Earnings Call Transcript - A Q3 2025

Operator, Operator

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agilent Technologies, Inc. Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press *1. To withdraw your question, press *1 a second time. Thank you. Parmeet Ahuja, you may begin the conference. Thank you.

Parmeet Ahuja, Moderator

Welcome everyone to Agilent's conference call for 2025. With me are Padraig McDonnell, Agilent President and CEO, and Rodney Gonzalez, Agilent Vice President and Interim CFO. Joining the Q&A will be Simon May, President of the Life Sciences and Diagnostics Markets Group, Angelica Riemann, President of the Agilent CrossLab Group, and Mike Zhang, President of Applied Markets Group. This presentation is being webcast live. The press release for our third quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You'll find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth is adjusted for the impact of currency exchange rates and any acquisitions and divestitures completed within the past twelve months. Guidance is based on forecasted exchange rates. As a reminder, beginning in 2025, we implemented certain changes to our reporting structure related to the reorganization of our three business segments. We have recast our historical segment information to reflect these changes and have provided the financial details on our website. 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 risk and other factors. And now I'd like to turn the call over to Padraig.

Padraig McDonnell, President and CEO

Hello, everyone, and thank you for joining today's call. Agilent delivered outstanding results of $1.74 billion in revenue in the third quarter, exceeding our guidance while continuing to transform our enterprise operating model in a highly dynamic environment. We also delivered $1.37 earnings per share in the quarter. Thank you to the Agilent team who has remained laser-focused on our customers and committed to our mission of advancing the quality of life. Our fiscal 2025 third quarter marks our fifth consecutive quarter of sequential core revenue acceleration, a testament to how we've evolved our enterprise strategy to be market-first and then realigned our businesses to our markets. For this fiscal year, we've gone from 1.2% in Q1 to 5.3% in Q2 and now 6.1% in Q3. Just as important, our two-year growth stack also is improving, showing that this is durable momentum, not just a short-term bounce. The two-year stack is a summation of our growth over two consecutive years, providing a clear view of sustained performance by smoothing out short-term quarterly fluctuations. Given this strength, we are raising our fiscal 2025 full-year revenue guidance to the range of $6.91 to $6.93 billion, representing a core growth of 4.5% at the midpoint. This is a $150 million increase from our prior range at the midpoint and one and a half percentage points of additional core growth. A clear step up in our growth outlook heading into Q4. This upgrade reflects our confidence in delivering another step up of revenue into Q4 even as we absorb the impact of tariffs this year. Momentum is broad-based and led by our two largest end markets, pharma and chemicals and advanced materials. In Q3, both grew 9% and 10%, respectively. In pharma, small molecule grew double digits fueled by demand in downstream QAQC and adoption of our Infinity Tree LC platform. GLP ones also continue to drive demand, both for our leading analytical lab solutions and the unique capabilities we bring with BioVet. In chemical and advanced materials, demand rebounded across all major geographies. This was supported by new investments in the semiconductor and chemical sector, with robust uptake in our GC and GCMS platforms. We also saw healthy contributions from our food, diagnostics, and clinical end markets. And the academia and government end market returned to modest growth despite continued funding pressures in the US. Environmental forensics was the only market to decline as changes in the US EPA led to some cautiousness on new capital spending. Despite this temporary headwind, our market-leading PFAS business grew low double digits globally during the quarter. Against the tough compare of nearly 50% growth last year. Demand outside the Americas continued to be excellent with broad-based growth in the low thirties. PFAS remains an excellent opportunity with strong, long-term demand drivers intact globally. Powering the strength of our execution is our Ignite enterprise operating model. This year, our value-driven approach to pricing delivered results that were twice the impact of last year. At the same time, we streamlined the enterprise by reducing management layers by more than 15%. That didn't just remove cost. It gave us speed. Making decisions faster and empowering our teams to be agile. We're also taking a consistent enterprise-wide approach to manufacturing and procurement. These efforts already are delivering double-digit savings in key cost categories. And we see even greater opportunities ahead as we scale these practices globally. Our Ignite tariff task force has shown the power of the model in action. In a highly dynamic environment, we reorganized supply chains, shifted production across our global footprint, and implemented targeted pricing actions. Giving us confidence we can fully mitigate the impact of tariffs in 2026 at current rates. Ignite continues to be a differentiating growth driver for Agilent. It is proving that by embedding new tools, enhanced capabilities, and smarter ways of operating across the company, we unlock the full scale of our enterprise. That means stronger performance today and resilience and growth for tomorrow. Innovation also continues to be a major driver. Our Infinity Tree LC platform delivered mid-teens growth with early adopters coming back for larger follow-on purchases based on superior performance and productivity gains. And the Pro IQ LCMS system is tracking well ahead of our launch forecast, winning key accounts at major pharma customers. The new system performance benchmarks open new app possibilities across pharma and biopharma and are resonating strongly with customers, as evidenced by strong funnel growth during the quarter. Also, the newly launched DACO OMDAS family brings our gold standard fully automated pathology class platform to a broader range of lab sizes. Capturing a new market segment and strengthening our diagnostics portfolio. Together, these platforms are not just driving near-term revenue; they're continuing to build a foundation for sustained growth into FY '26 and beyond. This growth is supported by a strong funnel, and accelerating customer adoption across our portfolio, demonstrated by an instrument book to bill above one for the last six quarters. Importantly, we expect Q4 to be our largest revenue quarter of the year, with core growth of 5.4% and revenue of nearly $100 million higher than Q3 at the midpoint of our guidance. Our sequential momentum and two-year growth stack remains solid. And combined performance of the second half provides a sound foundation as we look into FY 2026. The growth we expect in Q4 is underpinned by healthy demand for key platforms, strong funnel conversion, and broad-based strength across our end markets. The latest industry data is evidence of our continued superior commercial execution with market share gains across all major geographies. The combination of strong top-line performance and stable operating margin means we have successfully delivered to our bottom-line commitments throughout the year. However, we did have higher expectations for margin improvement in the quarter. The increasing revenue growth also comes with