Agilent Q2'16 Earnings Conference Call: Full Transcript

Operator:

Good day, ladies and gentlemen, and welcome to the Q2 2016 Agilent Technologies Incorporated A Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today’s call is being recorded.

I would now like to turn the conference over to Alicia Rodriguez, Vice President, Investor Relations. Please go ahead.

Alicia Rodriguez:Investor Relations:

Thank you, Sabrina, and welcome everyone to Agilent’s second quarter conference call for fiscal year 2016. With me are Mike McMullen, Agilent’s President and CEO; and Didier Hirsch, Agilent’s Senior Vice President and CFO. Joining in the Q&A after Didier’s comments will be, Patrick Kaltenbach, President of Agilent’s Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent’s Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group.

You can find the press release and information to supplement today’s discussion on our website at www.investor.agilent.com. While there, please click on the link for financial results under the Financial Information tab. You will find an investor presentation along with revenue breakouts and currency impacts, business segment results, and historical financials for Agilent’s operations. We will also post a copy of the prepared remarks following this call. Today’s comments by Mike and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. And please note that we will refer to core revenue growth which excludes the impact of currency, the NMR business and acquisitions and divestitures within the past 12-months.

Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Guidance is based on exchange rates as of the last day of the reported quarter. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties, and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risks and other factors. Before turning things over to Mike I would like to remind you that Agilent will host its Analyst and Investor meeting in New York City on May 25. Details about the meeting and webcast are available on the Agilent Investor Relations website.

And now let me turn the call over to Mike.

Mike McMullen:President and Chief Executive Officer:

Thanks, Alicia, and hello, everyone. Thank you for joining us on today’s call. The Agilent team delivered another strong quarter our Q2 revenue and earnings were above the high end of our guidance. Let me highlight three key results. First, revenue was up over 8% on a core basis. Second, we delivered adjusted operating margin of 19.4%, an increase of 110 basis points from a year ago. Finally, EPS of $0.44 was up 16% over last year.

Before moving on to a view of our Q2 results I do want to address our year-over-year comparisons which reflects unusual events from last year. Of the 8% core growth that we are announcing today about 1.5 percentage points due to shift of revenue last year from Q2 ‘15 into Q3 ‘15. In the second quarter year ago we experienced $15 million of shipment delays due to start up challenges with our new US logistic center. In addition, our process approved efforts over the past few quarters to cover incoming orders more quickly to revenue have paid off. We have reduced our order to revenue cycle time particularly in China. Consequently some shipments initially forecast for Q3 of this year were delivered in Q2. As the strong results of led by double-digit core growth in pharma and food markets. We also experienced continued strength in Academia and government environmental and diagnostic and clinical markets. All end markets grew except chemical and energy. Growth was broad based across most of our portfolio.

Geographically all regions grew except Japan led by very strong growth in China.

Let me highlight our Q2 results for our business group. The Life Science and Applied Market Group delivered core revenue growth of 8% led by strong demand in the pharma and food markets. About 3 percentage points of the 8% increased was thanks to -- compare due to the timing issues mentioned earlier from last year’s US logistic center startup. The combination of strong top line growth, expense management and gross margin improvements partially due to NMR exit drive LSAG’s operating margin to 19% up 320 basis points from a year ago.

LSAG continues to strengthen his portfolio in Q2 as an introduce VistaFlux software. This new software speeds up clinically research data analysis so scientists can more quickly understand the underlying causes of disease such as Cancer. VistaFlux strengthens Agilent’s leadership position and better blow mix.

Last week we announced the new Agilent 1260 Infinity II LC at the analytical trade show. This instrument provides best in class lab efficiency and improve performance of full backward compatibility. Next the Agilent CrossLab Group continue to deliver consistently strong revenue results. Core revenue growth in Q2 was 10% led by strength in contract services, LC columns and lab supplies.

Expansion and penetration in Asia continue to be strong contributors to our growth. Operating margin was flat versus a year ago at 21.5%. CrossLab represents a strategic transformation of our services and consumables business. I am pleased to report that Agilent’s recognized with the 2016 Reviewers’ Choice Award for our customer service.

This award is from SelectScience, an independent, expert led scientific review. This is a second year a row that scientists in North America have judge Agilent’s customer service to be the best in the laboratory products industry. Finally, the Diagnostics and Genomics Group delivered 5% core growth in Q2 against a difficult compare. The pathology business continues on a steady trajectory back to market growth rates.

However by strong demand for our new PDL-1 companion and complementary diagnostics test. Genomics showed strong market performance led by our sure select target enrichment and our ACG’s offerings.

The ACG’s operating margin was flat versus a year ago at 15%. In Q2, Agilent announce an $80 million investment in Lasergen an emerging biotechnology company with innovate next-gen sequencing technology. Our two companies will collaborate on building an NGS work flow for a clinical applications. In Q2, Agilent also announced the commercial availability has expanded to the EU for our new PDL-1 diagnostic test for non squamous non small cell lung cancer.

This diagnostic was developed through a collaboration with Bristol-Myers Squibb the maker of --.

Now I’ll provide an overview of Agilent’s core revenues by end market. Life Sciences and Diagnostics market saw a continuation of our first quarter performance was strength across all end markets. Pharma grew 14%, fueled by technology refresh deals, new product uptake, and sustained growth in the aftermarket. This is the fifth consecutive quarter of greater than mid to high double-digit growth in pharma.

Academy and government grew 7% driven by strong demand in China and an uptake in the US. Clinical and Diagnostics also grew 7% was strengthen in genomics led by target enrichment in ray CGH.

Applied end market performance was mixed food was up 25% with strong sales in China and the Americas. China also drove 6% well by growth in the environmental forensics. Chemical energy declined 3% reflecting continued macroeconomic concerned and the effects of lower oil prices. Now I’ll like turn to an update on our operating margin improvement initiative.

