Agilent Technologies, Inc. (A) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Agilent Technologies Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Thank you, Abigail. And welcome everyone to Agilent's third quarter conference call for fiscal year 2016. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. You can find the press release and information to supplement today’s discussion on our website at www.investor.agilent.com. While there, please click on the link for Financial Results under the Financial Information tab. You will find an Investor Presentation along with revenue breakouts and currency impacts, business segment results and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call. Today’s comments by Mike and Didier 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. Please note that we will refer to core order and revenue growth percentages. Core orders and revenue exclude the impact of currency, the NMR business, and acquisitions and divestitures within the past 12 months. Reconciliations between reported and core growth in dollars and percentages can be found in the Financial Results section on the IR website. 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 Mike.

Thanks, Alicia, and hello, everyone. Thank you for joining us on today’s call. I will start with a summary of our Q3 performance. Then I’ll move to an update and outlook on operating margin expansion and capital deployment plans. Finally, I will close with our full-year guidance. I am very pleased to report our Q3 results, with the Agilent team delivering revenue at the high-end of our guidance and earnings above our guidance range. Agilent’s Q3 revenue of $1.01 billion grew 1% over a year ago, up 9% on a core basis. Orders of $953 million, while down 6% compared to a year ago, were up 3% on a core basis. Our strong revenue growth was driven by continued strength in the pharma, diagnostics, environmental and forensics markets, and across all geographies. We saw strong customer acceptance of our new instrument product introductions, and strength in our CrossLab services and consumables, diagnostics and genomics offerings. We also resolved previous start-up issues in our Americas Logistics Center, which delayed $15 million of shipments last quarter. A few additional comments on the order front, our 3% core growth was against a tough compare of 9% growth in Q3 ’14. We also experienced some U.S. and state government big deal delays into Q4, and customers in the industrial markets continue to take a cautious stance, in like a weak -- in light of weak commodity prices and uncertainties in the world economies. Adjusted operating margin, including the adjustment for Keysight billings, was 19.9%, expanding 110 basis points over a year ago. Earnings per share were $0.44. This marks another quarter of significant year-over-year margin improvements, driven by our intense focus on growing our operating margin, as we seek to achieve 22% margins by fiscal 2017. Moving on to the results by business group. The Life Sciences and Applied Markets Group or LSAG as a reminder, brings together Agilent’s analytical laboratory instruments and informatics. Core revenue growth of 9% was driven by strong performance in Pharma, environmental and forensics markets. Core orders were down 1%. LSAG operating margin for the quarter was 18.7%, up 220 basis points from a year ago. The previously announced exit of the NMR hardware business continues to proceed as planned. We expect our LSAG sales funnels to continue to strengthen, given a number of recent significant new product introductions. At June’s HPLC 2015 Conference in Geneva, we further enhanced our new Infinity II LC line with the new 1290 Infinity II Vial-Sampler. This product significantly lowers the entry price to the top-line product range, offering analytical laboratories a cost-effective way to experience the advantages of ultrahigh-pressure liquid chromatography. We released the 6470 LC/MS Triple-Quad at ASMS in June. This newly engineered core platform provides attogram-level sensitivity, and accurate quantitation with up to six orders of linear dynamic range. The new product delivers significant improvements to the best-selling core LC/MS Triple-Quad, the 6460. It offers improved performance, precision, speed and robustness; and features a small footprint to preserve bench space in the lab. And in spectroscopy, the 7800 quadrupole ICP-MS, which we launched in Q2, is the latest addition to Agilent’s industry-leading ICP-MS portfolio. This new product raises the standard for routine elemental analysis. Next, the Agilent CrossLab Group, or ACG, combines our analytical laboratory services and consumables businesses under a new Agilent brand. Core revenues were up 8%, while core orders grew 6% in the quarter. Operating margin was 22.6%. Last quarter, we launched the Agilent CrossLab Brand Promise program. This program is focused on delivering a new and integrated approach that offers actionable insights to help customers. New service solutions include laboratory business intelligence reporting, RFID inventory management services, and laboratory asset utilization services. And in consumables, we expanded our AdvanceBio portfolio of solutions, which enables scientists to speed research and lower costs. Finally, turning to the Diagnostics and Genomics Group, DGG is comprised of three divisions: the former Dako business, Genomics and Nucleic Acid Solutions. DGG’s results were driven by excellent performance across all three divisions, pathology and companion diagnostics, genomics and nucleic acid businesses. DGG’s core revenue grew 10% versus a year ago. Orders grew 8% on a core basis. Operating margin of 16.8% was up 330 basis points over Q3 of fiscal year 2014. In the third quarter, DGG completed its acquisition of Cartagenia, a leading provider of software for clinical genetics and molecular pathology labs. We launched updated Gene Expression Microarray tools for researchers to better investigate expression patterns on a highly accessible platform. Adding to products for next generation sequencing, we released new Target-Enrichment Solutions for disease research, which will address current limitations in exome sequencing. Now, let’s take a brief look at Agilent’s revenue by end market performance on a core basis. Life sciences and diagnostics markets continued to see strength in pharma, a recovery with strong demand in the diagnostics and clinical market, and moderate growth in academia and government. Applied end-market performance was led by continued spending in environmental and forensics, and moderate growth in food. Chemical and energy was flat, due to reduced investments in oil exploration. We also saw cautious spending in downstream refining and chemical segments, driven by macroeconomic uncertainty concerns. Geographically, we saw healthy core revenue growth across all regions, particularly in the Americas, Europe and Asia Pacific, with strong growth in China. Major pharma spending was brisk, with large firms upgrading to the new Infinity LC platform. Turning from the report out of Agilent’s revenue and order results, let me update you on our operating margin improvement initiatives and Q3 capital deployment actions and outlook. Thanks to those of you on the call who joined us at our May Analyst and Investor Meeting. As a reminder, I highlighted three focus areas where we are working as a team to drive shareholder value: deliver above-market revenue growth, expand operating margins to historic highs and return 85% of free cash flow to shareholders. I’ve just discussed our revenue growth. Now here’s an update on our operating margin and capital deployment. Our multi-year “Agile Agilent” program is re-engineering the company to be more efficient, nimble and externally focused. As of the third fiscal quarter, we have delivered $35 million of the expected gross savings of $50 million in 2015 from our combined actions. We are committed to achieving a 22% operating margin by FY ‘17, a three point improvement over FY ‘14, while continuing to invest for long-term revenue growth. With the margin improvement results over the past two quarters, we are very confident in our ability to deliver on our margin expansion goals. Now turning to capital deployment. As previously guided, we are on track to return $500 million this year to shareholders in the form of dividends and buy backs. In Q3, we repurchased $99 million of stock, bringing our year-to-date repurchases to $267 million. With respect to guidance, we are reaffirming our previous FY 2015 EPS guidance of $1.68 to $1.72, as the operating model of the new Agilent continues to drive profitable growth and margin expansion. Thank you for being on the call today. I will now turn it over to Didier, who will provide additional details on our guidance and financial results. Didier?

