安捷倫 (A) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Agilent Technologies, Inc. earnings conference call. My name is Lacey and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later we will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Thank you, Lacey, and welcome, everyone, to Agilent's second-quarter conference call for fiscal year 2011. With me are Agilent's President and CEO, Bill Sullivan, as well as Senior Vice President and CFO, Didier Hirsch. Bill will give his perspective on the quarter and Didier will follow with a view of financial results. After Didier's comments we will open the line for questions. Joining in our Q&A will be the presidents of Agilent's Electronic Measurement, Life Sciences and Chemical Analysis groups, Ron Nersesian, Nick Roelofs and Mike McMullen.

In case you've not had a chance to review our press release, you can find it on our website at www.investor.Agilent.com. We are also providing further information to supplement today's discussion. At our website please click on the link for supporting materials, there you will find information such as revenue breakouts and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call.

If during this conference call we use any non-GAAP financial measures you will find on our website the most directly comparable GAAP financial metrics. We will make forward-looking statements about the future financial performance of the Company. These statements are only valid as of today and the Company assumes no obligation to update them throughout the current quarter. Please look at the Company's most recent SEC filing for a more complete picture of the risks and other factors at work. And now let me turn the call over to Bill.

Thanks, Alicia, and hello, everyone. Agilent's Q2 revenues of $1.68 billion were up 32% year over year. Without the impact of recent acquisitions and divestitures revenues were up 21% organically. Q2 orders of $1.7 billion outpaced revenues as demand for Agilent's products remained strong. Orders were up 27% year over year, up 18% organically. Overall financial results were excellent, non-GAAP EPS was $0.74 while operating margin was 19.3%.

Agilent continued to demonstrate the strength of its product portfolio as all key platforms grew by double digits for the fourth consecutive quarter. All regions posted double-digit organic revenue growth.

A few words about Japan. While there have been some issues from the recent earthquake and tsunami, we do not expect any business impact. Q2 Japan revenue was up almost 20% organically over year ago and accounted for 12% of Agilent's total revenue for the quarter.

In terms of supply chain, we do not anticipate any issues at this point in time. We continue to work with our suppliers to minimize any potential risk.

Moving on to the businesses. Our Electronic Measurement business continued to generate strong margins and organic growth. Quarterly operating margin of 23% was the highest for the business since the first quarter of fiscal 2001. Q2 revenues of $834 million reflect 19% year-over-year growth.

Excluding the Network Solutions divestiture, revenues and orders were up 26% and 15% respectively. We saw continued strength and momentum across markets and regions. General-purpose market revenues grew 26%; Industrial and Computer markets were strong, while Semiconductors appear to be moderating. Aerospace and Defense saw solid growth with near-term outlook improved by the resolution of the US government budget in March.

Communications' organic growth was also strong with revenue up 26% organically over the previous year. Test demand remained strong for wireless manufacture -- manufacturing driven by smart phones and 3G. LTE network rollouts continue to ramp up as well. We saw broad success in our core Electronic Measurement platforms including oscilloscopes, network analyzers, signal analyzers and signal sources.

In our Bioanalytical Measurement businesses the integration-related issues we experienced in Q1 around order fulfillment and logistics have been resolved. Life Science business revenues were up 39% to $464 million with 16% organic growth. Orders grew 21% organically; operating margin, including the Varian product, was 13%. We saw double-digit revenue growth across all regions and continued growth in our markets.

Pharma and Biotech grew 16% organically driven by the replacement and upgrades for lab instrumentation in big pharma. Academic and Government revenue grew 9%. Platform performance remained strong with solid growth in LC, LC/MS, genomics, micro-arrays, automation and informatics.

The Chemical Analysis business saw revenue growth of 60% to $381 million, up 13% organically. Orders grew 22% organically. Operating margin, again including the Varian products, was 19%. We saw double-digit organic growth across all regions and across all core products.

Chemical and energy organic growth of 19% was driven by China, higher oil prices and alternate energy investments. Food Safety growth of 10% was driven by demand in emerging markets, especially China. Environmental growth was also driven by emerging markets and increasing regulation.

We also saw strong growth across platforms. GC and GC/MS continued to expand. Spectroscopy sales are benefiting from the combined sales force and we saw especially strong growth in consumables and services.

As a reminder, this is the last quarter we will call out comparisons with the Varian acquisition. We saw revenue of $188 million from the ex-Varian product lines in Q2 including the catch-up from Q1. We expect to end the year at a revenue run rate of approximately $200 million. This number is built into our guidance.

We remain highly confident in achieving the $100 million of net cost savings from the acquisition. And as we introduce new products we believe we can reach an above market growth rate with this product portfolio.

Agilent announced two acquisitions in Q2, Lab901 and BIOCIUS. We also completed the acquisition and integration of A2 Technologies. These acquisitions will help expand Agilent's capability in electrophoresis, mass spectrometry and spectroscopy platforms.

