Good day, ladies and gentlemen, and welcome to the Agilent Technologies Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. .

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

Thank you, Karen, and welcome, everyone, to Agilent's Fourth 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. 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.

Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Guidance is based on exchange rates as of the last day of the reported quarter..

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 let me turn the call over to Mike. .

Thanks, Alicia, and hello, everyone. I'm very pleased to announce that our Agilent team ended 2016 with another strong quarter of excellent results. .

I will start by looking at our key numbers from the quarter. First, we continued to deliver above-market growth. Revenues of $1.1 billion exceeded the high end of the guidance by a sizeable $41 million and were up 6.3% on a core basis.

We were the first surprised by the strength of our instrument business in pharma, China and Europe, which far exceeded our expectations. .

Second, our adjusted EPS of $0.59 was $0.07 above the high end of our guidance. .

Finally, we continued our track record of improving profitability as we delivered another quarter of operating margin expansion. Adjusted operating margin of 22.5% was up 60 basis points from Q4 of fiscal 2015. .

Turning to our full year results. Core revenue continued to outperform the market, growing 5.9%. We increased operating margins 110 basis points to 20.7% from 2015. These results drove a 14% increase in adjusted earnings per share for the full year. .

We are capping off the second year of our company transformation with stellar performance by the Agilent team. Our fourth quarter and full year results demonstrate our continued ability to win in the market. We are outgrowing the market while expanding margins and fully leveraging our strong balance sheet. .

In the past year, we distributed $150 million in cash dividends, repurchased $434 million of our shares and invested $480 million directly into the business through M&A, strategic transactions and capital expenditures. .

Let me now address what's happening in our end markets and business groups. I'll start with the end markets. Our Q4 trends were similar to what we experienced last quarter with pharma and academia and government being the exceptions. We had expected continued strength in pharma, but our 16% growth on a difficult compare exceeded our expectations.

Growth is being driven by strong customer acceptance of our new products and enterprise service offerings. Academia and government's decline of 2% was less than expected. European spending is holding up better than projected, while our U.S. government investments continue to lag 2015 spending levels. .

Clinical and diagnostics grew 8% over last year, led by continued growth in reagents..

Within our applied end markets, food is up 10% with strong demand in China and Americas. China also drove growth in environmental market, up 3%. .

Chemical and energy declined 3% in line with expectations due to continued effect of crude oil prices and macroeconomic uncertainties. We expect this market to remain challenging for the rest of calendar year 2016 and into 2017, with no significant downward or upward movements..

Geographically, Asia, led by China, and Europe were stronger than forecast. Our Asia business, excluding Japan, grew double digit, driven by greater than 25% growth in China. While the overall European market remains challenged, we delivered solid mid-single-digit growth.

European pharma and food markets were strong and academia and government funding was stable with Q3. Japan and Americas were flat with growth constrained by continued chemical and energy market weakness and specific to the U.S., slow U.S. government funding. .

Moving on to the business groups. Life Sciences and Applied Markets Group delivered core revenue growth of 5%. Better-than-expected revenues from our analytical lab instruments business was driven by an attractive combination of introducing new products into growing markets.

This applied in particular to our new lineup of chromatography and mass spectrometry products targeted at the pharma in applied food, environmental and forensics markets. LSAG's operating margin for the quarter was 22.8%, up 280 basis points from a year ago..

We are building for the future. In August, we introduced the transformational Intuvo 9000 GC system. Building on our recognized GC leadership, the Intuvo system revolutionized the way users perform gas chromatography. Industry experts recognize unique innovation being delivered by Agilent with press coverage at 100% positive.

Intuvo is featured this month on the cover LCGC magazine, a major trade publication. .

Customer response is also very positive to this introduction, confirming our undisputed market leadership in gas chromatography. We anticipate a measured uptake in revenue. Limited international shipments are expected in Q1 of fiscal 2017, with volumes expected to increase over subsequent quarters..

Another industry-unique product, the Agilent 8900 Triple Quad ICP-MS system, which we just introduced in Q3, is also being well received in the market. This instrument is rapidly becoming the solution of choice in labs that demand the highest standards of performance. .

Next, the Agilent CrossLab Group continues to deliver strong, sustained growth with core revenue up 8%. Growth is healthy in both services and consumables. ACG's operating margin for the quarter was 22.7%, down 240 basis points from a year ago and in line with expectations..

ACG results were driven by strong pharma, food, clinical and diagnostic markets, where our CrossLab customer value proposition is being well received. Unlike our instrument business, ACG also grew in the chemical and energy markets. Laboratories supporting strong production levels drove demand for consumables.

There is also continued demand for services, as customers focus on keeping their older instruments operational..

We are investing for the future in ACG. We just introduced a new range of innovative and differentiated supplies. These new offerings enable the Agilent Intuvo 9000 GC to be the most efficient and cost-effective premium GC to own and operate.

We continue to successfully integrate the recently acquired iLab business, which brings differentiated capabilities to core lab managers. .

Last, but certainly not least in terms of impact, the momentum in the Diagnostics and Genomics Group continued, with delivery of 8% core growth. Our laser focus on improving the previously acquired Dako business is paying off.

The pathology business continues its steady climb back to market growth rates, with strong -- with strength in reagents and companion diagnostics..

Our nucleic acid solutions business, for which we recently announced a significant production capacity, grew double digits. This growth reflects the increasing demand for oligonucleotides for RNA-based drugs. DDG's operating margin for the quarter was 19.6%, up 40 basis points from a year ago. .

