安捷倫 (A) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 Agilent Technologies, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand the conference over to Ms. Alicia Rodriguez, Vice President of Investor Relations. Ma'am, you may begin.

Thank you, Brian, and welcome, everyone, to Agilent's third quarter conference call for fiscal year 2018.

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 Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. I'm also pleased to announce that Bob McMahon is joining us on the call today as well. As you know, he will be taking on the role as Agilent's CFO in September due to Didier's retirement at the end of October.

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 will find an investor presentation along with revenue breakouts and currency impacts, 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. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of July 31.

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. Hello, everyone. Thank you for joining us on today's call.

Before I discuss the Q3 financial highlights and our updated outlook, I'm pleased to have Bob McMahon join the call. Bob is an excellent choice for us as the next CFO and a very capable successor to Didier. Bob brings a strong track record of leadership to our team. Many of you already know Bob from his previous role as CFO of Hologic. He officially assumes the CFO role beginning September 1. As Didier hands off the baton, he will serve as adviser capacity until his retirement at the end of October. Bob and Didier are working together to ensure a smooth transition.

I first met Bob over coffee in Palo Alto where we shared our perspectives on business and company culture. We had an important conversation about values and their importance in business. I knew immediately that Bob will be a great fit for the Agilent culture. And, of course, his management style and business acumen are a perfect match for our approach to trading shareholder value. Bob has joined Agilent at an exciting time. I'm confident he'll help us lead the next phase of Agilent's growth.

While I'm very excited to have Bob join the Agilent team, I will greatly miss Didier's partnership and counsel. He has played a key role in the transformation of the company and our excellent business results. It's important for the CEO to have a very capable CFO. I couldn't have asked for a better partner. So thank you, Didier. You will be missed by me and our Agilent team.

Now, let me turn to our Q3 financial performance. The Agilent team delivered another strong quarter, with both growth and earnings exceeding our expectations. Our core revenue grew 6% and is above the high end of our guidance. Our adjusted EPS of $0.67 is $0.04 above the high end of our guidance despite currency headwinds since our last guide. This is a 14% increase from a year ago. We delivered an adjusted operating margin of 22.6%, which is an increase of 110 basis points from a year ago. This marks our 14th consecutive quarter of improving our core operating margins. Let's take a closer look at our results by our end markets.

We continue our strong pharma performance with 8% core growth. This is against a tough compare as we grew 10% in Q3 '17. We see strength across all our business groups, with particularly strong performance in mass spectrometry, cell analysis, CrossLab's consumables and services and genomics. Growth remains robust in both the biopharma and small molecule market segments. Our chemical and energy market revenue grew 12%. We are quite pleased with the strong growth, again, against a difficult prior year compare of 10%. Ongoing market investment remains positive. This is in spite of tariff rhetoric and retaliatory policies you will hear in the news. From a product perspective, strength in spectroscopy, GC, CrossLab's consumables and services is driving this result.

Geographically, strong gains in China and Europe are leading the overall global growth. Revenue grew 3% in academia and government, in line with expectations. Strong performance from cell analysis, molecular spectroscopy, ICP-MS and CrossLab's services and consumables are driving results. China and the rest of Asia are delivering double-digit growth in this end market.

Diagnostics and clinical revenue grew 5%, led by strength in genomics and our reagent partnership business. This offset continued challenges in the U.S. pain management market. Food revenue declined 1%. Strength in Americas is being offset by declines in Europe versus a tough compare of 35% growth rate last year. And as expected, China instrument sales were also down this quarter. Environmental forensics is flat this quarter. Forensics growth was offset by the expected temporary slowing of instrument sales in China environmental.

Geographically, let me first start with an overview of China. Our overall China business remains strong, growing 10% this quarter. Strength in China is being driven by double-digit growth in our 2 largest end markets, pharma and chemical and energy. Our CrossLab and DGG businesses also grew by double digits. We continue to expect healthy overall market conditions. This is more than offsetting any temporary slowing of instrument sales in the food and environmental markets. The business is also strong in Americas and the rest of Asia outside of China, with these 2 regions delivering healthy high single-digit growth. Europe was flat on a tough compare of 12%. In summary, we delivered a strong quarter with broad-based strength and standout performances in the pharma, chemical and energy and China markets.

Now, let's discuss results from our 3 business groups. The Life Science and Applied Markets Group delivered core revenue growth of 5%. This result is being driven by robust growth in the pharma and chemical and energy markets. From a product perspective, LC/MS, cell analysis and ICP-MS are leading the results. Ultivo, our game-changing LC/MS Triple Quad, continues to be well received. Geographically, demand in America and China are leading the results. Let me share a few examples of how we execute on our strategy to increase the depth and breadth of LSAG solutions portfolio.

On the M&A front, we closed on the acquisition of Genohm in early May. Genohm complements Agilent's informatics capabilities by adding laboratory management services. By integrating Genohm's LIMS platform into our OpenLAB portfolio, we can provide complete and integrated informatics solutions to our customers. Customers are very focused on informatics as a way to create insight and drive lab efficiencies. We are determined to lead in lab informatics. For example, last week, Agilent released the first software supporting the new standardized data format called the Allotrope Data Format or ADF for short. This format was created by a consortium of pharmaceutical companies for the pharmaceutical industry. By standardizing the collection, exchange and storage of analytical data capturing the laboratory workflows, labs will be able to transfer share data across platforms. We are proud to be the first company to develop and launch a commercial product to support this standard. We believe the adoption of standards like ADF will both shape the future of lab informatics and drive the adoption of our solutions.

In addition, our internal LSAG innovation engine continues to deliver. We just released the Agilent Seahorse XF Real-Time ATP rate assay kit. This new and unmatched product will enable biologists to enhance their understanding of how live cells function in real time. We are a leader in live cell analysis and continue to expand our offerings in this fast-growing market.

