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

I'm Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team based in New York. And for our next fireside chat, we're excited to host Agilent, joined by CEO, Padraig McDonnell. Padraig, thanks so much for being here.

Thank you, Mike.

Format will be same as usual. It will be a fireside chat. But if you've got questions, feel free to raise your hand, and we'll call on you.

Maybe just to kick things off here, sort of our standard opening question is, you reported fiscal 3Q a little over a month ago. You're most of the way through the year. Can you give us a high-level overview of sort of how you've seen the year played out so far relative to your expectations? What surprised you to the upside versus maybe what's kind of a little bit softer?

Yes. I would say at a high level, we're very pleased with the execution of the team through the year and in Q3, I think underpinned by some really important product launches, the Pro iQ single-quad, the 8850 really resonating, and of course, the Infinity III replacement cycle. So I think overall, I think very, very happy with that. Again, our services business being really critical. Our connection with customers around services or satisfaction around services helping to underpin the performance. But really kind of 4 key areas, I would say, the CDMO business really back on track. The pharma replacement cycle, GC replacement cycle, I think, going well. India doing well as a geography. But overall, I would say, the start of a replacement cycle across our installed base, good execution around that and sentiment improving. I would say, if you look at the quarter, where I thought was a very positive result was in the Chemical and Advanced Materials, where we grew 10% on both sides. It shows the diversity of our business, right? So pharma is 50% of our business, both Chemical and Advanced Materials, and the Applied Markets, where there's a lot of secular growth drivers is very important. And we saw a really excellent execution on that business. And just to kind of level up, our new group structure kind of -- it really mimics the market view of what we're doing on it. So the AMG group is overlapped with our applied businesses. So that focus is really paying off given the drivers in those markets.

All right. That's great. You touched on a lot of points there I wanted to hop on. Maybe first, let's just start with that replacement cycle. You've talked about it a number of quarters now. I feel you really picked it up starting in the Analyst Day and in the quarters since then. Can you talk about how Infinity III is doing and how that's sort of maybe helping drive the replacement cycle a little bit, especially we'll start on the pharma side.

Yes. So the Infinity III is out a number of quarters now. And again, we talked about a steady replacement cycle starting, and I think that's what we're seeing play out. The Infinity III, we did see a lot of deals early on where 2 or 3 systems were purchased. Now customers are coming back for multiple systems, 10 to 20 and above. And it's really playing out because of the productivity gains with the system, we can say a 20% improvement in productivity, and it's really resonating with customers. In the quarter, LC grew mid-teens, and that was driven by the Infinity III. So we're very pleased with how it's doing. I wouldn't be expecting every quarter is going to be exactly the same, but the order book is looking strong. And I would say the velocity of how pharma are approving orders has improved, right? So before, in some cases, you used to have a CEO approving -- CEO level approval for CapEx. Now we're seeing client level approval or even lab level approval, which really helps. So I think overall, very pleased with it. And then LC, of course, is the critical component around replacement cycle, but we're seeing the start of a replacement cycle in our chemical business, particularly around the 8850 GC. And then -- yes, so I think you're going to see that play out over the next few years as well.

Okay. Sticking with that pharma comment, how broad-based is it? You mentioned a couple of customers really scaling up. Is it concentrated in a handful of players? Are you seeing it across the spectrum? Just because we've seen still relatively mixed data out of pharma more broadly in terms of spending levels and decisions this year?

Yes, it is a tale of 2 cities. I mean our biopharma number was -- we were ex NASD flat in biopharma. And that's the small- to medium-sized biotech. It's very constrained. If you have a molecule and you have funding, you're in good shape. But if you're looking for more funding, it's a constrained area. But where our sweet spot is in pharma, QA/QC downstream, that's where we're seeing the largest replacements, which it should be, right? That's where our largest installed base is. So that's where we see the installed base being replaced at the moment. And we continue to see that with a number of drivers. Of course, reshoring in a few years, we expect new business from that, incremental business from it. But the pharma dynamic, if you think about small molecule or you think about manufacturing QA/QC, what's driving this business at a macro level is that you're seeing consolidation of supply chains in region for regions. For example, last quarter, in Europe, we grew 15% in small molecule. And that's kind of consolidation of the supply chain, but also capacity around some key therapeutics, ADCs, oligos, GLP-1s, there's capacity constraints. So people not only are replacing their fleets, but also expanding in a number of areas. And we think of greenfield sites just not as a new site, but also an expansion of the site that can happen. And that's happening as well, which is driving the pharma business.

