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

All right, I think we can look to get started here. So thanks. Thanks, everyone, for being here. I'm Patrick Donnelly, the Tools and Diagnostics Analyst here at Citi. Happy to have the Agilent team. We have Tom Callihan, the Chief Transformation Officer and then Tejas and Mark from the IR team.

So maybe, Tom, just given your seat, maybe we can start with some of the Ignite pieces. [ Porex ], obviously, made a -- given us some detail on that piece. It's been a pretty big change for the company. I think we're about a year in at this point to some of the Ignite transition, some of the reorganization. Maybe just talk about what you've seen so far? What are some of the key things you're implementing and certainly have some specifics on it as well?

Yes. I think if we take a step back, as you indicated, it's been a year journey, but we've really, really been executing it for about 6 months, right? And so -- because the first 6 months were about planning, scoping and things like that. I think if you think about the broader change in the organization, I think the one thing that's materially changing the organization is really the need to change. And the fact that an enterprise approach -- the company has historically made a lot of its decision-making at a bottoms-up, start with the product lines and move up into the divisions. But it was important with Ignite to start showing the benefit of actually taking an enterprise approach to decision-making, whether it's the pricing part about it, whether it's looking into the NPIs across the organization and -- which we have a very long tail of and start doubling down on the most material things to the customer that create the biggest value. Those have made big changes to the organization. And one of the big mindsets is that we started out 10, 12 projects, and they're enterprise projects. They're work streams, whatever you want to call them. And then all of a sudden -- and it became -- it was a little bit of a push and prove it. But what's really happened over the course of the last 6 months, in particular, once we started executing things, getting results, people are seeing the differences in what they do. Then now that people are coming to us, right? And so instead of the push out, it's more like, hey, we've got some ideas. We think enterprise approach will work good for this. That's how, as an example, we never started out with the tariff as a work stream, but that came in front of us. The AI opportunity has evolved over the course of the year. So what we're having is a situation is instead of us come up with the ideas, it's actually the organization really coming forward with us, and it's a good indication of how they've embraced it.

Yes. And to your point, I mean, it's -- I think you guys have talked about this 12-pronged approach, I think 6 are in motion. I guess, what are some of the biggest changes you've seen? And what are maybe some of the ones still to come that you have an eye on?

Well, the whole idea was to really have a balance, right? When we started out, this was interesting, the importance of Ignite and transformation wasn't going to be a 1-year journey. And it's really going to be an operating model going forward. And so what you didn't want to -- what you wanted to do is have a balance of, what I'll call, quick wins, funding the journey, however you want to call it, and then, work on fundamental investments, right? And so the initial things we started out with where we've seen better value than I think in a lot of cases than we even expected is, as an example, in our -- because we wanted to start Ignite and transformation with the top line growing, the customer and then the operating margin and the operations improvement. And I think that's really important because I think when people start thinking about transformations, they usually go right to the cost line. I think it was really important that this became driven by the customer, top-line growth, and then, obviously, there was operating margin improvement. And so we did have a focus initially on pricing as an opportunity. As I indicated, historically, we do some bottoms-up pricing, almost at a product code level, right? But that's not how the customer views us. The customer views us as a total solution, where they're buying the services, the consumables and the instrumentation and the software. So taking a more strategic approach to pricing and valuing what really matters to the customer and having it market driven is -- instead of doing kind of these peanut butter spread pricing changes that we've done historically, I think, has made not only an impact on how we actually price it, but it's actually really connected with the sales teams and the commercial teams because that's how the customer views it, and our pricing opportunities are really in the areas, in particular, where the customer were driving the most value and productivity for the customer. So it works out very well.

Yes. And you mentioned the tariff piece, and that was, I think, where Ignite really kind of showed some promise is a very quick reaction to the tariffs, the mitigation side. Maybe talk about how you guys approach that? What advantages you had because of where Ignite was? And how you're mitigating the tariffs overall?

