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Agilent Technologies Inc. (NYSE:A)
Q2 2018 Earnings Conference Call
May 14, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 Agilent Technologies 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 follow at that time. If anyone should require assistance during the program, please press * then 0 on your touchtone telephone.

As a reminder, this conference is being recorded. I would not like to hand the call over to Alicia Rodriguez, Investor Relations. Ma'am, you may begin.

Alicia Rodriguez -- Vice President of Investor Relations

Thank you, Amanda, and welcome everyone to Agilent's second quarter conference call for Fiscal Year 2018. 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 Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, 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. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency, and acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of April 30th.

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 June 6. 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.

Mike McMullen -- President and Chief Executive Officer

Thanks, Alicia. Hello everyone, thank you for joining us on today's call.

Before I discuss the Q2 financial highlights with you, I would like to welcome Jacob Thaysen and Sam Raha to their first earnings call in their new roles. Most of you know Jacob from his former role as the President of Agilent's Diagnostics and Genomics Group. He now has transitioned into a new role as the President of our Life Sciences and Applied Markets group. Sam is replacing Jacob as the new President of Agilent's Diagnostics and Genomics Group. Sam, as you may recall, rejoined Agilent a year ago as Senior Vice President of Corporate Strategy and Business Development. Both Jacob and Sam have extensive backgrounds in life sciences, wide industry knowledge and connections. Both are highly experienced at building and leading large organizations. Agilent is fortunate to have a deep leadership bench to draw upon to fill these two roles.

Now, let me turn to our Q2 financial performance. I can report that the Agilent team delivered another strong quarter. Our momentum continues. Our core revenue growth of 4.3 percent is at the mid-point of our guidance. Our adjusted EPS of $0.65, exceeded our expectations and is above the high-end of guidance. Our adjusted EPS is up 12% from a year ago. We delivered an adjusted operating margin of 21.9%. On a currency adjusted basis, this is our 13th quarter in a row of improving operating margins.

After two strong quarters to start the year, our core growth now stands at 7%, with an adjusted operating margin of 22.2% and an adjusted EPS up 19%. I am making some references to our first half results, as the Lunar New Year had a material impact on the timing of our reported revenues.

In Q1, our Chinese customers requested deliveries earlier than anticipated. As a reminder, this pulled in approximately $10 million of revenue from Q2 into our first quarter. In Q2, we also estimate that the reduced number of "selling days" due to the Lunar New Year had a negative impact of close to $10 million on our ACG annuity business. These two factors reduced Q2's reported company growth by two percentage points.

Back to our Q2 results and turning to our end markets, Pharma, our largest business, continued

its strong showing with 8% growth. Strength in Mass Spectrometry, consumables, services and genomics led the results. Growth was strong in both the Bio-Pharma and Small Molecule market segments. We remain very confident in achieving our 2018 Pharma growth objectives.

Our Chemical and Energy market revenues grew 5% in-line with our expectations and against a difficult compare of 14% growth last year. The global Chemical and Energy market environment remains favorable, although we note a slight pause among our US customer base, which may be attributable to some concerns about trade policies.

We grew 2% in Academia and Government driven primarily by strength in LC/MS, Cell Analysis, and our CrossLab services and consumables business. Diagnostics and Clinical grew 3% led by strength in our Reagent Partnership and Genomics businesses and offset continued weakness in the U.S. Pain Management market.

Food revenue was down 1%, reflecting the initial impact of the Chinese government reorganization of the food safety ministries. On March 21st, the Chinese government announced the creation of the National Market Supervision Administration (NMSA), consolidating many previous independent agencies such as AQSIQ, SFDA and SAIC into one market supervisory agency. This is resulting in a temporary slowing of new instrument purchases as ministries are being consolidated and decision-makers are being clarified. We expect the reorganization to take as long as one year to be completely finished with an expected slowdown of 6 to 9 months in new instrument purchases.

Environmental and Forensics grew 2%, driven by strong gains in our global Forensics business. In March, the Chinese government also announced some changes to the structure of the Environmental ministries. These changes, however, are not as large as those to the Food market ministries. While we did see some slowdown in new instrument purchases, we expect business to return to higher levels of growth in the next quarter or two.

Geographically, the Americas and Europe grew strongly, with high-single-digit growth. China was flat in Q2 due to the timing impact of the Lunar New Year, and the recently announced changes to the government Food and Environmental ministry agencies. For the half, our China team delivered strong 9% core growth.

Now, I will cover some of the highlights from our business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 3%. Growth in Chemical & Energy remained robust offsetting the weakness in the Food testing market. From a product perspective, we saw strength in LC/MS, Cell Analysis and ICP/MS. Our new LC-MS, Ultivo, continues to be well-received by the market and perform ahead of our targets.

On the M&A front, we announced the acquisition of Advanced Analytical Technologies, Inc. Agilent is known as an innovator in capillary electrophoresis based instrumentation, and this acquisition will add complementary technologies to our portfolio. The regulatory review is under way.

After the quarter end, we also announced plans to acquire Genohm, which closed today. Genohm is a developer of highly differentiated, on-premise and cloud-based software solutions for laboratory management. The Genohm team will join Agilent as part of our LSAG group. Customers are looking to do more with their data. By integrating Genohm's platform into our OpenLab portfolio, Agilent will extend its OpenLab value proposition to encompass the management of all the context and content in the lab.

We continue to build our cell analysis business. In collaboration with BioTek Instruments, we announced a new, integrated solution that combines cellular metabolic analysis and imaging technologies. This collaboration provides new capabilities to our Agilent Seahorse analyzers, which help biologists measure cell activity in real time.

Agilent CrossLab Group continued its consistent, outstanding performance with 7% core revenue growth. Gains across our major end-markets were led by double-digit growth in Pharma and Academia & Government. Performance was balanced across consumables and service.

China delivered double-digit growth and all other geographies grew in mid- to high-single digits.

During the quarter, we made progress on our mission to improve both the science and the economics of our customers' laboratories. We introduced an innovative and extremely stable new GC column that is receiving a very positive response from customers. ACG Services is expanding its Agilent Enablement Services Pilot to include additional platforms across Agilent. The pilot is aimed at improving the customer's onboarding experience by shortening their time-to-value after they purchase our solutions. We also opened a new Global Solution Development Center in Singapore to meet the increasing demand for integrated end-to-end solutions.

Our online capabilities continue to gain momentum. Our China online business has seen double-digit growth since the beginning of the year. And, our China WeChat Services program has attracted more than 13,000 active customers since its rollout at the end of last year.

