Agilent Technologies (A) Earnings Report: Q2 2016 Conference … · 2016-05-17 · Agilent...

CompanyName:AgilentT echnologiesIncCompanyTicker:ASector:HealthCareIndustry:HealthServices

EventDescription:Q22016EarningsCallMarketCapasofEventDate:13.97BPriceasofEventDate:42.94

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AgilentTechnologies(A)EarningsReport:Q22016ConferenceCallTranscriptThefollowingAgilentTechnologiesconferencecalltookplaceonMay16,2016,04:30PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

AliciaRodriguez;AgilentTechnologies,Inc;InvestorRelationsMikeMcMullen;AgilentTechnologies,Inc;President&CEODidierHirsch;AgilentTechnologies,Inc;CFOPatrickKaltenbach;AgilentTechnologies,Inc;President-LifeSciences&AppliedMarketsGroupJacobThaysen;AgilentTechnologies,Inc;President-Diagnostics&GenomicsGroupMarkDoak;AgilentTechnologies,Inc;President-AgilentCrossLabGroup

OtherPart icipants

DanLeonard;LeerinkPartners;AnalystJonathanGroberg;UBS;AnalystTychoPeterson;JPMorgan;AnalystJackMeehan;BarclaysCapital;AnalystBrandonCouillard;JefferiesLLC;AnalystRossMuken;EvercoreISI;AnalystPaulKnight;JanneyMontgomeryScott;AnalystTimEvans;WellsFargoSecurities,LLC;AnalystIsaacRo;GoldmanSachs;AnalystDerikdeBruin;BoAMerrillLynch;AnalystDanArias;Citibank;AnalystDougSchenkel;CowenandCompany;AnalystMiroslavaMinkova;StifelNicolaus;AnalystSteveBeuchaw;MorganStanley;AnalystJeffElliott;RobertW.Baird&Co;AnalystDaneLeone;BTIG;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheQ22016AgilentTechnologiesIncorporatedearningsconferencecall.

(OperatorInstructions)

Asareminder,thiscallisbeingrecorded.

IwouldnowliketoturntheconferenceovertoAliciaRodriguez,VicePresidentofInvestorRelations.Pleasegoahead.

AliciaRodriguez (InvestorRelations):

Thankyou,Operator.Welcome,everyone,toAgilent'ssecond-quarterconferencecallforFY16.




WithmeareMikeMcMullen,Agilent'sPresidentandCEO;andDidierHirsch,Agilent'sSeniorVicePresidentandCFO.

JoiningintheQ&AafterDidier'scommentswillbePatrickKaltenbach,PresidentofAgilent'sLifeSciencesandAppliedMarketsGroup;JacobThaysen,PresidentofAgilent'sDiagnosticsandGenomicsGroup;andMarkDoak,PresidentoftheAgilentCrossLabGroup.

Youcanfindthepressreleaseandinformationtosupplementtoday'sdiscussiononourwebsiteatwww.investor.Agilent.com.

Whilethere,pleaseclickonthelinkforfinancialresults,underthefinancialinformationtab.You'llfindaninvestorpresentation,alongwithrevenuebreakoutsandcurrencyimpacts,businesssegmentresults,andhistoricalfinancialsforAgilent'soperations.Wewillalsopostacopyofthepreparedremarksfollowingthiscall.

Today'scommentsbyMikeandDidierwillrefertonon-GAAPfinancialmeasures.Youwillfindthemostdirectly-comparableGAAPfinancialmetricsandreconciliationsonourwebsite.Pleasenotethatwewillrefertocorerevenuegrowth,whichexcludestheimpactofcurrency,theNMRbusiness,andacquisitionsanddivestitureswithinthepast12months.

Unlessotherwisenoted,allreferencestoincreasesordecreasesinfinancialmetricsareyear-over-year.Guidanceisbasedonexchangeratesasofthelastdayofthereportedquarter.

Wewillalsomakeforward-lookingstatementsaboutthefinancialperformanceofthecompany.Thesestatementsaresubjecttorisksanduncertainties,andareonlyvalidasoftoday.

Thecompanyassumesnoobligationtoupdatethem.Pleaselookatthecompany'srecentSECfilings,foramorecompletepictureofourrisksandotherfactors.

BeforeturningthingsovertoMike,I'dliketoremindyouthatAgilentwillhostitsanalystandinvestormeetinginNewYorkCityonMay25.DetailsaboutthemeetingandwebcastareavailableontheAgilentInvestorRelationswebsite.

Now,letmeturnthecallovertoMike.

MikeMcMullen (President&CEO):

Thanks,Alicia.Helloeveryone.Thankyouforjoiningusontoday'scall.TheAgilentteamdeliveredanotherstrongquarter.BothQ2revenueandearningswereabovethehighendofourguidance.

Letmehighlightthreekeyresults;First,revenuegrowthwasupmorethan8%onacorebasis.Second,wedeliveredadjustedoperatingmarginof19.4%,anincreaseof110basispointsfromayearago.Finally,EPSof$0.44wasup16%overlastyear.

BeforemovingontoareviewofourQ2results,Idowanttoaddressouryear-over-yearquarterlycomparisons,whichreflectunusualeventfromlastyear.The8%coregrowththatweareannouncingtoday,about1.5percentagepoints,isduetoashiftofrevenuelastyearfromQ22015intoQ32015.Inthesecondquarterayearago,weexperienced$15millionofshipmentdelaysduetostart-upchallengeswithournewUSlogisticscenter.

Inaddition,ourprocessimprovementeffortsoverthepastfewquarterstoconvertincomingordersmorequicklytorevenuehavepaidoff.Wehavereducedourordertorevenuecycletimes,particularlyinChina.Consequently,someshipmentsinitiallyforecastforQ3ofthisyearweredeliveredinQ2.

Agilent'sstrongQ2resultswereledbydouble-digitcoregrowthinpharmaandfoodmarkets.Wealso




experiencedcontinuedstrengthinacademiaandgovernment,environmental,anddiagnosticandclinicalmarkets.Allendmarketsgrew,exceptchemicalandenergy.Growthwasbroad-basedacrossmostofourportfolio.Geographically,allregionsgrewexceptJapan,ledbyverystronggrowthinChina.

LetmehighlightourQ2resultsbybusinessgroup.TheLifeScienceandAppliedMarketsGroupdeliveredcorerevenuegrowthof8%,ledbystrongdemandinthepharmaandfoodmarkets.About3percentagepointsofthe8%increasewasthankstoasoftercompare,duetothetimingissuesmentionedearlierfromlastyear'sUSlogisticscenterstartup.

Thecombinationofstrongtop-linegrowth,expensemanagementandgrossmarginimprovements--partlyduetotheNMRexit--droveLSAG'soperatingmarginto19%,up320basispointsfromayearago.

LSAGcontinuestostrengthenitsportfolio.InQ2AgilentintroducedVistaFluxsoftware.Thisnewsoftwarespeedsupclinicalresearchdataanalysis,soscientistscanmorequicklyunderstandtheunderlyingcausesofdiseases,suchascancer.VistaFluxstrengthensAgilent'sleadershippositioninmetabolomics.

Lastweek,WeannouncedanewAgilent1260InfinityIILCattheAnalyticatradeshow.Thisinstrumentprovidesbest-in-classlabefficiency,andimprovestheperformanceoffullbackwardcompatibility.

Next,theAgilentCrossLabGroupcontinuedtodeliverconsistentlystrongrevenueresults.CorerevenuegrowthinQ2was10%,ledbystrengthincontractservices,LCcolumns,andlabsupplies.ExpansionandpenetrationintoAsiacontinuedtobestrongcontributorstoourgrowth.Operatingmarginwasflatversusayearagoat21.5%.

CrossLabrepresentsastrategictransformationofourservicesandconsumablesbusiness.I'mpleasedtoreportthatAgilentwasrecognizedwiththe2016ReviewersChoiceawardforcustomerservice.ThisawardisfromSelectScience,anindependent,expert-ledscientificreview.ThisisthesecondyearinarowthatscientistsinNorthAmericahavejudgedAgilent'scustomerservicetobethebestinthelaboratoryproductsindustry.