Can you put this replacement cycle in context with prior ones just in terms of the duration you anticipate it could take? How much could it really boost the top line? Just talk about how far into it are we?

Yes. I would say we're very much in the early stages. We expect that replacement cycle to continue over the next 2 to 3 years. 3 years, I would say, is the average. And of course, it continues beyond that, but the ramp-up through that, I think, the next 2 to 3 years. And if you think we're mid-single digits generally in pharma, you grow a bolt-on in the instrument side when there's a replacement cycle because the opportunity is there. And what's kind of very interesting for us is that you have 1,100 LCs out there in some cases, 1,260 is Infinity II, Infinity III is backward compatible from a method perspective with all of those. So it means the friction of change is low, right? So the method development on it is lower. The regulatory requirements are lower. So I think you expect that over the next 3 years, you're going to see that.

Okay. And then your comment on moving away from sort of CEO or C-suite level approval more down to the plant managers. Again, is that pharma getting more comfortable with MFN risk and tariff risk current environment? Is that something about maybe age of fleet is getting a little bit older and they're kind of -- they're desperate, they can't wait anymore. Sort of what's driving that change?

Yes, it's all of the above. I mean tariffs -- pharma were past tariffs way quicker than you would think. I think they had it assumed in their models. They're making a lot of no regret moves being in region for region. You see that with the announcements on the reshoring. So I think that carries. The MFN, I think, was a big topic, but again, it's pretty muted at the moment. We don't hear about it from our customer side to have it fairly well baked in and an aging fleet. You put it all together, at some stage, you're going to have to release the budgets. And downstream is important to pharma. Having productivity in your labs, having your capability and manufacturing to deliver is really, really important, and that's why we're in the sweet spot where we can really have.

Okay. I want to come back to CAM and the GC replacement cycle later, but maybe on the topic of biopharma, can you talk about BIOVECTRA and how that's done? You're a little over a year, ownership. Just the progress you've made in that business, looking back on the first year, how has it gone?

Yes. We're really pleased. I was there 3 weeks ago in Canada with the teams. And of course, it takes a few months when you acquire a company to get up the standards to be crossed, but really complementary capabilities from NASD. They have strong microbial fermentation capacity, which is very important for new modalities. Sterile fill finish, which is another area that's important. And of course, they're right in the sweet spot of GLP-1 production. And so we reviewed it with the team last week. We're very happy with the year and how it's gone. We had a delay in Q3 because of a reconstitution of our production line that was very welcome, because it ups our capacity for '26. So we're very -- I think the pumps are prime for '26. We have a very strong order book. And I think we're right in the right area. So we're very pleased with BIOVECTRA.

And on the topic of capacity expansion, you've seen a number of pharma companies make commitments to capacity expansions in the U.S. in the last couple just days and weeks, literally had an announcement about API manufacturing in Houston. There are others in North Carolina. So yes, what's your involvement at those stages? And when we think about reshoring, can you talk about how that impacts Agilent and where you would stand to benefit from that for pharma specifically?

Yes. I mean I've seen this 15 years ago in Ireland, when I was in Europe, where you see reshoring in Ireland pharmaceutical production. Generally, the topology of how this works is you have greenfield sites that people break ground on. You're working with the construction companies. The project management companies are engaged. Generally, from the announcement from the start, it's probably 2 years before we see the orders. It could be 18 months, but 2 years is probably the median. So what happens is labs are planned in these sites. Then we're brought into how you set up a lab, how do you make it an effective lab with your equipment. Vendors are brought in. Then you have an opportunity to talk about why you're different with your services and enterprise services going forward. So we expect to see that within 18 months to 2 years, and that will be a significant tailwind to us because we're in downstream.

One thing we've really struggled and had a number of debates with investors on is whether these announcements are truly incremental, or whether it's, a, things that we're going to get done anyway and now are just getting a bigger press release; or maybe they would have been done in Ireland or the U.K. or India and are now being moved to the U.S. and net-net, the dollar amount is the same. What's your take on that? What do you see from the pharma...