Yes. But what we did -- what we realized when we first started out with the tariffs is one benefit we had is that we had large manufacturing areas and sites where our largest customer bases are. So whether it was the U.S. or Europe or China or Asia outside of China, we had a big advantage we thought to at least having locations closest to our largest customer base. So it allowed us to kind of quickly understand that if you focus on your major products, your large instrumentation, your LCs, your GCs, your columns, you'll focus those and move those around the world, and we really obviously developed capability around the world to kind of manufacture the same products in different locations around the world. And what we did is -- what we didn't realize is it -- because it wasn't quite as incremental as you would think an additive work, we actually leveraged a lot of what was going on at Ignite because Ignite had already been going through the process of regionalizing our -- we used to be plant by plant all around the world. We started getting into a much more regional structure. So that very, very easily fit into what we needed to do for tariffs on the procurement side. We started doing and started just doing localized procurement opportunities. We actually took the power and the benefit of the total Agilent volume and started doing global RFPs. And so we're able to quickly leverage that as well as the pricing opportunity we talked about. So the nice thing about the tariff situation is we had active work streams that we could quickly leverage. And that's where we're able to kind of mitigate things as quickly as we did.

Yes. And did you guys -- in terms of, obviously, some folks moved different production areas around, what was your guys' approach in terms of the footprint, reacting to -- obviously, there are some headlines, then they changed and they changed again? How did you guys react to the various headlines? Were you moving production?

Well, I think the first thing we have to do is we wanted to make no regret moves, right? So regardless of what the tariff rates are today versus tomorrow and how that plays out, we wanted to make -- we think there's a fundamental move where we're going to be manufacturing closer to our largest customer bases, right? And so when we make those moves, we don't make those with -- it helps to mitigate the tariff situation, obviously. If you're not making something in Europe, you decide to make it in the United States, as an example, to avoid 50% tariffs. But at the same time, what you're also doing though is -- we really think these are fundamental moves and are making our major products in various locations around the world is something we'll just -- regardless of the tariff rate, I think that's there to stay.

Okay. That's helpful. Yes. Go ahead, Tejas.

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It's a perfect example. If you make that no regret move to kind of move to be able to start manufacturing different things, as an example, in China for the tariffs and then you have that situation occur and you just continue to double down on it.

Yes. Okay. Makes sense. So I have some more on Ignite, but we'll circle back on that in a minute. Tejas, maybe on a high level, you guys just reported, I think it was just last week, and yes, you put out the '26 guide, 4% to 6%. I guess, when you think about that range, maybe just give us some quick hits in terms of what went into the range, maybe some variables, low end to the high end? We would love just some context around how you guys approached it.

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Okay. That's helpful. And then China, always a topic with you guys, just given the size of the revenue base, you mentioned $300 million a quarter, probably reasonable that you guys have been stable there for some time. How are you thinking about China? What did you see in fiscal 4Q? And then again, to your point, you guys pulled the stimulus out of the number for '26? How are you thinking about just the setup in China as you move into next year?

Yes. I mean, look, I would say that underlying growth on an ex stimulus basis is a little bit better than flattish, right? And we weren't ready to really call for a more robust sort of broadening out of the recovery because you look at the different end markets for us there. Essentially, we are a little bit over-indexed to applied. We're under-indexed to pharma and clinical in the region. Outside of academic and government, which grew mid-single digit for us, all the other end markets were down in the quarter. On the other hand, it's like you do get these quarterly swings, right? So in the first quarter of next year, for example, in the guide, we think China will actually grow reasonably. But then, in the second quarter, we've got tougher comps, and that comes down to the Lunar New Year timing, plus the consumables benefit that we saw the pull forward we saw in the second quarter of fiscal '25. So you're going to see sort of China growth look good, then it's probably going to swing the other way a little bit. But for the full year, we still think flat is a reasonable sort of assumption. Now, to your second part of the question on the stim, we could sort of see that come through late in the year. We just didn't want to assume that at this stage. If we -- if you look at the process, the tender process last time on the first round of stimulus, we think we can deliver pretty quickly in terms of the revenue conversion there once we win that tender. So it could come through late this year, just not something we were prepared to assume.

It might get the orders this year, but it might not generate revenue and volume. I think the other thing just to emphasize on China is to -- that gives us some comfort level, at least in the forecast being stable is the share. Our share remains very stable along with that $300 million a quarter.

Yes. And then, Tejas, to your point, there are certain markets in China that are maybe taking a little bit longer to come back. Obviously, you guys play in some different areas over there. How are you seeing that market? Are there verticals where you feel better or verticals that are maybe lagging a little bit over there?

