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Edited Transcript of A earnings conference call or presentation 14-May-19 8:30pm GMT

Q2 2019 Agilent Technologies Inc Earnings Call

SANTA CLARA May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Agilent Technologies Inc earnings conference call or presentation Tuesday, May 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ankur Dhingra

Agilent Technologies, Inc. - VP of IR

* Jacob Thaysen

Agilent Technologies, Inc. - SVP

* Mark Doak

Agilent Technologies, Inc. - SVP

* Michael R. McMullen

Agilent Technologies, Inc. - CEO, President & Director

* Robert W. McMahon

Agilent Technologies, Inc. - Senior VP & CFO

* Samraat S. Raha

Agilent Technologies, Inc. - SVP

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Catherine Walden Ramsey Schulte

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Daniel Gregory Brennan

UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences

* Daniel Louis Leonard

Deutsche Bank AG, Research Division - Research Analyst

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jack Meehan

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

* Patrick B. Donnelly

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Puneet Souda

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

* Ross Jordan Muken

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology

* Stephen Barr Willoughby

Cleveland Research Company - Senior Research Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Agilent Technologies Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

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

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

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Thank you, Liz, and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2019. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO.

Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group.

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

Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30.

We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors.

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

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

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Thanks, Ankur, and thanks for joining our call today. Our Q2 results are mixed. On one hand, we continue to deliver strong growth in 2 of our 3 businesses. On the other hand, our LSAG business is experiencing unexpectedly soft market conditions.

Despite revenue below our expectation, the Agilent team delivered solid earnings with EPS of $0.71 at the midpoint of our guidance. This represents 9% EPS growth over last year. We also delivered our 17th consecutive quarter of adjusted operating margin expansion.

For the quarter, total revenues were $1.24 billion, representing 4% core growth. Let me break that down.

Performance was led by our Agilent CrossLab Group with core growth of 9%. Our Diagnostics and Genomics group delivered 6% core growth, while our LSAG business declined 1%.

There were 2 key market factors observed in the latter part of the quarter that contributed to the LSAG revenue shortfall. First, we're experiencing a slowing of instrument orders in China. The second factor is tied to more general slowdown in orders from big pharma.

I'd point out that this slowdown became apparent to us at beginning of April. Let me explain this in a little more detail. In China, our overall business grew 3% driven by double-digit growth in ACG. However, our LSAG business declined by 1% during the quarter.

There are 2 major factors impacting our China LSAG business. First, the recovery in the food market has not yet materialized. Government labs have not yet resumed purchasing at the levels we have previously seen.

Second, the Chinese government's 4+7 initiative to lower generic drug prices is having a greater-than-expected impact on small molecule pharma. Consequently, we're lowering our revenue expectations in China this year. China does, however, remain an important long-term growth market for us.

The other factor affecting LSAG growth is moderating demand in small molecule pharma. We've seen several large accounts delaying replacement purchases. In contrast to small molecule pharma, we continue to see strong global biopharma demand. While overall growth declined 1%, there are positive signs in other LSAG end markets. Demand remains strong in the environmental and forensics and biopharma markets with solid results in chemical and energy.

You'll recall, we strengthened our leadership in gas chromatography with the recent launch of the new 8860 and 8890 GCs. Since the launch, we're very pleased with the stronger-than-expected customer demand we've seen.

We also have some other very exciting new products. In April, we introduced the new Agilent 6546 LC/MS Q-TOF system. This system is tailored to environmental, metabolomics research and food testing laboratories providing the ability to acquire high-resolution data across an unprecedented dynamic range. Customers can simply see more compounds and analyze them more quickly with this new offering.

In addition during the quarter, we also introduced a unified purpose-built portfolio of cell-analysis products targeting cancer immunotherapy with the addition of ACEA BioSciences. This offering enables research in this fast-growing segment. Our cell analysis business continues to deliver double-digit growth.

While we're facing soft market demand in our LSAG business, we remain confident in the strength of our portfolio and believe we are well positioned to continue winning in the market.

Now I'd like to share more detail about the other 2 businesses.

The Agilent CrossLab Group continues to deliver excellent results, growing 9% on a core basis. Demand is broad-based across all regions. This reflects the market-leading value of our portfolio and differentiated customer experience.

In China, the ACG business grew in the mid-teens. The team continues to excel -- execute on its strategy of leveraging Agilent's large instrument installed base. We also continue to expand our services footprint in emerging cities and tailor our consumables portfolio to the local market.

The Diagnostics and Genomics Group delivered a solid quarter with 6% core revenue growth. Regional demand is led by strength in the Americas. Our pathology-related businesses grew high single digits. Previously announced large competitive wins along with continued strong demand for our antibodies and our Companion Diagnostics services are driving our growth in that segment.

Agilent also received an expanded FDA approval for our PD-L1 IHC companion diagnostic for metastatic non-small-cell lung cancer. This companion diagnostic will now be used to identify a broad range -- broader range of patients who may qualify for first-line treatment with KEYTRUDA.

The NASD business continues delivering strong performance with mid-teens growth. We are on track to bring our second facility online. We anticipate the initial production of GMP-grade APIs by the end of fiscal 2019. Material revenue contributions are expected in fiscal year 2020.

Looking ahead to the second half of the year, we're confident that the momentum will continue in our ACG and DGG businesses.

For our LSAG business, our outlook for the second half is tempered by our view of continued soft market conditions. As a result, we revised our outlook for the full year, reaffirming our prior EPS commitment while lowering revenue growth. Bob will describe this in more detail but first, just a few summary comments.

We now expect to deliver core growth for the year between 4% and 5%. While we're facing market headwinds in our LSAG business, our full year earnings guidance remains intact. The Agilent team remains firmly committed to meeting our current guidance for earnings growth. Our guidance reflects confidence in the strength of the overall Agilent business model and our ability to drive solid earnings results.

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

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

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Thank you, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional detail on revenue, walk through the second quarter income statement and some other key financial metrics. And then I'll finish up with our updated guidance for Q3 and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results, and percentage changes will be on a year-over-year basis.

