Agilent Technologies, Inc.
Q2 2017 Earnings Call Transcript

Published: 16 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2017 Agilent Technologies Incorporated Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now look to introduce your host for today's conference, Miss. Alicia Rodriguez, Vice President of Investor Relations. You may begin.

[Alicia Rodriguez:]

Thank you, Kristal, and welcome everyone to Agilent's third quarter conference call for fiscal year 2017. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Science and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group. You can find the press release and information to supplement today's discussion on our website at www.investor.agilent.com. While there, please click on the link for financial results under the Financial Information tab. You will find an investor presentation along with revenue breakouts and currency impacts, business segment results and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call. Today’s comments by Mike and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency, the NMR business, and acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of the last business day of the reported quarter. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties, and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, let me turn the call over to Mike.

[Mike McMullen:]

Thanks, Alicia. Hello, everyone and thank you for joining us today. Q3 marked another strong quarter for the Agilent team. We exceeded our own expectations on both the top and bottom line. We continue to deliver above-market growth. Our revenues of $1.11 billion grew by 7.5% on a core basis. Adjusted EPS of $0.59 is up 20% over last year’s third quarter. Our focus on operational excellence continues to pay-off. We delivered an adjusted operating margin of 21.5%, up 90 basis points from a year ago. I can remember when I became Agilent’s CEO, you asked me a very good question, could Agilent make the adjustments to improve our operating margin while outgrowing the market? Well, we have. This is the 10th consecutive quarter of improving core operating margins while outgrowing the market. So where is our strong Q3 growth coming from? From an end-market perspective, both the global Chemical & Energy and Pharma markets grew by 10%. And geographically, China continues to be strong, while we experienced better than expected growth in Europe. Let’s take a closer look at what’s happening in our end-markets. Our Pharma revenue is up 10%. We are well-positioned to capture growing customer demand with our broad and differentiated offerings of instruments, services and consumables. Demand was also strong for our API offerings. Chemical & Energy is up 10%. This is the second consecutive quarter of double-digit growth. Similar to last quarter, growth was broad-based across regions and products. Our customers are beginning to upgrade their labs and are investing in equipment replacements. While some uncertainty remains on the pace of recovery, we are encouraged by the reinvestment. After four consecutive quarters of decline, we had a nice surprise with the low-single digit core growth in Academia and Government. Strength in Europe and double-digit growth in cell analysis, spectroscopy and services drove our results. Food grew 2% against a difficult compare in Q3 last year. Food market fundamentals remain sound with strength this quarter in Europe. Environmental and Forensics grew a healthy 7%. Our strong growth was driven by Asia Pacific and the Americas. Concerns about the health of our environment continue to drive the Asia market. Diagnostics and Clinical grew by 6%, led by pathology and companion diagnostics and geographically, strength in Europe. Now turning to look at our different regions. Geographic performance was driven by double-digit growth in Europe and continued China performance. The Americas grew by mid-single digits, while Japan was flat. And now let’s turn to the highlights from our business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 7%. From an end-market perspective, strength in Chemical & Energy, Pharma and Environmental continue to drive the performance. Looking at our product portfolio, growth is broad across all our products. And we continue to strengthen our line-up. We recently introduced several new additions to our InfinityLab LC series. At ASMS, we unveiled our newest LC-MS triple quad, the Ultivo. It is not an exaggeration to say it’s revolutionary. The Ultivo is 70% smaller than previous instruments, yet it still delivers the same or better performance than its predecessor. Our customers tell us that the triple quad is the workhorse of the lab. The Ultivo allows our customers to maximize their lab space and increase capacity without compromising performance or uptime. This revolutionary new instrument is a great example of Agilent’s market expertise and commitment to customer-centric innovation. We also strengthened our GC-MS line up with the introduction of a new high-resolution, accurate-mass system. This new product will help our customers address the growing demand for identification of unknown chemical samples. We look to buy businesses in fast growing, adjacent market segments with differentiated offerings and strong teams. In July, we completed the acquisition of Cobalt Light Systems, adding Raman spectroscopy to our spectroscopy line-up. Cobalt Light Systems has developed ground breaking technology that is integrated into an innovative suite of benchtop and handheld instruments. We are now directly participating in this fast-growing spectroscopy market segment. There are strong synergies between the two companies. We are scaling the operations of Cobalt Light Systems and will be offering our current customers these ground-breaking solutions. CrossLab, a key strategic move of the New Agilent, continues to pay-off. The Agilent CrossLab Group maintained its strong performance again this quarter, with core revenue growth of 8%. Growth was robust for both services and consumables. The Diagnostics and Genomics Group also delivered strong core revenue growth of 8%. Results were driven by strong demand for our pathology products and companion diagnostics services. We see particular strength for our PD-L1 and molecular products. As I mentioned earlier, our Nucleic Acid Solutions business, which can be lumpy, performed well and is up by very strong double digits. The growth we saw in our Pathology business is a strong sign that we are regaining market share with our automation system, OMNIS, and the new products we are continuing to introduce. From special stains to new ready-to-use antibody offerings, our Pathology Division is creating a lot of momentum. We also introduced our newest next-generation sequencing library prep solution, Agilent SureSelectXT HS. This research solution benefits our customers by streamlining the entire NGS workflow. On the M&A front, we acquired the molecular and sample barcoding patent portfolios of Population Genetics Technologies. This expansion of our IP portfolio bolsters our target enrichment leadership position enabling the future introduction of new solutions to our customers. Rapid integration of the Multiplicom business continues to proceed according to plan. Let me close out my portion of the call, recapping the journey of the New Agilent and with some comments on our Q4 outlook. In May of 2015, at our first analyst and investor day of the New Agilent, we laid out an ambitious three-year plan to create shareholder value. We made three commitments. We committed to outgrow the market. We committed to improve adjusted operating margins over 400 basis points. We committed to take a balanced approach to deploying our capital. Over the past 10 quarters we have been delivering on our commitments. I am so proud of this team. We are on the cusp of achieving the goals that we set for ourselves that we first shared with you over two years ago. We are a team that delivers on its commitments. I think it is now time to retire the description New Agilent. We have put in a new foundation for the company to grow and we are firmly focused on the future. The achievement of these goals is just the beginning. Our story is a forward-looking story with a laser focus on delivering superior earnings growth and creating shareholder value. Looking at the more immediate future, I want to close with a few comments about Q4 ’17. First, we remain somewhat cautious about the potential for a cyclical recovery. We also know we are heading into a period of tough compares for our global Pharma and China businesses. Yet, the overall market environment for Agilent is stronger than forecasted coming into this year. Given these considerations, we are once again raising our full-year core growth and earnings expectations. I look forward to answering your questions later in the call. I will now hand off to Didier. Didier will provide additional insights on our Q3 results and updated guidance. Didier?

