The Agilent Technologies Q3 2023 Earnings Conference Call has begun, with Parmeet Ahuja welcoming everyone and introducing Mike McMullen, Agilent's President and CEO, and Bob McMahon, Agilent's Senior Vice President and CFO. Additionally, Jacob Thaysen, Sam Raha, and Padraig McDonnell will be joining the Q&A after Mike and Bob's comments. The presentation is being webcast live and the news release, investor presentation, and other information related to the call are available on the company's website. The comments will refer to non-GAAP financial measures and forward-looking statements may be made during the call.

Mike McMullen reported that Agilent's Q3 revenue was $1.67 billion, which was at the top end of expectations, but was a decline of 2% on a core basis. Excluding China, the rest of Agilent grew 2%. The major drive behind the year-on-year decline in revenue was China's economy, which continued to weaken during the quarter. As a result of this, Agilent has lowered their growth expectations for the remainder of the fiscal year, and are not expecting any improvement in the China market. Despite this, they remain confident about the long-term growth prospects of their end markets.

Agilent's Life Science and Applied Markets saw a 9% decline in revenue compared to 18% growth last year, due to the market environment in China and pharma globally. The Agilent CrossLab Group saw an 11% core growth in all regions and end markets, due to customers embracing their value proposition. Agilent has continued to invest in innovation, introducing new products and comprehensive workflows to improve data quality and productivity for customers.

The Diagnostics and Genomics Group generated $349 million in revenue, with Pathology growing in the high single digits and NASD in the high teens. Resolution Bioscience, however, has not been successful, so the company has decided to shut it down. Agilent is focusing on cost efficiency and increasing productivity to generate savings to invest in innovative solutions and support customers, and Bob McMahon will provide details on the results and outlook for the remainder of the year.

In Q3, revenue was $1.67 billion, a 2.3% decline from the prior year. Pharma, the largest end market, saw an 8% decrease, while Chemicals and Advanced Materials was down 3%. The academia and government market was up 5%, the diagnostics and clinical market grew 3%, the environmental and forensics business grew 2%, and the food market grew 1%. China underperformed, while the Americas and the rest of Asia were better than expected, and Europe was in line with expectations.

In the third quarter, gross margin was 56.3%, down 10 basis points from a year ago. Operating margins were strengthened by expense reduction actions, and the quarter's earnings per share were $1.43, up 7% from a year ago. Cash flow from operations was $562 million in the quarter, and the company returned $401 million to shareholders through dividends and share repurchases. A $291 million pretax charge was taken in Q3 associated with the decision to shut down the Resolution Bioscience business. The company is increasing their free cash flow forecast for the year to $1.2 billion, comprised of operating cash flow of $1.5 billion and CapEx of $300 million.

The company is expecting a decline in revenue for the year due to a more challenging macroeconomic environment, particularly in China. In Q3, China experienced a mid-single digit decline in revenue, but in July there was a further deterioration resulting in a 17% decline for the quarter. For Q4, the company is expecting a mid-30s year-on-year decline and for the full year, they are expecting China to decline mid-single digits compared to growing mid-single digits last year.

Bob expects the company's full year fiscal 2023 non-GAAP earnings per share to be between $5.40 and $5.43, representing leveraged earnings growth of 3% to 4%. The fourth quarter revenue is estimated to be between $1.655 billion to $1.705 billion, a decline of 8% to 10.5% on a reported basis and a decline of 9.5% to 12% on a core basis. Mike expressed his confidence in the long-term growth prospects of the company's end markets and its ability to grow faster than the market.

Agilent is a trusted partner that customers can rely on during difficult times, and has been recognized as a great place to work in 27 countries. The company is focused on advancing the quality of life and has proactively managed the business to drive leveraged earnings. In regards to China, Agilent believes the current environment is transitory and is mainly due to pharma, but could also be due to cyclical or structural issues.

Mike McMullen discusses the macro story in the Chinese market, noting that it is still challenged. He mentions that the market will take a while to get back to growth, but that they are positive about the ability to grow the aftermarket in their diagnostics business. In response to a follow-up question about their ACG business, he mentions that they achieved 30% plus margins in the quarter and that there were some one-offs that should be taken into account when measuring expectations.