Thank you, Mike, and hello, everyone. To recap the quarter, our core order and revenue growth, excluding the impact of currency, NMR, and acquisitions and divestitures were respectively 3% and 9%. This quarter, currency subtracted 6.9 percentage points from our year-over-year revenue growth. And as Mike stated, start-up issues with the transfer of U.S. distribution center were resolved in Q3, which resulted in about $15 million of additional revenue. Finally, adjusted operating margin was 19.9%, 160 basis points higher than our guidance and 110 basis points higher than last year on just 0.5% higher nominal revenues. Excluding the $40 million annual cost dis-synergies resulting from the Agilent/Keysight split, operating margin grew 210 basis points. I will now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.03 billion to $1.05 billion and EPS of $0.45 to $0.49. At midpoint, revenue will grow 6.7% on a core basis and our 20.3% adjusted operating margin at midpoint will be up 40 basis points sequentially. We expect to continue our disciplined buyback program with planned purchases of $98 million in Q4. Now to the guidance of fiscal year 2015. The Q4 guidance results in the following fiscal year guidance. At midpoint, revenue will grow 6.6% on a core basis, again, excluding the impact of currency, NMR, and acquisitions and divestitures. Fiscal year '15 revenue guidance is $37 million lower than previous guidance, of which $15 million is due to currency. Our EPS guidance of $1.70 at midpoint is unchanged from previous guidance, due to additional Agile Agilent savings that compensated for slightly lower revenues. Adjusted operating margin for the year is expected to be 19.2% or 40 basis points higher than last year. Excluding the impact of the $40 million cost dis-synergies related to the Agilent/Keysight split, our operating margin will be 140 basis points over previous year, on flat reported revenue growth. With that, I will turn it over to Alicia for the Q&A

Thank you, Didier. Abigail, would you please give the instructions for the Q&A.

[Operator Instructions] And our first question comes from the line of Dan Leonard with Leerink. Your line is open.

Thank you. I was hoping you could elaborate a bit on your book-to-bill. I think I’m calculating a 0.94, which is the lowest you’ve had in years. So I wonder if there's any additional color to be offered there.

Yes. I’m looking at Didier in the conference room here. I think that number is correct. And we had very, very strong Q3 revenue. And as we look ahead to the fourth quarter, we have a lot of confidence in our ability to have our growth rate pick up as we have -- are expecting a number of areas of strength in the marketplace, such as pharma, the diagnostics, the environmental forensic space that I talked about earlier continue to be quite strong. And we've had a lot of new product introductions. Our sales funnels are building. And we’ve seen really strong win loss ratios of that new business. And sometimes orders can be a little bit lumpy. So we do see some big deals moving between quarters, which we saw here in the third quarter on the state and federal level in United States. And I would just also point out we had a tough compare when we look at kind of the results for the third quarter.

Got it. So nothing you had specifically spike out as an area of concern then?

No absolutely, not. I think we have a lot of reasons to be positive about the outlook. And other thing I did not mention, Dan, was that, we got off to a slow start in the third quarter in incoming orders after finishing so strong in Q2. But throughout the quarter, we saw an acceleration of incoming orders throughout the quarter and finished the quarter strong.

Got it. Thanks, Mike.

Thank you. Our next question comes from the line of Brandon Couillard with Jefferies. Your line is open.

Hi. Good afternoon. Mike, would be interested in getting some more granularity on just how China performed in the period, how the book-to-bill ended there? And what you perceive the implications of the currency revaluation are to your profitability there? And just remind us whether you price in local currency or in USD?

Yes. Sure. I mean, great question. I figure we'd probably spend some time today talking about China, given some of the recent news. But in terms of our performance in China in the third quarter, we have very strong revenue growth with low-double digits. And we’re tracking through the first three quarters right on the plans. We've talked about with all of you at the analyst meeting the high-single digit level of growth in China. In terms of the areas of strength, we’re continuing to see strength in pharma, life science, research, the diagnostics, food, environmental. And the business really continues to develop as we had expected, albeit some of the recent changes, which in terms of how that affects our profitability in China, it's really neutral. We’re naturally hedged in China in terms of both the amount of revenues that we bring in, in China. Even though it is our second largest country in terms of revenue, we also have a very large footprint there, including local manufacturing. So we are naturally hedged in China. And in terms of your question around the mix of RMB versus dollars, about 20% of our business is in RMB and about 80% is in dollars. And in terms of the overall business, just maybe one final comment here on China, we can dig into other areas of China if you like. But when we look at the devaluation, we’re not really expecting to have that significant of an impact on the business in China itself. And then it depends also how you view to actually be successful and drive some more growth there. I think the better question is, what could it mean to the economies and currency in some of the emerging markets? But hopefully I answered your question. If not, come back with another one.

