Agilent Technologies, Inc. (A) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Agilent Technologies, Fourth Quarter 2015 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, 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 Fiscal Year 2015. With me are Mike McMullen, Agilent’s President and CEO, and Didier Hirsch, Agilent 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 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. 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. Our new Agilent team had a strong year. Let me start by highlighting our fourth quarter performance, focusing on three key numbers. First, revenue is up 6.2% on a core basis. Second, adjusted operating margin is up 150 basis points to 21.9%. Finally, EPS of $0.50 is above the high end of our guidance. Now I would 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 is 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’ve 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 are 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 services and consumables, and diagnostics and genomics products. Let me highlight the Q4 results by business group. The Life Sciences and Applied Markets Group delivered core revenue growth of 2%. Strong performance in Pharma was offset by softness in the industrial and academia & government markets. LSAG’s operating margin for the quarter was 20%, down 20 basis points from a 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’s unique technology is the perfect complement to Agilent’s market-leading separations and mass spec solutions, in particular for metabolomics and disease research in pharma. The combination of these two platforms gives 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 in 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 next-gen sequencing; and we also launched several targeted solutions, such as our GC QTOF Pesticide Analysis Solution, and our LC QTOF 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 benefitting from ACG’s new brand promise to deliver insights that lead to outcomes. In Q4, Agilent University introduced an enhanced 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 and 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, while 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 diagnostics products from DGG received FDA approval. The first product was created in partnership with Merck & Co. 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 complementary diagnostic developed in collaboration with Bristol-Myers Squibb. This new test can identify PD-L1 expression levels on the surface of non-small-cell 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 sciences and diagnostics markets continue to see ongoing strength in the pharma, diagnostics and clinical markets, fueled by technology refresh deals, new product uptick and healthy demand across the spectrum. Spending in Academia & Government was down versus an extremely strong Q4,’14. Applied end-market performance was led by continued growth in food and environmental and chemical & energy were flat on a core basis. As we noted in our Q3 call, customers in the 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 U.S. and Asia, excluding Japan. Now let me provide some additional insight on our operating margin improvement initiatives. Our multi-year Agile Agilent program launched in Q2 is re-engineering the company to be more nimble and efficient. In fiscal 2015 our actions delivered about $40 million in gross savings. In addition, the NMR closed 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 achieving 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 in long-term revenue growth. Our results over 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 the 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 May Analyst and Investor Day meeting. Before turning 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 are 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 spinoff, 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 points improvement in adjusted operating margin by fiscal year ‘17. 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 fiscal year 2016. Our fiscal year ‘16 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 exchange rates and takes into account the Cartagenia and Seahorse acquisitions, as well as the XRD divestiture and NMR exit. We expect currency will have a 1.7% negative impact on revenues. Regarding XRD and NMR, fiscal year ‘15 revenues were $58 million and fiscal year ‘16 revenues are expected to be $12 million. We project fiscal year ‘16 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 4.0% 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 fiscal year ‘16, please consider the following nine points; first, annual salary 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 is the third point, depreciation is projected to be $100 million for the fiscal year. 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. Six, 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 billed to Keysight. Eight, for purpose of our EPS guidance, we have assumed a diluted share count of 328 million shares, 7 million less than the average diluted share count in fiscal year ’15. And ninth and last, we expect operating cash flow of $650 million and capital expenditures of $140 million, $42 million over fiscal year ‘15 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 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 will turn it over to Alicia for the Q&A.

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

Thank you [Operator Instructions]. And our first question comes from the line of Isaac Ro with Goldman Sachs. Your line is now open.

Good afternoon, thanks very much. I think you guys mentioned in the script a couple of times the fact that you are taking a more conservative approach to guidance this year. So Mike, wondering if 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 the thinking behind the guidance. As you know I mentioned earlier, this is the first year the New Agilent Technologies. It is 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, if you will a more prudent and conservative outlook to our guidance and a couple of 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 come a lot more challenging since then. We’ve seen IMF grow on the GDP and some of our larger chemical customers who have taken down their outlook for ’16 and I thought just bringing down the guidance of bid in terms of the top-line mid-point or half point or so was a prudent way to plan for the company. We’ll take a look at the business as it develops over the quarter or two, but really wanted to take a more prudent and conservative outlook into 2016. I will also remind you that we are not altering our commitments to achieving our 22% operating margin by 2017 and then the number of the 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 our executives are compensated within the company. So hopefully the additional color will help in terms of understating our thinking a little bit more deeply, Isaac.

