Agilent Technologies, Inc. (A) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2018, Agilent Technologies Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over Ms. Alicia Rodriguez, Vice President Investor Relations. Ma’am, you may begin.

Thank you, Brian, and welcome, everyone, to Agilent’s third quarter conference call for fiscal year 2018. 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 Jacob Thaysen, President of Agilent’s Life Sciences and Applied Markets Group; Sam Raha, President of Agilent’s Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. I’m also please to announce that Bob MacMahon is joining us on the call today as well. As you know, he will be taking on the role as Agilent’s CFO in September due to Dider’s retirement at the end of October. 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. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of July 31. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risks and other factors. And now, I’d like to turn the call over to Mike.

Thanks, Alicia. Hello, everyone. Thanks for joining us on today's call. Before I discuss the Q3 financial highlights and our updated outlook I'm pleased to have Bob McMahon join the call. Bob is an excellent choice for Agilent’s next CFO and a very capable successor to Didier. Bob brings a strong track record of leadership to our team. Many of you already know Bob from his previous role as CFO of Hologic. He officially assumes the CFO role beginning September 1. As Didier hands of the baton, he will serve in an advisory capacity until his retirement at the end of October. Bob and Didier are working together to ensure a smooth transition. I first met Bob over a coffee in Palo Alto where we shared our perspectives on business and company culture. We had an important conversation about values and their importance in business. I knew immediately that Bob would be a great fit for the Agilent culture and of course his management style and business acumen are a perfect match for our approach to creating shareholder value. Bob has joined Agilent at an exciting time. I'm confident he'll help us lead the next phase of Agilent growth. While I'm very excited to have Bob join the Agilent team I will greatly miss Didier's partnership and counsel. He has played a key role in the transformation of the company and our excellent business results. It's important for the CEO to have a very capable CFO. I couldn't have asked for a better partner. So thank you Didier. You will be missed by me and our Agilent team. Now, let me turn to our Q3 financial performance. The Agilent team delivered another strong quarter with both growth and earnings exceeding our expectations. Our core revenue grew 6% and is above the high-end of our guidance. Our adjusted EPS of $0.67 is $0.04 above the high-end of our guidance despite currency headwinds since our last guide. This is a 14% increase from a year-ago. We delivered an adjusted operating margin of 22.6%, which is an increase of 110 basis points from a year-ago. This marks our 14th consecutive quarter of improving our core operating margins. Let's take a closer look at our results by our end-markets. We continue our strong Pharma performance with 8% core growth. This is against a tough compare as we grew 10% in Q3 '17. We see strength across all our business groups with particularly strong performance in mass spectrometry, Cell Analysis, CrossLabs consumables and services and genomics. Growth remains robust in both the biopharma and small molecule market segments. Our Chemical Energy market revenue grew 12%. We are quite pleased with this strong growth, again against a difficult prior-year compare of 10%. Ongoing market investment remains positive. This is in spite of tariff rhetoric and retaliatory policies you'll be hearing in the news. From a product perspective, strength in spectroscopy, GC, CrossLabs consumables and services is driving this result. Geographically strong gains in China and Europe are leading the overall global growth. Revenue grew 3% in academia and government in line with expectations, strong performance from Cell Analysis, molecular spectroscopy, ICP/MS and CrossLabs services and consumables are driving the results. China and the rest of Asia are delivering double-digit growth in this end-market. Diagnostics and clinical revenue grew 5% led by strength in genomics and our reagent partnership business. This offset continued challenges in the U.S. Pain Management market. Food revenue declined 1%, strength in the Americas is being offset by declines in Europe versus a tough compare of 35% growth rate last year, and as expected, China instrument sales were also down this quarter. Environmental forensics is flat this quarter. Forensics growth was offset by the expected temporary slowing of instrument sales in China environmental. Geographically, let me first start with an overview of China. Our overall China business remains strong, growing 10% this quarter. Strength in China is being driven by double-digit growth in our two largest end-markets, Pharma and Chemical and Energy. Our CrossLab and DGG businesses also grew by double-digits. We continue to expect healthy overall market conditions. This is more than offsetting any temporary slowing of instrument sales in the food and environmental markets. The business is also strong in the Americas and the rest of Asia outside of China, with these two regions delivering healthy, high-single-digit growth. Europe was flat on a tough compare of 12%. In summary, we delivered a strong quarter with broad-based strength and stand out performances in the Pharma, Chemical & Energy, and China markets. Now, let's discuss results from our three business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 5%. This result is being driven by robust growth in the Pharma and Chemical Energy markets. From a product perspective, LC/MS, Cell Analysis and ICP/MS are leading the results. Ultivo our game-changing LC/MS triple quad continues to be well received. Geographically demand in America and China are leading the results. Let me share a few examples of how we’re executing our strategy to increase the depth and breadth of LSAG solutions portfolio. On the M&A front, we closed on the acquisition of Genohm in early May. Genohm complements Agilent informatics capabilities by adding laboratory management services. By integrating Genohm's LIMS platform into our OpenLAB portfolio, we can provide complete and integrated informatics solutions to our customers. Customers are very focused on informatics as a way to create insight and drive lab efficiencies. We are determined to lead in lab informatics. For example, last week Agilent released the first software supporting the new standardized data format called the Allotrope Data Format or ADF for short. This format was created by a consortium of pharmaceutical companies for the pharmaceutical industry. By standardizing the collection, exchange, and storage of analytical data captured in laboratory workflows, labs will be able to transfer and share data across platforms. We are proud to be the first company to develop and launch a commercial product to support this standard. We believe the adoption of standards like ADF will both shape the future of Lab Informatics and drive the adoption of our solutions. In addition, our internal LSAG innovation engine continues to deliver. We just released the Agilent Seahorse XF Real-Time ATP Rate Assay kit. This new and unmatched product will enable biologists to enhance their understanding of how live cells functions in real time. We are a leader in live cell analysis and continue to expand our offerings in this fast growing market. The Agilent CrossLab group continues outstanding performance with 8% core revenue growth. Gains across our major end markets led by double digit growth in chemical energy and strong results in pharma and Food. Performance was balanced across consumables and services. China led growth in all regions with mid teens growth. CrossLab is a key growth driver of the new Agilent. We are delivering on a mission to improve both the science and the academics of our customers labs. As we expand the strength in the CrossLab platform, we are creating more value for our customers and Agilent. For example, during the quarter, we announced two acquisitions to further expand our consumables portfolio. We acquired the business assets of Ultra Scientific, a provider of chemical standards and certified reference materials. On August 1, we also acquired ProZyme a provider of biopharma consumables for glycan analysis. As you know, glycan analysis is essential to development of biotherapeutic drugs and we will now directly participate in this fast growing biopharma market segment. We continue to invest and build on our leadership position in China. We recently opened a new logistic hub in Shanghai. This hub will enable faster delivery of parts