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spk19: Please stand by. We're about to begin. Ladies and gentlemen, welcome to the Agilent Technologies Q3 2023 Earnings Conference Call. My name is Beau, and I will be coordinating your call today. If you would like to ask a question following the presentation, you may do so by pressing star 1 on your telephone. I will now hand you over to your host, Parmeet Bahooja. Parmeet, please go ahead.
spk15: Thank you, Beau, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2023. With me are Mike McMullen, Agilent President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Tyson, President of the Agilent Life Science and Applied Markets Group, Sam Raha, President of the Agilent Diagnostics and Genomics Group, and Porek McDonald, President of the Agilent Cross Lab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at www.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 and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike.
spk11: Thanks, Parmeet, and thanks, everyone, for joining our call. In today's call, I will walk you through our Q3 results, share what we're now seeing in the market, and provide context for our revised full-year outlook. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. The Agile team continues to execute well as we navigate our way through the ongoing challenges of the current market environment. Our Q3 revenue is $1.67 billion at the top end of our expectations. This is a decline of 2% on a core basis against a tough compare of 13% in Q3 of last year. We continue to be proactive and are taking steps to help us deliver on our leveraged earnings model. Operating margins are 29.3%, up 180 basis points. Quarterly earnings per share of $1.43 are up 7% and above our expectations. The major driver behind our Q3 year-on-year declining revenue is our China business. Excluding China, the rest of Agile grew 2%, which was better than expected. We knew we were up against a difficult compare in China and had previously guided for lower China revenues in Q3. However, the economy in China continued to weaken during the quarter, translating into a more challenging market environment than we had anticipated. With the softer market conditions in China and continued global macroeconomic challenges, we have lower growth expectations for the remainder of the fiscal year. We now expect core growth for the full year to be around 1%, down from our previous guide. Based on what we're seeing at this time, we're not assuming any improvement in the China market for the remainder of the year. We, however, view the near-term challenges we're experiencing as transitory and remain confident about the long-term growth prospects of our end markets. Returning now to our third quarter results, I'd like to touch on our two largest end markets. Our total pharma business is down 8%, driven by the pharma market in China being down 30%. Within pharma, our biopharma business grew 5%, while small molecule was down 16%. the chemical advanced materials market declined 3% versus a 22% increase last year. While we did see the chemical energy space being weighed down by macro concerns, slowing growth in advanced materials was more a function of a difficult compare as the volumes have remained steady and robust. Looking at performance by business unit, the life science and applied markets group delivered revenues of $927 million. This was a decline of 9% of a very tough compare of 18% growth. Last year's growth was helped by the benefits of the recovery from the Q2 2022 Shanghai shutdown. LSAG's performance continues to be affected by the market environment in China across all end markets and pharma globally. Our sales funnel remains healthy and are up year on year, but deal velocity continues to slow as customers remain cautious in making capital purchases. We expect this market environment for new instrument purchases to continue for the rest of the year. At this time, we are not assuming any benefit from the year-end budget flush or incremental stimulus in China. As we said before, we are continuing to prioritize investment innovation. As an example, in June, AdSense Investment Innovation were on full display at the annual ASMS Conference. The LSG team introduced new products and comprehensive workflows to enhance data quality and productivity for our customers. These include two new LCMS systems, a new PFAS workflow solution, and an AI software for data analysis, among others. The Agilent Cross App Group posted revenues of $396 million. This is up an impressive 11% core with growth in all regions and end markets as customers continue to embrace our value proposition. We continue to see strong demand for our services as we help customers drive productivity in the lab. The diagnostic and genomics group delivered revenues of $349 million, up 3% core. Pathology grew high single digits as demand for our diagnostic tests continues to grow. Our NASD business grew to high teens. This growth was partially offset as we continue to see market weakness for our genomics and resolution bioscience businesses. Regarding resolution bioscience, the market for KIDIT, NGS-based companion diagnostics, has not developed as we expected. Furthermore, we don't see a realistic path to profitability. As a result, we've made the difficult decision to shut down the business. However, our investments in future growth continue. For example, we achieved an important milestone during the quarter. when our NASD business generated the first revenues for our Train B investment in Frederick, Colorado. Now looking forward for the company, as we navigate this challenging macroeconomic environment, we remain confident in the Agilent team and our ability to continue driving leveraged earnings growth using our Agile-Agilent framework. We faced challenges before and we're taking actions now that will make us stronger and position us well for the future. As we've made the last quarter, we are doubling down on delivering cost efficiencies and increasing productivity. The goal is to generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We are on track to achieve the cost savings we've targeted for the second half of this year. We are in attractive markets that will produce long-term growth. Our innovation engine remains strong. and the battle test of one Agile team is driving outstanding execution. Bob and I will provide the details and our results, as well as our outlook for the remainder of the year. After Bob delivers his comments, I'll be back to provide some closing remarks. And now, Bob, over to you.
