安捷倫 (A) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Agilent Technologies Incorporated earnings conference call. My name is Patrick and I will be your facilitator for today.

At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder to all participants, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Thank you, Patrick, and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2013. With me are Agilent's CEO Bill Sullivan, as well as Senior Vice President and CFO Didier Hirsch. Joining in the Q&A after Didier's comments will be Agilent's President and Chief Operating Officer Ron Nersesian. Also joining are the Presidents of our Electronic Measurement, Chemical Analysis, Life Sciences, and Diagnostics and Genomics groups, Guy Sene, Mike McMullen, Nick Roelofs and Lars Holmkvist.

You can find the press release and information to supplement today's discussion on our website, at www.investor. Agilent.com. While there, please click on the link for financial results, where you will find revenue break outs, business segment results and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call.

Bill and Didier's comments today will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website.

We will 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 Bill.

Thanks, Alicia and hello, everyone. Today, Agilent reported revenues of $1.73 billion for the second quarter of fiscal 2013, inclusive of the Dako acquisition. Adjusted net income was $269 million, or $0.77 per share. We exceeded EPS guidance, despite continued industry headwinds and macroeconomic challenges.

Strong Q2 earnings were driven by our ability to generate higher manufacturing margins while sequentially reducing operating expenses. These improvements demonstrated the strength of Agilent's business model, which enables us to streamline our operations while supporting future growth.

We expect the macroeconomic environment to remain challenging through the second half of 2013. We are taking additional action to insure that Agilent is solidly positioned for the future success and value creation.

Today, we announced a $50 million restructuring program to further streamline our operations and reduce our cost structure. In addition, Agilent's Board has authorized the doubling of our stock repurchase authorization, from $500 million to $1 billion. The repurchase program will be executed by the end of calendar year 2013.

Despite current challenges, Agilent is well-positioned in our targeted markets. The integration and leverage of our worldwide manufacturing operation will continue to drive higher gross margins. We have a deep pipeline of new product introductions and our commitment to customer satisfaction is second-to-none.

Here are some of the business highlights. Agilent's Q2 orders of $1.69 billion were down 8% over last year, including Dako. Revenues of $1.73 billion were flat year-over-year. Operating margins were 19%.

With the acquisition of Dako, we will no longer refer to our Life Science and Chemical businesses as Bioanalytical Measurement, or BAM. Instead, we will use LDA, for Life Science, Diagnostics and Applied Chemical markets. Please note, this is not an organizational change. We will continue to report Life Science, Diagnostics and Genomics and Chemical Analysis as separate segments.

Revenue for LDA were $972 million in Q2, up 13% year-over-year, inclusive of Dako. Operating margin was 18%. Overall, Pharmaceutical markets grew 8%, driven by technology upgrades. Academic and Government Markets declined 5%.

Food Safety grew 8%, offsetting softness in the Forensics and Environmental markets. Petrochemical was up 3%. Within LDA, the Life Science group revenue grew 2% year-over-year. Operating margin was 15%.

Performance was led by LC, LCMS and recurring revenues. The new Encore Multispan Liquid Handling System from our Automation division has been well received in the marketplace.

Revenues in the Diagnostics and Genomics group grew 124%, down 3% organically. Operating margin was 17%.

While currency impacted our Genomics business, CGA's sales remain strong. Target enrichment volumes grew even in the face of strong competitive pricing, underscoring our leading market position. SureFISH renewals continue at a high rate, as we continue to expand the customer base.

We continue to be pleased with results in Dako. Last quarter, Dako launched its new advanced staining platform, Omnus, which includes hardware, software and reagents. Placements have begun at key seed customer sites and feedback has been excellent.

Chemical Analysis Group revenues grew 3% year-over-year. Operating margin was 22%. Our recently introduced GC/Q-TOF and IC Triple Quad showed solid results. In addition, we introduced the new 7890B gas chromatograph and the 5977A series single quad mass spec, as well as a whole new release of our open lab chromatography data system.

Electronic Measurements group revenues declined 13% over last year. Despite the lower than expected revenues, operating margin of 21% was strong. We were able to maintain gross margins and rapidly reduce expenses in response to the changing environment.

Industrial demand was down 17%, reflecting weak macroeconomic conditions that are expected to persist in the near term. Computers and semiconductors also declined by double digits, reflecting the over capacity situation and the weak PC market.

Aerospace and Defense was flat, as overseas sales offset declines in the United States. Wireless R&D was down 1%, as customers continued to invest cautiously. Wireless manufacturing was down 26%, due to the loss of business from a large customer, as we could not agree on terms this year. This will continue to have major negative revenue impact to the rest of FY 2013.

Nevertheless, we continue to see opportunities in wireless manufacturing. We just introduced our new manufacturing solution for wireless LAN. We will continue to invest in market-leading wireless test solutions in both R&D and manufacturing. We are excited with our upcoming product launches for the second half of the year.

We're also in the midst of two significant transformations related to module and handset instruments, while we continue to make investments and bring new products to market. We are seeing continued double -digit growth year-to-date in our AXE and PXI module platforms, and our microwave FieldFox hand held has been well received by the customers. As I indicated, we are forecasting a weak Q3, due to lower revenue from our wireless manufacturing business and a challenging macro environment for Electronic Measurement.

In summary, here are the additional actions we are taking to leverage our integrated and variable business model and to increase Agilent's financial performance. We will maintain the expense controls that we have in place in Q2. These controls enable us to expand margin and exceed EPS even in the face of lower revenues.

As part of the $50 million restructuring I mentioned earlier, we will reduce Agilent's overall workforce by an additional 2%, or 450 employees. This is on top of the manufacturing restructure that has already been initiated. Finally, we'll increase our stock repurchase program by $500 million, to $1 billion, to be completed within the calendar year.

We now expect FY 2013 revenues as $6.75 billion to $6.85 billion, which is at the low end of our previous guidance. We expect FY 2013 adjusted EPS of $2.70 to $2.85. Our ongoing expense controls, restructuring and additional stock repurchase programs announced today are expected to absorb most of the impact of the lower revenue on our EPS.

While we face the tough operating environment, we are executing the right strategy for Agilent to benefit from a market recovery when it occurs. We have built a strong foundation for growth, by safeguarding our profitability while capitalizing on opportunities for the future. We believe this strategy will enable Agilent to build and sustain shareholder value.

Thank you for being on the call. Now I'll turn it over to Didier for a more detailed discussion of our financial results.

