Agilent Technologies Q2 2023 Earnings Report

Agilent Technologies EPS Results

• Actual EPS: $1.27
• Consensus EPS: $1.26
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $1.13

Agilent Technologies Revenue Results

• Actual Revenue: $1.72 billion
• Expected Revenue: $1.67 billion
• Beat/Miss: Beat by +$42.54 million
• YoY Revenue Growth: +6.80%

Agilent Technologies Announcement Details

• Quarter: Q2 2023
• Date: 5/23/2023
• Time: After Market Closes
• Conference Call Date: Tuesday, May 23, 2023
• Conference Call Time: 4:30PM ET

Agilent Technologies (NYSE:A) is a global provider of scientific instrumentation, consumables, software and services for laboratories across the life sciences, diagnostics and applied chemical markets. The company’s product portfolio includes analytical instruments such as liquid and gas chromatographs, mass spectrometers, spectroscopy systems, and laboratory automation solutions, together with reagents, supplies and informatics tools that support measurement, testing and data analysis workflows. Agilent also offers instrument maintenance, qualification and laboratory services designed to help customers improve productivity and comply with regulatory requirements.

Founded as a corporate spin-off from Hewlett‑Packard in 1999, Agilent has evolved through a combination of strategic restructuring and acquisitions to concentrate on life sciences, diagnostics and applied laboratories. In the 2010s the company refocused its businesses through a separation that resulted in a dedicated electronic measurement company, allowing Agilent to prioritize analytical and diagnostic technologies. Over time Agilent has expanded its capabilities and product lines to address increasingly complex analytical challenges faced by its customers.

Headquartered in Santa Clara, California, Agilent serves a broad international customer base across the Americas, Europe, Middle East & Africa, and Asia-Pacific. Its customers include pharmaceutical and biotechnology companies, academic and government research institutions, clinical and diagnostic labs, environmental and food-safety testing organizations, and industrial manufacturers. The company is managed by an executive leadership team and a board of directors that oversee its global operations and strategic direction.

Agilent Technologies Q2 2023 Earnings Call Transcript

Key Takeaways

• Agilent reported Q2 revenue of $1.72 B, up 9.5% core, with EPS of $1.27 (+12%) and a 25.6% operating margin (+30 bps) beating expectations.
• Growth was led by Pharma (+6%) and Chemicals & Advanced Materials (+16%), while China sales surged 32% despite tough COVID comps.
• Early‐stage biotech customers cut capital spending, prompting a full‐year revenue outlook cut to 3–4.5% core growth and EPS guidance of 7–8%.
• By segment, Life Sciences & Applied Markets rose 10% core (LC/LC-MS +16%), CrossLab services grew 13%, and Diagnostics & Genomics up 3% core (NASD +20s%, but genomics down).
• For Q3, Agilent expects a 2.5–4.5% revenue decline (core) and 1.5–3% EPS growth on tough comps, driving more cautious near-term spending.

Presentation

[Operator]

Ladies and gentlemen, welcome to the Agilent Technologies Q2 2023 earnings call. My name is Sarah, and I will be coordinating your call today. If you would like to ask a question following the presentation, you may do so by pressing star one on your telephone. I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead.

[Parmeet Ahuja, Vice President, Investor Relations at Agilent Technologies]

Thank you, Sarah. Welcome everyone to Agilent's conference call for the second quarter of fiscal year 2023. With me are Mike McMullen, Agilent President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jakob Thaysen, President of the Agilent Life Sciences and Applied Markets Group, Sam Raha, President of the Agilent Diagnostics and Genomics Group, and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You'll find the most directly comparable GAAP financial metrics and reconciliations on our website.

[Parmeet Ahuja, Vice President, Investor Relations at Agilent Technologies]

Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past twelve months. Our guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. Now, I'd like to turn the call over to Mike.

[Mike McMullen, President and CEO at Agilent Technologies]

Thanks, Parmeet, thanks everyone for joining our call. In our call today, I'd like to first cover our second quarter results. I'll then provide some insight into the recent market dynamics that we are seeing and how this has translated into lower expectations for the second half of this year. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. In an increasingly challenging market environment, the Agilent team delivered very solid results in the second quarter. Revenues of $1.72 billion were up 9.5% core above our expectations with growth across all end markets and regions. Our results are driven by an innovative and broad portfolio, a differentiated customer experience, and outstanding execution by the Agilent team.

[Mike McMullen, President and CEO at Agilent Technologies]

Operating margin in the quarter, 25.6%, up 30 basis points. Earnings per share of $1.27 are up 12%. Highlights from an end market perspective include our two largest markets, pharma and chemicals and advanced materials, performing very well in the quarter. Our pharma business grew 6% on top of 13% growth last year. Pharma is led by biopharma, which grew 16%, driven by lab services, consumables, and our NASD business, while small molecule declined 1%. In previous calls, we talked about the small molecule replacement cycle and that the exceptional double-digit growth rates we've seen the past two years would eventually moderate, which is what we started to see this quarter. Our chemicals and advanced materials business delivered strong results once again, growing 16%.

[Mike McMullen, President and CEO at Agilent Technologies]

The advanced materials segment grew more than 20%, and the chemical and energy segment grew double digits. On a geographic basis, 32% growth in China exceeded our high expectations. While the compare was an easier one, even adjusting for the COVID lockdowns in Shanghai a year ago, we still achieved double-digit growth in China. In addition, Europe delivered 5% core growth, while Americas grew 3%, albeit against a tough compare of 13% a year ago. Looking at our performance by business unit, the Life Sciences and Applied Markets Group delivered revenues of $968 million, up 10% core. Our strong results were aided by backlog conversion across our instrument platforms. Our LC and LC-MS products continue to lead the way with 16% growth in the quarter, with strength across all end markets.

[Mike McMullen, President and CEO at Agilent Technologies]

Continued demand for lab consumables led to 13% growth in that business as well. During the quarter, we added additional strength to our LC-MS product line by acquiring e-MSion and their innovative electron capture technology. e-MSion technology allows researchers to develop biotherapeutic products more quickly for treating disease. Agilent's LSAG team continued to bring several innovative new products to market, including enhancements to our Bravo NGS automation, Cary UV-Vis, and the cell analysis NovoCyte systems. Many of these enhancements are specifically focused on serving our customers in the biopharma market. The Agilent CrossLab Group posted revenues of $387 million. This is up 13% core, driven by strong revenues from service contracts. ACG's growth was broad-based, representing ongoing resilient demand for our services. We continue to see many opportunities for future growth given our services portfolio.