Yes, I can take that, Patrick. I mean, I think as we look, I would say there's some dynamics going on in the pharma space where probably a little bit better outlook for the biotech part of pharma. We've seen obviously a lot of funding this year around molecule license -- out-licensing and things like that. Some of the changes that are being made around this anti-involution basically the -- looking towards more advanced kind of development. The government is encouraging like more advanced modalities. We think it's probably going to be a good longer-term trend for biotech. We'll see how that plays out this year. But I mean, I would say that would be a stronger area. I think the ones where -- yes, I mean the applied markets probably expect to be pretty subdued for the year. I mean, that's where some of the broader economic issues probably play a little bit more into the results. And then AMG is just -- I think it tends to be very stimulus-based, right? And like when is the government going to provide funding? There's been -- in the last few years, we've seen some regular funding there. It remains to be seen what's going to go on. We kind of think of that as separate than the stimulus that we've talked about, the larger stimulus and kind of broader stimulus.

Sure. And you mentioned the anti-involution. It came up a little bit as the quarter went. You guys flagged it. I think you said you haven't seen anything, but it just raised a flag of caution. Maybe just frame that up for us and for the folks who aren't aware of what it is, maybe just give some quick background.

Yes. I mean, I think generally, it is a -- our sense that we've gotten from teams there is that it's a push by the government to move in all areas really of the economy. I talked about pharma, but we do see this beyond away from this kind of race to the bottom, lowest price is the only thing. And that's -- they feel that I think that's -- they've sort of encouraged that with their tender processes and their public tenders in terms of just seeking out the absolute lowest price. And so that's what I think that they've sort of signaled a shift away from and that they want to start -- taking into account things like complexity and benefits to a consumer or whatever, things beyond just price essentially. And our team sees that as, hey, that's them sort of shifting away and moving -- being able to encourage more advanced technologies and development of those and make those investments worthwhile because at the back end, there's an expectation that, that's going to be rewarded rather than just the absolute lowest dollar. So I think we've talked about it in the context of pharma, but I mean it's also in the context of, I think, in -- even in the industrial parts of the space, the applied markets, things like solar, semiconductor stuff, where there will be sort of encouragement for more advanced technologies and not just...

A thing that, Patrick, that is also worth noting is the timeline to implementation, right? I mean, it's sort of 3- to 5-year sort of time period. Local governments at the province level could go faster. So we are keeping a very close eye on that. And the local team is already sort of being proactive about this. And as I mentioned earlier, as part of the Ignite sort of program, we can certainly flex manufacturing or local manufacturing content as needed to position us better.

Yes. And so I mean, as the way you guys would frame it, you're aware of it, haven't really seen an impact, but a reason just given how variable China has been, let's call it, a reason to just kind of hang at this $300 million a quarter for now and just see how it plays out.

Yes.

Okay. Fair enough. And then, yes, maybe some other pieces, Tejas. You touched a little bit on the margins, right? You guys are talking about 75 bps. I think you said if you hit 6%, maybe there's another 15 bps or so there. The margins have been an area of focus for investors, let's say, in terms of the past few quarters. Again, the revenue beats have been big, earnings beats may be a little less so. Maybe just talk about the flow-through of these revenue beats to the margins, why have the margins maybe been a little lacking in the last couple of quarters and the right way to think about the go-forward? Obviously, there's a lot going in there, right, tariffs, things like Ignite with you, Tom. So yes, maybe just frame up the margin framework for us.

Yes. So maybe I'll actually hand it to Tom because he's looked at that sort of very closely and certainly the Ignite piece...

I think the thing that impacts the second half of the year, as you indicate, even with the higher revenue and maybe not as much margin pull-through is really 2 factors that we call out. Number one, it is the tariff compare, right? And we'll have that compare -- we'll mitigate tariffs, but we're going to lower tariffs and offset it by pricing and some other things, but tariffs will not go away. So the comp that we have for the second half of the year, because the tariffs really started kicking in, in April, and that was the beginning of our third quarter, that really is a second half of the year compare. At the same time, we clearly over-delivered the year, so the variable comp component of that is taking -- took place, which is great news. And the third thing is the Ignite stuff is just starting to kick in, right? And so that's just -- and so are the mitigations. And so we're kind of in an upswing on that. And then we'll continue -- so if you look at '26, you'll still have the tariff impact year-on-year, right, for the first half, not the second half, right, because they would have fully been in the second half. The variable comp component will be a lot more comparable '25 to '26. It will go up a little bit because of inflation. But other than that, it's a much better comparison. And so we wouldn't expect big fluctuations in that unless we will over-deliver the 6 some way. And then finally then, the Ignite stuff continues to kick in and ramp up. So that's why we feel as though we'll -- as the revenue gets generated, we'll be in more of an accretive growth on the operating margin side.