Mike McMullen and Robert McMahon discussed the growth of the business in the CAM segment, noting that the fastest-growing component is the contracted business with a mid-teens attach rate. They also noted that the profitability was higher in Q3, but not at the level seen in Q3, and that there is a nice, steady cadence of margin improvement. Jack Meehan asked about the more cyclical areas of the business in the CAM segment, to which Mike responded with an update on the chemicals customers.

Mike McMullen and Robert McMahon discussed the Advanced Materials segment of the market, which is driven by secular and cyclical trends, and how it has held up quite well despite tough comparisons to the previous year. They noted that energy has seen some growth, but chemicals have seen some slowing due to customers' macroeconomic caution. Jacob Thaysen then commented on the Advanced Materials side of the house, noting that the Americas and Europe have performed extremely well and that the dollars had remained very stable sequentially. However, they are expecting a challenging Q4 due to the 70% growth seen in China.

Mike McMullen and Robert McMahon discussed the margins for 2021 and the continued leveraged earnings growth into 2024. Mike McMullen also mentioned the decision on the Resolution Bioscience business as part of the story for 2021. Lastly, Vijay Kumar asked Mike McMullen about the phasing in the quarter in China, to which Mike replied that it started off down mid-singles and was July off like minus 25%-30%.

Mike McMullen and Robert McMahon discussed the performance of their company in China, which was down 17% in the quarter. They noted that the ACG business grew in all regions and end markets, including China, and that outside of China, performance was better than expected. They also discussed their use of a new firm, Transitory, and the implications of China stimulus, which may lead to a more normalized year in fiscal 2024.

Mike McMullen discussed Agilent's outlook for the rest of the year, noting that the markets are driven by investments to improve the human condition and that the sales funnel for instruments are growing. He mentioned that Agilent is not seeing order cancellations or changes to their one loss ratio, and is encouraged by the growth in biopharma. He noted that the real wildcard for Agilent in 2024 is what they assume around the China market and the path to return to historic growth rates.

Mike McMullen and Robert McMahon discuss the current cycle in China, which McMullen has not seen before. They believe that the government must focus on long-term goals of making China an innovation-driven economy and improving the health and environment of the population. They suggest that private sector confidence in China should be restored in order for businesses to reinvest, rather than waiting for economic stimulus.

Mike McMullen and Sam Raha discuss the decision to shut down Res Bio, a company that was acquired a couple of years ago. They explain that their differentiation was based around a kitted strategy of distributed on market companion diagnostics for their pharma partners, but the market had not developed as they had anticipated. They also clarify that they still serve the cancer research and diagnostic test developer customers in a number of ways.

Mike McMullen responds to questions about the trends in mass spectrometry and liquid chromatography in the quarter and the four-year CAGR for LSAG instruments exiting the year. He also mentions the discipline of portfolio rationalization and the better returns in other places to invest in.

Bob McMahon is discussing the company's performance in the LC and LCMS markets and Jacob Thaysen adds that they have taken share in the market over the last period of time. Robert McMahon then states that the LSAG business has been averaging a 5% CAGR over the last three years, despite being forecasted to be down this year. Finally, Bob addresses two housekeeping questions, noting that NASD growth in the third quarter was likely up sequentially with Train B coming online and that $200 million in CapEx was pushed out into 2024 due to the environment.

Robert McMahon answers questions about NASD's revenue and CapEx. He is pleased with the revenue from Train B and expects more to come. He also discusses pricing and how they can compete against Chinese local competitors, noting that they were slightly better than expected at 4% for the quarter.

Mike McMullen and Padraig McDonnell discuss the discounting trends, which have been stable, and the positive performance of the academic and government segment. They note that the instrumentation business may be affected by deflation in China, but they are still expecting positive price contributions for the year. They also mention that funding is available from governments around the world, and they expect this to continue.