Yes. That’s helpful. And then just one question on the chemical and energy markets. Could you give us any color around what the order trends are like there and whether you’re seeing any signs of stability I guess in the sort of energy-related end market if at all?

Yes. Great question. So we have seen stability, although it’s not where we hope to see coming into this year. So we’re now three quarters in a row of basically flat business in chemical and energy. And I think it's no surprise that the exploration side of that business is down fairly significantly. And we had anticipated that. And just to remind you of an exploration side, our business account for about 15% of this total segment. We are seeing growth in the downstream, chemical and refining process but not to degree that we had hoped to see early this year. So basically we get -- it’s grown enough to offset the downward pressure on the exploration side. Again that segment of the market is very profitable, but they seem to be still cautious on their spending. As you may recall from the analyst meeting we talked to you about our view that this was a 2% to 4% market growth segment and we still see it that way, but we’re just being cautious in our Q4 outlook in this segment right now. We do think it’s stabilizing. We got three quarters in a row of basically flat business in this segment for us.

Super. Thank you.

Thank you. Our next question comes from the line of Doug Schenkel with Cowen. Your line is open.

Hi. Good afternoon. And thank you for taking the questions.

Hi, Doug.

So I guess I want to go back to Dan's question. I mean, it was a pretty solid quarter, but again that book-to-bill of 0.94 was arguably notably light. And the revenue number while solid, it wasn't Herculean feat. So it is helpful to hear the commentary on momentum building over the course of the quarter. That said, even recognizing the commentary in the slight reduction to guidance, the Q4 bar is still pretty high. You did lower guidance, albeit by only about $20 million, excluding FX. You could have chosen to cut more. Is it fair to say that if you saw any change in ordering patterns in the early part of this quarter, in particular those attributable -- now basically those customers that are more exposed to macroeconomic concerns that you probably would have cut guidance more?

Yes, Doug. Thanks for the question. And if I may humbly disagree in terms of the comments that revenue actually were quite pleased with being able to put those types of revenue numbers. But I think you’re on the right path. And question here, which is 3% constant currency order growth, what kind of converse do we have going forward? Clearly, if we have seen some of those patterns, I mean we’re having that call here today. We would reflect it in our guidance. And we have reason to be positive about the outlook. If you look at the business by our three groups, our ACG and DGG business have momentum. It’s a recurring revenue business. That business is tracking very nicely. We talked to you about -- I am actually going to ask Patrick to jump in and provide his perspective and as well. I think the obvious question is what’s the outlook for LSAG? And I think we’re one of the few companies out in the space that reports orders. So I think sometimes they get caught in these stories of lumpiness between quarters. When we look at our business here, we respect pharma, biopharma, diagnostics, clinical diagnostics, environment space to remain strong. China is on a steady trajectory, no expected hiccups there. And we just had a number of new product introductions and we’re coming off with tough year, yearly compare and a really strong Q2. So Patrick, I don’t know if you have anything else you would like to add to my comments?

Sure, Mike. Thanks. Yes, of course I kind of want to restate that you said here we had. In terms of your order pattern, order for LSAG, we had a slower start based on the very, very strong Q2. We had an also tough compare against last year where several of our big platforms have been 20% plus growth. Having said that, the pattern over Q3 was definitely accelerating through -- positively accelerating through Q3. And as you stated, the outlook for Q4 is positive. We see strong positive momentum in pharma where we have seen strong double-digit growth and we have no belief that momentum will slow down over the next couple of quarters. So given the confidence in our new platforms, which have been very well received, LCMS, and also latest introduction on the ICP-MS front, we are confident that we can deliver more plan for Q4.

Okay. Thanks, Mike and Patrick. That’s all real helpful. And one quick follow-up. I apologize if I missed this. The $30 million in revenue delayed from Q2 and the Q3 or at least that you talked about on the Q2 call, does that fully come through this quarter or will some of that potentially come through in Q4?

Didier has been quite today, so I think I will pass the call to have…

Yes. Back in Q2, we talked about the $30 million of being two parts. One part is the $15 million that was a clear miss from the change in the logistic center and we recovered that fully into Q3. The second part is about more of the new normal. What it means is that we have orders coming in later in the quarter and shipment terms being slightly extended versus what we’re used to. And this is really the new normal. So there was no recovery of that second $15 million and we don’t expect it to either to -- I mean, we expect the new normal to be with us for quite sometime.

Okay. Thanks, guys.

Thanks.

Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is open.

Hey. Thanks. I understand the forward looking commentary here, but I just, think about the quarter on LSAG? Can you actually talk about what drove the 1% decline in core order growth? Where were you most surprise, I guess, relative to your own expectations?

Thanks, Tycho. This is Mike. I am going to make a few comments and then, Patrick, I think, the question was the 1% order growth, where were the areas that we might have been surprise on. What I will do is, I will lead off and actually the order results for the quarter matched our own internal forecast. So we're really weren’t surprised, business developed as we had anticipated. And I think, maybe just kind of emphasizing a few comments would be, we saw some deal push-outs on the U.S. and state governments side, saw some continued flat levels of growth in the Chemical and Energy space. But just few other comments you like to add there, Patrick?

Sure, Mike. And the biggest surprise certainly for us was in the U.S. as you said, because we have seen the impact of both on the oil and chemistry side and a couple of delayed orders. On the positive side, Europe held up very nicely, as well as China was strong in growth. So in terms of platform to platform that have been affected most by the large delays, for example, LCMS, which had very tough compare compared to last year, where we had as we said plus 20% growth…

Yeah. I think it was 20% like last year.

