 7.7% from a year ago as we went up against a difficult compare due to the variable pay reset in Q3 of last year. Now, let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $452 million in the quarter and we invested $92 million in capital expenditures. As we committed in Q2, we ramped-up our share repurchases starting here in Q3. We purchased $585 million in shares and paid out $68 million through dividends, for a total of $653 million returned to shareholders in the quarter. This includes $500 million of the previously announced $750 million opportunistic share repurchase and we expect to complete the additional $250 million repurchase in Q4. We ended the quarter with a net leverage ratio of $0.6 and even with the upcoming BIOVECTRA acquisition, our balance sheet and leverage ratios will still be in a very strong position. In summary, we performed well and continue to see a steady improvement in the market and expect that to continue into FY 2025. Because of our Q3 results, we are increasing the midpoint of our revenue and earnings per share guidance for the year. We now expect full-year revenue to be in the range of $6.450 billion to $6.500 billion. This represents a decline of 5.6% to 4.9% on a reported basis and a decline of 5.0% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. Full-year non-GAAP earnings per share are now expected to be between $5.21 and $5.25, representing a decline of 4.2% to 3.5%. This assumes net interest income of $38 million, a 13% tax rate and $292 million fully diluted shares outstanding. We have not included any impact of the BIOVECTRA acquisition in our updated guidance and $0.06 does not have a material financial impact to the year or Q4. This full-year guidance translates into Q4 revenue in the range of $1.641 billion to $1.691 billion. This represents a decline of 1.9% to 1.1% growth on a core basis and a decline of 2.8% to 0.2% growth on a reported basis. Currency and M&A are a combined headwind of 90 basis-points. Fourth quarter non-GAAP earnings per share are expected to be between $1.38 and $1.42, marking a return to growth at the midpoint. We expect a 13% tax rate, a decrease in net interest income to $5 million due to the lower cash balance and $287 million diluted shares outstanding for the quarter. Now, I'd like to turn the call back to Padraig for some closing comments. Padraig?"
},
{
"speaker": "Padraig McDonnell",
"content": "These are exciting times at Agilent, with a team that is second to known, we are doubling down on our customer force culture and deepening our relationships to further enhance our market leading customer experience that is already the best in the industry. We are evolving our strategy to aggressively pursue our ambition to grow in markets where we have a right to win through both organic and inorganic growth and we will continue to accelerate value creation through strategic transformation initiatives. We remain a leader across key platforms and we're in great long-term growth markets that are beginning to show evidence of recovery. And best of all, our team is engaged, leading to Newsweek including Agilent on its America's Greatest Workplaces 2024 list. Again, thank you for joining today's call. I'm energized by how we are evolving Agilent. Each data team gains momentum in building an enduring company that sets the standard for excellence with our customers and creates value for our shareholders. We are fueled by the future possibilities and I look forward to continuing to share our progress. Parmeet, over to you for Q&A."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thanks, Padraig. Regina, if you could please provide instructions for Q&A now?"
},
{
"speaker": "Operator",
"content": "[Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead."
},
{
"speaker": "Matt Sykes",
"content": "Hi, good afternoon. Thanks for taking my questions. Maybe the first one, just digging in a little bit on the LSAG where you had a pretty solid beat. It looks like that was driven primarily by consumables and services. So, I'm curious if you can give any more color on what instruments did? I know you had a book-to-bill above one, but just how does that inform your view as we go into 2025 on the replacement cycle, specifically large biopharma demand and how that might impact your view on when that replacement cycle starts kicking-in?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Thanks a lot, Matt, maybe I'll kick it off and give it to Bob. I think, first of all, you're correct, we saw very, very promising growth in both Consumables & Services, which shows lab activity is actually improving or is very stable. We're still very challenged on the instrument side, but what we're seeing is, we're seeing a lot of activity around conversations with lab managers. Our funnel is extremely stable. We haven't seen any -- any cancellations. But what I would say is that, deal closure times are still elevated. So we're not at this point seeing any budget towards the end of the year and which of course for us ends at the end of October, but we're watching that closely. I don't know if you want to add anything, Bob?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. Thanks, Matt, for that question and maybe just to fill in and add some additional commentary to what Padraig was saying. When we looked at the quarter, we were very pleased actually both our Consumables business, as well as our Instrument business performed better-than-expected in the quarter. We were down 7% in total. Our Consumables business was actually up mid-single digits towards the high-end there. And our Instruments business was down low-double-digits, but that was better than what we expected. And as Padraig mentioned, we had a book-to-bill that was greater than one on the instrument side again this quarter, which was very encouraging."
},
{
"speaker": "Matt Sykes",
"content": "Got it. Thanks for that. Very helpful. And then just on Academic & Government, I know you've talked about it and you've talked about it for a while, how volatile that can be, but just given sort of the two quarters in a row of sort of negative performance there and you called out Europe and China specifically. Are there any kind of durable trends you're seeing either in funding or in demand that you think might be more persistent in that specific end-market as we go through Q4 and then as we look into 2025?"
},
{
"speaker": "Padraig McDonnell",
"content": "No, I think, look, we saw a decline of about 11% and that was really against the comparative feature, the stimulus in EMEA and strong results in APAC and China. And so it was a really tough compare. And I think what we're seeing is funding remains stable in most regions and except I would say Europe where we're seeing a reallocation of funding towards defense, but I would say no major changes in that market."
},
{
"speaker": "Matt Sykes",
"content": "Got it. Thank you very much."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Rachel Vatnsdal with JP Morgan. Please go ahead."
},
{
"speaker": "Rachel Vatnsdal",
"content": "Perfect. Good afternoon. Thanks for taking the questions you guys. I wanted to dig into NASD a little bit. Obviously, we had some positive announcements intra quarter with the Helios-B readout. You mentioned that NASD stepped down sequentially as expected and then you said you're expecting that to then step up into fiscal 4Q. So could you unpack all that for us a little bit? How should we think about the magnitude of the step-up into 4Q? And then given some of the updated data readouts that we got intra quarter, how does that underpin your assumptions on NASD next year and then also long-term?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Look, I'll start off and maybe I'll hand it over to Simon, who is on the call here as well. We've seen, with clinical batches, of course, there can be changes with customers progress in those batches. We're not seeing any changes in what we're saying for Q4, so we're fairly certain of Q4 on that. What we're seeing as well is that we've grown our clinical business over 50% this year, which is very promising. The long range view of the market is very strong with the drugs and the modalities that are being used. But I think what you're seeing is a normal kind of up and down between quarters with that business. But I don't know if you want to add any more color, Simon?"
},
{
"speaker": "Simon May",
"content": "Yes, I'd just echo what Padraig said, I think the Q3 performance that we saw in NASD was largely in line with expectations. And in that business, we always see a natural lag between order booking activity and revenue recognition because of the length of time that these programs take. And towards the end of last year, we were really seeing the effects of the IRA impacts and that's still not completely waned, but what we saw in Q3 was pretty strong bookings activity. So as we look to Q4 and into 2025, I think we're cautiously optimistic about seeing a return to growth there. So I'd really just characterize Q3 as in line with expectations and part and parcel of the lumpiness you see in this business. You also mentioned Helios, I think it's just worth mentioning that we were very happy to see that development, but still very early days in terms of how that's going to ramp up and play out and too soon to say where that's concerned. There's certainly no impact in the remainder of 2024 and unlikely in 2025 as well."
},
{
"speaker": "Bob McMahon",
"content": "Yes. Hey, Rachel, this is Bob. Just to add-on a little more to answer your last part of your question in terms of the sequential step-up where we had talked -- as Simon and Padraig had said, we've done a little better actually in Q3 than we expected and we're expecting a roughly $20 million step-up from Q3 to Q4. Those orders are all in-house and we're still on-track for the long -- the full-year estimate for NASD and that's incorporated into our guidance."
},
{
"speaker": "Rachel Vatnsdal",
"content": "Great. That's helpful. Then for my follow-up, I just wanted to dig a little bit more into 4Q guidance and what that means in terms of an exit-rate into 2025. So appreciate some of your comments earlier, you highlighted in Matt's question that you're not really assuming a budget flush for your fiscal year end in October. But I guess, how should investors look at this 4Q number on an organic growth basis of that down 2% to up 1% on the range. And how do we look at that translating into 2025? If I look at consensus right now, consensus is just shy of 5% organic on 2025, Street is also nearing that double digit EPS growth. So I appreciate it's still a little bit early for you guys to formally give us 2025 expectation, but what do you think about exit rate and where sell-side numbers are right now?"
},
{
"speaker": "Bob McMahon",
"content": "Yes, you were reading my mind, Rachel. This is Bob and it is a little too early to talk about FY 2025. But I think what it does show is our expectation of this continued steady improvement. We improved here in Q3, 300 basis-points sequentially. We're expecting another improvement here going into Q4. And I would expect that improvement to continue into FY 2025. So -- and we do expect -- while it's too early to give you a specific number, we do expect to grow next year. These markets will return and we've been below the long-term trend, but there's nothing to suggest that the or the long-term growth rates of these markets, there's nothing to suggest that these markets have changed and so we're optimistic about continued recovery going into FY 2025."
},
{
"speaker": "Rachel Vatnsdal",
"content": "Understood. Thanks, guys."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead."
},
{
"speaker": "Patrick Donnelly",
"content": "Hey, guys. Thank you for taking the questions. Bob, maybe one for me, just on China, how you guys are thinking about the region there? It sounds like it was down 11%, that got a little bit better on the revenue side sequentially. It sounds like again, lab activity maybe look a little bit better. Could you just talk about expectations into year-end? Some of your peers have suggested you could see a bit of a pause on the capital side into calendar year-end as we wait for a little clarity on the stimulus. Just how you guys are thinking about China, again, not only into your fiscal year, but just into the year-end on the calendar side and what's your view in terms of do we see a little bit of an air pocket here until the good news dollars get firmed up?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, Patrick. It's a great question and we had actually seen a little of that in our Q2 of last -- just a quarter ago here really on the bid activity, primarily for instrumentation. We are optimistic about the mid-term here in terms of the stimulus. That's probably more FY 2025 event probably. But what we are seeing is more activity there and I think what's encouraging and maybe I can turn it over to Angelica as well, our services business has seen an increase in a pickup in activity and certainly we saw consumables as well. So it still dampened demand and we did see that impact in Academia & Government, that was the biggest impact in China, but we are seeing some pockets of green shoot in terms of recovery."
