安捷倫 (A) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to Agilent Technologies' first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Ms. Alicia Rodriguez, Vice President of Investor Relations. Ma'am, you may begin.

Thank you, Siad. And welcome everyone to Agilent's first-quarter conference call for FY15. 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 Patrick Kaltenbach, President of Agilent's Life Sciences and Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics and Genomics Group; and Mark Doak, President of the Agilent CrossLab Group.

You can find the press release and information to supplement today's discussion on our website at www.investor.agilent.com. While there, please click on the link for financial results under the financial information tab. You'll 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 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 reported first-quarter revenues of $1.03 billion, an increase of 2% versus last year. Orders of $995 million were up 2% over a year ago. Operating margin was 17.2%. Earnings per share were $0.41.

Mike and Didier will provide further details about Agilent's Q1 performance. But before I turn it over to Mike, I would like to take a moment to thank the investor community for your ongoing support of Agilent.

As most of you know this will be my last earnings call as Agilent's CEO. I am very proud of the accomplishments the team has made over the last 10 years. In 2005 we launched a strategic initiative to focus on our core expertise of measurement science and direct investments into the life science market. We divested our semiconductor-related businesses, SPG, now Avago, our semiconductor test business, Verigy, now part of Advantest, and our solid-state illumination joint venture, Lumileds, with Phillips.

With the electronic measurement business as the foundation of the Company, we embarked on a journey to turn a hard-core electronics company into a life science and diagnostics company. As a result of the enormous efforts of the team, excellent organic growth and several key acquisitions, we have grown our analytical instrumentation genomics and diagnostic business from $1.4 billion to $4 billion per year in revenue, gaining the number two position in the marketplace.

This success led to our recently completed split of the Company and the creation of Keysight Technologies. The ability of a company to transform itself while spinning off or divesting businesses is a testament to the skills and dedication of its employees.

Of course the work of the new Agilent is not done. We need to manage through the added costs of the separation dyssynergy and drive our operating margins higher. We will continue our commitment to be a leader in our markets. And we must capture the returns from the investment we have made in the clinical and as diagnostic markets.

Mike and his team are well prepared to lead the Company forward. Mike has a proven track record of building very profitable market-leading businesses. Mike's new team has all the expertise, skills and drive to move Agilent forward. I believe our investors, customers and employees are in excellent hands.

And now, I'll turn it over to Mike.

Thanks, Bill.

I would like to take a moment to acknowledge the incredible job that Bill has done leading this Company for the past 10 years. He not only transformed Agilent into an industry leader in life sciences, but he's leaving us in a very strong position for our journey ahead. And on a personal note, I could not ask for a better partner during the CEO transition. Thanks, Bill.

Now I'd like to share some additional insights on the transition and the quarterly results. The transition within Agilent is in full swing. At the start of Q1, we announced the most expansive reorganization in our Company's history. Three new business groups were formed to drive expansion in the core analytical lab, and leverage this leading position to further penetrate the connected clinical research and diagnostics markets.

We launched an agile Agilent program to streamline and create a more nimble customer-focused and faster moving Company. In Q1, we delivered a strong start to the year, driven by the strength of our core analytical lab business.

We delivered 2% reported growth, or 6% core growth. We had strong profitability, despite currency headwinds and challenges in our diagnostics and genomics business. Our Analytical Lab business, which represents 86% (sic - see Slide "87%") of the total Company, is comprised of two externally reported business segments, The Life Sciences and Applied Markets Group and the Agilent CrossLab Group.

The Life Science and Applied Markets Group, LSAG, brings together Agilent's analytical laboratory instrumentation condition and informatics. LSAG's revenues grew 2% reported growth, or 5% on a core basis. Growth was broad-based across most product lines and end markets. Operating margin for the quarter was 19.6%.

Our growth continues to be driven by innovative new offerings. The Agilent 1290 Infinity II LC system, which we launched in Q4, has been extremely well-received by the market. This system sets a new benchmark in analytical instruments and laboratory efficiency. New spectroscopy products, such as the recently released FTIR imaging hardware and software enhancements are accelerating research through improved work flows and opening up imaging to a wider range of non-spectroscopy customers.

The new Agilent CrossLab Group, ACG, which combines our analytical lab services and consumables business under a new Agilent brand delivered outstanding results. ACG revenues grew 5%, up 10% on a core basis.

Growth was strong across consumable supplies, columns, sample prep and services. This reflects the innovative products we are bringing to market and the customer value proposition of our CrossLab strategy.

We saw exceptional growth in demand for our catcher sample prep kits. The introduction of RFID inventory management services were also well received by the market and customers. Operating margin for ACG was 20.7%.

The Diagnostic and Genomics Group, DGG, is comprised of three divisions. First, the former Dako Company is focused on pathology, companion diagnostics and reagent partnerships. Second, the genomics division includes our arrays, NGS target enrichment and our other genomics solutions. Third, the nucleic acid solutions division manufactured synthetic RNA to be potentially used as active pharmaceutical ingredients.

DGG's first-quarter revenues declined 6% year over year, down 1% on a core basis. We enjoyed record placements of Omnis instruments, strong companion diagnostic business and strong SureSelect NGS target enrichment business.