Okay, thank you. And then maybe just a follow-up on a couple of details. One would be, can you disclose a growth rate in China this quarter and secondly, in DDG it looks like gross margin was down a little bit sequentially on a higher based 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 if you can chime in on the DDG specific questions. So, the results came 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 this as a source of growth for the company. I think you may really, we I think are 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, it will really be depended on what happens in the chemical and energy space. That really is the wildcard I think for our overall growth rate in China next year. But the business developed as forecasted and we are quite pleased with how we ended the year. And with that, I’ll pass it over to Jacob on the DGG question.

Yes, hi Isaac. Yes, you’re right that our gross margin came down a little bit and it’s really due to the mix that we in Q3 had higher number of ratings and we had a little bit higher number of instruments in Q4. But that’s just the variability between the quarters and nothing you can say fundamentally has changed.

Thanks so much guys. I appreciate it.

Thank you.

Thank you. And our next question comes from the line of Ross Muken of Evercore. Your line is now open.

Good afternoon guys. So I guess, as you think about sort of the key delta you started – stick on the guidance topic, but the key dealt sort of 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? Weather 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 multiyear cost, the next year operating margin targets are a bit lower. And then if you have any sense of where the delta is versus the street, because in our math based on the consensus it looks like there was a bit higher of other income assumption. So we are just trying to figure out if that was one of the deltas again versus maybe what the market was looking for?

Yes, thanks Ross. I appreciate the question. So relative to how your thinking has evolved since the May, I think I would point to two things; one is the chemical and energy space. This is the fourth quarter in a row for us in terms of flat growth and now it’s still a robudence [ph] in our environmental business because we are really not getting the same volume and that was associated with the fracking in the U.S. That’s the one where we’ve kind of pushed out the timing in terms of the return of growth. The business is holding steady, but is not yet to a growth trajectory. So I think point one would be kind of a longer timeline in terms of the return to growth in the chemical and energy sector and then the other one is the impact, what we are seeing in some of the emerging economics, 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 just an outlook of being a little bit more conservative and prudent on our overall guidance assumptions. And Didier, I think Ross’s math is correct on other income, but would you like to add some comments on that.

Yes Ross, we are looking at the – we also analyzed the delta versus the consensus and it seems to come from a little bit from 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 a quite significant number surprisingly on other income and expense. And I must say, you are the only one who nailed that number exactly, precisely and we’ve seen that in other cases quite significant differences in other income and expense. And I remind everybody that especially net interest expense this year we incurred $59 million. We say that we are going to borrow $250 million. We have modeled to borrow it at the middle of February and therefore we’ll add about $9 million of interest expense. So basically I think those were the main factors.

All right, great. And I guess maybe secondarily, so I feel it’s 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 ’16. 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 sort of where that delta was versus kind of what you laid out?

Hey Ross, this is Mike. Well I’ll 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 the Ross’s question. So hey Ross, I do really appreciate the question, but we are not really in a position to comment on the circumstances around the stock repurchases in to Q4. But I would remind you is that are going to resume repurchase this quarter and as Didier mentioned in his remarks, I believe we are targeting $480 million of repurchases in 2016. And Didier can you address the second quarter.

Yes, on the cash flow basis your correct. When we started the year, we talked 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 I mean 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 analysis day.

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

You’re quite welcome Ross.

Thank you. And our next question comes from the line of, John Groberg of UBS. Your line is now open.

Great, thanks. Mike, on the outlook again, I know you are no longer commenting explicitly on orders and backlog like you were previously. But as you go into next year, was there anything from an orders standpoint that gives you a little bit more caution in ‘16 or is it just the dynamics you just read previously, wanted to be a little bit more conservative?