As Mike mentioned, we delivered solid Q2 earnings despite slower-than-anticipated top line growth, underscoring the strength of Agilent's financial model and our ability to respond quickly to changing market conditions.

Revenue for the quarter was $1.24 billion with core revenue growth of 4%. Reported growth was 3% as currency negatively impacted growth by 320 basis points, slightly higher than expected. This was partially offset by M&A contributing 190 basis points of growth.

As Mike spoke to the business group's performance for the quarter, I'll provide some additional details around our end markets and regional performance.

Pharma, our largest end market, delivered 2% core growth. We continue to see strength in biopharma in aftermarket services and consumables and in our NASD business. However, the slowing of the instrument replacement cycle for small molecule applications led to a softer-than-expected result.

Chemical and energy core growth was a strong 6%, above expectations and driven by a strong low-teens growth in services and consumables. All regions grew led by strength in the Americas.

Environmental and forensics was up 7%. Strength in forensics is linked to the ongoing global opioid crisis, which is driving demand for expanded forensic laboratory capabilities, more samples and broader screening requirements. The environmental market grew mid-single digits and continues to be driven by an ongoing expansion of testing and oversight in China.

Now wrapping up our end market discussion. Core revenue for both diagnostics and clinical and academia and government both grew 5%, while food declined 3% due to the softness in the China market.

Geographically, we saw growth in all regions led by the Americas with 6% growth as conditions in the U.S. continue to be healthy.

Europe, with 4% growth, performed better than anticipated driven by pharma outsourcing trends and continued strong biopharma investments.

China grew 3%. And while we had strong mid-teens growth in the ACG business, softer instrument sales in the food market and small molecule pharma led to lower-than-expected overall results.

Now before I leave revenue, the core growth of our combined LSAG and ACG businesses, while below our expectations, was 4% in the quarter and we believe compares favorably to the overall analytical lab market growth.

Now turning to the rest of the P&L. Q2 gross margin was 56% and increased 70 basis points compared to the prior year. We continued to achieve good gross margin improvements through our productivity initiatives and driving continued economies of scale in our ACG services business.

Operating margin was 21.9%, up 60 basis points, mainly due to disciplined cost management as shifting market conditions became increasingly apparent in the latter part of the quarter.

Additionally, the tax rate was down marginally and average diluted shares were 321 million. This led to non-GAAP earnings per share of $0.71 in the second quarter, an increase of 9% compared to the prior year and at the midpoint of our guidance.

Now before moving to Q3 guidance and full year guidance, I want to touch on a few additional financial metrics on cash flow and on the balance sheet. Our free cash flow for the quarter was $213 million. We deployed $102 million in the quarter consisting of $52 million in dividends and $50 million in share repurchases, representing roughly 635,000 shares.

Lastly, we ended the quarter with $2.2 billion in cash and $1.8 billion in debt. And during the quarter, we also renewed our revolving credit line of $1 billion, which remains undrawn.

With our strong balance sheet position, we will be more active in the second half of the year deploying capital. Specifically, we intend to deploy $500 million for share repurchases with the majority of that to come in the third quarter. This underscores not only our balance sheet strength but also our confidence in the future.

In addition, we still have plenty of capacity for M&A and we have an active business development funnel, although we will continue to remain disciplined in our approach.

Now let's turn to our non-GAAP financial guidance for the fiscal year. As Mike indicated, we are reducing our core revenue growth outlook for the year. While our expectations for ACG and DGG aren't changing, our forecast for the second half is tempered by softening market conditions in certain segments on the instrument side of the business. The developments in China coupled with the continued uncertainty on trade is creating a more challenging macro environment.

As a result, we are updating our full year revenue guidance to a range of $5.085 billion to $5.125 billion, representing 3.5% to 4.3% reported growth. Currency is expected to be a headwind of 210 basis points partially offset by M&A. And as a result, we're now expecting core revenue growth in the range of roughly 4% to 5%.

Now despite reducing revenue guidance, we feel confident in holding to our full year earnings per share guidance range of $3.03 to $3.07, representing growth, excluding currency, of roughly 10% to 11% and reported growth of 8.6% to 10%.

As Mike mentioned, or EPS guidance reflects confidence in the strength of Agilent's business and our ability to drive earnings through multiple levers. These include disciplined expense management and the use of our balance sheet. Based on deploying the additional $500 million toward share repurchase, we are updating our average diluted share count down to 319 million for the year.

Now finally turning to the third quarter, we're expecting revenue in the range of $1.225 billion to $1.245 billion, representing reported growth of 1.8% to 3.5% and core growth of 2.7% to 4.1%. Currency is estimated to be a headwind of 210 basis points partially offset by M&A contributing roughly 120 to 150 basis points of growth.

Third quarter 2019 non-GAAP earnings are expected to be in the range of $0.71 to $0.73 a share, which is 6% to 9% reported growth versus a year ago. The share count for Q3 is expected to be 317 million.

Let me conclude by saying we are pleased with the team's ability to preserve earnings performance despite shifting market conditions. We are confident in the strength of Agilent's business and our ability to navigate softness in certain markets.

With that, before opening it up for questions, I will turn it back to Mike for some closing comments

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

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Thanks, Bob. I just want to add a few closing words before I move into Q&A. Great companies do not just react to market conditions. They see market opportunity. At Agilent, we will continue to drive productivity and double down our efforts to be a more agile company. We have multiple levers to drive earnings, including disciplined expense management and use of our balance sheet.

However, we are not going to expense-cut our way to growth. We will continue to bring innovative new products to market and aggressively compete for market share.

Now Ankur, back to you for the Q&A.

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Ankur Dhingra, Agilent Technologies, Inc. - VP of IR [6]

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Thank you, Mike. Liz, if you can please provide instructions for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Dan Leonard with Deutsche Bank.

