安捷倫 (A) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to turn the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Thank you, Sabrina, and welcome, everyone, to Agilent's fourth quarter conference call for FY15. With me are Mike McMullen, Agilent's President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Patrick Kaltenbach, President of Agilent's Life Sciences & Applied Markets Group; Jacob Thaysen, President of Agilent's Diagnostics & 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 the 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 Mike and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. As a reminder, we are no longer reporting or commenting on orders or book-to-bill.

Please note that we will refer to core revenue growth, which excludes the impact of currency, the NMR business, and acquisitions and divestitures within the past 12 months. Reconciliations between reported and core growth in dollars and percentages can be found in the financial results section on the IR website. We will also make forward-looking statements about the financial performance of the Company.

The 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 Mike.

Thanks, Alicia, and hello, everyone. Thank you for joining us on today's call.

Our new Agilent team had a strong year. Let me start by highlighting our fourth quarter performance, focusing on three key numbers. First, revenue was up 6.2% on a core basis. Second, adjusted operating margin was up 150 basis points to 21.9%. Finally, EPS of $0.50 is above the high end of our guidance.

Now I'd like to talk about our full-year results. For the full year, our core revenue is up 6.4%. It is worth noting that this is our highest annual core growth rate since 2011.

Adjusted operating margin was up 80 basis points to 19.6% and EPS of $1.74 is above the midpoint of both our November 2014 and August 2015 guidance. We offset significant FX headwinds and $40 million of dis-synergies from the spin-off of our electronic measurement business.

Our fourth quarter capped off a stellar performance by the team in our first year of the new Agilent. This team has not skipped a beat as we have navigated through a CEO transition, implemented a new strategy, and dealt with changing market conditions. Both our fourth quarter and full-year results demonstrate our commitment to drive both growth and operating margin expansion.

Now let me move on to more details on what is going on within the business. Our Q4 results were driven by strength in the pharma, diagnostics, clinical, and food markets. Geographically, we saw core growth across all regions, with particular strength in our liquid chromatography offerings, CrossLab's services and consumables, and Diagnostics & Genomics products.

Let me highlight the Q4 results by business group. The Life Sciences & Applied Markets Group delivered core revenue growth of 2%. Strong performance in pharma was offset by softness in the industrial and academia and government markets. LSAG's operating margin for the quarter was 20%, down 20 basis points from year ago.

In November, Agilent closed its acquisition of Seahorse Bioscience. Seahorse is a leader in providing instruments and assay kits for measuring cell metabolism and bioenergetics. Seahorse is a unique technology, is a perfect complement to Agilent market-leading separation and mass specs solutions, in particular for metabolomics and disease research and pharma. The combination of these two platforms give scientists a more comprehensive and faster path to researching some of the most challenging diseases affecting mankind. Seahorse will be incorporated into Agilent's financials starting the first fiscal quarter of 2016.

In Q4, Agilent started shipping the new 1290 Infinity II Vialsampler, as well as the 600-bar 1260 Infinity version. At the BCEIA conference in Beijing, we introduced the Agilent 5977B High-Efficiency Source GC/MSD system, a tandem gas chromatograph and mass spectrometer that delivers lower levels of detection than any other instrument in its class.

We also introduced the 4200 TapeStation system. This fully automated instrument enables scientists to rapidly analyze up to 96 DNA samples at a time and sets a new sample QC standard for NextGen sequencing. And we also launched several targeted solutions, such as our GC/Q-TOF pesticide analysis solution and our LC/Q-TOF water analysis system.

Next, the Agilent CrossLab Group delivered another strong quarter with core revenue growth of 11% in Q4. Both services and consumables experienced strong growth across all geographies. Operating margin was 25.1% for the quarter, up 150 basis points from a year ago. Customers are benefiting from ACG's new brand promise to deliver insights that lead to outcomes.

In Q4, Agilent University introduced an enhance portfolio of online training courses. This enables customers from lab technicians to researchers to develop new skills and gain insights that can improve economic, operational, and scientific outcomes for their laboratories. The launch of the online training has exceeded our expectations.

In consumables we introduced a new product to help food safety labs test high-fat samples more accurately. The enhanced matrix removal lipid removes matrix interferences that have made test results challenging to reproduce. This gives food safety labs a better way to address what has been one of their most challenging tasks.

Finally, the Diagnostics & Genomics Group continued to build momentum in Q4, delivering 10% core revenue growth and strength across all of its businesses. Target enrichment was particularly strong with Dako Omnis once again had record shipments and it continues to gain competitive wins. DGG's operating margin for the quarter was 19.2%, up 430 basis points from a year ago. In the fourth quarter, two new diagnostic products from DGG received FDA approval. The first product was created in partnership with Merck and Company. This new companion diagnostic test can reveal whether a patient with advanced non-small cell lung cancer is likely to respond to Merck's anti-PD-1 therapy, KEYTRUDA.

The second product is our first (inaudible) diagnostic developed in collaboration with Bristol-Myers Squibb. This new test can identify PD-L1 expression levels on the surface of non-cell small lung cancer tumor cells and provide information on the survival benefit with OPDIVO for patients with non-squamous, non-small cell lung cancer.

Now let's take a brief look at Agilent's revenues by end market performance on a core basis. Life Science & Diagnostics markets continue to see ongoing strength in the pharma, diagnostics and clinical markets fueled by technology refresh deals, new product uptake, and healthy demand across the spectrum. Spending in academia and government was down versus an extremely strong Q4 2014.