[Mike McMullen, President and CEO at Agilent Technologies]

In particular, the benefits of our service offerings as they help customers drive productivity in the lab are even more relevant in today's challenging environment. Our strong and trusted customer support is also helping us to drive share gains and acquire new enterprise customers. The Diagnostics and Genomics Group delivered revenues of $362 million of 3% core. Strength in our pathology and NASD businesses drove growth, partially offset by general industry-wide weakness in genomics. NASD posted another strong quarter of growing in the high 20s. Our Train B manufacturing expansion remains on track to come online later this quarter, while construction has already started on the next phase of expansion. Overall, we wrapped up Agilent's first half of fiscal 2023 with double-digit core growth in both revenue and EPS.

[Mike McMullen, President and CEO at Agilent Technologies]

Continued macroeconomic uncertainty, coupled with stresses in the banking system, have accelerated a more conservative approach from our customers across the globe. This has primarily affected CapEx-related instrument spending across most end markets, but is centered mainly in the pharma markets in the US and China. Early-stage biotech customers, while a small part of our revenue, dramatically scaled back purchases as funding and liquidity challenges drove cash conservation. Outside of these early-stage biotechs, the order funnel continues to be healthy, but it has taken a longer time for orders to be approved, slowing deal velocity and generation of new orders. We expect this constrained capital environment to remain in place throughout the course of our fiscal year. Because of these factors, we are taking a more cautious approach to the second half and have revised our forecast downward.

[Mike McMullen, President and CEO at Agilent Technologies]

As a result, we now expect core revenue growth to be in the range of 3%-4.5%, with EPS growing faster than revenue at 7%-8%. Our operating margins increased in the first half of the year, and we're doubling down on delivering cost efficiencies and increasing productivity to drive more leverage earnings growth in the second half. As we've done in the past, we will generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We have an unstoppable One Agilent team that is battle-tested. They consistently execute at extremely high level and are well prepared to deal with any challenges they may face. Bob will provide the details on our outlook for Q3 and the full year.

[Mike McMullen, President and CEO at Agilent Technologies]

Overall, we remain convinced our strategic focus, customer service, and unmatched execution by the Agilent team remain the key to our continued success. After Bob delivers his comments, I'll get back to you to provide some closing remarks. Now, Bob, over to you.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Thanks, Mike. Good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll finish up with our updated guidance for the year and our third quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q2 revenue was $1.72 billion, exceeding our expectations. Revenues were up 9.5% core and up 6.8% on a reported basis. Currency was a 2.8-point headwind, while the M&A contribution was minor as expected. In Q2, we continued to leverage our backlog and exited the quarter with our backlog at a normalized level. As Mike mentioned, our two largest end markets performed well in the quarter.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Pharma, our largest end market, posted 6% growth led by biopharma, while small molecule declined slightly. Chemicals and advanced materials continued to drive strong secular growth of 16% during the quarter on top of 9% growth last year. The chemical and energy subsegments of the market are doing well, with the advanced materials market continuing to lead the way. As in past quarters, semiconductors and batteries are driving demand in this space. In looking at the rest of the end markets, the food market grew an impressive 21% during the quarter, driven by very strong growth in China. We also saw strong results in the Americas and in Europe. The academia and government market was up 11%, led by China and Europe, as the funding environment continues to be constructive.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Our business in the Diagnostics and Clinical market grew 6% on top of 5% growth last year. Pathology again led the way for us here, partially offset by Genomics. The environmental and forensics business grew 2%, led by China and the Americas, while Europe declined. The Americas slowed after a very strong Q1, but still delivered mid-single-digit growth. On a geographic basis, the China team exceeded our expectations, delivering 32% growth following last year's COVID lockdowns in Shanghai. As we mentioned last year, the COVID-related lockdowns deferred roughly $55 million in Q2 from last year into third and fourth quarters. While Q2 is an easier compare, we have much tougher compares in China going forward. Taking out the effects of the lockdown this quarter, we estimate China still grew double digits, so very solid results by our China team.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

The rest of Asia grew high single digits, better than expected. The Americas grew 3% with growth across all end markets. From a group perspective, both ACG and DGG grew, while LSAG unexpectedly declined low single digits as we started to see the accelerated effects of the slowing CapEx environment. Europe grew 5% in line with expectations led by pharma and CAM. Moving down the P&L, second quarter gross margin was 55.3%, down 40 basis points from a year ago, largely due to an unfavorable product mix. The benefit of pricing was as expected. Below gross margin, we had good cost discipline in SG&A, which drove our operating margin to 25.6%, up 30 basis points from last year. Below the line, we benefited from higher than planned interest income due to higher interest rates and strong cash flow.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Our tax rate was 13.75% for the quarter, and we had 297 million diluted shares outstanding, both as expected. Now, putting it all together, Q2 earnings per share were $1.27, up 12% from a year ago. A very good result combined with our 9.5% core top-line growth. During the quarter, operating cash flow was very strong, generating $398 million. This result was helped in part by deferring estimated U.S. tax payments of roughly $60 million to our fiscal fourth quarter. This is due to the payment deferral relief made available by the IRS to taxpayers in designated counties affected by the winter storms in California.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

We returned $151 million to shareholders, $66 million through dividends and repurchased shares worth $85 million, while also investing $57 million in CapEx, continuing our successful balanced approach to capital deployment. Our strong balance sheet is even more of an asset in this market environment and remains very healthy as we ended the quarter with a net leverage ratio of 0.7 times. Earlier this month, Moody's upgraded Agilent's investment grade rating on our corporate long-term debt to Baa1. This action is an important recognition of Agilent's financial strength. On to the revised outlook for the year and guidance for Q3. For the year, we now expect revenue to be in the range of $6.93 billion-$7.03 billion.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

This represents reported growth of 1.2%-2.7% and core growth of 3%-4.5%. Currency is expected to be a headwind of 1.9 points, while M&A will contribute 0.1 points of growth. In addition to revising our guidance, we've increased the guidance range for the second half of the year to reflect a wider range of possible outcomes. For modeling purposes, I would encourage you to use the midpoint of our guide. Our updated guidance reflects a more constrained capital market, primarily impacting our instrument business. The outlook for our recurring revenue businesses remains largely unchanged. From an end market perspective, the market most impacted is pharma, where we are now expecting full-year growth of low single digits, down from high single digits.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

From a geographic perspective, we see impacts focused in the U.S. and China. With the change in revenue, we now expect full-year fiscal 2023 non-GAAP earnings per share to be between $5.60 and $5.65, representing growth of 7%-8%. As with revenue, I encourage you to model at the midpoint of our guidance. Turning to Q3, we expect revenue in the range of $1.64 billion-$1.675 billion. This represents a decline of 4.5% to a decline of 2.5% for both reported and core revenue. This is on top of a tough compare of 13% growth last year. Adjusting for the China deferral in Q3 of last year would add roughly 200 basis points to both reported and core growth in the quarter.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Currency and M&A impact in Q3 are minimal and are expected to offset each other. Third quarter non-GAAP earnings per share are expected be between $1.36 and $1.38, representing growth of 1.5%-3% versus the prior year. We are pleased with the first half performance, and while we are facing a more difficult market environment than we were estimating a quarter ago, I am confident our team will continue to deliver for our customers. Thanks for being on the call. Now I'll turn over things back to Mike for some closing comments before we take your questions. Mike.

