Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2025 Agilent Technologies Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions]. Thank you. Parmeet Ahuja, you may begin the conference.

Thank you, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2025. With me are Padraig McDonnell, Agilent President and CEO and Bob McMahon, Agilent Senior Vice President and CFO. Joining the Q and A will be Simon May, President of the Life Sciences and Diagnostics Markets Group Angelica Riemann, President of the Agilent CrossLab Group and Mike Zhang, President of the Applied Markets Group. This presentation is being webcast live. The press release for our second quarter financial results, investor presentation and information to supplement today's discussion, along with the recording of this webcast, are available on our website at www.investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You will 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 and references to revenue growth are on a core basis. Core revenue growth is adjusted for the impact of currency exchange rates and any acquisitions and divestitures completed within the past twelve months. Guidance is based on forecasted exchange rates. As a reminder, beginning in the first quarter of fiscal 2025, we implemented certain changes to our reporting structure related to the reorganization of our three business segments. We have recast our historical segment information to reflect these changes and have provided the financial details on our website. These changes have no impact on our company's consolidated financial statements. During this call, 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. And now I'd like to turn the call over to Padraig.

Hello, everyone, and thank you for joining today's call. Agilent delivered strong second quarter results in a highly dynamic market environment. Revenue of $1.67 billion for the second quarter represented growth of 6% reported and up 5.3% core compared with the second quarter of 2024. Operating margin was a solid 25.1% as we absorbed some incremental tariff costs. We also delivered EPS of $1.31 growing 7% compared with the second quarter of 2024. Both revenue and EPS exceeded our expectations, marking the fourth consecutive quarter of accelerating growth. Our performance was driven by growth across markets and regions, speaking to the diversity of our business. We also saw another quarter of building momentum in Instruments with our book to bill ratio again greater than one. Thank you to the Agilent team for delivering these results by tirelessly going above and beyond for our customers. No matter where I travel in the world, our customers consistently say the same thing. The Agilent team is second to none and for that reason, they want to increase their partnership and collaboration with us even more, even during a challenging macro environment. These conditions have proved the efficacy of our three year Ignite transformation, which is the execution of our strategy. We're already leveraging Ignite to create an enterprise operating model that has resulted in multiple early wins, including tariff mitigation. More on that in a moment. First, let me tell you why our Q2 was so strong. All regions grew in the quarter. Americas grew low single digits. EMEA grew mid-single digits. And China led the way at 10% growth, exceeding our expectation, while the rest of Asia grew high single digits. China saw stable demand conditions sequentially, while a favorable Lunar New Year comparison helped year on year growth. In Asia, India…

Thanks, Padraig, and good afternoon, everyone. In my remarks today, I'll provide additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then cover our full year and third quarter guidance. As Padraig mentioned, Q2 revenue was $1.67 billion above the high end of our guidance. On a core basis, we posted growth of 5.3%, while reported growth was 6%. Currency had a negative impact of 1.6%, which was 0.5 point better than estimated as the dollar weakened during the quarter. M&A also contributed 2.3%, coming in nicely ahead of expectations. Now let me talk about our performance by business group. The Agilent CrossLab Group reported revenue of $713 million, growing 9%, which was ahead of our expectations. Double digit growth in consumables and automation and high single digit growth in services drove ACG's performance. Our life sciences and diagnostics market group reported revenue of $654 million in the quarter, growing 3%. Core growth was driven by our pathology business and NASD, both of which delivered high single digit growth and our LC and LCMS instruments that grew mid-single digits. Our cell analysis business returned to growth, up low single digits. Performance was partially offset by an expected mid-single digit decline in our NGS business. And our applied markets group reported $301 million in the quarter, flat versus last year on a core growth basis. Growth in spectroscopy and GCMS was offset by some timing related declines in gas chromatography. Before getting into the rest of the P&L, I want to cover additional details on Q2 revenue that were influenced by the April tariff announcements, primarily in China. While there was no revenue impact to Agilent overall, we did see some shifts by group in the quarter. Specifically,…

