Q3 2023 Agilent Technologies Inc Earnings Call

Please standby we're about to begin.

Ladies and gentlemen, and welcome to the Agila Technologies Q3, 2023 earnings Conference call. My name is slow and I will be coordinating your call. Today. If you would like to ask the question. Following the presentation. You may do so by pressing star one on your telephone I will now hand, you over to your host pardon me.

Please go ahead.

Thank you Bo and welcome everyone to <unk> conference call for the third quarter of fiscal year 'twenty to 'twenty three.

With me are Mike Mcmillan, Hadrian, President and CEO , and Bob Mcmahon <unk> Senior Vice President and CFO joining in the Q&A after Mike and Bob's comments will be Jacob Tyson.

President of the <unk> and life Science and applied markets Group Sam.

Samara Huh.

It into the adjuvant diagnostics and genomics group.

And porting Mcdonald President of the Adjuvant Cross Lab group.

This presentation is being webcast slides the news release for our third quarter financial results Investor presentation, and information to supplement today's discussion.

Along with a recording of this webcast are available on our website at www Dot investor Dot adjuvant Dot com today's comments by Mike and Bob 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 and.

And references to revenue growth are on a core basis.

Core revenue growth excludes the impact of currency.

And any acquisitions and divestitures completed within the past 12 months.

Guidance is based on forecasted currency exchange rates.

During this call. We will also make forward looking statements about the financial performance of the company. These.

These statements are subject to risks and uncertainties and are only valid as of today.

The company assumes no obligation to update them.

Please look at the company's recent SEC filings for a more complete picture of our risks and other factors and now I'd like to turn the call over to Mike.

Thanks, Paul and thanks, everyone for joining our call.

In today's call I'll walk you through our Q3 results.

And we're now seeing in the market and provide context for our revised full year outlook.

And then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments.

The agile team continues to execute well.

As we navigate our way through the ongoing challenges of the current market environment.

Our Q3 revenue was $1 $67 billion at the top end of our expectations.

This is a decline of 2% on a core basis against a tough compare of 13% in Q3 of last year.

We continue to be proactive and are taking steps to help us deliver on our leveraged earnings model.

Operating margin at 29, 3%.

180 basis points.

Quarterly earnings per share of $1 43 are up 7% and above our expectations.

The major driver behind our Q3 year on year decline in revenue is our China business.

Excluding China, the rest of Asia grew 2%, which was better than expected.

We knew we are up against a difficult compare in China and had previously guided lower China revenues in Q3.

However, the economy in China continued to weaken during the quarter.

Translating into more challenging market environment than we had anticipated.

But the softer market conditions in China and continued global macroeconomic challenges.

You have lower growth expectations for the remainder of the fiscal year.

We now expect core growth for the full year to be around 1% down from our previous guide.

Based on what we're seeing at this time I will not assume any improvement in the China market for the remainder of the year.

However, the near term challenges, we are experiencing as transitory and we remain confident about the long term growth prospects of our end markets.

Returning now to our third quarter results I'd like to touch on our two largest end markets.

Our total pharma business down 8%.

And by the pharma market in China being down 30%.

Within pharma or Biopharma business grew 5%, while small molecule was down 16%.

The chemical advanced materials market declined 3% versus a 22% increase last year.

We did see that chemical entity space being weighed down by macro concerns.

Slowing growth in advanced materials was more of a function of a difficult compare as volumes have remained steady and robust.

Looking at performance by business unit, the life Science and applied markets group delivered revenues of $927 million.

This was a decline of 9%, although a very tough compare of 18% growth.

Last year's growth was helped by the benefits of the recovery from the Q2 2022 Shanghai shutdown.

<unk> performance continues to be affected by the market environment, China across all end markets and pharma globally, our sales funnel remains healthy and.

And are up year on year, but deal velocity continue to slow as customers remain cautious in making capital purchases.

We expect this market environment, it's been purchases to continue for the rest of the year.

At this time, we are not assuming any benefit from a year end budget flush or incremental stimulus in China.

As we said before we are continuing to prioritize the best innovation.

As an example in June <unk>.

<unk> divestment innovation was on full display at the annual <unk> Conference.

The LSA G team introduced new products and comprehensive workflows to enhance data quality and productivity for our customers.

These include two new LC Ms systems, a new P fast workflow solution and an AI software for data analysis among others.

<unk> group posted revenues of $396 million.

This is up an impressive 11% core with growth in all regions and end markets as customers continue to embrace our value proposition.

We continue to see strong demand for our services as we help customers drive productivity in the lab.

The diagnostic and genomics group delivered revenues of $349 million up.

Up 3% core.

Pathology grew high single digits as demand for our diagnostic tests continues to grow.

Our NASD business grew high teens.

This growth was partially offset as we continue to see market weakness for our genomics and resolution bioscience businesses.

Regarding resolution bioscience the market for kit at NCS based companion diagnostics has not developed as we expected.

Furthermore, we don't see a realistic path to profitability.

As a result, we have made the difficult decision to shut down the business.

However, our investments in future growth continue for example, we achieved an important milestone during the quarter.

But our NASD business generate the first revenues for our train B investment in Frederick Colorado.

Now looking forward for the company as we navigate this challenging macroeconomic environment, we remain confident in the agile team and our ability to continue driving leverage earnings growth used our agile Ashland framework.

We faced challenges before and we're taking actions now that will make us stronger and position us well for the future.

As we stated last quarter, we are doubling down on delivering cost efficiencies and increasing productivity.

The goal is to generate additional cost savings. So we can continue to invest in innovative new solutions and support for our customers.

As we enter a future profitable growth.

We are on track to achieve the cost savings we have targeted for the second half of this year.

We are in attractive markets that will produce long term growth.

Our innovation engine remains strong and the battle tested one agile team is driving outstanding execution.

Bob will now provide the details of our results.

As well as our outlook for the remainder of the year.

After Bob leaves his comments I will get back provide some closing remarks and now Bob over to you.

Thanks, Mike and good afternoon, everyone.

