安捷倫 (A) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Agilent Technologies Q3 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Thank you, Abigail, and welcome, everyone to Agilent's third-quarter conference call for FY15. With me are Mike McMullen, Agilent's President and CEO, and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group, and Mark Doak, President of the Agilent CrossLab Group.

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 under the financial information tab. You'll find an investor presentation, along with revenue breakouts and currency impact, business segment results and historical financials for Agilent's operations. We will also post a copy of the prepared remarks, following this call.

Today's comments by Mike and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year.

Please note that we will refer to core order and revenue growth percentages. Core orders and revenue exclude the impact of currency, the NMR business and acquisitions and divestitures within the past 12 months. Reconciliations between reported and core growth in dollars and percentages can be found in the financial results section on the IR website.

We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties, and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors.

And now I'd like to turn the call over to Mike.

Thanks, Alicia, and hello, everyone. Thank you for joining us on today's call.

I will start with a summary of our Q3 performance, then I'll move to the updated outlook on operating margin expansion and capital deployment plans. Finally, I will close with our full-year guidance.

I am very pleased to report our Q3 results, with the Agilent team delivering revenue at the high end of our guidance and earnings above our guidance range. Agilent's Q3 revenue of $1.01 billion grew 1% over a year ago, up 9% on a core basis. Orders of $953 million, while down 6% compared to a year ago, were up 3% on a core basis.

Our strong revenue growth was driven by a continued strength in the pharma, diagnostics, environmental, and forensics market, and across all geographies. We saw strong customer acceptance of our new instrument product introductions, and strength in our CrossLab services and consumables, diagnostics and genomics offerings. We also resolved previous startup issues in our American logistics center, which delayed $15 million of shipments last quarter.

A few additional comments on the order front. Our 3% core growth was against a tough compare of 9% growth in Q3 2014. We also experienced some US and state government big deal delays into Q4, and customers in industrial markets continued to take a cautious stance in light of weak commodity prices and uncertainties in the world economies.

Adjusted operating margin, including the adjustment for Keysight billings, was 19.9%, expanding 110 basis points over a year ago. Earnings per share were $0.44. This marks another quarter of significant year-over-year margin improvements, driven by our intense focus on growing our operating margin, as we seek to achieve 22% margins by FY17.

Moving on to the results by business group, the Life Science and Applied Markets group, or LSAG, as a reminder, brings together Agilent's analytical laboratory instruments and informatics. Core revenue growth of 9% was driven by strong performance in pharma, environmental and forensics market. Core orders were down 1% LSAG operating margin for the quarter was 18.7%, up 220 basis points from a year ago. The previously announced exit of the NMR hardware business continued to proceed as planned.

We expect our LSAG sales funnels to continue to strengthen, given a number of recent significant new product introductions. At June's HPLC 2015 conference in Geneva, we further enhanced our new Infinity II LC line, with a new 1290 Infinity II Vial-Sampler. This product significantly lowers the entry price to the top line product range, offering analytical laboratories a cost-effective way to experience the advantage of ultra high pressure liquid chromatography.

We released a 6470 LC/MS Triple-Quad at ASMS in June. This newly-engineered core platform provides attogram-level sensitivity and accurate quantitation, with up to six orders of linear dynamic range. The new product delivers significant improvements to the best-selling core LC/MS triple quad, the 6460. It also offers improved performance, precision speed and robustness, and features a small footprint, to preserve bench space in the lab. And in spectroscopy, the 7800 Quadrupole ICP-MS, which we launched in Q2, is the latest addition to Agilent's industry-leading ICP-MS portfolio. This new product raises the standard for routine elemental analysis.

Next, the Agilent CrossLab group, or ACG, combines our analytical laboratory services and consumables businesses under a new Agilent brand. Core revenues were up 8%, while core orders grew 6% in the quarter. Operating margin was 22.6%.

Last quarter, we launched the Agilent CrossLab Brand Promise Program. This program's focused on delivering a new and integrated approach, that offers actual insights to help customers. New services solutions include laboratory business intelligence reporting, RFID inventory management services, and laboratory asset utilization services. And in consumables, we expanded our AdvanceBio portfolio of solutions, which enables scientists to speed research and lower costs.

Finally, turning to the Diagnostics and Genomics group, DGG is comprised of three divisions. The former Dako business, genomics, and nucleic acid solutions. DGG's results are driven by excellent performance across all three divisions. Pathology and companion diagnostics, genomics, and nucleic acid businesses.

DGG's core revenue grew 10% versus a year ago, orders grew 8% on a core basis, operating margin of 16.8% was up 330 basis points over Q3 of FY14. In the third quarter, DGG completed its acquisition of Cartagenia, a leading provider of software for clinical genetics and molecular pathology labs.

We launched updated Gene Expression Microarray tools for researchers to better investigate expression patterns on a highly accessible platform. Adding to products for next-gen sequencing, we released new Target-Enrichment Solutions for disease research, which will address current limitations in exome sequencing.

Now, let's take a brief look at Agilent's revenue by end market performance on a core basis. Life Sciences and Diagnostics markets continue to see strength in pharma, a recovery of strong demand in the diagnostics and clinical market, and moderate growth in academia and government. Applied end market performance was led by continued spending in environmental and forensics, and moderate growth in food.

Chemical and energy was flat due to reduced investments in oil exploration. We also saw cautious spending in downstream refining and chemical segments, driven by the macroeconomic uncertainty concerns.

