Alicia Rodriguez - VP, IR Mike McMullen - President and CEO Didier Hirsch - SVP and CFO Patrick Kaltenbach - President, Life Sciences and Applied Markets Group Jacob Thaysen - President, Diagnostics and Genomics Group Mark Doak - President, CrossLab Group.

Derik de Bruin - Bank of America Merrill Lynch Tycho Peterson - JP Morgan Steve Beuchaw - Morgan Stanley Brandon Couillard - Jefferies Doug Schenkel - Cowen Dan Arias - Citi Catherine Schulte - Baird Tim Evans - Wells Fargo Securities Jack Meehan - Barclays Paul Knight - Janney Montgomery Puneet Souda - Leerink Partners Steve Willoughby - Cleveland Research Patrick Donnelly - Goldman Sachs Dan Leonard - Deutsche Bank.

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Agilent Technologies, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded.

I would now look to introduce your host for today’s program, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead..

Thank you, Jonathan, and welcome everyone to Agilent’s fourth quarter conference call for fiscal year 2017. 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. References to revenue growth are on a core basis.

Core revenue growth excludes the impact of currency, the NMR business, and acquisitions and divestitures within the past 12 months. Guidance is based on exchange rates as of October 31st. 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. Hello, everyone. Thanks for being on today’s call. I’m pleased to have an opportunity to continue to tell the Agilent story, a story of strong revenue and profit growth that we’ve been telling for the past three years.

The Agilent team closed out 2017 with another strong quarter, capping off a tremendous year of revenue and profit growth. We again exceeded our growth expectations. Q4 revenues of $1.19 billion are up almost 6% on a core basis.

Reflecting our commitment to improve as Agilent’s operating margins, our Q4 adjusted operating margin of 23.3% is up 80 basis points. This is our 11th consecutive quarter of improving operating margins. The strong revenue growth and margin improvements resulted in Q4 adjusted EPS of $0.67, an increase of 14%.

Looking at the full year, we delivered a highest growth rate since the 2014 launch of the New Agilent. Our 2017 revenues of $4.47 billion are up 6.7% on the core basis. We have strong momentum going into 2018. Adjusted operating margin for the year is up 130 basis points over last year.

And as you know, in 2015, I committed to increasing Agilent’s adjusted operating margin by 410 basis points over FY14’s adjusted operating margin to 22% by 2017. I’m pleased to announce that we’ve made this commitment and accomplished our goal. We are not done yet of course, but this is significant achievement by the Agilent team.

We will continue to focus on making improvements in our operating results. The momentum in our business combined with our operational excellence drove a 19% increase in adjusted earnings per share for the full year to $2.36 per share. Let me now take a minute or two to look closer what’s driving our stellar results.

From an end market perspective, our chemical and energy revenue grew 15%. This was third consecutive quarter of double-digit revenue growth. Growth was broad-based across the spectrum of exploration, refining and chemicals.

We are encouraged by the uptake and reinvestment by our customers as they’re upgrading their labs and investing in next generation equipment. A return to growth accelerated in academia and government with 12% growth, which was above our expectations. Growth was broad based across product lines with particular strength in Europe and Americas.

Our higher than expected growth has resulted in improved funding environment and market share gains. Food revenue grew 10% against the difficult compare of 10% in Q4 of last year. From a product perspective, the strength was broad based, led by services, consumables, mass spectrometry. Regionally, Europe and Asia drove the gains.

Pharma revenue declined 5% against the difficult compare of 16% growth in Q4 of last year, which itself came on top of a 19% growth to Q4. We had been anticipating continued strong pharma investment levels with difficult compares slowing our reported market growth rates to mid-single digits. Some additional specifics of our Q4 results.

As expected, the LC replacement cycle continues in this small molecule market segment, but at a slowing rate. NASD revenue also is down, as we expected. We noted in our Q3 call that NASD revenues are batch based which makes them vary from quarter-to-quarter, depending on the timing of customer acceptance.

Market demand however for the NASD API offering remains strong. Our product and geographic mix also contributed to the results. We experienced strong order demand from Europe and for higher end mass spectrometry technologies. The order to revenues cycle is longer for Europe in these types of products.

We expect these revenues materialize in Q1 and Q2 of FY18. The biopharma segment of our pharma business remained strong along with services and consumables across the entire pharma end market. Diagnostics and clinical grew by 9% led by pathology and companion diagnostics.

Continued strong end-market demand and market share gains are driving performance. Environmental and forensics grew 4%, in line with expectations. Concerns about the health of our environment continued to drive the market in Asia. Geographically, our Company results are driven by higher single digit growth in Europe and China.

The Americas grew by mid single digits, and Asia excluding China and Japan grew by low single-digits. And finally, let’s turn to highlights from our business groups. The Life Sciences and Applied Markets Group delivered core revenue growth of 4%.

Market revenue was led by strength in chemical and energy, academia and government, and food, partially offset by declines in pharma. Double-digit growth in several platforms including mass spectrometry, microfluidics and cell analysis were key driver to reported growth.

LSAG had a tremendous year on the innovation front, launching several new high-impact products such as the Ultivo LC-MS triple quad with a 70% smaller footprint than its predecessor. The Ultivo, which began shipping this November and other recent new product introductions are being well-received by the market. This gives us momentum going into 2018.

The integration with recent acquisition of Cobalt Light Systems is going very well. Agilent’s CrossLab Group’s strong performance continued this quarter with 8% core revenue growth. Growth was healthy across services and consumables, most regions and end markets.

