Parmeet Ahuja:

Thank you, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, our newly named President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second 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 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 exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. 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 Padraig.

Bob McMahon:

Thanks, Padraig, 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 cover our updated full year and third quarter guidance. Q2 revenue was $1.573 billion. a decline of 7.4% core. On a reported basis, currency had a negative impact of 0.8 percentage points, while M&A had a negative impact of 0.2%, resulting in a reported decline of 8.4%. As Padraig mentioned, Pharma, our largest end market, declined 11%, with both Biopharma and Small Molecule declining roughly the same percentage. Instrument demand continues to be constrained, while services delivered mid-single-digit growth. Looking forward, while we have seen sentiment improve, instrument purchases are still constrained and we are expecting that to continue for the rest of the year. In addition, we have reduced our expectations for NASD as several clinical programs have pushed out into next year and some commercial products have not ramped at the pace as expected. As a result, we have reduced our full year growth outlook for the Pharma end market from roughly flat to down low double digits, similar to our Q2 performance. Our revised expectation for the Pharma end market is the largest change in our outlook. The Chemical and Advanced Materials market was better than expected, declining 3% after coming off a very tough comparison of 16% growth last year. The academia and government market declined 12% against a tough compare of 11% growth last year. While soft globally, the decline was driven by China, which was down mid-30s. Our business in the Diagnostics and Clinical market declined 2%. Our pathology business continues to show resilience in this market, growing mid-single digits, while our NGS QC instrumentation business also grew slightly. These were offset by softness in our NGS chemistries business. The Environmental and Forensics market declined 2%. The business grew mid-single digits ex China, highlighted by continued strength in serving the rapidly expanding PFAS opportunity. The Food market declined 13% on a very tough compare of 21% growth last year, heavily impacted by the low 30s decline in China. On a geographic basis, all regions declined. The Americas region was down 5%. Europe was down 3%, while Asia Pacific ex China was down slightly. China was down 21%, missing our expectations of a mid-teens decline. We saw demand weakness expand beyond Pharma. As a result, we have revised our full year expectations for China for a mid-single-digit decline to a double-digit decline. We have seen funnel activity increase because of the recently announced stimulus program, but we are not assuming any revenue impact in our fiscal year. Moving down to P&L. Our second quarter gross margin was 55.6%, up 30 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.1% was down year-over-year as expected. Below the line, we benefited from greater-than-expected interest income and a lower tax rate. Our tax rate was 12.5%, and we had 293 million diluted shares outstanding. Putting it all together, Q2 earnings per share were $1.22, down 4% from a year ago, less than the decline in revenue and ahead of our expectations. Now let me turn to cash flow and the balance sheet. Operating cash flow was $333 million in the quarter and we invested $103 million in capital expenditures as we continue our planned NASD expansion. We returned $299 million to shareholders in the quarter, $69 million through dividends and $230 million through repurchase shares, catching up on our anti-dilutive buying year-to-date. In summary, we met our expectations for the quarter our markets are recovering but at a slower pace than we anticipated. We are directing our energy towards high-growth opportunities and are committed to delivering value to our customers and our shareholders. Now on to our revised outlook for the year and our third quarter guidance. We now expect full year revenue to be in the range of $6.42 billion to $6.50 billion. This represents a decline of 6.0% to 4.9% on a reported basis and a decline of 5.4% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. This is a $300 million reduction at the midpoint and is primarily related to changes in two areas

Parmeet Ahuja:

Thanks, Padraig. Regina, if you could please provide instructions for the Q&A now.

Matt Sykes:

Maybe just the first one is more of a timing question on China. I mean we've been through a lot of quarterly results this season and the stabilization theme in China has been pretty consistent and you guys have talked about sequential stabilization over the last number of quarters. So, was this really an April impact that you saw in China? And if so, what was sort of the deceleration that you saw there? And what were some of the causes of it?

Matt Sykes:

Got it. And then just for my follow-up, you guys have often talked about sort of 18- to 24-month down cycle in the LC replacement cycle. And I'm just wondering just given some of the comments you made around Biopharma, given that's an important customer segment for that, have you kind of changed those views in terms of what the LC replacement cycle will look like and what the potential recovery in the replacement cycle will look like? I think some were thinking sort of towards the end of this year, but is this more now into 2025, is that replacement cycle been extended in terms of recovery?

Bob McMahon:

Yes. I think, Matt, as you said, we're still expecting improvement in the back half of this year, just not at the pace that we had expected. And so, we're not seeing any material extension of kind of the use case for LC or an LC/MS in the marketplace and are still expecting recovery in '25.

Jack Meehan:

I was wondering if you could share what's the new sales outlook for an ASP this year? And can you talk about like bridging from kind of the second half to some of the longer-term targets you've had previously. Like what are you assuming in terms of kind of progression after this year?

Bob McMahon:

Yes, I think Jack to add some numbers to what Padraig was saying here. Originally, we were expecting it to be roughly flat, which would have said roughly a $350 million business. We're now seeing roughly $300 million this year. As Padraig is mentioning, we're expecting to build back from there as these clinical programs move through the clinical pathway and are expecting to have more volume in '25. And I would say our long-term perspective on NASD remains unchanged. We're still very excited about that opportunity and are still building out the capacity in our Colorado site.

Jack Meehan:

And then on the cost savings program, I think I heard talk about $100 million. I just wanted to clarify, is that incremental to the $175 million you previously talked about? And where are those -- any color on where the savings is coming from?

Operator:

Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Padraig McDonnell:

Yes. Yes. No, I think at an at level, as we talked about, our book-to-bill was greater than one, which is a positive sign and where orders grew year-over-year. On the instrument side, the orders grew low single digits, excluding China, but declined low single digits overall. So, what we're really seeing is that our funnel is really stable, but we're seeing those extended purchasing decisions being continuing to extend out through the second half.

Patrick Donnelly:

Okay. That's helpful color. And then maybe to follow up on Jack's question on NASD there. You understand the revenue change. How are you guys thinking about the capital investment on that front? Obviously, it's been sizable in the past years, you've often talked about the continued expansion of the trains. How do you think about the CapEx devoted to this over the next few years? Has there been any change in terms of push out of that capital? Or how you're thinking about the potential investment and the expansion on this front just given the shift in revenue here.

Bob McMahon:

Yes. Patrick, just one other thing to add on to that as I'm sure you're aware, as part of that expansion, not only are we expanding capacity, we're also expanding our therapeutic options. So, not only siRNA but also anti-sense and also CRISPR opportunity. So, it also provides us with more capabilities to support our existing and new client base.

Vijay Kumar:

I guess Padraig or Bob, thanks for laying out the changes in the guidance assumptions here, right. I think part of it was China, part of it was NASD. But more than half, I think, it's coming from Pharma cautiousness that's outside of China, ex-NASD, which I think that the market. I thought we were expecting stabilization. Is this a funding environment kind of question or is elections or what changed because second quarter, it feels like revenues were roughly in line -- was it the exit rate? Can you just talk about what the exit rate trends were and what customers are telling you?

Bob McMahon:

Vijay, to build on what Padraig is saying, the guidance that we're building out right now is based on what we're seeing today. It doesn't assume any meaningful inflection. That certainly -- I'd characterize this as a prudent guide given what we know today. Certainly, we're not assuming any of that inflection. You bring up a number of variables, which are hard to quantify around the upcoming election and so forth. But we don't think it's a funding issue. We do feel like we are seeing biotech funding coming up. Obviously, on the Small Molecule side, those are they're well-capitalized companies. It's just a very -- it's still cautious in terms of them getting through their approval processes.

Bob McMahon:

Let me answer the last question first. So that is a cumulative number for the second half of the year. We'll see some of that happen here in Q3 and roughly be at that $100 million run rate in Q4. So roughly about a $25 million run rate and then we'll get the full incremental 65, obviously, next year as we go into the business. Do you want to comment?

Operator:

Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead.

Padraig McDonnell:

Yes. Look, I think having worked with China for many years. It's a multiyear program as opposed to the last one, which I think was a year program in the shorter term. So, it's very encouraging to see it. We've seen some proposals from customers, but they're still, quite frankly, trying to work out what are the mechanisms for the funding as we go forward. So, we're seeing a lot of activity around that. And I would say in terms of the confidence boost, we do really see that in '25, we're going to get some benefit from this, but really too early to tell on it. So, we're taking down our guidance in the second half primarily related to this.

Dan Brennan:

Got it. And then -- and maybe just one more on Pharma, if you don't mind. So, the instrument growth was so powerful for yourselves and some of your peers coming out of COVID. Is there any chance that like the slowdown you're seeing now maybe just some miscalculation, maybe there was such instrument demand and purchase is done in the last couple of years that customers at work just kind of working through that all those purchases versus like an exceptional slowdown right now given the macro? Just maybe speak a little bit to that, if you could about the overhang for maybe the strength in the past couple of years versus what you're seeing real time now?

Bob McMahon:

Yes. And Dan, just to kind of build on what Padraig had said. We looked at ACG and our CSD or our consumables business outside of China, both of those grew mid- to high single digits in the quarter. So, it does speak to lab activity. They're not having instruments just sitting idle. And in ACG, our contracted services business continues to perform extraordinarily well, up double digits. So, the demand is there outside of China right now.

Rachel Vatnsdal:

So first up, I just wanted to ask on China. We've seen some of the headlines from BIOSECURE Act. So, I was wondering if you could break down your exposure to large CDMOs in the region? And if that contributed to any of the weakness there just given me some of the commentary from an RFP standpoint? And then just on China stimulus and some of the dynamics there, how should we think about local competition competing for some of these dollars on the stimulus dynamic and you talked about some of these proposals that you're working on. So, can you detail what sectors, what types of customers are you really seeing that proposal work be done right now?

Bob McMahon:

Yes. I would say just a building on that point on our questions around CDMO, most of our business in China is local. So, it's not multinational and so wouldn't necessarily fall under the BIOSECURE Act. There are certain large companies that are on that list that are customers of ours, but that is that business has been pretty muted for a while, and that's not the cause of the incremental weakness here. I would say on the bid activity, it's about -- it's across the board. It's not in one region of the country or one end market or customers and obviously, Chinese local competitors are going to be buying for that business like we are. But I think we've shown time and time again our ability to provide very strong and robust instrumentation, coupled with very good service. And so, I don't think that we're in any disadvantage from a local perspective from that standpoint.

Rachel Vatnsdal:

Great. And then for my follow-up, just given some of the moving pieces on this fiscal 3Q guide, could you walk us through your expectations by segment for 3Q?

Operator:

Our next question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead.

Padraig McDonnell:

Maybe I'll kick it off a bit at a high level. I think, first of all, we participate in excellent markets with multiple long-term growth drivers. You look at the characterization that's going to be needed in biotherapeutics in time, improving human health. Quality of our Food is really going to be a continued growth driver for the Company. I would say there's a lot of growth factors within the business that in adjacent markets where we continue to invest in those opportunities. You've seen part of Biopharma, PFAS. And I do believe NASD long term is going to continue to grow. In our service business, we expect that to grow high single digits over the long term as we increase our attach rate, which is not a small point because every percentage increase in attach rate is about $30 million incremental on that side. So overall, I think we're in extremely durable long-term markets. On the China story, we're going to see probably getting down to more mature level growth rates in China, but I would remind everybody that there are secular drivers in China that continue to come up and the government continues to invest in science and technology, but also the scale of the country being so large, we benefit tremendously from the aftermarket element consumable and service around that and being able to kind of drive attachment to some of the emerging workflows. So, Bob, I don't know if you have anything to add on that?

Doug Schenkel:

Okay. And Bob, maybe sticking with you. If we go back to the beginning of the year when you set guidance for the fiscal year. Yes, I think it's fair to say there were a number of questions from the investment community about how you were setting guidance for the year. Specifically, there was concern about the plausibility of what you assumed for the second half. In hindsight, obviously, these questions and concern to be well-founded. What went wrong? Does this tell you something about your visibility for the business? If so, is it a transitory issue? And if that's the case, can you help us explain why? And if it's not visibility, what do you need to do in terms of changing your guidance philosophy moving forward?

Operator:

Our next question comes from the line of Dan Leonard with UBS. Please go ahead. Dan, your line might be on mute. Our next question will come from the line of Michael Ryskin with Bank of America. Please go ahead.

Bob McMahon:

Yes. I think if we look at just first half, second half and look at where our core guidance is, it's not assuming any inflection in the back half. I mean you could make an argument that typically, we have a higher weighting towards the back half of the year, just part of normal seasonality, and we're not assuming that in our guide. And so, if you look at also Pharma, we're assuming it's down roughly the same as it's been in the first half of the year, but we'll get easier compares. And so, we're not expecting "a big inflection in the back half of the year." I would say also on NASD, which we are assuming a reduction in the second half of the year relative to the first half of the year, we have all those orders in-house. And so, we've got a plan, a production plan and both for Q3 and Q4. And while something could happen, it's not like we're looking for orders to guide us on those. And those are the two big areas that made the biggest change when I think about where we were back in November, giving guidance to where we are today.

