Agilent Technologies, Inc.

Good afternoon and welcome to the Agilent Technologies third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. And now I'd like to introduce you to the host for today's conference, Ankur Dengra, Vice President of Invest Relations. Sir, please go ahead.

Thank you, Mike. And welcome everyone to Agilent's third quarter conference call for fiscal year 2019. With me are Mike McMullen, Agilent's President and CEO, and Bob McMahan, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Tyson, 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 Agilent's CrossLab Group. You can find the press release, investor presentation, and information to supplement today's discussion on our website at .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 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 would like to turn the call over to Mike.

Thanks Ankur and thanks everyone for joining our call today. Our Q3 results exceeded our expectations. The Agence team delivered total revenues of $1.27 billion, up 6 percent on a core basis. Our EPS of 76 cents is up 13 percent. Both our top line revenue and EPS are above the high end of our guidance range. This marks our 18th consecutive quarter of adjusted operating margin expansion. In July we also announced the pending acquisition of Biotech, which would be our largest acquisition since the 2015 launch of the new Agilent. We continue to invest for growth even amid market uncertainty. At the same time, our Agilent business system continues to drive operational improvements. Our excellent overall company growth is being driven by two factors. First, strengthen the global pharma market in both small molecule and biopharma. Secondly, geographic strength in the U.S. across most end market segments. China growth was generally in line with expectations. Business unit performance is led by double digit growth in our Agilent cross lab and diagnostic genomics group. Let's take a closer look at the performance of all three of our business groups. I will start with ACG, our Agilent cross lab group. The ACG business continues its trajectory of consistently strong results with 11 percent core growth. This growth was broad based across all market segments and regions. Our service business grew at a double digit rate. As we continue to see higher demand for our expanding portfolio, both from current and new customers, we see a continued secular trend of customers seeking to drive increased productivity and to outsource non-core services in the lab. Our services offering puts us in a leadership position to benefit from that trend. Our consumers business also grew double digit. We continue to introduce highly differentiated consumables that address important customer challenges and significantly improve user experience, especially in high growth markets like biopharma. I'm very pleased with the continued positive impact on total company results from the Agilent cross lab strategy. Our consistent results speak to the strong execution from the Agilent team and the value it brings to our customers. We're meeting the ever increasing demand from our customers and we see the attach rates to our install base of instruments consistently improving. Now turning to DGG, our diagnostic genomics group business. DGG's growth momentum continues with strong 13% core growth. The growth is broad based across pathology, genomics, and our NASD businesses. Let me share a few additional comments on our NASD business. NASD turned in a very strong third quarter as we can see increasing demand from our customers clinical trials. As a reminder, in June we opened our second production facility located in Frederick, Colorado. We remain on track to start commercial shipments this quarter. We also announced that we purchased our previously leased site in Boulder, Colorado. These two facilities enable Agilent to meet the growing demand for development of RNA based therapeutics and continue to be a partner of choice to both pharmaceutical and biotech companies. Now moving on to our LSAG, our life sciences and applied markets group business. LSAG's revenue is flat year over year on a core basis and in line with our expectations. Strength in the pharma, environmental and forensics markets was offset by chemical energy declining against a very tough 12% compare and expected weakness in the China food market. As you know in Q2 we discussed three areas that impacted LSAG's growth rates. Let me give you an update. First, starting with the 4 plus 7 initiative in China. We saw a sequential improvement in demand from generics manufacturers. This is driven by business coming from the winners of the first 4 plus 7 pilot resulting in growth in our instruments business. We have deep relationships and history of these customers. While the program is expected to expand over the rest of the calendar year, we see incremental regulatory clarity ultimately drive an increased production volumes in a favorable long term investment environment. Second, the China food market conditions remain the same as last quarter and in line with our expectations with revenues flat to Q2. The business from government owned labs remains muted while commercial testing labs activity is increasing. We are expecting similar overall market conditions this coming quarter as well. Finally, the global small molecule pharma business outside of China saw improvement in demand relative to Q2. We saw budgets free up and LCB replacements taking place in some of our large accounts as well as the addition of new customers. While macroeconomic and political conditions are creating market uncertainty for capital investments, I am quite confident in our ability to take market share in whatever market environment we encounter. We have an industry leading portfolio and are not sitting still. We continue to invest in new offerings and markets. One of these new market investments is the pending acquisition of biotech. As I mentioned earlier, this quarter we announced our intent to acquire biotech, a global leader in design, manufacture and distribution of innovative cell analysis instrumentation. I'm very excited by the significant step forward in strengthening our leadership position in the fast growing cell analysis space. Our strategic focus in this area began with the purchase of Seahorse Bioscience in 2015 and was followed by the acquisitions of Luxo Biosciences and the CEO Biosciences in 2018. By combining biotech's offering with Agilent's, we will create a business with revenues of greater than $250 million per year up from zero four years ago. This business is growing double digits today. Looking ahead, we will now be able to deliver a breadth of differentiated workflows, enabling customers to obtain deeper, more reliable insights across a variety of cell analysis applications. This is yet another example of how we're investing in new, high growth markets where we can leverage core Agilent capabilities and our One Agilent culture. The culture and portfolio fit with biotech are extremely well aligned. We share the same core values and have very similar cultures with a genuine focus on our customers and teams. I look forward to welcoming the biotech team into the Agilent family. We expect the acquisition to close later this fiscal quarter. We also continue to bring new and innovative offerings to the market across all of our businesses. These new offerings are consistently drawing very strong interest from both new and existing customers. For example, earlier this year we launched major updates to our gas chromatography, spectroscopy, and genomics portfolio. In addition, in Q3 we had an excellent showing at the ASMS conference, highlighted by the launch of the new Agilent Infinity Lab LC-MSD IQ system. This new system incorporates designed-in smart features, software, and hardware developed specifically for chemists and chromatographers. Our new LC-MSD IQ system is a single-quad mass spec, built on the revolutionary Altivo LC triple-quad core technology platform. We also launched a brand new Agilent 6546 LC-Q top system that provides analysts the ability to simultaneously acquire high-resonant data across unprecedented dynamic range. In addition, during the quarter we introduced a new Agilent 6495C triple-quad LC-MS system that provides industry-leading precision in complex matrices. And finally, we introduced a new Agilent Broward sample prep system for a metabolic analysis of human plasma samples. This new offering further strengthens our leading position in metabolomics. We also brought to market the first outcome of our joint development work with the newly combined Agilent and ASSIA teams. At the CITO 2019 conference, we introduced the NovaSight Advanti-End flow cytometer. This new offering addresses today's high-end and increasingly sophisticated multi-color flow cytometry assays. It provides unsurpassed sensitivity, resolution, detection speed, and flexibility of fluorescent channels. In addition, the number of indications from our PD-L1 diagnostic assay continue to expand. In Q3, we received FDA approval for two new indications. Our PD-L1 diagnostic may now be used as an aid in identifying patients for treatment with K-Treater in a total of six cancer types. While making all these investments and launching new products, we continued our trajectory of margin expansion by 90 basis points versus last year. Our Agilent system of continuous process improvement and discipline cost management keeps the team focused on finding and executing the new opportunities. A few closing comments on our Q3 results and company transformation that has been underway for several years. Looking ahead, we continue to see uncertainty in a challenging market environment and some end markets for capital instrument purchases. This quarter's results again demonstrate Agilent's ongoing transformation towards higher growth markets and an increasingly resilient business model with a higher mix of recurring revenue streams. Given our Q3 results and outlook, we're raising our full-year guidance for earnings as well as revenue growth at the midpoint of guidance. Bob will describe this in more detail. Before I turn it over to Bob, I'd like to leave you with a few, a couple of thoughts here. At the close of our Q2 call, I commented that great companies do not just react to market conditions, they see market opportunity. At Agilent, we will continue to invest for growth and take market share in whatever market conditions we encounter. We're continuing to drive productivity and we're doubling down our efforts to be a more agile company. We will continue to leverage our strong balance sheet to invest in the business and return capital to our shareholders. I'm quite confident that our company has never been stronger and that we're well positioned to drive continued growth and earnings expansion in an increasingly uncertain global economy. Thank you for being on the call and I look forward to answering your questions. I'm now going to hand off the