And the other thing I would add there, Patrick, is starting the year, we're probably going to be down like about 40 basis points year-over-year. That is almost entirely driven by the tariff dynamic because there is no tariffs in the comp, right? And then, through the year, we are expecting very robust sequential margin improvement. I mean, a lot of that is largely driven by seasonality that we see through the year. But then, in addition to that, you'll get the tariff and the variable comp stuff, which again, at the annual level, they roughly net out. But on the year-over-year compared to the quarterly level, you got to think about those dynamics.

Yes. Yes. No, that's helpful. And then, I guess, another part of the margin piece is the pricing side. We certainly get questions there. Tom, I know it's an initiative for you guys as well. How do you guys think about the pricing piece? What's the contribution as we work our way into '26? Any changes in terms of the pricing environment from your perspective?

Well, we -- in '24, before Ignite, we did about 0.5 point improvement. We doubled that, a little over doubled that in '25. So our jump-off point as we view it going into '26 is really at least a point, if not more, because I think we have good jump-off point and good momentum, especially as the things we're implementing in Ignite are continually being adopted globally, right? We're -- again, I'll just reiterate with Ignite, all the things we're doing are really starting to kick that in, in the second half of '25. So now you're going to start to get more annualized basis to the opportunity, and it gets adopted more throughout the company.

Sure. And another piece of the margins is obviously the specialty CDMO. I think you guys are characterizing now with NASD and BIOVECTRA combined. I know that's a gross margin drag, and that's been something the models have taken a little bit to get cleaned up. Maybe just contextualize what the margin structure there is? I think it's $450 million, $500 million of revs. Obviously, we'll dive into that in a bit. But just the margin piece, is that dilutive on the gross margins? I believe NASD, positive op margins, accretive op margins; BIOVECTRA, obviously not yet. But yes, maybe just talk through what the specialty CDMO does to the margins? And how to think about that?

Yes. I mean, it's a good business, right? I mean, that's one of the reasons we want to -- it is a specialized CDMO with specialized modalities. Customers value what we're doing, right? If we look at '25, the combined businesses were accretive to Agilent's overall margin at an operating margin level, not as you said, at a gross margin level. Obviously, there -- it's just a different profile, a different structure of the business, higher COGS, lower OpEx, but at an Agilent level, they were accretive combined. As you mentioned, I think there's definitely a difference. I mean, NASD is at a higher level. We think there's good opportunity. Obviously, we talked about that when we did the acquisition. I think we kind of delivered what we thought with expectations as far as BIOVECTRA, but do see nice upside there going forward. So we think that, that could come up to Agilent margin levels. But even as a combined business already, it is above Agilent overall. So we're really excited about the potential there. And with growth, we -- growth really helps the margins in that business, as it does with any business, but that's something we're pretty excited about.

Yes. Yes, maybe we can dive into that piece now that the specialty CDMO. Maybe we can start with NASD. Again, obviously, some really nice trends there. It had a couple of challenging years with the clinical commercial piece, and now, it seems very squarely back on track, opening up some new lines, I think, end of this year into '27, but maybe talk about the visibility. I believe you guys talked about orders kind of covering all of '26. I think track C and D will open up late this year into next. So maybe just what you're seeing there? How to think about the growth rate? I think you talked mid-teens for the entire specialized CDMO. But maybe on the NASD piece, how do we think about that business and the trends you're seeing? It certainly feels like it's a pretty healthy backdrop here for you guys.

Yes. I mean, we're really excited about both businesses. I would say NASD, really, it's hard to sort of -- it's like picking a child, right? I guess, they're both doing very well. We're really managing them together. I think we've seen a lot of benefits. Some of the synergies that we've seen really have been around operational, using and leveraging what we've learned and what we've implemented at NASD into BIOVECTRA in kind of getting that discipline and being able to deliver, and so that's been a really, really nice to see. I think, as we look into next year, right, I mean, I think demand for the modalities that they serve is really strong. We're really optimistic and encouraged. I think we do have real -- more demand, frankly. I think we have to manage our capacity carefully. And we -- part of being a good partner to our pharma customers and something that we think is a big success of the business is that we are always available when they need to do something. And that means that we don't over-schedule capacity. We schedule to be as full as we can be, and that's -- but we're not committing to new customers that, hey, we'll do this for you even though we don't really have space in the plan, right? So it's a big part of the success. But I mean, I think as we see the siRNA, GLP-1 capabilities at BIOVECTRA, siRNA, obviously, at NASD, I think we're seeing continued momentum on approvals there. I believe there was 1 or 2 weeks ago. We're -- the demand for those modalities is just really strong in pharma. As you mentioned, I mean, we have really -- '26, really good line of sight to what we're going to be doing there, excited. Early '27 -- 2027 is when we expect to open sort of the Train C element, the first part of that new expansion. So that's really the largest part of that expansion in terms of the volume capacity. And so...