In October, there was some exciting news from Merck for lung cancer patients and for Agilent. Merck's KEYTRUDA is now approved by the FDA for first-line treatment for metastatic non-small-cell lung cancer for patients with high rates of PD-L1 expression.

In conjunction, Agilent's pharmDx companion diagnostics PD-L1 test is now approved for expanded use. This is the first time an Agilent's PD-L1 companion diagnostic is approved for first-line testing..

The theme of investing for our future is also evident in DDG. We launched a comprehensive offering of pooled CRISPR libraries for functional genomics. This will help accelerate research into complex diseases and drug discovery.

We signed an agreement with the Burning Rock Biotech to develop cancer diagnostics in China based on Agilent SureSelect solutions. And we broke ground and initiated construction on the previously announced $120 million investment in a new factory in Colorado to expand nucleic acid production capacity..

Turning now to operating margin. We remain focused on operating margin improvement. Since the new Agilent leadership team was appointed, we have delivered 7 consecutive quarters of improved operating margin and strong growth.

Despite continued challenges in the chemical and energy business, we have improved adjusted operating margin by 280 basis points in the first 2 years of the company's transformation. We have completely absorbed and offset the $40 million of dis-synergy costs due to the spin-off of Keysight..

On the operations front, our Agile Agilent program continues to simplify the company and lower operating costs. This program is designed to keep us nimble, improve our interaction with customers and lower our costs. It is having an impact and will continue to deliver savings in 2017 and beyond. .

In the coming year, we will realize cost savings from the completion of the integration of Dako in early 2017, a simplified enterprise IT systems environment and other cost-savings initiatives..

Turning to our FY '17 market and company outlook. As a reminder, our shareholder value creation model for superior earnings growth is to outgrow the market and expand operating margins with a balanced deployment of our capital. Didier will go through the specifics of our Q1 '17 and full year guidance.

I want to share our thinking about end markets and our initial guidance philosophy, given an environment of increased uncertainty. This is a change since our last call and the May 2016 Analyst Investor Day. .

In our end markets, we expect continued strength in pharma, accompanied by continued solid growth in the food, environmental and clinical research and diagnostics markets. Geographically, China and India are expected to grow at significantly higher rates than other countries. There remains considerable uncertainty about European markets.

We are forecasting moderate growth in the United States with the U.S. government policies and spending and chemical and energy markets being the wildcards..

Chemical and energy, while entering a period of easier compares and improved oil prices, has not yet returned to growth. We expect a continued subdued academic and government research market in the coming year until uncertainties resulting from Brexit and the U.S. elections play out. We are also keeping a watchful eye on how potential new U.S.

government driven trade and currency evaluation discussions could impact our business..

We finished 2016 very strongly, and we are well positioned for future growth with a pipeline of new offerings. In our initial revenue guidance for 2017, however, we want to be on the cautious side. We want to see some more clarity on U.S.

and European government actions and have better indicators of when we will return to growth in our industrial end markets. .

Predicting end-market growth in today's uncertain political and economic environment is challenging. However, I can predict quite confidently that we will continue our track record of outgrowing the market whatever market environment we encounter.

We continue to expand our customer channel reach and fortify our portfolio, which strengthens us well for the coming year and beyond. .

The transformation of Agilent we discussed at the May Analyst and Investor Day is in full force. The new leadership team, put in place in early 2015, continues to deliver strong operating results each and every quarter. We are building momentum for future growth. .

We have improved our adjusted operating margins by 200 basis points over the past 2 years and our march to improved operating margins will continue in 2017. However, in our initial operating margin and earnings per share guidance for 2017, we want to be on the cautious side.

Since our May Analyst and Investor Day meeting, changes in exchange rate, pension expenses and the recent iLab acquisition are having a short-term dilutive impact on our operating margins of 0.5%. The Agilent team, however, is laser-focused on improving another 130 basis points of operating margin.

We have an internal action plan aligned with achieving a 22% operating margin goal in fiscal 2017, excluding M&A impact. This is the primary goal for our executive team's compensation. We continue to hold ourselves to a higher level of performance, expectations than reflected in our initial full year earnings guidance..

As you assess our future possibilities, I will leave you with a few thoughts. We are expanding our product portfolio and extending into adjacent markets. We're improving the customer experience by streamlining processes and modernizing systems, making the company more efficient and customer friendly.

Our Agile Agilent program has and will continue to deliver incremental improvements in operating margin. The One Agilent team continues to work well together and is determined to win in the market. We believe we are well positioned to sustain our strong operational performance and achieve our long-term goals.

The entire Agilent team is energized and committed to deliver future growth. .

Thank you for being on the call today. I will now turn it over to Didier, who will provide initial insights on our financial results and initial guidance for our fiscal Q1 and full year 2017.

Didier?.

Thank you, Mike, and hello, everyone. As Mike stated, we are very pleased with our Q4 and full year performance, both well over the high end of our guidance. .

We delivered above-market core revenue growth of 6.3% and 5.9%, respectively; and our operating margin, adjusted for income from Keysight, was up 60 basis points and 110 basis points, respectively. .

Our full year EPS at $1.98 is 14% higher than the previous year. Please note that we have reduced our pro forma tax rate by 1 percentage points, which had a $0.02 impact on our EPS. Our operating cash flow for the full year, at $793 million, reflects our strong overall performance. .

And turning to capital returns. For the first -- for the year, we returned $584 million to shareholders in the form of dividends and buybacks or 89% of our free cash flow. .