Q2 marks the fifth consecutive quarter of year-over-year operating margin improvement delivered by the new Agilent team. This will be result of our ability to outgrow the market while drive an operational efficiency improvements. Our multi-year Agile Agilent program continues to simplify the company making us more enable and lowering our cost. Our execution and companywide streamline of organizations, processes, and systems continues to be on track to deliver incremental savings in 2017.

For example in Q3 we will take a major step forward and simplifying the company’s systems’ infrastructure with all of our financial systems now on SAP. On the capital deployment front we paid $37 million in dividends, repurchased $94 million of Agilent stock and invested $80 million to enable NGS work flow strategy. Finally, our one Agilent initiative driving a well received cultural transformation to improve cost company collaboration and delivery of results. At last year’s Analyst and Investor day described the shareholder value creation model for Agilent will be driven by outgrowing the markets, expanding operating margins and a balanced capital allocation policy.

I would like take a minute to position Q2 results in the context of our longer term goals. After delivering our highest annual core revenue growth in 2011 of 6.4% in 2015 we’ve now had two strong quarters to start 2016 including this quarter’s 8% core revenue growth. Since a new Agilent team leadership team is put in place the team has delivered year-over-year operating margin improvements every quarter. We have completing offset initial $40 million of the synergies from the company split.

In fiscal 2015, we returned $400 million to shareholders and $370 million year-to-date in 2016 through a cash dividends and share repurchase. From 2015 until now we have also invested our $400 million in new business via M&A and equity investments. Didier will share more specifics later but we are raising our full year 2016 outlook for core growth, operating margin, EPS and cash flow.

Let me now talk about our second half ‘16 forecast in light of what we have already achieved in 2016 and we’ll be planned to deliver in 2017. When we look at today’s overall market environment while we phase increasingly tough compares we expect strength in pharma continue in the second half 2016 and into 2017. China is also expected to remain strong in second half of 2016 and 2017. Taking a closer look at the chemical and energy markets we have been -- more prolonged and sleeper slowdown that initially anticipated.

We are now forecasting overall low single-digit market declines for the year versus our initial flat guidance assumptions. The oil exploration segment of this market has been down significantly for some time with a recent well reported spiller into the refining segment. There are initial indications however of a bottom end with increased deal activity in the large chemical segments of the market. We have projected an improved chemical energy market environment in 2017.

We are assuming we will continue to face headwinds in this market for remainder of 2016. We are currently modeling 2017 with an above market core revenue growth of 4.5% at the midpoint. This is in line with our projected full year 2016 core growth rates but higher than our expected core growth rate in the second half of 2016. There are two reasons for this increase, first we expect to have a very strong new product introduction in the second half of FY ‘16 which will drive revenue growth in FY ‘17.

Second, on the end market front we expect chemical energy to have bottom now for year-end accompanied by a continuing solid conditions and all of our other end markets and in China.

Overall we remain on track with our 2017 goal to outgrow the market and improve our operating margins to 22%. Looking inside the company I can share with you today that the one Agilent team is working well together and is driven to win in the market place. I look forward to see many of you at our Analyst and Investor day where I’ll share progress versus our commitments, how we will sustain or improve performance and the longer term outlook for the company. Thank you be on the call today.

I will turn it over Didier who will provide additional insights on our financial results and guidance for the third quarter and full year 2016. Didier?

Didier Hirsch:Senior Vice President, Agilent Chief Financial Officer:

Thank you, Mike and hello everyone. As Mike stated we delivered a strong performance this quarter again 8% core revenue growth, 110 basis points of operating margin expansion and $256 million in operating cash flow. After adjusting for last year’s $15 million slippage in revenue from Q2 to Q3 as we launch our new US logistics center our core revenue growth of 6.5% remained well above market. During the quarter we brought back $94 million of stock and paid $37 million in dividends.

Finally, a May 3rd we successfully moved all finance applications from Alcor to SAP which is our main ERP. This will result in significant simplifications of our finance and IT operations. I will now turn to the guidance for our third quarter. We expect Q3 revenues of $1.03 billion to $1.05 billion and EPS of $0.45 to $0.47.

At mid-point revenue will grow 1.3% on a core basis or close to 3% adjusting for last year’s $15 million impact from the US logistics center. And turning to share repurchase, we expect to buy back $93 million this Q3.

Now to the guidance of fiscal year 2016, we are raising to midpoint of our revenue guidance by $60 million including $50 million due to currencies. As a result, we are increasing our core revenue growth guidance at mid-point from 4.25% to 4.50%. We are also raising the mid-point of our EPS guidance by $0.06 including $0.03 coming from currency and $0.03 from operational performance. And one important note, after further review we and our auditors have concluded to account for the Lasergen investment using the cost methods of accounting.

This means that we will not book our share of Lasergen losses as previously communicated. Finally, we are raising our operating cash flow guidance from $650 million to $740 million and there is no chance to CapEx guidance of $140 million.

With that I will turn it over to Alicia for the Q&A.

Alicia Rodriguez:

Thank you, Didier and Sabrina will you please give the instructions for the Q&A.

Question & Answer

Operator:

Yes, thank you. Ladies and gentlemen if you have question at this time please press star then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue please press the pound key. And our first question comes from the line of Dan Leonard of Leerink Partners. Your line is now open.

Dan Leonard:Leerink Partners:

Thank you. Two questions first of all can you elaborate on the business trends you are seeing in Europe and then secondly on the pharma end market can you talk about what gives you confidence in the fiscal 2017 outlook you would have get another strong year in pharma following two years then a tough comps in capital markets which have been more less shot. Thank you.

Mike McMullen:

Yes thanks Dan I think I actually pass that over to Patrick he was just this back from our trip to Europe provide some insight in what’s going on in Europe and then also pickup the question on pharma as well.