And what I'd say there, Patrick, is also like that expansion for C and D, it's quite well timed in terms of coinciding with our customers' regulatory timelines, which should help, right, with the capacity utilization and what happens to margins, et cetera, there. The other piece, which I think is worth emphasizing here, is that the commercial versus clinical mix, right? So it's 60-40 now, and we think it only gets more skewed towards commercial through 2026. And that's always a good thing, right? It's good to have anchor tenants, but it's also good to have a healthy sort of commercial SKU to make sure you have good line of sight on near-term revenue generation.

It's not only a good line of sight, but production batches, it's just a more efficient process and a more predictable process. So the big pivot for us to what you indicated is really nice is the skew towards the commercial versus the clinical over the last 18 months has been pretty encouraging and not depending upon a single product as an example for the volume.

Yes. And when you guys look at the business, as you talked about, maybe a little bit capacity constrained. I mean, is there potential upside to numbers? Or is it really you're kind of maxed out until -- and I think Train C is more siRNA, are you just kind of constrained a little bit? Or do you save a little bit of capacity to say, all right, just in case these customers need it, maybe those numbers move up a little bit as the year goes? How do we think about that?

I would say, like, look, we always hope there will be upside to that mid-teens number. To Mark's earlier point, I mean, NASD is also much larger than BIOVECTRA. So you got to think about that as you factor in the growth rates there. Lots of small numbers probably helps BIOVECTRA a little bit more at this stage. But the pipelines are really good. We feel pretty good about how that business is shaping up, not just into '26, but even beyond. And so...

Sure.

And then mid-teens...

Sorry, go ahead.

No, and the -- as you wouldn't forget to add capacity in terms of the efficiency of the manufacturing process itself. We continue to get better and better refined. The yields continue to get better for us. And so that helps even with the current footprint to add capacity over time.

Is that mid-teens growth rate? Is it reasonable to think of NASD and BIOVECTRA similar in that mid-teens? Is that about right?

Similar-ish.

Similar-ish. Okay. That's fair enough. And I guess with BIOVECTRA, you guys came out -- obviously, I think a lot of people feel that there's some reasonable GLP exposure there. You guys talked about the overall GLP business. I believe, it was $130 million, which was higher than a lot of folks I talked to were expecting. Maybe talk about the GLP exposure, the part in BIOVECTRA, the part that's not, and the tailwinds you're seeing there? Obviously, the oral piece, I think, has a lot of eyeballs on it. You guys do have some exposure there, I believe. So maybe just talk about the GLP side? And again, what to make of that business as we go forward?

Yes. So, as you suggested, Patrick, $130 million in '25, it is roughly evenly split between BIOVECTRA when you get the synthetic peptide stuff, and then, on the analytical tools piece. I mean, we are very optimistic about the opportunity. I mean, the key takeaway really is that we are indexed to volume here rather than price or modality, right? And let's sort of -- I think it's worth sort of double-clicking into each of those dynamics a little bit. So on the recent deals with the GLP-1 manufacturers have signed with the Trump administration, really, I mean, the key takeaway there is that we have these price reductions for the Medicare and Medicaid patient populations, you have direct-to-consumer access. And then, ultimately, you potentially have label expansion coming down the road as well, right? And so all of that stuff is sort of good for us in terms of greater volume. And then, frankly, we have seen meaningful sort of recent RFP activity there related to greenfield expansion. So we feel pretty good about how that piece is shaping up. And then, on the second point on sort of the oral launches coming up, et cetera, frankly, we are modality agnostic. And the idea here is that you've got on the injectable side, as those continue to scale, the demand for chrome and mass spec tools used in cauterization, release testing, some of the regulated QC stuff is only going to increase. And then on the pill form, the idea here is you should see accelerating demand for small molecule analytics, right? And then whether that's impurity profiling, the solution testing, solid dose method development, stability assessments, et cetera, those are all sort of areas where we have differentiation and pretty deep penetration. So pretty optimistic about that GLP-1 piece on a go-forward basis. I think one of the questions that people have asked in the post-earnings is a little bit sort of maturing of the analytical tools piece of the puzzle there. I think it's still very early. Again, like just the indexation to volumes plays in our favor there. And the pill launches, again, are at least in our minds, more of an expansion of the GLP-1 opportunity for us rather than any sort of cannibalization dynamic or what have you.