call to Bob. Bob? Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional detail on revenue, walk through the third quarter income statement and some other key financial metrics, and to discuss our capital deployment during the quarter. I'll then finish up with our updated guidance for Q4 in the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike said, our third quarter results were very good as we had strong execution across a number of fronts. Revenue for the quarter was $1.27 billion with core revenue growth of 6.2 percent. Reported growth was 5.8 percent with currency negatively impacting revenue by 1.9 points and acquisitions adding 1.5 points to growth. In terms of end markets, pharma, diagnostic and clinical, and environmental and forensics led the way for us in the third quarter. Pharma, our largest market, grew 13 percent. Strength was broad-based across instruments, services and consumables, as well as NASD. Our biopharma business continues to grow at double-digit rates, and we saw good growth in the small molecule business as well, both in instruments and recurring revenues. Our environmental and forensics business grew 15 percent on a core basis in the third quarter, albeit on an easier compare. As with the second quarter, our forensics strength is tied to demand for expanded lab capabilities. This is a result of the ongoing global opioid crisis, which is driving increased sample testing and broader screening requirements. Our environmental business grew high single digits, again driven by the ongoing expansion of testing in China. Diagnostics and clinical core revenue grew 7 percent during the quarter, driven by strength of our pathology and genomics businesses. Chemical and energy revenue grew 1 percent against a very tough compare of 12 percent growth from Q3 of last year. Results were driven by continued strength in services and consumables. Academia and government declined 5 percent, largely due to order timing. And rounding out the discussion of end markets, food revenue declined 3 percent, driven by China coming in as we expected and as Mike discussed. On a geographic basis, we again saw growth in all regions, led by the U.S. growing at double-digit rates, with strength across all three businesses. China grew 1 percent, generally in line with our expectations, primarily due to the weakness in food. If you exclude food, growth in China was 6 percent. Asia, outside of China, also grew at a double-digit rate, driven by growth in Japan and South Korea. Europe grew 3 percent, in line with our expectations, as the market environment remains subdued. Now, turning to the rest of the P&L, third quarter gross margin was 56.4 percent, essentially flat -over-year, with tariffs impacting gross margins adversely by 30 basis points. We've been able to mitigate the impact of tariffs through disciplined cost management and the ongoing focus on efficiency. Our operating margin was 22.8 percent, up 90 basis points, as revenue growth outpaced growth in operating expenses. -to-date, our margins continue to expand as our teams have executed strong expense discipline. And as a result, non-GAAP EPS for the quarter came in at 76 cents, three cents higher than the top end of our guidance, and representing 13 percent growth. In addition to our operating performance, we were very active in deploying capital during the quarter. In Q3, we returned $600 million to shareholders. We bought back shares worth $549 million, totaling 8 million shares, and paid $51 million in dividends. As Mike mentioned, we also signed a definitive agreement to acquire biotech instruments and expect the deal to close by the end of our current fiscal fourth quarter. So -to-date, including biotech, we've committed to deploying over $2.2 billion in capital this year. Of that, $1.4 billion was spent in growth acquisitions with the CN Biotech, expanding our cell analysis franchise. We have also returned over $800 million through dividends and share buybacks. Our balance sheet today remains healthy, and we continue to look for opportunities to add growth assets to our portfolio. Now turning to the cash flow, we generated $242 million in operating cash flow and ended the quarter in an effectively cash-neutral position. Now let's turn to our non-GAAP financial guidance for the fiscal year. As Mike mentioned, with the strong results in Q3 and our outlook for the fourth quarter, we are raising our full-year revenue and EPS guidance. Please note that our guidance does not include any impact from the expected biotech acquisition. For the full-year revenue guidance, we're increasing the lower end of our range, thereby increasing the midpoint, resulting in a new range of $5.105 to $5.125 billion, representing .9% to .3% reported growth. Currency is expected to be a headwind of roughly 200 basis points, partially offset by M&A contributing 150 basis points. As a result, we're now expecting core revenue growth in the range of 4.4 to .8% for the full year. With the strong execution we've seen in terms of our business strategies, we're raising our full-year earnings for share guidance to a range of $3.07 to $3.09. This represents growth of 10 to .8% for the year. And now turning to the fourth quarter, we're expecting revenue in the range of $1.31 billion to $1.33 billion, representing reported growth of 1.2 to .8% and core growth of 1.5 to 3%. Currency is estimated to be a headwind of roughly 100 basis points, partially offset by M&A contributing roughly 70 to 80 basis points of growth. Fourth quarter non-GAAP earnings are expected to be in the range of 84 to 86 cents per share, which is .7% to .2% reported growth versus a year ago. Also of note, the newly announced tariffs on the additional $300 billion of U.S. imports from China is not expected to be material for us. And the share count for Q4 is expected to be 313 million shares. Now before opening up the call for questions, I'd like to conclude by saying that Agilent's resilient business model is built for the long term. We believe we are focused on the right strategies that will continue to serve us well and ensure solid shareholder value long into the future. And with that, Ankur, back to you for the Q&A.