In my remarks today I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics.

I'll, then finish up with our updated guidance for the full year and our fourth quarter outlook.

Unless otherwise noted my remarks will focus on non-GAAP results.

Q3 revenue was $1 67 billion.

A decline of two 3% core and down two 7% on a reported basis.

This compares with 13, 2% core growth last year.

Currency was a half point headwind, while M&A contribution was minimal.

As you May recall Q3 of last year benefited from roughly $35 million in revenue deferred from the second quarter as we ramp back up from the Shanghai shutdown in China.

Accounting for this our Q3 core growth would be roughly flat versus year ago.

As Mike mentioned pharma, our largest end market declined 8%.

This is in line with our reduced expectations coming out of Q2 with underperformance in China offset by better performance in the rest of the world.

The chemicals and advanced materials market was down 3% off a very tough 22% compare the dollar wise was flat sequentially.

The academia and government market was up 5% with all regions showing growth, except the Americas, which was flat.

Our business in the diagnostics and clinical market grew 3% driven by high single digit growth in pathology, partially offset by genomics weakness.

The environmental and forensics business grew 2% driven by double digit growth in the Americas and Europe . The growth was generated by the build out of water infrastructure projects and expansion of funding for <unk> related activities.

The food market grew 1% based on strength in Asia outside of China, and mid single digit growth in Europe , driven by new food testing regulations.

On a geographic basis, while China underperformed the.

The Americas and the rest of Asia were better than expected, while Europe was in line with our expectations.

Moving down the P&L.

Third quarter gross margin was 56, 3% down 10 basis points from a year ago.

Like last quarter. This was largely due to the product and services mix.

Pricing was slightly better than our expectations.

Below gross margin the expense reduction actions, we initiated in the second quarter helped strengthen operating margins. We also benefited from a reduction in variable pay expenses as Mike mentioned margins were 29, 3%.

Up 180 basis points from last year.

Below the line our interest income was higher than planned while our tax rate was 13, 75% and we.

295 million diluted shares outstanding.

Putting it altogether Q3 earnings per share were $1 43 up seven.

Sent from a year ago.

Good result, given declining revenue.

Now, let me turn to cash flow and the balance sheet.

I continue to be pleased with our cash flow generation this year.

Cash flow from operations was $562 million in the quarter and is $1 $3 billion year to date.

In Q3, we invested $81 million in capital expenditures.

Totaling $214 million year to date effectively flat year on year as we continue to optimize our capex spending.

Given the strong year to date results, we are increasing our 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.

This is an increase of $250 million from the midpoint of our previous guidance.

Despite the challenging macroeconomic conditions, our balanced capital allocation strategy is intact.

During the quarter, we returned $401 million to shareholders.

$66 million through dividends and repurchase shares were $335 million. This ongoing balanced approach to capital deployment is another example of the confidence we have in our team and our.

Belief in the long term strength of our markets.

Before getting into the revised full year outlook.

Want to mentioned, we have taken a $291 million pre tax charge in Q3 associated with the decision to shutdown the resolution bioscience business.

This charge, which is excluded from non-GAAP results included an impairment write down along with charges associated with the wind down and exited the business we.

We expect the wind down to continue through Q4 and into early FY 'twenty four.

Now to the revised outlook for the year in Q4 given.

Given the more challenging macroeconomic environment, we are seeing particularly in China. We now expect full year revenue to be in the range of $6 eight zero to $6 $85 billion.

This represents a decline of <unk>, 7% to flat on a reported basis.

Core growth of 0.8 to one 5%.

This is a core growth reduction of 260 basis points from the midpoint of our last guide roughly.

Roughly 85% of the change is related to reduced expectations in China, while the remainder is due to some incremental cautiousness from our customers on capex spend.

As well as softness in genomics and the shutdown of resolution bioscience.

As Mike said earlier, we're not assuming any incremental stimulus in China or any material year end budget flush and these revised projections.

Given the large change in China I wanted to provide some additional perspective on how we're forecasting the rest of the year recognizing that the market continues to be very dynamic to.

To provide some context in Q3 through June our business in China was tracking to a mid single digit decline in revenue, which was in line with our expectations. However in July we saw a further deterioration in China, resulting in a 17% decline for the quarter.

And while the Q3 decline in China was centered in pharma, which was down 30%, we did see weakness in the other end markets as well.

We expect the conditions, we've seen in July to persist in China for Q4 in.

In addition, we are facing our most difficult quarterly compare in China, where we grew 44% in Q4 of last year. We're now expecting Q4 to decline in the mid <unk> year on year.

For the full year, we're expecting China to decline mid single digits versus growing mid single digits.

With the change in revenue, we now expect 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% and roughly 6% to 7% growth net of currency.

The change in full year guide results in Q4 revenue being in the range of $1 655 to $1 $705 billion.

This represents a decline of eight to 10, 5% on a reported basis and a decline of nine 5% to 12% on a core basis. The recovery last year in Q4 of the remaining revenue deferred from the Shanghai Q2 shutdown negatively impacts the year on year results by rough.

A point.

Fourth quarter non-GAAP earnings per share are expected to be between $1 33.

And $1 36.

Thanks for being on the call and now I will turn things back over to Mike for some closing comments before taking your questions Mike.

Thanks, Bob.

While today's macro environment is challenged for new instrument purchases.

We remain confident in the long term growth prospects of our end markets and.

The diversification of our business and in our proven ability to grow faster than the market.

I'd like to share a few examples.

Oh, why my confidence remains intact, despite near term challenges.

In pharma, our largest end market innovation in advance of the medicines continue with new therapeutics flown into the market.

The demographic drivers on this market are on our side a growing global population.

<unk> access to health care, and extending life expectancy to be key priorities from their governments.

Our market, leading solutions are critical to innovation behind new therapeutics, and ensuring the safety and quality of bond market drugs.

In the applied markets growing P fast testing.

Electric vehicle transition are here to stay.

And new opportunities for growth.

Everyone wants to have a safer water to drink food to eat and air to breathe.