spk09: Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated guidance for the full year and our fourth quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q3 revenue was $1.67 billion, a decline of 2.3% core and down 2.7% on a reported basis. This compares with 13.2% core growth last year. Currency was a half-point headwind, while M&A contribution was minimal. As you may recall, Q3 of last year benefited from roughly $35 million in revenue deferred from the second quarter as we ramped back up from the Shanghai shutdown in China. Accounting for this, our Q3 core growth would be roughly flat versus a year ago. As Mike mentioned, pharma, our largest end market, declined 8%. This is in line with our reduced expectations coming out of Q2, with underperformance in China offset by better performance in the rest of the world. The chemicals and advanced materials market was down 3% off a very tough 22% compare, but dollar-wise was flat sequentially. The academia and government market was up 5%, with all regions showing growth except the Americas, which was flat. Our business in the diagnostics and clinical market grew 3%, driven by high single-digit growth in pathology, partially offset by genomics weakness. The environmental and forensics business grew 2%, driven by double-digit growth in the Americas and Europe. The growth was generated by the build-out of water infrastructure projects and an expansion of funding for PFAS-related activities. The food market grew 1% based on strength in Asia outside of China and mid-single-digit growth in Europe, driven by new food testing regulations. On a geographic basis, while China underperformed, the Americas and the rest of Asia were better than expected, while Europe was in line with our expectations. Moving down the P&L, third quarter gross margin was 56.3%, down 10 basis points from a year ago. Like last quarter, this was largely due to the product and services mix, and pricing was slightly better than our expectations. Below gross margin, the expense reduction actions we initiated in the second quarter helped strengthen operating margins. We also benefited from a reduction in variable pay expenses. As Mike mentioned, margins were 29.3%, up 180 basis points from last year. Below the line, our interest income was higher than planned, while our tax rate was 13.75%, and we had 295 million diluted shares outstanding. Putting it all together, Q3 earnings per share were $1.43, up 7% from a year ago, a very good result given declining revenue. Now let me turn to cash flow and the balance sheet. I continue to be pleased with our cash flow generation this year. Cash flow from operations was $562 million in the quarter and is $1.3 billion year-to-date. In Q3, we invested $81 million in capital expenditures, totaling $214 million year-to-date, effectively flat year-on-year as we continue to optimize our CapEx spending. Given the strong year-to-date results, We are increasing our free cash flow forecast for the year to $1.2 billion, comprised of operating cash flow of $1.5 billion and CapEx of $300 million. This is an increase of $250 million from the midpoint of our previous guidance. Despite the challenging macroeconomic conditions, our balanced capital allocation strategy is intact. During the quarter, we returned $401 million to shareholders. $66 million through dividends, and repurchase shares worth $335 million. This ongoing, balanced approach to capital deployment is another example of the confidence we have in our team and our belief in the long-term strength of our markets. Before getting into the revised full-year outlook, I want to mention we have taken a $291 million pre-tax charge in Q3 associated with the decision to shut down the Resolution Bioscience business. This charge, which is excluded from non-GAAP's results, includes an impairment write-down along with charges associated with the wind-down and exit of the business. We expect the wind-down to continue through Q4 and into early FY24. Now to the revised outlook for the year in Q4. Given the more challenging macroeconomic environment we are seeing, particularly in China, we now expect full-year revenue to be in the range of 6.80 to 6.85 billion dollars. This represents a decline of 0.7 percent to flat on a reported basis and core growth of 0.8 to 1.5 percent. This is a core growth reduction of 260 basis points from the midpoint of our last guide. Roughly 85 percent of the change is related to reduced expectations in China while the remainder is due to some incremental cautiousness from our customers on capex spend, as well as softness in genomics and the shutdown of resolution bioscience. As Mike said earlier, we are not assuming any incremental stimulus in China or any material year-end budget flush in these revised projections. Given the large change in China, I wanted to provide some additional perspective on how we are forecasting the rest of the year recognizing that the market continues to be very dynamic. To provide some context, in Q3 through June, our business in China was tracking to a mid-single digit decline in revenue, which was in line with our expectations. However, in July, we saw a further deterioration in China, resulting in the 17% decline for the quarter. And while the Q3 decline in China was centered in pharma, which was down 30%, we did see weakness in the other end markets as well. We expect the conditions we've seen in July to persist in China for Q4. In addition, we are facing our most difficult quarterly compare in China, where we grew 44% in Q4 of last year. We are now expecting Q4 to decline in the mid-30s year-on-year. For the full year, we are expecting China to decline mid-single digits versus growing mid-single digits. With the change in revenue, we now expect full-year fiscal 2023 non-GAAP earnings per share to be between $5.40 and $5.43, representing leveraged earnings growth of 3% to 4% and roughly 6% to 7% growth net of currency. The change in full-year guide results in Q4 revenue being in the range of $1.655 to $1.705 billion. This represents a decline of 8% to 10.5% on a reported basis and a decline of 9.5% to 12% on a core basis. The recovery last year in Q4 of the remaining revenue deferred from the Shanghai Q2 shutdown negatively impacts the year-on-year results by roughly a point. In fourth quarter, non-GAAP earnings per share are expected to be between $1.33 and $1.36. Thanks for being on the call, and now I will turn things back over to Mike for some closing comments before taking your questions. Mike? Thanks, Bob.
spk11: While today's macro environment is challenged for new instrument purchases, we remain confident in the long-term growth prospects of our end markets, the diversification of our business, and in our proven ability to grow faster than the market. I'd like to share a few examples of why my confidence remains intact despite near-term challenges. In pharma, our largest end market, innovation and advances in medicines continue, with new therapeutics flown into the market. The demographic drivers on this market are on our side, a growing global population that expects access to healthcare and extending life expectancy to be key priorities from their governments. Our market-leading solutions are critical to innovation behind new therapeutics and ensuring the safety and quality of on-market drugs. In the applied markets, Growing PFAS testing and the electric vehicle transition are here to stay, ushering in new opportunities for growth. Everyone wants to have safer water to drink, food to eat, and air to breathe. And the search for and production of more sustainable materials and energy sources remains a global priority. Azla is a diversified leader in a unique position to help our customers drive their solutions. We remain a trusted partner our customers know they can rely on in both good and challenging times. Our combination of leading instrumentation and world-class customer support is a long-term competitive advantage. At the heart of this long-term competitive advantage is the Agilent team and the One Agilent culture. You see this reflected in a recent recognition on Glassdoor, and in being named a great place to work in all 27 countries and territories around the world where we qualify for certification. We have a company mission focused on advancing the quality of life. To learn more about this, I would encourage you to review the latest edition of the ESG report that we issued last month. We are proactively managing the company through the short term, always with an eye towards our customers and in the long term. We have been proactive in managing our business to drive leveraged earnings, but not at the expense of customer satisfaction and future growth. Yes, these are challenging times, but we have the team, the strategy, and the right culture that will deliver long-term success. Thank you for joining us today. And now, over to you, Parmeet, to lead the question and answer session. Parmeet?
spk15: Thanks, Mike. Bo, if you could please provide instructions for the Q&A now.
