安捷倫 (A) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2016 Agilent Technologies Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's program is being recorded.

I would you now like to introduce your host for today's program, Alicia Rodriguez, Vice President Investor Relations. Please go ahead.

Thank you, Jonathan, and welcome everyone to Agilent's first-quarter conference call for FY16. 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 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 will find an investor presentation, along with revenue breakouts and currency impact, 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, and our guidance is based on exchange rates as of the last day of the reported quarter. And 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. 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 Mike.

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

I'm pleased to report that our team delivered a very strong start to our FY16. Both revenue and earnings are above the high end of our guidance.

I will now highlight three key results. First, revenue was up over 6% on a core basis. Second, we delivered an operating margin increase of 200 basis points from a year ago to 20.2%, adjusted for Keysight billings. Finally, adjusted EPS of $0.46 was up 12% over last year.

Our Q1 results are driven by continued strength in the pharma, clinical, and diagnostics markets, with the return to growth in academia and government. Market demand remains strong for liquid chromatography, CrossLab services and consumables, and Diagnostics and Genomics offerings. Geographically, all regions grew on a core basis with strong growth in China.

Let me highlight the Q1 results by our three business groups. The Life Sciences and Applied Markets group delivered core revenue growth of 2%. We see continued strong global pharma demand, growth returned in academia and government markets, and China government investments in environmental and food markets. All this offset continued weaknesses for new equipment purchases in the chemical and energy market space.

LSAG's operating margin for the quarter was 21.7%, up 210 basis points from a year ago. As a reminder, in November we closed the acquisition with Seahorse Bioscience. Integration activities are in full swing with the team excited to be part of Agilent.

LSAG continued to strengthen its portfolio in Q1. We released two new refractive index detectors, the 1260 and 1290 Infinity II RID. These detectors help expand the capabilities of modern UHPLC chromatography to make difficult measurements of certain chemical, biopharma, and food applications.

Agilent's innovation strength was recognized in the January edition of Analytical Scientist magazine. We were honored with an innovation award for our unique LC dual needle technology. This is a breakthrough in the way samples are injected into Agilent's LC products. The unique design enables fast injections cycles, scalable injection volumes, and ultra low carryover.

Next is the Agilent CrossLab Group. We continue to see consistently strong revenue results. Our core revenue growth was 10% in Q1. Strong pharma and chemical and energy market demand drove growth in our services and consumables offering.

Operating margin was 22.1% for the quarter. This is up 140 basis points from a year ago.

We continue to bring novel new chemistries to market. For example, we released AdvanceBio SEC family of products. These innovative new products are designed for accurate and precise size exclusion chromatography, targeted at biopharma applications. Early adopting customers are reporting significant economic and performance benefits over any current technologies offered by our competitors.

Finally, the Diagnostics and Genomics Group continued to demonstrate momentum. In Q1, DGG delivered 12% core revenue growth with strength across all of its businesses.

The pathology business continued the steady trajectory to market growth rates. We see strong growth for Dako Omnis reagents, and growing revenue PD-L1 diagnostics.

The companion diagnostics business also continued to demonstrate momentum. Double-digit growth in nucleic acids and genomics reflected strong demand from pharma and clinical markets, and the favorable compared.

DGG's operating margin for the quarter was 9.6%. That's up 910 basis points from a year ago. I want to remind you that last year this business broke even in Q1 of FY15.

Last year our Dako complementary diagnostic for Bristol-Myers Squibb's OPDIVO was approved by the FDA for non-squamous, non-small cell lung cancer. In January of this year the FDA approved expanded use of this PD-L1 diagnostic to include patients with melanoma. Positive PD-L1 status in melanoma has been correlated with the treatment effectiveness of Bristol-Meyers Squibb's drug treatment. Agilent was the first company to provide FDA-approved tests for lung cancer and melanoma for PD-L1 markers.

Now, I'll take a brief look at Agilent's revenues by end market performance on a core basis. We saw strength in all our Life Sciences and Diagnostics markets. Continued robust demand drove pharma revenue up 19%. Growth was fueled by technology refresh deals, new product uptake, and aftermarket demand for services and consumables.

Our clinical and diagnostics revenue was up 7% and we experienced a return to growth in academia and government, up 4%. This growth was significantly driven by the authorization of larger research budgets in the US. Applied end market performance was generally soft, except for environmental, which was up 9% driven by strength in China.

Food declined 1%. Our food market strength in China was offset by soft demand in developed countries. Chemical and energy declined 2% driven, by the well-publicized macroeconomic concerns.

Let me provide an update on our operating margin improvement initiatives. This quarter marks the fourth consecutive quarter of year-over-year operating margin improvement.