Our CrossLab’s Service and Support organization hit a significant milestone, $1 billion in annual service orders for the first time in a single fiscal year. This milestone was accomplished ahead of our initial expectations. It validates our strategic focus on developing a service business for the entire lab.

In a rather short period of time, our team has turned its services business into a key differentiated offering for Agilent. Through these services, we can as a strategic partner with our customers, helping them achieve greater lab efficiencies and outcomes. The customer response to our service offerings is overwhelmingly positive.

Our chemistry business and ACG also continue to be awarded for technical innovation with double-digit growth in the AdvanceBio column portfolio for the fiscal year. The Diagnostics and Genomics Group also delivered strong revenue growth of 7%. Demand is increasing for our pathology products and companion diagnostic services.

We are seeing continued strength of our PD-L1 and molecular products. As expected, our new Nucleic Acid Solutions business was down for the quarter, given the product driven nature of the business. As previously mentioned, market demand for APIs for RNA-based therapeutics remains strong.

DGG achieved a major milestone this year, delivering a 20% operating margin exclusive of acquisitions for the first time.

Three years ago, this business had a 13% operating margin; we have increased that to 20%, a tremendous achievement made possible by integrating and driving improvements in the former Dako business, bringing to the market compelling new offerings and executing on gross margin improvement initiatives. DGG continues to expand its market reach.

We received several significant FDA approvals this quarter for offerings that help our customers in their efforts to fight cancer. We received FDA approval for expanded use of our PD-L1 cancer diagnostics for Merck’s Keytruda and Bristol-Myers Squibb, Opdivo. We have been closely collaborating with both companies.

Our GenetiSure Dx Postnatal Assay received 510(k) clearance. This is our first comparative genomic hybridization assay approved by the FDA for diagnostic use. Our R&D advancements continue to yield differentiated and new products.

At the American Society for Human Genetics Conference, we introduced our first expansion of the SureGuide pooled CRISPR libraries for functional genomics. This new offering will help accelerate research in the complex diseases and drug discovery.

Agilent received the 2017 Scientists’ Choice Award for Best New Clinical Laboratory Product for the IQFISH Panel for Lung Cancer from the American Association for Clinical Chemistry. This award is elected through online nomination and voting by scientists around the world.

This demonstrates how we’re meeting our customers’ needs of products that win their trusts. Before touching on the 2018 outlook, I want to provide you with a perspective about our guidance philosophy and the market environment assumptions underlying our initial outlook. Later in the call, Didier will provide additional guidance specific.

We entered 2017 thinking that China and the pharma market would be strong. We also pointed out at that time that we moved into a period of increasingly difficult quarterly compares for these markets. At the same time, we were uncertain about the outlook for Europe and the chemical and energy market.

We closed out 2017 with China and the pharma market developing generally as expected; Europe and the chemical and energy market another hand exceeded our initial expectations growing 8% and 11% on a core basis respectively. We enter 2018 with a strong backlog and good visibility for the next one to two quarters.

For the full year, we expect pharma to moderate down slightly from a 6% growth rate delivered in 2017. We expect China to maintain a high-single-digit growth rate. For Europe and the chemical and energy markets, while we experienced unexpectedly strong 2017 growth, we will cautiously guide to lower growth in FY18.

A level of political and economic uncertainty persists across the globe, providing less visibility into second half 2018. We are taking a wait-and-see outlook for the European and chemical and energy markets. A few final comments about the next chapter in the Agilent story. 2017 was a stellar year for Agilent.

We delivered our highest growth rate since the lunch of the new Agilent. We raised our operating margins 410 basis points in three years to 22%. We grew adjusted earnings per share by 19%. While we’re busy improving our operating results, we’ve also been building the Company for the future.

Our Agile Agilent program continues to streamline the Company as we upgrade our systems and infrastructure, and drive continued process improvements. We continue to build an even stronger portfolio through our revamped R&D programs and execution of our M&A strategy.

We are delivering to the market truly differentiated offerings and augmenting our internal investments with acquisitions. These acquisitions are bringing to Agilent new capabilities and unique new offerings. We then leverage our Company scale to drive revenue and create cost synergies.

Our one Agilent cultural transformation is changing the way we work, improving the customer experience; it’s a key driver of our excellent results. We’ve just completed the third year of our Company transformation.

We now have a solid foundation in place, a proven track record of doing what we say we will do, and of executing winning a growth strategy. I often tell the Agilent team that the best is yet to come. We have momentum and I believe Agilent’s prospects have never been stronger.

Thank you for being on the call and I look forward to answering your questions. I will now hand off the call to Didier.

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 core revenue growth of 5.8% and 6.7% ,respectively; and our operating margin was up 80 basis points and 130 basis points, respectively.

Just as importantly, we reached the goal set in March 2014 to achieve 22% operating margin adjusted for income from Keysight in fiscal year 2017. Our full year EPS at $2.36 is 19% higher than the previous year.

Our operating cash flow for the full year at $889 million is $39 million above the increased guidance provided last quarter and $96 million or 12% higher than fiscal year 2016, reflecting a strong overall performance.

CapEx spending was $176 million, lower than our initial guidance of $200 million as some CapEx related to our new Nucleic Acid facility was pushed into fiscal year 2018. Turning to capital returns for the year, we paid $170 million in dividends and repurchased $194 million worth of shares. I’ll now turn to the guidance for fiscal year 2018.

Although we are comfortable with the present revenue and EPS consensus estimate, we believe as we did in fiscal year 2016 and fiscal year 2017 that it is appropriate to have a cautious first guidance of the year. Our fiscal year 2018 revenue guidance of $4.72 billion to $4.74 billion corresponds to a core revenue growth of 4% to 4.5%.