},
{
"speaker": "Angelica Riemann",
"content": "Yes, Bob, I'll just add. In China, we are encouraged from a services perspective on the nice sequential growth that we saw from Q2 to Q3, which is indicative of continued and somewhat increasing lab activity in China."
},
{
"speaker": "Patrick Donnelly",
"content": "Okay. That sounds encouraging. And then maybe another one for you, Bob. Just as we think about the margin construct as we work our way into year end and into 2025, maybe just remind us some of the moving pieces to think about high-level as we look ahead to next year, obviously, the cost out program seems to be progressing well to your point, the margins came in nicely here in 3Q. But yeah, maybe just the moving pieces as we go ahead to next year without talking too much about the top line, obviously, the volume matters there. But just kind of down the P&L, how to think about some of the margin algo for next year would be helpful."
},
{
"speaker": "Bob McMahon",
"content": "Yes, I think as we talked about, Patrick, it's a great question and we're committed to continuing to drive efficiencies across all of the P&L line items and I think you've seen that across the actions that we've taken. We're on track to delivering that $100 million of incremental annualized savings by the end of 2024. So there will still be a tailwind, obviously going into 2025 for that benefit. Offsetting that will be some resets of our variable pay and activities like that, but we are committed to covering that. If I think about it at the highest level, what I would expect us to continue to be able to do is drive leveraged earnings next year. And I think you're seeing that the scale benefit that we're seeing in certainly our ACG business here this last quarter, just phenomenal profit contribution and I think with volume coming back into the instrument business as well, that will set us up nicely for next year. So think about a nice incremental tailwind associated with the continued actions or the annualization of that actions that come in FY 2025, partially offset by merit in some of the activities and then we'll have our ongoing productivity measures and some -- we'll actually share some of the more detail around this probably in our Analyst Day in December. So stay-tuned on that as well."
},
{
"speaker": "Patrick Donnelly",
"content": "Thanks. Okay. That's great. Thank you, guys."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead."
},
{
"speaker": "Jack Meehan",
"content": "Thank you. Good afternoon. I wanted to dig into some of these instrument trends a little bit more. I was wondering, if you could talk about just what you're seeing across some of the big categories like LC, LCMS, GC, spectroscopy, any color on how those performed?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, I mean in general terms, Jack, I think you know the customers are very, very cautious. But what I will say is that lab manager remain very engaged with our sales teams about future projects, that is true. We see a lot of stability in that. So it's still very challenged and I would say that, you know our deal close rate is still elevated, but our funnels are very stable with low cancellations. So I think that goes across most of the markets. And as you see going-forward, you know our results in CST and services growing mid-single digits and bodes very, very well in terms of lab activity increasing. So we're seeing slow, but steady improvement."
},
{
"speaker": "Bob McMahon",
"content": "Yes. Hey, Jack, just to follow-on to that. I think one of the things as we mentioned in the call, the book-to-bill being at one for instruments is a positive sign. It was slightly better than what we expected. Overall, LSAG instruments were down low-double-digit."
},
{
"speaker": "Jack Meehan",
"content": "Yes. Yeah. Were all the categories kind of right around there?"
},
{
"speaker": "Padraig McDonnell",
"content": "I would say if you looked at the LC and LCMS business, they were in the mid-teens, our spectroscopy business better than that."
},
{
"speaker": "Jack Meehan",
"content": "Okay. And then just as one end-market follow-up, I was curious in CAM in the third quarter, so it was down 5%, it was a little bit below what I was thinking. Is there anything just within the different categories within that end-market that softened a little bit relative to what you were thinking a few months ago?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. So, you're correct, it was declined by 5% and it was really due to the impact of overproduction in China, which negatively impacted market investments globally. But we did see increases in service and consumables, both combined at 7% increase, but there was a decrease of about 14% in instruments and I think CapEx spending remains slightly challenged there."
},
{
"speaker": "Jack Meehan",
"content": "Yes. That makes sense. Thank you, guys."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead."
},
{
"speaker": "Vijay Kumar",
"content": "Hey, guys. Thanks for taking my question. One, I guess, Padraig or Bob, if you look at the guidance change over the last three months, NASD, China, biopharma, those have been the big categories, right? I think the guide assumes NASD doubled -- down double digits in fiscal 2024, China down high singles, double-digits, biopharma down, which of these is expected to get better next year? What is getting better or worse? And is there a first-half versus second-half dynamic that we should be aware of?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, Vijay, thanks for the question. I think in terms of what we expect getting better, we expect all of them to improve next year. We raised the midpoint of guidance, $15 million on revenue and $0.03 in EPS and we see across all those areas, markets improving slowly and that's reflected in the sequential increase that we're guiding in Q4. So while we had a kind of a solid Q3, the end market environment for capital remains constrained and visibility while improving is still difficult."
},
{
"speaker": "Vijay Kumar",
"content": "Understood. And maybe on that Q4 commentary for guidance implies I think up 6% or 7%, which seems generally in line with your historical sequential step-up from 3Q. And is the bookings trends that we saw and NASE trends we saw, does it support that historical, I guess, seasonality because I think where the Street is debating upon is that historical seasonality, does it bake in some year-end budget flush or what is baked into that sequential step-up?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. So I think what we're seeing is that it's -- we normally see the step-up, that's what we're expecting this time. We're not including the budget flush in that. If we see a budget flush, it's on top and that will be in our Q1 numbers as we go forward."
},
{
"speaker": "Bob McMahon",
"content": "Yes. Hey, Vijay, this is Bob and just to build-on what Padraig is saying, I mean you're absolutely right. When we look at the sequential, it is in-line with our historical in our order book based on what we've seen today. Obviously, we have to book orders in Q4, but our order book trends would support that."
},
{
"speaker": "Vijay Kumar",
"content": "Fantastic. Thank you, guys."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Tycho Peterson with Jefferies. Please go ahead."
},
{
"speaker": "Tycho Peterson",
"content": "Hey, guys. Question on BIOVECTRA and maybe just synergies with the rest of the NASD business. How do you think about -- does that change views on capacity? And maybe just talk a little bit about how much of their BIOVECTRA business is clinical versus commercial and any kind of emerging modalities that you're adding here?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. I'll start, Tycho and I'll bring in Simon in a minute. So we are absolutely delighted with BIOVECTRA. We think it's a great asset that enhances our offerings and it really allows us to deepen our relationships with our key pharma customers. And what we're really excited about is that it builds on our capabilities on the current NASD modalities around anti-sense and particularly gene editing with microbial fermentation and ADC capability. And so we're very happy with that. So there's a lot of synergies as we bring that forward. So I'll hand over to Simon to talk maybe about capacity in the main business."
},
{
"speaker": "Simon May",
"content": "Yes, I think Padraig hit many of the high notes already in terms of the synergies. We already mentioned the complete solution offering in gene editing, which we see as a really significant competitive advantage going forward. Sterile fill finish is another synergy that we're excited about. We've had a lot of request from our customers over the past few years for that capability. And from the diligence we've done with BIOVECTRA, we think they've got truly world-class capabilities there. And as Padraig also mentioned with microbial fermentation, high potency APIs, there's an existing footprint there in GLP-1 manufacturing. So I think we've got a slightly higher clinical mix in BIOVECTRA than we have in NASD. So I think we're just killing several birds with one stone with this acquisition. From a capacity perspective, I'd say BIOVECTRA has been ahead of the curve with capacity CapEx and we've got some skin to grow into there over the next few years"
},
{
"speaker": "Tycho Peterson",
"content": "Okay. That's helpful. And then a follow-up on China. You had the pull-forward dynamic in the first quarter, $15 million. If that were back in 2Q, I think you were effectively flat, maybe down a little bit. First, is that the right assumption? What are you actually embedding in 4Q for China in guidance? And then how do you think about the return to growth in 2025? Could you see that in the first half of the year?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Hey, Tycho, that's -- your recollection is correct. And as we think about implied fourth quarter down mid-single digits in China, we're going up quite honestly against some easier compares in-full disclosure. And we would expect a slight sequential step-up from a revenue perspective as well. And so that reflects this steady improvement. We do expect, again, not a lot of that stimulus to come in our Q4, basically none, but more into Q5, but the bidding activity that we're seeing has ramped-up. And then I think the activity that we're seeing in services and consumables, we're expecting that to continue. It's probably too early to tell next year for China, but I would expect it to continue to improve and not be down the way it is. We're expecting a low double-digit decline this year, we would expect to improve from that and it will probably be improvement throughout the year as opposed to an immediate improvement. Certainly, the stimulus will help us with that. But again, that will be in our first and second quarters most likely, but we're not expecting a huge step-up right there. It will be overtime because this stimulus is over a three-year period."
},
{
"speaker": "Tycho Peterson",
"content": "Understood. Thanks."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead."