And the search for and production of more sustainable materials energy sources remains a global priority.

<unk> is a diversified leader in a unique position to help our customers drive their solutions.

We remain a trusted partner our customers know they can rely on in both good and challenging times.

Our combination of leading instrumentation and world class customer support is a long term competitive advantage.

At the Heartless long term competitive advantage is the Ashland team and the one <unk> culture.

You see this reflected in our recent recognition on Glassdoor.

And in being named a great place to work and all 27 countries and territories around the world, where we qualify for certification.

We are a company mission focus on advancing the quality of life to learn more about this I would encourage you to review the latest edition of the ESG report that we issued last month.

We are proactively managing the company through the short term always with an eye towards our customers and in the long term.

We have been proactive in managing our business to drive leveraged earnings.

But not at the expense of customer satisfaction and future growth.

Yes. These are challenging times, but we have the team the strategy and the right culture that will deliver long term success.

Thank you for joining us today and now over to you pardon me to lead the question and answer session pardon me.

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

Thank you pardon me, ladies and gentlemen, if you would like to ask a question. Please press star followed by one under telephone now and if you do change your mind. Please press star one again to withdraw your question when preparing to ask your question. Please ensure your phone is on mute it locally.

We'll go first this afternoon to Max sites at Goldman Sachs.

Hi, good afternoon, Thanks for taking my questions sure Matt.

Maybe I'll start just with China is sort of a high level question you guys talked about sort of the transitory impact of the current environment you mentioned pharma.

Could you kind of extend those comments to China.

Do you think it's more cyclical versus structural are there competitive issues that you're facing or just your outlook on that region.

Yeah, Matt. Thanks for the question. So let me start with the last part of your question. This is a macro story not a competitive story. So our market shares continue to be very very strong I know, there's a lot of discussion about increased local competition.

Look pretty aggressively and are made in China strategy. So we don't see that all as a competitive issue.

Transitory comment there is really about the fact that the China market is not going away.

It's going to be a big market for years to come it clearly is challenged right now and.

We're not we're taking it one quarter at a time actually month by month as Bob mentioned in his comments I think July we actually saw the weakest performance within the quarter.

<unk> seen weakness in the pharmaceutical industry for example, the level of manufacturing declined pretty specifically in the month of July so.

We think the market is going to be there, but it's going to take a while for it to get back to back to growth.

And I think the other thing the other thing.

The point here is.

And again I'm talking specifically around the instrument side of the China market. As you know we have a very large in fact, the largest installed base of instrumentation. The marketplace. So very positive on the ability to grow the aftermarket in our diagnostics business.

Bob anything else you'd add to that because okay.

Maybe just for my follow up just on ACG.

Very good quarter in that business and I know you guys talked about a year or two ago about sort of the goal of 30% plus margins. Obviously achieved that this quarter can you just talk about sort of where you see the durability of that growth is sort of high single low double 30% plus margins, how we should be thinking about the business, where there's some one offs in the quarter that you would want to call out.

To kind of.

Measure expectations there.

Yes, we have.

We've consistently communicated that we think this is a high single digit low double digit kind of growth business for us and it's been that way since.

Pretty much most of my tenure as CEO and we don't see that changing as we go forward of course, there'll be puts and takes by quarter, but we are.

We're continuing to see good growth in our connect rates, which we've talked a lot about and we're also doing very well on winning the enterprise business as well to complement the other aspects.

<unk> of our portfolio offerings, I would say that the profitability was probably a little bit higher in Q3 then.

But we do think that the high double digit number you code that is pretty manageable for that business, but not the level. We saw in Q3 right Bob Yes, Hey, Matt. This is Bob and just maybe to further what Mike is saying when we think about the components of that business. The fastest growing component is actually the contracted business, which is that connect rate and it was.

In the mid teens this last quarter and continues to be faster growing than the overall business and as long as we continue to be able to drive that increased attach rate. We feel very good about that and that comes with that with that growth comes scale and being able to leverage our team with the work that the digital initiatives that we have.

<unk> had as.

As well and so as Mike said don't book I think it was 32%.

Going forward because there were some.

Variable pay true ups, but certainly what <unk> seen.

And quarter out as a nice steady cadence of margin improve.

Improvement there.

Okay.

Got it thanks guys.

Okay.

Thank you well go next now to Jack Meehan on research.

Thank you good afternoon.

Jack.

Mike was hoping you could talk a little bit more about.

Some of the more cyclical areas of.

Of the business and in.

<unk> segment, just what are you seeing from some of your chemicals customers.

<unk> heard some.

Conversation of budget cuts there or are you starting to see that just how is your visibility into some of these cyclical areas.

Yes, so as we've talked earlier thats. Thanks for the question, Doug and Jack.

Vitamins comments, and then have Jacob jumping on this one as well, but when we look across the Cam I'd say the advanced materials segment of that market, which we've communicated is more driven by secular trends and cyclical trends continues to hold up quite quite quite well and by the way also I just want to point out we had a really tough compare I think we grew 22.

<unk> last year in Q3 and camp.

We look at the chemicals and energy side of it the energy cycle action side actually popped up a bit, particularly driven by the U S.

Where we are seeing some weakness is in the chemical side, where.

Customers are looking at the macroeconomic environment and a slowing of the capital investment there. So I'd say that kind of puts puts and takes but I think in terms of the quarter by I think we came in right about where we thought we'd be in Cam and I'd say it's.

Mixed story in terms of different segments growing at different rates before Jacob maybe I'll jump in and I think the one thing that I think is important is you really have.

The story in China, which has its own and then the rest of the business and so if you think about where Americas and Europe has performed extremely well and if you actually look we mentioned this in the call sequentially. The dollars actually were very stable and so we are expecting a challenging Q4 main.

Because we grew 70% in China Muslim 43% in Q3.

It's a compare situation but.

This business continues to be very strong so anyway any comments on the advanced materials side of the house there Jacob I can say that and Mike I think you also started with that thing that we continue to see a lot of activities in that space, especially in the battery space. We're aware of cost out also <unk>, but there's still a lot of interest in that space and we are doing.