It is based on the October 31st exchange rates, and currency has a 1.3% positive impact on revenues. We project fiscal year 2018 adjusted operating margin of 22.2% to 22.7% and fiscal year 2018 EPS of $2.50 to $2.56, growing 7% at midpoint.

If market conditions and our performance continue as strong as we are presently seeing, we stand ready to reflect the ongoing strength as we set quarterly guidance in the future. As you update your models for fiscal year 2018, please consider the following 10 points. First, annual salary increases will be effective December 31, 2017.

Second, stock-based compensation will be about $72 million. As we frontload the recognition of stock-based compensation, the Q1 expense will be about $31 million. Third, depreciation is projected to be $101 million for the fiscal year. Fourth, the non-GAAP effective tax rate is projected to remain at 18%.

Fifth, we plan to pay $192 million in dividends, as the Board just approved a dividend increase of 13%. Over the last three years, we will have increased our dividend by nearly 50%. Sixth, as for buybacks, we registered 10b5-1 in September that includes two tranches with the maximum overall spend of $380 million.

The first tranche is to ensure the repurchase of 2.7 million shares with daily execution throughout the year, to maintain our diluted share count at about 326 million shares on average for the year. The second tranche as in the previous years is opportunistic.

Seventh, for purpose of our EPS guidance, we have assumed the diluted share count of 326 million, i.e. we have assumed that the opportunistic tranche does not get triggered. Eighth, net interest expense is forecasted at $59 million, and other income at $14 million.

Ninth, we expect operating cash flow of $970 million and capital expenditures of $200 million, which includes about $110 million to complete the new nucleic acid factory that will be operational in 2019. And tenth, the projected tax rate and cash flow exclude any impact from the potential U.S. tax reform.

Finally, moving to the guidance for our first quarter. We expect Q1 revenues of $1.145 billion to $1.165 billion, and EPS of $0.55 to $0.57. At midpoint, revenue will grow 5.25% year-over-year on the core basis and EPS will grow 6%.

At customary, Q1 EPS is negatively impacted by the December salary increase, the strong 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 will turn it over to Alicia for the Q&A..

Thank you, Didier.

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

Certainly. [Operator Instructions] Our first question comes from the line of Derik de Bruin from Bank of America Merrill Lynch.

Your question, please?.

So, can we you talk a little bit about the pharma results in the quarter. Just can you parse out the contribution or the lack of contribution from the NASD versus the European rev rec for us? And then, I’ve got a couple of follow-ups on that..

Sure. Happy to do so, Derik. So, I’d point you to three comments on our Q4 results in pharma. The first, the one that we’ve been signaling for most of the year which is tough compares. We came off 16% growth in Q4 last year then we had 19% Q4 the prior year. Second piece is the revenue recognition timing, and I think there’s two aspects of that.

One is the NASD business which we described in the call as really being a batch based business, kind of depends on when the customer wants to finish up the batch. But the overall market demand looks really good for these products. And then, as you are indicating, we had really strong results in mass spec and in Europe.

And typically, we don’t -- they will be order results. Typically, we don’t talk about order, but we wanted to give you a sense of the strength of our pharma business in these areas and how it translates into revenue going into the first half of next year.

The third piece would be that we are seeing expected slowing of the LC replacement cycle in small molecule side. So, those are three major drivers of our -- behind our Q4 performance in pharma. Just to remind, we ended up right on our full year guide. So, we came in at 6%, right where we thought we would in terms of pharma.

To your specific question, I would say the bulk of the downward trend in the quarter had related to the LC replacement cycle and the shift in European business, probably less than 15%, 20% was NASD, right?.

Correct, NASD accounted for about 1 percentage point..

Yes, 1 percentage point..

And just following up on this. I mean, last quarter, people were sort of having questions about inventory destocking in the biotech and pharma just because there were some mix results. It seems like also a little bit of that this quarter, but not as pronounced.

So, you are still not seeing anything other than tough comps that’s making nervous in terms of the pharma, biotech markets?.

No. In fact, that’s why we went on our way to give you some additional detail in this call, because fundamentals in pharma are still very strong. And then, the biopharma segment in particular has been a continued area of really strong growth for us, and we called that out in our script as well..

Our next question comes from the line of Tycho Peterson from JP Morgan.

Your question, please?.

The guidance for next year of 40 bps of operating margin expansion; you guys have obviously been trending above that; we have been modeling about 100 bps for next year.

Just, is that all the offset in the API investment or are there other areas your reinvesting?.

So, I think the question related -- good afternoon, Tycho. And the question of Tycho was we’ve got about 40 basis points of improvement in our guide, he’d been modeling more like 100.

Is the API, investments that are causing the gap?.

No, API had no -- the Nucleic Acid facility had no impact there. No, we just -- as we did last year at the same time, are cautious overall and have an operating margin that ties with our cautious revenue growth for the guidance. So, it’s consistent and hopefully we did the way, we did last year..

And I guess also that Tycho very much like last year, I made the comment that the management team continues to have a goal on operating margin that is higher than the guide that we just gave you..

And then, can you maybe comment on chemical and energy, where you are incrementally more positive? I think you said exploration is now growing; there are some nuances there you can call out.

And as we think about a year ahead, how should we think about chemical and energy?.

Yes. Sure, happy to do. And then, I’ll let Patrick in the Q&A, if I missed anything. But, we actually -- we now have seen a much more broader based growth scenario across entire spectrum of the chemical and energy market. In prior calls, we only had been focusing on that 60%, which is the chemical side of that space.