},
{
"speaker": "Puneet Souda",
"content": "Yes. Hi, guys. Thanks for the questions here. Instrumentation growth, obviously, an important question. You know, last quarter, you lowered expectations meaningfully, but again, book-to-bill was a strong more than one. Again, this quarter it is more than one and I think you said that, that last quarter was the first time you saw growth in the market after seven quarters. So that looks like it's continued again into the quarter. So just maybe help us understand instrument where we sit on instrumentation and what sort of recovery are you seeing here in August and what gives you sort of confidence that the instrumentation should bounce -- continue to bounce back into 2025 as well?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, look at the indications from the team, we have a strategic account team that does a lot of citations with our major accounts. There's -- we're seeing that more positive than negative in terms of customer sentiment, which is a very good sign. We see a lot of activity in our testing labs, as well as focusing on PFAS and so on. So there is drivers within the markets that are positive. But overall, I would say it's slow and steady and we're trading it as that. And the teams have really good visibility. Our commercial teams, which we've transformed in the last few years are really, really close to our customers. We have really good visibility into that. So it's slow, but steady. I don't know if you want to add anything, Bob, to that?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. No, I think you're spot-on and we're not building any budget flush into our Q4, Puneet. So if that does in fact happen, that would be a benefit to our current estimate."
},
{
"speaker": "Puneet Souda",
"content": "Okay. Thanks. And then recent drug pricing negotiation with Medicare on the first drugs are out. Obviously, IRA is having an impact, but over the next three years annually, 15 drugs will be negotiated and that probably leads to another set of impacts. So what are you hearing from your large pharma customers and overall, how are they thinking about the R&D spend and the spend that they're -- that they currently have on Agilent?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Look, I think in general, they're very cautious, of course, with some of the impacts, the macro impacts that are facing. They're not -- there's a lot of M&A activity going on within pharma, a lot of consolidation, which of course takes time and energy for these companies to focus on. And I think what you're going to see overtime is it probably even out in terms of impact. What isn't going down, by the way, is the number of R&D programs. We see that increasing in a number of key modality areas, particularly around GLP-1, etc. So we need to wait and see, but having said that, people kind of forget in the last few years the enormous amount of spend that has happened and we're seeing that normalize now, of course in the installed-base and coming out of that in 2025."
},
{
"speaker": "Puneet Souda",
"content": "Okay, fair. Okay. Thank you."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead."
},
{
"speaker": "Michael Ryskin",
"content": "Hey, guys. Thanks for taking the questions. I want to follow-up on maybe this is what Puneet was just getting at, but you called out in your prepared remarks a couple of times that with biopharma, small molecule held up a little bit better or small molecule did a little bit better than large molecule, I assume. Just wondering if you could delve into that a little bit more, was that a particular instrument class or modality that drove that? Was that -- does that have to do with budget cycles, just what you're seeing there and why there's such a difference in molecule type?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. Hey, Mike, this is Bob. You're right, I mean, our small molecule business was down mid-single digits in the quarter, which was better-than-expected actually. And then in Europe, it grew, which was a very positive sign. And this does speak to -- you can only hold-on to your old instruments for so long before the replacements need to happen. We're not calling replacement cycle inflection just yet, but every quarter these instruments get older. And one of the things that I think is important here is, pill counts and volumes continue to grow. And back to the question around the IRA and the pricing, I think it was generally, you know, not the worst case scenario, maybe a little better than people expected. And where our strength is, is in the development moving into production and that continues to be long-term positive trend. So that would be our core LC franchise and then the biopharma, some of that was impacted by our NASD business, which was kind of the air pocket. Actually, if you take our biopharma business, which was down double digits and you take NASD out, we are at mid-single digits as well. Not as -- it was down a little more than small molecule, but generally still in that same range. So both of them are actually when you take out the kind of the one-time unique aspect of NASD performing better quarter-on-quarter, which is a positive sign."
},
{
"speaker": "Padraig McDonnell",
"content": "So I would say, just adding to that, Bob, we saw services growing double-digits in biopharma and mid-single digits in small molecules. So that's a big component of what we see in those different modalities."
},
{
"speaker": "Michael Ryskin",
"content": "Okay. Both of those answers really helpful. And then for my follow-up, I want to lean in a little bit more on BIOVECTRA. I mean, everything you kind of laid out there for the rationale and the financials of the deal certainly makes sense. But I'm just curious, you know, you've had a presence in some CDMO type capabilities in the past. Just wondering how hard are you going to lean into this? And what I'm alluding to is obviously, one of your large traditional tools vendors has a CDMO business has been in that business for a number of years now and there's a lot of talk of the benefits of having both the instrument, the consumables and the services business on the tail-end. Is this something you're going to continue to grow overtime? Is it BIOVECTRA like a beachhead acquisition? I mean we should expect more investment down the road?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, I'll start and then maybe hand it over to Simon. When we look at our M&A ambition, first of all, we're -- it's going to be -- it's going to be really centered around where our strategy is, what's the strategic fit in faster-growing markets and of course, value creation. BIOVECTRA takes all of those boxes and it's an area of where we're building out more capabilities for customers. So we see that continuing. And so we're really excited about it, but we do see that this business has a lot of runway. It's a business that's growing well, very well-run, of course and has had a lot of capital investment over a number of years. And I think this is only the start of our ambition in continuing to grow BIOVECTRA and NASD. But Simon?"
},
{
"speaker": "Simon May",
"content": "Not much to add really, only beyond that, we've got a very strong existing position in the RNA modality. I'd say up until this point, it's been a relatively narrow capability position and BIOVECTRA builds on that quite nicely as we look at future optionality around complementary capabilities and modalities, we think it's a rich space and that's probably all we can say at this point."
},
{
"speaker": "Michael Ryskin",
"content": "Great. Thank you."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead."
},
{
"speaker": "Dan Brennan",
"content": "Great. Thanks. Thanks for taking the questions. Maybe just back to China, the down 11% was a bit better than we were looking for. Can you just unpack what specifically got better in the quarter given the guidance cut that you made last quarter, maybe either by customer type or by product type? And then just to clear up, like so your guidance for China, I know it was down double digit. Has that changed at all? Have you improved that? So that's my first question."
},
{
"speaker": "Bob McMahon",
"content": "Yes. Hey, Dan. Thanks for the question. China is still in line with our full-year end guidance down low-double-digits. If I look at where we actually performed slightly better than what we anticipated, it was actually in pharma and it gets back to what we were talking about before, the activity both on the services side performing sequentially better, as well as our consumables business actually growing. And so we were down you know close to 30% in Q2 of last year, we were down low double-digits in pharma year-on-year. And so that was the big sequential improvement in Q3 and I would expect that to continue into Q4."
},
{
"speaker": "Dan Brennan",
"content": "Okay. Thanks, Bob. And then sorry to go back to NASD, but there's just been a lot of questions from investors after the turn of events year-to-date in terms of that business really slowing a lot. Can you -- did you say what it did actually in the quarter? I didn't hear the number kind of year-over-year, what did NSD do in the quarter and then kind of if we take your guidance full-year, I know you said step-up, could you just give us some clarity on the quarter? And then any additional color on clinical versus commercial? It sounds like your bookings are improving, so that portends well for the outlook, but just trying to unpack like what's going on right now in the quarter? Thank you."
},
{
"speaker": "Bob McMahon",
"content": "Yes. Hey, Dan. What I would say is, we typically don't give a specific number for NASD, but it actually performed in line or slightly better than what we expected. So we had been signaling a step down in Q3 and we actually did better than what we were expecting there. The full-year is still in line with where we were, which is roughly a $300 million business. As Simon was saying, the bookings continue to be positive in terms of activity and we're starting to see some of our customers, the readouts of some of the activities, which is more a harbinger of long-term opportunity versus short-term. But you know, if anything, it was a little better than we expected. So I don't want anyone to takeaway that it wasn't -- even though it was down in the quarter, we expected that and communicated that as part of our guidance and we're still on-track for the full-year estimate that we had coming into the quarter."
},
{
"speaker": "Dan Brennan",
"content": "Got it. Thank you."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Catherine Schulte with Baird. Please go ahead."
},
{
"speaker": "Catherine Schulte",
"content": "Hey, guys, thanks for the questions. Maybe first, just could you talk about growth rates by segment for the fiscal fourth quarter and maybe your assumptions for instrumentation versus consumables and services in the fourth quarter?"
},
{
"speaker": "Padraig McDonnell",
"content": "Bob?"
},
{
"speaker": "Bob McMahon",
"content": "Yes, I'll -- hey, Catherine, it's Bob. What I would say is, if I look at our Q4, all groups, we would expect to do better and if I went by group, LSAG would be -- we're expecting kind of low single digits off of a down 7% this year. Consumables being better than that overall and with the instrument side, still probably down slightly or would be down slightly. DGD down mid-single digits and ACG up mid-single digits towards the high-end. That's what we've embedded in our guidance. So all three of those actually performing better than where we were in Q3."
},
{
"speaker": "Catherine Schulte",
"content": "Yes, perfect. And then maybe going back to Small Molecule, nice to see the improvement there. I think what was just Small Molecule performance excluding China? I know you said Europe grew, but just curious to get more color on what you're seeing elsewhere?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, I think what we're seeing is Europe was a standout in Small Molecule, a lot of activity there, but probably stable across the different markets on us. And what we did see from the Small Molecule side, we did see pretty good growth in services that as well as has had that number, but I think overall Europe ahead, but everywhere else stable."
},
{
"speaker": "Bob McMahon",
"content": "Yes. What -- and so we were down mid-single digits and as Padraig said, if you took China out, we were down low-single digits everywhere else."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Josh Waldman with Cleveland Research. Please go ahead."