We're we're well Semicon is also cycling down right now, but we are we continue to see business in that space, but not as strong as we did last year.

Thank you Jacob.

Yes.

My follow up wanted to ask about margins.

Just how youre thinking about some of the puts and takes for 2020 for I think some of the cost savings you've talked about should extend into next year should get some leverage out of NASD, but at the same time some of the performance comp comes back and with some of these top line pressures extend as well.

I don't know can you just talk about maybe relative to the <unk>, how you're thinking about margins for next year.

Yeah.

Bob do you want to at leisure.

By the way one thing I'd add to that for about the specifics Jack is our decision on the legislation bioscience business. So as part of the part of the story for US next year in terms of margin expansion. So Bob Yes, I would I would.

Say that are our view of leveraged earnings growth continues into 'twenty four and so while we do have some things coming back to us.

Some of the actions that we've taken will.

Continue to move into a full year for 2024 and quite honestly thats kind of what we expect our job to be is to be able to drive that returning to growth.

Thank you guys.

Welcome.

Yeah.

Thank you. We'll go next now to Vijay Kumar of Evercore ISI.

Okay.

Hey, guys. Thanks for taking my question and good job on.

The margin execution here Mike.

Mike maybe.

I missed some of the comments here.

Can you talk with the phasing in the quarter here.

I think I heard you.

Can you start off down mid singles and with.

With July offer like minus 25 minus 30 is that the exit rate.

Yes.

Cadence within the quarter, Yes, Hey, Vijay this is Bob.

Your math is in the ballpark, yes. So we were we were down mid single digits through June So may and June kind of tracking as we expected and then we saw incremental weakness in July and we ended up for the full quarter down 17%.

And what we're assuming going into Q4 is that that performance will continue into Q4.

Given the tough comp that we have because I think we grew 44% in Q4 of last year, we're estimating roughly a 35 ish percent drop and in.

In Q4 in China.

Yeah, sorry, Yeah, that's helpful. Bob and just sorry, if I was going with that question was can you talk with capital versus recurring and I think when I look at your Americas and Europe America is flattish could you see a similar sort of phasing in ex China, and then maybe talk about exit rates in.

July .

So actually if you think about it.

The ACG business actually ACG grew in all regions and all end markets inclusive of China. So there wasn't a change there.

I would say both in the Americas and Europe , we didn't see that same effect in.

And overall outside of China. The geographic performance was better than expected correct. We saw no. We saw no trends like the China trends in our other geographies.

That's helpful, Mike and Mike maybe one that you mentioned in a couple of times on transitory I think thats, a near term because you're using.

What have you heard.

John I think I'll move away from prudent the transitory.

Yes, yes.

Whatever you guys heard on the ground in China stimulus, maybe some positive commentary, but nothing is concrete and why.

<unk> okay.

Implication here in fiscal 'twenty, four should be a more normalized year when we look at the comps.

Yeah.

Yes so.

A couple of thoughts here I think.

Relative to that.

The China, the China business.

We're hearing similar things, but nothing really significant.

There is not enough to go onto assumes don't have any kind of material impact on our outlook for the rest of the year.

When we talk about janitorial, we talked about the fact that these markets are driven by investments to improve the human condition as I mentioned, they are not going to go away.

And while we're not going to get into specifics of an actual number we actually see a path to growth next year for a full year for Ashland.

<unk>.

Of course, we have the tough comparison in the first half of next year, we did.

Coming off a double digit print for the first half of this year, but as we look at our business keep in mind were.

Okay.

What's behind my my thought process here, which is you know.

Or an instrument company, yes, we have big instrument is around 60%, we have 40% of the recurring revenue business.

I don't know if you caught it in my call script, but our sales funnels for instruments are actually growing so that would say that at some point in time.

Those budgets are going to be released in the orders will close we're not seeing deals come out of the out of the funnel warehouse in order cancellations were not seeing changes to our win loss ratio.

And we're encouraged by the growth we're seeing it in Biopharma.

On the small molecule side, we know there is different rates of replacements during the cycles, but we think those will follow historical cycle I think the real wildcard for us as we look forward into 'twenty four is really what do we assume around the <unk>.

China market, we're not assuming any kind of major further degradation, but at the same point in time.

Its path to return to historic growth rates.

The open question right now.

Thanks, guys.

Yeah.

The next now to Dan Leonard at Credit Suisse.

Hey, Dan Thank you.

Hi, Mike.

I wanted to follow up on that last thought you've seen a lot of cycles in China over 30 plus years.

And what would you compare this to and how do we get out of it.

But.

<unk> is all of the dirt.

And have been working in this marketplace since the mid nineties I haven't seen a cycle like this before.

And we've not seen a situation, where theres really seem to be a lack of confidence right now in the macro economy outlook and I'm, not saying anything that the audience here doesn't fully understand already so the way the way we get out of this I think is.

China led by the government will get back to focusing on his long term goals of making China, an innovation driven economy, which is going to require continued investments in R&D. It's going to also get back to focusing on improving the health of that service.

The population addressing some of the environment issue. So we think it's getting back to fundamentals.

We think that eventually will occur, but theres a lot of issues that need to be worked through within within the within China right now, but we it's a very large market. The market is not going to disappear and I think.

There'll be investments I think theres also.

Needs to be a level of confidence in the private sector in China that is a good time to reinvest in maybe I shouldnt wait on the sidelines, hopefully stimulus stimulus, but get back to work and get my business going so theres a lot of dynamics I really have to say, though I don't know if I have real comparable.

Situation that we've been through for this long I think Bob and I were talking earlier today.

The change in the food ministries number a year ago is it was the biggest thing we've seen or four plus seven and some of the biggest things we've seen the change but this is much more of a macro economic issue in China, which is different than what we've seen before.