However, both of our nucleic acid businesses were significantly impacted by manufacturing issues that we resolved late in the quarter. Operating margin was 0.5%, impacted by the lower revenues and the remediate expenses to last year's FDA warning letter. Those remediation efforts are going well, on track with our expectations to be completed by Q4.

We continue to strengthen our portfolio. In January DGG launched a new GenetiSure Pre-Screen kit. This kit provides an innovative test for abnormal normal number of chromosomes. At the same time DGG launched a new release of its cytogenetics software, which enables rapid analysis of samples processed with the Pre-Screen kit. Together this solution provides the fastest turnaround on the market.

Also in January we announced a strategic partnership with Cell Signaling Technology to supply antibodies for use in Dako-branded diagnostics products. We expect to return DGG to low double-digit operating margins in Q2, driven by a recently announced restructuring initiative and the return to normal manufacturing operations at our California and Colorado sites.

Now, let's take a look at Agilent's total Company performance by end markets on a reported basis. Pharma revenues were up 6%. We saw strength in technology refresh deals, healthy demand in mid- to small-sized pharma and sustained growth in the after-market.

We continue to see improving conditions in life science research, where academia and government up 1% with increased funding from Europe and China. Demand for a high-end LCMS, as well as GC, GCMS, informatics and consumables drove results.

Our food testing business grew 5%. We had solid growth worldwide as governments and major food manufacturers managed the challenges of a complex global food supply and public food safety demands.

Environmental markets grew 4%, driven by China as they continue to focus on creating a cleaner environment. In addition to increasing enforcement of its existing environmental regulations, China is developing new monitoring methods and legislation driving growth in this space.

Chemical and energy revenues were flat year over year as the industry responds to a greater than expected drop in oil prices. We saw a slight decline in forensics, down 2% as some US state and federal US agencies have delayed their capital purchases due to some budget uncertainty.

Turning to clinical and diagnostics, revenues declined 4% over a year ago. Their primary driver was manufacturing capacity constraints addressed late in the quarter.

Geographically, Americas grew 3%, Europe 2%, and Asia 1%. China revenue, including Hong Kong, was a source of strength, up by double digits on demand from food and environmental customers and a relatively easy compare.

On the other hand, revenues in Japan were down 19%. This is primarily currency-related due to the weakening yen along with a difficult year-over-year compare.

Moving to the year ahead, in our last call I highlighted three focus areas to drive shareholder value. One, grow organically at the high end of the market. Two, aggressively expand operating margins. Three, deploy capital for long-term shareholder value.

Moving from our update on the strong Q1 core growth, a few highlights on our operating margin improvement initiatives and capital deployment. The exit of the NMR hardware business announced in October is proceeding as planned. In Q1 we completed the closure and sale of our Lake Forest, California chemistry manufacturing site and consolidation of production volume into an existing Agilent site.

We have initiated a restructuring program as part of the Company's reorganization. We have also launched a multiyear Agile Agilent program, reengineering our Company to be a more nimble, efficient and customer-focus. We expect gross savings of a minimum of $50 million in 2015 from all these actions.

We will also continue to tax effectively deploy capital for long-term shareholder value. This year, as previously stated, we intend to return $500 million to shareholders in the form of dividends and buybacks.

We will complete the CEO transition at the March 18 shareholder meeting with my new leadership team fully in place. My new team and I look forward to our May 28 analyst meeting in New York.

At this meeting I will outline my strategic vision for the Company, our plans to outpace the market, drive EPS growth, and achievement of our long-term operating model. It's a full-court press within Agilent to sustain our core growth trajectory, mitigate currency headwinds and drive earnings.

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

Didier?

Thank you Mike, and hello everyone.

To summarize Q1 results, we delivered on our revenue and EPS midpoint guidance, even as currency impacted our revenue by $12 million and our EPS by $0.01. Also, adjusting for the $11 million reimbursement from Keysight for Agilent ITN site services, our operating margin was 18.2%, 1 percentage point higher than the reported operating margin.

Regarding our Q1 negative operating cash flow of $20 million, it was impacted by three factors. First, separation-related expenses amounted to $33 million. Second, transformation and research [earning] expenses amounted to $14 million. And third, we paid $42 million in taxes related to the spin. In addition we paid in December, as usual, the variable compensation related to the previous six months.

I will now turn to the guidance for FY15. The strengthening of the US dollar since our last guidance has a negative impact of $130 million on our revenue, $30 million on operating profits, and $0.08 on our EPS.

However, thanks to the strength of our business and the initiatives underway that Mike mentioned, we anticipate offsetting about $0.05 of the currency impact. We are therefore only slightly modifying our previous guidance.

We expect FY15 revenue of $4.06 billion to $4.12 billion. At the midpoint of our revenue guidance, our year-over-year growth will be 1% on a reported basis but 6.9% on a core basis. The difference due to currency. Our core growth is driven by a strong order funnel, expected recovery in our DGG business, the impact of a significant number of new products and continued improvements in demand from China.

We project FY15 EPS to range from $1.67 to $1.73 with a midpoint of $1.70. Please note that our EPS guidance assumes 338 million shares and that our annual operating cash flow is projected at $550 million.

Finally moving to the guidance for our second quarter, we expect Q2 revenues of $985 million to $1,005 million and EPS of $0.37 to $0.41. At midpoint, revenue will grow 0.7% year over year on a reported basis, or 7.5% on a core basis. The difference again as a result of currency. At midpoint, Q2's adjusted operating margin of 18.2% will be 130 basis points higher than last year's.