},
{
"speaker": "Josh Waldman",
"content": "Hey, good afternoon. Thanks for taking my questions. A couple for you. Padraig or Bob, maybe first a follow-up. On your assumption for no budget flushing impact on pharma instrumentation, is that just a function of the timing of your quarter relative to calendar year-end buying from these customers? Or are there other things you're seeing that are leaving you on the sidelines as it relates to end of your pharma spending? And then a related question was, curious any high-level thoughts you had on 2025 based on planning conversations you're having with pharma accounts, are you thinking next year should be a return to normal growth type year in pharma instrument budget as budgets are reset or is it more of a gradual recovery or return to normal over a couple of year period. Any feedback you're getting from accounts on that?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, I'll take the first one and maybe hand-off to Bob for the second one. I think it's a year ago and we were -- people were talking about budget flushes. We didn't expect it and we didn't see it. We saw a little bit, but not much. We're expecting the same this time, of course, our year-end at the end of October. So if we do see any activity will be in Q1 2025. Why do we see this is because we're very close to our customers. We know exactly when, where the funnel is, where the deals are and where installed base, we have a lot of installed base information. So we're not expecting it anything substantial at the end-of-the year. But what we are seeing is a lot more conversations about next year, slow, steady recovery and we're hearing that across the board. I don't know if you want to take the second question, Bob?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. Josh, on 2025 as we were saying, it's probably too early to say. But what I -- our current indication is that it's not going to snap back November 1st to be back to normal. I do think that you'll continue to see a recovery throughout FY 2025 and get back to that long-term growth rate sometime in 2025, that's the way we kind of think about it. But I don't think it's another two to three year estimate either or based on our conversations with our customers right now. So it's probably in between."
},
{
"speaker": "Josh Waldman",
"content": "Got it. Okay. And then just had a follow-up on ACG. I was curious if you could provide a bit more context on the dynamics you're seeing there, especially interested in what you're seeing from an RFP and win rate dynamic in the contracted business? And then you mentioned, I think in the slide decks, benefiting from mix. I was wondering if you could flush that out a bit?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, I'll take the first part of that question and hand it over to Angelica. Extremely pleased with ACG's performance and that's years of investment in a broad product offerings in key markets, that are really being received by customers in this environment where they want to get more productivity out of their systems, they want to use their assets in different ways. And we've seen the flow through to our results in spite of the CapEx challenges all year. So the business performs extremely well and the margins are extremely good. So I'll ask Angelica to provide more color on the contract business. But I think what's really interesting is our enterprise service business as well. Angelica?"
},
{
"speaker": "Angelica Riemann",
"content": "Yes, so to really dive in on the contracts, right? It's nearly 70% of our business in Q3 and it's continuing to grow double-digit. As we continue to see that strong demand in our enterprise service offerings, which are in the high -- the mid-teens, it's really about being there to help customers optimize their lab operations, improve their productivity and our offers really facilitate our customers improving the lab operations, the efficiencies and the waste reduction. So we're continuing to see some very strong and sticky behavior within our contracts franchise."
},
{
"speaker": "Bob McMahon",
"content": "Yes. And Josh, just on the comment on mix is, when we have business on-contract, that generally is good for us and good for our customers as well."
},
{
"speaker": "Josh Waldman",
"content": "Got it. Okay. Appreciate all the detail."
},
{
"speaker": "Operator",
"content": "Our final question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead."
},
{
"speaker": "Doug Schenkel",
"content": "Hey, guys. Thanks for fitting me in. I know it's late in the call, that being said, I got three lightning round questions, which I'm going to rattle through and then listen to the answers. The first is on math. If recurring revenue growth was up mid-single digits in the quarter, it seems like instruments has to be down around 20%, maybe more based on the numbers you reported in the 10-Q in Q3 of last year. Bob, I think you said in response to Matt Sykes' question, it was down low-double digits. What are we missing? Just not trying to be too picky here, but it just seems important in the context of assessing trends and what way to put on your book-to-bill commentary. So that's the first question. The second is on China stimulus. Any change in dynamics regarding stalling either in terms of conversions or even cancellations? There's some skeletal that that there's been some recent changes as the shape of stimulus becomes a bit more clear? And then the third question is on 2025. If you exit 2024 with flattish core growth in Q4, that would obviously be a positive trend relative to what we've seen over the last few quarters. That said, it would seem like if you draw a straight line that you'd be on track to exit 2025 at around, call it 5%, maybe 6% growth rather than growing mid-single digits for the year. So I think you need a fundamental improvement in overall market conditions and/or a real impact from China stimulus to get to mid-singles for the year. I just want to see if any of my logic is flawed there? Thank you and have a good night."
},
{
"speaker": "Padraig McDonnell",
"content": "That's certainly a lightning round, Doug, but we'll try and we'll answer it. I think, Bob, you can take the first and the last one, I'll take China."
},
{
"speaker": "Bob McMahon",
"content": "Yes. The comment that I had on Instruments was specifically related to LSAG instruments and they were down low double-digit. Consumables was up mid-single digits for the total being down minus 7%. So that is. We do have some instrumentation in DGG as well that was down roughly the same as where LSAG was. So down 20% is way too negative. I'll turn it over to Padraig for the second one and then I can jump back into last one."
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Look, I think, we're very close to our China team and the local team has seen an increased activity. We're seeing that improve from last quarter and for clarity, of course, we're not building any benefit from the stimulus into our Q4 guide. But what we're seeing is, we're seeing in early days, what we're hearing that the stimulus is broader in terms of its reach over a three-year period. Having said that, we are hearing that the first tranche will likely be focused on Academic & Government accounts. But again, it's early days, as it trickles down through provinces, as the mechanism of the funding goes, we'll be sure to update as we know that."
},
{
"speaker": "Bob McMahon",
"content": "Yes. And I think just the last one real quick. It's too early. We're not going to get into what we're looking at for FY 2025 other than to say that we expect improvement throughout the year."
},
{
"speaker": "Operator",
"content": "And I'll now turn the call back over to Parmeet Ahuja for any closing remarks."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thanks, Regina and thanks everyone for joining the call today. With that, we'd like to end the call. Have a good rest of the day, everyone."
},
{
"speaker": "Operator",
"content": "Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect."
}
] |
a | 2,024 | 2 | [
{
"speaker": "Operator",
"content": "Ladies and gentlemen, welcome to the Agilent Technologies Q2 2024 Earnings Call. My name is Regina, and I will be coordinating your call today. [Operator Instructions]. I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thank you, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, our newly named President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments 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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, 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'd like to turn the call over to Padraig."
},
{
"speaker": "Padraig McDonnell",
"content": "Thanks, Parmeet. Good afternoon, everyone, and thank you for joining today's call. I want to begin by saying I'm incredibly honored to serve as CEO of this great company, and I'm thankful for the opportunity to lead such a talented team. I truly believe the Agilent team is second to none, and I'm energized about the future possibilities that lie ahead of us. I also want to take this time to welcome our new DGG President, Simon May to the Agilent team. Simon's diversified experience, strong technical skills and growth mindset will be a key asset in this role. Since starting earlier this month, Simon has hit the ground running, and I am really looking forward to him helping move DGG and Agilent forward. Before I talk about the quarterly results, I'd like to tell you how I spent my time since the announcement in February that I will become Agilent's CEO. I've been meeting and connecting with employees, customers and shareholders around the world to listen to their perspectives and how we should build on our strengths and evolve Agilent. What they have told me is clear, Agilent must become even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. This has really resonated with our employees and customers. As an energized Agilent team, we will evolve our strategy, adapting quickly to market trends and changes while accelerating our pace of innovation in areas of greatest return for long-term growth. We will double down on our customer first culture, deepening our relationship to further enhance our market-leading customer experience that is already the best in the industry. Now let's talk about the Q2 results and outlook moving forward. In a challenging market environment, the Agilent team delivered on expectations. In the second quarter, we reported revenue of $1.573 billion, a 7.4% decline. This was against a tough compare of 9.5% growth in Q2 of last year. While revenues declined in the quarter, our book-to-bill was greater than one, and orders grew year-over-year for the first time in seven quarters. Earnings per share of $1.22 beat our expectations and represented a 4% decline from the second quarter of 2023. Now looking forward, the market environment continues to be challenging, but we are seeing early signs of recovery. However, as we announced in our press release, this market recovery is not at the pace we anticipated when we provided guidance earlier in the year. As a result, we are reducing our market growth expectations and revising our full year core revenue to be in the range of $6.42 billion to $6.5 billion and growth to decline between 4.3% and 5.4%. We now expect earnings per share to be between $5.15 and $5.25 for the year. We have responded quickly to the lower market growth expectations and are taking difficult, but necessary actions to streamline our cost structure. These actions will allow us to invest in our most promising growth opportunities while also delivering incremental annualized savings of $100 million by the end of the fiscal year. We are sharpening our focus on key growth vectors such as Biopharma, PFAS and Advanced Materials, while also investing in our digital ecosystem, and accelerating our innovation to drive even faster execution. And we are leveraging our strong balance sheet and plan to repurchase $750 million of our common stock across the third and four quarters, over and above our normal anti-dilutive repurchases. Bob will provide more details on our results and latest outlook in his remarks. Getting back to Q2 results. As expected, all end markets saw a declining revenue in Q2. Geographically, the Americas and Europe came in slightly ahead of expectations, while China lagged. Despite the challenging market conditions, our Agilent team stay close to our customers and continue to leverage our strong relationships with them to execute remarkably well while maintaining strong cost discipline. When we look at our performance by business unit, the Life Sciences and Applied Markets Group reported $754 million in revenue, down 13%. The group saw a decline across all end markets and regions, with consumables being a bright spot. Consumables grew in the low single digits, driven by Chemical and Advanced Materials, Food, and Environmental and Forensics. Also, while relatively small, we continue to see strong growth in our pre-owned instrument business. The LSAG team continues to innovate, introducing two new instruments this quarter that extend our applied markets leadership. First, our 7010D GC/Triple Quad instrument delivers exceptional sensitivity for customers in the environmental PFAS and Advanced Materials markets. Designed for analysis that demand the lowest limit of detection. And second is our 8850 GC, a distinguished new member of our market-leading GC portfolio. The 8850 is ultrafast in separation and colon speeds with design innovations that enable customers to run tests up to twice as fast as regular benchtop GC. And it's the smallest high-performance benchtop GC on the market. Plus, it's sustainable, using up to 30% less electricity power compared with a traditional benchtop GC. Now moving on to the Agilent CrossLab Group, which delivered revenue of $402 million for the quarter, up 5%. ACG grew across all end markets in every region except China. The business delivered double-digit growth in services contracts which now represent almost 70% of the total business, offset by declines in new instrument installation revenues. The ongoing strength in our contracted business speaks to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers. The Diagnostics and Genomics Group posted $417 million in revenue, representing an 8% decline. Pathology was up mid-single digits globally and was more than offset by declines in the mid-20s in cell analysis due to the constrained capital environment for instrumentation. NASD declined low teens as expected, driven by more clinical products being produced this year versus Q2 of last year. Europe was a bright spot for DGG, growing low single digits in the quarter, while Americas and China declined. Despite the subdued market environment, we continue to innovate in our cell analysis business. We recently introduced the Agilent Spectrum Flow Cytometer, which allows our customers to perform sophisticated experiments that expand the range of the research on the same easy-to-use NovoCyte platform. Bob will now provide details on our results as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob."
