Earnings Call Transcript - A Q2 2023

Operator, Operator

Ladies and gentlemen, welcome to the Agilent Technologies' Q2 2023 Earnings Call. My name is Sarah, and I will be coordinating your call today. I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead.

Parmeet Ahuja, Host

Thank you, Sarah, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Our guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike.

Mike McMullen, CEO

Thanks, Parmeet, and thanks, everyone, for joining our call. In our call today, I'd like to first cover our second quarter results. I'll then provide some insight into the recent market dynamics that we are seeing and how this has translated into lower expectations for the second half of this year. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. In an increasingly challenging market environment, the Agilent team delivered very solid results in the second quarter. Revenues of $1.72 billion are up 9.5% core above our expectations with growth across all end markets and regions. Our results are driven by an innovative and broad portfolio, a differentiated customer experience and outstanding execution by the Agilent team. Operating margin for the quarter 25.6%, up 30 basis points. Earnings per share of $1.27 are up 12%. Highlights from an end market perspective include our two largest markets, pharma and chemicals and advanced materials performing very well in the quarter. Our pharma business grew 6% on top of 13% growth last year. Pharma was led by biopharma, which grew 16% driven by lab services, consumables and our NASD business, while small molecule declined 1%. In previous calls, we talked about the small molecule replacement cycle and that the exceptional double-digit growth rates we've seen in the past two years would eventually moderate, which is what we started to see this quarter. Our chemicals and advanced materials business delivered strong results once again growing 16%. The advanced materials segment grew more than 20% and the chemical and energy segment grew double digits. On a geographic basis, 32% growth in China exceeded our high expectations. While the compare was an easier one, even adjusting for the COVID lockdowns in Shanghai a year ago, we still achieved double-digit growth in China. In addition, Europe delivered 5% core growth, while Americas grew 3%, albeit against a tough compare of 13% a year ago. Looking at our performance by business unit. The Life Sciences and Applied Markets group delivered revenues of $968 million, up 10% core. Our strong results were aided by backlog conversion across our instrument platforms. Our LC and LCMS products continued to lead the way with 16% growth in the quarter with strength across all end markets. Continued demand for lab consumables led to 13% growth in that business as well. During the quarter, we added additional strength to our LCMS product line by acquiring e-MSion and their innovative electron capture technology. e-MSion technology allows researchers to develop biotherapeutic products more quickly for treating disease. Agilent's LSAG team continued to bring several innovative new products to market, including enhancements to our Bravo NGS automation, Cary UV-Vis and the cell analysis NovoCyte systems. Many of these enhancements are specifically focused on serving our customers in the biopharma market. The Agilent CrossLab Group posted revenues of $387 million. This is up 13% core driven by strong revenues from service contracts. ACG's growth was broad-based, representing ongoing resilient demand for our services. We continue to see many opportunities for future growth given our services portfolio. In particular, the benefits of our service offerings as they help customers drive productivity in lab are even more relevant in today's challenging environment. Our strong and trusted customer support is also helping us to drive share gains and acquire new enterprise customers. The Diagnostics and Genomics Group delivered revenues of $362 million, up 3% core. Strength in our pathology and NASD businesses drove growth, partially offset by general industry-wide weakness in genomics. NASD posted another strong quarter growing in the high 20s. Our Train B manufacturing expansion remains on track to come online later this quarter, while construction has already started on the next phase of expansion. Overall, we wrapped up Agilent's first half of fiscal 2023 with double-digit core growth in both revenue and earnings per share. However, continued macroeconomic uncertainty, coupled with stresses in the banking system have accelerated a more conservative approach from our customers across the globe. This has primarily affected CapEx-related instrument spending across most end markets but are centered mainly in the pharma markets in the U.S. and China. Early stage biotech customers, while a small part of our revenues, dramatically scaled back purchases as funding and liquidity challenges drove cash conservation. Outside of these early-stage biotechs, the order funnel continues to be healthy, but it has taken a longer time for order to be approved, slowing deal velocity and generation of new orders. We expect this constrained capital environment to remain in place throughout the course of our fiscal year. Because of these factors, we are taking a more cautious approach to the second half and have revised our forecast downward. As a result, we now expect core revenue growth to be in the range of 3% to 4.5%, with EPS growing faster than revenue at 7% to 8%. Our operating margin increased in the first half of the year and we're doubling down on delivering cost efficiencies and increasing productivity to drive more leveraged earnings growth in the second half. As we've done in the past, we will generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We have an unstoppable One Agilent team that is battle-tested. They consistently execute at extremely high levels and are well prepared to deal with any challenges they may face. Bob will provide the details on our outlook for Q3 and the full year, but overall, we remain convinced our strategic focus, customer service and unmatched execution of the Agilent team remain the keys to our continued success. After Bob delivers his comments, I'll be back to provide some closing remarks. And now, Bob, over to you.