Yes. No, that's really helpful. And I guess on BIOVECTRA specifically, I know there was some confusion in the quarter about the acquisition contribution versus what BIOVECTRA actually was. I guess, there was 2 months inorganic, then it flipped to organic. October was bigger. Maybe just a quick context around that. I know you guys might not give the exact numbers, but yes, maybe just help us frame that up a little bit.

Yes. I mean, just the linearity in the quarter, right? The first couple of months were relatively light versus our expectations and October was pretty strong. I mean, I would say that it's one of those situations where October is actually a little bit larger than the first 2 months combined. Now, look, I mean, the CDMO businesses, I mean, you and I lived through enough of those, Patrick, where lumpiness is just the nature of the game. Certainly, on a month-to-month basis, if not across quarters, right? And then that's important to keep in mind. I think really the important thing to understand there is that there's no pull forward of demand that happened here. We had that question as well, so -- is there going to be some sort of an air pocket after this huge October? So I would certainly sort of -- I'm in the camp of no sort of weird one-offs. This is just lumpiness that comes through.

And if you kind of keep in mind, as we talked about in the third quarter, we had the shutdown deliberately to build the capacity, and that was going to play out not right away in the fourth quarter. It was going to play out throughout the fourth quarter.

Yes. And Tom, maybe to that point, one of the questions we got was, obviously, you guys did the shutdown in 3Q. I think there were some questions, were you transitioning capacity from some other modality into GLPs? Or were you expanding it and now the pie is bigger? What's the right way to think about that?

Yes, it was expansion, right? It was taking a process that we had modifying it, increasing basically the throughput of that process to be able to deliver more. And so it was an existing customer with an expansion.

Okay. Okay. That's helpful. And then, maybe just flipping over to the instrument side of the portfolio. Obviously, some nice tailwinds there as well. You guys are in the midst of a bit of a replacement cycle at the moment. Maybe talk about where we are in that, and then, would love to kind of get into the year-end budget flush and expectations there as well.

Yes. So look, I mean, I don't want to sort of overemphasize the budget flush dynamic. That's not certainly something that we are counting on in any particularly material way. I'll turn it over to Mark for which inning in the replacement cycle we are on. It's not mid for sure, but it's not the first inning either. And then Mark, double-click on that on the GC piece.

Yes. No, I mean, I think as we look at the replacement cycle, Patrick, I mean, for those baseball averse, maybe we're offering first quartile of the replacement cycle maybe as a way to think about it and certainly on the LC side. And I think as we think that's -- we're in that space. These typically 2- to 3-year kind of replacement cycles is kind of the norm historically, and we think it could be within our LC business, probably 200 to 300 basis points of incremental growth relative to kind of long-term growth rates for that space or for that business. So really optimistic. And obviously, with Infinity III, I think we have a reason -- we're giving customers a good reason to go back and replace. It's not just, hey, your stuff is old, but also, hey, we got some exciting productivity improvements, some exciting improvements in the platform, and customers are really liking it. So, I mean, I think that, that's -- it's kind of just doubling down on that and really helping to drive that decision within the customer base.

And that plays out a little differently on GC.

Yes. On the GC side, it's -- that is a longer life instrument. And I think that has implications on how the replacement cycle works. I would say that -- it's a longer cycle with probably a shallower slope. So instead of 2 to 3 years, probably more like 3 to 4 to maybe even 5 years of kind of increase and a smaller amount, probably more like 100 basis points on the kind of the overall GC business versus long-term rate. So still a nice driver, but it's a bit smoother just given that those instruments kind of have a longer lifespan.

Sure. Yes, it makes a lot of sense. And I guess on that piece, Tejas, you touched a little bit on the budget flush side. Pharma, I think you guys are talking about high single-digit type growth for '26. There's been a lot of focus on pharma just given the policy removal of the overhang, hopefully, a couple of months ago. What have those conversations been like? It was an interesting timing. Obviously, we were out with you guys the day or 2 after that, and things were moving quick. But I guess, what's your perspective? Have the conversations changed? Has the tone changed? Obviously, the reshoring piece we can get into. But even more near term, are those budgets loosening up? And are those purse strings finally loosening up from the pharma side?