Yeah.

And then, on DGG, 8% core growth is kind of at the high-end where you’ve talked about for market growth? Can you maybe just talk about the sustainability of trends and whether there is a little bit of catch up effect here now around the [omnesys] [ph].

Yeah. You are right, I mean, if you look into, I mean, that’s why we have seen a very nice quarter here also with great growth and now see orders coming in at 8%. I do believe that we are on a good traction right now. We are continued to see great performance from the DGG. But you're also right that it did little bit above what I’ve guided in our Analyst Day and clearly, we are also moving through a few quarters here, where we last year had some back order issues in the pathology business there, somewhat is an easy compare, but underlying the momentum is definitely here.

Yeah. I see. Patrick had some tough compares. You have some easy compares coming.

Right. Right.

Okay. Thank you.

Thanks, Tycho.

Thank you. Our next question comes from the line of Paul Knight with Janney Montgomery. Your line is open.

Good afternoon. How are you guys?

Going just well.

Thanks Paul.

Good. On the DGG Group, are the CMS guidelines that were released late in the year, so you where, I guess, implying is it, are those new guidelines helping DGG business and is it kind of more momentum from that occurring right now within that group?

For DGG, what is the, can you clarify MM for me at least?

Oh! I am sorry, on the center for Medicare or Medicaid services. They put out the new rules in October last year?

Okay. Got it. Got it. Got it. So, why don’t you go over that, Jacob?

Yeah. Thanks for that question. Actually, those rules are not really covering the -- our particularly business -- the pathology business and that sits outside the pathology business, so we don’t -- we didn't see any change to that and overall the pathology market continues to be healthy. So we have not been impacted by those changes in guidelines and I don't expect that we will see any changes in our performance due to those guidelines going forward either.

Do you think you are taking share in pathology?

Yes. I mean, we are -- we definitely continue to see that the on this momentum installation is improving. As I have also mentioned earlier, there is sales cycle that are more than few months or maybe even few quarters. So we are still building momentum, but we continue seeing and also an improvement in taking back market share and win competitive accounts. So I am pretty optimistic around that the future also in pathology business.

And then lastly, Mike, on the NMR closure, are you now in the peak of cost savings there or is it part of the reason you're seeing improving margins going forward?

Yeah. We are well above our run rate of cost savings, I would say, we say that initially we were actually for $50 million per year now it’s a $20 million and we are getting to pretty much our run rate there. The one thing I will signal is that, we are -- next year we still we will have about $11 million of revenue that will show on the RPD front and for the first three quarters as we make the last installations and then recognize revenue, so that will be about $50 million reduction from this year and but we will continue showing our orders and revenue on a core basis, excluding NMR so that we are comparing apple-to-apple.

Okay. Thank you.

Thanks Paul.

Thank you. Our next question comes from line of Isaac Ro with Goldman Sachs. Your line is open.

Hey. Good morning, guys. Thanks. Just want to circle back to an earlier topic in the Q&A, specifically regarding the impact of new products this year in the business? Could you maybe offer like a full-year expectation for contribution from new products to topline?

How if I pass it over to Patrick and talk about some of the new offerings in the instruments side and Jacob and Mark you comment on your groups and then I will close with answer to your question, Isaac.

Definitely last few years, so this is Patrick speaking. So when you look at our new product offering this year and there is a series new products we launched, let me start with the LC business where the, actually, end of last year, startup of the Infinity II LC launch and we added this year actually at the HPLC Meeting another set of products to it that is driving definitely a lot of market share gains for us so far this year. In Q3 we had growth in orders and in revenues. We had double-digit growth on this platform driven by strong acceptance in many markets, mainly in the pharmaceutical markets where we see larger enterprises, as well as more companies making replacement and buy some new instruments, because this has -- platform has such a strong offering. Then on LC/MS we just launched the new 6470 Triple Quad system which will overtime replace our very solid performing 6460 Quad platform, again very strong interest after ASMS introduction and there is more to come during the year. So the contribution for product we don’t disclose the actual percentage, but it drives a lot of new business for us and a lot of attention in the market.

And maybe I want to comment on some of the spectroscopy, I know it’s…

Yes. Yeah. I will just give you an example from the spectroscopy, thanks Mike. So we launched the ICP-MS solution 7800 and on the OES side as we introduced a year ago the IC -- 5100 ICP-OES system that just an example of how we kept about 7 points in market share over 15 months based on this highly differentiated platform. So it’s really one of the means for us to capture market share and drive growth. It will make significant contribution.

I think, Mark, I made a few comments in the call script about some of the recent offerings, but maybe just a few highlights for Isaac on the ACG side.

Thanks, Mike and hi, Isaac.

Hi, Mark.

On the ACG side, as Mike alluded to you in his earlier comments, obviously, it’s a key driver of our ongoing growth too. So specifically for this quarter on the enterprise side a trio of services that are largely around our asset management area and also include in the advanced bio area. So it’s hard to put an exact percentage on it, but obviously, we are putting a lot of effort behind growing what we see the differentiated side of our portfolio in consumables and services and putting R&D and marketing budgets behind that. I would also add based on the Patrick's comments, when you introduce new platform it is also a great opportunity to introduce new services and consumables around that and to that end we, obviously, have chance to augment introduction whether it’s consulting services or consumables that put a whole platform. So when you tie all together there is some nice synergies between what goes on from the LSAG side, the DGG side, and obviously, our ACG team.

And then maybe just bringing it home, Jacob.