Before I close, I want to thank our retiring Board member, Heidi Kunz, for many years of service with Agilent. And I want to welcome Pascal Soriot and Judy Gawlik Brown to the Board. Pascal is CEO of AstraZeneca, and Judy is currently Founder and CEO of Downtown Advisory after holding senior leadership positions at Amgen and Perrigo. Both bring decades of global leadership experience from the pharmaceutical, biotechnology and healthcare sectors, with a proven track record in strategy, innovation, operations and finance. I look forward to working with you both. It's an exciting time to be part of the Agilent growth story, to be part of building on our foundational strength of being an established leader in $80 billion markets driven by secular growth, having leading market share and sustainable competitive advantage through our intense customer focus and reaccelerating growth through innovation and market share gains. And we continue to look at the long term. As Bob mentioned, we have a strong balance sheet and remain focused on augmenting our internal innovation with external growth opportunities. We have a robust pipeline of opportunities of all sizes that are aligned with our strategy we explained in December and will further build this great company. In a highly dynamic macro environment, Agilent is excelling. We remain confident in our ability to deliver on our full year 2025 commitments and in our long term trajectory towards financial framework we explained at Investor Day. With Ignite scaling and our pace of innovation accelerating, Agilent is well positioned to outperform regardless of the near term market dynamics. After one year as CEO, I'm even more energized by what we're accomplishing at Agilent, and we're only getting started. Thank you for your attention. I'll now hand it over to Parmeet to kick off our Q and A.

Our first question comes from the line of Patrick Donnelly with Citi. Please go ahead.

Maybe one just on the order trends that you guys saw in the quarter. Can you just give us some color how those progressed as the quarter progressed? I mean, you guys are unique with the timing, probably saw a little bit of the pharma tariffs, the actual tariffs come in. Just curious, if you're willing to talk about April, certainly, May would be welcomed as well. But what you saw on the order front? Did you see any pull forward around the pharma tariffs? I know you talked about the ACG pull forward on the consumables. But just curious what you're hearing from customers? And again, what you thought on the order front versus the revenue side would be helpful as well.

So first of all, book to bill was greater than 1 and our orders grew low single digits in Q2. And overall for the first half orders grew mid-single digits. So in terms of any pull forward from Pharma, we haven't seen anything. We've seen actually very stable business across the regions of course as Bob talked about in the script. We did see a pull forward in consumables that comes out in the wash given some of the issues we had with customs etc. in April, but that's back to normal now. So what I would say is peak pharma customers are in particular still spending on key projects. The replacement cycle continues and so no changes there. And we do expect this gradual recovery to continue in the second half.

And then maybe just on the NASD BIOVECTRA piece, it sounds like those performed quite well in the quarter. Can you talk about expectations for the rest of your, it sounds like NASD is maybe creeping a little bit higher, which is great. Can you talk about the visibility there? I know sometimes you get orders well out a few quarters. I mean, are you into ‘26 on some of these order books? Maybe just talk about the visibility and what you're seeing in those businesses would be helpful.

I'll start and I'll hand it over to Simon. So first of all, really, really pleased by the progress in our CDMO business and NASD with high single digit growth and with BIOVECTRA in the high teens. We're seeing the combination of these businesses right in the sweet spot of really important therapeutic areas coming together. But I'll hand it over to Simon for more color on that.

I'd say overall in the CDMO businesses we were pleased on a couple of major fronts for the quarter just past. We saw progression of some early commercial programs in the NASD business. We've talked about that a few times previously. We're now starting to see the revenue mix there evolve more from 50/50 towards 60/40 in favor of commercial. We think that bodes well for the future. And then in the BIOVECTRA business, there was also some really noticeable progress. Our GLP-1 manufacturing programs, we saw successful scale up there. We saw some nice process efficiency gains. And that's now beginning to become a pretty meaningful contributor to the CDMO business overall. As we think about going forward in the near term, I'd say we're pretty confident about the second half of the year as we look at NASD. In particular, we've got very clear line of sight to the double digit growth that was mentioned in the script. I'd say we've got the orders in house that we need to fulfill that. And then longer term, we continue to think we're extremely well positioned in this space. And again, these combined capabilities of NASD and BIOVECTRA really put us in the sweet spot of advanced therapeutic modalities and particular areas that really excites us like oligos and antibody drug conjugates. And bioconjugation generally is a really high growth area where we've got real strong capability in BIOVECTRA. So a lot to be pleased about in the quarter. As always, I'd caveat it. This business is lumpy. It will continue to be lumpy, but we're on a clear upward trajectory here. We feel like we're nicely positioned and we got a good line of sight to the rest of the year.

Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead.

I wanted to follow-up on Patrick's first question just around the in quarter impact you saw on ordering just around the tariffs. The $15 million of consumables that got pulled forward, what were you hearing from customers as to just the reason for why that happened? Just curious about that. And then on the instrument side, does the guide assume you recapture that in the fiscal third quarter? Or do you think that could come later in the year?

Jack, this is Bob. I'll take that. And as you can imagine, in China, given the high tariff rates that were being proposed at the time of mid-April, there was a desire to try to get ahead of that from some of our customers and we had inventory in-country. And so we just saw some stocking of orders that would normally be throughout Q3 being pulled into Q2 and being delivered. On the flip side, because of the changing tariffs, there were a number of longer delivery times and logistics activities that were happening at the ports in China as well that primarily impacted our instrument business because we bring those in. And so that offset in total in China. And so when we look at that, we would expect no change. We didn't see any change to our overall revenue in Q2, just some moves between instruments and consumables. And that will reverse itself we expect here in Q3. But again, in total for Q2 and Q3 the total results, are fine.

Got it. That makes sense. And I think that explains where I was going to go with my second question as to why China was much better than I was thinking. So I do have one other follow-up, which is, Bob, just can you boil it all down now on the margin side for the year, kind of what the guide implies for operating margin?

So the margin, given obviously the cost associated with the incremental tariffs, we are covering that with a combination of tariff mitigation activities as well as some pricing surcharges and then some of the Ignite. But given the impact of that, it will be closer to flat versus year ago. If you took that out, we would still be on track for the margin expansion similar to what we saw here in Q2 as an example. So we were flat year on year. But if you took out that 55 basis points, we've been right on track. So we still feel good about that cadence going forward, particularly when we talk about 2026. When we talk about mitigations, that means that we will eliminate the gross impact of the tariffs through some of the supply chain moves that are already ongoing.

Our next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead.

In the past you've noted that the majority of your exposure within your pharma business is in clinical versus earlier stage research. Have you seen any differences between the ordering patterns of these two applications, especially with the recent uncertainty in the research spend from these customers?

No, I would say the lion's share of our business is actually on the QAQC and development side and we saw small molecule actually grow 10% in the quarter which was a fantastic result. So we see across pharma that actually that's the part that's more resilient currently and particularly in the future where you see potential reshoring that may happen over a few years of course. QAQC testing benefits from that and of course benefits by the way from supply chain changes with pharma around the globe as they look to mitigate things themselves. So overall, I would say a very strong quarter on that side and we continue to expect. We do actually of course serve our customers on the R&D side and the development side, but the vast majority would be on the QAQC side.

And then within PFAS, we've seen some potential easing of regulation within water in the US. Have you seen this impact orders as customers work through the uncertainty? And then how much can growth in food and product testing offset potential weakness in the water regulation?

So first of all, just a tremendous result in PFAS in Q2. We grew 75% year-over-year and also saw tremendous growth around consumables and connect rates with our systems. Just to give a little bit of color as well, Europe and China led really grew well and of course with EMEA. So lots to like about us. If you think about some of the recent announcements, it's hard to get some of the details in those announcements with the restructuring that's going on. But I think you're going to see the water testing continue over the next few quarters especially in the broader area outside the US. I think the larger part of our PFAS business in the US over the next year or the next half is going to come from industrial based testing that's around wastewater silent discharges. That's where you see people worried about litigation. You'll see a lot from the EPA coming out to pay for any infringements. So we also see that material testing globally and water testing in EMEA, APAC to drive business over the next two quarters. So I would say we're expecting very strong results for the year, but beyond the year extremely strong as well. There's also one emerging thing that's coming up quite a bit is that PFAS testing is going to start more into air and volatile PFAS, which is right in our sweet spot for GCMS. Currently, that's about, I would say, 2% to 3% of the market. But over the next 12 to 18 months, we expect that to go to 8% to 12% of the market where we will have a very high market share win rate on that. So that gives the color on PFAS.