},
{
"speaker": "Bob McMahon",
"content": "Thanks, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then cover our updated full year and third quarter guidance. Q2 revenue was $1.573 billion. a decline of 7.4% core. On a reported basis, currency had a negative impact of 0.8 percentage points, while M&A had a negative impact of 0.2%, resulting in a reported decline of 8.4%. As Padraig mentioned, Pharma, our largest end market, declined 11%, with both Biopharma and Small Molecule declining roughly the same percentage. Instrument demand continues to be constrained, while services delivered mid-single-digit growth. Looking forward, while we have seen sentiment improve, instrument purchases are still constrained and we are expecting that to continue for the rest of the year. In addition, we have reduced our expectations for NASD as several clinical programs have pushed out into next year and some commercial products have not ramped at the pace as expected. As a result, we have reduced our full year growth outlook for the Pharma end market from roughly flat to down low double digits, similar to our Q2 performance. Our revised expectation for the Pharma end market is the largest change in our outlook. The Chemical and Advanced Materials market was better than expected, declining 3% after coming off a very tough comparison of 16% growth last year. The academia and government market declined 12% against a tough compare of 11% growth last year. While soft globally, the decline was driven by China, which was down mid-30s. Our business in the Diagnostics and Clinical market declined 2%. Our pathology business continues to show resilience in this market, growing mid-single digits, while our NGS QC instrumentation business also grew slightly. These were offset by softness in our NGS chemistries business. The Environmental and Forensics market declined 2%. The business grew mid-single digits ex China, highlighted by continued strength in serving the rapidly expanding PFAS opportunity. The Food market declined 13% on a very tough compare of 21% growth last year, heavily impacted by the low 30s decline in China. On a geographic basis, all regions declined. The Americas region was down 5%. Europe was down 3%, while Asia Pacific ex China was down slightly. China was down 21%, missing our expectations of a mid-teens decline. We saw demand weakness expand beyond Pharma. As a result, we have revised our full year expectations for China for a mid-single-digit decline to a double-digit decline. We have seen funnel activity increase because of the recently announced stimulus program, but we are not assuming any revenue impact in our fiscal year. Moving down to P&L. Our second quarter gross margin was 55.6%, up 30 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.1% was down year-over-year as expected. Below the line, we benefited from greater-than-expected interest income and a lower tax rate. Our tax rate was 12.5%, and we had 293 million diluted shares outstanding. Putting it all together, Q2 earnings per share were $1.22, down 4% from a year ago, less than the decline in revenue and ahead of our expectations. Now let me turn to cash flow and the balance sheet. Operating cash flow was $333 million in the quarter and we invested $103 million in capital expenditures as we continue our planned NASD expansion. We returned $299 million to shareholders in the quarter, $69 million through dividends and $230 million through repurchase shares, catching up on our anti-dilutive buying year-to-date. In summary, we met our expectations for the quarter our markets are recovering but at a slower pace than we anticipated. We are directing our energy towards high-growth opportunities and are committed to delivering value to our customers and our shareholders. Now on to our revised outlook for the year and our third quarter guidance. We now expect full year revenue to be in the range of $6.42 billion to $6.50 billion. This represents a decline of 6.0% to 4.9% on a reported basis and a decline of 5.4% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. This is a $300 million reduction at the midpoint and is primarily related to changes in two areas: China overall in the Pharma end market outside of China. For China, we have reduced our expectations to a double-digit decline from mid-single digits with all end markets being reduced. This represents roughly $70 million of the guidance reduction. The remainder of the change in the Pharma end market globally outside of China is due to two factors. The first and largest factor is continued caution in budget releases and extended approval times for instrumentation purchases in both Small and Large Molecules. This is roughly $175 million of the change. The second factor is related to NASD due to the reasons I mentioned earlier, and represents the remaining $55 million reduction. While down from our previous guidance, we are expecting growth in the second half of the year to be roughly 400 basis points better than the first half of the year and plan to exit the year roughly flat year-on-year at the midpoint of the new guidance. Full year non-GAAP earnings per share are now expected to be between $5.15 and $5.25, representing a decline of 5.3% to 3.5%. This incorporates a roughly $35 million expense reduction due to the actions Padraig mentioned. The majority hit in Q4 in order to help mitigate the bottom-line impact of the change to our revenue guidance. It also assumes a 13% tax rate and 292 million fully diluted shares outstanding. We will leverage our strong balance sheet and plan to repurchase $750 million of our shares in the second half of the year in addition to our anti-dilutive repurchases. We expect these repurchases to be weighted towards Q3. All told, we expect to return roughly $1.4 billion to shareholders this year between dividends and share repurchases. In addition, the Board authorized a new $2 billion share repurchase program that will go into effect August 1 and replace the existing authorization. Now for our Q3 guidance, we expect revenue will be in the range of $1.535 billion to $1.575 billion. This represents a decline of 8.2% to 5.8% on a reported basis and a decline of 6.9% to 4.5% on a core basis. Currency and M&A combined were a headwind of 130 basis points. Third quarter non-GAAP earnings per share are expected to be between $1.25 and $1.28, representing a decline of 12.6% to 10.5%. Looking forward, we remain disciplined. We're focusing on what we can control and driving strong execution in a challenging market, and we are optimistic about the long-term future. Now back to Padraig."
},
{
"speaker": "Padraig McDonnell",
"content": "When I joined you last quarter as CEO-elect, I said Agilent has a compelling story to tell, and I was excited by the possibilities that lie before us as we help our customers bring great science to life. That excitement has only grown. I spent 26 years at Agilent, first starting as a field employee before moving to sales and then leading some of our businesses. I know Agilent's strengths and its opportunities very well. We are in great long-term growth markets. And while the markets are recovering slower than anticipated, they are recovering. This company is a leader across key platforms, making us uniquely qualified to support our customers and their missions to solve some of the world's most important problems. And our customers value their relationships with us because we offer them an unparalleled experience. And as I said earlier, that is a competitive differentiator in the market. The actions we are now taking, while difficult, will enable us to quickly capitalize on growth opportunities as the markets fully recover. I know the future is bright, and we will forge an enduring company that sets the standard for excellence with our customers and create value for our shareholders. Thank you again for joining today's call. I look forward to continued dialogue with all of you. Parmeet, over to you for Q&A."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thanks, Padraig. Regina, if you could please provide instructions for the Q&A now."
},
{
"speaker": "Operator",
"content": "[Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead."
},
{
"speaker": "Matt Sykes",
"content": "Maybe just the first one is more of a timing question on China. I mean we've been through a lot of quarterly results this season and the stabilization theme in China has been pretty consistent and you guys have talked about sequential stabilization over the last number of quarters. So, was this really an April impact that you saw in China? And if so, what was sort of the deceleration that you saw there? And what were some of the causes of it?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Thanks, Matt. I think while Q2 was relatively soft to guidance, we adjusted the H2 outlook, what we're seeing in China is we saw a -- stability over a number of quarters. What we really believe is that this is not a material deterioration from that. But what we've seen is that we've seen the stimulus have some effect and the stimulus has been much larger than previous stimulus. It's over multi-years. And of course, customers are looking about what are the components of that and they're looking at some of the areas and where it's going to help them. So that has had a material effect. We don't see the stimulus having an impact in H2, but we do think it's going to have an impact in '25. I think there's kind of a direct and indirect side of the stimulus. I think on the direct side, you see this delay, which is normal, but you see also the indirect side where, the government is investing in technology and sciences going forward, which creates a lot of, I would say, future momentum."
},
{
"speaker": "Matt Sykes",
"content": "Got it. And then just for my follow-up, you guys have often talked about sort of 18- to 24-month down cycle in the LC replacement cycle. And I'm just wondering just given some of the comments you made around Biopharma, given that's an important customer segment for that, have you kind of changed those views in terms of what the LC replacement cycle will look like and what the potential recovery in the replacement cycle will look like? I think some were thinking sort of towards the end of this year, but is this more now into 2025, is that replacement cycle been extended in terms of recovery?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, we don't see any material change. But Bob, I don't know if you want to add some color on that."
},
{
"speaker": "Bob McMahon",
"content": "Yes. I think, Matt, as you said, we're still expecting improvement in the back half of this year, just not at the pace that we had expected. And so, we're not seeing any material extension of kind of the use case for LC or an LC/MS in the marketplace and are still expecting recovery in '25."
},
{
"speaker": "Operator",
"content": "Our next question will from the line of Jack Meehan with Nephron Research. Please go ahead."