Patrick Kaltenbach:

Sure I am happy to do. So let me start first to giving you some insights on Europe we have seen actually some teasing growth in Central Europe, we have seen some weakness on what we called the idea was Eastern Europe and that’s mainly driven by the chemical and energy markets with the energy market on that side. In Central Europe as -- strengthen in Germany and -- states around it we still see some issues on the Academia and government side of is one of the flat but pharma for example is also every strong in Europe. For your pharma question overall we are confident that we will continue to see pretty high growth in pharma for the remainder of this year we targeted low double-digit growth for pharma and looking into 2017 we have think the pharma market will be continue to be strong for us driven by two vectors.

We see a continue demand in the replacement business and as you probably know we just launched at the end of the -- conference we launched our new 1260 Infinity LC Series as an example to get the infinity lab consumables and service and we think that will drive continue to drive a lot of good replacement before this for us in pharma and then we see also continue demand in the biopharma space that are looking for new solutions helping but it is more complex molecules in terms of analysis and we have a very comprehensive operating for this spaces well.

Dan Leonard:

Great. Thank you.

Mike McMullen:

You are welcome Dan.

Operator:

Thank you and our next question comes from the line of Jonathan Groberg of UBS. Your line is now open.

Jonathan Groberg:UBS:

Hey thanks congratulations on another great quarter Mike. Can you just collaborate a little bit on I think you said core guidance on the if I am looking at presentation core revenue growth guidance in the third quarter is pretty precised at 1.3% and then I just heard that you still expect pharma to grow low double-digits can you may be just give little kind of inside is to what you’re seeing in the third quarter?

Mike McMullen:

Yes, what we looked at was what’s our growth rate that we’ve had over the first half of this year and as we looked in the Q3 and Q4 and when I point to is a couple of things Jonathan first of all tough compares and this is inclusive of a few onetime moves between quarters which actually were driven by improvements of role operations so as Didier mentioned we had this $15 million shift in Q2 of last year into the Q3 which when we had our start up issues with new logistics center so we adjust with that we catch up about 3% growth. The other thing we saw happened in the Q2 was we reckon really hard to improve the overall cycle time from the time that customer places order to actually install and we can recognize the revenue. In Q2 we actually see their expectations and we got there lot faster we had thought and was that meant was we have significant amount of revenue probably $20 million to $25 million that came from Q3 and Q2 are initially forecasted into the second third quarter.

All in all we kind of take in account those things as you have got putting more of consistent kind of the growth scenario between Q2 and Q3. I would tell you though the chemical energy is still looking for bottom and that’s why we have that outlook for the year which basically that’s down and stayed down for the rest of the year. There are some signs it could be getting better we have not commenced that we seeing the bottom chemical energy so I thing the combination of those tough compares as well as our outlook on chemical energy is what’s driving the overall guidance for the second half.

Jonathan Groberg:

Okay that’s helpful. And then I guess is one more are there any sometimes when we shifts on to one platform at cohort SAP is there anything at all any kind of -- less there in terms hick ups in the quarter.

Mike McMullen:

Yes what we try to do here exact right Jonathan so the legal room we last for we make sure will then live the first month of the quarter and Didier in the cumbersome here smile and Didier I don’t see I want add additional color and how is going so far.

Didier Hirsch:

Yes it’s it going very well the migrations and the start up of the operations that was zero disruption obviously we expect to have to deal with some stability stabilization activities throughout the quarter we will do too close before we do the quarterly close so everything is we couldn’t be happier about how it will, went and you’re correct it is a very complex endeavor one that we are pretty used to we’ve done few of those in the past but still it remains a very complex endeavor and we are really happy how smoothly it went. And Jonathan as I put it out of my script this is one of the Agile Agilent initiatives which will start to see payoffs in our cost structure as we move into ‘17.

Jonathan Groberg:

Great. Thanks a lot.

Mike McMullen:

Thank you.

Didier Hirsch:

Thank you.

Operator:

Thank you and our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open.

Tycho Peterson:JP Morgan:

Hey just following up on that last one on the SAP margins can you may be on the margin impact can you may be qualify how much that could plan on margins for this year?

Mike McMullen:

For 2016 I think it would be very limited at this that Tycho because we’ll be one of some duplicate backup systems and then the other aspects of our external spends we don’t come out to ‘17. So I really position that in ask to think about this more as ‘17 impact but a proof point -- everything we’re going to be able to improve our margins again in ‘17.

Tycho Peterson:

And then academic 7% can you may be just talk us to whether you’re seeing an acceleration there because you saw this quarter?

Didier Hirsch:

Yes what we saw in last quarter is really strong performance in China and some increase science of life in the US side of things. I think and that’s will be pointed to an uptick not a lot of significant moves on the European side it’s mainly a China, -- story and I think if there will be upside to it will come from the US so how we’re thinking about it. Okay and then lastly just in terms of pharma obviously that’s been a nice driver can you maybe talk about where you are in the LCMS upgrade cycle and how much your growth going forward is going to be contingent on R&D budget expanded versus the upgrade cycle.

Mike McMullen:

Yes sure Tycho great question. I know Patrick and I will be look at this pretty closely and what the view on that.

Patrick Kaltenbach:

Yes. So I think that two cycles we are looking at the first cycle we went through was -- operate cycle from HPLC to UHPLC which is still ongoing but part of that probably has been done. But when you look at the install base instrumentation it still deals with core LC and this is where we are targeting -- two series right now. There is still lot of replacement pending out there.

Just as a reminder we have probably about 150,000 systems out there based on the 1100, 1200 platform which overtime will up for replacement and we are position extremely well with over platform because its 100% backed to its compatible and we also ample for example to immolate some of our competitors systems on our platform so if the technology we called ISET Intelligent System Emulation Technology and that actually compels very nicely with our customers and gives us a unique advantage in the market.

Tycho Peterson:

So I think we see both those have -- through ‘17.