I will now turn to the guidance for fiscal year 2017. As Mike stated, our initial guidance, like last year, assumes that -- what we believe to be appropriate caution. Our fiscal year '17 revenue guidance of $4.35 billion to $4.37 billion corresponds to a core revenue growth of 4% to 4.5%.

It is based on October 31 exchange rates and currency had a 0.6 percentage point impact -- negative impact on revenues. We project fiscal year '17 adjusted operating margin of 21% to 21.5% and fiscal year '17 EPS of $2.10 to $2.16, growing 8% at midpoint. .

First, annual salary increases will be effective December 1, 2016. Second, stock-based compensation will be about $59 million. And as we front end the recognition of stock-based compensation, the Q1 expense will be about $23 million. Third, the reduction in bond yields is negatively impacting our annual pension expenses by about $12 million.

Fourth, depreciation is projected to be $104 million for the fiscal year. Fifth, the non-GAAP effective tax rate is projected to remain at 19%. Sixth, we plan to return approximately $600 million in capital to shareholders, including $170 million in dividends and $430 million in buybacks, subject to customary conditions.

Seventh, we plan to borrow $250 million in the second half to fund a portion of our capital returns. Eighth, net interest expense is forecasted at $71 million and other income at $11 million.

Ninth, for purpose of our EPS guidance, we have assumed a diluted share count of 324 million shares, 5 million shares less than the average diluted share count in fiscal year '16.

And finally, tenth, we expect operating cash flow of $825 million and capital expenditures of $200 million, about $60 million over fiscal year '16, mostly due to the investment in the second nucleic acid facility..

Now finally, moving to the guidance for our first quarter. First, please note that Lunar New Year falls in Q1 this year versus Q2 last year, meaning about $15 million of revenue shifting from Q1 to Q2. We expect Q1 revenues of $1.04 billion to $1.06 billion and EPS of $0.48 to $0.50.

At midpoint, revenue will grow 2.2% on a core basis and EPS will grow 7%. And as customary, Q1 EPS is negatively impacted by the December salary increase, 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 year. .

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

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

[Operator Instructions] Our first question comes from the line of Steve Beuchaw from Morgan Stanley. .

First question for me is I wonder if you could just juxtapose your results against what we've heard from others in the category over the last several weeks. I mean, it sounds like a particularly strong category by number -- quarter by number of metrics.

You actually accelerated while we saw a number of others decelerate in terms of organic growth in the quarter.

Can you give us, from a high level, what you think are the keys there in terms of positioning? Why it is the quarter was so good for you guys relative to the market?.

Yes, thanks, Steve. The headline for me was as we looked throughout the quarter, we were winning more business than we planned. So we're winning a lot of business in our core markets.

I think some of the end-market strength that we planned too was actually fairly similar to what I've seen other people comment on relative to the strength of China, strength of pharma, continued subdued but kind of a stable academia and government environment.

And for us, I think we were just delighted by our performance, in particular, in our analytical instrument business where we seem to be winning more business than we planned and we think that bodes well for the strength of our portfolio and some of the things we've been doing over the last year in our channels as well. .

And then so the follow-up, I guess, just to dig a little deeper would be, did you notice anything in terms of instrument trends relative to consumables trends accelerating or decelerating? And what is that telling you about end of year, I should say end of calendar year budget flush?.

Yes, we were talking a bit about this yesterday with the team. And if you look at our performance through the quarter, we got off to a strong start in August and it continued throughout the quarter. And sometimes, it's hard to tell over first month where things will land for the quarter.

But I'd say by the end of September, we knew we are winning more business than we planned. And it's really shaping up to be a strong quarter for us and really position us well for us going into 2017. .

And our next question comes from the line of Tycho Peterson from JPMorgan. .

Mike, just hoping for a little bit more color on some of the expectations and guidance in particular around pharma. Are you still assuming that's kind of double-digit growth next year? Or are you factoring in a moderation? And on environmental, you managed to grow that business in contrast to what we saw from one of your peers last week.

So maybe talk a little bit about contributions from the GC replacement cycle for next year as well. .

Yes, sure. Tycho, you broke up a bit on the call. So if I don't get to the specific questions, please come back to me. But I think relative to the expectations for end market kind of thinking for growth rate, we had pharma below the double-digit growth that have been placed in '16.

So as we look at our end markets, we would expect a moderation of growth, not because the spends are going to go away, but you really are going to start to get into tough compares.

And, Didier, if I remember correctly, we were in the mid- to high single-digit growth for pharma?.

Yes. .

And then I think the story -- I think, Tycho, the question was around environmental. .

Yes, and the GC replacement cycle. .

Yes, so in environmental, the story really there is China. And we think that's got many quarters in front of us of growth in China. And we -- as you know, I'm fairly bullish on the prospects of that market. And I think we've got kind of a perfect storm here going on where we have strong products going into -- in the growing markets.

Relative to the GC replacement cycle, this is really about what's going to happen in the chemical and energy market. And I'll make a few comments here, then, Patrick, you may want to provide your perspective as well.

So you may have noticed in my call script, I went kind of out my way to talk about a measured ramp-up of our new Intuvo GC because we think we've got a winner product on our hands. We know there's a lot of interest from customers. But we also recognize the reality of constraints they may have in their capital budgets.

I know they're working with their own management teams internally of these companies about what they may get in terms of funding in 2017.

What are your thoughts, Patrick, on that as well?.

Yes, thanks, Mike. Looking at the GC market, we definitely are positioned very well to capture any growth opportunity there.