All right. Thanks and thanks Isaac for asking the question, I am -- as you can hear, we can definitely talk long time about all the new exciting products. But I will just remind you that that we have a few different dynamics going on in my business. First of all, with the pathology and diagnostics businesses and we are in partnership. This is not about bring out new product everyday, but they have -- you want to install your new instrument into the account and then get the contract and then run the rate and the new products we actually bring out there is new assay that goes on top of that. So you, of course, have a different lifecycle of the products that we have in chemical market compared to maybe in the genomics research market where we come up with some existing products also, the HaloPlex HS which actually address very low concentration of sequencing information, the [indiscernible] exome improvement also and Gene Expression arrays. Those have shorter lifetime and we see a higher percentage of our sales from this year and into next year from those products.

And why they made us put a bow on this discussion, but we talk a lot about the portfolio, but I would be remiss that to remind you of the channel change you made this year. So, we’re also -- we simplified our cell structure and it’s going to allow us to invest in buildout coverage. So I think you’re going to see our growth being fueled going forward not only on the strength of the new portfolio but also the expanded channel reach and specialization, we’ve been investing in. And this is a note through the first three quarters. I think our quarter revenues were over 6% and we’re on track for our strongest revenue growth in several years. I think probably a point greater than any other growth rates we’ve put up in the last three years. But again if I could just leave that with you on the combination of both the new product offerings but also our change in channel strategy as well.

All right. Hey guys, I really appreciate all the detail. I don’t want to sound too ungrateful but on that 6% number year-to-date, how much of it was on those new products?

We don't know. We don’t -- we don't have that number that we've shared externally but it’s been a contributor. All I can say is significant contributor.

Fair enough. Appreciate that. One last one, if I could just sneak in on China?

Yeah.

I think everyone is obviously trying to get a handle on what’s going on in the economy there. It seems to me maybe a simple way to break it up will be to delineate the percentage of your business in China that is maybe funded by sort of federal and in government sort of associated entities versus products that might be tied more to discretionary CapEx. Do you have a way to maybe break it down between those two buckets within, just sort of, I think, within China 17% of sales, maybe between those two end markets, how would you split it?

I don’t know if we have that, Didier. I know it’s been…

No. Not at the company level, I mean, information, it’s probably tracked by some of our people. But I’m not collecting it and aggregating it.

What I can share with you is because we’ve been kind of nosing around on this question ourselves internally. And the areas of strength particularly the Pharma area is a lot of private sector money. So traditionally this market has been heavily dominated by the direct investment by the government. We’re seeing a move. I think it’s still the majority but we are seeing a lot more business coming from private funded enterprises, particularly as the Chinese government also is moving a lot of its testing outside of government testing labs, for example, the food area where there's now whole new set of private testing labs that are -- they are coming online in the country.

Yeah. The other complexity we are even trying to attract that is for the companies that fewer Chinese companies that in their exporters versus the local -- I mean companies that can go after the local market, the exporters will benefit from the weakening yen. So it’s going to be that several layers of complexity, would we want to try to focus the overall impact of the weakening of the yen or the weakening of the Chinese GDP.

Got it. Appreciate all the color guys. Thank you very much.

Thanks.

Thank your. Our next question comes from the line of Dan Arias of Citigroup. Your line is open.

Good afternoon guys. Thanks.

Hey Dan.

Mike just -- hi Mike. Just following up on the China discussion, what's your take at this point on where we are with the anti-corruption investigations? Is it your sense that we kind of fully turned the corner there or is it still little early to signal all clear on that?

Yeah, Dan. Great question. I think it's a new normal. I think this is -- the effort is here to stay. I think in terms of the changes where we talked about before of slowing deal velocity and a lot more conservatism in terms of the overall approval process. I think that sort of baked out now. So we’re no longer pointing to longer deal cycles in China as a result of anti-corruption. But I think the longer deal cycles are here to stay and now are now in this kind of this rhythm of really cautious approvals by the government authorities. And that's why I mentioned earlier that a lot of the areas of growth particularly in the private sector where you’ve not seen the same bureaucratic approach to approvals of deals. I think this is the new normal.

Got it. Okay. That's helpful. And then maybe just on LSAG, can you maybe comment on pricing in chromatography as we just sort of thinking about the new product introductions and then just the strong overall results across the space. Curious maybe to just get an updated view on how ASPs are trending relative to ….?

Great. Dan. I’m going to bounce over to Patrick on this one.

Happy to take this one. So as you can imagine, every new product introduction gives the opportunity to also improve your gross margins and ASPs which we actually have seen. And there is actually for us, that’s one of the reasons why we’re also confident on delivering to the bottomline over the year. So we will continue to launch these new products because they are highly differentiated and give you an opportunity to drive ASP and we will keep ASP up which otherwise would erode overtime.

I think it is fair to say Patrick particular to -- specific to the Japan business, it’s not a new phenomenon. But our competitors there who don’t have the same currency challenges that we do are using that to be very aggressive at times on pricing but we have the gross margin structure to be able to compete.

All right. Okay. Thank you.

Thank you. Our next question comes from the line of Ross Muken with Evercore ISI. Your line is open.

Good afternoon guys. So Mike, obviously as you sort of embarked to CEO of the new Agilent, you put forth a lot of programs to sustain sort of the superior growth and improve the margin and the cash flow generation. If you think about the various things highlighted in the call, where do you feel like you sort of outperformed kind of timing expectations and you’ve seen maybe similarly signs of the benefits in the organization and where do you feel like you need to make the most progress?

Thanks Ross. Appreciate the recognition of the kind comments. I think the area that I’m mostly done is the ability to get the margin improvements. I mean, we’re basically six months into the journey since I transitioned to the role from Bill. And I can see the momentum and our ability to get our margin structure to different place. I think you’ve heard reference in the number of times in our call today. And if you were inside the company, I think everybody knows the goal that we’re trying -- we're shooting for. So I think that’s the area that I’m really -- obviously the growth, pleased with their ability to grow. And we always want more growth but we’re looking for -- we're on pace to have our highest growth year since 2011. So -- and then I think there's been a solid reaction to how we modified our approach to couple of deployment as well.