The Agilent CrossLab Group continues outstanding performance with 8% core revenue growth, gains across our major end markets led by double-digit growth in chemical and energy and strong results in pharma and food. Performance is a balance across consumables and services. China led growth in all regions with mid-teens growth. CrossLab is a key growth driver of the new Agilent. We are delivering on our mission to improve both the science and the academics of our customers' labs. As we expand the strength in the CrossLab platform, we are creating more value for our customers and Agilent. For example, during the quarter, we announced 2 acquisitions to further expand our consumables portfolio. We acquired the business assets of Ultra Scientific, a provider of chemical standards and certified reference materials. On August 1, we also acquired ProZyme, a provider of biopharma consumables for glycan analysis. As you know, glycan analysis is essential to the development of biotherapeutic drugs, and we will now directly participate in this fast-growing biopharma market segment.

We continue to invest and build on our leadership position in China. We recently opened a new logistic hub in Shanghai. This hub will enable faster delivery of parts, supplies and consumables to laboratories. This is the first of 5 forward stocking locations we are establishing. This allows us to improve our service and the speed at which we support our customers. Our focus on digital investment is also delivering results and gaining traction. Our digital channel orders are growing at a record pace. For the first time ever, over 50% of our consumables orders are now digital. China is leading the charge on this front. We are improving the customer buying experience, expanding our customer reach and driving growth.

The Diagnostic and Genomics Group delivered core revenue growth of 5%. Excluding our NASD business, which declined as expected in the quarter, the DGG Group delivered core revenue growth of 7% against a tough compare. Let me further explain. As we've mentioned previously, NASD revenues are batch-based, which can make the revenue vary from quarter-to-quarter, depending on timing of customer acceptance. As expected, the business declined in the quarter as this is going up against a 45% growth rate in Q3 of last year. We expect the business return to growth in Q4. As I mentioned, without this variability reported revenue effect, this quarter, our core DGG business grew 7%.

A few additional comments on our NASD business. I just returned from a visit with our team in Colorado. The capacity expansion underway will allow us to meet the growing demands for GMP-grade oligonucleotides and CRISPR offerings. I'm pleased with our progress on our new facility and the strong market environment. For example, just last week, one of our customers, Alnylam Pharmaceuticals, received FDA approval from ONPATTRO, a first-of-its-kind targeted RNA-based therapy to treat a rare disease. This is wonderful news for Alnylam and, most importantly, their patients. NASD remains a long-term growth play for Agilent, and I'm excited about the future.

Back to the overall DGG results. Strong results are driven by double-digit growth in genomics and strength in our reagent partnership business. Geographically, outstanding growth in China and Japan drove the results. We continue to strengthen our ability to support the fight against cancer and other diseases. Burning Rock Dx received China FDA approval for their human lung cancer NGS detection kit. Agilent SureSelect reagents are used as part of this panel. And our own PD-L1 Companion Diagnostics product received expanded USDA approval in cervical cancer.

During the quarter, we completed the acquisition of AATI, Advanced Analytical Technologies, Inc. AATI provides capillary electrophoresis-based solutions for fully automated analysis of a range of molecules. This acquisition builds on Agilent's existing expertise, providing customers a more comprehensive set of solutions for NGS workflows and other applications. NGS is driving and will continue to drive strong growth of this new business to Agilent.

With the addition of the AATI team, we created a new biomolecular analysis division with DGG. This new division now often includes our complementary microfluidic business, previously part of our LSAG group. Didier's team has reflected this change in our current financials along with the company financial restatements.

Now, let me provide a few remarks on where we are in the Agilent journey and our near-term outlook before turning the call over to Didier. Let me start with a few comments on tariffs. On the customer side, we are not seeing any changes in customer buying behavior. On the duty front, we have planned for and have taken actions to partly offset the impact of expected increases in tariff-related duties. This proactive approach resulted in a small 500k impact on our Q3 results. And in Q4, we expect an impact of approximately $3.5 million of incremental duty cost or approximately $0.01 of EPS, which has been incorporated into our latest guidance. Looking into 2019, if the tariffs remain in place, we plan to aggressively reduce the remaining effect via potential change in prices and further adjustment to our supply chain.

For some time, we've been on a path to increase shareholder value. We've been focused on delivering strong growth while expanding core operating margins and putting our strong cash flow and balance sheet to work in a more impactful manner. Q3 results demonstrated our continued commitment to creating value for our shareholders and customers. We delivered another quarter of strong operating results while deploying our capital as committed. We returned $291 million in capital to shareholders through repurchasing $243 million of our own shares and paying out $48 million in dividends. We are also investing in the business. We closed 4 acquisitions, paying out $430 million in the quarter, and announced 2 more acquisitions. This is a record number for Agilent and will further strengthen our company's foundation for growth. As we continue to aggressively strengthen our portfolio via the Agilent innovation engine and M&A, we are also continuing to execute on our agile Agilent customer experience and efficiency improvement initiatives. The twin drivers of our success continue to be a strong portfolio and a customer-focused way of doing business.

Now, a few words about our outlook going forward. The Agilent team continues to capitalize on healthy end markets. We remain confident in our outlook. We are increasing our full year core growth and earnings guidance. Didier will walk you through the details, but we're raising our guidance for core revenue growth, operating margin and EPS. The Agilent team remains committed, confident and energized about our future. In our Agilent DNA is our team's ability to drive customer-focused innovation, coupled with operational excellence. It is this powerful combination that will continue to fuel our future growth and earnings expansion.

Thank you for being on the call, and I look forward to answering your questions. I will now hand off the call to Didier, who will share more insights on our Q3 financials and guidance. Didier?