This is how we are driving the sustained performance. We are building a new Company portfolio. We have exited unattractive businesses and are acquiring new ones to enable our growth strategy. Our multi-year Agile Agilent program is simplifying our Company, making it more nimble, and lowering our costs.

Finally, while we are improving our execution capabilities, transforming our culture to work as one team across the entire Company, we call this One Agilent. As we enter the second year of the new Agilent, here is what you can expect as we move forward.

We are building a new business, one that delivers above market growth. We will continue to target operating margin expansion. Finally, we are driving a balanced capital allocation policy that includes increased levels of free cash flow being returned to shareholders.

Going forward, we will continue to make tough decisions to ensure our long-term competitiveness. For example, we have just frozen our US-defined benefits retirement plan. This change is effective the second half of FY16.

I have also spoke with many of you about our multiple ERP systems and oversized IT environment. We continue to streamline our IT systems and infrastructure, reduce cost, and increase effectiveness. While work remains, we are pleased with the start to the second year of the new Agilent and our progress in transforming the Company.

Let me share my view on the current market outlook. The principle of new Agilent is to be realistic and to closely monitor market conditions that could affect our business. Global macroeconomic concerns are pressuring some end markets in emerging economies. The good news is that we see solid market conditions in other end markets and geographies.

I remain confident in our ability to achieve our full year core growth and operating margin goals. I am also confident that we will make course corrections as market conditions dictate.

We are strengthening our portfolio, building on our prior year introductions. We have an exciting pipeline of compelling new offerings set to launch this year. In tandem with these new offerings, we are creating a new go-to-market capability. We have a focused, energized sales force, and we are overhauling our e-commerce environment to make it easier for customers to do business with us.

And most importantly, across the Company we have the organizational capability to execute and deliver. The Agilent team is aligned and highly energized, driven to win in the marketplace.

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 updated guidance. Didier?

Thank you Mike, and hello everyone.

To summarize Q1 results, they are above the high end of our revenue and EPS guidance, even as currency impacted revenue by $7 million and OP by $2 million. The EPS beat was a result of the higher revenues, as well as favorable mix.

Our adjusted operating margin of 20.2% and operating cash flow of $106 million was strong. We bought back $200 million, or 4.9 million shares in Q1.

I'll turn now to the guidance for FY16. We are confirming the core revenue growth guidance of 4.0% to 4.5% we provided in November. However, the strengthening of the US dollar since our November guidance is expected to have a negative impact of about $50 million on reported revenues, $13 million on operating profit, and $0.033 cents on EPS. As a result, we now expect FY16 revenues of $4.1 billion to $4.12 billion, and EPS of $1.81 to $1.87.

To note, in the last two weeks we've seen the US dollar weaken. If the weakening continues, we will reflect the positive impact in our May guidance. Turning to our share buyback program, we remain committed to our plan of repurchasing another $280 million of shares before our fiscal year-end.

Finally, moving to the guidance for our second quarter, we're expecting Q2 revenues of $965 million to $985 million, reflecting typical second quarter seasonality versus Q1. The midpoint corresponds to a core revenue growth of 4.0%.

The sequential reduction in revenues will translate into a sequential reduction in EPS. We expect Q2 EPS to range between $0.37 to $0.39.

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

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

Certainly.

(Operator Instructions)

Our first question comes from the line of Doug Schenkel from Cowen and Company. Your question, please.

Hi, this is Ryan Blicker filling in for Doug. Thanks for taking my question.

Starting with operating margin guidance, it seems as though you reduced full year guidance by about 10 basis points. But it seems as though most of that was FX. Can you confirm that that was all due to FX or are there other changes we should be thinking about?

No, it was entirely due to FX, absolutely. As I had mentioned, the FX impact was $13 million and that is precisely the amount of the reduction in operating profit reflected in our guidance, and we have maintained the guidance at 20.2% which was the average of 20% to 25% that we had guided to in November. No change.

Okay. Thank you. And looking at the pharma end market, obviously another very strong performance in the quarter. Can you give us more details on what drove this strength and were there any one-time dynamics like a budget flush or pull-forward of revenue? And lastly, do you still expect growth in this end market to approximate high single digits for the full year? Thank you.

This is Mike, let me make a few comments on the pharma strength we saw in the first quarter. Clearly, no one-time events and we saw great pacing throughout the quarter.

This would highlight a few points here. One, we're seeing strong growth in liquid chromatography, both in terms of the uptake in our new products but also the technology refresh that is underway within the segment. Also, customers responding quite positively to our biopharma solutions. Then across the board, between biopharma and pharma we're seeing strong demand for enterprise-wide services and consumables.

19% growth for the first quarter. We don't expect that level of double-digit growth to continue all through the year, but we're quite confident in our projections of high single digit. We're calling for 8% overall growth for the year in pharma. So we see no signs that this market won't remain robust for us throughout the rest of this year.