Patrick Kaltenbach:

Absolutely those going on into ‘17 the combined again with the is PC coming out of biopharma.

Tycho Peterson:

Okay thank you.

Mike McMullen:

You’re welcome Tycho.

Operator:

Thank you and our next question comes from the line of Jack Meehan of Barclays. Your line is now open.

Jack Meehan:Barclays:

Hi thanks good afternoon guys. I just wanted to start the better at least relative to what I was looking for it looked like you had better gross margins in the LSAG segment now two quarters in a row. Can you just talk about what’s in the notable changes there are is there anything with product mix such driven the improvement or do you think this is the new normal of course I think let me make some initial comments and then -- Patrick and you can build with. In terms of product mix part of what you’re seeing is the fact that we are winding down through a P&L the impacted NMR business and I think you can see the benefit of that exit decision on the P&L because it really has been contributing to improved the gross margins that’s not the whole story the other story in obviously the strong demand for the products and the volume benefits we’re getting as well as the focus on taking cost out of our material cost side of our business as well as we talked lot about the logistics last year we can also talk about logistics this year which is we’re doing a much better job in terms of overall logistics operations that’s blowing through on the P&L as well.

So Didier Hirsch if I missed anything else.

Didier Hirsch:

No you --- Thank you.

Tycho Peterson:

Great and then just one more for the adoption of companion diagnostics now few quarters into the launch. Are you in a position could you may be just help us size with that businesses today or just in the market where you think you hold in terms of market share? Thanks.

Mike McMullen:

why don’t you take that Jacob.

Jacob Thaysen:

Yes thanks for that question and we are definitely pleased with the pickup of the PDI 1 and this continues during the last based is in the three quarters. The market is still very early we still really only in U.S. We have had a few press releases here lately also that we entering into Europe but we just catching the surface in Europe and further more it still a second line still addressing the second line treatment and if that also goes to the first line treatment the market comp will become significantly
Larger.

At this point of time it still small revenue in the biggest scheme of things but I do believe that the PDI 1 has an opportunity to be a as big as the -- market. However I will remind you that the at least four probably five different potential ---- and companion diagnostics out that has to share that market. So still early days but a great opportunity.

Operator:

Thank you and our next question comes from the line of Brandon Couillard of Jefferies. Your line is now open.

Brandon Couillard:Jefferies & Company:

Mike could give us or Didier could you give the China growth rate the percentage change in the quarter and if you could speak demand in the food area outside of China and Asia that will be helpful.

Mike McMullen:

Yes so in the China of Q2 what we have been pointed to is strong double-digit growth. So it was very very strong quarter for us in China. I would remind you the part of the strong growth was not only the strength in market but those operational efficiency improvement that I talked about where we really had shorten the improved cycle time from orders to install that was really dramatic in China. So basically quite strong for the year, you should not expect those strong double-digit growth every quarter though for in Q4.

But overall China is just to complete the history here. When we came into this year we thought that the overall performance for Agilent in China might be high single-digit we’re now look at low double-digit growth in China for the full year.

Brandon Couillard:

Thanks and one more for Didier, I know as you -- for the operating cash flow guidance in about $90 million how much of an impact does the and there is a tax refund benefit if you can quantify that and just help bridge to delta between prior versus new.

Didier Hirsch:

There was the overall tax outlays forecasted for this year where I think about $10 million less than what we had anticipated in our initial guidance $10 million $15 million and the rest is really operational performance improvements in a working capital management and FX and then just the operating profits.

Brandon Couillard:

Super. Thank you.

Didier Hirsch:

Sure. Thanks.

Operator:

Thank you and our next question comes from the line of Ross Muken of Evercore. Your line is now open.

Ross Muken:Evercore:

Good afternoon guys. So Mike since taking over its obviously been a pretty hectic journey and you’re messaging from the beginning it’s been pretty consistent around growth and margins and returns obviously last few quarters you start to develop a cadence last quarter results were had the challenges on FX. Do you feel like this is the first quarter where you feel like you got to deliver the full bag where you are able to sort of drop through the top-line out performance which is clearly better than market. It droves the margins your buying stock to returns, the cash flow is good that your finally able to sort of show the market that the business models working and that sees I guess into your confidence also I would assume on ‘17.

Mike McMullen:

Yes I couldn’t set a better myself, thanks Ross for the question. I think that we’ve been working really hard last four or five quarters and new leadership team and as you look at everything came together this quarter when we’ve had our strong growth, we’ve improved in our operating margin that I pointed out in ‘15 but all of ---- really came together nicely in the second quarter and I was particularly pleased on some of the more operational activities about working on side the company and that may not always be so apparent initially on the outside world but you start to see the results and the fact that we’re doing we’ve just a logistics challenge. Do I have to talk about you and your competitors but it fixed that actually now is contributed to improve results.

Yes we had a talk about the shorten cycle time for orders to revenue and importance some revenue were initially plan for the third quarter but we made this operational improvements since the cycle times are shorter and this is now the new normal.

So I guess that was closing comments with yes, when a new normal for the company we have got a lot of confidence about 2017 perhaps little bit my thunder for the Analyst meeting next week but still hope one attends. But when you start having this proof points of quarter in and quarter I think it starts to show you the team is delivering and I think the results are now starting to be appreciated and believed.

Ross Muken:

Great and then maybe quickly just to see horse can you just give us update on how that business is performing relative to your expectations and how its plugged and where you know you’re sort of seeing maybe the early fruits and some cross synergy with the existing business.

Mike McMullen:

We just in fact very timely question for ask we just had our 180 day review this morning and Patrick why didn’t you go ahead and share a couple of highlights from that session.