Bob McMahon:

Yes. The biggest change there is our NASD business, which we will see a low water point here in Q3 if we -- what we ended up seeing is some of these clinical programs getting pushed out. They've got pushed out from Q3 into Q4. And so, there's a $30 million incremental step-up from Q3 to Q4. So, if you took that out, we did get back to a more historical kind of level.

Dan Arias:

Bob or Padraig, on the capital equipment portfolio and the order book and the sales funnel that you have there, maybe just in simplistic terms, how would you describe the average time to deal close that it feels like you're going to be working with in the back half of the year versus what you've seen as a historical average? And embedded in that is just this question on instrument demand that you have a line of sight on via the sales funnel, but that just hasn't been booked yet versus what's not materialized at all yet? And then how the outlook change reflects those two things.

Bob McMahon:

Yes. Dan, I wish I could say we have all the orders in-house for the second half for instruments. It just doesn't work that way. So, we have much better visibility into Q3, but we will need continued performance in Q3. Now we've had several quarters here of book-to-bills being greater than one in our instrumentation portfolio, which is a positive thing. I would say, hey, we're building some backlog. And as Padraig mentioned earlier in the call, particularly in LSAG. LSAG orders grew ex-China. And that is the first time that's happened in several quarters. So, we are seeing some positives and if you look at the second half of the year, our performance relative to last year should improve just because of the benefit of easier compares. And so -- we're not, again, looking for that huge inflection. And we're not expecting also as Padraig was saying, a constriction, so to speak, or an acceleration of those deal funnels. We're expecting them to stay very similar to the way they are right now.

Dan Arias:

Okay. And then maybe on -- as a follow-up on Biopharma. I'm just curious about the extent to which the IRA is part of the conversation there these days. It sounded like last year, the industry kind of contemplated an adjustment as the idea was coming into the picture. So, do you think spending expectations got rightsized for a period of time? Are you finding that that's sort of a continual evolving conversation?

Operator:

Our next question will come from the line of Josh Waldman with Cleeland Research. Please go ahead.

Padraig McDonnell:

I don't know if you want to take that one, Bob.

Josh Waldman:

Got it. Okay. Then a follow-up on China. I wondered if you could comment a bit more on where we’re seeing…

Josh Waldman:

Is it -- what were the two platforms?

Josh Waldman:

Okay. Okay. Got it. Got it. And then a follow-up on China. I just wondered if you could comment a bit more on where all you're seeing demand coming softer than expected from a new booking’s perspective and then a bit more detail on how you're contemplating the stimulus. I mean, it sounds like you saw improved bidding and funnel activity on the prospects of stimulus, but just wondered if you could provide what's giving you the confidence that, that stimulus related funnel ends up converting to orders and sales at some point in the future?

Josh Waldman:

Got it. Did you see stimulus-related postponing and Pharma and CDMO as well or more just government accounts?

Operator:

Our next question comes from the line of Catherine Schulte with Baird. Please go ahead.

Padraig McDonnell:

Yes. What we're seeing is a postponement, and I think it's really too early to tell on the funnel side on -- if the customers are still working out the mechanisms about how it works, we're still waiting to see on the impact on the panel, particularly for '25, it's too early to tell.

Padraig McDonnell:

Bob, do you want to take this one?

Operator:

Our next question will come from the line of Paul Knight with KeyBanc. Please go ahead.

Bob McMahon:

It's roughly 45%.

Bob McMahon:

Long term or in the quarter?

Bob McMahon:

Yes. So, if we looked at our Biopharma business, it was down roughly 12%, Small Molecule was down roughly 10%. Total Pharma was down 11%. So, it kind of gives you a sense. I think.

Paul Knight:

Yes. And then I know that you've got -- you have always been very aggressive and innovative on your M&A for biologics. Are you seeing that market open up on the M&A side of that marketplace?

Paul Knight:

Is pricing becoming more realistic as you think about your acquisition strategy?

Operator:

I will now turn the call back over to Parmeet Ahuja for closing remarks.

Operator:

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.

Parmeet Ahuja:

Thank you, Regina and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2024. With me are Mike McMullen, Agilent's President and CEO; Padraig McDonnell, Agilent Chief Operating Officer and CEO-elect; and Bob McMahon, Agilent's Senior Vice President and CFO and acting President of the Diagnostics and Genomics Group. Joining in the Q&A will be Phil Binns, President of the Agilent Life Science and Applied Markets Group; and Angelica Riemann, our newly named President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first 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 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 exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. 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.

Padraig McDonnell:

Thank you, Mike. I'm honored to be able to follow you as Agilent's next CEO and I'm grateful for your support throughout my career and during this transition. You have made a significant impact on Agilent, our customers and our team. I'd also like to welcome Angelica Riemann to this call. After leading our services division for the last 2.5 years, I can tell you she has the experience and the skill set to continue evolving ACG to align with the growing opportunities that the business has demonstrated in supporting the broad installed base and our enterprise customers. Expect to see continued great things ahead from Angelica and ACG. I've had the pleasure of meeting some of you on this call and I look forward to meeting and working with you all in the future. Agilent has a compelling story to tell and I'm excited by the possibilities that lie in front of us as we help our customers bring great signs to life.

Robert McMahon:

Thanks, Mike and good afternoon, everyone. In my remarks today, I'll 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 second quarter guidance. Q1 revenue was $1.66 billion, a decline of 6.4% core. On a reported basis, currency added 0.9 percentage points, while M&A had a negative impact of 0.1%, resulting in a reported decline of 5.6%. And overall, orders were greater than revenue in Q1 as expected. As Mike mentioned, pharma, our largest end market declined 12%. Within pharma, biopharma declined low single digits but grew low single digits outside China, bolstered by strength in services and consumables. Small molecule was down high teens in the quarter with softness globally. The chemical and advanced materials market was down 4% off a very tough comparison of 14% growth last year. We saw broad resilience in advanced materials with a low single-digit increase year-on-year as well as growth sequentially. Given the extremely tough compare of high 20s growth last year, these are impressive results. As expected, the chemical side saw a decline. The academia and government market was up 2%. The growth in this market reflects the stability of academic funding and lab activity. Our business in the diagnostics and clinical market declined 5%, mid-single-digit growth in pathology was more than offset by continued headwinds in genomics, cell analysis and LC and LC/MS. The environmental and forensics market declined 1% after growing 12% in Q1 of last year. We continue to see new regulations around the world driving PFAS testing. Europe grew mid-single digits, while China and the Americas were down low single digits. Americas faced a difficult compare of low 30s growth last year. The food market declined 3% but was up low single digits, excluding China. On a geographic basis, as Mike mentioned, both China and Europe exceeded our expectations while the Americas were in line with our expectations. China was down 9% and showed a sequential increase over last quarter which was much better than expectations. China benefited from continued stabilization and a bigger-than-expected Lunar New Year impact as some customers pulled forward incremental demand from Q2. We estimate the pull-forward impact to be roughly $15 million or 5% of China's revenue in the quarter. Even adjusting for this impact, China outperformed. Europe was down 4% year-on-year after growing 10% last year and was up mid-single digits sequentially. This was driven by continued strong demand for our ACG services, offset by muted demand in pharma and expected softness in chemicals. In the Americas, revenue was down 8% due to declines in pharma and the softness in NASD and NGS chemistries. Moving down the P&L. First quarter gross margin was 56.0% down 50 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.8% was down year-over-year as expected. Our ongoing cost savings initiatives are delivering as planned. Below the line, we benefited from greater-than-expected interest income in the quarter, driven by nice work from our treasury team, coupled with very strong cash flow. Our tax rate was 13.5% and we had 294 million diluted shares outstanding. Putting it all together, Q1 earnings per share were $1.29, down 6% from a year ago and ahead of our expectations. Now, let me turn to cash flow and the balance sheet. I continue to be very pleased with our cash flow generation. Operating cash flow was $485 million in the quarter, significantly above last year. In Q1, we invested $90 million in capital expenditures as we continue our planned NASD expansion. And during the quarter, we returned $69 million to shareholders through dividends. Although no shares were repurchased during the quarter, we expect to catch up on our anti-dilutive share repurchasing for the remainder of the year. In Q2, we expect a minimum of $180 million to be repurchased. All in all, we had a good start to the year. And as Mike mentioned, it reinforces our confidence in the full year guide we provided in November. Now, to our guidance for the second quarter. We expect Q2 revenue will be in the range of $1.56 billion to $1.59 billion. This represents a decline of 9.1% to 7.4% on a reported basis and a decline of 8.4% to 6.7% on a core basis against 9% growth last year. Currency and M&A combined are a headwind of 70 basis points. Our Q2 guidance also reflects the $15 million impact of the Q1 pull forward in China I mentioned earlier. Second quarter non-GAAP earnings per share expected to be between $1.17 and $1.20. Before turning back over to Mike, I just want to express my thanks to Mike and to congratulate Padraig. Mike, it has been a real pleasure to work with you. While there have been many ups and downs in the markets these past few years, one thing I knew I could always count on is your steady leadership and strong partnership. And Padraig, congratulations again. I'm really looking forward to working with you. And now, I'll turn things back over to Mike. Mike?

Parmeet Ahuja:

Thanks, Mike. Regina, if you could please provide instructions for Q&A now.

Derik De Bruin:

Congratulations, Mike. And good luck. So first question, we've been getting a lot of incomings on the NASD business. And just because the growth trajectory is not doing what I think what people had thought it was going to do this year. I assume there's a couple of questions. It's like, look, there's been some pushouts in some clinical readouts from Alnylam with their HELIOS-B trial, there's been some other sort of like developments in the market. I guess the question is like, are you still confident that, that segment can grow this year, NASD can grow this year? And I just -- is there any risk at all that there's like an overcapacity situation because as the market -- is it just taking longer for things to catch up? Just sort of your thoughts on that, please?

Robert McMahon:

Yes. Derik. And as you're talking about, we remain very optimistic about the future of NASD, our forecast for Train C and D remains intact in terms of building out the expansion. I would say that as we're talking about things, you mentioned one of the clinical trials. That's an important element of one of our customers. We are seeing some potential pushouts into FY '25. And as they are looking at revisiting the clinical trial programs and time lines and it's probably closer to flat this year based on that, although we're not giving up hope but that's built into kind of keeping our guide the way it is. But I think if you look at the number of commercial programs -- or excuse me, clinical programs that we have, we're very excited about the future.

Robert McMahon:

That's right.

Mike McMullen:

Yes. Great question, Derik. Obviously, top of mind, within Agilent, as we mentioned, Q1 came in where we thought it would. But what's the outlook? And Padraig, I know you've just spending a lot of time with your team and customers talking about this exact question.

Mike McMullen:

Yes. I think what you shared with me earlier, Padraig, was the tone was more negative at this time last year. It's still not super positive yet and still a lot of caution but we're not seeing anything to cause us to change our outlook for the year. I think Bob -- thank you very much. I think, Bob, you had one.

Operator:

Our next question will come from the line of Matt Sykes with Goldman Sachs.

Mike McMullen:

Yes, sure. Thanks for the question, Matt. And as we had a really, I think, a nice print to start off the year. A big part of that was the performance in China. Yes, we had a bit of a pull-in from Q2 from Lunar New Year but the business overall was better than expected. And to answer your question, we now have several quarters real orders, real revenue and the sequential growth, the numbers are real. So we're not seeing anything on the macro world that would also dramatically change what has continued to be a very challenging economic market in China. So what gives us confidence is the fact that we've had a number of quarters now, our predictability in the business. The numbers are coming in slightly better than we had anticipated. But again, I think it's more just the fact that there's ongoing run rate of business that gives us confidence on the outlook. And Bob, I know that you want to jump in on this one Padraig?

Matt Sykes:

And then maybe just on ACG which had a good quarter. You talked about the contract revenue and specifically enterprise services. With that growth, maybe could you just help kind of size that contract business within ACG? And then maybe talk about what is driving that growth? And what kind of contribution can that make to the ACG segment over the course of this year?

Angelica Riemann:

Yes. Thanks, Mike. As you mentioned, it's about 65% of the total business. And a part of that demand has really been driven by the lab-wide enterprise services offerings, where we're able to help customers as they're navigating their own economic situation really helping them optimize their entire lab operation. And our portfolio offerings in this stage have allowed us to really facilitate that improvement in lab operations, lab efficiency and that's particularly important to those enterprise customers.

Robert McMahon:

Matt, just one other quick thing on that. One of the great things that Angelica and team have been doing and you heard us talk about this a lot is about the increasing of the attach rate and that continues to grow at roughly 1 point again year-on-year this year. And that kind of locks in that resiliency of that stability in that business. And if you think about a 2/3 of that business growing double digits, it really helped power the business and when we see the inevitable turnaround of the instrument business, that will be a nice tailwind as well.

Operator:

Your next question comes from the line of Brandon Couillard with Jefferies.

Mike McMullen:

Yes. So I'll do a tag team on this with Padraig. So as you may recall, we've talked earlier this year about these secular growth drivers in the applied markets. And we saw that pretty much across the globe. And I think what we're seeing again is the investments being made in advanced materials relative to the semiconductor supply chain and also the fab is driving productivity. We're seeing continued investment relative to battery, battery development, QA/QC. And I think we continue to see some real nice growth in the PFAS side of our environmental business. Started in the U.S., I think all those applied market secular drivers that we've been pointing to for, for some time, delivered in Q1. And I think our outlook remains the same that we're expecting there'll be a source of positivity for us in the overall CAM [ph] market space, albeit the chemical market is expected to remain subdued.