Robert McMahon, CFO

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

Mike McMullen, CEO

Thanks for being on the call. And now I'll turn over things back to Mike for some closing comments before we take your questions. Mike? Thanks, Bob. During Q4 '22 call in November, I shared with you that I believe Agilent has the right growth strategies, the right team and right culture to continue delivering strong above-market results. My belief remains unchanged. Our customers know we are reliable, resilient and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. While the near-term outlook points to continuing challenges in the market, we remain confident in the long-term growth prospects in our end markets and our ability to continue to grow faster than the market. As a trusted partner that our customers know they can rely on, despite the current market environment, I remain confident in our ability to deliver on our shareholder value creation model. Our core values and approach haven't changed. Our focus on investing for growth, providing the industry's best customer support, our innovation prowess and being a great place for our team to work with a differentiated company culture are here to stay. They remain Agilent's formula for long-term success. Thank you. And now to you, Parmeet, to lead the question-and-answer session.

Parmeet Ahuja, Host

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

Operator, Operator

Your first question comes from Brandon Couillard with Jefferies. Please go ahead.

Brandon Couillard, Analyst

Hi, thanks. Good afternoon.

Mike McMullen, CEO

Good afternoon, Brandon.

Brandon Couillard, Analyst

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

Mike McMullen, CEO

Sure. I'm happy to help, Brandon. There are notable differences between the two sectors. The small biotech sector is largely inactive at the moment. They are making significant efforts to conserve cash as they face financing challenges due to reduced venture capital availability, banking issues, and limited IPO opportunities. In contrast, medium-sized and large pharmaceutical companies are exhibiting an increasing level of caution regarding new capital investments, especially concerning our instruments business. It's possible that there may be a year-end budget influx if customers seek to utilize unspent money by the end of the year, but we aren't counting on that since we can only discuss current observations. We aren't suggesting that circumstances will change. Ultimately, it will likely be a decision made by the CEOs and CFOs at larger pharmaceutical companies regarding the management of their full-year budgets, particularly in relation to our instruments. As mentioned in our prepared remarks, we continue to see strong demand in consumables and services in these markets. Is there anything else you want to add?

Robert McMahon, CFO

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

Mike McMullen, CEO

Bob, I also wanted to point out that we haven't heard about any budget cuts. However, as Bob mentioned, the timeline is being extended, and we're frequently seeing higher levels of approval within our customer base.

Brandon Couillard, Analyst

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

Mike McMullen, CEO

Yes, Brandon. Earlier this year, we identified Europe, especially Western Europe, as an area of concern. While we still view it that way, we are pleased with the results so far. We are noticing a trend of increased caution among our chemical customers in Europe, but demand for advanced materials remains strong. Overall, we are satisfied with how the business is performing at this moment.

Operator, Operator

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

Vijay Kumar, Analyst

Hi guys, thanks for taking my question.

Mike McMullen, CEO

Sure.