Thank you, Mike, and hello, everyone. First, let me express my appreciation for Agilent employees' passion and professionalism in accomplishing their mission, creating shareholder value and, finally, for their support throughout the years. With Mike's continuing leadership and Bob's contribution, I'm convinced that the best is yet to come for Agilent.

As mentioned by Mike, we delivered strong top and bottom line results, both on a year-over-year basis and versus our guidance. On the revenue front, we [did] our midpoint guidance by $14 million after excluding currency headwinds of $11 million and contributions from our 2 recent acquisitions, AATI and Ultra Scientific of $5 million. Our core revenue growth of 5.9% was well over the midpoint guidance of 4.25%. Our adjusted operating margin of 22.6% was 110 basis points over last year's and 120 basis points of our guidance, and we delivered a core operating margin incremental of 55%. EPS were $0.05, above the midpoint of our guidance. During the quarter, we bought back 3.76 million shares for a total of $243 million and paid $48 million in dividends. Finally, we repatriated $1.5 billion of our offshore cash.

I'll now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.24 billion to $1.26 billion and EPS of $0.72 to $0.74. At midpoint, revenue is expected to grow 4.7% on a core basis. Versus previous guidance, FX is projected to have a negative impact of $21 million on revenue and $2 million on operating profit. Our 23.6% adjusted operating margin at midpoint will be up 100 basis points sequentially and up 30 basis points on a year-over-year basis, even after funding the Lasergen R&D. The increase in tariffs, effective early July, is expected to have a negative impact of $3.5 million as we have initiated actions to our supply chain. When those actions are complete mid-2019, we expect the net annualized impact to be approximately $9 million, excluding potential pricing actions.

Now to the guidance of fiscal year 2018. The Q4 guidance is expected to result in the following fiscal year guidance. First, at midpoint, revenue is projected to grow 6.1% on a core basis or 60 basis points over the previous guidance. The revenue guidance of $4.87 billion is $10 million over previous guidance, including $22 million due to the acquisition of AATI, Ultra Scientific and ProZyme, with currency having negative impact of $32 million. Second, our EPS guidance of $2.70 at midpoint is up $0.05 from previous guidance and corresponds to a 14% year-over-year increase. Third, adjusted operating margin for the year is expected to be 22.6% or 60 basis points higher than in fiscal year '17. And fourth, our core operating margin incremental is expected to be 39% for the fiscal year, at the high end of our operating model.

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

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

(Operator Instructions) And our first question will come from the line of Steve Beuchaw with Morgan Stanley.

I'd say, first, it's hard not to echo some of Mike's comments. Didier, I really appreciate everything you've done being such a great partner for us. So I hate to see you go. And, Bob, welcome aboard.

Thank you very much, Steve. Much appreciated.

There's a big smile in the room here, Steve. Thanks for those comments.

Well, I have to say Didier is a pretty unique guy. As someone who shares some of his lineage, it's going to be hard for you to match that. The questions I'd like to focus on, I'd say, first, are very high level for Mike. When you made the decision to raise the guidance at core, it'd be really helpful for you to just kind of talk us through. Here's what after a good quarter maybe confident in saying, look, we're going to beat the expectations that we had set earlier in the year. What really jumped out to you in terms of things going better?

Yes, great question, Steve. Appreciate the opportunity to share that with you. So, obviously, we have a good view of our order funnel, so that gives me 1 level of confidence, which is the strength of the orders. But what really gives me a lot of confidence moving forward is 2 dimensions of the story here. One will be the end market strength. Both chemical and energy and pharma continue to be very strong. And as you know, coming into this year, we had positioned chemical and energy as sort of the upside of the plan. That was sort of the wild card to our business. And there were some concerns that perhaps all the rhetoric around tariffs and other things a few months ago might actually be quite detrimental to this marketplace, which is [back is not at all curved]. So I think it's the continued strength in both those 2 end markets. And I think, geographically, Asia, led by China, we post a really strong China number. And then the Americas was also quite strong for us. I think the fact that our 2 largest geographies in terms of countries, China and United States, are really doing quite well gives us a lot of confidence about the outlook from a market perspective. And I think we're really positioned well to win. I mean, our portfolio continues to become much more competitive. And as you know, we have a unique value proposition with this CrossLab platform, which really allows us to capture a lot of the growth that's out there as well.

And then just a couple of quick follow-ups before I jump back in the queue. One is, Mike, you made a comment about customer behavior on tariffs, and I appreciate the follow-up there, but it will be really helpful if you could spend another minute on it. It sounds like your perspective is that the tariff headlines aren't changing the way that people really think about doing what they do. I wonder if you could just give us even some anecdotes on what you've done at that point. And then, Didier, it was a really good quarter in terms of core margin expansion, the incremental is really good. Any color on what it is that you've seen that made the quarter so strong on that front and how we should think about seasonality there would be great. Really appreciate it.

Yes. So let me take on the first question. So when I've been out talking to the customer base, you talk to people in the pharmaceutical industry, you talk to people in the research base, whether it be in academia and private sector. They plan on -- they're taking a long-term view of investments. Purchasing our equipment, purchasing our solutions are absolutely critical for their enabling their growth plans, if you will, and research plans. So they're not at all distracted by the tariff discussion. As I mentioned on my last call, we have seen some cautiousness in certain aspects of the chemical and energy market where they were a little bit slower to approve the deals but are still getting deals approved. It's the same kind of situation we had last quarter. So no new changes in customer buying behavior. So this is coming directly from conversations I have with customers. So, again, that gives us a lot of confidence about our outlook, because despite all the noise and rhetoric out there, it really hasn't yet affected any of the actual buying behavior of customers. Obviously, it's creating some work for us relative to adjusting our supply chain and production locations to mitigate the duty impact side of things but, in terms of customer buying behavior, have not seen any real changes.