The Diagnostics and Genomics Group delivered core revenue growth of 4%, as expected, led by strength in our Genomics business. On the innovation front, we introduced several new products this quarter. Our launch of the HRP Magenta for the Dako Omnis, Agilent's flagship instrument for immunohistochemistry and in situ hybridization, allows pathologists to more easily visualize cancer in skin and lung tissues.

We continued to expand our portfolio of in situ hybridization probes with the release of several new probes for Omnis to maximize our differentiation in automated ISH staining. On the Genomics side, we enhanced our industry leading target enrichment portfolio for next-gen sequencing.

Our recent introduction of the SureSelect All Exon V7 is being well-received by customers -- as it improves both performance and cost-effectiveness. On the Genomics informatics front, we released a new module for the Alissa Clinical Informatics Platform. This new module further simplifies the informatics processes and accelerate time-to-results for our customers.

We continue to invest for future growth. We signed a definitive agreement to acquire the remaining shares of Lasergen, and closed the acquisition on May 7th. As many of you will recall, we made an initial investment in Lasergen in 2016 for a 48% ownership stake. This acquisition brings into Agilent a powerful sequencing chemistry and a world-class group of scientists and engineers, dedicated to bringing our integrated clinical workflow solution for molecular diagnostics to the market. We are very excited to have the Lasergen scientists and engineers on the One Agilent team. We expect to invest about $35 million per year to deliver our molecular clinical workflow solution to the market in 2020.

Now, let me provide a few remarks on where we are in our journey at Agilent and our outlook for the rest of the year.

The Agilent team continues to execute and our momentum remains. We are right where we want to be for the first 6 months of the year. We delivered strong growth, while improving operating margins and deploying our capital in a balanced manner. Once again, our EPS growth is in the double digits.

Our R&D innovation engine continues to strengthen our portfolio. We also are adding new capabilities through M&A. We believe this combination of organic growth-driven investments and complementary M&A together with our execution capabilities will deliver continued strong growth relative to the market.

For the past 3 years, our focus has been on building a company foundation. A foundation that would leverage the One Agilent company culture, innovation and execution capabilities -- to generate above-market growth and earnings expansion. Our platform for top-line and earnings growth is now in place. We are delivering. When we were rebuilding the company, I also wanted to focus on making the company more agile and responsive to our market environment.

Looking forward, we continue to proactively assess market forces and move in an agile manner to capture the most promising opportunities. As you know, our two largest end-markets are Pharma and Chemical & Energy. Through the first half of this year, our Pharma performance has been above our expectations, and we are raising our full-year Pharma outlook. Our full-year guide for the Chemical and Energy market business remains unchanged with expected strong mid- to high-single digit growth.

Geographically, we are bringing down our expected full-year growth rates in China to about 7% as a result of the expected pause in business from the realignments of the government agencies. At the same time, we remain confident in the strength of our European and Americas businesses and have raised our full-year outlook for these geographies from our Q1 guide assumptions.

While there are some end-market and geographic "give and takes," our overall model remains intact. Following the significantly raised guidance last quarter, we are reaffirming our full-year core growth and earnings guidance, inclusive of currency headwinds and increased investments in our molecular clinical workflow offering.

The Agilent team is confident, energized and excited about our future, our next phase of growth and delivery of results. We are looking forward to sharing more about what is behind this outlook in our upcoming Analyst and Investor Day.

Thank you for being on the call, and I look forward to answering your questions -- and seeing you in June.

I will now hand off the call to Didier, who will share more insights on our Q2 financials and updated outlook. Didier?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Thank you, Mike, and hello, everyone. As Mike stated, we delivered another strong performance this quarter and year-to-date.

For the quarter, our core revenue growth of 4.3% was in line with our guidance, and we overdelivered on OM and EPS. Our core revenue growth would have been more than 1 percentage point higher if not for ICPMS shipment delays and the recently announced reorganization of Chinese government ministries. Our adjusted operating margin of 21.9% was 40 basis points above the implied guidance, and EPS of $0.65 was $0.03 above. Further adjusting for currency, the operating margin was 22.4%, which was 30 bps above last year and, as highlighted by Mike, represented our 13th quarter of increased year-over-year operating margin. We delivered $303 million in operating cash flow. During the quarter, we bought back 674,000 shares of Agilent stock for a total of $46 million and paid $48 million in dividends.

I will now cover the guidance for Fiscal Year 2018. We are maintaining our core revenue growth guidance of 5.5%, even as we anticipate that the reorganization of Chinese government ministries may push out about $20 million of revenues into FY19. We are also maintaining our EPS guidance of $2.65 while absorbing $22 million or $0.06 for FX and our technology investments in Lasergen and Genohm. Regarding Lasergen, we forecast to spend $15 million this second half, and about $35 million in both FY19 and FY20, when we plan to commercialize our solution. There is no change to our operating cash flow guidance of $1.05 billion and CapEx guidance of $200 million.

I will now turn to the guidance for our third quarter. We expect Q3 revenues of $1.185 billion to $1.205 billion and EPS of $0.61 to $0.63. At midpoint, revenue will grow 4.3% on a core basis. With that, I will turn it over to Alicia for the Q&A.

Questions and Answers:

Alicia Rodriguez -- Vice President of Investor Relations

Thank you, Didier. Amanda, will you please give the instructions for the Q&A session?

Operator

Absolutely. Ladies and gentlemen, at this time, if you have a question, please press * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Our first question comes from the line of Derik de Bruin from Bank of America. Your line is open.

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Hi, good afternoon. The operating margin guide for the year, it's down about 20 bps. Is that FX and the dilutive impact of the acquisitions? Is that's what's going on there?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

There's a little bit of, certainly, FX, and the rest is on the acquisition front; you're absolutely right.

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Got it. And I think you already answered my question in terms of what you're going to absorb in terms of Lasergen, but what are these other deals -- the Advanced Analytical and the Genohm going to add in terms of the top line for M&A contributions? Do you they have significant revenues?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Yeah, so Lasergen doesn't bring -- [inaudible] the ATI, it hasn't closed yet. Because it hasn't closed, we have not included it at all in our guidance projections. We'll only do that once it closes.

Mike McMullen -- President and Chief Executive Officer

And Genohm, it's a few million on the top line.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Exactly.

Mike McMullen -- President and Chief Executive Officer

A few million on the top and about 40 people coming in. It's primarily a technology acquisition.

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

I'm a little curious on the China comments. None of the -- just having -- you guys are at the end of earning season and none of your other life sciences peers commented. It sounds like this happened late in March about the Chinese food reorg. I'm wondering just can you talk a little bit more about that and exactly what's going on and why you think it's going to take a year to sort of wind through the system?