Overall we are pleased with our results and momentum. We look forward to a strong second half of fiscal 2011. For the third quarter we expect revenues in the range of $1.64 to $1.60 -- excuse me, revenues in the range of $1.64 billion to $1.66 billion. Non-GAAP earnings are expected to be in the range of $0.71 to $0.73 per share.

We're also raising our overall guidance for 2011. For the full fiscal year we expect revenues in the range of $6.55 billion $6.6 billion with earnings per share in the range of $2.84 to $2.88. Thank you for being on the call. Now I'll turn it over to Didier.

Thank you, Bill, and hello, everyone. I'll start by providing some additional color on our second-quarter results and then comment on our outlook for the fiscal year and for Q3. And as in prior calls, all of my comments will refer to non-GAAP figures. References to organic results are results without the impact of acquisitions and divestitures within the past year.

So starting with Q2 results, as Bill mentioned, we are very pleased with Agilent's second-quarter results. Orders of $1.70 billion were up 27% from one year ago or 24% on a currency adjusted basis. On an organic basis orders increased 18% year over year including 3% favorable currency impact. All three business segments generated double-digit organic order growth.

Organically orders were up 26% in Asia-Pacific or 22% in local currency; 7% in the Americas; and 21% in Europe or 19% in local currency. Revenues of $1.68 billion were up 32% from one year ago or 29% in local currency. Organically revenues were up 21% including 3% favorable currency impacts. Organically revenues in Asia-Pacific were up 27% or 23% in local currency while the Americas grew 12% and Europe 22% or 19% in local currency.

Now moving to the income statement. Second-quarter non-GAAP operating profit of $324 million improved $123 million from one year ago on a $408 million increase in revenues, a 30% operating margin incremental. The year-over-year organic operating margin incremental exceeded our 30% to 40% commitment.

Q2 operating margin of 19.3% was slightly above our last quarterly high of 19.1% reached in Q4 of last year and increased 3.5 percentage points year over year. Interest expense declined $3 million sequentially as we recognized the full quarter benefit of the $1.5 billion World Trade debt retirement that occurred in Q1.

Moving to taxes, we have reduced our non-GAAP tax rate down to 17%. Non-GAAP net income of $261 million or $0.74 per share compares to $152 million and $0.43 per share one year ago, an increase of 72% year over year. The tax rate reduction contributed $0.02 to Q2 EPS.

Turning to the cash flow and our net cash position, total cash from operations was $378 million, an increase of $154 million from one year ago, even as inventories increased $54 million this quarter, in line with our revenue growth expectations. Our net cash position at the end of April was $885 million, up $331 million from a quarter ago. Finally, I'm pleased to report that Moody's and Fitch raised our credit ratings while S&P revised our outlook from stable to positive.

Now turning to the fiscal year 2011 outlook. Given our solid Q2 performance and reflecting Agilent's strong competitive position we are raising our revenue guidance for the year. This raised revenue guidance reflects exchange rate as of the end of Q2. We now expect revenues for fiscal year '11 of $6.55 billion to $6.60 billion, which at the midpoint of the range represents 20% year-over-year revenue growth, or 16% growth on an organic basis, EMG 19%, LSG 13% and CAG 11%.

Consistent with our 30% to 40% year-over-year incremental operating margin commitment, we're also raising our EPS guidance to $2.84 to $2.88 based on 356 million diluted shares. The tax rate reduction to 17% is contributing $0.04 to the higher guidance. At the midpoint of the guidance fiscal year '11 EPS will grow by 43% year over year.

We are also raising our fiscal year '11 operating cash flow projections from $950 million to $1.050 billion. Capital expenditures for the year are now projected to be approximately $200 million, a $50 million increase, largely due to planned capacity expansion and manufacturing rationalization. Net-net therefore we are raising our free cash flow guidance from $800 million to $850 million.

Finally, moving to the third-quarter guidance. We expect Q3 revenues of $1.64 billion to $1.66 billion and EPS of $0.71 to $0.73. At the midpoint of the range year-over-year revenue growth will be 18% or 16% on an organic basis. The midpoint of our EPS guidance corresponds to year-over-year EPS growth of 33%.

One additional note with regards to Q3, with the exception of the first two weeks of May Varian results will be incorporated into our organic business base. Comparisons going forward take into account the fact that as of May 15 we will have been operating one year as a combined company. With that I'll turn it over to Alicia for the Q&A.

Thank you, Didier. Lacey, will you please provide the instructions for the Q&A?

(Operator Instructions). Tony Butler, Barclays Capital.

Good morning and thank you for the cogent remarks. Bill or Mike or Nick, could you just spend a minute on where you stand with the refresh of the Varian products? And then the second question, Bill, is a little more forward looking. Where can ROIC actually go under your current business model? Thank you.

