Agilent Technologies, Inc. (A) Q3 FY2025 Earnings Call Transcript & Summary

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agilent Technologies, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Parmeet Ahuja, you may begin the conference.

Thank you, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2025. With me are Padraig McDonnell, Agilent President and CEO; and Rodney Gonsalves, Agilent Vice President and Interim CFO. Joining the Q&A will be Simon May, President of the Life Sciences and Diagnostics Markets Group; Angelica Riemann, President of the Agilent CrossLab Group; and Mike Zhang, President of the Applied Markets Group. This presentation is being webcast live. The press 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 investor.agilent.com. Today's comments 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 references to revenue growth are on a core basis. Core revenue growth is adjusted for the impact of currency exchange rates and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As a reminder, beginning in the first quarter of fiscal 2025, we implemented certain changes to our reporting structure related to the reorganization of our 3 business segments. We have recast our historical segment information to reflect these changes and have provided the financial details on our website. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Padraig.

Hello, everyone, and thank you for joining today's call. Agilent delivered outstanding results of $1.74 billion in revenue in the third quarter, exceeding our guidance, while continuing to transform our enterprise operating model in a highly dynamic environment. We also delivered $1.37 earnings per share in the quarter. Thank you to the Agilent team, who has remained laser-focused on our customers and committed to our mission of advancing the quality of life. Our fiscal 2025 third quarter marks our fifth consecutive quarter of sequential core revenue acceleration, a testament to how we've evolved our enterprise strategy to be market-first and then realigned our businesses to our markets. For this fiscal year, we've gone from 1.2% in Q1 to 5.3% in Q2, and now 6.1% in Q3. Just as important, our 2-year growth stack also is improving, showing that this is a durable momentum, not just a short-term balance. The 2-year stack is a summation of our growth over 2 consecutive years, providing a clear view of sustained performance by smoothing out short-term quarterly fluctuations. Given this strength, we are raising our fiscal 2025 full year revenue guidance to the range of $6.91 billion to $6.93 billion, representing a core growth of 4.5% at the midpoint. This is a $150 million increase from our prior range at the midpoint and 1.5 percentage points of additional core growth, a clear step-up in our growth outlook heading into Q4. This upgrade reflects our confidence in delivering another step-up in revenue into Q4, even as we absorb the impact of tariffs this year. Our momentum is broad-based and led by our 2 largest end markets, Pharma and Chemicals & Advanced Materials. In Q3, both grew 9% and 10%, respectively. In Pharma, small molecule grew double digits, fueled by demand in downstream QA/QC and strong adoption of our Infinity III LC platform. GLP-1s also continue to drive demand, both for our leading analytical lab solutions and the unique capabilities we bring with BIOVECTRA. In Chemicals & Advanced Materials, demand rebounded across all major geographies. This was supported by new investments in the semiconductor and chemical sector with robust uptake in our GC and GC/MS platforms. We also saw healthy contributions from our Food and Diagnostics & Clinical end markets. And the Academia & Government end market returned to modest growth despite continued funding pressures in the U.S. Environmental & Forensics was the only market to decline as changes in the U.S. EPA led to some cautiousness on new capital spending. Despite this temporary headwind, our market-leading PFAS business grew low double digits globally during the quarter, against a tough compare of nearly 50% growth last year. Demand outside the Americas continued to be excellent with broad-based growth in the low 30s. PFAS remains an excellent opportunity with strong, long-term demand drivers intact globally. Powering the strength of our execution is our Ignite enterprise operating model. This year, our value-driven approach to pricing delivered results that were twice the impact of last year. At the same time, we streamlined the enterprise by reducing management layers by more than 15%. That didn't just remove cost. It gave us speed. We're making decisions faster and empowering our teams to be agile. We're also taking a consistent enterprise-wide approach to manufacturing and procurement. These efforts already are delivering double-digit savings in key cost categories. And we see even greater opportunities ahead as we scale these practices globally. Our Ignite tariff task force has shown the power of the model in action. In a highly dynamic environment, we reorganized supply chains, shifted production across our global footprint and implemented targeted pricing actions, giving us confidence we can fully mitigate the impact of tariffs in 2026 at current rates. Ignite continues to be a differentiating growth driver for Agilent. It is proving that by embedding new tools, enhanced capabilities and smarter ways of operating across the company, we unlock the full scale of our enterprise. That means stronger performance today and resilience and growth for tomorrow. Innovation also continues to be a major driver. Our Infinity III LC platform delivered mid-teens growth, with early adopters coming back for a larger follow-on purchase based on a superior performance and productivity gains. And the Pro iQ LC/MS system is tracking well ahead of our launch forecast, winning key accounts at major pharma customers. The new system's performance benchmarks open new application possibilities across pharma and biopharma and are resonating strongly with customers as evidenced by strong funnel growth during the quarter. Also, the newly launched Dako Omnis family brings our gold-standard, fully automated pathology platform to a broader range of lab sizes, capturing new market segments and strengthening our diagnostics portfolio. Together, these platforms are not just driving near-term revenue, they are continuing to build the foundation for sustained growth into FY '26 and beyond. This growth is supported by a strong funnel and accelerating customer adoption across our portfolio, demonstrated by an instrument book-to-bill above 1 for the last 6 quarters. Importantly, we expect Q4 to be our largest revenue quarter of the year, with core growth of 5.4% and revenue of nearly $100 million higher than Q3 at the midpoint of our guidance. Our sequential momentum and 2-year growth back remains solid. And combined performance of the second half provides a sound foundation as we look into FY '26. The growth we expect in Q4 is underpinned by healthy demand for key platforms, strong funnel conversion and broad-based strength across our end markets. The latest industry data is evidence of our continued superior commercial execution with market share gains across all major geographies. The combination of strong top line performance as stable operating margin means we have successfully delivered to our bottom line commitments throughout the year. However, we did have higher expectations for margin improvement in the quarter. The increasing revenue growth also comes with additional tariff expenses and higher variable pay. We've invested in our commercial capabilities