Thank you, Bill and hello, everyone. As we have stated, the low end of our revenue guidance assumed that the sequester would take effect on March 1. Our Q2 revenues were $8 million below the low end of our guidance, a difference that was entirely due to the $12 million negative impact from currency changes. Q2 EPS, on the other hand, were $0.07 above the high end of our guidance, as we executed on our commitment to significantly curtail discretionary expenses as long as the economic environment remained highly uncertain.

To recap the quarter, core orders, which exclude the impact of currency and acquisitions, were down 12% year-over-year, while core revenues decreased 4%. However, our operating margin at 19.3% was on par with last year's 19.5%. By segment, EMG core revenues decreased 12% year-over-year, CAG was up 5%, LSG was up 4%, and DGG was flat year-over-year. By region, core revenues were down in the Americas by 7%, Europe by 2%, and Japan by 7%, and flat for the rest of Asia Pacific.

Our strong 19.3% overall operating margin, 20.5% for EMG and 18.3% for LDA, demonstrates that we have come a long way since 2009, when we also experienced tough economic conditions that severely impacted EMG and, to a lesser extent, LDA. Back then, our overall operating margin was about 7%, even after the temporary 10% pay cuts.

Clearly, the actions we have taken to reduce our fixed cost structure, leverage the scale and integration of Agilent for order fulfillment and global and infrastructure organizations, as well as our acquisition strategy, have paid off nicely. We did not eliminate EMG sensitivity to the macroeconomic environment, nor the lumpiness of some markets, but we did reduce significantly the bottom line volatility.

Regarding cash, we generated $315 million in operating cash flow for the quarter. We bought back 3.3 million shares for $140 million, and have a net cash position of $225 million.

Now turning to the guidance for the full year. The low end of the revenue guidance provided last February, which again assumed the sequester would be effective March 1, was $6.9 billion. Since then, currency changes have had a negative impact of $50 million versus the last guidance.

In addition, there's no sign yet of a macroeconomic recovery, and PMI indices are stuck around 50. We're now expecting fiscal year 2013 revenues to range from $6.75 billion to $6.85 billion, a 1% reported year-over-year decrease at the mid-point. Which translates into a 3% core revenue decrease, reflecting the loss of the wireless manufacturing business Bill talked about.

On the cost front, our global order fulfillment organization is on track to generate about $50 million of savings, and our control of discretionary expenses will be maintained in the foreseeable future. Those actions, coupled with the benefit of the incremental $500 million stock buyback, will offset most of the impact of lower revenue projections and currency headwind from our EPS, which is expected to range from $2.70 to $2.85.

Finally, moving to the guidance for our third quarter. We expect Q3 revenues of $1.63 billion to $1.66 billion. At the mid-point, reported revenue would be down about 5% versus last year, with EMG down about 19%, and LDA up about 10% including Dako, and up 5% excluding Dako.

Excluding the impact of the wireless manufacturing business lost, EMG would be down about 8%, reflecting the sequester and the ongoing challenging macroeconomic situation. We will continue clamping down on discretionary spend and will start seeing the first savings from the additional restructuring program in the third quarter. We expect Q3 EPS of $0.60 to $0.64.

With that, I'll turn it over to Alicia for the Q&A.

Thank you, Didier. Patrick, will you please give the instructions for the Q&A?

(Operator Instructions) Your first question comes from the line of Tony Butler with Barclays Capital. Please proceed.

Thanks very much, Bill. On the wireless manufacturing customer, again, is it a single customer? I assume it's a contract, and did the contract come to fruition only recently, a ;a after the analysts' meeting? And I guess thirdly, can you give us any additional details around -- is there any additional negotiations that could occur, or you're assuming that this is just totally lost effectively throughout the end of the year, and if you decide to do this again next year, you're not even banking on that? And I'm trying to understand what happens with other customers that know that this occurred with this single customer. Thanks very much.

Yes. First of all, needless to say, negotiations have been going on for a long period of time. Agilent's not at liberty to share specific terms of the agreement, but I can say that the terms exposed Agilent to significant penalties under certain conditions that we were not confident we could prevent without jeopardizing our ability to honor our commitments to other customers. Effectively, committing to one customer at the expense of other customers is not consistent with our policies and practices. And so it's very clear, very specific opportunity, and right now, assuming that it will not come back.

Thank you, Bill.

We'll go to the line of Mark Douglass with Longbow Research. Please proceed.

Hello. Good afternoon.

Hello.

So this is $250 million a year. Am I calculating that about right, as far as the size of this?

We, of course, don't talk specifically related to individual customers at all, but it can be assumed that our one box tester related to manufacturing, wireless manufacturing tests, will be down $230 million year-over-year. The quarterly impact in Q3 to EMG is 75% of its decline. In Q4, 72% of its decline is related to the drop of one box tester business for wireless manufacturing.

Okay. I'm kind of curious, it's hard to see how they could put you in a box. This is a pretty big order. I'm not sure there are many other people who could deliver something like that. So can you help us understand a little bit more how you lost leverage here? Was it another competitor that just swooped in and really brought it to a head?

As I said, we could not accept the significant penalties under certain conditions. Typically, these are always around guarantee of supply, if in fact there's a supply interruption. And Agilent, as I said, is not consistent with its policies or practices to commit to one customer at the expense of others.

Okay. So in the second quarter then, April quarter, how much of an impact -- you guided an impact to Q3. How much of an impact in Q2, and a little more discussion about what's happening in the industrial spaces or any signs of life here in May?

So I will answer the question regarding our one box tester business was affected EMG's year-over-year revenue impact by 31% of the decline. I'll have Guy answer your questions regarding the industrial computer and semiconductor.

Yes, this is Guy. So clearly, as you probably have seen in our report, our industrial computer and semiconductor business declined 13% in Q2. On the computer and semiconductor we declined 18%, really on a continuing weakness of the semiconductor business. Capacity is low and there's also a pause in the technology investment that we have benefited from in the past. On the other side, also as Bill said in his remarks, the computer business is in a transition between PC and tablets, and this has slowed down quite some investment test and measurement. So for now, I would say ICS segment is probably still going to be in a low for the rest of the fiscal year. And this is what we had planned for.

So right now, would you say that a lot of the PC manufacturing, they're just swapping the test instruments over to the tablet manufacturing?

Well, it's not as clear. Tablets require different type of products for test, and in fact, require less products for test. So there is a transition not only on the manufacturing side, but also between the different companies that do them.

And as you remember, we also provide a lot of test equipment for the PC board manufacturers, the Board stuffing, verification of what's called board test, which of course, is always dominated by these big consumer products.

Okay. Thank you.