additional tariff expenses and higher variable pay. We've invested in our commercial capabilities to support our growth now and into the future. For the fourth quarter, we expect to deliver significant sequential margin improvement as increasing revenue combined with additional Ignite benefits will result in accelerated profit leverage. Rodney will provide some additional details in his remarks. Now let me tell you more about why our Q3 was so strong. Starting in our largest end market, pharma, we grew 9% during the quarter and continue to see steady improvements, as we have referenced over the last seven quarters. This quarter saw a positive momentum in funnel conversion as lab managers are increasingly able to access and spend their available capital budget. There is reduced dependence on executive-level approvals that have slowed or stopped spending in the recent past. Our long-time lab-wide enterprise service relationships with large pharma allow us to capitalize on these improving conditions with deeper visibility into customer needs. This ensures we are in the right place at the right time, with the right solution when lab managers are looking to replace aging instruments and expand capacity. In our second largest end market, chemical and advanced materials, we delivered 10% growth with broad strength globally. Growth was balanced between two submarkets. We saw increased capital investment from chemical customers and robust demand in advanced material space as investments in new semiconductor fab facilities globally continue to progress. Our market leadership in key product platforms for these markets position us well to capture this significant instrument replacement opportunity in a market that has seen several years of underinvestment. All our business segments delivered revenue growth that exceeded guidance for the quarter. The life science and diagnostics market grew 7%; core growth was led by excellent low double-digit performance for LC and LC MS instruments, leveraging our recent Infinity Tree launch and focused LCMS solutions for key applications across both pharma and the applied markets. LDG also saw another strong quarter from our CDMO business, NASD, and BioVectra. NASD grew in the high twenties as we see continued growing demand for our RNA modalities in clinical and commercial programs. BioVectra also delivered on expectations while planned facility shutdown to work with a key customer to transition to a higher throughput process. In the applied markets group, growth of 5% was also ahead of expectations. Breaking down the performance our market-leading platforms, GC, GCMS, and spectroscopy delivered strong growth in Q3 with encouraging momentum in the chemicals, advanced materials, food, and pharma markets. Geographically, all regions delivered growth led by Asia ex China and EMEA. The geographic growth in AMG was driven by investment from supply chain reshoring, greenfield opportunities, capacity expansion, and replacement from our large installed base. Also, our recent launch of new products, including the 8850 GC, continue to ramp up ahead of expectations as customers are attracted by their exceptional performance, superior lab productivity gains, and leading sustainability benefits. The Agilent CrossLab Group delivered 5% growth in Q3, better than we had guided. The CrossLab team drove mid-single-digit consumables, supported by our focus on e-commerce and digital. This was a strong result despite the $50 million tariff-driven pull forward of sales in Q2 that we mentioned during our last call. Our services business grew mid-single digits led by strength in the applied markets in Europe, achieving 90% customer satisfaction. Meeting our vision of our customers to feel confident, valued, and inspired. Lab activity remains strong, giving us confidence in the fundamental strength of this business. Plus, the increasing pace of instrument sales for replacement of aging fleets and large labs where capital budgets have been reduced or withheld expansion for new capacity, along with growing demand for automation, bodes well for the CrossLab business into the future. It provides a cycle to generate customer lifetime value through connections of high-quality consumables, software, services, and automation to maximize instrument utilization and overall lab productivity. Turning now to our geographic results, we saw broad-based growth. With all regions growing at least mid-single digits during the quarter. Our business in Asia ex China continues to capitalize on opportunities from reshoring of supply chain, growing 10%. We saw increasing safety regulations across the region driving an excellent mid-twenties percent growth for our food markets. Within the region, India continued to lead the way with broad strength across our end markets resulting in 20% overall growth. We are seeing great success with the Infinity Tree as existing and new customers in pharma QAQC environments look to benefit from its productivity improvements. As the country invests to build domestic semiconductor and EV manufacturing capabilities, we are seeing increased demand for our solutions in these markets. India is a strategic growth market for Agilent. As part of our increasing investment there, I visited India in July to open Agilent's Biopharma Experience Center in Hyderabad. This center will bring together advanced lab technologies, efficient expert training, and regulatory-ready workflows to help researchers, scientists, and companies develop high-quality, life-saving medicines faster and more efficiently. In Europe, growth of 7% was also broad-based with double-digit growth in pharma and food and high single-digit results in chemical, advanced materials and academia, and government. In China, results continue to be stable as expected, growing 4% during Q3. We saw some government funding flow to some of our academia and government customers during the quarter. Based on our interactions with customers and local officials, we continue to expect a more meaningful stimulus impact towards the end of this calendar year primarily in our applied markets. In the US, the challenging conditions for biopharma spending and in the academia and government space persisted. Outside of those areas, we saw nice low double-digit growth in small molecule pharma and chemicals and advanced materials. Improved capital spending has driven instrument placements, leading to a 5% growth in the Americas in the quarter. We continue to meet the challenge presented by the dynamic environment for global trade. Tariff expenses were higher than our prior expectations as we saw a meaningful increase in shipment volumes and increased inventory to support Q4 growth. We continue to leverage our unique Ignite enterprise operating model to optimize our use of global production networks. Manage our diversified supply chain to optimize materials cost, and where required, make pricing adjustments to offset added cost. Leveraging Ignite, we still expect that we will fully mitigate the impact of tariffs either through avoidance or other offsetting opportunities in FY '26. And before I hand it over, I want to take a moment to introduce Rodney. Some of you might know him from a period where he led Agilent's investor relations team. For those who do not, Rodney has been an integral part of the finance leadership team at Agilent for many years. He has been a principal accounting officer for the last ten years and is also leading our FP&A team. I am delighted at how he's been able to seamlessly step in and lead our finance organization while we conduct a thorough search for our next CFO. Rodney will share further details about our Q3 results and guidance for Q4 and the full year.