We’re now seeing reinvestment occurring also in refining as well as exploration.

Anything to add to that, Patrick?.

You’re absolutely right. We see now really the pent-up demand is kicking in and we see the replacement, we see replacement coming as expected..

Yes. So, we’re guiding to try probably mid-single-digit growth or 5ish next year for chemical, as I mentioned in my -- in energy, as I mentioned in my call script. We’re pretty confident about the first half and on a wait and see for the second half..

And then last, when you increased the dividend, it was a small increase, small dividend.

But, anything to read in that in terms of capital allocation, particularly as we think about the M&A landscape, your price are still pretty high?.

I think our strategy all along has been a balanced capital allocation policy, and part of that has been to continue to find ways to return cash to our shareholders and part of that formula for us has been increase in the cash dividends, up almost 50% over the last three. So, no read through on the M&A..

I think this is as more, I think a validation of our doing what we say we’re going to do..

Our next question comes from the line of Steve Beuchaw from Morgan Stanley.

Your question, please?.

My question is actually on costs takeout and incremental margins. If we go back to the financial plan, introduce subsequent to the introduction of Agile Agilent program, introduce a series of plans, taking out some number of tens of millions of dollars cost per year.

Some of those plans, going into 2018, 2019, and then more recently heard more about shared services savings.

So, I wondered if you could give us a sense for relative to those objectives, how you’re thinking about, within the context of the guidance for 2018 and 2019, just succeeding on hitting those objectives where they would have an 2018, 2019 impact, are we assuming that those targets get hit, are we assuming that they don’t hit and we’re taking wait and see approach on execution?.

No, I think we’re really quite pleased with our ability to execute. I think three years ago when we laid out -- I think it was pretty audacious goal at the time to do 410 basis points. And you saw us through -- those following three years, how we through a constant drumbeat of execution were able to deliver on that 410 basis points.

We have had same operational discipline today, it still exists and exists going forward. So, we have a whole series of plans inside the Company continue to sustain this ability to improve the operating margins. As you know, we’ve indicated at our prior AID that would be greater than 22 and this guide is consistent with that.

But we’re quite confident in ability to hit the guide that Didier just gave you..

Yes. And just, if -- we are very consistent, as Mike said, with what we stated last year. In fact, it’s amazing, because last year we provided our first guidance with 4 to 4.5%, exactly like this year in core revenue growth, and 50 basis points improvement in operating margin, which is same thing as this year.

We ended by beating our operating margin first guidance by 80 basis points to 22%. And obviously….

Okay. Thank you for that. And then, my other question relates to the buyback. You mentioned there are two tranches to the buyback; one, more maintenance, one, more as you say opportunistic. I wondered if you could spend a little bit more time on thinking around the buyback, the scale of the buyback. Balance sheet is obviously very strong.

How you make the decision about whether you allocate more to the buyback or not or potentially expand it? Thanks. .

Yes. As Mike stated, we do want to have a very balanced capital deployment policy, which we presented to the Board, both to support organic growth via CapEx to support inorganic growth, so to support business as well as dividends and buybacks.

So, $380 million with the big chunk of that being automatic since -- in line with our balanced capital deployment policy..

Yes. We’ve been talking on the rate scenario, about a percent of the outstanding shares, and that clearly would represent that.

And then, as we mentioned earlier, our continued primary focus for the use of the cash and the strength of our balance sheet is invest in the business, either through M&A we think that makes sense, the right valuation; and then, as you know, we are investing fairly heavily on the CapEx side right now. .

Yes. And if they would be more opportunistic as part of the U.S. tax reform to repatriate more cash, our intent would be to allocate it under the similar fashion and to maintain our present policy..

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

Your question, please?.

Thanks, good afternoon. Didier, maybe start-up one for you.

Could you walk us through your core growth assumptions for 2018 by segment as well as the SBUs, so sort of end market and between LSAG, CrossLab and DGG?.

Yes. Overall, we had our slowest growth, I would say for ‘18 which would be along academic and government, and environmental and forensics around 3%, and then the most important growth would be in diagnostics and clinical, not exactly the DGG, 6%; and the rest is in between so, you have chemical and energy….

And pharma is 4% to 5% range..

Yes. And guidance by group, obviously DGG has a lot of overlap but not only with diagnostics and clinical..

Okay. That’s helpful. And one for Mike. Curious to hear your thoughts on how you would characterize the quality of the R&D pipeline right now? And I think of late, you started implementing what you kind of referred to as a product cycle management system.

Can you sort of walk us through exactly what is and whether there any P&L benefits associated with that kind of over time that we should expect?.

Yes, happy to answer both questions. I am going to invite again Patrick on the second as well he is the executive sponsor on our PLM program. But, we’re super excited by the strength of our R&D pipeline. And you may have noticed in my earnings call script, I talked about how we’ve revamped our R&D programs a few years ago.

Now, you are seeing some great things come to market. And as I tell my team all time, we are not done yet. So, we have a nice rhythm of continued introductions we are planning over the next few years across all three groups.

So, we are really pleased with how our teams -- the ideas we have but also our teams are actually executing on delivering to the market.

And you are exactly right, I think we called this out in our last call, but we’re investing pretty heavily right now in a new -- it’s actually I think our first ever product lifecycle management system which really will give -- a new one, been a while I think Patrick.

And this is really going to drive a lot of efficiencies in the R&D process as well as it’s going to drive continued reductions in cost of sales because of -- why don’t you share some of the details, Patrick?.

Thanks Mike and thanks for the positive comment on the new product. So, the focus of this program is really on improving R&D efficiency and new product introduction.