Mike McMullen -- President and Chief Executive Officer

Sure. As you may know, they have these big annual sessions they call -- I won't read out the full abbreviation, but the NPC -- the National People's Congress -- and the CPPCC, which they had these two annual events. After those events occurred, on March 21st, they announced the reorganization of the ministries. Where we came up with an estimate about a year was based on our experience in 2014 and 2015, when there was a similar reorganization within the CFDA. We saw a pause of 6 to 9 months of business during that period of time. We're using that as a similar rule of thumb. It's very consistent with the estimates on our team.

I can remember being on the earnings call at that time and saying, "Listen, the business is not going away, but we know there will be a pause, at least on new instrument purchases, as they work through all the changes." That's our guidelines. Of course, we'd like to see it be shorter but we wanted to be somewhat cautious in our outlook, given our prior experience with major changes such as this. The change on the Environmental side is much less significant and should have a shorter term impact.

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Great. I'll get back in the queue. Thanks.

Operator

Thank you. Our next question is from the line of Tycho Peterson of J.P. Morgan. Your line is open.

Tycho Peterson -- J.P. Morgan Securities, LLC -- Analyst

Thanks. Maybe I'll start with Academic. You had a similar comp this quarter to last quarter. Obviously, results a little bit lighter. Was that just the timing dynamic or is there something else going on?

Mike McMullen -- President and Chief Executive Officer

Tycho, you hit that nail right on the head. Is this the timing? That business can be a little bit more lump, but we're actually positive on the overall funding [inaudible], so I wouldn't over-read into that quarterly result. Of course, we also had the shortened period of business in China, which also affected that a bit, as well, in Academia and Government.

Tycho Peterson -- J.P. Morgan Securities, LLC -- Analyst

Then in Chemical and Energy, you called out the slight pause in the U.S. Can you maybe just talk to that dynamic in a [inaudible] in May?

Mike McMullen -- President and Chief Executive Officer

Yeah, thanks, Tycho. I mean, the numbers were solid. We had 5% growth off of a really difficult compare. But there's some kind of noise in the system, particularly in the U.S. Business is good, but it could have been even more robust. As you know, business doesn't like uncertainty. There's lots of uncertainty what's going to happen with trade policies and tariffs, and so we thought it prudent to mention it didn't affect materially the results, but the noise is out there. Although, as you can see in our guide, we still remain very confident about our ability to grow this year in Chemical and Energy.

I know we're going to talk a bit about China day as well, but that is one segment of the China market that is really, really strong and we can expect good growth there for years to come. But again, we just thought it was good to share with the audience what we've been hearing from some of our customers.

Tycho Peterson -- J.P. Morgan Securities, LLC -- Analyst

Is it fair to say you're not yet still seeing meaningful benefits from Intuvo at this point on Chemical and Energy?

Mike McMullen -- President and Chief Executive Officer

Yeah, it's ramping as we said. It's part of the story there, but we still have a lot more runway with that product.

Tycho Peterson -- J.P. Morgan Securities, LLC -- Analyst

Okay. Then last one on Lasergen. Are there milestones we should be thinking about on the development pathway here in terms of placing additional beta units or how do we think about the roadmap here for commercial --

Mike McMullen -- President and Chief Executive Officer

Look for something visible in the market in 2020.

Tycho Peterson -- J.P. Morgan Securities, LLC -- Analyst

Okay.

Mike McMullen -- President and Chief Executive Officer

We'll wait later on for that, right?

Tycho Peterson -- J.P. Morgan Securities, LLC -- Analyst

All right. Thanks, guys.

Mike McMullen -- President and Chief Executive Officer

You're quite welcome, Tycho.

Operator

Thank you. Our next question is from the line of Dan Leonard of Deutsche Bank. Your line is open.

Dan Leonard -- Deutsche Bank -- Analyst

Thank you. Just quick follow-up on Lasergen there. Mike, is the $35 million in annual spend, is that all incremental or is some of that in the base?

Mike McMullen -- President and Chief Executive Officer

It's incremental.

Dan Leonard -- Deutsche Bank -- Analyst

Then how does that impact how you're thinking about the margin expansion trajectory for corporate Agilent in Fiscal 2019 and 2020? Because that's a material amount of spend versus what we would think of normal operating margin improvement cadence for the total company?

Mike McMullen -- President and Chief Executive Officer

We'll give you some more detailed information in the analysts' meeting in June, but our thinking has been that our core business will continue to follow the incremental growth in terms of market expansion you've seen over the prior years. This is a dilutive acquisition for us, but we think we can carry the support and we'll share all the details with you when we meet in June, but again, our core model of continuing to expand the operating margin with the incrementals is intact.

Dan Leonard -- Deutsche Bank -- Analyst

Then finally, just trying to think about how to size the China food safety exposure. Is it fair to think about your business in China being a mid-single-digit grower until this normalizes or is it lower than that over the next, call it 6 to 9-month timeframe?

Mike McMullen -- President and Chief Executive Officer

You mean the outlook?

Dan Leonard -- Deutsche Bank -- Analyst

Yeah, for total China.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

We've provided the outlook, the guidance is for 7%. We used to have 10% in the previous quarter guidance. So we are now at 7%.

Dan Leonard -- Deutsche Bank -- Analyst

Okay, I can do the math. Thank you.

Mike McMullen -- President and Chief Executive Officer

Yeah, that's for total China, right, Didier?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Yes.

Mike McMullen -- President and Chief Executive Officer

Yeah, absolutely.

Operator

Thank you. Our next question is from the line of Ross Muken of Evercore. Your line is open.

Ross Muken -- Evercore ISI -- Analyst

Good afternoon, guys. I just want to be clear on the sequential sort of headwinds Q1 to Q2, and then sort of the jump-off from there. I think you said a couple different things. So, we had obviously the New Year shift. We had the day shift in the quarter, and then it seemed like there was also something you said on ICP and Med. So, just help us versus the original plan. What were the actual components of the Delta that affected this Q? It seemed like the only thing coming out of this Q that's updated new, other than maybe the developed markets are better is kind of China net worse because of Food. I just want to make sure I get the cadence and the components right.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Let me take that one, Ross. You are absolutely correct. The Lunar New Year, the impact was obviously already reflected in our guidance, as well as a very tough compare. Remember that last year we had 9% core revenue growth and the year before 8%. And also the fact that last year we had $7 million of a settlement within our DGD organization.

What is new versus the previous guidance, the shipment delays and the ICPMS and the reorganization of the Chinese Government Ministry. So only those two factors, which take away about 1 percentage point of our growth, were not included in our previous guidance.

Ross Muken -- Evercore ISI -- Analyst

Got it. And in terms of risk factors, both positive or negative to the 2H guide, where do you think there's the biggest potential for either up or down side from a segment perspective and/or markets?