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

At this time, I would like to remind everyone in order to ask a question, press star one on your telephone keypad. To withdraw your question, press the pound key. In order to allow everyone time for questions, we ask that you please limit yourselves to one question each. We'll pause for a moment to compile the Q&A roster. Your first question comes from Derek DeBrun from Bank of America, Merrill Lynch.

Hi, good afternoon. Good afternoon, Derek. Hey, Mike and team, can you talk a little bit more, obviously the China numbers, the 4 plus 7 hit seem to be a little less than a quarter. Can you talk a little bit more? You mentioned spending, and I guess it's like how are you sort of thinking about spending patterns now the second wave kicks in, just a little bit more color and seeing there. And then as a correlate question, there's obviously a lot of changes going on in the drug manufacturing space right now with some consolidation going on, obviously some M&A in some of the ones. It's like how are you sort of thinking about some of the changes going on in some of the bigger generic players, some of the consolidation in the space, and I guess how are you positioning those markets?

Yeah, sure. I'll take the first one, and Jacob, you can pass the second one to you. First of all, as we talked in the last call, we had seen a pause in our second quarter as related to the rollout of the 4 plus 7 initiative, but at the time we said, listen, we actually did a good thing long term and eventually will lead to increased investments once we start to sort out who the winners are. And that actually is how the quarter developed for us, where we actually saw the winners starting to invest, and we think that level investment relative to wave one will continue through our fiscal year. As relates to the core of your question, which is how about round two, our view is that they'll be going through a process of doing the bidding and sorting out the winners over the latter part of this year, and the impact on the business is more an FY2020 kind of impact in terms of what we're going to see in China. But again, I just point to that we think these are good long term developments for our business here because the strength of our relationships and their real emphasis on productivity and compliance. Jacob, your thoughts around the questions around the industry, consolidations

and generics? Yeah, I think that's a really relevant question and clearly with some of the winners coming out now in China, I think we will see some consolidation. I think actually we'll be in a very good position in this space, both in China and in general, as we have very strong relationship with many of the larger and the winners in the generic space. So when this happened, which is part of the normal pharma cycle, we are ready to support them and make them successful.

Yeah, and Derek, I just put a period on this one, which is whether the generic consolidations is happening in China or in other parts of the world, we think overall the productivity message and real value we can deliver to this segment of market really, really resonates with them. Great, thanks very much. I'll get back to you.

Your next question comes from Ross Muchen from Evercore ISI.

Good afternoon, guys. I guess maybe just digging in a bit on DGG, right? I think the performance there was kind of notably strong and so you called it a couple things, including NSAD, which seems like it's starting to ramp, but also a bit on opioids and then on the sort of array side. But academic was weak. Just give us a little bit of a picture kind of of the magnitude maybe of some of the outperformance in some of these pieces and then kind of how to think about that cadence maybe into the context of sort of the fourth quarter guide.

Sure, Ross. I'll make some initial comments here. Then, Sam, you can jump in and correct me if I'm off target here. But one of the messages we were trying to convey in our earnings call, which is while the NASD growth was very strong in a quarter, that wasn't the only bright spot in DGG. It really was across the board, whether it be in our pathology business, and we think we're putting up numbers that are growing faster than the market, whether it be because of the increased acceptance for automation, platform, the ominous, the continued utilization and expansion of the PDL-1 assay. On the genomic side, we saw good growth in our NGS-related business. Sam, I think that was probably double digit for us for the quarter and then led for the NASD strength, which we think is here to stay. Looking into the fourth quarter, we're kind of thinking something like high single digits, I think, for this business. Sam, anything else you want to add there? Because the thing, the whole mess you want to get across was broad-based strength. I think,

Mike, you really outlined where the business is. Pathology, it's a business that's built over time. It's not just about a single quarter, but it is the combination of the assays that we have, the increasing number of indications, PDL-1 related, that we announced two of them, approval from the FDA, but it's also the ongoing growth in our install base, be it of Omnis, be it of our other platforms, and our companion diagnostic business, which a lot of it feeds into that, is also performing in a really healthy way. The genomics business also, as you said, performed well, but that's broad-based around the world. We're pleased to see that both in terms of genomics-related instruments, like the platforms that we have for tape station, bioanalyzer, the AATI product category. So we feel good about the performance in the coming quarter, too.