[Didier Hirsch:]

Thank you, Mike, and hello, everyone. As mentioned by Mike, we delivered strong top and bottom line results, both on a year-over-year basis and versus our guidance. Currency had a positive impact on revenue and operating profit of respectively $7 million and $1 million versus previous guidance. Please also note that we have reduced our pro-forma tax rate by 1 percentage point, which had a $0.02 impact on our Q3 EPS. I will now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.15 billion to $1.17 billion and EPS of $0.60 to $0.62. At midpoint, revenue is expected to grow 3.5% on a core basis. As a reminder, our core revenue growth last Q4 was a strong 6.3%, so Q4 is a tough compare, coming after an easier Q3 compare. Versus previous guidance, currency is estimated to have a positive impact of $24 million on revenue and $4 million on operating profit. Finally, our 22.4% adjusted operating margin at midpoint will be up 90 basis points sequentially. Now to the guidance for fiscal year 2017. The Q4 guidance is expected to result in the following fiscal year guidance. First at midpoint, revenue is projected to grow 6.0% on a core basis, or 1 percentage point over the previous guidance. The revenue guidance of $4.445 billion is $75 million over previous guidance including $31 million due to currency and $1 million due to M&A. Second, our EPS guidance of $2.30 at midpoint is up $0.12 from previous guidance and corresponds to a 16% year-over-year increase. Currency contributed $0.01 and the reduction in pro-forma tax rate contributed $0.03. Third, adjusted operating margin for the year is expected to be 21.8% or 110 basis points higher than in FY16. And last but not least, we have raised our operating cash flow guidance from $825 million to $850 million and we are reducing our CapEx guidance from $200 million to $185 million, this leads to an increase in free cash flow guidance of $40 million. With that, I will turn it over to Alicia for the Q&A.

[Alicia Rodriguez:]

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

[Operator:]

[Operator Instructions] And our first question comes from Dan Arias from Citigroup. Your line is open.

[Dan Arias:]

Didier, in the DGG business, a bit of quarterly variation of the op margin line. Where do you think the op margin settle in if we just look out a bit maybe past the current year, is there a range you kind of help us with there?

[Didier Hirsch:]

Yeah, you're right. The DGG business can be a little lumpy on an operating margin basis for many, many reasons. What's important is that we came from you know we were coming from 13% operating margin in 2015 to 16% in 2016. And we are aiming still as we have basically announced back two years ago to close to 20% in 2017. So the range I would say after we complete this fiscal year will be around 20% that we've talked about. And Jacob, I don’t know if you want to add anything?

[Jacob Thaysen:]

No, that’s absolutely correct.

[Dan Arias:]

And then Mike maybe just on chemical and energy, could you just put a little color to what you're seeing inside that business. Obviously the unit is always doing better. Just curious what the commentary on exploration sounds like at this point. Are you expecting to finish the year sort of on a similar note or might we see some pick up towards the fourth quarter.

[Mike McMullen:]

Sure Dan. Maybe first of all I want to reground some of the segments because I think probably last five or six maybe seven quarters I would describe a certain breakdown of the chemical and energy along the lines of energy refining and chemical. And as you know we've been under - the energy sector has been under a lot of pressure last two quarters. So right now our estimates are that energy represents about 10% of the - excuse me, thank you Patrick, exploration I got mixed up here, exploration represents about 10% of the total, where refining is about 30% and the chemical side is about 60%. So just to kind of ground yourself there's less of our business now in the exploration side of the business. We actually expect that to continue to be down for the remainder of this year. So we're not really seeing much going on there. What we are seeing is what I pointed into in my script is that there's been a high emphasis on cash management and cash control in prior years. We’re starting to see a little bit of money being freed up to focus on reinvestments and really to drive productivity and back to the small recent article in Wall Street Journal talking about the importance on customers, companies driving towards increased earnings. So what that tells us is that energy - the exploration side of the segment is going to continue to be down. We expect replacement to continue in the chemical side. We are still cautious on the refining side of the business. In fact you may have recently seen that the next 12 months EPS forecast for large cap and refining companies have declined since May. So it's not all going well in the segment, but overall we're encouraged by the results. So only two quarters of strong growth, so we're not yet ready to call a cyclical turnaround. But I would remind you that for the year we're forecasting overall 8% growth for this chemical energy segment, a much different result than you’ve seen in the prior two years. So hopefully that helps get at your question.

[Operator:]

Thank you. Our next question comes from Tim Evans from Wells Fargo Securities. Your line is open.

[Tim Evans:]

What's your general sense for how much of the strength you saw this quarter was overall end market strength versus strength of some of the new products that you've launched?