to support our growth now and into the future. For the fourth quarter, we expect to deliver significant sequential margin improvement as increasing revenue combined with additional Ignite benefits will result in accelerated profit leverage. Rodney will provide some additional details in his remarks. Now let me tell you more about why our Q3 was so strong. Starting in our largest end market, Pharma, we grew 9% during the quarter and continued to see steady improvements we referenced for several quarters now. This quarter, we saw positive momentum in funnel conversion as lab managers are increasingly able to access and spend our available capital budgets. There is reduced dependence on executive-level approvals that have slowed or stopped spending in the recent past. Our long-time, lab-wide enterprise service relationships with large pharma enable us to capitalize on these improving conditions with deeper visibility into customer needs. This ensures we are in the right place at the right time with the right solution when lab managers are looking to replace aging instruments and expand capacity. In our second largest end market, Chemical & Advanced Materials, we delivered 10% growth with broad strength globally. Growth was balanced between 2 submarkets. We saw increased capital investment from Chemicals customers and robust demand in Advanced Materials space and investments in new semiconductor fab facilities globally continue to progress. Our market leadership in key product platforms for these markets position us well to capture the significant instrument-replacement opportunity in a market that has seen several years of underinvestment. All our business segments delivered revenue growth that exceeded guidance for the quarter. The Life Science and Diagnostics market grew 7% core. Growth was led by excellent low double-digit performance for LC and LC/MS instruments, leveraging our recent Infinity III launch and focused LC/MS solutions for key applications across both Pharma and the Applied Markets. LDG also saw another strong quarter from our CDMO business, NASD and BIOVECTRA. NASD grew in the high 20s as we see continued growing demand for siRNA modalities in clinical and commercial programs. BIOVECTRA also delivered on expectations while executing a planned facility shutdown to work with a key customer to transition to a higher throughput process. In the Applied Markets group, growth of 5% was also ahead of expectations. Breaking down the performance, our market-leading platforms, GC, GC/MS and Spectroscopy delivered strong growth in Q3 with encouraging momentum in the Chemicals & Advanced Materials, Food and Pharma markets. Geographically, all regions delivered growth led by Asia, ex China and EMEA. The geographic growth in AMG was driven by investment from supply chain reshoring, greenfield opportunities, capacity expansion and replacement from our large installed base. Also, our recently launched new products, including the 8850 GC, continue to ramp up ahead of expectations as customers are attracted by their exceptional performance, superior lab productivity gains and leading sustainability benefits. The Agilent CrossLab Group delivered 5% growth in Q3, better than we had guided. The CrossLab team drove mid-single-digit consumables and supported by our focus on e-commerce and digital. This was a strong result despite the $15 million tariff-driven pull forward of sales into Q2 that we mentioned during our last call. The Services business grew mid-single digits, led by strength in the Applied Markets in Europe. Agilent service continues to delight our customers, achieving greater than 90% customer satisfaction and meeting our vision of our customers to feel confident, valued and inspired. Lab activity remains strong, giving us confidence in the fundamental strength of this business, plus the increasing pace of instrument sales for replacement of aging fleets in labs where capital budgets have been reduced or withheld, expansion for new capacity and growing demand for automation bodes well for CrossLab business into the future. It provides a cycle to generate customer lifetime value through connections of high-quality consumables, software services and automation to maximize instrument utilization and overall lab productivity. Turning now to our geographic results. We saw a broad-based growth with all regions growing at least mid-single digits during the quarter. Our business in Asia ex China continues to capitalize on opportunities from reshoring of supply chains, growing 10%. And we saw increasing safety regulations across the region to drive an excellent mid-20s percent growth for our Food markets. Within the region, India continued to lead the way with broad strength across our end markets, resulting in 20% overall growth. We are seeing great success with the Infinity III as existing and new customers in pharma QA/QC environments look to benefit from its productivity improvements. As the country invests to build domestic semiconductor and EV manufacturing capabilities, we are seeing increased demand for our solutions in these markets. India is a strategic growth market for Agilent. As part of our increasing investments there, I visited India in July to open Agilent's Biopharma Experience Center in Hyderabad. This center will bring together advanced lab technologies, expert training and regulatory-ready workflows to help researchers, scientists and companies develop high-quality, life-saving medicines faster and more efficiently. In Europe, growth of 7% was also broad-based, with double-digit growth in Pharma and Food, and high single-digit results in Chemicals & Advanced Materials and Academia & Government. In China, results continue to be stable as expected, growing 4% during Q3. We saw some government funding flow to some of our Academia & Government customers during the quarter. Based on our interactions with customers and local officials, we continue to expect a more meaningful stimulus impact towards the end of this calendar year, primarily in our Applied Markets. In the U.S., the challenging conditions for biopharma spending and in Academia & Government space persisted. Outside of those areas, we saw a nice low double-digit growth in small-molecule Pharma and Chemicals & Advanced Materials. Improved capital spending has driven instrument placements leading to a 5% growth in the Americas in the quarter. We continue to meet the challenge presented by the dynamic environment for global trade. Tariff expenses were higher than our prior expectations as we saw a meaningful increase in shipment volumes and increased inventory to support Q4 growth. We continue to leverage our unique Ignite enterprise operating model to optimize our use of global production networks, manage our diversified supply chain to optimize materials costs and where required, make pricing adjustments to offset added costs. Leveraging Ignite, we still expect that we will fully mitigate the impact of tariffs, either through avoidance or other offsetting opportunities in FY '26. And before I hand it over, I want to take a moment to introduce Rodney. Some of you might know him from a period where he led Agilent's Investor Relations team. For those who do not, Rodney has been an integral part of the finance leadership team at Agilent for many years. He has been a principal accounting officer for the last 10 years, while also leading our FP&A team. I am delighted at how he's been able to seamlessly step in and lead our finance organization while we conduct a thorough search for our next CFO. Rodney will share further details about our Q3 results and guidance for Q4 and the full year.