Do you have an impact on our life sciences tools, but it's a much bigger macro story is really driving the softness right now in our markets. Yes. The only thing I would say Dan to build on what Mike is saying is is as he mentioned the demographics are with US when you think about the aging population the need to actually access healthcare more more important therapeutics.

The importance of ensuring the.

The water and food supply they are the world's leaders today and electric and clean energy. It's hard to believe when you everyone thinks about that but they are the leader.

And they have more electric cars than any other.

Region.

So I think that investment is going to be key as Mike talking about from the government and.

Unless they change their strategic priorities I think that's the benefit for for life Sciences in general.

Yeah.

I appreciate all that perspective, and just a follow up I was hoping you could elaborate on your decision to shutdown <unk> bio I was surprised by that given that you acquire the company only a couple of years ago.

Yes, sure sure Dan Happy happy to do so so obviously, a very difficult decision and then I'll have Sam jumping on this conversation, but our fundamental belief was that our differentiation will be all around what we called the kitted strategy to have a distributed.

On market companion diagnostics for our pharma partners in that market really hasn't developed as we had anticipated.

Yes, Yes, Mike building on what you said.

While NDS in cancer diagnostics.

Is here and we serve that market in a number of ways right for just to be clear too. We absolutely continue to serve cancer research translational research and diagnostic tests developer customers, but are are core to our thesis our differentiation is really the ability to develop and distribute these kitted tests in the <unk>.

The pharma market and the testing market just hasn't evolved that way.

And we also looked at our recent analysis and concluded that even with more additional investment. This is going to be a business that's going to be undergoing significant losses for for some foreseeable future. So.

It was a difficult as Mike said that the right decision to make this move now, but again to be clear we continue to serve.

Cancer research and diagnostics and a number of ways I think stand when and we've talked about this in the past. So we think we're still going be able to participate in what we believe the strong growth of liquid biopsy market, but to really providing a lot of the if you will ingredients for the test developers themselves here, Mike I'm going to take this opportunity to also just to say.

Beyond our core sure select target enrichment portfolio, which is used broadly for liquid biopsy testing today.

Early next year, we'll be launching solutions from Aviva, Aviva Biomet and acquisition that we announced earlier this year, which we think is really going to be a differentiated way to look at methylation as well as classic mutation analysis.

Yeah, Hey, maybe just one one add Dan is.

Obviously, a difficult decision for us, but I also think it also looks.

It shows the discipline that we have in terms of our portfolio rationalization and we felt we had better returns and other places to invest and so.

Understood. Thanks for the time.

Youre welcome.

We'll go next now to Brandon Couillard at Jefferies.

Hey, Thanks, good afternoon.

Good afternoon Brandon.

You can find a packing mastech versus LC trends in the quarter and then based on your revised guide what is the four year CAGR from 2019 for <unk> instruments exiting the year at how does that compare to historical average over the cycle.

Hey, Brian I'm going to start with the response to your question I'll, let Bob dig through his notes.

Notice defined find the actual number.

First of all I'll just start to say is that we.

We believe what we're dealing with here.

Our core investment portfolio inclusive of the LC and LC Ms continues to be a macro market story.

Our market shares are holding up really well, we're seeing in our one loss.

Data, we're seeing it in the external reports from order.

I think when we look at our when we look at our performance in those core platforms versus our peers, who reported some numbers and kind of adjust for.

For the timing of when we report I think were putting up a similar kind of numbers.

And Jacob I know you've looked at this thing pretty closely.

I'm trying to buy some time for Bob to check down to every nine to find the CAGR of last three years with I don't have in front of me here, but youre right Mark and Mike We follow this very accurately and and we are doing and we continue to do very well in this marketplace. We continue to innovate into it and we have seen actually we have taken share over the last period of time and if.

If you actually compare our calendar <unk>.

Our calendar two versus competition would actually CW approximately flat in the <unk> space and I think that stacks up very well versus competition.

Yeah, Hey, Brendan we can get that to you afterwards, okay. I can tell you, though if you looked at the LSA business over the last three years, it's been averaging 5% CAGR, despite being forecasted to be down this year.

Obviously those are two large businesses.

Okay.

I guess two housekeeping questions for you Bob.

Talk about.

<unk> growth in the third quarter imagine might've been up sequentially with trained be coming online.

On the Capex line pushed out $200 million spend is that just roll into 'twenty. Four there are some projects that maybe you decided to defer for the time being given the environment. Yes. It's a great question. So NASD, we continue to be very pleased with that we had our first.

Revenue in Q3 from train B, the first of many more revenues to come from that standpoint and.

Expect it to continue and we're still on track for the numbers that we've been talking about $3 50, plus for the full year.

And in terms of the the.

The capex some of that will roll forward, but it's not we're not.

Not going to spend that $200 million 24, as well this would be we have deferred projects being very rational really focused on.

Revenue generating.

Programs.

And so I do expect some of that will flow into 'twenty four but I.

I don't expect 24 to have an incremental $200 million show up in the forecast.

Okay. Thank you.

Okay.

We'll go next now to commit to that.

At Leerink partners.

Hey, Mike Thanks for taking the questions.

The first one.

Thanks.

Maybe Bob could you elaborate a bit on pricing here I know pricing was meaningful contributor. Initially this year, we're seeing China, obviously, you talked to quite a bit about it and where we're seeing the headline for China deflation. So wondering if you are expecting pricing to maintain there or do you expect pricing pressure in China.

Anna.

Continuing and also we're seeing some of the peers sort of bio processing companies talking about local competition rising on the less high tech product and so wondering.

If you are seeing that on any of sort of your product product lines as well.

Yes, let me take the second question first.

We we can compete against the Chinese local competitors, each and every day and nothing has changed from that standpoint, we continue to feel very good about our portfolio and continue to drive that growth in regards to pricing across the board we were slightly better than what we had expected was roughly over a little over 4% for.

For the quarter.

And that was that was driven across all three of the groups. So we continue to drive.

Positive price across not only our <unk>.

<unk> and ACG business, but also our instrumentation and that's globally.

<unk>.

