安捷倫 (A) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Agilent Technologies fourth-quarter 2014 earnings call.

(Operator Instructions)

I'd now like to turn the call over to your host, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Thank you, Patrick, and welcome, everyone, to Agilent's fourth-quarter conference call for FY14.

With me are Bill Sullivan, Agilent's CEO; Mike McMullen, President, Chief Operating Officer, and CEO-elect; and Didier Hirsch, Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Fred Strohmeier, President of Agilent's Life Sciences and Diagnostics Group, and Mark Doak, Senior Vice President of Agilent's Cross-Lab 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 break-outs, 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 Bill, 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.

We will 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 Bill.

Thanks, Alicia, and hello, everyone.

Today, Agilent, including Keysight Technologies, reported Q4 revenues of $1.81 billion, operating margin of 20.7%, and earnings per share of $0.88. Keysight Technologies discussed their performance and outlook in a separate call earlier today. Accordingly, the rest of the numbers we will share today deal exclusively with Agilent's performance in the life sciences, diagnostics and applied markets.

New Agilent reported record fourth-quarter revenues and orders. Revenue of $1.04 billion increased 3% versus last year. Orders of $1.15 billion were up 5% over a year ago. Operating margin was 20.4%, book-to-bill was 1.1.

In a moment, Mike and Didier will discuss the details of the Q4 performance and outlook for the new Agilent. However, I'd like to highlight three major accomplishments during the quarter:

First, we completed the separation of the Company. The Keysight and Agilent teams executed a flawless separation of the Company without impacting the day-to-day business of either Company. With the completion of the separation of the Company, we have created two companies with greater strategic and management focus, with each Company well-positioned for growth and long-term shareholder value in their respective markets.

Second, during the quarter, Agilent retired an additional $500 million of debt, to maintain our leverage at a level consistent with our current investment grade rating. Third, we named a new CEO. In September, we announced that Mike McMullen has been named Agilent's President, Chief Operating Officer, and CEO-elect. Mike will become CEO on March 18, 2015, the day of the annual shareholders meeting.

With the separation now complete, this is the perfect time to name the new CEO, for the new Agilent. Mike and I are working to ensure the transition is smooth and seamless to the organization, customers and investors.

I will now turn the call over to Mike.

Thanks, Bill.

I'd like to share some of the detail behind the quarter's results. To reiterate, LDA, the new Agilent's fourth-quarter revenues came in at $1.04 billion, or 3% growth year over year. Unfavorable currency, lower NMR revenues, and late orders drove the difference from August guidance of $1.08 billion at the midpoint.

As a reminder, in October, we announced our exit from the NMR instrument business. We will no longer take NMR instrument orders, and our current backlog will ship in 2015. Excluding NMR and currency effects, each having a negative 1 percentage point impact on reported growth, revenues grew 5%, and orders grew 8%, compared to a year ago.

Now turning to results by end market, and growth on a reported basis. Within the Life Science and Applied Markets, pharma biotech was up 5%, driven by equipment refreshes from large and mid-sized pharma customers, and continued specialty pharma demand.

Life science research for academia and government was up 4% again this quarter, driven by improved government spending in the US and China. Government spending, particularly in the US and China, contributed to growth in forensics, up 6%, food testing, up 4%, and environmental, up 2% over a year ago.

Chemical energy revenues remained relatively flat, growing 1%. Pressure from reduced crude oil and naturals gas prices, and continued softness in the industrial markets slowed demand.

Turning to clinical and diagnostics, revenues grew 1%, with solid demand for genomics products related to cancer applications, and mass spec for therapeutic monitoring, offset by lower pathology revenues.

Geographically, economic recovery and government spending continued to drive growth in the Americas, up 6%. Asia, excluding Japan, grew 5%. We saw low single-digit growth from China, led by life science research, environmental, and food testing.

Europe was flat in the quarter. Continued strength in Eastern Europe and the Middle East was offset by softness in Western Europe. Japan declined 6% due to currency, but grew modestly in local currency basis, primarily in applied markets.

Turning to the business segments within LDA, life science and diagnostics group revenues grew 2%, while orders were up 3%. Excluding NMR, revenues were up 4%, and orders were up 6%, with strong growth across LDG's portfolio, except pathology.

Operating margin for the quarter was 17.5%, down 170 basis points from last year, but up 180 basis points from the previous quarter. Excluding the impact of NMR and FDA incremental expenses, LDG operating margin would have been 20% in Q4.

Our life science team introduced a number of key new products in the past quarter. The 1290 Infinity II LC system sets a new benchmark in analytical, instrument, and laboratory efficiency. OpenLAB CDS chromatography data system, will fully support the 1290 Infinity II LC system, and provides one of the most comprehensive software control systems in the industry.

We introduced ClearSeq AML, which is the first in a line of next-gen sequencing panels developed for cancer research. And our new family of SureSelect Focused Exome products provides the most comprehensive and high performance NGS solutions for postnatal research on high throughput and benchtop sequencers.

Turning to the chemical analysis group, revenues grew 5%, while orders were up 8%. Operating margin for the quarter was strong at 24.5%, flat with a year ago, and up 120 basis points from Q3.