Repeat the second part of your question, Tony.

Yes, it's where could ROIC actually go?

What I'll do is start off with Mike and Mike can give an update on where we are. Then to Nick in terms of the transformation of the two portfolios. And then Didier, again, can update the question on that given the guidance that we gave in our March analyst meeting. Mike?

Thanks, Bill, and thanks, Tony, for your question. So let me first talk about the instrumentation side of the Varian acquired portfolio. We have a significant step-up in R&D, as we talked earlier at the March analyst meeting, and you'll start to see yields from those investments in the coming quarters. You're going to see our first launch of the UV-Vis product in Q3. And later on this year in Q4 you'll see a launch in the atomic spectroscopy area.

We're also making significant investments in our chemistries area, have completely rebranded all the portfolio and you should see some new columns and new chemistry product coming out in Q3 and Q4. So the message here, Tony, is the portfolio transformation is well underway. It's a multi-year effort but you'll see some initial signals of what it's going to look like in the coming quarters.

Thanks, Mike.

This is Nick --.

Go ahead.

I was going to say, this is Nick. I will go ahead and add the comments about the portion of the Varian portfolio for LSG, primarily it's an NMR comment. And really as we've said before, this is a long cycle. So like Mike's comments, we are well underway with that investment transformation.

We're actually shipping the first console for NMR that represents some electronics group technology in our portfolio and that started last quarter. But the real refresh on these products is a two to two and a half year cycle. So you'll be getting to see those in year three as a real restatement. So we've got about another 18 months to go before we get the real platform refresh wholly done.

Okay, and regarding your question on ROIC, Tony -- as we deliver 30% to 40% incremental operating margin on about 8% revenue growth, mechanically our operating profit -- operating margin would go up 1 percentage point every year and our ROIC 3 percentage points every year.

Thank you, Didier.

Ross Muken, Deutsche Bank.

Good morning, guys, and congrats on a great quarter.

Thank you.

So in the EMG segment, obviously you continue to have spectacular performance there. If we look at the communications line, can you tease out what's in that growth rate driven by core market growth versus share gain versus sort of your new product momentum?

Ron, why don't you go ahead and outline our communication performance.

Sure. As was mentioned earlier, our communications growth was 26% year over year and we continue to see a very strong business. Certain sectors in certain areas that are very communications dependent grew even faster. For instance, our China order growth was over 60%, which was very, very strong.

We continue to see the wireless ecosystem to be strong across the board. And as Bill mentioned, in 4G where the LTE infrastructure is being put in place, so we're seeing strong base station business. On the handset side that follows it typically by a couple of years. But we're continuing to see very strong smart phone growth in 3G. So things look pretty solid across the board and we saw very strong manufacturing growth and are continuing growth in the R&D sector.

Excellent. And on the LC business, obviously the 1290 has had great adoption. If you sort of look at the breadth of the customer base and the breadth of the utilization of the box, has anything changed in the context of where the placements are going or the magnitude in terms of are we seeing more widespread switch outs at large are institutions or is it more onesie twosie type of placements at broad labs and generic CROs, etc.?

Nick, why don't you take that, please?

Yes. So thanks for the question. I want to make two comments; first you pointed specifically at the 1260 -- I'm sorry, 1290. We're seeing this disseminate across all the markets, so we're seeing a real technology upgrade. We are seeing large numbers at customers who do have big sites, so we're seeing wholesale site upgrades in many cases and part of that is the backward compatibility.

We're seeing strength in the applied markets as well for the 1290. So it really is pretty broad across the market and whole sites are doing conversion as they replace old instruments and/or upgrade to this technology.

The last comment I want to make is I want to point to the 1260; we launched a bio-inert 1260 instrument last quarter, this is part of our family of 1200 series, and that instrument is taking off. So we started shipping that instrument in March and that's contributing pretty strongly to our LC number and LC portfolio as well.

Hey, Nick, this is Mike. I'd just like to add a little commentary around the 1290. It also is driving a high adoption of our new LC columns where we have a much higher attachment rate to the new product.

Great, thanks, guys.

William Stein, Credit Suisse.

Thanks and good morning. We saw yet another quarter of backlog build in EMG. I think there was a plan to start to try to burn that off. But I think investors are happy with this. Bill or Ron, can you talk about the cyclical nature of that business, whether you believe we'll start seeing below typical seasonal growth anytime later this year? Or do we just power through that this year and continue to see new highs later in the year?

Yes, I'll make a comment and then I'll turn it over to Ron. First of all, we are working as hard as we can to get additional capacity online to burn off our backlog, and Didier mentioned that during his comments. And we've increased our capital investment this year by $50 million; most of this is in EMG to put on additional capacity.