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Daniel Louis Leonard, Deutsche Bank AG, Research Division - Research Analyst [2]

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So first question, trying to -- so trying to make sure I understand the issues in small molecule pharma. Is that an LC comment specifically or more broadly customers you're labeling as small molecule pharma? And can you comment on the trends between ethical pharma and generics?

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

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Yes. So I'll make a few comments. And then Jacob, feel free to jump in on this. I think it's primarily LC-related. And it's a situation we're seeing actually globally. I called out specifically the government initiative in China. But we also saw on our large pharma accounts in U.S. and Europe, these delays in purchasing. In fact, I remember talking with our European field manager. We had an order that was supposed to close in January, a big European pharma company. It was pushed out. We thought it was going to close at the end of March. And now this closed in May. And perhaps, you can add your thoughts here as well, Jacob.

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Jacob Thaysen, Agilent Technologies, Inc. - SVP [4]

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No, you're absolutely right, Mike, that, that is primarily the LC business. However, many of those pharma companies also have investment into some other areas. And when they now see some chances in the generics, they might put back also in other areas. So LC is the prime focus, but it certainly also expands into the mass spec and others.

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

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And I think just to close this off, Dan, I think the comments for China specific to generics, I think globally we saw both in ethical and generic drugs in small molecule side.

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Daniel Louis Leonard, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay. And then, Mike, my follow-up. Can you elaborate a bit further on the actions you're taking to respond to the market softness? And I ask because the decremental margins in LSAG were pretty high. So can you elaborate a bit on what you're doing to react?

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

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Yes. So as Bob mentioned in his call notes, we're actually quite pleased by the Agilent team to really rapidly adjust the cost structure in a phenomena developed probably over the last 4 to 6 weeks of the quarter. And the actions are just double-downing on the Agile Agilent programs that we had already in flight, but also really making sure that we look to the expenses that weren't directly related to growth and really it was a call to action to kind of pull back on things that really don't drive growth like internal travel for example. So we pulled all the levers we could but while maintaining intact our coverage model in the field as well as our NPI programs.

Bob, I don't know if you'd add anything else to that.

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [8]

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Yes, I would just add, Dan, while the LSAG business did show a decline year-over-year, I would remind you to look at the total company, which actually did improve margins for year-over-year and for the 17%.

So we operate this as a full company as part of the One Agilent approach. And so we're taking a number of initiatives, but as Mike said, we're also doubling down on areas such as the new products in the areas where we think we can drive. We did see pockets of strength in LSAG, and Jacob and team are really focusing on those areas, areas such as cell analysis and chemical and energy and some of the other areas as well.

So it's not just an expense, it is really ensuring that we're focused on the areas that we have the fastest opportunities for growth.

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Operator [9]

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Our next question comes from the line of Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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I got a follow-up on some of the pharma questions. Mike, when we did the CEO call back in early April, you did call out the China generic headwinds. We didn't really hear about the pharma delays at that point. So obviously it seems like it came up later in the quarter. And you mentioned it was several accounts. So can you maybe just talk on how widespread it is? And is this a transitory issue in your mind? Or how are you thinking about pharma for the remainder of the year?

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [11]

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Thanks for the excellent question, Tycho. And I do recall our conversation. I think it was in early April. And I just come back from China. And we were first hearing about the 4 by 7 (sic) [4+7] initiative in China. And to your question, I think that we saw the fairly broad-based -- this is outside of China. So I think China has got some specific things happening relative to the government actions around 4+7, which I think are fairly publicized.

But we saw it in both our U.S. and European customers, and we have a -- we just had a major account review, and all of our major accounts were down year-over-year, and they're just a level of caution relative to replacing investments in the small molecule side of businesses.

These same companies, however, are investing quite heavily in the biopharma side. So it's sort of a tale of two cities from the standpoint of what's really going well inside some of our larger accounts versus where there's been a pause. And Bob, I know you've looked at this quite closely as well. I don't know if you have anything else to add to that?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [12]

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No, I think you're right, Mike. And Tycho, as we're thinking about the guidance going forward in the second half of the year, we are looking at probably a more moderated growth for pharma going forward, but still not at the rate that we saw in Q2, but probably in the mid-single digits where we were expecting probably high single digits globally.

So I think we're taking a prudent approach there as we're thinking about the outlook for the year. I do say -- I would say that we're continuing to, as Mike said, grow our biopharma business. But we still have the proportion -- a large proportion of our pharma business being in the small molecule side.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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And it was somewhat surprising -- go ahead.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [14]

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I would just add, Tycho, one thing we have seen though is on the small molecule side, there still is very high demand for chemistries and services. I think you're seeing that reflected in the strong ACG results.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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And it was a little surprising to see food down now that you've anniversaried it. Can you maybe just -- I know it's not recovering, but is it getting worse?

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [16]

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Yes. Thanks, Tycho. It was a surprise to us as well. It's not getting any worse, it's just not getting any better. And we had anticipated coming on the anniversary that the central government would start reinvesting at the previous level, and the spends just are not there.

Now we are seeing in other parts of the end markets, so the spends and investments in environmental are quite strong, but they've not yet returned to the spending levels that we had seen prior in the food market. But again I would say, the same story here relative to the aftermarket flows. We are seeing -- still seeing the strong growth on the aftermarket flows in food. It's just the instrument purchases aren't there. So it's not getting any worse, but it's not getting better, as we had thought.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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All right. And then one just last clarification on the cost side. Are you taking any additional tariff remediation efforts given round 3, just curious?

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [18]

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Yes. Bob, why don't you take that one?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [19]

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Yes. We continue to be focused on additional remediation to minimize that. The increase between the round 3 from the 10% up to the [25%] is incorporated into our guidance. It was a -- I've talked about this before. It's roughly about $750,000 to $1 million in the second half of the year net of the efforts that we're taking.

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Operator [20]

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Our next question comes from the line of Patrick Donnelly with Goldman Sachs

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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Mike, maybe just some clarity around some of the slowing you saw beginning in April. In the last call, you kind of talked about January being slow. So maybe just talk us through the cadence of the quarter, particularly in China. Were February and March trending okay and then you've kind of got the signs of 4+7 and April really slowed because again one of your peers who didn't have April in their quarter had some real softness there, which obviously was in March. So maybe just talk us through kind of month-by-month how things trended there.