Thanks, Sam.

And then maybe just on the C&E side, I mean, obviously you called out a tough comp, but a lot of macro volatility in the last few weeks, a lot of things happening on the trade side. I guess, how are you trying to interpret sort of all the tea leaves in that subsegment, as you've had some good underlying product cycle, but obviously there's some instability just broadly. And so how do you feel like, aside from sort of competing well in whatever market there is about sort of what that actual end market environment is going to look like for the next quarter or two?

Yeah, great question, Ross. It's something we've spent a lot of time here inside the company talking about. And kind of entering into this year, we had some concerns about the chemical energy market in terms of the lot of, there's macro noise even coming into our fiscal year. So I think we got it, like kind of low singles coming into the year. But as you may recall in our first guide after we raised the guide, we said, hey, this could be a source of upside. Well, clearly that is not happening. So we're still assuming kind of low single digits, but probably negative growth in instruments, because even though the product cycles are really strong, I think we're well positioned to win when money's there. But we're still going to assume for at least the rest of this fiscal year that will be growth in chemical energy, but overall, that'll be driven by the strength of our ACG business. And we expect the demand to be pretty muted, if you will, in the CNA. And Baba, maybe you take a quick look at this, a deep look at this while we have some quick comments.

Yeah, I think that's right, Mike. And Ross, thanks for the question. If you look at our Q4, I think we're trying to be prudent in our forecast, certainly with continued strength in our ACG and DGG businesses, but the LSAG or the capital businesses continue to have slow growth. And capital in the CNA area is one of those markets that we're looking at. And certainly with PMIs, the way that they are, and as you say, the uncertainty in the market certainly isn't helping. And so we think we've tried to take that into account for our fourth quarter. The new products that Mike mentioned didn't have a material impact on the quarter, but the ones that we've launched, the gas chromatographs and so forth, continue to have very positive uptake, but the market is slower. And it's kind of playing out the way we expected at the very beginning of the year. I guess

if there's one silver lining in terms of, which is, again, back to this productivity message and the fact that we now have a fleet of really great new products and there's a real productivity benefit to the customer, they're in a stronger position to go to their management and get support for investments because it does really help their P&L.

Perfect. Thanks,

Mike. Quite welcome, Ross. Your next question comes from Tycho Peterson from JP Morgan. Thanks.

Mike, can you talk a little bit about the global pharma picture? You said it delays last quarter. Now you're saying kind of budget's freed up. So how much of the 13% growth you saw was just kind of a catch up from last quarter and how are you feeling about sustainability of that going forward?

So I'll let Bob do a little math on the catch-up, but let me make some macro comments while you're doing your mental math. But as we pointed out in Q2, we said, hey, in Q2, biopharma really is quite strong. By the way, it was strong and even stronger this quarter. But we said, hey, we saw a pause in the small molecule side outside of China and we talked a lot already about the 4 plus 7. But it really was kind of curious for some saying what was going on with our large accounts in US and Europe. And I think they were just being prudent in their budgeting process. And we saw a release of funds in our third quarter and we're expecting that to continue. So we don't see that as being a one quarter phenomena, albeit that that's why we tried to use the words. In some end markets, we're expecting some pretty challenging market conditions. So pharma actually we think is going to continue to be a source of growth on the LSAG instrument side while we expect some markets to actually be down year over year. And Bob, I don't know how we can part of

the catch-up. Yeah, I think Tycho, the way I would talk about it is, as I mentioned, the pharma business grew 13% in the quarter. And if you look at small molecule, it was mid single digits. So there was probably some catch-up, but I wouldn't say it was material. That mid single digits is kind of where it has been historically over the last several quarters. So I think what we have said and kind of the hypothesis has been that's primarily a replacement cycle. They can hold off for a number of quarters, but they can't do that forever if they want to keep their manufacturing processes in place. And so we think we are in that. It wasn't a snapback, so there wasn't more in Q3 than what we saw. But I think it was now they're getting further in the fiscal year and they're actually spending that

money. So sort of back

to historical

one

rates,

would you agree, Jacob? Yeah,

and I think that's correct. But we do see that the larger accounts are still very conservative in their procurement while some smaller pharma actually is investing these days. So that's where we actually see some of the growth coming from also. And we are taking good share of that.

Yeah, thanks for the bill there because in my narrative, I talked about the business coming not only from existing customers, but new customers. And we've been very aggressive in that regards as well.

And can you provide a little more color on the academic order timing that throws the decline in academics?

You know, Bob, I'm not sure we have much more insight in this, that business tends to be lumpy for us, right? And yeah, it's,

you know, as you know, it's a relatively, it's the most common piece of our business and it goes up and down. And so we're not going to call out any one particular order or orders across the business. But we feel good about our position there going forward. And, you know, we're expecting that to return to growth in the fourth quarter. I will also say back on the pharma business, you know, when we look at our ability, I think one of things that, you know, speaks well to our value proposition with our customers is when you look year over year, our pricing actually has held up pretty well. Our pricing is roughly, it's slightly above on the LSAG business. So I think that speaks to the value that we are able to bring from a productivity standpoint to customers.