Thanks, Padraig, and good afternoon, everyone. In my comments today, I will provide additional details on revenue in the quarter as well as walk through the income statement and cover other key financial metrics. I'll then cover our updated full year and fourth quarter guidance. Q3 revenue was $1.74 billion, above the high end of our guidance. On a core basis, we posted growth of 6.1%, while reported growth was 10.1%. Currency had a favorable impact of 2.1%, which was 1.5 better than what we estimated as part of our guidance. M&A contributed 1.9%, in line with our expectations. Gross margins in Q3 came in at 53.1%, down year-on-year, driven by currency, tariffs and the impact of downtime to expand capacity of BIOVECTRA, as Padraig mentioned earlier. Operating margin was 25.1% in Q3 and has been consistent across the year in increasingly challenging conditions. Ignite is enabling us to translate top line growth into bottom line results, while we continue to invest in innovation and growth. As Padraig indicated, margins were below expectations. We've seen roughly equal impact from 3 areas. First, our higher revenue volume drove up net tariff costs as we shipped additional products and backfilled logistics centers to support Q4 growth, even while full tariff mitigation is still on track for FY '26. Next, we increased variable pay expectations with higher awards driven by stronger business performance, consistent with our pay-for-performance culture. Finally, we invested incremental commercial spend required to support short- and long-term revenue growth, including for critical product launches and improving our geographical coverage. For Q4, we are targeting a sequential operating margin improvement of approximately 230 basis points. We expect most of this improvement to come from leveraging our fixed costs as we drive another sequential increase in volume. We are also getting meaningful contribution from both excellent margin conversion on the significant step-up in CDMO revenue in Q4 and delivering another step-up in Ignite benefits with a partial offset due to higher tariff costs. Now moving below the line, we had $6 million of income, while our tax rate of 12% was as expected, and we had 285 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.37. That was at the high end of our expectations and grew 4% from a year ago. Now let me turn to cash flow and the balance sheet. Operating cash was $362 million in the quarter, down versus last year as working capital was up on volume growth and tariff-related inventory build. We also incurred severance costs related to our organizational efficiency efforts. Additionally, we invested $103 million in capital expenditures. We purchased 85 million shares and paid out $71 million in dividends during the quarter. And we ended the quarter with a net leverage ratio of 0.9, so we continue to have a very strong balance sheet. Now let's move on to the outlook for the fourth quarter. We expect Q4 revenue to be in the range of $1.82 billion to $1.84 billion. This represents an increase of 4.8% to 6% on a core basis and 7.1% to 8.3% on a reported basis. Currency and M&A are expected to be 0.2% and 2.1% tailwinds, respectively. Also, to help you with your models, I want to provide you with additional details on expectations for growth in our end markets during the fourth quarter. In Pharma, we're expecting mid- to high single-digit growth with stable to improving conditions. In Chemicals & Advanced Materials, we're guiding high single-digit growth with another quarter of healthy capital investment expected. In Diagnostics & Clinical, as well as in Food, we expect mid-single-digit growth. Finally, we expect very low single-digit growth in Environmental & Forensics and mid-single-digit decline in Academia & Government as those markets face a difficult compare for U.S. federal spending at the end of the fiscal year. Fourth quarter non-GAAP earnings per share are expected to be between $1.57 and $1.60 ,representing leveraged earnings growth of 7.5% to 9.6%. We expect a 12% tax rate, $9 million in other income and 284 million diluted shares outstanding. Turning to the full year. As Padraig mentioned earlier, we are raising our revenue outlook. We now expect our full year reported revenue to be in the range of $6.91 billion to $6.93 billion. This represents an increase of 4.3% to 4.6% on a core basis and 6.2% to 6.5% on a reported basis. Currency is now expected to represent a small headwind for the year, while we expect a 2% revenue impact from M&A. Our full year EPS guidance is now $5.56 and to $5.59, unchanged at the midpoint versus our prior guidance, and we continue to offset additional tariff costs across the second half. This represents a year-on-year increase of 5.1% to 5.7%. For clarity, let me briefly summarize the updated tariff assumptions that we incorporated in our FY '25 guidance. Based on the rates currently in place, we are now anticipating $20 million net cost for the year, up from the minimal impact we guided in May. This increase is due to our better-than-expected revenue performance across the second half as well as the 50% tariff increase on imports from Europe announced at the beginning of the month. Strong demand for our LC products that are currently produced in Europe until U.S.-based production begin to scale later this quarter, also amplifies the impact of the recent European tariff increase. Finally, for your modeling, we are now projecting an increase of other income and expense to $26 million in income, along with a 12% tax rate for the year and 285 million diluted shares outstanding. Now I'd like to turn the call back to Padraig for closing comments. Padraig?