Yes. My feel is that it is incremental. It's not a replacement per se of, say, we're going to take down in Europe and we're going to move it to the U.S., but it's going to be both. Of course, you're going to get maybe a different dynamic with CapEx in some areas in different geographies. But I would say it is incremental by the very nature of it. And talking to some pharma CEOs, they want to be in region for region and they want to be close to our customers. So tariffs or no tariffs, these are no regret moves. And of course, bioprocessing, you probably see the CapEx on that a bit earlier, because it's more upstream in the manufacturing case on around biologics. But I think we're going to see a net benefit from it.

And again, for you, the benefit will primarily be HPLC...

HPLC, a number of our other platforms, spectroscopy platforms, molecular spectroscopy. Then, of course, we have our services capability. Like one thing that's probably not well appreciated from our service business is that we have lab-wide enterprise services where we run labs where we actually look at the productivity of labs. That's super important as you're setting up these new sites. And I think also we have a lot of relocation capability, so we can move systems as needed, requalify them, get labs up and running, and that provides a lot of benefit to our customers. But we have a strategic account program within Agilent. It's pretty unique. So we have a high-level team that works directly at high levels with our global companies, and they're really critical in this moment of looking at where the investment is going, what are the modalities going in and then how do we follow those modalities with our workflows.

So putting that together, are you at all surprised that you're seeing such a significant upgrade or replacement cycle in HPLC ahead of the reshoring. So there's going to be a replacement cycle for 2 years and then a reshoring cycle?

Yes. No, look, I mean, I don't think I'm surprised by it. It's a normal start of a standard replacement cycle. So you would expect that because if you have labs with aging fleets in Asia or in Europe, they have to be replaced and they have to -- and I don't think it's predicated on this reshoring that anything would change with that replacement cycle.

Okay. And then maybe pivoting to GC and CAM. I mean, first, on CAM overall, like you said, that was probably one of the bigger surprises in fiscal 3Q was the strong result there. I think especially because we've seen a little bit more mixed data points from some of the other companies in the chemical space. What drove that outperformance? Was anything that stood out to you? Just talk about the results.

Yes, I can go through that market. So first of all, I would say execution by our team, right? I mean, it's easy when things are improving, but execution, particularly around Ignite helping with that. And again, I talked about our AMG business looks primarily at our applied markets, so our focus makes a difference. But if you look on the Chemical side, we grew 10% in the Applied Materials side, we grew Applied Markets. Advanced Materials, we grew 10%. But let me talk about both of those. First, on the Chemical side, you're seeing a lot of, in their way, like supply chain, making sure they have the right capacity in region for region. We have by far the largest market share in that business. So the replacement cycle kicking in as well. And you can see some of the monetary policies in China with the price of crude oil that drives CAM and the chemical business in China. And again, what is the downstream need from the Chemical business? It's supplying in semiconductors, it's supplying in chips, et cetera. So there's a downstream supply from that. So very pleased with that, and that's a sweet spot for us that we continue to see will improve over time. And on the Advanced Materials side, there's a number of particularly idiosyncratic kind of tailwinds in there for us, semiconductor and high-purity chemicals around semiconductor, you can see from a geopolitical standpoint, fabs are being created in region for region. Even I was in India 4 weeks ago. They're talking about setting up fabs there and high-purity chemical infrastructure around it. So that's driving a lot of business for us, and we have a very high market share on our atomic spectroscopy portfolio there. And then, of course, sustainability and batteries. That has been a big grower for us. It continues to grow across the globe, and we continue to see that very important, both from an R&D perspective, but also from a production perspective.

Okay. Can you talk about the GC replacement cycle? The 8850. I mean, I feel like the last time we really talked a lot about GC replacement cycle was 2016, '17, '18, it's been a number of years. But sort of frame that in context of what you would typically see in LC and what you would expect there.

You've got a good memory on that one. That was probably Intuvo at that point. Yes. So the 8850 is really resonating for a number of reasons. It's a small form factor GC and actually with the same workflow that was there. So you can get 2 into 1 place in a chemical facility. It also has 30% more efficiency around power, and it's got a lot of smarts in it that was used in Infinity III. So we can predict when failures will arrive. And you can imagine in a refinery, knowing when things are going to fail, you need to know in advance to continue the production on it. Very early stages. I mean we have a huge installed base on us. GC replacement cycles usually go across -- in general, go across 10 years versus the median of what would happen in LC is around 7 years. So we have a big opportunity. It's going to be a slower momentum, but we were very pleased to see the funnels, by the way, and also our performance in Q3 and see that start off.