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

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

(Operator Instructions)

Dan Leonard, Leerink.

I have a question on your sales to chemical and energy companies. Is flat performance that you reported in the quarter, is that a reasonable reflection for how you expect sales in these end markets to trend with current oil prices, or is there downside to this result?

Thanks, Dan for the question. This is Mike. I think I'm going to pass it over to one of the newcomers on the call, Patrick Kaltenbach, who manages our Life Science and Applied Markets Group for his commentary on the impact of oil prices on that segment.

Thank you, Mike. Yes, and as we have reported, our growth in the chemical energy segment actually has been flat this quarter.

The negative impact of the oil price will most likely be seen more of our customers who are on the exploration side. And they make up about 15% of our total chemical and energy segment. The stronger part of the segment is actually on the chemical side, which actually could see some nice tailwind moving forward with lower feedstock prices.

Okay. Is that balance of flat, is that a reasonable way to think about the mix?

Well, I would say it's the current version we see. Moving forward, again I think both sides probably haven't fully appreciated the lower oil price yet. We might see a little downturn on the exploration side, but on the other there might be also an upside moving forward on the chemical side using the lower feedstock prices.

Just to close off on Patrick's comments, as he's mentioned only about 15% of this segment is actually impacted directly by the downward trend in terms of the less capital expenditures on the exploration side of the business. And we expect a continued replacement market in this with stability in this market segment.

Got it. Thank you. And then my follow-up.

Could you elaborate on the performance in China and whether you're seeing confirmation of the improved trends that you've baked into your guidance?

Thanks, Dan, for that question. As we've talked in the prior calls we've been fairly transparent in China about some of the operational issues we had historically. And also our commentary has been that we were projecting a gradually improving market environment in China. And I would say that in the first quarter we saw that actually come to fruition.

So under the backdrop of a gradually improving market environment, we've seen a return, for example, of some food deals. Our operational issues are behind us, and we believe we're growing above market in China and it will be a source of strength for us in 2015.

Got it. Thank you.

Paul Knight, Janney Capital.

Hey, Bill, thanks for being a straight shooter for 10 years and congratulations.

Thank you.

I guess my question would be, you've had pretty exceptional growth in Europe as well. How do you explain that dynamic when it's obviously been a risk area?

Paul, I'll go ahead and take that call. Bill saying hey, Mike it's now your turn to field the calls after 10 years of very transparent dialogue. And you will find me to also be a straight shooter, Paul, on these calls in our dialogues as well.

I think it really comes back to the core of the strength of Agilent, which is the innovation, our go-to-market strategy. So we believe that in Europe, like other parts of the world, we have been bringing to market some very innovative new offerings to the customer. And have a unique strategy focused on the CrossLab, both the services and consumables aspects and informatics of the laboratory.

So we think the combination of our go-to-market strategy, the innovations we've had in terms of the new product introductions as well as our clear intent to go after not only the technology aspect of the lab but the services, consumables and informatics side of the lab has allowed us to outpace the market. In particular Europe performance has been really strong relative to the competition.

Mike, it looks like your growth rate in analytical was above market. Do you think you're taking share? And what have you been -- from your experience in Wilmington, what's happening the right way for you to be doing this kind of share gain?

Paul, thanks for the question. When we looked at the performance for the first quarter we had 6% core growth. And if you actually stripped out the NMR, it's 7% growth for us in the first quarter.

I think it's always -- I'll leave the are we gaining market share question to my competitors. But we think that this recipe of new product innovation and really making sure our operational challenges are behind us and picking the right leaders, I would add, are really driving this strong growth.

And the growth across our portfolio is really broad-based. And in fact, I'll ask Patrick to make some few comments here as well.

One other thing I forgot to mention, Paul, around our results in Europe. We had a very strong European regional manager who now is running our global sales operation for the new analytical lab sales for us. So quite confident that [Danilo] will bring his talent to the global organization, and you've seen his success already in Europe.

Patrick, maybe a little bit more comments on what you saw in the lab site for the instruments. And then Mark, you can jump in on the CrossLab.

Sure. Thanks, Mike. We definitely see a lot of momentum based on our new recently introduced portfolio and solutions, like the Infiniti II Series LC which launched in Q4.

The ICP OES, the [CFLR] and high-end MS solutions. Those products have been really well received by our customers, and we actually have a very strong funnel behind these products. And that's also why we are looking forward also to very successful Q2.

Thanks, Patrick. Mark, if you could make a few comments on the CrossLab where the growth was really quite exceptional as we close off this question?

Thanks, Mike. And obviously with the 10% core growth rate we had strength in a lot of areas.

But I would call out, we had exceptional strength in the Americas with both the LC columns and in China. Our small columns and -- excuse me, our small molecules in general are growing. And certainly from the services side we continue to see in Europe, in particular, growth from our enterprise services as well as our instrument services side.

Thank you.

Tycho Peterson, JPMorgan.

Mike, can you talk on multi-progression for the quarter? Trying to get a sense on how January fared versus December, and the strength of the order book exiting the quarter?

