Alicia Rodriguez - Vice President-Investor Relations Michael R.

McMullen - President and Chief Executive Officer Didier Hirsch - Chief Financial Officer & Senior Vice President Mark Doak - Senior Vice President and President-Agilent CrossLab Group Patrick Kaltenbach - Senior Vice President & President-LSAG Business Jacob Thaysen - Senior Vice President & President-DGG Business.

Doug A. Schenkel - Cowen & Co. LLC Dane Leone - BTIG LLC Isaac Ro - Goldman Sachs & Co. Tycho W. Peterson - JPMorgan Securities LLC S. Brandon Couillard - Jefferies LLC Ross Jordan Muken - Evercore ISI Paul Richard Knight - Janney Montgomery Scott LLC Steve C. Beuchaw - Morgan Stanley & Co. LLC Daniel Arias - Citigroup Global Markets, Inc. (Broker) Jeff T.

Elliott - Robert W. Baird & Co., Inc. (Broker) Derik De Bruin - Bank of America Merrill Lynch Miroslava Minkova - Stifel, Nicolaus & Co., Inc. Jack Meehan - Barclays Capital, Inc..

Good day, ladies and gentlemen, and welcome to the Agilent Technologies Second Quarter 2015 Earnings Conference Call. And as a reminder, this conference call is being recorded. I would now like to turn the call over to Alicia Rodriguez, Vice President of Investor Relations. Please begin..

Thank you, Latoya, and welcome everyone to Agilent's second quarter conference call for fiscal year 2015. 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'll find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. As a reminder, we will talk about core growth, which reflects growth adjusted for currency and for M&A within the past 12 months.

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 the call over to Mike, I would like to remind you that Agilent will host its annual analyst and investor meeting in New York City on May 28. Details about the meeting and webcast are available on the Agilent investor website. And now, I'd like to turn the call over to Mike..

accelerate organic growth, expand operating margin, deploy capital for long-term shareholder value. Turning from the report out of the momentum in our core growth, let me update you on our operating margin improvement initiatives and Q2 capital deployment actions.

We are executing our multi-year Agile Agilent program, reengineering the company to be more efficient, nimble and externally focused. Our previously announced restructuring is underway. The new sales channel and divisional structure are fully implemented. We continue to look for opportunities to streamline and rethink our legacy business models.

The recent closing of our U.S. Government Affairs office is just one example. We have already delivered $24 million of the expected gross savings of $50 million in 2015 from our combined actions. We remain committed to achieving a 22% operating margin by FY 2017.

As previously guided, this year we're on track to return $500 million to shareholders in the form of dividends and buybacks. In Q2, we repurchased $162 million of stock, bringing our year-to-date repurchases to $168 million.

In our Q1 call, we raised our core growth guidance and commit to offset $0.05 of negative FX impact through cost controls and other actions. We are confirming this full year EPS guidance. Didier will provide further details in his remarks.

As the new CEO, it gives me great pleasure to announce that Forbes has identified Agilent as one of America's best employers in its first-ever ranking. We're rated as a top employer in the healthcare equipment and services industry category. Part of my mission would make us even better.

We look forward to seeing you at our May 28th analyst meeting in New York. We'll take that opportunity to discuss Agilent's businesses in more detail.

I look forward to sharing more about the steps we are taking to reach the goals we have set to drive long-term shareholder value through accelerated growth, operating margin expansion, and optimal capital allocation.

Thank you for joining our call today, and I'll now turn it over to Didier, who will provide a more detailed discussion of Agilent's financial results and guidance.

Didier?.

Thank you, Mike, and hello everyone. To recap the quarter, our core order and revenue growth, excluding the impact of closed and divested businesses, were respectively 10% and 5%. As Mike stated, about $30 million of revenues was carried over into Q3 due to late incoming orders and some startup issues with the transfer of our U.S. distribution center.

Those issues have now been stabilized and they will be fixed this quarter. Although revenues ended up $32 million under the midpoint of our guidance, adjusted operating margin was 18.3%, 10 basis points higher than guidance, and 140 basis points higher than last year on 2.5% lower nominal revenues.

This quarter, currency subtracted about 6.8 percentage points from our year-over-year revenue growth. Finally, we bought back $162 million of stock in Q2 and generated $183 million in operating cash flow. I'll now turn to the guidance for our third quarter. We expect Q3 revenues of $995 million to $1.015 billion and EPS of $0.38 to $0.42.

At midpoint, revenue will grow 7% on a core basis. Our 18.3% adjusted operating margin at midpoint will be equal to this quarter's operating margin. We expect to continue our disciplined buyback program and reach the planned $365 million of repurchases by year-end. Now to the guidance for the fiscal year.