supplies and consumables to laboratories. This is the first of five forward stocking locations we are establishing. This allows us to improve our service and the speed at which we support our customers. Our focus on digital investment is also delivering results in gaining traction. Our digital channel is growing at a record pace. For the first time ever over 50% of our consumables orders are now digital. China is leading the charge on this front. We are improving the customer buying experience, expand our customer reach and driving growth. The diagnostic and genomics group delivered core revenue growth of 5%. Excluding our NASD business, which declined as expected in the quarter the DGG group delivered core revenue growth of 7% against a tough compare. Let me further explain. As we've mentioned previously NASD revenues are batch based, which can make the revenue vary from quarter-to-quarter depending on timing of customer acceptance. As expected, the business declined in the quarter as is going up against a 45% growth rate in Q3 of last year. We expect the business to return to growth in Q4. As I mentioned, without this variability of reported revenue effect, this quarter, our core DGG business grew 7%. A few additional comments on our NASD business, I just returned from a visit with our team in Colorado. The capacity expansion underway will allow us to meet the growing demands for GMP grade oligonucleotide and CRISPR offerings. I'm pleased with our progress on our new facility and the strong market environment. For example, just last week, one of our customers, Alnylam Pharmaceuticals received FDA approval for Onpattro, a first-of-its-kind targeted RNA-based therapy to treat a rare disease. This is wonderful news for Alnylam and most importantly their patients. NASD remains a long-term growth play for Agilent and I'm excited about the future. Back to the overall DDG results. Strong results are driven by double-digit growth in genomics and strength in our reagent partnership business. Geographically outstanding growth in China and Japan drove the results. We continue to strengthen our ability to support the fight against cancer and other diseases. Burning Rock Dx received China FDA approval for their human lung cancer NGS detection kit. Agilent SureSelect reagents are used as part of this panel and our own PD-L1 companion diagnostics product received expanded USDA approval in cervical cancer. During the quarter, we completed the acquisition of AATI, Advanced Analytical Technologies Incorporated. AATI provides capillary electrophoresis base solutions for fully automated analysis of a range of molecules. This acquisition builds on Agilent's existing expertise for providing customers with a more comprehensive set of solutions, for NGS workflows and other applications. NGS's driving and will continue to drive strong growth of this new business to Agilent. With the addition of the AATI team, we create a new biomolecular analysis division with DGG. This new division now also includes our complementary microfluidics business, previously part of LSAG group. Didier's team has reflected this change in our current financials along with the company financial restatements. Now, let me provide a few remarks on where we are in the Agilent journey and our near-term outlook before turning the call over to Didier. Let me start with a few comments on tariffs. On the customer side, we are not seeing changes in customer buying behavior. On the duty front, we have planned for and have taken actions to partly offset the impact of expected increases in tariff-related duties. This proactive approach resulted in a small 500k impact on our Q3 results. In Q4, we expect an impact of approximately 3.5 million of incremental duty costs or approximately $0.01 of EPS which has been incorporated into our latest guidance. Looking into 2019, if the tariffs remain in place, we plan to aggressively reduce the remaining effect via potential changes in our prices and further adjustments to our Supply Chain. For some time, we've been on a path to increase shareholder value. We've been focused on delivering strong growth, while expanding core operating margins and putting our strong cash flow and balance sheet to work in a more impactful manner. Q3 results demonstrated our continued commitment to creating value for our shareholders and customers. We delivered another quarter of strong operating results while deploying our capital as committed. We returned $291 million in capital to shareholders through repurchasing $243 million of our own shares and paying out $48 million in dividends. We're also investing in the business. We closed four acquisitions, paying out $430 million in the quarter and announced two more acquisitions. This is a record number for Agilent and will further strengthen our company's foundation for growth. As we continue to aggressively strengthen our portfolio via the Agilent innovation engine and M&A, we are also continuing to execute on our agile Agilent customer experience and efficiency improvement initiatives. The twin drivers of our success continue to be a strong portfolio and a customer focused way of doing business. Now a few words about our outlook going forward. The Agilent team continues to capitalize on healthy end markets. We remain confident in our outlook. We are increasing our full year core growth and earnings guidance. Didier will walk you through the details, but we're raising our guidance for core revenue growth, operating margin and EPS. The Agilent team remains committed, confident and energized about our future. In our Agilent DNA is our team's ability to drive customer focus innovation coupled with operational excellence. It is this powerful combination that would continue to fuel our future growth and earnings expansion. Thank you for being on the call and I look forward to answering your questions. I will now hand off the call to Didier who will share more insights on our Q3 financials and guidance. Didier? <> Thank you, Mike, and hello, everyone. First, let me express my appreciation for Agilent employees' passion and professionalism in accomplishing the mission, creating shareholder value and finally for their support for all the years. With Mike's continuing leadership and Bob's contribution I'm convinced that the best is yet to come for Agilent. As mentioned by Mike, we delivered strong top and bottom line results, both on a year-over-year basis and versus our guidance. On the revenue front, we did our midpoint guidance by $40 million, after excluding currency headwinds of $11 million and contributions from our two recent acquisitions ATI and ULTRA Scientific of $5 million. Our core revenue growth of 5.9% was well over the midpoint guidance of 4.25%. Our adjusted operating margin of 22.6% was 110 basis points over last year's and 120 basis points over guidance and we delivered a core operating margin incremental of 55%. EPS were $0.05 about the midpoint of our guidance. During the quarter we bought back 3.76 million shares for a total of $243 million and paid $48 million in dividends. Finally, we repatriated $1.5 billion of our offshore cash. I'll now turn to the guidance for fourth quarter. We expect Q4 revenues of $1.24 billion to $1.26 billion and EPS of $0.72 to $0.74. At midpoint, revenue is expected to grow 4.7% on a core basis. Versus previous guidance, FX is projected to have a negative impact of $21 million on revenue and $2 million on the operating profit. Our 23.6% adjusted operating margin at midpoint will be up 100 basis points sequentially and up 30 basis points on a year-over-year basis even after funding the Lasergen R&D. The increase in tariffs effective early July is expected to have a negative impact of $3.5 million, as we have initiated actions to our supply chain. And those actions are complete mid-2019, we expect the net annualized impact to be approximately $9 million excluding potential pricing actions. Now to the guidance of fiscal year 2018. The Q4 guidance is expected to result in the following fiscal year guidance. First, at midpoint, revenue is projected to grow 6.1% on a core basis or 60 basis points over the previous guidance. The revenue guidance of $4.87 billion is $10 million over previous guidance including $22 million due to the acquisition of AATI, Ultra Scientific, and ProZyme, with currency having a negative impact of $32 million. Second, our EPS guidance of $2.70 at midpoint is up $0.05 on previous guidance and corresponds to a 14% year-on-year increase. Third, adjusted operating margin for the year is expected to be 22.6% or 60 basis points higher than in fiscal year '17. And fourth, our core operating margin incremental is expected to be 39% for the fiscal year, at the high-end of our operating model. With that, I'll turn it over to Alicia for the Q&A. Thank you, Didier. Brian will you please give the instructions for the Q&A? Thank you.