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

Hey, Paul.

Hey, Mike. How are you?

I'm doing just fine.

Regarding the guidance of EPS, I know when you guided last time the euro had already fallen relative to the dollar, so are you measuring the euro on today's exchange rate, last week's exchange rate? Could you flesh out a little bit more?

Great question, Paul. It's the same question I asked Didier. I'm going to pass it back to Didier.

Hi, Paul. So the guidance is always based on the exchange rate on the last day of the quarter we report. So the new guidance is based on the exchange rate as of October -- as of January 30 of 2016.

And it was between November -- October 30, which was the November guidance, and then January 30 which is the present guidance, the dollar strengthened but we are seeing it weakening since November 30 a little bit, vis-a-vis the euro and certainly vis-a-vis the yen. If that continues, it will be reflected in our May guidance. Again, there was no change at all to our November guidance, except for those that resulted directly from the change in exchange rates between October 30 and January 30.

Paul, if I could just emphasize that again. The fundamental assumptions we made that underlined our prior quarter guidance remain intact with the exception being FX.

And then lastly, Mike, what stands out on technology is the PD-L1 approval and also the large molecule technology in CrossLab. Do you sit there with those two products on your menu thinking there's a bias toward more organic or where are you at with those two that you mentioned?

Just to make sure I understand the question, relative to -- thanks for the comments and observation. Just to make sure I understand the question, this would be relative to our expectation of a continued organic growth with those two new (multiple speakers)

Yes, are they enough to move the needle higher than what you would have thought 90 days ago on last guide?

Well, let me make a comment on the CrossLab service and consumables and then I'll pass it over to Jacob on the PD-L1. When we put together our guidance for the year, we were expecting strong growth in our CrossLab services and consumables business.

So that's part of the reasons why we had a lot of confidence coming into this year and still have the confidence in this year about making our organic core revenue growth targets, because as you've seen, even in the chemical energy space which is down in terms of new instrument purchases, they continue to buy and we see strong growth of services and consumables. So what I leave you is we expect continued strength in that space, but we were assuming that to be the case when we guided the Company earlier this year and Jacob, why don't you share your thoughts on the PD-L1?

Thanks, Paul. And you're right that we got the indication approval also for the melanoma for the OPDIVO drug. That's a great next step in the opportunities with PD-L1. I would not say it really changes the needle on an [evident] level, but it definitely is a part of our growth story in DGG.

But I will remind also that this drug or this companion diagnostic has only been out now for a few months, and we're still in the early days of seeing the uptake of it. So I see good progress but not something that really moves the needle here.

Thank you.

Thank you. Our next question comes from the line of Dan Arias from Citigroup. Your question, please.

Thanks for the questions. Mike, last quarter you mentioned that industrial weakness you were seeing kind of spilled over into the environmental business. I'm just wondering whether that's reversed a bit this quarter, so I guess is it fair to say that maybe growth in environmental this year could be a couple points higher than the cyclical segments? I guess how would you compare expectations for environmental versus industrial for this year?

Yes, Dan, thanks for the careful observation. And it was actually the environmental business was a pleasant surprise in the first quarter. We knew that China was going to be strong and we've been talking about China and our view of the investments that the Chinese government's making in places such as the environmental market and food safety.

But I will say that we were happy to see the growth in other segments because, yes, the chemical energy space has been under pressure but what we're still seeing is that fracking is still going on, so the production -- while prices of oil are down, the production demand is stable, and in fact if you look at the gasoline production in the US, for example, it's perhaps going up.

So we're seeing a continued need to do environmental testing so that's been a nice reaffirmation if you will of our outlook for the year, which called for low single digit growth in environmental. We thought that China would carry the whole load for us but I think we're getting a little help from the US as well.

Okay. And then maybe just staying in the BRIC region, any change in the way that you're thinking about Brazil and Russia and you how that might end up this year?

Unfortunately, no. I think we're still looking for very challenged conditions in those countries. I know there's been some recent news today about Russia and perhaps working with some of the other oil producing countries to change some aspects of production, maybe they'll have some dynamics in terms of their economy, but right now we're assuming continuation of the current challenged conditions for Brazil and Russia.

Got it. Okay. Thanks, Mike.

Quite welcome.

Thank you. Our next question comes from the line of Isaac Ro from Goldman Sachs. Your question, please.

Good afternoon. Thank you.

Good afternoon.

Mike, first question was on gross margin. It was a pretty big year on year improvement there and I was wondering if you could maybe break down the key drivers of gross margin performance, the extent to which there might have been one-time benefits, and the extent to which there are some items that are going to continue as the year progresses.