Geographically we saw healthy core revenue growth across all regions, particularly in the Americas, Europe, and Asia Pacific, with strong growth in China. Major pharma spending was brisk, with large firms upgrading to the new Infinity LC platform.

Turning from the report out of Agilent's revenue and order results, let me update you on our operating margin improvement initiatives, and Q3 capital deployment actions and outlook. Thanks to those of you on the call who joined us at our May analyst and investor meeting. As a reminder, I highlighted three focus areas where we are working as a team to drive shareholder value: Deliver above market revenue growth, expand operating margins to historic highs, and return 85% of free cash flow to shareholders.

I just discussed our revenue growth; now here's an update on our operating margin and capital deployment. Our multi-year Agile Agilent program is reengineering the Company to be more efficient, nimble and externally focused. As of the third fiscal quarter we have delivered $35 million of expected gross savings of $50 million in 2015 from our combined actions. We are committed to achieving a 22% operating margin by FY17, a 3-point improvement over FY14, while continuing to invest for long-term revenue growth. With the margin improvement results over the past two quarters, we are very confident in our ability to deliver on our margin expansion goals.

Now turning to capital deployment, as previously guided, we are on track to return $500 million this year to shareholders in the form of dividends and buybacks. In Q3, we repurchased $99 million of stock, bringing our year-to-date repurchases to $267 million. With respect to guidance, we are reaffirming our previous FY15 EPS guidance of $1.68 to $1.72, as the operating model of the new Agilent continues to drive profitable growth and margin expansion.

Thank you for being on the call today. I will now turn it over to Didier, who will provide additional details on our guidance and financial results. Didier?

Thank you, Mike, and hello, everyone.

To recap the quarter, our core order and revenue growth, excluding the impact of currency, NMR, and acquisitions and divestitures, were respectively 3% and 9%. This quarter, currencies subtracted 6.9 percentage points from our year-over-year revenue growth. And as Mike stated, startup issues with the transfer of US distribution center were resolved in Q3, which resulted in about $15 million of additional revenue.

Finally, adjusted operating margin was 19.9%, 160 basis points higher than our guidance, and 110 basis points higher than last year, on just 0.5% higher nominal revenues. Excluding the $40 million annual cost dissynergies resulting from the Agilent/Keysight split, operating margin grew 210 basis points.

I'll now turn to the guidance for our fourth-quarter. We expect Q4 revenues of $1.03 billion to $1.05 billion, and EPS of $0.45 to $0.49. At midpoint, revenue will grow 6.7% on a core basis. And our 20.3% adjusted operating margin at midpoint will be up 40 basis points sequentially. We expect to continue our disciplined buyback program, with planned purchases of $98 million in Q4.

Now to the guidance of FY15. The Q4 guidance results in the following fiscal year guidance: At midpoint, revenue will grow 6.6% on a core basis, again excluding the impact of currency, NMR, and acquisitions and divestitures. FY15 revenue guidance is $37 million lower than previous guidance, of which $15 million is due to currency.

Our EPS guidance of $1.70 at midpoint is unchanged from previous guidance, due to additional Agile Agilent savings, that compensated for slightly lower revenues. Adjusted operating margin for the year is expected to be 19.2%, or 40 basis points higher than last year. Excluding the impact of the $40 million cost dissynergies related to the Agilent/Keysight split, our operating margin will be 140 basis points over previous year on flat reported revenue growth.

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

Thank you, Didier. Abigail, would you please give the instructions for the Q&A?

(Operator Instructions)

Dan Leonard, Leerink.

I was hoping you could elaborate a bit on your book-to-bill. I think I'm calculating 0.94, which is the lowest in years. So I wonder if there's any additional color to be offered there?

I'm looking at Didier in the conference room, here. I think that number is correct. And we had a very strong Q3 revenue. And as we look ahead to the fourth quarter, we have a lot of confidence in our ability to have our growth rate pick up, as we have -- are expecting a number of areas of strength in the marketplace, such as pharma, the diagnostics, the environmental forensics space that I talked about earlier, continue to be quite strong, and we've had a lot of product introductions. Our sales funnels are building, and we've seen really strong win-loss ratios off that new business. And sometimes our orders can be a little bit lumpy, so we do see some big deals moving between quarters, which we saw here in the third quarter on the state and federal level in the United States. And I'd also point out that we have a had a tough compare when you look at the results for the third quarter.

Got it. Nothing you'd specifically spike out as an area of concern, then?

No. Absolutely not. I think we have a lot of reasons to be positive about the outlook. And the only thing I did not mention, Dan, was that we got off to a slow start in the third quarter in income and orders, after finishing so strong in Q2. But throughout the quarter we saw an acceleration of incoming orders throughout the quarter, and finished the quarter strong.

Got it. Thanks, Mike.

Brandon Couillard, Jefferies.

Mike, would be interested in getting some more granularity on just how China performed in the period. How the book-to-bill ended there, and what you perceive the implications of the currency revaluation are to your profitability there, and remind us whether you price in local currency or in USD?

Sure, Brandon. Great question. I figured we would probably spend some time today talking about China, given some of the recent news. But in terms of our performance in China in the third quarter, we had very strong revenue growth. Low double digits, and we're tracking through the first three quarters right on the plans we had talked about with all of you at the analyst meeting, the high single-digit level of growth in China.