The next question comes from the line of Jon Groberg with Macquarie. Please proceed.

Great. Thanks for the question. So Bill, it looks like, obviously, a tough environment. You're now finally making the decision to restructure the business a little bit more aggressively and then stepping in on the buyback, which I think are encouraging steps. But can you maybe give a little bit more detail around where the restructuring is taking place, any specific businesses or geographies?

So in regards to the restructuring, we are going to take the opportunity to look for opportunities to streamline our organization around the world. But needless to say, the biggest impact of the restructuring will be in our Electronic Measurement Group, given the drop in revenue and the likelihood of it not recurring.

Okay. And that's a worldwide, it's not focused in any particular geography more than another?

We have not made any statements at all in terms of where the restructuring is happening around the world. But based on past performance, you typically see the restructuring in the western countries.

Okay. And then, either Bill or Didier, if I think now for the last couple quarters here, obviously you maintained a phenomenal margin given the tough top line. It looks like, as I model out your guidance for the rest of the year, that you're expecting a fairly substantial decline in the operating margin, despite some of these initiatives that you highlighted. So would you mind just breaking out your revenue and op margin expectations for the different business units for the back half of the year?

Yes, I can talk about for the full year at the mid-point of the guidance, on the core basis, I would have EMG at about 11% year-over-year decline, core revenue decline year-over-year at the mid-point of the guidance for the full year; CAG at about 3% to 4% revenue increase; LSG, 3% to 4% revenue increase; DGG about 10% revenue increase for the full year. If I take LDA together, it's about 4% to 5%, and that would correspond to Agilent at minus 3%. And regarding the operating margin, we have -- at mid-point, we're getting to an operating margin of slightly over 18%. So it is not, I'm looking at -- it is, versus in Q1, we had 17.2% in Q2, 19.3%. So it's about staying at around the same level for the rest of the year, at mid-point.

Right.

And Jon, the impact will be in Q3, and then our typical recovery into Q4. And to Didier's point, the average will be actually roughly what it is in the first half.

That's what I was getting at. So it looks like Q3 it's a significant step down, Q4 it comes back up as it does historically. But maybe just as a group, given the initiatives on the gross margin side on the LDA side, just any insight in terms of what you expect for EMG margins in the second half versus the LDA margin?

Yes, we're not going to -- for the full year, EMG margin would still be north of 18% at mid-point. And then all the other ones -- CAG, north of close to 22%, and LSG, over 15%, and DGG, close to 14%.

Okay. That's helpful.

It's the same situation where Q3 in EMG for the short-term is going to be impacted, but again, very, very respectable. And then we'll have a strong recovery in Q4. And ex- the wireless manufacturing business, EMG effectively is going to be flat sequentially from Q2, as they move into a lot easier compares. So if there's any consolation to our situation, Guy and the team have easier compares moving forward.

Okay. If I could sneak one last one in, Bill. On Dako, you both know the two major competitors have talked about actually some pretty tough business on the advanced staining side, I think partly driven by the fact that the guidelines are no longer requiring negative controls there. So can you just let us know how Dako did relative to expectations? Thanks.

Sure. Lars, why don't you go ahead and talk about the organic growth rate from Dako? And again, I mention the one tough year-over-year compare, now being a US company.

Thanks, sure. It's true that during the last two quarters we've seen the overall market growth rate being slightly below 10%. I would probably say that the last two quarters have been around 6% to 7% growth rate overall. So indeed, the market has come down. And that's mainly driven from the fact that you had some changes in, call it, in the legislation or the recommendation in the US. We do think that that is going to pan out. So we probably will have to bleed through another two quarters until we are into an annualized impact of that where the market again is going to kick up. So it's true that the market has been somewhat slower in the last two quarters.

Now back to the question around Dako, how is Dako doing. Well, if you look at our performance, currency adjusted, Dako grew this quarter at 4%. If we, in all fairness, look at the recompare to prior year, if we exclude some of the sale that Dako made to embargoed countries that didn't recur or repeat this year, Dako was actually up to 6%. So fact would actually tell you that Dako is improving its performance, and the market seems to be, at least temporarily, now taking down. So if I compared the two companies that was out reporting as before us, it's probably fair to say that our quarter this time was pretty respective.

Thanks a lot.

Your next question comes from the line of Daniel Brennan with Morgan Stanley. Please proceed.

Thanks for taking the question. Bill and Didier, so maybe you can comment on the buyback, the additional $500 million, which I think should be well-received. Is this cash on-shore, or is this something that you had to do to get it onshore to access? And secondarily, what kind of led to the decision now to step up the buyback, given, I think, you've been kind of reluctant to do so, given the inability to access that cash? Thanks.

I'll take the first question. So it will be a mix of cash on our balance sheet and some debt, the funding of the incremental $500 million.

And as many of you know, we have to go back to the market this quarter to refinance $250 million tranche of coming debt. We will do that. We will take debt to pay for the restructuring, and we will bring on additional debt along with repatriation of cash during the course of the year to meet this commitment of additional $500 million of stock repurchase.

And Bill, was this anything that relates to your view of the world now, in terms of where the stock price is today and the expectation of what the outlook is? Or is it just a decision that -- because I thought in the past, you weren't willing to take on debt to buyback stock. So I'm just again wondering what was the trigger to see you guys step up and implement this more aggressive stock buyback plan?

Well, first of all, I think that the management team, with the Board's support, having bought back $9.5 billion worth of stock since 2005, as well as instituting a dividend, in fact has been very aggressive of returning cash to the shareholder. The issue is always about what the right balance is in terms of our debt load, cash generation and the macro environment. We are still quite confident, even though we're disappointed that the second half is not going to recover as strong as we expected, we're still looking for continued growth into 2014. As Didier said, our cash generation continues to be very, very robust. We have an opportunity to refinance anyway, and so to be able to easily afford without having any major impact on what the future of the Company or overall credit rating, the announcement of additional $500 million seems quite prudent.

Great. And then maybe, you touched upon it there in that answer, Bill. But at the time of the last call, you had indicated that despite the end of quarter shortfall, that you were pretty constructive about the opportunity in '13 and hence, you didn't want to cut too deeply. So just maybe as an update, how you're viewing the world today, maybe you can just give an updated view of what you're seeing from the global economy and how you're positioned for the remainder of the year.

