Agilent Technologies, Inc. Q3 FY2024 Earnings Call

Ladies and gentlemen, welcome to the Agilent Technologies Q3 2024 Earnings Call. My name is Regina and I will be coordinating your call today. I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead.

Thank you and welcome, everyone, to Agilent's conference call for the Third Quarter of Fiscal Year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent 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, 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 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 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 rate. As a reminder, 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 risk 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 risk and other factors. And now, I'd like to turn the call over to Padraig.

Thanks, Parmeet. Good afternoon, everyone and thank you for joining today's call. The Agilent team executed well in the third quarter and posted solid results, delivering better-than-expected revenue and earnings. Revenue of $1.578 billion declined 4.4%, an improvement of 300 basis points from Q2, reflecting the steady improvement in the market. Operating margin of 27.4% improved sequentially as the actions we announced last quarter start to deliver. And we remain on track to deliver the incremental annualized savings of $100 million by the end of the fiscal year. Earnings per share of $1.32 is $0.04 above the high end of guidance. As a result of our strong Q3 performance, we are raising our guidance at the midpoint for both revenue and EPS and we continue to make investments in our most promising growth opportunities that I referenced in our Q2 call. We are investing in our digital ecosystem to further enhance our differentiated customer experience, plus we are mobilizing the organization to accelerate value creation through strategic transformation initiatives, driving margin expansion and growth and increasing our execution capabilities. Separately in the quarter, we were excited to announce two acquisitions that demonstrate our focus on biopharma and our digital ecosystem, which I'll talk about in a moment. As you know well, the pace of change is faster than ever. Our markets, customers, and competitors are not standing still, neither are we. We are accelerating our pace of innovation and execution, so we can add to and capitalize on opportunities in front of us. We are sharply focused on key growth vectors, including biopharma, PFAS, and Advanced Materials. I continue to meet and connect with employees, customers, and shareholders around the globe to listen to their perspectives on how we should build on our strengths and move Agilent forward. The entire Agilent team is clear on what is vital to the company's future, becoming even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. We are evolving our strategy, adapting quickly to market trends and changes, while accelerating our pace of innovation in areas of greatest return for long-term growth. We're excited to announce that you'll hear more about these topics and our transformation at our Investor Day we have planned in New York on December 17th. Now, let's talk further about our Q3 results. All our end markets except academia and government, which is our smallest, ended the quarter better-than-expected. Our largest market pharma declined in high-single-digits, slightly better than our expectations and while biopharma continues to be pressured, we are seeing relatively better performance in small molecules. Our leadership in providing workflow solutions for PFAS continued to show strong performance in the environmental markets. Geographically, Europe exceeded expectations led by small-molecule pharma, as well as continued strength in environmental. Our other regions performed roughly in line with expectations. While capital equipment budgets remain constrained, we continue to see good lab activity in Q3 with services plus consumables growing in mid-single digits. When looking at our performance by business unit, the Life Sciences and Applied Markets Group reported $782 million in revenue, down 7%. While the instrument side of the business remains constrained, it was encouraging that our instrument book-to-bill was again greater than one. The group saw a decline across all regions and most end-markets with low single-digit growth in Environmental & Forensics. The Consumables continue to be a bright spot, growing by mid-single digits. The LSAG team also was busy innovating with the introduction of the 8850 GC that helps customers reach their sustainability goals by delivering answers efficiently while using up to 30% less power than other GCs and has a much smaller footprint. Moving on to the Agilent CrossLab Group, the business delivered revenue of $411 million for the quarter, up mid-single-digit. ACG grew in every region except China, where we were down modestly year-on-year, but showed meaningful improvement versus last quarter. Once again, we drove double-digit growth in service contracts, which represented nearly 70% of the total business. And beyond another quarter of solid revenue growth, ACG also delivered a record operating margin of 34%, demonstrating that the resiliency and strength of the recurring revenue business continues despite the constrained capital equipment environment. The continued strength of our business is a testament to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers in helping them reach their productivity goals. The Diagnostics and Genomics Group posted $385 million in revenue, representing an 8% decline. Pathology grew mid-single digits globally and was offset by declines in Cell Analysis, NASD, and genomics. NASD stepped down sequentially in Q3 as expected and we are on track for NASD's revenues to step up sequentially in Q4. In the face of a constrained CapEx environment, the Agilent team has remained consistent in putting our customers first and fostering deeper relationships with them. We continue to execute well and be disciplined while investing in high-growth opportunities. As I mentioned earlier, we were thrilled to announce two acquisitions that speak to our focus on biopharma and increasing recurring revenue, as well as on strengthening the digital ecosystem for Agilent customers. In late July, we signed a definitive agreement to acquire BIOVECTRA, a leading specialized contract development and manufacturing organization. The Canada-based company builds on Agilent's capabilities in oligonucleotides and CRISPR therapeutics by expanding our portfolio of services. BIOVECTRA adds rapidly growing modalities in microbial fermentation, antibody-drug conjugates, and high-potency active pharmaceutical ingredients. It also brings world-class capabilities that when combined with NASD enables us to deliver customers a complete gene editing solution. The company delivered more than $110 million in revenue during the calendar year 2023 and expects double-digit revenue growth this year. The BIOVECTRA acquisition remains on track to be closed by the end of the year, and we're looking forward to welcoming the BIOVECTRA team to Agilent. At the end of the quarter, we also announced the acquisition of California-based Sigsense, a start-up that uses artificial intelligence and power monitoring to help customers optimize their lab operations. Sigsense Technology is already available to our customers through CrossLab Connect, a suite of digital applications that improve lab performance. A hearty welcome to the Sigsense team who is already part of Agilent. During the quarter, we released our annual ESG report, which showcases a large and growing portfolio of products that help our customers reach their sustainability goals. Instruments certified with the My GreenLab ACT label now account for 40% of all instrument revenue and we continue to regularly release products like the new 8850 GC with environmental benefits. We are also proud that we have recently ranked in the top 20 of Time Magazine's 500 Most Sustainable companies in the world. Bob will now provide the details on our results, as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob.