Mike McMullen -- President and Chief Executive Officer

I'll take that one. I think the Chemical and Energy market continues to offer the biggest upside for the business. We've already raised the outlook of Pharma and maybe we could do that again. But the big end markets for Agilent are very solid with potential with upside and Chemical and Energy, and that's why I mentioned some of the noise. So, as soon as we can get some clarity on trade policy, I think that really will calm things down. If that happens fairly soon, I think it would be really good news for us in this space.

So, I think the Chemical and Energy market offers the biggest upside for us. Although we're trying to take a very objective outlook on China, maybe -- it's always hard to predict how quickly these things happen, we've painted what we think is sort of, if you will, a longer tail scenario, but we could actually find they move through the process much more quickly. So, I think that might be an area where you could see some upside relative to our guide assumptions.

Ross Muken -- Evercore ISI -- Analyst

Yeah, and just maybe, Mike, sorry, on that. On the ICPMS comment, is that de-coupled from the China Food comment?

Mike McMullen -- President and Chief Executive Officer

No, it's actually part of the China story. So, it's actually about $10 million so.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

$7-$8 million.

Mike McMullen -- President and Chief Executive Officer

$7-$8 million, closer to $10 million. So, I always like to round up a bit, as you can tell. But, that was just a byproduct of the product is hot right now. So, we just had a really high backlog. As you may know, I think you know this already, Ross -- particularly in China, you have to get an IVL license to get the products through the approval process with the government. So, that's took a little bit longer. I think, Didier, we've already shipped those this quarter.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Yes, we did. Absolutely.

Mike McMullen -- President and Chief Executive Officer

So, it would've been nice for this call if we'd gotten them in last quarter, but I think --

Didier Hirsch -- Senior Vice President and Chief Executive Officer

It's in the bag for this quarter.

Mike McMullen -- President and Chief Executive Officer

Yeah, it's in the bag for the quarter. It's already been shipped and booked. But again, this was more of a backlog issue because we've been seeing such strong growth, particularly in China for ICPMS.

Ross Muken -- Evercore ISI -- Analyst

Got it. Thanks, Mike.

Mike McMullen -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Steve Beuchaw of Morgan Stanley. Your line is open.

Steve Beuchaw -- Morgan Stanley -- Analyst

Hi, good afternoon. Thanks for the time here. My first question is actually on margins. I appreciate the commentary that you have a good degree of confidence that the underlying margin expansion trend is intact, but as I look at the last few quarters or the last three quarters, at the incremental margins, they've been tracking below the 30% target level. I wonder if you might help us understand here why the trend is evolving along the lines. Are there any operational items to call out and when can we see a return back to the 30%+ level?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

I'll take that question, Steve. It's interesting. The impact of mostly currency on both the top line and the gross margin is fairly significant. You are absolutely right. When you look at reported operating margins incremental, in Q1 and Q2, there were respectively 32% and 20%. If you adjust for currency and a little bit, but that's very minor for acquisitions, but on the core basis, you get to 36% for Q1 and 34% for Q2. So, very much in line with our model. It is mostly the impact of currency and what happens there is with the weakening of the dollar, it increases the denominator, which is the revenue, and it has a negative impact because of the hedging policy on the numerator, which is the margins. So all in all, if you adjust for that, you get back to our model regard core operating margin incremental.

We have some data in our annex, I think, we established. But anyway, if you want, I can take you through the details, but that's basically the impact.

Steve Beuchaw -- Morgan Stanley -- Analyst

Okay, that's so much for that. And then, two quick ones for the DGG lines. One is, I wonder if you can give us an update on the timelines for the capacity ramp in Colorado. Then, two, could you speak to the trends you're seeing on immunotherapy assays, PD-L and PD-L1 assays, given all the enthusiasm out there now for TMB testing as a diagnostic approach for IO. I'll get back in the queue.

Mike McMullen -- President and Chief Executive Officer

Thanks. I'm glad we had a chance to be able to point to other members of the team for a couple questions. I'm going to actually pass these over to Jacob, in your old role, and what I would just say to start things off is we just completed recently a review of the factory buildout in Frederick. I think we have the latest information. So, Jacob, if you wouldn't mind taking those two questions?

Jacob Thaysen -- President, Life Science and Applied Markets Group

Yes, absolutely. So, thanks for that. Again, a reminder that we see a very strong market in the NSD business, the nuclear gasses solutions for API business, and so we're very confident that we'll continue to have strong growth, and as you also reminded us about, Steve, is that we are in a situation where we have more demand than we have capacity.

So, we are now building out and we've done that for a few quarters now, but building. It's very impressive to see the site coming along out in Frederick, out close to the Boulder site. We're still progressing according to our plan. We expect to have products coming out here basically in a year from now.

Steve Beuchaw -- Morgan Stanley -- Analyst

How about the assays of PD-L and PD-L1?

Jacob Thaysen -- President, Life Science and Applied Markets Group

The PD-L1 on the IC platform and the question is, how is that going to compete against the tumor mutation burden and other genomic assays? What we see and what we believe is this will be complementary. First and foremost, IC continues to have growth. [Inaudible] we had a very strong penetration over the last 18 months and we continue to see the growth here. What we believe is that, and what we can see in the market is that immuno-oncology is just much more complex than probably one marker is giving you information about. So, what we believe is and what we can see out there -- we can see our customers are using that, the ones that start with TMB, is that they are using both and they'll continue to use both markers.

So, we don't see that this is cannibalization. We actually think there's enough synergies between the markers.

Operator

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

Brandon Couillard -- Jefferies LLC -- Analyst

Thanks, good afternoon.

Mike McMullen -- President and Chief Executive Officer

Hey, Brandon. How are you?

Brandon Couillard -- Jefferies LLC -- Analyst

Great. Mike, I'm curious if you could give us a sense of how Chemical and Energy orders progress through the quarter and as we look through this business today, is it any less cyclical today, especially given the new product cycle, than perhaps it was 3 to 5 years ago?

Mike McMullen -- President and Chief Executive Officer

Great question. The first one, I think we saw nothing out of the ordinary in Chemical and Energy. The only other contact I would comment on would be Chemical and Energy grew in China, but not as much as it would normally grow, given the shorter period of time. But Chemical and Energy looked fine through the whole quarter. Nothing out of the ordinary. I think there's probably a case to be made that maybe it's a little bit less cyclical just because of the fact that there's a lot more pent-up and aged equipment than there was when we started the cycle 3 or 5 years ago. It is a more cyclical business for us, but to some degree, I can't handicap it, but directionally I would say that it is a little bit less cyclical than it has been in the past.