My pleasure, ma'am, thank you. [Operator Instructions] And our first question will come from the line of Steve Beuchaw with Morgan Stanley. Your line is now open.

Hi guys. Thanks for all the help here and thanks for the time. I'd say first it's hard not to echo some of Mike's comments. Didier, really appreciate everything you've done being such a great partner for us, so I hate to see you go and Bob, welcome aboard.

Thank you very much, Steve much appreciated.

There's a big smile in the room Steve thanks for those comments.

Bob, I have to say Didier is a pretty unique guy, as someone who shared some of his lineage, it's going to be hard for you to match that. The questions I'd like to focus on I'd say first are very high-level for Mike. When you made the decision to raise the guidance at core, it would be really helpful for you to just kind of talk us through; here is what after a good quarter, maybe confident in saying look we're going to beat the expectations that we had set earlier in the year. What really jumped out to you in terms of things going better?

Great question Steve, appreciate the opportunity to share that with you. So, obviously we have a good view of our order funnel so that gives me one level of confidence which is the strength of the orders, but what really gives me a lot of confidence moving forward is two dimensions of the story here. One will be the end-market strength, both Chemical and Energy and Pharma continue to be very strong. And as you know, coming into this year, we had positioned Chemical and Energy as sort of the upside of the plan that was sort of the wildcard to our business, and there were some concerns that perhaps all the rhetoric around tariffs and other things a few months ago might actually be quite detrimental to this marketplace which in fact has not at all occurred, so I think that it's the continued strength in both of those two end-markets, and I think geographically Asia led by China, we posted a really strong China number and then the Americas was also quite strong for us. I think the fact that our two largest geographies in terms of countries in China and the United States are really doing quite well, gives us a lot of confidence about the outlook from a market perspective. And I think we're really positioned well to win. Our portfolio continues to become much more competitive and as you know we have unique value proposition with this CrossLab platform which really allows us to capture a lot of the growth that's out there as well.

And then just a couple of quick follow-ups before I jump back in the queue. One is Mike, you made a comment about customer behavior on tariffs and I appreciate the follow-up there. But it will be really helpful if you could spend another minute on it. It sounds like your perspective is that the tariff headlines aren't changing the way people really think about doing what they do. I wonder if you could give us even just some anecdotes on what you've done on that point? And then Didier it was a really good quarter in terms of core margin expansion, the incremental is really good. Any color on what it is that you've seen that made the quarter so strong on that front? And how should we think about seasonality there would be great. Really appreciate it.