Hey, Bob, I also, back on academia and government, maybe just share the session we were having inside the company, which was, we're not overly concerned about this because we still see the funding environment as actually being quite strong and stable. So it's just a timing issue. So we don't see anything happening materially different in the marketplace.

Okay, if I could ask one last clarification before hopping off on China 4 plus 7, do you expect the impact to be the same magnitude next year as it is this year, given that it's different rules for round two? I wasn't sure from your commentary.

So, so take off, I'm going to resist the temptation to do an FY20 guy, but I would say directionally it's going to be an increase.

Okay, thank you. Your next question comes from Brandon Collier from Jeffreys.

Hey, thanks, good afternoon. Hey, Brandon. Mike, just starting with the China food business. You sort of give us an update on where you stand as far as building out some of your commercial teams to after that private lab channel in China, sort of your general visibility now today relative to maybe where you were three months ago.

Yeah, happy to do so. So we're fully built out. So we've been working this probably well over a year, 15 months, you know, because I think the first time I started talking about this was Q2 2018 call. So from a channel reach, channel perspective, we're there both in terms of our direct reach, but also through some of our digital enablement of customers. So we feel really good about our channel reach and relationships with the commercial accounts and we're seeing in the numbers. So we're seeing really, it's really a tale of two cities. And Jacob, I'll have you jump in on this one as well in a second, because I know you've been digging into this, but sort of tale of two cities, we're getting good growth in the commercial. There's just no real new investment happening on the government lab side of things.

Yeah, that's true, Mike. And we do see double-digit growth on the contract labs these days, but coming from a smaller base and while, so we have a very large market share in the government accounts. So clearly when the catch-up is happening, I actually believe we will see a very strong growth in this business again.

Again, if there's any silver lining, it would be as Q3 was as we expected. So we weren't surprised by the number, albeit down.

Yeah, and as we're expecting Q4 to be kind of play out the way Q2 and Q3 did in terms of roughly flat at that 40-ish million-dollar revenue run rate.

Right, which you know, looking at our, I think we clocked a 16% growth overall in China Q4 last year, so obviously up against the top compare.

And then maybe one more for Mark Doak. The gross margins in the cross-lab business are pretty substantially -over-year. I think the new high at 52%. Sort of speak to the drivers of gross margin improvement and sort of where you, what you see is the midterm runway, midterm opportunity for gross margins. Thanks.

I'm sure I'd be glad to and if you pull this back, it's several things contributing to it. Over time, mix has been a play in terms of our consumables business being from a margin perspective north of the company average, but also a lot of work we're doing is relative to some of the Agile Agilent programs, but specifically looking at delivery efficiencies in our services team. We've been able to add a lot more revenue without a lot of proportional cost to that. And that comes to really what we're seeing increasing as a big factor in our margin expansion is scale. And we're in that position now where we can invest. Mike had talked about some of our digital capabilities, both in the channel, but also in the back office areas. And it starts to fuel these efficiencies and we can reinvest some of those profits to build even more strength in the area. So it's really eating off itself as you will. And when you pull it all together between a portfolio mix, continued move towards scale and driving efficiencies through these digital capabilities, those are probably the big drivers behind it.

Very good. Thank you.

Thanks,

Mark. Your next question comes from Puneet Suda from SVB Lerink.

Yeah. Hi, Mike. Thanks for the question. Thanks. So first one on the cell analysis market, I mean, with your recent acquisition of biotech and obviously you've added Seahorse and Asieh before. Do you think you have enough pieces here to sort of ultimately serve this growing and expect it to be even further growing cell therapy development in the market? Or do you see more room for further capital deployment here? And I should say that this did increase your biologics exposure in some ways and it's likely to increase that. So just wanted to get a sense of what you have currently and should we expect more here?

So let me start this off and then Jacob, feel free to chime in as well. So we think now at $250 million, we have a business with scale. And I think that's really important to say we think really compete and really, we are really bullish on this space. And I think our investment streams started several years ago. So while we are still in the process of digestion, what we've just recently acquired, and then we have to bring the into the Agilent family, the new biotech team. So we think we have a lot of really good scale once we close with the biotech acquisition. But that being said, I think we have further aspirations to continue to build out in that space as

well. Yeah, and building on that, I think first of all, we clearly have scaled this today. But what is very important here is that the strategy we started out some years ago, four years ago now, was not just to build scale in the cell analysis business, but build differentiated components that could build together into workflows that would really do differentiate, really provide differentiating information for our customers. So not only have flow up against flow and some plate read up against plate read, we will combine them together with a particularly important immunocompetitive space and especially here in the CAR T space. And we've seen that already happening. So before actually the acquisition of biotech, we used the seahorse and the biotech and collaborated between the two companies to provide a workflow that combined those two technologies together in the same software and the same micro title plate. And we saw that that actually grew the market opportunity significantly. So now combining the seahorse, the biotech and loxul together, I think we have a really, strong differentiated position. But it also allows us to add more workflows into that space going forward. But our main priority right now is to integrate and be successful in biotech.

And I just say to Wits, revenue synergy is often theoretical. When you do an acquisition, we actually have real proof points already with customers and markets that we can do this. And there's real value to customers.

Okay, great. Thanks for the details. And if I could touch on NASD business, just wanted to get a sense of if you could quantify how much was that in the quarter and the current run rate that you have and what's your expectation longer term here? Has that changed from the earlier expectation and comments that you gave around customers demanding the R&D product and the overall long-term view of the business? Thank you.