[Mike McMullen:]

Hey Tim, thanks for the question. So as you know our whole model is built around outgrowing the market based on a real focus on innovation that matters to customers tied to really a solid go to market channel. So I think what you've got going on is sort of a perfect storm if you will from a standpoint of, we're able to put up these very strong growth results because we have a highly competitive and differentiated portfolio. So we know we're gaining market share in a growing market and that really leads to the kind of results that we're having here. So I know all CEOs claim to be gaining market share, but we look at the numbers that seem to prove out for us.

[Tim Evans:]

And then could you maybe just comment on the runway for CrossLab, is that something where you still feel like there is multiple years of above market growth?

[Mike McMullen:]

So I’ll make some initial opening comments here Tim and then I'll invite Mark to take a bow in terms of the results we’ve been pushing up here and talk about the future. So as I commented in my script this was a major strategic initiative for us to really go after this, what we see to be a new market for us in CrossLab, so I think much broader about our offering in the lab and really to focus on enterprise services and we think about the entire lab as our opportunity. We've had a number of quarters of very strong growth and our view is that we can expect to see this growth continue. And I point out to you some of their markets which historically haven't been big purchase of service for example, are really driving a lot of growth for example, we had stellar results once again in China. So Mark, why don’t you give your thoughts about the future of the CrossLab group and can you sustain this run here on.

[Mark Doak:]

Oh thanks Mike and hi Tim. Let me elaborate a little bit on Mike's comment and a lot of attention comes around our enterprise solutions business. And that is a big factor behind our growth. However, want to peel that back a little bit. The instrument service business is much larger been growing in high single digits that’s enabling workflows and certainly complimentaring a lot of the new product technologies we’re bringing to market and the consumables business is routinely growing in the mid to high single digit range too. If I look ahead though we see a very robust market for the enterprise business in particular in pharma and increasingly inside the commercial labs and serve across multiple end markets, they can be environmental, food et cetera. And so, I don't think there is any end in sight when it comes to the challenge of improving the productivity of the lab operations and that's really where our value proposition is build upon versus single sourcing can we truly help you get the efficiency of the lab going out. So very bullish about our runway in this business going forward and I’d say it’s more than just enterprise service story, it's really about our instrument service business and our consumables rounding out the entire picture.

[Operator:]

Thank you. Our next question comes from Jack Meehan from Barclays. Your line is open.

[Jack Meehan:]

Mike, I was hoping you could elaborate a little bit on the performance in biopharma in this quarter, specifically the trends you're seeing at US pharma and then maybe just elaborate a little bit more on the commentary related API and the offering there.

[Mike McMullen:]

The second question was, sorry, I missed that one.

[Jack Meehan:]

Related to the commentary around the API offering.

[Mike McMullen:]

Sorry about that Jack, they say your hearing is one of the first things to go when you get older. Let me start with the biopharma comment and then Patrick I’m going to have you jump in and give your view on the dimensions by geography. But, we’re really pleased although we don't report externally the absolute results in the biopharma segment of the pharma market. We're really pleased with how this business is performing. As you may recall this is a major strategic initiative that we launched probably about two and a half years ago to really go after the biopharma market segment in a much different manner. We've been bringing to market a number of new novel solutions. We've changed our go-to market strategy and it's paying off. So what I can tell you is we grew double digits in biopharma in the third quarter. We think we’re outpacing the overall market and perhaps you have a view of mix by geography and then anything else you want to add Patrick.

[Patrick Kaltenbach:]

Yeah, sure thanks Mike. So we have seen a very, very strong growth in China. We have seen reasonable growth in EMEA and Europe, and also a single-digit growth in AFO. So that's the distributional regional level. And it's heavily driven of course by biopharma as Mike mentioned because that is growing ahead of the global pharma space, but I would say if you look at the difference segments in pharma, it's on the R&D side as well as manufacturing [indiscernible] very well represented there. And we don't see a real slowdown right now in the biopharma space. So looking forward given the new portfolio we have, also the focus on complete workflows that we launched over the last couple of months, we're pretty confident that we will continue to grow strong in this market and capture more share.

[Mike McMullen:]

Thanks Patrick and Jacob, perhaps you can address Jack's question on the API.

[Jacob Thaysen:]

So on the API side, our nuclear acid solution division, we see a lot of great momentum in the business and we continue to really be in situation where capacity is our main constraint. So that's also why we right now as we've explained before we are building this new manufacturing capacity out in Colorado and Boulder, to really make sure we can expand versus the demand that’s out there. We have seen - as a goes in this business, we did see a few quarters ago that one of our customers did not meet the end point in a phase 3 clinical trial and that has led us to rebuild the pipeline. We have seen very strong demand and we’re really back in full swing again.

[Jack Meehan:]

And then clearly you know a lot of new product launches coming on the mass spec side. I was wondering if you have any thoughts related to pushing mass spec into the clinical setting, a couple of your peers are pretty active there. I was wondering if that was a future target for Agilent as well.

[Mike McMullen:]

Patrick?

[Patrick Kaltenbach:]

So I'll take that Mike thank you. So, as you know we're currently present in the LTG space, we launched class one product several years ago and this is what we see as the sweet spot right now for LCMS and clinical, it's really all about pain management, vitamin D testing and all that application, immunosuppressants. And we are pretty well represented in that space right now, whether it will be able to replace immuno assays as some of our competitors might think, we have some question marks there, we think we are pretty strong in the LTG markets that might continue, we see actually probably more promise on the more sophisticated assays that are related to metabolomics and that are more later spaced of cancer diagnostics and more complex diseases like Alzheimer's a couple of years out. So this is where we see the focus for this business because getting into in a clinical workflow where the light based assay are established and trying to replace those, will be quite difficult I would say.

[Operator:]

Thank you. Our next question comes from Tycho Peterson from JP Morgan. Your line is open.

[Tycho Peterson:]

My question on maybe just the longer term outlook on margins, wondering if you can comment a little bit as we think about the framework for next year. Could you get a similar level of margin improvement in other levers, whether it's pricing or improving R&D efficiency that you can kind of point to as we think about the margin set up for next year.