Vijay Kumar, Analyst

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

Mike McMullen, CEO

There's a lot to discuss here. Bob, you and I can collaborate on this. First, let's address the pace of business. As you pointed out, Vijay, it really represents two different scenarios. In the first half, we experienced double-digit core growth, double-digit EPS growth, and ongoing margin expansion. However, we have been noting a cautious sentiment in our customer base, and we've mentioned the uncertainty reflected in our second half guidance for a few quarters now. Recently, particularly towards the end of March and into April, we observed an increase in customer caution. Deal cycles are continuing to be extended, and deals have not been closing, which led us to revise our second half guidance downwards. As for what we're seeing through May, orders so far are aligning with our updated expectations. We've faced similar downturns before, and predicting these cycles is challenging since it's difficult to pinpoint exactly when they begin. Our experience suggests these cycles usually last around 12 to 18 months. This is what we need to navigate in the upcoming quarters. As I've mentioned previously with Bob, we focus on one quarter at a time, and today we are sharing our current observations from the marketplace, which indicate increased caution regarding capital spending.

Robert McMahon, CFO

Vijay, I would like to add a couple of comments to what Mike mentioned. In the second quarter, we indicated that our revenue exceeded our orders, particularly toward the end. We entered Q2 with a backlog that was still above normal levels. Our OFS team successfully reduced our backlog and utilized it effectively. If we exclude the backlog's impact from our figures, we would have seen mid-single digit results for transparency in Q2, and we had factored some of that into our forecast. However, we did not refill the pipeline as much as we had anticipated coming into Q2, which led to lower expectations for the second half of the year.

Vijay Kumar, Analyst

That's extremely helpful, Bob and Mike. Sorry, go ahead, Mike.

Mike McMullen, CEO

I think it's fair to say that in relation to our guidance assumptions, we are primarily focused on the pharmaceutical market. However, the increased level of caution we are observing is actually present across all end market segments, with a particular emphasis on pharma.

Vijay Kumar, Analyst

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

Robert McMahon, CFO

Yes, you're correct. In the second quarter, our revenues exceeded expectations. However, we experienced some negative mix effects that led to a lower-than-expected margin. While we did achieve growth, it was not as significant as we had hoped. Consequently, with the lowered guidance, as Mike mentioned, we are intensifying our focus on cost efficiencies. We've implemented several measures to streamline our spending for the latter half of the year to promote greater margin expansion, which will ultimately enhance our earnings per share.

Mike McMullen, CEO

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

Dan Leonard, Analyst

Hi, thank you. Going back to the, Mike, so your comment on large pharma, mid and large pharma, the 90% of the business is not the emerging biotech within your reported pharma segment. Do you have any sense or any theory from your field team on why that customer base has gotten more cautious and why deal cycles have lengthened? I wouldn't think it would be very GDP, PMI-tethered and I wouldn't think that Silicon Valley Bank or what have you would be that material for that customer set.

Mike McMullen, CEO

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

Padraig McDonnell, President CrossLab Group

Yes. And I would add, Mike, the approval levels that we're seeing are going up and up and at the highest levels within pharma accounts are making decisions on capital purchase. So a lot of caution is around that.

Mike McMullen, CEO

Yes. Dan, I must say honestly that it’s somewhat challenging to determine, as we initially believed that the markets would show more resilience. While we anticipated some pressure, as indicated in our second half guidance, we expected them to hold up better despite a slowing GDP. However, developments have unfolded more quickly than we expected, and the rise in costs we’ve observed over the last four to six weeks is notable. It’s tough to identify a specific external reason for this, but we are seeing it across a wide range of our customer base.

Dan Leonard, Analyst

Appreciate that. And a separate question. Can you comment a bit more on what's going on in the genomics market within your DGG business? Do you think there's any share shift happen? Is it all the pressure is market related? And when would you expect that that could improve?