As you know, I've been one of the more negative CEOs, in terms of growth prospects in the US and Europe. Must admit, I had a moment, particularly in the Analysts' Day, that I actually thought there was some likelihood of recovery in the second half of the year. And it's just a hard reality, it's not happening. The continued issues in the US and Europe, Japan stimulus hasn't kicked in, China is going to grow at 7.5% to 8%. We are not going to get the type of revenue growth that is going to be able to maintain our margins. I was very clear in the Analysts' Day that we know what it takes to do to be able to drive increasing margins, and given that the likelihood of our business not growing into our operating model, again, the 4% organic growth rate as a Company, we are taking the appropriate actions moving forward, and we will execute that as efficiently and quickly as we can.

Great. Thank you very much.

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

Hello. Good afternoon. Bill, in terms of the formal guidance reduction, I'm curious if there was anything that really changed in the macro environment beyond the one discrete customer loss? And then how would you characterize your ability to do more on the cost front and restructuring side if the second half doesn't pan out as expected?

So on the first question, as Didier said, in terms of the guidance, half of it is strictly currency. As you know, for example, we have a large amount of business inside of Japan. The other part of the business is tied to our Electronic Measurement that Guy talked about. Industrial is not coming back, and we have continued pressure in the Computer and Semiconductor. And particularly in some of our semiconductor cap lines, we're the only supplier. So this is nothing to do with market share or anything. It's just a tough environment moving forward. We try to balance the long-term growth prospects of the Company versus the short-term operating needs, and we'll continue to evaluate that. I believe as difficult as it is to lay off 450 people, we are highly confident that that will not have an impact on our long-term growth opportunities, have a major impact at all to our new product introduction or ability to expand in emerging markets. We, at this point in time, do not see a scenario where you're going to see a dramatic -- additional dramatic decrease of revenue, unless there was some sort of new economic crisis.

And let me just add one clarification regarding the loss of this wireless business, the wireless manufacturing business. That was already taken out from our guidance in February or in March at the analyst meeting. This is not a new element. The reason why we're talking about it now, it's on a year-over-year basis. It does explain both, especially for Q2 and Q3 and a little bit for Q4, some of the significant reported or projected reduction in revenue for EMG.

All right. Thanks. And then Didier, any update on the operating cash flow outlook for the year?

Yes, we will, versus what I had communicated, I think it's some time ago, in November in fact, where I had said that our operating cash flow would be about $1.25 billion and about $220 million in CapEx. We are now down more to $1.1 billion in operating cash flow, a little bit over that, between $1.1 billion and $1.15 billion, and still the same level of CapEx. So basically, the reduction is both the restructuring program and lower -- the reduced profits versus what we had said in November. So it's about a reduction of about $100 million, still over $1.1 billion in operating cash flow.

Great. Thank you.

Sure.

Your next question comes from the line of Patrick Newton with Stifel. Please proceed.

Yes. Thank you for taking my question. Good afternoon. I guess a multi-part question for Didier or Bill. Within this lost wireless manufacturing business and outside of the guarantee supply issue that you previously discussed, Bill, was pricing a major impact to the contract negotiation with this large customer? Was this business won by a traditional competitor or one of the newer entrants into wireless test? And was this business margin dilutive relative to the EMG average?

We're not going to go into the details of the specific deal, other than the fact that we are very, very competitive in this space. We have some of the highest gross margins in the industry as the business unit is moving forward. And we have said very, very clearly, the issue is related to terms.

Okay. And then Guy, on the communications front, are you still seeing better infrastructure trends relative to your -- obviously, the handset manufacturing, but to the R D test? And then can you comment on some of the geographic trends within infrastructure and then perhaps any thoughts you might have on timing of China Mobile investments?

Yes, on the infrastructure side, especially the base station, we have not seen major shift and changes happening yet in Q2. We won a couple of deals in China around TD LTE that could be a premise of what's happening going forward. But it's really very early, and everybody is waiting for China Mobile to do the request for proposals for the base station suppliers. So we don't know yet who is going to get this business and when. So it's very difficult to predict, frankly, as we're waiting for this for a number of quarters now.

Okay. And then Bill, I'm sorry if I missed this. You might have already commented on this. But I think within guidance, you'd previously said that from a revenue perspective you were anticipating a 10% impact to your defense business because of sequestration, and worst case of 20%. Is that still how we're looking at it? Any update there post- some details you guys picked up on March 1?

Again, I think the guidelines is fine. I'll have Guy make a comment, because the US defense business was not great, but we had outstanding performance in Europe and Japan. So Guy, why don't you give the latest update on the overall defense business?

Yes, the overall defense business, in fact, we finished flat versus last year in terms of revenue, and mostly driven by the business outside of the US. So clearly, places in Europe, like Russia, are very strong in satellite and other defense investments, and this is helping. As I said, and I think I commented at our day in Wall Street, surveillance is another business that is going very well, and we won large deals in Japan, for instance, that helped. On the other side, in the US, it is clearly as we were expecting, even a little bit lower. The DOD orders were 50%, even more than 50%, down compared to what we had last year. And I would also comment that the sequestration in the US has a border effect on the wider, smaller companies that we probably have classified more in the industrials, as everybody is waiting a little bit to understand what's happening in the defense business.

So it sounds like that down 20% year-over-year is more realistic, at this point?

Yes.

Perfect. Thank you. Good luck.

Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.

Good afternoon. Thanks for taking the question. Just want to revisit the capital allocation question. I do think the increased buyback here was a positive step, but was I hoping maybe you could give your shareholders a little more visibility on the long term value creation process in the context of this growth environment, certainly think that -- at least appreciate the operating environment's very challenging, but just would be helpful if you could talk a little bit more about how you're thinking about use of cash for the longer term.

Our position on the use of cash has not changed at all. Our first priority is to continue to look for acquisitions that helped drive our overall growth and is strategic to the Company. The bulk of the $4.5 billion of investment we have made in acquisitions since 2005 have been in the healthcare area, and as you know, in Life Science, in Chemical and Diagnostics. And in 2005, our Life Science and Chemical analysis business was $1.5 billion. And this year, we're on the verge of getting to $4 billion, and $1.5 billion of that revenue is through acquisition. So we will continue to look for opportunities to accelerate our growth in this part of our business, the LDA part of our business.

Secondly is our obligation to return excess cash to the shareholders. We have clearly demonstrated that over the last 8.5 years, both through stock repurchase, and this year, a 20% increase in dividend. And we will continue to look at ways to tax effectively, bring cash back into the US. We'll continue to be able to look at our debt capacity and insure that we make the trade-offs, not only for the short-term opportunity, but for the long-term health of the company.