Thank you John and I do really appreciate the question, but as we mentioned previously, we are no longer reporting on coming in orders. But I would say that the guidance reflects of you, of conservatism, not any concerns on the order front.

Okay, and then last one for me, if you look at the Life Science & 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 John, I think I’m going to go ahead and pass it over to Patrick to add this comments.

Sure, thanks Mike. Regarding the operating margin you have to realize that we first and foremost had all sort of dis-synergies of this plate, which brought us down about a 1% compared to last year. And then if we look at the product mix that we have this quarter, it was a little bit different that the quarters before in terms of we had less cheesy, given the exposure we had in the oil industry, in the chemical and energy market and a little bit while other pieces in spectroscopy came up. So product mix had also a minor impact, but the biggest one you have seen is probably through there, because of the dis-synergies.

Okay, great. I’ll hop back in the queue for others. Thanks.

Thanks John.

Thank you. And our next question comes from the line of Jeff Elliott from Robert W. Baird. Your line is now open.

Yes, thanks for the question there. First one for me is on the academic and government in the market. I guess you talked about a spending pause in the U.S. Can you give us a little more color there? I guess when did that happen and what do 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. So as Mike alluded to first, it was tough compared to last year. This is one of the major reasons why it has been flat or slightly negative this quarter. And we had also lower spending in the US, it was softer than we had expected especially in September. For a very specific month we have seen smaller deals and our customers are a little bit more cautious given the budget uncertainties they have seen in some areas. So looking forward we actually [Audio Gap].

Got it. And how about other geographies like Japan. I guess what do you see in the academic and government funding their?

Well, on a worldwide base I would say is what we have seen is that it was more solid in Europe and in China and Japan it was also flat for the last quarter. So the biggest impact we have seen was definitely in the U.S.

Okay, and then one more from me. On the forensics side, you referenced timing of some larger deals I guess. What happened there and can you quantify how big the impact was?

On forensics?

Yes.

Yes, well the growth for forensic was in the low single digit for the quarter, yes. Which one do you mean it now?

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

Yes, just earlier in the prepared remarks I guess in the deck you talked about forensic being muted by the timing of the larger deals. Yes, I’m just kind of curious on what happened in terms of the timing and how big those larger deals were. What was the impact?

You mean, okay 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 brought the overall growth down in the U.S.

Okay, thanks guys.

You’re welcome, Jeff.

Thank you. And our next question comes from the line of Dane Leone of BTIG. Your line is now open.

Good afternoon guys. Thanks for taking the questions.

Sure.

I think I’ll stick with the guidance if you wouldn’t mind. Could you maybe breakdown expectations for the three main segments next year? I mean effectively in our models right now we’re essentially having the organic growth rate that you guys reported in 2015. So if you could kind of help us source maybe where we should modify some expectations, I think that would be pretty helpful.

Sure Dane, I’ll be happy to. So as we looked at the growth assumptions by end markets, I think the biggest one I think will be chemical 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 and academia in the low single digits, pharma high single digits and the diagnosis and the clinical markets are also high single digits. So you can see there’s quite a mix between the pharma and diagnostics market of differential versus the chemical energy space.

So if we flow that through the model, I think where we might have a little trouble is looking at 2016. So we give about – take everything together about 3% top-line growth to get to that $4.16 billion. To get to the operating profit line of about 20 spot to five or spot two if you wanted the brand, that’s about a 60% plus variable margin, which seems a bit high given you can kind of go back in history, and I think even in kind of coming out of a trough year in 2010 it was still about 55%. And then when we flow that through to 2017 to kind of hit the targets, you are talking about another 60% variable margin. Can you kind of help us in line with where you guys laid out your analyst day and reiterated in the presentation here, how to get to that 22% operating margin in 2017, because it’s I guess looking pretty aggressive at the moment.