Finally,theDiagnosticsandGenomicsGroupdelivered5%coregrowthinQ2,againstadifficultcompare.Thepathologybusinesscontinuesonitssteadytrajectorybacktomarketgrowthrates.HighlightedbystrongdemandforournewPDL1companion,andcomplementarydiagnostictest.Genomicsshowedstrongmarketperformance,ledbyourSureSelectTargetEnrichment,andourArrayCGHofferings.

DGG'soperatingmarginwasflatversusayearago,at15%.InQ2,Agilentannouncedan$80millioninvestmentinLasergen,anemergingbiotechnologycompanywithinnovativenext-gensequencingtechnology.OurtwocompanieswillcollaborateonbuildinganNGSworkflowforclinicalapplications.

InQ2,AgilentalsoannouncedthatcommercialavailabilityhasexpandedtotheEUforournewPD-L1diagnostictestfornon-squamousnon-smallcelllungcancer.ThisdiagnosticwasdevelopedthroughacollaborationwithBristol-MeyersSquibb,themakerofOPDIVO.

NowI'llprovideanoverviewofAgilent'scorerevenuesbyendmarket.LifeSciencesandDiagnosticsmarketssawacontinuationofourfirst-quarterperformance,withstrengthacrossallendmarkets.Pharmagrew14%,fueledbytechnologyrefreshdeals,newproductuptake,andsustainedgrowthintheaftermarket.Thisisthefifthconsecutivequarterofgreaterthanmidtohighdouble-digitgrowthinpharma.

Academiaandgovernmentgrew7%,drivenbystrongdemandinChina,andanuptickintheUS.Clinicalanddiagnosticsalsogrew7%,withstrengthingenomicsledbyTargetEnrichmentandArrayCGH.

Appliedendmarketperformancewasmixed.Fluwasup25%,withstrongsalesinChinaandtheAmericas.Chinaalsodrove6%worldwidegrowthinenvironmentalandforensics.Chemicalandenergydeclined3%,reflectingcontinuedmacroeconomicconcerns,andtheeffectsofloweroilprices.




NowI'llturntoanupdateonouroperatingmarginimprovementinitiative.Q2marksthefifthconsecutivequarterofyear-over-yearoperatingmarginimprovement,deliveredbythenewAgilentteam.Thisisaresultofourabilitytooutgrowthemarket,whiledrivingoperationalefficiencyimprovements.

Ourmulti-yearAgileAgilentprogramcontinuestosimplifytheCompany,makingusmorenimbleandloweringourcosts.OurexecutionofCompany-widestreamliningoforganizations,processesandsystemscontinuestobeontracktodeliverincrementalsavingsin2017.Forexample,inQ3,wewilltakeamajorstepforwardinsimplifyingtheCompany'ssystemsinfrastructurewithallofourfinancialsystemsnowonSAP.

Onthecapitaldeploymentfront,wepaid$37millionindividends,repurchased$94millionofAgilentstock,andinvested$80milliontoenableourNGSworkflowstrategy.Finally,ourOneAgilentinitiativeisdrivingawell-receivedculturaltransformationtoimprovecross-Companycollaborationanddeliveryofresults.Atlastyear'sanalystandInvestorDay,IdescribedtheshareholdervaluecreationmodelforAgilenttobedrivenbyoutgrowingthemarket,expandingoperatingmargins,andabalancedcapitalallocationpolicy.

I'dliketotakeaminutetopositiontheQ2resultsinthecontextofourlongertermgoals.Afterdeliveringourhighestannualcorerevenuegrowthsince2011of6.4%in2015,wehavenowhadtwostrongquarterstostart2016,includingthisquarter's8%corerevenuegrowth.

SincethenewAgilentleadershipteamwasputinplace,theteamhasdeliveredyear-over-yearoperatingmarginimprovementseveryquarter.Wehavecompletelyoffsettheinitial$40millionofdyssynergiesfromtheCompany'ssplit.InFY15,wereturned$400milliontoshareholders,and$370millionyear-to-datein2016throughcashdividendsandsharerepurchase.

From2015untilnow,wehavealsoinvestedabout$400millioninnewbusinessviaM&Aandequityinvestments.Didierwillsharemorespecificslater,butweareraisingourfull-year2016outlookforcoregrowth,operatingmargin,EPS,andcashflow.

Letmenowtalkaboutoursecond-half2016forecast,inlightofwhatwehavealreadyachievedin2016,andwhatweplantodeliverin2017.Whenwelookattoday'soverallmarketenvironment,whilewefaceincreasinglytoughcompares,weexpectstrengthinpharmatocontinueinthesecondhalfof2016andinto2017.Chinaisalsoexpectedtoremainstronginsecondhalf2016and2017.

Takingacloserlookatthechemicalandenergymarket,wehavebeenexperiencingamoreprolongedandsteeperslowdownthaninitiallyanticipated.Wearenowforecastingoveralllowsingledigitmarketdeclinesfortheyear,versusourinitialflatguidanceassumptions.Theoilexplorationsegmentofthismarkethasbeendownsignificantlyforsometime,witharecentwellreportedspilloverintotherefiningsegment.

Thereareinitialindications,however,ofabottoming,withincreaseddealactivityinthelargechemicalsegmentofthemarket.Weareprojectinganimprovedchemicalandenergymarketenvironmentin2017.Weareassumingwewillcontinuetofaceheadwindsinthismarketfortheremainderof2016.

Wearecurrentlymodeling2017withanabovemarketcorerevenuegrowthof4.5%atthemidpoint.Thisisinlinewithourprojectedfull-year2016coregrowthrates,buthigherthanourexpectedcoregrowthrateinthesecondhalfof2016.Therearetworeasonsforthisincrease.

First,weexpecttohaveaverystrongnewproductintroductioninthesecondhalfofFY16,whichwilldriverevenuegrowthinFY17.Second,ontheendmarketfront,weexpectchemicalenergytohavebottomedoutbyyear-end,accompaniedbycontinuingsolidconditionsinallofourotherendmarkets,andinChina.Overall,weremainontrackwithour2017goaltooutgrowthemarket,andimproveour




operatingmarginsto22%.

LookinginsidetheCompany,IcansharewithyoutodaythattheOneAgilentteamisworkingwelltogether,andisdriventowininthemarketplace.Ilookforwardtoseeingmanyofyouatouranalystandinvestorday,whereI'llshareourprogressversusourcommitments,howwewillsustainourimprovedperformance,andthelongertermoutlookfortheCompany.

Thankyouforbeingonthecalltoday.

IwillnowturnitovertoDidier,whowillprovideadditionalinsightsonourfinancialresultsandguidanceforthethirdquarterandfullyear2016.

Didier?

DidierHirsch (CFO):

Thankyou,Mike.Helloeveryone.

AsMikestated,wedeliveredstrongperformancethisquarter,again.8%corerevenuegrowth,110basispointsofoperatingmarginexpansion,and$256millioninoperatingcashflow.Afteradjustingforlastyear's$15millionslippageinrevenuefromQ2toQ3,aswelaunchedournewUSlogisticscenter,ourcorerevenuegrowthof6.5%remainedwellabovemarket.

Duringthequarterweboughtback$94millionofstockandpaid$37millionindividends.Finally,onMaythethirdwesuccessfullymovedallfinanceapplicationsfromOracletoSAP,whichisourmainERP.ThiswillresultinsignificantsimplificationsofourfinanceandIToperations.

I'llnowturntotheguidanceforourthirdquarter.WeexpectQ3revenuesof$1.03billionto$1.05billion,andEPSof$0.45to$0.47.Atmidpoint,revenuewillgrow1.3%onacorebasis,orcloseto3%adjustingforlastyear's$15millionimpactfromtheUSlogisticscenter.Andturningtosharerepurchase,weexpecttobuyback$93millionthisQ3.