Thanks for that question, Tycho. So we saw solid order strength through the quarter. I would say we always get a little bit of a bump at the end of December as a lot of our customers close off their budgets. And then -- but with the quarterly quota-setting process in the Company, there's always an incentive for the sales to close in June -- in January.

So really, no changes from a historical seasonality pattern of business through the quarter. And as you noted -- as we noted in the DGG side of our business, we actually built backlog during the quarter.

To that point, when do you think that Dako can get back to something resembling a market growth rate? Is that a 2016 event? How do we think about the earliest you can be back to a mid-single-digit growth rate potentially for that business?

I'll make some initial comments here then introduce Jacob Thaysen, our Group President for our Diagnostics and Genomics business. So as you saw on our call notes we think will be back to low double-digit profitability in the second quarter.

Your question really is in terms of the overall top-line return to market growth and above market growth. And I think it's a -- what you'll hear from Jacob is some real aggressive plans to continue to push the growth rate. And many encouraging signs, particularly with the omnis side of things. But not to steal Jacob's thunder, and introduce you to the community here on this call.

Thank you, Mike. And thanks, Tycho, for the question. I do believe that we have an exciting opportunity also in Dako to come back. And we had a record number of shipments of Omnis in this quarter.

And this is actually a very good indicator for an improved position in the market. And overall the market continues to be very attractive.

We actually -- I do believe we have the right solutions to regain market share. For example also on the IQ HER2 FISH side, which is a very important component in diagnosing breast cancer, we have also launched a very good product that have been able to take the turnaround time from 24 hours down to be done within the same day.

And this will actually allow the laboratory to perform analysis that was not possible to do before within the same day. And we see substantial market improvement also in that. So I do believe at this point in time we have the right products, we have the right team, and we will see momentum during 2015 and into 2016 also to regain into market.

Last one. Just on the operational initiatives you highlighted, Mike, I think some would argue the multiple in stock's given you benefit for that. Maybe some M&A speculation as well.

But can you talk about what you see as the path to additional value creation from what you've laid out here? In other words, why the reluctance to buy back more stock beyond the $365 million that you've talked about? And the reluctance to maybe cut a little bit deeper to try get something north of a 22% operating margin by 2017?

I think I'll make some initial comments here then invite Didier into the dialogue as well. As I outlined in the prior call and reemphasized today, we think that the way to drive additional appreciation of our share price is to aggressively go after improvements of our operating margin.

We've outlined, I think, a fairly regressive plan. 400 basis points, when you consider the dyssynergies we're starting off with as a Company. I outlined on my call today some very quick and expansive far-reaching changes in how the Company is operating. The story is an organic growth and cost reduction story to drive our margins up.

So that's how we're going to do it while I work in the income statement. And we have fully committed this year to high use of our available cash to repurchase stock.

So again, the $500 million of share repurchases and dividends is a plan for 2015. And Didier, I know you've done some analysis working with external folks as well in terms of how we modeled aspects of leverage as it relates to stock repurchases.

Clearly the leverage and buyback programs and dividend programs are ongoing topics of discussions with the Board. And the Board is assisted by a banker in making sure that we are making the right decisions to optimize shareholders' value.

So it is right now we are authorized to distribute $500 million, which basically will put us in a zero cash position in the US towards the end of the year. So we are utilizing 100% of the cash that we have available. And again, the Board is always looking at ways to optimize shareholder value.

And this quarter you bought back $6 million, is that right?

Tycho, could you repeat that, please?

This quarter you bought back $6 million in stock?

Yes. We -- this quarter we bought back just a little bit. We continued buying back a little bit after the end of the quarter. We have a 10b5-1 filing, but it was a minimum, yes.

But we are still planning to buy back $365 million from now to the end of the year on an opportunistic basis.

And Didier if I would just add one additional comment here. When we look at our leverage versus our peers, we're right at our peer group.

Yes.

Okay. Thank you.

Doug Schenkel, Cowen and Company.

This is Ryan Blicker filling in for Doug. Thanks for taking my question.

So starting with China, can you provide more color on what you're seeing in China that's giving you increased confidence in your guidance? And what level of growth from China is implied in the 2015 guidance?

Sure, Ryan. Be happy to offer some commentary on China. So in terms of the overall outlook of the market, we see a gradually improving environment in China.

It's not a snapback to the types of market growth rates we've seen historically, but a gradually improving market environment. They're investing very heavily, for example, in the environmental areas I outlined in my call notes.

We've seen, as you know, there's been a massive consolidation and reorganization of the food ministries in 2014. A lot of that reorganization is behind and we're starting to see some bids and some projects and some orders coming through. So there are indications from a total market perspective that the market is improving, albeit on a gradual basis.

But I'd say the China story is, for Agilent, is not just a market improvement story, it's also the fact that the operational issues which we've been very transparent in disclosing to the investment community a while back, that is completely behind us. So we've got a very strong organization that really is aggressively going after the market in China.

So I think it's a combination of both a gradually improving market environment and our operational challenges are behind us in China. And we're looking at a high- to mid-single-digit kind of growth rate in China.

Okay. Thank you.

Maybe one more on DGG and some of the recent companion diagnostics announcements. There have been some exciting partnership announcements over the last few months.

But just trying to think about how this may impact 2015 results. Can you quantify what companion diagnostics are as a percent of Agilent or DGG sales now, and maybe what you expect them to be as a percent of sales exiting 2015?