Our chemical analysis team also had a number of key new product introductions, including a new 7010 Triple Quad GCMS, and the 7200 GC/Q-TOF, which expands pesticide screening beyond the capabilities of any other GC/Q-TOF system.

We strengthened our industry-leading atomic spectroscopy portfolio with the launch of the Agilent 5100 ICP-OES. This sets a new standard for optical emission spectroscopy, and has been extremely well-received by the market.

Among its many innovations, analysis can be run 55% faster, using 50% less gas per sample than competitive systems. In addition, the design changes have led to a 20 percentage point gross margin improvement over the previous product.

As we launch the new Agilent and enter the new fiscal year, we have three focus areas for the Company: Grow organically at the high end of the market, aggressively expand operating margins, deploy capital for long-term shareholder value.

First, we will focus on sustaining share growth within the core analytical lab. We will continue to bring innovative new offerings to the marketplace, and expand our lab-wide services and consumables, with a truly differentiated customer experience. We will leverage this strength in the analytical lab to drive growth in the fast-growing genomics, clinical research, and diagnostic markets.

Second, we will focus on aggressively growing our adjusted operating margins, with our portfolio and order fulfillment transformation programs. We will leverage SG&A and R&D investments, and reduce cost of synergies resulting from the separation of Keysight.

Keep in mind that FY15 is a transition year for Agilent. Year one cost of synergies are the highest following the Company's separation, and NMR and FDA remediation work will continue to weigh on our results. While we have a lot of work ahead of us, I have the highest confidence in our ability to meet Agilent's long-term operating goals.

Third, we will deploy capital for long-term shareholder value, with expected return of $500 million to shareholders in FY15. This includes a combination of cash dividends, approximately $135 million, and opportunistic share buybacks.

Turning to guidance, Agilent's revenues for the fiscal first quarter of 2015 are expected to range from $1.02 billion to $1.04 billion, for 2.2% reported growth, or 4.9% core growth at the midpoint. We expect first-quarter earnings per share from $0.39 to $0.43. For the full year, we expect revenue in a range from $4.12 billion to $4.18 billion, and earnings per share from $1.68 to $1.78.

Thank you for being on the call. I will now turn to Didier, who will provide a more detailed discussion of Agilent's financial results and guidance.

Thank you, Mike, and hello, everyone.

Bill and Mike have already covered Q4 orders, revenues and EPS. I will add that LDA's 20.4% operating margin is in line with our volume-adjusted midpoint guidance.

Also, please note that we spent an incremental $9 million in Q4 to address the FDA warning letter. Without this expense, and assuming we had already exited the NMR-related business, therefore saving $15 million on an annualized basis, LDA's Q4 operating margin would be about 22%. Finally, we redeemed $500 million of debt in Q4, and generated $166 million in operating cash flow.

This is lower than traditional for three main reasons: First, we paid $80 million for the redemption of the 2017 notes, and also prepaid the current interest on the notes. Second, pre-separation expenses amounted to $70 million.

Third, we paid $41 million in taxes related to the spin. Also note that we booked mostly non-cash charges related to the exit of the NMR-related business of $68 million.

I'll now turn to the guidance for FY15. Our FY15 revenue guidance of $4.12 billion to $4.18 billion assumes the economy will pick up moderately in the second half of our fiscal year.

At midpoint, our year-over-year growth will be 2.5% on a reported basis, but 4.9% on a core basis. The difference due to currency. We project FY15 EPS to range from $1.68 to $1.78, with a midpoint of $1.73, as per our October 17 guidance.

As you update your models for FY15, please consider the following: First, annual salary increases will be effective December 1, 2014.

Second, stock-based compensation will be about $65 million. As we front-load the recognition of stock-based compensation, the Q1 expense will be about $26 million. Third, depreciation is projected to be $100 million for the fiscal year.

Fourth, net interest expense is forecasted at $63 million and other income at $29 million. About $26 million of other income comes from services billed to Keysight; $12 million for IT services in the first half and $14 million for ongoing rental income. As we have previously communicated, the corresponding expenses are reflected in our operating profits, so you will need to increase the reported operating profit with the value of those services billed to Keysight, if you want to make a year-over-year comparison of our operating profit.

Fifth, the non-GAAP effective tax rate is projected to be 20%. Sixth, we plan to return approximately $500 million in capital to shareholders, including $135 million in dividends, and $365 million in opportunistic buybacks. The buybacks will occur from time to time on the open market, with consideration given to our stock price.

Seventh, for purpose of our EPS guidance, we have assumed a diluted share count of 340 million shares. But we could achieve a lower diluted share count of about 335 million shares, would we execute the buyback program in full.

Eighth, we expect operating cash flow of $600 million, and capital expenditures of $120 million. The operating cash flow reflects post-separation expenses of $50 million, and separation-related taxes of $40 million. Both will be pro forma.

Finally, moving to the guidance for our fourth quarter. We expect Q1 revenues of $1.02 billion to $1.04 billion, and EPS of $0.39 to $0.43. At midpoint, revenue will grow 2.2% year over year, or 4.9% on a core basis. The difference again, as a result of currency.

As customary, Q1 EPS is negatively impacted by the December salary increase, the front loading of stock-based compensation, and the increase in payroll taxes due to the divestment of the variable incentives paid over the previous semester.