Versus our previous guidance, currency is forecasted to have a $10 million negative impact on revenue. We are adjusting our revenue guidance for that impact, but we are not modifying our EPS guidance. We expect fiscal year 2015 revenues to range from $4.05 billion to $4.11 billion and fiscal year 2015 EPS to range from $1.67 to $1.73.

With that, I'll turn it over to Alicia for the Q&A..

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

Thank you. The first question is from Doug Schenkel of Cowen & Company. Your line is open..

Hey, good afternoon, guys, and thanks for taking the questions. My first question is really on the guidance. So you slightly reduced full-year revenue growth expectations, but not by much. I believe your second half core growth would have to exceed about 7% to get to your full year guidance.

When you combine these observations with the observation that you talked about strong backlog heading into the third quarter, but then you guided revenue expectations a bit below where consensus stood, it does seem like second half growth is not only expected to accelerate but also to be a bit more back-end loaded than most of us were expecting.

Could you just talk about what gives you confidence in the implied Q4 growth acceleration expectations that you seemingly built into guidance?.

Yeah, Doug, this is Mike. Thanks for the great question. And let me offer some additional commentary on our thinking about the confidence we have in the top line momentum and also our thinking about how we guided for the second half. When we look – obviously, very pleased with the top line momentum that I mentioned in my prepared remarks.

And if you look at it, we've had two strong top line order quarters for the company. And what we're seeing is strong market, end-market strength in pharma, clinical and diagnostics, a strong U.S. and recovering China market.

And we believe we're very well-positioned, which is reflected in the order numbers, to capture this growth with the strength with not only our portfolio but also our new sales structure. As I did mention in my remarks, though, we did have some startup issues with the logistics center. And also, we saw a late time in orders coming in the quarter.

So we're becoming increasingly mindful of what seemed to be a change of customer buying behavior as we look at our revenue projections for the third quarter. But with the backlog, the ongoing strength of the top line, we remain quite confident in our ability to deliver on the top line growth forecast.

Didier, anything else that you would add?.

No, just to quantify. I mean, the $30 million that moved into Q3 is equivalent to 3 percentage points of revenue, if you would adjust the first half of that 3 percentage points, that really moved into the second half, then the growth between the first half to the second half is a lot more reasonable..

Yeah, and Doug, it may also help you to hear directly from each of the group presidents how they look at their respective business just to give you a better feel for how we're thinking about the business in the second half.

And Mark, perhaps I can start with you?.

Thanks, Mike. And obviously this is another quarter where we've produced double-digit core order growth. So from the standpoint of the response we've got in the marketplace around our innovative products and services has been quite good. And I think it's a validation of our CrossLab strategy and the value we have for the customers.

And looking forward, the fundamentals, as you suggest, really don't change much as we look at the end market strength in Americas and in China and some other places around the globe. And we continue to have strong demand from Europe. So long story short, it's a continuation we see of the strong fundamentals we have right now..

Hey, Patrick, how about LSAG?.

Yeah, thanks Mike. So for LSAG, we have seen continued strong performance in our core product lines like LCMS, ICP-OES throughout Q1 and Q2. There's a lot of very strong momentum behind these new products that we recently introduced. And solutions like the Infinity II LCs that you mentioned or the ICP-OES and our high-end LCMS solutions.

So for the second quarter, as you stated before, we had order growth on a core base of 10% excluding RPD. I think we have a very strong pipeline. We see a strong funnel, and therefore also are committed to the second half..

Thanks, Patrick.

And maybe you can just bring us home, Jacob?.

Yes, certainly. As you have noticed, DGG had a strong Q2, definitely compensating for the challenges in Q1. And we see the improved momentum in all our divisions.

Soon being out of the FDA activities and back to normal operationally, I do expect to see the pathology business continue to strengthen throughout the rest of the year together with the rest of the portfolio. So I also have very strong confidence in the second half year..

Great. That's really helpful, and given all the detail I will step away, get back in the queue, and let some other folks ask some questions. Thanks again..

All right, thanks Doug..

Thank you. The next question is from Dane Leone of BTIG. Your line is open..

Hi, thanks for taking the questions, guys. Just I guess another question in terms of the back half expectations. Clearly, the trend for the operating margin has been a bit down with some of the dissynergies coming from the spinout.

But as we think about coming into the end of the year, can you help us with the pacing? I mean, it seems like the implied guidance would still have us down marginally in the back half of the year, but quite a substantial improvement versus the first half.

So any thinking you can help us with on the operating expenses as they move into the back half of the year I think would be appreciated..