Let me take on the first question. So, when I have been out talking to the customer base, we talk to people in the pharmaceutical industry, we talk to people in the research space, whether it be in academia and in the private sector, they plan on -- they're taking a long term view of investments on purchasing our equipment, purchasing our solutions are absolutely critical for their enabling their growth plans if you will and research plans. So they're not at all distracted by the tariff discussion. As I mentioned on my last call, we have seen some cautiousness in certain aspects of the chemical energy market where they were a little bit slower to approve the deals, but still getting the deals approved. It's the same kind of situation we had last quarter, so no new changes in customer buying behavior. So this is coming directly from conversations I had with customers. So again, that gives us a lot of confidence about our outlook because despite all the noise and rhetoric out there, it really hasn't yet affected any of the actual buying behavior of customers. Obviously it's creating some work for us relative to adjusting our supply chain and production locations to mitigate the duty impact side of things, but in terms of customer buying behavior have not seen any real changes.

And then Steve, on your question on the core operating margin incremental you're right. It's been impressive at 57%. The reasons are multiple, we started off with last year's compare that was a little bit of a soft compare. We had the operating margin down a little bit sequentially from Q2. Then there was good operating leverage, good mix certainly the impact of all the Agile Agilent programs and we certainly don't expect to maintain such a high level of operating margin.

Part of your parting gift --.

Well, I certainly appreciate the send off gift from the Agilent team that's for sure.

But in all seriousness, I think going back to few some of the things that Didier outlined at the AID meeting in New York, where he said listen, our pipeline and our programs are as robust as ever in terms of really allowing us to work on the operating margin incrementals.

Thanks so much, guys.

Thank you. And our next question will come from the line of Tycho Peterson with JPMorgan. Your line is now open.

Hey. Thanks. Mike I want to follow-up in some of the strength in China. Can you maybe talk about some of the puts and takes there? I think you called out environmental weakness in the slide, so maybe if you could talk maybe where there some softness. And then on the supply chain dynamics, can you maybe flush that out a little bit? I think you do some of the TC production there as well as in Delaware. So can you may be just talk about how you are thinking about potentially moving Supply Chain if you need to?

Sure so happy to do so Tycho. So let's start with China. Again very important market for us and we were just delighted by the strength in the business, so if you look at the six end-markets we had strong growth in all but two and then we actually had foreshadowed this coming in our last call saying, hey we know there's some things happening relative to some realization -- ministries in the country nothing happened to us relative to the competitive side of the business. So we saw really strong, continued strong demand in Pharma, in Chemical and Energy, investments in Academia and Government hints back to some of the comments I made around tariffs. And as you may recall in our AID presentation, we talked about the opportunities we had with our CrossLab business and our DGG business, and you saw us starting to deliver on those promises with really strong double-digit growth in both of those businesses, and then relative to food and environmental we think it's a temporary situation as related to the instrument purchases. You have to keep in mind though that they will continue to buy consumables and services from us and we're just waiting to have the reorganization complete, the budgets finalized and then we know-how to follow the money where it's going to go because two things are really happening here. You've got the consolidation going on where new budgets are created, being created in a new consolidated set of ministries and then part of that money is also getting deployed to what they call tier 3 and 4 cities so we're following the money and we'll be ready to capture once it's there.

And then on the Supply Chain?

Oh, yeah I forgot about that so relative to the Supply Chain, as I mentioned in my script, we took some actions actually in advance of the formal announcement of the tariffs, so we've already relocated our production for China-made products into our site in Wilmington Delaware and now we're in the process of moving aspects of the Supply Chain which is also subject to the tariffs, but we've already moved the production in some of the Supply Chain.

Okay. And then two quick follow-ups, for NASD you highlighted kind of just the inherent lumpiness in that business and the fact it'll return to growth in the fourth quarter. Can you maybe just talk about how we should think of the ramp there next year ahead of the capacity coming online?

So we'll be able to, we're going to try to get as much growth out of our current facility as possible and then the growth, the expansion will start to come on line in the second-half of next year. The current plan is the second-half of '19, you start to see some initial revenue is starting to ramp through the quarters, and Didier I think we put out a number of…

Next year, like about $20 million is what we said at AID.

So it really gets started next year and then when you get into 20s when you get the real full year ramp and Bob and I and Didier were just in Colorado as I mentioned and had a chance to also review the progress of the facility construction and capability expansion, but also what's going on relative to perspective demand from customers, so the pipeline looks really encouraging.

Last one, can you just comment on how much Ultivo is contributing to C&E growth at this point?

I think its part of the mix, growing with the average. I think that's it. I wouldn't say it's an outside contribution, but solidly delivering.

Okay, thank you.

Welcome.

Thank you. And our next question will come from Doug Schenkel with Cowen. Your line is now open.

Hi, good afternoon. And before I get to the questions another Harvey thanks to Didier you've been a great leader at Agilent and I know I can't speak for many of us and saying we really appreciate your help over the years and I look forward to grabbing another glass of wine at some point soon as always it will be your choice.

Okay. Thanks, Doug.

And Bob while Agilent has big shoes to fill, it's great to know they made such great choice, so congrats through and the company. So now for the questions. On Q4 guidance, can you talk a bit more about the rational behind 4.7% core growth. This would be a deceleration versus what we saw this quarter and that's in spite of comparisons that don't appear much different. I didn't hear anything in your prepared remarks regarding timing dynamics or changes in momentum relative to what you generated year-to-date. Is it fair to assume you're baking in some conservatism here? I've admittedly having a hard time figuring out why growth wouldn't continue at around 6%, the underlying rate for most of this year. So am I missing something on end markets or timing dynamics or something else?

I think we decided to stay true to the guide for last year we had and even though as Didier retire. So as Didier has mentioned in prior calls, we don't assume everything's going to be perfect in the quarter. And again, the one that could go one way or another always has been chemical energy. So if that business holds up and it has been holding up, we should be in a good position to beat that number.

>: Great. And then sort of related from a buyback standpoint, the stock was in the low-60s for much of the quarter. I think you still have about $240 million in the buyback authorized and if I'm not doing that math right there's certainly enough dry powder there to put in place another authorization. I'm just wondering why you weren't a little bit more active in buying shares during the quarter ?