And then, Steve, on your question on the core operating margin incremental, you're right. It's been impressive at 57%. The reason (inaudible) multiple is we started off with last year's compare that was a little bit of a soft compare. We had the operating margin down a little bit from -- sequentially from Q2. Then there was good operating leverage, good mix, certainly, the impact of all the Agilent programs. And we certainly don't expect to maintain such a high level of operating margin (inaudible).

It was part of your parting gift.

Well, I (inaudible) appreciate the style of gift from the Agilent team, that's for sure.

But in all fairness, I think it was back to see some of the things that Didier outlined at the AID meeting in New York (inaudible). Listen, our pipeline and our programs are as robust as ever in terms of really allowing us to begin to work on the operating margin incrementals.

And our next question will come from the line of Tycho Peterson with JPMorgan.

Mike, I want to follow up on some of the strengths in China. Can you maybe talk about some of the puts and takes there? I think you called out environmental weakness in the slide, so maybe if you could just talk maybe where there are some softness. And then on the supply chain dynamics, can you maybe just flush that out a little bit? I think you do some of the GC production there as well as Delaware. So can you maybe just talk a little bit about how you are potentially thinking about moving supply chain, if you need to?

Sure. Happy to do so, Tycho. So let's start with China. So, again, very important market for us, and we were just delighted by the strength in the business. So if you look at the 6 end markets, we had strong growth in all but 2, and then we actually had foreshadowed this coming in our last call saying, hey, we know there are some things happening relative to some reorganization of certain ministries in the country. Nothing happened to us relative to the competitive side of the business. So we saw a really strong -- continued strong demand in pharma, in chemical, energy. Investments in academia and government [hence] back to some of the comments I made around tariffs. And as you may recall in our AID presentation, we talked about the opportunities we had with our CrossLab business and our DGG business, and you saw us starting to deliver on those promises with really strong double-digit growth in both of those businesses. And then relative to food and environmental, we think that's just a temporary situation as it relates to instrument purchases. You have to keep in mind, though, that they'll continue to buy consumables and services from us, and we're just waiting to have the reorganization complete, the budgets finalized and then we know how to follow the money where it's going to go. Because 2 things are really happening here. You've got the consolidation going on where new budgets are created -- being created in a new consolidated set of ministries. And then part of that money is also getting deployed to what we call Tier 3 and 4 cities. So we're following the money and we're going to be ready to capture once it's there.

And then on the supply chain?

Oh, yes, I forgot about that. So what we did relative to supply chain, we -- as I mentioned in my script, we took some actions, actually, in advance of the formal announcement of the tariffs. So we've already relocated our production for China-made products into our site in Wilmington, Delaware, and now we're in the process of moving aspects of the supply chain, which is also subject to the tariffs. But we've already moved the production and some of the supply chain.

Okay. And then 2 quick follow-ups. With -- for NASD, you highlighted kind of just inherent lumpiness in that business and the fact it will return to growth in the fourth quarter. Can you maybe just talk about how we should think about the ramp there next year ahead of the capacity coming online?

Yes. So we'll be able to -- we're going to try to get as much growth out of our current facility as possible, and then the growth, the expansion will start to come online in the second half of next year. The current plan is the second half of '19, you start to see some initial revenue, will be starting to ramp through the quarters. And, Didier, I think we've put out a number of...

Next year?

Yes.

About like -- yes, about $20 million.

About $20 million.

About $20 million (inaudible) is what we said at the AID.

Yes. So it will really get started next year, then when you get into '20s, when you get the real full year ramp. So -- and Bob and I and Didier were just in Colorado, as I mentioned, and had a chance to also not only review the progress of the facility construction and capability expansions but also what's going on relative to perspective demand from our customers. So the pipeline looks really encouraging. And I think you saw evidence -- yes. Go ahead. Sorry.

Last one, can you just comment on how much (inaudible) is contributing to C&E growth at this point?

Yes, I think it's part of the mix growing with the average. Yes, I think that -- so I wouldn't say it's an outside contribution, but (inaudible) delivering.

And our next question will come from Doug Schenkel with Cowen.

And before I get to the questions, another hearty thanks to Didier. You've been a great leader at Agilent, and I know I speak for many of us in saying we really appreciate all your help over the years. And I look forward to grabbing another glass of wine at some point (inaudible). As always, it will be your choice. And, Bob, while Agilent has big shoes to fill, it's great to know they made such a great choice. So congrats to you and the company. So now for the questions. On Q4 guidance, can you talk a bit more about the rationale behind 4.7% core growth? This would be a deceleration versus what we saw this quarter, and that's in spite of comparisons that don't appear much different. I didn't hear anything in your prepared remarks regarding timing dynamics or changes in momentum relative to what you've generated year-to-date. Is it fair to assume you're baking in some conservatism here? I'm admittedly having a hard time figuring out why growth wouldn't continue at around 6%, the underlying rate for most of this year. So am I missing something on end markets or timing dynamics or something else?

I think we decided to stay true to the guide for last year we had and even though Didier retires. So as Didier has mentioned in prior calls, we don't assume everything's going to be perfect in the quarter. And again, the one that could go one way or another always has been chemical and energy. So if that business holds up, it has been holding up, we should be in a good position to beat that number.

Great. And then sort of related, from a buyback standpoint, the stock was in the low 60s for much of the quarter. I think you still have about $240 million in the buyback authorized. And if I'm not doing that math right, there's certainly enough dry powder there to put in place another authorization. I'm just wondering why you weren't a little bit more active in buying shares during the quarter.