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

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Yes. Sure, Patrick, because we really want to make sure it's clear to the investment community what we saw during the quarter. So what I'd say is if you had been -- if we had been having this discussion at the end of February, we were feeling really good about the quarter. In fact, we got off to a very good start. And as we looked at our forecast for the remainder of the quarter, it looked pretty solid.

But as we increasingly went through the month of March, we were expecting in the last 7 to 10 days our normal push of orders to close this. When I say normal push, this is across all the regions because often we have a lot of customers who have quarter end date. So typically March is a pretty strong month for us.

And when we closed the last week-or-so of the orders in March, it just wasn't there. We just didn't get the normal month end surge. And then perhaps maybe some orders didn't get booked at the end of March. We didn't see anything unusual in the beginning of April. So I think it was at that time frame that we knew we were in the midst of something that we hadn't expected.

I would say again, I think it caught our teams by surprise. I had been in China at the latter part of March and we just reviewed the forecast. And then we could see that they were caught unexpectedly by customer delays in China. We also saw the same thing in Europe and the U.S. as well.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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Okay. That's really helpful color. And then maybe just...

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [24]

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Patrick, if I could just add one more thing. What I would tell you is -- and just to kind of reinforce the confidence we have in regards to the second half outlook, April did come in relative to our expectations on orders. Our recast orders on the LSAG front obviously, too late for revenue, but that gives us confidence that we have a handle on where the market is right now.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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So the orders trended a little better in kind of late April?

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [26]

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We came in relative to our forecast, yes. But again we're still saying that it's going to be subdued for the second half. I really wanted to kind of -- it's not a situation where we see a continuing worsening of the end market environment, but we also are not seeing a dramatic improvement either. But we do believe we've gotten a level of predictability back in the business based on what we saw in April.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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Understood. No, that's helpful, Mike. And then maybe just one kind of housekeeping item. Can you just help us frame how much of your business is small molecule? I know 30% is kind of under that biopharma umbrella, but maybe just help us think about how much is specific to the...

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [28]

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Yes. Great question. In fact, Bob and I were just talking about this right before the start of this call. And I think right now, we'd characterize it as 80-20, which is about 80% in the small molecule. It was about 85% 2 or 3 years ago. We think there will be a shift to more biopharma naturally in 2020 given just the continued strong growth we're having with today's portfolio.

But back to my comments on NASD, once that additional revenue flows, you'll see the benefits of our broader biopharma play that Agilent has. But right now, I'd characterize it about 20% of our -- 20% of the 30% is in biopharma.

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Operator [29]

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Our next question comes from the line of Ross Muken with Evercore ISI.

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Ross Jordan Muken, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology [30]

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So, Mike, a lot of helpful color, but I guess, just going back to China, I mean, how much did you debate sort of what to do with the assumption there? Even though April came in -- it seems like -- or at least overall for the book, kind of in line. Obviously, the last couple of days have been quite a lot just in terms of some of the trade tensions and the uncertainty. It's possible some of the 4+7 pieces, kind of get worse just in terms of China's restrictions.

I guess how confident are you that you sort of titrated this correctly, not just for, kind of, what you saw in April, but sort of the current macro, relative to sort of the last week-or-so where obviously we had a pretty disappointing outcome on trade?

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

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Ross, great question. I almost feel like you may have been inside the hall here at the Agilent offices. So this was a big point of discussion with the team. And where we landed was our team had brought down their forecast in China relative to where we were before. And what we said is, we're going to take a very conservative view. We're going to assume that the strain on the overall pharma market continues in China as well as food. There is no recovery.

So basically, we're assuming that the softness that we had experienced already through much of -- through the back half of the quarter will continue in the second half. So I think we've tried to be prudent relative to taking the very conservative and bringing our forecast down. And as you know, we had a high single-digit kind of forecast for the full year for China. But I think we're probably around 3% for the whole year.

Again, I would keep -- I would remind the group too a lot of the call is focused on LSAG, which has really been the center of our weakness for the quarter on the top line. But one of the reasons why we have confidence in the overall growth forecast for China is that we have very predictable results coming through on the ACG side, which was mid-teens growth. And I think it's been fairly well publicized. We're underpenetrated on DDG, so we have expectations of good solid growth on both those businesses.

So it's kind of tale of two cities. We expect that the continued strength on the ACG and DGG side in China while bringing down our expectations on the LSAG side. And Bob, I know we had a lot of debate on this one, so maybe you have something else you'd like to add there?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [32]

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Yes. Yes, thanks, Mike. And Ross, maybe to put some dimensions to that when we think about where -- how we've taken our guidance down for the second half of the year. Really about 2/3 -- 2/3 to 70% of that reduction is really reflective of China. And the other 1/3, call it $10 million to $15 million, is probably the broader pharma.

So the majority of it is the lower expectations or tempered expectations in the China market.

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Ross Jordan Muken, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology [33]

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And maybe ACG margins were pretty impressive. Yes, the pull-through there continues to be north of I don't know, 50%. I guess, what's driving the massive step-up in that business this year because the expansion even relative to what you saw in the first quarter kind of accelerated. And so I'm trying to get a feel for kind of the underlying.

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

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Yes. So, Ross, I'm glad you noticed that because we really were quite pleased with the overall margin performance in ACG. And I think I made the comment inside the conference and said listen, we've proven that we can scale our service business and make good margins. What I'd like to do is maybe turn the call over to Mark Doak and let him take a little bit of a bow here with the audience and maybe share, Mark, what specifically has been going on within your team.

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Mark Doak, Agilent Technologies, Inc. - SVP [35]

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Thanks, Mike. And on the margins front, obviously we've seen a nice expansion through the first half along that.