The efficiencies that we will implement a new product lifecycle management tool, which takes really a lot of the manual processes we still have today, make sure that we’re in full compliance also on medical device side as we bring more and more products from neonatal [ph] business into clinical environment.

And with this, focus on improving the tools and processes, we are really shooting for much higher throughput from our R&D program that we have potential [ph].

We are really pleased with the work we have and I would say we are definitely positioned well to continue capture market share by bringing more of these breakthrough products to the market like we did last year, as we did [ph], Ultivo product, [indiscernible], you name it. There is a whole suite of new products out there.

We have a strong pipeline and I think it was time for us to update tools and processes in R&D as well and new product introduction, make sure that we get the best efficiency possible out of our engineering group..

2018 will be a year of investment. But, as you go out in the next few years, you can see reasons why we think we can continue to improve the effectiveness of our R&D investments as well as continue to lower our cost of sales. We are investing to make it happen. It’s not just hope and a prayer..

Our next question comes from the line of Doug Schenkel from Cowen. Doug Schenkel from Cowen.

Your question, please?.

Didier, based on your cash flow guidance, it seems like after backing out CapEx, dividends and the first tranche of buybacks to counter share creep that you’d still have over $350 million of cash flow to be deployed. And this is assuming you don’t beat your guidance which you characterized as conservative.

Should we view the other $350 million plus in cash flow is being there for M&A and the opportunistic buyback you describe, what we should think of as at least the initial budget for those sources of cash?.

No. We look at the M&A on the standalone basis, so based on how much value we can create through those programs. We clearly are not limited by, for example, how much cash flow we will have left over from what we generate during the year. In any case, if it is U.S. M&A and there is a tax reform, we’ll have to borrow to fund the acquisitions.

But, we have much larger financial capabilities in terms of M&A, and the number that you are quoting. And we have a very, very significant pipeline, all three presidents on a regular basis, present to Mike and me whole set of potential acquisitions. And that’s beyond the number that -- in terms of the number that you’re quoting -- you have quoted..

Okay.

And then, I guess, just as further clarification, if $350 million is isn’t towards M&A and you have the additional budget and additional sources for M&A as you described, where does that 350 go? Is that largely towards those opportunistic buybacks?.

It goes into outside of the U.S. The issue that we have dealt with on an ongoing basis is that we -- most of the cash that we generate, we generate outside of the U.S. So, if we intend to spend it in the U.S.

-- and it is true that if we only spend “$380 million” this year and buy back, we still have opportunities the Board gave us back in May of 2015, larger allowance to use our three years. So, we do have an opportunity there to spend more money on buyback. But if we do that, it will have, it will be funded through increasing U.S. debt..

And I just want to go back to -- I think it was Derik’s first question on pharma growth.

Would you be willing to specifically quantify what pharma growth would have been excluding the NASD impact? And based on your comments on mass spec and European order results recognizing your commentary in your prepared remarks, is the expectation in guidance that those European and mass spec orders that you called out, turn into revenue in Q1 and Q2?.

Yes, happy to provide additional insights, Doug. So, the first piece is that of the 5% decline, we saw in Q4 2017 over Q3 2016, 1 percentage point of that came from NASD. The second piece of it is, will we expect to have the revenue show up in Q1 and Q2, yes, absolutely. So, these tend to have a three to four-month cycle from order to revenue.

And like I said earlier, we don’t typically talk about orders, but we wanted to make sure that we make clear that the pharma business remains quite solid for Agilent and we have a nice backlog..

Thank you. Our next question comes from Dan Arias from Citi.

Your question, please?.

Just maybe going back to the new product discussion. Obviously, a lot of focus on the Intuvo replacement cycle.

Can you just maybe talk to how material you think contributions there are likely to be next year?.

I think it’s a very similar kind of story you’ve heard from us in the past. I think you’ll start to see increasing levels of direct contribution of that product to our top-line revenues.

As you know, in the past, we’ve also talked about the halo effect it’s had on all the aspects, or I guess from a targeted portfolio as our product is just reinforced, who is the leader by far in this space. So, a lot of the growth in the chemical and energy space is being fueled by gas chromatography sales.

So, we expect it to be a continually larger contributor to our growth. And as you know, that’s -- we’ve got our guide outside of the clinical diagnostics market. We have chemical and energy as our second strongest market next year in terms of our initial thinking for overall growth rate. And Intuvo is expected to be a contributor there..

Okay, thanks. Maybe just a follow-up for you or Didier, just on the outlook. I believe the comment there was that you were comfortable with the consensus number for 2018. I mean, I guess if we were to think about you’re getting to core growth, it’s more like 6 and 4 next year.

What businesses seem like most likely you’ve gotten in there, which -- where do you feel the segments are most conservative in the outlook? Thanks..

Yes. I would just reemphasize a few points I made in my call script. By the way, I talked about in my narrative, kind of remind everyone that last year things turned out -- we’re just super pleased with how this year progressed, but there was some uncertainty last year.

And things don’t always turn out exactly how you think, that’s why we’re taking a sort of wait and see, as it relates to the second half of the year for the Company.

I think the two areas to keep an eye on, a little bit growth rates in Europe sustain at these unexpected levels we’ve seen over the last quarters and the other one is chemical and energy.

So, I think those are the two watch ones for you to keep an eye on in terms of where the upside could be, if those growth rates continue at the same rate we’ve seen the past few quarters..

Okay. Very helpful. Thank you..

Thank you. Our next question comes from the line of Catherine Schulte from Baird.