Also, we are starting to, as we go forward the compare has become much more difficult. And based on the guidance that we gave you though we're still having an outstanding year, just the arithmetic of continued growth will -- that the percentage growth is going to slow down. But, Ron, why don't you share your crystal ball of the sustainability of the EMG growth?

Sure. Well, first of all, I would comment that in the past we had built a lot of backlog per quarter and now we've almost caught up to the current level. We had $844 million in orders and $834 million in revenue. But as Bill had mentioned, we are ramping capacity pretty much throughout the whole manufacturing process in our supply chain.

The compares do get tougher as we go forward, there is no doubt about it. But we continue to see very strong operating margin and operating performance. As Bill had mentioned, 23% operating margin for EMG was the highest operating margin in a decade, only outdone by one quarter in the dot.com boom when it was also 23%.

And our gross margin was at an all-time high in the history of Agilent at 59.5% and I'm talking organic. The incrementals that you're seeing delivered from the business right now, for instance, this last quarter at 54%, are something that are obviously above what we had planned. And I think we'll start to see things come back with a little bit more difficult compares in the future, but the business continues to be very healthy.

So, thanks for that. And when you look across the product portfolio, I think at the Analyst Day you spoke about some pretty hefty share gains in scopes, which is I think the biggest market -- biggest single product market in electronic T&M. So is the strength more concentrated in that market owing to share gains or do see this more as kind of industry cyclical strength?

Sure. I won't comment on competitors' growth, I will tell you what our growth is and then you can calculate that very easily. But if we look at our core products, which we consider oscilloscopes, network analyzers, spectrum analyzers and signal sources, we had over 30% growth in that area. In the oscilloscope area our revenue growth was over 60%, so that looked very strong and I think when you do your compares you'll be pretty impressed with that number.

The nice thing also was as you look at our oscilloscope business, it wasn't just the high-end performance products that we introduced about a year ago, it wasn't just the high-volume products that we introduced in the last quarter. We saw strong growth across all three of our segments, the high-performance, the high-volume growth, the high-volume area and also our sampling scope area, all of them were above 25% growth in each of those segments.

So our products look strong and when I look at the compares versus the industry, we're very pleased with where we are. We do have some excellent competitors that are very tough, but we will continue to drive hard to continue to increase our share.

That's great. Maybe one more quick follow-up if I can. Any update on the PXI modular portfolio development?

The PXI modular development is a long-term plan for us; we continue to be very focused on it. And we have more products and solutions in development as well as products that are out. We've done a good job building our channel as well as building our portfolio.

But that is not an instantaneous short-term spike; that is something that will allow us to give customers the form factor that they like. Whether they would like an all in one box, one box solution or whether they'd like a modular solution. We intend to be the strongest player and the leader in both of those segments.

That's great, thanks.

Mark Douglass, Longbow Research.

Good morning, everyone. Just again on EMG and the incrementals going forward. With all the stepped-up investments and the tougher comps, would you expect them to be maybe below the 40% range a little bit going forward just because of the stepped-up investments? Or do you still think you can hit that 40% bogey that you've put out there?

We have no -- there will be no change to the model that Didier shared in the last analyst meeting. Ron's business is targeted to deliver the 40% incremental at the 6% growth rate. And again, the capital investment will have a very minimal effect on the cost of sales.

Are you having to hire a lot of new people there as far as R&D, sales, feet on the street, that kind of thing with such strong growth here?

Ron, why don't you talk a little bit about our manufacturing, which is predominantly in Malaysia; secondly, the continued success of our alternate channel that has taken less pressure off of our direct channel?

Sure. Mark, we've been very, very careful to make sure that we don't make some mistakes that were done in the dot.com boom that went on where there was very, very much hiring and we could not deliver in the immediate years when the market crashed. We've been very careful not to build fixed infrastructure.

In manufacturing we will scale up but we also work with contract manufacturers and we're very, very careful on how we ramp our production working with our two main CMs in order to deliver the revenue on the upside but to not build a lot of cost infrastructure.

The same thing is true with our channel. As we look at our channel we focus our direct sales channel on our major accounts that bring in approximately 75% to 80% of the business and we are selectively making incremental investments whether you look at emerging markets or whether you look at just strong growth in more established areas.

But predominantly the way we're capturing that growth is by increasing our business through third parties or alternate channels. And that is a plan that we intend to stay with for a very, very long period of time and their alternate channels continue to grow and take up a more significant portion of the overall balance.

So I feel very, very good about that. And circling back to the last question, we delivered a 54% incremental this last quarter, but we were 100% committed to deliver at least the 40% incremental that is in our business model.

We continue to manage headcount in the Company very, very tightly. We are not going to repeat the mistakes that we have made in the past in the last decade to allow our headcount to drift up and then putting a lot of margin pressure when in fact business slows down. So again very, very tight headcount control.