We expect to be able to continue to demonstrate the value of our instrumentation across the globe, obviously in a deflationary environment that will put a little more pressure on.

The the instrumentation business, particularly in China, but we've incorporated that into our forecast and are still on track for.

Positive price contributions for the full year in excess of 3% maybe.

Before I can answer can maybe comment on some discounting trends he may have been seen.

Thank you.

I think the.

Pricing holds that discount is really really stable as well we haven't seen any.

The increase in that rate of us and we continue to monitor that put us be very stable.

Yes.

Got it thanks for that.

If I could ask on academic and the carbon here.

Smaller segment for you but.

Solid in the quarter, maybe could you talk a little bit about what youre seeing across the globe in different geographies for academic and government and your expectations there going forward. Thank you.

Yeah, Bob I think this is an end market that is holding up reasonably well.

We're seeing that on a global basis.

Cases, with the exception being being China, where.

<unk> is there the funding is stable and it's been it's been a positive surprise surprise for us so far through this year.

And.

I don't.

It's really across.

Many of our instrument platforms as well as the service business and.

From what we are seeing Puneet is funding continues to be available and it's flowing from governments, they're I think they're seeing the strategic nature of many of the investments that they're making.

And our expectation is that that funding will continue.

Got it.

Thank you.

Youre welcome.

Thank you the next now to Rachel that installed at Jpmorgan.

Great. Good afternoon. Thanks for taking the question. So first one of your peers and flag that they were actually early signs in pharma spending recovery I appreciate that most of the incremental this quarter its really related to the China weakness, but maybe ex China can you walk us through or if youre seeing any recovery in spending with biopharma customers and then as previously flagged.

Perhaps that historically when pharma spending is down like we're seeing today then it can take 12 to 24 months to recover. So how are you thinking about the timing of the recovery given the incremental weakness this quarter.

Okay.

Sure Rachel so.

Well, while we saw signs of stabilization.

In the.

Our European and U S business stabilization relative to expectations, we're not hearing anything along those lines yet in terms of a recovery or desire to increase spending. The fact, we're here in exact opposite right now from our large major pharma companies. So I hope.

I hope that commentary from others in this space is correct and there's going to be a big big recovery here from year end, but we're not seeing any kind of indications are that if it does happen great. It would be upside relative to our current outlook and we know we do well in these markets but.

Pork I don't think we're seeing and hearing anything along those lines I think that's spot on Mike.

The only thing I would say Rachel is if we look at our funnels. They continue to be growing so it's a question of when.

When not if.

And particularly in pharma and as Mike and important just mentioned, we're not assuming a budget flush.

Into.

Our Q4.

And.

If it happens.

That will likely happen in our Q1.

In any event from a revenue perspective, but what we see at least from our funnels as they continue to be healthy.

And let me just answer.

Brandon's question from from a couple of times ago, If I look at LC and LC Ms on a three year CAGR there between 7% to 9%.

So higher than the overall <unk> average okay.

Thanks for that and I think the second question relative to I think you're referring to the small molecule replacement cycle and as you know coming probably at least for the last 12 to 18 months, we had been indicating that we were expecting to see.

A slowdown in the rate of replacement and in fact, we've seen that occur this year actually given the weakness in China, even beyond our expectations with the minus 16% number overall.

In the quarter that being said, we do stay with our view that these tend to be 18 to 24 months 12 to 18 months cycles.

We would expect that they will start to see movement back towards higher growth rate and that's one of the reasons as we look into 2004 were saying some of these markets will start to turn as based on cycle gets back to more of a growth phase in that cycle and as we mentioned earlier, we see that particularly in the liquid chromatography is probably about a five.

Percentage kind of growth market long term.

Great. Thank you for all that color and maybe just following up on your small molecule comments. There are some small decline 16%. This quarter. So can you talk to ask about how much of your China exposure as it relates to those small molecule work flattish and then what else is really driving incremental weakness on the small molecule side.

Heard of IRA pressuring some apartment decision and potentially leading to them re prioritizing the pipeline. So is there any risk that one recovery.

Our cutlery, Oregon to growth rates for small molecule <unk> what are your conversations with customers on that thank you.

Okay. So let me start got it so relative to China, but I would say, it's probably the same ratios as a global business right.

Probably what $60, 65% is probably related to small molecule.

And relative to what's happened in the large pharma what we're seeing is in medium sized pharma is again, a continuation of this cautiousness about deferring capital I'm sure, they're thinking through implications of IR IRA and also other expenses that are running hotter in their P&L, where they need to make some offsets with calvert purchases.

That being said if.

If you believe and I know pharma believes the importance of having safe on market drugs, you have to have the instrumentation and QA QC environment support that that requires you to have modern liquid chromatography fleets. So I don't think it's a question that they can that this market is going to go away and it won't be an area that pharma will need to invest.

And if you can defer for a period of time, but then I'll, let Emily last for so long.

Yes.

Thank you we'll go now to Patrick Donnelly at Citi.

Yeah.

Hey, guys. Thanks for thanks for taking the questions.

Mike maybe just given that commentary around the instrument cycle youre, not really seeing much improvement yet obviously, the China piece.

Transitory, but certainly seems like it's going to linger.

Only a couple of months and 24 for you guys here, how do you think about some of these impacts lingering Ed I think you said there is still no plans for growth next year, but it certainly sounds like some of the headwinds at least will linger into the first half given the most call I just wanted to talk through that topline setup given headwinds lingering into next year.

Yes, we still have a few more months till we finish off the fiscal year and we'll give you our guidance in November and I think we'll know a lot more by then but I do think we know that we'll be able to grow. This company in 'twenty four that said I was very careful in my comments to make sure that it was a full year growth rate. We do expect the first half of the year.

A challenging year from a comp standpoint to begin with but also some of the things that we've been talking about today on the call. We don't expect a quick snapback to be occurring in the next quarter or two.

Yeah.

Okay. That's helpful. And then I know you mentioned budget flush.

Still a little bit away from that.