[Mike McMullen:]

Thanks Tycho, I appreciate the question. And what I'll do is I'll refer you back to the messaging that we provided in our last AID. So what we committed to was greater than 22 as we move forward. And we think we've got a model which allows us to continue to improve our operating margin and it's going to a combination of a number of things you mentioned already, which is the innovation focus, making sure that we're pricing for value, we’re managing on discounts correctly. So we have an initiative underway, we call the PDQ a pricing and discounting quote initiative to really make sure that we're managing the price envelope correctly. I other thing I would point to is also the great work that our order fulfillment team has been doing. So when we form the new company we centralized all the manufacturing logistics, a material procurement in one organization and they've been doing a very nice job. And we think that the transformation is underway in our supply chain, it currently allows us to have some cost reductions in the future. So won’t commit today in the call to a specific number, but we like improving operating margins without sacrificing growth that was my one of the key parts of my script which says, hey we're going to outgrow the market while improving operating margin. So that will continue be our model. And as we look forward and you can expect us to try to sustain levels of success we've enjoyed so far.

[Tycho Peterson:]

And then question on Intuvo, I understand you're generally not calling for a cyclical chemical and energy recovery, but if we think about just the sales cycle, can you maybe talk as to how it's tracked versus initial expectations. How long [indiscernible].

[Mike McMullen:]

Glad to, we're always happy to talk about Intuvo and we also have the Ultivo. So it is getting a little - can be a tongue twister at times, but Patrick why don’t you update the colors on what's going on with Intuvo.

[Patrick Kaltenbach:]

Yeah absolutely, where we're very happy with the feedback we receive from the installed base after instruments we have shipped so far. Customers are really excited about the performance, robustness and ease of use of this product. That said, we're not yet shipping it in really big bulk orders. As we said in the calls, last quarter and the quarter before is we think that will happen more in fiscal year ’18 when customers had enough time to test the instruments and also assign budgets to these instruments moving forward.

[Mike McMullen:]

I think that was a learning for us Patrick, which is we thought we had - we were in sort of a window with a. September launch, but we really - what we found out from our customers that we really didn't have time to plan for this in their 2017 budget.

[Patrick Kaltenbach:]

Absolutely, actually, we launched September last year and the feedback we got from several - lots and lots of accounts was well very nice instrument, we didn't have the time to really plan for the budget for fiscal year ’17, but we are now getting feedback from those that are certainly in the budget for fiscal year ’18. Again, the feedback is very positive. It’s still early in the ramped volume of this product but we are really excited about the excitement it drives also across the other products we have out there. We're clearly seen as the market leader on gas chromatography and go to company.

[Tycho Peterson:]

And then just one last one on academic, looks like Europe is being the driver there. Any comments on the US market, are budgets freeing up a little bit here from what you’re seeing?

[Mike McMullen:]

Tycho, when we looked at some of the numbers and talked about as a team, we said listen, what we really seen is, our growth, which is a nice surprise for us in the third quarter really was our market share gain story. So we're still not seeing a lot of active funding going on in the marketplace. And I think US still seems to be fairly subdued and Patrick I don't know what your thoughts on that, but I think we're not that bullish on the overall market environment. We do think we're able to pick up some growth here given that we've historically been under represented in terms of share, but the market is still not very robust.

[Patrick Kaltenbach:]

Agreed yes, definitely the US is not very robust. We have seen some upticks in Europe in the last quarter which helped to drive growth. And we think we are very well positioned with our portfolio. We also have a dedicated program within the company to really look at our coverage model for academia and government. And as Mike said, it's all about taking market share from other competitors and this is what we are after.

[Mike McMullen:]

I think that's maybe something that I should have mentioned earlier Tycho, as part of our channel strategy changes we made when I came in as CEO, we really cater a dedicated focus on academia and government. So I think perhaps they’re starting to see some payoff for those early investments now.

[Operator:]

Thank you. Our next question comes from Paul Knight from Janney Montgomery. Your line is open.

[Paul Knight:]

Can you talk about some of your initiatives that are on developing like your oligo expansion? And also my follow up would be your thoughts on, is Asia getting better or is the same specifically China?

[Mike McMullen:]

And relative to the oligo expansion, in fact a few of us are heading out there tomorrow to see firsthand, we've seen pictures of the building, but there is nothing like seeing it firsthand. So we have going out and spent some time with the team, we’re expanding in Frederick, the construction schedule is going right according to plan. I think, Jacob, we’re looking, probably looking like more still FY ’19 revenue.

[Jacob Thaysen:]

That’s correct.

[Mike McMullen:]

2018, the factory will be done, but there will be a validation process required. And the reason why I asked Jacob to talk about some of the customer activities because we still see a credible amount of demand for customers and it's been more of a capacity constrained kind of growth challenge for us. But we're fully committed, we'll see firsthand and I’ll have some more in-depth comments when I talk to you next, but the construction schedule and the go-to market is still per plan. And then relative to China, and overall Asia, so I think about China, China continues to develop just as we have forecasted. I think we're a little bit over double digit through the first three quarters, we thought it would to be a double-digit grower for us in 2017, seen no signs of slowdown there. I think what has been a nice surprise is the other countries in Southeast Asia that's been a very fresher growing market for us. You may recall about a year or so ago, lot of concerns about the impact of the currency side of those countries. And inside Agilent, we call it SAPK which is South Asia Pacific and Korea and we've been putting good growth up in that part of the sector much higher than we had in prior years. I would say that Japan is the one where the market is still sluggish. Although we’ve been able to have about a 6% growth rate over the last two quarters. So that's probably the most challenge of all the Asian markets we play in. I don't know whether you count India in Asia or not, it's managed in Agilent by our European team, but India market also continues to be quite strong. So I think Asia is going to continue to be a growth story, not only for 2017 but into ’18 as well.