What we can do is we can describe the rough breakdown of the three divisions that make up the DGG segments. Roughly 60% is in the pathology companion diagnostics/reagent partnership space we talked about, about 35% in genomics, and about 5% in the nucleic acid solutions division.

So in terms of additional financial breakdown, we wouldn't be providing it down to the granularity of the companion diagnostics. But what I would do is ask Jacob to share some insight in terms of what exactly is going on with Agilent's business in this space and why we're so excited about the future possibilities here.

Yes, thanks for that, Mike. I think there is two elements to companion diagnostic.

One is of course the fee-for-service business with our pharma partners where we develop the next generation companion diagnostic. And I'm really excited about all the partnership that we have, and we have plenty more in the pipeline. And I really consider us as the leader within IC and FISH companion diagnostic.

But obviously the big opportunity is with the companion diagnostic on the market. And each market has its own potential. So the best way of looking at that is that the usual suspects in the market today is that HER2 market, which has an overall market opportunity of around, I think, it's $80 million to $100 million. And then you have the other one, the big one, the ALK that has right now a market opportunity around $20 million to $25 million.

It is difficult to say what each market will do, but I would imagine that the companion diagnostic market in the future will be a great growth opportunity. But from launching products and seeing that to be a significant impact on 2015, that I do not consider but we see substantial uptake in our partnerships that has a great momentum as we speak.

Okay. That's helpful. Thank you.

Dan Arias, Citigroup.

Within DGG, I was hoping you could expand a bit on the manufacturing issues that you ran into it with the nucleic acid business? And how much of the DGG revenue base does that piece comprise?

Jacob, you want to take that question?

Yes. So as Mike alluded to, we have three overall businesses, The former Dako business, the pathology rate and partnership, and CDX. And we actually saw performance according to our expectations on those businesses.

So then we also have the genomics solutions division and then our nucleic acid solution division. And the genomics solution and the nucleic acid solution division, that's where we saw the manufacturing challenges.

And as was alluded to before the genomics, the businesses here, the nucleic acid solution business is very small business compared to others. But we have some larger customer and thereby moving the shipment from one quarter to the other actually have a significant impact on our overall performance.

Jacob, as I recall, I think our genomics and NASD business is about 40% of the total of your segment.

Yes.

Okay. That's helpful. Mike or Fred, on NMR it sounds like the wind-down is on track internally there.

So I guess, curious what the current outlook is like for a sale of those assets? Whether you're seeing any interest there from folks in the space. Thanks.

I'll ask Patrick to provide some further insight, both in terms of the wind-down and from the financial perspective. But also how we've been able to work with our customers who, as a result of our decision here -- and then we'll double-back on the question about the sale of the assets.

Yes, good. Thanks.

Mike, so as I said we are on track with [to sustain] a mild ramp-down. We still expect that we have most of our NMR shipments completed by end of Q2. However, some of the MRI and OEM will take until the end of the year.

Also regarding the savings, we are well on track with that as promised already in last conference call, which is based on the fact that we have ramped down our R&D and marketing as planned. When we look at our service capabilities, we have of course made sure that we are capable to service our customers. We are working closely with Mark's organization to make sure we have everything in place to make sure that we can service our customers and our installed base.

And regards to the question about the aspect on the sale possibility, when I made the decision to exit the NMR hardware business, of course if a qualified buyer would surface and interested in taking on the full aspects and liabilities of the NMR hardware business, we would be quite open to that discussion. But we decided it was in the best interest of the Company to make a decision now to end the bleeding -- the implication of the P&L, to allow us to refocus our investments elsewhere, and also to have a customer-focused mitigation strategy maintaining our services capabilities to support our customers.

I just have one comment on the benefits of the exit. We committed to save $10 million -- to have $10 million incremental operating profit in 2015, and then $15 million 2016. And we are seeing much better results. So right now we've raised our expectations 2015 in the guidance.

We expect to save $15 million and then $20 million in 2016. And that's in our guidance.

Okay. Thank you very much.

Isaac Ro, Goldman Sachs.

Wanted to follow up with another question on NMR. Really, you touched on some of the P&L benefits you're looking for here, and of course the organizational benefits. But curious if you could maybe look at it a little bit from a working capital standpoint, just given the nature of that business and the extent to which you're looking for some free cash benefits to the profile of your business once all of this is sorted out? Is there something you can quantify for us with regards to the benefits to working capital and free cash flow?

Didier, do you want to handle that question?

Yes. I would say in terms of free cash flow it's fairly similar to the increase in operating profit that I've mentioned, perhaps a little bit higher. And then for 2015 there's really not much difference in terms of working capital.

We have, as Patrick alluded to, even though we'll be -- we'll have finished the production in the first half, in the second half we're going to do all kinds of installations. And before we can (technical difficulties) and then we have time to collect the receivables.

Obviously, inventories are coming down now. I can follow-up and give you the exact amount of the reduction in working capital to expect as a consequence of the closing, but I would say it's probably immaterial in the grand scheme of things.

Got it. That's helpful. Thanks.

And then a second one on tax rate. Wondering if you could quantify some of the opportunities that you see for the long term here, either in terms of the magnitude of tax rate you could see and maybe the pacing around it? Just the benefits you're looking for, if any?