Brandon Couillard:

And then, Bob, in terms of the guide for the year, I mean, you're sticking with the organic growth range for the year, you beat the first quarter. This China pull forward, then explain all of the upside in the first quarter what the NASD outlook is lower, what other moving parts by end market or geography kind of gets you to the same midpoint?

Operator:

Your next question comes from the line of Puneet Souda with Leerink Partners.

Robert McMahon:

Yes. I'll take that. There are a lot of questions in that one question. But so true to form, Puneet and one of the things -- I'll start with the last one. I mean, we typically do have seasonality. There is that $15 million that gets pushed from one quarter to another; that's strictly timing in China because of the Lunar New Year. But Q2 is typically a lower revenue number. So we're building in that normal seasonality. In terms of book-to-bill in China, actually book-to-bill was greater than 1 in China; so continued stabilization. And in terms of book-to-bill for our instruments, it was below 1, are kind of expected. Now some of that was a result of the China pull forward where the orders came in and we were expecting that revenue to be shipped in Q2; so there's some element of timing there. But all in all, a positive start to the year.

Puneet Souda:

And then just a high-level question, or a simple question. Could you maybe elaborate a bit on the pharma side, where you're seeing more traction, more growth? Is it the large pharma, small biotechs, CROs, CDMOs. Maybe just talk a little bit about that.

Mike McMullen:

Bob, I think I recall correctly, outside of China, our biopharma business actually grew in the quarter.

Operator:

Your next question comes from the line of Rachel Vatnsdal with JPMorgan.

Mike McMullen:

I don't think there's any new trends here. I think without going into the details of our product line, the small molecule side has really been in an area where we've talked about the year-on-year challenges there from the LC side. But Phil, I don't know if you want to jump in with any thoughts here but I don't think there's any real outstanding new trends here with perhaps the better-than-expected trends we saw in applied markets, particularly on advanced materials but maybe you have something else you want to add?

Robert McMahon:

Rachel, just one other thing to build on what Mike and Phil were just talking about. When we look at our LSAG business, it was down 11% which was better than what we expected. The piece that's really been driving that down is the pharma market which is what we've been expecting. If we looked at the rest of the markets, they were much better than the down 11% with the exception of the diagnostics and clinical which is a small number.

Rachel Vatnsdal:

And then I just wanted to ask about monthly trends. Some of your peers have talked about how spending a bit, a little bit slow out of the gate in January and then into early February. So I guess, since you guys have a few more weeks of visibility here. Can you walk us through where you seeing similar trends on just slower spending to start the year? And has any of that started to come back? Any color there as we enter fiscal 2Q would be helpful.

Padraig McDonnell:

Yes. No, I think that's right, Mike. I think on the ACG side, we see a number of service -- our service contract business comes in strong under the ACG side but on the capital side, we're not seeing much.

Operator:

Our next question will come from the line of Vijay Kumar with Evercore ISI.

Mike McMullen:

Both Padraig and I are in the conference and we're shaking our head, no. We've not heard anything about any potential stimulus. And what I can tell you is if it does happen, it's upside to our outlook.

Mike McMullen:

Bob, do you want to take that one?

Operator:

Your next question comes from the line of Patrick Donnelly with Citi.

Robert McMahon:

Yes. Thanks, Patrick. Great question. And what I would say is a couple of things. We are on track to have more interest income than what we anticipated at the beginning of the year that $20 million and some of that in the first quarter as well and that's really a result of actually having better-than-expected cash flow in the first quarter and great work by the treasury team. I would say that the savings -- we're on track for the savings targets for the full year. And as I think about the year, it's still very early in the year and this provides us what I would say is more confidence in the guide.

Robert McMahon:

Yes, no change to what we said back in November. Q1 is a proof point for what we said.

Daniel Brennan:

Maybe just going to beat the dead horse but just for the instruments, did you guys say -- I know in the Q, you usually put out what the instrument number actually was. So what did actually instruments do in the quarter? And then given how much easier comps go as we get through the year? Can you just kind of give us a sense of pacing like what should we expect on Q2 in instruments and then we can kind of have at the back half of the year?

Robert McMahon:

Yes, I would say we typically don't give all that information but it was down -- we were down 11%. It was down, puts 20%, in the quarter but that was better than expected, offset by 6% growth in our consumables business. If we look at the LSAG thinking for Q2, it's down low teens. So -- and a lot of that has to do with some of the timing associated with that $15 million shift. That's almost all capital equipment from Q1 -- from Q2 back into Q1. So if you look at it, it is in line with where we expect it to be.

Robert McMahon:

Correct, correct.

Mike McMullen:

I think we've have raised it up a bit. It's still down...

Mike McMullen:

And Padraig, I know you want to jump in this as well.

Mike McMullen:

Yes, I think the story is a great. I think the story really was in pharma, Q1, the instrument and the CapEx side of things. But we're pleased with the start there.

Catherine Schulte:

Maybe first, when pharma was down 12% in the quarter. I think you said biopharma was up 2% ex China. What was small molecule performance ex China. And maybe the outlook for biopharma versus a small molecule for the rest of the year?

Catherine Schulte:

Okay. And then maybe on consumables, it's great to see a return to growth there this quarter. Can you talk through what you saw outside of China on the consumables side?

Mike McMullen:

So I don't know if you have anything you want to add to that on the -- or we've seen the consumables, I think we're really pleased to see that because it really speaks to the lab activity being robust. So anything else you want to jump in on with?

Mike McMullen:

Thanks, Phil. I'm really glad you close with the comments about connect rates. We talked about that relative to our services business, we're also seeing a very strong positive trend on consumables as well which bodes well to our future in terms of recurring revenue business growth.

Jack Meehan:

Just had a couple of follow-ups. The first one was, could you just talk about what you're seeing in the genomics business within DGG. I know it's still been a bit of a drag. Just when do you think that's going to start to turn?

Robert McMahon:

That's right. Thanks, Mike. And as you said, our NGS QC portfolio from an instrument and consumable side actually grew mid-single digits in the quarter which was very nice. The genomics chemistry side that we referenced in the prepared remarks was down. We faced some very difficult comps. We had a couple of companies that reorganized and exited some businesses. They had some lifetime buys at the end of Q1. I would expect that the performance of that to improve starting in the second half of the year.

Mike McMullen:

Yes, Jack, thanks for noticing that. That was a real bright spot for us. We actually grew, I think, 2% in the quarter. And this is -- we've been working on this thing for some time to really build out our portfolio and really change our market position in academia research and I think it's starting to show up in the numbers. I think stabilization really is what we're seeing which is the funding is there. And NIH is a relatively really small part of Agilent's business, so really is immaterial. But we're seeing universities have increasingly been funded through private sector. So the money is there. And even so, we saw money in China as well. So it was really a nice global story for us and we're fairly optimistic that, that kind of stabilization can be there for us for the rest of the year.

Doug Schenkel:

I want to ask a question on guidance and then a question on capital deployment.

Doug Schenkel:

So for the year, on one hand, around 48% of sales is in the first half, at least that's how you've guided, I believe. Yes, that's lower than last year but it's not outside the norm for the last several years. On the other hand, just given some math, your guidance for the first half embeds the assumption that revenue declines around 7% organically and then improves 7% to 9% positive organic in the second half. Can you could do that just as a function of the comps? Or do you actually really need to see improvement in certain geographies or certain end markets or categories? And then again, just a math question. Does guidance assume Q4 revenue kind of exiting around like $1.8 billion?

Mike McMullen:

And Bob, I think that's why we really emphasized in the script, the word stabilization because as things, as we have kind of a stabilization, we're going to get a lift in the growth rate just by the comps as they go.

Mike McMullen:

Yes. I think we remain very interested in deploying capital in a balanced way which is inclusive of investing for in the business. And that speaks directly to we are interested in M&A. It's our build and buy growth strategy. I just have to say that the funnel pipeline is more robust than I've seen in a number of years and nothing to obviously announce but we're very much engaged.

Josh Waldman:

Yes. Just a couple on my end and maybe Bob, starting with you first, a follow-up on the guide. Can you comment a bit more on how Q2 guide moved versus the framework and the initial outlook? I assume core outlook came down a bit but just wanted to confirm the moving pieces there. And then, does the core guide reflect any changes in Q3 or Q4? Or is it really just reflecting an update on H1?

Josh Waldman:

And then, Mike, can you talk about how visibility in the business as you've covered the last three months? Has there been any improvement in the ability of the funnel to predict near-term sales or still seeing an elongation of kind of opportunity and quoting, flipping to orders. Curious, total company and then also what you're seeing in pharma specifically.

Padraig McDonnell:

I think that's right, Mike. And I think as far as the quality of orders remains -- that remain in our backlog, nothing has changed. We've not seen any increase in cancellations and ex China the funnel continues to grow and that's led by the aftermarket business. I will say as a continuing theme, the deal closure times remain at an elevated levels but it's definitely stable and deal win rates have been consistent.

Operator:

Your next question comes from the line of Dan Leonard with UBS.

Robert McMahon:

No, if you looked at the sequential number, it's going to be roughly the same as what we had in Q1.

Mike McMullen:

Yes. Thanks for that. So while it's maybe a surprise to many on the call and it was a surprise when I shared the news across the company because the Agilent team just knows how much I love working for this company and work with them. And it really was a hard-wall, really difficult decision for me but not been contemplating this for a while. And I pulled the Board into the discussion sort of communicating with them because we really wanted to make sure that they had enough time to really run a thorough and thoughtful selection process in which they were able to do. And in my mind, they came out with the best possible choice in selecting Padraig. But yes but this is something that I've been contemplating for a while and then try to engage in the Board about my timing and then I really want to make sure they had enough time to really pick the right successor and that's what they did.

Mike McMullen:

Thank you. It's going to be hard to step away. But I have to say, the [indiscernible] family was just too strong. We have a 6-month old -- 18-month old grandson and he will soon have a brother and sister so there's a lot going on, on the family side. And there's only one way I could make more time. So again, it's been a real pleasure to work with all of you on the call.

Luke Sergott:

I just want to talk about the margins on the quarter and kind of the step down in DGG and LSAG and I assume, obviously, it's probably driven by the volume declines there on the instrument side. But how do you guys view the recovery in the margins between DGG and LSAG throughout the year to hit your guide?

Luke Sergott:

And then, just a follow-up here from the 2Q guide. Can you just help frame what you guys are embedded there by the different segments?

Operator:

Our final question will come from the line of Paul Knight with KeyBanc.

Mike McMullen:

Thanks, Paul. Yes, we do go way back to don't we and it's been great to work with you over those years, going way back to the CAG days in my prior role, I think we think this is a 4% to 6% kind of growth market, mid-singles. So we think that the kind of market growth that we're not experienced in the industry right now is the anomalies and this will be back to that 4% to 6% kind of long-term growth rate. Obviously, certain segments within that overall macro number, that big TAM will be growing faster than that and that's always a challenge to make sure that you pick those segments so you can actually beat that number. I think there's going to be some geographic mix. I mean, we've evolved our view of long-term growth into China because we actually expect some of the supply chain moves and other things that have been going on that you'll see a growth, more growth in Europe which has been more of a slower grower for us geographically. But we've been -- continue to be surprised how well we do. Our team does in Europe. I think you're going to expect to see Japan rejuvenate it, particularly, I think you can make the case of the semi industry which is going to return to some strength in Japan. But that's the beauty of this business is just the diversified nature of both the end markets and geographies. So that would be my last -- I guess, my final projection of long-term growth for the market in this role. But thanks, Paul. I appreciate the comments and looking forward to staying in touch.

Parmeet Ahuja:

Thank you, Regina and thanks everyone for being on the call today. With that, we'd like to close the call. Have a good day, everyone.

Parmeet Ahuja:

Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. This presentation is being webcast live. The news release for our fourth quarter financial results investor presentation and information to supplement today's discussion along with a 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 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 exchange rates. 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.