Sam Raha, President Diagnostics and Genomics Group

Yes. So I'm going to invite Sam on to this, but I think what you'll hear from him is he'll talk to you about it's a U.S.-centric phenomenon, not a market share issue. And there is that level of CapEx there that's on the instrument side that we're feeling a bit as well. Yes. Absolutely, Mike. And thank you for the question. What we found is that when you think about translational research, we've already talked about pharma here also as it's used in genomics and diagnostic testing too. There's just become a slowness in decision making, not only in instruments, but even in the usage of consumables particularly on the instruments. I will tell you that even within the quarter, our NGS QC backlog for consumables related to NGS QC, that's actually grown and our orders have grown. So we're doing well there. But there has been a slowness that we're seeing that's broad-based. And to answer your question about share, we don't believe that we're losing share. Similar to what you've heard about the instrument, it's not that we're losing orders at the time in which the orders are being placed. It is just being lengthened. And in U.S. in particular, a little bit in China is where we're seeing the impact.

Mike McMullen, CEO

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

Robert McMahon, CFO

Yes. I would say, Dan, some of our end customers have had a really challenging time and shut down sites, and that has affected our volumes. We saw that in Q1, and it continued into Q2. As Mike, you're saying, we start anniversary-ing some of those in the back half of the year and expect it to perform better. But some of those are customer-specific.

Operator, Operator

Your next question comes from the line of Derik De Bruin with Bank of America. Please go ahead.

Mike Ryskin, Analyst

Hi, thanks for the question. This is Mike Ryskin standing in for Derik. I'm following up on your previous point about big pharma slowing down. You mentioned a significant slowdown in deal velocity, with longer timelines for closing deals. However, you noted that there's no clear catalyst for this change. Is there a risk that we might observe slower deal velocity in other sectors as the year progresses? I'm referring to areas like academia and government, which have also seen above-trend growth in recent years and during the first half of this fiscal year. Yet, it seems there’s no cautious outlook being factored in for these sectors for the rest of the year. How do you assess the risk there, especially considering the rapid changes in pharma?

Mike McMullen, CEO

Sure. Bob and I think we've got a realistic forecast here. And that's why we're asking to think about guidance in the midpoint. We had already assumed some level of slower capital investment in those end markets in our previous guide. So there really is no change to that. We think that outside of maybe the chemical side of CAM, those other end markets will hold up relative to our guide expectations. And listen, we've had experience in these cycles before. And Mike, one of the things I wanted to mention earlier to a previous caller's question was, we know when the market is low. This is actually when the Agilent team even shines further. We always gain market share in down markets. So I'm absolutely convinced you heard in my prepared remarks that we're going to come out of this thing stronger. I think the only debate is how long the cycle is going to be.

Mike Ryskin, Analyst

Yes, for the fiscal second half, you're indicating a 3.5% decline in core sales growth for the third quarter, with expectations of being roughly flat in the fourth quarter. You mentioned some fluctuations with comps in China. It represents a significant reacceleration in the fourth quarter, regardless of perspective, even in absolute dollar terms. Are you anticipating any reacceleration in the fourth quarter? Is there any evidence of that in terms of orders? Why is it specifically the fiscal third quarter that is facing these challenges?

Robert McMahon, CFO

Yes. I mean, we typically do have some seasonality built into our results. If you not just looked at last year, but historically, our Q4 does have a typical ramp-up from Q3. And we're looking at it. If you look historically kind of how we're looking at the seasonality, that's kind of how we built it in. We are expecting stronger both revenue and order performance, Q4 relative to Q3, based on what we know today.

Operator, Operator

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

Dan Brennan, Analyst

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

Robert McMahon, CFO

Yes, I'll start with the last point first. We initially projected our LSAG business to grow by mid-single digits for the full year, but we are now expecting it to be low single digits, just above zero. Therefore, we anticipate a decline in both the third and fourth quarters for LSAG, influenced partly by the emerging biotech and small molecule sectors. Regarding biopharma, it actually grew by 16% in the second quarter, largely due to NASD. Excluding NASD, the growth was 11%. We observed a shift during the quarter and expect that trend to remain relatively stable in the latter half of the year.