Thanks, Padraig 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 cover our updated full-year and fourth quarter guidance. Q3 revenue was $1.578 billion, a decline of 4.4% core, but a 300 basis-point sequential improvement as Padraig noted. Excluding China, revenue declined low-single digits in the quarter. On a reported basis, currency had a negative impact of 1.1 percentage points, while M&A had a negative impact of 10 basis points, resulting in a reported decline of 5.6%. Our largest end market pharma declined 8%. Biopharma was down low double-digits or down mid-single digits, excluding NASD. Small molecule performed better, down mid-single digits and was led by growth in Europe. Services and pharma continue to perform well, growing high single-digit. In Chemical & Advanced Materials, revenue declined 5%, with growth in Americas offset by softness in China. Our Advanced Materials sub-segment performed better, driven by our business in the semiconductor market. Academia and government, our smallest market, can be lumpy from quarter to quarter. We saw a decline of 11% as Europe and China both saw double-digit declines, partially offset by better performance in the Americas region. Our business in the diagnostics and clinical end-market grew 2%, including continued mid-single-digit growth in pathology, offset by ongoing softness in genomics. In Environmental & Forensics, we grew 4%, another great quarter for our PFAS testing business. We saw robust business in Europe, led by the new EU Water Directive and in China due to the nationwide emerging pollutants program. Now wrapping up our end markets, food was down 3% versus last year, but grew sequentially and was led by Asia, ex-China. Moving on to our regional performance, Europe was flat overall, beating our expectations, while we declined 6% in the Americas and declined 1% in Asia, ex-China. China revenue declined 11% with quarterly revenue improving sequentially, driven by growth in services and consumables. This speaks to some increase in lab activity, which is encouraging. Now, let's move on to the rest of the P&L. Gross margin was 56.0% in the quarter, down slightly versus a year ago, but up 40 basis points sequentially. Our operating margin of 27.4% improved sequentially and was better-than-expected. Despite the dampened demand, we continue to make good progress in driving our productivity initiatives and continuing to manage the cost structure very well, while investing for growth. As Padraig mentioned, we are on track to deliver the $100 million in incremental annualized cost-savings by the end of the fiscal year. Below the line, our net interest income was in line as was our tax rate of 13%, and we had $291 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.32. That was ahead of our expectations, but down 7.7% from a year ago as we went up against a difficult compare due to the variable pay reset in Q3 of last year. Now, let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $452 million in the quarter and we invested $92 million in capital expenditures. As we committed in Q2, we ramped up our share repurchases starting here in Q3. We purchased $585 million in shares and paid out $68 million through dividends, for a total of $653 million returned to shareholders in the quarter. This includes $500 million of the previously announced $750 million opportunistic share repurchase, and we expect to complete the additional $250 million repurchase in Q4. We ended the quarter with a net leverage ratio of $0.6, and even with the upcoming BIOVECTRA acquisition, our balance sheet and leverage ratios will still be in a very strong position. In summary, we performed well and continue to see a steady improvement in the market and expect that to continue into FY 2025. Because of our Q3 results, we are increasing the midpoint of our revenue and earnings per share guidance for the year. We now expect full-year revenue to be in the range of $6.450 billion to $6.500 billion. This represents a decline of 5.6% to 4.9% on a reported basis and a decline of 5.0% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. Full-year non-GAAP earnings per share are now expected to be between $5.21 and $5.25, representing a decline of 4.2% to 3.5%. This assumes net interest income of $38 million, a 13% tax rate and $292 million fully diluted shares outstanding. We have not included any impact of the BIOVECTRA acquisition in our updated guidance and $0.06 does not have a material financial impact to the year or Q4. This full-year guidance translates into Q4 revenue in the range of $1.641 billion to $1.691 billion. This represents a decline of 1.9% to 1.1% growth on a core basis and a decline of 2.8% to 0.2% growth on a reported basis. Currency and M&A are a combined headwind of 90 basis points. Fourth quarter non-GAAP earnings per share are expected to be between $1.38 and $1.42, marking a return to growth at the midpoint. We expect a 13% tax rate, a decrease in net interest income to $5 million due to the lower cash balance and $287 million diluted shares outstanding for the quarter. Now, I'd like to turn the call back to Padraig for some closing comments.