Yeah, Dane, this is Mike. Thanks for the question. I'll make some initial comments and then pass it over to Didier. So as you saw in my prepared remarks, we were quite pleased with the operating margin performance for the business, particularly in that revenue came in below our initial expectations, albeit we'll pick it up in the second half.

And you also saw that I went to some length to describe the costs that have been coming out of the structure already, and we're about halfway through the $50 million commitment already.

So I think as the final tail-off of our restructuring starts to hit and some of the other costs and some of our other aspects of our Agile Agilent program start to hit, you'll see us continue to bring down the operating expenses in the coming quarters.

And, Didier, I don't know if you want to add to that?.

Yeah, I'll just, and you know, as you have been able to calculate, I mean our guiding midpoint for an operating margin in Q3 of 18.3%, which is at the same level as we've had in Q2 with slightly lower gross margin.

Q2 had some very favorable currency hedging gains and slightly higher OpEx, mostly because of currency and some slight increase in stock-based compensation.

And then for Q4, the implied operating margin for the Q4 to get to the 19% for the whole year, which we are guiding to, would be 20.9%, which would be slightly higher than what we achieved last year of 20.4%, which means that we will see then the full impact of the Agile Agilent program as with an increase in operating margin, even though we are facing still the $40 million dissynergies that we've talked about at length..

Okay. So yeah, I guess the overarching theme that Doug kicked off with was a pretty strong fourth quarter. Maybe you could just kind of elaborate on the comps that you have from the fourth quarter last year.

Was there something particularly weak in terms of how the business is constituted last year that maybe you'd hit better overhead absorption, et cetera, in the fourth quarter this year along with some strong organic growth comps? I guess that's probably what we're kind of grasping at here is, where the confidence for the fourth quarter specifically is coming from..

I think it's twofold, right? One is we do have some level of easy compares, I would say that, particularly as Jacob mentioned in his earlier comments, we now see our DGG business back on track, but we were seeing a retraction in terms of our growth at this time last year. So I think there is an element of, if you will, easier compares in Q4.

I think Q4 historically is always our strongest quarter, and we've got this very strong order momentum and backlog going into the back half. And I would say we're trying to guide fairly conservatively for Q3 on the revenue as well..

Yeah so, certainly to emphasize what Mike has said, last Q4 was 1 percentage point lower core revenue growth than the average of the year. So it was kind of, I would say, a weaker quarter in terms of revenue growth that we saw throughout the year.

And then as I mentioned, we are guiding for an operating margin of 20.9, which is not that far away that we achieved in Q4 of last year of 20.4%. And obviously we are, as you have noted, expecting higher revenue on an easier compare..

Okay. Thanks, guys. I'll yield back to the field..

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

Hey, good afternoon, guys. Thank you. First question for me was on China. It seems like for the most part this sector has seen a modest improvement, or at least stability, in that region this quarter. And there may be a couple outliers where we saw commentary that was perhaps more cautious.

So, if you could talk a little bit about what you saw there across your end markets and what's baked into your expectations..

Sure, Isaac. Thanks again for joining the call. I just got back from a week or so in China in the early part of April, and I'll share with you today in the call what I shared with our board at the time, which was I continue to see a gradually improving overall market environment in China.

I think that there's a level of pessimism about the China market, which I think is not called for. When you look at where the market is growing, and we put up high single digit market growth orders in our second quarter, you see a continued strong pharma, biopharma investments in life sciences, in human health.

We see that much of the reorganization of the food ministries are behind us. In fact, I had an opportunity to represent Agilent at the BOA conference where we heard President Xi talk about his Silk Road policy, and there is also a major forum on food safety, which I participated in.

And there's no doubt that the food safety areas will be back on track in terms of investment. And then I think you're seeing – you can count on really strong growth in the environmental segment for I think years to come.

I think the one area which was a little bit more subdued in terms of overall growth would be the chemical and energy space, but that we expect still to grow in the low-single digits.

So I think that the days of those double-digit market growth in China are behind us, but I think you can expect to see solid market growth in China throughout the rest of this year..

Great. That's helpful. And just dovetailing on your last comment there about chemical and energy, it's obviously I think 25% of the business now, so perhaps maybe a little more important than we've previously appreciated. And it's no surprise obviously that the commodity price there has hurt spending.

But I'd be curious, in the past you've talked about how when the commodity prices come down, there's actually a bit of an uptick that you see downstream in the markets you serve on the chemical side that are oil-price sensitive, so I'd be curious if you could talk a little bit about from a timing perspective.

How we should think about that tailwind kind of helping to offset the CapEx pressure..