Rodney Gonzalez, Vice President and Interim CFO

In my comments today, I will provide additional details on revenue in the quarter, as well as walk through the income statement, and cover other key financial metrics. I'll then cover our updated full-year and fourth-quarter guidance. Q3 revenue was $1.74 billion above the high end of our guidance. On a core basis, we posted growth of 6.1% while reported growth was 10.1%. Currency had a favorable impact of 2.1%, which was a point and a half better than what we estimated as part of our guidance. M&A contributed 1.9%, in line with our expectation. Gross margins in Q3 came in at 53.1%, down year on year driven by currency, tariffs, and the impact of downtime to expand capacity at BioVectra as Padraig mentioned earlier. Operating margin was 25.1% in Q3, and has been consistent across the year in increasingly challenging conditions. Ignite is enabling us to translate top-line growth into bottom-line results while we continue to invest in innovation and growth. As Padraig indicated, margins were below expectations. We've seen roughly equal impact from three areas. First, our higher revenue volume drove up net tariff costs as we shipped additional products and backfilled logistics centers to support Q4 growth. Even while full tariff mitigation is still on track for FY 2026. Next, we increased variable pay expectations. Higher awards driven by stronger business performance, consistent with our pay-for-performance culture. Finally, we invested in incremental commercial spend required to support short and long-term revenue growth, including for critical product launches and improving our geographical coverage. For Q4, we are targeting a sequential operating margin improvement of approximately 230 basis points. We expect most of this improvement to come from leveraging our fixed costs as we drive another sequential increase in volume. We are also getting meaningful contributions from both excellent margin conversion on the significant step up in CDMO revenue in Q4 and delivering another step up in Ignite benefits, with the partial offset due to higher tariff costs. Now moving below the line, we had $6 million of income while our tax rate of 12% was as expected. And we had 285 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.37, which was at the high end of our expectations, and grew 4% from a year ago. Now let me turn to cash flow and the balance sheet. Operating cash was $362 million in the quarter, down versus last year as working capital was up on volume growth and tariff-related inventory build. We also incurred severance costs related to our organizational efficiency efforts. Additionally, we invested $103 million in capital expenditures. We purchased 85 million shares and paid out $71 million in dividends during the quarter. We ended the quarter with a net leverage ratio of 0.9, so we continue to have a very strong balance sheet. Now let's move on to the outlook for the fourth quarter. We expect Q4 revenue to be in the range of $1.82 to $1.84 billion. This represents an increase of 4.8% to 6% on a core basis and 7.1% to 8.3% on a reported basis. Currency and M&A are expected to be 0.2% to 2.1% tailwinds, respectively. Also, to help you with your models, I want to provide you with additional details on expectations for growth in our end markets during the fourth quarter. In pharma, we're expecting mid to high single-digit growth with stable to improving conditions. In chemical and advanced materials, we're guiding high single-digit growth with another quarter of healthy capital investment expected. In diagnostics and clinical, as well as in food, we expect mid-single-digit growth. Finally, we expect very low single-digit growth in environmental and forensics and mid-single-digit decline in academia and government as those markets face a difficult compare for US federal spending at the end of the fiscal year. Fourth-quarter non-GAAP earnings per share are expected to be between $1.57 and $1.60 representing leverage earnings growth of 7.5% to 9.6%. We expect a 12% tax rate, $9 million in other income, and 284 million diluted shares outstanding. Turning to the full year, as Padraig mentioned earlier, we are raising our revenue outlook. We now expect our full-year reported revenue to be in the range of $6.91 billion to $6.93 billion. This represents an increase of 4.3% to 4.6% on a core basis and 6.2% to 6.5% on a reported basis. Currency is now expected to represent a small headwind for the year, while we expect a 2% revenue impact from M&A. Our full-year EPS guidance is now $5.56 to $5.59, unchanged at the midpoint versus our prior guidance. And we continue to offset additional tariff costs across the second half. This represents a year-on-year increase of 5.1% to 5.7%. For clarity, let me briefly summarize the updated tariff assumptions that we incorporated into our FY 2025 guidance. Based on the rates currently in place, we are now anticipating $20 million in net costs for the year, up from the minimal impact we guided in May. This increase is due to our better-than-expected revenue performance across the second half as well as the 50% tariff increase on imports from Europe announced at the beginning of the month. Strong demand for our LC products that are currently produced in Europe until US-based production begins to scale later this quarter also amplifies the impact of the recent European tariff increase. Finally, for your modeling, we are now projecting an increase of other income and expense to $26 million in income, along with a 12% tax rate for the year and 285 million diluted shares outstanding.

Padraig McDonnell, President and CEO

Thanks, Rodney. These strong results are a testament to the progress we've made as a company over the past year. We are encouraged by the growth momentum we have created and look forward to building on that success next quarter and into the future. Thank you for your attention. Hand over now to Parmeet to kick off for Q&A.

Parmeet Ahuja, Moderator

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

Operator, Operator

At this time, I'd like to remind everyone in order to ask. Our first question will come from the line of Dan Brennan with TD Cowen. Please go ahead.