These are exciting times at Agilent, with a team that is second to none. We are doubling down on our customer-first culture and deepening our relationships to further enhance our market-leading customer experience that is already the best in the industry. We are evolving our strategy to aggressively pursue our ambition to grow in markets where we have a right to win through both organic and inorganic growth, and we will continue to accelerate value creation through strategic transformation initiatives. We remain a leader across key platforms, and we're in great long-term growth markets that are beginning to show evidence of recovery. And best of all, our team is engaged, leading to Newsweek including Agilent on its America's Greatest Workplaces 2024 list. Again, thank you for joining today's call. I'm energized by how we are evolving Agilent. Each data team gains momentum in building an enduring company that sets the standard for excellence with our customers and creates value for our shareholders. We are fueled by future possibilities, and I look forward to continuing to share our progress. Parmeet, over to you for Q&A.

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

Our first question will come from Matt Sykes with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Maybe the first one, just digging in a little bit on the LSAG where you had a pretty solid beat. It looks like that was driven primarily by consumables and services. So, I'm curious if you can give any more color on what instruments did? I know you had a book-to-bill above one, but just how does that inform your view as we go into 2025 on the replacement cycle, specifically large biopharma demand and how that might impact your view on when that replacement cycle starts kicking in?

Yes. Thanks a lot, Matt, maybe I'll kick it off and give it to Bob. I think, first of all, you're correct, we saw very, very promising growth in both Consumables & Services, which shows lab activity is actually improving or is very stable. We're still very challenged on the instrument side, but what we're seeing is we're seeing a lot of activity around conversations with lab managers. Our funnel is extremely stable. We haven't seen any cancellations. But what I would say is that deal closure times are still elevated. So we're not at this point seeing any budget towards the end of the year, which of course for us ends at the end of October, but we're watching that closely. I don't know if you want to add anything, Bob?

Yes. Thanks, Matt, for that question and maybe just to fill in and add some additional commentary to what Padraig was saying. When we looked at the quarter, we were very pleased, actually both our Consumables business, as well as our Instrument business performed better-than-expected in the quarter. We were down 7% in total. Our Consumables business was actually up mid-single digits towards the high-end there. And our Instruments business was down low-double-digits, but that was better than what we expected. And as Padraig mentioned, we had a book-to-bill that was greater than one on the instrument side again this quarter, which was very encouraging.

Got it. Thanks for that. Very helpful. And then just on Academic & Government, I know you've talked about it for a while, how volatile that can be, but just given sort of the two quarters in a row of sort of negative performance there and you called out Europe and China specifically. Are there any kind of durable trends you're seeing either in funding or in demand that you think might be more persistent in that specific end-market as we go through Q4 and then as we look into 2025?

No, I think, look, we saw a decline of about 11% and that was really against the comparative feature, the stimulus in EMEA and strong results in APAC and China. And so it was a really tough compare. And I think what we're seeing is funding remains stable in most regions and except I would say Europe where we're seeing a reallocation of funding towards defense, but I would say no major changes in that market.

Got it. Thank you very much.

Perfect. Good afternoon. Thanks for taking the questions, you guys. I wanted to dig into NASD a little bit. Obviously, we had some positive announcements intra quarter with the Helios-B readout. You mentioned that NASD stepped down sequentially as expected and then you said you're expecting that to then step up into fiscal 4Q. So could you unpack all that for us a little bit? How should we think about the magnitude of the step-up into 4Q? And then given some of the updated data readouts that we got intra quarter, how does that underpin your assumptions on NASD next year and then also long-term?