Thanks, Isaac. You have a great memory on earlier conversations. So, in fact, what I think I'll do is I'll pass it over to Patrick. He can provide some insights on that end market..

Yeah, thank you, Mike. And you're right – it makes up about 25 – chemical and energy makes up about 25% of Agilent's business, and – but as a reminder, the decline is mainly driven by the impact on the falling oil prices. And we have seen most of it on the customers on the exploration side.

And actually that segment is only 15% of our chemical and energy segment overall. So I think actually there is some upside still on the chemical side based on the lower feedstock prices that has not yet materialized. I think these customers are still a little cautious to start more spending. So we will continue to carefully monitor the situation.

But I don't see any immediate changes or more dramatic reductions in the business overall. I think, again, there will be into 2016, probably you will see the shortfall on the exploration side, but it's positive momentum what we can expect – positive momentum on the chemical side..

Okay, thanks helpful. Thank you, guys..

Thank you. The next question is from Tycho Peterson of JPMorgan. Your line is open..

Hey, thanks.

Mike, can you just clarify how much of the $30 million delay was self-inflicted versus – the shipping center stuff versus the customer order side? And on the customer side, was that all academic?.

Tycho, you kind of broke up a bit in the call.

I think you're asking about the breakdown of the $30 million revenue?.

How much was the – yes, the self-inflicted, the shipping logistics....

Oh, yeah. Got it. Got it. It's roughly 50%-50%. So, about $15 million of it was through the start-up issues with our logistics network in the United States, and the other $15 million was from very late coming in orders that we couldn't turn into revenue within the quarter..

And then can you maybe touch on share dynamics? I'm sure we're all going to get the question tomorrow, given that Waters have been up 15% organic. Can you maybe just talk about how much of what you're seeing was – I mean the order book was up 6%, so that's the silver lining.

But can you just talk about your ability to hold share in this environment? And any color on pricing would be helpful too..

We're doing more than holding share, we're taking share is our view because we had 10% core order growth in the marketplace, and with the one exception of Waters, I don't think anybody's putting up numbers like this in the space.

And as you may be able to dig into some of the details and remarks, some of the areas where we compete directly with Waters in LC, LC-MS and pharma and biopharma, I think, Patrick, you might want to jump on this as well. We saw very, very strong growth.

So, I think there is a different composition of our portfolio and end-market play than Waters, but where we compete we're clearly holding our own..

Absolutely. And I want to speak here only to the auto side because we had these issues on the revenue side.

But both in LC as well as in MS, our orders have been up double-digit, so we see a strong momentum, as I said in the beginning, behind our new Infinity II series and also behind our – mainly behind our high-end LC-MS systems like the 6495 Tripe Quad. So I would say we are competing very effectively..

Okay. And one last one.

Sure..

Maybe for Didier. The EPS impact to the $30 million delay given that some was orders, some was....

The EPS impact is your question, Tycho?.

Correct. Correct..

Well, it will be about $0.03 I would say..

Okay. Thank you..

Thanks, Tycho..

Thank you. The next question is from Brandon Couillard of Jefferies. Your line is open..

Thanks. Good afternoon..

Hi, Brandon..

Mike, just a question on the pharma market. I think this is the first time in a little while you've mentioned a large pharma group as being a source of strength in the period. Are you seeing a recovery from that customer base? And just kind of talk about the outlook I guess for the balance of the year in the pharma market..

Yeah, good catch, because we've been talking before about the small and medium size in specialty pharma, so it's a broad-based recovery, and we're really starting to see the large pharma investing and really coming off their delayed technology refresh plan.

So I think that's why Patrick mentioned earlier the very strong growth we're seeing in our LC and LC-MS product line. So, this is a much larger broad-based recovery across pharma than we have pointed to in the past. And then biopharma continues to be a strong segment in the industry as well..

And one more for Didier. Given the Dako resolution came in about six months earlier than planned, curious why the incremental spend that's baked into the outlook isn't lower I guess relative to the prior view of about $15 million of incremental spend..

Good question, Brandon. It is slightly lower. We are planning to spend about $15 million. There is a lot of work that needs to be done towards – until about June, and then we will stop seeing a serious pay down of the expenses.

But don't forget, I mean we are very, very serious on investing whatever we need to make sure that we comply with all the regulatory requirements. And Jacob, you probably want to add too..

Yes. Surely, I mean first of all, we are obviously very pleased that we received the notice from FDA that the warning letter has been lifted, and as Didier's also mentioning we will finalize the activities that we've committed to, to close out with FDA.

Therefore, the spending is also a little bit lower than what we have guided earlier, but we will also continue to invest in a higher compliance level going forward..

Super. Thank you..

You're welcome..