Well, the situation for the new Agilent is we have a lot more very profitable manufacturing activities in the US with the reagents and then the chemistries and also some instrument manufacturing then -- as a proportion to the overall Agilent than we used to in the past, as Keysight had most of their manufacturing offshore. So the consequence is that it puts pressure on our tax rate.

And the 20% I see as fairly sustainable over the course of the next two years, three years. We'll see after that. Obviously there's all kinds of debates that I'm hopeful in Congress will lead to a different tax regime. But at this point in time the best is to assume that we will maintain our 20% tax rate in the foreseeable future.

Understood. Thanks a bunch.

Brandon Couillard, Jefferies.

In terms of the organic revenue growth outlook being 200 basis points higher, I'm pretty sure you're probably the only company on the planet raising guidance at this point in the year. What gives you the confidence?

What's changed exactly relative to three months ago? One or two most important things, whether it's China or new product flow. Can you parse that out for us?

Brandon, thanks for the question. First of all, it starts with the strength of our analytical lab business in the first quarter. It has momentum. It grew 6% core growth, 7% without the NMR impact fueled by new product introductions, the new products that we highlighted in our call last several quarters are driving new growth.

And the operational challenge we have in China are behind us. And that's in a backdrop of a gradually improving overall China market.

So point one would be strength of the analytical lab business fueled by new product innovations. And the addressing of previously disclosed operations in China.

And the second one is confidence in recovery our diagnostics and genomics business. As we outlined on our call today we had some operational issues that are being addressed.

And we're quite confident in our ability to right the ship and get that business in the direction we want it to be. So those of the two things I would leave you with. Strength of the analytical lab business and the confidence in the recovery of our diagnostics and genomics business.

Okay. That's helpful. Didier, just on the Agile Agilent savings plan. I think you said gross savings, you expected at $50 million this year.

If I just think about the bridge between your prior guidance and revised outlook, can you quantify the buckets between better organic growth, currency a little worse, restructuring benefits? Just the moving parts?

Well, I did provide the currency impact, and the rest is really way too many things. We are having good momentum on the restructuring program, the $50 million.

Part of that -- $15 million is NMR, $35 million is what I would call the Agile Agilent programs which is ramping up nicely although there was some benefits already in Q1. There is some volume benefits also. A lot of other programs.

We are also making sure that we invest properly in our businesses to support our expectations to outgrow the market. So there's really a lot of things. We do bridge that very carefully within the Company. But there's a lot, a lot of different factors.

Didier, this is Mike. I would add inclusive of guiding with continued momentum assumption our analytical lab business and recovery of our diagnostics and genomics business, we are also taking other actions to offset the FX wind.

So this isn't just a story of momentum on the organic growth side. It's also true costs are coming out of our structure to drive our earnings per share, and we're pulling out all stops to address these FX winds without damaging our long-term growth prospects.

Super. Thank you.

Jack Meehan, Barclays.

Just want to start with the life science research business here in the US. Sounds like the tone is a little bit more muted relative to slightly more optimistic commentary from peers. Just curious what's driving that and what your expectations are for the rest of the year?

Patrick, why don't I ask you to offer your perspective on that question?

So we have seen, as Mike alluded, the growth in life science research this quarter was mainly driven from coming from China and Europe. Actually where we have seen higher demand from life science research in the US, I think we are [capably] optimistic for the second part of the year that some of the funds will get released. But right now the really drive is coming, the momentum is coming out of Europe and China.

Got it. And is there a way to frame within that business how much is US versus ex-US? Do you know?

That's something I think we are not ready to disclose right now.

Got it. Okay. Just one more.

Getting back to the leverage and the cash that you have overseas, I was wondering if you had any new thoughts on what the optimal use of that cash is, and then when you to be able to put it to work?

I think as we said earlier in our call today, we are fully committed to tax effectively returning share to our stockholders. Agilent has a long history of doing that, over $10 billion during Bill's tenure as a CEO. And we're going to continue that strategy of getting cash back on a tax effective basis to our shareholders.

As you heard from Didier, pretty much all of our US-based cash will be gone by the end of this year, having returned that to our shareholders. And Didier, I don't know if you have anything else you want to add here?

No. I'm certainly, again, waiting for some movement in Washington, and hopeful, and we'll see. If there would be an opportunity certainly to repatriate cash under a new tax regime, I would be very much so inclined to do so.

Yes, agreed. Okay, thanks, guys.

Steve Beuchaw, Morgan Stanley.

I wonder if we could start with a strategic one on pharma as an end market. The comments that you made about the growth in biotech and spec pharma are certainly consistent with what others are saying.

I wonder if you're thinking now that the growth of the sub-markets in pharma seems to have diverged. If you're thinking any differently about how to approach the biotech and spec pharma segments of pharma? And if you could share with us what any of those strategies might be?

Why don't I make a few summary comments and then invite Patrick in on this dialog, as well as Jacob. So overall, as we reported, 6% reported growth and a very strong end market segment for the Company.

And as we also have been highlighting, the bio-pharma, the biotech side of that has been a real area of strength as you peel back the segments within pharma moving away from the traditional small molecule analytical side. So be interested in both your perspectives on how you're seeing that in response to the question.

Sure. Happy to. This is Patrick speaking.

So if you look at pharma in total and where our growth comes from, of course we see all these strong pockets like bio-pharma and the midsize companies. But I think it would be fair to say that during Q1 we have seen several larger deals of replacement business coming from large pharma.