Yes. Thanks for that Doug. I think we've -- I think the numbers are right about 240, 270 from a...

ye

So you're in the right range. And we actually -- Bob we're fairly aggressive because we went outright after what we saw was a dislocation in the stock price after the Q2 announcement and bought the $200 million right away and then continued anti dilutive. We obviously continue to look at that during the upcoming quarter.

Okay. And one last one. You guided us to expect China food revenue growth would start to rebound in early fiscal 2019. Based on what you've seen over the past few months, anything that would tell us or tell you that this is aggressive or maybe things start to thaw a little more quickly than anticipated?

I think I want to stay with those initial estimates. So we signaled that in the last call and released our experience. It takes a good six months or so to kind of work for these things. And I think I want to hear from my team, it's tracking along the same lines.

Okay. All right. Thanks again. Thank you. And our next question will come from the line of Patrick Donnelly with Goldman Sachs. Your line is now open.

Great. Thanks. Just expanding on Tycho's question on supply chain given the tariffs and focused, could you just walk us through the import export dynamic in China, just looking explicitly kind of how much of the China revenues is being imported from the U.S. and may be where the majority of those revenues is being manufactured? And then kind of the same thing on U.S. revenues anything being imported from China there.

Patrick after you're looking at both the incoming to China and from China to the U.S.?

Yeah, exactly.

So from China to the U.S., it's a relatively small amount of Agilent's business. It's primarily the gas chromatography product line and related support parts. So it's about $100 million and that's why the 25% gives us about $25 million gross impact. And then as we mentioned, we're going to reduce that amount over time to even before pricing adjustments $9 million on an annualized basis. And then going the other direction, basically, China, we import from the U.S. the GCMS and many reagents in the chemistry that is made in the U.S. but there's no tariff at this stage. There might be in the future and we'll update you on the potential impact that it's not significant really at the end of the day. So it's about $100 million and that's why the 25% gives us about $25 million gross impact. And then as we mentioned, we're going to reduce that amount over time to even before pricing adjustments $9 million on an annualized basis. And then going the other direction, basically, China, we import from the U.S. the GCMS and many reagents in the chemistry that is made in the U.S. but there's no tariff at this stage. There might be in the future and we'll update you on the potential impact that it's not significant really at the end of the day. But that's not subject to retaliation. So basically we have a lot of our business outside of this tariff discussion.

That's helpful. And then just staying in China, given the soft July data points out this morning including China industrial production coming in light of expectations, can you just kind of talk through the cadence of results in China this quarter? How are trends in July in particular given that data and then also the tariff rhetoric was kind of increasing during the month so just curious as you went through the quarter how you guys were feeling.

Great question, I saw that same article as well, and I have based on what we saw it was having no impact so we saw no hesitancy in customers or any signals from our field that things were different.