spk19: Thank you, Parmeet. Ladies and gentlemen, if you would like to ask a question, please press a star followed by one on your telephone now. And if you do change your mind, please press star one again to withdraw your question. When preparing to ask your question, please ensure your phone is unmuted locally. We'll go first this afternoon to Matt Sykes at Goldman Sachs.
spk05: Hi, good afternoon. Thanks for taking my questions. Sure, Matt. I thought maybe I'd start just with China, sort of a high-level question. You guys talked about sort of the transitory impacts of the current environment. You mentioned pharma. Could you kind of extend those comments to China? Do you think it's more cyclical versus structural? Are there competitive issues that you're facing or just your outlook on that region? Thanks.
spk11: Yeah, Matt, thanks for the question. So let me start with the last part of your question. This is a macro story, not a competitive story. So market shares continue to be very, very strong. I know there's a lot of discussion about increased local competition, but we've moved pretty aggressively on our made-in-China strategy, so we don't see it at all as a competitive issue. Transitory, the comment there is really about the fact that the China market is not going away. It's going to be a big market for years to come. It clearly is challenged right now. And We're not – we're taking this sort of one quarter at a time, actually month by month. As Bob mentioned in his comments, I think July we actually saw the weakest performance within the quarter, and we're still seeing weakness in the pharmaceutical industry. For example, the level of manufacturing declined pretty precipitously in the month of July. So we think the market's going to be there, but it's going to take a while for it to get back to growth. And I think the other thing – probably the other point here is – know and again i'm talking specifically around the instrument side of the china market as you know we have a very large in fact the largest installed base of instrumentation in the marketplace so very positive on the ability to grow the aftermarket in our diagnostics business probably yes you add to that because okay maybe just for my follow-up just on acg um pretty good quarter um in that business and i know you guys talked about a year or two ago about sort of a goal of 30 plus margins obviously achieved by this quarter
spk05: Can we talk about sort of where you see the durability of that growth is sort of high single, low double, 30% plus margins, how we should be thinking about the business, or were there some one-offs in the quarter that you'd want to call out to kind of measure expectations there?
spk11: Yeah, you know, we've consistently communicated that we think this is a high single digit, low double digit kind of growth business for us. It's been that way since the pretty much most of my tenure as CEO, and we don't see that changing as we go forward. Of course, there'll be puts and takes by quarter, but we're continuing to see good growth in our connect rates, which we've talked a lot about, and we're also doing very well on winning the enterprise business as well to complement other aspects of our portfolio offerings. I would say that the profitability was probably a little bit higher in Q3, but we do think that the high double-digit number you called about is pretty manageable for that business, but not a level we saw in Q3, right, Bob?
spk09: Yeah. Hey, Matt, this is Bob. And just maybe to further what Mike is saying, when we think about the components of that business, the fastest growing component is actually the contracted business, which is that connect rate. And it was in the mid-teens this last quarter and continues to be faster growing than the overall business. And as long as we continue to be able to drive that increased attach rate, we feel very good about that. And that comes with that growth comes scale and being able to leverage our team with the work that the digital initiatives that we've had as well. And so, as Mike said, don't book, I think it was 32% going forward because there were some, you know, variable pay true-ups. But certainly what you've seen quarter in, quarter out is a nice steady cadence of margin improvement there.
spk18: Got it. Thanks, guys. Thank you. We'll go next now to Jack Meehan at NetFarm Research. Thank you. Good afternoon. Good afternoon, Jack.
spk02: Mike, I was hoping you could talk a little bit more about some of the more cyclical areas of the business in the CAM segment. Just what are you seeing from some of your chemicals customers? We've heard some conversation of budget cuts there. Are you starting to see that? Just how's your visibility into some of these cyclical areas?
spk11: Yeah, so as we've talked earlier, thank you for the question, Jack, and I'll provide some comments and then have Jacob jump in on this one as well. But we look across the CAM, I'd say the advanced materials segment of that market, which we've been communicating is more driven by secular trends and cyclical trends, continues to hold up quite, quite, quite well. And by the way, also, I just want to point out we had a really tough compare. I think we grew 22% last year in Q3 and CAM. If we look at the chemicals and energy side of it, the energy cycle actually popped up a bit, particularly driven by the U.S. Where we are seeing some weakness is in the chemical side where customers are looking at the macroeconomic environment. and are slowing their capital investment there. So I'd say that kind of puts and takes, but I think in terms of the quarter, Bob, I think we came in right about where we thought we'd be in Cam, and I'd say it's a mixed story in terms of different segments going at different rates.
spk09: Yeah, before Jacob maybe jump in, I think the one thing that I think is important is you really have a story in China, which is its own, and then the rest of the business. And so if you think about where America is and Europe is, it's performed extremely well. And if you actually look, we mentioned this in the call, sequentially, the dollars actually were very stable. And so we are expecting a challenging Q4, mainly because we grew 70% in China. Up 43% in Q3, right? Yeah. So it's a compare situation. But this business continues to be very strong.
spk11: Do you want to make any comments on the advanced materials side of the house there, Jacob?
spk01: Yeah, I can say that. And, Mike, I think you also started with that, saying that we continue to see a lot of activities in that space, especially in the battery space, where, of course, there are also compares we are up against, but there's still a lot of interest in that space, and we are doing very, very well. Semicon is also cycling down right now, but we continue to see business in that space, but not as strong as we did last year. Thanks, Jacob. Great.
spk02: My follow-up, I wanted to ask about margins. You know, just how you're thinking about some of the puts and takes for 2024. You know, I think some of the cost savings you've talked about should extend next year, should get some leverage out of NASD. But at the same time, you know, some of the performance comes back and would think some of these top-line pressures extend as well. I don't know. Can you just talk about maybe relative to the LRP, how you're thinking about margins for next year?
spk11: Bob, you want to lead that one?
spk02: Sure.
spk11: Yeah, yeah. By the way, one thing I'd add to that before Bob clears the specifics, Jack, is, you know, our decision on the Resolutional Bioscience Business Act is also part of the story for us next year in terms of margin expansion. So, Bob?