Thinking about the installed base, sort of framing that opportunity, can you talk a little bit about sort of the size of that base, how much of it is amenable to upgrade? I think when we were doing the math, the last replacement cycle, I think we kind of came to like 1 point, 1.5 points of growth upside versus sort of the steady state model. Does that still hold?

Yes, I think that's a good way to look at it, 1 point to 2 points of growth on the upside. We don't give out the specific amount of systems we have out there, because we want to keep that proprietary, but we have a very broad installed base, a lot of different types of systems, 60 at 90, 60 at 50s, and it's very broad-based. And I would say we have a deep connection with these customers. People think it's just the GC that goes in, but we work with a lot of VAR partners, which we call value-added resellers that actually do a lot of customization around refinement. And that makes us very, very sticky with customers. And of course, then from a replacement point of view, that's very important too.

And when I think about GC relative to LC or HPLC or UHPLC, we tend to think that GC is a little bit of a more mature technology, and it's harder to make improvements from system to system. You mentioned the form factor of the 8850 as being advantaged. Anything else you can talk to that differentiates that platform in terms of what's going to incentivize, sort of drive the customer base to upgrade?

Yes. I mean the need in the analytical lab from a user perspective, and it's the same in the chemical industry is people do not want to be involved in the technicalities of the system. They want to have a plug-and-play system, but also to have smarts in the system to say, right, what is possibly going to go wrong? When do I need to change my column in advance rather than fail and then change it? And how do I make sure the uptime of the system is -- so again, overall productivity. So the same smarts that are in the Infinity III were used in the electronics of this 8850, that's really important. And people are really interested in energy consumption within that space. So we can do a 30% improvement on energy consumption on these large fleets, which really helps people with their sustainability goals and also is a differentiator from the competition.

Okay. Maybe I want to hit on a couple of individual points of NASD. You've talked a number of times about capacity expansion there. It's been a little up and down in the last couple of years because of some specific commercial programs. Could you give us an update on your mix there, your exposure there? And seems like you're still hitting a bit of a steadier patch as you exit the year. Early thoughts on '26 visibility there?

So we saw 20% growth in the quarter. We're very pleased with that. And if you go back to some -- where we had some, I would say, more softness in the business was really around pharma companies with true IRA looking at their clinical pipeline and moving that to higher indications. But the oligo capability we have there is right in the heart of siRNA platform in terms of our customers. And I think if you look at the number of the disease states, number of the indications that have been announced have been really, really positive this year, and we're a key partner with a lot of those companies. We expect to end the year with probably 60% clinical, 40% commercial, which is a nice healthy mix as we go into '26. And for '26, we have it more or less fully booked for '26 from customers in terms of capacity. So our new capacity will be coming online at the end of '26, at the start of '27. And that's a really important capacity expansion given the momentum we see in the business. So we're very pleased with it.

Can you talk to how much of that future capacity is prebooked or sort of customer-specific allocated versus negotiations that are still ongoing?

Yes, it's still ongoing. I think we're actually booking into '27 now, and that capacity is a factor in that booking, like people want to see what you can do in those areas. Those conversations are going on now.

And you mentioned the 60-40 clinical commercial split. Anything you can talk about derisking that if programs fail or reprioritize? Just maybe if there are take-or-pay contracts or just sort of how much the backlog there is?

Yes. Look, we have a very strong backlog, and we have very good contracts around that business. So when we go into the business, we expect to see the volume from that, and that has played out. I mean, with the exception of the reconfiguration during that IRA change. So I think the backlog is there. There's always clinical areas that maybe don't come to fruition, but that's the normal case of the business. And that's why having a good, long, broad range of clinical batches going through is important, right? And then getting them into the commercial batches is a normal state. So I think we feel really good about that. And I think 60-40 is probably the right way to think about it for the future. It might be a little bit bigger on the commercial side, but I think we're feeling good about it.

Can you talk about maybe now that you've brought BIOVECTRA on board as well, between NASD and BIOVECTRA, sort of what are the opportunities you're seeing leveraging the 2 businesses?