Applied end market performance was led by continuing growth in food, and environmental and chemical energy were flat on a core basis. As we noted in our Q3 call, customers in industrial markets continue to take a cautious stance in light of weakening commodity prices and uncertainties in the world economy. Geographically, we saw core revenue growth across all regions led by the US and Asia, excluding Japan.

Now let me provide some additional insight on our operating margin improvement initiative. Our multi-year Agile Agilent program, launched in Q2, is reengineering the Company to be more nimble and efficient. In FY15, our actions delivered about $40 million in gross savings. In addition, the NMR close resulted in $15 million in savings and our Agilent order fulfillment organization delivered on its $25 million committed savings.

The Agile Agilent program and order fulfillment cost savings will be key drivers behind continued operating margin expansion. We remain on track to achieve a 22% operating margin by FY17, a 4-point improvement over FY14 exclusive of Company split dis-synergies. At the same time, we continue to invest for long-term revenue growth.

Our results of the past three quarters give us confidence in our ability to deliver on this longer-term operating margin expansion commitment. We are pleased with the operational results for our first year as a new Agilent Technologies and our ability to meet our external earnings commitments for the full year.

Now I want to tell you about how we think about our guidance. We are committed to achieving our long-term financial goals. At the same time, we will be more conservative in our guidance.

This is especially prudent due to macro market concerns that have developed since I spoke with many of you at our mini analyst and investor day meeting. Before I turn the call over to Didier, I want to recap a few highlights of our first year as the new Agilent Technologies.

This was a transformational year for the Company. We successfully completed the CEO transition. We formed a new executive leadership team that is deeply committed to delivering results. We have also implemented a new Company strategy, restructured the Company's operations and product portfolio, and committed to new long-term financial goals. Despite all this change and moving pieces, we have delivered growth and increasing profitability over the past three quarters.

Let me close with a few comments about the future. We're making acquisitions such as Cartagenia and Seahorse, expanding our presence in served life sciences and diagnostics markets. Our pipeline of new offerings has never been stronger. I am convinced we have an energized, aligned team at Agilent that will deliver on our full potential. I remain quite confident in our long-term prospects of above market growth, increasing profitability levels, and greater shareholder value.

Thank you for being on the call today. I will now turn it over to Didier, who will provide additional insights on our financial results and our FY16 guidance. Didier?

Thank you, Mike, and, hello, everyone.

As Mike stated, we are very pleased with our Q4 and full-year performance. We delivered above market core revenue growth of 6.2% and 6.4%, respectively, and our operating margin adjusted for income from Keysight was 21.9% and 19.6%, respectively.

Excluding the $40 million annual cost dis-synergies resulting from the Keysight spin-off our operating margin was up 240 basis points in Q4, and up 170 basis points for the full year. We are, therefore, well on our way to deliver on the committed 400-basis-point improvement in adjusted operating margin by FY17.

Our hedging strategy, consisting of both structural and systematic financial hedges, was put to the test this year and delivered very well. Thanks to structural hedging stemming from our global footprint, flow-through was just 20%, and we also gained $18 million from our systematic cash flow hedges.

Turning to capital returns and cash flow, for the year, we returned $400 million to shareholders in the form of dividends and buybacks and generated $491 million in operating cash flow. We did not repurchase stock in the fourth quarter, but we intend to repurchase this quarter subject to customary conditions.

I will now turn to the guidance for FY16. Our FY16 revenue guidance of $4.15 billion to $4.17 billion corresponds to a core revenue growth of 4.0% to 4.5%. It is based on October 30 action rates and takes into account the Cartagenia and Seahorse acquisitions, as well as the XRD divestiture and the NMR exit. We expect currency will have a 1.7% negative impact on revenues.

Regarding XRD and NMR, FY15 revenues were $58 million and FY16 revenues are expected to be $12 million. We project FY16 EPS to range from $1.85 to $1.91, growing 6% to 10%, based on an adjusted operating margin of 20.0% to 20.5%. You will notice that we are projecting a narrow revenue and EPS range at this time. We believe that 4.3% core revenue growth and 20.3% adjusted operating margin are the proper midpoints, taking into account both the present macroeconomic environment and our operating margin commitments.

With those midpoints, we want to set the low end of our guidance in line with our commitments. Having set those at 4% core revenue growth and 20% adjusted operating margin, the high end of the guidance naturally falls out at 4.5% core revenue growth and 20.5% adjusted operating margin.

As you adjust your models for FY16, please consider the following nine points. First, annual seller increases will be effective December 1, 2015. Second, stock-based compensation will be about $57 million, and as we front load the recognition of stock-based compensation the Q1 expense will be about $22 million. Depreciation is projected to be -- that was the third point -- depreciation is projected to be $100 million for the fiscal year. The fourth point, the non-GAAP effective tax rate is projected to be 20%.

Fifth, we plan to return approximately $635 million in capital to shareholders, including $155 million in dividends and $480 million in buybacks, subject to customary conditions. Sixth, as communicated at the analyst and investor day in May, we plan to borrow $250 million around February to fund a portion of our buyback program.

Seven, net interest expense is forecasted at $68 million, and other income at $7 million, including $12 million dealed to Keysight. Eight, for purpose of our EPS guidance, we have assumed a diluted share count of 328 million shares, 7 million shares less than the average diluted share count in FY15. And, ninth, and last, we expect operating cash flow of $650 million and capital expenditures of $140 million, $42 million over FY15, as we embark on a two-year program to significantly increase the capacity of our nucleic acid facilities.