spk09: yeah i would i would say that our our our view of uh leveraged earnings growth um continues into 24 and so while we do have some things coming back to us um you know some of the actions that we've taken will um continue to move into a full year for 2024 and you know quite honestly that's kind of what we expect our job to be is to be able to drive that leverage earnings growth thank you guys welcome
spk18: Thank you. We go next now to Vijay Kumar at Evercore ISI.
spk16: Hey, guys. Thanks for taking my question, and good job on the margin execution here, Mike. Mike, maybe I missed some of the comments here. Can you talk about the phasing in the quarter here? China, I think I heard you started off down mid-singles, and with July off, like minus 25, minus 30, is that the exit rate?
spk09: Yeah, Vijay, I have a couple of decades within the quarter. Yeah. Hey, Vijay, this is Bob. Your math is in the ballpark. Yeah. So we were down mid-single digits through June, so May and June, kind of tracking as we expected. And then we saw incremental weakness in July. And we ended up for the full quarter down 17%. And what we're assuming going into Q4 is that performance will continue into Q4 and Given the tough comp that we have, because I think we grew 44% in Q4 of last year, we're estimating roughly a 35-ish percent drop in Q4 in China.
spk16: Sorry, that's helpful, Bob. And just, sorry, where I was going with that question was, can you talk about capital versus recurring? And I think when I look at your Americas in Europe, America is just flat-ish. Did you see a similar sort of phasing in ex-China markets? Maybe talk about eggs or crates in July.
spk09: No. Actually, if you think about the ACG business, actually ACG grew in all regions and all end markets, inclusive of China. So there wasn't a change there. And I would say both in America and Europe, we didn't see that same effect.
spk11: And overall, outside of China, the geographical performance was better than expected. Correct. We saw no trends. like the China trend in our other geographies.
spk16: That's helpful, Mike. And Mike, maybe one that you mentioned in a couple of times on transitory, I think that's a new term that you're using. What have you heard on the ground?
spk11: I think I moved away from prudent to transitory.
spk16: Yes. Yes. What have you guys heard on the ground on China stimulus? You know, maybe some positive commentary, but nothing as concrete and, and, Now, why, you know, use the word transitory? Is the implication here fiscal 24 should be a more normalized year when you look at the comps?
spk11: Yeah, so, you know, a couple thoughts here. I think, you know, relative to the China business, you know, we're hearing similar things, but nothing really significant. And there's not enough to go on to assume it's going to have any kind of material impact on our outlook for the rest of the year. When we talk about transitory, we talk about the fact that these markets are driven by investments to improve the human condition, as I mentioned. They're not going to go away. And while we're not going to get into specifics of an actual number, we actually see a path to growth next year for a full year for Agilent. Of course, we have the tough comparison, the first half of next year we did, coming off a double-digit print for the first half this year. But as we looked at our business, keep in mind, what's behind my thought process here, which is we're an instrument company. Yeah, we have a big instrument business, around 60%. We have 40% of a recurring revenue business. I don't know if you caught it in my call script, but our sales funnels for instruments are actually growing. So that would say that at some point in time, you know, those budgets are going to be released and the orders will close. We're not seeing deals come out of the funnel. We're not seeing order cancellations. We're not seeing changes to our one loss ratio. And we're encouraged by the growth we're seeing in biopharma on the small molecule side. We know there's different rates of replacements during the cycles, but, you know, we think this will follow a historical cycle. I think the real wild card for us to look forward into 24 is really what do we assume around the China market? We're not assuming any kind of major further degradation, but at the same point in time, you know, it's path to return to kind of historic growth rates. You know, that's the open question right now.
spk18: Thanks, guys. So next now to Dan Leonard at Credit Suisse.
spk03: Hey, Dan.
spk18: Thank you. Hi, Mike.
spk03: I wanted to follow up on that last thought. You've seen a lot of cycles in China over 30-plus years. What would you compare this to, and how do we get out of it?
spk11: Well, I am as old as dirt and have been working in this marketplace since the mid-90s. I haven't seen a cycle like this before. And we've not seen a situation where there really seems to be a lack of confidence right now in the macro economy outlook. And I'm not saying anything that the audience here doesn't fully understand already. So the way we get out of this, I think, is, you know, China, Led by the government, we'll get back to focusing on its long-term goals of making China an innovation-driven economy, which is going to require continuing investments in R&D. It's going to also get back to focusing on improving the health of the population, addressing some of the environmental issues. So we think it's getting back to fundamentals. We think that eventually will occur, but there's a lot of issues that need to be worked through within China right now. But we have a very large market. The market is not going to disappear. And I think, you know, there'll be investments. I think there's also needs to be a level of confidence in the private sector in China that it's a good time to to to reinvest. And maybe I shouldn't wait on the sidelines, hope for a stimulus stimulus, but get back to work and get my business going. So. There's a lot of dynamics. I really have to say, though, I don't know if I have a real comparable situation that we've been through for this long. I think Bob and I were talking earlier today, you know, the change in the food ministries a number of years ago is – was the biggest thing we'd seen, or 4 plus 7 was one of the biggest things we'd seen to change. But this is much more of a macroeconomic issue in China, which is different than what we've seen before. It obviously has an impact on life sciences tools, but it's a much bigger macro story that's really driving the softness right now in our markets.
spk09: Yeah. The only thing I would say, Dan, to build on what Mike is saying is, As he mentioned, the demographics are with us. When you think about the aging population, the need to actually access healthcare, more important therapeutics, and the importance of ensuring the water and the food supply. You know, they are the world's leaders today in electric and clean energy. It's hard to believe when everyone thinks about that, but they are the leader. And they have more electric cars than any other region. And so I think that investment is going to be key, as Mike's talking about, from the government. But unless they change their strategic priorities, I think that's the benefit for life sciences in general.
spk13: Mm-hmm.
spk03: Appreciate all that perspective. And just to follow up, I was hoping you could elaborate on your decision to shut down ResBio. I was surprised by that, given that you acquired the company only a couple of years ago.