Thanks, Rodney. These strong results are a testament to the progress we've made as a company over the past year. We are encouraged by the growth momentum we have created and look forward to building on that success next quarter and into the future. Thank you for your attention. I'll hand over now to Parmeet to kick off our Q&A. Parmeet?

Thanks, Padraig. Operator, if you could please provide instructions for Q&A now?

[Operator Instructions] Our first question will come from the line of Dan Brennan with TD Cowen.

Maybe just the first one on the margins since obviously, top line really strong, but the margins were light as you kind of spoke to them. Can you just unpack the 3 variables you kind of highlighted? Kind of how much are you spending? How much are you buying more inventory for yourselves? How much was that a factor? And question, the topic #2 and 3 variable pay and incremental spend. I'm just wondering what the return on that is as we think about the 4Q guide and we think about jumping off into '26, do that -- do some of those investments benefit you in '26? So any help on kind of unpacking those. And then I have a follow-up.

Yes. Thanks, Dan. So first of all, really committed to our long-term commitment goals around margins. And as the tariffs along with related logistics costs were the biggest single impact that we had in '25. And I want to kind of be clear that the headwind will peak in Q4 and the net impact in dollars will trend downwards at the start of '26, and we'll fully mitigate tariffs in '26. But to your question about the area, so it's higher tariffs driven by higher-than-expected volumes, incremental commercial investments and higher variable pay and equal measure. Let me talk a little bit about the commercial investments and why we're doing it. So you see the demand and the revenue as demand for the replacement cycles and our markets are going up. We've, of course, did a lot of work on our commercial org over the years and making it effective, but now is the time to invest for this demand that's going to go into '26 to make sure we can capture it and increase our market share, which we're already doing on it. So I don't know, Rodney, if you want to give any more color on that, but that's how it breaks out.

No, I think, Padraig, those are very good points in terms of why we were below our expectation for the quarter. When we look at it from a year-on-year basis, we were down about 230 basis points. Again, the big thing was tariffs and logistics-related costs associated with those tariffs. And that total to be about 200 basis points on a year-on-year basis. It was pretty significant. On top of that, we saw unfavorable -- we saw the effects of currency and also the effects of the BIOVECTRA shutdown. So when you look at all those pieces together, that's why we saw our operating margins decline about 230 basis points year-on-year.

Got it. Okay. I know there'll be a bunch of more questions there. But maybe just a second one, just on Pharma. Super strong. I think I heard NASD growing kind of north of 20%. So can you just unpack a little bit on what the outlook calls for NASD kind of in the back half of the year and as we look ahead? And then I know you gave some color on large pharma being strong, but it sounds like there's still some headwinds with biologics. Maybe just some more color underneath the hood, what you're seeing in Pharma and kind of how we think about the Pharma outlook from here.

No problem, Dan. I'll kick it off, and I'll hand over to Simon about NASD. So Pharma, it's our largest end market, grew 9% overall. Small molecule grew double digits. And that was really fueled by demand for downstream QA/QC and strong adoption and an increasing replacement cycle of the Infinity III, which is now mid-teens in terms of growth. And what we're seeing from the Infinity III is actually early adopters coming back for larger purchases, which is really positive. On the Biopharma side, we saw high single digits overall. Ex NASD, we were flat. And that's really around U.S. biopharma spending continues to be muted, which was expected. But what we're seeing really in the market is we're not seeing any concerns translate into negative impact around MFN or tariffs at all. But we have early indications of a standard year end in terms of customer spend in Pharma. So customer budgets have really started to normalize, and customers are asking for larger quotes to spend by the year-end. And if you think about the 3 major drivers in Pharma, really you're seeing 3 big areas. Global redistribution of small molecule supply chain, which is a net tailwind for us, which is really important on downstream. Manufacturing capacity investments, we're seeing that in Americas, Asia and in Europe, driven by blockbuster success in GLP-1s, et cetera, but also macroeconomic conditions. And you do see capital budgets in biopharma remain conservative with venture capital funding. But we do think over time, as interest rates come down, that will be released steadily over time. But on the NASD part, I'm going to hand it over to Simon.

Yes. Thanks, Padraig. I'd say for NASD, we were very happy with the quarter overall, and we continue to be very happy with the momentum we see for NASD, both as we move towards the end of the year and into 2026. As I think we mentioned in the script, we saw really robust revenue growth well into the 20s for NASD. It was also another really solid quarter with orders. And as we look at some of the macros that we're seeing out in the field as well, it was a very notable quarter in terms of some approvals and label expansions that we saw out in the marketplace, which really just emphasize the confidence that we have in this therapeutic modality and also our capabilities to capitalize therein. So as we put it all together, we're happy with the momentum that we have coming into the end of the year. I think we've said previously for the full year, we're looking at high single digit, nudging double digit. I'd say we're increasingly confident now where the double-digit full year outlook is concerned. A bit too early to call FY '26, but I'd say we're also sensitively confident about the momentum carrying forward there, and stay tuned for more over the coming weeks.