Thank you. The next question is from Ross Muken of Evercore ISI. Your line is open..

Good afternoon, guys. So I guess as we try to put tonight's print in context, obviously, CapEx business or the backlog swings, we've seen these before. But it seems to happen here a little bit more than we've seen it at some of the other CapEx-focused players.

So Mike, you've been spending a lot of time trying to reinvigorate sales and the sales organization, and obviously you've got your margin discipline you're also trying to execute against.

I mean as you think about all of the various moving parts here, do you feel like pushing the organization to degree that you are, this is sort of the result? Or do you think this is purely kind of just, hey, we just didn't execute and things need to change? I'm just trying to figure out how to isolate – we heard the explanation before – kind of how to put in context all of the moving parts with kind of the outcome.

Because obviously you sound excited, but I think the stock's 5% now; the shareholders aren't nearly as excited today. So I'm trying to figure out how to put that all together..

Hey, Ross, thanks for the question and the acknowledgment of the efforts we have underway to really accelerate traction in a couple of key topics for us on a strategic nature. So, great question. So when I step back from them and look at this, which is, I went to great lengths to highlight the start-up issue we had with logistics center.

But – and I think it's an evidence of the new Agilent in terms of we're going to make bold moves. We're going to drive towards changing our cost structure. When we're done here, we'll have probably $3 million or so out of our cost structure, much improved customer experience.

So – and then when I found out about my team and I learned about my team is when we have issues, such as the one we discovered once we went live in the later part of March, we got all over it. What I didn't share with you was also the fact that we delivered 10% order growth in the midst of a major field reorganization.

So I think that we're not pushing the team too hard. We have the ability to execute and to drive the company forward aggressively. There will be – perhaps will be some times won't go completely according to plan. But what this team will do is get all over it as a team and work very quickly to address it.

So hopefully that gives you some insight in terms of how the company is running inside. We're enthusiastic, we're energized, and I don't think anybody believes that they're overly taxed yet..

And maybe as a follow-up, so you bought a little bit more stock this quarter, but it's still a pretty small amount relative to your overall share mix. So we just saw last week, one of your larger peers buy a separations chromotography asset for 19 times EBITDA.

As you think about sort of the value of your asset, particularly relative to all of the things you're doing to hopefully augment and fix and improve the profitability of it, as you think about sort of harnessing some of those returns for Agilent shareholders, and maybe you'll cover it in more detail at the Analyst Day.

But how are you guys thinking about the share buyback, just given sort of all the various data points out there in the market?.

Yes, thank you, Ross, for that question. So right now, what you heard today was that we're doing what we said we would do, which is we would buy back $365 million of stock, and we are well on our way to doing that.

However, as also I've said in prior calls, we continue to look at our overall capital allocation policy, how we're deploying capital for return to shareholders. And perhaps as a teaser for the May Analyst Meeting next week, I'll say more to come..

All right. Thanks, Mike..

Thank you. And the next question is from Paul Knight of Janney Capital. Your line is open..

Hey, Paul, go ahead..

Please check to see if your line is on mute..

Hello..

Hello, Paul?.

Yeah, sorry..

Go ahead. No problem..

CrossLab was a little lower growth in the current quarter than the 10% or so organically in January's quarter.

Was that due to this re-org you were talking about, Mike, or what was going on with CrossLab? Was it weather, et cetera?.

No, we've got a lot of our – and Mark you can jump in as well. We got a lot of our revenue hung up in the logistics center issue that I talked about earlier, because we have such a high velocity of consumables and support parts going through, not only the U.S. logistics center for U.S.

customers, but also as a gateway into our global customer base as well. So you'll note in our prepared remarks, I think we had 12% organic order growth. So it really was a story on the logistics center.

But Mark, anything else you want to add?.

Well there's the other nuance, Mike, which in services, obviously order growth doesn't translate immediately to revenues. And this 12% growth, a lot of that came through services. And what you'll see is that becomes an annuity stream going forward for the remaining quarters.

So I would say we put some money in the bank for looking out into the next year..

Yeah and then, Paul, that's also why again there's been a lot of questions about the second half revenue outlook, and this is one of the reasons why we're confident in our outlook..

Is CrossLab one of the major reasons you think you're taking share, along with the obviously the instrument technology.

But is it a reason?.

We think it's a combination of both, right. So we're driving really new innovative new solutions, so we're putting more instruments into the marketplace and taking share.

But we also embrace in a strategy which I think, and we'll go through some level of detail next week, where we really believe there's a broad-based play across the whole laboratory environment, not only for services and consumables for our instrumentation, but in the broader vendor base as well.