Yes. Thanks for that, Doug. I think we -- I think the numbers are right, about $240 million...

$270 million (inaudible).

Yes. So you're in the right range. And we actually thought we are fairly aggressive, because when we went out right after, what we saw was a dislocation in the stock price after the Q2 announcement and bought $200 million right away and then continued our anti-dilutive. We'll obviously continue to look at that during the upcoming quarter.

Okay. And one last one. You guided us to expect China food revenue growth would start to rebound in early fiscal '19. Based on what you've seen over the past few months, anything that would tell us or tell you that this is aggressive or maybe things start to thaw a little more quickly than anticipated?

I think I want to stay with those initial estimates. So we signaled that in the last call, that based on our experience, it takes a good 6 months or so to kind of work through these things. And I think if you want to hear from my team, it's tracking along those same lines.

And our next question will come from the line of Patrick Donnelly with Goldman Sachs.

Just expanding on Tycho's question on supply chain. Given that the tariffs aren't focused, are you able to just walk us through the import-export dynamic in China, just looking explicitly kind of how much of the China revenue is being imported from the U.S. and maybe where the majority of those revenues is being manufactured? And then kind of the same thing on U.S. revenues, anything being imported from China there?

So, Patrick, (inaudible) looking at both incoming to China and from China to the U.S.?

Yes, exactly.

So from China to the U.S., it's a relatively small amount of Agilent's business. It's primarily the gas from (inaudible) product line and related support parts.

Yes. So it's about $100 million. And that's why the 25% gives us about $25 million gross impact. And then as we mentioned, we're going to reduce that amount over time to -- even before pricing adjustments, $9 million on an annualized basis. And then going the other direction, basically, China, we import from the U.S. the GC/MS and many reagents from chemistry that are made in the U.S., but there is no tariff at this stage. There might be in the future. And we'll update you on the potential impact, that it's not significant, really, at the end of the day.

Yes. And as Didier mentioned, they only have a fairly global footprint in terms of manufacturing. So Didier mentioned a couple of the products that are made in the U.S. that go into China, inclusive of our reagents. We also have a large facility in Germany and Asia.

But that's not subject to retaliation.

So, basically, we have a lot of our business that's outside of this tariff discussion.

That's helpful. And then just staying in China, given the soft July data points out this morning, including China industrial production coming in light of expectations, can you just kind of talk through the cadence of results in China this quarter? How are trends in July and particularly given that data? And then also, the tariff rhetoric was kind of increasing during the month. So just curious, as we went through the quarter, how you guys are feeling.

Yes, great question. I saw that same article as well. And based on what we saw, it was having no impact. So we saw no hesitancy in customers or any (inaudible) from our field that things were different.

And our next question will come from the line of Brandon Couillard with Jefferies.

Mike, just -- and looking at Europe, it was flat in the quarter. I realized you lapped a tough comp there, but you did so, too, in the second quarter as well. Just curious if you're seeing any changes in any of the end markets, if you could just give us a little more color on what you saw in that region.

I think it's -- we obviously have a tough compare. And I do think it's probably fair to say that the region is a little bit slower than it was last year. But it's dramatically -- not dramatically different. I wouldn't over-interpret the Q3 results. I even mentioned to Didier, should we mention the World Cup, but -- and the reason why I say this comment not to get overly worried about the third quarter result is I spent some time with our field teams, and the European funnels look pretty good. The only thing that we're kind of keeping an eye on is whether the situation in Turkey could actually spread more broadly across Europe. But, again, I think that no significant change in the overall market environment in the third quarter, and I wouldn't over-interpret the 1 quarter's results.

And, I guess, secondly, with the Alnylam approval now on the tape, I would be curious as to how you're thinking about the next leg of capacity expansion of the NASD facility, when you might be in a position to perhaps pursue, I guess, the next capacity build-out and what the indicators might be that might lead you to do that.

Yes, sure. Thanks for that question. We've already made a decision to make the investment. So -- and that decision was made probably about 2 years ago, because this is a very unique capability to the company and, really, I think, speaks to the high barriers to entry and probably ultimately the kind of margins we expect to derive in this business. So we made the decision based on our forecast of likely demand. And I think the most recent announcement about Alnylam success is just 1 more proof point that the market's going to be there for the products. And, Didier, do you want to add something?

As a complement, I mean, as you know, we're only firing up train A in the facility. And as for train B, which we doubled capacity, we are certainly not ready yet to push on the button. The patisiran is still an orphan drug. It doesn't -- it's not a high volume. We're waiting for all the confirmation that our customers will move into a commercial space and then we'll fire up train B. So it's there. It's obviously at a much cheaper cost than the whole facility built up. And we're certainly ready when we see that there's confirmation that a lot of our customers are bringing commercial products onto the market.

Yes, thanks for the additional insight, Didier. So we're bringing on this 1 train, just to be clear. Next year, second half of '19, roughly $100 million-ish kind of additional revenue. Then we could bring on another $100 million or so with train B.

Yes, that's what I was referring to, was the next train line.

Yes. No, no. Didier picked up on that. I missed it. Sorry.

Our next question will come from the line of Dan Leonard with Deutsche Bank.

Maybe a couple more on China. First off, you've heard all your peers' report now, and it does seem that the environmental and food headwinds are something that Agilent is uniquely calling out. So do you have any opinion on why? Is it a reflection of the product dynamic that these customers are buying or maybe just some share with -- in a micro basket of customers?