Great, thank you, that's helpful. And just real finally, you mentioned before on the life science side of things, the 1290 pulling through some other products. What about, do you see that pulling through some of your mass spec products and maybe some of your Triple Quad's or maybe would it even be reversed -- your Triple Quad's are pulling through some 1290 sales?

Nick, why don't you go ahead and take that?

Yes, this is Nick. Well, I think given the strength of the mass spec portfolio, I'm not sure either one is pulling the other. Both of those portfolios are seeing double-digit growth where the first digit is a 2, and so I think we're seeing strength in both portfolios. We've got some exciting new mass spec products coming out in a couple weeks that we're going to talk about at ASMS. So we're very pleased with the LC and the new range that we continue to launch and we're very pleased with our mass spec portfolio.

Thank you.

Jon Groberg, Macquarie.

Thanks for taking the question. Hey, Bill, just to be clear, and Didier, what is your embedded expectation for EM growth for the second half of the year and your guidance?

Didier?

Yes, well, you can compute it; we've provided the guidance for the whole year of 19% organically for EM. So you can back -- to the second half easily.

Okay, sorry, maybe I missed on the 19% for the year. Okay, thanks. And then, Bill, just my only question for you is I guess all good CapEx cycles come to an end at some point. What's the desire on your part to increase the percent of your business that's more consumable or recurring in nature?

Well, as I've been very clear, we would love to expand our service business and particularly our consumables business. The Company is still 75% hardware, 25% consumables and services. We continue to look for acquisitions to try to enhance that and get acquisitions that we can get very strong returns.

Secondly, as Mike alluded to, we continue to invest organically in that area. And on Nick's side, which is really on the reagent side, genomic side, the continued success of SureSelect, as an example, sample prep for next gen sequencing has continues to be very, very successful. But again we'll have to see that mix change and we'll continue to focus on that area.

Just a follow-up on that I guess, on the inorganic front, you're anniversarying now Varian. It seems like even though the revenue is a real challenge you did a great job on the cost side and on integrating over the next 12 months. Is your appetite stronger for M&A now that that's kind of anniversarying?

Well, my appetite is strong. The problem is the valuations are through the roof. And as I've been very, very clear, we will not make an acquisition that we do not have high confidence of returning in a reasonable amount of time the cost of capital to our shareholders. So the answer is yes, we're excited. Obviously our financial situation is very, very strong. On the other hand, we will not pursue something that we don't have confidence that we can return economic value.

Okay. Thanks a lot.

Jon Wood, Jeffries.

Thanks a lot, good morning. Bill, going back to the last question, you guys have talked about making a decision on capital deployment or communicating a capital -- more of a defined capital deployment strategy by the end of the year. Has anything changed in the last quarter or so on your discretion with the excess cash and when we might see more of a defined commitment to return some cash to shareholders?

Nothing has changed from what we have said to date. As I had said during the analyst call that unless we find an acquisition that we can determine that we can get economic value our cash is going to increase. Based on Didier's remarks our cash is increasing faster than we had expected.

So I know for sure that we're going to get more questions about our capital deployment, but we have not fundamentally made any decision now. Number one focus is to look at strategic acquisitions. Secondly, in our history I think would support us. Working with the approval of the Board of Directors, we will return excess cash to our shareholders either through a stock repurchase or a dividend. We will continue, of course, our anti-dilutive stock repurchasing.

Okay, great. Then the next one for Nick and Mike, I guess together. Surprised to see the organic bookings growth in both of your businesses well ahead of the organic growth, the revenue growth in the quarter, despite the fact the comps are quite a bit more difficult.

So my question is, are there any external catalysts in the macro that either of you can point to actually contributing to the momentum accelerating as we go throughout the year?

Nick?

I mean, I am pretty pleased with the momentum, so I am not sure it is going to get faster. We have had some really good numbers; it's been some good quarters. Right now, if anything, we see the same sort of trajectory going forward, not necessarily acceleration. And obviously, we would like our book to bill to come closer to 1.

So it has been a positive, but not what we'd like in terms of operating. So we are putting a lot of capacity and energy into raising capacity so we can get that book to bill back towards 1.

Mike.

John, this is Mike. A similar view from myself in the Chemical Analysis business. As we've mentioned before, it is solid growth in the mature geography, driven a lot by replacement and recovery of the economic situation, particularly in the US. The emerging market growth story we've talked you about in the past.

And then again, I can't emphasize enough the investments we made even during the downturn in terms of making sure we have the most competitive portfolio -- all those things are leading towards these above market organic growth rates you're seeing. But as Nick said, I would not see an acceleration of that growth rate in the coming quarters over what you've seen in Q2.

Understood. Thanks a lot.

Isaac Ro, Goldman Sachs.