Dan Brennan, Analyst

Got it. Okay. And then regarding NASD, since you mentioned it, it was another great quarter. Can you elaborate on what the funnel looks like there? Is the same level of growth expected to continue in the second half? Additionally, with the new Train being implemented, how sustainable is that growth looking beyond year-end?

Robert McMahon, CFO

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

Mike McMullen, CEO

Absolutely.

Operator, Operator

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

Jack Meehan, Analyst

Thank you. Good afternoon. So I have one more question on China. Obviously, great quarter even if you exclude the comps. But you're talking about some incremental caution here. Can you talk about like what customers in the China region you're seeing. Some of this incremental caution, is CDMOs one of those? Just any color on specific customers in the region would be great.

Mike McMullen, CEO

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

Padraig McDonnell, President CrossLab Group

Yes. No, I think you said it well, Mike. It's a very similar dynamics in China from what we're seeing in the rest of the world, which is quite simply customers have become more conservative CapEx budgets and spending decisions, albeit on the EV markets and so on, that's a particular strength that we're going to continue to see. But I think that's what we're seeing.

Jack Meehan, Analyst

Great. One market you didn't mention in CAM was the PFAS testing. Could you give us an update on that and whether there have been any changes in the market dynamics?

Mike McMullen, CEO

I think we remain very positive on that, Jacob, right?

Jacob Thaysen, President Life Science and Applied Markets Group

Yes, absolutely. I think that we are still in the early innings.

Mike McMullen, CEO

Yes, American baseball terms.

Jacob Thaysen, President Life Science and Applied Markets Group

I believe we are in the early stages, but we've experienced significant growth last year and continue to see that trend. Currently, the market is somewhat uneven due to substantial government funding. However, looking at the long-term perspective, there is a tremendous opportunity for us, and we hold a strong position in our LCMS business. Additionally, we are witnessing expansion into new areas with our DCMS business. Therefore, I remain very optimistic and we see considerable business potential ahead.

Mike McMullen, CEO

And Jack, I think it's also fair to say it's primarily a U.S. and a little bit European phenomena. We've got to see really new ranks being deployed and implemented in China and Japan, which down the road could be a source of continued growth on a global basis.

Jacob Thaysen, President Life Science and Applied Markets Group

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

Jack Meehan, Analyst

Got it. Thank you, guys.

Operator, Operator

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

Patrick Donnelly, Analyst

Hi guys, thanks for taking the question. Mike, just a quick one. Just following up on the LSAG piece. Getting a good amount of inbounds on that. I know you don't want to talk about the book-to-bill, Mike, but just given the level of focus and the visibility here, I know you mentioned the backlog, back down to normal. It seemed like that was adding to it a little bit this quarter. Can you give us a sense on the orders? I mean, were they down double digits? And Bob, maybe just the magnitude of what that decline could look like in 3Q in terms of LSAG revs would be helpful.

Mike McMullen, CEO

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

Robert McMahon, CFO

Yes. So if you looked at our overall orders, they were down low single digits. As Mike mentioned, ACG and DDG grew and LSAG was down mid- to high single digits in the quarter. And as I mentioned before, our guide contemplates a decline for LSAG in both Q3 and Q4.

