Good day, ladies and gentlemen. And welcome to the Agilent Technologies Fourth Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. I’d now like to turn the call over to your host, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Thank you, Patrick. And welcome everyone to Agilent's fourth quarter conference call for fiscal year 2014. With me are Bill Sullivan, Agilent CEO; Mike McMullen, President, Chief Operating Officer and CEO-Elect; and Didier Hirsch, Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be Fred Strohmeier, President of Agilent’s Life Sciences and Diagnostics Group; and Mark Doak, Senior Vice President of Agilent CrossLab Group. You can find the press release and information to supplement today's discussion on our website at www.investor.agilent.com. There - 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, 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 Bill, 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 make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties, and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Bill.

Thanks, Alicia, and hello, everyone. Today Agilent including Keysight Technologies reported Q4 revenues of $1.81 billion, operating margin of 20.7% and earnings per share of $0.88. Keysight Technologies discussed their performance and outlook in a separate call earlier today. Accordingly, the rest of the numbers we will share today deal exclusively with Agilent’s performance in Life Sciences, Diagnostics and Applied Markets. New Agilent reported fourth -- record fourth quarter revenues and orders. Revenue of $1.04 billion increased 3% versus last year, orders of $1.15 billion were up 5% over year ago, operating margin was 20.4%, book-to-bill was 1.1. In a moment, Mike and Didier will discuss the details of the Q4 performance and outlook for the new Agilent. However, I'd like to highlight three major accomplishments during the quarter. First, we completed the separation of the company. The Keysight and Agilent teams executed a flawless separation of the company without impacting the day-to-day business of either company. With the completion of the separation of the company, we have created two companies with greater strategic and management focus, with each company well-positioned for growth and long-term shareholder value in their respective markets. Second, during the quarter, Agilent retired an additional $500 million of debt, to maintain our leverage at a level consistent with our current investment grade rating. Third, we named a new CEO. In September, we announced that Mike McMullen had been named Agilent’s President, Chief Operating Officer and CEO-Elect. Mike will become CEO on March 18, 2015, the day of the Annual Shareholder’s Meeting. With the separation now complete, this is the perfect time to name the new CEO for the new Agilent. Mike and I are working to ensure the transition is smooth and seamless to the organization, customers and investors. I will now turn the call over to Mike.

Thanks, Bill. I’d like to share some of the details behind the quarter’s results. To reiterate, LDA or new Agilent’s fourth quarter revenues came in at $1.04 billion, or 3% growth year-over-year. Unfavorable currency, lower NMR revenues and late orders drove the difference from August’s guidance of $1.08 billion at the midpoint. As a reminder, in October, we announced our exit from the NMR instrument business. We are no longer taking NMR instrument orders and our current backlog will ship in 2015. Excluding NMR and currency effects, each having a negative 1 percentage point impact on reported growth, revenues grew 5% and orders grew 8% compared to a year ago. Now, turning to results by end market and growth on a reported basis. Within the Life Sciences and Applied markets, Pharma/Biotech was up 5%, driven by equipment refreshes from large and mid-size pharma customers, and continued specialty pharma demand. Life Sciences Research or academia and government was up 4% again this quarter, driven by improved government spending in the U.S. and China. Government spending particularly in the U.S. and China contributed to growth in Forensics up 6%, Food Testing up 4% and Environmental up 2% over year ago. Chemical and Energy revenues remained relatively flat, growing 1%. Pressure from reduced crude oil and natural gas prices, and continued softness in the industrial market slowed demand. Turning to Clinical and Diagnostics, revenues grew 1%, with solid demand for genomics products related to cancer applications and Mass spec for therapeutic monitoring offset by lower Pathology revenues. Geographically, economic recovery and government spending continued to drive growth in the Americas, up 6%. Asia excluding Japan grew 5%. We saw low single-digit growth from China, led by Life Science Research, Environmental and Food Testing. Europe was flat in the quarter. Continued strength in Eastern…

