Agilent Technologies, Inc. ($A)

Okay. Great. We're going to kick it off. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce Agilent this morning.

Maybe great quarter. Why don't we start there? A lot of momentum, LDG, AMG, both nicely ahead, strong growth for CAM, diagnostics, forensics, semiconductors, pharma? I mean, you're kind of humming along on all fronts, nice margin expansion too. So maybe with that in mind, just talk about some of the messages coming out of 2Q and what gets you excited about the remainder of the year.

Yes, no problem. Thanks, Tycho, and thanks. Great to be here. So great quarter 6.3% growth. We had 130 bps year-over-year margin expansion, which was just great, and that was really fueled by our Ignite transformation, 14% EPS growth, which was well ahead of guidance. So clean beat across the board. If you look at the markets, we had high single digit in CAM, diagnostics, environmental and food, and pharma was in line still really strong. And then broad CAM growth. Of course, we had a semicon part in there that was really great as well. That helped. And when you think about -- when you put it all together, it's really a number of things. I think the replacement continues to grow. You see low double-digit growth in our LC and LC/MS business. That shows our replacement cycle is really humming along. Book-to-bill is greater than 1 for 9 consecutive quarter momentum continuing. And innovation, this is all underpinned by innovation, Infinity III, of course, driving that replacement cycle, Pro iQ and a number of launches at ASMS this week, 9500 which is right in that semicon space as well. And we talk -- I think every company talks about share gains when we look at our objective share gain data from we had a really strong share gains across our instrument portfolio. And I think you look at our Ignite operating system now being able to mitigate tariffs fully mitigated 200 bps of pricing. So our enterprise pricing model is really working. And I think you see digital going extremely well. Actually, digital would have grown 20% ex China, 9% growth in our digital orders. So that shows the flywheel. And of course, we're an integration playbook with BIOVECTRA and now Biocare coming up. So you put it all together, I think it was an extremely good quarter.

And you touched on the ASMS news, 9500 triple quad first big refresh their ICP-MS in a decade. Talk a little bit about how you're thinking about the opportunity? Is it new market unlock, share gains, replacement cycle?

Yes. So I would think about it as a tech refresh rather than replacement cycle. So if you think about ICP-MS, it's really we have about 80% market share in semicon and fabs and actually not only fabs but also high-purity chemical companies around the fabs. And it really is a technology jump. There's 2 areas to patent the dual cell system that really helps with workflows. And also, we have this revolutionary mode that helps the analysis side. And with that 80% market share, I think customers with these new capabilities are now going to do a tech refresh with the 9500. So we're really, really excited about it. When you think about companies like TSMC, where we have a huge installed base in Taiwan, we have a huge installed base in the U.S., we'll just be reshoring in semis. And we've been working with those customers over the last number of years in those reshoring opportunities. So people think it's just pharma. But actually the semi reshoring has been happening quietly over time and for a long time, and we're right in that space. So we had a great response at ASMS. We were taking a lot of orders now, so we're excited about it.

And I think if we think about ICP-MS being a $275 million business or so, how much does this tech refresh kind of impact that installed base? And how do you think about like you've talked about GC replacement cycle being a few percentage of the business? Could this be comparable?

Yes. I think, look, if you think about it, semis represents about a $400 million market opportunity for us. By the way, it's not just ICP-MS, it's GCMS products that are in those fabs as well. And our total semi exposure is about 3% to 4% of Agilent's revenue. So I think, overall, we grew double digits in that side of it, we expect that to continue. So I think it's going to be above that in terms of growth rates as we do this tech refresh.

And then on the column side, just kind of rounding out on ASMS, the alternate columns you launched last year, up 50% sequentially, now 75% penetrated the top 20 pharma. Maybe talk about momentum, how much of this is allowing you to recapture share and then you're launching new products into the family of Ulta Aerocom. Can you maybe just talk about that?