[Paul Knight:]

What's your primary most important element do you think behind your market share gains, is it CrossLab or the tuck-in potential situations like Cobalt?

[Mike McMullen:]

I think it's really, if I’d step back from it, I think it's both a combination of how we’ve been able to broaden our portfolio tied with a true customer focus. And I know you hear it all the time, but we really try to think about what matters to our customers and then aligned our business strategies behind us. So we're only doing great science and driving innovation with some of the new instrumentation that we've been inducing. But as we mentioned earlier, we’re really helping our customers with what we call the economics of the lab and that's really the CrossLab. So I think we're getting share in both places. And I think it's been that combination of how we architected our, you know, so architect if you will our portfolio strategies. And I can also over emphasize enough the importance of having the right go to customer sales model. And we’ve made some pretty big changes the first year of the new Agilent. And we're now I think starting to see the benefits of that, which is to have a really tight set of customer relationships tied with a broadening portfolio with a much clearer economic value proposition via CrossLab.

[Paul Knight:]

And lastly were there a share repurchase in the quarter, Mike?

[Mike McMullen:]

No.

[Operator:]

Thank you. Our next question comes from Puneet Souda from Leerink Partners. Your line is open.

[Puneet Souda:]

Just on Dako if I could ask, with the Omnis rollout happening here and you mentioned Quest contract earlier, was that a contribution in the quarter and how should we think about this pull through from these boxes in the back half of the year once they start getting out there.

[Mike McMullen:]

And I know Jacob would love to talk about the overall pathology results for the quarter and then maybe go in specifically to the question around the impact of Quest and timing it may have on our business.

[Jacob Thaysen:]

Yeah, thanks for that and we are very pleased with where we are with our Dako Omnis business today, where we really see a very strong momentum, a continuous momentum with the business. Clearly we were very pleased with the win of Quest being the primary vendor here, which we announced I think it was last time, we are still in the progress of installing our solutions on several Quest sites. So we haven't seen any contribution from Quest in this quarter and we’ll start to see it coming in the next quarter. But it's primarily a fiscal ’18 view - situation that we would start to see Quest coming in. So right now, our pathology business is really driven by everything else we're doing out there and Quest is just a part of the story. It's a great part of the story but we just do see strengthening in all parts of geographies right now.

[Puneet Souda:]

And then second one on just the pharma growth, obviously strong in the quarter. So if you look at the pharma CRO and the CDMO accounts, what's your sense of sustainability here? What's driving it, is the bio molecules, I mean I suppose they're using a number of products through the LSAG segment. What gives you the sense that these customers are continuing to see growth in bio molecules here. As we’ve heard from few other competitors, there was lumpiness in that segment.

[Mike McMullen:]

I know that some of our competitors reported that, but that's not what we experienced and Patrick you want to...

[Patrick Kaltenbach:]

I agree, but this is not what we're seeing right now. And part of it is again the solutions we brought out, the new solutions that helped drive the business there that really focused on the biopharma space. The molecular antibodies, there is a new software solutions out there for biosimiliars like our [indiscernible]. I think we’re addressing the needs of his market space better and better. And this will drive for us more pieces moving forward. Especially I think the biosimilars is a market space that will continue to grow. I don't expect a big slowdown in that area.

[Puneet Souda:]

And just last, quickly on China, are you still seeing benefit from the CFDA changes or this contribution, I mean obviously you have tougher comps coming up and you're base is significantly larger in China. So what's your sense of CFDA changes continuing to benefit versus the food environmental business.

[Mike McMullen:]

Yeah, thanks for that question. So we expect the food market to continue to be strong in China, explicitly called that out, I think we used the word food market fundamentals remain strong, growth rates actually a little bit lower for China in Q3 just because we’re coming off a 20% some compare from a prior year. But the money is there, the emphasis is there, it's a critical government policy to continue to improve the safety of their food supply. A lot of work still to be done, so we're expecting growth to still be there.

[Operator:]

Thank you. Our next question comes from Dan Leonard from Deutsche Bank. Your line is open.

[Dan Leonard:]

Just want to dive into a little bit detail on what you're seeing from one specific customer base within pharma. So it seems like the generic industry is getting weaker and the challenges are worsening there, at least for some of the public companies. Are you seeing any of that in your customer base yet or any of that in the purchasing patterns?

[Mike McMullen:]

What do you think Patrick?

[Patrick Kaltenbach:]

No, I mean it's definitely not growing at the same pace as biopharma did as you outlined here, but it's still growing for us and we don't see any material changes in the next couple of quarters. Yes, we will see tough compares because we have been growing so strong over the last six quarters or seven quarters in pharma, but the fundamental business in small molecule is also there.

[Mike McMullen:]

But if you can show a return on investment, so and I think that’s been one of the selling propositions for the new portfolio?

[Patrick Kaltenbach:]

Absolutely.

[Mike McMullen:]

When they're under pressure, generic guys, they're willing to invest because they can see it help serve their earnings profile.

[Patrick Kaltenbach:]

Yeah. The whole messaging is around productivity and efficiency gains and cost of ownership for the solutions and that resonates very well with this customer base.

[Mark Doak:]

I’ll just add on. This is Mark. Obviously with the enterprise solutions business, I’d echo the same comments that Patrick and Mike have, we’ve the value proposition around the economics of the lab continue to resonate as they have more challenges.

[Dan Leonard:]

And then for my follow up, as I think about the 3.5% core growth rate for the fourth quarter, that would be the lightest core growth and I think it's four or five quarters and how much of that would you attribute to a tough comp versus maybe some caution on the end markets versus just some plain old conservatism?