NowtotheguidanceforFY16.Weareraisingthemidpointofourrevenueguidanceby$60million,including$50millionduetocurrency.Asaresult,we'reincreasingourcorerevenuegrowthguidanceatmidpointfrom4.25%to4.50%.We'realsoraisingthemidpointofourEPSguidanceby$0.06,including$0.03comingfromcurrency,and$0.03fromoperationalperformance.

Andoneimportantnote.Afterfurtherreview,weandourauditorshaveconcludedtoaccountfortheLasergeninvestmentusingthecostmethodofaccounting.Thismeansthatwe'llnotbookourshareofLasergenlossaspreviouslycommunicated.

Finally,weareraisingouroperatingcashflowguidancefrom$650millionto$740million,andthereisnochangetoourCapExguidanceof$140million.Withthat,I'llturnitovertoAliciafortheQ&A.


Operator,willyoupleasegivetheinstructionsfortheQ&A?

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

AndourfirstquestioncomesfromthelineofDanLeonardofLeerinkPartners.




DanLeonard (Analyst-LeerinkPartners):

Thankyou.Twoquestions.Firstoff,canyouelaborateonthebusinesstrendsyou'reseeinginEurope?Andsecondlyonthepharmaendmarket,canyoutalkaboutwhatgivesyouconfidenceintheFY17outlookthatyouhaveyetanotherstrongyearinpharma,followingtwoyearsthenoftoughcompsincapitalmarkets,whichhavebeenmoreorlessshut?Thankyou.


Thanks,Dan.IthinkI'mactuallygoingtopassthatovertoPatrickwhoisjustbackfromatriptoEurope,andmaybecanprovidesomeinsightonwhat'sgoingoninEurope,andthenalsocouldpickupthequestiononpharmaaswell.

PatrickKaltenbach (President-LifeSciences&AppliedMarketsGroup):

Sure,I'mhappyto.SoletmestartfirstgivingyousomeinsightsonEurope.WehaveseenactuallysomedecentgrowthincentralEurope.WehadseensomeweaknessonwhatwecalltheIDRstates,EasternEuropeandthat'smainlydrivenbythechemicalandenergymarket,ortheenergymarketonthatside.

IncentralEurope,there'sdefinitelystrengthinGermanyandotherstatesaroundthat.Westillseesomeissuesontheacademiaandgovernmentside.Itisratherflat.Butpharma,forexample,isalsoverystronginEurope.

Foryourpharmaquestion,overall,weareconfidentthatwewillcontinuetoseeprettyhighgrowthinpharmafortheremainderofthisyear.Wetargetlowdouble-digitgrowthforpharma,andlookinginto2017,wethinkthepharmamarketwillcontinuetobestrongforus,drivenbytwofactors.Weseeacontinueddemandinthereplacementbusiness,andasyouprobablyknow,wejustlaunchedattheAnalyticaconference,welaunchedournew1260InfinityLCseriesasanexample,togetherwiththeInfinityLabconsumablesandservice,andwethinkthatwilldrive--continuetodrivealotofgoodreplacementbusinessforusinpharma.Andthenweseealsocontinueddemandinthebiopharmaspace,thatarelookingfornewsolutionshelpingwiththesemorecomplexmoleculesintermsofanalysis,andwehaveverycomprehensiveofferingforthatspace,aswell.


Thanks,Patrick.

DanLeonard (Analyst-LeerinkPartners):

Great.Thankyou.

Operator :

JonathanGrobergofUBS.

JonathanGroberg (Analyst-UBS):

Congratulationsonanothergreatquarter,Mike.


Thankyou,Jonathan.


Canyoumaybeelaboratealittleon--Ithinkyousaidcoreguidance,andifI'mlookingatyour




presentation,corerevenuegrowthguidanceinthethirdquarterisprettypreciseat1.3%.IthinkIjustheardyoustillexpectpharmatogrowlowdoubledigits.Couldyougivealittleinsightastowhatyou'reseeinginthethirdquarter?


Whatwelookedatwas,what'sourgrowthratethatwe'vehadoverthefirsthalfofthisyear,andaswelookedintoQ3andQ4.AndwhatIwouldpointtoisacouplethings,Jonathan.Firstofall,toughcompares,andthisisinclusiveofafewone-timemovesbetweenquarters,whichactuallyweredrivenbyimprovementsinoveralloperations.

SoasDidiermentioned,wehadthis$15millionshiftinQ2oflastyearintoQ3,whichwhenwehadourstartupissueswithournewlogisticscenter.Ifyouadjustforthat,thatgetsyouabout3%growth.TheotherthingwesawhappeninQ2was,wewereworkingreallyhardtoimprovetheoverallcycletime,fromthetimeacustomerplacesanordertoactuallyinstall,andwecanrecognizetherevenue.

InQ2,weactuallyexceededourexpectations,anditgottherealotfasterthanwehadthought.Andwhatthatmeantwaswehadasignificantamountofrevenue,probably$20millionto$25millionthatcamefromQ3intoQ2,whereweinitiallyhadforecastedintothesecond,thirdquarter.Allinall,ifyoutakeintoaccountthosethings,you'vegotmoreofaconsistentgrowthscenariobetweenQ2andQ3.

Iwouldtellyou,though,thechemicalandenergyisstilllookingforabottom,andthat'swhywehavethatoutlookfortheyear,whichbasicallyit'sdown,it'sgoingtostaydownfortherestoftheyear.Therearesomesignsitcouldbegettingbetter,butwearenotconvincedyetwe'veseenthebottomonchemicalandenergy.Thecombinationofthosetoughcompares,aswellasouroutlookonchemicalenergyiswhat'sdrivingtheoverallguidanceforthesecondhalf.


Okay.That'shelpful.Andthen,Iguessjustonemore.Arethereany--sometimeswhenweseeshiftsontooneplatform,likeOracletoSAP,isthereanythingatall,anywiggleroomyou'veleftthere,intermsofhiccupsinthequarter,ormaybejust--?


You'reexactlyright,Jonathan.Thewiggleroomweleftwas,wemadesurewewentlivethefirstmonthofthequarter,andDidier'sintheconferenceroomheresmiling.Idon'tknowifyouwanttoaddanyadditionalcoloronhowit'sgoingsofar?

DidierHirsch (CFO):

It'sgoingverywell,themigrationsandthestartupoftheoperation,therewaszerodisruption.Obviously,weexpecttohavetodealwithsomestabilizationactivitiesthroughoutthequarter.We'lldotwoclosebeforewedothequarterlyclose,soeverythingis--wecouldn'tbehappierabouthowitwent.

Andyou'recorrect,itisaverycomplexendeavor,onethatweareprettyusedto.We'vedoneafewofthoseinthepast.Butstill,itremainsaverycomplexendeavor,andwearereallyhappyhowsmoothlyitwent.


Jonathan,asIpointedoutinmyscript,thisisoneoftheAgileAgilentinitiatives,whichyou'llstarttoseepayoffinourcoststructureaswemoveinto2017.





Great.Thanksalot.

Operator :

TychoPetersonofJPMorgan.

T ychoPeterson (Analyst-JPMorgan):

JustfollowinguponthatlastpointontheSAPmargins,canyoumaybe--onthemarginimpact.Canyoumaybequantifyhowmuchthatcouldplayonmarginsforthisyear?


For2016Ithinkitwouldbeverylimitedatbest,Tycho,becausewe'llberunningsomeduplicatebackupsystems,andthentheotheraspectsofourspendreallydon'tcomeoutuntil2017.I'dreallypositionthat,andI'daskyoutothinkaboutthismoreasa2017impactbutaproofpointofwhywethinkwe'regoingtobeabletoimproveourmarginsagainin2017.


Andthenacademic,7%,canyoumaybejusttalkastowhetheryou'reseeinganaccelerationthere?Whatyousawthisquarter?


WhatwesawinthelastquarterisreallystrongperformanceinChina,andsomeincreasedsignsoflifeintheUSsideofthings.That'swhatwepointedtoanuptick.NotalotofsignificantmovesontheEuropeanside.It'smainlyaChinastory,andIthinkiftherewouldbeupsidetoit,itwouldcomefromtheUS,ishowwe'rethinkingaboutit.