Brandon Couillard -- Jefferies LLC -- Analyst

Thanks. A couple for Didier. No. 1, on the Pharma outlook for the year. Maybe I missed that, what the new outlook is for core growth from Pharma. Then secondly, would you mind walking through the hedge and the translation impact? I see $6 million in the back of the supplement packet, but I'm curious if that includes both the hedge and the translation effect on OP?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Yes, so in terms of Pharma, Mike mentioned that we are raising our full-year Pharma outlook and we are raising it from 5% to 6%. So slightly raising it. In terms of the impact of currency, you're mentioning the $6 million and that's the impact for the full-year. The precise number is $5.4 million. It's a negative headwind that comes from mostly translation impact offset by some gains due to our hedging. So, it's the net of the two.

Brandon Couillard -- Jefferies LLC -- Analyst

Thank you.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

The hedging is then continues to basically offset whatever direct impact you have from the translation.

Brandon Couillard -- Jefferies LLC -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Doug Schenkel of Cowen. Your line is open.

Doug Schenkel -- Cowen and Company -- Analyst

Hey, good afternoon, guys.

Mike McMullen -- President and Chief Executive Officer

Good afternoon, Doug.

Doug Schenkel -- Cowen and Company -- Analyst

Maybe just starting with another question on China, just a clean-up question. You mentioned that you believe the day's effect related to Lunar New Year resulted in a $10 million headwind. I think you said specifically within CrossLab. Did Lunar New Year have a broader impact on the quarter? If it did, I may have missed it if you quantified that.

Mike McMullen -- President and Chief Executive Officer

No, we were just trying to show what a normalized growth rate might look like for the quarter. You're exactly right. The $10 million, just because the customers weren't in the labs that day. Clearly, the business will come back. That makes the CrossLab number we reported even more impressive because we delivered double-digit growth even with that effect. In a normal quarter, we'd have even much higher reported growth.

Doug, if you don't mind, while we're on China, I know we're going to spend -- and there's a lot of focus, rightfully so, on the call about what's happening in the Food segment of the market in China. I think it's important though, the overall dynamics in the China market will replay, for example, Pharma, Academia and Government, Chemical and Energy. I was just in China two weeks ago speaking first hand to our customers to sign up back, so those markets are still very robust and we can expect a lot of growth from them in the coming years.

So, again, I think it's also important to think about the overall context of the China market. We knew there were going to be lots of puts and takes this quarter with Lunar New Year and this reorganization of the Ministry, so happy to answer any additional questions you might have on China, as well.

Doug Schenkel -- Cowen and Company -- Analyst

Yeah, no. That's real helpful, Mike. I guess kind of what I was getting at is there's that $10 million impact on CrossLab and what was even with that a really strong quarter for that part of the business. There's presumably a broader gaze affect on the business which may be harder to quantify, but certainly had an impact on overall growth. Is that a fair statement?

Mike McMullen -- President and Chief Executive Officer

I'm not sure I understand the question.

Doug Schenkel -- Cowen and Company -- Analyst

Lunar New Year, the day's affect of Lunar New Year. It's easier to quantify within CrossLab, but presumably it has some impact on the broader business, which you didn't quantify.

Mike McMullen -- President and Chief Executive Officer

Yeah, that's a little bit tougher for us, so that's why we were hesitant to put something out.

[Crosstalk]

Didier Hirsch -- Senior Vice President and Chief Executive Officer

-- with one week less in the quarter, but whereas for [inaudible], those are lost days.

Doug Schenkel -- Cowen and Company -- Analyst

Yeah, OK. So then a broader guidance question. Your reaffirmed guidance assumes you maintain a 4% to 4.5% year-over-year growth rate for the remainder of the year. If we look at one-year comparison in the two-year stacks, it seem like you're assuming that growth moderates a bit relative to recent trend. In spite of actually sounding pretty good on most fronts, are you baking in a little more cushion than you have recently to account for unforeseen surprises, just given all the incremental uncertainty, in a couple areas that you described in your prepared remarks?

Mike McMullen -- President and Chief Executive Officer

That's probably somewhat of a fair assumption. I think that what Didier and I try to do is we try to guide in a way that will accommodate if we have a surprise or two. Look what happened this quarter. We were able to beat our EPS guide and beat consensus on the EPS side, but we hadn't seen the ICPMS shipment delays or the reorganization of the Chinese Food Ministry. So, we were able to accommodate those within the guide. That's our philosophy. I think we're hoping to be able to set up the second half so if something else would happen to occur that we hadn't seen coming, that there's room in there for us to absorb it.

Doug Schenkel -- Cowen and Company -- Analyst

Okay, that's great. Maybe one last one. There were a lot of timing dynamics in the quarter. Oil prices may be working in your favor. Trade policy uncertainty maybe causing things to take a little bit longer than maybe before. With all that in mind, any chance you could provide some directional commentary on order trends, book-to-bill, anything like that?

Mike McMullen -- President and Chief Executive Officer

Beyond the fact that we can tell you that pacing the orders was nothing unusual. Beyond discussing specific to Chemical and Energy, Doug, but I think your comment about some of the orders taking a little bit longer in the U.S. because OK, let's see where this lands. I think that's -- I could comment on cycle time to order close in the U.S.

Doug Schenkel -- Cowen and Company -- Analyst

Okay, but nothing out of the usual across the business? Okay.

Mike McMullen -- President and Chief Executive Officer

No. And then the earlier question was, "Hey, Mike, where do you think your upside could be to your plan?" I think it is Chemical and Energy.

Doug Schenkel -- Cowen and Company -- Analyst

Okay. All right. Thank you very much.

Mike McMullen -- President and Chief Executive Officer

Thank you.

Operator

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

Daniel Arias -- Citi Investment Research -- Analyst

Hi, good afternoon. Thanks. Question maybe for Jacob.

Mike McMullen -- President and Chief Executive Officer

Hi, Dan.

Daniel Arias -- Citi Investment Research -- Analyst

Hi, Mike. Question for Jacob in his new role, if he's willing. A lot of discussion on --

Mike McMullen -- President and Chief Executive Officer

He's ready, he's ready.

Daniel Arias -- Citi Investment Research -- Analyst

Okay, good. We'll put him to the test then. In just the mass spec market, you guys have been pretty active. I think you called it out as a strength this quarter. Can you just maybe talk about the growth you're seeing if you separate out the high research side from the more routine applied market products? How does growth compare there?

Mike McMullen -- President and Chief Executive Officer

I know Jacob would love to jump in on this question, but I think he just had a few weeks to get close to the question. I know you've been digging in a bit, but why don't I take this one, which is the routine market is really where we've been focusing a lot of our new portfolio moves. The Ultivo LC/MS is doing very well relative to our targets. It's really focused in the places where you have the highest volume in the routine market. That's where we've been doing really quite well with the most recent introduction.