And I think it's very clear that we're picking up very good business and services in consumables, and I'm guessing it's above market..

I certainly think it is, Mike, but I would say what our intent is, obviously to ensure we differentiate all of the solutions Agilent brings to the market. I feel confident a lot of the innovation we have is driving that share gain..

And then lastly, Didier, the China organic was what in the quarter? I missed that..

On the revenue growth?.

Yeah..

It was negative on the revenue side and the positive on the order side, and revenue was kind of a negative low single digit..

Yeah, and we had high single digit order growth. We think it was a few digits..

Yes, exactly. And perhaps low to mid single digits on the revenue side. And again, as Patrick said, it's very difficult this quarter to talk about revenue considering the $30 million.

And for example, a lot of that impacted China because although we kind of recovered some towards the end of the quarter, because of the shipment times, we were not able to recognize revenue, in particular in China. It was the region that was the most impacted by the $30 million revenue shortfall..

Is it the facility in the U.S.

or China?.

The facility is in the U.S., but it ships all over on whatever is produced in the U.S. And including, for example, it ships GCMS into China, and because of a long transit time, China was positively impacted..

Okay, thank you..

Thank you. The next question is from Steve Beuchaw of Morgan Stanley. Your line is open..

Hi, good afternoon everyone..

Hey, Steve..

Let's just start by rounding out the geography. You called out Japan. So subsequent to the revenue commentary, you made a comment there, much like China, that the orders were very strong.

It seems like while you're certainly not the first to call out Japan as an area where there are a few moving parts, can you give us a sense for what it is that you're seeing in Japan? Number one, is this an area where some of the shipment delays are having an impact? Number two, to the extent there is any softness there, where are you seeing it? And number three, how do you see it playing out over the balance of the year?.

Yes sure. thanks, Steve, for the opportunity to talk, provide some insight into Japan. Different story from my perspective than China. Though we were pleased to see the order growth that we saw in Q2, we have to keep in mind that it was off a relatively easy compare in 2014.

And I think we know the history there with the Japanese implementation, the VAT tax, and how it really changed the seasonality of orders for everybody in the early part of last year. What we're seeing going forward is a environment where we're expecting continued weakness in the academia and government segment.

The quantitative easing budget money doesn't seem to be really flowing into our space. The flip side of that is, we're actually seeing improvements in the private sector. Now it's a very fragile environment right now, but we think that if it's holding together, we expect it to be subdued.

It won't be the same level of growth as you're going to see in China, but we're also not seeing any kind of significant downturn. And Didier, I don't know if you have any other observations on Japan..

No, I mean what we are seeing and what we've started seeing in April certainly seems to tie also with the general projections from the economies that are seeing that after Q1 with a negative GDP growth, Q2, Q3 growth will accelerate and will clearly be positive during those two quarters. So we are hoping that they are right for the one..

But again, I think you need to look at the Japan results with some caution..

Okay, very helpful. And then, just one housekeeping question for Didier. With Cartagenia now in the books and the XRD transaction, can you give us a sense for how much incremental we should expect on the top line from these transactions over the balance of the year and hopefully for next fiscal year? Thanks so much..

Yes, let's say that for the immediate future, it's not going to move the needle, and I probably would leave it at there.

Jacob, do you want to add any color?.

No, I agree, Didier. I mean first of all, most impact of Cartagenia is going to be minimal in the short-term future in the whole Agilent picture.

But I do believe that Cartagenia is a very important pillar in our strategy going forward, where we want to really develop the workflows into pathology labs and focusing on – and on genetic disorder labs also..

I certainly couldn't agree more, but just to put a finer point on it, between XRD and Cartagenia, can you give us any sense for what the run rate in terms of dollars was on revenue for those businesses? Thanks so much..

Didier, I'll just jump in. On the XRD, it was a little less than $15 million or so of revenue, and then we had about 88 employees associated with that business mainly in Poland that now have joined Rigaku.

Anything else you want to add, Didier?.

No..

Thanks so much..

Thank you..

Thank you. The next question is from Dan Arias of Citigroup. Your line is open..

Afternoon, guys. Thanks. Mike, does the outlook for the rest of the year pretty much assume that demand from the energy customers stays where it is? Or are you assuming you maybe start to get a little bit of relief. You've gotten a slight rebound in crude prices over the last month or so. I'm not sure that's meaningful to your thinking at all..

No, great question, Dan. Thanks for the opportunity to comment. No, we're not expecting any kind of rebound, just staying the status quo. If – I think Patrick pointed to more of a 2016 kind of up rebound on the chemical side of that. So it happened before, that would represent upside to our thinking, but we're not currently forecasting that..

Okay, thanks.