spk11: Yeah, sure. Sure, Dan. Happy to do so. So that was a very difficult decision. And I'll have Sam jump in on this conversation. But our fundamental belief was that our differentiation would be all around what we call the KIDIT strategy to have a distributed on-market companion diagnostics for our pharma partners. and that market really hasn't developed as we had anticipated.
spk14: Yeah, yeah, Mike, building on what you said, you know, while NGS and cancer diagnostics, you know, is here, and we serve that market in a number of ways, right, for, you know, just to be clear, too, we absolutely continue to, you know, serve cancer research, translational research, and diagnostic, you know, test developer customers, but our core, our thesis, our differentiation was really the ability to develop and distribute these kitted tests. And the market, the pharma market and the testing market just hasn't evolved that way. You know, and we also looked at our recent analysis and concluded that even with, you know, more additional investment, this is going to be a business that's going to be, you know, undergoing significant losses for some foreseeable future. So it was a difficult, as Mike said, but the right decision to make this move now. But again, to be clear, we continue to serve cancer research and diagnostics in a number of ways.
spk11: Yeah, I think, you know, Sam, when we talked about this in the past, we think we're still going to be able to participate in what we believe the strong growth of the liquid biopsy market, but through really providing a lot of the, if you will, ingredients for the test developers themselves.
spk14: Here, Mike, I'm going to take this opportunity also just to say, you know, beyond our core SureSelect target enrichment portfolio, which is used broadly for, you know, liquid biopsy testing today, you know, early next year we'll be launching solutions from Avita, Avita Biomed, an acquisition that we announced earlier this year, which we think is really going to be a differentiated way to look at methylation as well as classic mutation analysis.
spk09: Yeah, hey, maybe just one add, Dan, is, you know, obviously a difficult decision for us, but I also think it also looks, you know, it shows the discipline that we have in terms of our portfolio rationalization, and we felt we had better returns in other places to invest in, so.
spk13: Understood. Thanks for the time.
spk18: You're welcome. We'll go next now to Brandon Couillard at Jefferies. Hey, thanks. Good afternoon.
spk04: Mike, would you mind unpacking mass spec versus LC trends in the quarter? And then, based on your revised guide, what is the four-year CAGR from 2019 for LSAC instruments exiting the year, and how does that compare to the historical average over the cycle?
spk11: Hey, Brad, I'm going to start with the response to your question and let Bob dig through his notes to find the actual number. But first of all, I'd just start to say is that we believe what we're dealing with here in our core instrument portfolio, inclusive of LC and LC-MS, continues to be a macro market story. Our market shares are holding up really well. We're seeing it in our one loss data. We're seeing it in the external reports from ALDA. And I think When we look at our performance in those core platforms versus our peers who are reporting some numbers and kind of adjust for the timing of when we report, I think we're putting up similar kind of numbers. And Jacob, I know you looked at this thing pretty closely.
spk01: I'm trying to buy some time for Bob to check down to find the last 3 years, which I don't have in front of me here. But you're right. Mark Mike, we follow this very accurately and and we are we doing we continue to do a well in this marketplace. We continue to innovate into it and we have seen actually, we have taken share over the last period of time. And if you actually compare our calendar, our calendar two versus competition, would actually see that we are approximately flat in the LC, LC-MS space. And I think that stacks up very well with competition actually.
spk09: Yeah. Hey, Brandon, we can get that to you afterwards. Okay. I can tell you though, if you looked at the LSAG business over the last three years, it's been averaging 5% CAGR, you know, despite being forecasted to be down this year. And, you know, obviously those are two large businesses.
spk04: Okay, and then I guess two housekeeping questions for you, Bob. Did you talk about NASD growth in the third quarter? I imagine it might have been up sequentially with train B coming online and then on the capex line, you pushed out 200 million to spend. Did that just roll into 24? Are there some projects that maybe you decided to defer for the time being given the environment?
spk09: Yeah, it's a great question. So, NASD, we continue to be very pleased with that. We had our first revenue in Q3 from Train B, the first of many more revenues to come from that standpoint. And, you know, expect it to continue and we're still on track for the numbers that we've been talking about, you know, through 50 plus for the full year. And in terms of the CapEx, Some of that will roll forward, but we're not going to spend that $200 million in 24 as well. This would be, we have deferred projects being very rational, really focused on revenue generating programs. And so I do expect some of that will flow into 24, but I don't expect 24 to have an incremental $200 million show up in the forecast.
spk18: We'll go next now to Pramit Sudha at Varying Partners.
spk17: Hey, Mike, Bob, thanks for taking the questions. Sure. First one, thanks. So, you know, maybe, Bob, could you elaborate a bit on pricing here? I know pricing was a meaningful contributor initially this year. We're seeing China, obviously, you talked quite a bit about it, and we're seeing the headline for China deflation. So wondering if you are expecting pricing to maintain there, or do you expect pricing pressure in China continuing? And also we're seeing, you know, some of the peer sort of bioprocessing companies talking about local competition rising on the less high-tech product end. So wondering if you're seeing that on any of sort of your product lines as well.
spk09: Yeah, let me take the second question first. We can compete against the Chinese local competitors each and every day, and nothing has changed from that standpoint. We continue to feel very good about our portfolio and continue to drive that growth. In regards to pricing across the board, we were slightly better than what we had expected. It was roughly a little over 4% for the quarter, and that was driven across all three of the groups. So, we continue to drive positive price across not only our DGG and ACG business, but also our instrumentation, and that's globally. we expect to be able to continue to demonstrate the value of our instrumentation across the globe. Obviously, in a deflationary environment, that will put a little more pressure on the instrumentation business, particularly in China. But we've incorporated that into our forecast and are still on track for, you know, positive price contributions for the full year in excess of 3%.
spk11: Hey, Bob, maybe Bob – Pork and Oscar made a comment on some discounting trends you may have been seeing.
spk12: Yeah, no, I think. No, I think it's the pricing holds at discounts as really, really has stable as well. We haven't seen any increase in that rate of us and we continue to monitor that, but it's been very stable.