Now, finally, moving to the guidance for our first quarter. We expect Q1 revenues of $1.0 billion to $1.02 billion and EPS of $0.42 to $0.44. At midpoint, revenue will grow 3.5% year-over-year on a core basis, and EPS will grow 5%. 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 disbursement of the variable and incentive pay of the previous semester.

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

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

(Operator Instructions)

Isaac Ro of Goldman Sachs.

Good afternoon, thanks very much. I think you guys mentioned in the script a couple times the fact that you were taking a more conservative approach to guidance this year. So, Mike, wondering if you could just put a little more color around how your process around guidance has changed this year? Just want to get a better appreciation for what you guys are doing different when it comes to planning for guidance?

Yes, thanks, Isaac. I appreciate the opportunity to comment on our philosophy around and thinking behind the guidance. As you know, I mentioned earlier, this is the first year of the new Agilent Technologies. It was also my first year in the CEO seat, and I had a chance to reflect on how we have guided the Company over the last year.

And what I decided to do was really take a more prudent and conservative outlook to our guidance, and a couple factors were in my thinking. One is, first, the world has really changed since May when we spoke to the group about the longer-term outlook for the Company's growth. And the macro outlook has become a lot more challenging since then, we know we've seen IMF lower on the GDP and some of our larger chemical customers have taken down their outlook for 2016.

And I thought just bringing down the guidance a bit in terms of the top line by 1 point, 1.5 point or so was the prudent way to plan for the Company. We'll take a look at the business as it develops over the next quarter or two, but really wanted to take a more prudent and conservative outlook into 2016. I would also remind you that we're not at all changing our commitments to achieving our 22% operating margin by 2017, and in the number of conversations over the last several months, we've indicated that we can make those margin improvements even at a 4% top line revenue growth scenario.

And then maybe just one final note here, as a reminder, when we provide guidance our internal plans are always higher and that's how our executives are compensated within the Company. So hopefully that additional color was helpful in terms of understanding our thinking a little bit more deeply, Isaac.

Okay, thank you. And then maybe just a follow-up on a couple details. One would be, can you disclose a growth rate in China this quarter? And then, secondly, in DGG, it looked like gross margin was down a little bit sequentially on a higher base of revenue than you had in fiscal 3Q, so I'm just wondering what's going on in that business? Thank you.

Sure. How about if I go ahead and make some commentary on China, then, Jacob, you can chime in on the DGG specific questions. So the results came in in China just as we expected. We exited the year in mid-single-digit growth rate for the year. Finished the year very strongly in China, and we do see this as a continued source of growth for the Company. I think, you may recall, we were I think one of the first to call an early return to growth about this time last year.

For me, whether it goes to mid- to high-single-digit range will really be dependent on what happens in the chemical and energy space. That really is the wild card, I think, for our overall growth rate in China next year. But the business developed as forecasted, and we're quite pleased with how we ended the year. And with that, I'll pass it over to Jacob on the DDG question.

Hi, Isaac. Yes, you are right that our gross margin came down a little bit, and it's really due to the mix in Q3 had a little higher number of [reagents] and a little bit higher number of instruments in Q4, but that's just the variability between the quarters and nothing, you can say, fundamental has changed.

Thanks so much, guys, appreciate it.

Thank you.

Ross Muken of Evercore.

Good afternoon, guys. As you think about the key deltas, sorry to stick on the guidance topic, but the key deltas today versus the Analyst Day, or even versus where you were maybe a month or two ago? Where would you sort of point out the significant assumption changes were, whether it was top line? And then, can you just flow that through? Because it does look like still, even though you are delivering on the multi-year cost, the next year operating margin targets are a bit lower.

And then, if you have any sense of where the deltas versus the Street because on our math, based on the consensus, it looks like it was a bit higher of a other income assumption, so we're just trying to figure out if that was one of the deltas, again, versus maybe what the market was looking for?

Thanks, Ross, I appreciate the question. So relative to how the thinking has evolved since May, I think I would point to two things. One is the chemical energy space. This is the fourth quarter in a row for us in terms of flat growth, and now it has spilled over a bit into the environmental business because we're not really getting the sample volume that was associated with the fracking in the US. That's the one where we've pushed out the timing in terms of return to growth. The business is holding steady, but is not yet to a growth trajectory.

So I think point one would be a longer time line in terms of the return to growth in the chemical energy sector. And then the other one is the impact -- what we're seeing in some of the emerging economies, Brazil, Russia continue to be quite weak for us, albeit, we have good strength in India and as I mentioned earlier, China. And I think third was an outlook of being a little bit more conservative and prudent on our overall guidance assumptions. And, Didier, I think Ross' math is correct on the other income, would you like to add some comments on that?

Yes, Ross, we're looking at the -- we also analyze the delta versus the consensus, and it seems to come from a little bit on the revenue side, probably not taking into account the reduction due to RPD. So a little bit on that, a little bit on the operating margin percentage, and quite a significant number, surprisingly, on the other income and expense.

And I must say, you are the only one who nailed that number exactly, precisely, and we've seen in other cases quite significant differences in other income and expense. I remind everybody that, especially net interest expense, this year we incurred $59 million, we said that were going to borrow $250 million. We have modeled to borrow it in February and, therefore, we will add about $9 million of interest expense. So, basically, I think those were the main factors.