Our next question comes from the line of Tycho Peterson with Jefferies.

I want to probe a little more on the pharma comments, just kind of reduce dependency on sign-offs that you noted. I'm just curious how widespread is that. Is that globally? Is it CDMOs, just large pharma? And how much pent-up demand, I guess, do you think there is that could come through with this change in sign-off dependency?

Yes. No, we've really noted that across all geographies, actually within -- particularly within small molecule, but in large pharma, of course, small to medium biopharma is slightly different in that regard. But what we're seeing, Tycho, is really that replacement cycle that we've talked about. We've always talked about it being gradual moving ahead and people are releasing budgets for it. I would say the velocity has improved in that, and we're releasing larger quotes for the end of the year. So that always bodes very well for the end of the year. And when you have approvals not going to executive or even higher levels in the company that's given into the hands of lab managers or site managers, that makes a big difference in momentum.

Okay. And then a follow-up on PFAS. Was that a little bit softer in the U.S? I know you talked about it being up 10% overall, but it seems to imply that U.S. was maybe down or pretty soft in the quarter. I'm just curious if there's something going on there. Did you get that?

Sorry, maybe you can't hear me now, but I'll repeat that. So low double-digit growth overall in Q3, which is a solid result, 50% year-to-date growth. It remains a really strong opportunity. In Americas, we were down 20%, and that was really around the U.S. EPA changes that drove impact. No policy change that impacts the volume of testing, but uncertainty around CapEx spend and increasing clarity around the EPA changes will mean there's a little bit of a question over Q4 and Q1. But overall, I would say PFAS is going extremely well around the globe.

Okay. Maybe just one last quick one. The commercial investments that you flagged, when do you decide to move forward with those? And why weren't they baked into the guide?

Yes. So look, you deal with what's in front of you and where you see your momentum in terms of orders, and we had -- we spent many years transforming our commercial organization into one central area globally. We have a number of product launches that are coming out, and we are way ahead of our ramped up volumes, both on the Infinity III. And for example, in the Pro IQ LC/MS. So it was really a dynamic situation. And having come from commercial and experience over many, many years, you need to get investment in early when the markets start to come back and you have opportunities because it's a very competitive place. We want to gain share not only in our accounts, but in competitor accounts. And we want to continue to raise our ability to have technical expertise in the field to really help with that.

Our next question comes from the line of Rachel Vatnsdal with JPMorgan.

Perfect. I just wanted to push on 2026 expectations here. If we look at your fourth quarter guide, the midpoint really implies around like a 5.5% organic growth rate at the midpoint. And it looks like consensus is right around that number for next year as well. So can you just walk us through the moving pieces on 2026? Is taking that fourth quarter number and rolling it into next year, a reasonable starting point? Or are there other things that we should be thinking of?

Yes, I'll start off, and I'll hand it over to Rodney. I think, of course, it's too early to give out any detail on the guide for '26. But on the revenue side, let me talk about revenue and margins. Revenue in the second half of '25 was meaningfully stronger than the first, and that provided really -- that provides a really positive indication momentum into '26. While, of course, we need to remain mindful of the broader economic environment and more challenging comps, we do see this as a solid foundation for growth. And on the margin side, we've addressed many of the challenges in '25 and tariffs being the largest, and we expect harvest to be fully mitigated within the year and that should provide a tailwind. And of course, we have Ignite that's going to drive us forward on it. But Rodney, I don't know if you want to give more color around '26.

Yes. Yes, Padraig, I think you mentioned some of the tailwinds that we saw, particularly on the margin side, both as we continue to mitigate tariffs, we will see improvement from a margin perspective as we go into '26. I think the other thing is, as you mentioned, we'll continue to see savings associated with Ignite. One of the things we still need to be factoring in is what kind of cost increases we may be seeing from our suppliers. So that would be a bit of a tailwind that we're still looking at.

Great. And then just as my follow-up here. I wanted to ask around budget flush assumptions. Padraig, you mentioned a little bit how pharma companies are putting in some larger orders before year-end and that they have some more visibility on budgets overall. So are you embedding any budget flush assumptions into that fourth quarter guide? Or would that be upside?

Yes. So I think we -- what we're seeing is quotes actually at this stage, not orders for the end of the year and the early indication is that it's more of a standard year-end in terms of budget flush. And I think it's been quite a few years since we've seen that and everybody knows the history in our markets, but customers are starting to -- budgets start to normalize and seeing larger value quotes is what we've seen. And so we're guiding with what we see at the moment.

Our next question will come from the line of Michael Ryskin with Bank of America.

Great. I want to touch on Chemicals & Advanced Materials, really strong quarter there and kind of up on it being pretty broad-based. We've had some more mixed data points there. So that was a little bit of surprise. Could you just talk a little bit more about where you saw it geographically, sort of what gives you confidence that there was no pull forward and that's a little bit more sustainable going forward?