Patrick Kaltenbach:

Sure absolutely. What I really would like to highlight is how seamlessly integration --- so we are now at 6 months in integration and we will say the target full integration by June which mean that you have implemented all of the systems which is a pretty fast space. At the same time we are seeing that the positioning of Seahorse within our portfolio really works out. We have to see nice deals and combined sales of ---- and Seahorse and areas like disease resurgent disease could ---- actually exciting where we thought it’s complementing our strength in metabolisms with the life set of metabolism which see springs --- and this is a very nice story well with our customers we are again we are on the integration side we are very pleased for footwear we stand and looking forward very successful.

Didier Hirsch:

Yes Ross I just had two things the comment I made just add two things the comment I made this morning is this is the fastest I have seen this doing integration they seems usually along from many quarters in the some cases for years. This one is moving along really fast and we are getting some wins the fact we want an LCMS deals because of -- so I mean it’s the complementary nature of the portfolio is to starting to work.

Ross Muken:

Excellent thanks.

Mike McMullen:

Thanks, Ross.

Operator:

Thank you and our next question comes from the line of Paul Knight of Janney Montgomery Scott. Your line is now open.

Paul Knight:Janney Montgomery Scott:

Hi, Mike the move you made to create cross labs since began interaction can you give us little background on CrossLab in terms of who do you think is taking share from somebody at that kind of growth rate could you give us more color on CrossLab.

Mike McMullen:

Yes so as you mentioned that was a major strategic move when we the company we established Agilent CrossLab Group. We have this vision about how we could really attack and go after the enterprise wide services and consumers opportunity and as you see Mark and the team have really delivering and we know that the customers are responding to the value preposition but Agilent offers both in terms of how our service capability is -- so I mentioned in my script about the external recognition we’ve recently received. But they also appreciate the fact that we are able to give some insights in terms of actually help them improve the business operation and we are seeing a really strong demand for this in the pharma and growing interest in other parts of the applied market. So we know that we are growing faster than of our competitors in this space.

We also know that there is only few -- really trying to go after this type of business I believe this is where the market is already going to and I think you want to be a player here leave it to can you guys that figure who is about losing share but doesn’t feel like but I think see I can tell you as we’re growing close to double-digit in this space so I mean so it’s been attractive move for us.

Operator:

Thank you and our next question comes from the line of Tim Evans of Wells Fargo Securities. Your line is now open.

Tim Evans:Wells Fargo Securities:

Thanks, congratulations on a good quarter and I am just trying to understand the variance in the quarter relative to what you’re expecting I believe you had called last quarter for 4% core growth and we saw 8% this quarter. I hear is that it’s sounds like about half of that variances about 200 basis points was from the better booked backlog to revenue conversion in this quarter and in know you also called that the compare us to last of that comparison should have already been known so I just want to understand what’s that looks to other 200 basis points that really surprised during the quarter.

Mike McMullen:

Sure Tim -- thanks for your comment and I can give you few dollar numbers of revenue impact the way we’ve been looking at it and you can do the perhaps a math on the impact on the growth rates, but what we saw relative to our initial expectations for the quarter we’re really first of all starts with the market right. So the overall market demand came in as we predicted we saw a good growth across entire portfolio led by pharma and food markets in China --earlier but I’d ask you to look at two things. One is this higher conversion of orders to revenue then forecast so basically what we’ve done is we reduced the cycle time and by our estimates happened lot fast while we had brought which I think is good news from the standpoint of operational efficiency did create some forecasting challenges but probably $20 million to $25 million came from Q3 and into Q2. The other thing I think you should take a look at is the FX assumptions so around $9 million or so Didier I think it was the number so FX added about another $9 million.

So between that’s the cycle time improvements the FX assumptions and this the fact that the market continues to get more fair share of markets where the growing I think those combination of those three facts I think will help the bridge the difference between our guided growth and what actually occurred.

Tim Evans:

Okay and just a real quick similar question on the margin side obviously a little bit of the margin in the quarter was the drops through. But it looks like you probably did better than your expecting on and absolute dollar basis on the SG&A as well can you help me understand may be what is going little faster there than you anticipated.?

Mike McMullen:

I think on the SG&A front I mean we’ve got a couple of our program inside the Agilent little bit ahead of plan and but the reality is something else of

Didier Hirsch:

Most of the impact was volume driven and obviously the FX but there was versus the initial guidance.

Mike McMullen:

I will say the field structure that we put in place last year is really stable down I think it’s delivering help us in the gross side and also on the SG&A front as a more efficient go to market channel.

Tim Evans:

Thank you.

Mike McMullen:

Thank you.

Operator:

Thank you and our next question comes from the line of Isaac Ro of Goldman Sachs. Your line is now open.

Isaac Ro:Goldman Sachs:

Good afternoon and thank you. I had a question on margins as well. On the gross margin side I was curious if we should expect may be another way of improvement now that you have the ERP integration done and on the all margin side curious, how satisfied you are with the sales force realignment and whether or not there is still more synergies we had there as well.

Mike McMullen:

Yes a couple of comments here than I’ll bounce to Dedier to indicate to add a few things here. But in terms of the sales force integration and go to -- we couldn’t be happier I mean that was a major move we made last year where we basically went from five sales force than two sales force one focused on the and with the laboratory market place than the other one focused on the regulated diagnostics market place.

There is a time I remember sharing with you we’re marking a big change here and it could affect the top-lines and short line that’s didn’t happen in fact I submit that as we go out into ‘16 and ‘17 we’re now putting more resources of specialization academia and biopharma so I think you’re going to see the changes paid off in terms of longer term growth so we’re really happy with both the fact that will all behind us it settle down and I think it start to pay off on the initial benefits of envision created that structure.

Relative to gross margin ERP this keep in mind that what we’ve been talking about is a financial systems which really go into the SG&A line. So it really won’t affect the gross margin that being said we do think we can do more on gross margin as we move forward n ‘16 and ‘17.