Okay.Andthenlastly,justintermsofpharma,obviouslythat'sbeenanicedriver.CanyoumaybetalkaboutwhereyouthinkweareintheLCMSupgradecycle,andhowmuchyourgrowthgoingforwardisgoingtobecontingentonR&Dbudgetexpandingversustheupgradecycle?


Sure,Tycho.Greatquestion.Patrick,Iknowyoulookedatthisprettyclosely.What'stheupdatedviewonthat?


Ithinktherearetwocycleswe'relookingat.ThefirstcyclewewentthroughwastheupgradecyclefromsellHPLCtoUHPLC,whichisstillongoingbutaconsiderablepartofthatprobablyhasbeendone.Whenyoulookattheinstalledbaseofinstrumentation,itstilldealswithcoreLC,andthisiswherewearetargetingwiththeInfinityIIseriesrightnow.There'sstillalotofreplacementpendingoutthere.

Justasareminder,wehadprobablyabout150,000systemsoutthere,basedonthe1100,1200platform,whichovertimewillbeupforreplacement.Wearepositionedextremelywellwithourplatforms,becauseit's100%backwardscompatible,andwearealsoable,forexample,toemulatesomeofourcompetitors'systemsonourplatformswiththetechnologywecallISET,IntelligentSystemEmulationTechnology,andthatactuallycomparesverynicelywithourcustomers,andgivesusauniqueadvantageinthemarket.





Ithinkweseeboththosehavinglegsthrough2017.


Absolutely.Ithinkthisgoesoninto2017,combinedagainwiththe(dryerPC)comingoutofbiopharma.


Thankyou.

Operator :

JackMeehanofBarclays.

JackMeehan (Analyst-BarclaysCapital):

Ijustwantedtostart,thebetter--atleastrelativetowhatIwaslookingfor,lookedlikeyouhadbettergrossmarginsintheLSAGsegment,nowtwoquartersinarow.Canyoutalkaboutwhatsomeofthenotablechangesthereare?Isthereanythingwithproductmixthat'sdriventheimprovement,ordoyouthinkthisisthenewnormtolookfor?


LetmemakesomeinitialcommentsandthenDidierorPatrick,ifyoucanbuildtoit.Intermsofproductmix,partofwhatyou'reseeingisthefactthatwearewindingdownthroughourP&LtheimpactoftheNMRbusiness.IthinkyoucanseethebenefitofthatexitdecisionontheP&L,becauseitreallyhasbeencontributingtotheimprovedgrossmargins.That'snotthewholestory.

Theotherstoryisobviouslythestrongdemandfortheproducts,andthevolumebenefitswe'regetting,aswellasthefocusontakingcostoutofourmaterial,costsoutofourbusiness.Aswellaswetalkedalotaboutlogisticslastyear.Wecanalsotalkaboutlogisticsthisyear,whichiswe'redoingamuchbetterjobintermsofoveralllogisticsoperations.That'sblowingthroughontheP&Laswell.SoDidier,I'mnotsureifImissedanythingelse.

DidierHirsch (CFO):

Youcovereditall.Thankyou.

JackMeehan (Analyst-BarclaysCapital):

Justonemorefortheadoptionofthecompaniondiagnostics,nowafewquartersintothelaunch.Areyouinaposition,couldyoumaybehelpussizewhattakebusinessistoday,orjustinthemarket,whatyouthinkyouholdintermsofmarketshare?Thanks.


Whydon'tyoutakethat,Jacob?

JacobT haysen (President-Diagnostics&GenomicsGroup):

Thanksforthatquestion.AndwearedefinitelypleasedwiththepickupofthePD-L1,andthiscontinuesduringthelast--basicallyit'snowthreequarters.Themarketisstillveryearly.WestillreallyonlyinUS,wehavehadafewpressreleaseshere.Lately,also,we'rereenteringintoEurope,butwe'rejustscratchingthesurfaceinEurope.

Furthermore,it'sstillasecondline--it'sstilladdressingthesecondlinetreatment,andifthatalsogoes




tothefirstlinetreatment,themarketwillbecomesignificantlylarger.Atthispointintime,it'sstillsmallrevenueinthebiggerschemeofthings,butIdobelievethatthePD-L1hasanopportunitytobeasbigastheHER2market.However,Iwillalsoremindyouthereareatleastfour,probablyfivedifferentpotentialdrugandcompaniondiagnosticsouttherethathastosharethatmarket.Sostillearlydays,butagreatopportunity.

Operator :

BrandonCouillardofJefferies.

BrandonCouillard (Analyst-JefferiesLLC):

MikeorDidier,couldyougiveustheChinagrowthrate,thepercentagechangeinthequarter,andifyoucouldspeaktodemandinthefoodareaoutsideofChinaandAsia,thatwouldbehelpful?


IntheChinaresultforQ2,whatwe'vebeenpointingtoisstrongdouble-digitgrowth.Soitwasavery,verystrongquarterforusinChina.Iwouldremindyouthough,partofthestronggrowthwasnotonlythestrengthinthemarket,butthatthoseoperationalefficiencyimprovementsItalkedabout,wherewereallyhadshortenedtheimprovedcycletimefromorderstoinstall,thatwasreallydramaticinChina.

Sotheoverallbusinessisgoingtobequitestrongthroughtheyear.Youshouldnotexpectstrongdouble-digitgrowtheveryquarter,though,forQ3andQ4.Butoverall,Chinais,tocompletethestoryhere,whenwecameintothisyear,wethoughtthattheoverallperformanceforAgilentinChinamightbehighsingledigits.We'renowlookingatlowdouble-digitgrowthinChinaforthefullyear.


Thanks.OnemoreforDidier.Inoticeyoubumpedtheoperatingcashflowguidanceofabout$90million.Howmuchofanimpactdoesthe--Inoticedthetaxrefundbenefit.Ifyoucouldquantifythat,andjusthelpusbridgethedeltabetweenpriorversusnew?

DidierHirsch (CFO):

Theoveralltaxoutlaysforecastedforthisyearwere,Ithink,about$10millionlessthanwhatwehadanticipatedinourinitialguidance,$10millionor$15million,andtherestisreallyoperationalperformance,improvementsinourworkingcapital,management,andFX,andthenjustouroperatingprofits.


Super.Thankyou.

Operator :

RossMukenofEvercore.

RossMuken (Analyst-EvercoreISI):

Mike,sincetakingoverit'sobviouslybeenaprettyhecticjourney,andyourmessagingfromthebeginninghasbeenprettyconsistentaroundgrowthinmarginsandreturns.Obviously,thelastfewquartersyoustarteddevelopacadence,lastquarterresultsweregood,butwehadthechallengesonFX.

Doyoufeellikethisisthefirstquarterwhereyoufeellikeyougottodeliverthefullbag,whereyouwere




abletodropthroughthetoplineoutperformance,whichisclearlybetterthanmarket,youdrovethemargins,you'rebuyingstock,thereturnsareup,thecashflow'sgood,thatyouwerefinallyabletoshowthemarketthatthebusinessmodel'sworking,andthatfeeds,Iguess,intoyourconfidencealso,Iwouldassume,on2017?


Icouldn'thavesaiditbettermyself.Thanks,Ross,forthequestion.Ithinkthatwe'vebeenworkingreallyhardoverthelastfourorfivequarterswiththenewleadershipteam,andasyoulookat--everythingcametogetherthisquarter.We'vehadstronggrowth.

We'vehadimprovementinouroperatingmarginasIpointedoutin2015,butallthevectorsreallycametogethernicelyinthesecondquarter.AndIwasparticularlypleasedonsomeofthemoreoperationalactivitieswe'vebeenworkinginsidetheCompany.Thatmaynotalwaysbesoapparentinitiallyontheoutsideworld,butyoustarttoseeitintheresults.Thefactwe'veaddressedourlogisticschallenges.