We have launched the Intuvo, which is a strong message to all our customers that we are standing behind them when it comes to drive for lower cost of measurement, when it comes to lower cost of ownership, when it comes to increased productivity and it positions us clearly as the market leader in gas chromatography.

So we are in a lot of discussions with them, not only on Intuvo, but I think what the Intuvo launch did for us, we also -- it also spread a lot of discussion again about other -- of our other part of portfolio to 7890 and other products, which are market-leading products.

And again, the discussion with the customers in the suppressed market is all about how can we help them increasing their productivity, driving their cost of analysis down and this is where we are exceptionally well positioned with this portfolio. .

Yes, maybe just to up an exclamation point on this is that we know that the installed base is at historic levels of aging. We know the equipment is being used. And it's just a matter time for that replacement cycle is going to turn on. But as you saw in my call comments, we're not ready to call that yet. .

Okay. And then just one clarification on the operating margin guidance.

Half of the cut, you're down about 1% from what you talked about the Analyst Day, half of that is from iLab, pension and FX, is the rest just conservatism, given kind of the macro?.

Yes, actually, I think where we had was the high end of our guidance is around 21.5%, right, Didier? And... .

currency, acquisition and pension expenses. And the other thing to note is, as Mike has clearly stated, we are still being measured on achieving 22% in terms of our variable compensation. .

Yes, and the way Didier and I talked about this one was listen, we think we've got a path to 22%. But there's lot of higher risks than there was back at the last call and at the May AID. So we thought it was prudent for us to guide this way. But we're all out inside, all our comp is tied to the 22% number. .

With the 3 elements that were clear headwinds. .

And our next question comes from the line of Ross Muken from Evercore ISI. .

This is Luke in for Ross.

Just hoping you could give a little more color on your margin assumption for next year? What you guys are thinking about pacing the FX headwinds, if any, what's going to be operational, what's pricing, et cetera?.

I think the question, Didier, was relative to the composition of our operating margin improvements for next year. And perhaps we can start with the mix between volume and OpEx and gross margins. .

Yes, I mean, the -- I mean, I'm not going to give you the full bridge. I mean, when we provided the guidance of 21% to 21.5%, we took into account obviously, the -- all the impacts that I've mentioned. So there is -- it's based on the 4.3% core revenue growth. So there is clearly an operating leverage impact.

And a lot, a lot of actions that are taking place to offset inflation and other headwinds that probably I have mentioned. The guidance assumes some level of increase improvements in gross margins as well as a reduction in terms of our -- the OpEx as a percentage of revenue.

So you have a pretty much on all fronts, some improvements, not as much as we had initially anticipated because of the 3 headwinds that I've mentioned. Some of it related to operating leverage and some of it related to the continuation of our Agile Agilent programs. .

And maybe just reminding the audience, Didier. When we first started this march almost 2 years ago to go to the 22%, we laid out a path, which is really around 60% was going to be on volume, the other 40% was going to be on OpEx improvements in gross margin. And I think we're thinking about the same kind of mix for 2017. .

That's right, yes. Absolutely. .

Okay, great. And I guess just one more. You guys did really well on the cash flow in '16. I think $647 million and you're guiding for $625 million.

Is there any timing impact on that '17 guide? And then, I guess, on the tax of '17, kind of what are you baking into that benefit down there?.

So I assume when you refer to timing impact, you're referring to special -- I mean between '16 and '17, some cash outlays only that could….

Yes, correct. .

Yes, there's a little bit. I mean, let me just highlight 2 potentially. This -- in fiscal year '16, we disbursed $66 million for overall Agilent variable pay and pay for results. Next year, we -- but we've changed our program so that we now do a lot of the cash outlays on an annual basis instead of semi-annual.

So we have the full brunt in '17 of improvements in '16 and the fact that we're going to pay in '17 something that is more than pertaining to '16. So it's going to be $91 million; going from $66 million to $91 million. So an increased capital cash outlay. And then second, we did not fund our U.S. pension plan in '16.

So our overall contributions to our worldwide pension plan was $24 million. We intend to fund our U.S. pension plan more in '17 and the contribution to the pension plan will move to $45 million. So an increase from $24 million to $45 million.

So that -- those are the 2 things that come to mind in terms of explaining some of the variance between '16 and 17. But even with those 2 headwinds, we are still showing, in our initial guidance, a nice increase of $30 million on a year-over-year basis.

And your second question?.

Related to tax rates. .

Yes, on the tax rates, I did mention at the May Analyst Day that we were going to work really hard on the reducing our tax rate by 2 percentage points over the course of the next 2 to 3 years. We are very happy to be able to deliver already 1 percentage point in this fiscal year '16.

We still are aiming to reduce our effective tax rate by other 1 percentage points over the course of the next 24 months as committed to or as indicated, I would say, in fiscal year -- in -- at the AID. But it's prudent to assume that the reduction will come in fiscal year '18 and not in fiscal year '17.

So in your models, we advise you to put a 1 percentage point's reduction in tax rate from 19% to 18% in fiscal year '18, not in fiscal year '17. .

Okay.

And does that include the FASB 2016-09 benefit?.

It includes everything. .

And our next question comes from the line of Doug Schenkel from Cowen and Company. .

This is Ryan Blicker on for Doug.

Would you be willing to provide what your LC/MS growth was in the quarter? And how that was impacted by the comparison relative to recent quarters and maybe what your annual growth was there?.