To come back to a couple of things, I think Mike and Bob has alluded to, first of all on the Agile Agilent programs, many of these are shared services across the company, which certainly help the broader gross margins for the business. But inside of the business, particularly services, there's been 2 major themes.

One is, we've used advanced analytics to really look at how we can improve various aspects of our operations, and used these analytics pretty widely over the course of the last year to help drive that.

And then a second component of that, I've talked many times about our drive to put our business online and use things like mobile apps that fundamentally facilitate faster and more complete workflows for our team on the ground.

So if you put all those pieces together, it's turned out to be actually a quite positive development, but this is after a lot of years of investment to really build a platform that crossed our services business that's scalable.

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Operator [36]

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Our next question comes from the line of Doug Schenkel with Cowen.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [37]

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So I'm going to have a couple more questions on pharma in a second but I actually want to start on DGG. If pathology grew high-single digits and NASD grew mid-teens, it would seem hard for DGG to only grow 5.3% core, given those businesses account for about 60% of DGG sales, unless you have some weakness in genomics.

How did genomics go in the quarter and how are competitive dynamics evolving in target enrichment? Or maybe I'm just off course here and if so, maybe you can point me in the right direction.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [38]

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I don't know the exact math, I had about 6% overall for the DGG. But I think the answer would be the genomics business came in exactly as we had forecasted overall. Clearly, there are some competitive wins out there on the target enrichment side, but the main challenge that we've seen have been more on our legacy genomics. And Sam, anything that you might want to comment on there?

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Samraat S. Raha, Agilent Technologies, Inc. - SVP [39]

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No, Mike. I mean, you said it right. There are the puts and takes in any business. I mean, overall we performed as we expected. We had some -- we're continuing to see some really good strengths related to our QC part of the portfolio and so really nothing more to add. It's...

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [40]

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Yes, and the reason why I mentioned, we have what we call our non-NGS part of genomics because that NGS side, which is inclusive of target enrichment was close to double digits. So it's been more of some of the older products.

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Samraat S. Raha, Agilent Technologies, Inc. - SVP [41]

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Exactly, yes.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [42]

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Okay, all right, that is helpful. So on LSAG, it looks to us like LSAG would have to decline to get to the midpoint of fiscal Q3 guidance. We get to the high end with it actually flat year-over-year, and that's not changing our DGG or ACG assumptions, which we don't think we're being too aggressive there and basically being consistent with what you guys have been talking about all year.

So are you assuming LSAG core growth declines in the third quarter? And if so, how do we reconcile that with your comment on instrument orders improving in April? Does that tell us something about May order trends? Or is this just conservatism coming off of a weaker-than-expected quarter?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [43]

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Yes, this is Bob, Doug. As we think about the various pieces, obviously, there's some variation there. But we're assuming roughly flat for LSAG in Q3. Hopefully, that proves to be conservative but given that we saw this late in the quarter, I think we're taking a prudent approach for Q3.

As Mike said, our April orders hit our revised forecast, but that's also one month. So hopefully, it proves to be conservative, but I think it's the appropriate level of forecast right now.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [44]

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And I think, Bob, the way that Doug's thinking about the modeling at ACG and DGG, that's just how we've been thinking about it as well.

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [45]

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That's right. We expect them -- they continue to perform as expected and we would continue to see the growth rates that they've experienced in the first half be similar in the second half of the year.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [46]

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Okay. And last one, the slowdown in small molecule demand is something you've been talking about for a while. Clearly, things were and are worse than you expected, so I think all of that's clear, but I want to make sure on the large molecule side, that growth met your expectations.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [47]

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Yes, absolutely. Yes, so that's like I said earlier, it's a tale of two cities. The biopharma continues to do quite well, both in the instrumentation side but also we've been investing very heavily on the chemistry side, inclusive of one of our recent acquisitions, ProZyme was really targeted in the biopharma side. And then also, we have the NASD story as well. So the biopharma is right where we thought it would be.

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [48]

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And Doug, I would say the other thing is, I know we're talking a lot about pharma and certainly, it didn't meet expectations. Let's say the biggest variable in the quarter though, was food because we were expecting the anniversary of the reorganization and to have a much better performance, and it was still down.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [49]

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Yes.

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Operator [50]

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Our next question comes from the line of Derik De Bruin with Bank of America

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [51]

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So sort of following up on the food question, just looking in this. Obviously, your -- water had some issues as well. I mean, is it -- is there -- did some business just go to Shimadzu or some business go to Dionex or some of the other companies that are sort of out there? I mean, can you just sort of talk about that it's not just business shifting around rather than things not coming back?

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [52]

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Yes, sure. Happy to do so, Derik. In fact, I think it was almost a year ago in my Q2 '18 call that we first started talking about the organization of whole food safety and structure in China. And we're really confident the business isn't going anywhere else, it's just not there.

And when I talk about the business, think about it along 2 dynamics, one which is the business that's been shifted to contract testing labs, which we're well positioned. But what we're focusing on is the central agencies where Agilent has historically had a very strong position. They are just not investing right now beyond supporting the ongoing operations with chemistries and services. So we're quite confident that the business isn't going anywhere else, it's just not there.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [53]

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And did you -- I mean, I think we were all surprised by the strength in the first fiscal quarter. I mean, did you -- is some of the weakness just potentially as you saw there was some stockpiling you didn't see happening in Q1 that -- yes.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [54]

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No, no, no. In fact, I think the -- like I said earlier, we were sitting here at the end of February thinking that the quarter or this quarter [wasn't] developed just as it was. And what we didn't anticipate was the -- just the how quickly the pharma business slowed down in China and then as well as the lack of recovery in China on the food side. And then there was a -- there seemed to be this whole small molecule side in the U.S. and Europe. So really, it was a tale of the latter part of the quarter. We saw nothing unusual about our -- we can't point to anything unusual relative to our Q1 results.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [55]

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And the U.S. and European pharma slowdown, was this just capital not being -- I mean, I know there's always a little bit of slowness when releasing capital funds at the beginning of the year. Is it that or just people -- you mentioned some order delays and I guess, is that because the companies are just nervous on their small molecule businesses? I mean, are they -- I mean, once again, sort of asking the question, are they back to extending the life on their current instruments or where -- going along those lines, just trying to figure out what's driving that.