That's very helpful. And maybe just on the first item you mentioned regarding M&A in Diagnostics. You obviously have a start there with Dako, but seems to me that most of the competitors you have in that space have a broader range of offerings there. And my thought is that the asset prices there tend to be pretty rich relative to your ROIC hurdle. So the question is, have you seen any abatement in the price tag for the assets you'd want to bolt on to Dako? Thanks.

Well, we haven't. Again, we're a conservative company. We feel very fortunate that we were able to acquire Dako and not have the deal jumped. It's a very competitive environment, and we have chosen not to participate in these competitive positions moving forward. I do believe that the combination of our Genomics business and our Pathology business is the right fit, and we need to continue to look for holes in our portfolio in this space that we have. And maybe Lars, maybe you could talk a little bit, now that you're managing both parts of the business for the last few quarters, your thoughts of the synergy between the Genomics business and your Pathology business and how you look at the environment for potential acquisitions.

Yes, sure, Bill. So obviously, a little rough to take a shot at potential acquisitions and targets here. But somewhat around the thinking here, two things are coming to play here. Clearly, technologies from our Genomic Solutions division is going to find its way into the clinical lab channel covered by the Dako folks. So basically, we'll see more of it validated, regulated play from the organization for the array business. We hope that we will be plugging some of the holes in our sequencing offering. We have a great, basically, haloplex offering, source select offering. We are looking at how we can complement that with, say, other tools, at this point in time. And we are deeply diving into the opportunities in that market that we see here.

And clearly, the Dako channel is going to be able to leverage what comes out of the GSD organization. And we're going to play that partially into site to labs, but obviously into the core channel that we have in the core pathology area. That's going to happen. We have a fairly, call it, exhaustive list of opportunities that we are looking into. Our path will be past at this point in time on the key areas and potential targets that we are looking at. But I would expect that in the next couple of months, maybe even the next year or so, that you'll see the organization, DGG, being fairly active in a few areas, let's put it this way, at this stage.

Got it. Thanks.

Your next question comes from the line of Amit Bhalla with Citi. Please proceed.

Thanks. Didier, can you just help me bridge the mid-point of your earnings guidance change, about an $0.08 difference between your current and your previous guidance. Can you just help break down the parts there?

Yes, let me take a shot at it. So at mid-point, there's a $200 million reduction in the top line, and that would translate to about $140 million reduction in gross margin. And then we have various cuts in discretionary expenses. We have the restructuring savings. All in all, as Bill and I mentioned, those savings offset a big chunk, most of the impact of the lower revenue. So on an operating profit basis, it's about $40 million reduction, instead of starting from $140 million to about $40 million, and that would about translate into $0.10 of EPS deterioration. And then the impact of the buyback is about $0.03. So $0.02 to $0.03. So you get to the $0.08 that you mentioned.

Okay. And then the second part, I want to make sure I heard this right. You said the $200 million in revenue reduction, none of that is due to this manufacturing customer loss? You said you already included that in the previous guidance?

Yes, absolutely. I mean, very little. There was some always hope that upside perhaps we would get something. But most of the reduction doesn't come from February to the May guidance, doesn't come from that lost business. Again, this lost business has a bigger -- is a big explanation of the year-over-year variance, but not in the change in the guidance.

Okay. I just need to sneak one more in. Can you just talk about Pharma Biotech and Academic Government performance in April and just the cadence through the quarter of those two segments? Thanks.

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

So we're seeing some continued strength in Pharma. In fact, there's been an uphill momentum across the quarter. So it was really strong. In fact, in the US it was fairly strong, with a lot of investment going into new sites for biotech R&D in the Pharma sector. Academic Government, it is very weak. And a lot of that weakness is the US sequestration and the offshore impact. As you know, there's connected grant giving between US government and other governments. So Academic Government, as we told you, was down about 5%. If you looked at the macro for LSG, that represented about 0.5 point drag on us in the quarter. So that's kind of the view.

Thanks.

Your next question comes from the line of Dan Arias with UBS. Please proceed.

Hello. Thanks for the question. Bill, obviously last quarter you were a bit frustrated by the lack of visibility that you were being afforded. Would you say that visibility has gotten worse at this point, or in light of the way that the quarter unfolded, is it pretty much the same it was in February?

Excellent question. I'm going to have Ron answer the question, because that has been one of the more frustrating areas in trying to predict where our ultimate earnings are going. And even this quarter, as you know, our earnings were well above the mid-point of our guidance, through heroic efforts of Ron and the team. So Ron, why don't you share some of your findings on causes of unpredictability and what we're trying to do to manage through it?

The biggest challenge that leads to the unpredictability is the last $20 million of $40 million worth of revenue that we're trying to ship and get through and have customers accept before the end of the quarter. So what we've seen is a continual delay, or people dragging their feet by making the final purchases and actually getting the approvals through, then we have to go ahead and ship the product, get it installed and make sure that it gets signed off. And the last week or two of the quarter is where the whole ballgame has been won or lost. And we saw this in Q3. And in Q1 it was also pretty tough. But again, it's very hard to predict. It all depends on when the customers need the orders at the end of the quarter, and that has tended to move revenue over the quarter boundary. But we're working very hard at trying to understand what the customer needs are, trying to be a little bit more conservative in what we project. And as you saw in the last quarter, we pulled all the stops out on expenses, and that caused us to be at $0.77 over the top.

Our guidance methodology has not changed. The high end of our guidance is our best view of what will happen. The lower end of the guidance is our guess forecast of what is the likely volatility, due to the issues that Ron just described.

Okay. And then maybe just to go back to Q1, you were able to recognize all of the revenues that got pushed off in that last week of the quarter?

Yes.

Okay. And then maybe on the CAG side, gross in Petrochem was a little bit better than I would have thought, just given the industrials commentary from some of your peers. Is that really a function of the new GC introductions, and what is your outlook for the market growth in those areas for the next couple of quarters?

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

Sure, Bill. I think the slight recovery you saw in the chemical and energy space is really driven by the emerging markets in Asia. I don't think it points to an overall fundamental strong recovery yet in the global market space. And although the new product that Bill referred to earlier launched in Q2, our shipping in Q2 did have an impact, but I think I really point to the geographic strength in China and other emerging economies.

Thanks very much.

Your next question comes from line of Paul Knight with CLSA. Please proceed.

Hello. This is actually Bryan Kipp on behalf of Paul. You discussed how you saw some strength in Japan on the Aerospace side. But with the bad currency translation, I just wanted to hear what you guys were thinking or what you saw in the quarter coming out of Japan, and what kind of impact it had? And then for your 2013 guidance, what's the spot rate you guys have on the FX translation for the yen?

Didier, why don't you give the overview on Japan in whole? And then Bryan, if you have any follow-up questions by product line.