Dan Brennan, Analyst

Great. Thanks for the questions. Maybe just the first one on the margins since obviously top line really strong, but the margins were light as you kind of spoke to them. Can you just unpack the three variables you kind of highlighted? Kinda how much are you spending? How much are you buying more inventory for yourself? How much was that a factor? You know, in question, you know, the topic number two and three, variable pay and spend. I'm just wondering, like, what the return on that is as we think about the Q4 guide and we think about jumping off into 26%. So any help on unpacking those, and then I have a follow-up.

Padraig McDonnell, President and CEO

Yeah. Thanks, Dan. So first of all, you know, really committed to our long-term commitment goals around margins. And know, as tariffs along with related logistics costs were the biggest single impact that we had. The net impact in dollars will trend downwards at the start of '26 and will fully mitigate tariffs in '25. And I want to kind of be clear that the headwind will peak in Q4 in '26. But, to your question about the area, so it's higher tariffs driven by higher than expected volumes. Incremental commercial investment, and, higher variable pay in equal measure. Let me talk a little bit about the commercial investments and why we're doing it. So you see the demand and the revenues, the demand for replacement cycles, and our markets are going up. We've done a lot of work on our commercial org over the years and making it effective. But now is the time to invest in this demand that's gonna go into '20 to ensure we can capture it and increase our market share, which we're already doing on it. So I don't know, Rodney, if you wanna give any more color on that, but that's how it breaks out.

Rodney Gonzalez, Vice President and Interim CFO

No. I think, Padraig, those are very good points in terms of why we were below our expectations for the quarter. When we look at it from a year-on-year basis, we were down about 230 basis points. Again, the big thing was tariffs and logistics related costs associated with those tariffs. And that total would be about 200 basis points on a year-on-year basis. It was pretty significant. On top of that, we saw unfavorable impacts from currency and also the effects of the BioVectra shutdown. So when you look at all those pieces together, that's why we saw our operating margins decline about 230 basis points year on year.

Dan Brennan, Analyst

Got it. Okay. I know there'll be a bunch of more questions there. But maybe just a second one, just on pharma. Super strong. I think I heard NASD growing kind of north of 20%. So can you just unpack a little bit on what the outlook calls for for kind of in the back half of the year and as we look ahead? And then know you gave some color on large pharma being strong, sounds like there's still some headwinds with biologics. Maybe just some more color underneath of what you're seeing in pharma. Kind of how we think about the pharma outlook from here.

Padraig McDonnell, President and CEO

No problem, Dan. I'll kick it off, and I'll hand it over to Simon about NASD. So pharma, you know, it's our largest end market, grew 9% overall. Small molecule grew double digits, driven by demand for downstream QA strong adoption, and increasing replacement of the Infinity Tree, which is now mid-teens in terms of growth. What we're seeing from the Infinity Tree is actually early adopters coming back for larger orders, which is really positive. On the biopharma side, we saw high single digits overall, and, you know, ex NASD, we were flat. That's really around US biopharma spending, which continues to be muted, as expected. But what we're seeing really in the market is we're not seeing any concerns translate into negative impact around MFN or tariffs at all, but we have early indications of a standard year-end in terms of customer spend in pharma. So customer budgets have really started to normalize and customers are asking for larger quotes to spend by the year-end. If you think about the three major drivers in pharma, really, you're seeing three big areas: global redistribution of small molecule supply chain, which is a net tailwind for us, which is really important for downstream. Manufacturing capacity investments are happening in the Americas, Asia, and Europe driven by blockbuster success and GLP ones, etc., but also macroeconomic conditions. You do see capital budgets in biopharma remain conservative due to venture capital funding. But we think over time, as interest rates come down, that will be released steadily over time. But on the NASD part, I'm gonna hand it over to Simon.

Simon May, President of the Life Sciences and Diagnostics Markets Group

Yeah. Thanks, Padraig. I'd say for NASD, we were very happy with the quarter overall, and we continue to be very happy with the momentum we see for NASD both as we move towards the end of the year and into 2026. As I think we mentioned in the script, we saw really robust revenue growth well into the 20s, for NASD. It was also another really solid quarter with orders, and as we look at some of the macros that we're seeing out in the field as well, it was a very notable quarter in terms of some approvals and label expansions that we saw out in the marketplace, which really just emphasized the confidence that we have in this therapeutic modality and our capabilities to capitalize therein. So as we put it all together, we're happy with the momentum that we have coming into the end of the year. I think we've said previously for the full year, we're looking at high single digit, nudging double digit. I'd say we're increasingly confident now where the double-digit full-year outlook is concerned. Bit too early to call FY '26 but I'd say we're also tentatively confident about the momentum carrying forward there. Stay tuned for more over the coming weeks.

Parmeet Ahuja, Moderator

Terrific. Thank you.

Operator, Operator

Our next question comes from the line of Tycho Peterson with Jefferies. Please go ahead.

Tycho Peterson, Analyst

Hey, thanks. I want to probe a little more on the pharma comments just kind of reduce dependency on sign-offs that you noted. I'm just curious, how widespread is that? Is that globally? Is it CDMOs, just large pharma? How much pent-up demand, I guess, do you think there is that could come through with this change in sign-off dependency?

Padraig McDonnell, President and CEO

Yeah. No. We've really noted that across all geographies, actually within particularly within small molecule, but in large pharma, of course, small to medium biopharma is slightly different in that regard. But what we're seeing is, Tycho, is really that replacement cycle that we've talked about. We've always talked about it being gradual. Moving ahead, and people are releasing budgets for it. I would say the velocity has improved in that. And we're releasing larger quotes for the end of the year. So that always bodes very well for the end of the year. When you have approvals not going to executive or even higher levels in the company that's giving into the hands of lab managers or site managers, that makes a big difference in momentum.