Why don't I make a few high level comments here, then Didier can jump in and augment my comments. But I think, one, there were some one-time improvements and I think we highlighted those specifically as related to DGG where we had some revenue that was really trapped last year in the first quarter due to production issues. But the lion's share of the improvement is resulting from our continued sustained efforts that I highlighted in my call, both the portfolio efforts in terms of the businesses we're no longer in, the businesses we acquired as to changing our gross margin profile.

We're taking real cost out of our system through the Agile Agilent program. So there were some one-time events as it relates to the revenue for DGG but the bulk of our margin improvement is from the underlying core efforts we've had over the last several quarters to fundamentally change the operating model of the Company. Didier, anything else that you would add to that?

Just two points that also contributed. Number one, you will recall that last year we were spending heavily on remediation points to address the FDA warning letters. So that is now we're spending significant amounts to maintain our strong position now, but certainly not in the same magnitude of what we have spent for two years in a row.

And then the second point is there was a favorable mix. We talked about how strong the pharma business is and pharma does generate higher gross margin than the rest of the businesses. So favorable mix and the pharma being just one of them, but a significant one, and then the FDA, the reduction in FDA spend also in addition to all the points that Mike has made.

Okay. That's helpful. Thank you. And then just a follow-up on CrossLab. You mentioned the driver there, looking like it was just healthy demand in the end market. But I don't think of that business as necessarily having a sustainable growth rate in that double-digit range.

So I'm wondering if there was an element of market share that was helpful. It's just not a market where we have a ton of quarter on quarter visibility, so I was wondering if you could put some color around the extent to which market share was helpful and how you would characterize where it's coming from. Thank you.

Great question. I'll make a few comments. And then Mark, why don't you jump in with your thoughts here.

As we looked at the overall growth rate for CrossLab, you should assume that we're right in the range where we talked about at the AID. And we think there's both market growth, but as you pointed out market share gain opportunities for us, where we really have changed our view of what the addressable market is for our business and it's no longer the Agilent install base but it's the entire lab. And Mark, why don't you talk about some of the things we're doing in terms of capturing market share?

Thanks, Mike. And I think you've hit on the primary piece which is we continue to see the primary drivers in pharma and also China's been very strong for us. When you pull it all back, though, when capital spending is constrained, we continue to see customers improve the productivity of their assets through services and the chemistries we talked about earlier. But I think what's more robust than it was a year ago, even, is really the strength of our multi-vendor and enterprise portfolio and that does allow you to take share if you will from the broader market.

Got it. I appreciate all the color, guys. Thank you.

Quite welcome.

Thank you. Our next question comes from the line of Ross Muken from Evercore ISI.

Hey, Ross.

Good afternoon, guys.

Good afternoon.

So I'm just trying to double check on the guidance math here because I think a few of us are a little bit confused. So we beat the quarter, right, by around, I don't know, call it $0.03. We lost $0.033 on FX, roughly, and the range came down [4].

So I'm trying to get a sense for -- again, it seems like FX was the key delta. Just the simple math would have suggested to me a little less downward pressure on the full year range, and again, I realize there's probably a few other moving parts. I'm just trying to make sure I understand how we're doing versus the plan for the year.

Sure. Didier would be happy to clarify.

As I mentioned earlier, we have reduced our top line revenue from a midpoint from $4.16 billion to $4.11 billion which is a $50 million reduction. We've reduced our operating profit from $830 million to $817 million. That's $13 million and that's entirely due to the impact of the strengthening of the dollar and related to the $50 million.

And then I mentioned $0.033, but with rounding we are going from a midpoint of $1.84 to the new midpoint of -- sorry, we're going from the midpoint of $1.88 to the midpoint of $1.84 and that's $0.04 and that's the $0.033 which is rounded because of the -- going from one to the other, you can understand that. So basically what we felt is even though we are starting the year very strongly, we felt that with the overall macroeconomic condition it would not be wise at this point in time to change the guidance we had provided, core revenue guidance of 4% to 4.5%.

We have the same confidence as we had in the month of November when we provided that guidance that we're in good shape to heed it and perhaps beat it. But certainly didn't want to change it.

I guess what I'm trying to get at is sort of the comments last quarter suggested sort of conservatism, and you obviously can't control what happens with the dollar, so that's understandable. I'm just trying to get a sense for how much conservatism there is now in the forecast and whether or not we have risk to that core growth rate given, again, that the range came down but you reiterated the top line. I'm just making sure that we're sort of not over-extrapolating here.

Sure, Ross. This is Mike. I really appreciate the opportunity to comment on this. If you will, if I add the conservatism meter on our guidance, it's at the same level as it was last quarter. So the only real fundamental change in terms of outlook is the view on FX. That's it.

And we saw no reason to change our core revenue growth to offset a part of the FX, because FX can go up and down and it's too volatile nowadays to immediately -- unless we see some long-term structural changes as we have last year and we reacted accordingly, we were not going to react by what we believe are temporary changes in FX by actions on our structural spend.