Much like avoiding the temptation to talk about FY20 guide, I'll also avoid the temptation to talk about specific details or product line level. But what I can do is give you a directional number. So I think we've been talking about this business hitting probably 100 million or so this year. And then as we look in FY20, we've added at least that much in terms of capacity. So we hope to be up to a larger number by the end of next year at a sort of a run rate level at a higher number. We're not ready to kind of commit to what the number actually is, but it's going to be a pretty nice step up for us. And Bob, I know you've been doing some modeling in this area as well already.

Yeah, I think, Puneet, nothing has changed. We had a very good quarter. We're expecting another very good quarter next year, our next quarter, excuse me, largely on the back of our existing capacity. And the team has just done a fantastic job. As Mike said, we're on pace to deliver in that 100 million dollars consistent with what we said really since the beginning of the year. And, you know, we're excited about the new facility coming online. And as Mike mentioned, it's bringing on manufacturing capacity right now. And look forward to 20 and beyond serving our customers.

And by the way, don't interrupt my comments as being any less bullish in this space. We just know that as we bring on the new facility, you have to time when you actually can start the batches up. A lot of that's being driven by, you know, customers' timing when they're doing the clinical trial. So we're much more specific when we do our FY20 guide because we'll have a much better handle on the timing when these new customers will be coming into our new facility. I can tell you we've sold a good percentage of that capacity already.

Mike, maybe if I could just add one thing.

I'm a mature baby.

You know, one thing that we've already stated is the basis of this is the number of clinical trials and work being done here. We see the supplier opportunity for us growing from a half a billion dollar market to over $750 million over the next several years. So we're going to grow with that. And it is a fact, too, that we are doubling our overall capacity for manufacturing. But I just want to reemphasize what both Mike and Bob said, that, you know, there is a ramp-up process over a number of years. So just because we're doubling our capacity doesn't mean we're going to double our revenue there, just to be explicit about that again. But we'll be very good at that. And we're not in year

one.

Yeah, exactly, in year one.

Yeah. All right. Thanks. Very helpful, guys. Congrats

on the quarter. Thank you. Your next question comes from Catherine Schilty from Baird.

Hi. Thanks for the questions. First, I was just wondering, can you go into a bit more detail on your strong results in environmental and forensics? I think this is the fourth quarter in a row of high single digit or double digit growth there. So we'll just be curious to hear more details on the drivers and then in market.

Catherine, I think I'm actually going to pass this to Jacob,

who's here. Yeah, I mean, and again, it speaks to the portfolio we built up here over the past years on really robust, reliable instrumentation that allow us to really go into, of course, opioid is a big crisis here in the US. So we have actually quite a large growth in that area. We also see in soil and water here in the US, which have actually driven a lot of business. And the same token in China has actually continued to have strong growth in both those areas, but specifically the environmental, which is heavily regulated. So we are doing very well in regulated spaces. And this has driven also the environmental and forensic this quarter.

Yeah. I think it's fair to say. I'll go ahead, Mark.

I was going to say, if I could add to that too, in concert with Jacob, we've been working a lot on the environmental side in terms of the end market workflows and complementary consumables and services to go along with it. So it's clearly another driver of this end market for us.

Yep.

Okay. And then we heard one of your peers talk about starting to see a bias against US companies and some China tenders. Are you seeing signs of that dynamic as well?

No, Catherine, thanks for asking that question. Not at all. So that's always been the risk of the tensions between US and China as it relates to trade. We have not at all seen that in our business.

All right. Great. Thank you.

Your next question comes from Doug Schenkel from Cowen.

Hey, good afternoon, guys. I only have one question, but it has three or four parts. So I know, I don't want to disappoint. So I know you're up against a tough comp in Q4, and I'm guessing there's some desire to be a bit more conservative in the current environment. That said, given the strength of really ACG and DGG and Q3 and really the past few quarters, we would have expected Q4 revenue growth guidance to be a bit higher. So one, were there any timing dynamics that benefited Q3 at the expense of Q4? Two, did you see any end market conditions weaken over the course of Q3? And if so, are you baking in an assumption into guidance that this continues in the fourth quarter? Three, are you assuming that LSAG growth is lowering Q4 versus the flat performance in Q3? It seems like you'd have to unless you're expecting ACG and or DGG to moderate. And four, kind of building off of the last one, I'm just wondering if NASD is not expected to be as strong in Q4 as Q3, maybe just because things have to pause a little bit as you bring new capacity on. Thank you.

Yeah. So Doug, we've been waiting for this question. So thanks for putting that out there. And I'll start off and have Bob share some of our guide for last we saw. I really want to be really clear on this. We saw nothing unusual relative to pulling in from the fourth quarter. So our book to build is solid. And so there's nothing unusual happen in terms of changing the seasonality business by pulling in from Q4 into Q3. When we look at our LSAG business, we actually expected the decline in Q4 off that tough compare. I think you were almost 9% last year. And now there's two other parts. I only got two of the four parts. Yeah, I wrote some of them down. So Doug, I'll try to tag team with Mike.

As Mike said, we didn't see any pull forward or any dynamic that took orders out of Q4 into Q3. And as he said, our backlog actually did not deteriorate. But that being said, you're seeing it. We saw it today in the market. There's a tremendous amount of uncertainty. The trade resolution is nowhere, it's no closer now than it was when we had our call back in Q2. And so we're de-risking Q4 a little bit relative to where we are. It is a tough comp. And there is a little more uncertainty in the marketplace today than there was even three months ago. And we're trying to be prudent there. That being said, we raised the full year. We're on the top line and certainly on the bottom line. And feel good about that. To your question about NASD, we are expecting that growth to moderate. It had a very strong Q4 of last year. But when you look at the run rate, we still feel very good about the run rate. So it's less about level loading and manufacturing, and it's more about just comparables there. And we are expecting continued performance in both ACG and DGG. Not necessarily at the double-digit rate. That would be good. But that's not built into our guide. And as Mike said, we are expecting a flattish to slight down in LSAG just given the strong 9% compare that we had in Q4 of last year.