Yes, happy to share my thoughts here. So there is something going on here. It's unique to Agilent because we are uniquely the leader in the ministries where the consolidation is occurring. So that's why you're seeing Agilent calling us out where others didn't have probably any business there. So we're the ones getting impacted the most by it, and I think that's why you're hearing us call it out. And other people are kind of rightfully not seeing it as a major issue. There's nothing happening competitively in terms of share new offerings. It really is a macro effect where we're really strong. And we think this is going to be a temporary situation as things move out. And again, I would just -- again, just remind you, overall, China business grew double digit for Agilent in the third quarter. It was the fastest-growing region we had in the company.

That's helpful color. And then as a tariff-related follow-up, so you've mentioned a couple of times that your remediation effort assumptions don't yet include pricing actions. So could you comment on your ability to get price in some of the affected product lines? Do you think you have pricing power? Or would you expect that as a lever you could pull or not?

Yes. As I indicated in my call, price is 1 area that you can use to offset the tariff impact. You would have to do some of the more broad-based as opposed to a 25% increase or whatever it may be on a core product platform. So it will be broad-based, and we think we have the ability to do that. Again, it comes back down to the differentiation of portfolio. If you have something truly of value that differentiates from your competition, you're in a position to be able to do that. So we're not overly concerned about our ability to mitigate the impact on the P&L on tariffs as they stand right now.

It was like 0.2% increase on our $5 million of revenue to offset the $9 million in net tariffs impact. So it's...

Yes. I'm glad you could do the math on that, Didier.

And our next question will come from the line of Ross Muken with Evercore ISI.

I want to echo the view. Obviously, Didier, it's been a great time working with you of getting the business through quite a transformation. And then, Bob, I know (inaudible) is very jealous, but we look forward to spending more time with you if you get (inaudible). So maybe just -- can we (inaudible) pharma a little bit? It seems like performance in the segment has been better than maybe what you would have foreshadowed some time ago. And it feels like maybe there's a bit of share you've taken. And obviously, you called out some of the emerging markets (inaudible). But maybe on a product basis or any other way you want to cut it, give us a little bit of a feel for how you feel like you're performing there maybe versus the peer group.

Yes, Ross, thanks for the opportunity to comment on this. As pharma being our largest market, this is really important for us. I mean, we often focus on this 1 product platform in this area, but the strength of Agilent is we have this broad-based portfolio. And what we can see is, particularly in the area of mass spectrometry, gaining a lot of share, both on the LC/MS side as well as there's a number of new regulations that are driving growth of ICP-MS into this space. So we have the breadth of the portfolio to go after those. And then to begin, I'll ask Mark to make a few comments here. But I truly believe that this CrossLab platform that we've developed really is allowing us to take, really, outsized growth in the space. And you can start to see the numbers, they're starting to be quite significant and important to Agilent. And, Mark, if you could just maybe add a few comments about what you think maybe happened to your business in pharma.

Thanks, Mike. And maybe a top level picture, that we're seeing really strong response in all aspects of our pharma business. I think we've mentioned that, certainly, (inaudible) that we've invested a lot in our chemistries business, particularly to address the biopharma area. That part of the business is going very well. A lot of complementary pieces coming together in our chemistries business around the pharma space at large. And then enterprise services, we continue to see strengths in that area, in pharma, too. And as we've mentioned many times, when they're looking for better productivity or improving some of the better management of the overall assets, we're seeing that in -- moving into the smaller, midsized pharmas and the biopharma companies in general. So long story short is it's been very sustainable. I think we continue to just see high single-digit growth over the past few years in this space. And our product portfolio will lend itself -- certainly, we're planning on keeping that momentum going in the future.

And, Ross, I'll just closed off on this. I think Mark's been able to develop a scalable platform, right? So discussion before used to be only focused on large pharma, will the game be over. And I think the platform is very scalable to small and medium-sized pharma as well.

That's helpful, Mike. And so maybe one for Sam. You've done some acquisitions. You've closed out the Lasergen interest. It feels like you've got pretty good momentum at least in terms of tuck-in M&A in that division -- your division. How are you feeling about sort of the -- sort of pipeline of things you have in front of you? Because it's probably the area where you have (inaudible) the broadest set of things to bring in. And then from a product standpoint, particularly on the companion side, it seems like there's a couple of things that could potentially go your way. How are you thinking about that business?

Go ahead, Sam. I've been doing a lot of talking today.

Thanks for the question, Ross. Maybe I'll go -- I'll start in reverse with your questions. For our Companion Diagnostics business, we remain very excited about that. We are continuing to do work with the partners that are publicly known in terms of Merck and BMS. But beyond that, we've had a very active effort to increase what we're doing and develop new Companion Diagnostics with new pharma partners as well as to expand the number of biomarkers. PD-L1 is very important, and it's an area that we are continuing to focus on.

I think you gave me some stats the other day of how many countries that was registered in, in some new indications.

Yes, absolutely. I mean, you're talking about PD-L1 in particular. I mean, for the 22C3 variant to that, which is for KEYTRUDA and Merck, we're now registered in over 83 countries for more than 5 indications. So that's good progress and more to come on that. But in response to your question, it's beyond that, we are working on a number of new biomarkers with a number of new partners. So I think that there is goodness to come that we are driving for the coming quarters and coming years.

You told me that because we're going to have to fill up that expense we're doing in the site. So we ran out of space.

That's right. Thank you, Mike, for that and DDA. And the parting gift, we are expanding our footprint because the work is very real. It's more than a pipeline and things that we're signing. And then, Ross, with respect to your question on general pipeline, we -- I think I had diluted to and actually mentioned at the Analyst and Investor Day, even within our next-generation sequencing, series of products that we have something called Magnis, which we'll be introducing in early 2019, which is a platform which will automate, starting with DNA, going to prepared libraries. We're excited about that, and that's just an example. But we continue to have new products, and you'll see it coming out of both from -- it's been our traditional part of our Diagnostics and Genomics Group, but also now out of AATI. So the pipeline will complement the market opportunities, and we have a number of things that we'll be able to share in the coming months and quarters.