[Mike McMullen:]

So, let me add some color, then, you can add your comment as well, Didier. So when we look at the comps, they're real. I haven't done the math in terms of the X percentage, but pharma is our largest market. It grew 16% Q4 last year. China, which is our second largest geography, grew 27%. So the comp -- the tough compares are real and that's been part of our guiding philosophy all this year, we've been calling that. Business remains robust, but we know we're going into a period of tough compares. I would say relative to the chemical energy, what we're saying here is business is going to be better than we initially thought it was going to be coming in this year. We're glad to see the strong growth last two quarters, but there are still some signs that say, let’s not get too far ahead of ourselves here. We've had -- 40% of the segment is still under pressure. The company's earnings forecasts are projected to be down, so we just think that it's right thing to be doing to not call for a cyclical turnaround just as yet. And Didier, I don’t know if you have anything else to our approach to looking at the quarter.

[Didier Hirsch:]

Maybe just that Europe, we've had double digit growth two quarters in a row and we also want to be a little bit cautious about extrapolating that number. If last quarter we had told you where we are focusing Europe to go 12% in Q3, I think, you would have crucified us and so it’s tough to adjust. We don’t want to extrapolate those kind of superb results for two quarters.

[Operator:]

Thank you. Our next question comes from Catherine Ramsay from Robert W. Baird. Your line is open.

[Catherine Ramsay:]

Can you elaborate a little bit more on that initial feedback on an uptick of Ultivo Triple Quad and then just comment on your performance in LC/MS in general?

[Mike McMullen:]

Yeah. Catherine, I’d be happy to. Great question and when your question came through, there was a smile on Patrick’s face. I know he's anxious to share a little more about what's going on with Ultivo.

[Patrick Kaltenbach:]

Absolutely. So first, let me handle the Ultivo question and then return all of you on LC/MS and GC/MS as well. We think Ultivo was really to start is here at ASMS. When we introduce the product, it creates a lot of excitement among our customer base. They cannot wait to get the hands on the prototypes. That said, we will launch it anything before end of this quarter. So I don’t expect any revenue contribution in Q4 coming from Ultivo product itself. I think we’re very well positioned to run that product in fiscal year ’18 and capture the market opportunity, specifically in environmental and food application space, where this product is really front and center in terms of the specifications and the application domain. So lots of excitement around there, but that’s not the only product we have launched at ASMS. We launched a new Infinity Single Quad solution. We have biopharma solution and we launched a new GC solution that will all again drive the momentum behind mass spectrum and solutions. There is strong selling and we’re very optimistic about the future of this product line, the technologies and the focus we have on customer applications, as it creates a lot of excitement and we see that also in the growth rates, all of that in Q3.

[Catherine Ramsay:]

And then I wanted to spend a little time on the Cobalt acquisition. Can you just walk us through your thought process there, revenue run rate and then what kind of growth you think you could get out of that business?

[Mike McMullen:]

Sure, Catherine. So as I mentioned in the call, we’ve really been trying to find companies which in adjacent markets, which fill gaps in our current offering, but also have a differentiate offering and a very strong team and we've been trying to build out our spectroscopy business with a lot of success over the last several years, one hope was Raman Spectroscopy, which is arguably one of the fastest growing segments in spectroscopy. So we engaged the Cobalt Light Systems team early. In fact, just had a chance to spend some time with the leadership team here early today and I don’t think they’re yet ready to move to the next phase, but we got to them early, talking about joining the company, being part of Agilent and they really saw advantages to scale in the innovation focus that Agilent has. It’s a 50% plus company, about 10 million plus run rate and we think that, I think double digit growth, Patrick.

[Patrick Kaltenbach:]

Yes. Given that our market is, and differentiated technologies, I think we definitely look for double digit growth.

[Operator:]

Thank you. Our next question comes from Steve Beuchaw from Morgan Stanley.

[Steve Beuchaw:]

I’ve got two for Jacob. One is a follow up on the SureSelect commentary. I wonder, as the discussion around that product portfolio has become bigger from Agilent over the last couple of years, if you could give us a little bit more granularity. Can you give us a sense for maybe how big that business is, how fast it's growing, are you taking share, is it accelerating, can you talk about how the portfolio, including SureSelect and around SureSelect in library prep, sample prep, is contributing to the growth in DGG.

[Jacob Thaysen:]

Yes. So Steve thanks for that. And I’m very pleased with the new announcement of the SureSelectXT HS, which I think is going to really drive the business going forward. First of all, it will work very well with FFPE and with the molecular barcodes, you will also see that we will be able to really get very certain results on low, little frequencies. So I think this is exactly what the market is looking for. Overall, the SureSelect and our target enrichment business has been a success story for DGG and for genomics over last many years. It is a substantial part of the genomics business and it continues to grow in the double digit regime. I think we've seen the industry over the last few quarters that the market has at least taken a little bit of a pause, but we still show double digit growth of our business. So it is -- I think we still are definitely keeping our market share out in the business. I'm not sure right now whether we’re taking market share, but we’re certainly keeping it and with the new SureSelectXT HS, I'm very convinced that we will start to see even stronger momentum again. I will say that SureSelect and where we’re going with all of this right now is our strategy is to become a whole workflow provider, where SureSelect is going to be a key part of that and SureSelect’s entry into that market. So clearly, it’s very important for us going forward, but we're going to expand out both with the platform, our bioinformatics platform, but also with our Lasergen investments, we hope to be a full workflow provider in the future.

[Steve Beuchaw:]

The second thing I was hoping to just get a little color on is the new asset solutions market, the environment surrounding the investment in Colorado. On the last call, Mike gave us an update on the progress there. We talked about the potential for that to be a more material contributor to capacity expansion for fiscal ’19. Could you give us a sense for how big you think the relative opportunity is compared to how much business you're doing there today and how much business are you just having to pass on because of that capacity constraint and how fast does it ramp?