The calendar year for pharma and other areas do you have any view at this point. It sounds like you guys are expected to give you a more subdued budget flush, but whatever youre hearing from customers would be helpful. Just to pull it back a little more on that.

Yes, sure Patrick happy to do so and then all right.

Pour into this conversation we all know has been talking a lot of it to the team about this but.

As I mentioned earlier, we're not really seeing any kind of indication.

Customers, saying, hey, listen.

I'm going to have money on plan on spending at <unk>.

This weighed in fact, we've seen the opposite where sometimes orders that we thought were close to actually keep deferring and require more ore purchases and in fact I think one story, we heard was that.

That's why we wanted to order three times funnel CFO approved it on the third go round and the CEO of overrode. It. So we know eventually going to get that business, but this is kind of dynamics that we're seeing so we're not seeing a lot of indications of a strong.

Year end budget flush again, we'd love to see the opposite happen, but they're not getting indications that.

You have some yes.

There what we're hearing from the customers is that we're not planning on a budget flush at the end of the year, but where we would take the upside of course with dark homes I think.

I think one thing is really really cleared of the formulas are very strong and it's there, but we're not seeing them to be released.

At the end of the year and I think this comment Patrick on the funnel as being strong and then these funnels are actually growing is really important because this is this is one of the reasons why we think about full year outlook. In 2004, we know the business is there just a question of when it's going to get and we watch very closely our win loss rates.

And we haven't we've seen them very very stable, we have a strong funnel, which is very positive over time.

Understood. Thank you guys.

Well go next now to Derik de Bruin at Bank of America.

Yeah.

Hi, good afternoon good.

Good afternoon Derik.

Lot of what I wanted to ask has been asked so I've got some clean ups here.

Did you give a specific instrument core growth number and consumables growth for a number for <unk>.

<unk> and then sort of your.

All in number for this year.

With respect to yes, yes, we didnt <unk> for Q3 was down roughly 9% core.

Consumables was up slightly.

Got it thank you.

So what's the revenue contribution for <unk>, and <unk> and what do we need to pull out for 2024.

Yes, so we've got a minimal number in Q4 as we wind down the business and I would say it was roughly a point to a little over a point to the headwind to <unk> going forward in FY 'twenty four.

Got it okay.

So staying on the topic of M&A I mean, you've done a couple of genomics deals, which haven't gone your way in.

I'm, just sort of wondering what youre thinking about deployment going forward I mean valuations have obviously come in.

Industry is consolidating you've been saying because it's been relatively quiet across the space for the last 18 months like how you're sort of thinking about capital deployment.

At what point do you.

Besides you maybe want to buy.

Start may be doing with the share prices, maybe doing some share buyback just sort of talk about your general capital deployment strategy at this moment.

Yes, I think Bob alluded to it a bit in his prepared remarks, but we still are staying with our balanced capital allocation and allocation strategy and you saw us in the market Opportunistically on share repurchases, given where we saw the share price setting that in terms of an appetite for M&A it remains unchanged.

Given that despite the residential bioscience decision, we know that was a higher risk acquisition for US early stage company and hot area based on a really differentiating strategy that didn't really play out, but we've had some success in other aspects of our genomics.

Acquisitions, including the <unk> acquisition on the instrumentation side. So we're still out there looking.

But.

As Bob mentioned.

We take a disciplined approach not only to how we view.

Our internal choices.

Internal business performance in terms of what's in the portfolio, but will also take that same lens. If you will on how we look at M&A. So really nothing has changed beyond the fact that this is more of a buyers buyers market.

And that companies with a strong balance sheet like Ashland I think are in a good favorable position too.

To work on opportunities but.

We're going to stay disciplined and not get caught up in what once was a value of our company either the private or public space.

Just one more follow up if I may.

What are your orders in liquid chromatography, how is your order book or are you seeing orders increasing.

Our order book was.

Down.

Largely a function of China.

But they were down year on year.

Thanks.

Yeah.

Thank you we'll go next to Josh Waldman at Cleveland Research.

Hey, Thanks for taking my questions a couple for you.

First.

First Bob can you provide more context on the puts and takes within the fourth quarter core organic growth guide I guess, maybe the assumptions by business unit, and then curious what areas or end market outside of China seem to be slowing real time that youre trying to reflect in the guide versus areas that.

Maybe stabilized or improving over time.

Yes.

Yes, so Josh just real quick when we think about kind of the Q4 implied guide the big the Big driver is China.

I mentioned down roughly mid thirties.

And that really impacts.

A number of markets you can imagine both pharma and chemical <unk> energy, which are that our chemical and advanced materials, which are the two largest markets in China.

I would also say that.

Diagnostics and clinical is also down we've seen that softness in genomics and then obviously the.

The shutdown of <unk> also impacts that that business and that's primarily.

U S phenomenon.

So we did see an impact in U S on that side and then there are some puts and takes in other places, but those are the two big pieces for Q4 above as I recall, I think 85% of the change was really China, driven it bleeds over into a pharma and Cam.

Got it Okay, and then Mike I guess staying on on China, and a follow up there can you unpack a bit more what youre seeing by end market.

Where demand is holding in versus like areas that you would see.

Come in lighter as the quarter progressed again, I guess outside of China, sorry outside of pharma and then I guess a follow up on Dan's question.

I believe it was earlier what are the variables within China, Mike that Youre trying to account for as your forecast.

The medium term maybe beyond just the next couple of months and I guess.

Any risks that we need to kind of rethink the underlying growth rate in the industry.

China It remains light here in the medium term.

Yes so.

Let me start with the view by by end market and I think the.

Academia and government market.

Was it grew for us in the in.

In the third quarter.

But everything else was pretty much down.

The big change really we're in the pharma the pharma space and as Bob Bob coming out earlier about how we exited the quarter the July performance.

Some weakness in chemicals by say the down down there was really just a byproduct of.

A 43% compared to last year, and we're looking at a 70% growth compare in the fourth quarter, but I would say that the.

The concerns or the cautiousness in the China market place is really across the board.

And.

And with varying degrees, but I think its release.