spk17: Thanks. Got it. Thanks for that. And then. If I could ask an academic and government here, you know, smaller segment for you, but, you know, did solid in the quarter. Maybe could you talk a little bit about what you're seeing across the globe and different geographies for academic and government and your expectations here going forward? Thank you.
spk11: Yeah, Bob, I think this is an end market that is holding up reasonably well. I mean, we're seeing that on a global basis, in most cases with the exception of being China, where funding is there, the funding is stable, and it's been a positive surprise for us so far through this year. And I don't know.
spk09: No, it's really across many of our instrument platforms as well as the service business. And, you know, from what we're seeing, Puneet is funding continues to be available and it's flowing from governments. I think they're seeing the strategic nature of many of the investments that they're making. And our expectation is that that funding will continue.
spk18: Got it. Super. Thank you. You're welcome. Thank you. We'll go next now to Rachel Battenstall at JPMorgan.
spk00: Great. Good afternoon. Thanks for taking the questions. So first off, one of your peers had flagged that they were actually seeing some early signs of pharma spending recovery. I appreciate that most of the incremental this quarter is really related to the China weakness, but maybe ex-China, can you walk us through if you're seeing any signs of recovery of spending with biopharma customers? And then you've previously flagged for us that historically when pharma spending slows down, like we're seeing today, that it can take 12 to 24 months to recover. So how are you thinking about that timing of recovery given the incremental weakness this quarter?
spk11: Sure, Rachel. So, you know, while we saw signs of stabilization in our European and U.S. business stabilization relative to expectations, we're not hearing anything along those lines yet in terms of of recovery or desire to increase spending. In fact, we're hearing the exact opposite right now from our large, major pharma companies. So I hope that commentary from others in this space is correct and there's going to be a big, big recovery here from year end, but we're not seeing any kind of indications of that. If it does happen, great. It would be upside relative to our current outlook, and we know we do well in these markets. But, you know, Poreg, I don't think we're seeing it here or anything along those lines. No, I think it's spot on, Mike.
spk09: The only thing I would say, Rachel, is if we look at our funnels, they continue to be growing. So it's a question of when, not if, particularly in pharma. And as Mike and Poreg just mentioned, we're not assuming a budget flush into, you know, our Q4. And if it happens, that would likely happen in our Q1 in any event from a revenue perspective. But, you know, what we see, at least from our funnels, is they continue to be helping. And let me just answer Brandon's question from a couple of times ago. If I look at LC and LCMS on a three-year CAGR, they're between 7% and 9%. So, higher than the overall average, thanks for that.
spk11: And Rachel, I get a 2nd question relative to, I think you're referring to the small molecule replacement cycle. And, as, you know, coming probably at least for the last 12 to 18 months, we had been indicating that we were expecting to see a slow down in the rate of replacement. And in fact, we've seen that occur this year. Actually. uh given the weakness in china even beyond our expectations with a minus 16 percent number overall um in in the quarter you know that being said uh we do stay with our view that these tend to be 18 to 24 months 12 to 18 month cycles uh and we'd expect uh that they start to see movement back towards a higher growth rate and that's one of the reasons as we look into 24 you know we're saying you know some of these markets will start to turn as the replacement cycle gets back to more of a growth phase in that cycle. And as we mentioned earlier, we see that particularly in the liquid chromatography, it's probably about a 5%-ish kind of growth market long term.
spk00: Great. Thank you for all that, Collar. Maybe just following up on your small molecule comments there. So small molecule declined 16% this quarter. So can you talk to us about how much of your China exposure is really tied to those small molecule workflows? And then what else is really driving incremental weakness on the small molecule side? You know, we've heard of IRA pressuring some of pharma's decisions and potentially leading to them reprioritizing the pipeline. So is there any risk that we won't see a recovery or could the growth rate for small molecule really be resetting? What are your conversations with customers on that front? Thank you.
spk11: Okay. So I got it. So relative to China, I would say it's probably the same ratios as the global business, right? So it's probably what 60, 65% is probably related to small molecule. And relative to what's happening in large pharma, what we're seeing is in medium-sized pharma is, again, a continuation of this caution just about deferring capital. I'm sure they're thinking through implications of IRA and also other expenses that are running hotter in their P&Ls where they need to make some offsets with capital purchases. That being said, If you believe, and I know pharma believes, the importance of having safe, unmarket drugs, you have to have the instrumentation, QAQC environment to support that. That requires you to have modern liquid chromatography fleets. So I don't think it's a question that this market is going to go away and won't be an area that pharma will need to invest in.
spk18: You can defer for a period of time, but that only lasts for so long. Thank you. We'll go next now to Patrick Donnelly at Citi.
spk07: Hey, guys. Thanks for taking the questions. Mike, maybe just given that commentary around the instrument cycle, not really seeing much improvement yet. Obviously, the China piece, transitory, but certainly seems like it's going to linger. You're only a couple months from 24 for you guys here. How do you think about some of these impacts lingering in? I think you said there's still plans for growth next year, but It certainly sounds like some of the headwinds at least will linger into the first half given some of those comps. I just wanted to talk through that top-line setup given some of these headwinds lingering into next year.
spk11: Yeah, you know, we still have a few more months till we finish off the fiscal year and we'll give you our guide in November. And I think we'll know a lot more by then. But I do think we know that we'll be able to grow this company in 24. That said, I was very careful in my comments to make sure that it was a full year growth rate. We do expect the first half of the year to be a challenging year. Just from a comp standpoint to begin with, but also some of the things that we've been talking about today in the call, we don't expect quick snapbacks to be occurring in the next quarter or two.
spk07: Okay. That's helpful. And then I know you mentioned budget flush. We're still a little bit away from that at the calendar year end for pharma and other areas. Do you have any view at this point? It sounds like you guys are expecting maybe a more subdued budget flush, but Whatever you're hearing from customers would be helpful just to pull the curtain back a little bit on that.