Yes. No, it really is the family. So we launched last year, we actually launched the PFAS column long and short chain this year as well. So we'll continue on building on this side. So we're early days, but we're in about 15 of the top 20 pharma company is growing extremely well. And for context, that column is about 5% of ACG CrossLab Group. And that we're seeing a lot of broad new applications around peptide therapeutics, large oligos and gene and cell therapy. So putting it all together, we're going to continue to launch, and we're seeing a really strong take-up in labs and companies that already have the family, and we're going to see that continue over time. And it has, of course, with our instrument connect rate.

Maybe just focusing on CAM for a minute. Obviously, a lot going on on the macro. Maybe just unpack what you saw and just talk a little bit about mix dynamics, how you're thinking about the rest of the year, comps get tougher, but a lot of positive underlying momentum?

Yes. So CAM's performance was high single digit for Q2, really strong and low double digits across the Advanced Materials side. So if you think about chemical and Advanced Materials, about 2/3 of that is the chemical and energy side, 1/3 is the Advanced Materials side. That's how it breaks out. And we see -- we've really seen strong momentum over a number of quarters. Again, we're going into tough compares. But again, batteries and about $400 million opportunity. And we see in batteries, about $250 million opportunity, $400 million for semis. And on the chemical side, it is a very topical area with it. But it's an area if you think about the chemical business and chemical and energy, it really is our heartland of our installed base. So we have a GC replacement cycle going on there that's going to about 100 bps on top of what we're seeing. And I would say, about 15% to 20% is related to exploration and production and about 50% is related to chemicals. And of course, people were saying, well, are we seeing just a slowdown on CapEx. Actually, CapEx spending was very strong during the year in the refinery and production side. And it depends if you that continue over time. If you're going to see that -- you're going to see on the chemical side, of course, we get a good downstream effect from semiconductors. So it's used in a lot of the semiconductor workflows. So there's a reverse is declining prices help refiners while deepening demand on upstream production. So it's kind of give and take, but overall, we feel really good about that business.

And just to circle back on batteries and semis, I appreciate the TAM numbers you threw out. Should we continue to assume these are outsized drivers here in these 2 businesses?

Yes. And it's our market share position those then when you put a new technology that leapfrogs the competition that you're going to see that as an outside driver for sure. .

And then anything on chemicals by geography that might be helpful to share?

Yes. No, I think we saw broad strength across it. I think China was a little bit slow for us and we were expecting that, but we saw broad strength in the Americas, Europe and Asia outside China. .

And then you are talking more about share gains overall, I talked about having some of the best market share in 2Q. Was this specific to LCMS and GC or are you starting to see outside share gains?

So it's all our instrument product lines. So just for context, every company submits the units and dollars for each of their product lines. We saw outsized share gains in LC spectroscopy and GC where the key we're the top but I would say broad-based across it. And I would say, if you look at regions outside share gains in North America and Japan. Now Japan, we had a relatively low market share historically because we've had a local competitor there. We put a lot of focus in there and now we're seeing a lot of share gain advantage, but North America was extremely strong for us.

And obviously, we touched on innovation. I mean, are there things you're doing differently from a commercial execution standpoint too, that are driving share gains?

Yes. So before I took over the role of CEO as Chief Commercial Officer, and actually, we did a lot of transformation before I took the position. And we spent a lot of time looking at our digital connection with customers and sometimes we want to have 1 central account manager, and we invested heavily in application support, application engineers and product specialization. Why is that important? It's important in an area like semis where actually, the application science means everything and the product support of that moving forward. So I think our investments back then are really paying off now. And we have 1 leader that controls our service, sales, marketing and digital. So it means we can move really quick on the deployment of AI and also our connection with customers. And I think when you -- the 1 thing we've centralized, Tycho, which is kind of unique, we have a launch excellence team, now that central for every 1 of our product lines. So each product line isn't launching in a separate way. We have the same methodology, how we do prelaunch, how we do launch and then how do we make sure we get our ramps on our ramp to volume targets. So overall, you put that flywheel together of improved innovation and a commercial engine, I think it's -- that is a key reason why we're gaining share.