And our next question will come from Steve Willoughby with Cleveland Research.

A couple for you. First, you made a comment regarding seeing good demand for both small molecules as well as biopharma customers. Just was wondering, as it relates to the small molecule side, is that a change in the trend that you're seeing? And kind of where you're seeing that amongst your small molecule customers. The -- what sounded -- it sounds to be pretty good demand. And then secondly, Mark or Didier, you outperformed your guidance in the quarter by a pretty decent amount. And assuming you had some insight on your orders, is it fair to assume that you had stronger pacing at the latter part of the quarter in the month of July here?

How about if I take the first one, right? So, Steve, you're a great reader of the results and listener, because when I first saw that, I said -- because we've been expecting that the growth rate will start to separate between biopharma and the small molecule segments of our overall pharma business, and we saw strong performance to small molecule. We often tie that to liquid chromatography, but what's going on here is 2 things. One is the overall demand for the ACG services, which is what we -- and consumables, which Mark commented on earlier. So that really is -- our small molecule customer may not be buying new LC to the same rate they were, but we've seen, really, expansion of our growth in services and consumables around our platforms as well as our competitors' platforms. And then we're also showing these numbers of the demand that's going with ICP-MS related to the -- some of the [USD reg]. So that's also driving some of the growth. I think the real story here is the ACG platform. And I think your comment was around the order pacing and...

We always expect the third month of the quarter to be stronger than the other months, but in the last 2 years, we've been a lot more linear than we used to be. So there's nothing remarkable about this last month of the quarter, this month of July.

Yes. Probably relative to the order (inaudible) Didier, Henrik's team did a fantastic job on the order to revenue conversion. I think we're getting a lot better at making that happen pretty quickly.

Our next question will come from the line of Puneet Souda with Leerink Partners.

Didier, we'll absolutely miss you, and I welcome Bob. I wanted to touch on -- just briefly quickly on ICP-MS. Could you elaborate how much of -- and I don't know if you've touched on this. And from the last quarter, there were shipment delays that were recognized in this quarter. What was the LSAG growth excluding those ICP-MS orders catch-up? And I just wanted to confirm if you saw any other similar revenue recognition in this quarter as well that could change expectations for the next quarter.

Yes, I haven't done the math, Didier, but I think it's relatively immaterial to the overall LSAG growth rate. It's about $3 million, I think, was...

Yes, maybe $5 million.

Maybe $5 million. So I think it was relatively immaterial to the overall growth of LSAG in the quarter. What was the second question?

(inaudible)

No, no, no. We would have called those out if we've had any of those. So I would say the demand for that product continues to be quite strong. So the -- and I think you can expect to hear us talking about ICP-MS in our fourth quarter call as well.

Yes, in both pharma and semiconductor and environmental.

Yes, it's a hot product and some really hot markets right now.

Okay, great. And my -- another question is on pharma. I know that's been discussed a bit here. But just looking at your acquisitions, ProZyme, Ultra Scientific, and now what you're doing here with Allotrope with OpenLAB, just help us understand high level -- how you're thinking about the overall long-term pharma growth in LSAG and overall about the LC/MS business and your expectations there to deliver in this market. Just help us understand how you see this evolving in a few years from now.

Yes. Happy to do this. Then let me invite Jacob in this conversation here about -- specifically on LC/MS. But we see pharma, as we highlighted in our AID meeting, that's our largest market with the expected -- some of the highest expected growth rates outside of clinical and diagnostics for the company. So this is an area of major focus for the company. And we've talked about our solutions focus as a company. And one of the reasons why we've been able to get the strong growth in biopharma is not just because of the great new LC/MS partner we have, but we've been able to broaden our solutions offering. This is where Mark's play of the consumables come in to give us the (inaudible) chemistries around our platforms. And on the informatics front, we think so much of the value of the customers' experience with the company is going to be in informatics, and we're a big believer in the importance of opening standards. And that's why we highlighted Agilent being first to market commercially, because this is something our customers -- our customers are moving us here. And some of our competitors prefer closed environments. We've always embraced universal connectivity, universal architecture. So philosophically, this line's up with our customer focus strategy, and we're delighted to be the first one in there. So, Jacob, maybe you have a few comments about the Allotrope play but also about our aspirations in LC/MS as well.

Yes, thanks, Mike. And let me just start overall and echo what you're saying, Mike, that we believe that it's a great future for Agilent in the pharma opportunity. LC has always been a big part, but LC/MS has certainly been an even bigger opportunity going forward. Also, we see especially in the biopharma where customers is looking for high performance but also for ease-of-use. And our Advance Q-TOF, Bio Q-TOF, has certainly shown that, and we have great success with that. But we also see that -- from an informatics perspective, that our customers are looking for something that is faster -- fast acquisition of information, ease-of-use again, but also getting a full comprehensive overview of all the data in the lab. And that's where Allotrope is very important to get data -- data standard across all the different modalities. And further than that, while we've been strong with our OpenLAB looking at the scientific information and controlling your -- the hardware itself, now with the Genohm acquisition, we also have full insight on the sample itself. So all these investments goes into that. We see a great opportunity in pharma, and the LC/MS is just getting started there.

And our next question will come from the line of Jack Meehan with Barclays.

Welcome, Bob. And, Didier, we'll miss you down in Miami.

Thanks, Jack. (inaudible) because I will be running some time there in the future.

(inaudible) invitation to your conference, Jack.

If you're -- if you'd like to swing in, you're welcome to. I want to focus on some of the recent acquisitions and just if you can elaborate a little bit on your plan to scale some of the platforms. If I look at the fourth quarter, you're calling for a little bit of a step-up in the contribution. Is there a level you think that these could contribute at just the deals you've closed in 2019 at this point?