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [56]

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Yes, I think it's a little bit of both, Derik. I mean, I do think that they're -- we haven't seen -- we obviously have a backlog and so forth, but we haven't seen orders being canceled or people saying they're not purchasing, it's actually being delayed. And so the question for us was, is it transitory and it will catch-up or we're taking the approach that it's probably not going to catch-up and it's just going to continue to push.

But I also do think that there's probably some element of trying to get more mileage, so to speak, out of the existing instrumentation, particularly as they're looking at capacity.

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Samraat S. Raha, Agilent Technologies, Inc. - SVP [57]

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And Bob, I think it's very clear out there that we see that, that there is certainly conservative procurement tactics happening right now and people are stalling a little bit. But at the same time, we actually see that our funnel is quite rich. So we still see a lot of business, but it takes -- it goes much slower these days. So we actually -- we do believe there's a greater opportunity out there, but we can't call it right now.

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Operator [58]

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Our next question comes from the line of Brandon Couillard with Jefferies

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [59]

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Mike, I'd like to step back a little bit. I've realized it's early but could you speak to the -- as we look at fiscal '20, could you sort of speak to the relevancy of the 4.5% to 6% midterm range that you talked about at the June Analyst Day last year, relative to the 4% to 4.5% you're going to put up this year? And what specifically needs to get better to achieve that?

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [60]

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Yes, I think it's probably a little early to talk about 2020, but there really isn't anything developing that we can see that takes away from our long-term view of to really grow this company. And we've got, as I mentioned in my opening comments, we had 2 or 3 businesses are performing very well and we have some incremental stuff that's going to be coming in those businesses in 2020. And then the -- I think what we need to see is really just focused on the soft points that we saw in the LSAG business, which is a return to positive growth, a higher level of growth in China, which I called out it out in my remarks and said, listen, the quarter obviously did not develop as we had forecasted, but we believe that as things -- eventually things will get settled down, issues will get resolved and we'll get clarity on -- even in generics, which are currently under a lot of pressure. When that industry gets through that knot and the survivors are going to be in a reinvestment mode and who need to drive productivity, we think there's going to be business there.

So I think that part of the story for 2020 is a return to an improved China market environment. Jacob, I think you'd like to jump in on this as well.

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Jacob Thaysen, Agilent Technologies, Inc. - SVP [61]

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Yes. I think overall, we -- over the past few quarters, we have also delivered some very nice NPIs, new products introduction here in the market and we still have a very strong funnel. So as Mark is saying and Mike is saying, when the market is coming back, we are absolutely in a very strong position to take our share of the market.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [62]

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Yes, and essentially too, as Bob noted in his call, the chemical energy business, which I have positioned earlier on as sort of the wild card for Agilent on the upside, we actually had really, really solid growth in Q2. And we're pretty optimistic about that for the rest of the year.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [63]

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That's helpful. And secondly, we'd love to get an update on how some of the more recent acquired assets are performing relative to your deal models like ACEA and the AAT. Looks like the M&A contribution expected for the year kind of came down a bit, so I would love to get an update on how some of those assets are performing.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [64]

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Yes. Overall, I think that they continue to do -- ACEA is early, but the -- in fact, we just had a review with -- on this yesterday afternoon and it delivered strong double-digit growth and is ahead of expectations. So while it's not yet in revenue so ACEA is tracking very nicely. AATI, we're still very pleased with the performance to date. The growth rates are probably a little bit slower there, tied to if you look at the number of new instrument placements that Illumina had in the first quarter. So to some extent, that business growth rate is tied to the growth rate of the Novoseek and some other parts of the portfolio in Illumina. We're expecting I think, Sam, in the back half is probably looking a little bit better for that as Illumina gets more of its instruments placed.

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Samraat S. Raha, Agilent Technologies, Inc. - SVP [65]

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Yes, that's absolutely, right, Mike. And looking at overall NGS QC, we're still tracking with the market, absolutely.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [66]

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And I think we also got a fair number tied to PacBio so if that gets resolved, so -- but you're close to the numbers but overall, there's still double-digit growth out of the companies we've acquired. And I pointed to the cell analysis business overall as being a double-digit grower for us in the quarter.

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Operator [67]

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Our next question comes from the line of Jack Meehan with Barclays.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [68]

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I wanted to follow up and was hoping you can just elaborate a little bit more, contrasting some of the weakness on the capital side versus the strength you're seeing at ACG. I guess, just what's embedded in the outlook for CrossLab through the end of the year and just the level of comfort that some of the slower replacement cycle in the instrument side, that the recurring piece can hold up as you look out over the next year.

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

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Yes, we're really confident about the outlook on the ACG business. And often, we find that if you have a slowing capital replacement, it actually is an upside to the service business in particular, where they'll often -- they're going to be extending the life of equipment. So Bob, I think we're pretty -- this is an area of high confidence for us.

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

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Yes. I mean -- and Jack, we're expecting the continued performance into the second half of the year like we had in the first half and quite honestly, the way that we had in '18 as well, which is high single-digit growth there, really behind both services as well as the consumables. We aren't seeing testing volumes decline, whether that be in pharma or any of the other end markets. They're actually quite, quite strong and so we feel pretty good about that. Our forecast remains unchanged there.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [71]

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Great. And then just wanted to follow up on some of the comments related to the NASD business. Obviously, growth came in a little better again in the quarter than we were expecting but just the pacing of when the new line is going to open up and just that's a fourth quarter kind of step up you're expecting? Just confirm that.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [72]

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Yes. Sure, Jack. In fact, we just had a review, a very timely call. So we're expecting most likely the fourth quarter is where we'd start to see some initial revenue coming out of the new site. We're still in the final phases of validation, so we don't want to say we're done yet, but we're getting close. And we have our first customers lined up to -- for those initial batches out of our Frederick site. And we're planning an opening in mid-June, but that's just a ceremonial opening, we won't be yet producing a product, but we're forecasting inside the company in the fourth quarter of this year. And so that's some initial revenue then with the largest step-up coming in 2020.