Yes. Thanks for the question. I think it's been fantastic in terms of growth, 10% growth in Q3, broad-based, 10% in Chemicals & Advanced Materials. And our strong position in our leadership in our platforms is really important and our really strong connection with customers. But really driven by 3 areas, I would say, in Q3. I think capacity growth from supply chain regionalization is very true for that market. Greenfield investments, by the way, in both broad Chemicals & Advanced Materials, and actually replacement momentum. We've often talked about this a lot that is not only LC replacement cycles that are important, but we're now starting to see replacement investments as we go forward on it. And it's driven, I would say, by the chemical sector continuing to lead by driving demand in downstream industries like semiconductor. And of course, energy growth in April, which is going to continue in the Americas, that's going to continue. So I think overall, I think we're really pleased with the results. We see that continuing, and we see that continuing, particularly in both of those areas as we go forward.

Okay. And then following up on Rachel's question just now and kind of taking it back to the margin topic. I know you quantified tariffs for third quarter. Could you remind us what the tariff hit is on the margin line for all of fiscal year '25? And then when you talk about fully mitigating for next year, just making sure the simple math is we're just kind of assuming that at least that much is how much comes back next year on the gross margin line. Is that the right way to think about when you talk about being able to offset for next year?

Yes. So I think you're thinking about it the right way. I think we focused in 3 areas on the tariff side with mitigation, leverage an existing manufacturing footprint around the globe, working with suppliers to relocate manufacturing locations to minimize tariffs and, of course, targeted pricing changes. And we see the most critical activities implemented by Q4 and ramping through '26. But the key element of our mitigation is that it will be implemented by the end of fiscal '25 and would ramp through '26. So I think, Rodney, I don't know if you want to add any color to that, but that's how we see.

Yes. I think the only other point, Padraig, is that, yes, we recognized about $35 million. We were originally looking at about $25 million in tariff costs in the third quarter. That's up about $10 million. And we expect the same level in the fourth quarter. So $70 million for the second half. And again, we have a lot of our actions. We are -- most of our planned mitigation actions will be implemented by the end of this quarter. And so we should start seeing that those -- the impact to our gross margins as we start moving into Q1 and through '26.

Okay. So $70 million for the year for '25. Thanks.

Our next question comes from the line of Patrick Donnelly with Citi.

Maybe to stay on that same topic there that Mike was on, on the margin side. I guess given that tariff piece, given Ignite, obviously, some temporary costs in this quarter impacting the margins. Padraig, I know when we've talked in the past, you've always going to say, hey, there's a reason we put the plus sign on the margin algorithm for the out years. I guess is next year setting up that it has that potential to be an outsized margin year given kind of the headwinds this year that will not recur next year. Just trying to frame that, if you are able to grow, call it, over 5%, it feels like it has that potential, but I just want to see if that makes sense and if you could throw some numbers around it.

Yes. Look, there's 3 really key tailwinds. I think Ignite continues to drive gains. We've delivered a lot of gains over it. Tariff mitigations will be higher and will ramp through the year. And the volume should be really a helper on it. So overall, I think we're in good shape. Of course, it's too early to guide on it and to say what it's going to be. But Ignite is there for a reason. We put out 100 basis points plus for a reason, and we still feel very, very good about that as we go forward. I will say also, if you look at Q4 margins, Patrick, it's something to be really clear about is that are expected to really increase versus Q3, where we're expecting a 200 basis point sequential margin improvement from Q3 to Q4 when Q2 to Q3 was flat. And that's going to be driven by leverage on sequential uptick in revenue in Q4, which we have a good line of sight of. And I think while the increase -- while revenue increased sequentially, the full quarter tariffs along with currencies were headwinds that offset against it and the incremental Ignite savings. But I think for next year, we're in good shape.

Okay. That's helpful. And then I guess maybe just in the quarter, what you saw on kind of the pricing side, it's definitely a question we get. I think people are just seeing the margins. I'm wondering if pricing is a part of that. So if you could just talk about what you saw on predicting gross volume in the quarter and expectations going forward, that would be helpful.

Rodney, do you want to take this one?

Yes, I'll take this one. Yes, we're actually starting to see some more movement in our pricing. And for the quarter, we saw about 100 bps improvement in pricing.

Our next question comes from the line of Jack Meehan with Nephron Research.

I wanted to ask about how you think the trade tariff dynamics are influencing your customer buying behavior. Last quarter, you talked about the $15 million of consumable pull forward, $15 million instrument push out. Did that play out as expected? And then just anything incremental that you saw in terms of stocking, destocking?

Yes. I mean, Jack, thanks for the question. On that side, nothing. We did talk about that pull forward in consumables last quarter, which worked itself out very, very quickly. And maybe I'll ask Angelica to add more color on this in a second. But we have seen no pull forward. We've seen nothing in terms of stocking. We monitor that quite closely. So nothing on that side. And I would say lab activity remains very, very strong. But Angelica, on the consumable side, maybe you can give some color.

Yes. Thanks, Padraig. And thanks, Jack, for the question. As Padraig has already said, we had the pull through in Q2, but we had mid-single-digit growth in Q3, which is no indication of any further pull forward. The lab activity we're seeing is continuing to support the demand here, no doubt about it. We had good growth across all of our end markets and across our regions. So we're continuing to see strong lab activity driving strong recurring revenue demand. And we expect that to continue.