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

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

(Operator Instructions)

Our first question comes from Doug Schenkel with Cowen & Company. Your line is open.

This is [Ryan Blicker] filling in for Doug. Thanks for taking my questions.

It appears as though our China pressures haven't completely subsided, despite the low-single digit growth in the quarter, that from your commentary, sounds like it outpaced your expectations. You sounded very positive on the spending environment in China the quarter.

Can you talk about what you're seeing in the marketplace, as well as what level of growth from China is baked into your current 2015 guidance?

Ryan, this is Mike. I'll field the question on China.

So yes, I think your read-through on the commentary is correct. We saw low single-digit revenue growth, but we're encouraged by the overall strength of the order performance in the quarter, with hitting the 8% order growth for the quarter.

And what we saw happening in China was a return to levels of improved, albeit still subdued government spending, which fueled our growth in our life sciences research, environmental testing, and food businesses.

Okay. Thank you.

And then just maybe one high-level question. So over the past few years, you've invested pretty materially above your peer group, in terms of R&D for the LDA segment. How should we assess the related return on investment looking forward, and more specifically, where do you expect to pick up share and at what pace?

I know you mentioned in some presentations earlier in the year beginning to leverage some of your R&D investments in 2015. At what point should we think about R&D starting to become maybe a lower percentage of sales? Thank you.

Just a follow-up commentary on your question. Again, this is Mike.

Relative to the comments you saw in my narrative, in my earlier comments, we talked about leveraging the investments we have made in R&D. In particular, we have invested quite heavily to build our portfolio out in the life sciences space. And we've also invested to build out a sales channel, focused on our life sciences customer base.

So you would expect that we would continue to be able to outgrow the market in these parts of the portfolio. In particular, I would tell you that we had real strong strength in our separations, our chromatography and mass spectrography in the fourth quarter across liquid separations, gas-phase separations, and the metals analysis side of the business, the ICP-MS, but I think those core product categories will continue to fuel above-market growth and have been recipient to a lot of our investments that we talked about earlier.

Okay. Thank you.

Our next question comes from Tycho Petersen with JPMorgan. Your line is open.

Thanks. Maybe just a follow-up on the leverage question.

As we're thinking about operating margins, either Mike or Bill, can you maybe just talk about -- give a little bit more color on some of drivers of margin leverage, in particular on the order fulfillment and portfolio aspect, and do you in fact expect SG&A leverage in 2015 as well?

I think -- this is Mike.

There's three drivers behind the overall operating margin improvement. And as you may have seen already, we've committed to a 3-point operating margin improvement over the next three years, hitting 22 by 17%, and as we've also indicated, FY15 is a significant transition year for us, in terms of working all the synergies, but also significant in terms of underlying improvement to the operating performance of the Company.

And with three key components of our margin improvement plan, one is the portfolio transformation that I highlighted earlier in my comments, and one example of that is the new ICP-OES, which through new product design and capabilities, has a 20 point better gross margin position than its predecessor product. So you will continue to see us coming to market and driving not only top line growth with improved offerings, but also a better margin structure, just based on the inherent design and platform design of the product.

The order fulfillment transformation program is still centered on what you saw at the March analyst meeting last year, where Henrik is driving an overall consolidation of manufacturing sites, and more importantly, a drive towards lower cost of our supply chain, as we have moved our manufacturing into low-cost parts of the world, such as Penang, Malaysia. The next phase of that program is to start to move our material supply chain, which as you know, represents actually a higher element of cost of the manufacturing products.

The third aspect of the plan is SG&A and R&D cost structure leverage, and you will start to see in FY15, particularly on the SG&A line, as we leverage that and it starts to decline as a percent of overall revenue, again, adjusting for the dissynergies we'll absorb in year one.

Okay. And then in the comments you called out some of the pathology headwinds. Can you maybe talk a little about when you think those bottom out, and how much of a headwind was it in the quarter?

If you don't mind, I think I'll pass this question over. Fred, this would be -- I'm sorry, I was going to pass this over to Fred Strohmeier, and Fred, the question was related to the pathology business. When did you see the headwinds perhaps turning on that business, Fred?

I think in pathology, we are seeing, at the moment, a flat revenue across in the last two quarters. And I think particularly in Q4, we have a tough compare in Europe.

I think we are seeing a slowdown in the US and Europe, and due to healthcare reforms, lower reimbursement and also consolidation of labs. And also, in Asia-Pacific, stricter regulatory controls.

And internally, as Mike already mentioned, we are seeing also some reflections of our FDA program on the revenues we are seeing in Q4. But we are optimistic that we are able to turn the situation around for next year.

The companion diagnostic is doing quite well, so it's growing nicely. OEM is on plan. Our reagent partnership is on plan. And what we are hearing from our customers in the field concerning on this and our products is pretty encouraging.

Okay.

And then lastly, you left M&A out of the capital deployment discussion. Any reason you wouldn't consider tuck-ins if they became available?

Our focus really in FY15 is really to launch the new Agilent Technologies, really go after some of the operational opportunities for improvement I discussed earlier, and you heard from Didier and myself, we do have a plan to return capital to the shareholders this year.