Okay. So sorry, I'm going to monopolize for a minute just because I'm trying to make sure as my inbox lights up, I'm getting everyone the answers they need. So to be clear, we have the FX hit. I'd love to also understand what were the key currencies, because as most of us can see, the dollar's actually -- again, we'll see if it sustains, weakened a bit.

So it seems like it's outside the euro and the yen that might have caused some of the headwinds. So I'd love to hear just a little bit of color on maybe it's the yuan or some of the other emerging market currencies, and just to be clear also on the second point, so we didn't really bake in the beat from this quarter. Is that sort of where the conservatism comes in? And then I'm done, I promise. I'll cede the floor.

In terms of the currencies, we have a detailed model that takes into account, obviously, all the currencies. The dollar versus the euro or the dollar versus the yen had major impact, also I think dollar versus the British pound.

And again, today's guidance is based on the October -- January 30 exchange rate, so the euro at $1.84 and the yen -- and vis-a-vis the yen, the US dollar is JPY121.4. And we are seeing that at today's rate, if we had provided the guidance based on just if we had -- we were able to instantly reflect the currencies as of the day of the guidance, would have a very different guidance.

And I think your second statement is probably a fair one.

Okay. Thank you.

Thank you. Our next question comes from the line of Jeff Elliott from Robert W. Baird. Your question, please.

Yes, thanks for the question. Question for Mike on chemical and energy. You were down 2% this quarter. The last couple of quarters you were down 9% or 10%.

Can you give us a sense for what's happening on the E&P side. You talked about stability on the refining side but what are you seeing on the E&P side? It seems like that's kind of what allowed the improvement relative to the last couple of quarters.

It's probably worth doing a little bridge on the last few quarters, because in fact we've seen relative flat performance over the last several quarters, and while instruments were down the percentage you were talking about, high single digits, we've seen a continued ability to offset through services and consumables. What I would say is that the chemical energy market is sort of playing out the way we had expected for the year. So I wish we had a different story here but the price -- the oil price is low as you know, but the product demand still remains pretty strong for our customers' products.

The refineries are running. The chemical plants are running. We're trying to sell to them new equipment based on a productivity message, but at the same point in time recognize that if they use the equipment longer, it's a good opportunity for us on the services and consumables side.

One thing I would ask you to reflect on is that Q1 2015, as you dig into some of the numbers, Q1 2015 really was our best quarter for the whole year. I think we grew 3% in the first quarter of last year on a quarter basis. We ended up growing I think 1% for the whole year. So that shows you we're in decline through the year.

So I wouldn't overinterpret the numbers. We think it's right in kind of the range where we thought. And Patrick, I don't know if you had any other comments you'd add to that.

Well, no, not really. I think it's, as you said, it's playing out as expected. There's continued pressure on the exploration side and production side.

But for the refinery side demand really drives also replacement business for us. We try to incentivize our customers and give them opportunities to upgrade, to increase their productivity and efficiency, and on the chemical side I would say that the lower feedstock prices have not yet fully materialized. So we stay with the forecast for the year, for the whole segment to stay flat.

And Jeff, this is Mike. I think we shared these numbers with you in the past, but the way we looked at this, we always look at our business and say about 15% or so is in E&P as you described, exploration and production, which would be about 3% to 4% of our total revenues, about 35% of that segment is in refining and the other 50% is in chemicals. So it sort of remains stable at a subdued level.

Great. Thank you.

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

Good afternoon and thanks for taking the questions here.

Good afternoon. Our pleasure.

I'd like to follow up just a bit on the pharmaceutical space. It was really helpful to hear just how confident you guys are in the outlook for the year, growing 8% in pharma.

I wonder if you could maybe add a little bit to the conversation, though, and talk about what you're hearing, Mike or Patrick, in your conversations with pharma customers as they talk about their budgets for this year. I apologize for coming back to the topic but there is a lot of interest out there in the sustainability and growth in the space, so any color you could offer on how your customers are thinking would just be really helpful.

Absolutely. So Patrick, why don't you take that question and I'll add one closing comment.

Sure, thanks. So what we're hearing from our customers is that actually they are holding their budgets. We don't see any significant reduction there. And this comes, by the way, across the board from small and medium size and large enterprises.

So it's really, for us, it's a good mixture between different size companies and also between the different markets talking about small molecules versus biopharmaceuticals. The growth really comes from both sides. And this is why we're so confident that we will maintain to see this high single digit growth for pharma.

And the other thing that we've done, we're getting a broad-based demand across all segments of the market, then we also continue to do our own math in terms of what's out there in terms of the install base of our products. So we have a pretty good idea, at least on the technology refresh side, how much more demand we can expect in this segment.