Robert McMahon:

Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year, as well as take you through the income statement and other key financial metrics. I’ll then finish up with our guidance for fiscal year 2024 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Agilent finished the fourth quarter with core growth at the top end of guidance and EPS exceeding our expectations as we executed well against challenging macroeconomic conditions. Q4 revenue was $1.69 billion, down 9.7% core and 8.7% on a reported basis. This is after growing 17.5% in Q4 last year, when we benefitted from the recovery from the Shanghai shutdown in Q2 of last year. This created an estimated 1 point of headwind in the year-on-year results this quarter. As expected, we saw weakness in capital purchases in LSAG with the biggest impact in our China business. Now, I’d like to share additional detail on our end markets for the quarter. Revenue in our largest market pharma, declined 14%, versus 20% growth in Q4 last year. BioPharma declined 2% while small molecule was down 23%. However, biopharma ex-China was up 7% in the quarter and grew solidly for the year. And while small molecule was down, the decline was most pronounced in China. And outside China, small molecule was up sequentially in the quarter. Chemicals and advanced materials declined 11% versus growth of 27% last year, while flat sequentially. Our chemicals and energy subsegments were down 15% while advanced materials were down roughly 2% globally and up 4% in the Americas and Europe combined. The food market was down low double digits against a tough 20% growth comparison last year. High single digit growth in the Americas was offset by declines in all other regions. In the Americas, PFAS testing is emerging as an important growth area in food testing, helping drive the high single digit growth. We expect testing for PFAS chemicals will continue to be a growth driver across multiple end markets over time. The environmental and forensics market declined 3% versus 18% growth last year. Similar to the food market, the Americas region continues to experience strong growth, up double digits driven by PFAS. This strong performance was primarily offset by softness in China, which was down year-on-year, but up slightly on a sequential basis. Our business in the diagnostics and clinical market declined 4%. While we delivered low double-digit growth in our pathology-related businesses, it was more than offset by continued weakness in genomics. The academia and government market was down low single digits with strength in the Americas driven by government funding offset by weakness in China and Europe. Results were pressured across all geographies in the quarter. As Mike mentioned, China was down 31% year-on-year after growing 44% in Q4 of last year, in line with our expectations coming into the quarter. The rest of Asia was down mid-single digits and both the Americas and Europe declined low single digits in the quarter. Before turning to the rest of the P&L, I’d like to quickly summarize some full year highlights by end market and geography. From an end market perspective, all markets grew low to mid-single digits for the year except for pharma, which was down 2% globally. In addition, all geographies grew, except China which was down 5%. Back to the P&L for the quarter. Despite the revenue declines, our team continues to execute at a very high level. Fourth quarter gross margin was 55.8%, and our operating margin was a healthy 27.8% in Q4, which was slightly better than our internal expectations. Below the line, we benefitted from stronger than expected cash flow generating incremental interest income in the quarter. Our tax rate was 13.75% and we had 293 million diluted shares outstanding, both as expected. Putting it all together, earnings per share were $1.38 for the quarter, exceeding our expectations, albeit down 10% from a year ago when EPS grew 26%. As Mike mentioned, our Q4 results capped a year where we grew 1.5% core on the topline, increased operating margins by 30 basis points and grew EPS by 4%, while overcoming a couple of points of currency headwinds. This is a real statement on the team’s ability to quickly adapt to market changes while still delivering leveraged earnings growth. Turning to cash flow and the balance sheet, I’m incredibly proud of the Agilent team as Q4 continued a string of very strong quarterly cash flow results. In Q4, we generated operating cash flow of $516 million, well over 100% of adjusted net income, and invested $84 million in capital expenditures. CapEx spending is driven by our ongoing NASD capacity expansion, which remains on track. For the year, we delivered $1.5 billion in free cash flow, an increase of 44% over last year. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.6 times. With the current challenges in the market, it is great to be a company with a fortress balance sheet and strong cash flow. In the quarter, we paid out $66 million in dividends and spent $80 million to repurchase shares. And for the year, we returned $840 million to shareholders through $265 million in dividends and $575 million in share repurchases. Looking forward, you may have also seen that we recently announced a 5% increase in our quarterly dividend providing another source of value to our shareholders. It’s worth noting that we have increased our dividend every year since we first began issuing them in 2012. Now, let’s move on to our outlook for the upcoming fiscal year and first quarter. As Mike stated, we expect to see a slow but steady recovery throughout fiscal 2024. However, we also acknowledge the continued market uncertainty, high interest rates, volatile exchange rates and depressed capital spending. Like several of our peers, we expect the markets to be down slightly for the year, while we expect to perform better. Given the expected slower market conditions, we have taken additional steps to adjust our cost structure. Incorporated into our guidance is roughly $175 million of cost savings. Given the significance, I want to provide a little more detail on these actions. Roughly 30% of the savings are related to portfolio optimization decisions we have taken in DGG, the largest of which was the exit of the Resolution Biosciences business. Another 25% is related to materials and logistics cost savings as well as optimizing our real estate footprint, with the remaining savings tied to continued reductions in discretionary spend and optimizing our workforce. Along with these actions, we have taken a $46 million charge for restructuring and other related costs in our Q4 GAAP results. These reductions, while difficult, are necessary to ensure we continue to fund our most critical investments as well as fund the variable compensation resets from this year. These actions help ensure the company delivers leveraged earnings growth in FY24 and will enable us to emerge even stronger when our markets inevitably return to their long-term growth rates. As Mike noted earlier, we exited Q4 with some potential signs of stabilization with a book to bill ratio of 1 for the company and greater than 1 for LSAG instruments. While this is positive, we are going to be prudent in our initial guidance. For the full year guide, we expect revenue in the range of $6.71 billion to $6.81 billion. This represents a core growth range from a slight decline of 0.5% at the low end to 1 point of growth at the high end. Currency is a headwind of 1.2 points while M&A is also a slight headwind of 10 basis points related to Resolution Bioscience. On a reported basis, we are expecting a decline in the range of 1.8% to 0.3% year-on-year. From a geographic perspective, we expect modest growth in the Americas and Europe. While we expect to see recovery during the year in China, our initial view is it will still decline for the full year. From a business group perspective, we expect growth in both DGG and ACG, while LSAG instruments will still be pressured. In terms of phasing, we expect the first half of FY24 to look similar to the second half of FY23, with growth in the second half of next year. We are projecting modest operating margin expansion for the year. Below the line, we expect interest income and expense to offset each other, a tax rate of 13.5%, and 293 million shares outstanding. Fiscal 2024 non-GAAP EPS is expected to be in the range of $5.44 to $5.55. This range represents flat to 2% growth versus FY23. From a cash flow perspective, we expect another robust year. We are expecting roughly $1.6 billion in operating cash flow and $400 million in CapEx as spending increases on NASD’s Train C and D expansions. Looking to Q1 2024, we expect revenue in the range of $1.555 billion to $1.605 billion. This represents a core decline of 11.3% to 8.5% with currency and M&A having a minimal impact. At the midpoint, we are expecting growth that resembles what we just delivered in Q4 and assumes no significant budget flush during the end of this calendar year. This is against another difficult comp of 10% growth in Q1 of last year. First quarter 2024 non-GAAP earnings per share are expected to be between $1.20 and $1.23 as the cost savings fully ramp through the quarter. As Mike indicated, while we are expecting low growth in 2024, we remain optimistic about the future of our markets and our long-term prospects. Our business remains very profitable and healthy, and I know we will come out stronger as a company when market growth returns. And now I will turn the floor back over to Parmeet for your questions. Parmeet?

Operator:

[Operator Instructions] We'll go first this afternoon to Vijay Kumar at Evercore ISI.

Robert McMahon :

Yes, Vijay. Let me take that. I think if you look at the book-to-bill ratio, it's -- for LSAG instruments, it's actually very similar to both including China and excluding China. China was actually slightly positive as well. So that's a good sign. And as we mentioned in the prepared remarks, we're taking a prudent approach to our first quarter. And certainly, we see this as a positive. We did have some -- we typically do have seasonality from our Q4 to Q1, but we're taking it kind of one quarter at a time.

Vijay Kumar :

Understood. I'm glad to hear prudency and right off the bat here.

Vijay Kumar :

On -- just one more related on guidance here. What are you assuming for NASD in China for fiscal '24?

Mike McMullen:

Mid-singles. Yes.

Patrick Donnelly:

Maybe kind of a follow-up on the 1Q guide. It seems like, again, the order's encouraging. Maybe a little bit prudent on the guide, as you said, I guess when you think about just the implication for the ramp 2Q to 4Q, is it optimism in the market based on some of those order trends is that obviously the comps get easier in the second half as you work through it. And can you just talk about the visibility into the recovery and kind of what gives you the confidence in the ramp as the year progresses here?

Robert McMahon:

Yes. And Patrick, you asked about Q1, as I mentioned in the prepared remarks, I think we're taking a prudent approach here. but we're also going up against last year where we did have a budget flush and happened earlier in the year but for delivery in November and December, and we're assuming that we're not seeing that or building that into our into our estimates. So that happens, then it would be -- that would be a nice thing for all of us.

Patrick Donnelly :

That's helpful. Bob. And maybe, Bob, just on the margin side, helpful to hear you talk through a few of the different moving pieces. It sounds like some cost savings in DGG, among others. I guess can you just give a bit more color on kind of the moving pieces, where you're pulling levers, the ability to take out some additional costs to hit these margin numbers. Obviously, you talked about margins being up a bit. I think there are some headwinds like incentive comp, things like that. So maybe just talk about the gives and takes there and confidence in terms of some of the cost outs.

Mike McMullen:

And Patrick, this is Mike, I stated about the confidence about the growth recovery. I think when it comes to hitting the $175 million, high degree of confidence, we control this 100%, and we'll deliver on this.

Matt Sykes:

Maybe just on NASD, I noticed just over the past, call it 1.5 years, we've kind of gone from high double digits, low double digits next year, mid-single digits, which it's probably just some level of normalization as you ramp capacity. But just given the step up in CapEx you're guiding to next year, is there some wiggle room in terms of how you guys lay that capacity out? Or is the confidence in that market growth enough to keep investing in that area next year?

Robert McMahon:

Yes. I think, Matt, it's a great question. And so if we look at the details of kind of the mix, actually, I would say we have the most healthy mix of portfolio in NASD and '24 than we've had. So a significant increase in the number of programs that we are going to have been going through. Now it's a bigger component of clinical volume versus commercial volume, which I actually think bodes very well for the future going forward. We have seen some, I would say, some pausing of certain customers as associated with IRA but we think that, that's transitory. So as Mike said, we're not at all concerned about the long-term growth prospects of this market. And in fact, many of the programs that we're seeing come into our portfolio are actually as what we had talked about in previous calls, much larger targeted patient populations, which really speaks well to the volume. And then as Mike mentioned, we're actually expanding our portfolio, our technologies. And so it's not just siRNA, but we're having the ability to continue to grow our CRISPR -- GMP grade CRISPR business as well as antisense. So we're continuing to do that as well.

Sam Raha :

Yes. Absolutely, Mike. I'll just add a couple of things to your and Bob's comments. One, we are now on contract with more major pharma than we ever have been. And it's very promising. If you look at publicly the percentage of their overall R&D budgets that they're now spending on therapeutic oligos, and we are in the driver's seat to win those opportunities. And just in the last couple of weeks alone, I've spoken with a number of our lead pharma partners, and they've reaffirmed. So there is a slight navigation through the IRA, as Bob mentioned, the conviction on their end of the market potential remains unchanged and in the leadership position to pursue that.

Robert McMahon:

Yes. Matt, that's a great question. And we ended the Q4 at just a little under 3% and actually for the full year was greater than that. So it actually continues to be hold up very well. What we're building into our plan for next year is roughly 2 percentage points of price, which, as you know, is greater than our historical kind of pre-COVID levels. And so what we've been able to do, I think, is -- really speaks to the value proposition that we have as well as the emerging mix of our businesses as well.

Rachel Vatnsdal:

So first off, I just want to ask on China. You mentioned that the region is down 30% this quarter. That was in line with your expectations. You're expecting it to decline mid-singles again next year. So I guess, just how much of a function is that really due to some of the comps and starting to lap the easier comp late into next year versus is there anything structurally wrong with that market? And how do you expect China to continue to grow on that medium to long term?

Robert McMahon:

Yes, yes. So well, I think from the standpoint of the comps, what we would see is, obviously, if you looked at what we did in the first half of this year, we had very strong growth, and then we're going up against, extremely difficult comparisons this year. I mean, as I mentioned, we were down -- up 44% in Q4 of last year, so down 31% this year, we're still up over the 2 years. And as we think about this similar to the rest of the kind of the guide, we're expecting kind of declines in the mid-20s in Q1 and getting better from there. And some of that, it will be an easier comp. And I'm sure Mike will talk a little bit more about this, but we don't see anything structurally changing in the Chinese marketplace for life science tools.

Rachel Vatnsdal:

Yes. No, that's helpful color. And then I just want to dig a little bit more on your comments around next year. So you mentioned that you expect the first half to be similar to what you're seeing in the back half of this year. So I guess, can you just walk us through in a little bit more detail what exactly you mean by that? Should we be expecting similarities from an organic growth perspective? Or are you really talking about more from a revenue dollar standpoint. And then same type of question on the trajectory of the rebound on margins and EPS next year. Should we expect kind of that similar ramp given the cost dynamic as well?

Operator:

Moving on now to Derik De Bruin at Bank of America.

Mike McMullen:

Yes, I think the answer is the deal funnel still remain elongated. So…

Robert McMahon:

Yes. And Derik, I think if we think about the pharma end market, we're assuming very low single-digit growth for next year. And some of that is actually getting past the tougher comps in China. If we looked at actually our pharma business ex China, we grew in FY23. And actually, our biopharma business grew in total. And we think about small molecule was the area that was dragging the pharma business down as you know very well, that typically has a replacement cycle. We are well into that replacement cycle. We were up very high. We kept calling it. And we've seen that be very depressed, and our expectation is that will start coming back in earnest in '24, but probably in the back half of '24.