Okay. Thank you.

Our next question comes from Isaac Ro with Goldman Sachs. Your line is open.

Good afternoon, thank you.

Question for you on capital allocation. There was obviously a focus on shareholder returns, as it relates to repurchase and dividend. But wondering if you can comment a little about your interest and appetite for M&A?

If we look across the portfolio, there are some gaps, my view, particularly in diagnostics and genomics, where you could theoretically deploy some investment dollars to run out your offering. Just curious how you're thinking about M&A in the near to medium term?

I'll go ahead and take this question.

So as I mentioned earlier, we've made a sizable bet in our Dako acquisition, and we think it has a tremendous amount of promise working through some short-term operational challenges. So our focus right now for FY15 is not to pursue large M&A, but really to focus on realizing the potential of the acquisition we have made.

Great.

And then if I could just ask one question on a shorter term basis, regarding some of the regional trends. I think you mentioned some softness in, I think, Europe and then in food safety, I think it was the mid single-digit growth rate.

Curious on the latter item, in particular. It seems like in China, the industry in general this quarter has seen a little bit of pressure, mostly tied to some reshuffling in the government that will hopefully be a transient issue.

So I'm just wondering if number, you'd share that view on China? And, secondly, in Europe, if you could maybe give us a mark-to-market as to how that trended at the end of the quarter?

Let me make some comment first on China. Just back about six weeks ago from a visit to China and had an opportunity to see firsthand and draw my own conclusions on what's happening in the marketplace.

And I think your characterization is spot-on in terms of, there's been a significant reshuffling of ministries within the food safety arena, and I think it's a temporal slowdown that we've seen in the space. And as we pointed to in earlier calls, this actually had a pretty significant pulldown, in terms of overall order growth rate.

We did see in the fourth quarter some initial signs that we may be transitioning to some higher levels of growth in the food space, in China. I would caution you that it's still subdued, but it's trending in the right direction. So I think this is clearly an area of great interest in Chinese government, but they also want to make sure they're investing efficiently, and I think they've drawn the conclusion they had way too many ministries overlapping one another in terms of jurisdiction.

They're getting their selves better organized. I do believe you'll start to see a return to growth and investment in the food space. I also would add that the prospects for investment in environmental testing and life science research are also bullish, longer term, in China.

The pull-through on Europe is continued sluggish conditions in Western Europe, but as we report the number, our European business also includes what we call the IDO or Eastern Europe part of the world, as well as the Middle East. Despite some of the political noise that you see in terms of what's going on in the Middle East, our business is holding up quite well there, and has continued to be an area of strength for us.

Got it. Thanks a bunch.

Our next question comes from Dan Arias, with Citigroup. Your line is open.

Didier, on the warning letter for Dako Manufacturing, with the $9 million this quarter, is that issue now behind you from a P&L perspective, or should we look for some of that to carry over into 2015?

No, we are planning, and in our guidance, we're including some further expenses throughout 2015. Obviously, going lower after Q1.

But the expenses will be flat in Q1 and potentially into Q2, from the Q4 run rate that we have.

The situation in Denmark is complicated. There have been quite a few warning letters, more than us, inside of Denmark, and as a result of that, we've had to source resources from other parts of Europe, and even from the US to help out on the mitigation. So the expenses will continue into Q1.

Okay. Thanks.

And just as a follow-up, wondering if you can comment on manufacturing, and how that factors into gross margin improvement? If you look across the next year or two, with what you have going on, how much of the gross margin gain that you think you'll see is expected to come from what you might consider a fix for a particular issue, whether it be NMR or Dako, versus what should just come from more opportunities to become incrementally more efficient?

It's a great question and -- this is Mike -- and that's why I pointed to three aspects of the program, in terms of operating margin. The supply chain transformation, which you're referring to, the portfolio transformation, and then our rationalization and leverage of SG&A and R&D investments.

I think it's probably an equal spread across the three. It's a little bit hard to quantify.

Got it. Okay. Thanks very much.

Our next question comes from Ross Muken with Evercore ISI. Your line is open.

So can you just give a little sense on the order pacing? You talked a little bit about some late orders and such. And just give a sense for how if the NMR announcement also had any impact on any of the other legacy spectroscopy businesses?

Ross, this is Mike. Thanks for the question, and maybe address the last part of your question first.

No impact at all on the other aspects of the portfolio growth rates from the NMR announcement. In fact, we had a really fantastic quarter in terms of top line order growth in our spectroscopy business, fueled by introduction of the new product I had mentioned to you earlier.

In terms of the overall order flow through the quarter, we were actually quite pleased with how the quarter finished, orders coming in higher than forecast. And it's always a little bit hard to project exactly what your win/loss ratios may be in a particular deal situation, but obviously, we were pleased with -- the win/loss ratios were higher than we had forecast, and new products were above targeted ramp rates.

And then as I mentioned earlier, the China orders were solid at 8%. So I think there was a geographic dimension, as well, to our order flow.

Great.

And maybe if you could just give us a first blush of where the pro forma balance sheet is now? Obviously a number of moving parts in the quarter in terms of debt paydown, and how you think about the optimized leverage ratio for this business?