Our next question comes from the line of Rachel Vatnsdal with JPMorgan. Please go ahead.

I want to follow-up on your comments there and Evie's question regarding reshoring. You've had a few of your peers call this out as a potential tailwind, just given the number of capacity announcements that we've heard from pharma companies in recent months. Can you walk us through, have you had any concrete conversations with customers regarding these capacity build outs? And how do we think about the timing of when we could see any tailwinds related to onshoring?

Having spent three decades in this industry and actually the earlier parts of those decades in Ireland when there was a lot of pharmaceutical being built in Ireland in terms of capacity. Generally, the way these things happen, it takes quite a bit of time. What we're leading with is our strategic account program. So we're at the very highest levels with our pharma customers. Discussions are extremely early. So I wouldn't say any concrete out of that yet. But generally what happens is you see the plans for the site being put up. You also see qualification plans for the site. Generally construction tenders are out. And then from the construction tenders people think about lab capacity and that is the point which is really critical to be in and we feel very good about our position with the strategic accounts. Also by the way you hear of methods moving early so maybe it moves from EMEA to the US. So we find out from our large installed bases where those methods are going to go. But we don't expect anything. I would say you're going to see something maybe at the end of two to three years. But it will be a tailwind for us given the amount of systems and also the proportion of QAQC in those systems.

And then just for my follow-up, I wanted to ask on pricing. Can you talk about your ability to pass on price in this environment given the dynamic environment that we're seeing in light of tariffs? And in general, what's embedded for pricing for the rest of the year and for guidance?

I'll take the first part and I'll give the second part to Bob on it. So we have enterprise pricing capability that we build through Ignite. So we do surcharges in a very structured way. Clearly we're looking at our competitive situation around in different regions and making sure we're staying focused on the customers. So based on the work we're already optimizing our pricing and we have- it has been quite a big part of our mitigation going forward. But Bob, don't know if you want talk about guide?

To build on what Padraig said, just to reiterate what we said in the prepared remarks, we've already achieved what we achieved all of last year through the first six months of this. So a very good performance there. If you recall, in our guide, we had about 100 basis points of price. We're on track for that for the year, probably a little bit higher with the pricing mitigation activities that are being established as a result of tariffs. As you can imagine, depending on the competitive nature there, the type of pricing that we would have vis-a-vis the supply chain activities, which would be a permanent mitigation, we're balancing all of those as well as the Ignite savings activities as well. So we are not taking all of the mitigation from tariffs out of price. We think that is something that will help us with our customers as well. And looking to move things around to have what we would call internally kind of no regrets moves to be able to manage our supply chain globally, given the dynamic nature of how these rates are moving back and forth. So that's kind of how we're thinking about the second half of the year. And again, in 2026, we would expect to have all of the tariff rates being mitigated.

Our next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead.

First one on the replacement cycle, you talked about book to bill being more than 1. Just trying to understand how should we think about the Infinity III replacement cycle? How is it doing in the environmental labs versus the pharma labs? What are you seeing in the field? Early traction? Maybe just help us understand how should we think about the anatomy of this replacement cycle for Agilent?