That being said, some of the enhancements we've made to our portfolio, particularly on the Bio LC/MS side, have really enhanced our position and research side. We've seen strong growth in both segments of the mass spec market, but I think just given the volume of our business is in the routine segment. That's been the driver for the overall revenue for [inaudible]. But really quite pleased with both portfolio moves we made there. Jacob, anything you'd like to add to that?

Jacob Thaysen -- President, Life Science and Applied Markets Group

I'll just say thanks for helping out, Mike.

Daniel Arias -- Citi Investment Research -- Analyst

Okay, well, my second question is actually on DGG, sort of a similar tack. You did specifically call out the way the demand was shaping up for tissue and thinning products. Can you do the same on the Genomics side? What are you seeing as far as a contribution from sample prep and that array, especially given that there are some new products there as well?

Mike McMullen -- President and Chief Executive Officer

By the way, I'll pass that to you, Jacob, as well. But just a reminder too, I've been called out on my script, but when we look at the growth rates or at DGG business relative to the Q2 last year, it's probably about a 3-point effect, given we had an order cancellation that was booked all in [inaudible] Q2. On a normalized basis, DGG growth would've been 7% in Q2. With that, Jacob, if you could just add some thoughts on the Genomics side?

Jacob Thaysen -- President, Life Science and Applied Markets Group

Yeah, absolutely. I'm certainly more comfortable in taking that question. We've seen quite a good performance in Genomics recently. I think you have seen the overall market perform very well, and we have certainly benefited from that. So, we have seen very strong growth in our [inaudible] business, especially with the XTSS that came out, I think it was 6 or 9 months ago? We see very high demand and adoption of that. Now, the V7, as Mike mentioned here, just came out some weeks ago. The good news here is we have seen very good feedback from our customers, but we haven't really seen it in our numbers yet. So, I think it's a good opportunity in front of us with that product also.

Daniel Arias -- Citi Investment Research -- Analyst

Okay. Maybe just one follow-up. Is growth on the target enrichment side kind of in line with NGS growth overall?

Mike McMullen -- President and Chief Executive Officer

Yes. Hey, Sam, I know you've been looking on that side. I'm dying to get your voice on the call as well, so why don't you take that one?

Sam Raha -- President, Diagnostics and Genomics Group

Yeah, happy to say that. Absolutely. What we're finding is good growth returning for our target enrichment portfolio consistent with what'd you expect in the NGS market. If you look at the others that are participating there, we're seeing that both with our larger accounts, our national accounts and global accounts, if you will, as well as the broader marketplace. So, very happy with the growth that we've seen. Based on what we are seeing directionally, we expect that to continue in the coming quarters.

Mike McMullen -- President and Chief Executive Officer

Thanks, Sam.

Daniel Arias -- Citi Investment Research -- Analyst

Okay, thank you.

Operator

Thank you. Our next question is from the line of Jack Meehan of Barclays. Your line is open.

Jack Meehan -- Barclays -- Analyst

Thank you and good afternoon.

Mike McMullen -- President and Chief Executive Officer

Hey, Jack.

Jack Meehan -- Barclays -- Analyst

I wanted to follow up on Dan's first question related to mass spec. Have you seen any changes in the competitive environment recently? Can you provide an update on just how the old [inaudible] is resonating in the market versus your plan?

Mike McMullen -- President and Chief Executive Officer

Jacob, if you don't mind, I'll take this one as well. Actually, the market's been fairly stable. We haven't seen any major moves of strategic by any of the competitors. Then for us, this is just such an important new offering because we're not yet the leader in the space, so it's not an installed base [inaudible] market play. This is actually a market expansion play for us. Again, we're playing to one of our strengths, is really to provide tools to the routine market where they want robust, reliable instrumentation that gets the job done. That's really what we do quite well, in addition to providing leading-edge technologies for the research side of the business.

Jack Meehan -- Barclays -- Analyst

Great, thanks, Mike. On M&A, I just want to follow up on that. You've certainly been active in terms of a string of [inaudible] deals now. Are there any additional pieces of the puzzle that you need to put together in the clinical NGS workflow and can you talk about where the investment is going? In terms of either content, informatics, or the platform itself? Where you're investing there, thanks.

Mike McMullen -- President and Chief Executive Officer

Great questions. Again, some teasers for our June analysts' day. We'll spend a little bit more time going through our thinking around M&A. As you know, we like M&A in markets where we know the customers, where we know that we have a channel and really can leverage the scale of Agilent. That's the kind of opportunities we've been pursuing. Relative to the NGS workflow, we're continuing to build that out. We've brought in the sequencing chemistry, as we just mentioned. Then, we're in pretty good shape right now, but there's always things we can do perhaps on the informatics and content side. Sam, anything else you'd add to that?

Sam Raha -- President, Diagnostics and Genomics Group

I think, Mike, you're exactly right. Just to further detail out, we feel very good about the fact that we have a number of gold standard elements of the NGS workflow, be it ours or the NGS workflow that's being used broadly. But, there definitely is opportunity for partnership or adding content in an organic element such as content at some point.

Jack Meehan -- Barclays -- Analyst

Great, thank you both.

Operator

Thank you. Our next question is from the line of Catherine Schultz of Baird. Your line is open.

Catherine Schultz -- Robert W. Baird -- Analyst

Hey, guys. Thanks for the question.

Mike McMullen -- President and Chief Executive Officer

Sure, Catherine.

Catherine Ramsay -- Robert W. Baird -- Analyst

First on Dako, can you give some commentary on how the Quest rollout has gone and any opportunities for incremental wins in that space?

Mike McMullen -- President and Chief Executive Officer

So, Jacob, would you look to comment on the former Dako business, which we've been referring to as our Pathology business? I know they're in the midst of the rollout. That's been a point of major dialogue in the company to move us Dako into Agilent. So, how are things going with Quest?

Jacob Thaysen -- President, Life Science and Applied Markets Group

Well, things are going very well. It's been a while since we announced that deal, but usually these things take some time to implement fully. We have a very good traction and more of half the year instruments have been installed in the sites. We've also started to see a good uptake in the revenue. So, we're very pleased with where we are and we're very pleased with the partnership with Quest. We have also seen that this has resonated in the market and other similar types of accounts that are interested to look into the opportunity.

Catherine Ramsay -- Robert W. Baird -- Analyst

Great. Then can you just remind us what percent of your China revenue is food? Is it similar to the breakout of the total company or more heavily weighted in China.

Mike McMullen -- President and Chief Executive Officer

Let's check that.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

I can give it to you.

Mike McMullen -- President and Chief Executive Officer

I need the 12-C. Catherine, if you don't mind holding on for a second, Didier is pulling out his calculator. My guess is it's probably a little bit heavier weighted to the global average than Asia.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

In Q2, it was 41% of the worldwide food market that is in China.