[Mike McMullen, President and CEO at Agilent Technologies]

Thanks, Bob. During the Q4 2022 call in November, I shared with you that I believe Agilent has the right growth strategies, the right team, and right culture to continue delivering strong above-market results. My belief remains unchanged. Our customers know we are reliable, resilient, and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. While the near-term outlook points to continuing challenges in the market, we remain confident in the long-term growth prospects in our end markets and our ability to continue to grow faster than the market. Agilent, a trusted partner that our customers know they can rely on. Despite the current market environment, I remain confident in our ability to deliver on our shareholder value creation model. Our core values and approach haven't changed.

[Mike McMullen, President and CEO at Agilent Technologies]

Our focus on investing for growth, providing the industry's best customer support, our innovation prowess, and being a great place for our team to work with a differentiated company culture are here to stay. They remain Agilent's formula for long-term success. Thank you. Now over to you, Parmeet, to lead the question and answer session. Parmieet?

[Parmeet Ahuja, Vice President, Investor Relations at Agilent Technologies]

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

[Operator]

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone now. If you change your mind, please press star one again to withdraw your question. When preparing to ask your question, please ensure that your phone is unmuted locally. Your first question comes from the line of Brandon Couillard with Jefferies. Please go ahead.

[Brandon Couillard, Analyst at Jefferies]

Hey, thanks. Good afternoon.

[Mike McMullen, President and CEO at Agilent Technologies]

Good afternoon, Brandon.

[Brandon Couillard, Analyst at Jefferies]

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

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, sure. Happy to do so, Brandon. I think there are differences between the two sectors. The small biotech is pretty much shut down. We've seen real efforts on cash conservation as they've been dealing with, you know, the financing challenges of less venture capital money out there, you know, banking crises, and limited access to the IPO market. But on the medium-sized and large pharma companies, we still see a very actually an increasing level of conservatism coming from new capital investments, particularly as it relates to our business in instruments. You know, you could make a case that perhaps there'll be a year-end budget flush, you know, if customers go to try to spend their year-end money that they're not spending now.

[Mike McMullen, President and CEO at Agilent Technologies]

We're not assuming that because all we can really comment on right now is what we're seeing today. We're not given any indications that that situation will change. I think what remains to be seen is, you know, I think it's gonna be a CEO, CFO decision at our larger pharma companies about how they'll handle their full year budgets. Again, that relates primarily to the instrument side of our business. You know, as we commented in our, in our prepared remarks, you know, consumables and services demand continue quite strong in these marketplaces. Bob, anything else you add to that?

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Hey, Brandon, this is Bob. Just to kind of frame in, if we think about these businesses, this emerging biotech, which is the one that has really changed during the course of Q2, that represents roughly about 10% of our pharma business, we were projecting that at, you know, roughly, you know, low double digits, and now we're expecting that to decline. As Mike was saying, the rest of the business was high single digits, and now we're assuming kind of a low double digits given this more conservative capital. I would also say the funnels are healthy.

[Mike McMullen, President and CEO at Agilent Technologies]

Yep.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

From the standpoint of working with them. It's just taking longer for them to translate that deal velocity into orders.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Bob, one thing I forgot to mention as well is we aren't hearing the budgets are being cut. The timelines, as Bob mentioned, are extended. We're often of higher levels of approval as well within our customer base.

[Brandon Couillard, Analyst at Jefferies]

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

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, sure, Brandon. You know, you may recall earlier this year, we really were pointing to Europe as a watch area, particularly Western Europe. You know, I have to say, you know, we continue to point it as a watch area, but we've been pleased with the results to date. We are seeing signs of increased cautiousness on the chemical side of our customer base in Europe. You know, advanced materials continues to be demand there, and we're pleased with how that business is holding up right now.

[Brandon Couillard, Analyst at Jefferies]

Great. Thanks.

[Operator]

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

[Vijay Kumar, Senior Managing Director at Evercore ISI]

Hey, guys. Thanks for taking my question.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Vijay. Sure.

[Vijay Kumar, Senior Managing Director at Evercore ISI]

Mike, just can you just frame sort of what, you know, April trends were? You know, how May progressed because I'm just trying to make sense of the guidance. You know, you guys did double digits in first half, and we went from, you know, double digits to, you know, low single digit decline. I just frame as this pace of slowdown. Is there any historical analogies when you see these kinds of slowdowns? Do these things last like, you know, a couple of quarters or is this like 4 quarters? I'm assuming this guide change so far, it's only pharma, correct? Like, we're not reflecting any other end market changes.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. There's a lot to unpack there, Bob. You and I maybe can tag team on this. Let's first of all talk about the pace of business. As you're right, Vijay, it really is a tale of two cities. I mean, look at how we performed for the first half, double-digit core growth, double-digit EPS growth, continued margin expansion. We have been signaling a level of cautiousness in our customer base. You know, we talked about the uncertainty that was assumed in our second-half guide. We've been talking about that for a few quarters. What I would tell you is that we actually started, and it's really a late-quarter phenomena.

[Mike McMullen, President and CEO at Agilent Technologies]

We started to see a little bit in maybe last week or so of March, really centered in April, where the level of caution from our customers increased. Deal cycles were continued to get further pushed out. Deals weren't closing. That really was the main reason for the push in terms of downward guide for the second half. What I can tell you know, what we're seeing so far through May, I think that was also one of your questions, is, you know, May, today orders, if you will, are tracking towards our revised order expectation. You know, we've been through these cycles before in terms of downturns.

[Mike McMullen, President and CEO at Agilent Technologies]

These are always hard to predict because it's always hard to know exactly when the cycle started. Our experience is they're, you know, at least 12-month kinda cycles, 12-18 months. I think that's really the question that we need to work through here in the next few quarters. Again, as Bob and I have said in the past, we take one quarter at a time. What we're trying to do here is comment to you today is what we're seeing today in the marketplace, and it's a level of increased cautiousness on capital deployment.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah. Hey, Vijay, maybe just to add a couple of other comments to what Mike was saying. In the second quarter, we talked about revenue exceeding our orders, and that was really towards the back end. We came into Q2 with a still greater than normal backlog. Our OFS team was able to actually drive down our backlog and leverage that. If you took the backlog impact out of our numbers, we would have been at mid-single digits for transparency in Q2. Now, we had built some of that-

[Vijay Kumar, Senior Managing Director at Evercore ISI]

That's true.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

... into our forecast. We just didn't refill the funnel as much as we thought we were going to, coming into Q2, which means, you know, resulted in a lower expectation for the second half of the year.