Great. Thank you. Operator: Thank you. And our next question will come from the line of Brandon Couillard with Jefferies. Your line is now open. Thanks. good afternoon.: Mike, just in looking at Europe, it was flat in the quarter. Realized you lapped a tough comp there, but you did so too in the second quarter as well, just curious if you're seeing changes in any of the end-markets if you could just give us a little more color on what you saw in that region? I think we did obviously have a tough compare and I do think that it's probably fair to say that the region is a little bit slower than it was last year, but it's dramatically, not dramatically different. I wouldn't over-interpret the Q3 results. I even mentioned to Didier, should we mention the World Cup, but and the reason why I say this is to not get overly worried about the third quarter result is spent some time with our field teams and the European funnels look pretty good. The only thing that we're kind of keeping an eye on is whether this situation in Turkey could actually spread more broadly across Europe, but again, I think that no significant changes in the overall market environment in the third quarter and I wouldn't over-interpret the one quarter's results. Thanks. And I guess secondly, with the Alnylama approval now on the tape, I'd be curious as to how you're thinking about the next leg of capacity expansion at the NASD facility? When you might be in a position to perhaps pursue I guess the next capacity build-out and what the indicators might be that might lead you to do that? Yes, sure. Thanks for that question. We've already made a decision to make the investments and that decision was made probably about two years ago. This is a very unique capability right into the company and I really think it speaks to the high barriers to entry and probably ultimately the margins we expected to derive in this business. So we made the decision based on our forecast of likely demand and I think the most recent announcement about success is one more proof point that the market's going to be there for the products. And Didier, you want to add something? :: As a compliment as you know we're only firing up Train A in the facility and as for Train B which we doubled capacity, we are certainly not ready yet to push on the button the around is still an orphan drug. It's not high volume we are waiting their confirmation that our customers will move into a commercial space and then we'll fire up Train B. So it's there. It's obviously at a much cheaper cost than the whole facility built up and we're certainly ready when we see that's this confirmation that a lot of our customers are bringing commercial products onto the market. Thanks for the additional insight Didier. We're bringing on this one train just to be clear. Next year, it's second half of 2019 roughly $100 million ish kind of additional revenue then we could bring on another $100 million or so with Train B. Yeah. That's what I was referring to the train line. Yeah. Didier picked up on that I missed it, sorry. Very good. Thank you. Operator: Thank you. Our next question we come from the line of Dan Leonard with Deutsche Bank. Your line is now open. Thank you. May be a couple more on China. First off, you heard all your peers' report now and it does seem that the environmental and food headwinds are something that Agilent is uniquely calling out. So do you have any opinion on why? Is there a reflection of the product dynamic that these customers are buying? Or maybe just some share in a micro basket of customers? Yeah happy to share my thoughts here. So there is something going on here. It's unique to Agilent because we are uniquely the leader in the ministries where the consolidation is occurring. So that's why you're seeing Agilent calling us out, where others didn't have probably any business there. So we're the ones getting impacted the most and I think that's why you're hearing us call out and other people kind of rightfully not seeing it as a major issue. There's nothing happening competitively in terms of sharing new offerings. It really is a macro effect where we're really strong and we think this is going to be a temporary situation as things move out. And again, I just to remind you overall China business grew double digit for Agilent in the third quarter. It was the fastest growing region we had in the company. That's helpful color. And then just a tariff related follow-up. So you mentioned a couple of times that your remediation effort assumptions don't get include pricing actions. So could you comment on your ability to get price in some of the affected product lines? Do you think you have pricing power? Would you expect that is a lever you could pull or not? Yeah. As I indicated in my call price is one area that you can use to offset the tariff impact. You would have this on the more broad based as opposed to a 25% increase or whatever it may be on a core product platform. So it will be broad based and we think we have the ability to do that. Again, it comes back down to the differentiation of portfolio. If you have something truly a value with differentiated from your competition, you're in a position to be able to do that. So we're not overly concerned about our ability to mitigate the impact on the P&L, on tariffs as they stand right now. Thanks for the color. 0.2% increase on $5 million of revenue to offset the $9 million in net tariffs impact. I'm glad you could do the math on that for me Didier thanks. Appreciate that. Thank you. You're welcome. Operator: Thank you. And our next question will come from the line of Ross Muken with Evercore ISI. Your line is now open. Hey guys. I echo the view. Obviously Didier it’s been a great time working with you and we've seen the business through quite a transformation and Bob I know VJ is very jealous but we'll look forward to spending more time with you as you get ramped. So may be just -- can we take out Pharma for a little bit? It seems like performance in the segment has been better than maybe what you would have foreshadowed some time ago and it feels like maybe there's a bit of share you've taken and obviously you've called out some of the emerging markets strength, but maybe on a product or any other way you want to cut it, give us a little bit of a feel for how you feel like you're performing there maybe versus the peer group? Yeah, Ross thanks for the opportunity to comment on this as Pharma being our largest market. This is really important for us. And we often focus on this one product platform in this area, but the strength of Agilent we have is broad-based portfolio, and what we can see is particularly in the area of mass spectrometry gaining a lot of share both on the LC/MS side as well as there's a number of new regulations that are driving growth of ICP/MS into the space, so we have the breadth of the portfolio to go after those. And again I'll ask Mark to make a few comments here, but I truly believe that this CrossLab platform that we've developed really has allowed us to take really outsized growth in this space and you can start to see the numbers have starting to be quite significant and important to Agilent and Mark if you could just maybe add a few comments about what you think maybe happened to your business in Pharma. Thanks, Mike and maybe at top level, the picture that we're seeing really strong response in all aspects of our Pharma business. I think we've mentioned certainly at AID that we invested a lot in our chemistries business particularly to address the biopharma area. That part of the business is going very well, a lot of complementary pieces coming together in our chemistries business around the Pharma space at large. And then enterprise services, we continue to see strength in that area, in Pharma too and as we've mentioned many times, when they're looking for better productivity or improving some of the better management of the overall assets, we're seeing that and moving into the smaller mid-sized Pharmas and the biopharma companies in general. So long story short is it’s been very sustainable. I think we've continued to see high-single-digit growth over the past few years in this space, and our product portfolio will lend it that way. Certainly we're planning on keeping that momentum going in the future. And Ross I'd just close off on this. I think Mark has been able to develop a scalable platform, right. So discussion before used to be only focused on large Pharma with the game being over and I think the platform is very scalable to small and medium-sized Pharma as