I will talk a little bit about more about in detail next week in New York but as you may know our initial 400 basis points of improvement when I came on board we said half will come through OpEx and other operational cost and then other through growth and a growth peace would be a lot of be driven by our ability to capture gross margin improvements on an increase volume. So we think we still have room to improve our material cost and we think that we’ve got room to continue to bring down our logistics cost.

Isaac Ro:

That’s really helpful may be just a follow up on just to clarify on two topics one is biopharma and the other one on the commentary you made on China. On biopharma could you just compare the growth rate you’re seeing in the QAQC setting versus R&D and then in China just curious how much of improve outlook there is based on the visible you have with government funding versus sort of end markets that are more in private industry side. Thank you.

Mike McMullen:

I think that on the your question what I’ve seen a real significant differences in growth rates that could cause segment to describe in pharma. I do think if you go out a couple years down the road I think we would expect the growth rate in biopharam be higher than small molecule well that’s not at all the case. Right now and you heard early from Patrick we expect that to continue through ‘17 we are getting more clarity about what’s going on in China I think there is lot of concerns of one point time on the private sector inside of the business but obviously as you know -- government drives the market area to large extent and we are getting more clarity on what’s happening in funding. So that’s why we have increased confidence in our outlook for our business in China.

Isaac Ro:

Got it thanks so much.

Mike McMullen:

Thanks.

Operator:

Thank you and our next question comes from the line of Derik De Bruin of Bank of America. Your line is now open.

Derik De Bruin:Bank of America Merrill Lynch:

Hi good afternoon.

Mike McMullen:

Hey Derik

Derik De Bruin:

Hey I just wanted to clarify, did I hear you correctly that your initial flash for core growth guidance for fiscal ‘17 was 4.5% to mid-point.

Mike McMullen:

Yes.

Derik De Bruin:

Okay and so can you sort of like point that in terms of what you are thinking for the chemical energy market there I mean just sort of what you are expecting in terms of a rebound and I am just could you help us frame that comment a little bit more in terms of --.

Mike McMullen:

Sure I’d be happy to because sometimes you can use language it doesn’t really could be insight you need. So let me try to clarify. So what we said was in this year we thought our performance will be flat for the entire year well infact its going to be down we probably think in the range of 2.5%, 3% for the year for the entire year and that is the change from our assumptions coming into this year and that was the assumption we’ve made at the time of initial guidance which makes our revenue results even much more we’ve a really pleased results given the fact that the chemical engineering market has not developed the way we initially had thought. That being said in ‘17 we actually going to be improve which means it won’t be declining and in fact will probably flat or may be low, low single-digits and why do we believe that.

If you look at how our business breaks down in that segment we’re often talked about the oil side but 50% of our business historically has been in the exploration of --- is been in refining.

The other half which if by far the biggest individual segment is the chemical side and they’re benefiting by lower feedstock cost may’ve got 10 of investment demands and we’re starting to see increased deal activity. So in fact Patrick and I were talking about this morning that currently reminds me of a --- former a few years ago basically we’re going to have two years of shrinking performance in this market place. A lot of pent up demands so long story -- our growth assumptions would actually assumes a low single-digit chemical energy a growth for the year again was still believe we’re searching for the bottom so and it’s still early in year of 2016 but that’s our basic assumption for ‘17 which is an improved environment not dramatic but improved from what we’re seeing over the last 24 months.

Derik De Bruin:

And just to the quick follow up on the chemical comment, you’re not worried that some of the activity between down to -- and it looks like there may be like -- there maybe Monsanto and companies that are dancing around you worried that could sort of tiny investment if you are using - sort of combinations of other companies if there is some potential headwind from the chemicals market.

Mike McMullen:

Yes no Dough that’s a great question. We looked at this pretty closely when the announcement was first made although Dell and -- are very important customers to us that particularly deal activity really in material to the total company’s performance and we didn’t associate as a sign of an acceleration of M&A and consolidations going on this space so of course there will be some pause if would see more that, but we are not concerned about that and I guess the beauty of those business is been just the broad based nature of our customer base so we are overly dependent any one single customer.

Derik De Bruin:

Thank you very much I will back in queue.

Operator:

Thank you and our next question comes from the line of Dan Arias of Citigroup. Your line is now open.

Daniel Arias:Citigroup Group:

Good afternoon thanks. Mike can you just touch Japan how Mike can you just touch on Japan and things that you saw during the quarter in terms trends and then maybe what you are looking for just point on the--.

Mike McMullen:

Yes so Dan thanks for question and if you had little bit of my history I spent five years in Japan. So I always been a big support of Japan in terms of long term view of the market and I’d actually take a long term view of the market in Japan. So that was the only market that actually was down for us in the second quarter and we are expecting continued subdue performance in Japan. So we are not expecting much in terms of improvement in the overall market environment in Japan.

We do think that it could be a market which often will respond to new technologies, innovative new products so we do hope that we could take some share from some of our new interest coming out in the second part of this year but from an overall market perspective we expected to remain subdue and our internal forecast are not based on any type of material improvement at all on our performance in Japan.

Daniel Arias:

Okay. Thanks for that color and then you kind of - some new product introductions in the back half that should be meaningful to grow I am sure you don’t want to give you any secrets but can you just sort of help us with what part of the business you’re anticipating seeing the boost in 2017?

Mike McMullen:

Yes. So thanks for the -- on your question. So what we can point to with great confidence and clarity is the recent introduction we made in analytic and what I would say to you you’ll see broad based introductions across the entire portfolio and core growth essential to our business plan as when I came in last year we spend a lot of time recognizing our R&D structure and also reallocating where we put money and I think we will start to see some of that starting to pay off as we going to later part of ‘16. So we did want to put a themes were out there and also just to make sure you had a confidence in terms of what’s behind our view of improved adjuvant performance in ‘17 off of the second half of this year.

But I think you are going to expect to see as talking about activities across all three business groups.

Daniel Arias:

Got it. Okay. Thanks very much.