},
{
"speaker": "Jack Meehan",
"content": "I was wondering if you could share what's the new sales outlook for an ASP this year? And can you talk about like bridging from kind of the second half to some of the longer-term targets you've had previously. Like what are you assuming in terms of kind of progression after this year?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. I mean the NASD business, we talked before about the business being about 50% commercial and 50% clinical that's changed a bit to be more like 75% clinical and 25% commercial. We've seen the IRA inflation Reduction Act having an impact on the price provisioning. So, what you see with Pharma partners, they are looking for larger indications instead of smaller indications. So, what we've seen is, I would call it, an air pocket in Q3. And our clinical business is actually growing. Orders are growing about 50%. So, we're -- we have a good order book on that side. So, it's a readjustment and we see that readjustment go through H2 and beyond. I don't know if you want to add anything to that, Bob."
},
{
"speaker": "Bob McMahon",
"content": "Yes, I think Jack to add some numbers to what Padraig was saying here. Originally, we were expecting it to be roughly flat, which would have said roughly a $350 million business. We're now seeing roughly $300 million this year. As Padraig is mentioning, we're expecting to build back from there as these clinical programs move through the clinical pathway and are expecting to have more volume in '25. And I would say our long-term perspective on NASD remains unchanged. We're still very excited about that opportunity and are still building out the capacity in our Colorado site."
},
{
"speaker": "Padraig McDonnell",
"content": "Second question, I think the second part of the question was about '25. We'll grow next year. And as you can see in our guidance that we really are anticipating improving conditions across the second half, but it's too early to talk about specific ranges for next year. We want to wait to see how pacing an improvement plans out in the second half."
},
{
"speaker": "Jack Meehan",
"content": "And then on the cost savings program, I think I heard talk about $100 million. I just wanted to clarify, is that incremental to the $175 million you previously talked about? And where are those -- any color on where the savings is coming from?"
},
{
"speaker": "Bob McMahon",
"content": "Yes, it is incremental to the savings that we've already built into the plan, and we're expecting to get that annualized savings by the end of the year. It's primarily headcount-related, Jack."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead."
},
{
"speaker": "Patrick Donnelly",
"content": "Maybe one on the instrument side, I guess it will be China and then just broadly, I know a few quarters ago, you guys felt like orders were picking up, the funnel looked okay, but it was really that I think, Bob, you said it was the velocity of conversion of those orders in that funnel to revenue. Is that what you're seeing is just that continues to stretch out the visibility into that normalizing. It's just proving to be a little trickier. I just want to talk through, I guess, that instrument piece because again, you sound okay on the orders in the funnel and the conversation, but that converting over rim, I guess that I just want to talk through again, the conversion piece and the velocity of the conversion."
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Yes. No, I think at an at level, as we talked about, our book-to-bill was greater than one, which is a positive sign and where orders grew year-over-year. On the instrument side, the orders grew low single digits, excluding China, but declined low single digits overall. So, what we're really seeing is that our funnel is really stable, but we're seeing those extended purchasing decisions being continuing to extend out through the second half."
},
{
"speaker": "Bob McMahon",
"content": "Yes. I think, Patrick, to build on what Padraig is saying at the beginning of the year, we were expecting when we were talking primarily to our Pharma customers, budgets weren't being materially cut outside of a specific number of well-publicized customers. And we were expecting to see by our second quarter, some of these budgets being released. And what we're seeing now is still a very cautious environment. And so, the funnel is still there. We are seeing our book-to-bill as Padraig mentioned, to be greater than one. We just haven't seen that inflection, which we would have expected to see at least in our order book. One of the things that we do see and it primarily happened late in the quarter is our teams are paid on first half versus second half quota. And so, our April numbers are usually quite large, which prepares us for the -- for Q3 and we just didn't see that inflection in late April, which we normally would see."
},
{
"speaker": "Patrick Donnelly",
"content": "Okay. That's helpful color. And then maybe to follow up on Jack's question on NASD there. You understand the revenue change. How are you guys thinking about the capital investment on that front? Obviously, it's been sizable in the past years, you've often talked about the continued expansion of the trains. How do you think about the CapEx devoted to this over the next few years? Has there been any change in terms of push out of that capital? Or how you're thinking about the potential investment and the expansion on this front just given the shift in revenue here."
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. No, absolutely not. I think despite some near-term headwinds that we have, the medium, long-term story for NSAD is really holds firm. And as I said before, we're seeing our clinical business grow more than 50% this year, and we really remain excited about the expansion of customers. And getting back to the therapeutic class that we're involved in with siRNAs drugs, we're seeing those approvals for drugs increase substantially in 2023. And being an integral part of the manufacturers of several of these on market therapeutics, the future is extremely bright in this area. So, no change in our capital investment."
},
{
"speaker": "Bob McMahon",
"content": "Yes. Patrick, just one other thing to add on to that as I'm sure you're aware, as part of that expansion, not only are we expanding capacity, we're also expanding our therapeutic options. So, not only siRNA but also anti-sense and also CRISPR opportunity. So, it also provides us with more capabilities to support our existing and new client base."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Vijay Kumar with Evercore ISI. Please go ahead."
},
{
"speaker": "Vijay Kumar",
"content": "I guess Padraig or Bob, thanks for laying out the changes in the guidance assumptions here, right. I think part of it was China, part of it was NASD. But more than half, I think, it's coming from Pharma cautiousness that's outside of China, ex-NASD, which I think that the market. I thought we were expecting stabilization. Is this a funding environment kind of question or is elections or what changed because second quarter, it feels like revenues were roughly in line -- was it the exit rate? Can you just talk about what the exit rate trends were and what customers are telling you?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. I mean on the Pharma instrumentation side, in terms of guidance, we see an impact of about $175 million and it really simply Pharma's willingness to spend in capital equipment remains challenged over time. And again, customers are focusing on lab efficiency and productivity. But based on what we're hearing from customers, these trends will continue to impact the second half. And that's why we're lowering our expectations around that instrument piece. What I will say that the formulas are holding very strong. The conversations are very robust with customers, so we do expect it to improve going into next year."
},
{
"speaker": "Bob McMahon",
"content": "Vijay, to build on what Padraig is saying, the guidance that we're building out right now is based on what we're seeing today. It doesn't assume any meaningful inflection. That certainly -- I'd characterize this as a prudent guide given what we know today. Certainly, we're not assuming any of that inflection. You bring up a number of variables, which are hard to quantify around the upcoming election and so forth. But we don't think it's a funding issue. We do feel like we are seeing biotech funding coming up. Obviously, on the Small Molecule side, those are they're well-capitalized companies. It's just a very -- it's still cautious in terms of them getting through their approval processes."
},
{
"speaker": "Vijay Kumar",
"content": "And just maybe related to that Padraig, Bob. I think is this just a few handful of customers or across the Board? Because obviously, the next question is, is this a share loss? Or is this more of -- what gives you the confidence that this is just a pushout and not a share shift on the savings or cost savings, Bob, that 35 is in Q4. So the expectations is the incremental 65 is for fiscal '25."
},
{
"speaker": "Bob McMahon",
"content": "Let me answer the last question first. So that is a cumulative number for the second half of the year. We'll see some of that happen here in Q3 and roughly be at that $100 million run rate in Q4. So roughly about a $25 million run rate and then we'll get the full incremental 65, obviously, next year as we go into the business. Do you want to comment?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Yes, look, when we look across our Pharma customers, we see generally, it's across the board. We do have some customers that are a little bit more positive than negative this year. But overall, I would say it's a market effect. What I would say -- on the other question, this is definitely a macro story, not a market share story. And in fact, when we look at our objective market share data, we're holding or even gaining in some areas. And I will remind you not to comment on our peers in this area, but we have a month ahead in what we're seeing on it, but we're seeing very robust market share numbers coming in."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead."
},
{
"speaker": "Dan Brennan",
"content": "Maybe first one, just on China. You talked about in response to an earlier question about the stimulus is delaying demand this year. Could you just speak through that a little bit? Like what's your visibility on that? Any way to get a sense of how much of what you should be seeing in China's customers waiting to see the final details of the stimulus. And I know you also alluded to like this could be a big impact in '25. Can you just speak through that a little bit?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Look, I think having worked with China for many years. It's a multiyear program as opposed to the last one, which I think was a year program in the shorter term. So, it's very encouraging to see it. We've seen some proposals from customers, but they're still, quite frankly, trying to work out what are the mechanisms for the funding as we go forward. So, we're seeing a lot of activity around that. And I would say in terms of the confidence boost, we do really see that in '25, we're going to get some benefit from this, but really too early to tell on it. So, we're taking down our guidance in the second half primarily related to this."
},
{
"speaker": "Bob McMahon",
"content": "Dan, this is Bob. To build on that, I had mentioned in our prepared remarks that bid activity has actually improved. And so, we're seeing a number of proposals working with our customers to actually get a piece of the stimulus. What's not yet clear is the timing of the release of that budget comes from the provincial -- or from the state down to the provincial and then to the local government. And so, we've taken a, what I would say, is a conservative approach to assuming none of that stimulus money will actually -- we'll see any of that in the second half of the year. But it will come, it will come. And so -- if it comes earlier, that would be a benefit to what we're forecasting right now. But we're -- what we did see, particularly in April is a little slowing down of normal bid process waiting to get access to that money. And so, we think that, that's just a transitory change, not a structural change."
},
{
"speaker": "Dan Brennan",
"content": "Got it. And then -- and maybe just one more on Pharma, if you don't mind. So, the instrument growth was so powerful for yourselves and some of your peers coming out of COVID. Is there any chance that like the slowdown you're seeing now maybe just some miscalculation, maybe there was such instrument demand and purchase is done in the last couple of years that customers at work just kind of working through that all those purchases versus like an exceptional slowdown right now given the macro? Just maybe speak a little bit to that, if you could about the overhang for maybe the strength in the past couple of years versus what you're seeing real time now?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, no doubt about it. We've -- tremendous growth rates during the post-COVID period. But we don't see anything fundamentally changing with the cycle on instrument replacement cycles. We don't see it's a kind of a rundown of available instruments or anything like that because lab activity is very, very high. We see that across the board. We actually see activity on the sales side, but also on the support side, very, very high. So we think it's primarily actually on the macro situation."