Yes. I mean, oligos, APIs, I mean, sterile fill finish is really important, BIOVECTRA that has some usages with it. Actually, customers, we have now dual customers that are giving us business on the BIOVECTRA side and on the NASD side. So it broadens our CDMO, I would say, reach. And also having the ability to do ADCs in BIOVECTRA and building on that capability is really important. And the regulatory nature of the business and I would say the operations around it, we have a lot of cohesion now having 2 businesses, we have it at the same standard. We get economies of scale through that through the regulatory side, et cetera. So we're very pleased with the complementary side of it, and it's actually under the one leader. And also the commercial side. So the commercial motion in CDMO is completely different from the analytical lab, right? It's very consultative. You're working with your pharma partners for years. You know about indications before the world knows about it. So you're kind of co-creating in a space that you're a critical part of that supply chain. So having the commercial groups under one leadership now that we can expand allows us to get more funnel in, quite frankly, on both sides and allows us to capitalize on that model.

Maybe we haven't, I mean, I think, we touched on China yet. Can you give us sort of your latest thoughts on what you're seeing there from a funding perspective, maybe from a stimulus perspective? And just sort of how is that market recovering after the last couple of years?

Yes. I mean let me talk about China as a market in general. We had a really solid quarter. Again, we were mid-single digits in pharma. We were mid-single digits in Chemical and Advanced Materials, actually high single digits on that side. And if you look there, you look at the pace of innovation in China, particularly in pharma, the number of licensing that's coming out of China, it's like $50 billion this year. It's double what it was last year. 30% of the global molecules that are coming out are Chinese. So there's a high innovation momentum there. So I think the baseline is really stable. We expect that to improve next year. We expect China in the long range to be mid- to high single digits, and I think next year is that year of improvement. I'm leaving stimulus out now, Michael, but I'll talk about that in a second. And then the Chemical and Advanced Materials side, again, semiconductor is, of course, really important in that market. We saw also the Advanced Materials battery part of that market really performing. And now the chemical market, that replacement cycle, we saw that in this quarter. So we expect more from the chemical side. And again, our deep team relationships, our longevity in China, our understanding of the market, and we really kept a high technical expertise in China underpinned with manufacturing in China for China has met us -- we're really well positioned to capitalize on that market coming back. And let me talk about stimulus. If you look at the last stimulus, that was a $70 million opportunity. It was on the customs side, we won 50% of that business. The next stimulus is much bigger. It's $140 million. I wouldn't say that 50% win rate, because it's broader, et cetera, but we expect a good win rate from that business. And the stimulus as well creates momentum in the economy, particularly in our space. So we're feeling good about that. And there's a lot of new things happening. We're talking about a free trade zone around biopharma in one of the cities on the 2-tier cities that have been set up, which would be beneficial to us. And then you see the normal production inside with WuXi, et cetera, doing well. They have aging fleets, the replacement cycle will need to happen on us. And there's a big new government initiative around technology and productivity. So automation and productivity is going to be a bigger story in China. And we've set up a small group within the Shanghai facility to tap into that innovation and co-create with customers, and we've seen quite a bit of business on that automation side for the analytical lab so far. So overall, I would say, stable and improving.

Okay. I mean on the topic of the investments in automation productivity, the innovation in pharma, can you talk about sort of what your win rate is among that or how you feel you're positioned there? You touched about China for China. We keep hearing increasingly that maybe there is the long-awaited China moves, the local vendors and U.S. vendors are phased out. It feels like that's sort of an overhang every year. I mean not any change there in the current environment?

I mean that's something we've been quite -- to be honest, we've been watching for a decade, local Chinese competitors. We see it in our CRM. We look at it in our win/loss rates. Maybe if I give you a pareto on the first stimulus order, because we saw the quantitative data out of that, 10% of that stimulus was won by local Chinese competitors. And it's usually on lower-end equipment, you see it on GC molecular spectroscopy equipment. So they're competing, right? And we compete with them. But we haven't seen any big jumps into the broader range of the analytical portfolio. And I think there's a number of reasons for that. Scale matters, right? So your service scale in the country, your scale in R&D, your technical capabilities matter. And diagnostics is another side of the story where you've seen a lot of Chinese competitors up and take a strong position in it. But on the tool side, we haven't seen that jump. And of course, we have a lot of huge amount of SKUs. It's a broad business, and it's not a very high volume business per se, what you would see in other areas in China. So we feel that it's probably going to remain around the same format for the next few years at least.

We've got about 10 minutes left, so a lot we want to cover. I want to pivot to Ignite. You've been talking about Ignite more and more. Obviously, a major focus. Can you talk about what you've been able to achieve so far sort of in terms of the low-hanging fruit, how do we think about it playing out over the next 2 or 3 years?