Operator:

Thank you and our next question comes from the line of Doug Schenkel of Cowen & Company. Your line is now open.

Doug Schenkel:Cowen & Company:

Hi. Good afternoon. Mike I wanted to go back to some of the comments you made on effort to tightened cycle times from ordered revenue which seem to be yielding benefits sooner than expected particularly in China. Can you provide a bit more background on the effort and why was most in tactful in China and then maybe talk about similar efforts underway and another geographies and related you position this in answering some questions as if they were temporary at least it seems like your guidance treat this a sustainable improvement yet everything else you said suggest that these are truly sustainable improvements so I was just hoping you can help us understand that a little bit better.

Mike McMullen:

Yes, sure Doug I really appreciate the question. I maybe start with the last part of your question which is the takeaway here we do believe there is a sustainable improvement. So in my mind a --- language use this is the new normal in terms of our ability to convert orders to revenue and so I would characterize this is new normal covering operate. So how do we get here and why did they look us so significantly different in China.

So first of all I will start with looking at the entire process from an end-to-end customer perspective from the time of order place until shipment and to customer installation occurs and as you know when I restructure the company I really trying to breakdown the --- and we had very --- oriented approach to this end-to-end process from a customer perspective and the company we looked at each slice of the process but nobody is looking at the collective process and then you start doing that when you start seeing what the issues are. The opportunities are. So we found ways to improve our order linearity, we have improved the quality of booked orders initially gets to your question about China often you’re dealing with letters of credit issues and then other trade issues that in the past have delayed ability to actually booked them as clean owners and turn them into revenue, we call this delivery box, we have been working on make a sure we had material availability. I think we had more of our best quarters ever in terms of having material availability for all of our shipments so we improved ability to get an orders in a linear fashion make sure this orders are clean and not have lot of rework and then we improved our delivery performance and then spend a lot of time improving our efforts between shipment and installation which sometimes can go on for several week.

So I think it all starts with this looking at the whole process from an end to end perspective and the result has been a significant improve in a cycle time and orders turned into revenue more quickly than in the past. I do think this represents our new way of operating and again as I mentioned in my remarks it did create some it did have -- of how we guide the company for the second and third quarter but I think we are delighted be able to actually have ongoing strong operations of this improvement in place so that we know how to predict about revenue even better in the future.

Doug Schenkel:

Okay that’s really helpful Mike and but just to be really clear recognizing this are well learn sustainable improvements it’s not apparent that this is fully these improvements to sustain abilities fully reflected in guidance if that’s the case is that just because you want to see this play out for a couple of quarters before you start baking it in?

Mike McMullen:

Yes no Patrick why don’t you

Patrick Kaltenbach:

Yes I think the confusion might be that what we have stated is that this quarter in Q2 we got $20 million to $25 million of revenue that we had anticipated to be recognizing Q3 as we were bringing all those programs to we had earlier results which is great from where we are now the order to revenue cycle time is sustainable but we will not see further improvement that will bring Q4 revenue into Q3 or whatever it is. The 20 to 25 that’s a one time we’ve got to the level we wanted to be at and from now on it’s just business as usual without any fundamental change in the order to revenue cycle time.

Doug Schenkel:

All right and thanks for that Didier and just one last one for you on the change Lasergen accounting was there any dilution in the quarter and based on the accounting change should we no longer expect this to be a $0.02 to $0.03 diluted deal for the year.

Didier Hirsch:

Correct you are correct. So there was no dilution in Q2 and there will not be any dilution in for the rest of ‘16 or ‘17 until we exercise our goal option and then we will just fully consolidate if we do that obviously fully consolidated the Lasergen revenue. So that’s a change there was lot of I mean discussions with the auditors they surprises a little bit by going to national to get especially to kind of challenge kind of the accounting that we had anticipated locally among the two teams and then we agreed to the recommendation and therefore no dilution to EPS coming from Lasergen in the next two years.

Mike McMullen:

Right and we were pleased where to get to this closed of which we finish the quarter.

Doug Schenkel:

Okay great thanks guys.

Didier Hirsch:

You’re welcome.

Operator:

Thank you and our next question comes from the line of Miroslava Minkova of Stifel your line is now open.

Miroslava Minkova:Stifel:

Yes hi good afternoon guys congratulations on the quarter maybe if I could focus on operating margin again for a second. Just help us remind there is a lot going on there in terms of the programs you have in place and improvements you have going on. Help us remind us the bridge between fiscal ‘16 and ‘17 what gets you to the 22% operating margin.

Didier Hirsch:

well as a teaser we are going to go through this in some detail next slide on topic next week but we will what I can share with you conceptually is that we will be continuing and completing of the integration of --- acquisition we have a series of operational programs, we talked about one of those already which is the implications of the ERP and the continued focus on gross margin improves specifically material cost reductions and logistic savings. So I think the combination of those three factors are plus with ---- core growth assumptions that were currently -- 4.5 gets us to the 22.

Miroslava Minkova:

Okay great and the strengths in the food market was it’s all China or are you seeing the strength elsewhere?

Mike McMullen:

Obviously it was both in food -- excuse me, both in two market both in China and in United States. As you may recall from Q1 announcement this business tends to be a little lumpy where as I think the performance in food market in China has been sustained. But we saw a nice rebound in the U.S. in the second quarter.

Miroslava Minkova:

Got you. Okay and may be finally give us your view of the M&A pipeline we have seen you do a couple of deals just recently here now that you have sort of many of the operational initiative for the new in place. Should we expect your more active with the tuck-ins going forward.

Mike McMullen:

Again this is a teaser number two which is talked about this a little bit more detail in next week. But I do feel that the companies foundation is really firmly established and as I mentioned earlier I think we are getting lot better in terms of our speed to be able to integrate but what I think in respect of expect to still remain disciplined and focus in terms of finding those opportunities that make sense for us and I would ask you to think about as been complementary M&A in nature. We are continue to look for those. So our balance sheet is huge asset for the our shareholders and one would you like to deploy relative to M&A but it has to be the right target.