The most reflected in the pharma outlook.

I think thats the Thats the 64000 dollar question.

I think theres a case to be made that this market will get back to its longer term growth rates, but it will take a period of years to get there, it's not going to be a snapback in 12 months.

But again that's.

Thats work to work to be done the factors that we're looking at I think of the same factors other else's Darren at which is what's going to happen to the macro in China.

Storyboard here as a macro story and it's bleeding over into life sciences tools, but.

We need to see the China economy get moving again, we need to see consumer confidence coming back when you see.

Investment confidence coming back.

In China, I think those things will take some time, but I do think their priorities of the government and they'll find a way to make that happen.

We're not calling for a quick snapback here either.

Got it I appreciate it guys.

Yeah.

Thank you well go next nasty, Dan Brennan FTE count.

Oh.

Okay.

Great guys. Thanks for taking the questions, maybe just one on Internet and cloud I think we talked earlier.

I think we've got a question maybe you gave the <unk> number but I know there's consumables within that could you just breakout what the instrument number I know, we'll get it on the Q just wondering I went tremendous data.

If we look ahead I think given your quota.

And I know, there's been various times asked throughout but Thats, how would we think about.

The outlook for instrument.

It would be fourth quarter, if you want point to scope out a little further.

Yes.

We add a little more.

Our flavor and clarity to the to my answer previously LSA G was down 9% core it was down 9% and instruments as well so.

The consumables business was up.

A point.

And as we look out there I'm just wondering I guess, it's really dependent upon that.

A product, which you guys already discussed it sounds like you're optimistic on <unk> given the funnel when we get back towards that excuse me that Alex and that this is going to get back to that 5% growth I guess would you assume instrument as a starting point growth in fiscal 'twenty.

Based on what we see today, yes.

Got it.

One just wanted like that.

There is no reason to believe when we think about kind of the.

The level of investment over time.

The importance of our instruments in the.

Discovery of new therapeutic areas or.

Food testing, we think about as Mike was talking about these new areas around applied markets.

There is no reason to think that there's something fundamentally has changed that they don't need instrumentation.

And so I think we feel very good about our market share and our competitiveness and.

Do expect our <unk> business to be a growth driver for us going forward.

Yes completely now is this more just on the comp basis after making that sounds great and then just one quick one just on the on the applied versus the chemical you mentioned some chemical weakening just there were concerns in the quarter, but the appliance obviously powering through can you just maybe unpack a little bit more how youre thinking about like how we exit the year across your different buckets.

Within the chemical products segment.

Yes, I mean, I think if you look at Q4 it'll be really.

An impact of China. So we're actually looking at chemical and advanced materials declining in Q4 because of that 70% increase that Mike mentioned in Q4 of last year.

That was across the board I would say the advanced materials will be much stronger than that.

<unk>.

Hi art.

Double digits.

And the chemical side, probably will have.

A bigger impact if you recall, the Shanghai shutdown impact.

Was centered in the chemical and advanced materials market, because thats, where our GC manufacturing was and Thats a.

Our workhorse for for some of those products. So.

We do see it down in Q4, but up for the full year I think that's a really important showing them to make sure that people understand.

Great. Thank you.

Okay.

Okay.

Thank you and we have time for one more question. This afternoon will take that now.

At Barclays.

Great. Thanks for squeezing me in.

Just real quick on that.

So real quick on the NASD.

Have you guys seen any pressure from the market youre seeing any in sourcing from the market I know novartis is.

About doing some of this as well.

And then lastly.

Additionally, with that with the.

The Capex guide down are you guys still investing in additional lines there for the year or is that really on pause is that have anything to do with that kind of capex steps down let.

Let me leave with US and then have Bob jumping in the Sam as well, but from in sourcing standpoint, no. We're not seeing any material moves in this direction and in fact, as we head into 'twenty four.

We continue to broaden our book of business and we're going to have more customers than we've ever had in terms of breadth of customers as we go into 'twenty four.

And yes, that's called project endeavor. So train B, we went live which will have a different code name.

And Thats why but we continue to move forward with our expansion plans on the Algo front Si RNA.

Front, along with what we like to do on the Crystal side, as well and anti sense. So we're going to broaden that so our stated investment plans remain remain unchanged, yes to be very clear look to add what might say, we are not slowing that down at all.

That investment is one of the highest priorities we have.

Trimmed it back spending in another less.

More infrastructure kind of oriented projects as opposed to kind of revenue generating I think what youre seeing actually is it's actually coming in better than expected because the pricing is better than expected and you probably have seen that in other places and so the.

Ability of parts.

The key materials.

Is better than what we had initially planned as well.

Only add to what you guys said that Mike along with having more customers and actually more diversified set of customers we're going to be.

We're contracted to do more programs next year than in the history of NASD. So it's.

Yes.

<unk>.

Full speed ahead.

Gotcha Gotcha and then.

I didn't hear anybody asks about the ACG margin, maybe they did I missed it but you guys had a material step up there can you talk about really what went on there is that there is any benefit that you saw from like lack of incentive comp just kind of breakout where.

The drivers there and really how we should think about that.

Four and as the jump off point.

Yes, we did mention that there was a benefit.

<unk>.

The.

Variable pay comp obviously, that's got a big component of people in it but it's also a reflection of the scale on the continued growth of that business. We didn't say take that 32% I believe it was in Q3 and kind of book that is the new starting point.

Because it had outsized growth, but we continue to be pleased and expect continued margin expansion for ACG going forward.

Alright, great. Thank you.

Thank you Emily.

Ladies and gentlemen at this time I would like to turn things back to <unk> for any closing comments.

Thanks, Bill and thanks, everyone for joining the call today.

That we'd like to end the call.

Have a good day everyone.

Thank you pardon me, ladies and gentlemen, this does conclude today's call. Thank you for joining we wish you all a great day Goodbye.

Okay.

The call.

Have a good day everyone.

Thank you pardon me, ladies and gentlemen, this does conclude today's call. Thank you for joining.