[Mike McMullen:]

Yeah. Thanks, again, Steve and appreciate the interest in the [indiscernible] business, which is very exciting. Most of our costumers today are still doing clinical trials. So there's a lot of investment and we continue to track the investment going into this market right now with this new type of drugs and there is a continued increased investments and we're hopeful to see some of those clinical trials coming out into commercial products over the next few years here and that will create a substantial step up in the -- both in the expectations and also the requirements to our capacity. So I see that this could take it quite far over the next ten years, I would say, pharma does not go as fast as diagnostic, but you will see some step-ups every time we see some products going out and be commercial. So related to our current business, I think there is certainly an opportunity to substantially -- see a substantial growth going forward over the next five years and probably also next ten years. Do you want to say more?

[Didier Hirsch:]

Yeah. I'll just add one thing Steve. Right now, the business is about $70 million, $80 million and we are capped, we are operating at maximum capacity. And as Mike and Jacob mentioned, the new capacity only comes on board in 2019 and will add about $100 million after its full running state. So the ramp will be throughout fiscal year ’19, so fiscal year ’20, we’re talking about $100 million just with that additional business, but 2018 will be relatively flat with 2017, because we’re already at capacity of existing facilities.

[Operator:]

Thank you. Our next question comes from Brandon Couillard from Jefferies. Your line is open.

[Brandon Couillard:]

Mike, just a question on the M&A. At a high level, how you see the pipeline and if you could sort of elaborate on exactly what the Population Genetics deal does for you strategically and economically?

[Mike McMullen:]

Sure, Brandon. Happy to address both questions. Relative to M&A, we still see that there's a pretty robust pipeline of targets out there, but not in the historic places where people are focused on in the US public sector. There's a lot of very, very strong companies in Europe in the private sector as well as in the US and you may recall that in May, we had a new Head of Strategy and Business Development join Agilent and one of the priorities there is related to continue to find ways to make M&A more of a growth platform within the overall operating model we have to continue to describe for us in terms of how we want to use our cash and our balance sheet strength, I would say valuations are a little rich, so you have to be -- make sure you don't get too far ahead of yourself in terms of what you’re willing to pay, but I think that there are viable targets out there, particularly for a company of Agilent’s size where we can acquire companies and really can make a meaningful impact ultimately in terms of our ability to grow. The recent IP that we purchased, why don’t you talk a little bit about the strategic thought process, Jacob and the financials around it?

[Jacob Thaysen:]

Yeah. Absolutely. And the Population Genetics, PopGen is as Mike was mentioning an IP consideration and we’re very pleased to have that, which creates a very strong IP situation within molecular barcodes, where we see a very strong interest for molecular barcode is, I think, this is going to be very important is, first of all, most in liquid biopsies, but secondly also for what we call eliminating false positives that you see in NGS right now and especially going into DX, the diagnostic markets where you need to make sure that what you made sure is actually fully related to or correlated to actually the sample you’re having there and using those molecular barcodes ensures that you are very certain of what you measure is actually also there. So I believe actually that molecular barcodes is going to be required to really have a play in the diagnostic setting going forward and so I think we will be in a very strong position to really drive that market.

[Brandon Couillard:]

One more for Didier, in terms of the CapEx outlook, the $15 million reduction, was that a pushout into ’19 and or excuse me ’18 and as far as next year goes, should we still expect a return to normal level of CapEx, call it, around 110 million, 120 million for next year?

[Didier Hirsch:]

Yeah. It is indeed a pushout into ’18, but you will see ’18 will be lower than the number that we’ve just quoted for ’17. So we are returning to a more normal stage in ’18, but mostly it will be in ’19.

[Operator:]

Thank you. Our next question comes from Doug Schenkel from Cowen.

[Doug Schenkel:]

I want to touch on two topics. The first is tax. You reduced your full year tax rate guidance, you're on track to get to an 18% non-GAAP tax rate level well ahead of your prior expectations. Should we expect further tax rate reductions towards your, something like your much lower cash tax rate moving forward and if you could quantify anything there would be helpful. The second topic is on end markets and guidance. I was hoping that you'd be willing to share your assumptions for growth by end market and geography at least as they're embedded into your Q4 revenue growth guidance. Thank you.

[Didier Hirsch:]

Sure. Yes. Doug, yeah, you rightly pointed out that our new pro forma tax rate of 18% is way above our cash tax rate, which is less than 10%. So we do see opportunities, but it’s hard work. I’m not ready to commit now to like a, did not commit to a precise operating margin expansion number. I’m not ready to commit yet to a precise path, but yes, there is more opportunities and we’re working hard to identify ways to reduce our reserves, so that we can move closer to, I mean, move our pro forma tax rate down and it’s -- stay posted.

[Mike McMullen:]

Let me take the next one. Yeah. So I think if you look at our full year guidance, Doug, 6% core growth for the overall enterprise, we expect China to be right around 10% or so for the year. Overall, Asia around double digit with mid-single digit growth in Europe as well as Americas. So again, the Asia side of the business is expected to be the growth engine, as other geographies are expected to grow for us this year. And then when I look at, like if I find my notes relative to the, maybe you can help me. Thanks, Alicia. So when we look at the end market, again, the same 6% core growth. Here, what we are seeing is I think about 7% to 8% range is I think what we’ve been talking about, about 8% for the year. As I mentioned, there are some caveats, still, there are some segments which still have some question marks. We’ve been very consistent with our view that pharma would go from its double digit grower that we had in ’16 to more high single digit. So you probably look in 8-ish pro forma for the full year, flat for academia and government and then high single digits for diagnostics and clinical and then food, environmental and forensics, low single digits. So the story here is –

[Operator:]

Thank you. Our next question comes from Derik de Bruin from Bank of America Merrill Lynch. Your line is open.

[Derik de Bruin:]

All right. So Doug just took my question, so now I got to be creative. Thanks, Doug. So can we talk a little bit about pacing during the quarter? I mean, you do have an extra month relative to some of your peers on this, was July any different than May or June? I mean, any signs of potential unusual seasonality showing in the quarter?