Well, right now as I had said in my comments, that the leverage in the Company is consistent with our present credit rating. And we feel very comfortable with where we are, between BBB and BBB-plus.

I'll remind all of the investors, in the last five years, we have returned 62% of our free cash through dividends and share repurchases. The framework of where we are is, I think, very solid, and we have a proven track record of tax effectively returning excess cash to our shareholders.

Thanks. I was just hoping maybe, because we didn't get any pro forma balance sheet, et cetera, if you could just give us a sense of where the net cash or the leverage is, just on a rough dollar basis?

Absolutely. For new Agilent we have a little bit over $2.2 billion in cash, and $1.650 billion in debt. And as Bill mentioned, our adjusted leverage is about 2, a little bit over 2, 2.1, 2.2, adjusted debt to EBITDA ratio.

Given a large percentage of that cash, of course, is trapped overseas.

80% of the cash is trapped overseas. We have about $400 million in the US. The rest is trapped overseas.

Great. Thank you.

Our next question comes from Tim Evans with Wells Fargo Securities. Your line is open.

I wanted to return to the diagnostics business for just a second. You have forecast that you expect that market to grow 8% to 10%.

This year, you certainly didn't get there, and obviously, there's some issues happening including the warning letter, but also some things that are out of your control on the regulatory front, and the reimbursement front. What gives you the confidence that you can get back to that high single digit growth rate, which I guess is what it would take to get to the appropriate hurdle rates that you need on the Dako acquisition?

You want to take that, Fred?

Thank you. I think this is a very good question.

I think first of all, I believe we will get back to the growth by the promise we had made over the last couple of quarters, to automate the pathology business. I think we are really good on the consumables piece, I think the automation will be key, so Omnis will be one of the elements. And we have seen a couple of really good responses in the meantime. One of the biggest regions, just as an example, in Denmark, has picked Omnis as the prime diagnostic tool, in order to do cancer diagnostic, number one.

Number two, I think we are also making really progress with our new products we have introduced, like the SureFISH, which has been growing in this quarter, over 100%, really significant. We have a couple of new products on the market, like the ClearSeq AML. This is a leukemia cancer diagnostic tool, which is looking at cancer and variations and cancer research.

That is the new HER2 FISH IQ Omnis available in the meantime, which allows another set of cancer diagnostic tests. So from a product perspective, I think we are fueling the pipeline, in order to grow the business over time.

Okay.

And then just one quick housekeeping question for Didier. When did those transitional services for Keysight end, or how exactly do they wind down post 2015?

So the IT services will wind down by the end of -- before the end of our fiscal year, or first half of FY15, so by April. And then the rental services, those are about $15 million, and those are ongoing. By the way, Keysight, we're also buying from Keysight, and include another $15 million also of rental services.

I'll remind you the way we went about splitting our real estate is more or less balanced, one of the two companies ended up being the landlord in each side. There was one of the two companies ended up being the landlord and subleasing some of the space the other Company needed. The two things offset each other.

We'll be receiving about $15 million of rental income. We'll pay about $15 million of rental expense to Keysight.

Okay. Thanks.

Our next question comes from Steve Beuchaw with Morgan Stanley. Your line is open.

Good afternoon. Thanks for taking the questions.

I wonder if you could build on some of the commentary that you made here on the call, regarding some of the new product launch traction. Could you give us a sense in FY15, not necessarily by product, but maybe with a focus on geographies or customer types, where future product launches will be targeted most directly?

Yes, sure, Steve. So, this is Mike.

I'll provide some color on some of the instrumentation around our separations, and mass spectrometry offerings. And then Fred, I'd ask you to jump in and talk about some of the diagnostics and genomic products that are coming out.

As I mentioned in my comments, in our core liquid chromatography, in our leading platform, the 1290 was replaced by an even stronger platform, the 1290 Infinity II series. This allows the capture opportunities in pharma, biotech and across the applied market space. This is a broad-based tool that will go across all of our key end markets.

The GC Triple Quad, the GC/Q-TOF, the mass spectrometry products that I discussed, are heavily focused toward food safety, pesticide analysis, environmental testing, but also increasing adoption in the life sciences research arena as well.

And then finally, the new ICP-OES is targeted towards the environmental, pharma and material science space, and in terms of -- that would be in terms of the end market usage. Obviously, we're encouraged by what we saw as an uptick in growth in China, because these products will play very strongly into this geography, as well as the replacement market in the US and Europe.

Fred, maybe some additional comments on the DDG side?

I just made a couple of comments on the new products on the pathology side. I think just what I want to mention is once we are improving the situation around the FDA letter, that by itself will stimulate some further growth, number one.

Number two, I believe it is very important that we are launching products, where we are using the synergy with other things we have in our product line, which are the genomics products. I think putting those things in a meaningful way together, that we are creating work flows, which make a difference to the customer, is one of the themes for next year.

I think a couple of those things we have started launching a new PCR, acute PCR instrumentation, which will be in this market. We have launched some editing tools, so synthetic biology or genome editing tools for synthetic biology, and the [crisper cast] solution, which comes with the market and is introduced to the market, which will pick up next year.

Thanks. Very helpful, and then one for Didier on currency.