spk11: Yeah, sure, Patrick. Happy to do so. And then I'll invite Torgan to this conversation. I know he's been talking a lot to his team about this. But as I mentioned earlier, we're not really seeing any kind of indication of customers saying, hey, listen, I'm going to have money. I'm planning on spending it. Just wait. In fact, we've seen the opposite where sometimes orders that we thought were closed actually keep deferring and require more purchases. In fact, I think one story we heard was We thought we wanted to order three times. The CFO approved it on the third go-round, then the CEO overruled it. So we know eventually we're going to get that business, but this is the kind of dynamics that we're seeing. So we're not seeing a lot of indications of a strong year-end budget flush. Again, we'd love to see the opposite happen, but we're not getting indications of that. I don't know if you have some questions you'd like to add there.
spk12: What we're hearing from the customers is that we're not planning on a budget flush at the end of the year, but we will take the upside, of course, if that comes. I think you know i think one one thing is really really clear though the funnels are very strong and it's there but we're not seeing them to be released or a big flush at the end of the year
spk11: I think this comment, Patrick, on the funnels being strong and that these funnels are actually growing is really important because this is one of the reasons why we think about, you know, full year outlook in 24. We know the business is there. It's just a question of when it's going to get released.
spk12: Yeah, and we watch very closely our win-loss rates, you know, and we haven't, you know, we've seen them very, very stable with a strong funnel, which is very positive over time.
spk18: Understood. Thank you, guys. We'll go next now to Derek DeBruin at Bank of America. Hi, good afternoon. Good afternoon, Derek.
spk08: A lot of what I wanted to ask has been asked, so I've got some cleanups here. Just did you give a specific instrument core growth number and consumables growth number for 3Q and then sort of your all-in number for this year?
spk09: expecting yeah we yeah we didn't lsag for q3 was down roughly nine percent core uh consumables was up slightly got it thank you um so what's the revenue contribution for res bio and 4q and what do we need to pull out for 2024 yeah so we've got a minimal number in q4 as we wind down the business And I would say it was roughly a point to a little over a point to the headwind to DGG going forward in FY24.
spk08: Got it. Okay. And so staying on the topic of M&A, I mean, you know, you've done a couple of genomics deals which haven't gone your way. And I'm just sort of wondering what you're thinking about deployment going forward. I mean, valuations have obviously come in. You know, industry is consolidating, you would think, but it's been relatively quiet across the space for the last 18 months. So how are you sort of thinking about capital deployment? And at what point do you decide you maybe want to buy, you know, start maybe doing more of the share prices, maybe doing some share buybacks? Just sort of talk about your general capital deployment strategy at this moment.
spk11: Yeah, I think Bob alluded to it a bit in his prepared remarks, but we still are staying with our balanced capital allocation strategy, and you saw this in the market opportunistically on share repurchases, given where we saw the share price sitting that. In terms of our appetite for M&A, it remains unchanged, despite the resolution of the bioscience decision. We knew that was a high-risk acquisition for us, early-stage company in a hot area, based on a really differentiating strategy that didn't really play out. But we had some success in other aspects of our genomics acquisitions, including the AAT acquisition on the instrumentation side. So we're still out there looking. But as Bob mentioned, we take a disciplined approach not only to how we view our internal choices and our internal business performance in terms of what's in the portfolio, but we'll also take that same lens, if you will, on how we look at M&A. So really nothing has changed beyond the fact that this is more of a buyer's market. And companies with a strong balance sheet like Ashland, I think, are in a good favorable position to work on opportunities, but we're going to stay disciplined and not get caught up in what once was a value of a company, either in the private or public space.
spk08: Just one more follow-up, if I may. What are your orders in looking at chromatography? How is your order book? Are you seeing orders increasing?
spk09: Our order book was down, largely a function of China, but they were down year on year.
spk18: Thanks. Thank you. We'll go next now to Josh Waldman at Cleveland Research.
spk06: Hey, thanks for taking my questions. A couple for you. Sure. First, Bob, can you provide more context on the puts and takes within the fourth quarter core organic growth guide? I guess maybe the assumptions by business unit. And then curious what areas or in markets outside of China seem to be slowing real time that you're trying to reflect in the guide versus areas that maybe have stabilized or are improving over the last few days?
spk09: Yeah, so Josh, just real quick, when we think about kind of the Q4 implied guide, the big driver is China, as I mentioned, down roughly mid-30s. And that really impacts a number of markets you can imagine, both pharma and chemical and advanced materials, which are the two largest markets in China. I would also say that the diagnosis and clinical is also down. We've seen that softness in genomics, and then obviously the shutdown of ResBio also impacts that business, and that's primarily a U.S. phenomenon. So we did see an impact in U.S. on that side. And then there's some puts and takes in other places, but those are the two big pieces for Q4.
spk11: If I was to recall, I think 85% of the change was really China-driven and bleeds over into pharma and cam.
spk06: Got it. Okay. Then, Mike, I guess staying on China and a follow-up there, can you unpack a bit more of what you're seeing by in-market? I mean, like where – demand is holding in versus like areas that you've seen come in lighter as the quarter progressed. Again, I guess outside of China, sorry, outside of pharma. And then I guess a follow-up on Dan's question, I believe it was earlier. What are the variables within China, Mike, that you're trying to account for as you forecast the medium term? I mean, maybe beyond just the next couple of months. And I guess any risk that we need to kind of rethink the underlying growth rate in the industry if China remains light here in the medium term?
spk11: Yeah, so let me start with the view by end marketing. I think the academic and government market was a rule for us in the third quarter, but everything else was pretty much down. The big change really were in the pharma space, and as Bob Bob commented earlier about how we exited the quarter in the July performance. Some weakness in chemicals, but I'd say down there was really just a byproduct of, you know, we're going off a 43% compare last year. We're looking at a 70% growth compare in the fourth quarter. But I'd say the concerns or the caution in the China marketplace is really across the board and with varying degrees, but I think it's really – most reflected in the pharma outlook. I think that's the $64,000 question. I think there's a case to be made that this market will get back to its longer-term growth rates, but it'll take a period of years to get there. It's not going to be a snapback in 12 months. But again, that's work to be done. You know, the factors that we're looking at, I think, are the same factors that everybody else is staring at, which is What's going to happen to the macro in China? You know, the storyboard here is a macro story and it's bleeding over into life sciences tools. But, you know, we need to see the China economy get moving again. We need to see consumer confidence coming back. We need to see, you know, investment confidence coming back in China. I think those things will take some time. But I do think there are priorities of the government and they'll find a way to make that happen. But we're not calling for a quick snapback here either.