Yes. I'd be happy go through some details. So the Infinity III ramp continues extremely well. We see a lot of very strong adoption and customer feedback continues to be very positive. Our order funnel is really growing nicely with the Infinity III and we're really pleased with market acceptance. What we're actually seeing with Infinity III on the replacement cycle is we're seeing actually a higher connect rate in service and consumers with that system, which really bodes well for the future. But overall replacement cycles on the LC side, I'll focus on that first and then maybe talk to the broader portfolio. We've been seeing a continuous ramp on that. We expect that to continue over the next few quarters. We have thousands of 1100s. We have 1260s, 1290s. We're moving through that replacement cycle. But of course, it doesn't happen in one quarter. It doesn't happen sequentially quarter after quarter. You see it gradually build. And generally, I would say the funnel to close is about six to nine months to close an LC order. So we continue to see that increase, but very pleased with the adoption. And of course, there's a much broader continuum around our replacement cycle given our GC, GCMS and our LCMS installed bases that are already I think continuing to start to replace.

Hey, Padraig, just to reiterate some of the proof points that you talked about when we talk about small molecule QAQC, which is the lion's share of installed base that grew double digits in Q2 from a revenue, all in inclusive of service consumables and instrumentation. So it speaks to the full workflow solution. And to your question about environmental, that's our sweet spot and we grew in PFAS over 70%. So I think it can kind of tells how well that's being adopted in the environmental space as well.

Got it. And my follow-up is, can you size how much of the China growth in the quarter was from the sort of the Lunar New Year timing perspective, how Lunar New Year played out this year versus last year versus the sort of the consumable pull forward that you saw? And what was the China stimulus in the quarter?

Yeah, I'll start on that Puneet. So the pull forward of the consumables that we were talking about actually had nothing to do with Lunar New Year. It was really driven by the tariffs. So that I think is an idiosyncratic activity that wouldn't continue. The Lunar New Year played out the way we expected it to for the full year guide. So there's roughly about 2 points of total company when you look at the change year on year and it kind of played out the way we expected it to. And so if you look at our revenue dollars in China sequentially, it's actually a very good performance, still well above $300 million speaks to the stability in that market. And in terms of the last question that you had around stimulus, we continue to be pleased about the performance. If you looked at the applied markets, we had some very good performance in food, some of the other implied markets. Most of our stimulus was actually in Q1, but we're very optimistic about the funnel activity right now for the next stimulus, which we are starting to work with our customers and putting together bids for the second half of this year, probably will be revenue at the end of our calendar year here potentially in Q4 that would be upside. If it is in Q4, we haven't built that into our numbers. But feel very optimistic about our ability to do that given our made in China capabilities.

Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.

My first one on the guidance here. You look at ACG, think ex the pull forward, it was still a pretty healthy six plus, maybe high singles kind of number. Why is it slowing down to low singles? I think you said in 3Q. And when you apply that to overall company, right, I think it's stepping down by 250 basis points sequentially. I know like on a year on year basis like the comps maybe explains that. But on a stack comp basis, it looks maybe a little conservative. So maybe talk about the third quarter assumptions.

Thanks for the question. I think coming back to the tariff related consumables pull forward, right, we made those adjustments. And so once we make those adjustments for the quarter on quarter growth rates and normalize them, the guide is in the mid-single digit range. So that's really accounting for it. But when you look more holistically, the fundamentals of ACG remain incredibly strong as we look towards the rest of the year. We're well positioned to continue to support customers as they're maximizing the assets in their laboratory through the broad portfolio, whether that's consumables, services as well as some of the other offerings in the ECG portfolio. So we just adjusted and still a healthy growth rate across ECG for full year.

Then maybe one on the P&L. I think on the margins, I thought I heard you say gross margins was in line. It looks like versus Street, maybe numbers came down. Sequentially, gross margins were down. Maybe talk about what happened on gross margins, was that a mix impact? And I think you had a restructuring charge, which wasn't there in prior quarters. Is this some new cost actions that hasn't been initiated?

When we were talking about the gross margins, if you look at it year on year, we did have the unplanned tariff activity, which was about 55 basis points in gross margin that hit in Q2. If you look at it versus year ago, there was a combination of tariffs, product mix, which we had incorporated as well as some currency related activities. So feel good about kind of where that is. In terms of restructuring, that's probably more on a GAAP basis, Vijay. And we would have taken that out for the numbers that I was just referencing on a non-GAAP basis. But that would have been part of some of the organizational health activities that Padraig had mentioned as part of Ignite.