And as we -- in terms of strategies, several things from pharma that are important. There's a lot of replacement business for us out there in big pharma. And the way we position our instruments is making sure that we are 100% backwards compatible while really deploying or offering the best solutions in the market and the most powerful solutions in the market, like for example entering the [Dew] series that we just recently launched. This is a story that has been very well received, especially by the large pharma companies.

Secondly, when you look at bio-pharma, the strategy there for us is clearly working with our customers and looking at their demand, what their needs are as they develop bio-similars and other novel therapeutics, making sure we have not only the right equipment in terms, but also the right software solutions so they have the right tools on hand to be as efficient and productive as possible.

Jacob, I know your portfolio goes here space as well.

Yes. Our business is somewhat different from Patrick's business here, that we have our companion diagnostic, which I have already described.

And then have our nucleic acid solution division, which are developing and manufacturing the active ingredients for pharmaceutical components. And we also see very high demand for that. So within the DGG business we continue to see a high demand from the pharma industry.

Thank you, Jacob. Just to close out this question, I would just remind those on the call Mark's earlier comments about the growth in services in the pharma and how he is approaching that marketplace.

And one, I suppose this would be for Jacob. If we could circle back to the new genetic screening kit launches that Mike referenced in his prepared remarks for chromosomal abnormalities and cytogenetics. Where are you seeing the most notable potential demand for these new kits?

Is there any expanded promotional effort tied to those launches? Just a little color on where you see these products headed. Thanks.

Well, I would like to start by saying that we have a very, very attractive business within our array business within the cytogenetics space. This particular product is very much suited for the individual fertilization business where we have pressure samples, obviously, and what it really that you can do.

And our product is best-in-class for that. So we consider this in the range of our array technologies, and this particular for the individual fertilization.

Got it. Thanks so much.

Tim Evans, Wells Fargo.

Didier, I wanted to ask about some of the sensitivities around the 30% incremental operating margin that you're looking for. If your growth ended up being only 3% or 4%, or alternatively if it ended up being 6% or 7%, how would that incremental operating margin change?

Yes. We have long talked about 30% to 40% range, which to take into account reasonable low end and reasonable high end in terms of volume increase. Right now we are shooting for even higher percentage this year, adjusting for the dyssynergies.

So it is sensitive, but a lot of the operating margin improvement comes from hard savings and the Agile Agilent programs and really sneaky kind of savings. So we would have to face really, really, really bad market situation not to deliver on this 30%. And if the market is delivering as per expectation, if we are delivering as per expectations we could go fairly significantly higher than the 30%.

Great. Thank you.

Derik de Bruin, Bank of America.

Can you give us what the organic revenue growth comps are for the three different segments for the second quarter since we don't have those on a historical basis?

Can you help me out? (Multiple speakers) you have those with those, Didier. You've got a full page of numbers there on the table.

The second-quarter forecast? Well, we expect currency to have an impact of -- a negative impact on a year-over-year basis of about 7 points, which mostly it's around 7 points on average.

And besides that we expect pretty much all the businesses to grow on a currency-adjusted basis about at the same level, with LSAG perhaps 1 percentage point over the rest of the other two businesses. So very much in line by business with the number that we've provided for the Company. LSAG a little bit higher, and then the currency impact being 7% impacts pretty much all the businesses about the same way. DGG a little bit more, and then ACG and LCG.

If you go into my prepared remarks you can tease out the actual reported numbers in Q1 in terms of the core growth by segment. And obviously we would expect to see an acceleration of the growth rate in our DGG business in Q2.

Right. I was trying to get to the Q2 comp for modeling purposes on that.

And looking at the gross margin, there was a big step-up, like 150 basis points sequentially and year over year in the Agilent CrossLab Group on the new breakout. Is that just simply driven by the 10% organic revenue growth? Is that a volume-driven thing, or is there something special that went on, on that margin?

It is mostly volume adjusted. There's a lot of headwinds and tailwinds, but obviously with 10% revenue growth on the annual it is a big impact.

On the negative side, ACG is pretty much impacted by the currency also. But anyway, it is mostly on the volume. And then there is some programs that Mark has put in place.

Last year we spent a lot of time and resources and money to deliver a new CRM which will provide a lot more effectiveness to the organization. Mark perhaps can talk a little bit about it. But that is also a factor that is -- we expect to deliver incremental operating margins to help deliver over time.

Mark, maybe you can jump in, because we had talked earlier about some of the anomalies, even tried to do the year-over-year compares given the dyssynergies. And I think that even gives us more positive comments around our performance Q1. But any additional color you can provide here?

Thanks, Mike. It is, if you will, it's a compare that going forward, it's hard to look in the past and see how these two actually compare. And what we, as Didier had indicated, we actually have made investments associated with putting a single system in place to run our business and services. And that will actually bring us improvements in our operating.

But all that being said, the dyssynergies is really the key element of this, and we'll continue to work on as operational elements. But in addition to that, we obviously see top-line growth as the area we'll continue to push forward onto.

Thanks, Mark.

Thank you.

Richard Eastman, Robert W. Baird.

I wanted to just follow up on that question. So basically what you're saying the SG&A, given the investments you made, the SG&A is up here but you've gotten good volume leverage at the gross profit margin line? You're explaining that?