Yes, I mean there’s a lot of moving parts, but nothing has fundamentally changed, except that we exceeded our first year opening margin expansion goal basically achieving 170 basis points. So we are now one year or three up, 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 place, at this time and decided to have a guidance that is somehow conservative. But nothing has fundamentally changed, but the moving parts are really I mean like this. I mean the salary increases, I mean all the different components, the new trends to our projections regarding the benefits from the NMR exit, from the Agile Agilent program, from the fact that we have the FDA warning there behind us, the OSS, the order fulfillment annual improvement, there’s really no chance. The only chance I would say is a positive chance we’re slightly ahead of the game at the end of Tier 1.

Yes Dane, if I could just add some additional comments here too. So we’re really quite pleased with how we performed this first year. I think we’re well in that trajectory to 22% and finally we found a way to get there even if we got 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 multiyear programs and a lot of them will start hitting into the end of 2016. So we started to get the real big million dollar cost savings coming out of our infrastructure in ’17. So we’re right on our plan, in fact ahead of our internal plan. So we’re 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.

And our next question comes from the line of Steve Beuchaw of Morgan Stanley. Your line is now open.

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

Yes, 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 will be positive news and that’s also as I said earlier, we’ll watch the business for the next quarter or two and kind of see where things go. So if these positive developments happen, it will be reflected in our view of the outlook for the business. But what we did 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. And Patrick, I can’t remember the exact percentage of our funding to NIH. So maybe you can add a little color there as well.

Well, I don’t have the exact funding, but I agree with you that we didn’t bake in numbers like the ones have just been mentioned, certainly not the 5% they are going at low single digit projections on the budgets. So if there is upside, we’ll be happy to take it.

Absolutely, absolutely.

Okay, thanks for that. And then just one for Jacob. I'm sorry, if you wouldn’t mind, could you give just us 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 driver and dynamics, whether they are competitive or otherwise really appreciative? Thanks so much.

Hey Steve, as you know we don’t provide insight on the individual divisions, but I can say that we continue to see strong performance in our pathology business and this continues to break records in placements and that obviously is driving the growth there. So we see great growth there in our companion diagnostic business, with all the activities around the recent launches within the PDL-1, it’s also a great growth driver. So overall I see great momentum in the businesses, but the actual number I cannot comment on.

Got it, thanks so much.

Thank you. And our next question comes from the line of Tim Evans of Wells Fargo Securities. Your line is now open.

Hi, thank you. I wanted to drill down on the pharma and biotech end markets a little bit, and the strongest growth 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 a contract labs, what kind of clients are you seeing driving the growth? Thanks.

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

Yes, so these are several questions at once. So let me start with the platforms that drive the growth. Actually we had very competitive platforms for the pharmaceutical and the biopharmaceutical markets. The biggest growth driver right comes actually out of the LC business, which drives a lot of replacement business off the installed basis. You probably know we had more than [140,000 1,100] [ph] systems installed worldwide. A lot of them are in the pharma space and the offering we have today with the Infinity II series gives a seamless replacement of the systems which have a much higher performance, better efficiency, so a huge improvement from our customers. So that resonates well and it resonates actually well across the board, whether its smaller 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 U.S., 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 small molecule pharma and we continue to address this also with more specific solutions around our LCMS portfolio and some of it also in the spectroscopy space. So I think we have a very attractive portfolio for our customers. We have a lot of good new releases. This year out with the 6470 Triple-Quad system which is well received from pharma as well and they will continue to drive growth for us in this space.

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

Thank you.

Thank you. And our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open.

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

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

Yes, I mean you have been kind of growing pharma 6% to 8%, so 19% was certainly notable. So was there anything you can call out that was unique to the quarter?

No, we had 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 into 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 in May we provided the number at the Analyst and Investor Day, just taking away all the one-time cash outflows that we had during the year, which are related to the separations deal 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 the number that includes those elements, even better than the 555 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 as 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 it at the Analyst and Investor Day of potentially two deals of the size of Seahorse per annum. Obviously it could be slightly bigger, but we were not looking at any larger deals in the short term, but we are ready to take on the two deals of that size per year perhaps, slightly bigger.

Okay, thank you.

Thank you. And our next question comes from the line of Derik de Bruin of Bank of America. Your line is now open.

Hi, good afternoon.

Good afternoon Derik.