Great. And, I guess maybe secondarily, I thought it was unusual you guys didn't buy any stock in the quarter. Can you give us a sort of sense, it seems like the assumption is that will, obviously, occur in 2016. Give us a sense for why that was, was it Seahorse, was it something else? And then, it looked like free cash came in a little bit below, or a reasonable amount below what you were looking for, can you just walk us through where that delta was versus what you laid out?

Hey, Ross, this is Mike. Why don't I go ahead and handle the first part of the question and then I'll bounce it back to you, Didier, for the second part of Ross' question. Ross, I do really appreciate the question, but we're not really in a position to comment on the circumstances around the stock repurchases in Q4,. But what I would remind you is that we're going to resume repurchasing this quarter. And as Didier mentioned in his remarks, I believe we're targeting $480 million of repurchases 2016. And Didier, can you address the second question?

Yes, on the cash flow basis, you are correct. When we started the year, we talked at about $600 million of operating cash flow and now we are at $500 million. But already at the Analyst Day we had adjusted that number, although we provided a number excluding one-time items, but it was, if I recall, $555 million. And since then we've been exactly in line with the commitment, so the number is about $500 million. The reason why it's down from the initial estimate is mostly related to currency, mostly that's what it is. And again, we are in line with our commitment since the Analyst Day.

Great. Thank you for the candor, Mike, and thanks, Didier.

You are quite welcome, Ross.

Jon Groberg of UBS.

Great, thanks. Hey, Mike, just on the outlook, again, I know you're no longer commenting explicitly on orders and backlog like you were previously, but is there -- as you go into next year was there anything from an order standpoint that gives you a little bit more caution in 2016, or is it just the dynamics you described previously of wanting to be a little bit more conservative?

Thank you, Jon, and I do really appreciate the question, but as we mentioned previously, we are no longing reporting on [comment] orders. But I would say that the guidance reflects a view of conservatism, not any concerns on the order front.

Okay, and then last one for me, if you look at the life science and applied markets group, I think the operating margin there was down 20 basis points. Can you maybe just dig into a little bit more detail about that business?

Sure Jon. I think I'm going to go ahead and pass it over to Patrick to add his comments.

Sure, thanks, Mike. Yes, regarding the operating margin, you have to realize that we first and foremost had to also absorb some of the dis-synergies of this [plate] which brought us down about 1% compared to last year. And then if you look at the product mix that we had this quarter, it was a little bit different from the quarters before in terms we had last [GC], even given the exposure we had in the oil industry, in the chemical energy market and a little bit [other pieces] (inaudible) came up. Product mix had also a minor impact. But the biggest one you have seen is probably because of the dis-synergies.

Okay, great. I'll hop back in the queue for others. Thank you.

Thanks, Jon.

Jeff Elliott from Robert W. Baird.

Yes, thanks for the question. First one for me is on the economic and government end market, you talked about a spending pause in the US. Can you give us a little more color there? When did that happen and what you see in other geographies in terms of academic and government?

Patrick, why don't you take that one?

Sure, thanks, happy to take it. As Mike alluded to at first, it was a tough compare to last year, so this is one of the major reasons why it has been flat or slightly negative this quarter. We had also lower spending in the US, it was softer than we had expected, especially in September. For the very specific month we have seen smaller deals and our customers a little bit more cautious given the budget uncertainties they have seen in some areas. Looking forward, we actually expect it could even in the low single-digit growth.

Got it. And how about geographies like Japan, I guess, what you seeing in the academic government funding there?

On the worldwide basis, I would say, what we have seen is that it was more solid in Europe and in China and Japan was also flat for the last quarter. So the biggest impact we have seen was definitely in the US.

Okay, and then one more for me, on forensics, you referenced timing of some larger deals, what happened there and can you quantify how big the impact was?

On forensics?

Yes

The growth for forensics was in the low-single-digits for the quarter. Which one do you mean now?

Jeff, would you mind repeating your question so we make sure we got a solid answer for you?

Yes, earlier in the prepared remarks, in the deck, you talked about forensics being muted by the timing of some larger deals, and I'm curious what happened in terms of the timing and how big the larger deals were, what was the impact?

You mean for the deals in the US. Again, last year, given we had these double-digit growth, it was based on several large deals we had. Those large deals, we haven't seen the same magnitude this year, this is what I wanted to say. So they were smaller compared to last year, this is also what brought the overall growth down in the US.

Okay, thanks, guys.

You are welcome, Jeff.

Dane Leone of BTIG.

Good afternoon, guys, thanks for taking the questions. I think I'll stick with the guidance, if you wouldn't mind.

Sure, Dane.

Could you maybe break down expectations for the three main segments next year? Effectively, in our models right now, we are essentially having the organic growth rate that you guys reported in 2015. If you could help us source maybe where we should modify some expectations, I think that would be pretty helpful.

Sure, Dane, be happy to. So as we've looked at the growth assumptions by end markets, I think the biggest one would be chemical and energy, which is, as you know, 25% of the Company and we're assuming flat for the entire year. The applied markets, low-single-digit growth, higher for food, but really no growth in the environmental side of that segment. And then as Patrick mentioned earlier, government/academia in the low-single-digits, pharma the high-single-digits, and diagnostics and clinical markets also high-single-digits. So you can see there's a quite a mix between the pharma and diagnostic markets, or differential versus the chemical energy space.

