Alicia Rodriguez - Vice President-Investor Relations Michael R.

McMullen - President and Chief Executive Officer Didier Hirsch - Chief Financial Officer & Senior Vice President Jacob Thaysen - Senior Vice President, President, Diagnostics and Genomics Group Mark Doak - Senior Vice President and President-Agilent CrossLab Group Patrick Kaltenbach - Senior Vice President, President, Life Sciences and Applied Markets Group.

Ryan Blicker - Cowen & Co. LLC Paul Richard Knight - Janney Montgomery Scott LLC Daniel Arias - Citigroup Global Markets, Inc. (Broker) Isaac Ro - Goldman Sachs & Co. Ross Muken - Evercore ISI Jeff T. Elliott - Robert W. Baird & Co., Inc. (Broker) Steve C. Beuchaw - Morgan Stanley & Co. LLC Tim C.

Evans - Wells Fargo Securities LLC Brandon Couillard - Jefferies LLC Tycho W. Peterson - JPMorgan Securities LLC Jack Meehan - Barclays Capital, Inc. Derik De Bruin - Bank of America Merrill Lynch Dan L. Leonard - Leerink Partners LLC Dane Leone - BTIG LLC.

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

I would 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 fiscal year 2016. 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 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, 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 fiscal 2016, both revenue and earnings 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 a return to growth in Academia & Government.

Market demand remains strong for Liquid Chromatography, CrossLab's 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 return on Academia & Government markets, and China government investment in Environmental and Food markets. All this offset continued weaknesses for new equipment purchases in the Chemical & 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 of 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 refracted index detectors, the 1260 and 1290 Infinity II RID.

These detectors help expand the capabilities of modern UHPLC chromatography to make difficult measurements in 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 injection 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 & Energy market demand drove growth in our services and consumables offerings. 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've released advanced Bio 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 continues to demonstrate momentum. In Q1, DGG delivered 12% core revenue growth with strength across all of its businesses. The pathology business continued a steady trajectory to market growth rates. We see strong growth for Dako Omnis reagents and growing rev for new 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 compares. 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 fiscal 2015. 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 diagnostics to include patients with melanoma.

Positive PD-L1 status in melanoma has been correlated with the treatment effectiveness of Bristol-Myers Squibb's drug treatment. Agilent is 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 & Government of 4%.

This growth was significantly driven by the authorization of larger research budgets in the U.S. 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 & 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 a sustained performance. We are building a new company portfolio.

We have exited unattractive businesses and are acquiring new ones to enable our growth strategies. 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's 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 U.S.

defined benefits retirement plan. This change is effective in the second half of fiscal 2016. I've also spoke with many of you about our multiple ERP systems and oversized IT environment. We continue to streamline our IT systems and infrastructure to reduce costs and increase effectiveness.

While work remains, we are pleased with the start of 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 and 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?.

Yes. 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 the 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 fiscal year 2016. We are confirming the core revenue growth guidance of 4.0% to 4.5% we provided in November. However, the strengthening of the U.S.

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 on EPS. As a result, we now expect fiscal year 2016 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 U.S. 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. Our first question comes from the line of Doug Schenkel from Cowen & 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 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 the strength and were there any one-time dynamics like a budget flush or pull-forward of revenue? And, I guess, lastly, do you still expect growth in this end-market to approximate high-single-digits for the full-year? Thank you..

Hey, Ryan. 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. I just would highlight a few points here.

One, we're seeing a strong growth in Liquid Chromatography both in terms of the uptake and our new products, but also the technology refresh that is underway within the segment. Also, customers are responding quite positively to our biopharma solutions.

And 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 for 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? I mean, could you flush out a little bit more?.

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

Yeah. 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 January 30 of 2016. And it was between November – October 30, which was a 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-à-vis the euro, and certainly, vis-à-vis the yen. So 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 result directly from the change in exchange rates between October 30 and January 30..

Yeah, Paul, if I can just emphasize that again, I mean, 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?.

Paul, just to make sure I understand the question relative to -thanks for the comments and observations. Just to make sure I understand the question, this would be relative to our expectation of continued organic growth of those two new....

Yeah.

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 services 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 have you 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'll 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?.

Yeah. Thanks, Paul. And you're right that we got the indication approval also for the melanoma for the OPDIVO drug. And that's a great next step in the opportunities for PD-L1. I will not say that it really changes some needle on an Agilent 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..

Hi, Dan..

Mike, last quarter you mentioned that industrial weakness you were seeing 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 of points higher than the cyclical segments? I guess, how would you just compare expectations for Environmental versus industrial for this year?.

Yeah, Dan. Thanks for the careful observation. And 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 investments that the Chinese government's making in places such as environmental market and food safety.