Yes, Bill. So in terms of how we guide in regards to currency, there's been no change in our process, in our methodology. We take the spot rate as of the last day of the previous quarter, and we assume that will be the rate for the remainder of the year. We are hedged, as you know, overall, 100% for the first quarter and then on the declining basis over three to four quarters. We also have, in general, we are pretty well structurally hedged also, having a huge footprint in most of the regions. However, clearly in Japan, we have less cost than we have revenues in yen. And therefore, like other companies, our operating margin will be impacted by the weakening of the yen. But because of our hedge, that impact is not felt yet completely in the present quarters and will be felt over time.

And then regarding Japan, let me give you the numbers. So overall, we saw Japan down on a GAAP basis about 14%, but then when you take into account -- that is on the reported basis. But on a core basis, it's down 7%.

Okay. Thank you. And just a quick follow-up. You guys did a great job on pulling through some of these cost controls in the quarter and just wanted to get a little more color on there. I remember during the Analyst's Day, you said that there was about seven sites that continue to be in process of consolidation. Have those been consolidated for your guidance for the $50 million in incremental cost savings? Are those all in there, or are those more outer years, in 2014 and 2015? And if so, if you can, can you pull some of those forward to recognize some additional cost savings in '13?

I will have Ron answer the questions regarding the $50 million of manufacturing cost savings. Again, that was previously announced, moving forward for the status update. The $50 million that we announced today are all out of our expense structure and are in addition to the $50 million that were related to manufacturing in the sites that you referred to. So Ron, why don't you give an update again on our manufacturing consolidation?

Our manufacturing restructuring program is right on track. We have a multi-year program that we talked about at Analysts' Day that adds up to close to $200 million, and we're about 33% of the way through that, and we are on track to deliver according to the schedule that we outlined before. And as Bill mentioned, this additional $50 million is that of OpEx in addition to that program.

Thank you very much.

Your next question comes from the line of Dan Leonard with Leerink Swann. Please proceed.

Dan?

Apologies. I had my mute on. Can you hear me now?

Yes.

Great. I was hoping to get more color on the pacing of sequester's impact in your non-EMG business. So sequester hit March 1, but were there differences in behavior through the month of March as opposed to the month of April? Was there any benefit from folks having certainty, or did you see that 5% hit across Academic and Government in a pretty linear fashion across the months and the quarter?

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

Yes, the sequestration wasn't linear. People seemed to think that they were going to be able to spend in March, and so there was a little bit of noise and still some spending in March. And then I think the reality that it might be protracted discussion started hitting toward the end of March. So we saw stronger braking. Remember that we had already been seeing braking from beginning of the calendar year. But we saw stronger braking as we got towards the end of March and April. So really, that's non-linear. Going forward, it's probably at the full breaking mode, which on a global basis, you're talking about 1.5%, roughly, of the Life Science market. And we're not fully exposed, so we're going to do less than 1%. But it's drag on everybody until it's clear, or resolved in a positive way.

Okay. Thank you. And for my follow-up question, Didier, the EPS build you're looking for from Q3 to hit the mid-point of your full year guidance, the Q3 toQ4 is a bit larger than usual. So how do we think about that? Is it the timing of benefits from the share repurchase and the restructuring? Is that what gives you the extra quarterly boost, or is there something else we should be thinking about as we roll into Q4?

No, in Q4, if you do the math with taking the mid-point of our revenue guidance for Q3 and the mid-point of revenue guidance for Q4, you can see that we're expecting revenue to be up about $100 million between Q3 and Q4, and that translates, obviously, into a higher EPS. Then you do have the impact of the buybacks, the overall $0.02 to $0.03. There's more of an impact, obviously, in Q4 than Q3. And then the restructuring, the $50 million also, Q3 will see a small amount of benefits yet of savings, and we'll start seeing some significant savings in Q4, going into Q1 of next year.

Okay. Thank you.

Sure.

Your next question comes from the line of Tycho Peterson with JPMorgan. Please proceed.

Hello. Thanks. Wondering, with the restructuring actions you've discussed here, is a portfolio review on the table? I'm just thinking, are there particular product lines or areas that you would maybe want to revisit? And if not, can you talk about why commit to spending the same level of R&D for the Communications business, given how problematic it's been?

So first of all, we have a long history of evaluating product lines and businesses that fit in Agilent's long term strategy, and we've made the corresponding adjustments. At this point in time, we are very happy with our overall product portfolio, and so we have no short-term plans to divest, for example, a particular product line moving forward. If you look at our research and development spending, it has actually come down two points over the last year, from 12% of revenue to roughly coming down to 10%. If you do a weighted average of the Electronic Measurement business and our LDA business, while we have a slight highly bias on R&D on the LDA, slightly lower on Electronic Measurement, we are right at the weighted average of the market moving forward. And so Guy has taken the adjustments in EMG, accordingly. We're focusing on the opportunity, particularly focusing on module instrumentation and hand helds, as well as being a leader in the very high end, feature-rich instruments. So I feel very good in terms of the level of R&D that we're spending, and particularly excited, as I said, about the pipeline of new products that we'll be introducing in the second half of the year.

And then maybe one for Nick. I know you had a question earlier on the Biopharma markets. 8% growth really stands out relative to the peers. Can you talk about how much of that was mass spec versus LC, and are you pulling share? And also, how much of that's coming from service?

Yes. So mass spec continues to be a strong platform for us. I would say relative to share of LC in mass spec, we're holding our own. I wouldn't say we're outrunning the competition. You'll see all of the numbers from everybody on that. What we really saw there was a good -- in fact, a better term -- an easy compare in some of the geographies. So India is coming back a bit. It was kind of flat. It's been pretty negative. China looked pretty strong. And I said the Americas. So it was as much a compare on the Pharma and momentum, as any specific product. And the Pharma guys continue to go with the technology upgrade, so there's legs in that.

Okay. And last one on Environmental Forensics, I know they were soft. I don't know if Mike has any comments on the outlook for that market. Was the weakness more biased toward Europe? We've heard that from some of the competitors.

Yes. Thanks for the opportunity to share some insights here. So it's both Europe and the US, and the story here is continued weak government funding to both the federal and state level. So if there is one silver lining, that does continue to be the emerging markets, specifically China. And you may have recently seen the announcement coming from new leadership about the Chinese dream and how they are going to be the guiding principles to improve the standard of living in China. And that will play very well into the environmental market. But right now, the overall numbers are down, given weakness in both US and Europe.

Okay. Thank you.