So if we flow that through the model, I think we might have a little trouble is looking at 2016. We give, bake everything together, about 3% top line growth to get to that $4.16 billion. To get to the operating profit line of about 20.25%, or 20.2%, if you want, at the upper end that's about a 60%-plus variable margin. Which seems a bit high given, you can go back and history and I think even coming out of a trough year in 2010 it was still about 55%. And then when we flow that through to 2017 to hit the targets you were talking about, another 60% variable margin, can you help us in line with what you guys laid out at your analyst day, and reiterated in the presentation here, how to get to that 22% operating margin in 2017? Because it's looking pretty aggressive at the moment.

There's a lot of moving parts, but nothing has fundamentally changed except we exceeded our first year operating margin expansion goal basically achieving 170 basis points. So we are now one year out of three at 43% of our goal, so we are a little bit ahead of what we had committed to. And as stated by Mike, we certainly didn't want to assume a second fantastic year like this one, or at least provide that as a guidance at this time and decided to have a guidance that is somehow conservative.

But nothing has fundamentally changed, but the moving parts are really the salary increases, all of the different components, the no change to our projections regarding the benefits on the NMR exit from that Agile Agilent program, from the fact we have the FDA warning letter behind us, the OSS, the order fulfillment, annual improvements, there is really no change. The only change I would say is a positive chance, we are slightly ahead of the game at the end of year one.

Yes, Dane, if I could just add some additional comments here too, We are really quite pleased with how we performed this first year, and think we're well on that trajectory to 22%. And we found a way to get there even if we guide a little bit lower on the top line revenue.

I also would say that part of our thinking was influenced by many of our major systems' infrastructure programs, which I think I've talked to you in the past, around the Agile Agilent. These are multi-year programs, and a lot of them won't start hitting until the end of 2016. So we start to get the real big $1 million cost savings coming out of our infrastructure in 2017. We're right on our plan, in fact, ahead of our internal plan, so we are quite confident in our ability to get to that 22%. But there are some timing issues related to some of our major, major programs.

Thank you very much.

Thank you.

Steve Beuchaw of Morgan Stanley.

Hi, good afternoon, and thanks for taking my questions. Mike, we've focused a lot here on the impact of [chem] and energy. I wonder if we could think about a couple of potential catalysts to the upside, one is NIH budgets. To what extent are you thinking about the possibility of stronger funding for the NIH and if the NIH gets something like a plus 5% for 2016, what does that mean for your business?

Let me make some general comments, and then if you have anything specific to add onto that, Patrick, that would be great. Clearly, if the NIH funding would go up, that would be a positive for the business. Albeit, I think, as Patrick will share, it's not a huge part of the overall funding for our Company, but that would be positive news.

That's also why I said earlier, we will watch the business for the next quarter or two and see where things go. So if these positive developments happen, we will reflect in our view for the outlook for the business. But what we didn't want to do is plan on a lot of good news now, given some of the uncertainty of either budgets being finalized or where some of these end markets and economies are going. Patrick, I can't remember the exact percentage of our funding in NIH, so maybe you can add a little color there, as well.

I don't have the exact funding, but I agree with you that we didn't bake in numbers like the ones that have just been mentioned. So at 5% they are growing at low-single-digit projections on the budgets, so if there's upside we will be happy to take it.

Absolutely, absolutely.

Okay, thanks for that. And then one for Jacob, I'm sorry, if you wouldn't mind, could you give us just a bit more granularity on the performance of Dako in the quarter? I'm not sure if I missed it in the prepared remarks, but did you give a growth rate? And any additional color on the drivers and dynamics, whether they are competitive or otherwise, really appreciate it. Thanks so much.

Hey, Steve, we don't provide insight on the individual divisions, but I can say that we continue to see strong performance in our [pathology] business. Omnis continues to break records in placement, and that, obviously, is driving the growth there. We see great growth there, and our companion diagnostic business, with all the activities around the recent launches within the PD-L1, is also a greater growth driver. So overall, I see great momentum in the businesses, but the actual number I cannot comment on.

Got it. Thanks so much.

Tim Evans of Wells Fargo Securities.

Hi, thank you. I wanted to drill down on the pharma and biotech end market a little bit. This has been the strongest grower for you this year, last year, and it sounds like next year, that expectation, is that it would continue to be your strongest grower. Can you talk about some of the technologies that you are seeing, being the strongest drivers of that growth, and how you are addressing that market? And also, I'd like to hear about whether this is big pharma, is it small, midsize pharma, is it contract labs? What kind of clients are you seeing driving the growth? Thanks.

Why don't you take that one, Patrick, and I have a follow-up.

Yes, there were several questions at once. So let me start with the platforms that drive the growth, actually, we have very competitive platforms for the pharmaceutical and the biopharmaceutical markets. The biggest growth driver right now comes actually out of the LC business, which drives a lot of replacement business at the installed base. As you probably know, we have more than 140,000 1100 systems installed worldwide, a lot of them are in the pharma space. And the offering we have today with the Infinity II series gives us a seamless replacement of these systems with much higher performance, better efficiency, so a huge improvement for our customers. So that resonates well and it resonates actually well across the board, whether it's small pharma or large pharma. The large deals, of course, come mainly out of the large pharmas, and we have seen several big deals in the US, as well as in Europe, in the last quarter.

The second piece of the question was regarding biopharma. In biopharma, we see actually higher growth moving forward than in smaller molecule pharma, and we continue to address this also with more specific solutions around LC LC/MS portfolio in some of the (inaudible) spectroscopy space.

So I think we have very attractive portfolio for our customers. We have a lot of good new releases this year, also the 6470 Triple Quad system, which is very well received in pharma, as well, and they will continue to drive growth for us in the space.