[Mike McMullen:]

I think Derik, we don’t explicitly talk about our incoming orders in terms of where we finish, but what I can tell you is Q3 was like any other Q3 we’ve seen, so nothing really special about it besides the fact that it was an excellent quarter for the company.

[Derik de Bruin:]

Okay. And when you look at your pharma business, I mean we've had a lot of questions about generic exposure and how much of your business is actually tied to the generics manufacturers in the overall pharma segment?

[Mike McMullen:]

I don't have a good number in my head on that one. Patrick?

[Patrick Kaltenbach:]

Generics is probably difficult to answer, I would say, small molecule overall versus biopharma, 80-20 you could say, yeah.

[Derik de Bruin:]

80-20 small molecule or 80-20 biopharma.

[Mike McMullen:]

80% small molecule and 20% bio molecule.

[Derik de Bruin:]

Great. And I’m just sort of looking at the numbers –

[Mike McMullen:]

You’re already on your third question. You said you have no questions.

[Derik de Bruin:]

Hey, I’m not as dumb as I look. So you did 6% core growth in ’15, 6% in ’16, you’re tracking to 6% this year, given a conservative Q4 guide. When we sort of look at the business and just looking where the segments are, I mean are there, is the mid-single digit sort of core growth rate on the business for next year is certainly a reasonable number to sort of think about as we start thinking about expectations.

[Mike McMullen:]

So, I’m going to kind of do a little kind of teaser for our November call. So I’ll hold the guide for November call. Didier is giving me hand signals on that one right now, but I think what you can see a consistent message is our ability, our model is all about outgrowing the market. So I think that’s what you can look for us to do and like I said earlier, we really, we return [indiscernible], foundation and the model that’s gotten us here, we’re going to stay with that model. But if you could just wait a few more months, I’ll have much more clear answer to your question.

[Operator:]

Thank you. Our next question comes from Isaac Ro from Goldman Sachs. Your line is open.

[Isaac Ro:]

Wanted to come back to the industrial portion of the business and I think you covered some of the backdrop on energy, but interested in what went on in chemical this quarter, just talk a little bit about not just the growth rate, but also kind of your outlook for the rest of the fiscal year, obviously the commodity dynamic here may hold volatile, so interested in the chemical side of your business and how you’re managing through that.

[Mike McMullen:]

So just a reminder, we're now going to be talking about a different ratio of the three segments that make up the generics space, given the climate we’ve over last two years in exploration side, so exploration is about 10%, it is about 30%. So if you will, the energy sector about 40%. The other 60% is what we call chemicals and materials. And that’s really been where, what the growth we’re seeing has been coming from. Some reinvestment in the refining side, but most of the growth has been on the chemicals and materials side. What we're seeing is, for the year, we’re forecasting, as I mentioned earlier to Doug's question, we think we can probably do 8% or so for the year in chemical energy, which is remarkable turnaround given the fact that the prior two years actually had strong for us, but I can't emphasize enough that there still are signs of caution, you may want to use the word conservatism, but I just say I'm just trying to be very pragmatic and think about what's going on here and I’m saying, listen two good quarters of growth, okay. Great. Let’s see how the next quarter shapes up and I keep coming back to 40% of that segment is still under pressure and our major customers here, those companies themselves are seeing a downgrade in their earnings forecast for the next 12 months. So all in all, a much better picture than we thought coming into the year, but still some reasons to be a little bit pragmatic in terms of how we view the future growth in Q4 and beyond.

[Isaac Ro:]

Maybe just second question would be on the DGG segment, since you guys didn’t do your annual investor meeting this year, I was hoping for a bit of a long term refresh on the strategy. You obviously have had good success with the guys didn't do your show and you will. And that's I mean if here I was hoping for a bit of a long term refresh on the strategy obviously had good success with the Dako asset, you talked about SureSelect and you've got obviously a lot of other investment and irons in the fire for NGS, I mean put that all together, how should we think about your appetite to invest strategically and organically in DGG relative to the rest of the company. I mean, it seems like there's a good opportunity to add in to -- fill in some of the whitespace and I'm curious how high a priority that is?

[Mike McMullen:]

Yeah. We have a very large appetite in this space and a number of things have been happened. So if you look, Jacob has done a really excellent job in terms of addressing the fundamentals of the business, pathology business with double digit growth for us. When I first came in his role, a lot of questions about the future of the Dako acquisition, so we've got that. We get good growth there and we're making a number of significant investments, both organically and inorganically. So a lot of our M&A has been focused in this area. So whether it be the Multiplicom acquisition, Lasergen equity investment, the recent PopGen, so we have a lot of interest in this space. And as I mentioned earlier, not to put any pressure on Sam who happens to be in the room with me, but we brought in a new Head of Strategy and Corporate Development and really from the space, so we're very interested in finding new ways for Agilent to grow in the space. We like the fundamentals of the market and we like our ability to take a bigger piece of that market.

[Isaac Ro:]

And just last question there is just given that it’s your small segment and the end market opportunities there are pretty vast, should we assume that will remain the highest growth segment in the company for the foreseeable future and just trying to put that all in context on the numbers?

[Mike McMullen:]

Well, I think all three group Presidents are fighting now to see who can grow them fast. So we think all of our business groups can grow. I think that there are some really unique fundamentals going on in DGG space which perhaps has a higher long term inherent growth rate on the markets. So we think they’re all going to be winners and maybe perhaps a little bit higher growth ultimately in DGG.

[Operator:]

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Alicia Rodriguez for any closing remarks.

[Alicia Rodriguez:]

Thank you, Crystal. On behalf of the management team, I'd like to thank everybody for joining us today. If you have any questions, please give us the call at Investor Relations and I’d like to wish you a good rest of the day and thank you again. Bye-bye.

[Operator:]

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