Your next question comes from the line of Richard Eastman with R. W. Baird. Please proceed.

Yes, just a couple questions, either for Bill or Guy. I wanted to just ask, with this lost manufacturing test customer, has there been any change in the test protocol that makes your approach somewhat redundant and expensive relative to a different test protocol, for instance, just physical layer test versus signal test? So when you get back to the market next year, do you come back with a different solution?

I'll have Guy answer the question regarding our overall solution and the evolution of what is a consumer-based product and where testing is going. And again, I'm very excited about the direction we're going. I want to make this explicitly clear, we did not come to terms -- we did not come to an agreement on contract, based on terms. Nothing to do, other than that. Guy?

Yes, I would just highlight also that it's definitely not a product issue. Our product are very adequate for this marketplace and have been used in many customers across the world. So the transformation that you're referring to, Richard, is really something that, in fact, we have led what we call non-core processing test. In the past, people, for cell phones, would have to test the phone in operation, that the phone would have to connect to a base station to be fully tested. Now this is no longer true for most of the phone test strategies, and we've been a leader in helping progressing towards this. And we will keep doing this with the current generation and the future generation of our products.

And can I also ask, when I look at EMG orders and the decline year-over-year, could you just speak to the decline geographically and just approximate decline in the three regions in orders?

Well, if I normalize for this deal that we spoke about, that is obviously in terms of revenue mostly impacting our business in China, because that's where the largest bases are. I would say the rest of the decline is pretty even across all geographies.

So the order on the large customer, that order was a China order in the past?

Let me just take that question. In the way we report our regional orders and revenue, it would have shown as the Americas. It is just when sometimes we talk about on a ship-to basis, that our instrument ended up in China. But on the way we report orders and revenue, it would have shown in the Americas.

It would have been. Okay. That's great. And then just last thought. I just had, in terms of the second quarter, was there -- I'm just referencing back to an answer that was given on sales for EMG. Were there any order cancellations at the end of the second quarter? Because given the first quarter order level in EMG and some of the first quarter pushed business into the second, I'm curious that your sales number wasn't a little bit higher on the conversion from the first quarter orders, unless there was some cancellations?

No, we did not have any major or out of the range cancellations.

Okay. All right. Thank you for taking the questions.

Your next question comes from the line of Ross Muken with ISI.

Hello, guys. I thought maybe I'd start first on the P&L. Can you talk about the margin progression Q to Q? In terms of the Q3 guidance, I'm just trying to look at what the implied decrementals are. It looks to be more significant, obviously, than I would have assumed, just given the revenue outcome. So maybe talk through the components sequentially of what drives it. Is it the type of lost business? Is it FX? Is it the delay on some of the cost flow throughs where you're getting the savings? I'm just trying to understand the Q2 to Q3 margin progression.

Sure. So I'll take that one. So Q2 to Q3, at mid-point of our guidance, Q3 shows about $100 million reduction in revenue sequentially. So again, $100 million in itself, that's kind of $0.14, rule of thumb, reduction in EPS. And what we are showing is EPS going down from $0.77 to $0.62. So on average, at the mid-point of the guidance. So I think that should answer your question. I'm not going to go into the specifics of OpEx and gross margins, but we are, obviously because of the loss of $100 million revenue, operating gross margin will be down slightly, and then we expect OpEx to be about flattish. But you know, normally you would expect Q3 OpEx to be much higher than Q2, because of the fact that, just the normal seasonality and that's not happening.

And maybe just to follow-up, Bill, on Tycho's question, in terms of the portfolio. Some businesses that the last two quarters have performed exceptionally well, most of the assets are doing what you would expect in this environment for the type of company you are. But there's bits and pieces, whether it's handset, where it seems like you foregoed some business and that's going to be down substantial. You've got the semi piece, et cetera, that are a bit more volatile than the rest. As you're thinking about the profile of this business continuing to have these hyper cyclical pieces, do you feel like that's something that's going to be a drag on your valuation? Do you think that that's something that sort of makes sense, given all the other pieces? I'm just trying to get a sense for, when you have the internal debate, what are the puts and takes of whether something belongs or doesn't belong?

Well, first of all, fundamentally, is the business a good business and one that over a business cycle returns at or above Agilent's operating model? And the situation, I'll use the semiconductor capital business that we kept, we essentially have 100% market share, and as a result of that has just outstanding returns through the course of the cycle. And so in times like this, when parts of our Electronic Measurement are going through a tough patch, it's easy to say, let's jettison this for a short-term gain. And from our viewpoint, it just doesn't make sense.

The operating model inside of EMG has been dramatically changed over time. If you had asked me 8 years ago, 10 years ago that, given the headwinds that they've reached, that they would have a 20% operating quarter, I would say there's no way. We have a great franchise and with some volatility in the downside. And the flip side, when this turns around and semiconductor capital equipment and our small part expands, when you get more growth in the computer side of the house, some of the industrial growth returns, we're going to have a completely different story. In fact, if anything, we're going to drive higher on the upside in our Electronic Measurement than we've done in the past, given the decisions that we have made. So we have a great franchise in these, and we'll just weather the storm.

Yes, I understand from the business concept perspective. I guess I'm trying to understand in the context of what the investment community reflects relative to that volatility. I'm just trying to get a sense, when you benchmark internally versus peers, are you looking at a distinct group for the whole asset when you're trying to compare your performance, whether it's on earnings growth, core growth, return on invested capital, cash flow generation, et cetera, and how you do versus for cash versus your peers, are you comping against a very distinct set of similar companies where you feel like they have the same asset mix, or are you mixing and matching when you're trying to figure out overall, this is why our stock is getting reflected in this way while other peers are having a different view in terms of valuation?

Well, the valuation of Agilent, the sum of the parts, is a very straightforward process. Almost everybody who has an MBA know how to do the calculation. We, often time, use third parties to validate our own assumptions moving forward. Our pay system is tied to total shareholder return. As you know, since 2005, we have consistently beat all three indexes that we compete in, Industrial, IT, and Healthcare. Clearly our situation has changed since we have been reclassified into the Healthcare sector. The analysts that cover us and the analysts inside of the big funds clearly have changed moving forward. We also, of course, do that evaluation in terms of what our peers are within the Healthcare.

As it stands today, based on our evaluation, Agilent --and again, which has been confirmed from outside help, is that we're trading roughly at a 12% discount. If you look at the effort in the short-term to be able to divest to go through the overhead absorption related to that and the distraction for a very short-term outlook, we think just doesn't make sense at all, that historically these assets perform well. We will, in fact, win other handset manufacturing test business. Electronic Measurement is a great franchise for the Company moving forward, and to be able to be distracted on, I think quite honestly, simplistic short-term views are, I think, just aren't accurate.