And, Patrick, if I can add one final comment. Tim, you are focused on the technology as driving a lot of the growth in our reported pharma results, but I'll also call your attention to the Agilent who delivered another double-digit growth in the fourth CrossLab Group quarter. And we're seeing strong demand for our services in consumables in CrossLab services in consumables, in the pharma, as well as our technology offerings.

Thank you.

Tycho Peterson of JPMorgan.

Maybe just a follow-up on the pharma. You guys had been trending along a 6% to 8% growth, so 19% growth really stands out. Was there anything one-time that you saw this quarter on the pharma business that you can call out?

Tycho, you broke up a bit. I think what you asked was, we had put up double-digit growth and was there anything of a one-time nature in this most recent quarter? I just want to make sure I understand your question.

Yes, you had been growing pharma 6% to 8%, so 19% is certainly notable. So was or anything you can call out that was unique to the quarter?

No, we have now several quarters in a row where we had double-digit growth in pharma, so it's really -- and as Mike said, moving forward, we see it continue to grow in the high-single-digits at least.

Okay, and then for Didier. I'm just trying to understand the explanation on the free cash flow, down 20% in six months relative to what you said at the end of May. Currency hasn't really moved, so I'm just trying to understand the explanation there?

So since the -- in May, we provided a number at the analyst and investor day, taking away all the one-time cash outflows that we had during the year which are related to the separation deals where we had to pay a lot of invoices related to the separation. And also, I think about $50 million of taxes that were related to the separation also. So my point was just the number that we have now is even better because it is a number that includes those elements even better than the $555 million that we provided that excluded those elements. So we have a better operating cash flow than we projected in May, however, it is not as good as the one we projected back in November of the previous year and mostly related to currency.

Okay, and then last one, just capital deployment, you highlighted Seahorse and Cartagenia, should we assume deals of similar magnitude going forward, or do you have an appetite to potentially do something a little bit larger?

Yes, we've talked about an idea at analyst and investor day of potentially two deals of the size of Seahorse per annum. Obviously, it could be slightly bigger, that we are not looking at a larger deals in the short term. But we are ready to take on two deals of that size per year, perhaps slightly bigger.

Okay, thank you.

Derik de Bruin of Bank of America.

Hi, good afternoon.

Good afternoon, Derik.

So a couple questions, first of all, could you talk about the academic/government lab a little bit? I'm a little bit surprised, just given that some of your competitors, like Thermo, who have a much bigger academic exposure, basically didn't call out anything unusual in September. So could you talk a little bit more about that? And particularly, what did you see in October since you guys go a little bit longer?

Okay, I'll have Patrick --

I will take that. The compare for us this quarter was mainly a difficult compare because we had a strong Q4 growth last year with double-digit growth with some exceptional large deals in the space. The pause, or the slowdown we had seen in September, where we usually have more budget released, now to some extent came back in October. So we've seen for the year and we're on track with what we project in the low- to mid-single-digit growth rate for academia and government.

Returning to revenue, yes.

Got you, I just wanted the clarity, thank you. And could you give a little bit more color, your 4.25% core growth, what are you looking for core growth for each of the segments, LS, DX and CrossLab?

We're not providing the projections per segment, however, I will tell you, and that won't surprise you, that our instrument segment, LSAG, will have slightly lower than the average. And our other two segments Agilent CrossLab and the DGG will have a higher growth rate than the average.

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

Thank you, Derik.

Jack Meehan of Barclays.

Hi, thanks, and good afternoon. I just wanted to ask, could you talk about the level of visibility in the budgets and chemicals and energy end market, and do you feel like things have begun to bottom out now after a few quarters in the exploration business?

Patrick, do you want to take that one?

I can take this, yes. You are actually right, what we are -- we are seeing currently the market really bottoming out, so we don't expect any major further declines on the exploration side. Which gives us confidence that the growth rate that Mike projected being the low-single-digits combined chemical energy should also materialize moving forward. We are now like four to five quarters in the situation with the low oil price, and we had been mainly hit in the first couple of quarters on the exploration side, and now we see this really bottoming out.

And just as a point of clarification, we are forecasting flat for right now.

Got it, that's helpful. And then just one more on the deal environment, I'm just curious if you had any updated thoughts on the cash that you are holding overseas? Thanks.

We have about $200 million of cash we had at the end of October in the US, plus $235 million in escrow for the Seahorse, which was put to good use on November 1. The rest of the cash is overseas. We've had a good year in terms of being able to repatriate some of that [office use] cash into the US, that's why we ended up with $435 million about. And we are looking for continuous opportunities to bring back some of the cash tax effectively. But still, most of the cash that we generate is overseas.

Brandon Couillard of Jefferies.

Thanks, good evening. Most of my questions have been addressed already, but, Mike, just one for you on the decision to expand the capacity of the nucleic acid solutions business. You speak to the drivers of that decision and exactly where capacity utilization is today and what the, I guess, P&L effects in terms of growth, the implications are in 2017 from that?

Brandon, thanks. Would love to take that call, it's a great story, and I think I will allow Jacob the pleasure of responding to that one.

Yes, thank you. So as you know, our nucleic acid solution division is manufacturing oligos for active pharmaceutical ingredients. And we have seen a significant demand for those products over the last few years, and we continue to see demand that actually is beyond our current capacity. And, therefore, we have decided to invest in expanding that capacity over the next few years, and this is actually what has been reflected in that by -- this activity will set in the DGG business.