Your question please?.

I was just wondering if you could walk through some focus areas for DGG next year, be it expanding multiple comps offerings more globally or any new product launches to call out?.

Yes, absolutely. I’m delighted to give Jacob a question on this call. So, this is -- and again, we were just so pleased with the results for DGG this year.

Team really hit a major milestone of achieving significant improvement in operating margin for the business and really think we’re seeing the benefits of how we’ve turned the former Dako business around.

So with that, Jacob, let’s move away from the past and talk about the future?.

Yes. Thank you for that. And I see, as 2017 was strong, I continue to see also that 2018 is going to be strong, actually across all our five divisions, and you start out with Multiplicom. We have now integrated Multiplicom into Agilent infrastructure. So, we can now really take the full advantage of Agilent’s reach.

So, I’m pretty pleased and I’m expecting a lot out of Multiplicom in 2018. But I see that also very much in a combination with our old technologies.

We will of course continue to invest into the [indiscernible] which is the former [indiscernible] platform, combining our bioinformatics pipeline with our strong presence in target enrichment, Multiplicom being one but clearly also SureSelect and HaloPlex, that we speak a lot to the genomics.

And our whole strategy will continue to be to move into the clinic and build a full workflow around our offering here. We continue to see strong growth in the pathology business where PD-L1 has been a great success story. But, really, also on this platform, it’s having a lot of momentum. So, I also continue to see a lot of traction in that space.

And then, obviously, the NASD business, we see a lot of tailwind there. We are -- we will continue to be really limited by our capacities. Really pleased to see that announcements coming out in the market about the RNAi drugs getting close to commercialization and we start to see a lot of interest by lot of other pharma companies out there.

So, I see a lot of opportunities in the space and good future productivity..

And then, any hurricane impact on the quarter to call out?.

Catherine, nothing of materiality for the Company..

Our next question comes from the line of Tim Evans from Wells Fargo Securities.

Your question, please?.

Just wanted to take a step back and look at the pharma issue from more of a macro level. It does seem like the comments you’ve made all basically amount to a fairly material deceleration in pharma end market growth in 2018.

And if I kind of think about the elements that you’ve called out, it sounds like maybe the replacement cycle in LC might be the driver of that.

I guess, first question is that, is that the right way of thinking about it? And then, if so, what are kind of the macro things happening in the pharma end market right now that you might draw line to as the major factors there?.

Sure, Tim, happy to provide perspectives. First of all, I would actually characterize a little bit differently. I wouldn’t characterize it as a pharma issue. For the last 12 to 18 months, we have been calling this. We have been saying that when we think about the pharma market, think about two segments, small molecule and large molecule.

Large molecule biopharma, very, very strong, continue to be very strong. There are still investments going on in the small molecule side but we’ve been saying that there is going to be a slowing of a growth rate because you get to the difficult compares and investment levels aren’t going to keep increasing at those 15%, 19% kind of growth rates.

So, we actually don’t see it as a pharma issue at all. This is actually developing exactly as we had bought. That’s why I mentioned earlier that our full year guide last year had us 6%. And Didier I think we ended up pretty much close on 6% for the year. And then, there is some good fundamentals.

I mean, there is the NASD business, which you know is batch based. We know that the demand is there for 2018. We’ve got very good demand for mass spec products in the pharma space. And then, if you look at the numbers, our ACG business continues to be strong, both on the services and consumables side. So, we actually don’t see pharma as an issue.

We see it as continued area of strength for the Company. But we’ve been signaling for some time that there will be some moderation of overall growth rates in this segment, primarily because obviously of large numbers and difficult compares..

Our next question comes from the line of Jack Meehan from Barclays.

Your question, please?.

So, one in terms of cash, I think you’re coming up on the decision related to the final Lasergen payment.

Is that something we should embed in the 2018 forecast? And then, just any updates on development of a clinical NGS workflow?.

So, what I’ll do is provide you some comments around the guidance, inclusion or exclusion and then maybe Didier, you can just provide a few voiceover on how things are going with Lasergen. So, as a reminder, we have the ability to make a call option -- calling option in 2018.

Just like any other M&A possibility, it’s not included in our guides at this point in time.

So, Jacob, if you comment on how things are going?.

Yes. I would say, we have a very good relationship with Lasergen, and I I’m very pleased to see the Lasergen team and our Agilent come together. And as you might recall, we are not only get to develop an instrument but full workflow. So, what’s very important is that the teams work together, both for the instrument, but also for the full solution.

So, the whole workflow works together. And I see that -- that we have very good momentum here and things are moving forward according to our expectations..

And then maybe one more for Jacob, while we’re on it, the margin expansion in DGG. Obviously, another great year there.

Just help us, what do you think the long-term opportunity is here, how far do you think you can push margins over time?.

I’m quite interested in this answer too, Jacob..

I’d say that I am very proud of the team of what we delivered over the three years, of 700 basis points improvements with the CAGR of 8% over last three years growth. That is a very impressive turnaround of a business. We will continue to look at expansions.

But, I can tell you that we don’t want to go with the same rate we have done over the last few years. We think -- we are out there with industry, with the average of industry and obviously we’ll continue to improve. But we will also make sure that we invest into the business going forward..

Our next question comes from the line of Paul Knight from Janney Montgomery.

Your question, please?.

Hi, Mike.

Is the Nucleic Acid facility on schedule or where are you with the timing on that?.

Yes. Good afternoon, Paul. Right on schedule. So, just as a reminder, the plan has been to complete the construction in our 2018 and then move into validation process, which is probably 9 to 12 months, we think Jacob. But then, we’re looking at maybe second half 2019 back half is when we start to see some revenue coming out of that facility.