Yes, for sure. I mean, I think it's important to sort of differentiate between the larger cap sort of customers and then mid-cap biotech, right? So larger cap, both on the pharma and biotech side continue to saw the conversations get better. I mean, we talked about decentralized decision-making a quarter ago, and that certainly has continued as well. I mean, in the context of the MFN tariff stuff, the turning over of that card is really a positive onto itself, right? Because now people have guardrails in place as they frame what's coming next down the pipe. And frankly, for a lot of these companies, the LOEs that they are facing over the next 5 years or so, that's certainly top of mind as well, and that becomes the priority now. And you've seen that manifest in -- not just in terms of the flow of dollars for -- on equipment and consumables and all the rest of it, but even on M&A, right? There's been a big pickup in biotech M&A over the last sort of 6 months or so. And that helps on the mid-cap side as well to my earlier point about the fact that there are those sort of happy outcomes in play. And the expectation is for interest rates to come down as well. So you're starting to see the dollars flow there as well. It's still early on this mid-cap biotech piece. I mean, that's like low single digit of total revenue for us, so not a hugely meaningful driver of volatility in a sense. But certainly, on the large cap side of things, I would say that things look to be steadily improving.

Yes. We got the clarity, whether it's the tariffs or the MFN. That clarity for big pharma has helped and gives us a comfort level that we're into more normalized, whether you call it a replacement cycle or a normalized kind of budget flash at year-end that gives us a bit more comfort level.

Sure. And then, the out-year carrot was the reshoring piece. You guys threw out -- you were brave enough to put a number out there. I don't know if anyone else did. But you guys talked about the $1 billion opportunity, maybe 30% of that could be yours. I guess, what went into that number? I think, it's through 2030. Maybe just talk about where that came from, how you're thinking about it and what that opportunity looks like.

Sure. I mean, look, so we looked at it both on a top-down and bottom-up basis, right? And so if you look at sort of the announced sort of CapEx investments in that $350 billion to $400 billion range, we assumed about 2.5% of that is going to be lab instrument spend. And then, about 10% of that is what we serve, right? So that's how you get to that sort of approaching $1 billion sort of ZIP code opportunity. And again, we think we can capture about 1/3 of that over the course of, let's say, 3 or 4 years, right? Now, the other lens that we took in it was to look at it on a bottom-up basis, right? So we took it. We looked at each individual sort of company that has announced a capacity investment here, and then, we made certain assumptions around the number of greenfield sites and the number of labs per site. And from there, you can sort of -- just based on our extensive experience dealing with these customers, you can make assumptions around instrument spend, and then, the consumables and the services piece layering on probably 1 year, 1.5 years later after that instrument investment, right? And so we did that sort of bottom-up build at a pretty detailed level. And the good news here, Patrick, is that a lot of these pharma companies that have announced these investments, they map quite nicely to our strategic customer program, which is obviously a very high priority for our commercial teams. And we are in sort of almost biweekly conversations with those customers. So we have a very good lens now. Look, I don't want to kind of like paint a picture of false precision, right? So this is not about like, oh, let's take $75 million to $100 million and throw it into the model for '27 to '30. That's not the point of this exercise. I think it's still early. We've got to make some sort of -- we will find out more about sort of how much of this is incremental, how much of this is sort of investments that were going to happen outside the states are now happening here, et cetera. But directionally, we feel pretty good about that number.

Because we are at least starting -- we're in conversations now, surely gives us something. Again, we're not at the order-taking standpoint. But to the point that Tejas was making, we feel like there'll be more and more -- activity will grow throughout the year, become more definitive and more of a revenue play for '27 from a material...

And to be clear on that point, Patrick, there's nothing in revenue in '26 for reshoring. Maybe a little bit of order benefit late in the year, but that's about it.

Okay. And then, Tom, maybe back on the Ignite side. I know AI has been one tool you guys have talked about just improving productivity measures. What businesses are you planning on kind of layering AI in on? What's the right way to think about where you guys are? And this is obviously a big, big theme out there.