And then Didier, on the Agile Agilent savings, should we look for what's left on the $50 million for the year to be recognized pretty evenly in the back half? Or might that be weighted towards one quarter than the other?.

No, I mean it's slightly obviously a little bit more in Q4, but Q3 is going to be fairly significant. So, perhaps 45/55 in the second half between Q3 and Q4..

Got it. Okay. Thanks very much..

Thank you. The next question is from Jeff Elliott of Robert W. Baird. Your line is open..

Yes, good afternoon. Thanks for the question.

Mike, do you think the customer order patterns have changed permanently, or was there something unique to the quarter that you called out? And then secondly, I guess, have you seen any change in the order cancellation rate?.

Yes, Jeff, great question. So in fact, we've really been asking ourselves all the same question, which is, we saw a different seasonality in this Q2 than last year. So all we kept coming back to was we really can't control the customer buying behavior. So I really don't have a good solid answer for you.

But what we are going to do, and I think I hinted at it earlier, we're going to be adjusting our revenue forecasting models, sort of increasingly mindful of what seemed to be a changed timing of order flow within the quarter, so does seem to be customer-driven. I can't really put a logical explanation behind it.

So what we want to do is we want to evolve in our forecasting models from a revenue standpoint. And in terms of order cancellation, it's not at all on our radar screen as a topic of concern..

Got it, okay that's great.

And just a follow-up, Didier, can you give us a segment break down for the $30 million of I guess of orders that got slipped out of the quarter?.

It was mostly around LSAG. I mean clearly, DGG had no impact; ACG a little bit, but relatively minimum. It was mostly LSAG instruments. Mostly instruments..

Yeah, the instrument side..

Mostly instruments..

Got it. Okay, thank you..

Sure..

Thank you. The next question is from Derik De Bruin of Bank of America. Your line is open..

Hi, good afternoon..

Hey, Derik..

Hey, so sticking with Jeff's question, changes in ordering patterns, but was there any sort of pricing competition at the end of the quarter, any unusual changes from your competitors? Or is it just customers just behaving differently?.

Yeah, as I look around the conference room here, everybody is shaking their head no. No really significant changes from competitors or pricing behaviors..

Okay and on – you've gotten rid of NMR, XRD.

Is there anything else within that old Varian business? For example, the old vacuum pump business that is no longer core to the organization?.

Yeah, no, thanks for the great question. So I think that you see, Derik, that we're continuing to look at our portfolio and we're quite happy with the status of the portfolio right now.

And in fact, on the vacuum side, we're seeing – I've got a profitable business that we actually see has a fair amount of synergies in Agilent, particularly as we think about designing and developing next-generation of mass spectrometry and kind of being able to integrate the pumps in a different manner, in terms of our new systems, albeit, also the fact that we've integrated them on a sales-force perspective to also take advantage of the opportunities that exist in the analytical lab.

We see it as an enabler for our CrossLab business. So, I've got a business that's making money, and I can see the synergies with the rest of the company. So it's solid right now within Agilent..

Great and just one final question.

So you said XRD was about $15 million, and remind me what the NMR hit was to this year?.

I'll defer to Didier on that one..

Yes, on the year-over-year basis, it was relatively minimum. I'll give you the numbers. But it had a much bigger impact on orders, obviously, because we stopped taking orders. So last year, we had about $50 million of orders for the whole year on NMR, and this year, is even slightly negative because we canceled a few of the orders in the backlog.

And in terms of revenue last year, we had about $80 million in revenue. This year, we'll have about $65 million, and we'll have some revenue even next year as we recognize revenue on the last OEM magnet that we stopped taking orders on back two years ago, but we are still shipping..

Great. Thank you..

Sure..

Thanks, Derik..

Thank you. The next question is from Miro Minkova of Stifel. Your line is open..

incentives, territories, compensation. It sounds like you didn't think this impacted your ability to close orders.

But give us a sense as to when you might see perhaps, a positive impact from the reorganization?.

Yes, thank you, Miro. I really appreciate the opportunity to comment on this. So I think we're already – I'll go in a second on the details of the reorganization, but we're already seeing the impact, which is again, I think phenomenal order results in the second quarter, building on a strong Q1.

And what we've done is we've gone from five sales forces to two. We have one sales force that's focused on the diagnostic and genomics area, which is really our regulated marketplace.

And then we now have one sales force that covers the entire analytical lab from pharma, chemical, environmental, food, forensics, life science research, and as I mentioned earlier, also inclusive of the vacuum. Those organizations previously were three separate organizations, and it led to a lot of extra cost.