Mike McMullen:

Yes. I think as we said earlier, Derik, there's reason to believe that you have the comps working in our favor for the second half, there’s real. And we know that customers want there's interest in the products. And I think they've got a step -- and by the way, we're not calling for this miracle snapback in 2024. But we're also saying that small markets continue to decline 20%, 30% on the numbers we're seeing this year, particularly, that's where the pressure has been. But we know that biopharma, they need some tools for R&D. We know that those replacement cycles only last -- can only be held up for so long. So there's confidence relative to what we see in the funnel. Deals aren't coming out of the funnel. And then although we are focusing here on pharma right now in his commentary, there's a lot of other strength in some of the other secular markets and applied markets, in particular, which is a nice diversification we have on the instrument side as well. And Bob, I don't know if there's any additional thoughts on the pharma story.

Derik De Bruin:

And just one final one. Just what were bookings. I mean, I know you said the book-to-bill was greater than 1, but I'm just curious in terms of bookings. And do you often see a spike in bookings in Q4 Basically, I'm just trying to get the sense of like what you saw as a head fake or you've got -- where you think you've got real demand here?

Mike McMullen:

Yes. And through the quarter, Derik, we saw a normal seasonality. So there wasn't anything unusual about the order pattern to kind of say, is this a head fake or not. So I think that also is one of the reasons why we say, okay, early signs of some stabilization here. Again, not huge growth. We're seeing stabilization.

Jack Meehan:

So I wanted to dig a little bit more into LSAG in the quarter. Can you break down the growth between instruments and consumables and just any commentary across product lines.

Jack Meehan:

Okay. And so does that imply instruments may be down over 20% in the quarter?

Jack Meehan:

Okay. Yes. And I guess maybe just a follow up on Derik's question. I think everybody is trying to think about the right way to interpret this book-to-bill commentary, but just is there any additional color you can share on the magnitude were orders down in the quarter? Or I guess, just trying to understand because there was an easy or a difficult comp on revenue like are orders kind of more -- don't have a similar level of volatility. It should have mathematically been over 1, right?

Mike McMullen:

And Jack, I think it's fair to say, Bob, that one of the things we were conscious was a lot of commentary about how significantly things we're getting in terms of being worse. And as you know, we've been out for some time, calling for no year-end budget flush, constrained capital environment. We came into the year actually guiding for a slower growth in the second half. So what we're trying to intimate in the call today is what we've been saying for the last several quarters is exactly what we're seeing right now. And I thought -- we thought a proof point was the book-to-bill -- listen, it's not great out there in terms of robust growth, but the sky is also not falling either.

Puneet Souda:

First one on CrossLab. Bob, with 65% of your business being a service contracts, could you elaborate on what sort of growth contribution we should expect here for full year? And also, I don't know if you provided the LSAG expectation contribution for 2024 as well?

Puneet Souda:

Got it. Okay. And then on -- if I could ask a little bit on am I onshoring that's point that you're pointing -- that's not something we are focused on in prior calls. And I hear you that you're growing on the PFAS side, but just wondered -- could you elaborate a little bit on both some onshoring as well as the environmental gains that you're having? And why shouldn't that contribute more to your instrumentation growth in 2024.

Mike McMullen:

But I think we saw some trends too that we're starting to see, PFAS is also now driving some testing in the food marketplace as well as every country that we talk to is in the process of further enhancing their own reg. So we wanted to have some other areas of potential growth for the company beyond the story around pharma.

Josh Waldman:

Maybe one for Bob and then one for Mike. Bob, maybe circling back on Derik's question, I wondered if you could provide more context on the forecasting process this round or the puts and takes that went into the organic guide. Could you take a step back, were there segments in the business that were like decelerating or slowing as you went into the guide or maybe areas where you're still trying to find bottom? And if so, how did you expect that in the guide?

Josh Waldman:

Yes, that's helpful. And that was actually going to be my follow-up. And maybe I don't know, Bob or Mike, if you want to take it. I was curious if you could maybe quantify where the funnel stands entering '24 versus maybe where it typically is entering the year? And just how correlative or how much do you think it is a predictor of near-term demand? I mean is that -- is better funnel conversion at all kind of part of what drives the improvement as you progress through the year?

Robert McMahon:

Correct. We're going up against -- the first half of this year, actually, what you saw was the elongation of those cycle times. And so what we're seeing right now is kind of -- like I said, it's not necessarily fully stable, but it's not decline -- or increasing at the rate that we saw in the first and second quarters of last year. And so you're starting to see that. And so all things being equal, that conversion is actually improving slightly versus a year ago. It's still not back to historical numbers. And that's what we're trying to handicap here as we look at our forecast going forward.

Daniel Brennan:

Great. Maybe just on China. I know you mentioned, I think, in the prepared remarks like month-to-month pacing had improved in the quarter. Just any more color or anything on exit rates in China. And if you could, I'd be entered to get like some more color on the end market trends in China. I know you gave some color on biopharma, but could you discuss pharma overall and any other interesting color from an end market basis?

Robert McMahon:

Dan, and to build on Mike's point, just a couple of other additional data points. we were down pretty significantly in all end markets in Q4, as you would expect because we were up 44% in Q4 of '22. And so that's probably not as relevant because we were catching up relative to some of the catch-up of the Shanghai shutdown. Another data point, though, is if we looked at kind of year-on-year growth actually, we exited October, the year-on-year performance. It was still a decline, but it was much better than what we saw at the beginning of the quarter. And so we actually saw a sequential improvement. I think Mike mentioned that in his prepared remarks. And then if we looked at kind of absolute dollars, they've been pretty steady month-on-month.

Mike McMullen:

So how about Bob lead here a few comments. And then I've been dying to pull Phil in on here as well. And maybe talk about some of the things he's seen on the Advanced Materials side, which is a real area of expertise for him, so. But I think your word of tail of 2 cities is really quite appropriate, both in terms of breakout by segment, also by geography. I think we posted 70% growth, if I remember correctly, in China last year. So I mean that's a tough comp. I don't care who you are. But we're seeing continued slowness on the C&E side. Our major customers here are really conservative in terms of their deployment of capital. Many of our largest customers are on cost control. So that's been -- that's what you're seeing reflected in the numbers, and that's why we expect a constrained outlook on that side of the business for a while. The different story on the Advanced Materials, and I think Bob, you pointed to good growth geographically globally outside of China. And then Phil, I know you and the team got a whole bunch of initiatives around the applied markets, particularly not only PFAS but Advanced Materials. And I thought a good opportunity for me to introduce you to the audience and have you share your perspective on what we're doing on the applied on the Advanced Materials side.

Operator:

We go next now to Dan Leonard at UBS.

Mike McMullen:

Great question, Bob.

Dan Leonard:

Appreciate that. And then as a follow-up, can you remind me in 2024, when do we lap the headwinds on the genomics side? And what is your appetite continued investment in genomics as part of the DGG portfolio.

Mike McMullen:

Yes, I think first of all, just to remind the audience, when we talk about the genomics mix business, what are we talking about? We got a $500 million business, probably 50% of it is in QA/QC instrumentation, where we are the undisputed leader here, a lot of appetite to invest here. Our TapeStation product, particularly the consumables business is on fire right now. Capital side is constrained as we've seen across the marketplace. And then I think we all believe in the view that NGS will continue to be a growth market for us. And for the industry, I think that people are dying on back their expectations about how robust it is for a period of time. And I think we're seeing that in our business. So why do we make some of the structure changes we made in the portfolio because we want to ensure that we've got the ability to have a healthy P&L while at the same point in time invest in growth. So there's a reallocation of R&D dollars happening as a result of some of the changes we made that we talked about over the call. So answer the story is we have a lot of appetite for focused investments in areas where we think we can win in genomics.

Parmeet Ahuja :

Thanks, Bob, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good day, everyone.

Parmeet Ahuja:

Thank you, Bo, 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's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab 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 a 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.

Robert McMahon:

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 0.5 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 ramp 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% and 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 pretax charge in Q3 associated with the decision to shut down the Resolution Bioscience business. This charge, which is excluded from non-GAAP 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 FY '24. 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 billion to $6.85 billion. This represents a decline of 0.7% to flat on a reported basis and core growth of 0.8% to 1.5%. This is a core growth reduction of 260 basis points from the midpoint of our last guide. Roughly 85% 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 billion 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 1 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?

Parmeet Ahuja:

Thanks, Mike. Bo, if you could please provide instructions for the Q&A now.

Matt Sykes:

Hi. Good afternoon. Thanks for taking my questions. I thought maybe I'd start just with China, sort of a high-level question. You guys talked about sort of the transitory impact 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.

Matt Sykes:

Maybe just for my follow-up, just on ACG. So a good quarter 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 this quarter. Can you maybe 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?

Robert McMahon:

Yes. 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 - 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 variable pay true-ups. But certainly, what you've seen quarter in, quarter out is a nice, steady cadence of margin improvement there.

Operator:

Thank you. We'll go next now to Jack Meehan at Nephron Research.

Mike McMullen:

Good afternoon, Jack.

Mike McMullen:

Yes. So as we've talked earlier - thanks for the question and Jack and 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 communicated is more driven by secular trends and cyclical trends continues to hold up 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 in CAM. If we look at the chemicals and energy side of it, the energy side 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 growing at different rates.

Mike McMullen:

43% in Q3.

Mike McMullen:

Do you want to make the comments on the Advanced Materials side of the house there, Jacob?

Jack Meehan:

Thanks Jacob. And my follow-up, I wanted to ask about margins. Just how you're thinking about some of the puts and takes for 2024. I think some of the cost savings you've talked about should extend to next year, should get some leverage out of NASD. But at the same time, some of the performance comp 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?

Robert McMahon:

Yes. I would say that our view of leveraged earnings growth continues into '24. And so while we do have some things coming back to us, some of the actions that we've taken will continue to move into a full year for 2024. And quite honestly, that's kind of what we expect our job to be is to be able to drive that leveraged earnings growth.

Mike McMullen:

Welcome.

Vijay Kumar:

Hi, guys. Thanks for taking my question. 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 in China? I think I heard when you start off down mid-singles and was July off like minus 25%, minus 30%, is that the exit rate?

Robert McMahon:

Yes, Vijay, this is Bob. Your math is in the ballpark. Yes. 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, 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.

Robert McMahon:

So 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 the Americas and Europe, we didn't see that same effect.

Robert McMahon:

Correct.

Vijay Kumar:

That's helpful, Mike. And Mike, maybe one that you mentioned a couple of times on transitory. I think that's a new firm that you're using -- what have you heard -

Vijay Kumar:

Yes. What have you guys heard on the ground on China stimulus, maybe some positive commentary, but nothing is concrete and why use the word transitory is the implication here fiscal '24 should be a more normalized year when we look at the comps?

Vijay Kumar:

Understood. Thanks, guys.

Mike McMullen:

Hi, Dan.

Mike McMullen:

I am as old as the 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 the - there's really seem to be a lack of confidence right now in the macro economy. Now, look I'm not sharing - anything that the audience here doesn't fully understand already. So, the way we get out of this, I think is China led by the government. We'll get back to focusing on its long-term goals of making China an innovation driven economy, which will require continued investments in R&D. It's going to also get back to focusing on improving the health of - the population, addressing some of environment issue, so we think it's getting back to fundamentals. Yes, we think that eventually will occur, but there's a lot of issues that we may be work through within the China right now. But - it's a very large market, the market is not going to disappear. And I think 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 reinvest and maybe I shouldn't wait on the sidelines hope for its 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 comparable situation that we've been through for this long. I think Bob and I were talking earlier today. The change in the food ministry, a number of years ago is - was the biggest thing we've seen or 24 plus seven some of the biggest things we've seen a change, but this is much more of a macro economic issue in China, which is different than what we've seen before. Obviously, we have an impact on life sciences tool, but it's a much bigger macro story is really driving the softness right now in our markets.

Dan Leonard:

I appreciate all that perspective. And just a follow-up. I was hoping you could elaborate on your decision to shut down Res Bio. I was surprised by that, given that you acquired the company only a couple of years ago?

Sam Raha:

Yes, Mike. Building on what you said, while NGS and cancer diagnostics is here and we serve that market in a number of ways, right, for just to be clear, too. We absolutely continue to serve cancer research translational research and diagnostic, test developer customers. But our core to our thesis, our differentiation is really the ability to develop and distribute these kitted tests in the market, the pharma market and the testing market just as evolve that way. And we also looked at our recent analysis and concluded that even with more additional investment, this is going to be a business that's going to be undergoing significant losses for some foreseeable future, so. It was a difficult, as Mike said, that 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.

Sam Raha:

Here and Mike. I'm going to take this opportunity to also just to say beyond our core SureSelect Target Enrichment portfolio which is used broadly for liquid biopsy testing today. Early next year, we'll be launching solutions from Avida 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.

Dan Leonard:

Understood. Thanks for the time.

Operator:

We'll go next now to Brandon Couillard at Jefferies.

Mike McMullen:

Good afternoon, Brandon.