Tycho Peterson, Analyst

Okay. And then a follow-up on PFAS. Was that a little bit softer in the US? I know you talked about it being up 10% overall, but it seems to imply that the US was maybe down or pretty soft for the quarter. I'm just curious if there's something going on there.

Padraig McDonnell, President and CEO

Sorry, maybe you can't hear me now, but I'll repeat that. So low double-digit growth overall in Q3, which is a solid result, 50% year-to-date growth remains a really strong opportunity. In the Americas, we were down 20%, and that was really around the US EPA changes that drove impact. No policy change that impacts the volume of testing, but uncertainty around CapEx spending. And increasing clarity around the EPA changes will mean there's a little bit of a question over Q4 and Q1, but overall, I would say, PFAS is going extremely well around the globe.

Tycho Peterson, Analyst

Okay. Maybe just one last one. The commercial investments that you flagged, when did you decide to move forward with those, and why were they baked into the guidance?

Padraig McDonnell, President and CEO

Yeah. So look at it. You know, you deal with what's in front of you and where you see your momentum in terms of orders, and we had a you know, as we many years transforming our commercial organization into one centralized area globally. We have a number of product launches that are coming out, and we are way ahead of our ramp to volumes both on the Infinity Tree and, for example, on the ProIQ LCMS. So it was really a dynamic situation and, coming from commercial and experience over many, many years, you need to get investment in early when the market starts to come back, and you have opportunities because it's a very competitive place. We want to gain share not only in our accounts but in competitor accounts. We want to continue to raise our ability to have technical expertise in the field to really help with that.

Tycho Peterson, Analyst

Okay. Thanks.

Operator, Operator

Our next question comes from the line of Rachel Vatnsdal with JPMorgan. Please go ahead.

Rachel Vatnsdal, Analyst

Perfect. Good afternoon. Thanks so much for taking the questions. Just wanted to push on 2026 expectations here. If we look at your fourth-quarter guide, the midpoint really implies around like a 5.5% organic growth rate at the midpoint, and it looks like consensus is right around that number for next year as well. So can you just walk us through the moving pieces on 2026? Is taking that fourth-quarter number and rolling it into next year a reasonable starting point? Or are there things that we should be thinking of?

Padraig McDonnell, President and CEO

Yeah. I'll start off, and I'll hand it over to Rodney. I think, you know, of course, it's too early to give out any detail on the guide for '26. But on the revenue side, let me talk about revenue and margins. Revenue in the second half of '25 was most meaningfully stronger than the first, and that provides a really positive indication of momentum into '26. And while we need to remain mindful of the broader economic environment and more challenging comps, we do see this as a solid foundation for growth. And on the margin side, you know, we've addressed many of the challenges in '25, with tariffs being the largest. We expect tariffs to be fully mitigated within the year, and that should provide a tailwind. And, of course, we have Ignite that's gonna drive us forward on it. But, Rodney, I don't know if you wanna give more color on '26.

Rodney Gonzalez, Vice President and Interim CFO

Yeah. I think you mentioned some of the tailwinds that we saw, particularly on the margin side, both as we continue to mitigate tariffs. We will see improvement from a margin perspective as we go into '26. I think the other thing is, as you mentioned, we'll continue to see savings associated with Ignite. One of the things we still need to be factoring in is what kind of cost increases we may be seeing from our suppliers. So that would be a bit of a tailwind that we're still looking at.

Rachel Vatnsdal, Analyst

Great. And then just as my follow-up here, I wanted to ask around budget assumptions. Padraig, you mentioned a little bit how pharma companies are putting in some larger orders before the year that they have some more visibility on budgets overall. So are you embedding any budget flush assumptions into that fourth-quarter guide? Or would that be upside?

Padraig McDonnell, President and CEO

Yes. So I think we're we what we're seeing is quotes actually at this stage, not orders, for the end of the year. The early indications suggest it’s more of a standard year-end in terms of budget flush. And I think it's been quite a few years since we've seen that in our markets. But customers are starting to normalize budgets and seeing larger value quotes is what we see in it. So we're guiding with what we see at the moment.

Operator, Operator

Our next question will come from the line of Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin, Analyst

Great. Thanks for taking the question. I want to touch on chemicals and advanced materials. Really, strong quarter there and kind of up on it being pretty broad-based. We've had some more mixed data points there, so that was a little bit of surprise. Could you just talk a little bit more about where you saw it geographically? Sort of what gives you confidence that there was no pull forward and that's a little bit more sustainable going forward?

Padraig McDonnell, President and CEO

Yeah. Thanks for the question. I think, you know, it's been fantastic in terms of growth, 10% growth in Q3, broad-based 10% in chemicals and advanced materials. Our strong position in our leadership in our platforms is really important and our strong connection with customers. But really driven by three areas, I would say, Q3. Capacity growth from supply chain regionalization is very true for that market. Greenfield investments, by the way, in both broad chemicals and advanced materials, and actually replacement momentum. We've often talked about this, Aled, that it's not only LC replacement cycles that are important, but we're now starting to see replacement investments as we go forward on it. And it's driven, I would say, by the chemical sector continuing to lead driving demand in downstream industries like semiconductor and, of course, energy growth in AFO, which is gonna continue, and that growth in the Americas is gonna continue. So overall, I think we're really pleased with results. We see that continuing, particularly in both of those areas as we go forward.