Good morning, thanks for taking the question. Just first off, looking at your regional performance, on a sequential basis I think Americas were down a little bit and then Asia Pac obviously up very significantly. So is it fair to say that the majority of the catch-up in revenues for Varian were recognized in Asia Pac? And then maybe if you could comment on what's going on in the Americas by end market, that would be helpful.

Yes, I don't know, Didier, if you -- I can't -- the first part of your question, I don't have that data in front of me.

Bill, this is Mike. I can probably make some comments if Didier would like me to.

Yes, go ahead.

Yes, I think that the -- actually when you look at the, if you will, the catch-up from Q1, the primary areas where you saw it actually were in the Americas and Europe, which is where we saw the most of our business constraint in terms of Q1 shipments.

So I'm not sure what numbers you're pointing to, but the growth rate in the Americas on the chemical analysis side, and I think Nick can probably have a similar situation, was double-digit. So we saw both double-digit growth in the Americas and Europe. So that's consistent with the view I've just made around the Varian portfolio.

(multiple speakers), we were double-digit in year over year and sequential was close to double digit for Americas.

I could make a couple of comments with regards to EMG, just two. One, the wireless infrastructure market continues to be very strong as we see smart phone growth. So we've seen our US players be strong. But the big factor is Aerospace Defense and obviously that had been clogged for a while without there being a budget. And now that it's passed we are finally starting to see some things break loose. But again, it is a muted Aerospace Defense market. So overall those are the two factors that really affect the Americas for EMG.

Again, as Ron said, Aerospace and Defense is a large part of our business obviously dominated in the US.

And regarding Asia Pacific, this is Didier, Bill already noted the strong performance in Japan year over year, almost 20% organic year-over-year growth and Japan now accounting for 12%. We also had exceptional performance in China, again over 40% year-over-year organic growth in China. And that is not -- again, it's organic without Varian.

Great, that's very helpful. And then just secondly, Didier, while we're talking about Varian, could you maybe update us on the integration progress that you made this quarter and just sort of over the next two quarters -- remainder of this fiscal year what some of your key goals are on the integration process?

Well, on November 1 we had integrated the quote-to-cash processes, now we're working on integrating the back end side of it, so the manufacturing ERPs and progressing very well. We'll do a first integration in one of our factories in June and the integration will go on until the middle of next year.

And then on the cost savings front Bill mentioned we are working towards -- I mean we are totally in line with our timeline. We said earlier that by the end of the fiscal year we will on an annualized basis we'll have achieved 50% of $100 million. We're working towards that goal. That will be 25% for the calendar year, but on a year-end basis 50%. So we're making great progress.

Great, thanks a bunch.

Richard Eastman, Robert W. Baird.

Yes, just a question just regarding -- maybe for Nick and Mike. Was the core business incremental margin in line with the targets that you set, kind of 35% and I think 40% -- 35% to 40% in CA and 30% to 35% in LS?

This is Didier, I can take that one and the answer is yes, absolutely.

And my math might be off a little bit, but did Varian then generate some profitability in the quarter?

Varian was a slight -- I mean let's say breakeven on a fully accounted basis. It's getting more and more difficult obviously to track Varian's financials because the tenet of our strategy is to integrate Varian. So once it's integrated and we are not waiting, it's getting a little bit more difficult.

But we think it's going to be -- it is about breakeven, but that's taking into account the fact that at the present time they are paying for both some of the overall infrastructure -- Agilent infrastructure, plus remaining costs that they have. And obviously we've moved them to our Agilent terms and conditions, the employees, so -- but we think it's about breakeven.

Yes, the thing is -- in terms of looking at the Varian integration, and I know it's frustrating for you guys, but the way we integrate is so different than other companies. So first of all, we bring in 3,500 employees, they're on our variable pay while the variable pay process is roughly targeted at 10%.

The corporate savings, which immediately was there, the $35 million of corporate savings goes into the corporate pool that gets reallocated across the Company. So to try to back calculate exactly where Varian is today as if all these savings go exactly back to the product line is next to impossible the way we are doing our integration.

And what you're going to see going forward is -- for both Mike and Nick needing to continue to drive their gross margins up because the bulk of the savings, the $65 million is all in manufacturing.

So as we talk about exiting this fiscal year we'll have about half of the savings. That will begin to show up obviously as profit -- I mean that's kind of where your 50% of the $100 million on top of kind of a core profit run rate for Varian, that starts to show up in fiscal '12?

Yes, exactly, as you move forward. Because, Mike, for example, Chemical Analysis' gross margin is 50%, used to run at 55% thing. Mike and I will debate how quick it will be back to 55%, but that's exactly where you're going to start seeing the differentiation. Correspondingly you can see the few points impact from NMR on Nick's business and both these guys are absolutely focused to get back to our historical gross margin.

And is part of that -- I guess if you look at a face value, is the R&D effort kind of the gross -- maybe the growth investment up in order of magnitude of 2 here or something in this integration period for Varian's products?