Historically, the Company's had a pretty effective natural hedge, so the translation from the top line into the P&L was relatively muted. Is that still true for new Agilent, and if not, are there any currencies that we should look out for as potentially having an impact on margins? Thanks so much.

Yes, it is still true. We have one of the smallest flow-through, I would say, of among our peer group, with the current mix, about 20% to 25%. So for reduction of $1 in the top line, $0.20 to $0.25 impact on the bottom line. It is not zero, even though we are structurally hedged, because we have a presence, a worldwide presence, and we also have financial hedging.

But the financial hedging doesn't cover one full year. It really covers 100% of the coming quarter, then 75%, 50%, 25%. Overall, we believe we are properly hedged, knowing that the hedges, the financial hedges, cannot really cover you forever.

And then in terms of the mix, it's clearly -- our flow-through is even smaller in Europe, for example, where we have a strong presence, which is only 10%, versus Japan where we have less of a presence and therefore, an impact on the top line will not be totally offset by an impact to OpEx and cost of sales. So there is a mix difference, but on the present mix, it's about 20% to 25% flow-through.

Very helpful. Thanks, everyone.

Our next question comes from Paul Knight with Janney Capital. Your line is open.

Good morning.

As I do the back-out on the capital redeployment, you're talking maybe 5 million decline in share outstanding, which I think implies $165 million share comp number. Is that share comp number a little high because of the spin, and what should that share comp number be?

The math is a little bit complicated, but there's no -- the split pretty much has no impact on our share count. What you have to consider every year is that the share count evolves because of grants of our issues or long-term performance plans or exercise of stock options or the employee stock purchase plan.

It also changes with changes in valuation of our stock price or our TSR versus our peer group, and then we do buy back shares. It's a little bit complicated. But no impact from the split.

Didier, earlier in the call, you had mentioned that you were talking about a 22% pro forma operating margin net-net. Do you think you'll be talking 22% and higher, same discussion as FY15 rolls out?

So no. Mike mentioned where we are extremely committed to improving our operating margins to 23% by 2017. But this is a three year plan. Q4's operating margin is always stronger, because it's where we have realized the highest volume.

And the number that I have provided excludes the impact of NMR, assumes that NMR is exited, and as Mike mentioned we won't exit NMR until the end of 2015. And also assume -- it basically backed out the expenses related to addressing the FDA issues, and as we have also talked, we will spend money in 2015 to continue to spend money to address those issues.

And last, Mike, what did you see or do at chemical analysis that you think you can do at the rest of Agilent?

Thanks, Paul. Appreciate the question.

And I think it's really -- and Bill and I have talked about this as well, which is to really take a view of the focused bets that you're going to make, be very selective on the bets you make, and I tried to highlight a few of those earlier, and then drive an operational excellence around those focused bets, and then couple that with what we've done historically, which was meaningful M&A in the Varian deal, for example.

I really think it's all about picking right, focused bets, getting the organization aligned on those focus areas, and then driving operational excellence around the activities.

Thank you.

Our next question comes from Miro Minkova with Stifel. Your line is open.

Let me just start with a question on the academic markets. It seemed like you were seeing some improvement there for the second quarter in a row.

I was wondering if you could comment if you're seeing the funds flow in the second half of the year, the calendar year? And you do have, like others in the industry, you have had the month of October in your quarter. I'm wondering if it is too early to speculate on a possible year-end budget flush?

This is Mike. I'll jump in with my perspective, then Fred, feel free to add your view as well.

I think the answer to your question, Myra, I think it's too early to call a year-end budget flush, if you will. We were encouraged by the results, but keep in mind, the US government closes off in September a lot of their spending.

And we also had a closing of our own sales cycle at the end of October, which sometimes doesn't always mimic the spending patterns of our customers. While encouraged, I think it's too early to call a significant global recovery here in this segment.

And Fred, I don't know what you're hearing from your field team.

Pretty consistent with what I'm hearing. I think the academia and government markets remain soft. Even so, we are seeing a greater improvement in the results we are seeing at the moment, are impacted predominantly by NMR.

As such, because this is going mainly through the academia and government market, we see a funding growth in China, as Mike pointed out, results are showing that. So this is certainly impacting the growth in next year. We see a stable funding in [SABK]. Japan is weak, and maybe remains weak, given the missing stimulus from last year.

We are seeing demand in HPLC, GC, GC-MS and LC-MS, but it's really hard to [subject] and this is probably driving some of the growth next year is cell biology, stem cell research, research on next-generation sequencing. These are areas which will drive some of the growth.

NAH is spending about plus 2% this year. Hopefully we see something like that next year, as well. Europe, already we heard about it, very tight, and if you look to the distribution of the countries, it's a completely mixed bag.

China reorganizing. Even so, I talked about the growth. Reorganizing the academia -- China's academia of science which certainly also will have some impact on the spending pattern. We talked about Japan already.

Okay. Thank you.

And secondly, on the gross margin, it did decline slightly year over year. I was wondering if you could help us understand the puts and takes, and for the new Agilent going forward, despite the dissynergies that you have this coming year, can you drive gross margin expansion in 2015?