Catherine Ramsay -- Robert W. Baird -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Paul Knight of Janney Montgomery. Your line is open.

Paul Knight -- Janney Montgomery Scott LLC -- Analyst

Hey, Mike. Could you talk a little more in granularity about where you're heading with operating margin like specific actions? I think your [inaudible] program, you've been working on that, what? The last year or longer? What other initiatives are you working on? Then, I guess, layering on that, Didier, are you leveraging your manufacturing to stay at that 30% incremental operating margin as well?

Mike McMullen -- President and Chief Executive Officer

Thanks for the question, Paul. Didier and I are going to go through this in fairly high-level detail when we see all of you, hopefully, in June, but conceptually, what we've been doing is this is a multi-year phased program with different areas of prioritization and focus. The message we're going to deliver in June and I'll just share right now is there's still more programs behind the numbers.

So, when we talk about margin expansion, it's not just a hope and a dream. There actually is something behind it. The something behind it, to your question, Paul, would be really heavy work in the order fulfillment area, manufacturing, particularly focused on material costs, supply chain, value engineering will be big levers for us, in terms of reducing our going material costs. We also have initiatives around how we manage our pricing and discounting. We think we've got room there in terms of how we think about the pricing and discounting.

We're also making some major investments in our R&D system that will think will allow us to come to market more quickly. Then, from a cost standpoint, take a lot of cost out of our platform cost because we're going to force the sharing of common components across all our divisions, where historically our divisions have operated fairly independently on the R&D side.

Didier, anything else I missed there?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

There are lots of other things but you'll have to wait [inaudible].

Mike McMullen -- President and Chief Executive Officer

Okay. It's our teaser for the June analyst day movie.

Paul Knight -- Janney Montgomery Scott LLC -- Analyst

Then last, Mike, on Academia plus 2%, where do you think it'll shake out for the year? 2 seems kind of below market right now.

Mike McMullen -- President and Chief Executive Officer

Yeah, for that quarter, I think that's fair. We look at our guide for the full year -- where were we on that, Didier? I think we were at about 5%, right? Mid-single-digits, so 5%-ish plus? So, mid-singles.

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Correct.

Mike McMullen -- President and Chief Executive Officer

We're actually quite bullish on Academia come fall. The Agilent team, and we've gotten our act in order, if you will, a couple of years ago, really, refocusing how we sell into academia. We have a companywide academia program. Like I said earlier, the funding conditions we see are more favorable than they were a year ago, so we think this combination of improved Agilent capabilities and funding environment bode well for continued strength throughout the year. Again, I wouldn't over-interpret the Q2 results.

Paul Knight -- Janney Montgomery Scott LLC -- Analyst

Okay.

Operator

Thank you. Our next question is from the line of Steve Willoughby of Cleveland Research. Your line is open.

Steve Willoughby -- Cleveland Research Company -- Analyst

Hi, thanks for taking my questions, guys. For Didier, I was noticing your expected interest expense for the year is now down maybe $12 million or so versus last quarter. I was wondering if there were any initial comments on that? Then secondly, if there's any additional color on the Ultivo and the feedback you might be hearing from customers on why that's being adopted so well so far, now that it's been out there for 6 months?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

You are absolutely correct, Steve. Part of that is higher interest, higher yield, higher interest income, more cash available, but I must say that part of it is also that our previous forecast was extremely conservative.

Steve Willoughby -- Cleveland Research Company -- Analyst

Okay.

Mike McMullen -- President and Chief Executive Officer

Then, Steven, relative to your question on the Ultivo, so if you remember, the initial value proposition, which was the power of the tiger, this high-performance instrument in a very small footprint and easy-to -use instrumentation, rugged, stackable. That value proposition, which we felt would resonate with customers, but you're never 100% sure until you get product out into the market. As you can imagine, very much like we've seen with the Intuvo, it's so different that often customers are saying, "Does this really work ad advertised?" Yes, it's working as advertised.

I think what's been happening here, the value proposition we thought around the new workflow for the customer, now we've been able to prove that it actually performs as intended. We've really been given a nice uptake. Again, I think this goes to our ability to really understand what it is that customers want and how to help them with both their science, but also the business operations side of their lap.

Steve Willoughby -- Cleveland Research Company -- Analyst

Okay. Then, if you don't mind, if I could squeeze in one more follow-up. The Chinese Ministry-related delays or, I guess, cutbacks. Did that have any impact here in 2Q or is that the $20 million of pushouts, is that just a second half number?

Mike McMullen -- President and Chief Executive Officer

No, we think about $5 million or so is what we estimated in Q2. Then the elective team in the second half.

Steve Willoughby -- Cleveland Research Company -- Analyst

Okay, so you've got $5 million from that and then another $7 to $10 million of ICPMS delays as well, in China?

Mike McMullen -- President and Chief Executive Officer

That's the right numbers, yeah.

Steve Willoughby -- Cleveland Research Company -- Analyst

Okay, perfect. Thank you.

Operator

Thank you. Our next question is from the line of Puneet Souda of Leerink Partners. Your line is open.

Puneet Souda -- Leerink Partners -- Analyst

Yeah, thanks, Mike. I had a question that I was just trying to understand, not sure if it was covered. In terms of weakness and pain management, my understanding was reimbursement was already lowered here some time ago. Was there another downtrend or what's driving this weakness here, and could you size that business for us?

Mike McMullen -- President and Chief Executive Officer

I think it's just working out the excess capacity that was in the space. We saw one of the customers, three silo customers went bankrupt in this space last quarter. It's primarily associated with our refurbished LC/MS business, is probably the biggest piece, right, Didier?

Didier Hirsch -- Senior Vice President and Chief Executive Officer

A little bit of everything, really. Really, when you sort out the part that comes from DGG, that's a positive and it's offset by about 2 points related to everything else, so the refurbished business, but even a little bit of service in consumables, a little bit of instruments, a little bit of everything. Nothing of strategic, but all together it took away 2 points of growth in Clinical and Diagnostics.

Mike McMullen -- President and Chief Executive Officer

We highlighted it in the call just because there has been a new market development. I think what's just going on though is just their capacity is coming out of the system.

Puneet Souda -- Leerink Partners -- Analyst

Got it. So 2 points on DGG, that was the impact? Okay. Just wanted to clarify one last thing on China. Last call, you highlighted a number of efforts targeted to enter into the entry level in China in terms of instrumentation, somewhat of a value line. My assumption was those were targeted toward food, given that these labs are more independent and food labs are somewhat cost conscious to begin with. So, after this regulation is said and done in 6 to 9 months, what's your expectation? Do you think that line would be more in demand or would you think more premium offerings on the market are likely to fare better here? Just wanted to understand that. Maybe just around overall impact to the rest of the peer group as well.