In terms of the areas of strength, we're continuing to see strength in pharma, life science, research and diagnostics, food, environmental. And the business really continues to develop as we had expected. Albeit some of the recent changes, which, in terms of how that affects our profitability in China, it's really neutral. We are naturally hedged in China in terms of both the amount of revenues that we bring in, in China. Even though it is our second largest country in terms of revenue, we also have a very large footprint in there, including local manufacturing, so we are naturally hedged in China.

And in terms of your question around the mix of RMB versus dollars, about 20% of our business is RMB, and about 80% is in dollars. And in terms of the overall business, maybe one final comment here on China, we can dig into other areas of China if you like, but when we look at the devaluation, we're not really expecting it to have that significant of an impact on the business in China itself. And then depends also how you view if it will actually be successful and drive some more growth there. I think the bigger question is what could it mean to the economies and currency in some of the emerging markets? Hopefully that answers your question. If not, come back with another one.

That's helpful. One question on the chemical and energy markets. Could you give us any color around what the order trends are like there, and whether you're seeing any signs of stability in the energy-related end market, if at all?

Great question. So we have seen stability, although it's not what we hope to see coming into this year. So we're now three quarters in a row of basically flat business in chemical and energy. I think it's no surprise that the exploration side of that business is down fairly significantly, and we had anticipated that. And just a reminder that the exploration side of our business accounts for about 15% of this total segment.

We are seeing growth in the downstream chemical and refining process, but not to the degree that we had hoped to see earlier this year. So basically it's grown enough to offset downward pressure on the exploration side. Again, that segment of the market is very profitable, but they seem to be still cautious on their spending. As you may recall from the analyst meeting, we talked to you about our view of that this was a 2% to 4% market growth segment, and we still see it that way. But we're just being cautious in our Q4 outlook in this segment right now. We do think it's stabilized. We've got three quarters in a row of basically flat business in this segment for us.

Super. Thank you.

Doug Schenkel, Cowen.

I guess I want to go back to Dan's question. It was a pretty solid quarter, but again, that book-to-bill of 0.94 was arguably notably light, and the revenue number, while solid, it wasn't a Herculean beat. So it is helpful to hear the commentary on momentum building over the course of the quarter. That said, even recognizing the commentary and the slight reduction to guidance, the Q4 bar is still pretty high.

You did lower guidance, albeit by only about $20 million, excluding FX. You could have chosen to cut more. Is it fair to say that if you saw any change in ordering patterns in the early part of this quarter, in particular those attributable now, basically those customers that are more exposed to macroeconomic concerns, that you probably would have cut guidance more?

Doug, thanks for the question. If I may humbly disagree, in terms of the comments on revenue, actually we're quite pleased with being able to put up those types of revenue numbers. But I think you're on the right path and question here, which is, the 3% constant currency order growth. What kind of confidence do we have going forward? Clearly, if we had seen some of those patterns, we're having that call here today, it would be reflected in our guidance.

And we have reason to be positive about the outlook. If you look at the business by our three groups, our ACG and DGG business have momentum. It's a recurring revenue business. That business is tracking very nicely. We talked to you about, and I'm actually going to ask Patrick to jump in, and provide his perspective as well.

I think the obvious question is, what's the outlook for LSAG? I think we're one of the two companies out in the space that reports orders, so I think sometimes they get caught up in these stories of lumpiness between quarters. But when we look at our business, we expect pharma, biopharma, diagnostics, and clinical diagnostics, the environmental space to remain strong. China is on a steady trajectory. No expected hiccups there. And we just had a number of new product introductions and we're coming off a tough year, yearly compare, and a really strong Q2. So Patrick, I don't know if you have anything else you'd like to add to my comments.

Sure, Mike. Thanks. Of course I can only restate what you said here. We had, in terms of the order pattern for LSAG, we had a slower start based on a very, very strong Q2. We had an also tough compare against last year, where several of our big platforms have been 20%-plus growth. Having said that, the pattern over Q3 was definitely accelerating through -- positively accelerating through Q3, and as you stated, the outlook for Q4 was positive this year. Strong positive momentum in pharma, where we have seen strong double-digit growth, and we have no belief that momentum will slow down. Over the next couple of quarters. So given the confidence in our new platforms, which have been very well-received, LC, LC-MS and also latest introduction on the ICP-MS front, we are confident that we can deliver on the plan for Q4.

Okay. Thanks, Mike and Patrick. That's all real helpful. And one quick follow-up, I apologize if I missed this, but the $30 million in revenue delayed from Q2 into Q3, or at least that you talked about on the Q2 call, did that fully come through this quarter, or will some of that potentially come through in Q4?

Didier has been quiet today, so I think I'll pass the call to him.

Okay.

Back in Q2, we talked about $30 million as being two parts. One part is the $15 million that was a clear miss from the change in the logistics center, and we recovered that fully into Q3. The second part is more of the new normal. What it means is that we have orders coming in later in the quarter, and shipment terms being slightly extended, versus what we are used to. And this is really the new normal. So there was no recovery of that second $15 million. And we don't expect it, either. We expect the new normal to be with us for quite some time.

Okay. Thanks.

Tycho Peterson, JPMorgan.

I understand the forward-looking commentary here but in thinking about the quarter on LSAG. Can you actually talk about what drove the 1% decline in core order growth? Where were you most surprised relative to your own expectations?