[Vijay Kumar, Senior Managing Director at Evercore ISI]

That's extremely helpful, Bob and Mike.

[Mike McMullen, President and CEO at Agilent Technologies]

And then-

[Vijay Kumar, Senior Managing Director at Evercore ISI]

Sorry, go ahead, Mike.

[Mike McMullen, President and CEO at Agilent Technologies]

I was just gonna say, too, Bob, I think it's fair to say relative to our guide assumptions, we're mainly looking at the pharma end market.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

That's right.

[Mike McMullen, President and CEO at Agilent Technologies]

This level of cautiousness, the increased level of cautiousness we're seeing is really across all end market segments, but really centered in pharma.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yes.

[Vijay Kumar, Senior Managing Director at Evercore ISI]

That's helpful, Mike. Just one, quick one.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure.

[Vijay Kumar, Senior Managing Director at Evercore ISI]

This back half EPS and margins, Bob, I think 2Q operating margins missed. Just rough math here suggests back half operating margins need to be up 300 basis points from 2Q levels. With revenues coming down, can you just walk us through on what gets us to that what drives that margin expansion?

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah. You're right. In Q2, we did, you know, we had higher revenues than expected. And we did have some negative mix of effect that resulted in a lower than expected margin. Now we did expand, we just didn't expand as much as we had anticipated. As a result of the lower guidance, as Mike talked about doubling down on cost efficiencies. We've taken a number of actions to streamline our spending profile in the second half of the year, in order to drive greater margin expansion in the second half to drive the EPS.

[Mike McMullen, President and CEO at Agilent Technologies]

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

[Vijay Kumar, Senior Managing Director at Evercore ISI]

Understood. Thanks, guys.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

All right.

[Operator]

Your next question comes from the line of Puneet Souda with SVB Securities. Please go ahead.

[Puneet Souda, Senior Research Analyst at SVB Securities]

Yeah. Hi, Mike, Bob. Thanks for taking the question.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Hey, Puneet.

[Puneet Souda, Senior Research Analyst at SVB Securities]

So...

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Sure.

[Puneet Souda, Senior Research Analyst at SVB Securities]

Thanks, Mike. First one is really on, you know, obviously China, very strong in the quarter. Can you elaborate a bit on sort of the stimulus contribution that happened this quarter? Obviously, you're expecting moderation in the second half. Also, if you could talk about if you're seeing anything relevant to the new COVID wave that's emerging there. Is that something baked into your guide? Overall, just expectations for China for the full year.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. Why don't I start out with answering the last question first, and then I'll, and I'll point eventually to you, Bob, to our guide assumptions. In terms of, I think you mentioned new COVID waves. We've not considered that into our second half guide, and I don't believe we would because we have experienced pretty significant COVID waves throughout the years. As we've shown each quarter, we can fairly well, very easily, not easily, but we can navigate through that. In fact, that was a storyboard that you may recall from Q1 of this, of this year.

[Mike McMullen, President and CEO at Agilent Technologies]

Relative to stimulus, we've been on record and the story remains the same, is, we've seen no material impact from China's stimulus, which in fact we understand, was closed off at the end of February. That initial stimulus program, from our understanding, was really focused on the high-end research space, you know, things such as NMRs and SEMs, products that where we don't have an offering or compete. We're not seeing much happening at all on our front relative to stimulus. There is some discussion in the marketplace that maybe there's another one coming.

[Mike McMullen, President and CEO at Agilent Technologies]

If that would occur, that would be upside to our forecast for the year, as we're assuming really no change in the current environment and no stimulus is assumed in our second half guide. Bob, I know we've made some adjustments to the outlook for China. Do you wanna add for the year?

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah, Puneet, you know, if we look at Q2, we always assume that Q2 was going to be a very strong, given what we were facing an easier comp, and we talked about that in our prepared remarks, where Shanghai was shut down for roughly six weeks. That deferred

[Mike McMullen, President and CEO at Agilent Technologies]

Roughly $50 million-$55 million of revenue that now showing up in Q3 and Q4 of last year, which will make it much tougher comps. To give you a perspective, last year we went -3% in Q2, 29% growth, and then 44% growth. We're always expecting moderated growth expectations in the back half of the year, just given that tough comp. What we've seen is not a pickup in the performance in the marketplace, particularly in pharma, which we were expecting coming out of kind of the first quarter after the elimination of the zero COVID. We're assuming that this current performance will maintain through the second half of the year. We're not gonna see a recovery.

[Mike McMullen, President and CEO at Agilent Technologies]

Got it. That's super helpful. Then, you know, if I could touch on the early stage biotech customers?

[Mike McMullen, President and CEO at Agilent Technologies]

Mm-hmm.

[Mike McMullen, President and CEO at Agilent Technologies]

Could you just remind us for the overall company, I know you provided pharma, but for the overall company, what's the mix there? Also, is there any impact that you saw, expect there from in the NASD business or your cell therapy offerings, you know, as a result of that? You know, just given the number of questions we're getting here, just, you know, at a high level, Mike, instrumentation very strong over the last 2 years, one of the remarkable m-cycle of instrumentation placements that we have seen over the last few decades. You know, what when do you think we get back to sort of a normalized order pattern for instrumentation? Thank you again for taking all those questions.

[Mike McMullen, President and CEO at Agilent Technologies]

Maybe we start with the biotech and.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah

[Mike McMullen, President and CEO at Agilent Technologies]

... NASD business questions first. No impact at all on our NASD business. I think, Sam, we can say that pretty equivocally, right?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. To give you a perspective, emerging biotech, Puneet, is roughly, you know, it's less than 5% of the total company. It's roughly closer to 3% for the full company in terms of revenue.

[Mike McMullen, President and CEO at Agilent Technologies]

Your last question is the toughest question, which is, you know, sort of, if you will, your crystal ball question. We've typically seen 12-18 month kind of cycles historically. As Jake and Bob have talked in the past, we've always felt that this is more of a mid-single digit kind of growth market for instruments, which is still very healthy end market growth rate, and particularly when you build around at the service and consumables piece. We're not calling for that yet through this year.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

I think the only other thing I would say is, you know, for a large majority of our instrument business, it's a replacement cycle. We've talked about that time and time again. These products are in the installed base, they will have to be replaced. The question is, when?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

Again, interest and demand remains high. I mean, our backlog is strong. As we mentioned in prior calls, and I just reemphasize that again today. Quality backlog remains high. No significant order cancellations. As Padraig likes to say, we're adding fresh funnel to the backlog. It points to future demand, but we're just not seeing indications of when their buying behaviors are gonna change.