Great. And again there seems to be just a little confusion sort of the order versus revenue pacing. Last quarter, obviously at the short fall, you build the backlog. It looked like $30 million you called out looked about right versus the last few years. In this quarter, it looked like you flushed around $60 million of backlog based on the differential versus orders. And then as we think about and again I realized most players in the industry don’t give a book to bill. It seems like your commentary is suggestive of your orders around track, which I guess would more imply we did see that backlog flush this quarter. And so I’m just trying to reconcile that versus Didier’s comment because I thought implied we didn’t get full all of the 30 back in some. I’m trying to reconcile the delta between what the backlog is showing and kind of what you actually saw in the business because in my mind you did about 1.01 book to bill over the two quarters. And again this is the CapEx business. So looking over a longer period is usually better.

Yeah. Thanks for that clarifying question, Ross. I think what Didier was trying to point out, I think we talked about $15 million of business coming in. We couldn’t ship it to the Q3. So obviously that came through this quarter. But the view is we’ve probably got another 15 in which we’ll ship and which we didn’t ship this quarter. Did that answer the question, Ross?

Yeah. But I guess, on the order rate side, the other point, it seems like that's more of a function of timing and revenue recognition, any sort of underlying change in the tone of the business?

No. I understand your question now, so -- and again, I think we saw a good quarter momentum through the quarter. And you’ll see some new movements between quarters lot of times which we saw between Q2, Q3 and Q4. But the overall ….

I guess, when you look at your business, I think year-to-date, you guys are probably the fastest-growing life science company at least that we look at in terms of traditional analytical equipment. As you try to figure out in -- it's tough comparing different companies, given different product and geographic exposure but where do you feel like you're doing the best and is it really maybe -- how much of it sort of leveraged to biopharma which seems to be healthiest end market, which you guys have obviously done well in versus may be technology share or other elements, some of the other sub-sectors. We’re just -- it is just of perception here that maybe you guys are growing on average to me, I’m curious if it is to you. Looks like you’re actually probably the fastest growing. So, I’m just trying to bridge that gap.

Our internal map would match your numbers or your view. Obviously, pharma, biopharma has been a key part of the growth story but it’s not the only part of the growth story. And I think it speaks to the breadth of our portfolio and businesses we are in so. As you know from -- you may recall from the analyst meeting, we talked at great length about our view of CrossLab services, consumable, informatics, how that was going to be an area of future growth outside of just the technology areas. And then you heard the DGG story already from Jacob and that’s a business that will continue to get momentum as we continue to put more and more of the [omnesys] [ph] out there. You start to close deals on the slides and then that starts to show up in revenue in the coming quarters. And then we haven’t talked about it today but Companion Diagnostics, we’ve been winning some deals there. So, I think it’s not only a story of end market strength in certain segments like pharma but also where we are playing in our view of lab-wide services and the momentum we have in our DDG business. And then finally, I think from a technology platform, it is very clear we are doing quite well in spectroscopy in the liquid phase and spectrometry areas.

Great. Thanks guys.

Thanks, Ross.

Thank you. Our next question comes from line of Miro Minkova with Stifel. Your line is open.

Hi. Good afternoon, guys.

Good afternoon.

Quick question here. Just about the revenue guidance reductions, heard just about that. Just trying to understand, Didier, if I heard you correctly, of the $37 million reduction in the sales line, $15 million is FX. What is the remainder of the reduction, where is it coming from?

The $22 million remainder is basically a reassessment of our view on the chemical and energy markets where we are seeing now that the downstream refining and chemical markets are not picking up as fast as we expected the benefits of the low cheaper feedstock. So probably considering the fact that there is some little bit of stickiness about the world economy, we are not seeing the pickup in those downstream markets that will offset the drop in our revenues in the exploration production. So, we were hoping for again a pickup there and it’s not happening. And our business overall is about flat.

Okay. Got you. So no change in the remainder of the end markets? It’s all about chemicals. Got you.

Yeah. That’s the one change, yeah.

Okay. Excellent. And separately, let me ask you, the $15 million of revenue, the help that you had from the revolution of your logistics center issues, was there any impact on margin on the operating margin expansion there?

Great question. So, Didier, correct me if I’ve got my math wrong here. But in terms of the topline, we got everything through. The shipments are back to normal. The customers experience is just fine. But we have seen cost overruns relative to our expectations as we work through the operational issues and I think it's probably been to the tune of about $0.01 on Q3 on reported EPS.

But besides that from the $15 million, it’s about kind of average, vouching for that piece although there is probably a little bit more of consumable for the little bit better operating margin at the average. But still that in itself, we had the operating leverage not much else. And then, this point that Mike was making that as we worked addressing the issues that we were facing logistics centers, we incurred close to $0.01 of additional cost in Q3.

Got you. Thank you very much.

Thank you. Our next question comes from the line of Jack Meehan with Barclays. Your line is open.

Hi. Thanks and good afternoon.

Good afternoon, Jack.

Yes. I just want to ask about some of commentary in the deck about the U.S. and state government deals getting pushed into 4Q. I was curios if you could give a little bit more commentary around that. And then just whether you thought any of the momentum in the academic and the market around and Congress around some improved funding, maybe that with impacting out there?

Patrick, you want to take that one.

I can take this one, yes. Thanks Mike. So what we have seen in the first half, you’ve heard all the comments, we actually had a pretty healthy business in this market segment. In Q3, we saw kind of a pause where we have seen several of our larger accounts, actually took a pause and reassessed the budget for the remainder of the year and just delayed several deals. So, we don’t see these deals lost and we really anticipate that we will see in academic, government section, especially in U.S. that picking up again in Q4 this year.