Yes. So it's a 3-year program, and it was set up really to look at how we could improve the company across all areas. So there's like we have 12 work streams in Ignite. We initiated 6 this year. I'll go through some of them. We looked at our spans and layers. We looked at our organizational footprint. We took out $80 million of cost there by taking out layers and also getting our span of controls correct. And that's been a massive benefit for the company in terms of speed of decision-making and how we're moving forward. We've moved from 21 product lines to 6 groupings, which allows allocation across R&D in a much better way. So that's a fundamental change. We also saw a really great benefit initially from indirect procurement. We took $40 million of cost out of that in 2 months. We're now moving to direct procurement. And if you think about the tariff situation, we had already started talking about our supply chain and our footprint. So we're well on our way through Ignite in mitigating all of those things. But Ignite is as much about investment as it is about cost. So the margin flexibility, we've been able to invest heavily in our digital programs this year, particularly around our website and our CRM, which is really important. We do $1 billion of digital. And I think supporting that over the next number of years is really important. And I think now we're kicking off a number of our new work streams, one around innovation, where we want to be more asymmetric with our innovation dollars, making sure we don't have a long tail of innovation that is taking away resources from some of our bigger platforms to accelerate it. We have a new CTO, August Specht. He's in place. So he's working with the presidents on this innovation side, and that's really increasing the pace. But -- so it's really changing how we're working as a company. And you see our execution in this quarter largely has to do with a lot of the new Ignite modalities that we're bringing in and expectations. And of course, we see tariff shocks that come in. We see higher variable pay in the quarter. We see all of these things. But Ignite really allows us to deliver on that over the long term.

All right. I mean, on the topic of Ignite and tariffs, I think we talked about in 3Q, there were a lot of positive surprises, GC, pharma, replacement cycle, NASD. But I think one of the more disappointing parts was margins kind of come in a little bit lighter despite that top line and the volume benefit. Can you talk about what impacted margins and how that played out in the third quarter? What gives you confidence in the 4Q margin ramp and sort of what the right jumping off point for 2026 is from there?

Yes. So first of all, we're very confident in the ramp in Q4. We expect 230 basis points improvement from Q3 to Q4 margins. So we're confident on that side. There was really 3 factors that caused the margin impact, I would say. First of all, the tariffs, higher-than-expected tariffs in Europe. And we were well on our way of moving supply chains to America for LC business, which our production was largely in Europe, but now we have production set up in Delaware. But of course, building inventory around that and of course, getting that set up with a high impact on that European tariff, which was more than we expected. Variable comp. We were pleasantly surprised by our top line as we went through the quarter. The quarter was -- first month was good, second month was good, third month was good. So the variable comp is how we had to accrue that, had to be accrued in Q3 and will be accrued in Q4. So that was something that wasn't expected on it. And then we had things like the BIOVECTRA shutdown, which was a very positive shutdown because of the capacity expansion. That had an impact in the quarter on margins. But we expect Q4 to deliver what we said we would deliver on it. And in terms of our long range of 50 to 100 basis points plus, we're not going to guide next year. We're going to guide our next quarter, both top and bottom line, but we're very positive about that margin expansion over a number of years going forward.

So that 230 bps quarter-over-quarter from 3Q to 4Q. So part of that -- in terms of what's underpinning that, part of that is the BIOVECTRA filling out, and then tariffs, you're going to start to have a better handle on that.

Yes, surcharges on the -- yes, surcharges will take a while to kick in because of the nature of quoting and so on. So we'll get a benefit from that. And then, of course, the top line leverage number, the number on the top line driving margins as well. So that's where we expect to see.

Can you break down that 230 bps? Roughly, how much of it is coming from which part?

It's probably 1/3, 1/3, 1/3 is the way to look at it in general and all of it contributing. And next year, tariffs is going to work itself out. I think by the end of next year, we'll be completely annualized with it. So...

By the end of next year. So there will still be a gradual effect?

Yes. I mean as you see, if you go into Q1, you have some resonances from the previous quarter and what you saw in the last year. So it takes over time, but it gets less and less and less through the year.

I mean, you just mentioned tariff surcharge. Maybe we talk about price here. You had a nice price tailwind in fiscal 3Q. What are your expectations on price in 4Q ex surcharge, and then again, longer term in '26 and beyond?