Michael Ryskin, Analyst

Okay. And then following up on Rachel's question just now and kind of taking it back to the margin topic. I think you quantified tariffs for the third quarter. Could you remind us what the tariff hit is on the margin line for all of fiscal year '25? And then when you talk about fully mitigating for next year, is the simple math correct in assuming that at least that much comes back next year on the gross margin line? Is that the right way to think about it when you talk about being able to offset for next year?

Padraig McDonnell, President and CEO

Yeah. So I think, you're thinking about it the right way. You know, I think we focus on three areas on the tariff side with mitigation. Leverage an existing manufacturing footprint around the globe, working with suppliers to relocate manufacturing locations to minimize tariffs, and of course, targeted pricing changes. We see the most critical activities implemented by Q4 and ramping through '26. But the key element of our mitigation will be implemented by the end of this quarter, and we will ramp through '26. Rodney, I don't know if you wanna add any color to that, but how we see it.

Rodney Gonzalez, Vice President and Interim CFO

Yeah. I think the only other point, Padraig, is that we recognized about $35 million. We were originally looking at about $25 million in tariff costs in the third quarter. That's up about $10 million, and we expect the same level in the fourth quarter. So $70 million for the second half. Again, many of our actions. We have planned most of our mitigation actions that will be implemented by the end of this quarter. We should start seeing the impact on our gross margins as we start moving into Q1 and through '26.

Michael Ryskin, Analyst

Okay. So $70 million for the year for '25. Alright. Thanks.

Operator, Operator

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

Patrick Donnelly, Analyst

Thanks for taking questions. Maybe just stay on that same topic there that Mike was on on the margin side. I guess, given that tariff piece, Ignite, obviously, some temporary costs in this quarter impacting the margin, you know, Padraig, I know when we've talked in the past, you've always kinda said, hey, there's a reason we put the plus sign on the margin algorithm for the out years. I guess, is next year setting up that it has that potential to be an out margin year given kind of the headwinds this year that will not recur next year? Just trying to frame that, you know, if you are able to grow over 5%, it feels like it has that potential, but just wanna know if that makes sense and see if you could throw some numbers around it.

Padraig McDonnell, President and CEO

Yeah. Look. There are three really key tailwinds, I think. You know, Ignite continues to drive gains. We've delivered a lot of gains over us. Tariff mitigations will be higher and will ramp through the year. The revenue should be a helper on it. Overall, I think, in good shape. Of course, it's too early to guide on us. And to say what it's gonna be, but Ignite is there for a reason. We put out a 100 basis points plus for a reason, and we still feel very good about that as we go forward. I will say that if you look at Q4 margins, Patrick, it's something to be really clear about as they're expected to really increase versus Q3. We're expecting a 200 basis point sequential margin improvement from Q3 to Q4, while Q2 to Q3 was flat. That's going to be driven by leveraging sequential uptick in revenue in Q4, which we have good line of sight of. I think while we increase revenue sequentially, we, you know, the full quarter tariffs along with currencies will be headwinds that offset against it, and the incremental Ignite savings. But I think for next year, we're in good shape.

Patrick Donnelly, Analyst

Okay. That's helpful. And then I guess maybe just in the quarter, know, what you saw on kind of the pricing side? It was definitely a question we get. I think people are just seeing the margins and wondering if pricing is a part of that. So if you could just talk about what you saw pricing versus volume in the quarter and expectations going forward, that would be helpful. Thanks, Padraig.

Rodney Gonzalez, Vice President and Interim CFO

Yeah. I'll take this one. We're actually starting to see more movement in our pricing. And for the quarter, we saw about a 100 basis points improvement in pricing.

Operator, Operator

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

Jack Meehan, Analyst

Thank you. Good afternoon. Wanted to ask about how you think the trade tariff dynamics are influencing your customer buying behavior. Last quarter, you talked about the $15 million of consumable pull forward, dollars 15 million instrument push out. Did that play out as expected? And then just anything incremental that you saw in terms of stocking, destocking? Thank you.

Padraig McDonnell, President and CEO

Yeah. I mean, Jack, thanks for the question. On that side, nothing. You know, we did talk about that pull forward in consumables last quarter, which worked itself out very, very quickly. And maybe I'll ask Angelica to add more color on this in a second. But we have seen no pull forwards. We've seen nothing in terms of stockpiling. We've monitored that quite closely, so nothing on that side. I would say lab activity remains very strong. But, Angelica, on the consumables side, maybe you can give some color.

Angelica Riemann, President of the Agilent CrossLab Group

Yeah. Thanks, Padraig. Again, thanks, Jack, for the question. You know, as Padraig has already said, we had the pull through in Q2, but we had mid-single-digit growth in Q3, which is no indication of any further pull forward. The lab activity we're seeing is continuing to support the demand here. No doubt about it. We had good growth across all of our end markets and across our regions, so we're continuing to see strong lab activity driving strong recurring revenue demands.

Jack Meehan, Analyst

Great. We expect that to continue. Okay. And then an unrelated question, was curious about the China diagnostics market, saw the reference to Daco ex China. A lot of questions around VBP and DRG just for the universe broadly speaking. Do you mind just reminding us what your exposure is to China diagnostics and what, if any, you're seeing in regard to those topics?

Padraig McDonnell, President and CEO

Yeah. So, I mean, our exposure is very low in China in terms of diagnostics. It's a very stable business as we go forward on it. But Simon, do you want to give some color on the China story? With BBB? We're not really being impacted by it.

Simon May, President of the Life Sciences and Diagnostics Markets Group

I think the long story short is that we've seen minimal impacts so far as we look at our diagnostic tools in China. We do see some local vendors there. But where Agilent's product offering is concerned, we're really serving more advanced staining applications, and I think we've got a pretty esoteric product offering and menu there. So pressure, but I don't think we've really seen that trickle through in a meaningful way.