What I can tell you is that -- back to my earlier statement, is that we're winning more business that planned. So we're quite pleased with how we've been doing with the LC/MS portfolio. And, Patrick, you may just want to remind the audience of some of the new stuff that we've come out with.

So I guess, I'm not comfortable giving the specific of the growth rate. But just giving you a sense of trend of the business and maybe a few proof points of why we believe it's going as well as it is. .

Sure, again, we are confident that we are outgrowing the market on many fronts. And we have a very strong LC/MS portfolio. We launched a lot of exciting products at ASMS this year. And I think the reception of the market just underlines our strength. The combination of LC and LC/MS is important, and we think both are winning platforms.

We see strong adoption across all the end markets. If there was one market where we have seen some headwind, then it was probably at the pain management market segment. But that is also in line with what you probably have heard with some of our competitors. But overall, we have been very pleased with the result in Q4. .

Okay, that's helpful. And then it seems like there could be a repatriation holiday of some sort in 2017. I believe over 90% of your cash is currently trapped internationally.

Can you provide any initial thoughts on how you would you prioritize repatriated cash, specifically on M&A opportunities and returning capital to shareholders?.

Yes, sure, Ryan. So Didier, how about I make a few initial comments and then if you wanted to add anything to it. But, firstly, I think we also need to put a series of caveats on my response because we really don't know what this might look like. What strings might be attached to, how you can use it, whether you can use cash in a certain way.

But obviously, we would welcome this type of development, including a move to a more permanent reduction in U.S. corporate tax rates.

That being said, I think if you go beyond the theory, I assume with those caveats, I think what you'd expect us to do is handle the return to cash very much along the lines of how we're managing our current use of capital.

So we would want to use it for U.S.-based M&A, and we'd like to use that in situation where we've been using debt, such as our share repurchases so we would able to finance our share repurchases. And then we might look at our debt structure.

But I think what we want to do is, first of all, obviously, understand what are the restrictions that could be tied to it. Also remind the group that some of the cash does need to remain permanently investment overseas.

But we were -- if that particular situation would develop, we would like -- we would bring it back and use the cash very much along the lines how we've been using cash with the exception is I won't need to borrow money like I've done in the past for U.S.-based M&A or stock repurchases. I guess you might be okay with that, Didier.

You haven't said anything else. Okay. .

Absolutely. Absolutely. I was just waiting for his bated breath for the fine lines on the -- any chance, but yes. .

And our next question comes from the line of Jonathan Groberg from UBS. .

Mike, so I was just going back and looking, you did 6% growth organically for last year, 6% this year in '16. Just at a high level, you had some pretty tough, tough businesses and some of the industrial business this year and still put up 6%.

I guess I'm just wondering, as you look out to '17, are there some initial thoughts you have around the election from an end-market standpoint, outside of tax, that make you incrementally concerned? Is there -- maybe just high level of kind of what makes you think you're going to get that kind of 150 bps slowdown year-over-year. .

Yes. So great question, Jon, and thanks for that and obviously, we've spent a lot of time talking about this as a team and I mentioned to Alicia before the call, I think we may be the first company in our space that had to do guidance after the U.S. election. So what I'm going to tell you is the kind of factors we're thinking about.

And then also give you maybe some little bit more thinking about why we guided the growth rate we did as a company. But we don't yet have a position on these issues. What we do know is there's a multitude of factors that we need to pay attention to.

Regulated markets, what's going to happen to other customers in the food markets, the environmental markets, the drug -- the FDA regulatory markets? So we know there's going to be a customer impact. What's going to happen with U.S. government funding? A lot of our business is driven by U.S. government funding.

What's going to happen with trade agreements? There's been a lot of noise about Chinese currency. We just talked about the tax.

And will the M&A environment change in terms of -- so all I can say right now, Jonathan, is perhaps, like everybody else on this call, we kind of had a sense of the issues, but we don't know which ways these things are going to go yet, so we're not going to call them.

And we're just going to -- and that's one of the reasons why we took what we believe to be a prudent, cautious initial guide to FY '17. If I look at the end markets, I mean, pharma's going to continue to be strong. But we don't believe that it can continue to grow in double digits throughout all of FY '17.

So we've tapered down our expectations a bit about pharma. We also think that China has been just a -- just fantastic for us. I think our number for the year was 21% growth for the year; I'm dialing that back a bit to double digit.

So what we're doing is really just trying to moderate our view of growth for next year based on what we've seen to be some pretty difficult comparisons in some markets that really have been driving the business. As I mentioned to you, the wildcard is the turn on energy.

One of the things that you pointed out, Jonathan, and what I'm really delighted is, we've had 6%, close to 6% growth, 2 years in a row with our #2 market declining for 8 quarters. When that market turns, that obviously will help us in the growth.

So -- but I've learned over the first 2 years in this job, it's really hard to call in terms of major markets. So I'm not going to. And we'll just kind of keep an eye on it, and we'll update you as we go through the year, but that's our thinking about how we're viewing the U.S. election and the thought behind our end-market guidance for next year. .

And if I could just -- one more on the diagnostic and clinical market?.

Yes, Jacob's been dying to answer a question. .

Yes, so obviously, another -- you have 8% growth there. Obviously, you're probably going to say too early to think about how hospitals may react to the potential repeal of the ACA.

But how about the PD-L1 testing business, how much of your growth was driven by that market? And any -- can you size that market for us yet?.

Well, it's -- I can start by saying that we have been very pleased with the performance of the PD-L1 over the last 12 months, I think it's 13 months now. And it has growing, if not to our expectation, then above even. And we expect that to continue to grow now based on KEYTRUDA going first line.