},
{
"speaker": "Bob McMahon",
"content": "Yes. And Dan, just to kind of build on what Padraig had said. We looked at ACG and our CSD or our consumables business outside of China, both of those grew mid- to high single digits in the quarter. So, it does speak to lab activity. They're not having instruments just sitting idle. And in ACG, our contracted services business continues to perform extraordinarily well, up double digits. So, the demand is there outside of China right now."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Rachel Vatnsdal with JPMorgan. Please go ahead."
},
{
"speaker": "Rachel Vatnsdal",
"content": "So first up, I just wanted to ask on China. We've seen some of the headlines from BIOSECURE Act. So, I was wondering if you could break down your exposure to large CDMOs in the region? And if that contributed to any of the weakness there just given me some of the commentary from an RFP standpoint? And then just on China stimulus and some of the dynamics there, how should we think about local competition competing for some of these dollars on the stimulus dynamic and you talked about some of these proposals that you're working on. So, can you detail what sectors, what types of customers are you really seeing that proposal work be done right now?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Look, I think on the BIOSECURE Act, we see normal -- people are looking at their supply chains, and that's positives and negatives around the globe. As you see that one of the areas that we've seen from that is actually we see a benefit on our service business as we relocate laboratories in some cases and get them up and running quickly with our services on that one. So, definitely some exposure to CDMO, but I would say not the overall macro side on it. And then I think the second part, Bob, I don't know if you want to take that one?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. I would say just a building on that point on our questions around CDMO, most of our business in China is local. So, it's not multinational and so wouldn't necessarily fall under the BIOSECURE Act. There are certain large companies that are on that list that are customers of ours, but that is that business has been pretty muted for a while, and that's not the cause of the incremental weakness here. I would say on the bid activity, it's about -- it's across the board. It's not in one region of the country or one end market or customers and obviously, Chinese local competitors are going to be buying for that business like we are. But I think we've shown time and time again our ability to provide very strong and robust instrumentation, coupled with very good service. And so, I don't think that we're in any disadvantage from a local perspective from that standpoint."
},
{
"speaker": "Padraig McDonnell",
"content": "In fact, Bob, I would say our scale and service there really makes it a differentiator where we can scale with customers and get them up and running very, very quickly. We take the competition very seriously. But we've always had competition in China, and we continue to keep a focus on that."
},
{
"speaker": "Rachel Vatnsdal",
"content": "Great. And then for my follow-up, just given some of the moving pieces on this fiscal 3Q guide, could you walk us through your expectations by segment for 3Q?"
},
{
"speaker": "Bob McMahon",
"content": "Sure. I'll take that real quick. By business group, we're expecting LSAG to be down double-digits DGG down mid-single and ACG growing at mid-single digits. If we looked at by end market, Pharma, as I mentioned in the prepared remarks, would be down very similar to Q2, so down low double digits. And with academia and diagnostics markets being roughly flat, Chemical and Advanced Materials being very similar to Q2 results. And then Food being down roughly the same, maybe a little better than where we saw Q2 as well. And then Environmental and Forensics similar performance as Q2."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead."
},
{
"speaker": "Doug Schenkel",
"content": "I guess, I have too high level, but I think important questions. One is Yes. Simply put, I want to get your thoughts as we sit here today about the Company's long-term growth outlook. And essentially, to what top line growth rate are you managing the business as you think about the next few years? In Pharma and Biotech, you have less exposure as a percentage of sales to some of the higher growth areas of that end market and the outlook for one of your higher growth areas, NASD within Biopharma it's certainly in question amongst investors given how things have been going recently. And while there is hope that China stimulus will help across many end markets, as we kind of think past that, ultimately, many believe the durable growth rate in China where you're overexposed will be materially lower than what we've seen in years past. And then as we think of other discrete differentiating growth drivers for the Company, when we look at CrossLabs and DGG, the growth rates have moderated there in part because of the market, but also in part because you did have above-average concentration with one high-growth diagnostic companies as an example. So, there's a lot of bad guys here right now. Obviously, in the long term, there's a lot of belief in Agilent in how you run the business. But I think there are a lot of questions when you kind of pull all this together about what is the inherent growth rate of this business. Can you share any thoughts on that?"
},
{
"speaker": "Padraig McDonnell",
"content": "Maybe I'll kick it off a bit at a high level. I think, first of all, we participate in excellent markets with multiple long-term growth drivers. You look at the characterization that's going to be needed in biotherapeutics in time, improving human health. Quality of our Food is really going to be a continued growth driver for the Company. I would say there's a lot of growth factors within the business that in adjacent markets where we continue to invest in those opportunities. You've seen part of Biopharma, PFAS. And I do believe NASD long term is going to continue to grow. In our service business, we expect that to grow high single digits over the long term as we increase our attach rate, which is not a small point because every percentage increase in attach rate is about $30 million incremental on that side. So overall, I think we're in extremely durable long-term markets. On the China story, we're going to see probably getting down to more mature level growth rates in China, but I would remind everybody that there are secular drivers in China that continue to come up and the government continues to invest in science and technology, but also the scale of the country being so large, we benefit tremendously from the aftermarket element consumable and service around that and being able to kind of drive attachment to some of the emerging workflows. So, Bob, I don't know if you have anything to add on that?"
},
{
"speaker": "Bob McMahon",
"content": "Yes, I would just say, as we think about kind of our long-term algorithm that we've been talking about, that 5% to 7%, we're not ready to walk away from that. I think we still feel good about that. And I think while you talked about some of the bad guys, we still believe in Biopharma and are continuing to invest there. In addition, Padraig mentioned a few things on the applied side where we are the undisputed leader. So, things like PFAS, the electrification, semiconductors, those things weren't there five years ago to the extent that they're going to be there in the next five years. So certainly, the markets are a bit challenging right now, but we are seeing them recover, and we would expect to be able to get back to those rates in the near term."
},
{
"speaker": "Doug Schenkel",
"content": "Okay. And Bob, maybe sticking with you. If we go back to the beginning of the year when you set guidance for the fiscal year. Yes, I think it's fair to say there were a number of questions from the investment community about how you were setting guidance for the year. Specifically, there was concern about the plausibility of what you assumed for the second half. In hindsight, obviously, these questions and concern to be well-founded. What went wrong? Does this tell you something about your visibility for the business? If so, is it a transitory issue? And if that's the case, can you help us explain why? And if it's not visibility, what do you need to do in terms of changing your guidance philosophy moving forward?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. Thanks, Doug. And I think it is visibility. I think if you looked across the last seven years, the two most volatile years have been the last two. And so, I think we were expecting based on the feedback that we got from our customers that they would be releasing budgets much more quickly than what they have or at least what we're seeing and while we did have an expectation that we were going to see an inflection in the back half of this year, when we're talking to our customers, it just hasn't happened. And so, I think the visibility is something that I think will we will get back, particularly as we have more recurring revenue and continue to have the connect rate on to the services business. And we're disappointed as everyone else is, but you can rest assured that we're going to come out of this stronger going forward."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Dan Leonard with UBS. Please go ahead. Dan, your line might be on mute. Our next question will come from the line of Michael Ryskin with Bank of America. Please go ahead."
},
{
"speaker": "Michael Ryskin",
"content": "I want to pick things up exactly where you just ended on the last answer with Doug on visibility. So, I mean you kind of talked about how you had a certain set of expectations going into the year based on conversations with customers that didn't play out. I mean, is that -- is there any reason to think that visibility is better now, I guess, is my question, if we look at the guide change and specifically focusing on Pharma with or without an NASD, if you want to just talk about Pharma, the CapEx of Pharma and NASD, it seems like visibility there is still really, really challenged. So, on the one hand, a lot of your prepared remarks are markets are improving. But on the other hand, you're not expecting in 3Q because you just talked about low double digits. It doesn't seem that you're expecting for the rest of the year. So just exiting the year, entering next year, how do we know we're not going to be having the same conversation again about another push out and then another push out? Just talk about that visibility going forward."
},
{
"speaker": "Bob McMahon",
"content": "Yes. I think if we look at just first half, second half and look at where our core guidance is, it's not assuming any inflection in the back half. I mean you could make an argument that typically, we have a higher weighting towards the back half of the year, just part of normal seasonality, and we're not assuming that in our guide. And so, if you look at also Pharma, we're assuming it's down roughly the same as it's been in the first half of the year, but we'll get easier compares. And so, we're not expecting \"a big inflection in the back half of the year.\" I would say also on NASD, which we are assuming a reduction in the second half of the year relative to the first half of the year, we have all those orders in-house. And so, we've got a plan, a production plan and both for Q3 and Q4. And while something could happen, it's not like we're looking for orders to guide us on those. And those are the two big areas that made the biggest change when I think about where we were back in November, giving guidance to where we are today."
},
{
"speaker": "Michael Ryskin",
"content": "Okay. And Bob, since you touched on 3Q, 4Q ramp, I'm going to follow up on that as well, actually. I mean, you normally do see some seasonality third quarter, the fourth quarter, depending on the year, depending on the comp, let's call it about $100 million, maybe $100 million plus. You're something that your guide for 3Q and fiscal year implies about $120 million repeat to 4Q for this year. So again, not excessive, but still some step-up and it seems like 2Q and 3Q certainly are below trend. So, is there any risk to that 4Q number? I mean is there anything else we should be thinking about in terms of what makes that achievable besides just comp and seasonality?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. The biggest change there is our NASD business, which we will see a low water point here in Q3 if we -- what we ended up seeing is some of these clinical programs getting pushed out. They've got pushed out from Q3 into Q4. And so, there's a $30 million incremental step-up from Q3 to Q4. So, if you took that out, we did get back to a more historical kind of level."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Dan Arias with Stifel. Please go ahead."