Any way to quantify share gains like in any of the product categories or...

Yes. If you look at -- I mean, if you look at share gains, I'll give you an example in LC, you don't see that move huge amounts, but I mean 1% or 2% on the upside is a lot of business on that side. So I think we're -- we've seen that and if you look at all our product lines, except for one, which was just stable, we saw outsized gains. .

And then biopharma overall straight quarter of mid-single-digit growth. Obviously, some nuances there, biotech growing low double digits, large-cap fine, mid cap still soft, small molecule, up low single digit. Can you just talk on the exposures to these categories and talk about the barriers left for some of the lagging segments?

Yes. I mean, look, we've -- we're about 50-50 small molecule versus large molecule, both growing well. small molecule is low single digits this time and biotech was low double digits. And again, when you look at the MFM deals that have happened, it's removed a big overhang from our customers, we're reshoring coming in '27. That's progressing very well. We're doing more quotes. We're getting closer on those numbers that we put out, we feel really good about those numbers we put out. So when you think about that, I think overall pharma spending, there's an aged installed base in pharma, particularly where we are downstream in QA/QC. So that replacement cycle momentum and the reshoring coming is a really great sweet spot.for us. And then in a small tech, small mid-cap size, it's been very muted for a number of years. But through April, you see the number of deals that are being done in the number of dollars that have been deployed, I think $40 billion being deployed in that area. So we're expecting some benefit for that in '27. We're not expecting it this year. But overall, we really believe that the kind of licensing and the M&A activity is going on is going to -- as we've seen in previous cycles, it's going to prove very, very important for us in terms of our cell analysis equipment, et cetera, we wouldn't see that.

But why do you think it hasn't converted yet? I mean, biotech funding has been strong here for a little while.

Yes. I mean it's kind of similar than the last time. I think there is just funding generally takes probably 12 to 18 months to come true to our side. So I think we're getting to the midsize of that. So I think really, we're going to exceed that at the start of '27. I wouldn't say there's anything very different from this time. But there's been a large, I would say, air pocket in that market for a long time, so we need to see that work through. .

Advanced Therapeutics, the old CDMO business, 2Q was up high single digit. You reiterated the guide for the year of mid-teens. Just talk about what's underpinning that acceleration going forward?

Sure. Yes, I'll take that. So first of all, you saw a solid first half growth in our CDMO, which we're calling ATD now, which is Advanced Therapeutics Division. So we had solid growth in the first half. That's low double digit, as I said. The nice thing is we have visibility into the second half growth and that acceleration. So we remain confident in our ability to deliver that mid-teens growth for the full year, which we've talked about. The revenue for the year was always weighted to the second half of the year, and that's just based on our production schedules. And the nice part about CDMO is you do have visibility into the production schedules. The challenge with it is sometimes those production schedules are lumpy from a quarter-over-quarter perspective. The nice thing going into the second half of the year and ATD in general is that, that mix, commercial and clinical, last year, we finished the year at about 60-40 commercial to clinical, and we're seeing that shift more to a commercial mix over time. And then the last piece I would just highlight is in that second half acceleration implied underneath that, which you can see is a very, very strong Q3 with a flattish Q4, and that's once again based on comparison production schedules.

And how about margin lift as utilization improves?

Yes. So you can expect over time, as those ramp, the margin will continue to expand, and we've said the margin of our ATV business is accretive to our overall margin once they're fully up and running. .

And then we've had the pleasure of going out and seeing the facility. Train C goes live in '27. Just talk a little bit about how much that adds once fully ramped. If you go back to Train B, it added $150 million. Can this be closer to $200 million with the yield improvements?