But I will say that we're 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 U.S., 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 calling 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 U.S. 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 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..

You're welcome..

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

Yeah. Good afternoon. Thank you..

Good afternoon..

Yeah. Mike, first question was on gross margin. There's pretty big year-on-year improvement there, and I was wondering if you can 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..

Yeah. Why don't I make a few high-level comments here, then, Didier, you 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 it 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 are 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'd add to that?.

Just to point that also contributed the number one – you will recall that last year we were spending heavily on remediation point 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 of 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-to-quarter visibility, so I was wondering if you could put some color around the extent to which market share was helpful and how you'd characterize where it's coming from. Thank you..

Yeah. Great question.

I'll make a few comments, and 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 hit on the primary piece, which is we continue to see the primary drivers in pharma, and also, China has been very strong for us.

When you pull it all back to 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. 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..

Hi. Good afternoon, guys..

Good afternoon..

So I'm just trying to double-check on the guidance map 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 $0.04.

So I'm just trying to get a sense for – again, it seems like FX was the key delta, but 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. So I'm just trying to make sure I understand how we're doing versus the plan for the year..

Sure. We're happy to – Didier would be happy to clarify..

Yeah. As I mentioned earlier, we have reduced our top line revenue from a midpoint from $4.160 billion to $4.110 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 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 have 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 hit it and perhaps beat it, but certainly, didn't want to change it..

Yeah. I guess, what I'm trying to get at is sort of the comments last quarter suggested sort of conservatism, right. 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. 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. So if you go by the conservatism meter on our guidance, it's at the same level as it was last quarter. So the only real fundamental changes from our outlook is the view on FX. That's it..

And that 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 my inbox lights up. I'm getting everyone the answers they need. So all right. To be clear, we have the FX hit.

I'd love to also understand what were the key currencies, because most of us can see the dollar's actually, again, we'll see if it sustains, weakened a bit. And 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 where the conservatism comes in? And then, I'm done I promise. I'll cede the floor..

Yeah. I mean, 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 a major impact also, I think, dollar versus the British pound.

And again, I mean, today's guidance is based on the January 30 exchange rate, so the euro to dollar €0.84 and the yen – and vis-à-vis the yen at the U.S.

dollar is ¥121.4 and we are seeing that at today's rate if we had to provide the guidance based on just if we had to – we're able to instantly reflect the currencies as of the day of the guidance, we'd have a very different guidance..

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

Okay. Thank you..

Yeah..

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

Yeah. Thanks for the question. So question for Mike on Chemical & Energy. You were down 2% this quarter. The last couple of quarters you were down 9% or 10%. I guess, 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 what allowed the – I guess, the improvement relative to last couple of quarters..

Yeah. Actually, it's probably worth maybe just 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 continuing ability to offset through services and consumables.

So what I would say is that the Chemical & Energy market is sort of playing out the way we had expected for the year. So we wish we had a different story here, but the oil price is low as you know, but the product demand still remains pretty strong for our customers' products.

So the refineries are running, the chemical plants are running, and then we're really 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 consumable 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 core basis. We ended up growing, I think, 1% for the whole year so that shows you were declining through the year.

And so I wouldn't over-interpret the numbers. We think it's right in 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, as you said, it's playing out as we 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 opportunity 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 focus for the year to – for the whole segment to stay flat..

Okay. 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, say, about 15% or so is in E&P, as you described, exploration and production, which will 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 that's how we – it remains stable at a subdued level..

Great. Thank you..

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

Hi. 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 wondered if you can 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's a lot of interest out there in the sustainability of growth in the space.

So any color you could offer on how your customers are thinking would be really helpful..

Yeah. Absolutely. So, Patrick, why don't you take that question and I have 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-sized and large enterprises.

So it's really for us, it's a good mixture between different sized companies and also between the different markets. Talking about small molecule 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, so we're getting 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 of – at least on the technology refresh side how much more demand we can expect in the 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 as with some of the other customer verticals? And to what extent, is one dependent on 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.

But 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 in the 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 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 on the Chemical & Energy side, but we're hopeful that it will down the road. But there's a couple of 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 a update on 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..

Yeah. Thanks, Tim. Appreciate the opportunity to provide a perspective on here. So 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. And so I think you saw doing the Seahorse deal, where we added capabilities in life science, research, Cartagenia in the area of next-gen sequencing. We built out our workflow there.

We'd still like to find ways to build out our workflow in next-gen sequencing. And so our stated strategies of really adding capabilities, expanding our portfolio, building on our workflow solutions with particular emphasis on life sciences, research, next-gen sequencing workflows in the overall consumables and services place, they're our priorities.

Well, that being said, most people still have the memories of the 52-week highs. So we'll see how this plays out.