Brandon, this is Mike again. The beauty of this business is we will get long-term customer commitments for purchase volumes, and then you'll start to see this show up in very significant income and revenue as you get in the outer years of 2017 and 2018 for the Company.

Thanks, that's helpful. And then, Didier, just one clarification, did you say that you have embedded the mid- to high-single-digit growth outcome for China for 2016, was that right?

Yes, I think it's Mike who made that comment.

I think that was me. I said we were expecting mid-single-digit growth in China. And what could happen, Brandon, depending on what happens in the chemical and energy, we could see that get to high-single-digit growth as an overall market. Just some additional color here, we expect the pharma, the food, and environmental segments to continue to be quite strong as an end market, along with continued interest and services and consumables.

Again, the wild card, it will move us between the two estimate points would be what growth rate we would see in the chemical energy space. But it looks like a solid growing market for us next year, and depending again what happens to chemical energy we could see more end market growth than we are projecting right now.

Super, thank you.

Miroslava Minkova of Stifel.

Hi, good afternoon, guys. Just a follow-up on this last comment here. On China and the chemical and energy business, have you seen that deteriorate further, or how are the orders tracking in that business given the macro headwinds that are coming out of China?

Yes, Mira, this is Mike, thanks for the question. I know we don't specifically comment on orders, what I can just refer you to is the overall view of the results for the quarter from a revenue standpoint, and four quarters in a row of flat. I believe earlier Patrick used the comment that we think we have bottomed out and I think that applies to China, as well.

Sounds good, thank you for that comment. Secondly, just given the mixed end market environment for you, wondering how are you prioritizing your investments for FY16? Has anything changed in terms of your thinking there, as well as level of investment you devote to each of the end markets?

Great question, and I think, as you know, we try to align our investments to where we see the best growth prospects. But I have to say, the market has been fairly consistent in terms of how it's developed relative to our internal view of where to place our bets. And I would say, no, I don't think we had any real fundamental changes to our investment and technology front or in places where we are building out our channel coverage.

Okay, sounds good. And lastly, for Didier, the negative 1.7% of currency you see next year, what kind of flow-through should we assume on EPS?

Similar to what we have seen in 2015, so about 20%. We think that currency will have an impact of about $68 million for the year, and the impact on the operating profit is about $14 million to $15 million

Okay, great, thank you, guys.

You are welcome.

Doug Schenkel of Cowen and Company.

Good afternoon, guys.

Good afternoon, Doug.

So based on what I am hearing from a lot of folks who are listening to this call, I think there's a little bit of a debate as to how to view your guidance. I think that's a clear observation at this point. So, Mike, you acknowledged previously that you maybe should have guided FY15 to slightly more conservative levels. And now we have FY16 guidance, and like I just said, I think a lot of folks are trying to figure out how much of this guide is you swinging to the other extreme, which seems pretty prudent for a variety of reasons, including the macro backdrop. Or is there something fundamental you are seeing that is giving reason for pause?

So if I could just, as we're getting to the end of this call take another shot at asking a couple of questions. The first would be, your guidance implies that margin will expand, operating margin will expand by 50 to 100 basis points this year, and then 150 to 200 basis points in FY17, if I'm doing the math right. How much is that dependent on a favorable change in revenue mix relative to recent trends?

The second question would be recognizing a key focus area for you, Mike, has been to bring much of what you successfully did with chemical analysis to broader Agilent. Is the variable cost structure progressing to the point where you still feel comfortable that you can get to that 22% margin target in FY17, even if core revenue growth is, say, 4% to 4.5% the next couple of years?

The third question would be getting at really the question of fundamental demand and recognizing you don't want to get into book-to-bills for the reasons that you've outlined previously. To be fair, a lot of your peers do comment, at least on demand, coming out of the quarter, heading into the end of the quarter. Given the performance and LSAG, it seems like it would be helpful for you guys to release a something about trend there.

And the last one would be, Tycho asked the question about free cash flow guidance for FY16, to be more specific, at your Analyst Day, you guided us to expect $620 million in free cash flow this year. Your guidance is now for $510 million, so FX has changed, but really only a little bit. And I know there were a lot of one-timers in there, but $110 million is a big delta. Could you just walk us through what's going on there? Thank you.

Sure, Doug, these are very important questions, so I appreciate the opportunity to add some additional clarity. If I miss anything please come back to me, but I think I've got the key points here. One is, let's start with the view of 22%, how dependent it is an on a higher level of revenue. As I may have indicated earlier in the call, at 4.0% to 4.5%, we will make the 22% operating profit in 2017. And I say that with a lot of confidence because the results we've put up over the last three quarters, plus I know we have a number of major programs that have yet to deliver on their projected cost savings. We started to see those near the tail end of 2016 going into 2017, they are completely independent of revenue.

We're assuming no significant change of revenue mix beyond what we have shared at the Analyst Day, and also what you saw in results today where we do expect our ACG and DGG groups to grow faster than LSAG, but LSAG will also grow. We do expect our non-instrument product lines to grow faster.

In terms of the commentary, we saw no real change in fundamental demand coming through and actually in the quarter. The comments we made about revenue, I think, speak directly to how we saw the quarter develop. And, again, back to, how you leaded off the question, part of it is a reflection on 2015 guidance, and also the fact that we do want to be prudent out the gate and a little bit more conservative. It's still early in the year, and there are a couple things that we are trying to handicap in terms of what's going on with chemical energy, how will the emerging markets hold up in some of the economic concerns they have.