well. That's helpful, Mike. And so maybe one for Sam, you've done some acquisitions. You closed out the Lasergen interest. It feels like you've got pretty good momentum at least in terms of tuck-in M&A in that division and your division. How are you feeling about sort of pipeline on things you have in front of you because it's probably the area where you have made the broadest set of things to bring in? And then from a product standpoint particularly on the companion side, it seems like there's a couple of things that could potentially go your way. How are you thinking about that business? Go ahead, Sam. I've been doing a lot of talking today. Yes, thanks for the question, Ross. Maybe I'll go -- I'll start in reverse with your questions. For our Companion Diagnostics business, we remain very excited about that. We are continuing to do work with the partners that are publicly known in terms of Merck and BMS. But beyond that we've had a very active effort to increase what we're doing and develop new Companion Diagnostics with new pharma partners as well as to expand the number of biomarkers. PD-L1 is very important and it's an area that we are continuing to focus on. I think you gave me some stats the other day of how many countries that was registered in some of these indications. Yes, absolutely. You're talking about PD-L1 in particular for the 22C3 variants of that which is for KEYTRUDA and Merck. We're now registered in over 83 countries for more than five indications, so that's good progress and more to come on that. But in response to your question, it's beyond that, we are working on a number of new biomarkers with a number of new partners. So I think that there is goodness to come that we are driving for the coming quarters and coming years. You told me that because we're going to have to flip that expense for doing in the site. That’s right. Thank you, Mike, for that. We are expanding our footprint because the work is very real. It's more than pipeline and things that we're signing. And then Ross with respect to your question on general pipeline, I think I had alluded to you and actually mentioned at Analyst and Investor Day even within our next generation sequencing series of products that we have something called MAGNIS, which we’ll be introducing in early 2019, which is a platform which will automate, starting with DNA going to prepared libraries. We're excited about that and that's just an example but we continue to have new products and you'll see it coming out of both from what’s been our traditional part of our Diagnostics and Genomics Mixed Group but also now out of AATI. So the pipeline will complement the market opportunities and we have a number of things that we'll be able to share in the coming months and quarters. That’s all. Thank you. Quite welcome, Ross. Operator: Thank you. And our next question will come from Steve Willoughby with Cleveland Research. Your line is now open. Hi. Good evening. Thanks for taking my questions. A couple for you. First, you made a comment regarding seeing good demand for both small molecules as well as biopharma customers. Just was wondering, as it relates to the small molecule side, is that a change in the trend that you're seeing, and kind of where you're seeing that amongst your small molecule customers. It sounds to be pretty good demand. And then secondly, Mark, or Didier, you outperformed your guidance in the quarter by a pretty decent amount. And assuming you've had some insight on your orders, is it fair to assume that you had stronger pacing at the latter part of the quarter in the month of July here? Yes, how about I take the first one, right? Steve you're a great reader of the results and listener because when I saw that I said, we've been expecting that the growth rates will start to separate between biopharma and the small molecule segments of our overall pharma business and we saw strong performance to small molecule. We often tie that to liquid chromatography, but what's going on here is two things. One is the overall demand for the ACG services which is and consumables which Mark commented on earlier so that really is our small molecule customers may not be buying new LCs at the same rate they were, but we seen a real expansion of our growth in the services and consumables around our platforms as well as our competitors platforms. And then we also show in these numbers the demand that's coming with ICP/MS related to some of the USP Regs so that’s also driving some of the growth. But I think the real story here is the ACG platform. And I think the comment was around the order pacing? We always expect the third month of the quarter to be stronger than the other month, but in the last two-years we've been a lot more linear than we used to be, so there's nothing remarkable about this last month of the quarter, this month of July. Probably relative to the orders, I just have a thing Didier. Henrik’s team did a fantastic job on the order to revenue conversion. I think we're getting a lot better at making that happen pretty quickly. Okay. Thanks very much. You're quite welcome. Operator: Thank you. Our next question will come from the line of Puneet Souda with Leerink Partners. Your line is now open. Yeah, hi Mike. Thanks for taking the question. Congrats on the quarter and Didier, I will absolutely miss you and welcome, Bob. I wanted to touch on just briefly quickly on ICP/MS. Could you elaborate how much of and I don't know if you've touched on this from the last quarter, there were shipment delays that were recognized in this quarter. What was the outside growth excluding those ICP/MS orders catch up and just wanted to confirm if you saw any other similar revenue recognition in this quarter as well that could change expectations for the next quarter? I'd have to do the math, Didier, but I think it's relatively immaterial to the overall because growth rate it's about 3 million bucks I think. So I think it's relatively immaterial to the overall growth for LSAG in the quarter. What was the second? No, no, we would have called those out if we had any of those. I would say the demand for that product continues to be quite strong, so and I think you can expect to hear us talking about ICP/MS in our fourth quarter call as well. In both Pharma and semiconductor and environmental. It's a hot product in some really hot markets right now. Okay, great. And my another question is on Pharma. I know that's been discussed a bit here, but just looking at your acquisitions, ProZyme, Ultra Scientific, and now what you're doing here with Allotrope, but OpenLab, just help us understand high-level, how are you thinking about the overall long-term Pharma growth in LSAG and overall about the LC/MS business and your expectations there to deliver in this market, just help us understand how you see this evolving in a few years from now? Happy to do so and then I may invite Jacob in this conversation here about specifically on LC/MS, but we see Pharma as we highlighted in our AID meeting. That's our largest market with the expected some of the highest expected growth rates outside of clinical diagnostics for the company. So this is an area of major focus for the company, and we've talked about our solutions focus as a company and one of the reasons why we've been able to get strong growth in biopharma is not just because of the great new LC/MS partner but we've been able to broaden our solutions offering. This is where Mark's play of the consumables come in to give us need of chemistry is around our platforms. And on the informatics front, we think so much of the value of customers experience with the company is going to be in informatics and we're a big believer in the importance of opening standards. And that's why we highlighted that Agilent being first to market commercially because this is something our customers are moving us here and some of our competitors prefer closed environments. We’ve always embraced universal connectivity, universal architecture. So philosophically this lines up with our customer focused strategy and we're delighted to be the first one in there. So Jacob maybe you have a few comments about the ultra play, but also about our aspirations in LC/MS? Yes. Thanks, Mike. And let me just start over and echo what you are saying Mike that we believe that’s a future for Agilent in the pharma opportunity. LC has always been a big part but LC/MS has certainly been an even bigger opportunity going forward. Also we see especially in the biopharma where customers is looking for high performance but also for ease of use