Miroslava Minkova:

Okay. Thank you very much.

Operator:

Thank you and our next question comes from line of Steve Beuchaw of Morgan Stanley. Your line is now open.

Steve Beuchaw:Morgan Stanley:

Hi good afternoon and thanks for taking the questions. Just two clarifications on how you thinking about the ‘16-’17 progression. The first is actually on the NIH to what extent if any are you anticipating a pick up in the research channel from NIH funding when we start to see that get disbursed in the second half of the year and then second and its maybe even longer term question but how do you think about the evolution of FSMA regulations in the food space in the US is to seeing to start getting incrementally optimistic about how they could contribute to the outlook. Thanks.

Didier Hirsch:

Yes thanks -- to address both of your question so in the NIH front I think when we talk about the uptake and sort of our improved confidence about that spends in Academia and government in the US I think we do think that the NIH start to flow through to our business relative to some in our space we don’t have higher percentage of our business tide to the NIH but it will be positive for us and I think again one more pattern which points to continue to view that this market will be solid for us as we moved into ‘17. I think and I have to agree with comment with the comment which is I think it early as too soon to get overall excited about the this from a US spending I have seen this before where the legislation is announced and there is lot of backdrop but we don’t always see a backed up by investments although we did we did we are seeing some looks like some may be more friendly government allocations to this agency unlike we have seen to the EPA. So we’re not expect an anything dramatic to occurred differently in the market because of this but if it would that would be a clearly good news for us.

Steve Beuchaw:

Thanks for the perspective Mike.

Mike McMullen:

You’re welcome.

Operator:

Thank you and our next question comes from the line of Jeff Elliott of Robert W. Baird. Your line is now open.

Jeff Elliott:Robert W. Baird:

Yes. Thanks for the question. Mike on the margins overall a really good quarter but then when you look at the margins and DGG and CrossLab basically flat year-over-year is because is that what you are expecting or you anything kind of the you could call out in the quarter I know there is some pieces in the top-line?

Mike McMullen:

Why don’t you take Didier.

Didier Hirsch:

No that’s a great question and the answer is yes precisely what we had expected one of the obviously based on from one quarter to next that could be someone onetime items that as little bit of volatility. For example last year both ACG and DGG had very favorable heading gains which have gone away for the whole company the heading gain last year in Q2 was over $7 million and this Q2 was about to 1.5 something that. So and it was mostly in ACG and DGG and there are other onetime items that including regarding the allocation of our shift services among the different businesses which explain but both business are on their way to contribute to the opening margin expansion and the 22% that we are committing to.

Mike McMullen:

Also ask Mark to we talked about this earlier this last week as well about see the operational efficiency improvements that underlying looks to flat margins but we go back to the other end the hedging gains all other things of actually some real operational -- there.

Jeff Elliott:

Thanks, Mike as Didier said there are several things that were factors in last year kind that didn’t come in to play this year. But we will working on lot of the things in terms of improvements the mix is somewhat favorable in the context that we are selling but overall when we look at our plans for the first half were up 70 basis points in the first half over last. So our ability to actually due to margin improvements when you pull back and look at in the first half regardless of all those things is quite positive.

Didier Hirsch:

And it is our fastest growing business is being picking up more of the corporate cost services.

Mike McMullen:

Shared services.

Didier Hirsch:

Yes, shared services.

Jeff Elliott:

Okay. Thanks guys.

Mike McMullen:

Hope that was helpful.

Jeff Elliott:

Yes, it was thanks.

Operator:

Thank you. And our final question comes from the line of Dane Leone of BTIG. Your line is now open.

Dane Leone:BTIG:

Thanks guys I just had a quick clarification from earlier. So you are talking about the replacement cycle and biopharma and -- I think 150,000 LC system placed on the 1100, 1200 platform. Can you clarify if that’s what you think the opportunity is ahead of you or that’s opportunity in progress and if so kind of what how far are you into that?

Patrick Kaltenbach:

This is Patrick let me answer this question. This is the first and for most this is not biopharma and -- and biopharma compliance and when I talk about 150,000 systems out there it’s a install base of LC systems in all markets. So it’s not only in pharma and biopharma, but we think that the biggest push was actually right now coming from pharma and biopharma and I would still say we are in the mid stuff of replacement cycle. We don’t see that to be in the next couple of quarters.

So is healthy demand and we are negotiation with lot of our core customers on upcoming replacements that how we place two systems and how plan it out for them to we would works for them.

Mike McMullen:

Again Dan if I could add just one other comments to Patrick’s response we will focus lot today obviously is -- from biopharma, but keep in mind that the replacement cycles in a very, very subdues on the Applied market side in the --autography so we have several we have tens of thousands systems on that side of the house as well and again this is why we look out in the ‘17 and ‘18. We think that our growth rates of are sustainable.

Dane Leone:

Anyway you can handicap using a baseball analogy or something like that like what I think you thinking in.

Mike McMullen:

No that’s good -- about the baseball analogy

Didier Hirsch:

I save you on the pharma side you’ve probably in 5 or 6 I mean -- is there is way through may be two-thirds.

Mike McMullen:

I think and my point would be that I think the game the ball game as this gaming started may be in the first inning we --to be in the first innings soon that cycle on the Applied market side.

Dane Leone:

Okay great. Thank you guys very much.

Mike McMullen:

Your welcome.

Operator:

Thank you and I am showing no further questions at this time. I would now like to turn the conference back to Alicia Rodriguez for closing remarks.

Alicia Rodriguez:

Thank you everybody and I would like to thank you all for joining us today on the call. If you have any questions, of course please give us a call in IR and this would hope that we’ll see you next week at our Analyst Day in New York City. Thanks again. Bye, bye.

Operator:

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.