And 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'd be interested in..

Thank you..

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

Thanks. Good afternoon..

Good afternoon, Brandon..

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 the mid- to high-single-digit target for the year?.

Yeah. Thanks. I appreciate the opportunity to talk about China; one of my favorite topics. So we saw a very good demand in China, high-single-digit growth in our analytical 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 & 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 really quite amazing.

There was a report by the Cancer Hospital of the Chinese Academy of Medical Sciences said that every minute an average of 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..

Then one more for Didier.

Could you split out the contribution from Seahorse relative to the headwind from the NMR in the first quarter in terms of just dollars?.

No, no, 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 the 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 comments on how is it going so far..

Well, the 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 fiscal year 2016.

As Didier said, we expect double-digit growth. We have the salesforce 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, Tycho..

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.

I mean, it sounds like you all front-end loaded, and I mean, how do we think about a reauthorization once you get through this tranche, given your stock's probably under some pressure tomorrow?.

Yeah. 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 with certain formula. But for your model, you should assume that we are 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. I mean, the $13 million hit is the FX hit, but, I guess, 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 doesn't that carry through for the next three quarters?.

We're not saying it's not going to carry us 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 the – 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, in my call comments, I tried to highlight a few things on 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 is 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. And, in fact, Patrick, I think you were showing me some statistics the other day about what's going on in the area of refineries in the U.S..

Yeah. I mean, what we see, as Mike said, is the continued demand for – not only in the U.S., 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've 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 install 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.

And 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?.

Yeah. No, I'd just point to two things. One is in terms of our normal seasonality through the quarter. Q1 of 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 DDG side. We had, I think, one less working day, I think, this year. So that does affect the Genomics business in terms of how much revenue we get in that quarter. But really, it was 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 U.S.

Curious on your view on the NIH and really timing-related there, because of the timing of the Congressional approvals at year-end..

Yeah. I can take this question here. We have seen moderate growth again in Academia & Government, which was a positive surprise. And as you all have read, there are more budgets available now in the U.S. These budgets are slowly released and 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 for Academia & Government, at the moment, mainly driven by the U.S., 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? Are you assuming the budgets get released a little bit faster from here?.

If the budgets were to be released faster, I think, it would probably be upside for us. Our current view is low-single-digits for Academia & Government for the year..

Got it. And then, just one other question on the margins in DGG, definitely appreciate the year-over-year improvement. I was wondering what your thoughts were bridging through the end of the year just given how the relative margins compared to the end of 2015. Thanks..

Great. 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..

Yeah. Thanks for that, Jack, 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 where most expected. We sit in the DGG business with a pretty fixed cost base.

So when you have a Q1 with the lower base than in Q4, you will see that our margins has also impacted economy. So you always see us coming out with a strong Q4 and a weaker Q1 and the gross margin also on our operating margin. So it's kind of by the book and really as expected..

Yeah. 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 basis points to 180 basis points of margin expansion next year.

I'm just curious, if you couldn't find 10 additional basis points of margin expansion in 2016 to offset the impact, what gives you confidence you're going to be able to get 130 basis points, 180 basis points next year?.

I'd just reiterate – great question this one. Again 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 this 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 field in my call, I mean, changes in terms of our benefit structure, changes in terms of our IT cost, our IT systems. It is a major company-wide initiatives that right now we're 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 looking for in that..

Okay..

Second question.

Second question is given some of the turmoil going on in Europe, have you seen any changes in the academic or government spending like the governments grapple with the refugee crisis and everything that's going on? Is there any noticeable change to spending patterns in Europe?.

Patrick, you're....

Yeah..

You're shaking your head here right now..

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

Great. 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 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 us a little bit more color in terms of the product mix? As I look at the different groups really the margin leverage seem 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 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 are two things I would point to and then, Didier, feel free to jump in in as well. But 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 shown on the P&L where we had revenue in the NMR business and much higher revenues in FY 2015. 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 are the things....

You said it all. Absolutely. I had mentioned earlier that the favorable mix came in part from the pharma mix. And within pharma, clearly Liquid Chromatography has the 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 on those products specifically that's not expected to continue for the rest of the year?.

Well, you can almost think about 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're seeing in terms of reflected in our mix column as it relates to gross margin..

Okay. And then, on the FX rate, so if you just use the DXY 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 assuming worst-case that the dollar goes back up here?.

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 the rest of the year, and then, it's just pure math from there..

That's been same methodology for ever..

Okay.

So it's an extrapolation off of January 31, not what's happening in February?.

Exactly. That's correct..

Okay. Got it..

And that's why I made a comment on 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..

Yeah. Okay. Perfect. Thank you very much..

Very 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..