And obviously, now with our companion diagnostic, we will see a bigger demand for it here in U.S., in Europe and in other regions. The market itself is very difficult to size. As you know, there's both been the companion with 1 drug and then there has been the complementary with another drug, and those have very different sizes at this point of time.

I still believe that the overall PD-L1 market might end up in the same size as the HER2 market.

But the difference is that HER2 is the only one -- one -- basically, one drug, one class of drug, together with one diagnostics, where the PD-L1 will be up to 5 different drugs, maybe more and 5 different diagnostic, maybe even for a lot of indications also. So this is as close as I can get to right now.

The market we place in is -- or the 2 companion diagnostics that we have today continues to grow strongly. I won't say that that's the overall arching driver for the 8%. Basically, all our businesses today have a very nice growth performance, but it's definitely contributing. .

And our next question comes from line of Derik De Bruin from Bank of America. .

The pace in the quarter was very good.

Can you talk a little bit about backlog and, I guess, did you pull -- are you worried that you pulled anything from the first quarter in? I mean, any unusual spending patterns that you thought?.

Yes, thanks for the question, Derik. So as I mentioned earlier, we saw strength throughout the quarter. And we were quite delighted with the results. And we're not specifically commenting about orders or backlogs. But I did say in my early comments that we're well positioned for 2017.

I would ask you to think about the Q1, particularly the impact of Chinese Lunar New Year. I told Didier, I said, don't want to talk about it in the Q1 call. So let's make sure that we include it in our guide. So that is the one thing that I would ask you to think about in terms of the next 3 months of the company's performance.

Because we think we'll probably push about a week's worth of revenue or so from Q1 to Q2 because customers just won't be there to take delivery, and as you saw, the growth rates have been really exceptional for us in China. .

So I'm going to -- I appreciate the New Year's comment. So I'm actually going to follow that up with another question. It's like are you -- have you had any conversations with your customers that -- I mean, obviously, you're not the only ones trying to figure out what the new world order is in terms of how spending is going to be.

Are you worried at all about potential in terms of lower CapEx spending, lower spending beginning of the year as people try to get their arms around what exactly the new administration has in store?.

No, actually, we don't have that concern. What we've been more thinking about is where's the thing going long term. So -- but in the next quarter, we don't have any real concerns about that. So -- and that's why we are doing a full year guidance here in November. And it's really hard to see what's going to happen longer term throughout the year.

But in the next quarter or so, we wouldn't expect that to have any significant impact. .

And our next question comes from the line of Paul Knight from Janney. .

This is actually Bill [ph] on behalf of Paul. Maybe just touching on China again. Could you maybe talk about what your underlying trends have been driving the outsize growth for the company.

Is it biopharma? Is it food? Is it environmental? And how does that impact as you look to next year?.

Yes, thanks for the question. I have to say it really was across the board with one exception, which is the chemical and energy market. So all the other markets were up quite substantially for us.

And I think this is consistent with what we had talked about in prior calls, which is really there's going to be a level of investment in China relative to quality of life issues and in environmental, in food, lined up directly with their 5-year plan that they're in the midst of a major improvement in their overall pharma industry and that there's a lot of money going on to research.

So -- and then I think the reason Agilent has been able to do so well here is we've got this combination of we've been working the organizational structure, the -- our channel model in the country. We've had a lot of stability over the last 18 months. So we've got a really strong team there.

And that combination of the team, our historical strength in China and the new products we have, it's all coming together in terms of growth. And I guess, I maybe just add one thing and, Mark, perhaps, you can comment here.

We often talk about the strength of end markets and the new products going to these end markets, but I think there's something going on relative to your business there and the move to services, I think, is worth a comment on as well. .

Thanks, Mike, and thanks, Bill [ph].

To add a little color to that is we've seen a fundamental shift in buying behaviors in China, largely shifting from the core areas and around Shanghai, Beijing, to some of the more Tier 2, Tier 3 cities, where services now is viewed as the commonplace purchasing item in China, and it's certainly driving the growth.

But the breadth of services, I think, in China, as well as the consumables business now, is the rest of the story, where they have reached the size and scale that they have the same interest that we'd find in the Western markets around enterprise services and consumables all coming together.

So starting, as you've mentioned, Mike, with our extraordinarily strong position to start with, the installed base of China has just allowed us to build the business and truly outgrow our expectations in the second half around this, too. .

Yes, I mentioned -- I ask Mark to comment on that because as you may recall, we really have changed the portfolio composition of the company, doing much more in the aftermarket. So cath lab instruments are actually less than 50% now of total company's revenue. And historically, China has been driven by new instrument purchases.

We're seeing increasing growth also coming from services and consumables. .

Great. And then just a follow-up for Didier on the guidance. CapEx up to about $200 million this year.

Could you maybe just talk about where the incremental dollars are going and maybe what you think the maintenance CapEx is for Agilent as a whole?.

Yes, the main reason for the increase, which is about $60 million, from $139 million this year to $200 million next year, is really the significant increase that we're planning in terms of our nucleic acid facilities, RNA-based therapeutics and -- in Colorado. So we had one facility.

We're still expanding the capacity of that facility, but we are building and we just started a few weeks ago 20 miles away a second facility that will kind of double the capacity when it will be put in production end of 2018, 2019. So that is the main reason for the increase.

And starting in 2018, we should start -- we will see a reduction in the CapEx. This is not the run rate. Our CapEx run rate is still between -- like between $100 million and $120 million per year. So this is way above our run rate. .