Great. I think you hit them all. Thank you very much.

Great. Thanks, Doug. Appreciate the question. Your next question comes from Patrick Donnelly from Goldman Sachs.

Thanks, guys. Maybe one on ACG for you, Mike. And I'm sure Mark can chime in. But it was right there with the best growth you guys have ever put up in that segment, even while facing a high single-digit comp. So how are you guys continuing to drive that segment to these levels of growth? I mean, it's been years since you had that initial refocus. How are we still seeing follow-through? What's really driving the re-acceleration?

Yes. So I'll take the congratulations on behalf of Mark, but then pass it on to Mark. But you're exactly right. I can remember the early days we were getting questions about when was this going to stop. And we said, why would it stop? Because there's a number of things to do. And there's also an expanding market underway. And as Mark pointed out, the strength was broad-based across consumers and services. And we really think we're playing into—and I tried to highlight this into my script—that we're really playing into some real changing customer needs. They really want something that's going to help drive their productivity. And they're also looking for, at times, vendors to take on some of the work they've been doing inside. And then on the consumer's front, they really want these integrated workflows. But I can't do the strategy justice. So Mark, why don't you fill in the pieces I've missed?

Thanks, Mike. And hi, Patrick. I guess it may be a little bit of the past, but also the future. And we're still very bullish about our potential to grow. But some of the drivers made really significant investments in the expansion of our portfolios. And from services, we've got breadth now in more of our value-added services. And in the enterprise capabilities that we'll not only have, but we'll roll out over the continuation of this year. And in a consumables business, it's an intentional drive to drive for more complete workflows for our targeted end markets. And we called out BioFarma in particular, a high-growth market, where we've really been focused around grabbing that. So portfolio is a big driver. We're really getting some great results from expanding our reach and our ability to wallet share, growth inside of our current accounts through each channel, e-subscriptions, still a lot of opportunity there. We still have a significant opportunity to improve our attachment rates to the Agilent instruments. But I always like to come back and remind everyone, we view our market not only as the Agilent install base, but also the competitions. And that adds a significant size and scale to the market opportunity. And not only we can take market share from our competitions on multi-vendor perspective, we are. So kind of sum it up, a lot of work that's been done over the past, built a lot of capabilities from the standpoint of portfolio, digital, working on some fundamental basics around what we can do in the attachment rate from the sales channel and our big market opportunity out there. So hopefully it gives you a sense of where we've been, a little bit of a sense of where we're going too.

Yeah, that's helpful color. And then maybe just a quick one for Bob on the share repurchase front. It was encouraging to see you guys step in and be opportunistic with the $550 million this quarter. How should we think about going forward? Obviously the market has pulled back a decent amount, your stock along with it. So maybe just provide some perspective on that front.

Yeah, you know, we will. Thanks, Patrick, and I appreciate you acknowledging that. And we'll continue to evaluate the market. You know, obviously our focus is first on growth and we'll be, you know, closing the biotech acquisition this quarter and our M&A funnel continues to be strong. And we will be looking at that, but not afraid to go into the market if the price is right, so to speak. So I think the way that we are looking at that is first on M&A. And then looking to continue to deploy capital. We're, as I mentioned before, cash neutral right now with the acquisition of the biotech will probably be at net debt of roughly one time. And so we still have plenty of capacity there.

Okay,

thank

you. Your next question comes from Steve Willoughby from Cleveland Research.

Hi, good evening. Most of my questions have been asked. Just two things for you, I guess. You know, first, Mike, I was just wondering if you could comment a little bit more and provide any more color on some of the new products you recently launched and how they're being accepted into the market, particularly the new GCs as well as the new IQ system. And then I guess secondly, for Bob or Mike, if you want to take it,

are

you able to quantify how much you're expecting in terms of revenue in the fourth quarter from the new NASD facility you're starting up here? Thanks, guys.

Yeah, so if you don't mind, I'll make some summary comments. And Jacob, you can fill in some of the details. But last time I saw you on our new GC family launch was actually ahead of where we thought we'd be. And I think we're doing well on the IQ as well. But maybe you can kind of fill in some details there.

Yeah, certainly. I think we are, despite some challenging market conditions, we're actually doing extremely well with the 88 series and in front of our on our own ramp to volume. So I think that this is working very well. And it's really the combination of what we call the smart instrument combined with us already proven, well proven technology, GC technology, and that really resonates with our customers. And the same can actually be said with the with our IQ, which of course, little only was introduced a few weeks ago at the SMS. And we start to ship here very soon. We have received the first orders. But what I can say there is that it has been very well received where we have been out introducing it and presenting it to customers. I think they very much like the ease of use, the intuitive of the of the detector itself, and also all the self awareness that it have. So it it really helps the customer to be successful, not only successful, but also allow them to be have much more uptime in the laboratory. And this really addresses the QA QC labs, where it's all about being uptime and of course, get the thing through the laboratory. So it's been very well received, but it's still early days for the IQ. So we have received orders, but we are shipping in this quarter here.

And Bobby, you

want to take

the question? Steve, just on NASD, you know, it's going to be, as we've said earlier in the year, you know, it's not going to be material to the overall numbers. So it's going to be low single millions.