Yes. Look, I'll start off and maybe I'll hand it over to Simon, who is on the call here as well. We've seen, with clinical batches, of course, there can be changes with customers' progress in those batches. We're not seeing any changes in what we're saying for Q4, so we're fairly certain of Q4 on that. What we're seeing as well is that we've grown our clinical business over 50% this year, which is very promising. The long-range view of the market is very strong with the drugs and the modalities that are being used. But I think what you're seeing is a normal kind of up and down between quarters with that business. But I don't know if you want to add any more color, Simon?

Yes, I'd just echo what Padraig said. I think the Q3 performance that we saw in NASD was largely in line with expectations. And in that business, we always see a natural lag between order booking activity and revenue recognition because of the length of time that these programs take. And towards the end of last year, we were really seeing the effects of the IRA impacts and that's still not completely waned, but what we saw in Q3 was pretty strong bookings activity. So as we look to Q4 and into 2025, I think we're cautiously optimistic about seeing a return to growth there. So I'd really just characterize Q3 as in line with expectations and part and parcel of the lumpiness you see in this business. You also mentioned Helios, I think it's just worth mentioning that we were very happy to see that development, but still very early days in terms of how that's going to ramp up and play out and too soon to say where that's concerned. There's certainly no impact in the remainder of 2024 and unlikely in 2025 as well.

Yes. Hey, Rachel, this is Bob. To expand on the last part of your question regarding the sequential step-up, we actually performed better in Q3 than we anticipated and are projecting about a $20 million increase from Q3 to Q4. We have all those orders in-house and remain aligned with our long-term estimates for NASD, which is reflected in our guidance.

Great. That's helpful. Then for my follow-up, I just wanted to dig a little bit more into 4Q guidance and what that means in terms of an exit-rate into 2025. So appreciate some of your comments earlier, you highlighted in Matt's question that you're not really assuming a budget flush for your fiscal year end in October. But I guess, how should investors look at this 4Q number on an organic growth basis of that down 2% to up 1% on the range? And how do we look at that translating into 2025? If I look at consensus right now, consensus is just shy of 5% organic on 2025, the Street is also nearing that double-digit EPS growth. So I appreciate it's still a little bit early for you guys to formally give us 2025 expectations, but what do you think about exit rate and where sell-side numbers are right now?

Yes, it is a bit early to discuss FY 2025, but I believe it indicates our expectation for ongoing steady improvement. In Q3, we saw a sequential improvement of 300 basis points, and we anticipate further improvement as we head into Q4. I expect this trend to continue into FY 2025. While I can't provide a specific number yet, we do expect growth next year. The markets are likely to rebound, and although we've been below the long-term trend, there is nothing indicating a change in these markets, so we remain optimistic about continued recovery moving into FY 2025.

Understood. Thanks, guys.

Hey, guys. Thank you for taking the questions. Bob, maybe one for me, just on China, how you guys are thinking about the region there? It sounds like it was down 11%, that got a little bit better on the revenue side sequentially. It sounds like again, lab activity maybe look a little bit better. Could you just talk about expectations into year-end? Some of your peers have suggested you could see a bit of a pause on the capital side into calendar year-end as we wait for a little clarity on the stimulus. Just how you guys are thinking about China, again, not only into your fiscal year, but just into the year-end on the calendar side and what's your view in terms of do we see a little bit of an air pocket here until the good news dollars get firmed up?

Yes, Patrick, that's a great question. We noticed some activity in our Q2 regarding bid activity, mainly for instrumentation. We are hopeful about the mid-term due to stimulus, which will likely be more relevant in FY 2025. We've observed increased activity, and it's encouraging that our services business has seen a rise in demand, as well as consumables. However, demand has still been dampened, particularly in the Academia & Government sector, with the greatest impact in China. Nonetheless, we are spotting some signs of recovery.

Yes, Bob, I'll just add. In China, we are encouraged from a services perspective on the nice sequential growth that we saw from Q2 to Q3, which is indicative of continued and somewhat increasing lab activity in China.

Okay. That sounds encouraging. And then maybe another one for you, Bob. Just as we think about the margin construct as we work our way into year end and into 2025, maybe just remind us some of the moving pieces to think about high-level as we look ahead to next year, obviously, the cost out program seems to be progressing well to your point, the margins came in nicely here in 3Q. But yeah, maybe just the moving pieces as we go ahead to next year without talking too much about the top line, obviously, the volume matters there. But just kind of down the P&L, how to think about some of the margin algo for next year would be helpful.