And just as a reminder, the first, a full year capacity would add approximately $100 million of revenue to the Company. It’s really quite an impressive new facility we’re building, I had a chance to visit. And the construction is moving on quite well and we’re now into the final phases.

So, we have a much better view of -- and confidence if you will in terms of the timeline. So, it’s a very unique facility, but we’re getting pretty close to the end. So, we have a high degree of confidence on the timeline..

And then, also, you’d mentioned on the diagnostic side, your FISH panel won award.

Now, are you getting traction in your FISH panel for PD-L1 due to automation accuracy? But I know automation had been issue in the past years, I guess that’s solve or what’s the color around that?.

Yes. What I’d like to -- let me make some additional comments and Jacob, please jump in here. But as Jacob pointed out, he used the word attraction of the Omnis platform and I think that’s where historically the former Dako organization had some gaps in its offering, relative to automation.

We came out with the new platform almost like a three years ago and really it’s been well accepted in the market. You’ve seen us talk about from big wins like the Quest win here in the U.S. And I think that’s been on the -- part of this been on the strength of the new automation platform.

Anything else, you’d add there, Jacob?.

I will say that all our IHC and PD-L1 is automated on one platform or the other. And we obviously have the strategy of having PD-L1 automated on both of our platforms going forward. The same on FISH, the Omnis platform was built primarily IHC but also for the FISH assays. And it’s actually automated on -- the FISH is automated on Omnis today.

So, you can actually do that already today..

Okay. And then, Mike, just to refresh, on pharma you were talking 6% growth this year, but a little lower in your guidance.

Is that what you had mentioned?.

Yes, absolutely, Paul. So, what we had said was a slight moderation I think in the 4% to 5% for next year..

European Linked?.

I’m not sure I understand the last comment, Paul?.

Due to European budget is uncertain?.

No. The main reason there is a slight downward movement in terms of the outlook is really just based on the small molecule side of that segment that we’ve always felt that that’s what will continue, but not at the high double digit rate. So, this is more a question of really tough compares. The overall fundamentals are really solid.

The comments around Europe really had to do with the timing of why we believe that we’ll have the kind of numbers we talked about in pharma next year, because there could be some questions raised, right, which is minus 5% Q4, 2017, there; is there something fundamentally a concern there.

And we’ve gone out of our way in this call and really tried indicate no. And in fact, the order backlog is quite solid in the number of product categories which we’ve not yet seen revenues for, and that we’ve been thinking this is exactly how the market would develop. So, this is not at all surprise to us..

Thank you. Our next question comes from the line of Puneet Souda from Leerink Partners.

Your question please?.

Hi, Mike, thanks for that. Just a quick question on the GST.

Was there impact from that in the quarter from India?.

Go ahead, Didier. .

Yes. There was a little bit of an impact. And I think as everyone who -- each of our competitors who is operating in India has also identified a slowdown due to the fact that customers and companies are just linked to the new agreement. And we think over the next few months, it will build -- the business will return to normal..

It did have some impact on the pharma reported numbers, because we’re heavily weighted towards pharma in India. But we didn’t want to give you a whole -- of all kinds of details. But that did have some impact on our Q4 pharma results, although the business is coming..

Okay, thanks for that. And if I could ask a bit of a strategy question on the LSAG business. I mean, traditionally, the LCMS instruments competed more on the sense of the end resolution, and now you have successfully kept those with Ultivo and brought about a smaller size and potential greater ease of use here.

Could you maybe elaborate how that’s translating to it? I know this is early, so the instruments are starting getting out.

Are those the same customers that are appreciating the same product or are you getting new customers into the mix?.

Why don’t you take that, Patrick?.

Thanks. Actually very good question. When we launched the Ultivo, we really launched it with a perspective that we want to dominate what we call the routine applications out there. And we are going first for food and environmental spaces, given the mass range the product has.

It is a product that is really tailored towards ease of use and meeting the sensitivity needs that you mentioned as well for the targeted applications. I think this product will display a lot of strength in other areas as well. So, we will extend the range around Ultivo going forward.

But when you talk about the overall strategy for LCMS, we are not entirely focused just on the routine markets. As you know, we have launched a bio[ph] solution very successfully which drives a lot of growth in the biopharma market as well.

So, with both playing in triple quad as well as top [ph] space where we think there we have plenty of opportunity to still gain market share. And to Mike’s comment on strong R&D pipeline, LCMS is clearly one of the big bets we have in the Company, very heavily investing in R&D..

Thank you. Our next question comes from the line of Steve Willoughby from Cleveland Research.

Your question, please?.

Two questions for you. First, just following up on the Ultivo. It just started shipping this month. I was wondering if you could comment on what your capacity looks like for that system. And I guess with that, what kind of contribution can new products contribute in 2018? And then, I have a follow up..

Yes. So, I think relative to the question about capacity is from a manufacturing standpoint, no issue at all. So, we’ve -- in fact, we are right now our launch plan with our manufacture lease have incurred at schedule. And you may have noticed in my call, we actually have begun shipping the product.

And I think we don’t call out specifically, the revenue impact on new products. But, I would say this is just part of our formula.

So, over the last three years, we have been out going to market, and we just put up our biggest growth rate in the history of the new Agilent, although I think I officially retired this, I had to stop using that new Agilent.

But I think that’s part of our formula of success and I think that’s why I used the word momentum a few times in my script because we really feel like both in terms of the products that we’ve released over the 12 to 18 months plus the products we know that come out in ‘18 will continue to have momentum because each of our three business groups have a pretty robust set of R&D development activities and commercialization plans for next year as well.