Tycho, this is Mike. I'm going to make a few comments, and then Patrick, I think the question was the 1% order growth, where were the areas that we might have been a bit surprised on? What I'll do is I'll lead off saying actually the order results for the quarter matched our own internal forecasts, so we really weren't surprised. Business developed as we had anticipated, and I think maybe emphasizing a few comments would be, we saw some deal push outs on the US and state government side, saw some continued flat levels of growth in the chemical and energy space, but a few other comments you'd like to add there, Patrick?

Sure, Mike. The biggest surprise certainly for us was in the US, as you said. We have seen the impact from both on the oil and chemistry side, and a couple of delayed orders. On the positive side, Europe held up very nicely, as well as China was strong in growth. So in terms of platforms, that platforms that have been affected most by the large delays were, for example, LC-MS, which had a very tough compare, compared to last year, where we had, as I said, plus 20% growth.

I think we were 20% in that aspect last year.

And then on DGG, 8% core growth is at the high end of what you've talked about for market growth. Can you talk about the sustainability of trends, and whether there's a little bit of a catch-up effect here now around the Omnis?

You're right. If you look into first of all have seen a very nice quarter here with great growth, and now we see orders coming in at 8%. I do believe that we are on a good traction right now. We're continuing to see great performance from the DGG. But you're also right, that it is a little bit above what I guided in analyst day. And clearly, we are also moving through a few quarters here, where we last year had some back order issues in the pathology business there. Somewhat an easy compare, but underlying the momentum is definitely here.

Patrick had some tough compares, you have some easy compares coming.

Right.

Okay. Thank you.

Paul Knight, Janney Montgomery.

On the DGG group, are the CMS guidelines that were released late in the year, what you're implying is that -- are those new code new guidelines helping the DGG business, and is it more momentum from that occurring right now within that group?

DGG, what is can you clarify CMS for me, at least?

Sorry. On the Center for Medicare and Medicaid Services they put out the new rules in October last year.

Got it. Got it. Got it. Why don't you go ahead with that, Jacob?

Thanks for that question. Actually those rules are not really covering the -- our particular business the pathology business, and that sits outside the pathology business, so we didn't see any change to that. And overall, the pathology market continues to be healthy. So we have not been impacted by those changing guidelines. And I don't expect that we will see any changes in our performance due to those guidelines going forward, either.

Do you think you're taking share in pathology?

Yes. We are -- we definitely continue to see that the -- Omnis Momentum installation is improving. As I've also mentioned earlier, that is a sales cycle that are more than a few months, or maybe even a few quarters. So we're still building momentum but we continue seeing an improvement in taking back market share, and win competitive accounts, so I'm pretty optimistic about the future also in pathology business.

And then lastly, Mike on the NMR closure, are you now in the peak of cost savings there or is it part of the reason you're seeing improving margins going forward?

We're at about our run rate of cost savings, as we said additionally. We were shooting for $15 million per year. Now it's $20 million, and we are getting to pretty much our run rate there. The one thing I will signal is that next year, we still will have about $11 million of revenue that will show on the RPD front, and for the first three quarters, as we make the last installations and recognize revenue, so that will be about $50 million reduction from this year. But we will continue showing our orders and revenue on a core basis, excluding NMR, so that we are comparing apples to apples.

Thank you.

Isaac Ro, Goldman Sachs.

Want to circle back to an earlier topic in the Q&A, specifically regarding the impact of new products this year in the business. Could maybe you offer like a full-year expectation for contribution from new products to top line growth?

How about if I pass it over to Patrick and talk about some of the new offerings in the instruments side, and then Jacob and Mark, you comment on your groups, and I'll close with an answer to your question, Isaac?

Definitely, last few years, this is Patrick speaking. So when you look at our new product offering this year and there is a series of new products we launched, let me start with the LC business, with actually our end of last year startup of the Infinity II LC launch, and we added this year at the HPLC meeting, another set of products to it. That is driving definitely a lot of market share gains for us. So for this year, in Q3 we had both in orders and revenues, we had double-digit growth on this platform, driven by strong acceptance in many markets, mainly in the pharmaceutical markets, where we see larger enterprises as well as more companies making repeat buys and buying new instruments, because this platform has such a strong offering. Then on LC-MS we just launched the new 6470, the Triple-Quad system which will over time replace our very solid performing 6460 core platform. Again very strong interest after ASMS introduction. And there's more to come during the year. So the contribution for the product, we don't disclose the actual percentage, but it drives a lot of new business for us, and a lot of attention in the market.

Want to comment on some of the spectroscopy?

I'll just give you an example from spectroscopy, thanks Mike. So we launched the ICP-MS solution, the 7800. And on the OES side, as we introduced a year ago or 1.5 years ago, the 5100 ICP-OES system. That's just an example of how we captured about 7 points in market share over 15 months, based on this highly differentiated platform. So it's really one of the means for us to capture market share and drive growth and that makes a significant contribution.

Mark, I made a few comments in the call script about some of the recent offerings, but maybe just a few highlights for Isaac on the ACG side?

Thanks, Mike. Isaac, on the ACG side, as Mike alluded to in his earlier comments, obviously, it's a key driver of our ongoing growth too. So specifically for this quarter, on the enterprise trio of services that are largely around our asset management area, and also including the AdvanceBio area. So it's hard to put an exact percentage on it, but obviously we're putting a lot of efforts behind growing what we see the differentiated side of our portfolio in consumables and services, and putting the R&D and marketing budgets behind that. I'd also add, based on Patrick's comments, when you introduce a new platform, it's also a great opportunity to introduce new services and consumables around that. And to that end, we obviously have a chance to augment introductions, whether it's consulting services or consumables that put the whole platform. So when you tie it all together, there's nice synergies between what goes on from the LSAG side, the DGG side, and obviously our ACG team.