[Mike McMullen, President and CEO at Agilent Technologies]

Got it. All right. Thanks, thanks, guys. I appreciate it.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure.

[Operator]

Your next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead.

[Matt Sykes, Senior Equity Research Analyst at Goldman Sachs]

Hey, good afternoon, Mike and Bob. Thanks for taking my questions.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure, Matt.

[Matt Sykes, Senior Equity Research Analyst at Goldman Sachs]

My first question is just clearly it seems to be the delta and the changing full year guide is largely concentrated in pharma, both large and small. Given the sort of resilience you've seen and the strength in the chemical and advanced materials space with that 16% growth, what is your kind of outlook on that end market? I mean, should we expect a level of durability of demand, certainly relative to what you're seeing in pharma over the course of this year that could help offset some of the growth impact you're seeing in LSI?

[Mike McMullen, President and CEO at Agilent Technologies]

That's a great question. Bob, I think that's actually what we've assumed in our, in our full year guide. Maybe you want to share some of the specifics.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, Matt. you know If you looked at where we were at the beginning of the year, the largest change is in pharma, where we were at high single digits and as I mentioned, you know, going to low single digits. Our chemical and advanced materials, we're still assuming a mid to high single digit growth for the full year. Certainly front-end loaded, given kind of the challenges that we see in terms of the comps with China. We are seeing, you know, we are expecting that to be more resilient given the, you know, some of the fundamental secular drivers of semicon in batteries. Those continue to be strong and are expected to stay strong in the second half of the year as well.

[Matt Sykes, Senior Equity Research Analyst at Goldman Sachs]

Got it. Thanks. That's really helpful. Just second question for you guys, maybe Padraig, just on ACG. Just given if we do have this sort of 12-18 month cycle, you've talked in the past about the ability for ACG on the services side, whether it's extended warranties or others, in terms of kind of helping to offset some of the weakness you might see in sort of capital equipment purchases by extending those services or increasing those services revenues. I realize it's a smaller portion of revenue relative to LSAG, but I'm just wondering if this is sort of a 12-18 month cycle, could you see some level of acceleration or at least durable, you know, sort of low double, high single-digit growth in ACG over the course of that time period?

[Padraig McDonnell, President and CEO at Agilent Technologies]

Look, I think the breadth of product offerings across many of the hardware platforms enables us to add all types of customer helps all types of customer operations. What we're seeing is extremely strong demand for services as utilization of the install base happens. In particular, we're seeing lab-wide enterprise service offerings, a big demand for that, where we're helping customers with their efficiency.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Their asset management and so on. I think it's a very durable business, and I think it's going to continue to be durable over that time frame.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, I think durability is the right word to use here, Padraig and Matt. You know, this is a resilient part of our company's portfolio. We've talked about these recurring revenue businesses. I think the story here is even bigger, Padraig, than extension of instrument life if people are deferring replacement purchases. We also believe we've been picking up share and particularly, again, doing really nicely job on the enterprise level.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

I would also say, Mike, we still have a big opportunity to attach our service contracts onto the business. Of course, as we go through this cycle, we continue to accelerate that.

[Padraig McDonnell, President and CEO at Agilent Technologies]

Great. Thanks very much, guys.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure.

[Operator]

Your next question comes from the line of Rachel Vatnsdal with J.P. Morgan. Please go ahead.

[Rachel Vatnsdal, Equity Research Analyst at J.P. Morgan]

Great. Thank you for taking the questions. first up here, just on.

[Mike McMullen, President and CEO at Agilent Technologies]

Hi, Rachel.

[Rachel Vatnsdal, Equity Research Analyst at J.P. Morgan]

Yeah. Hi, guys. First, just maybe some questions on backlog. You noted that you worked on your backlog this quarter. Could you just tell us how many months of backlog you have on that instrument portfolio today? Last quarter, you noted that you'd worked on the backlog on the instrument portfolio, but for the total business, orders had grew faster than revenues. Can you kind of give us some of that context as well in terms of order book and backlog trends between instruments versus the rest of the business as well?

[Mike McMullen, President and CEO at Agilent Technologies]

Sure. Hey, Rachel, thanks for the question. As you know, we don't report on book-to-bill, but what we can use is how to qualitatively describe the backlog. Bob, I think would use the word normalized backlog from the elevated levels we had seen in the quarter. We're at a normal level of backlog in terms of month supplies. We've been talking about this movement towards normalization in terms of the backlog, and we're there now.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah. Yeah. Rachel, you're right. Our orders grew greater than revenue in Q1. As I mentioned earlier in the call, Q2, it reversed where revenue was greater than orders. We did eat into backlog both in Q1 and Q2 in the instrument side, you know, as supply, you know, as the delivery times declined. We thought that that was a healthy thing. We're back at normalized delivery times as well as a normalized backlog.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Bob, I think we did have some pretty tough compares in terms of our prior year order growth. I think ACG and DG continue to grow.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

That's right.

[Mike McMullen, President and CEO at Agilent Technologies]

... in the quarter.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yes.

[Rachel Vatnsdal, Equity Research Analyst at J.P. Morgan]

Great. Question on the LC market here? You guys grew 16% in the quarter. We've heard some varying comments on this market. Can you just walk us through what are you exactly seeing, and what do you expect for the full year for LC growth? Finally, you've said some comments today about share gains, and you've talking about that in some recent weeks as well or recent months as well. Can you just talk to us about share gains and kind of what parts of the market, whether that's geographic basis or customer segment-wise, that you're doing in LC? Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, I'm gonna pull Jacob into this call, but he hasn't had an opportunity to join in the conversation. I think the storyboard here for LC is very consistent with the overall macro environment we described, which is an increasingly cautious set of decisions being made by customers relative to new instrument purchases. As you know, we've been talking for some quarters about the moderation we were expecting to see in small molecule LC placements, that the 20-plus growth rates that the industry had been seeing for a number of quarters, we'd actually would see a level of moderation start to occur, and that's what we saw in this recent quarter. We would expect to see that continue throughout this year.

[Mike McMullen, President and CEO at Agilent Technologies]

Perhaps you want to add some of your thoughts here as well, Jacob, and then take on the question about market share as well.