Yes. So I'm very excited about Train C when we start there. We're a leader in NASD, it's always good when you can invest behind a leadership position. We also hit an important milestone this year with the mechanical completion of Train C. So that happened in Q2. So that positions us then to start generating revenue sort of in the spring of next year. And the way I would think about that as Train C over time, and once it's fully ramped, we'll double our revenue capacity once fully ramped. And the way I think about that is it's about $350 million in total. But once again, there'll be variability from time to time based on just the general mix, it should start to skew more commercial than clinical as we've seen in our other lines, but really excited about it. And so then the last piece I would just highlight on this as you think about the ramp of Train C, it'll start -- the revenue will start in the spring. It will take about 6 to 8 quarters to get to that full revenue that I just talked about, that $350 million. But what excites me even more is we have visibility to the majority of the capacity we have available in 2027 now. So we're in a really good position. You can see that our customers appreciate the service and the quality that we deliver so investing behind that leadership position before I guide it was a great move, and we're going to reap the benefits of it.

And I guess similar question on the margin trajectory for next year as you're kind of scaling Train C up.

Yes. And so what we've talked about is, of course, there's a margin implication as you turn the facility on, start depreciating it, et cetera. But what we've said is we'll manage that within our broader profile. And once again, we have the Ignite operating system, which helps us think about those things, prioritize and find incremental efficiencies to offset. .

Maybe we can go back to replacement cycle. We touched on it a little bit. LCMS, both up low double digits in 2Q. Just talk about where we are in the cycle? It's been coming along for a couple of quarters here. And just where you think about '27, '28 as we think about the remainder of the cycle?

Yes. Look, I think the cycle we're probably -- I'd say we're 1/3 through the cycle, I would say where we are. I think it's -- you see our instrument numbers versus our peers in terms of delivery. So we're doing extremely well. We're -- and it's not only in our installed base, but on the competitive deal side, it's a very competitive landscape. So we've been able to take competitive deals drive that. We expect it's going to add about 200 to 300 bps as we go forward on that replacement cycle. And it's kind of interesting. People think it's just 1 lab or 1 site but lots of equipment, 1,100 1260s, 1290s that are installed that are replacing at different times. So strong momentum and really good uptake with the Infinity tree. So we expect that to keep going. And then, of course, you got reshoring coming along. So I think that's very important. I think on the GC replacement cycle again, you see that in our -- across all our markets, but you see that in our CAM markets, particularly, that's going at about 100 bps on top of where we are. And the GC replacement cycle is longer. I would say we're very early on in that. We just launched a new GC platform in ASMS as well. So we have the 8850 and the new platform. So that really helps us as we're moving forward and replacing and even older installed base on the GC side. And again, our market share in GC is extremely high.

Any pockets lagging, whether it's CDMOs or China, like just on the replacement cycle specifically?

No, I would say it's pretty broad-based. I think once you see the -- I think our CDMO and our CRO segments where we look at that, I think it's pretty broad-based. I think the bolus of our business is QA/QC, development in QA/QC, and that's moving along. So I would say not really any laggards on that side.

And then China, that was 1 of the areas that was soft in the quarter, down 9%. Just unpack what you're seeing there, how you think about the remainder of the year, obviously, some focus on stimulus and then biopharma being a bright spot up high teens, talk about the durability of China?

Yes, yes. So look, I mean, is this Lunar New Year effect. And of course, we had tariffs last year, which pulled in a lot of orders in CSD that created a tough compare on that side. But we're extremely committed to China and what we see in the market is that our biopharma, small biopharma doing extremely well. And you see the investment that's happening in there in terms of the deployment of capital, the 1 area that's really important for us is the speed of innovation in China in our sector. So we'll be announcing more investment in an innovation center in Shanghai, where our manufacturing is to tap into that innovation in China for China and beyond. So overall, I think the It's got variable timing. It can happen. It can happen at different timings and so on. We were expecting the SAMR still happen in '26, it's going to happen in '27. We're actually quoting there now. That's a $50 million opportunity. We expect about a 30% win there like we've seen in the past. So -- but that's not in our guide currently, but we'll see that coming through. So overall, I think we feel China stable, we're going to see that improve in '27 to get up to the mid high single-digit growth rate again in time.

And last round of stimulus skewed food heavy. Is that kind of similar assumptions at this time? Or how you...