Mike McMullen:

Hi Brandon, I'm going to start with the response to your question. I'll let Bob dig through his notes to find the actual number. But first of all, I just started to say, is that we believe what we're dealing with here in our core instrument portfolio, inclusive of LC and LCMS continues to be a macro market story. Our market shares are holding up really well. We're seeing in our one loss data. We're seeing it in the external reports from order. And I think when we look at our performance in those core platforms versus our peers, we're 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 and I'm trying to buy some time for Bob to check down the...

Robert McMahon:

Yes, hi Brandon, we can get that to you afterwards.

Robert McMahon:

I can tell you though, if you looked at the LSAG business over the last three years, it's been averaging 5% CAGR, despite being forecasted to be down this year. And obviously, those are two large businesses.

Robert McMahon:

Yes, 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 expect it to continue, and we're still on track for the numbers that we've been talking about through 50-plus for the full year. And in terms of the CapEx, some of that will roll forward, but it's not - 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.

Operator:

We'll go next now to Puneet Souda at Leerink Partners.

Mike McMullen:

Sure.

Robert McMahon:

Yes. 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 over - 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. And 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 positive price contributions, for the full year in excess of 3%.

Padraig McDonnell:

Yes. No, I think - no, I think it's the pricing holds discounts has really held stable as well. We haven't seen any - increase in that rate of it, and we continue to monitor that, but it's been very stable, Mike.

Mike McMullen:

Yes, 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 being China, where the 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...

Puneet Souda:

Got it. Super. Thank you.

Operator:

We'll go next now to Rachel Vatnsdal at JPMorgan.

Mike McMullen:

Sure, Rachel. So 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 recovery or desire to increase spending, the 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 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 Padraig, I don't think we're seeing and hearing anything like along those lines.

Robert McMahon:

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, and particularly in pharma. And as Mike and Padraig just mentioned, we're not assuming a budget flush into our Q4. And if it happens, that would likely happen in our Q1 in any event, from a revenue perspective. But 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 LSAG average.

Rachel Vatnsdal:

Great. Thank you for all that color. 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? We've heard of IRA pressuring some pharma decisions and potentially leading to them reprioritizing the pipeline. So is there any risk that you won't see a recovery? Or could the growth rate for small molecule really be reset in? What are your conversations with customers on that trend? Thank you.

Robert McMahon:

Yes.

Operator:

Thank you. We'll go next now to Patrick Donnelly at Citi.

Mike McMullen:

Yes. We still have a few more months so 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 there's 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 a quick snapback to be occurring in the next quarter or 2.

Mike McMullen:

Yes, sure, Patrick, happy to do so, and then I'll invite Padraig 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 to spend it this way. In fact, we've seen the opposite where sometimes orders that we thought were closed to actually keep deferring and require more purchases. In fact, I think one story we heard was we probably 3x. Fondo CFO, approved it on the third go-around and the CEO overruled it. So we know eventually going to get that business. But this is kind of dynamics ever seen. 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 going to indication of that. And I don't if you have something to add there.

Mike McMullen:

I think this comment, Patrick, on the funnel being strong and these funnels are actually growing is really important because this is one of the reasons why we think about full year outlook in '24. We know the business is there. It's just a question of when it's going to get -

Patrick Donnelly:

Understood. Thank you, guys.

Derik De Bruin:

Hi. Good afternoon.

Derik De Bruin:

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 in consumables growth or number for 3Q and then sort of your all-in number for this year, what you're expecting?

Derik De Bruin:

Got it. Thank you. So what's the revenue contribution for Res Bio in 4Q? And what do we need to pull out for 2024?

Derik De Bruin:

Got it. Okay. And so staying on the topic of M&A. I mean, you've done a couple of genomics deals, which haven't gone your way. And I'm just sort of wondering what's your thinking about deployment going forward? I mean valuations have obviously come in, industry is consolidating, you would say, but we have -- it's been relatively quiet across the space for the last 18 months. And so like how are you sort of thinking about capital deployment? And at what point do you decide you maybe want to buy -- start maybe doing even with the share prices, maybe doing some share buybacks. You sort of talk about your general capital deployment strategy at this moment?

Derik De Bruin:

Just one more follow-up, if I may. What are your orders in liquid chromatography? How is your order book? Are you seeing orders increasing?

Derik De Bruin:

Thanks.

Josh Waldman:

Hi. Thanks for taking my questions. A couple for you. 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 like slowing real time that you're trying to reflect in the guide versus areas that maybe have stabilized or improving over the last few days.

Mike McMullen:

But as I recall, I think 85% of the change was really China driven and bleeds over into pharma in CAM.

Mike McMullen:

Yes. So let me start with the view by end market. I think the academia and government market was - grew 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 commented earlier about how we exited the quarter, the July performance. Some weakness in chemicals, but I'd say the down there was really just a byproduct of - we're going off of 43% compared last year. And we're looking at a 70% growth compare in the fourth quarter. But I'd say the concerns or the cost of this 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 a $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 will 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. 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. Storyboard here is a macro story and is bleeding over into life science tools, but we need to see the China economy get moving again. We need to see consumer confidence coming back. We need to see investment commerce is 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.

Operator:

Thank you. We'll go next now to Dan Brennan at TD Cowen.

Robert McMahon:

Yes. So to maybe add a little more flavor and clarity to my answer previously, LSAG was down 9% core. It was down 9% in instruments as well. So the consumables business was up basically a point.

Mike McMullen:

Based on what we see today, yes.

Robert McMahon:

There's no reason to believe when we think about kind of 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 is something fundamentally has changed, that they don't need instrumentation. And so, I think we feel very good about our market-share and our good about our market-share, and our competitiveness and do expect our LSAG business to be a growth driver for us going forward. Yes, no completely. No, is this more just on the comp basis, after making…

Robert McMahon:

Yes. I mean, I think if you look at Q4, it will 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 we 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, we do see it down in Q4, but up for the full-year. I think that's a really important to make sure that people understand.

Operator:

Thank you. And we have time for one more question this afternoon, we'll take that now from Luke Sergott at Barclays.

Mike McMullen:

Hi Luke.

Mike McMullen:

Let me leave it there. And then have Bob jump-in and Sam as well, but from in-sourcing 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 overhead 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 we had a different code-named. And that's live, but we continue to move forward with our expansion plans on the other front, siRNA front, along with what we like to do on the CRISPR side as well And antisense. So, we're going to broaden that. So our stated investment plans remain unchanged.

Sam Raha:

Yes, I only add to what you guys said that Mike along with having more customers and actually more diversified set of customers, we're going to be we're contracted to do more programs next year than in the history of NASD. So it's a yes, all full-speed ahead.

Mike McMullen:

Yes, 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 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.

Operator:

Thank you. Ladies and gentlemen, at this time I would like to turn things back to Parmeet Ahuja for any closing comments.

Operator:

Thank you, Parmeet. Ladies and gentlemen, this does conclude today's call. Thank you for joining. We wish you all a great day. Goodbye.

Parmeet Ahuja:

Thank you, Sarah, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second 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. Our 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.

Robert McMahon:

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 year and our third quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q2 revenue was $1.72 billion, exceeding our expectations. Revenues were up 9.5% core and up 6.8% on a reported basis. Currency was a 2.8 point headwind, while the M&A contribution was minor as expected. In Q2, we continued to leverage our backlog and exited the quarter with our backlog at a normalized level. As Mike mentioned, our two largest end markets performed well in the quarter. Pharma, our largest end market, posted 6% growth led by biopharma, while small molecule declined slightly. Chemicals and advanced materials continued to drive strong secular growth of 16% during the quarter on top of 9% growth last year. The chemical and energy subsegments of the market are doing well, with the advanced materials market continuing to lead the way. As in past quarters, semiconductors and batteries are driving demand in this space. And looking at the rest of the end markets, the food market grew an impressive 21% during the quarter driven by very strong growth in China. We also saw strong results in the Americas and in Europe. The academia and government market was up 11%, led by China and Europe as the funding environment continues to be constructive. Our business in the diagnostics and clinical market grew 6% on top of 5% growth last year. Pathology again led the way for us here, partially offset by genomics. And the environmental and forensics business grew 2%, led by China and the Americas, while Europe declined. The Americas slowed after a very strong Q1, but still delivered mid-single-digit growth. On a geographic basis, the China team exceeded our expectations, delivering 32% growth following last year's COVID lockdowns in Shanghai. As we mentioned last year, the COVID-related lockdowns deferred roughly $55 million in Q2 from last year into third and fourth quarters. So while Q2 is an easier compare, we will have much tougher compares in China going forward. Taking out the effects of the lockdown this quarter, we estimate China still grew double digits, so very solid results by our China team. And the rest of Asia grew high single digits, better than expected. The Americas grew 3% with growth across all end markets. From a group perspective, both ACG and DGG grew, while LSAG unexpectedly declined low single digits as we started to see the accelerated effects of the slowing CapEx environment. Europe grew 5%, in line with expectations led by pharma and CAM. Now moving down the P&L. Second quarter gross margin was 55.3%, down 40 basis points from a year ago, largely due to an unfavorable product mix. The benefit of pricing was as expected. Below gross margin, we had good cost discipline in SG&A, which drove our operating margin to 25.6%, up 30 basis points from last year. Below the line, we benefited from higher-than-planned interest income due to higher interest rates and strong cash flow. Our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. Now putting it all together, Q2 earnings per share were $1.27, up 12% from a year ago, a very good result, combined with our 9.5% core topline growth. During the quarter, operating cash flow was very strong, generating $398 million. This result was helped in part by deferring estimated U.S. tax payments of roughly $60 million to our fiscal fourth quarter. This is due to the payment deferral relief made available by the IRS to taxpayers in designated counties affected by the winter storms in California. We returned $151 million to shareholders, $66 million through dividends and repurchased shares worth $85 million, while also investing $57 million in CapEx, continuing our successful balanced approach to capital deployment. Our strong balance sheet is even more of an asset in this market environment and remains very healthy as we ended the quarter with a net leverage ratio of 0.7x. And earlier this month, Moody's upgraded Agilent's investment-grade rating on our corporate long-term debt to Baa1. This action is an important recognition of Agilent's financial strength. Now on to the revised outlook for the year and guidance for Q3. For the year, we now expect revenue to be in the range of $6.93 billion to $7.03 billion. This represents reported growth of 1.2% to 2.7% and core growth of 3% to 4.5%. Currency is expected to be a headwind of 1.9 points while M&A will contribute 0.1 points of growth. In addition to revising our guidance, we've increased the guidance range for the second half of the year to reflect a wider range of possible outcomes. For modeling purposes, I would encourage you to use the midpoint of our guide. Our updated guidance reflects a more constrained capital market, primarily impacting our instrument business. The outlook for our recurring revenue businesses remains largely unchanged. From an end market perspective, the market most impacted is pharma where we are now expecting full year growth of low single digits, down from high single digits. And from a geographic perspective, we see impacts focused in the U.S. and China. With the change in revenue, we now expect full year fiscal 2023 non-GAAP earnings per share to be between $5.60 and $5.65, representing growth of 7% to 8%. As with revenue, I encourage you to model at the midpoint of our guidance. Now turning to Q3. We expect revenue in the range of $1.64 billion to $1.675 billion. This represents a decline of 4.5% to a decline of 2.5% for both reported and core revenue. This is on top of a tough compare of 13% growth last year. Adjusting for the China deferral in Q3 of last year would add roughly 200 basis points to both reported and core growth in the quarter. Currency and M&A impact in Q3 are minimal, and are expected to offset each other. Third quarter non-GAAP earnings per share are expected to be between $1.36 and $1.38, representing growth of 1.5% to 3% versus the prior year. We are pleased with the first half performance, and while we are facing a more difficult market environment than we were estimating a quarter ago, I am confident that our team will continue to deliver for our customers. Thanks for being on the call. And now I'll turn over things back to Mike for some closing comments before we take your questions. Mike?

Parmeet Ahuja:

Thanks, Mike. Sarah, if you could please provide instructions for the Q&A now.

Brandon Couillard:

Hi, thanks. Good afternoon.

Brandon Couillard:

Mike, it would be helpful if you kind of unpack what you're seeing in terms of instrument demand between, let's say, mid to large pharma relative to smaller biotech. Some of your peers have talked about maybe that large pharma budget just being delayed coming back later in the year. Curious what you're embedding in kind of your outlook and how you're bringing those two customer bases?

Robert McMahon:

Brandon, this is Bob. Just to kind of frame in, if we think about these businesses, this emerging biotech, which is the one that has really changed during the course of Q2. That represents roughly about 10% of our pharma business, and we were projecting that at roughly low double digits. And now we're expecting that to decline. And as Mike was saying, the rest of the business was high single digits, and now we're assuming kind of low double digits, given this more conservative capital. I would also say the funnels are healthy from the standpoint of working with them. It's just taking longer for them to translate that deal velocity into orders.

Brandon Couillard:

That's helpful. Lastly, if you could unpack kind of what you're seeing in Europe. Overnight, we got pretty weak manufacturing PMIs. I was just curious if you see any slowdown in terms of the more cyclical, let's say, industrial odds in the geography.

Brandon Couillard:

Thanks.

Vijay Kumar:

Hi guys, thanks for taking my question.