Ihavetotalkaboutyear-over-yearcompares,butit'sfixed,andactually,nowit'scontributingtoimprovedresults.Yes,wehadtotalkabouttheshortenedcycletimefororderstorevenueandhavebroughtinsomerevenuesweinitiallyhadplannedforthethirdquarter,butwemadetheseoperationalimprovements,thecycletimesareshorter,andthisisnowthenewnormal.

SoIguessthatwouldbetheclosingcomments,whichisyes,we'reinanewnormalfortheCompany.We'vegotalotofconfidenceabout2017.Perhapsstealalittlebitofmythunderfortheanalystmeetingnextweek,butstillhopeeveryoneattends.Butwhenyoustarthavingtheseproofpoints,quarterinandquarterout,Ithinkitstartstoshowyoutheteamisdelivering,andIthinktheresultsarenowstartingtobeappreciatedandbelieved.


Great.AndmaybequicklyjustonSeahorse,canyoujustgiveusanupdateonhowthatbusinessisperformingrelativetoyourexpectations,andhowit'spluggedin,andwhereyou'reseeingmaybetheearlyfruitsandsomecross-synergywiththeexistingbusiness?


Yes,infact,verytimelyquestion,Ross.Wejusthadour180-dayreviewthismorningandPatrick,whydon'tyougoaheadandshareacouplehighlightsfromthatsession?


Sure,absolutely.WhatIreallywouldliketohighlightishowseamlesslytheintegrationofSeahorsewent.Wearenowsixmonthsinintegration,andwewouldsaywe'retargetingfullintegrationbyJune,whichmeansbasicallywehaveimplementedallofthesystems,whichisaprettyfastpace.

Atthesametime,weareseeingthepositioningofSeahorsewithinourportfolioreallyworksout.We'reseeingnicedealsandcombinedsalesofLCMSandSeahorseinareaslikediseaseresearchanddiseasediscoverythatisactuallyexactlywherewethought,it'scomplimentingourstrengthinmetabolomicswiththelifecellmetabolismwhichSeahorsebringstothetable.Thisisaverynicestorythatresonatesverywellwithourcustomers.Again,ontheintegrationside,we'reverypleasedwithwherewestand,andwe'relookingforwardtoaverysuccessfulsecondhalf.


Ross,I'djustaddtwothings





Excellent.Thanks.

Operator :

PaulKnightofJanneyMontgomeryScott.

PaulKnight (Analyst-JanneyMontgomeryScott):

Mike,themoveyoumadetocreatesCrossLabseemstobegainingtraction.CanyougiveusalittlebackgroundonCrossLab,intermsofwhodoyouthinkistaking--it'stakingsharefromsomebodyatthatgrowthrate.CouldyougiveusmorecoloronCrossLab?


Asyoumentioned,thatwasamajorstrategicmovewherewhenwesetuptheCompany,weestablishedtheAgilentCrossLabGroup.Wehadthisvisionabouthowwecouldreallyattackandgoaftertheenterprise-wideservicesandconsumablesopportunity.Andasyousee,Markandtheteamhavereallybeendelivering.WeknowthatthecustomersarerespondingtothevaluepropositionthatAgilentoffers,bothintermsofhowourservicecapabilityisviewed,andthat'swhyImentionedinmyscriptabouttheexternalrecognitionwerecentlyreceived.

Buttheyalsoappreciatethefactthatwe'reabletogivetheminsights,intermsofactuallyhelpingthemimprovetheirbusinessoperations,andwe'reseeingarealstrongdemandforthisinthepharma,andgrowinginterestinotherpartsoftheappliedmarkets.Soweknowthatwe'regrowingfasterthansomeofourcompetitorsinthisspace.Wealsoknowthatthere'sonlyafewcompaniesreallytryingtogoafterthistypeofbusiness.

Ibelievethisiswherethemarketisalreadygoingto,andIthinkyouwanttobeaplayerhere.I'llleaveittoyouguystofigureoutwho'slosingshare.Asyoucansee,allIcantellyouiswe'regrowingclosetodouble-digitinthisspace.Soit'sanattractivemoveforus.

Operator :

TimEvansofWellsFargoSecurities.

T imEvans (Analyst-WellsFargoSecurities,LLC):

Congratulationsonagoodquarter.IjustwantedtomakesureIunderstandthevarianceinthequarterrelativetowhatyouwereexpecting.Ibelieveyouhadcalledlastquarterfor4%coregrowth,andwesaw8%thisquarter.Ihearyou,thatitsoundslikeabouthalfofthatvariance,about200basispoints,wasfromthebetterbookbacklogtorevenueconversionthisquarter.

AndIknowyoualsocalledoutthecomparerelativetolastyear.Butthatcompareshouldhavealreadybeenknown.SoIjustwanttounderstandwhat'stheother200basispoints,thatreallysurprisedyouinthequarter?


Sure,Tim.HowaboutifI--again,thanksforyourcomment.Icangiveyouafewdollarnumbersofrevenueimpact,thewaywe'vebeenlookingatit,andyoucandoperhapsthemathontheimpactonthegrowthrates.

Butwhatwesawrelativetoourinitialexpectationsforthequarterwerereally--firstofall,itstartswith




themarket.Theoverallmarketdemandcamein,aswepredicted.Wesawgoodgrowthacrosstheentireportfolio,ledbypharmaandfoodmarkets,andChina,asyouheardearlier.

ButI'daskyoutolookattwothings:oneisthishigherconversionoforderstorevenuethanforecast.Sobasicallywhatwe'vedoneiswereducedthecycletime,andbyourestimates,ithappenedalotfasterthanwehadthought,whichIthinkisgoodnewsfromthestandpointofouroperationalefficiency.Itdidcreatesomeforecastingchallenges.Butprobably$20millionto$25millioncamefromQ3intoQ2.

TheotherthingIthinkyoushouldtakealookatistheFXassumption.Soaround$9millionorso,Didier,Ithinkwasthenumber.SoFXaddedaboutanother$9million.Sobetweenthecycletimeimprovements,theFXassumptions,andjustthefactthatthemarketcontinues--we'regettingourfairshareofmarkets,wherethey'regrowing,Ithinkthosecombinationofthosethreefacts,Ithinkwillhelpyoubridgethedifferencebetweenourguidedgrowthandwhatactuallyoccurred.


Okay.Justarealquicksimilarquestiononthemarginside.Obviouslyalittlebitofthemargininthequarterwasthedrop-through,butitlookslikeyouprobablydidbetterthanyouwereexpectingonanabsolutedollarbasisontheSG&A,aswell.Canyouhelpmeunderstandmaybewhatisgoingalittlefastertherethanyouanticipated?


IthinkontheSG&Afront,we'vegotacoupleofourprogramsinsidetheAgileAgilent,alittlebitaheadofplan,and--butDidier,Idon'tknowifthere'sanythingelse.

DidierHirsch (CFO):

Mostoftheimpactwasvolumedriven,andobviouslytheFX.Buttherewas--versustheinitialguidance.


Iwilltellyou,thefieldstructurethatweputinplacelastyearreallystableddown.Ithinkit'sdelivering,helpingusonthegrowthside,andalsoontheSG&Afront,asamoreefficientgo-to-marketchannel.


Thankyou.

Operator :

IsaacRoofGoldmanSachs.

IsaacRo (Analyst-GoldmanSachs):

Ihadaquestiononmargins,aswell.Onthegrossmarginside,Iwascuriousifweshouldexpectmaybeanotherwaveofimprovement,nowthatyouhavetheERPintegrationdone.Andontheopmarginside,curioushowsatisfiedyouarewiththesalesforcerealignment,andwhetherornotthere'sstillmoresynergiestobehadthereaswell?


Acouplecommentshere,thenI'llbounceitovertoDidier,incasehe'dliketoaddafewthingshere.Intermsofthesalesforceintegrationandgo-to-market,wecouldn'tbehappier.Thatwasamajormovewemadelastyear,wherewebasicallywentfromfivesalesforcesintotwosalesforces,onefocusedontheanalyticallaboratorymarketplace,andtheotheronefocusedontheregulateddiagnosticmarketplace.