Our next question comes from the line of Tycho Peterson with Jefferies. Please go ahead.

I want to go back to NASD. The comps get easier here in the back half. So presumably double digit growth. Could that business be double digit for the full year? Or should we think about high single digit for NASD? Also, can you talk about capacity utilization as we think about Trane C and D and then also BIOVECTRA full finish? And then third question on that is just with the onshoring theme, are you seeing more interest from pharma given that most of that business is US and then some in Canada? Has that kind of peaked and then picked up interest from some pharma companies?

So as we think about the back end of the year and NASD and we've been saying all along that we envision high single digit growth and nudging double digit growth. I'd say there's a growing confidence that we think we can nudge that double digit growth as we look at the forecast that we're seeing begin to crystallize for Q3 and Q4. And then as far as BIOVECTRA goes, I think we're going to see a sequential dip in the third quarter. We're looking at some planned equipment shutdowns there. And as those come online again, which we anticipate in Q4, provided that all goes to plan, then I think we'll be back to firing on all cylinders where that's concerned. As for Train C and Train D, we've been through this dynamic for a while now where we were coming through the back end of the IRA impacts and then we started to see our order intake really improve in 2024. That's continued through to 2025. Again, I think we've got pretty much all of the orders in hand now to deliver on 2025. So that utilization of Train C, Train D is starting to become another positive tailwind driver for us now.

And I would say we haven't seen any impact at all from potential tariffs on pharma etc. reshoring or shifts at all in that business in any conversations we have with our pharma.

And then follow-up on replacement cycle. I appreciate the commentary and color you gave previously. Are you able to give us what percentage of LC systems are Infinity III at this point? Is it 15%, 20% of the mix? And then you haven't talked much about the GC replacement cycle. You did kind of allude to that. How are you thinking about that as well?

It's steadily growing. I mean we're six months into the launch or a little bit more than that on the Infinity III. So it's building over time, but we don't give out the exact percentage of our installed base on that one. But I can assure you it's going extremely well, Tycho. And given what we're seeing on the cadence from our older systems and even up to the 1260s and 1290s customers are really voting for the Infinity III when they replace. But I'm going to ask Mike Zhang here on the GC replacement cycle.

We're the leader in the GC and also GCMS and we have a very large installed base and we're working with our customers. And I can tell you, yes, we have a large installed base. We have some very significant AGS installed base as well. We're actually very excited to see some very strong momentum with our customers, well, the GC and also GCMS. If you look at our order pace, think it's very encouraging. And we also have been exciting new innovations. We just launched the new GC and we have other exciting innovations as well. What I can tell is in the next few quarters, next few years, we're going to see a significant opportunity coming to materialize.

Our next question comes from the line of Brandon Couillard with Wells Fargo. Please go ahead.

Bob, you took down the operating cash flow guide for the year. Is that driven by tariffs and maybe inventory builds? And could you quantify the impact of currency on EPS in 2Q and then what's embedded for the full year now?

You are spot on, and from a cash flow perspective, that is, in fact, what we have done is looked at building inventory, which is impacting our cash flow. It's kind of a onetime activity as well as some capital equipment as well as building up. We didn't change our overall capital forecast, but there is some working capital there as well. So that's what we have. In terms of the EPS, it's close to about a point or two from an EPS standpoint for the full year impact, Brandon. And we can get you the details post call.

Big picture, the balance sheet is very clean right now. Are you less likely to consider a larger deal right now given the macro, tariffs, interest rate volatility? Or are you seeing more attractive valuations for assets? And how do you think about those trade-offs?

We don't make any decisions based on the news that we see every week around how we're going to deploy capital going forward. But I can say a few things. We have a very strong list of opportunities. It's wedded in our strategy. So we have done a lot of work on that. Of course valuations are down a little bit, but of course we're going to remain very disciplined in what we do going forward. But I will say that M&A will become a bigger part of our story over the next few years.

Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead.