Vijay Kumar:

Mike, can you just frame sort of what April trends were? How it may progress because I'm just trying to make sense of the guidance. You guys did double digits in the first half. And we went from double digits to low single-digit declines. Just frame us this pace of slowdown. Is there any historical analogies when you see these kinds of slowdowns? Do these things last like a couple of quarters or is this like four quarters? And I'm assuming this guide change so far, it's only pharma, correct? Like we're not reflecting any other end market changes?

Robert McMahon:

Vijay, maybe just to add a couple of other comments to what Mike was saying. In the second quarter, we talked about revenue exceeding our orders, and that was really at the -- towards the back end. And we came into Q2, we'd say, still greater than normal backlog. And so we were able to -- our OFS team was able to actually drive down our backlog and leverage that. And if you took the backlog impact out of our numbers, we would have been at mid-single digits for transparency in Q2. And we had built some of that into our forecast. We just didn't refill the funnel as much as we thought we were going to coming into Q2, which means resulted in a lower expectation for the second half of the year.

Mike McMullen:

I was just going to say too, Bob, I think it's fair to say relative to our guide assumptions, we're mainly looking at the pharma market. Although this level of cautiousness -- the increased level of cautiousness we're seeing is really across all end market segments, but really centered in pharma.

Vijay Kumar:

That's helpful, Mike. And just one quick one. This back half EPS and margins up, I think 2Q operating margins missed and just rough math here suggests back half operating margins need to be up 300 basis points from 2Q levels. With revenues coming down, can you just walk us through what gets us to that? What drives that margin expansion?

Mike McMullen:

And Vijay, I'd also point out there is a level of variability in our pay plans tied directly to adjust for the company's performance that are assumed in our guide for second half.

Robert McMahon:

All right.

Puneet Souda:

Yes, hi Mike, Bob, thanks for taking the question. Thanks Mike. So first one is really on, obviously, China, very strong in the quarter. Can you elaborate a bit on sort of the stimulus contribution that happened this quarter? And what are you -- obviously, you're expecting moderation in the second half. Also, if you could talk about if you're seeing anything relevant to the new COVID wave that's emerging there. Is that something baked into your guide and overall just expectations for China for the full year?

Robert McMahon:

Yes. Puneet, if we look at Q2, we always assumed that Q2 was going to be a very strong, given what we were facing on an easier comp, and we talked about that in our prepared remarks, where Shanghai was shut down for roughly six weeks. That deferred roughly $50 million to $55 million of revenue that's now showing up in Q3 and Q4 of last year, which will make it much tougher comps. And to give you a perspective, last year, we went minus 3% in Q2, 29% growth and then 44% growth. So we're always expecting moderated growth expectations in the back half of the year just given that tough comp. Now what we've seen is not a pickup in the performance in the marketplace, particularly in pharma, which we were expecting coming out of kind of the first quarter after the elimination of the zero COVID. And we're assuming that this current performance will maintain through the second half of the year. We're not going to see a recovery.

Mike McMullen:

So maybe we start with the biotech and NASD business questions first. So no impact at all in our NASD business. I think, Sam, we can say that pretty equivocally, right?

Mike McMullen:

And your last question is the toughest question, which is, sort of, if you will, your crystal ball question. We've typically seen 12- to 18-month kind of cycles historically. And as Jacob and I and Bob have talked in the past, we've always felt that this is more of a mid-single-digit kind of growth market with -- for instruments, which is still very healthy end market growth rate and particularly when you build around at the service and consumables piece. We're not calling for that yet to occur for this year. So I think the only other thing I would say is for a large majority of our instrument business it is a replacement cycle. We've talked about that time and time again. And so these products are in the installed base. They will have to be replaced. The question is when. And again, interest and demand remains high. I mean, our backlog is strong. As we mentioned in prior calls, and I just -- we emphasized that again today. Quality backlog remains high, no significant order cancellations and as Padraig likes to say, we're adding fresh funnel to the backlog. So it points to future demand, but we're just not seeing indications of when their buying behaviors are going to change.

Operator:

Your next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead.

Mike McMullen:

It's a great question. And Bob, I think that's actually what we've assumed in our full year guide. So maybe you want to share some of the specifics?

Matt Sykes:

Got it. It's really helpful. And then just a second question for you guys, maybe Padraig. Just on ACG, just given if we do have this sort of 12- to 18-month cycle, you've talked in the past about the ability for ACG on the services side, whether it's extended warranties or others in terms of kind of helping to offset some of the weakness you might see in sort of capital equipment purchases by extending those services or increasing the services revenues. I realize it's a smaller portion of revenue relative to LSAG. But I'm just wondering if this is sort of a 12- to 18-month cycle, could you see some level of acceleration or at least durable sort of low double, high single-digit growth in ACG over the course of that time period?

Mike McMullen:

Yes. I think durability is the right word to use here, Padraig and Matt. And this is a resilient part of our company's portfolio. We've talked about these recurring revenue businesses. And I think the story here is even bigger, Padraig, than extension of instrument life as people are deferring replacement purchases. We also believe we've been picking up share and particularly been doing really nicely job on the enterprise level.

Matt Sykes:

Great. Thanks very much.

Rachel Vatnsdal:

Okay, thank you for taking the questions. So first, just maybe some questions on backlog. You noted that you worked on your backlog this quarter. So could you just tell us how many months of backlog do you have on that instrument portfolio today? And then last quarter, you noted that you'd worked on the backlog on the instrument portfolio, but for the total business, orders can grew faster than revenues. So can you kind of give us some of that context as well in terms of order book and backlog trends between instruments versus the rest of the business as well?

Robert McMahon:

And Rachel, you're right. Our orders grew greater than revenue in Q1. And as I mentioned earlier in the call, Q2, it reversed where revenue was greater than orders. And we did eat into backlog both in Q1 and Q2 in the instrument side and supply. As to the delivery times declined, we thought that that was a healthy thing. And we're back at normalized delivery times as well as a normalized backlog.

Robert McMahon:

That's right. Yes.

Mike McMullen:

Yes, I'm going to pull Jacob into this call, but he has had an opportunity to join in the conversation. But I think the storyboard here for LC is very consistent with the overall macro environment we described, which is an increasingly cautious set of decisions being made by customers relative to new instrument purchases. And as you know, we've been talking for some quarters about the moderation we were expecting to see in small molecule LC placements, that the 20-plus growth rates that the industry have been seeing for a number of quarters, would actually see a level of moderation start to occur. And that's what we saw in this recent quarter, and we would expect to see that continue throughout this year. And perhaps, you want to add some of your thoughts here as well, Jacob, and then take on the question about market share as well.

Operator:

Your next question comes from the line of Dan Leonard with Credit Suisse. Please go ahead.

Mike McMullen:

Yes. I don't think you can point to Silicon Valley, but you can point to the pressure that the pharma companies run relative to their P&Ls, and they're cautious. They're really cautious about deploying new capital. And it's...

Mike McMullen:

Yes. And Dan, I have to say in all transparency, it's a little bit hard to figure out, right, because we had a similar thesis, which was the markets would be more resilient. Although we expect with some level of pressure as we assumed in our second half guide, a little more resilient in the face of slowing GDP. But things have -- obviously, things have moved more quickly than we had anticipated. And this level of increased costs was something we've seen in the last probably four to six weeks. And it's difficult to figure out from the standpoint is there's no obvious external catalyst. We just know we're seeing it across a broad section of our customer base.

Mike McMullen:

Yes. So I'm going to invite Sam on to this, but I think what you'll hear from him is he'll talk to you about it's a U.S.-centric phenomenon, not a market share issue. And there is that level of CapEx there that's on the instrument side that we're feeling a bit as well.

Mike McMullen:

We are assuming a level of improvement in our genomics business in the second half in our guidance I'll recall, Bob, and not full recovery, but improvement.

Dan Leonard:

Thank you for all the color.

Mike Ryskin:

Hi, thanks for taking the question. This is Mike Ryskin on for Derik. Just following up on the previous point on pharma -- big pharma slowing down. You used a lot of comments in a slower deal velocity taking longer to close the deals, et cetera. But as you just said, you're not seeing an obvious catalyst. Is there any risk you're going to see slower deal velocity elsewhere as you go through the year? I mean, academic and government, applied materials, these are sectors that also had, I would say, above trend growth in recent years and in the fiscal first half. So -- but you're not building in any conservatism in those areas for the rest of the year. So how would you characterize the risk there just given how quickly pharma turned?

Mike Ryskin:

Right, right. Yes. And then kind of to that point, for the fiscal second half, I mean, you're pointing to a 3.5% decline core growth, core sales growth in 3Q, but then it implies roughly flat in 4Q. You touched a little bit on comps at China moving around and things like that. But still sequentially, that's a pretty big reacceleration in the fourth quarter regardless of how you look at it even in absolute dollar terms. So are you assuming any reaccel in the 4Q? Are you -- any indication of that happening in terms of orders? I guess, just why is it really fiscal 3Q that's being hammered here?

Mike Ryskin:

Okay, all right, thanks.

Dan Brennan:

Great, thanks. Thanks guys for the questions. Mike and Bob, maybe just a question just kind of clarifying some of the numbers here on emerging biopharma. What did that business do in the quarter itself? I don't think I caught that. I know, Bob, you said it's going to decline as part of your guidance. So if you just flush out like what you're assuming for the rest of the year for emerging biopharma and then kind of what does that imply for the commercial biopharma? And I didn't hear any as well for LSAG. Like did you guys talk about what you're expecting LSAG to do in the back half of the year?

Dan Brennan:

Got it. Okay. And then -- and maybe just one on NASD since you brought it up. Another terrific quarter. Can you just unpack a little bit on kind of what the funnel looks like there? Is the same level of growth kind of persist in the second half? And now that you're bringing on -- kind of working on the new Train, kind of what's the durability of that growth as you look out beyond year-end?

Robert McMahon:

Yes, super pleased with the performance of NASD. And as we look out to the second half of the year, we feel good about the performance and are excited about Train B coming online. And we're having conversations with customers as we look to fill that Train up. And what I would say is kind of stay tuned from that standpoint. But what I would say long term, we're extremely excited about this. That's why we're investing another $700 million in adding Train C and D as well. So we think that we're in the early stage of therapeutic discovery here in terms of RNA, siRNA-based therapies and there will just be more larger indications as those move through the clinic.

Dan Brennan:

Great, thanks guys.

Operator:

Your next question comes from the line of Jack Meehan with Nephron. Please go ahead.

Mike McMullen:

Yes, sure. Maybe I'll tag team with you, Padraig, on this one. So as Bob mentioned, even adjusting for the Shanghai shutdown last year, we did 10% core in China in Q2. We are bumping up some pretty hefty comparisons, 29% and 44%, if I remember the numbers correctly, for Q3 and Q4. But I would say that the China market is really reflective of what we're seeing in the United States as well. So it's our pharma customers in China. It's our chemical customers in China, albeit the advanced materials piece of the China market continues to hold up quite nicely. And Padraig, I know you've been in conversations with our China sales leader. What are you hearing from them?

Jack Meehan:

Great. And then one market you didn't call out in CAM was the PFAS testing. I was wondering if you could give us an update on that and just how you're -- if there's been a change in terms of the market dynamics there?

Jacob Thaysen:

Yes, absolutely. I think that we are still in the -- to use the baseball term, the early innings.

Jacob Thaysen:

I think I am, but we certainly are early innings here. We have been -- we've seen a lot of growth last year, and we continue to see it. Obviously, right now, since there's also a lot of funding through the government, it's a little bit lumpy. But if you look at for the long horizon, this is a huge opportunity for us, and we have a very strong position with our LCMS business here. And we're also seeing it expanding into new areas with the DCMS business. So I'm still very bullish on that, and we continue to see a lot of business here.

Jacob Thaysen:

Yes, you're absolutely right, Mike. I mean there's a lot of things going on here in U.S., and there's been regulation in certain states right now, but it's driven by regulation. So when regulations go onboard and online in different countries, you see a step-up in that. So there's definitely more to come here.

Operator:

Your next question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Mike McMullen:

Yes, sure. We want to give you some additional insights, Bob, so I think you've got some?

Patrick Donnelly:

Okay. Got it. And then maybe just a margin piece. I know you talked a little bit about the second half. And Mike, I think you flagged maybe some additional cost savings in the second half. Can you just talk about, I guess, where you guys are pulling some costs from? How nimble you can be, and how aggressive you want to be as well. Mike, you obviously sound good on the long term. You're kind of dealing with this pullback here. Looks like it's transitory. So how do you think about just the expense management in the near term and that second half margin ramp?

Robert McMahon:

Yes. Just to build on what Mike is saying. Obviously, we've got -- we've been looking at discretionary spend, things like travel but also demand related. If there's not demand, we're not going to spend the same level of marketing funds as an example. And we continue to really drive productivity. We talked about that at the very beginning of the year around productivity in our workforce, and we'll continue to do that, making sure that we don't get ahead of ourselves in terms of adding more people relative to the business.

Robert McMahon:

Sure.