I was talking about lots of dynamics. One of the big dynamics that we have is really the way also we allocate our share of infrastructure services, the so-called GIO. And because ACG is growing faster than -- has been growing extremely fast, they got a big lump of that allocation, including some of the cost dyssynergies that we've talked about over and over so the (multiple speakers).

And is there, for Mark, is there a geographic opportunity on the CrossLab -- in the CrossLab the business? By that I mean either on the service side or the consumables side? Are we underpenetrated in any particular geography?

Mark, why don't you jump in on that?

We performed well across most of the geographies. I would say our opportunities looking forward, our consumables and chemistries in China is still, I think, a great growth opportunity for us.

China in general from a CrossLab perspective, we're starting to see customers respond to enterprise services, much like we've seen in the Western markets. And in fact we've seen excellent growth in the pharma segments around Shanghai and Beijing.

Okay. And then just one last question as a follow-up. Have you seen any competitive disadvantage from a pricing standpoint with the strength in the dollar? In particular maybe on the analytical chemical analysis side of the business where those products, food, forensics, maybe there's a little more competition there?

Richard, it is Mike. I'll take that question.

Actually, no. I think it speaks to a couple things. First of all the strength of the portfolio, but also the fact that with one exception, most of the major competitors in this space are dealing with the same FX winds.

So nobody has any unique pricing power. And our Japanese competitor is clearly trying to work on their margins as well.

I see. Okay. Very good. Thank you.

Ross Muken, Evercore.

This is James Clark in for Ross. Most of my questions have been answered. But a quick one on the 22% margin target by 2017.

I'm just wondering if you guys have said anything about where you need to get from a segment margin perspective, and specifically on the DGG side to hit that 22%?

If you look at the DGG business historically, this should be a strong double-digit operating margin business. We are going to be in low double digits in Q2.

So clearly getting to that north of 20% operating margins for that business is part of the plan. And as you've heard from Jacob it's quite doable, and a lot of confidence that as we have our remediation -- as we move beyond remediation efforts, we'll have the trajectory we need in the business to obtain those goals.

And then just a quick one. No one asked, but Japan down 6 during the quarter. I know funding has been constrained.

We've heard other peers talk about this. But just wondering when you expect to see some clarity there? And are you seeing the same dynamics as the peers, or is there something specific to Agilent that's going on in Japan right now?

As you may know, I spent 5.5 years of my life in Japan. So I'm always a little bit biased in terms of my view on Japan. But if you look at what's unique about Agilent is our position in that marketplace relative to the competition.

Number two right -- with obviously Shimadzu leading in that marketplace. So I think we're seeing some of the same currency challenges that our competitors see in this space, and obviously we're waiting for some of the budgeting discussions to conclude and get released.

Although you can't see it in the currency results, because the currency has had such a huge impact in the most of recently reported quarter, we believe we're actually making some traction in that marketplace, particularly back in the discussion around the services and consumables in our CrossLab side. So we often think about markets in terms of instruments, new instruments and the capital market side, or capital budget side of things. But that's been a source of strength for us, but you just can't see it right now in the numbers, given the overwhelming impact of currency.

Got it. Thanks.

Mira Minkova, Stifel.

Most questions have been answered. I just have a clarification on the diagnostics and genomics business.

It sounds like you are assuming a rebound including on the revenue side, not just the operating margin in the quarters ahead. Can you maybe help us understand what are the actions that have been completed that give you the confidence you can do that and that it's turning?

And what still needs to be done? What are the milestones that you are looking for in order to see the rebound?

Jacob, why don't you comment on some of the things that are going on, on the manufacturing side relative to the 40%, and what's going on with the pathology side?

Yes. So thanks for the question, Mira.

And as also to alluded to before, the main reason for our challenges on the operating profit and the revenue side in Q1 was due to some manufacturing challenges we had on our nucleic acid businesses, both genomics business and the nucleic acid solution division. Those have both been resolved within the quarter. And we thereby expect to see us coming back to a normal situation into Q2 again.

Okay. And how big was the impact of this, roughly, any sort of magnitude?

If you look at the profitability we had in Q1, and then we've been fairly explicit in terms of our expectations for Q2 to low double-digit profitability in Q2. So I think you can perhaps model off of those vectors.

Okay. Thanks.

You're welcome.

And perhaps I missed it, but maybe comment a little bit on the gross margin as well as R&D and SG&A as a percentage of sales for the new Agilent apart from the operating margin? I guess I'm not seeing a explicit breakdown in the release and how those trended for the new Agilent ex-Keysight.

Yes, we did not provide the breakdown. We provide an EPS guidance, and -- but we don't provide the whole, the full P&L.

Clearly with the kind of growth that we expect, you would think that our OpEx as a percentage of revenue will come down over time. Our gross margin are going up, not just because of the revenue but also because of the actions that we are taking -- many actions that we are taking. But we don't provide more granular detail for the guidance.

Okay. Thank you very much. I'll (multiple speakers) up.

I'm showing no further questions at this time. I would like to hand the conference over to Ms. Alicia Rodriguez for closing remarks.

Thank you Siad, and thank you everybody for joining us today. We appreciate you joining our call. And if you have any questions, please give us a call at IR.

Thank you. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect. Have a wonderful day.