and our Advanced Q-TOF, Bio Q-TOF has certainly shown that and we have great success with that. But we also see that from an informatics perspective that our customers are looking for something that is faster acquisition of information ease of use again but also getting a full comprehensive overview of all the data in the lab and that's where, let’s hope, is very important to get data standard across all the different modalities and further than that what we have been strong with our OpenLAB looking at scientific information and controlling your -- the hardware itself now with the Genohm acquisition we also have full insight on the sample itself. So all these investments goes into that. We see a great opportunity in pharma and the LC/MS is just getting started there. Okay, great. Thank you. You are quite welcome. Operator: Thank you. And our next question will come from the line of Jack Meehan of Barclays. Your line is now open. Hi, Jack. Hey, Mike and welcome, Bob and Didier, we'll miss you down in Miami. Thanks, Jack. I will be running some time there in the future. Invitation to your conference Jack. If you'd like to swing in, you're welcome to. I want to focus on some of the recent acquisitions and just if you can elaborate a little bit on your plan to scale some of the platforms. If I look at the fourth quarter, you're calling for a bit of a step-up in the contribution. Is there a level you think that these could contribute at just the deals you've closed in 2019 at this point? Yes. So we believe that these acquisitions we made are in fast growing spaces and that was one of the primary rationales of why we went down the acquisition. So, for example, you look at the AATI, NGS driving that growth. And I think Didier, when we were at New York we talked about this thing going probably 20% on their own and I think we're going to stick with those numbers. We just reviewed our acquisition portfolio with our Board at the last Board meeting and all of the deals we've done are growing in excess of 20%. So, again, still the core organic growth is driving the company but we're adding on these faster growing pieces and I think over time even more material to the company's overall growth prospects. I think we're pretty excited about AATI and a couple of other things we've done, so I think let's just leave it there. Yes that's sounds good. And Mike Chemical & Energy is always the wildcard in the outlook, but could you walk us through each of the businesses, how they performed in the quarter and just how you think the funnel is coming together there? Specific to the three business groups or specific to chemical energy? I just want to make sure I got the question correct. I guess the end markets within the Chemical & Energy, if we think about chemicals E&P and… Okay, good. Thank you. Thanks for the clarification. So just a reminder, we think about this segment across three areas refining, exploration which is roughly 40% of the total. Then the other 60% is chemicals which also includes materials testing as well as our semiconductor base business and all three of those segments are growing. I would say the chemicals sector is growing faster really driven by the investments we're seeing in the semiconductor material space. But the good news here is all three segments are growing which is not a situation we've had say one year ago where some segments really were quite constrained. We see growth across all three of the subsegments with higher rates in the chemical/semicon piece. Great. Thanks Mike. Operator: Thank you. And our next question will come from the line of Derik De Bruin with Bank of America. Your line is now open. Hi, Derik. Operator: Derik, please check your mute button. Hi. Can you hear me? We sure can. There you are. Sorry about that mute. So jus to follow-up on the M&A question. So I know you said $22 million is the contribution in Q4. I guess in total what is the total amount of revenues that you've required this year? That's a great question. It's so far we are probably -- so let me just -- hold on a second. I try remember that number because…. I want to be sure. I don't try -- I have the number off the top of my head, but I think it's better if I read. Go to question number two while Didier, dig through his files here. You're still on mute? Yes, I'm still here. I'll follow-up another one which is it's also an acquisition question. I know it's a little bit early to start talking about 2019, but I'm going to. You've got deals… ….let you the second question I feel bad now. No, no. I mean you've got deals, you've got currencies, you've got Lasergen, you got tariffs, you've got a lot of stuff moving around. How do we think about margin expansion in 2019? I'll refer you back to our commitments made at the AIG. We think we have no reason to move away from those commitments to be able to do this core margin expansion. That's how we're setting the plan inside the company and putting all the right -- we have a number of things in slide already to ensure we can get there. So the answer to your question is with the acquisitions we've made this year LSAG, Genohm, AATI, Ultra Scientific and ProZyme those five acquisitions we are about $25 million for the fiscal year, fiscal year 2018 and then for fiscal year, we'll end up Q4 alone will be around $17 million, so you multiply by four to have the 2019 annualized number. Right, I think we're just starting that probably in early phase of ramping these things, we’re just getting a few months of revenue. Absolutely! That's helpful. Thank you. You're welcome. Operator: Thank you. And our next question will come from the line of Dan Arias of Citigroup. Your line is now open. Good afternoon guys. Thanks for getting me in here. Mike on the U.S. Chemical & Energy business last quarter you were kind of unsure about whether that might have been impacted by trade policies or whether that wasn't really seeing an impact. I guess looking back, do you feel like tariff considerations were at all a factor in 2Q as the discussions started to heat up? And then maybe just on the overall seeing the outlook, is it fair to say that double-digits for the year is in the view? I mean I know the comp is tough in 4Q, but I think you could also not grow at all and still be at seven, eight, just based on what you've done so far. Two comments on the first question, what I pointed out in the Q2 call was somewhat of a longer deal cycle that closed in the U.S. and I can't scientifically approve it, but we thought that there was a level of cautiousness tied to just the overall rhetoric that was in the environment. That's still there but it hasn't changed and that was my concern as you know in the last call that actually it would go much more constrained. That has not changed. So the behavior we saw three or four months ago so it's basically what I'm trying to communicate today is business-as-usual as relative to the environment that we had last quarter which did change as a result of a lot of this discussion in the macro environment. And while I'm not going to guide specifically, the C&E market for the fourth quarter, that would be our upside and it's within reason that we could hit those kind of numbers. Okay thanks. And then maybe just one more on the academic markets as you finish your year in that segment, are you kind of assuming that you stay low single-digit range for 2Q, 3Q, or do you think you see some NAH funds flowing and taking you a little higher. I know you just said you're not guiding those segments, but maybe I'll take a shot there. I can just give you directionally. I think we'd expect to see some improvement over the Q3 number. Keep in mind, I think we're about a 6% through the first three quarters of this year and typically, Q4 I mentioned earlier the strength in China relative to government and Academia and Government and then assuming that the rationality stays in place in Washington, we know that we'll get usually a nice push in September with Federal Government, so the fundamentals look pretty solid there. Okay. Thanks much. No problem. Operator: Thank you. And I'm showing no further questions in the queue at this time. So now, it is my pleasure to hand the conference back over to Ms. Alicia Rodriguez, Vice President of Investor Relations for closing comments and remarks. <> Thank you, Brian and to everybody on the line on behalf of the management team, thank you for joining us today. If have you any questions feel free to give us a call in Investor Relations. Have a good day. Bye-bye. Operator: Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.