I'll focus both on the margins and sort of the cadence through the year. Bob, you talked a lot about the impact of tariffs on 2Q, the 55 bps. But just looking at the gross margin guide, not the guide, but the implied number is kind of flat for throughout the rest of the year, maybe down 100 bps year-over-year. So the implied OpEx step up in 3Q and 4Q especially, it seems like it's coming off from the SG&A side. Could you just talk through how much of that is- whether that's volume leverage or the Ignite transformation coming through?

Yes. It's a little of both. As you could probably imagine, if you look at our kind of normal seasonality kind of first half to second half, we do have a step up in margin. Some of that's related to volume. We also have more holidays and lower spending in the second half of the year. And then you've got the full impact of Ignite transformation that Padraig talked about. We talked about this $80 million of annualized, $40 million of that will happen here in the second half of the year, which will help us offset some of the tariffs. So you're right, more of our margin improvement in the second half was actually going to show up in the OpEx because tariffs show up in the gross margin. And so we've got some mitigation at the gross margin side, but also the mitigation activities in the OpEx side as well.

And then on the tariff side, your point on, like you just said, partially offsetting as you go through the year on gross side, but then fully offsetting in 2026. So how do we think about gross margins either as a percent or whatever for 2026? Like what's the right jumping off point? Because optically, you're going to have a really easy compare of 54.5%, 55% for the year, but a lot of that is artificially depressed. So are we going to expect like a nice gross margin jump in '26 because those offsets and that mitigation kicks in for next year?

Yes. I would say, if I could forecast what tariffs are going to be here by '26, that would be something. But that being said, if they stayed the way they are, I would expect us to be able to have an improved gross margin next year for a couple of reasons. One is exactly what you just talked about. The gross will be eliminated. It's not just a mitigation, will eliminate it through the resourcing or reshoring of our supply chain. You'll have the benefit of volume as well. And then we also talked about the pricing capabilities that we would expect to have more price next year through price realization than we had here as a result of some of the pricing capabilities that Padraig talked about. So still early days, so we're not giving guidance here for 2026, but certainly, there's some opportunities more from a tailwind perspective in gross margin going into 2026.

Our next question comes from the line of Dan Leonard with UBS. Please go ahead.

I was hoping you could perhaps elaborate on trends you're seeing in China by end markets. I think you mentioned industrials was down low single digits, but just elsewhere between pharma, environmental, etc.?

Yes. So I think in China, we've seen a pretty very stable business. I mean, except for that pull forward on us, I would say that you see that industrials are down a little bit, but pharma is pretty stable. And I would say that there's a lot of excitement I would say building in China around the second phase of the stimulus, which is going to be more broader based. It's actually going to be more much more broader based than it was the last time the funnels are looking extremely strong for that. But I would say overall it's stable.

Yes, I would agree. If you look across, pharma, academia, government, food and environmental forensics were up. Diagnostics clinical to our smallest market was flat and then CAM was down just slightly. And some of that had to do with some of the instrumentation delays through customs that happened. Now you may ask why in China, because actually even though it was made in China, that has to go through a bonded warehouse and that still has to go through customs and it actually takes a little longer time. So no custom no tariff impact from that standpoint, but it still required going through customs. And so we expect that to come back here in Q3.

And then Bob, a follow-up on Q3 guidance overall. It looks like the midpoint of organic revenue growth is about 2% and that is a sequential step down from the 5% you just reported. I know there's some China timing issue there, but can you walk me through the main bridge factors between the Q2 result and the lower Q3 guide?

Yes. So a couple of things. We think we're taking a prudent approach given some of the still uncertainty in the tariff announcements here. Feel very good about our momentum going into Q3. And we also have a little more difficult comp in Q3 than we have Q2. So I wouldn't read too much into it when I look at sequential numbers in Q3 versus Q2.

And Mr. Ahuja, I'll turn the call back over to you.

Thanks, Regina. And thanks, everyone, for joining the call today. With that, we'd like to end the call. Have a good rest of the day, everyone.

This concludes today's conference call. You may now disconnect.