I'd also just compliment Sam and his team because we continue to find ways to get more revenue out of the existing Boulder sites. I would also tell you that our full year revenue projection in NASD are well intact.

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [73]

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And Jack, just to maybe build on that. I wouldn't build any incremental revenue in Q4 for your model because as we ramp up the facility, it's really going to be a material contribution in 2020.

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Operator [74]

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Our next question comes from the line of Puneet Souda with SVB Leerink

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [75]

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So maybe my first question is, I just wanted to clarify on USP regulation. I know USP has been helping you in the past in terms of ICP-MSs. Was there a step down in that application as well across the pharma channel worldwide or was it just weak in China? And what's your outlook in that business aligned with ICP-MS? And I mean, I'm asking this because it's levered to small molecules and your customers are using it for analyzing the small molecule coatings.

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

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I'll make a few summary comments and I'll have Jacob jump in on this. But I believe we think that's actually been declining in the pharma space. But overall, we expect really good growth in our Spectroscopy business as we look out with some of the other applications, given the stronger PMIs in the U.S., similar demand for product in other end markets outside of the USP. But Jacob, you're closer to it than I am.

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Jacob Thaysen, Agilent Technologies, Inc. - SVP [77]

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Yes, you're absolutely right that we saw a very nice opportunity last year in USP. But now, it's kind of moved on both to water analysis but also the STM business. And generally speaking, we see that the ICP-MS growth particularly in U.S. is very strong this year. So we actually see that there's plenty of opportunity with ICP-MS. Obviously, when new regulations come in place then there is a certain opportunity, but it looks like we're jumping from opportunity to opportunity in that space and I think it will continue to grow.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [78]

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Okay. And my second question is around -- I appreciate you're that getting a challenging quarter in LSAG here, but just help us understand the -- I mean, you talked about the magnitude of benefit that you received in 8890 and 8860. I don't know if you quantified that in the quarter. And I'm asking that because in the last call, you mentioned you started shipping that instrument, I think, in the second week of February. And I just wanted to get a sense of how that instrument is contributing and what's your expectation for the rest of the year.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [79]

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Yes. Puneet, thanks so much for asking about this because this was a real bright spot in the overall LSAG performance in Q2 and it kind of speaks to our view of the future.

We didn't quantify and probably won't quantify the exact contribution, but we did start shipping. But I'd say right now, we have more orders in backlog than we shipped. And I think we're 150%, 200% of our forecast. I mean, it's pretty significant.

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Jacob Thaysen, Agilent Technologies, Inc. - SVP [80]

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It has been very significant. Obviously, it is also some customers decided to move from the 78 series into the 88 series faster than we anticipated. But at the same time, we're also seeing that with the 8860 going for the mid-range that, that combination with the mass spec has actually been quite successful also. So overall, we see good momentum but we haven't quantified the incremental.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [81]

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Got it. And last one if I could squeeze in around food again. Just wanted to understand, again, is that business largely all LC there? Or how of the -- I mean, how do you look at that business in terms of the types of investments that are there? And how do you expect this improvement?

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [82]

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Sure. Happy to answer that, Puneet. So when we think about the food safety marketplace in particular, which is where we've been focusing our comments relative to China, it really is primarily a mass spec place. You're talking about GC/MS, LC/MS, ICP-MS and some stand-alone LCs. And I think that's one of the reasons why we have done so well in this space historically is just the breadth of the portfolio we have across all those technology platforms. So it's broader than -- for Agilent, it's broader than LC.

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Operator [83]

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Our next question comes from the line Catherine Schulte with Baird.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [84]

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Just going through your guidance commentary, you said about 2/3 of the reduction is from China. How much of that is 4+7 versus food?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [85]

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Yes, I would say about -- of that, roughly 2/3 of it is food and about 1/3 of it is 4+7.

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

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But I think we did some rough math. I think we did some rough math on the overall generic pharma, is probably 2%, 2-ish.

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

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Yes. Overall, when you think about China, the small molecule business in China is roughly 2% to 3% of the overall Agilent revenue, just to kind of frame in the size.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [88]

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And then on the 4+7 program, what's the incremental risk if that moves beyond the initial 11 pilot cities? And how long do you it takes the market to work through these changes?

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

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Yes, I actually think -- the way we're thinking about that, Catherine, is actually because of while it's only in 11 cities, I think it's actually created a pause throughout the provinces to understand kind of what the impact is. So it's actually got greater -- we think we're seeing that impact now as opposed to further impact down the road. I think actually what you'll see is once this is determined, it will actually create clarity about what's going to happen throughout the course. And we think we've seen the impact broader than just those 11 cities.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [90]

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Yes. In fact, that was the thinking behind the calculation we did, yes.

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Catherine Walden Ramsey Schulte, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [91]

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Okay, and then just last one. We saw U.S. PMI drop below 53 in April and Europe's been below 50 for a couple of months now. It sounds like you're pretty optimistic on chemical energy outlook, so maybe talk about what you're expecting in the back half for chemical energy and the puts and takes there.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [92]

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You want to take that one, Bob?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [93]

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Sure. Our chemical and energy business in the back half is -- we've talked about when we gave initial guidance at the beginning of the year, kind of low-single digits, and that's kind of what we're thinking about. We were positively surprised in Q2. For reference, Q1 was roughly 2%, grew to 6% in Q2. We're assuming kind of low-single digits in the back half of the year, consistent with our early guide.

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

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And I think on -- just on the overall European outlook it's -- we're not expecting that at the Q2 level.

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

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Yes. No, exactly. And for Europe as well across the businesses, we're thinking low-single digits again, consistent with our estimates at the beginning of the year. We were positively surprised in Q2, but we're expecting it to be consistent with what our initial expectations were.