[Jacob Thaysen, CEO at The Goodyear Tire & Rubber Company]

Yeah, absolutely. Thanks for the question. I mean, first of all, we continue to see good market share gain in the LC business. We see that as Mike was mentioning, also over the last year, we have really seen high growth in the LC business over many of our end markets. Obviously, it's been fueled significantly in the pharma, both small and large molecules. As both Mike and Bob was talking about, these markets are changing right now. While we will see a change in the market dynamics and thereby also some of the growth rates, the strategy we've been placed from LC-MS, and pretty much the whole portfolio has been to build these workflows that is based on robust, reliable instruments and really solution-oriented.

[Jacob Thaysen, CEO at The Goodyear Tire & Rubber Company]

We expect, and we see that this is what our customers are looking for. Hence, I'm expecting that while the markets are down, we will continue to see market share gain in this business and also in the LC-MS business.

[Operator]

Your next question comes from the line of Dan Leonard with Credit Suisse. Please go ahead.

[Dan Leonard, Analyst at Credit Suisse]

Hi. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Dan.

[Dan Leonard, Analyst at Credit Suisse]

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

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. I'll invite Padraig in this. I don't think you can point to Silicon Valley, but you can point to the pressure that the pharma companies are on relative to their P&Ls, and they're cautious. They're really cautious about deploying new capital.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

It's.

[Mike Ryskin, Research Analyst at Bank of America]

Yeah, I would add, Mike, you know, the approval levels that we're seeing are going up and up and at the highest levels within pharma accounts for making decisions on capital purchase.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Mike Ryskin, Research Analyst at Bank of America]

A lot of cautions around that.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, Dan, I have to say, in all transparency, a little bit hard to figure out, right? You know, we had a similar thesis, which was, the markets would be more resilient, although we expect with some level of pressure as we assume their second half guide, a little more resilient, in the face of a slowing GDP. Obviously, things have moved more quickly than we had anticipated. This level of increased cautiousness was something we've seen in the last probably 4-6 weeks. It's difficult to figure out from the standpoint is there's no obvious external catalyst. We just know we're seeing it across a broad section of our customer base.

[Dan Leonard, Analyst at Credit Suisse]

Appreciate that. A separate question, can you zoom in a bit more on what's going on in the genomics markets within your DGG business? Do you think there's any, you know, share shift happen? Is it all, you know, all the pressures market related? When would you expect that could improve?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. I'm going to invite Sam into this, but I think what you'll hear from him is he'll talk to you about it's really a U.S.-centric phenomena, not a market share issue. There is that level of CapEx there that's on the instrument side that we're feeling a bit as well.

[Sam Raha, Retired President of the Diagnostics and Genomics Group at Agilent Technologies]

Yeah, absolutely, Mike. Thank you for the question. You know, what we found is that, when you think about translational research, we've already talked about pharma here also as it used genomics, but diagnostic testing too. There's just become a slowness in decision-making not only in instruments, but even in the usage of consumables, particularly on the instruments. I will tell you that, even within the quarter, our NGSQC backlog for consumables related to NGSQC, that's actually grown and our orders have grown, so we're doing well there. There has been a slowness that we're seeing, you know, that's broad-based. To answer your question about share, we don't believe that we're losing share. You know, similar to what you'd heard about the instrument, it's not that we're losing orders.

[Sam Raha, Retired President of the Diagnostics and Genomics Group at Agilent Technologies]

The time in which the orders are being placed, is just being lengthened. In U.S. particular, a little bit in China is where we're seeing the impact.

[Mike McMullen, President and CEO at Agilent Technologies]

We are assuming a level of improvement in our genomics business in the second half, and our guide, as I recall, Robert McMahon.

[Sam Raha, Retired President of the Diagnostics and Genomics Group at Agilent Technologies]

Uh-huh.

[Mike McMullen, President and CEO at Agilent Technologies]

Not full recovery, but improvement.

[Sam Raha, Retired President of the Diagnostics and Genomics Group at Agilent Technologies]

Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

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

[Dan Leonard, Analyst at Credit Suisse]

Like I said, thank you for all the color.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure. Quite welcome.

[Operator]

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

[Mike Ryskin, Research Analyst at Bank of America]

Hey, thanks for taking the question.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Mike Ryskin, Research Analyst at Bank of America]

This is Mike Ryskin on for Derik.

[Mike McMullen, President and CEO at Agilent Technologies]

Mike.

[Mike Ryskin, Research Analyst at Bank of America]

Just following up on a previous point, on, you know, pharma, big pharma slowing down. You used a lot of comments, you know, slower deal velocity, taking longer to close deals, et cetera. As you just said, you're not seeing an obvious catalyst. Is there any risk you're going to see slower deal velocity elsewhere as you go through the year? I mean, academic and government, applied materials, these are sectors that also had, I would say, you know, above trend growth in recent years and in the fiscal first half. You're not building in any conservatism in those areas for the rest of the year. You know, how would you characterize the risk there?

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Mike Ryskin, Research Analyst at Bank of America]

just given, you know, how quickly pharma turned?

[Mike McMullen, President and CEO at Agilent Technologies]

Sure. You know, Bob and I think we've got a realistic forecast here, and that's why we're asking to think about guidance at the midpoint. We had already assumed some level of slower capital investment in those end markets in our previous guide, so there's really no change to that. We think that, you know, outside of maybe the chemical side of CAM, you know, that those other end markets will hold up relative to our, our guide expectations. Listen, you know, we've had the experience in these cycles before, and Mike, one of the things I wanted to mention earlier to a previous caller's question was, we know when the market's low. This is actually when the Agilent team even shines further. We always gain market share in down markets.

[Mike McMullen, President and CEO at Agilent Technologies]

I'm absolutely convinced, you heard it in my prepared remarks, that we're going to come out of this thing stronger. I think the only debate is how long this cycle is going to be.

[Mike Ryskin, Research Analyst at Bank of America]

Right. Yeah. kind of to that point, for the fiscal second half, I mean, you know, you're pointing to 3.5% decline, core growth, core sales growth in 3Q, but then implies roughly flat in 4Q. You touched a little bit on comps with China moving around and things like that, but still, sequentially, that's a pretty big re-acceleration in the 4Q, regardless of how you look at it and, you know, even in absolute dollar terms. Are you assuming any re-accel in the 4Q? Are you any indication of that happening in terms of orders? I guess just why is it, really fiscal 3Q that's being hammered here?

[Mike McMullen, President and CEO at Agilent Technologies]

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

[Jack Meehan, Equity Research Analyst at Nephron Research]

Okay. All right. Thanks.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure. Sure, Mike.

[Operator]

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

[Dan Brennan, Senior Analyst at TD Cowen]

Great. Thanks. Thanks, guys, for the questions. Mike and Bob.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure, Dan.