Yes. So we believe that these acquisitions we've made are fast-growing spaces, and that was one of the primary rationales of why we went down the acquisition. So, for example, you look at AATI, NGS is driving that growth. And I think, Didier, when we were in New York, we talked about this thing going probably 20% on their own, and I think we're going to stick with those numbers. We just reviewed our acquisition portfolio with our board at the last board meeting, and all of the deals we've done, they're growing in excess of 20%. So, again, still, the core organic growth is driving the company, but we're adding them these faster-growing pieces. And I think, over time, they got even more material to the company's overall growth prospects. And I think we're pretty excited about AATI and a couple of the other things we've done. So I think let us leave it there.

Yes, that's sounds good. And, Mike, chemical and energy is always the wildcard in the outlook, but could you walk us through each of the businesses, how they performed in the quarter and just how you think the funnel is coming together there?

Specific to the 3 business groups or specific to chemical and energy? I just want to make sure I got the question correct.

Yes. I guess, the end markets within the chemical and energy, if we think about chemicals, E&P and refinery.

Oh. Great. Good. Thanks for the clarification. So just as a reminder, we think about this segment across 3 areas: refining; exploration, which is roughly 40% of the total; then the other 60% is chemicals, which also includes materials testing as well as our semiconductor-based business. And all 3 of those segments are growing. I would say the chemicals sector is growing faster, really driven by the investments we're seeing in the semiconductor material space. But the good news here is all 3 segments are growing, which is not a situation we've had, say, a year ago where some segments really were quite constrained. We see growth across all 3 of the subsegments, with higher rates in the chemical/semicon piece.

And our next question will come from the line of Derik De Bruin with Bank of America.

Sorry. Can you hear me?

We sure can. There you are.

Great. Sorry about that mute. So just to follow up on the M&A question. So I know you said $22 million is the contribution in Q4. I guess, in total, what is the total amount of revenue that you've required this year?

That's a great question. It's -- so far, we are probably -- so let me just -- hold on a second.

I'm trying to remember that number for that.

Yes, I want to be sure that I don't -- I have the number off the top of my head, but I think it's better if I read...

(inaudible) while Didier dig through his files here?

You're still on mute?

Yes, I'm still here. I'll follow up another one, which is -- it's also an acquisition question (inaudible). I know it's a little bit early to start talking about '19, but I'm going to. You've got deals...

Yes, I shouldn't have let you have a second question. I feel bad now.

Well, no. I mean, you've got deals, you've got currencies, you've got Lasergen, you got tariffs. You've got a lot of stuff moving around. How do we think about that margin expansion in '19?

I'll refer you back to our commitments made at the AID. We think we have no reason to move away from those commitments to be able to do this core margin expansion. That's how we're setting the plans inside the company and putting all the right -- we have a number of things in slide already to ensure we can get there.

So the answer to your question is, with the acquisitions we've made this year, Luxcel, Genohm, AATI, Ultra Scientific and ProZyme, those 5 acquisitions, we are at about $25 million for the fiscal year '18. And then for fiscal year, we'll end up -- I mean, Q4 alone will be around $17 million. So you multiply by 4 to have the 2019 annualized -- 2019 number.

Right. I think we're just starting to -- we're probably in the early phase of ramping these things. We're just getting the few months of revenue (inaudible).

Yes, yes, yes, absolutely.

And our next question will come from the line of Dan Arias with Citigroup.

Mike, on the U.S. chemicals and energy business, last quarter, you were kind unsure whether that might have been impacted by trade policies or whether that wasn't really seeing an impact. I guess, looking back, do you feel like tariff considerations were at all a factor in 2Q as the discussions start to heat up? And then maybe just on the overall C&E outlook, is it fair to say that double digit for the year is in the view? I mean, I know the comp is tough in 4Q, but I think you could also not grow at all and still be at 7, 8 just based on what you've done so far.

Yes. So 2 comments. On the first question, what I pointed out in the Q2 call was a somewhat of a longer deal cycle that closed in the U.S. And I can't scientifically approve it, but we thought that there was a level of cautiousness tied to just the overall rhetoric that was in the environment. That's still there, but it hasn't changed. And that was my concern. As you know, in the last call, it actually would go much more constrained. That has not changed. So (inaudible) 3 or 4 months ago. So basically, what I'm trying to communicate today is business as usual relative to the environment that we had last quarter, which did change as a result of a lot of this discussion in the macro environment. And while I'm not going to guide specifically the C&E market for the fourth quarter, that would be our upside, and it's within reason to hit those kind of numbers.

Okay. And then maybe just one more on the academic markets. As you finish your year in that segment, are you kind of assuming that you stay low single-digit range for 2Q, 3Q? Or do you think you see (inaudible) funds flowing and (inaudible) a little higher? I know you said you're not guiding that segment, but maybe I'll take a shot there.

Yes, I guess, I'll give it directionally. I think we'd expect to see some improvement over the Q3 number. Keep in mind, I think we're about a 6% through the first 3 quarters of this year. And typically, Q4, we -- I mentioned earlier the strength in China relative to government -- academia and government. And then assuming that rationality stays in place in Washington, we know that we'll get a -- usually get a nice push in September with federal government. So the fundamentals look pretty solid there.

And I'm showing no further questions in the queue at this time. So now, it is my pleasure to hand the conference back over to Ms. Alicia Rodriguez, Vice President of Investor Relations, for some closing comments and remarks.

Thank you, Brian. And to everybody on the line, on behalf of the management team, thank you for joining us today. If you have any questions, feel free to give us a call in Investor Relations. Have a good day. Bye-bye.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.