I mean they used to run about $60 million in research and development. And I think, Didier, we've added in $15 million to $20 million, is that roughly accurate?

Absolutely, (multiple speakers) on an annualized basis, yes.

Okay. And then just a last question for Mike. Could you just talk for a second again on the environmental side of the business? I think I just missed that. Was that environmental business up and if so was it driven by any geography?

Yes, great. Thanks, Richard, for the question. The business was up in environmental and it's really, again, an emerging market story, particularly led by China. But I would also say that we're seeing return to growth in some of our more mature geographies as there seems to be more interest in actually enforcing regulations that are on the books as well as some new research going on in certain aspects of environmental contaminants in the environment. So again, very solid growth in environmental led by the emerging markets, specifically China.

Great, thank you.

Paul Knight, CLSA.

What are your biggest obstacles on the life science group for that margin improvement to occur? I mean what are the catalysts we should look for?

Improvement in NMR. Nick?

Yes. Oh, thanks. It's pretty simple. We're really putting investment into NMR at several levels. One is supply-chain, we're moving that around so that we can get better leverage. Second is manufacturing, we're also moving that. We've started a big move into Malaysia for manufacturing. And then third is the R&D. I mean, we're spending a lot. A big chunk of that delta that Bill talked about a moment ago is going into NMR.

So we're going to get a lot of improvement as those things start resulting in payback and we're already seeing some traction. But that's really the delta. I can tell you that the rest of the product portfolio continues to move positively on gross margin, so all we need to do is get the NMR group moving.

And really it's committed to the incrementals. I believe that group is going to start producing its own stand-alone incrementals, not that we're necessarily going to report them that way, that are consistent with our portfolio incrementals.

Bill, did you comment on supply-chain, good or bad, following the events in Japan?

Supply chain outbound as we almost grew 20%, our customers were able to take products. And one anecdote that I'll share with you is that we had the March order flash before the earthquake and tsunami and it's quite interesting. The Electronic Measuring group actually got higher orders than that forecast and the Chemical Analysis and Life Science just barely missed it.

So on the outbound things are looking okay. Not to say there are not issues below the surface, but in a macro sense we're in good shape. In terms of our suppliers shipping to us, we have to date mitigated any impact to our capacity. There are issues, but as it stands today we don't see any major disruption from any -- from a supply-side into our factories.

What do you believe the Japan growth rate is in that market?

Wow, not sure that I (multiple speakers).

(multiple speakers) Life Science starters.

Maybe Mike and Nick. I mean obviously we know what ours is, but I'm not sure if I know what the absolute Japanese market is. Mike, Nick?

Sure, let me comment on the chemical side and then pass it over to Nick. The plan coming into this year was we see this as obviously a more mature geography overall in terms of market growth rates. There are places of investment, there are places of growth, particularly with the new portfolio that we have coming into FY '11. I think we're looking at flat or low-single-digit type growth rates. The currency has an impact here, but moderate growth at best right now in Japan in the total macro standpoint, although we believe that our business will be stronger.

Okay.

For Life Science, I mean there still continues to be some government investment and a little bit of growth there. So Life Science markets probably low- to mid-single-digit in local currency in Japan and we're doing better than that. But that's kind of where we see it.

Okay, thank you.

Ajit Pai, Stifel Nicolaus.

Yes, good morning and congratulations on a very solid quarter.

Thank you.

A couple of quick questions. I think the first one is just looking at the CapEx and the CapEx increase. I think you talked about capacity increase, so could you give us some color as to is all the majority of that the EMG group and is most of that in finance? And also since you're moving to the contract manufacturing, the CM model, what is this extra money being spent on?

Yes, in terms of the manufacturing, across the board we're going to put on capacity online so that the Company can ship $7 billion revenue per year effective Q1 of '12. And so given our momentum, given that we have to burn off our backlog we need to get that capacity on line.

I don't know quite sure what the mix is of the $50 million, but I know it's biased to EMG because not only is there putting investment in the back end of the process but we're expanding our fab. We have a gallium arsenide indium-phosphide fab in Santa Rosa California that really makes all of our high-performance devices and Ron has been making investments there to add on capacity moving forward.

The bulk of our capacity expansion is actually buying and capitalizing our own test equipment that is used for the final test. In addition to that, we have been making investments in upgrading some of the buildings that -- and consolidating sites that we obtained through the Varian acquisition.

Got it. And then the second question would be just looking at the wireless LTE. I think at your Analyst Day you talked about how early they are in the upgrade cycle over there. So right now do you have any better visibility into how long potentially this cycle could last or the growth in that business could last at the robust rate you're seeing right now? Could it be a couple of years?

We had said in the meeting -- and again, Ron, you can make some comments. We had said at the analyst meeting that there's an upside potential if you model the turn on to G4 versus G3 of at least $160 million only enhance that test in R&D over the next three or four years. At least I don't have a different view. Ron?