},
{
"speaker": "Dan Arias",
"content": "Bob or Padraig, on the capital equipment portfolio and the order book and the sales funnel that you have there, maybe just in simplistic terms, how would you describe the average time to deal close that it feels like you're going to be working with in the back half of the year versus what you've seen as a historical average? And embedded in that is just this question on instrument demand that you have a line of sight on via the sales funnel, but that just hasn't been booked yet versus what's not materialized at all yet? And then how the outlook change reflects those two things."
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Look at it, I think it's hard to put a number on the extended deal time. It depends actually on the platform and portfolio. So, there's quite a big difference between, for example, GC and LCMS on that. But what I would say, in general, the deal time is prolonged. The win rates, of course, haven't changed. They're still very, very strong, but that deal time is prolonged. And I think if you look at it in the second half when we're looking at the visibility of what we're seeing in the funnel, the best thing and we're doing is staying close to customers on this one, making sure we're there to help them, of course, with their decisions and help them get up and running when they make the decision to purchase on it. So, we're going to see this continued extended deal time, I think, through the end -- through the second half."
},
{
"speaker": "Bob McMahon",
"content": "Yes. Dan, I wish I could say we have all the orders in-house for the second half for instruments. It just doesn't work that way. So, we have much better visibility into Q3, but we will need continued performance in Q3. Now we've had several quarters here of book-to-bills being greater than one in our instrumentation portfolio, which is a positive thing. I would say, hey, we're building some backlog. And as Padraig mentioned earlier in the call, particularly in LSAG. LSAG orders grew ex-China. And that is the first time that's happened in several quarters. So, we are seeing some positives and if you look at the second half of the year, our performance relative to last year should improve just because of the benefit of easier compares. And so -- we're not, again, looking for that huge inflection. And we're not expecting also as Padraig was saying, a constriction, so to speak, or an acceleration of those deal funnels. We're expecting them to stay very similar to the way they are right now."
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. I think just to close off, Bob, I think the deal closure time lines remain at an elevated but very stable level. They're not deteriorating further, which I think is a really good sign. And in terms of the funnel is stable, no cancellations within that, which, of course, is very important to see."
},
{
"speaker": "Dan Arias",
"content": "Okay. And then maybe on -- as a follow-up on Biopharma. I'm just curious about the extent to which the IRA is part of the conversation there these days. It sounded like last year, the industry kind of contemplated an adjustment as the idea was coming into the picture. So, do you think spending expectations got rightsized for a period of time? Are you finding that that's sort of a continual evolving conversation?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, I would say it's a continuing evolving conversation. Clearly, on the NASD side, we've seen an impact from the IRA something we're watching closely, but I think this will evolve over time. What we're seeing in terms of programs-based around pricing provisions, there definitely has been an impact on that side."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Josh Waldman with Cleeland Research. Please go ahead."
},
{
"speaker": "Josh Waldman",
"content": "A couple for you. Padraig or Bob, I wondered if you could talk a bit more on how instrument orders progressed sequentially. I mean did orders deteriorate over the last 90 days or really just a function of orders not improving as you expected? And then I wondered if you could comment on what you're seeing from new orders, new order perspective across the key product categories within LSAG categories like LC/MS, GC, ICP. I guess is it fair to assume LC/MS is driving the majority of the softness just given the comments on Pharma."
},
{
"speaker": "Padraig McDonnell",
"content": "I don't know if you want to take that one, Bob."
},
{
"speaker": "Bob McMahon",
"content": "Yes, I'll take it. So, I wouldn't characterize it, Josh, is a deterioration. It actually just wasn't the inflection or the acceleration that we were expecting. We did -- as we were saying here, we did have a positive book-to-bill and ex China orders grew. They just didn't grow to the extent that we expected them to, particularly in April, which we would typically have higher acceleration just kind of given the end of the quarter. In terms of the platform, what you're seeing is the platforms that are more focused on Pharma being the areas that are the weakest. So, LC and LC/MS are weaker than the applied markets. And you can kind of see that in our end markets as well. And so, we were expecting those to kind of perform better this year, and we're just still seeing that, I'd say, lower-than-expected performance from the standpoint of order velocity."
},
{
"speaker": "Josh Waldman",
"content": "Got it. Okay. Then a follow-up on China. I wondered if you could comment a bit more on where we’re seeing…"
},
{
"speaker": "Bob McMahon",
"content": "I would say -- sorry, just one quick -- so one thing I would say, though, is if I looked at the performance, the revenue performance versus the order performance, the order performance was significantly better in Q2 on those two main platforms than the revenue. So again, these are points that says we are getting out of it, maybe not at the pace that we were expecting. So -- and so those are some positive points that would suggest that we're going to continue to -- it's not going to deteriorate coming out in Q2 -- or excuse me, in second half. Sorry."
},
{
"speaker": "Josh Waldman",
"content": "Is it -- what were the two platforms?"
},
{
"speaker": "Bob McMahon",
"content": "LC and LC/MS. So yes. Yes."
},
{
"speaker": "Josh Waldman",
"content": "Okay. Okay. Got it. Got it. And then a follow-up on China. I just wondered if you could comment a bit more on where all you're seeing demand coming softer than expected from a new booking’s perspective and then a bit more detail on how you're contemplating the stimulus. I mean, it sounds like you saw improved bidding and funnel activity on the prospects of stimulus, but just wondered if you could provide what's giving you the confidence that, that stimulus related funnel ends up converting to orders and sales at some point in the future?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Maybe starting on the stimulus. This is an extremely large program, a multiyear program. It's very real. We've seen some of the customers with activity is asking us to bid and some of the things, even though they're not sure exactly yet how the mechanisms would work. So that gives us great confidence for '25 just from that. But I said earlier, also the indirect impact of confidence in science and technology in China. It's a real photo confidence by the government in making sure we -- making sure to get the market going again. So, I think in -- we saw meaningful softness extend to all markets because remember, the stimulus is not only academia and government, it's across all markets. And that has really come at once. And we did see at the end of the quarter, we also started to see customers postpone purchasing decisions have told us, right, sort of said we're going to postpone and they try to gauge if there's any benefit of the stimulus-related funding, and that's normal. I think that's expected. If you didn't see that, then the stimulus would have different questions. And why we believe that a stimulus program will ultimately be long-term positive, we really don't see any benefit in H2, and that's why we're roughly reducing by $70 million."
},
{
"speaker": "Josh Waldman",
"content": "Got it. Did you see stimulus-related postponing and Pharma and CDMO as well or more just government accounts?"
},
{
"speaker": "Bob McMahon",
"content": "Yes, it was both government and non-government accounts across the board. So, I would say it was pretty broad beyond Pharma."
},
{
"speaker": "Operator",
"content": "Our next question comes from the line of Catherine Schulte with Baird. Please go ahead."
},
{
"speaker": "Catherine Schulte",
"content": "Maybe just sticking on China stimulus to start off. Is there any way to quantify the increase in the funnel activity that you've seen there just as we try to think about potential opportunity in future years?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. What we're seeing is a postponement, and I think it's really too early to tell on the funnel side on -- if the customers are still working out the mechanisms about how it works, we're still waiting to see on the impact on the panel, particularly for '25, it's too early to tell."
},
{
"speaker": "Catherine Schulte",
"content": "Okay. And then on LSAG, what was performance in the quarter, excluding China? And then any commentary on the Pharma end market specifically for that business outside of China in the quarter?"
},
{
"speaker": "Padraig McDonnell",
"content": "Bob, do you want to take this one?"
},
{
"speaker": "Bob McMahon",
"content": "Yes. So, our LSAG business declined 13% globally, ex-China, it was down 8%."
},
{
"speaker": "Operator",
"content": "Our next question will come from the line of Paul Knight with KeyBanc. Please go ahead."
},
{
"speaker": "Paul Knight",
"content": "Within the 34% of business that's Pharma, what portion is Biopharma or Large Molecule, Bob?"
},
{
"speaker": "Bob McMahon",
"content": "It's roughly 45%."
},
{
"speaker": "Paul Knight",
"content": "And what's the overall growth rate of that piece, do you think?"
},
{
"speaker": "Bob McMahon",
"content": "Long term or in the quarter?"
},
{
"speaker": "Paul Knight",
"content": "In the quarter and long term."
},
{
"speaker": "Bob McMahon",
"content": "Yes. So, if we looked at our Biopharma business, it was down roughly 12%, Small Molecule was down roughly 10%. Total Pharma was down 11%. So, it kind of gives you a sense. I think."
},
{
"speaker": "Padraig McDonnell",
"content": "Yes, I would say before we get on to the long term, Bob, for Biopharma, really tough compare was mid-teens, plus mid-teens last year on that side. But what we're seeing is the long-term prospect for this market is very strong."
},
{
"speaker": "Paul Knight",
"content": "Yes. And then I know that you've got -- you have always been very aggressive and innovative on your M&A for biologics. Are you seeing that market open up on the M&A side of that marketplace?"
},
{
"speaker": "Padraig McDonnell",
"content": "You mean in the space itself."
},
{
"speaker": "Paul Knight",
"content": "Is pricing becoming more realistic as you think about your acquisition strategy?"
},
{
"speaker": "Padraig McDonnell",
"content": "Yes. Well, I think there's long memories. So, people don't forget the elevated pricing for assets, but we're going to remain very disciplined. It's going to become an increasingly bigger part of the puzzle for us M&A, but we're going to make sure that we do it in a very disciplined way, link to strategy and of course, looking at areas of where we can double down and growth factors. So we're very focused on that going forward. But I would say, while pricing maybe has come down in little areas across the board, people have long memories."
},
{
"speaker": "Operator",
"content": "I will now turn the call back over to Parmeet Ahuja for closing remarks."
},
{
"speaker": "Parmeet Ahuja",
"content": "Thanks, Regina, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good rest of the day, everyone."
},
{
"speaker": "Operator",
"content": "Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect."
}
] |
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