If in fact that we were trading at a substantial discount to our peer group, or to now the part of the S&P 500 that we're in, yes, that's a different issue. And again, we have a long history of addressing that. We made the decision in 2005 to divest semiconductor-related businesses and semiconductor component business because it wasn't tied to our strategy of being a leader in measurement science. So we continue to be very pleased with our portfolio of products. And that engineering excellence, the foundation of the Company, Electronic Measurement, our financial strength has created just an incredibly competitive franchise in our Life Science, Diagnostics and Applied Chemical market. And I think we are very positioned to weather this slowdown and be incredibly competitive as the economy upticks in 2014.

And I guess lastly, I'll ask one more simple one. So on the size of the buyback, how did you get to the conclusion that that was the right level of debt assumption and the right level of equity purchase, and it's now finally you've got it up to $1 billion all-in for the year, so it's more competitive with peers in the S&P. How did you go through the process of thinking about balance sheet optimization and utilizing what is to you, you just said, you have a depressed level of equity versus your intrinsic value calc, capitalizing on that given your confidence in the long-term trajectory of the businesses that you are obviously managing?

So we have a very detailed process that we go with the Board of Directors every year in September, where we make a forecast of our three-year growth outlook, why we believe we can outpace the market over that period of time, what our P&L looks like and our corresponding balance sheet. Given the operating model that Agilent has developed over the years, we know we will generate substantial amount of cash. As I said with the previous question, our number one focus is to invest in the businesses moving forward. The second one is to return cash back to our shareholders, tax effectively as we can.

So this is an ongoing process that we review with the Board officially in September, with updates as we move forward balancing what is the short-term outlook for uses of cash for investment in the business, where is the available cash, what is the prudent amount of debt level, insuring that we remain a high caliber credit-worthy company. And based on those ongoing analyses, we make the corresponding recommendations to the Board on returning additional cash to the shareholder, either through a dividend or stock repurchase.

Thanks, guys.

Your next question comes from the line of Doug Schenkel with Cowen and Company.

Hello. Thanks, guys. This is Shaun Rodriguez on for Doug. Just a couple of follow-ups for me. So you noted food markets as a key driver for the Chemical Analysis Group. I was just wondering if you could talk a bit more about this. You talked about China being a driver more broadly here, but specific to the food market drivers were there any specific initiatives or guideline changes or anything like that that were behind it? And also, your views on the sustainability of this impact over the balance of the year?

Mike, why don't you take that?

Sure. I think what you saw in the recently completed second quarter is what you're going to continue to see in the coming quarters of what you've seen from the past several quarters, a strong overall global growth environment being driven by the globalization of food supply, increasing demands by the world's population to have safe food to eat, and then high quality food to eat. And what we're seeing now is real investment lining up behind that. So I pointed to China in my earlier comments, and as we talked in our previous call, we said, you know, the market looks like it was in somewhat of a pause, because there's a leadership transition underway, we need to get the ministries to be organized. And that's happening, and now we're starting to see -- or that has happened, and starting to see flows of investments funding coming into the food market. But I really do think this is a global play being driven out of the emerging markets, but not only constrained to those marketplaces.

Then, you've got a great growth environment on the one end, on a global basis, and then you have to have the right products and solutions coming into that space. And as Bill mentioned earlier, we've had a number of very exciting new offerings coming into the space, whether it be spectrometry products or mass spec, and they are all hitting the mark and that's really driving the overall market growth that you're seeing from Agilent in a very healthy, what continues to be a very healthy food market.

Okay. Great. Thanks. And then on Dako, can you provide an update on where you are with the sales force expansion in Asia, when you'll be fully ramped there and what kind of trends you're seeing in response? And also in Dako, an update on the pharma partnerships you've discussed the last couple of quarters? And here, really what I'm asking about is, are there any specific development or commercial milestones and associated timeliness that we should be thinking about? Thank you.

Lars, why don't you take those two questions, please?

Sure, Bill. Well, with regards to the sales force expansion in APAC, I'm happy to report that we are pretty much ahead of schedule there and we have completed the hirings as per planned for the full year. So the majority of the hirings are going into China. We are probably adding another 25 to 30 customer-facing resources. The amount will be going in training, and we believe they'll be starting to deliver and become operational for, the third quarter. If I look at our development in China right now, Dako year-to-date is growing at around 60%. The base is low, but we are actually placing a great number of instruments, which is substantially up compared to prior year. So I think we are making very robust progress. And APAC as a region is obviously the fastest growing region for Dako, at this point in time. We continue to drive our business with direct customer access. We have recently completed an acquisition of a local distributer in Korea, and we will be looking at other opportunities to get closer to the customer and also to capture the value stream of such a transaction going forward. So Asia, we continue to be in there where we continue to invest in more footprint in front of the customer.

In terms of the Pharm DX, or companion diagnostics, as we call it right now, I'm pleased to say that we got a major customer contract where we agreed with Pfizer on a long-term developmental agreement that obviously also comprises some type of advisory services, from a regulatory point of view and also marketing point of view. And this is subject to support one of their new developments in the pipeline which is not disclosed by name at this point in time. We also got two important news. We got two our drugs, so basically, our Hercept test and the HER2FISH is the only companion diagnostic today approved to support the use of cadzill, or cadzulla, from Genentech. So we are in a privileged position, and we see now an uptake of our business in that regard. In terms of other milestones here, it would be fair to say that we will continue to balance more partnerships with tier 1 pharma companies in this particular field. And from fiscal year '14 and onward, we do expect to see a steady stream of new companion diagnostic tests that will be marketed through the Dako sales organization.

Thank you.

Your next question comes from the line of Tim Evans with Wells Fargo Securities. Please proceed.

Hello. Thanks. Didier, I just have one quick question. Can you give us a sense for how we should think about your incremental and decremental margins in an environment where the growth rate is essentially below the bottom end of your business model?

Yes, we covered that a little bit at the analyst meeting. I mean clearly, in order to get the stake at the operating model in the very low growth environment, we had to implement If we were not able to do that, you would normally expect a significant decremental when the revenue growth has slowed down to such an extent.

Okay. Got it. Thank you.

Thank you.

There are no remaining audio questions at this time. I'd now like to turn the call back over to Ms. Alicia Rodriguez for closing comments.

Thank you, Patrick. Just wanted to say good day to everybody and thank you for joining us on the call. If you have any questions, please let Elaine or myself know. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.