Yes, I think as we talked about, Patrick, it's a great question and we're committed to continuing to drive efficiencies across all of the P&L line items and I think you've seen that across the actions that we've taken. We're on track to delivering that $100 million of incremental annualized savings by the end of 2024. So there will still be a tailwind, obviously going into 2025 for that benefit. Offsetting that will be some resets of our variable pay and activities like that, but we are committed to covering that. If I think about it at the highest level, what I would expect us to continue to be able to do is drive leveraged earnings next year. And I think you're seeing that the scale benefit that we're seeing in certainly our ACG business here this last quarter, just phenomenal profit contribution and I think with volume coming back into the instrument business as well, that will set us up nicely for next year. So think about a nice incremental tailwind associated with the continued actions or the annualization of those actions that come in FY 2025, partially offset by merit increases in some of the activities and then we'll have our ongoing productivity measures and we'll actually share some of the more detail around this probably in our Analyst Day in December. So stay tuned on that as well.

Thanks. Okay. That's great. Thank you, guys.

Thank you. Good afternoon. I wanted to dig into some of these instrument trends a little bit more. I was wondering if you could talk about just what you're seeing across some of the big categories like LC, LCMS, GC, spectroscopy, any color on how those performed?

Yes, I mean in general terms, Jack, I think you know the customers are very, very cautious. But what I will say is that lab managers remain very engaged with our sales teams about future projects, that is true. We see a lot of stability in that. So it's still very challenged and I would say that our deal close rate is still elevated, but our funnels are very stable with low cancellations. So I think that goes across most of the markets. And as you see going forward, you know our results in CST and services growing mid-single digits and bode very, very well in terms of lab activity increasing. So we're seeing slow, but steady improvement.

Yes. Hey, Jack, just to follow-on to that. I think one of the things as we mentioned in the call, the book-to-bill being at one for instruments is a positive sign. It was slightly better than what we expected. Overall, LSAG instruments were down low double-digit.

Yes. Yeah. Were all the categories kind of right around there?

I would say if you looked at the LC and LCMS business, they were in the mid-teens; our spectroscopy business better than that.

Okay. And then just as one end-market follow-up, I was curious in CAM in the third quarter, so it was down 5%, it was a little bit below what I was thinking. Is there anything just within the different categories within that end-market that softened a little bit relative to what you were thinking a few months ago?

Yes. So, you're correct, it was declined by 5% and it was really due to the impact of overproduction in China, which negatively impacted market investments globally. But we did see increases in service and consumables, both combined at 7% increase, but there was a decrease of about 14% in instruments, and I think CapEx spending remains slightly challenged there.

Yes. That makes sense. Thank you, guys.

Hey, guys. Thanks for taking my question. One, I guess, Padraig or Bob, if you look at the guidance change over the last three months, NASD, China, biopharma, those have been the big categories, right? I think the guide assumes NASD down double-digits in fiscal 2024, China down high singles, double-digits, biopharma down, which of these is expected to get better next year? What is getting better or worse? And is there a first-half versus second-half dynamic that we should be aware of?

Yes, Vijay, thanks for the question. I think in terms of what we expect getting better, we expect all of them to improve next year. We raised the midpoint of guidance, $15 million on revenue and $0.03 in EPS and we see across all those areas, markets improving slowly and that's reflected in the sequential increase that we're guiding in Q4. So while we had a solid Q3, the end market environment for capital remains constrained and visibility while improving is still difficult.

Understood. And maybe on that Q4 commentary for guidance implies I think up 6% or 7%, which seems generally in line with your historical sequential step-up from 3Q. And is the bookings trends that we saw and NASE trends we saw, does it support that historical, I guess, seasonality because I think where the Street is debating upon is that historical seasonality, does it bake in some year-end budget flush or what is baked into that sequential step-up?

Yes. I believe we are observing the expected step-up this time as well. We are not factoring in any budget flush in that expectation. If there is a budget flush, it will be additional and will reflect in our Q1 numbers moving forward.

Yes. Hey, Vijay, this is Bob and just to build on what Padraig is saying, I mean you're absolutely right. When we look at the sequential, it is in-line with our historical, and our order book based on what we've seen today. Obviously, we have to book orders in Q4, but our order book trends would support that.

Fantastic. Thank you, guys.

Hey, guys. I have a question about BIOVECTRA and its potential synergies with the rest of the NASD business. How does this influence your perspective on capacity? Also, could you discuss the breakdown of BIOVECTRA's business between clinical and commercial, as well as any new modalities you are introducing?

Yes. I'll start, Tycho and I'll bring in Simon in a minute. So we are absolutely delighted with BIOVECTRA. We think it's a great asset that enhances our offerings and it really allows us to deepen our relationships with our key pharma customers. And what we're really excited about is that it builds on our capabilities on the current NASD modalities around anti-sense and particularly gene editing with microbial fermentation and ADC capability. And so we're very happy with that. So there's a lot of synergies as we bring that forward. So I'll hand over to Simon to talk maybe about capacity in the main business.