So a couple of questions. First of all, could you talk about the academic? I'm a little bit surprised just given that some of your competitors like Sterno have a much bigger academic exposure, basically didn't call it 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 got a little bit longer.

No, I’ll take that again. Again the compare for us this quarter was mainly a difficult compare, because we had a strong Q4 last year with double digit growth with some exceptional large deals in this space. The pause or the slowdown we have seen in September, where they usually have low budget release to some extent came back in October, so we’ve seen for the year and we are on track with what we project in the low to mid single digit growth rate for academia and government.

Right, I think it’s obviously not a time to turn into revenue, yes.

Yes.

Got you, but I just wanted the clarity, thank you. And could you give a little bit more color. I mean your 4.25% core growth, what are you sort of looking for core growth in each of the segment; LS, DX, at CrossLab?

So yes, we are 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 DGG will have higher growth rate than the average.

Great, I’ll get back in the queue, thanks.

Thank you.

Thank you. And our next question comes from the line of Jack Meehan of Barclays. Your line is now open.

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

Derek, why don’t you take that one.

I can take this, yes. So you’re actually right. We see currently marketing 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 and being in the low single digits combined chemical energy should also materialize moving forward. We are now like four to five quarters in this 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.

Yes, this is 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, just curious if you had any updated thoughts on the cash that your holding overseas. Thanks.

Yes, I mean we have about $200 million of cash we had at the end of October in the U.S., 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 overseas cash into the U.S., that’s why we ended there with $435 million about and we are looking for continued support to bring back some of the cash tax effectively, but you feel most of the cash that we generate is overseas.

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

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 clearly 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, around that.

Brandon, thanks. I’d love to take that call. It’s a great story and I think I’ll allow Jacob the pleasure of responding to that one.

Yes, thank you. So as you know our nuclear gases 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’ve decided to invest in expanding that capacity over the next few years and this is actually what has been reflected in that buy. 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 a very significant amount of revenue as you get in the outer years like ’17 and ’18 for the company.

That’s helpful, and then Didier, just one clarification. Did you say that you’ve embedded the mid to high single-digit growth outcome for China for ’16, was that right?

Yes, I think its Michael who made the comment.

I think that was me. I said we were expecting mid single digit growth in China and what could happen Brandon, kind of what happened 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 in the services and consumables. Again the wildcard that will lure us between the two estimate points would be what growth rate we would see in the chemical and energy space, but it looks like a solid growth market for us year and then again what happens to chemical and energy, we could see more end market growth than what we are projecting now.

Super. Thank you.

Thanks.

Thank you. And our next question comes from the line of Miroslava Minkova of Stifel. Your line is now open.

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 coming out of China?

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

Sounds good, thank you for that comment. Secondly, just given the sort of mixed end market environment for you. Wondering how are you prioritizing your investments for fiscal ‘16? Has anything changed in terms of your thinking there as well as the 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 that 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’d say no. I don’t think there’s any really fundamental changes to our investments 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, 15.

Okay, great. Thank you guys.

Welcome.

Thank you. And our next question comes from the line of Doug Schenkel of Cowen and Company. Your line is now open.

Hey, good afternoon guys.

Good afternoon Dough.

So based on what I am hearing from a lot of folks who are listening to this call, I think there is 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 acknowledge previously that you maybe should have guided ‘15 to maybe slightly more conservative levels and now we have fiscal ‘16 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 as giving your reason for a pause. So if I could just, as we are kind of getting into 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 fiscal ‘17, if I’m doing the math right. How much is that dependent on a favorable changes 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 fiscal ’17, 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-bill’s for the reasons that your 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 at least say something about trends there. And the last one would be, Tycho asked a question about free cash flow guidance for fiscal ’16. 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 a lot of one timers in there. But a $110 million is a big delta. Can you just walk us through what’s going on there? Thank you.