That's extremely helpful. One corollary, one follow-up there. I wonder if you could give us a sense for to what extent the success that you're having in pharma and the success that you're having in CrossLab are interrelated.

Are those two perhaps a little bit more overlapping than CrossLab is with some of the other customer verticals, and to what extent is one dependent upon the other? Thanks so much.

Great question. Happy to elaborate. They are highly connected. So when we talk about pharma market demand, it's both driving new equipment purchases, which were the focus on Patrick's comments, but also there's a demand for enterprise-wide services and consumables.

On the CrossLab side, not only are they investing in ongoing chemistries and services to maintain their operations and support their application needs, what we're also seeing is a change of their model. So what they're doing is they are taking activities that historically have been done inside the Company and are creating, if you will, a new set of services for vendors in our space to handle things such as asset management, and that's creating -- there's sort of a new set of services that are being created right now in pharma.

We haven't seen that new set of services' demand develop yet in the chemical energy side, but we're hopeful that it will down the road. But there's a couple dynamics going on in the pharma space which are driving both the new instrument purchases and the consumables and services from CrossLab.

That's super helpful. Thanks everyone.

Thank you. Our next question comes from the line of Tim Evans from Wells Fargo. Your question, please.

Thank you. Wondered if you could give us an update on the market for tuck-in acquisitions, what you're thinking about these days in terms of where you might like to plug some holes and also are you seeing more opportunities now that some valuations have come in? Thanks.

Thanks, Tim. Appreciate the opportunity to provide a perspective on here. Although we remain focused on our organic growth opportunities, we've got a lot of very exciting plans and new products coming out and working on the go-to-market capabilities I mentioned in my call comments. We're really continuing to look for acquisitions that augment our current portfolio and add to our Company capabilities.

So I think you saw us do the Seahorse deal, where we added capabilities in life science research, Cartagenia in the area of next-gen sequencing to build out our workflow there. We'd still like to find ways to build out our workflow in next-gen sequencing. Our stated strategies of really adding capabilities, expanding our portfolio, building out our workflow solutions with a particular emphasis on life sciences research, next-gen sequencing workflows in the overall consumables and services place, they're our priorities.

That being said, most people still have the memories of the 52 week highs. We'll see how this plays outs. What I will tell you is we will continue to be very disciplined in terms of how we think about M&A and does it provide an attractive return to our shareholders and can we do something to make the business better. If we can't make the business better, it's not something we would be interested in.

Thank you.

Thank you. Our next question comes from the line of Brendan Couillard from Jefferies. Your question, please.

Good afternoon. Mike, you pointed to strength in China in the period. Just curious if you could elaborate on the actual growth rate in the first quarter and if there's been any deviation from sort of the mid to high single digit target for the year.

Thanks, appreciate the opportunity to talk about China, one of my favorite topics. We saw very good demand in China, high single digit growth in our lab business, and as I mentioned to you in the past, the markets here are really being driven by strong investments in government policy-driven initiatives around quality of life concerns, whether the environment, drug and food safety, so all the markets with the exception of chemical and energy really saw quite strong growth.

And we're underpenetrated in DGG business compared to the rest of the Company. We've talked about that in the past, and we're underpenetrated in a growing market for cancer diagnostics, for example.

And I recently saw some statistics that I thought were quite amazing. There was a report by the Cancer Hospital of the Chinese Academy of Medical Science that said that every minute of the hour there are six people in the country were diagnosed with cancer, and five of those six would eventually die of the disease. So unfortunately there's going to be growing demand for cancer diagnostics as well.

I'm going to wrap this all up by saying we remain quite comfortable with the mid to high single digit growth expectation we laid out for China. It was strong for us in the first quarter and we expect that to continue through the year.

One more for Didier. Could you split up the contribution from Seahorse relative to the headwind from NMR in the first quarter in terms of just dollars?

No, we don't provide guidance or information regarding the acquisitions. We have stated and we are exactly in line that we expect Seahorse revenue to grow double digits in 2016 versus 2015 and we expect Seahorse operating margin to be also in the double digits. So no change to our expectations.

And Patrick, maybe you can just add a few color comments on how's it going so far.

Integration of Seahorse is going very well. It's giving us extended reach also into the research market and this was the whole play, plus we of course used the opportunity to use our strength in pharma to sell these products into the pharma space in areas like disease discovery as well.

And this will drive the growth in FY16. As Didier said, we expect double-digit growth. We have the sales force trained and we are looking forward to a very strong Q2, Q3, Q4 for this product line.

Super. Thank you.

Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Your question, please.

Hey, how are you? Maybe just first on capital deployment, you did $200 million in buybacks in the quarter, you guided for $480 million for the year. Sounds like you'll front end load it. How do we think about a reauthorization once you get through this tranche given your stock's probably under some pressure?