Operator, Operator

Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.

Vijay Kumar, Analyst

Congrats on a nice line print here. Maybe on the top line question here. I think last quarter, in second quarter, there was some instrument impact, if memory serves me correct. Did TQ benefit from from timing element here on the instrument side? The sort of another related actually that top line question is, you mentioned tariff rate. When you say pricing benefit, are you including surcharges as part of pricing? Could that explain part of what we're seeing here in margins? How much of this core beef was in a tariff surcharge related in the instrument catch up from prior quarter?

Padraig McDonnell, President and CEO

Yeah. No. Thanks, Vijay. Just a few points on the instrument side. Firstly, I think we've seen a steady improvement in replacements. You know, total instruments grew high single digits, and LCMS grew low double digits. We're very, very pleased with LC and LC mass growth in the Infinity Tree, of course, where we're seeing on the replacement cycle of aging fleets and, of course, new sites. In terms of pricing and surcharges, that hasn’t been realized yet. That takes a while to go through the system. We have a tariff task force that is second to none that's run through the Ignite program here where we look at data analytics. So we do it in a very structured way, but that takes time to go through. So we'll see those pricing in Q and '26 and beyond.

Vijay Kumar, Analyst

That's helpful. And, off of the topic on fiscal '26, common part, like one of your peers sort of hinted at end market growth perhaps being in the low single-digit range, maybe with some share gains, perhaps pointing to, like, four plus. How is that reasonable framework on how we think about Agilent? Or are there any things that are unique, whether it’s a chemical exposure or China, anything that’s not I mean that makes Agilent different versus, you know, how some of your peers have commented about fiscal '26?

Padraig McDonnell, President and CEO

Yeah. Look. We feel very positive about '26 across all of our markets. You see the momentum this time through applied and the pharma side. Driven by the top line, we think we're going to see that continue over time. I think as you look at different areas, what makes us different? I think China, there's gonna be a large stimulus order coming towards the end of the year where we'd be highly successful in that in the past. We've kept very focused with our teams there. So we expect China to continuously improve through '26. And, of course, that area is really important. And I think as well, the CDMO mix is very different. You know, 20% growth in NASD. BioVectra, we prime the pumps for '26. That's gonna be a high grower, and some of the indications are really, really great on it. So I think that's really important. You see our results in our chemical and applied materials. You know, these are secular drivers we have, significantly high market share, and that's gonna continue because of reshoring or fabs about where they're being built. Of course, battery investments in EVs, technology, makes us, I would say, differentiated as well.

Vijay Kumar, Analyst

Understood. Thank you.

Operator, Operator

Next question comes from the line of Doug Schenkel with Wolfe Research. Please go ahead.

Doug Schenkel, Analyst

Hey, good afternoon, everybody, and thank you for taking my questions. I want to start on guidance philosophy. So on one hand, I know you guys know that it's particularly important to set financial targets at levels that are especially derisked. Given how difficult the last few years have been across the tool space. On the other hand, you clearly had a lot of strength in the quarter, and you seemingly have really strong momentum heading into year-end. How do you balance momentum and strength with the goal of maybe skewing the error bars around your guidance targets to the upside? Maybe asked a different way, how would you describe your visibility on hitting these targets heading into year-end?

Padraig McDonnell, President and CEO

Heading into year-end, we have very good visibility. You know? I think particularly on the order book and what we put out on our guidance for revenue and margins. I think '26, you know, we don’t give out guidance on it, but you know, we do see that this positive momentum is not gonna just stop at the end of '25. We're gonna continue to see it. Now what that relates to guidance, and, of course, a lot can happen between now and the end of our fiscal year in the macro environment, tariffs, etc. So we will give guidance in the next half. But we want to be as usual at Agilent, very clear about what we're putting out at the end of the year, and it's clear and it's achievable going forward on it. So we'll have more next quarter on that one.

Doug Schenkel, Analyst

Okay. Thank you very much for that. And then the next topic I wanna discuss is capital deployment. So I think your net leverage ratio was 0.9 times, just under one. How are you thinking about capital deployment? It seems like you're feeling better about what you can control and maybe even your ability to navigate some of the things that are outside of your control from a policy standpoint. So if that's right, how does that impact your thoughts on M&A and or accelerating buybacks beyond dilution mitigation? And kind of related to that, how would you describe organizational readiness for something bigger given how many changes have occurred in leadership over the past year? Thank you.

Padraig McDonnell, President and CEO

Yeah. Let me talk about the last one first because I think it's a great point. If you see how Ignite is running inside and about how we're being able to execute inside, I think that has usages beyond Agilent if we do acquisitions in the future, whatever size they will be. So I think our readiness is extremely high on us. Our priorities are not overall changing, but we do expect M&A to be a more meaningful part of our capital deployment going forward. But I wanna be clear on three things, Doug: it’s gonna be a disciplined approach that's gonna be aligned to our pillars of our strategy, so you won't see any far-off areas that are not linked to the strategy. We're gonna be focusing on growth opportunities and, of course, value to shareholders. So if you came into our business development sections, we have a small list of very high-quality topics we're talking about. Internally, we're investing back into the business. We invested heavily in digital this year, a new CRM system, new online capabilities, and investing back into commercials that goes along hand in hand with that. So I think it's gonna be a very disciplined approach, but we're ready as we go into '26. I don't know, Rodney, if you have anything to add.

Doug Schenkel, Analyst

Okay. Thank you again, Padraig.