And then maybe bringing it home, Jacob?

All right. Thanks, Isaac, for asking the question. As you can hear, we can definitely talk a long time about all the new exciting products. But I would just remind you that we have a few different dynamics going on in my business. First of all with the pathology and diagnostic businesses and partnership this is not about bringing out new product every day, but you want to install your new instrument into the account, and then get the contract, and then run the rate. And the new products we actually bring out there is new assay that goes on top of that.

So you of course have a different life cycle of the products that we have in the clinical market, compared to maybe in the genomics research market, where we have come up with some exciting products. Also the HaloPlex HS, which actually address very low allele, or very low concentration of sequencing information, the OneSeq and make some improvement also in Gene Expression Arrays. Those have shorter lifetime, and we see a higher percentage of our sales from this year and next year from those products.

And Isaac, maybe to put a bow on this discussion, but we've talked a lot about the portfolio, but I would be remiss not to remind you of the channel change we made this year, so we're also -- we simplified our sales structure, and it's going to allow us to invest and build out coverage. So I think you're going to see our growth being fueled, going forward not only on the strength of a new portfolio, but also the expanded channel reach and specialization we've been investing in. And just as a note, through the first three quarters, I think our core revenue is a little over 6%, and we're on track for our strongest revenue growth in several years. I think probably a point greater than any other growth rates we've put up in the last three years. But again, if I could leave that with you, the combination of both the new product offerings but also our change in channel strategy, as well.

Guys, I really appreciate all the detail. I don't want to sound too ungrateful, but on that 6% number year-to-date, how much of it was all those new products?

We don't have that number that we share externally, but it's been a contributor, all I can say is, significant contributor. So.

Fair enough. Appreciate that. One last one if I could sneak it in on China. I think everyone's obviously trying to get a handle on what's going on in the economy there, and seems to be a simple way to break it up would be to delineate the percentage of your business in China that is maybe funded by federal and government associated entities, versus products that might be tied more to discretionary CapEx. Do you have a way to break it down between those two buckets, within China, 17% of sales maybe between those two end markets, how would you split it?

I don't know if we have that, Didier. I know it's been --

No. Not to the Company level, information is probably tracked by some of our people, but I'm not collecting it and aggregating it.

What I can share with you is we've been nosing around on this question ourselves internally. The areas of strength, particularly the pharma area, is a lot of private sector money. So traditionally, this market has been heavily dominated by direct investment by the government. We're seeing a move, I think it's still the majority, but we're seeing a lot more of the business coming from private funded enterprises, particularly as the Chinese government also is moving a lot of its testing outside of government testing labs, for example, in the food area, where there is now a whole new set of private testing labs that are coming online in the country.

The other complexity we were giving trying to track that is for the companies that are -- fewer Chinese companies that are exporters versus local -- companies that go after the local market. The exporters would benefit from the weakening yuan. So it's going to be that's several layers of complexity, would we want to try to forecast the overall impact of the weakening of the yuan or the weakening of the Chinese GDP?

Got it. Appreciate all the color. Thanks very much.

Dan Arias, Citigroup.

Mike, just following up on the China discussion, what's your take at this point on where we are with the anti-corruption investigations? Is it your sense that we've fully turned the corner there? Is it still a little early to signal all-clear on that?

Yes Dan, great question. I think it's the new normal. I think this is -- the effort is here to stay. I think, in terms of the changes where we talked about before of slowing deal velocity, and a lot more conservatism in terms of the overall approval process, I think that's baked out now, so we are now no longer pointing to longer deal cycles in China as a result of anti-corruption. But I think the longer deal cycles are here to stay, and are now in this rhythm of really cautious approvals by the government authorities, and that's why I mentioned earlier that a lot of the areas of growth, particularly in the private sector where you're not seeing this same bureaucratic approach to approvals of deals. But I think this is the new normal.

Got it. Okay. That's helpful. Maybe just on LSAG, can you comment on pricing in chromatography, as we think about the new product introductions and then just the strong overall results across this space? Curious if you could get an updated view on how ASPs are trending relative to the period.

Sure. I'm going to bounce over to Patrick on this one.

Happy to take this one. As you can imagine, every new product introduction gives you opportunity to also improve your gross margins and ASPs, which we actually have seen. And there is, actually for us, that's one of the reasons why were also confident on delivering to the bottom line over the years. So we will continue to launch new products, because they are highly differentiated, and give you an opportunity to drive ASP and ASP otherwise would erode over time.

I think it is fair to say, Patrick particularly specific to the Japan business, and it's not a new phenomenon, but our competitors there who don't have this same currency challenges that we do are using that to be very aggressive at times on pricing. But we have the gross margin structure to be able to compete.

Yes.

Right. Okay. Thank you.

Ross Muken, Evercore ISI.

Mike, obviously as you embark as CEO of the new Agilent, you've put forth a lot of programs to sustain the superior growth and improve the margin and the cash flow generation. As you think about the various things you highlighted on the call, where do you feel like you have outperformed timing expectations, and you've seen maybe some early signs of the benefits in the organization, and where do you feel like you need to make the most progress?