AtthetimeIremembersharingwithyou,we'remakingabigchangehere,anditcouldaffectthetoplineintheshortrun.Thatdidn'thappen.Andinfact,Isubmitthataswegooutinto2016and2017,we'renowputtingmoreresourcesofspecialization,academia,andbiopharma,soIthinkyou'regoingtoseethechangespayingoffintermsofourlonger-termgrowth.Sowe'rereallyhappywithboththefactthatwe'vegotitallbehindus,it'ssettleddown,andIthinkit'sstartingtopayoffontheinitialbenefitsthatweenvisionedwhenwecreatedthatstructure.

Relativetogrossmargin,theERP,justkeepinmindthatwhatwe'vebeentalkingaboutisthefinancialsystems,whichreallygointotheSG&Aline.Soitreallywon'taffectthegrossmargin.Thatbeingsaid,wedothinkwecandomoreongrossmargins,aswemoveforwardin2016,into2017.I'lltalkalittleaboutitmoreindetailnextweekaswegotoNewYork.

Butasyoumayknow,onourinitial400basispointsofimprovement,whenIcameonboard,wesaidhalfwouldcomethroughOpExandotheroperationalcostsandothersthroughgrowth,andthegrowthpiecewouldbe--alotwouldbedrivenbyourabilitytocapturethegrossmarginimprovementsonincreasedvolume.Sowethinkwestillhaveroomtoimproveourmaterialcost,andwethinkthatwe'vegotroomtocontinuetobringdownourlogisticscosts.


That'sveryhelpful.Maybejustafollow-up,justtoclarifyontwotopics,oneonbiopharma,andtheotheroneonthecommentsyoumadearoundChina.Onbiopharma,couldyoujustcomparethegrowthratesyou'reseeingintheQA/QCsettingversusR&D,andtheninChina,justcurious,howmuchofyourimprovedoutlookthereisbasedonthevisibilityyouhavewithgovernmentfundingversusendmarketsthataremoreontheprivateindustryside?Thankyou.


Ithinkthatonthe--toyourquestion,we'renotseeingsignificantdifferencesingrowthratesacrossthesegmentsyoudescribedinpharma.Idothinkifyougooutacoupleyearsdowntheroad,Ithinkwe'dexpectthegrowthrateinthebiopharmapiecetobehigherthanthesmallmolecule,butthat'snotatallthecaserightnow.AsyouheardearlierfromPatrick,weexpectthattocontinuethrough2017.

We'regettingmoreclarityaboutwhat'sgoingoninChina.Ithinktherewasalotofconcernsatonepointintimeontheprivatesectorsideofthebusiness,butobviouslyasyouknow,Isaac,thegovernmentdrivesthemarkettheretoalargeextent.Andwe'regettingmoreclarityonwhat'shappeninginfunding.Sothat'swhywehaveincreasedconfidenceinouroutlookforourbusinessinChina.


Gotit,thankssomuch.Seeyounextweek.

Operator :

OurnextquestioncomesfromthelineofDerikdeBruinofBankofAmerica.

DerikdeBruin (Analyst-BoAMerrillLynch):

Justwantedtoclarify.DidIhearyoucorrectly,thatyousaidyourinitialflashforcoregrowthguidanceforFY17was4.5%atthemidpoint?


Yes.





Okay.Andsocanyoulikeflankthatintermsofwhatyou'rethinkingforthechemicalandenergymarketthere?Imean,justwhatyou'reexpectingintermsofrebound?Couldyouhelpusframethatcommentalittlebitmore,intermsofsomeoftheputsandtakes.


Sure,I'dbehappyto.Sometimesyoucanusecolorfullanguage,itdoesn'treallygiveyoutheinsightyouneed.Letmetrytoclarifyhere.

Whatwesaidwasinthisyear,wethoughtourperformancewouldbeflatfortheentireyear.Well,infact,it'sgoingtobedown.Weprobablythinkintherangeof2.5%fortheyear,fortheentireyear,andthatisachangefromourassumptionscomingintothisyear,andthatwastheassumptionbeingmadeatthetimeofourinitialguidance,whichmakesourrevenueresultsevenmuchmore--we'rereallypleasedwiththeresults,giventhefactthatthechemicalenergymarkethasnotdevelopedthewayweinitiallyhadthought.

Thatbeingsaid,in2017,weactuallythinkitwillbeimproved,whichmeansitwon'tbedeclining,andinfact,willprobablybeflatormaybelowsingledigits.Andwhydowebelievethat?Ifyoulookathowourbusinessbreaksdowninthatsegment,wehaveoftentalkedabouttheoilside,but15%ofourbusinesshistoricallyhasbeenintheexploration,another35%hasbeenintherefining.

Theotherhalf,whichisbyfarthebiggest,biggestindividualsegmentisthechemicalside,andthey'rebenefitingbylowerfeedstockcost.They'vegotpent-upinvestmentdemands,andwe'restartingtoseeincreaseddealactivity.Soinfact,PatrickandIweretalkingaboutthis,thismorning,itremindsmeofpharmaafewyearsago.

Basically,we'regoingtohavetwoyearsofshrinkingperformanceinthismarketplace.Alotofpent-updemand,solongstoryshort,ourgrowthassumptionfornextyearassumeslowsingledigitchemicalenergygrowthfortheyear.Again,westillbelievewe'researchingforthebottom,so,andit'sstillearlyintheyearof2016.Butthat'sourbasicassumptionfor2017,whichisanimprovedenvironment.Notdramatic,butimprovedfromwhatwe'veseenoverthelast24months.


Justasaquickfollow-uponthechemicalscomment.You'renotworriedthatsomeoftheactivitybetweenDowandDuPont,andlooksliketheremaybeMonsantoandsomeoftheseothercompaniesthataredancingaround,areyouworriedthatcouldstymieinvestment,ifyou'reusingthepharmaanalogyofcombinationsofthosecompanies,istheresomepotentialheadwindsfromthechemicalsmarket?


Derik,that'sagreatquestion.Welookedatthisprettycloselywhentheannouncementwasfirstmade,andalthoughDowandDuPontareveryimportantcustomerstous,thatparticulardealactivityreallyisimmaterialtothetotalCompany'sperformance.Andwedidn'tnecessarilyseeitasasignofanaccelerationofM&A,andconsolidationsgoingoninthisspace.

Soofcourse,therewouldbesomepauseifwewouldseemorethanthat,butwe'renotoverlyconcernedaboutthat.AndIguessthebeautyofthisbusinesshasbeenjustthebroad-basednatureofourcustomerbase.Sowe'renotoverlydependentonanyonesinglecustomer.





Thankyouverymuch.I'llgetbackinthequeue.

Operator :

DanAriasofCitigroup.

DanArias (Analyst-Citibank):

Mike,canyoutouchonJapanandthingsthatyousawduringthequarterintermsoftrends,andmaybewhatyou'relookingforatthispointontheyear?


Yes.Dan,toanswerthatquestion,andifyouknowalittleofmyhistory,IspentfiveyearsinJapan,soIhavealwaysbeenabigsupporterofJapan,intermsofthelong-termviewofthemarket,andI'daskyoutotakealong-termviewofthemarketinJapan.Thatwastheonlymarketthatactuallywasdownforusinthesecondquarter,andweareexpectingcontinuedsubduedperformanceinJapan.Sowe'renotexpectingmuchintermsofimprovementintheoverallmarketenvironmentinJapan.

Wedothinkitcouldbeamarketwhichoftenwillrespondtonewtechnologies,andinnovativenewproducts.Sowedohope--wedoholdouthopethatwecouldtakesomeshare,someofournewintroscomingoutinthesecondpartofthisyear.Butfromanoverallmarketperspective,weareexpectingtoremainsubdued.Andourinternalforecastsarenotbasedonanytypeofmaterialimprovementatall,inourperformanceinJapan.


Thanksforthatcolor.Andyouteasedsomenewproductintroductionsinthebackhalf,thatshouldbemeaningfultogrowth.I'msureyoudon'twanttogiveawayanysecrets.Couldyousortofhelpuswithwhatpartofthebusinessyou'reanticipatingseeingtheboostin2017?