No, no. I think the first thing we did is the importance of bringing it into Ignite and particularly because it's the nice shiny tool. But what happens is you got to get deliberate results out of it, right? Otherwise, people just keep playing with it and experimenting with it. We see it in a couple of different ways. Obviously, the digital customer-facing experience in AI and helping customers purchase the consumables, in particular, online, we see a big benefit. But we have a lot of customer-facing activities that involve very technical information, whether it's with our service teams, whether it's with our pre or post sales teams, whether it's our call centers, right? And so there is a lot of technical detailed information and getting that information efficiently, and we're having one single source of truth. And to get it very quickly and accurately to the customer, we think, is a huge benefit to it. Even outside of the other opportunities we see in the more product development side, whether it's our software side or it's in the actual development cycles within our instrumentation and our consumables and other critical products. We see it from a couple of different ways, and Ignite is kind of the perfect way to actually take an enterprise approach and really prioritize and get deliberate results out of it.

Yes. And maybe one last one on Ignite. I mean, the capital allocation piece for Agilent -- I mean, the deal side has never been maybe one of the big strengths of the company. I know, Ignite, you're kind of using that to maybe look at assets in a different way on the potential deal side, the integration piece, maybe just quickly compare kind of the pre-Ignite, post-Ignite approach on capital allocation. And how you guys are looking at deals?

So I'll start, then -- yes, yes, yes, exactly. So what I'd say, Patrick, is I think it's -- there's a couple of things here, right? So if you think about capital deployment, internal innovation, the capacity expansion, both at CDMO and for consumables, and then, of course, M&A are sort of the top tier of priority. And then, in terms of the excess capital, we are certainly committed to anti-dilutive share repurchases at a minimum and the dividends, right? Now, I think when it comes to M&A, like we -- the idea here is we don't need a transformational deal to support our growth ambitions, but we remain open to looking at deals of all sizes, right? And there are certain areas, there's software, there's automation, there's specialty CDMO niches, there's high-growth adjacent technologies. All of that is within sort of the purview of how we are thinking about it. But I think that second part, which Tom can lean in on is that we have turned the page in terms of our ability to integrate these assets versus what came before. Tom, I'll hand it to you.

Yes. I think the Ignite enterprise approach on the transformation is a perfect and operating model to really -- and we were able to test this with BIOVECTRA by the way, right? And so learned from that and saw some real success with that. We did it a couple of different ways. First of all, we viewed integration more strategically. Quite frankly, historically, it used to be a bit of an afterthought to the company. Now, it's a very intentional part of the deal thesis, right, because in order to do that, how are you going to resource it, how quickly you're going to be able to get your sources of value through that and how you're going to be able to do it efficiently, so it doesn't carry on for years and years. And so we are very careful, that's part of the upfront work we do. At the same time, as opposed to the kind of the bottoms-up approach that we did before, this is a much more holistic approach driving to the same set of numbers, one source of truth and coordinating across the functions, along with the business because at times, we would have maybe historical differences between what the integration team would do versus actually what the business was driving towards. But ultimately, the business has to drive it and own it. And so we've made major changes on that. And then finally, we're able to leverage many of the work streams, whether it's in the pricing, the procurement, a regional approach to manufacturing versus a site-by-site type of approach to it. We think all of those added together really put us in a good operating model for taking on whatever size of opportunity is in front of us.

Okay. And last 30-second one, the tax rate, we got some questions when you guys guided a lot of questions, like is this tax rate real? Maybe just quickly, why is the tax rate higher? Is it -- do we see -- as the year goes, could that come down? Maybe just a quick hit on the tax side.

Yes, Patrick, I would say -- I mean, we do think it's a real number, right? I mean -- and it's related to Pillar 2 OBBBA regulations, right, and how those have been implemented. And looking across our model and our portfolio, global entities, what we think the result will be -- I mean, it is a one-time step-up. I don't think -- obviously, we'll continue to seek to optimize as things go forward and do what we can. But we think we understand this pretty well and that will be -- going forward, and we'll continue to work our best. I think, if we look around the industry, there's not tons that are below 15%. And I know the one other peer that does have a lot of other M&A and other things that can kind of -- they can use.

Yes. I think an important aspect of our tax rate when you see it, it's very close to our cash tax right? So it's pretty clean, right? And so we don't have a lot of maybe historical M&A and other things kind of flowing through. So you have a pretty clear look for that. Obviously, we're going to continue to look for opportunities to drive that down. But I think we have a good start -- a fair starting point given the regulations out there. But at the same time, we're also -- you can see our operating profit year-on-year that's high single digits growth. So we're going to continue to use Ignite and other factors in order to help mitigate that also.

Okay. Great. Thank you, guys, so much. Really appreciate it.

Good stuff, Patrick. Thank you.