No, I think that's it. I would just say that it's a long term cycle. If you look at 3G it was a decade-long and I think 4G is going to be the same thing in R&D. Now we're seeing the base station business really ramp and we will see the handset business ramp also after that. So no change from what we talked about before.

And what about the pace? Have you seen -- has this been accelerating at a faster pace than you expected or at a slower pace or roughly in line?

Roughly in-line again, but it is a little lumpy depending on deals and your wins. Because if you look at the number of players out there, there are not hundreds and hundreds of them, although there are when you look at individual chips. But if you look at some of the large players when you win some deals you've got to do some dramatic or significant capacity expansion which is exactly what we're doing due to some great, great wins.

Got it. And then the last question is, I think you talked about strength in some petrochemicals for your Chemical Analysis business. Could you give us some color as to what is driving that strength?

Mike?

Yes, that was a great question. It's very clear, the overall health of that industry segment. So our customers are going through replacement cycles that they deferred in the 2009 frame and return to kind of a normal replenishment cycle. So there's a bit of a catch-up, but that replacement cycle is going to be continuing to occur.

But also we have to keep in mind that the plant expansion is actually happening in Asia in places like China, India. So more capacity is also coming online in the Asian markets. And then finally, a lot of energy around research in new alternative energy sources. So we're getting kind of a threefold effect here that is driving that really strong growth in the segment that we reported today.

And what is your expectations in terms of how long these drivers could last?

I think it's very much along the same lines as Ron described, the conversion to 4G is maybe not a decade, but it's years. And we should also have this image that the replacement cycle is not something that just happens and goes away, that will continue to be a core part of our growth. You'll see some cyclicality here and there depending on the economic cycle, but the interest in new alternative energy replacement, you can argue at some point in time you won't need as much new capacity coming online, but this is going to be with us for a while.

Got it. Thank you.

(Operator Instructions). Anthony Luscri, JPMorgan.

Hi, thanks for taking the question. I wanted to dig in a little bit more about the certainty of your backlog and especially on the EMG side. You have very viable competitors in that space and do you think they're also seeing capacity constraints holding back their revenues? And with that, do you believe that you've seen any double ordering trends and/or de-bookings? Thanks.

Yes, just I'll make some general comments and then Ron can make some comments about our availability. We are very conservative, as you know, in terms of booking. We typically book no later than six months delivery time moving forward. Our growth rate in the last four quarters is the highest in the industry.

And I think that the team, as Ron had noted, this quarter is the first quarter at least the orders and revenues were close. Again we still built backlog, but I don't believe there's any double ordering of any magnitude. As Ron, I believe your availabilities have actually continued to come in even while we continue to outpace the market.

I think Bill hit the nail right on the head. Our backlog is very solid. We believe that it's high-quality backlog. Our cancellation rate is relatively low. So we feel very comfortable with what we have so far and we haven't seen any of the double or triple booking of any magnitude at all.

And, Ron, your availability of delivering has not stretched out as we've seen, for example, in the 2001 boom. Availabilities are still within a manageable range in the eight to 12 weeks. Is that fair?

That is. We definitely would like to be able to bring our delivery times down on certain products and other products it's right where we would expect it to be, to have the right balance between invested capital and delivery times. There are a couple of areas where we'd like to be able to ship a little bit faster. But our orders keep surprising us for the good.

And we will ramp this capacity -- the capacity expansion and the investment that Bill talked about is a very important part of our business, mostly on the backend buying Agilent test gear for final test. But also we have a spectacular fab on the front end of the process for gallium arsenide and indium-phosphide where we have a tremendous team there that produces world-class products.

Okay, thanks for the color there. A follow-up would be you cited I believe 60% order growth out of the communications in China. Can you speak to the drivers there? I believe it's 3G, is it wireless infrastructure or wireless manufacturing? And what are the legs in those -- in that trend?

Yes, we're seeing it pretty much across the board. The way I would tell you, the wireless ecosystem across the board is very strong. The semiconductor business is moderating a bit where you just see the pure semiconductor business. But as it drives into smart phones and handsets and a lot of the manufacturing there in general we've seen a very strong performance.

The last comment I would make is we're in the first year of China's twelfth five-year plan which is typically a slow year, so we don't see growth this year like we would see in the fifth year of a five-year plan that we saw last year. But still despite that we've seen some very strong order growth, as I mentioned, in this last quarter over 60%. So we're still feeling very, very strong about our -- not only the results in China but our competitive position in China.

Thank you.

And at this time we have no questions in queue. I would like to turn the call back over to Alicia Rodriguez for closing remarks.

Thank you, Lacey, and on behalf of the management team I'd like to thank everybody for joining us this morning. And have a good rest of the day. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.