spk18: Got it. Appreciate it, guys. Thank you. We'll go next now to Dan Brennan at TD Calais.
spk20: Great, guys. Thanks for taking the questions. Maybe just one on instruments, Bob. I think you talked earlier. I think to Derek's question, maybe you gave the LSAC number, but I know there's consumables within that. Could you just break out what the instrument number is? I know we'll get it on the queue, just wondering how instruments did and You know, as we look ahead, I think, given your instrument exposure, and it's always a key question I know has been various times asked throughout, but just how would we think about kind of the outlook for instruments, you know, whether it be fourth quarter, if you want to, you know, point the scope out a little further?
spk09: Yeah, so to maybe add a little more flavor and clarity to my answer previously, LSIG was down 9% core. It was down 9% in instruments as well. So the consumables business was up basically a point.
spk18: And as we look out there, I'm just wondering, I guess it really depends upon the type of product, which you guys already discussed.
spk20: It sounds like you're optimistic on LSAT, given the funnel is going to get back towards that, excuse me, that LSMS is going to get back to that 5% growth, I guess. Would you assume instruments as a starting point grows in fiscal 24 from what you see today?
spk18: Based on what we see today, yes.
spk09: Got it. And maybe one more quick one. There's no reason to believe when we think about kind of the the level of investment over time and the importance of our instruments in the discovery of new therapeutic areas or food testing. We think about, as Mike was talking about, these new areas around applied markets. There's no reason to think that there's something fundamentally has changed that they don't need instrumentation. And so I think we feel very good about our market share and our competitiveness and do expect our LSAG business to be a growth driver for us going forward.
spk20: Yeah, no, completely. No, it was just more just on the comp basis after, you know, mid-teens. But that sounds great, Bob. And then just one quick one, just on the, you know, on the applied versus the chemical, you mentioned some chemical weakening. just that we're concerned into the quarter, but the applied is obviously powering through. Can you just maybe unpack a little bit more how you're thinking about, like, how we exit the year across, you know, your different buckets, you know, within the chemical and applied segment?
spk09: Yeah, I mean, I think if you look at Q4, it'll be really – an impact of China. So we're actually looking at chemical and advanced materials declining in Q4 because of that 70% increase that Mike mentioned in Q4 of last year. That was across the board. I would say the advanced materials will be much stronger than that down high or down double digits. And the chemical side probably will have a bigger impact. If you recall, the Shanghai shutdown impact was centered in the chemical and advanced materials market because that's where our GC manufacturing was, and that's a workhorse for some of those products. So, you know, we do see it down in Q4, but up for the full year. I think that's a really important thing to make sure that people understand.
spk18: Great. Thank you. Thank you. And we have time for one more question this afternoon.
spk19: We'll take that now from Luke Sardot at Barclays.
spk10: Great. Thanks for squeezing me in. Just real quick on the – thanks. So real quick on the NASD. Are you guys seeing any pressure from the market, you know, seeing any insourcing from the market? I know Novartis has talked about doing some of this as well. And then lastly, you know, additionally with that, With the CapEx guy down, are you guys still investing in additional lines there for the year or is that really on pause? Does that have anything to do with that kind of CapEx step down?
spk11: You know, let me leave with this and then have Bob jump in and Sam as well. But from an insourcing standpoint, no, we're not seeing any material moves in this direction. And, in fact, as we head into 24, we continue to broaden our book of business, and we're going to have more customers than we ever had in terms of breadth of customers as we go into 24. And, yes, it's called Project Endeavor. So Train B, we went live, which was a different code name, and that's live, but we continue to move forward with our expansion plans on the Oligo front, the SIRNA front, along with what we like to do on the CRISPR side as well. and anti-sense. So we're going to broaden that. So our stated investment plans remain unchanged.
spk09: Yeah, to be very clear, Luke, to add what Mike said, we are not slowing that down at all. That investment is one of the highest priorities. We've trimmed back spending in other less you know, more infrastructure kind of oriented projects as opposed to kind of revenue generating. I think what you're seeing actually is it's actually coming in better than expected because the pricing is better than expected. And you probably have seen that in other places. And so the availability of parts and the key materials is better than what we had initially planned as well.
spk14: Yeah, I'll only add to what you guys said that, you know, Mike, along with having, you know, more customers and actually more diversified set of customers, we're going to be, you know, we're contracted to do more programs next year than in the history of NASD. So it's all full speed ahead.
spk10: Gotcha. Gotcha. And then I didn't hear anybody ask about the ACG margin. Maybe they did. I missed it. But you guys had a material step up there. Can you talk about really what went on there? Is any benefit that you saw from, like, lack of incentive comp? Just kind of break out where, you know, the driver's there and really how we should think about that in Q4, and that's a jump-off point.
spk09: Yeah, we did mention that there was a benefit, Luke, of the variable pay comp. Obviously, that's got a big component of people in it, but it's also a reflection of the scale and continued growth of that business. We didn't say, you know, take that 32%, I believe it was, in Q3 and kind of book that as the new starting point because it had outsized growth. But we continue to be pleased and expect continued margin expansion for ACG going forward. All right, great. Thank you.
spk19: Thank you. Ladies and gentlemen, at this time, I would like to turn things back to Parmig Alhuja for any closing comments.
spk15: Thanks, Bo, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good day, everyone.
spk18: Thank you, Parmig. Ladies and gentlemen, this does conclude today's call. Thank you for joining. We wish you all a great day. Goodbye.
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