Thanks, Ross. Appreciate the recognition and the kind comments. I think the area that I'm most pleased on is our ability to get the margin improvements. We're basically six months into the journey since I transitioned to the role from Bill, and I can see the momentum and our ability to get our margin structure to a different place. I think you have heard us reference a number of times in our call today, and if you were inside the Company I think everybody knows the goals that we're shooting for. So I think that's the area that obviously the growth, pleased with our ability to grow and you always want more growth, but we're looking for -- we're on pace to have our highest growth year since 2011. So then I think there's been a solid reaction to how we've modified our approach to capital deployment as well.

Great. Again, there seems to be a little confusion on the order versus revenue pacing. Last quarter, obviously you had the shortfall. You've built the backlog. It looks like the $30 million you called out looked about right versus the last few years. This quarter, it looked like you flushed around $60 million of backlog based on the differential versus orders.

As we think about, and again, I realize most players in the industry don't give a book-to-bill, it seems like your commentary suggests that your orders are on track, which I guess would more imply we did see that backlog flush this quarter. So I'm just trying to reconcile that versus Didier's comment, because I thought he implied we didn't get fully all of the $30 million back. So I'm trying to reconcile the delta between what the backlog is showing and what you saw in the business. Because in my mind, you get about a 1.01 book-to-bill over the two quarters, and again this is a CapEx business, so looking over a longer period is usually better.

Thanks for that clarifying question, Ross. I think what Didier was trying to point out, I think we talked about $15 million of business coming in, and we couldn't shift it to the Q3, so obviously that came through this quarter. But the view is we've probably got another $15 million which will ship, which we didn't ship this quarter. Does that answer the question, Ross?

Yes. On the order rate side, to the other point, it seems like that's more of a function of timing and revenue recognition.

Absolutely.

Any sort of underlying change in the tone of the business?

No. I understand your question now. So again I think we saw a good order momentum through the quarter. And you'll see some movements between quarters a lot of times, which we saw between Q2, Q3 and Q4. But the overall trajectory --

I guess when you look at your business, I think year-to-date, you are probably the fastest growing life science company at least that we look at in terms of traditional analytical equipment. As you try to figure out tough compare in different companies given different product and geographic exposure, but where do you feel like you're doing the best? And is it really maybe, how much of it is leveraged to biopharma, which seems to be the healthiest end market, which you have actually done well in, versus maybe technology share or other elements in some of the other subsectors? There's sort of a perception here that maybe you aren't growing on average, and to me, and I'm curious if it is to you, it looks like you're actually probably the fastest growing. So I'm trying to bridge that gap.

Our internal math would match your numbers, or your view. Obviously pharma and biopharma has been a key part of the growth story, but it's not the only part of the growth story. And I think it speaks to the breadth of our portfolio and businesses we're in. So as you know, from you may recall from the analyst meeting, we talked at great length about our view of CrossLab services, consumables and informatics, how that was going to be an area of future growth outside of just the technology areas.

And then you heard the DGG story already from Jacob. That's a business that will continue to get momentum as we continue to put more and more of the Omnises out there. You start to close deals on the slides, and then that starts to show up in revenue in the coming quarters. And then, we haven't talked about it today, but the companion diagnostics, we've been winning some deals there. So I think it's not only a story of end market strength in certain segments like pharma, but also where we're playing in our view of lab-wide services and consumables, and the momentum we have in our DGG business. And then finally, I think from a technology platform, it's very clear we're doing quite well in spectroscopy and the liquid phase of mass spectrometry areas.

Great. Thanks.

Mira Minkova, Stifel.

Quick question here. Just back to the revenue guidance reduction you just brought up, just trying to understand, Didier, if I heard you correctly, a $37 million reduction in sales line, $15 million is FX. What is the remainder of the reduction? Where is it coming from?

The $22 million remainder is basically a reassessment of our view on the chemical and energy markets, where we are seeing now that the downstream refining and chemical markets are not picking up as fast as we expected, the benefits of the low cheaper feedstock. So, probably considering the fact that there's a little bit of skittishness about the world economy, we are not saying the pickup in those downstream markets would offset the drop in our revenues in the exploration production, so we are hoping for again a pickup there and it's not happening. It's -- and our business overall is about flat.

Okay. Got you. So no change in the remainder of the end markets? It's all about chemical?

Yes. That's the one change.

Okay. Excellent. And separately let me ask you, the $15 million of revenues -- the help that you had from the resolution of your logistics center issues, was there any impact on the operating margin expansion there?

Great question. So Didier, correct me if I've got my math wrong here, but in terms of the top line, we've got everything through. The shipments are back to normal, the customer experience is just fine. But we have seen cost overruns relative to our expectations as we work through the operational issues, and I think it's probably been to the tune of about $0.01 on Q3 on reported EPS.

But besides that from the $15 million it's about average margin for that piece, although there's probably a little bit more of consumables, a little bit better operating margin than the average. But still that in itself we had the operating leverage not much else, and then there's a point that Mike was making, that as we worked at addressing the issues that we are facing at logistics centers, we incurred close to $0.01 of additional costs in Q3.

Got you. Thank you very much.

Jack Meehan, Barclays.

I want to ask about some of the commentary in the deck about the US and state government deals getting pushed into 4Q. I was curious if you could give a little more commentary around that, and whether you thought any of the momentum in the academic end market in Congress around some improved funding, maybe that was impacting that there?

Patrick, you want to take that one?

I can take this one, yes, thanks, Mike. What we have seen first half, you heard through our comments we actually had a pretty healthy business in this market segment. In Q3, we saw a pause where we have seen several of the larger accounts actually took a pause, and reassessed their budget for the remainder of the year. And just delayed, so we don't see these deals lost, and we really anticipate that we will see in the academia and government section, especially in the US, that picking up again in Q4 this year.