Yes, I think Padraig hit many of the high notes already in terms of the synergies. We already mentioned the complete solution offering in gene editing, which we see as a really significant competitive advantage going forward. Sterile fill finish is another synergy that we're excited about. We've had a lot of request from our customers over the past few years for that capability. And from the diligence we've done with BIOVECTRA, we think they've got truly world-class capabilities there. And as Padraig also mentioned with microbial fermentation, high potency APIs, there's an existing footprint there in GLP-1 manufacturing. So I think we've got a slightly higher clinical mix in BIOVECTRA than we have in NASD. So I think we're just killing several birds with one stone with this acquisition. From a capacity perspective, I'd say BIOVECTRA has been ahead of the curve with capacity CapEx and we've got some skin to grow into there over the next few years.

Okay. That's helpful. And then a follow-up on China. You had the pull-forward dynamic in the first quarter, $15 million. If that were back in 2Q, I think you were effectively flat, maybe down a little bit. First, is that the right assumption? What are you actually embedding in 4Q for China in guidance? And then how do you think about the return to growth in 2025? Could you see that in the first half of the year?

Yes. Tycho, your memory is correct. When we consider the expected mid-single-digit decline in the fourth quarter for China, we are actually comparing it against some easier comparisons. We anticipate a slight sequential increase in revenue as well, reflecting a steady improvement. We do not expect significant stimulus to take place in our fourth quarter—essentially none—but more in the fifth quarter, although we have seen increased bidding activity. The ongoing services and consumables activity is expected to continue. It's likely too early to make predictions for next year in China, but I expect it to keep improving and not decline as it currently is. We are forecasting a low double-digit decline this year but hope for improvement throughout the year rather than immediate growth. The expected stimulus will assist with this, likely impacting our first and second quarters, but we do not foresee a major increase immediately. The stimulus will roll out over three years.

Understood. Thanks.

Thank you for the questions. Instrumentation growth is clearly an important topic. Last quarter, you reduced expectations significantly, but the book-to-bill ratio remained strong at over one. This quarter, it continues to be above one, and you mentioned that last quarter was the first instance of growth in the market after seven quarters, which seems to have persisted into this quarter. Can you provide insight into our current position on instrumentation and the nature of the recovery you're observing in August? What leads you to believe that instrumentation will continue its upward trend into 2025?

Yes, look at the indications from the team, we have a strategic account team that does a lot of citations with our major accounts. We're seeing that more positive than negative in terms of customer sentiment, which is a very good sign. We see a lot of activity in our testing labs, as well as focusing on PFAS and so on. So there are drivers within the markets that are positive. But overall, I would say it's slow and steady and we're trading it as that. And the teams have really good visibility. Our commercial teams, which we've transformed in the last few years are really, really close to our customers. We have really good visibility into that. So it's slow, but steady. I don't know if you want to add anything, Bob, to that?

Yes. No, I think you're spot-on and we're not building any budget flush into our Q4, Puneet. So if that does in fact happen, that would be a benefit to our current estimate.

Thank you. The recent negotiations on drug pricing with Medicare for the first set of drugs are underway. The Inflation Reduction Act is clearly influencing this situation. Over the next three years, 15 drugs will be negotiated each year, likely resulting in further effects. What insights are you gaining from your large pharmaceutical clients regarding their outlook on R&D spending and their current expenditures with Agilent?

Yes. Generally, they are very cautious due to the macroeconomic challenges they are facing. There is significant M&A activity in the pharmaceutical sector, leading to consolidation, which requires time and focus from these companies. Over time, I believe this will balance out in terms of impact. On another note, the number of R&D programs is not decreasing; in fact, it is increasing in several key areas, particularly around GLP-1 and others. We need to wait and see how this unfolds, but it's worth noting that many people overlook the substantial spending that has occurred in recent years, which we are now seeing normalize as we move into 2025.

Okay, fair. Okay. Thank you.

Hey, guys. Thanks for taking the questions. I want to follow-up on maybe this is what Puneet was just getting at, but you called out in your prepared remarks a couple of times that with biopharma, small molecule held up a little bit better or small molecule did a little bit better than large molecule, I assume. Just wondering if you could delve into that a little bit more, was that a particular instrument class or modality that drove that? Does that have to do with budget cycles, just what you're seeing there and why there's such a difference in molecule type?