Parmeet Ahuja, Moderator

Thanks, Doug.

Puneet Souda, Analyst

Yes. Hi, Padraig and team. Thanks for taking my questions. First one really on the momentum or a change in momentum, if you saw that between July and August. You are clearly pointing to a strong book to bill for the last couple of quarters, but just trying to get a sense of if there's an acceleration in the near term. And obviously, you're seeing a normal budget flush replacement cycle is working. So I just wanna get a sense of is there something you saw differently in August? And if you could double-click on the pharma versus the side of the end markets where you're seeing a stronger pickup. Thank you.

Padraig McDonnell, President and CEO

Yeah. So I think, we definitely saw a pickup, and it's reflected, of course, in the numbers that we've seen. We've seen a pickup in quoting activity. We saw a significant pickup in the replacement cycle. Although it's gradual over time, we did see that in July and August that people are replacing their systems and aging fleets. And then, of course, this new greenfield opportunity that you see in both markets, pharma, and in chemical and advanced materials benefiting from that. So I would say that overall, really good. Our book to bill is greater than one that continues on that side. Our win rates are extremely good. Our market share gain, which a little bit offset a few months ago; we're gaining across the board in all platforms and geographies. So, it is positive. Now, of course, people have quotes for the end of the year, and we expect we weight those quotes in terms of what we expect to come in, and that's leading to more of a standard year-end CapEx area on it. And just to finish off, I would say, if you look at Pharma and chemical and applied or chemical and advanced materials applied, actually the momentum in both of those major markets is pretty similar. You know, you got a replacement cycle starting on the applied side. Probably a bit later than the pharma side, and then you're into well into the first innings of a replacement cycle on the LC side. So that's what we're seeing, but driven as well by the adoption of our new platforms, you know, the new LCMS, the ProIQ, and the Infinity Tree really making a difference in customer spending patterns.

Puneet Souda, Analyst

Got it. And then just a follow-up on China. Can you just elaborate a bit on what you're seeing in the quarter in China in the third quarter? And you talked about stimulus coming through. Maybe just give us a sense of the, you know, is that driven by more quoting activity? What gives you that confidence and the magnitude of it? Thank you.

Padraig McDonnell, President and CEO

Yeah. So I start off, and I'm gonna hand over to Mike on the stimulus topic because he's quite close to it. So, two of the largest end markets led the results in the quarter. We saw small molecules continue to grow. We grew about 6%. Biopharma grew mid-single digits, and we saw that through particular focus on innovative biopharma. Right? So ADCs, oligos, and GLP ones. The CAM market in China grew low teens, and that was led in two areas. Petrochemicals continued to benefit from lower crude oil prices, so that's very beneficial for us. And with advanced materials, China continues to build out the domestic semiconductor ecosystem, which is really important. There is a new development within China where they're unleashing what is called a new quality productive forces policy, which is around innovation and investing in innovation. That's gonna be launched by the central government, and that's gonna increase the pace of innovation across many industries. We are extremely well-poised to benefit from that because we've invested in a solution center and a lab productivity center that really fits into that. We've actually seen some of the orders or quotes for that come out. But overall, I think China's stable. We see that kind of improving as we go into '26 because of those drivers. But on the stimulus, Mike, do you want to talk a little bit about what you're seeing right now?

Mike Zhang, President of Applied Markets Group

Yeah. First of all, we have a very strong relationship with customers and we are working closely with customers to continue to support them as they prepare for investment. We continue to build a strong funnel. Obviously, it takes time to materialize, but we're still very excited about the potential. If you look at the track record, we have a very high win rate. So we are very excited about that potential.

Puneet Souda, Analyst

Okay. Thank you.

Operator, Operator

Our next question comes from the line of Dan Leonard with UBS. Please go ahead.

Dan Leonard, Analyst

Thank you. My first question is a clarification on the pricing front. Rodney, I think you said pricing was a 100 basis point year-over-year tailwind. But before you also mentioned that value-driven pricing was double the impact of the prior year. So can you help me reconcile those two comments? I thought pricing might have been a bit better a year ago.

Rodney Gonzalez, Vice President and Interim CFO

This is Rodney. No. It was about 50 bps last year. Year on year. And as I said earlier, about a 100 bps this year.

Dan Leonard, Analyst

Okay. That's square. Thank you. And then just my follow-up question here. I don't think I've heard you talk so much about the replacement opportunity in the chemical market since the launch of the Intuvo, and that was a very long time ago. So can you maybe help frame that replacement opportunity that you're alluding to, Padraig?

Padraig McDonnell, President and CEO

Yeah. For sure. I'm gonna bring in Mike here on the AMG side to talk about that.

Mike Zhang, President of Applied Markets Group

Yeah. First of all, as Padraig just highlighted, we have a very strong market share in this market, and we have a very large installed base. Intuvo certainly is a great innovation, but we continue to evolve innovation that we have to find Intuvos. We continue to put that into the current platforms. We are seeing a lot of momentum, as you can tell because the customer continues to improve productivity, embracing the new technologies. But I think what's more important is, let me take the new GC we just launched as an example, like the 8850 GC. It's a perfect replacement to advance the technologies and productivity sustainability that customers are looking for from us. Overall, you have to remember our strong position in the market, our very strong portfolios, and our continuous innovation. What's more exciting is that we have a strong pipeline innovation to drive this replacement cycle as it continues to accelerate.

Operator, Operator

Mister Ahuja, I'll turn the call back over to you.

Parmeet Ahuja, Moderator

Thanks. Thanks, Regina, and thanks, everyone, for joining the call today. With that, we'd like to end the call. Have a good rest of the day, everyone.

Operator, Operator

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