But I would not at all take this as a lack of confidence in the business going forward, or any kind of significant last quarter changes. In fact, we are really, really pleased with the way the year closed, the numbers we put up and how they closed off our first year. So, Didier, I am going to let you handle the last question of the bridge between the free cash flow, the $620 million to --

So in the past, I had talked about 2015 and the fact that we ended up at a higher free cash flow than what I had mentioned at the time. And the reason -- we're not comparing apples-to-apples, it's just because of the one-time expenses. So if you want, during the full out calls, and I will do that with each of you, we can go over the one-time items and the impact those have. That's probably the best to do.

Okay. Thank you, guys, for taking all the questions.

No problem, Doug, we appreciate the opportunity to answer them.

Dan Arias of Citigroup.

Good afternoon, thank you. Maybe just two quick ones for me on NMR, Mike, how removed are you at this point from that business and from the servicing of your customers there? And then, Didier, can you just touch on what you are assuming for operating profit improvement in 2016 for NMR?

Sure. Relative to NMR, as you know, we exited the NMR hardware business but have maintained the service relationship, and that continues to go very well in terms of our ability to service and support our customers. And it was really a major part of our thinking when we closed down the hardware business, we really wanted to preserve and mitigate the impact to customers, so we are in a position to handle their long-term service needs. And, Didier, I think you have got some specifics on expectations for next year?

Yes, the guidance that we have provided, we had about $50 million of cost reductions and expense reduction in FY15 and next year, we anticipate an additional $5 million, in line with what we had previously stated.

And I think you guided, Didier, some revenue flow-through as we walk off the last part of the backlog in 2016, so there will still be some --

There will be $12 million still revenue in 2016.

Okay, thanks very much.

You are welcome.

Paul Knight from Janney Montgomery.

Hi, Mike, only a couple of bricks to move now. (laughter)

Thanks, Paul.

Geographically, I know you've talked about China, where are you -- where is your thought on Europe and the United States in 2016?

Thanks, Paul, appreciate the opportunity to answer, a great, great question. So we see the US as a real area of strength, albeit, some of the commentary around what may happen in terms of the chemical energy space and how it has impacted the US business.

So we see the market there as being very robust, and it was a source of strength for the Company for the quarter and for the year. So we're looking forward to continued strength in the US. And I think the same call in Europe holds, as well. I think part of our European business that we report includes some of the Middle East and Eastern European countries would've been a little bit challenged for us, particularly in the chemical energy space. But overall, Western Europe and Germany in particular has been extremely strong for us, and we're seeing no indication that is changing for us in our European-based business.

And then lastly, when you look at the energy sector, I know there's a lot of pieces like gas chromatography, spectroscopy on the metals mining side, but weren't you already seeing that market pretty soft in the earlier quarters of this fiscal year, Mike? And, I guess, the short question is, it's been weak already, has it not?

Yes, that's correct, Paul, and you hit the right categories where it really affects our gas chromatography business where we have such a strong position in that segment. I think that was one of the mix issues that Patrick had alluded to earlier. And then in the metals and mining, that's really where we have seen the slowdown as it relates to our spectroscopy business. So you might look and say in 2016 that we could see some reported revenues versus easy compares, but we will wait until we call it then. But, again, we think it looks to us like the market may have bottomed and perhaps the worst is behind us.

Right, you've been through a few cycles yourself running that division. What does the market feel like? Do you sense the bottom in some of these categories?

Yes, we think so. Customers are starting to talk about the new technologies and replacement, particularly as it relates to data systems and associated systems. Some of the customers are still fairly conservative. BASF was out with a downgrade in terms of their outlook for 2016. But at the same point in time, the equipment is required to keep their facilities running at the highest levels of operational efficiency. So there is an active funnel. Now we have to see start closing some business.

Okay. Thank you.

Dan Leonard of Leerink.

Thank you, two quick ones. One, Didier, is there anything you would like to call out on the quarterly cadence in 2016 as we consider our models? Presumably, Q3 is going to be a very difficult comparison. And then, secondly, for Jacob, is there any effort or any plan to migrate a couple of these companion diagnostic approvals to the Omnis system? It looked like they were approved on your older Autostainer. Thank you.

On the first question, Dan, we will have the usual higher operating margin in the second half than in the first half based on volume and also based on the actions that we are taking throughout the year. Which will have more of an impact in terms of cost and expense reduction, already in the second half because of the carryover impact. So you should see a fairly steady ramp in operating margin throughout the year, pretty much in line with the usual seasonality and the pattern.

And, Didier, one additional thought here might be, looking at Q2/Q3 revenue year-over-year in that we had some logistical start-up issues in our Q2 where we had some [trapped] revenue.

Yes. But, basically, we are forecasting higher revenue, higher operating margin throughout the year.

Let me address the other question also, so you are actually right that we developed the PD-L1 for the Autostainer right now. And the reason is that this activity have been going for many years also. So we started out with the Autostainer back in the days where we also have the highest installed base. But you are absolutely right that we are in activity also moving it over to the Omnis, and we will clearly have our full portfolio on the Omnis going forward including companion diagnostics. So that will happen.

Got it. Thank you.

Thanks, Dan.

Thank you. I would now like to turn the conference over to Alicia Rodriguez for closing remarks.

Thank you, Sabrina. And on behalf of the Management team, I'd like to thank everybody for joining us on the call today. If you have any questions, please feel free to give us a call in IR, and I'd like to end by wishing everyone a good day. Thank you.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.