Thanksforthecaveatonyourquestion.SowhatwecanpointtowithgreatconfidenceandclarityistherecentintroductionwemadeatAnalytica.WhatIwouldsaytoyou,youwillseebroad-basedintroductionsacrosstheentireportfolio,andcoregrowthiscentraltoourbusinessplan.Asyouknow,whenIcameinlastyear,wespentalotoftimereorganizingourR&Dstructure,andalsoreallocatingwhereweputmoney.

Ithinkyou'regoingtostarttoseesomeofthatstartingtopayoff,aswegointothelatterpartof2016.Sowedidwanttoputateaseroutthere,andalsojusttomakesureyouhadconfidence,intermsofwhat'sbehindourviewofimprovedAgilentperformancein2017,offofthesecondhalfofthisyear.ButIthinkyoucanexpecttoseeustalkingaboutactivitiesacrossallthreebusinessgroups.


Gotit.Okay.Thanksverymuch.

Operator :

DougSchenkelofCowenandCompany.

DougSchenkel(Analyst-CowenandCompany):

Mike,Iwanttogobacktosomeofthecommentsyoumade,oneffortstotightencycletimesfromordertorevenue,whichseemedtobeyieldingbenefitssoonerthanexpected,particularlyinChina.Canyou




provideabitmorebackgroundonthiseffort,andwhyitwasmostimpactfulinChina?

Andthenmaybetalkaboutsimilareffortsunderwayinothergeographies?Andrelatedly,youpositionedthese,inansweringsomequestions,asiftheyweretemporary.Atleastitseemslikeyourguidancedoesn'ttreattheseassustainableimprovements,yeteverythingelseyousaidsuggeststhatthesearetrulysustainableimprovements.SoIwasjusthopingyoucouldhelpusunderstandthatalittlebitbetter.


Sure,Doug.Ireallyappreciatethequestion.Maybeletmestartwiththelastpartofyourquestion,whichisthetake-awayhere,wedobelievethereissustainableimprovement.Inmymind,orthelanguageIuse,thisisthenewnormal,intermsofourabilitytoconvertorderstorevenue.

AndsoIwouldcharacterizethisasnewnormalofhowwe'regoingtooperate.Sohowdowegethere,andwhydiditlooksosignificantlydifferentinChina?Sofirstofall,itstartswithlookingattheentireprocessfromanend-to-endcustomerperspective,fromthetimeoforderplacementuntilshipmentuntilcustomerinstallationoccurs.

Andasyouknow,whenIrestructuredtheCompanyIwasreallytryingtobreakdownthesilos.Wehadaverysilo-orientedapproachtothisend-to-endprocessfromacustomerperspective.IntheCompany,welookedateachsliceoftheprocess,butnobodywaslookingatthecollectiveprocessend-to-end.Youstartdoingthat,thenyoustartseeingwheretheissuesare,theopportunitiesare.

Sowefoundwaystoimproveourorderlinearity.We'veimprovedthequalityofbookedorders,andthisreallygetstoyourquestionaboutChina.Oftenyou'redealingwithlettersofcreditissues,andothertradeissuesthatinthepasthavedelayedourabilitytoactuallybookthemascleanordersandturnthemintorevenue.Wecallthesedeliverybox.We'vebeenworkingonmakingsurewehadmaterialavailability.

Ithinkwehitoneofourbestquartersever,intermsofhavingmaterialreadyforallofourshipments,soweimprovedourabilitytogetinordersinalinearfashion,makesurethoseordersareclean,andnothavealotofrework,andthenwehaveimprovedourdeliveryperformanceandthenspentalotoftimeimprovingoureffortsbetweenshipmentandinstallation,whichsometimecangoonforseveralweeks.Ithinkitallstartsatlookingatthewholeprocessfromanend-to-endperspective,andtheresulthasbeenasignificantimprovementincycletime,andordersturnedintorevenuemorequicklythaninthepast.

Idothinkthisrepresentsournewwayofoperating.Andagain,asImentionedinmyremarks,itdidcreatesome--itdidhaveimplicationsofhowweguidetheCompanyforthesecondandthirdquarter,butIthinkwe'redelightedtobeabletoactuallyhaveongoingstrongoperationalefficiencyimprovementsinplace,sothatweknowhowtopredicttherevenueevenbetterinthefuture.


Okay.That'sreallyhelpful,Mike.Butjusttobereallyclear,recognizingthesearewell-learnedsustainableimprovements,it'snotapparentthatthisisfully--theseimprovements,thesustainabilityisfullyreflectedinguidance?Ifthat'sthecase,isthatjustbecauseyouwanttoseethisplayoutforacoupleofquartersbeforeyoustartbakingitin?

DidierHirsch (CFO):

IthinktheconfusionmightbethatwhatwehavestatedisthatthisquarterinQ2wegot$20millionto$25millionofrevenuethatwehadanticipatedtoberecognizedinQ3,aswewerebringingallthoseprogramstofruition,wehadearlierresults,whichisgreat.Fromwherewearenow,theordertorevenuecycletimeissustainable,butwewillnotseefurtherimprovementsthatwillbringQ4revenueintoQ3or




whateveritis.Sothe$20millionto$25million,that'sone-time.We'vegottothelevelwewantedtobeat,andfromnowon,it'sjustbusinessasusualwithoutanyfundamentalchangeintheordertorevenuecycletime.


Allright.Thanksforthat,Didier.Justonelastoneforyou.OnthechangeinLasergenaccounting,wasthereanydilutioninthequarter,andbasedontheaccountingchange,shouldwenolongerexpectthistobea$0.02to$0.03dilutivedealfortheyear?

DidierHirsch (CFO):

Correct.You'recorrect.SotherewasnodilutioninQ2,andtherewillnotbeanydilutionfortherestof2016or2017,untilweexerciseourcalloption,andthenwewilljustfullyconsolidate.ifwedothat,obviously,fullyconsolidatetheLasergenrevenues.Sothat'sachangethattherewasalotof--Imean,discussionswiththeauditors,theysurprisedusalittlebitbygoingtonationalstogetspecialistchallengetheaccountingthatwehadanticipatedlocallyamongthetwoteams,andthenweagreedtotherecommendation.And,therefore,nodilutiontoEPScomingfromLasergeninthenexttwoyears.


Wewerepleasedwewereabletogetthisclosedoffbeforewefinishedthequarter.


Okay.Great.Thanks.

Operator :

MiroslavaMinkovaofStifel.

MiroslavaMinkova(Analyst-StifelNicolaus):

Congratulations.Onthequarter.MaybeifIcouldfocusonoperatingmarginsagainforasecond.Justhelpus,remindus,there'salotgoingonthere,intermsoftheprogramsyouhaveinplaceandimprovementsyouhavegoingon.Helpus,remindus,thebridgebetweenFY16andFY17,whatgetsyoutothe22%operatingmargin?


Well,asateaserwe'regoingtogothroughthisinsomedetailnextweek.

DidierHirsch (CFO):

Therewillbeaslideonthetopicnextweek.


ButwhatIcansharewithyouconceptuallyisthatwewillbecontinuingandcompletingofftheintegrationoftheDakoacquisition.Wehaveaseriesofoperationalprograms.Wetalkedaboutoneofthosealready,whichistheimplicationsoftheERP.Andthecontinuedfocusongrossmarginimprovements,specificallymaterialcostreductionsandlogisticssavings.Ithinkthecombinationofthosethreefactors,pluswiththeoverallcoregrowthassumptionsthatwe'recurrentlymodelingaround4.5%getsustothe22%.





Okay.Great.Andthestrengthinthefoodmarket,wasthisallChina,orareyouseeingstrengthelsewhereaswell?


Actually,itwasbothinfood--excuseme,thefoodmarketbothinChinaandtheUnitedStates.AsyoumayrecallfromourQ1announcement,thisbusinesstendstobealittlelumpy,whereasIthinktheperformanceinthefoodmarketinChinahasbeensustained.ButwesawanicereboundintheUSinthesecondquarter.