Yes. Hey, Mike, this is Bob. You're right, our small molecule business was down mid-single digits this quarter, which was actually better than we expected. In Europe, however, it grew, which is a very positive sign. This highlights that there’s a limit to how long you can keep using your old instruments before replacements are necessary. We're not yet declaring a shift in the replacement cycle, but each quarter, these instruments age. It's important to note that pill counts and volumes continue to rise. Regarding the IRA and pricing, it wasn't as bad as the worst-case scenarios, possibly even better than initial expectations. Our strength lies in the transition from development to production, which remains a positive long-term trend. This pertains to our core LC franchise, and our biopharma segment was somewhat affected by our NASD business, which experienced a setback. If we exclude NASD, our biopharma business was down in the mid-single digits as well. Although it saw a slightly larger decline than the small molecule sector, both areas are in a similar range, especially once we account for the unique situation with NASD showing improvement quarter-over-quarter, which is encouraging.

So I would say, just adding to that, Bob, we saw services growing double-digits in biopharma and mid-single digits in small molecules. So that's a big component of what we see in those different modalities.

Okay. Both of those answers are really helpful. And then for my follow-up, I want to lean in a little bit more on BIOVECTRA. I mean, everything you kind of laid out there for the rationale and the financials of the deal certainly makes sense. But I'm just curious, you know, you've had a presence in some CDMO type capabilities in the past. Just wondering how hard are you going to lean into this? And what I'm alluding to is obviously, one of your large traditional tools vendors has a CDMO business has been in that business for a number of years now and there's a lot of talk of the benefits of having both the instrument, the consumables and the services business on the tail-end. Is this something you're going to continue to grow overtime? Is BIOVECTRA like a beachhead acquisition? I mean we should expect more investment down the road?

Yes, I'll start and then pass it to Simon. When we consider our M&A goals, our focus will be on aligning with our strategy, ensuring a fit in faster-growing markets, and creating value. BIOVECTRA meets all these criteria and helps us enhance our capabilities for customers. We are enthusiastic about this opportunity, as we believe this business has significant growth potential. It is performing well, is well-managed, and has received substantial capital investment over the years. I see this as just the beginning of our efforts to expand BIOVECTRA and NASD. Simon?

Not much to add really, only beyond that, we've got a very strong existing position in the RNA modality. I'd say up until this point, it's been a relatively narrow capability position and BIOVECTRA builds on that quite nicely as we look at future optionality around complementary capabilities and modalities, we think it's a rich space and that's probably all we can say at this point.

Great. Thank you.

Great. Thanks. Thanks for taking the questions. Maybe just back to China, the down 11% was a bit better than we were looking for. Can you just unpack what specifically got better in the quarter given the guidance cut that you made last quarter, maybe either by customer type or by product type? And then just to clear up, like so your guidance for China, I know it was down double digits. Has that changed at all? Have you improved that? So that's my first question.

Yes. Hey, Dan. Thanks for the question. China is still in line with our full-year end guidance down low-double-digits. If I look at where we actually performed slightly better than what we anticipated, it was actually in pharma and it gets back to what we were talking about before, the activity both on the services side performing sequentially better, as well as our consumables business actually growing. And so we were down close to 30% in Q2 of last year; we were down low double-digits in pharma year-on-year. And so that was the big sequential improvement in Q3 and I would expect that to continue into Q4.

Thank you, Bob. I apologize for revisiting NASD, but there have been numerous questions from investors due to the significant slowdown in that business this year. Can you share what the performance was in the quarter? I missed the year-over-year number for NASD. If we consider your full-year guidance, which you mentioned will see a step-up, could you provide more clarity on the quarter? Additionally, any insights on the clinical versus commercial aspects would be appreciated. It appears that your bookings are improving, which is a positive sign for the outlook, but I'm trying to understand what is happening in the quarter. Thank you.

Yes, Dan. While we usually don’t provide a specific figure for NASD, it performed in line with or slightly better than our expectations. We anticipated a decline in Q3, but results exceeded those expectations. The full-year projection remains consistent at around $300 million. As Simon mentioned, bookings are encouraging, reflecting positive activity, and we are starting to see some customer interactions that indicate long-term opportunities rather than just short-term gains. Overall, while we expected a decline in the quarter, the results were slightly better than anticipated. We are still on track to meet our full-year estimate.

Got it. Thank you.

Hey, guys, thanks for the questions. Maybe first, just could you talk about growth rates by segment for the fiscal fourth quarter and maybe your assumptions for instrumentation versus consumables and services in the fourth quarter?

Yes, it's Bob. Looking at our fourth quarter, we anticipate improvements across all groups. Specifically for LSAG, we expect low single-digit growth from a decline of 7% this year. Consumables are expected to perform better overall, while the instrument segment may still see a slight decline. DGD is projected to be down in the mid-single digits, and ACG is expected to rise in the mid-single digits, approaching the higher end. This is what we've included in our guidance, so all three segments are actually performing better than they did in the third quarter.