Got it. Understood. And then, just one question on the gross margins in the CrossLab business. Just curious if you had any thoughts around the pricing dynamic there just given that the consumable piece of the business was doing quite well, I thought we might see a little bit more pull through on the gross margin line?

Mark, you want to take that question and then I might comment as well?

Sure. And Jack, in terms of the year-to-year comparable, once again it’s apples to oranges on the CrossLab business. And next year, you will be in a great position to ask me because it will be an apples-to-apples compare between the two. But the vast majority of the synergies are the spin and we did invest money to obviously take care of some logistics issues. So as Mike talked about some of the impacted earnings per share, a lot of that came through on our business. So overall though, I don't think we've seen near but frankly, we haven’t seen that much pressure on the ASPs at this point in time. Mike, I don’t know if you want to add any comments?

Yeah. I think the ASPs, a really solid year and mainly and if you look at our prior year comparisons, it really been a story of the synergies and market picking up the load of the logistics center, cost overruns. And as you saw in our cost script, we are really investing heavily to bring out new chemistry products, which have some very nice margin structure associated with them.

Thank you. Our next question comes from the line of Steve Beuchaw with Morgan Stanley. Your line is open.

Hi, everyone. Thanks for taking the questions. I'll start with one, a bit of a retrospective for Mike. It has to do with sales force strategy. Mike, your several number months now into this area where you have consolidated sales forces. When you make a decision to consolidate the sales force, introduces a number of different possibilities. One is that you can be more nimble going after opportunities. Number two is of course, there can be disruptions. Can you reflect on that process, what you've seen and to the extent if you can, can you share any progress on metrics around that process?

Yeah. Great, great question. And in terms of the sales force changes as you pointed out, that was one of the first major changes we’ve made in the new Agilent. And I really think it's allowed us to streamline our executive structure and we had a lot of well meaning managers but we spend a lot of time discussing things internally. And this allow us to actually move a lot faster as we really entered two business, the analytical lab marketplace across a number of end markets and then in the regulated diagnostics space in Jacob's business. I'm very, very pleased with how the overall plan has gone. We have been very -- in terms of how we look at internally, we are ahead of our cost reduction goals. I think more importantly, we're getting the growth and we're getting the coverage. They want it to be able to invest to cover, make sure we can cover all the markets and invest in specialization where we needed. Now this is a multiyear program. So, I think this really I would say is the foundation year. And I think as you go into FY ‘16 and ’17, you start to get the full benefit of our ability to have really close account relationships backed up by very, very competent sales personnel.

Thanks Mike. And then one for Jacob. I’m not sure if you gave it earlier but if you didn’t, would you mind giving us a growth rate for the Dako business? And it would be really helpful if you could comment on where you think we are in terms of the process of Dako, what inning if you will sort of using American sports analogy? Are we in with Dako in terms of getting back to full scale and our ability to grow the business quickly? And then sorry to keep piling on here. But if you wouldn't mind, it sounds like just based on your tone and comments really that that business really is picking up. If you wouldn't give us a bit of insight into the nuts and bolts of where it is you're seeing the business pickup, is it equipment refreshes in the replacement cycle, is it more about competitor share gains, is it more about the instrumentation and the consumables that get run through the instruments? Any color there would be really helpful. Thanks again.

All right, Steve. So, I will give you a little bit color without getting all the information about our underlying businesses here. But overall, the Dako businesses consist of few businesses. Two prime parts we have talked about is the pathology business and then our Companion Diagnostic business where the companion diagnostic is our partnering business with the pharma companies on developing new Companion Diagnostic within IHC and the FISH-based. And by the way, this is going very, very well and we will soon see the first significant launch of new Companion Diagnostic within a PLD-1 drug space. However, your questions around the pathology business and how we see that, I mean overall, we definitely see a good momentum. I will not say we are completely back in full scale yet. We did see some challenges last year on some back orders. We also have improved our performance on the Omnis over the last quarters, so we see actually all cylinders kick now. But it actually takes a few quarters to win deals in this space here. So, I would actually see continuous improvement over next few quarters. What we do see is that when we win deals, we of course win back. We win the deals that we -- in refresh of technology but we definitely also see a pickup in competitive deals as the Omnis solution is very competitive. And when you do that, when you put a new placement in, you will also get all the ranges running through that platform. So you place an instrument and then it takes another, maybe another quarter to get full loading of your consumables in there. So, I expect actually that we are in a good trajectory here. But the best remains to be seen also.

Great. Thanks again.

Thank you. Our next question comes from the line of Dane Leone with BTIG. Your line is open.

Hi. Thank you for taking the questions. So can we just kind of clarify some of the commentary that’s been given so far on the organic growth expectations? Given from what you’ve said on the past, the previous questions, it seems like the weaker book-to-bill in the third quarter could have been, due to some of the weakness in the energy and chemical markets and that kind of flows through into the fourth quarter, or is it a function of something else? I guess when it comes down to, it doesn’t make -- it isn't completely apparent in terms of how the delayed orders would necessarily adversely affect the book-to-bill, but then there would be an ultimate catch-up to that? So, I guess, could you just kind of help us walk through, are the expectations purely oil and gas or is there something else in there that we need to think about for the fourth quarter specifically?

Sure. Dane, I appreciate the opportunity to clarify some of the earlier comments. I think the relative to what we reporting to in our U.S. government side of the business, that a situation where normally we face on last year’s deal activity, we had Q3 business last year and what we saw was, as Patrick mentioned, that business is going to go from Q3 to Q4. So that’s one of the reasons why you had a drop in the book-to-bill. I think as we mentioned earlier too, we started off slow in the third quarter coming off a very strong close to Q2. We start off flow in May. We saw the pace of orders we just didn’t chance to close all the business in the third quarter. I really wouldn’t point to the chemical and energy beyond the fact that its just a continuation of what we have been seeing, which is basically no growth, three quarters in a row and I’m not going to call a recovery like I done earlier this year. So we’re just remained cautious on the implied industrial market both, the chemical and energy, as well as mining sector of our business.