Didier, why don't I make some initial comments and then you can build on it. If you look at our year-on-year gross margin, I believe the FDA remediation work is part of our cost of sales number. I also would point to changing our overall business model.

We haven't talked about it on this call yet, but with the creation of the cross-lab services, consumer informatics group, you're going to hear me talk a lot more about what's going on across the enterprise in our laboratories, and our services business has become an increasingly larger part of the Company. It's got a very nice operating margin story.

But as the mix changes, it does have a different gross margin structure relative to our instrument business. So when we look at just at the gross margin line, you're going to see a mix effect of the increasing portion of our business coming from services.

And Didier, I don't know if there's anything else you would add to that?

Yes, I mean, in terms of the gross margin, I will say the other negatives you mentioned, the dissynergies, and we already talked about the impact of currency on a year-over-year basis, and so that would be the main reasons why on the gross margin basis.

On an adjusted operating margin basis, we're going to see some slight improvement year over year, even with all those negative -- all those headwinds. But on the gross margin, it's going to be slightly down year over year.

I don't know whether I really clearly answered the other part of your question, this is Mike again, which is we do see, we have the ability to improve our overall gross margins and move forward, because obviously we're going to get the FDA remediation work behind us. We talked earlier about the new products coming out, and as well as our supply chain transformation.

So we do believe that we can improve our overall gross margins, but we're also working through some one-time transition challenges around NMR, the FDA, and just the separation, if you will, dissynergies.

Currency has a particularly big impact on the gross margins, because it's offset by the lower operating expenses. So when I said $400 million, you have net-net $20 million to $25 million impact to the bottom line. The impact to the gross margin is more significant. And then there's offset in OpEx.

Sounds good. Thank you very much.

Our next question comes from Richard Eastman with Robert W Baird. Your line is open.

Yes, good afternoon.

Mike, could you just talk for a minute or two about the petrochem, energy, chemical markets? I think you mentioned they were up 1% in the quarter, and quite frankly, all year they've been low-single digit.

But maybe what's your assessment there as we move into 2015? Are we in the early innings of a commodity-driven down cycle there in demand, or were orders and orders better in the fourth quarter here, heading into 2015?

Richard, thanks for the question.

And this has been a -- I have to say, a segment of the market that's been quite curious for me over the last several quarters, because at the very macro level, you would expect to have seen stronger business here. As you think about, particularly in the United States where you've had lower feedstock costs coming down, and some of our major customers actually talking about investing in the plant and infrastructure and new capacity in the US.

So I think what we saw in this most recent fiscal year, and a continuation in the quarter, was continued challenges in industrial side of the Chinese economy, where we haven't seen as much capacity being added as we've seen in prior quarters. I believe the real wild card, and this is why I think we'll start to see some moderate return to growth in FY15 in this segment, is the replacement market in the private sector, particularly in the US. The industry, outside of the exploration side, is actually finding itself much more profitable.

The age of the assets and equipment has really moved up over the last several years. We think that the combination of the aged assets, plus a lot of our customers are going to need to move on to new data systems, because of the obsolescence by Microsoft of several of their core operating systems.

I think this would point to an improved replacement market in FY15. Albeit, I said, it's been much slower to develop than I had anticipated.

Okay. All right.

And when I look at the CAG business and the LDG business heading into 2015, and I know the core growth is this -- at the midpoint is 4.9%, call it 5%. Is the LDG business expected to grow above that number, and CAG kind of low-single digits? Or how do you see the mix by end market playing to that 5% core growth number?

Great question.

I think you really picked up the insights we were trying to share in the call today, which was the strength of the underlying core business, when you strip out of the business such as NMR. Fred and I haven't compared exact growth rate assumptions between the two segments, but I would say in general, we would expect both to enjoy growth, but we would expect to see higher levels of growth in the life sciences side of the house, just given what we've seen to be stronger backdrop of pharma, some government spending and just our overall share position in those segments.

And again, also, keep in mind that part of the story here isn't just instruments and technology. Part of the story here is the services business, and in fact, after Fred makes a few comments, I'll invite Mark, you're not going to get away from this call without making some comments in your first call, but talk about what's going on in the pharma space and life sciences relative to the services business.

Fred, if you would maybe just add a little additional color?

Pharma industry's certainly at the moment growing in the area of 5% -- around 3% to 5%. We are seeing a lot of instrument refresh, as Mike has pointed out, that's particularly in pharma, a huge opportunity for services and consumables.

The most growing segment within that is at the moment biologics, which is growing about 18%. And the overall size is about 20% of the entire pharmaceutical market.

I think we are well-positioned with our products. Mike has just highlighted before our core products in LC, LCMS, so I think this is fueling the growth. The refresh in this business, I think, it's not as homogeneous as ours. Americas has a difficult compare, because we had a good business last year.

I think Europe is picking up at this point in time, also on generics. So overall I think this is one of the drivers, and academia and government we talked about before. I think this is also certainly slightly picking up. So from that perspective, this should fuel the growth for next year.

Mark, just closing off this question, give you a view of what's going on in the services side, and pharma in particular?

Sure, Mike.

As you alluded to, I think we see both areas across CAG, LDG being strong. In the pharma area in particular, continued strong demand for our enterprise services, and those particularly targeted at helping customers with operational efficiencies.