We basically decided to buy back in Q1 what we had not been able to do in Q4 of the preceding year. And then we have filed a 10b5-1 and with certain formula. But for your model you should assume that we're buying about one third of the remaining $280 million per quarter.

And then just to clarify on the margins because I've had a few questions. A $13 million hit is the FX hit, but people are having a hard time understanding why you're not seeing faster-than-expected realization of the COGS and SG&A cuts that we saw some of that this quarter. Why don't that carry through for the next three quarters?

We're not saying it's not going to carry through. We're saying we saw no reason in the present environment to change the guidance on an operating margin basis, 20.2%, that we had provided, 20% to 20.5% that we had provided previously, and again with the same level of conservatism as we had in November. So that's basically -- that was the premise for us maintaining both the core revenue growth and the operating margin we had provided in November.

And Didier, I'd just add that in my call comments I tried to highlight a few things of a longer term nature to show you that we're not out of gas in this tank in terms of our ability to continue to move our operating margin. We have other larger-hitting programs that are coming in late 2016 and will carry on into 2017 as well.

So this was not a one-time quarter where we just got a favorable mix, whatever. There's real fundamental improvements underway in the operating margin capabilities of the Company.

And then I guess speaking of running out of gas, you talked about refiners holding up. There's been news that at least two of the country's largest refiners are cutting output of gasoline. What gives you conviction that your business there holds up?

I'm not sure exactly what you're referring to, but relative to our view is that gasoline will continue to be needed to run the economy. And there's going to be demand there and what we've tried to share, as long as production is running and there's demand, the refineries will meet that demand. So we've seen no significant changes in the underlying demand for gas. In fact, Patrick, I think you were showing me some statistics the other day about what's going on in the area refineries in the US.

What we see, yes, as Mike said, is the continued demand for not only in the US but also in the emerging economies like China, so the refineries are basically running at capacity right now. There will be no new builds but we see that they replaced existing equipment and they also go into service contracts with us, they look for opportunities to drive more efficiencies which gives us an opportunity to upgrade the installed base with automation features and other things to make sure that the customers can save money with the equipment as well. So the oil price is clearly driven by the fact that there's overcapacity on the production side, but the refinery volume has not gone down significantly over the last quarters.

Okay. Then just lastly, can you talk about linearity in the quarter, anything notable in January, you guys have an extra month versus a lot of your comps, so just wondering if there's anything worth calling out in January trends versus November and December.

I'd just point to two things, one is in terms of our normal seasonality through the quarter, Q1 2016 was like prior quarters. We always see a nice strong December as we close off year-end with our customers, and followed our typical seasonality patterns through November, December, and January.

I think probably the only thing of note would be in the DGG side. We had I think one less day, working day, I think, this year so that does affect the Genomics business in terms of how much revenue we could get in that quarter but really was sort of business as usual if you will through the first quarter.

All right. Thanks.

Thank you. Our next question comes from the line of Jack Meehan from Barclays. Your question, please.

Hi. Thanks, good afternoon. I wanted to follow up on Tycho's last question, just around the academic end market. I'm curious, you mentioned in the presentation around some of the modestly larger research budgets being released in the US, curious on your view on the NIH and really timing-related there because of the timing of the Congressional approvals at year end.

I can take this question. We have seen moderate growth again in academia and government which was a positive surprise.

And as you all have read there are more budgets available now in the US. These budgets are slowly released, drove some of the growth for us in Q1 and looking at the funnel moving forward we actually see a good funnel there as well. So we stay with the forecast of low single digit growth on academia and government, at the moment mainly driven by the US which is where we see the strongest demand.

Got it. And are your expectations for this level of growth to stay at the same rate through the end of the fiscal year, or are you assuming the budgets get released a little bit faster from here?

If the budget would be released faster I think it would probably be upside for us. We're now -- our current view is low single digits for academia and government for the year.

Got it. Then just one other question on the margins and DGG. Definitely appreciate the year-over-year improvement. I was wondering what your thoughts were bridging through the end of the year, just given you how the relative margins compare to the end of 2015. Thanks.

I know Jacob's given a lot of thought to that potential question. So I'll pass it over to you, Jacob, to provide some color there.

Thanks for that. And first of all I want to say that very pleased to see the improvement versus the Q1 last year. But you're also right that versus Q4 that we saw a bit of a decrease and that was actually very much expected.

We sit in the DGG business for the pretty fixed cost base so when you have a Q1 with overall days then in Q4 you will see that our margins is also impacted accordingly. So you always see us coming out with a strong Q4 and a weaker Q1 and gross margin and also our operating margin. So it's kind of by the book and really as expected.