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Operator [96]

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Our next question comes from the line of Steve Willoughby with Cleveland Research

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Stephen Barr Willoughby, Cleveland Research Company - Senior Research Analyst [97]

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Two things for you, Mike. I guess first, as it relates to the China food business, have you thought at all, is it possible that the softness continues for quite a while here, even though we've started to anniversary it, as that volume moves to these more efficient commercial adds versus the previous government run lab? And then I just have one quick follow-up.

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

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Yes, sure. What's happened also is the charter of what these organizations do has changed, right? So a lot of the volume activities has been to the contract special labs and these guys are all now developing methods and the new regs. So we think they're going to require ultimately, the next-generation technology equipment to stay on the leading edge of research and development of new applications. That being said, we are not assuming any recovery in the second half of this year. So we've become much more cautious about the outlook for food in the second half. I think that is fair. Is it fair?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [99]

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Yes. Yes, I mean, we -- to be honest, we've assumed recovery and it's taking a little longer than we expected. So we're going to temper our growth until we're wrong to the upside.

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Stephen Barr Willoughby, Cleveland Research Company - Senior Research Analyst [100]

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Okay. Fair enough. And then just Bob, just one quick follow-up for you, and I know you're not going to provide any 2020 guidance. But just give us some perspective on the new Frederick NASD site. It sounds like minimal revenue here in fiscal '19. Where do we get in fiscal '20 as it relates to the kind of $100 million revenue potential capacity?

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Robert W. McMahon, Agilent Technologies, Inc. - Senior VP & CFO [101]

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Yes, Steve, you're correct, we're not going to give kind of forward looking. What I would say though is we're generally on track with what we said back in June of last year in terms of kind of the ramp-up and so forth.

So how that ramps across the quarters and across the year is still, we haven't gone through our planning cycle. But what I will tell you is that we feel very good. We have a very robust funnel for products that are going into that site. We've already had some customers tour the site. Obviously, it's not operational yet because we're still doing the validation as Mike talked about, but it's moving along as we expected.

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Operator [102]

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Our next question comes from the line of Dan Brennan with UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [103]

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So I wanted to ask a question maybe back to Jacob. I was hoping you can provide a little bit more color about what you're hearing from customers on the pharma side in U.S. and Europe to account for the more restrictive budgets. And if it's related to anything with global macro, maybe from Mike, if you've seen any such impact to your other businesses as well.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [104]

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Actually, why I don't start off, Dan, and thanks for the question. And I'll pass it down to -- over to Jacob for specifics on pharma.

We haven't seen that in the other segments of the marketplace, and there's a lot of noise out there. So uncertainty is never good, but we really can't point to anything specific. And I think if you look at the -- our results, I mean, you saw 2 or 3 businesses continue to perform as expected and do quite well. And then we had some isolated but obviously impactful slowdowns in aspects of the LSAG business, albeit the chemical energy, academia and government, environmental forensics and biopharma were a continued sources of strength.

So I think it's really been isolated to the factors you mentioned. And I know Jacob, you've been trying to do a little bit more diligence around this and we have some theories, but I'm not sure we have a 100% specific answer what's driving the customers to delay the purchases on the small molecule side.

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Jacob Thaysen, Agilent Technologies, Inc. - SVP [105]

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No, clearly, we are seeing that conservative procurement tactics that they are using. And obviously, we've been out doing our own digging to understand what's really going on there. And first of all, we don't see any change in competitive dynamics. This is not -- this is truly a market situation we're in right now. So this is where -- people or the procurement organizations and the customers and the owner are just more cautious in their decision on capital equipment expenditure right now.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [106]

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So I think this is more speculation on our part, but we -- some of the things where hey, there's still some question about where prices are going to land in certain parts of the world in terms of unused prices, some questions about growth. And then again, as we mentioned earlier in the call, prioritization that -- when push comes to shove, prioritization of biopharma over small molecule. Again, we just think it's a pushout delay. Business has not been canceled.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [107]

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And then maybe related to a question I know that was asked earlier, just maybe a clarification. I think you gave us what's pharma is baked in for Q3. Can you just let us know what's kind of assumed for pharma and food for Q3 and Q4? And just remind us, how big is your China food business?

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

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So on the guidance, Dan, this is Bob. We're assuming as I mentioned before, for pharma kind of mid-single-digit growth for the full year and that's consistent with where we are for Q3 as well on a global basis is better than the 2% that we had in Q2.

In food, we're expecting for Q3, probably a slight decline as well. Hopefully, as I mentioned, hopefully that proves to be conservative but we're assuming that overall, for the full year, food will be flat to slightly down.

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Michael R. McMullen, Agilent Technologies, Inc. - CEO, President & Director [109]

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And I think historically, Bob, it's round about 15% to 18% of our China business has been in food. Obviously, with the decline, it's probably close to that 15% number.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [110]

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Great. And then if I can ask one more since that seems be the trend here. Just on capital deployment, obviously more towards the buyback in Q3, but kind of how are you thinking about M&A? Obviously, you have a lot of balance sheet optionality. Just wondering what the pipeline looks at and kind of how we think about it over the next say, 6 to 12 months.

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

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Sure, Dan. Thanks for that question. In fact, the pipeline looks very, very robust. And as I signaled I believe in the last call, we're very active right now. And I don't have anything to announce, but we want to deploy the capital, we want to leverage the strength we have in the balance sheet. Bob is very explicit to how we're going to use one aspect of that relative to our -- the buyback side, but we have plenty of firepower to execute on targets.

And as you can see, based on my earlier comments and some of the numbers we're putting out with the companies we have acquired, we're increasingly confident in our ability to deliver on, SOVs, if you will, for our shareholders when we deploy that capital.

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

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Sources of value.

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Operator [113]

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And that concludes today's question-and-answer session. I'd like to turn the call back to Mr. Dhingra for closing remarks

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Ankur Dhingra, Agilent Technologies, Inc. - VP of IR [114]

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So with that, we'll close today's earnings call. Thanks a lot for joining.

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Operator [115]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.