Patrick Donnelly, Analyst

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

Mike McMullen, CEO

Yes. Thanks for the question. I'm really glad to address this head on. So because you hit one of the key messages, we still are very positive on the long-term growth opportunities in these markets we serve. We think we're in a pause in certain segments of our market, but we remain very bullish on the long-term end markets. And the trick here is to make sure you're doing the right thing to manage the business in the short run in terms of being able to deliver leveraged earnings growth for our shareholders, and that's why I talked about the confidence we have in our shareholder value creation model. But at the same point in time, make sure that we don't cut off things that are going to get in the way of our long-term growth. And we know how to do this. We've done this before. We've got some variable pay programs. We have things we look at relative to travel and other things that are associated with expense, things that aren't necessarily immediately near-term revenue generating. And then what we'll do is we'll prioritize. We'll make sure that we're focusing on the sustaining our ability to realize the growth opportunities in a lot of these businesses, which are growing right now. One thing that came out today is it's a story of the multiple growth drivers across Agilent. Clearly, we're having some near-term challenges right now in analytical instrumentation business, yet pathology is growing well. NSE is growing well, services, consumables. So we've got a pretty rigorous program. And what I can assure you is that we will make the reductions in areas that we don't think will get in the way of our ability to continue to sustain what we believe to be out market growth. And Bob, I know you put a lot of thought and time on this, but we've already been activating a lot of the software already. So we didn't wait to the earnings call to get started on this, but I know that we think there's a path forward here for us.

Robert McMahon, CFO

Yes. To expand on what Mike mentioned, we've been evaluating discretionary spending, such as travel, along with demand factors. If demand is lacking, we won't allocate the same level of marketing funds, for instance. We're committed to enhancing our productivity, which we highlighted at the beginning of the year concerning our workforce. We will continue to focus on this to ensure we don't overexpand our team in relation to business needs.

Operator, Operator

Your next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead.

Josh Waldman, Analyst

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

Mike McMullen, CEO

I want to collaborate with Padraig on this, and then I’ll return to the order question for Bob. What I have heard directly is that customers are not reducing their budgets. I was in Europe last month at our demo facility in Vauban, Germany, and it is fully booked for the next three months. There is significant interest in Agilent solutions; however, we are struggling to get the PEOs approved within their companies. That’s why we believe this situation is temporary, even though we must acknowledge our current observations, which are reflected in the updated guidance for the second half.

Padraig McDonnell, President CrossLab Group

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

Robert McMahon, CFO

And on orders, Josh, we won't disclose individual product lines. But as I mentioned, the order growth for LSAG was down mid to high, and they were higher than that. The decline was greater than the average.

Operator, Operator

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

Jack Meehan, Analyst

Mike McMullen, CEO

Padraig McDonnell, President CrossLab Group

Operator, Operator

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

Patrick Donnelly, Analyst

Mike McMullen, CEO

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

Robert McMahon, CFO

Patrick Donnelly, Analyst

Mike McMullen, CEO

Robert McMahon, CFO

Yes. To expand on what Mike mentioned, we have been evaluating discretionary spending, such as travel, as well as demand-related factors. If demand isn't there, we will not allocate the same level of marketing funds. We are also focused on enhancing productivity, which we addressed at the beginning of the year regarding our workforce, and we will maintain that focus, ensuring that we do not prematurely increase our headcount relative to business needs.

Operator, Operator

Your next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead.

Josh Waldman, Analyst

Mike McMullen, CEO

Yes, I want to collaborate with Padraig on this, and then I'll return to the order question for Bob. What I am hearing is that customers are not cutting their budgets. I was in Europe last month at our demo facility in Vauban, Germany, which is fully booked for the next three months. There is significant interest in Agilent solutions. The challenge we face is getting the purchase order approvals from their companies. We believe this situation is temporary, but we must acknowledge what we are currently observing, which is reflected in the revised guidance for the second half of the year.

Padraig McDonnell, President CrossLab Group

Robert McMahon, CFO

Operator, Operator

Your final question comes from the line of Liza Garcia with UBS. Please go ahead.

Liza Garcia, Analyst

Thank you for including me. I really appreciate it. Regarding the margin progression in the guidance, I value the clarity on the cost potential. With the second train line ramping up and considering NAV, I know you mentioned that these should enhance overall margins. As we think about its ramp-up, could you provide some context on how to assess the impact of this train line in the latter half of the year?

Robert McMahon, CFO

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

Parmeet Ahuja, Host

Thanks, Sarah, and thanks, everyone, for joining. With that, we would like to end the call for today. Have a great rest of the day, everyone.

Operator, Operator

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