And then an unrelated question. I was curious about the China diagnostics market, saw the reference to Dako ex China. Getting a lot of questions around VBP and DRG just for the universe, broadly speaking. Do you mind just reminding us what your exposure is to China Diagnostics? And what, if any, you're seeing in regard to those topics?

Yes. So I mean our exposure is very low in China in terms of diagnostics. It's a very stable business as we go forward on it. But Simon, do you want to give some color on the China story with VBP. We're not really being impacted by it.

I think the long story short is that we've seen minimal impact so far. As we look at our diagnostic tools in China, we do see some local vendors there. But where Agilent's products offering is concerned, we're really serving more advanced staining applications. And I think we've got a pretty esoteric product offering and menu there. So there's pressure, but I don't think we've really seen that trickle through in a meaningful way.

Our next question comes from the line of Vijay Kumar with Evercore ISI.

Congrats on a nice top line print here. Maybe on the top line question here. I think last quarter, in second quarter, there was some instrument impact, if memory serves me correct. Did 3Q benefited from timing element here on the instrument side? The sort of another related to the top line question is you mentioned tariff rate. When you say pricing benefit, are you including surcharges as part of pricing? Could that explain part of what we're seeing here in margins? How much of this core beat was a tariff -- surcharge related in the instrument catch-up from prior quarter?

Yes. No, thanks, Vijay. Just a few points on the instrument side. Firstly, I think we've seen a steady improvement in replacements. Total instruments grew high single digits. And LC/MS grew low double digits. And we're very, very pleased with LC and LC/MS growth and the Infinity III, of course, where we're seeing on the replacement cycle of aging fleets and of course, new sites. In terms of pricing and surcharges, that hasn't been realized yet. That takes a while to go through the system. We have a tariff task force that is second to none that's run through the Ignite program here where we look at data analytics. So we do it in a very structured way, but that takes time to go through. So we'll see those pricing in Q4 and '26 and beyond.

That's helpful. And off of the topic on fiscal '26 commentary. I think one of your peers, they sort of hinted at end market growth perhaps being in the low single-digit range and maybe with some share gains, perhaps pointing to like 4 plus. How -- like is that a reasonable framework on how we should think about Agilent? Or are there anything that's unique, whether it's your chemical exposure or China, anything that makes Agilent different versus how some of your peers have commented about fiscal '26?

Yes. Look, I think we feel very positive about '26 across all of our markets. You see the momentum this time through Applied and on the Pharma side, driven by the top line. We think we're going to see that continue over time. I think as you look at different areas, what makes us different, I think China, there's going to be a large stimulus order coming towards the end of the year. We've been highly successful in that in the past. We've kept very focused with our teams there. So we expect China to kind of continually improve through '26. And of course, that area is really important. And I think as well, CDMO mix is very different. 20% growth in NASD. BIOVECTRA, we prime the pumps for '26. That's going to be a high grower and some of the indications are really great on it. So I think that's really important. And you see our results in our Chemicals & Applied Materials. These are secular drivers where we have significantly high market share, and that's going to continue because of reshoring our fabs about where they're being built. Of course, battery investment in EVs technology, and that makes us, I would say, a very differentiated as well.

Our next question comes from the line of Doug Schenkel with Wolfe Research.

I want to start on guidance philosophy. So on one hand, I know you guys know that it's particularly important to set financial targets at levels that are especially derisked given how difficult the last few years have been across the tool space. On the other hand, you clearly had a lot of strength in the quarter, and you seemingly have really strong momentum heading into year-end. How do you balance momentum and strength with a goal of maybe skewing the error bars around your guidance targets to the upside? Maybe asked a different way, how would you describe your visibility on hitting these targets heading into year-end?

So heading into year-end, we have very good visibility. I think particularly on the order book and what we put out on our guide, both on revenue and margins. I think '26, we don't give out guidance, as you know, Doug, on it, but we do see that this positive momentum is not going to just stop at the end of '25. We're going to continue to see it. Now what that relates to guide and of course, a lot can happen between now and the end of our fiscal year in the macro environment, tariffs, et cetera. So we'll be giving guidance in the next half. But it is something we want to be as usual and Agilent. We want to be very clear about what we're putting out at the end of the year and it's clear and it's achievable and going forward on it. So we'll have more next quarter on that one.

Okay. And then the next topic I wanted to talk about is capital deployment. So I think your net leverage ratio was 0.9x, just under 1. How are you thinking about capital deployment? It seems like you're feeling better about what you can control and maybe even your ability to navigate some of the things that are outside of your control from a policy standpoint. So if that's right, how does that impact your thoughts on M&A and/or accelerating buybacks beyond dilution mitigation? And kind of related to that, how would you describe organizational readiness for something bigger given how many changes have occurred in leadership over the past year?

Yes. So let me talk about the last one first because I think it's a great point. If you see how Ignite is running Insight and about how we're being able to execute Insight, I think that has usages beyond Agilent if we do acquisitions in the future, whatever size they will be. So I think our readiness is extremely high on us. Our priorities are not overall changing, but we do expect M&A to be a more meaningful part of our capital deployment going forward. But I want to be clear on 3 things, Doug, is that it's going to be a disciplined approach that's going to be aligned to our pillars of our strategy. So you won't see a far distant areas that are not linked to the strategy. We're going to be focusing on growth opportunities. And of course, value to shareholders. So if you came into our business development sections, we have a small list of very high-quality topics we're talking about. But also internally, we're investing back in the business. We've invested heavily in digital this year, in a new CRM system, new online capabilities, and we're investing back in commercial that goes along hand-in-hand with that. So I think it's going to be a very disciplined approach, but we're ready as we go into '26. I don't know, Rodney, if -- okay, that's fine.