So, should we go on to your next question?.

Sure, thank you. I just was wondering if you could comment on the competitive environment within the CrossLab of lab service business.

One of your competitors made a comment a week or two ago regarding some wins and just if there’s any changes going on in the competitive environment for lab service outsourcing?.

Yes. I’m actually going to pass this right over to Mark Doak who runs that group for us.

Mark?.

Well, thanks, Steve. And as far as the business is concerned we continue to see very robust demand for our services. And as you look at the deals, they come and go; there is nothing particularly material that we have in play that would actually change our trajectory for growth.

So, for us, we continue to see, not only opportunity for the services in pharma but we are seeing stretch now into the broader aspect of commercial laboratories. And as Mike had said, we continue to bring to market robust set of capabilities into next year.

So, from a broader market perspective around services, lab wide, demand is still there and we expect good demand going forward?.

Yes. Steve, I’m glad you asked that question, because as you know the creation of the Agilent CrossLab Group was on the major initiatives that came out with three years ago. And I can remember the time when we got off to a really good start, is it sustainable.

And I think you’ve seen Mark and the team have been able to deliver high single digit growth for quarter in, quarter out. I think it really speaks to the power of the value prop to the customers..

Our next question comes from the line of Patrick Donnelly from Goldman Sachs.

Your question, please?.

Sorry to harp on this, but in terms of revenue order push out on the pharma side. Is that what’s driving? I know you’re talking about recognize it early in fiscal 2018. Is that what’s driving the 1Q growth higher than rest of the year, calling for 5.25 in 1Q, the rest of the year close to 3.5.

So, just wondering, does that make up that delta -- is it adding as much as 1% or 2%?.

Patrick, thanks for the questions. I’m glad you noticed that our Q1 revenue guide is higher than our full year guide at this point in time. And clearly, the pharma order to revenue conversion is part of the story. But I think just a greater story here, which is momentum in all three of the businesses.

And that’s why we wanted to reflect it in our Q1 guides. Listen, we don’t know right now how the second half of the year will play out. But, we’ve got a good feel for the first -- next quarter too. And that’s why you’ve seen us guide higher than our full year core growth guide.

So, Didier, I think this is departure from last year where when we actually guided lower in Q1 2017. So, pharma is part of that, but is not the exclusive part. I mean, this European mass spec story is part of that, but not the exclusive story for strength of our Q1 guide..

And then, on China, high-single-digit a bit on the low-end of the recent range and it’s been more of double-digit grower for you guys.

Anything to call out in the environment there or is it just purely a comp story?.

Thanks for this question as well. So, you may recall, last year, Q4 2017, we had 27% growth in China and 27% growth in what is our second largest market. We had been calling for a 10% growth for the full year, for China. And that’s exactly where we landed.

So, we’re super pleased again with how the China business has developed over the year, right according to plan. Key contributor to growth and 10% growth this year for the full year off a very difficult compare, we are really quite pleased with result.

So going into 2018, we’re expecting us to be in that – continue to be in that high-single-digit growth rate for China. So, continue to be an important contributor to the Company’s growth..

Our next question comes from the line of Dan Leonard from Deutsche Bank.

Your question, please?.

Now that the transformation is complete, there is no more new Agilent, you’ve hit your targets, how should investors think about the operating model, going forward in a normalized year? Is the 2018 guidance the right way to think about it, a mid single digit core revenue growth rate and high single digit EPS growth rate?.

I think -- first, I’d say, the transformation is probably never done. What we’ve done is we hit some milestones for the Company, because we put out some three-year goals for the company. I think what I’d ask you to think about is, we believe that we will continue to grow earnings above revenue.

We believe that we will continue to outgrow the market and our operating margin expansion track will continue. We’ve been very deliberate in terms of how we’ve improved our operating margins. And I think as Jacob kind of hit on this as well, which is we haven’t done anything that will compromise our ability to grow long-term.

And I think that’s served us well. So, we’ve been taking cost out and improving our operations over the last several years. And we’ve been doing it in such a manner that has allowed us to really continue to sustain our growth. And then, I think the foundation of this company is set for continued outperformance.

So, I would just say that way I ask you think about the Company is a company that can generate earnings growth faster than revenue growth and that whatever market environment that we encounter, we’ll be able to outgrow the competition.

And we have this whole constant improvement we call our Agile Agilent program inside the Company, which is a mindset of continued process improvement. So, we think we are going to continue to be able streamline the Company and improve operating margin.

We haven’t however put out as you know three-year long-term goals beyond the fact that we’re going to do better each year..

And then, my follow-up, I’m trying to understand what some of the levers are in the second half revenue guidance of low single digit core.

And specifically, how sensitive is that in your minds or even in your customers’ mind to the price of oil? Does that assume that oil goes back down to 45? And if it stays at 55, you would do better than those numbers or anything you can speak to on that front?.

No, I think, if you look at comments, we’re all kind of looking -- try to say that’s probably not the biggest driver, I would look at PMI. And I think, PMI is a better indicator of the overall growth in our chemical and energy business. Clearly, price of oil has some impact, but PMI is a major driver; there is a very high correlation.

So if the trends will continue, then we’re probably in good shape in the second half, but we’ll have to see..

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..

Thank you, Jonathan. And on behalf of all of the Agilent management team, thank you for joining us today. If you have any questions, please give us a call in IR. And I’d like to wish you a good rest of the day and a happy holiday season for those of who will be celebrating it. Thank you very much..

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