Sure Dough, these are very important questions. So I appreciate the opportunity to add some additional clarity. So 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 depended it is on a higher level of revenue. As I may have indicated earlier in a call its 4%, 4.5%, we will make the 22% operating profit in 2017. And I say that with a lot of confidence, because of the results we have put up over the last three quarters, plus I know we have a number of major programs that we have to deliver on their projected cost savings. You start to see those near the tail-end of ’16 going into ’17. They are completely independent of revenue. We are assuming no significant change of revenue mix beyond what we have shared at the Analyst Day and also what you saw in the results. 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. And in terms of the commentary, we saw no real change in fundamental demand coming through and existing 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 made it all off a question. I mean 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 couple of things that are trying to handicap in terms of what’s going on with chemical and 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’m going to let you handle the last questing of the bridge between the free cash flow of 620 to...

Well, so in the past I had talked about 2015 and the fact that we ended about high free cash flow that what I had motioned at the time, and the reason why you don’t – I mean we are not comparing apple-to-apple is just because of the one-time expenses. So if you want doing the follow-up 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. Thanks guys for taking all the questions.

No problem Dough. I appreciate the opportunity to answer them.

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

Hey, 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 excited 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’s really a major part of our thinking when we closed down the hardware business. But we really wanted to preserve and mitigate the impact of our customers. So we are in a position to be able to handle their long term service needs. And Didier, I think you’ve got some specifics on the expectations for next year.

Yes, there is no change to the guidance that we have provided. We had about $15 million of cost reductions and expense reduction in fiscal year ’15. 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 work-off the last part of the backlog in ’16. So there will still be some.

Should be $12 million still revenues in 2016.

Okay, thanks very much.

You’re welcome.

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

Hi Mike. Only a couple of bricks to move now.

Thanks Paul.

Geographically, I know you talked about China, where is your thought on Europe and the United States in ’16?

Thanks Paul. I appreciate the opportunity to answer. Great, great question. So we see the U.S. as a real area of strength, albeit some of the commentary around what may happen in terms of the chemical energy space and how its impacting the U.S. business. So we see the market there being very robust and was a source of strength for the company for the quarter and for the year. So we are looking forward to continued strength in the U.S. And I think the same call in Europe and Europe holds as well. I think part of our European business the report has been – it includes some of the Middle East and Eastern European courtiers and would have been a little bit of a challenge for us, particularly in the chemical and energy space. But overall Western Europe and Germany in particular has been extremely strong for us and we are seeing no indication of that is changing for us in our European based business.

And then lastly when you look at the energy sector, I know there is a lot of pieces like gas Chromatography and 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 where we really have seen a slowdown as it relates to our Spectroscopy business. So you might look at say in 2016 that we could see some reported revenues versus easy compares, but we’ll wait till we call it in. But again, we think that it looks like to us that the market may have bottoms and that perhaps the worst is behind us.

Right, you have been through a few cycles yourself running that division. I mean what does the market feel like? You sense the bottom in some of these categories?

Yes, I mean we think so. I mean 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. You know BASF was out with a downgrade in term of their outlook for ’16. 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. So we now are seeing to start closing some business.

Okay. Thank you.

Thank you. And our final question comes from the line of Dan Leonard of Leerink. Your line is now open.

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. I mean presumably Q3 is going to be a very difficult comparison. And then secondly for Jacob, is there any effort or plan to migrate a couple of these companion diagnostic approval to the ominous system. I looked like they were approved on your older Autostainer. Thank you.

So 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 because on the actions that we are taking throughout the year, which will have a more of an impact in terms of cost and expense reduction, already in the second half because of the carry over impact. So you should see a fairly steady ramp in operating margin throughout the year, very much in line with the usual seasonality and the pattern.

One Didier, one additional thought here might be looking at Q2, Q3 revenue year-over-year and that we had some logistical start up issues in our Q2 where we have some track revenue.

But basically we are forecasting higher operating margins throughout the year.

Okay, got it.

Hey Dan, let me address the other question also. So you asked about the right that we developed the PD-L1 for the Autostainers right now, and the reason is that these activates is ongoing for many years also, so we start off with the Autostainers packing base, where we also have the highest installed base. But your absolutely right that we are actively also moving it over to the Ominous and will clear have our full portfolio on the Ominous going forward, including our 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 call on IR and I’d like to end by wishing everybody 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.