Yes, perfect. And then maybe going back to Small Molecule, nice to see the improvement there. I think what was just Small Molecule performance excluding China? I know you said Europe grew, but just curious to get more color on what you're seeing elsewhere?

Yes, I think what we're seeing is Europe was a standout in Small Molecule, a lot of activity there, but probably stable across the different markets on us. And what we did see from the Small Molecule side, we did see pretty good growth in services as well as had that number, but I think overall Europe ahead, but everywhere else stable.

Yes. We experienced a decline in the mid-single digits, and if we exclude China, the decline was in the low-single digits across other regions.

Hey, good afternoon. Thanks for taking my questions. A couple for you. Padraig or Bob, maybe first a follow-up. On your assumption for no budget flushing impact on pharma instrumentation, is that just a function of the timing of your quarter relative to calendar year-end buying from these customers? Or are there other things you're seeing that are leaving you on the sidelines as it relates to end-of-year pharma spending? And then a related question was, curious any high-level thoughts you had on 2025 based on planning conversations you're having with pharma accounts, are you thinking next year should be a return to normal growth-type year in pharma instrument budget as budgets are reset or is it more of a gradual recovery or return to normal over a couple of year period? Any feedback you're getting from accounts on that?

I'll start with the first question and then pass it to Bob for the second. A year ago, there was a lot of talk about budget flushes, which we didn't anticipate and didn't really observe. We noticed a slight increase, but it wasn't significant. We're anticipating something similar this time, especially since our fiscal year ends in October. If any activity does occur, it would likely be in the first quarter of 2025. We have a strong connection with our customers and a clear understanding of our sales funnel, current deals, and a significant amount of installed base information. Therefore, we don't expect anything major at year-end. However, we are observing many discussions about next year, indicating a slow but steady recovery across the industry. Bob, would you like to address the second question?

Yes. Josh, on 2025 as we were saying, it's probably too early to say. But I think our current indication is that it's not going to snap back November 1st to be back to normal. I do think that you'll continue to see a recovery throughout FY 2025 and get back to that long-term growth rate sometime in 2025, that's the way we kind of think about it. But I don't think it's another two to three-year estimate either based on our conversations with our customers right now. So it's probably in between.

Hey, guys. Thanks for fitting me in. I know it's late in the call, that being said, I got three lightning round questions, which I'm going to rattle through and then listen to the answers. The first is on math. If recurring revenue growth was up mid-single digits in the quarter, it seems like instruments has to be down around 20%, maybe more based on the numbers you reported in the 10-Q in Q3 of last year. Bob, I think you said in response to Matt Sykes' question, it was down low-double digits. What are we missing? Just not trying to be too picky here, but it just seems important in the context of assessing trends and what way to put on your book-to-bill commentary. So that's the first question. The second is on China stimulus. Any change in dynamics regarding stalling either in terms of conversions or even cancellations? There's some skepticism that there's been some recent changes as the shape of stimulus becomes a bit more clear? And then the third question is on 2025. If you exit 2024 with flattish core growth in Q4, that would obviously be a positive trend relative to what we've seen over the last few quarters. That said, it would seem like if you draw a straight line that you'd be on track to exit 2025 at around, call it 5%, maybe 6% growth rather than growing mid-single digits for the year. So I think you need a fundamental improvement in overall market conditions and/or a real impact from China stimulus to get to mid-singles for the year. I just want to see if any of my logic is flawed there? Thank you and have a good night.

That's certainly a lightning round, Doug, but we'll try and we'll answer it. I think, Bob, you can take the first and the last one, I'll take China.

Yes. The comment that I had on Instruments was specifically related to LSAG instruments, and they were down low double-digit. Consumables were up mid-single digits for the total being down minus 7%. So that is. We do have some instrumentation in DGG as well that was down roughly the same as where LSAG was. So down 20% is way too negative. I'll turn it over to Padraig for the second one and then I can jump back into the last one.

Yes. Look, I think we're very close to our China team and the local team has seen an increased activity. We're seeing that improve from last quarter and for clarity, of course, we're not building any benefit from the stimulus into our Q4 guide. But what we're seeing is, we're seeing in early days, what we're hearing that the stimulus is broader in terms of its reach over a three-year period. Having said that, we are hearing that the first tranche will likely be focused on Academic & Government accounts. But again, it's early days, as it trickles down through provinces, as the mechanism of the funding goes, we'll be sure to update as we know that.

Yes. And I think just the last one real quick. It's too early. We're not going to get into what we're looking at for FY 2025 other than to say that we expect improvement throughout the year.