[Dan Brennan, Senior Analyst at TD Cowen]

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

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

I would say let me take the last one first. You know, our LSAG business, where we were assuming for the full year kind of mid-single digit growth, with it front-end loaded, we're now expecting low single digits, you know, just above zero. We're actually expecting a decline in both the second, third quarter and fourth quarter for LSAG, driven in part by the emerging biotech and the small molecule. In terms of the biopharma actually in total grew.

[Mike McMullen, President and CEO at Agilent Technologies]

16%

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

16% in the Q2 results. That was benefited obviously from NASD. If you took NASD out, it was it was 11%. What we saw was this change in the quarter, and we're assuming that change will stay, you know, pretty consistent in the back half of the year.

[Dan Brennan, Senior Analyst at TD Cowen]

Got it. Okay. Then, maybe just one on NASD, Bob, since you brought it up. Another terrific quarter. Can you just unpack a little bit on kind of what the funnel looks like there? Is the same level of growth kind of persist in second half? You know, now that you're bringing on, you know, kind of working on the new train, kind of what's the durability of that growth as you look out beyond your end? Thank you.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah, we're

[Mike McMullen, President and CEO at Agilent Technologies]

I'll take that one.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah. Super pleased with the performance of NASD. You know, as we look out to the second half of the year, we feel good about the performance and are excited about Train B coming online. You know, we're having conversations with customers as we look to fill that Train up. What I would say is kind of stay tuned for that standpoint. You know, what I would say long term, you know, we're extremely excited about this. That's why we're investing another $700 million in adding, you know, Train C and D as well. We think that we're in the early stage of, you know, therapeutic discovery here in terms of RNA, siRNA-based therapies.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

There will just be more larger indications as those move through the clinic.

[Mike McMullen, President and CEO at Agilent Technologies]

Absolutely.

[Dan Brennan, Senior Analyst at TD Cowen]

Great. Thanks, guys.

[Mike McMullen, President and CEO at Agilent Technologies]

You're welcome.

[Operator]

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

[Jack Meehan, Equity Research Analyst at Nephron Research]

Thank you. Good afternoon.

[Mike McMullen, President and CEO at Agilent Technologies]

Good afternoon, Jack.

[Jack Meehan, Equity Research Analyst at Nephron Research]

I have one more question on China. You know, obviously great quarter, even if you exclude the comps, but you're talking about some incremental caution here. Can you talk about, like, what customers in the China region you're seeing some of this incremental caution? Is CDMOs one of those? Just any color on specific customers in the region would be great.

[Mike McMullen, President and CEO at Agilent Technologies]

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

[Mike McMullen, President and CEO at Agilent Technologies]

What are you hearing from them?

[Padraig McDonnell, President and CEO at Agilent Technologies]

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

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah.

[Jack Meehan, Equity Research Analyst at Nephron Research]

Great. One market you didn't call out in CAM was the PFAS testing. Was wondering if you could give us an update on that and just how there's been any change in terms of the market dynamics there. Thank you.

[Mike McMullen, President and CEO at Agilent Technologies]

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

[Jacob Thaysen, CEO at The Goodyear Tire & Rubber Company]

Absolutely. I think that, we are still in the, to use, the baseball term, the early innings.

[Mike McMullen, President and CEO at Agilent Technologies]

You know your American baseball terms.

[Padraig McDonnell, President and CEO at Agilent Technologies]

I think I am. We certainly are in innings here. We've seen a lot of growth last year, and we continue to see it. Obviously, right now, since there's also a lot of funding through the government, it's a little bit lumpy. If you look at for the long horizon.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

This is a huge opportunity for us, and we have a very strong position with our LC LC-MS business here. We're also seeing it expanding into new areas with the LC-MS business. I'm still very bullish on that. We continue to see a lot of business here.

[Mike McMullen, President and CEO at Agilent Technologies]

Jake, I think it's also fair to say it's primarily a US and a little bit European phenomena. We've yet to see really, new regs being deployed and implemented in China and Japan, which, you know, down the road could be a source of continued growth on a global basis.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah, you're absolutely right, Mike. I mean, there's a lot of things going on here in U.S., and there's been regulation in certain states right now. It's driven by regulation. When regulation's gone on board and on-online in different countries, you see a step up in that. There's definitely more to come here.

[Mike McMullen, President and CEO at Agilent Technologies]

Got it. Thank you, guys.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Sure.

[Operator]

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

[Patrick Donnelly, Analyst at Citi]

Hey, guys. Thanks for taking the question.

[Mike McMullen, President and CEO at Agilent Technologies]

Hey, Patrick.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Sure.

[Patrick Donnelly, Analyst at Citi]

Hey, Mike. How are you?

[Mike McMullen, President and CEO at Agilent Technologies]

Doing just fine.

[Patrick Donnelly, Analyst at Citi]

Maybe a quick one. Yeah, good. Just following up on the LSAG piece, you know, getting a good amount of inbounds on that. You know, I know you don't wanna talk about the book-to-bill, Mike, but, you know, just given the level of focus and the visibility here, I know you mentioned the backlog, you know, is back down to normal. Seemed like you guys ate into it a little bit this quarter. Can you give us a sense on the orders? I mean, were they down double digits? Bob, you know, maybe just the magnitude of what that decline could look like in 3Q in terms of LSAG rev-

[Mike McMullen, President and CEO at Agilent Technologies]

Sure.

[Patrick Donnelly, Analyst at Citi]

Would be helpful.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, sure. We wanna give you some additional insights, Bob, so I think you've got some comments there.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah. If you looked at our overall order orders, they were down low single digits, as Mike mentioned. ACG and DGG grew. LSAG was down, you know, mid to high single digits in the quarter. As I mentioned before, you know, our guide contemplates a decline for LSAG in both Q3 and Q4.

[Patrick Donnelly, Analyst at Citi]

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

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. Thanks. Thanks for the question. Really glad to have an opportunity to address this head on. Because you hit one of the key messages, we still are very positive on the long-term growth opportunities in these markets we serve. We think we're at a pause in certain segments of our market, but we remain very bullish on the long-term end markets. The trick here is to make sure you're doing the right thing to manage the business in the short run in terms of being able to deliver, you know, leveraged earnings growth for our shareholders. That's why I talked about the confidence we have in our shareholder value creation model. At the same point in time, make sure that we don't cut off things that are gonna get in the way of long-term growth.