And to that end, also, if you add the consumables side of it too, continued focus on our biocolumns and sample prep area, that I think heading into next year, will continue to serve us well.

Does the op profit contribution or flow-through today to Agilent's P&L, is it north of 20% on the services side?

I don't know whether we've disclosed the actual operating percentages externally. I would just say we're in the range of our instrument business. It's not a drag on Company performance. You want to see us grow our business here.

Okay. And then I'm sorry, one last question.

The NMR business, year over year in the fourth quarter, was there a revenue delta that was meaningful? Fourth quarter of 2014 versus fourth quarter of 2013?

Do you remember the year, Didier, do you remember the year-on-year change?

Year-over-year basis, it's about -- there was a 22% reduction in revenue for the full year, and on the quarterly basis, it was 49%.

It was down 49% year over year?

Yes.

Revenues, yes.

Okay. Thank you.

Our next question comes from Derik DeBruin with Bank of America-Merrill Lynch. Your line is open.

It's Rafael in for Derek. Thanks for the questions.

Just first on 2015 guidance, just wondering what the expectation for growth is by geography in Americas, Europe, Asia-Pac, and China as well? Thanks.

Rafael, this is Mike.

Just make a few comments. I think you first of all saw in Didier's narrative, he talked about an overall gradually improving economic environment, in the second half of 2015. That's sort of the backdrop behind my comments.

What I'm just going to share with you, just general trends. I wouldn't want to be able to present myself with being able to predict exactly the growth rates in every of the geographic markets.

The backdrop of our forecast beyond this gradually improving second-half environment in 2015, is we've seen improving US, China and India, which we've not talked about today, continued weakness in Western Europe, Brazil, and Japan. So what's really driving this is the overall continuation of the improvements in the US, China and India marketplace.

Okay. Appreciate that color.

And just after exiting the NMR business, how should we think about the Company's portfolio review strategy, and whether the Company's planning on exiting any other product lines in the near term? Just thinking, I guess, bigger picture, of how content the Company is with the existing portfolio. Thanks.

Sure. Great question.

As Paul had asked me earlier, when we talked about the experience I had on the chemical analysis group, we always constantly reviewed where our portfolio was, what's going to be the expectations, did we see a path forward to a viable business?

That discipline that we've had in the prior years in the chemical analysis business, that will be carried forward with the new Agilent. I think you saw one example of that with our decision around NMR, which we really didn't see a path forward to a viable, attractive business for Agilent.

We're very satisfied and happy with the portfolio we have, but what I will commit to is a continued rigorous ongoing review of our portfolio, relative to our expectations.

Thanks. I'll jump back in queue.

Our next question comes from Justin Bowers with Leerink. Your line is open.

In terms of the NMR exit, can you frame that in terms of the duration of the top line impact, and then also the costs, too, that are coming out of that business?

The top line in 2015 will not be fundamentally much lower than really what we've seen in 2014, because we do have a big backlog, not just NMR business, but also the OEM business, that we exited one year ago. We say we still have backlog to flush for a big part of 2015.

And then the bottom line impact, we've indicated that is, on an annualized basis it's about $15 million. Next year it's about $10 million operating profit improvements, because of the exit and $15 million in 2016.

And then in terms of the top line in 2016, and maybe even 2017, are you still going to be delivering orders there or --?

No, we will be done in 2015 with flushing the backlog, and we are not taking in any order.

Okay. Great. And then just --

Done with the instruments.

I'm sorry.

That's an important build to Didier's comments. We will retain the profitable NMR service business, both making sure we have the business continuity for our customers, as well as an attractive business segment for us as well.

Okay. Great. Thanks. I'll take the rest offline.

Thank you. We have a question from Brandon Couillard with Jefferies. Your line is open.

Didier, just one question for you in terms of the free cash flow guidance. Implies about $480 million of free cash flow, I think going back to the Analyst Day, you pointed to more like a $620 million number.

Can you just walk us through what the factors are there, in terms of the delta in the free cash flow outlook?

Yes. So the $600 million of operating cash flow that we are projecting is after paying about $15 million of post separation expenses, and also $40 million of taxes related to the separation.

So there's $90 million which will be pro forma, but there will be cash outlays in 2015. So really on a sustainable basis, you're talking $690 million.

It's fair to say that those two numbers, the $90 million wasn't contemplated previously at the Analyst Day?

Yes, because it was excluding the one-time items, clearly. It was the sustainable cash flow contributions and we talked about 15% of revenues on an ongoing basis over a three year period, excluding those one-time separation-related items. They are both separation-related items.

Okay. And one more.

On the NMR business, would you -- can you quantify the operating loss incurred from that business in 2014 for us?

Well, what happens is it will be misleading, because it includes a lot of costs that are basically absorbed from the share -- allocated from the shared services. But what we have stated is the exit will basically improve operating profit by $10 million next year, and $15 million in 2016.

Fair enough. Thank you.

This ends our Q&A session. I will turn it back to Alicia Rodriguez for closing remarks.

Thank you, Patrick, and thank you, everybody, for joining us today. If you have any questions, please give us a call in IR, and we'd like to wish you all a good day. Thank you.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.