Our next question comes from the line of Puneet Souda with Leerink Partners.

First one, really on the momentum or a change in momentum if you saw that between July and August. You are clearly pointing to a strong book-to-bill for the last couple of quarters. But just trying to get a sense of if there is an acceleration in the near term. And obviously, you're seeing a normal budget flush replacement cycle is working. So I just want to get a sense of is there something you saw differently in August. And if you could double click on the Pharma versus the CAM side of the end markets where you're seeing more stronger pickup.

Yes. So I think we definitely saw a pickup and it's reflected, of course, in the numbers that we've seen. We've seen a pickup in quoting activity. We saw a significant pickup in replacement cycle, although it's gradual over time. We did see that in July and August that people are replacing their systems, aging fleets. And then, of course, this new greenfield opportunity that you see in both markets, Pharma and in Chemicals & Advanced Materials benefiting from that. So I would say that overall, really good. Our book-to-bill is greater than 1. That continues on that side. Our win rates are extremely good. Our market share gain, which is a little bit offset a few months ago, we're gaining across the board in all platforms and geographies. So it is positive. Now of course, people have quotes for the end of the year, and we expect -- we wait those quotes in terms of what we expect to come in and that's leading to more of a standard year-end CapEx early on. And just to finish off, I would say, if you look at Pharma and Chemicals & Applied -- Chemicals & Advanced Materials applied, it's actually the momentum in both of those major markets is pretty similar. You've got a replacement cycle starting on the applied side, probably a bit later than the Pharma side and then you're into -- well into the first innings of the replacement cycle on the LC side. So that's what we're seeing. But driven as well by adoption of our new platforms, the new LC/MS, Pro iQ and the Infinity III really making a difference in customer spending patterns.

Got it. And then just a follow-up on China. Can you just elaborate a bit on what you're seeing in the quarter in China in third quarter? And you talked about stimulus coming through. Maybe just give us a sense of the -- is that driven by more from quoting activity? Is that -- what gives you that confidence and sort of the magnitude of that?

Yes. So I'll start off and I'm going to hand over to Mike on the stimulus topic because he's quite close to it. So 2 of the largest end markets led the results in the quarter. We saw small molecule continues to grow. We grew about 6%. Biopharma grew mid-single digits. And we saw that through particular focus on innovative biopharma, right? So ADCs, oligos and GLP-1s. The CAM market in China grew low teens, and that was led in 2 areas. Petrochemicals continued to benefit from lower crude oil prices. So that's very beneficial to it. And with Advanced Materials, China continues to build out the domestic semiconductor ecosystem, which is really important. There is a new development within China where there is unleashing what is called a new quality product -- productive forces policy, which is around innovation and investing in innovation. And that's going to be launched by central government that's going to increase the pace of innovation across many industries. And we're extremely well poised to benefit from that because we've invested in a solution center and a lab productivity center that really fits in that. And we've actually seen some of the orders or quotes for that going out. But overall, I think China is stable. We see that kind of improving as we go into '26 because of those drivers. But on the stimulus, Mike, do you want to talk a little bit about what you're seeing right now?

Yes, Padraig. First of all, we have a very strong relationship and we are working with customers very closely to continue to support the customer as we prepare for the investment, and we continue to build strong funnel. Obviously, it takes time to materialize, but we're still very excited about the potential. And if you look at the track record, we have a very strong and high win rates. So we're very excited about that potential.

Our next question comes from the line of Dan Leonard with UBS.

My first question is a clarification on the pricing front. Rodney, I think you said pricing was a 100 basis point year-over-year tailwind. But Padraig, you also mentioned that value-driven pricing was double the impact of the prior year. So can you help me reconcile those 2 comments. I thought pricing might have been a bit better a year ago.

This is Rodney. No, it was about 50 bps last year year-on-year. And as I said earlier, about 100 bps this year.

Okay. That's square. And then just my follow-up question here. I don't think I've heard you talk so much about the replacement opportunity in the chemical market since the launch of the Intuvo and that was a very long time ago. So can you maybe help frame that replacement opportunity that you're alluding to, Padraig?

Yes, for sure. I'm going to bring in Mike here on the AMG side to talk about that.

Yes. First of all, as Padraig just highlighted, we have a very strong market share in this market, and we have a very large installed base. Intuvo certainly is a great innovation, but we continue to evolve innovation that we have from Intuvo. We continue to put that into the current platforms. And we are seeing a lot of momentum as you can tell because the customer continue to improve the productivities, they're embracing the new technologies. But I think what's more important, let me take the new GC we just launched as an example, like 8850 GC. It's a perfect replacement to advance the technologies and the productivity, sustainability that customers are looking for from us. So overall, I think you have to map our strong position in the market, our very strong portfolios, our continuous innovation. But what's more exciting is that we have a strong pipeline innovation to drive as this replacement cycle continue to accelerate.

Mr. Ahuja, I'll turn the call back over to you.

Thanks, Regina, and thanks, everyone, for joining the call today. With that, we'd like to end the call. Have a good rest of the day, everyone.

This concludes today's conference call. You may now disconnect.