Mike McMullen -- President and Chief Executive Officer

Puneet, thanks for the great question. I think what you may have been referring to was the value line of new consumables and chemistry products we introduced specifically for China. What I'm going to do is have Mark make a few comments on that. Then I'll double back and provide you some commentary on instrumentation as well.

Mark Doak -- President, CrossLab Group

Sure. I'll just voice what you had said, Mike. It's a value line that we had introduced well over a year ago in China. It's been very well accepted. That being said, it wasn't necessarily targeted at the food markets. The target is anybody in the general space across broad sets of markets. So, we intend to obviously continue to build out that value line as time goes on and we'll find market specific offerings, but that wasn't the intent to go specifically after good. It just turns out, as you know, that 40% of the business is derived from there.

Mike McMullen -- President and Chief Executive Officer

Thanks, Mark. But the question around the composition of instrumentation, I think you could expect to still be heavily focused on mass spec, which is the tool of choice in food safety analysis and also food alterization. So whether it be GC/MS, IC/MS, LC/MS, there is a growing market for routine instrumentation. It's still high-quality instrumentation, but with less features. That's what we've been doing with primarily our chromatography portfolio on the GC and LC and molecular and spectroscopy, atomic spectroscopy. So to build that out to routine. But relative to food safety, there's still going to be a very heavy demand for mass spec. But again, it will have to be whatever is seen, as the business starts to migrate into the Tier 2 and Tier 3 cities, you really need to make sure you have an instrument that's robust and easy to use, which has never been our design vector.

By the way, another thing I should have commented on earlier too, which was the dynamics of the food market are changing in China, as well as who buys. So, we've been focusing a lot of the government agencies, but we're also starting to see more and more testing pushed to third-party contract testing labs, where the Chinese government is saying, "Listen, we're not going to pay for everything ourselves and fund and build all the labs." So that also could be -- I talked earlier about the give and takes for the market and potential upside, which is depending on how quickly the volume shifts from some of these centralized labs into the contract testing labs, that could bode well for us because we're a really strong player in these areas.

Again, we wanted to see how things shake out here over the next few months before we actually called that what is happening. I think it's important to understand that dynamic as well because even though we've been through a major Ministry reorganization like this a couple years ago, the trend toward more testing done in third-party, private labs is new.

Puneet Souda -- Leerink Partners -- Analyst

Thanks, Mike. That's very helpful.

Mike McMullen -- President and Chief Executive Officer

You're quite welcome.

Operator

Thank you. Our next question is from the line of Patrick Donnelly of Goldman Sachs. Your line is open.

Patrick Donnelly -- Goldman Sachs -- Analyst

Great, thanks. Maybe one for Mike, just on the capital deployment front. Can you talk through an update on the larger size deal pipeline? How large are you comfortable going with the improved balance sheet post-repatriation? Then, would you do a larger scale earnings dilutive yield or should we think of that as not on the table?

Mike McMullen -- President and Chief Executive Officer

Earnings? I'm going to go to the second question. If I understood correctly, if we were to do an acquisition larger than we've done so far, we would do it an accretive deal. We would not be doing large technology or acquisitions of companies that weren't profitable or marginally profitable. So, my model works and I can bring in like a technology acquisition and we'll go through some of the details with you in a few weeks, but the model works. I can bring in a technology acquisition on Lasergen, but don't assume that's sort of our norm. We prefer to do [inaudible] that have revenues and profit.

We're open to larger [inaudible]. I would just give it at this. We want to make sure that we -- we're still going to stay quite disciplined with the use of our cash. We use the standard financial metrics on how we look at returns. The biggest takeaway that I'd like to share with you is that we really want to do deals that are in the areas that we know. Don't look for us to do what I would consider transformational deals where we're off in a space where we don't know the customer base, we don't know the markets, and we really don't know the business as well as we should. So, we want to stay in a place in the markets where we know quite well.

Patrick Donnelly -- Goldman Sachs -- Analyst

Okay, that's helpful. Then, I know exploration is only 10% of the Chemical and Energy segment, but given the move higher in oil, could you just talk through how sensitive that business is to higher oil prices and if you're baking in any improvement related to improved conditions there?

Mike McMullen -- President and Chief Executive Officer

Great question. Usually, it's fairly sensitive to movements in prices. We've seen in the past where it would completely shut off. I'd say that's sort of behind my earlier question and you may have teased that out of my response, which was you would have expected this exploration piece to pop even faster in the U.S. than it has been. It's not down like it was before. That's why we're saying there's some noise for some of our customers.

In fact, I was just reading an article today in The Journal about some of our customers in this area are trying to figure out what is this higher -- I get my stuff, my aluminum pipe comes in from a country in Europe and I've got to fill out all these forms with the U.S. government. I'm not really sure what's going on. That's the kind of stuff I was talking about earlier.

So, long story short, they should respond pretty quickly to changes in oil prices when the changes are dramatic. We haven't seen them as robust as we would've thought in the United States, given the movements in oil prices that we're attributing, to the best of our ability, to what's the noise in the market right now around trade.

Patrick Donnelly -- Goldman Sachs -- Analyst

That's helpful. Thank you.

Operator

Thank you. At this time, I'm showing no further questions. I'd like to turn the conference back over to Alicia Rodriguez for the closing remarks.

Alicia Rodriguez -- Vice President of Investor Relations

Thank you, Amanda, and to everybody, on behalf of the management team for joining us today. If you have any questions, please give us a call in IR. I'd like to wish you a good day. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's teleconference. You may now disconnect. Everyone have a great day.

Duration: 67 minutes

Call participants:

Mike McMullen -- President and Chief Executive Officer

Didier Hirsch -- Senior Vice President and Chief Executive Officer

Alicia Rodriguez -- Vice President of Investor Relations

Derik de Bruin -- Bank of America Merrill Lynch -- Analyst

Tycho Peterson -- J.P. Morgan Securities, LLC -- Analyst

Dan Leonard -- Deutsche Bank -- Analyst

Ross Muken -- Evercore ISI -- Analyst

Steve Beuchaw -- Morgan Stanley -- Analyst

Brandon Couillard -- Jefferies LLC -- Analyst

Doug Schenkel -- Cowen and Company -- Analyst

Daniel Arias -- Citi Investment Research -- Analyst

Jack Meehan -- Barclays -- Analyst

Catherine Ramsay -- Robert W. Baird -- Analyst

Paul Knight -- Janney Montgomery Scott LLC -- Analyst

Steve Willoughby -- Cleveland Research Company -- Analyst

Puneet Souda -- Leerink Partners -- Analyst

Patrick Donnelly -- Goldman Sachs -- Analyst

More A analysis

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