It's a little bit more -based. I think it's -- there's 4 segments in SMR, there's food, drug, industrial products and metrology. So it's a bit more broad-based. And again, when you think about those markets, that's a real sweet spot for us, Tycho. And so funding and bidding time line, funding is going to materialize in Q3, bidding time line in Q4 orders and revenue in Q1, and we've seen that happen in every previous stimulus in the same type of cadence.

One of the things I think you've focused on, which maybe doesn't get as much attention is software. And just be curious to talk about some of the AI deployment initiatives that you have underway?

Yes. So we saw -- we had an announcement today with OpenAI and BCG is 1 of the deployment areas. But first of all, maybe I can break it down into a few parts. First of all, for our customer segments, we really believe that AI is going to drive a lot of efficiencies in pharma. You see the numbers that are coming out from clinical to discovery clinical onto commercial, you're seeing 70% reductions in terms of molecules getting through that pipeline. Again, when you think about that, we would be the net beneficiary of that in terms of downstream testing, and it's going to be a tailwind over time. So that's the customer side. We spent a huge amount of time thinking internally about AI and not just giving flashy headlines but thinking about how it's going to reshape our business going forward on it. And I think when I think about AI, the first book that we think about is our product and customer connection, and that's where growth involved. So we're really looking about how it is going to help us with our software -- acceleration of our software products. With across that group, now we've put software into 1 place. We've done a lot of movements in the organization. So AI coming in at this time is a really important enabler for us go forward on it. And second, it's kind of reimagining our internal and end-user workflow. So how do we reshape what we do. I think some companies make a mistake by just layering AI over the top of existing process, you probably get a 5% to 10% benefit. But if you reshape process about how you're connecting with customers and how you connect inside, I think you get an oversized benefit. And that's going to be -- it's going to be self-funding as we go along and as we move forward. But I think what's going to be different at Agilent, when you see the headlines in different areas and sectors and different companies. First, we're going to have -- we create a huge amount of signal that's necessary for AI. You think of our installed base. There is no AI without data and signals. Our analytical tools feeding into that create a lot of opportunity for us. I think second, building and owns enterprise-wide capability not just buying disjointed AI tools, but connecting operations, product and our customer experience in 1 area creates a really strong dynamic flywheel. And we have really strong partnerships. It's 1 thing to announce a partnership with a frontier model, which we're really excited working with the OpenAI team. But then having BCG help us with the deployment and the execution across the company is super important through the Ignite framework. And this is going to be very tops down. It's going to be all numbers driven, but we're leading with that growth area. So I think we're -- it couldn't be a better time for us.

I guess how do we think about the implications of the deal today then? I mean, is this something that's going to result in a definable revenue stream? Is it more touch points with customers...

You're going to see that over time, we're going to be announcing that you're going to see revenue both on the product side and software side that we're going to be increasing over time. We expect our market share gains to improve on the customer connection side when we're only beginning on that site. So we'll be able to release those numbers over time as we deliver those numbers. it's going to be really important. And I think 1 thing we were very, very careful not to do was trying to just have a flashy announcement and just do a little -- because tokens are expensive. And you can see companies now areas where tokens become prohibitive over time, but we want to be very clear with our key use cases that are driving growth so we can self fund this amazing opportunity we have over time.

And Adam, from your perspective, AI, just on procurement supply chain, just margin levers, how are you thinking about that?

Yes. So it's obviously a great opportunity, and we're working to deploy it in the right spaces. And so there's some use cases and some very straightforward use cases. We're using 1 of the finance team. Procurement is part of -- was 1 of the initial Ignite transformation areas. And so part of coming out of that were some of AI opportunities as well. And then the other area is pricing and supply chain where we're seeing good opportunity. And you've heard a little bit about our control tower that we're using on supply chain, which has been such a help, not just to the planning and reliability of the supply, but also as we start to think about driving efficiencies going forward, and it really helps us think about our network differently. So in shocks to the network, things like that when you have that forward-facing outlook, it's much easier to plan and actually think about how you're building out that footprint. So it's been a real thing for us.