JPMorgan's Rachel Vatnsdal asked Mike McMullen, Padraig McDonnell, and Robert McMahon from the company about any signs of recovery in pharma spending and the expected timing of the recovery given the incremental weakness this quarter. McMullen and McDonnell do not believe that there are currently any indications of a recovery. McMahon added that their funnels continue to be growing, suggesting that it is a question of when, not if, the recovery will happen, though it is unlikely to be seen in Q4.

Mike McMullen answers Brandon's question about LC and LCMS CAGR, which is between 7-9%, higher than the overall LSAG average. He then answers Rachel's question about small molecule replacement cycle, which has seen a slowdown due to the weakness in China, and they expect a return to higher growth rate in the next 12-18 months. He also mentions the risk of not seeing a recovery and reprioritization of pipelines due to IRA, and the ratio of China exposure to the global business in small molecules being the same.

Mike McMullen states that there is a cautious approach to capital spending in medium-sized pharma and that they need to invest in modern liquid chromatography fleets, but it is possible to defer for a period of time. He also states that they will have more information in November when they give their guidance for the fiscal year and that they will be able to grow the company in 2024.

Mike McMullen and Padraig McDonnell report that they are not seeing customers plan for a strong end of year budget flush. Instead, customers are deferring orders and requiring more purchases. They are taking the upside of corsa.com, but not expecting a big push at the end of the year.

Mike and Padraig discussed their win-loss rates and Patrick asked about the growth of their consumables in the third quarter. Robert answered that the core growth was down 9%, and the consumables were up slightly. Derik asked about the revenue contribution of Res Bio in the fourth quarter and what would be needed for 2024. Robert answered that there would be a minimal number in Q4 and a headwind of 1 point to 1.5 points to DGG in FY '24. Derik then asked about their capital deployment strategy, as the industry has been relatively quiet for the last 18 months. Robert did not answer this question, but Derik suggested that they may consider buying back shares.

Mike McMullen talks about Agilent's capital allocation strategy and their approach to M&A. Robert McMahon provides an update on the order book for liquid chromatography, which was down year-on-year. Josh Waldman asks for more context on the fourth quarter core organic growth guide, including assumptions by business unit.

Robert McMahon and Mike McMullen discuss the implications of the guide for the fourth quarter, noting that the largest markets in China (AR and chemical and energy) are down by mid-30s and that the shutdown of Res Bio is primarily impacting the US. They also note that 85% of the change is driven by China, and that the academia and government market is the only one that is growing. They then discuss the view by end market, noting that everything else is down, with the biggest change being in the pharma space.

Bob discussed the weakness in chemicals and the cost of the China marketplace, which is reflected in the pharma outlook. He believes the market will get back to its longer-term growth rates, but it will take a period of years to get there. He believes the factors to be considered are the macro in China, consumer confidence, and investment commerce. Dan Brennan then asked for the instrument number for the L segment, which was provided on the Q.

Robert McMahon and Mike McMullen discuss the outlook for the instrument business, with the LSAG business expected to be a growth driver. They note that there is no reason to believe that there has been a fundamental change in the need for instrumentation. Dan Brennan then follows up by asking about the comparison between the chemical and applied markets, with the applied market powering through despite some chemical weakening during the quarter.

Robert McMahon explains that the chemical and advanced materials markets will experience a decline in Q4 due to the 70% increase in Q4 last year. Mike McMullen adds that they are not seeing any material moves towards in-sourcing and that they are expanding their book of business for 2024. Additionally, the CapEx guide is down but they are still investing in additional lines.

Mike McMullen, Robert McMahon, and Sam Raha all agree that the company is not slowing down its expansion plans and that investment is one of the highest priorities. They are seeing better-than-expected pricing and availability of parts and key materials, and have more customers and programs than ever before. Mike also mentioned that the ACG margin saw a material step-up due to the lack of incentive comp and the scale and growth of the business.

Parmeet Ahuja thanked everyone for joining the call and concluded the call, wishing everyone a good day. Luke Sergott expressed his pleasure with the expectation of continued margin expansion for ACG going forward. The operator thanked everyone and concluded the call.

This summary was generated with AI and may contain some inaccuracies.