Got it. Understood. And then just one question on the gross margins in the CrossLab business. Curious if you have any thoughts around the pricing dynamic there, just given that the consumables piece of the business was doing quite well? I thought we might see a little bit more pull through on the gross margin line.

Mark, do you want to take that question, and I can have my comment, as well?

Sure. Jack, in terms of the year-to-year compare, once again it's apples-to-oranges on the CrossLab business. And next year you'll be in a great position to ask me because it will be an apples-top-apples compare between the two. But that's the vast majority of the dissynergies of the spend, and we did invest money to obviously take care of some of the logistics issues as Mike talked about, some of the impacted earnings per share, a lot of that came through on our business. So overall though, I don't think we've seen-- frankly we haven't seen that much pressure on the ASPs at this point in time. Mike, I don't know if you want to add any comments.

I think the ASPs are really solid here, and mainly, if you look at our prior-year comparison year it's really been a story of dyssynergies and Mark, you're picking up the load of the logistics center cost overruns. And as you saw in our cost script, we're really investing heavily to bring out new chemistry products, which have some very nice margin structure associated with them.

Steve Beuchaw, Morgan Stanley.

I'll start with one, a bit of a retrospective for Mike. It has to do with sales force strategy. Mike, you're some number several months now into this era where you have consolidated sales forces. When you make a decision to consolidate the sales force, it introduces a number of different possibilities. One is that you can be more nimble going after opportunities. Number two is of course there can be some restructuring. Can you reflect on that process what you've seen and to the extent you can you share any progress on metrics around that process?

Yes. Great question. In terms of the sales force changes, as you pointed out, that was one of the first major changes we made in the new Agilent, and I really think it's allowed us to streamline our executive structure, and we had a lot of well-meaning managers, but we spent a lot of time discussing things internally, and this allowed us to actually move a lot faster, because we really were in two businesses, the analytical lab marketplace across a number of end markets, and then in the regulated diagnostics space in Jacob's business.

I'm very, very pleased with how the overall plan has gone. We have -- in terms of how we look at it internally, we're ahead of our cost reduction goals. I think more importantly, we're getting the growth, and we're getting the coverage. We wanted to be able to invest to cover, make sure we can cover all the markets and invest in specialization, where we need it. This is a multi-year program, so I think this I'd say is the foundation year, and I think as you go into FY16 and FY17 you'll start to get the full benefit of our ability to have really close account relationships, backed up by very, very competent sales personnel.

Thanks, Mike. One for Jacob, I'm not sure if you gave it earlier but if you didn't would you mind giving us a growth rate for the Dako business? It would be really helpful if you could comment on where you think we are in terms of the process at Dako, what inning, if you will, sorry to use an American sports analogy, are we in with Dako in terms of getting back to full scale in our ability to grow the business quickly? And then sorry to keep piling on here, but if you wouldn't mind, it sounds like, just based on your tone and comments earlier that business really is picking up. If you wouldn't give us a bit of insight into the nuts and bolts of where it is you're seeing the business pick up? Is it equipment refreshes and replacement cycle? Is it more about competitive share gains? Is it more about the instrumentation and the consumables that could run through the instruments? Any color there would be really helpful. Thanks again.

Steve, I will give you a little bit of color without getting all the information about our underlying businesses here. But overall, the Dako business consist of a few businesses. Two prime parts we've talked about is the pathology business, and then our companion diagnostic business, where the companion diagnostic is our partnering business with our pharma companies on developing new companion diagnostic within IC and the FIS space. And by the way, this is going very, very well, and we will soon see the first significant launch of a new companion diagnostic within the PD-L1 drug space.

However, your questions around the pathology business and how we see that, overall, we definitely see a good momentum. I will not say we are completely back in full-scale yet. We did see some challenges last year on some back orders. We also have improved our performance on the Omnis, over last quarters. So we see actually all cylinders clicking now, but it actually takes a few quarters to win deals in this space here. So I will actually see continuous improvement over the next few quarters.

What we do see is that when we win deals, we of course win back -- or we win our deals that in refresh of technology but we definitely also see a pick up in competitive deals. As the Omnis solution is very competitive, and when you do that, when you put a new placement in, you will also get all the reagents running through that platform. So you place that instrument and then it takes another, maybe another quarter to get full loading of your consumables in there. So I expect actually that we are in a good trajectory here, but the best remains to be seen, also.

Great. Thanks again.

Dane Leone, BTIG.

Can we just clarify some of the commentary that's been given so far on the organic growth expectations? Given from what you have said on the past the previous questions, it seems like the weaker book-to-bill in the third quarter could have been due to some of the weakness in the energy and chemical markets, and that flows through into the fourth quarter. Or is it a function of something else that, what it comes down to is, it isn't completely apparent in terms of how the delayed orders would necessarily adversely affect the book-to-bill, but then there wouldn't be an ultimate catch-up to that. So I guess, can you help us walk through, are the expectations purely oil and gas, or is there something else in there that we need to think about for the fourth-quarter specifically?

Sure, Dane. Appreciate the opportunity to clarify some of the earlier comments. Relative to what we were pointing to in our US government side of the business, that's a situation where, normally, based on last year's deal activity, we had Q3 business last year, and what we saw was, as Patrick mentioned, that business is going to grow from Q3 to Q4. So that's one of the reasons why you had a drop in the book to bill.