But even – perhaps even more importantly, it led to a lot of unnecessary internal interaction about accounts assigned, the territory assignments, was this a life science account or a chemical analysis account? That dialogue is completely gone now.

We've integrated under one global leader, and now all of our energy is focused on optimal territory assignments, taking care of the customers, and taking share from the competitors. So I couldn't be more delighted in terms of how the integration and reorganization of our sales force has gone.

And again, I think it's going to allow us to put more energy, more resources, more focus on front-line channel expansion, as opposed to internal dialogue and cost structure.

Patrick, do you want to add anything?.

Yes, I just want to add in terms of what you probably don't see from the outside is in terms of the divisional changes we made is we made a significant change in our MS business. We basically brought together the TCM LCMS business and 50% of all the labs organization into one new strong mass spectrometer group.

And I think the result of that will basically we see more in the future, as we have now much more horsepower on the R&D side to develop new product for what we see as the fastest growing market segment for us..

Yeah. Thanks for that, Patrick. And we talk internally and here we talk next week about One Agilent, we really are trying to leverage the full power of this company by organizing ourselves to get the maximum leverage out of the capability we have with the company.

Okay. Thank you very much for this color. And on the FDA warning resolution, congrats on getting this ahead of time. You already commented a little bit on the cost side.

But do you have – does this allow you to launch new products? Do you have anything in the pipeline that you could start launching now post-remediation?.

Yeah, thanks Miro, for that comment. And I'll pass it over to Jacob for some additional commentary..

Yeah, absolutely, and you're right on, of course having to deal with an FDA warning letter, you have a lot of operational focus on dealing with that warning letter and taking some of our focus away from new product development. Fortunately, we have more sites.

We have had strong development activities on other sites like the Carpinteria side and also our genomics side. We, in particular, within our companion diagnostic, we are looking into some very, very exciting launches coming up over the next quarters. I think you heard already Mike alluding to Merck & Co.

has communicated their ambitions within the PDL1 assay – PDL1 drug target, and we are together with them on coming out with a PDL1 assay. And we definitely look into over next quarters at least one launch in that area maybe even two.

And on the genomics side, we have had quite a lot of exciting launches this quarter also that I could talk a long time about, but I don't think we have time for it right here..

You have time next week..

Yeah, I will..

Thank you very much..

You're quite welcome..

Thank you. The last question is from Jack Meehan of Barclays. Your line is open..

Thanks and good afternoon. I just have a couple of clean-up ones..

Sure, Jack..

In the diagnostics business, just going through the slides, the delayed Q1 shipments, is there a way to quantify what that helped in the quarter? And then as you look into the back half, just being able to press some of the better growth now that you're past the warning letter and the manufacturing issues there?.

Yes, thanks, Jack, for the question.

I'll pass it over to Jacob or perhaps, Didier, you want to weigh in on this as well?.

Well, you are definitely right that our performance this quarter is a bit skewed by these orders that return to revenue into Q2. But we have an underlying business improvement, both in the pathology business with the rest of the portfolio that will start now to drive the underlying business growth.

So I expect to see an improvement in our performance on all elements, especially particularly in the pathology business. We once again saw record placements of Omnis, and this is a great indicator that we will start to see strong traction in the pathology business.

So I'm very comfortable – confident that we received the growth coming from the business going forward..

Okay. Good.

All right?.

And then, yeah, just the last one, Didier. You mentioned the hedging cadence in the quarter.

Can you just remind us how that works, and then is there a way to quantify on the earnings side what the total FX impact was?.

Yes, absolutely. So we have, in addition to our structural hedging program, we hedge both our balance sheet and our cash flow, and the accounting treatment is different.

The balance sheet hedging gains and losses show up in other income and expense below the line, whereas the cash flow hedges, the financial impact of the cash flow hedges shows up in cost of sales.

And as there was the fairly dramatic, as you have noticed disconnection of changes in currency rates in the last two or three quarters, I mean we have had fairly significant currency hedging gains. In Q1 they were about $3 million to $4 million. In Q2, they were about $7 million, so this Q2.

And because we settled the hedging programs always at the beginning of the quarter, we already know what our currency hedging gains will be in Q3. And they will be about $3 million. So there's a $4 million reduction in hedging gains, and that reduction shows in the cost of sales of gross margin.

So that's why I was mentioning everything else being the same, gross margin would be impacted to the tune of 0.4 percentage points sequentially..

Great. Thank you..

Sure..

Thank you. There are no further questions in queue at this time. I'll turn the call back over to Alicia Rodriguez for closing remarks..

Thank you everybody for joining us on the call today. If you have any questions, please give us a call, and we'd like to wish you all a good day. Thanks again..

Thank you. Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day..