And we have time for one more question. The last question comes from Dan Brennan from UBS.

Great. Thanks for thanks for the question. Congrats on the quarter, guys. Thanks, Dan. I was hoping to ask a question back on Mike. So best question back to China. Can you just provide some color on like what the actual generic business did in the quarter, like what the level of revenues was in year over year? And then, well, I appreciate I think, to take this question, you don't want to give a specific number for 2020. But just given, I think the investors and ourselves are just trying to get some frame of reference, like directionally. Is there any help you can provide just as we go to 2020? I know you made a comment to take over just a little more help if you could directionally on the food and the China generic side, how to think about that. Thank you.

Yeah. So happy to let me take the second part of that question first, which is when we think about the outlook for for 20, again, we know I'm going to stay away from percentage changes in growth rates. But I think we have a lot more confidence around where the generic side of that marketplace is going, because we already have some proof points. We've already seen, which is the thesis was in the second quarter, hey, we think this is going to lead to ultimately more business. And but there was a pause in business, we actually saw that play out in the third quarter. And we think it'll play out in the fourth quarter, where the winners are going to be buying, you know, the equipment, we think the same thing is going to happen in in the second quarter. And I think that's going to be a big issue too. I mean, excuse me, FY 20, be more than FY 20 event in terms of what it impacts the P&L, because we know what the process, we know what's going to happen. We know the winners who we have deep relationships with, are going to invest. So I think we're we have a level of confidence about where that market is going. I don't think the same thing can be said about the food market, because that's why I use the word future. What we do know is the commercial side of that segment will continue to grow. That will continue to grow. It's unclear right now what's going to be happening relative to China's desire to invest in the government labs. As you heard from Jake, earlier right now, they're prioritizing, for example, investments in environmental, and that's why we're seeing strong environmental growth. And Bob, maybe it's worth this kind of parshing out, I was just thinking, you know, how our business is in, I can't give a specific number relative to the generics, but this in terms of the size of our pharma business in China, and then roughly how much of it's in the non-biopharma side.

Yeah, so our, you know, maybe just a comment on the food, Dan, on the, and you know, on Q4, as I said earlier, you know, we're expecting it to be roughly that $40 million, which will be down year on year, pretty consistent with how we, you know, our results in Q2 and Q3. And, you know, the question is, over time, we do think that that business will come back, not at the levels it had been in the past, just given the different dynamics, but, you know, the question is when, and we're not ready to call that yet. On the pharma side, the business actually did better in Q3 than it did in Q2. And, you know, of roughly, you know, China is roughly 20% of the overall business and pharma is about 30% of that 20%. So it's about 6% overall, and it's roughly 50-50 in terms of consumables and instruments. So it's roughly -3% of our overall company. And, you know, in Q3, it grew, as Mike mentioned, you know, really on the back of the winners of the 4 Plus 7, and just kind of clarity on what this pilot meant going forward. So that's probably as much detail as we're going to get into relative to this. And, you know, we'll have another quarter under our belt for Q4, and then be better prepared to talk about it as things unfold for the fiscal year next in November.

Great. And if I could, since it is the last question, just one more. Mike, obviously a very strong quarter. You mentioned kind of similar to what you've been talking about. Obviously, we can see what's going on, but continued uncertainty out in the marketplace, especially for, I think, for cap equipment. And Bobby talked about PMIs. Any, but, you know, you also talked about good book to build, and you had a good quarter. So any way to help us think about, like, as we try to tease out all the noise that's out there on the marketplace, kind of what means to Agilent on a go-forward basis, like PMIs, do we watch that, do we pay a lot of influence to that, or just any more color about the customer conversations you're having and kind of how it relates back to those comments. Thank you.

Yeah. Happy to do so. So the first thing I would do is I would set aside 60% of the business of Agilent, which is the recurring revenue side of the business. And we've talked a lot about the DGG business, the ACG business, and our view that, you know, we're going to have continued, you know, strength there. And then what we've been trying to do is position the business. Hey, listen, there is this 40% of the business, which is instruments. And that does, is predicted by PMI. I think you may recall, you know, I have a conversation with, I think, still some of the models still hold, which is, you know, the PMI trends do drive, to some extent, you know, what's going to happen, ultimately, in the capital goods side. And I think we've already seen it. You know, PMI started dropping, you know, early this year. Albeit, there are some areas of Jacob's business which are still somewhat independent of that, whether it be the 4 Plus 7 Initiative, some policy changes, some of the things that are happening in environmental, you know, forensics. So I think it's sort of a, it's a mixed model. So, but the first thing I do is start off by just saying, let's set aside 60% of the business over here, and then start talking about the 40%, and then parse out the cell analysis piece, which is, which is by itself is a high growing business driven by certain dynamics there, and then parse out some of the policy driven stuff. And then you're left with primarily chemical energy exposure. So, Bob, how would you think about that? No,

I think, you know, maybe I'll just leave it here. I mean, I think we feel very good about our portfolio. Obviously, we can't, we can't, you know, time the markets from the standpoint of market growth, but we think that we're able to gain share in any market. And I think this quarter proves that. Our portfolio is strong. We continue to invest in areas that are faster growing than the overall company, things like cell analysis, and then also our biopharma businesses across all three business groups. So, you know, I think, you know, Mike mentioned it in the prepared remarks that the business is a lot different than it was five years ago. And I think we continue to invest in fast growing areas, continue to transform it, and make it a much more resilient model. And I think we feel good about that, certainly for not only Q4, but going forward.

Great. Thanks. Thanks again.

All right. Thank you. With that, we will conclude today's earnings call. Thank you, everyone, for joining.

This concludes today's conference call. You may now disconnect.