I think as we mentioned earlier too, we started off slow in the third quarter, coming off a very strong close to Q2. We started off slow in May, we saw the pace of orders, we just didn't get a chance to close all the business in the third quarter. I really wouldn't point to the chemical energy beyond the fact that it's a continuation of what we have been seeing, which is basically no growth. Three quarters in a row, and I'm not going to call a recovery, like I've done earlier this year. So we're just going to remain cautious on the implied industrial markets, both the chemical and energy, as well as the mining sector of our business.

And then one more question on China, I know you have answered a lot of them.

Sure.

Generally at the end of these five-year plans there is somewhat of a spending flush. Is that, it doesn't seem like many people have contemplated that. Is that something you have thought about, or given the state of things over there, it would be too aggressive to hope for something to occur like that?

I think, great question again. We've taken a fairly conservative view on that. If it happens, great, but we're not counting on that because there's been a lot of changes recently under the new leadership in terms of how they conduct their business. So again if it would happen, wonderful news for the industry. But we're not counting on them in our go-forward forecast.

Great. One last one for me, on the gross margin line, the current guidance does seem like we get above that 54% in the fourth quarter. Is that something that you feel confident we'll see, given where the FX rates and the composition of the product mix that we would expect there, or should we alter our expectations of where the operating margin uptick comes from?

But I think I'll bounce that over to Didier if you want to --

We don't usually provide guidance on the gross margin level, but yes, we're expecting a slight improvement in gross margin sequentially between Q3 and Q4.

That's typically the pattern we see historically, particularly in the services side, as we finish out the year.

Thank you very much.

Derik de Bruin, Bank of America.

A couple of questions. So is your fourth-quarter guidance dependent upon any large tender orders from the government?

I'm looking at Patrick right now, and he's shaking his head no.

Great. So I think there's some concern that commodity pricing may continue -- there's some concern that commodity prices may continue to fall, so if you do have like 5% to 10% decline in current levels of commodity price, how does that affect it?

I think we've been in this free fall of commodity prices for some time. So our view is that, if you continue to see downward pressure, I think it would push out your return to growth in this segment, but the business is pretty subdued there already. Patrick, I don't know if you have anything you would add to that.

No. What we discussed beginning of this year was that we could actually see some upside if lower feedstock prices, which didn't kick in so far, but which would be a fundamental underlying economical drive if the feedstock price could go further down. So I would say we are on the exploration side, we're not more exposed than we are already today.

On the one hand we're losing. On the other hand, economies who are large importers of commodities whether it's oil or others, it's a big plus, China, India, Japan. So.

Great. One final question. Can you remind us on your manufacturing footprint what you do in China versus Malaysia, and the basis of that question, I think there's some concerns that there could be some currency devaluations in some of the other countries, and I think people -- I'm getting some questions from investors about currency exposures.

Yes. Great question. If you look at what we call our strategic manufacturing sites, we're fairly diversified globally, but we have two major sites in Asia. One is in China for all our gas chromatography which is a major product line for us, and then in Penang, Malaysia, we have all of our spectroscopy, atomic and molecular spectroscopy, as well as some of our vacuum products, and some of the DGG products. So there are two major sites for us.

Great. Thank you very much.

Catherine Ramsey, Robert W. Baird.

Can we get a big picture update on Europe? What you're seeing in that market?

You broke up a little. Was that Europe?

Yes.

I think our European, outside of the currency offset, the business there has been a really nice story for us this year. And I'll point to Patrick, but I think we're seeing no real significant changes there. The one part of the European business that we're keeping a close eye on is really some of the emerging economies in Africa, in the Middle East, how that could play out. But Western Europe has been pretty good for us.

It has been very good in terms of end market, pharma has been definitely very strong story. We have seen flat to healthy business in the range of life science research, overall. There's actually some upside potential there with spending of the ECB. That should also materialize in research over time. So for us, European markets overall has held up very nicely, and we have been positively surprised over several quarters now by the local currency growth we have seen in Europe.

And it has just a story on the instrumentation side. We really -- the customers really have responded to this CrossLab Promise that Mark's team has put together. There's a lot of big wins on the service side in particular, and then you heard already what's been going on in the Dako and DGG business.

Thank you. One more question from me. Probably for Mike, how do you feel about the overall visibility in the business? Maybe ignoring backlog metrics, specifically? And how has that changed over the past 6 to 12 months?

But I think your question was how do I think about overall visibility in the business? Was that the question?

Yes.

Great. You broke up a bit. I think what we've seen is the visibility is pretty good out a quarter or so. This is a reminder, we book orders, we don't book any orders unless they can be delivered in six months, so I think our visibility of three to six months timeframe is pretty solid, because we have the funnel. Now of course we have deal funnels that we track that have longer deal cycles. So we have a view, pretty confident view, three to six months out. And a longer-term view beyond that, through our sales funnel metrics. I would say though, and this is the point that Didier made earlier, that we are seeing more and more of the business come late in the quarter, and rather than hoping for a change in historical pattern, we've now made this our new normal in terms of how we think and plan for the business on a revenue side.

Great. Thank you. That's very helpful.

I'm showing no further questions at this time. I'd like to turn the call back over to Alicia Rodriguez for closing remarks.

Thank you, Abigail, and thank you, everybody, for joining us on the call today. If you have any questions please give us a call in IR, and on behalf of all the management team, I'd like to wish you a good day. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.