I would just add that there's no change in plan and Jacob is still absolutely committed to reaching 20% operating margin in 2017.

Absolutely.

Thank you. Our next question comes from the line of Derik de Bruin from Bank of America. Your question, please.

Hi, good afternoon.

Good afternoon, Derik.

So I'm just curious. You're guiding to a 22% operating margin for 2017 so that's implying, assuming the 20.2% midpoint, 130 to 180 basis points of margin expansion next year. I'm just curious, if you can't -- if you couldn't find 10 additional basis points of margin expansion in 2016 to sort of offset the impact, what gives you confidence you're going to be able to get 130, 180 basis points next year?

I'd just reiterate -- great question. By the way, one of the things as you heard me say earlier in my comments, we continue to make sure we're realistic and we think about our business not on some hope and a prayer but we actually have solid plans behind our long-term operating goals. And I think we have a lot of confidence for two reasons.

One is we have a plan that can get us there with not all the top line. It's probably in the range of 4% ago. We can get to the margin goals.

We've laid out a plan that's got 60% of it's coming from the cost side. And we have multi-year programs that are going to take significant cost out of our structure.

So I highlighted a few of them in my call. Changes in terms of our benefit structure, changes in terms of our IT costs, our IT systems. These are major Company-wide initiatives that right now were underway.

You won't start to see them going through the P&L until like late 2016, going into 2017. So these are the kind of things that give us confidence to say okay, there's a path that gets us to where we want to get to in 2017.

Okay. Great. It was the late 2016, early 2017, that I think that was the key that I was sort of looking for in that. Second question is given some of the turmoil going on in Europe, have you seen any sort of changes in the academic and government spending, sort of like the government sort of grapple with the refugee crisis and some of the other things going on. Is there any noticeable change to spending patterns in Europe?

Patrick, you're shaking your head here.

I'm shaking my head because we have not seen any significant change over the last several quarters.

Thank you.

You're quite welcome, Derik.

Thank you. Our next question comes from the line of Dan Leonard from Leerink Partners. Your question, please.

Hey, guys, all my questions have been asked. Thank you.

Thanks, Dan. That's was fast. Thank you.

Thank you. Our next question comes from the line of Dane Leone from BTIG. Your question, please.

Hi, thank you for taking the questions. So on the gross margin line, can you just give a little bit more color in terms of the product mix?

As I look at the different groups, really the margin leverage seemed to come through the Life Sci and Applied Markets group. You guys almost reported a 59% gross margin there. Comment on the mix, please, and why the margin for that group specifically is expected to moderate when I guess historically it's been pretty steady quarter to quarter throughout the year.

I think there's two things I would point to and then Didier, feel free to jump in as well. First of all, remember the change we're making to our portfolio.

So we've exited the NMR hardware business and we're starting to see some of those margin improvements showing up in the P&L where we had revenue in the NMR business, much higher revenues in FY15, and then our pharma business is pulling a lot of liquid chromatography which is one of our highest gross margin products. I think it's really perhaps those two things.

You said it all, absolutely. Our liquid -- I had mentioned earlier that the favorable mix came in part from the pharma mix and within pharma, clearly liquid chromatography has higher than average operating margin and gross margin.

So to clarify, you felt that there was either a catch-up ordering or stocking in the quarter that, on those products specifically, that's not expected to continue for the rest of the year?

Well, you could almost think about the pharma, we had 19% pharmaceutical growth in the first quarter. What we're saying is we can't expect 19% to happen each of the next three quarters.

What we do expect is continued strong demand and right now we're calling 8% for the entire year. So that's what you've seen in terms of the reflective in our mix count as it relates to gross margin.

Okay. And then on the FX rate, I'm still -- so if you just kind of use the GXY proxy, right, the last quarter was actually pretty elevated, but since then the trend has actually come back into closer to where you guided the year. Are you expecting -- is there some nuance within this on how certain currencies have moved or are you just kind of assuming worse case that the dollar kind of goes (multiple speakers)

It's just pure math. So we're not making any projections at all about future levels of FX. What Didier has done is he takes the currency spot rates on the last day of the reported quarter and that's how we guide the Company, we say okay, that's what we know and we'll assume that rate stays the same for the rest of the year and then it's just pure math from there.

(Multiple speakers) same methodology forever.

Okay, so it's an extrapolation off of January 31, not what's happening in February. Okay, got it.

(Multiple speakers) that's why I made a comment during my script that would we had used, for example, today's exchange rates, the guidance would have been higher because the dollar between January 31 and today has weakened.

Okay. Perfect. Thank you very much.

Quite welcome.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Alicia Rodriguez for any further remarks.

All right. Thank you, everybody, for joining us on the call and if you have any questions, please give us a call in IR. We'd like to wish you a good day and I'm sure we'll be talking later. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.