The 1 thing I would just add, I forgot to mention, Tycho, is that when we did an assessment of where companies fail or companies really are successful in this, we created an AI center of excellence at the center, we have the Chief AI Officer. he's come in from Berle in what the businesses are required to deliver and deliver on the numbers. But having that central operating system of how it's deployed when and the sequencing of things and making sure what we said we're going to do is going to -- that is going to happen is really important, and that's going very important central capability for us.

I want to make sure we spend a minute on diagnostics. It's a $1 billion business. You've done M&A there recently. Just talk a little bit about how you're thinking about market growth and some of the dynamics that's allowing you to put up healthy numbers there?

So number one, I think you saw the strong diagnostics and clinical in Q2, so 11%. And we believe that's been a great business for us over the last number of years. Unfortunately, demographics are in our favor in that business, aging population, greater incidence of cancer, things like that. So that really helps us. The other piece is we're seeing strong traction with our technology. So the family is really gaining traction. You see that in the numbers, and you'll see that continue to evolve. The other piece I would layer in here which is important is this Biocare acquisition. It's -- number one, it's a great template for the types of deals that we want to do. And then you see how it layers into business, complementary and instruments. So where Dako is in the medium throughput, the Biocare instrument is in the low throughput. So complementary instruments, complementary geographies. So we're going to -- they're going to leverage our footprint in Europe, perfect, and then expanding on menu, which you know that the name of the game here is menu expansion, but it will also give us access to more tenders globally, things like that. And then the last piece, which hasn't gotten as much attention, but I'm personally very excited about is the innovation engine that we're getting out of Biocare. They've been very in creating new antibody tests and doing it efficiently. So big opportunity there. So really excited about Biocare, how that's going to roll through and it's just going to continue our legacy of being kind of a diagnostics leader.

Maybe just in the last minute, we could hit on margins. If you go back pre-COVID, the framework was 30%, 40% core incrementals. As we look ahead, any reason that you couldn't be at the high end of that range or above given tariff headwinds abating some of the AI initiatives you talked about?

Yes. So I think it's fair to think of our margins in that way. The one piece I would say is that we will be balancing that with investments in growth and innovation. And that's something we've been clear about all along. I would also say if you want to think about how the ramp will happen over time, think about the LRP guide that we've given, which is 50 bps to 100-plus bps on a year-on-year basis margin expansion. And I feel very confident in our ability to deliver that and the confidence comes from 3 areas, really. So if you look at number 1 is the execution excellence. You've seen our ability to perform under a variety of different conditions over the last several years, several quarters, and it's only getting better so that we can execute. The second is the Ignite operating system. So it started as a transformation is really now an operating system. So when we have a challenge or an opportunity, we can run it through and run it through the company very quickly in a cross-functional way. So it's very, very powerful. And you see that in our performance in the second quarter, top line margin and EPS. And then the last piece, which is what gets me up in the morning is the customer-driven innovation. And so with those 3 elements, I feel very confident we're going to be able to expand our margins. As we've said, you see the innovation that we just launched at ASMS and I think we're in position to deliver. Really excited about the future.

And just last one, tariff refunds not embedded in the guide. How do we think about the impact? I think it was a $60 million gross impact when you went in? How do we think about it?

Yes. So as you know, people who pay tariffs, we have the right to file for a refund. We filed where appropriate and will continue to file, so it doesn't happen all at once. We didn't include it in the guide, one because we don't have any information about the approval and what coming. We don't want to skew that. We'll be transparent about when you can get those numbers. The second piece is when we get the refund, we will include it in our adjusted non-GAAP earnings, we'll be transparent about it once again. The -- if you think about what we paid in '25, it's about $70 million. And when we get that back, the last piece I would just highlight is that there will be some impact potentially on our variable pay, so it may not all drop to the bottom line. But when you look back in 2025, there was the same effect and so we want to me sure [Audio Gap].