And our next question comes from the line of Jack Meehan from Barclays. .

I wanted to follow up on the diagnostics business. Really, I thought it was a nice quarter on a tough comp. I know you talked about the PD-L1.

But just any -- I wanted to focus on the Omnis and just whether you think you're picking up steam into 2017 and anything worth watching on the reimbursement side with that?.

Yes, Jack, thanks for the question. I think I'll pass it over to Jacob, maybe a little bit more color on the quarter results. .

Yes, it's -- we really continue to see overall in our ratings pickup definitely by Omnis that we see the growth is coming back. It's a nice momentum we're seeing and it continues to -- basically, it has continued to increase over -- during '16. So with that momentum, we expect that we will continue to see a good performance into '17 also.

From a reimbursement perspective, obviously, there are already some expectation how that will look like into '17 and '18 with the pharma and so on. But now we will have to see what happens under the new administration here whether that will change anything. But so far, we actually don't expect any significant changes into '17. .

Great, that's helpful. And then I just wanted to follow up on the margin again.

And just from our seat, what we should be watching? And what would push you to the 22% above level for this year? What are some of the actions that you think are going to be critical for doing that?.

Yes, I mean, Didier, feel free to augment my response here. But I think, obviously, it's going to be volume, which is about 60% of the margin improvement comes from volume. And the things that we can control, we're on top of. So it's really -- that's the one thing I can't control is what's going to happen in the market.

So obviously, there's that 60% tied to margin. And then we've got some pretty big initiatives in the gross margin area, with our water fulfillment team. I think you may have heard me speak previously about some of our work in value engineering, material cost, reductions in logistics.

So I think also we keep an eye on our gross margins as we work through the year. Some of the things take a while until actually they start coming through your P&L. But once they're there, they're there for extended period of time.

And, Didier, anything else you'd add to that?.

No, I mean, just that, I mean, we do have stretch goals. As we mentioned, we are paid internally on achieving 22%. And that means all of us have stretch goals to make -- to achieve that -- to contribute to the 22%.

And OSS, under Henrik, the order fulfillment and supply chain organization, which has delivered greatly in '16 is looking at opportunities to deliver even more in '17, which would help us bridge the gap. .

Yes. And thanks, Didier. I had one additional thought here is, I think it's important to remind everyone is that some of the things that are going to help in '17 have already been finished in '16. So things such as our simplification of our financial systems infrastructure. So it's done. And now the savings will show up in '17. .

And our next question comes from the line of Isaac Ro from Goldman Sachs. .

First question just quickly on the quarter. Curious if you could comment on pacing. You guys have the off-cycle calendar there with October.

I'm sure everyone is curious if whether it was on the capital spending side or any particular end market you saw a meaningful acceleration or deceleration in the month of October to the extent that portends the rest of the calendar year. .

No, Isaac, I just mentioned that what we saw was really strong pacing throughout the quarter. So it wasn't -- we didn't see something happen all of a sudden in the last 4 or 5 weeks. We had -- we had strength all through 3 quarters of our fiscal year close. .

Got it. And then maybe a longer-term question, Mike, regarding management incentives. You guys have spent a lot of time over the last couple of years talking about the emphasis on hitting your margin goals and you guys have done that pretty well.

So as you move pass that 22% number, I was wondering how you think about evolving inside of structure for the management team? And should we assume that the types of incentives you have in place stay in place maybe with slightly different targets? Or could the overall composition evolve a little bit here?.

Yes, Isaac, great, great question. And I would point back to what we discussed back at the May AID, where we really said, what this is really all about is generating superior earnings growth, right.

So if you think about what we're trying to do here is we're trying to outgrow the market, extend the operation margin to keep driving up our adjusted earnings per share growth. So what we'd like to be able to do is really that should be the focus of the team as we move forward.

Operating margin expansion and capital deployment and your growth and market are all ways to get there. So we'd like to really be that have become the cornerstone of our long-term focus. And we want Agilent viewed as a company who grows their earnings faster than revenue.

But as I mentioned in the AID is, I really want to also make sure that we don't get so focused on continuing to drive up the operating margin year in and year out that you pass on things that are immediately, say, accretive, maybe they're dilutive on your margins, but with good M&A additions to the business.

So I think the way we're going to talk about the company post '17 is very consistent with what we had talked about back in the spring in New York City. .

And our next question comes from the line of Brandon Couillard from Jefferies. .

Most of my questions have been addressed. Mike, just curious what you're embedding for the government and academia market globally for next year and any color you can give us sort of regionally would be helpful. .

Yes, sure, Brandon. As we -- as I look through my notes here, I think we're expecting low single-digit growth. And I think it's important to kind of parse it out by academia and government. So we think that if we go by the major regions, right, China is going to be strong. And they've actually helped mitigate some of what's been happening in the U.S.

and Europe. We're not expecting much in Europe. It's been down. It was down again, but not -- it was basically -- sort of almost feels like the chemical and energy market, which is kind of chugging along at a reduced rate. We're not expecting the governments there to do anything in terms of more stimulus.

In fact, one of things we're watching is what are they going to do as a result of Brexit, for those of things. So we expect a strong China, academia and government. We expect a continuation of this current environment in Europe. In the United States, the academia side is not bad. It's what we've seen more has been more on the U.S. government side.

The U.S. government -- our U.S. government business is down in 2016 relative to '15. And that's why in my call I mentioned, hey, we need to kind of see where this new administration goes with its budget plans and investment priorities.