Josh Waldman:

Mike, curious what year-over-year orders were in LC and mass spec? Were orders there down kind of in the mid-teens range? And then within large pharma, I think you mentioned the funnel remains healthy, but it's just taking longer to close deals. I guess based on conversations with key accounts recently, anything you can point to that gives you confidence that the slower orders here are more reflecting delays in the purchasing process as opposed to just tighter budgets and maybe lapse reprioritize the capital to other instrument categories, maybe outside of LCMS?

Padraig McDonnell:

Yes. No. Look, I think you're right, Mike. I think the customer activity remains high. I think one thing that we've really seen is no uptick in cancellations whatsoever. Funnels remain intact. And actually, we're adding fresh funnel in certain cases. So I think it's really a case of slower deal velocity.

Josh Waldman:

Okay. And then just a follow-up, I think, on Jack's question. Can you provide more context on what within pharma in China has been softer than expected? Any examples of customers -- any examples that customers have provided on why they're pulling back? And then curious if the softness has been pocketed within a few large accounts there or if it's been fairly systemic?

Robert McMahon:

Yes. I think, Josh, the one thing that we did see, and we talked about this at the beginning of the year because there was a lot of talk about the stimulus. That stimulus was targeted at higher-end applications and instrumentation that we don't necessarily have the product portfolio or compete in. And so I don't think that has moved budgets, but it created a stimulus for potentially areas that we're not as exposed to as maybe some other players in the marketplace.

Mike McMullen:

You're quite welcome.

Liza Garcia:

Thanks for squeezing me in. Really appreciate it. I guess coming back to the margin progression in the guidance and just kind of -- I appreciate all the clarity on kind of the cost potential. But also with the second train line kind of ramping and thinking about NAV, I know that you've talked about how those should be accretive -- train line should be accretive to the overall margins. But just as we think about it ramping, can you just give us some context to how to think about that train line coming on and its impact in the back half?

Robert McMahon:

Yes, sure. So Liza, if you looked at that in isolation, actually, there is margin compression, given the Train B startup. But we've taken that into account. We had that in our initial guide, and that's money. That's good money to spend because we've got a lot of opportunity there. And so the cost savings that we've been talking about is really not in that area. It's in the other parts of the business.

Robert McMahon:

That's correct. That's correct. It was actually a little over 4% for Q2.

Robert McMahon:

You're quite welcome.

Operator:

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

Parmeet Ahuja:

Thank you, Bill and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first 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. Our 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.

Robert McMahon:

Thanks, Mike and good afternoon, everyone. In my remarks today, I'll 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 full year guidance and initial guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q1 performance. It was a very solid start to the year. Q1 revenue was $1.76 billion, exceeding our expectations. Revenues were up 10% core and 5% on a reported basis. Currency was a 5-point headwind which was an improvement from the beginning of the quarter, while the M&A contribution was as we expected. Pricing for the quarter was higher than the full year forecast also as we expected. Now I'd like to share some additional detail on our end markets. Results in our largest market, pharma were again very strong. Pharma grew 11% following 17% growth of last year. Performance was solid across both small and large molecules. Small molecule grew 12%, while large molecule grew 9%. And as Mike mentioned, Chemicals and Advanced Materials also continued to be very strong, growing 14% during the quarter on top of 15% growth last year. The chemical and energy subsegments of the market are doing well while the advanced materials market continues to deliver outsized growth. Semiconductors and batteries are driving demand, helped by government investment in this area. The food market grew 8% during the quarter, driven by double-digit growth in China. The environmental and forensics business grew 12%, led by the Americas as increased testing for PFAS chemicals drives customer investment in this area and recently approved U.S. legislation leads to broad spending in the environmental market. Our business in the diagnostics and clinical market grew 4% versus 11% growth last year. Pathology led the way for us here, partially offset by industry-wide challenges in the genomics market. And the academia and government market was up 8%, led by LCs and services. Regionally, Europe and Asia showed strong results. On a geographic basis, the China team delivered 13% growth and Europe grew 10%, both exceeding expectations. The Americas had another solid quarter coming in at 8%, in line with our expectations. Now let's turn to the rest of the P&L. First quarter gross margin was 56.5%, up 40 basis points from a year ago. The gross margin performance, coupled with good cost discipline and SG&A helped drive our operating margin to 27.1%, up 80 basis points from last year. Below the line, our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. And putting it all together, earnings per share were $1.37, up 13% from a year ago. In summary, Q1 ended with 10% core top line growth and 13% earnings per share growth, a very good start to the year. Now some metrics on cash flow and our balance sheet. In Q1, we generated $296 million in operating cash flow, up 16% versus last year, while investing $76 million in CapEx. CapEx spending continues to be driven by our scale-up of our Train B manufacturing line and other capacity expansion projects. In the quarter, we returned $142 million to shareholders through $67 million in dividends and by repurchasing shares worth $75 million. We also announced we're increasing our dividend by 7%, along with a new $2 billion share repurchase authorization continuing our successful balanced approach to capital deployment. Our balance sheet continues to remain healthy as we ended the quarter with a net leverage ratio of 0.8. Now let's move to our revised outlook for the year and the upcoming quarter. The macroeconomic environment remains dynamic and interest rates and currencies continue to be volatile. However, given the good start to the year, we are increasing our full year revenue to a range of $7.03 billion to $7.10 billion. This increase updates our full year core revenue guidance to a range of 5.5% to 6.5%, increasing the midpoint of our guidance to 6%. We've also seen the dollar weaken against major currencies in the first quarter although it has rebounded somewhat in February. And as a result, the full year guide reflects $100 million of favorable currency movements since our initial guide in November. And for the full year, we still expect currency to be an almost 300 basis point headwind to reported growth. In addition, we're also raising our full year EPS guidance to a new range of $5.65 to $5.70 per share. And lastly, given the recently announced NASD expansion to double our oligo manufacturing capacity -- we are updating our forecasted capital spending for the year to $500 million, up $200 million from our guidance at the beginning of the year. Now turning to Q2, we expect revenue in the range of $1.655 billion to $1.680 billion. This represents core growth of 6% to 7.5% and reported growth of 3% to 4.5%. Currency is expected to be a headwind of 3.1 points, while M&A will contribute 0.1 points of growth in Q2 which is consistent with Q1. Second quarter non-GAAP earnings per share are expected to be between $1.24 and $1.27, representing growth of 10% to 12% versus the prior year. I'm pleased with how the team has delivered in the first quarter. We are focused on the things we can control. Our team is driving strong execution in the marketplace and coupled with our broad portfolio of products and services, we expect to continue to grow faster than the market as we go through the year. Thanks for being on the call. And now I'll turn over things back to Parmeet as we take your questions. Parmeet?

Operator:

[Operator Instructions] We take our first question this afternoon from Matt Sykes of Goldman Sachs.

Mike McMullen:

Yes. Thanks, Matt. First of all, I appreciate the recognition of the numbers we posted and we think there's still a lot more opportunity in front of us. And I want to actually have provide a little bit more color on where those opportunities may lie.

Mike McMullen:

Yes, I think we see a lot of opportunity, obviously, in China. That's when we flagged in the past. The other one that we're pointing to is a lot of the growth has historically been centered in the pharma space. We're seeing growing interest in the CAM space as well. So I think from an end market perspective, that's an area we would expect to see some more growth. And geographically, the China story still hasn't fully played out yet. And then again, I would just remind you, Matt, some of the points we made in the call, record renewals for support contracts and also clearly taking share on the enterprise level. Those attach rates we keep talking about are going up as well. So a lot to like here.

Mike McMullen:

Yes. So first of all, let me -- I'm taking a bit on this with Bob but let's -- I'll talk about the backlog, first of all, I think it's very important to just to remind the audience that the quality of our backlog remains extremely high. So -- and you can see the great work of our team at to work down the backlog but we're not seeing any cancellations or anything pulling out of backlog. So that gives us level of confidence around the revenues we can forecast. I think there really isn't anything new to talk about today relative to new news relative to the second half, we still remain -- we still want to acknowledge the uncertainty about the back half of the year. So really no new news here. It's very consistent to what we talked about in November. I think you're going to hear a lot of us talking about normalization of growth rates -- normalization of deal cycle times. So the funnels remain healthy. The deal cycle times are I think we've already more towards historical levels. And Bob, I don't know if you'd add anything to that?

Operator:

The next to Brandon Couillard of Jefferies.

Mike McMullen:

Well, I'm glad you noticed, Brandon and if you were in the conference room here, you see there's a lot of smiling in the room here because really proud of what the team has done here. So I don't think it's all a timing issue. It's about execution and its ability of this team to execute because our teams were hit with waves of COVID during the quarter. But we know how to execute. We've also enabled the -- our ability to interact with customers digitally. So while people maybe couldn't go to the office or couldn't go to customer sites, they were able to support the customers. So we were just -- we were just delighted with the performance out of China in Q3. And Bob, I think it was a broad-based story. We had growth and double-digit growth in pharma, chem, food. So it was really pleased with the results. I know our narrative is different than others are saying but I also think my team in China capability is also different.

Mike McMullen:

Yes. I want to tag team a bit with this with Sam and myself and Bob. So we evenly refer to Train B. That's the latest expansion that's coming online this year. In fact, we had a chance to see that firsthand when we went to the groundbreaking ceremony for what we call Project endeavor or as you're referring to [indiscernible]; it looks really good. We're on track for that mid-calendar year go live and we have a full book of business for that just a matter of ramp. And again, project up. And then I'm going to pass it over to Sam and maybe you want to remind, Brandon, what our plans are with the new expansion, when we expect to see some of that first revenue coming into Agilent.

Mike McMullen:

Sam, unless you're going to commit to me for earlier to go live. I think you meant to say '26, right?

Robert McMahon:

Yes. And Brandon, to your point around the question of purchase orders and so forth. We have good visibility into the pipeline in the funnel but we haven't started taking orders given the time frame there. So we have high confidence that we wouldn't be putting in $725 million into the expansion.

Vijay Kumar:

Congrats on a good print here, Mike. My first question here on the second quarter guidance, 6% to 7.5% organic. That's a sequential step down of 250 basis points at the high end. I guess the comps get easier. Is there anything in the second quarter? Was there any timing of revenues that got to fall to Q1? Or any China impact, anything that can explain here at the sequential guide for 2Q?

Robert McMahon:

That's exactly right. I mean, I think as we look at this, we just came off a 10%, still 6% to 7.5% is still significantly above where we're forecasting the full year and I think we feel good and I think it's consistent with how we have guided in the past.

Vijay Kumar:

I was waiting for that, Mike. So have to say the second quarter is a prudent guide. Is that a fair comment?

Vijay Kumar:

Fantastic. And then I did have one on this NASD, Mike -- at Novartis. I think they're pulling their API manufacturing in-house. And I know you're starting to train to see maybe provide some context and how big is Novartis as a customer? What's the pipeline looking in ASD and uses at risk?

Robert McMahon:

Yes, let me just add something. I mean I would say this means nothing to our expansion. I mean or I want to be very clear about that. I mean I think we feel very good about -- we've continued to be capacity constrained. We've had more orders than we can satisfy. And I think that continues to be the case and we feel extremely good about the overall technology and our position in the marketplace.

Sam Raha:

Mike, if I can just add just a couple of quick things, right? We've stated this before. We think the therapeutic oligo market for the suppliers that we are $1 billion today, growing to $2.4 billion by 2027. And what's really encouraging about the market is the number of molecules that are advancing, right? Just to give you a little bit more color, we're doing work with over 30 pharma partners today and on dozens of programs at various stages. So the pipeline of programs are working on, some of which have the potential of being molecules also broad populations is absolutely there and something that we're excited about.

Puneet Souda:

So first one, Bob, I don't know if I heard it on the call, contribution sort of from pricing in the quarter and for the full year. If I'm correct, you are still expecting 3% pricing contribution this year and that would imply a 3% volume contribution which it appears below historical levels for what Agilent has grown. So just maybe just -- we're trying to understand, given the tailwinds you're seeing in China, NASD and the other areas and obviously, congrats on the strong growth in the quarter. So is there anything you're seeing beyond sort of tougher compares that are emerging in the sort of the second half?

Puneet Souda:

Okay. That's helpful. And then on the Lunar New Year, is that part of -- is that baked into the guide as well? And I just wanted to clarify on China. I mean obviously, you have heard about the stimulus, your -- actually Agilent is listed -- one of the companies listed within the document that was put out for the loan stimulus for China. This is sizable. How are you thinking about it? You obviously have the longest and one of the most legacy positions in China. So just trying to understand what does that mean for China growth in 2023 and '24.

Robert McMahon:

Sure. Yes. But the impact of Lunar New Year was not only in Q1 but it's also been reflected in our Q2. It was roughly 0.5 point headwind in Q1 and that's come back to us in Q2. So it was kind of as planned. And in regards to the stimulus, the way we're looking at this is Sims got kicked off in the calendar Q4. There is a section in there that's focused on equipment for universities and hospitals. But from our perspective, it's still early. So we're kind of waiting right now to see how it plays out. And but I think at this point, we really haven't put anything assumed in our guide or China growth relative to the stimulus. So if it does get deployed and comes to our way, then that will be an upside to our current forecast.