And then, if you -- one more question on China, I know you guys have answered a lot of them color.

Sure.

Generally, at the end of these five-year plans there is somewhat of a spending flush. Is that -- it doesn't seem like many people contemplated that. Is that something guys have thought about or given the state of things over there? It would be too aggressive to hope for something to occur like that?

Yeah. I think great question again. We’ve taken a fairly conservative view on that, if it happens great, but we’re not counting on that, because there is lot of changes recently under the new leadership in terms of how they conduct their business. So, again, if it would happen, wonderful news for the industry, but we're not counting on them in our go-forward forecast.

Okay. Great. And one last one for me on the gross margin line, the current guidance does seem like we get above that 54% in the fourth quarter? Is that something that you guys feel confident, we’ll see given where the FX rates and the composition of the product mix that we would expect there or should we kind of alter expectations where the operating margin uptick comes from?

Yeah. I think I bounce that over to Didier if you want to.

Yeah. We don’t usually provide guidance on the gross margin level. But yes, we're expecting a slight improvement in gross margin sequentially between Q3 and Q4.

That’s typically where we that kind of pattern we see historically as particularly in the services side as we finish out the year.

Thank you very much.

Thank you. Our next question comes from the line of Derik de Bruin with Bank of America. Your line is open.

Hi Derik.

Hi. Good afternoon. Sorry about that. I was on mute. Couple of question. So is your fourth quarter guidance dependent upon any large changed orders in the government?

I’m looking at Patrick right now and he is shaking his head, no.

Great. So I think there is some concern the commodity prices need to fall, there is some concern the commodity prices may continue to fall. So if you do have -- if we given it like 5% to 10% decline in current level commodity price, how does that impact [Technical Difficulty]

I think we’ve been carrying this free fall of commodity prices for some time. So our view is that if we continue to see downward pressure, I think it would push out your return to growth in this segment but the business is pretty subdued there already. Patrick, I don’t know if you have anything, you’d add to that.

Yeah. I mean what we discussed beginning of this year was that we actually could see some upside, which flow of feedstock prices, which didn’t kick in so far but which would be a fundamental underlying economical drive if the feedstock price could go further down. So I would say we are on the exploration side. We’re definitely not further exposed than we are already today.

Yeah. On one hand we’re losing, on the other hand we saw economies with larger importers of commodities whether its oil or others, it’s a big plus, China, India, Japan so.

Great. And just one final question, can you sort of remind us on your manufacturing footprint what you do in China versus Malaysia? And I guess the question -- on the basis of that question, I think there is some concerns that there could be some currency devaluation on some of the other countries and I think people were -- I'm getting some questions from investors about company exposure.

Yeah. Great question. So if you look at what we call strategic manufacturing side, so we’re fairly diversified globally but we have two major sites in Asia. One is in China for our gas chromatography, which is a major product line for us. And then in Penang, Malaysia, we have all of our spectroscopy atomic and molecular spectroscopy, as well as some of our vacuum products and some of the DGG products. So they are two major sites for us.

Great. Thank you very much.

Thank you. Our next question comes from the line of Catherine Ramsey with Robert W. Baird. Your line is open.

Hey, guys. Thanks for the questions.

Sure.

Can we get a big picture update on Europe, just kind of what you’re seeing in that market?

I’m sorry. You broke up, was that Europe?

Yes.

Okay. I think our European outside of the currency offset, I mean the business there has been a really nice story for us this year and I point to Patrick. But I think we're seeing no real significant changes there. The one part of the European business that we’re keeping a close eye on is really some of the emerging economies in Africa and the Middle East, how that could play out, but Western Europe has been pretty good for us.

It has been very good. In terms of end markets, pharma has been definitely very strong story. We have seen flat to healthy business in the range of life science research overall. There is actually some upside potential there with we noticed to spending of the [EZB] [ph] that should also materialize in research over time. So for us the European market although has held up very nicely and we have been positively surprised over several quarters now by the local currency growth we have seen in Europe.

And it hasn’t been just a story on the instrumentation side, we’ve really -- the customers really have responded to this CrossLab promise that the Mark’s team has put together. There is a lot of big wins on the service side in particular and then you heard already what’s been going on in the Dako and DDG business.

All right. Thank you. And one more question from me. I guess probably for Mike, how do you feel about the overall visibility in the business? You may be ignoring backlog metrics specifically and how has that changed over the past 6 to 12 months?

I think your question was how do I think about overall visibility in the business? So that’s the question.

Yes.

All right. Great. You broke up a bit. I think what we've seen is the visibility is pretty good out a quarter or so and this is a reminder. We book orders. We don’t book any orders unless they can be delivered in six months. So I think our visibility of a three to six kind of months' timeframe is pretty solid because we got the funnel. And course we have deal funnels that we track that have longer deal cycles. So we have a pretty confident view three to six months out and a kind of a longer-term view beyond that through our sales funnel metrics. I would say though that and this is the point that Didier made earlier that we are seeing more and more of the business come late in the quarter. And rather than hoping for a change in historical and to this pattern, we now made this our new normal in terms of how we think and plan for business on the revenue side.

Great. Thank you. It’s very helpful.

Thank you. I’m showing no further questions at this time. I’d like to turn the call back to Alicia Rodriguez for closing remarks.

Thank you, Abigail. And thank you everybody for joining us on the call today. If you have any questions, please give us call on IR. And on behalf of all the management team, I’d like to wish you a good day. Thanks.