Gotyou.Okay.Andmaybefinally,giveusyourviewoftheM&Apipeline.We'veseenyoudoacoupleofdealsjustrecentlyhere.NowthatyouhavemanyoftheoperationalinitiativesforthenewAgilentinplace,shouldweexpectthatyou'remoreactivewiththetuck-insgoingforward?


Again,thisisateasernumbertwo,whichiswewilltalkaboutthisalittlemoreindetailnextweek.IdofeelthattheCompany'sfoundationisreallyfirmlyestablished,andasImentionedearlier,Ithinkwe'regettingalotbetterintermsofourspeedtobeabletointegrate.WhatIthinkyoucanexpectustodoisstillremaindisciplinedandfocusedintermsoffindingthoseopportunitiesthatmakesenseforus,andIwouldaskyoutothinkaboutusbeingcomplementaryM&Ainnature.We'regoingtocontinuetolookforthose.Soourbalancesheetisahugeassetforourshareholders,andonewhichweliketodeployrelativetoM&A,butithastobetherighttarget.


Okay.Thankyouverymuch.

Operator :

SteveBeuchawofMorganStanley.

SteveBeuchaw(Analyst-MorganStanley):

Goodafternoon.Thanksfortakingthequestions.Justtwoclarificationsonhowyou'rethinkingaboutthe2016,2017progression.ThefirstisactuallyontheNIH.

Towhatextent,ifany,areyouanticipatingapickupintheresearchchannelfromNIHfunding,whenwestarttoseethatgetdisbursedinthesecondhalfoftheyear?Andthensecond,thismaybeevenalongertermquestion,buthowdoyouthinkabouttheevolutionofFSMAregulationsinthefoodspaceintheUS?Isittoosoontostartgettingincrementallyoptimisticabouthowtheycouldcontributetotheoutlook?Thanks.


Thanks.Gladtoaddressbothofyourquestions.OntheNIHfront,IthinkwhenwetalkedabouttheuptickandourimprovedconfidenceaboutthespendsinacademiaandgovernmentintheUS,IthinkwedothinkthattheNIHstuffwillstarttoflowthroughtoourbusiness.

Relativetosomeinourspace,wedon'thaveashighapercentageofourbusinesstiedtotheNIH,butitwillbeapositiveforus.AndIthink,again,onemorefactpattern,whichpointstocontinuedviewthatthismarketwillbesolidforusaswemoveinto2017.IthinkI'dhavetoagreewiththecomment,whichis,IthinkitreallyistoosoontogetoverlyexcitedaboutthisfromaUSspending.I'veseenthisbefore,where




thelegislationisannounced,andthere'salotoffanfareaboutit,butwedon'talwaysseeitbackedupbyinvestments.

Weareseeingsome--lookslikesomemaybemorefriendlygovernmentalallocationstothisagency,unlikewe'veseentotheEPA.Sowe'renotexpectinganythingdramatictooccurdifferentlyinthemarket,becauseofthis.Butifitwould,thatwouldbeclearlygoodnewsforus.

SteveBeuchaw(Analyst-MorganStanley):

Thanksforalltheperspective,Mike.

Operator :

JeffElliottofRobertW.Baird.

Jef f Elliott (Analyst-RobertW.Baird&Co):

Thanksforthequestion.Mike,onthemargins,overallareallygoodquarter.ThenwhenyoulookatthemarginsinDGGandCrossLab,basicallyflatyear-over-year.Iguess,isthatwhatyouwereexpecting?Anythingthatyoucouldcalloutinthequarter?Iknowthere'ssomemovingpiecesinthattopline.


Whydon'tyoutakethisone,Didier?

DidierHirsch (CFO):

It'sagreatquestionandtheanswerisyes,it'spreciselywhatwehadexpected.Oneoftheobviously,fromonequartertothenext,therecouldbesomeonetimeadd-insthataddsalittlebitofvolatility.Forexample,lastyearbothACGandDGGhadveryfavorablehedginggains,whichhavegoneaway,forthewholeCompany,thehedginggainlastyearinQ2wasover$7million,andthisQ2wasabout$1.5million,somethinglikethat.

SoitwasmostlyinACGandDDG.Theyarewereotheronetimeitemsincludingregardingtheallocationofoursharedservicesamongthedifferentbusinesses,whichexplain.Butbothbusinessesareontheirwaytocontributetotheoperatingmarginexpansion,andthe22%thatwe'recommittingto.


Didier,maybeI'dalsoaskMarktoo.Wetalkedaboutthisearlierthis--lastweekaswellabouttheoperationalefficiencyimprovementsthatunderlyingwhatlookstobeflatmargins.Peelbacktheonion,thehedginggainsandotherthings,there'sactuallyrealoperationalstuffgoingonthere.

MarkDoak(President-AgilentCrossLabGroup):

Thanks,MikeandDidier.AsDidierhadsaid,therewereseveralthingsthatwerefactoredinlastyear,thatdidn'tcomeintoplaythisyear.We'reworkingonalotofthingsintermsofimprovements.Themixissomewhatfavorableinthecontextofwhatwe'reselling.Butoverall,whenwelookatourplansforthefirsthalf,we'reup70basispointsinthefirsthalfoverlastyear.Soourabilitytoactuallydothemarginimprovements,whenyoupullbackandlookatinthefirsthalf,regardlessofallthesethings,isquitepositive.


Andit'sourfastest-growingbusiness,he'sbeenpickingupmoreofthecorporatecostsofsharedservices.





Thanks,guys.


Hopethatwashelpful.


Yes.Itwas.Thanks.

Operator :

Thankyou.AndourfinalquestioncomesfromthelineofDaneLeoneofBTIG.

DaneLeone (Analyst-BTIG):

Justhadaquickclarificationfromearlier.Soyouweretalkingaboutthereplacementcycleinbiopharmaandquoted150,000LCsystems,basedonthe1100,1200platform.Canyouclarifyifthat'swhatyouthinktheopportunityisaheadofyou,orthat'stheopportunityinprogress?Andifso,what--howfarareyouintothat?


ThisisPatrick.Letmeanswerthesequestions.Firstandforemost,thisisnotbiopharmaatall.Thisispharmaandbiopharmacombined.

WhenItalkabout150,000systemsoutthere,it'stheinstalledbaseofLCsystemsinallmarkets.Soit'snotonlyinpharma,biopharma.Butwethinkthebiggestpushisactuallyrightnowcomingfrompharmaandbiopharma.AndIwouldstillsayweareinthemidstofareplacementcycle.

Wedon'tseethattobeoverinthenextcoupleofquarters.There'shealthydemand,andweareinnegotiationwithalotofourcorecustomersonupcomingreplacements,andhowweplacethesesystems,andhowweplanitoutforthem,soitworksforthem.


Dane,ifIcouldaddoneothercommenttoPatrick'sresponse.We'vebeenfocusedalotintoday'scallonpharma,biopharmabutkeepinmindthatthereplacementcyclehasbeenvery,verysubduedontheappliedmarketsside,inliquidchromatography,sowehaveseveral--wehavetensofthousandsofsystemsonthatsideofthehouse,aswell.Again,thisiswhywelookoutinto2017and2018,wethinkthatourgrowthratesaresustainable.


Anywayyoucouldhandicap,usingabaseballanalogyorsomethinglikethat,whatinningyouthinkyou'rein?

DidierHirsch (CFO):

Don'taskaGermanaboutabaseballanalogy.


I'dsayonthepharmaside,you'reprobablyinningfiveorsix.Twothirdsofthewaythrough,maybetwo-




thirds.MypointwouldbethatIthinktheballgameisjustgettingstarted.Wemaybeinthefirstinning,wehopetobeinthefirstinningsoonofthatcycle,ontheappliedmarketside.


Thankyouverymuch.

Operator :

Thankyou.AndI'mshowingnofurtherhequestionsatthistime.I'dnowliketoturntheconferencebacktoAliciaRodriguezforclosingremarks.


Operator :

Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.

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Agilent Technologies (A) Earnings Report: Q2 2016 Conference … · 2016-05-17 · Agilent...

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