[Mike McMullen, President and CEO at Agilent Technologies]

We know how to do this. We've done this before. We've got some variable pay programs. We have things we look at relative to, you know, travel and other things that are associated with expense, things that aren't necessarily immediately near term revenue generating. Then what we'll do is we'll prioritize. We'll make sure that we're focusing on the sustaining our ability to, you know, realize the growth opportunities in a lot of these businesses, which are growing right now. One thing that came out today is it's a story of the multiple growth drivers across Agilent. Clearly, we're having some near term challenges right now in our analytical instrumentation business, yet, you know, pathology is growing well. NASD is growing well. Services, consumables. We've got a pretty rigorous program.

[Mike McMullen, President and CEO at Agilent Technologies]

What I can assure you is that we will make the reductions in areas that we don't think will get in the way of our ability to continue to sustain what we believe to be outmarket growth. Bob, I know you put a lot of thought and time in this, but we've already been activating a lot of this stuff already. We didn't wait till the earnings call to get started on this. I know that we think it's a path forward here for us.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah. Just to build on what Mike is saying, obviously, you know, we've got, we've been looking at discretionary spend, things like, you know, travel, but also, you know, demand related. If there's not demand, we're not gonna spend the same level of marketing funds as an example. We continue to really drive productivity. We talked about that at the very beginning of the-

[Mike McMullen, President and CEO at Agilent Technologies]

Mm-hmm

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

... year-round productivity in our workforce. We'll continue to do that from making sure that we don't get ahead of ourselves in terms of adding more people relative to the business.

[Patrick Donnelly, Analyst at Citi]

Understood. Thank you, guys.

[Mike McMullen, President and CEO at Agilent Technologies]

Sure.

[Operator]

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

[Joshua Waldman, Senior Equity Research Analyst at Cleveland Research Company]

Hey, guys. Thanks for squeezing me in.

[Mike McMullen, President and CEO at Agilent Technologies]

Absolutely, Josh.

[Joshua Waldman, Senior Equity Research Analyst at Cleveland Research Company]

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

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. I wanna tag team with Padraig on this, and then I'll go back to the order question to Bob. Yeah, I mean, what we're hearing, what I've heard directly is customers aren't cutting their budgets. I happened to be in Europe last month and at our demo facility in Waldbronn, Germany. It's fully booked for the next 3 months. I mean, there's a lot of interest in Agilent solutions. You know, we just can't get the POs through their approval process inside their companies.

[Padraig McDonnell, President and CEO at Agilent Technologies]

Yeah.

[Mike McMullen, President and CEO at Agilent Technologies]

That's why we think it's transitory. Although we have to acknowledge what we're seeing today, and that's reflective of the revised guides for the second half.

[Padraig McDonnell, President and CEO at Agilent Technologies]

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

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah. Yeah.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

On orders, Josh, we won't disclose individual product lines. As I mentioned, the order growth for LSAG was down mid to high, and they were higher than that.

[Padraig McDonnell, President and CEO at Agilent Technologies]

Yeah.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Their decline was greater than the average.

[Joshua Waldman, Senior Equity Research Analyst at Cleveland Research Company]

Okay. Just to follow up, I think on Jack's question, can you provide more context on what within pharma and China has been softer than expected? Any examples that customers have provided on why they're pulling back? Curious if the softness has been pocketed within a few large accounts there or if it's been fairly systemic.

[Mike McMullen, President and CEO at Agilent Technologies]

Yeah, I think there's no real significant difference between sub-segments of the overall pharma market. Paurav, correct me if I'm wrong, but I think the overall sentiment is economic uncertainty, and just being cautious. It's like I said earlier, it's a hard one to initially figure out, because there's no obvious external catalyst because we deal in this. This is what we're seeing. We just thought it was important to share that directly in the call today.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Yeah. I think, Josh, the one thing that we did see, and we talked about this at the beginning of the year, 'cause there was a lot of talk about the stimulus-

[Padraig McDonnell, President and CEO at Agilent Technologies]

Mm.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

That stimulus was targeted at higher end applications and instrumentation that we don't necessarily have the product portfolio or compete in. So I don't think that has moved budgets.

[Padraig McDonnell, President and CEO at Agilent Technologies]

Mm.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

it created a stimulus for potentially areas that, you know, we're not as exposed to as maybe some other players in the marketplace.

[Joshua Waldman, Senior Equity Research Analyst at Cleveland Research Company]

Okay. Appreciate all the detail.

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

You're quite welcome.

[Operator]

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

[Elizabeth Garcia, Analyst at UBS]

Afternoon, guys. Thanks for squeezing me in. Really appreciate it. I guess coming back to the margin progression and the guidance and just kind of, I appreciate all the clarity on kind of the cost potential, but also with the and then the second train line kind of ramping and thinking about NAS, I know that you've talked about how those should be accretive, Train B should be accretive to the overall margins. Just as we think about it ramping, can you just give some context to how to think about, you know, that train line coming on and its impact in the back half?

[Robert McMahon, Senior Vice President and CFO at Agilent Technologies]

Bob, you wanna take that?

[Mike McMullen, President and CEO at Agilent Technologies]

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

[Elizabeth Garcia, Analyst at UBS]

Great. I just don't think I caught this, but, I'm assuming pricing's still tracking to, is 300 basis points still kind of what we should be thinking about in the guidance?

[Mike McMullen, President and CEO at Agilent Technologies]

That's correct. It was actually a little over four for Q2.

[Elizabeth Garcia, Analyst at UBS]

Great. Thank you so much, guys.

[Mike McMullen, President and CEO at Agilent Technologies]

You're quite welcome.

[Operator]

This concludes-

[Padraig McDonnell, President and CEO at Agilent Technologies]

I think with that.

[Operator]

Yes.

[Padraig McDonnell, President and CEO at Agilent Technologies]

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

[Operator]

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

Participants

Executives

• Jacob Thaysen, CEO
• Mike McMullen, President and CEO
• Padraig McDonnell, President and CEO
• Parmeet Ahuja, Vice President, Investor Relations
• Robert McMahon, Senior Vice President and CFO
• Sam Raha, Retired President of the Diagnostics and Genomics Group

Analysts

• Brandon Couillard, Analyst at Jefferies
• Dan Brennan, Senior Analyst at TD Cowen
• Dan Leonard, Analyst at Credit Suisse
• Elizabeth Garcia, Analyst at UBS
• Jack Meehan, Equity Research Analyst at Nephron Research
• Joshua Waldman, Senior Equity Research Analyst at Cleveland Research Company
• Matt Sykes, Senior Equity Research Analyst at Goldman Sachs
• Mike Ryskin, Research Analyst at Bank of America
• Patrick Donnelly, Analyst at Citi
• Puneet Souda, Senior Research Analyst at SVB Securities
• Rachel Vatnsdal, Equity Research Analyst at J.P. Morgan
• Vijay Kumar, Senior Managing Director at Evercore ISI