Yes. Longer term, like we expect 100 bps of pricing a year -- improvement a year. And the pricing was really an Ignite work stream where we were looking at pricing fragmented across the company. Now we look at it on an enterprise basis. And it really allows us as we sell multiple products into a customer to optimize our pricing. So it's about 1/3 of the mitigation in Q4, and we expect it to continue into next year. So I think pricing, we have room for improvement, and we've seen that improvement start.

Okay. I want to make sure we touched on M&A. You've been talking about it a little bit more and more, obviously, and a couple of other smaller deals over the past year. It seems like there's a lot of opportunities out there and the balance sheet is in a really good place. So could you give us an update on sort of your latest thinking on capital deployment and M&A? What are you targeting? Where do you see opportunities in the market right now in terms of dislocations?

Yes. So first of all, I think you're going to -- the targets that we look at is a very smallest of high-quality targets. It's going to be linked with our strategy. If you look at our overall strategy about faster-growing markets, increasing the pace of innovation, automation, productivity and faster-growing markets, parts of our markets, really addressing that in adjacencies is important. But we're going to be very disciplined around it. We've looked at a number of deals this year. We said no to those deals. Some of them were a strategic fit, some of them weren't, but the financial profile has to make sense. And I would say the one thing that's going to be really impactful for future M&A when it does happen is the Ignite Transformation, right? So you look at the cost synergy element, how Ignite has been able to take out significant costs within the company as a really deliberate engine. So I think that capability lends itself to M&A going forward on it. But you're not going to see any surprising shifts. And in terms of size, I get asked this all the time about the size. It's not really about the size. It's about the profile of the deal, the financial returns we get on the deal and where it's going to bring -- from a total shareholder return point of view, where it's going to bring us.

Would you be willing to use equity or just sort of how high would you be wanting to lever up just in terms of...

Yes. I mean, look, our balance sheet is in great shape, and it depends on what the situation is, whether it's equity or not. And of course, there's a lot of talk about that currently given some other deals that are going on in the environment. But we're very focused on our -- we're not focused on what we're going to do in M&A and not getting over our skis in any different areas of it. But like our leverage, we want to remain investment grade. Our leverage can probably go up to 3 easily on that side, and we continue to look what we need to do.

Maybe rolling it all together as we kind of sit here, towards the end of your fiscal year, looking forward to next year, a lot of moving pieces in terms of BIOVECTRA turning organic and some of that capacity coming online. NASD, we talked about, replacement cycle in LC, GC. And then on the other hand, on the margin side, and some of the tariff effects. What are the key moving pieces as we get into fiscal year '26, again, maybe not a specific guide, but just sort of keeping in mind as we update our models to get to next year, tailwinds, headwinds, puts and takes?

Yes. Look, I think we expect to finish the year strong. And next year, we continue to see improvement. I think the big area that we continue to look at is the continuing spend from pharma. It's over 50% of our business. So continuing to see that. And there is nothing that would say it's changing, but we're seeing that gradual improvement. Of course, the Chemical and Advanced Materials is going to be really important. And as PFAS, I think, settles out in the U.S., we had a temporary blip in the U.S. given the EPA reconfiguration. I think that's going to be a huge growth driver for us next year. So there's a lot of positives. On the negative side or the watch areas, again, geopolitical shifts, some shock in the systems that we haven't seen, but I think we're very resilient around that. And compares are going to be tougher as we go through the year, but I believe we're going into the year in a very positive position. And we're very confident in our long-range growth plan of 5% to 7%. I think next year is going to be on the lower range of that. We're going to build up as the year goes on and beyond that, but we'll be giving out guide next quarter.

And then if there's any questions in the audience, last chance. But otherwise, our standard closing remark, what do you see as most underappreciated or misunderstood about Agilent? Any misconceptions you want to clear up or just sort of takeaway messages?

Yes, we're going to be doing more detailed deep dives and things, like I think the CDMO business is always, I think, a key area. Our services and our commercial connection with customers makes us really unique. The scale of our service business and the way we have commercial under one organization makes us very unique. And our investments in digital are going to really pay off in that going forward, not only for us, but in future expansion areas. And I would say the Ignite transformation, we've been able to withstand a lot of shocks this year through it, but it's changing the company in terms of how we're executing. That execution is coming through in the numbers. And I think as we go towards the end of the year, we'll be talking more about the delivery on Ignite and what's coming on it.

Thank you so much, Padraig. Thank you so much for all there.

Thanks a lot. Appreciate it.