So right now, we're kind of standing on the sideline just saying it's going to continue to be just like it is, but -- in the United States. But we could see something different in a few months, we just don't know. .

And our next question comes from the line of Dan Arias from Citigroup. .

Mike, just sort of following up on the outlook.

Kind of like how are you thinking about the pacing of growth in chemical and energy in '17? Is the assumption that you kind of see some sequential improvement through the year? Or are you basically flat lining the business across the quarter just given that we haven't seen much in the way of positive signals?.

I think you anticipated my answer. So we basically have a flat line for the year. And it hasn't -- it's been shrinking for the last 7 or 8 quarters 2% or 3%. I think we ended up down about 3% for the full year. And we're basically saying, it's going to be flattish for '17.

If there's any good news to that story is the fundamental industries are still out there in terms of gasoline is being produced. We've seen record levels of production in the United States, for example. The plants are running. There's a lot of discussion. There's a lot of reports externally about a turn. Oil prices have been inching up.

But our history here is that it's really hard to know exactly when it's going to turn. What I can say is that if you have a profitability productivity message associated with something you can bring to the laboratory, then they might listen to you. And we're hopeful that some of our new product introductions will hit the mark there.

But in terms of our overall market assumption and growth assumption for the company, we're assuming flat for '17. No big movements one way or another. .

Got it. Okay, great. And then maybe just to go back to the M&A and the margin comments. As we sort of think about the moving parts on the op margin guidance and just what you might look to do this year, how at risk is the current op margin outlook from additional M&A? I mean, obviously, it's tough to discuss these things in the abstract.

But are you open to further dilution if the right asset comes along? Or do you kind of think you hold the line with the current forecasts?.

Yes. No, I think what we've said, and I'm really trying to be -- have actions that are consistent with our prior communication. We said we would look at acquisitions that could be short-term dilutive in nature, and we did one the latter part of '16. And we just love having iLab part of the portfolio.

It's going to be -- it's a great addition to the business. But right now, it's not at the corporate average. We'll move it up. So if we saw other opportunities like that, we would pursue them.

But I think if you want to look at the type of the deals and the size and other things, just look at what we've done so far to give you kind of a sense of the things that we're looking at going forward. We like accretive deals, and we like ones that can move up -- move the margins up. .

And our next question comes from the line of Puneet Souda from Leerink Partners. .

Just a quick follow-up, if I could, on the pharma. And just wanted to understand, there's clearly a solid contribution here. If you could maybe help us parse out.

Is that more coming from sort of a small molecules or macro molecules? Or is this -- are we thinking about them correctly? Or maybe we should be thinking about in terms of the service contract share that you're gaining and via the CrossLab Group? Help us, if you could parse that out a little bit. .

Yes, sure. So there's a couple of things going on, which is in terms of the overall fundamental end-market growth rates, we think biopharma and the small molecule side of pharma are both growing quite strongly. The small molecule side is really being driven by a conversion to the new technology, the liquid chromatography in particular.

Also, an increasing interest in enterprise service, what we have to offer from ACG. So I think what's been going on here for Agilent, we've had a combination of really strong end-market growth. There's a new market that has and will continue to develop in the services side, and we're doing well there, along with our new instruments in the pharma.

When I look at '17, we think that the biopharma side of that market is going to continue to go quite strongly. It's been an area of prioritization for us in terms of new solutions. But we do think that over time, that the small molecule stuff will start to move back towards more of its long-term growth rates.

And, Patrick, I think what do we kind of think about our long-term growth rates in the small molecule side?.

Well, on the small molecule side, I think we are more in the low- to mid-single-digits range; whereas in biopharma we're more optimistic, and it continues to be double digit. That's our projection right now. .

All right. Great. Just one more. In terms of the chemical and energy market side, I mean, we get the view into 2017.

But as you have conversation with the labs and lab directors, just help us understand how they're thinking about capital equipment in 2017 knowing these times and knowing that the progression that's been? Or are they thinking more in 2018 terms in the -- on the capital equipment?.

I have to say, I don't think they really know yet as well. What they're doing right now is in they're right in the midst of their capital budgeting process. So what I can tell you is I've had a couple conversations with customers over the last 2 or 3 weeks on this exact topic.

And what they described for me is, hey, our end -- these are -- one customer was somebody who provides services into -- and equipment into the energy market. So listen, we're starting to get interest in quotes, but we're not sure whether it's going to hit in '17 or '18.

When we had our VIP launch for the Intuvo 9000 GC, a lot our customers were in the chemical and energy space. And it's, "Listen, we love this productivity message you have here. I think there's a real economic ROI. I'm now right in the midst of my budgeting process inside the company.

Maybe I'll be able to get this thing through this year or maybe the following year." Because there still seems to be the sentiment, particularly with the larger companies that they want to hold on to the equipment as long as they can before they have to replace it.

So -- and again, that's why I pointed to the fact that it's not all negative because of the fact that we do have a strong service and consumables offerings into that space. But again, we just don't -- I don't think our customers know yet as well what's going to happen. We do know it's going to happen. History will repeat itself.

There will be a replenishment of aged equipment. But again, we're just not confident enough right now to say when that's going to occur. .

And that concludes our question-and-answer session for today. I would like to turn the conference back over to Alicia Rodriguez for any closing comments. .

Thank you, everybody. And on behalf of the management team, I wanted to thank you for joining us on the call. If you have any questions, feel free to give us a call in IR. Appreciate it very much. Bye-bye. .

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day..