Thank you, Mike and hello, everyone. Bill and Mike have already covered Q4 orders, revenues and EPS. I will add that LDA’s 20.4% operating margin is in line with our volume-adjusted midpoint guidance. Also, please note that we spent an incremental $9 million in Q4 to address the FDA warning letter. Without this expense and assuming we had already exited the NMR related business, therefore saving $15 million on an annualized basis, LDA’s Q4 operating margin would be about 22%. Finally, we redeemed $500 million of debt in Q4 and generated $166 million in operating cash flow. This is lower than traditional for three main reasons. First, we paid $80 million for the redemption of the 2017 notes and also prepaid the current interest on the note. Second, pre-separation expenses amounted to $70 million. Third, we paid $41 million in taxes related to the spin. Also note, that we booked mostly non-cash charges related to the exit of the NMR-related business of $68 million. I’ll now turn to the guidance of fiscal year 2015. Our fiscal year ‘15 revenue guidance of $4.12 billion to $4.18 billion assumes the economy will pick up moderately in the second half of our fiscal year. At midpoint, our year-over-year growth will be 2.5% on a reported basis but 4.9% on a core basis, the difference due to currency. We project fiscal year ‘15 EPS to range from $1.68 to $1.78 with a midpoint of a $1.73 as per our October 17 guidance. As you update yours model for fiscal year ‘15, please consider the following, First, annual salary increases will be less effective December 1, 2014. Second, stock-based compensation would be about $65 million. As we frontload the recognition of stock-based compensation, the Q1 expense would be about $26 million. Third, depreciation is projected…

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

[Operator Instructions] The first question comes from Doug Schenkel with Cowen and Company. Your line is open.

Hi. This is [Ryan Burke] [ph] filling in for Doug. Thanks for taking my questions. It appears as though that China pressures haven’t completely subsided despite the low single-digit growth in the quarter. From your commentary, it sounds like it outpaced your expectations, but you sounded very positive on the spending environment in China in the quarter. Can you talk about what are you seeing in the marketplace, as well as what relative growth from China is baked into your current 2015 guidance?

Brian, this is Mike. I will field the question on China. So, I guess, I think your read through in the commentary is correct. We saw low single-digit revenue growth, but we are encouraged by the overall strength of the order performance in the quarter with 7%, 8% order growth for the quarter. And what we saw happening in China was a return to levels of improved, albeit still subdued government spending, which fueled our growth in life sciences research, environmental testing and food businesses.

Okay. Thank you. And then just maybe one high-level question. So over the past few years you have invested pretty materially above your peer group in terms of R&D for the LDA segment. How should we assess the related return on investment looking forward and more specifically where do you expect to pick up share and at what pace? I know you mentioned in some presentations early in the year, you are beginning to leverage some of the R&D investments in 2015. At what point should we think about R&D starting to become maybe a lower percentage of sales? Thank you.

Just a follow-up commentary and the question, again, this is Mike. Relative to the comments you saw in my narrative in my early comments, we talked about leveraging the investments we’ve made in R&D. In particular, we have invested quite heavily to build our portfolio out in the life sciences space, and we've also invested to build out a sales channel, focused on our life sciences’ customer base. So you would expect that we continue to be able to outgrow the market in these parts of the portfolio. In particular, I would tell you that we had real strong strength in our separations, our chromatography and mass spectrometry business in the fourth quarter across liquid separations, gas phase separations and the metals analysis side of the business, ICP-MS. So, I think those core product categories would continue to fuel above market growth and has been a recipient to a lot of our investments that we talked about earlier.

Okay. Thank you.

Our next question comes from Tycho Peterson with J.P. Morgan. Your line is open.

Hey. Thanks. Maybe just a follow-up on the leverage question. As we are thinking about operating margins, either Mike or Bill, can you maybe just talk about, give little bit more color on some of the drivers of margin leverage, particular on the order fulfillment and portfolio aspect and do you in fact expect SG&A leverage in ‘15 as well?

Yeah. So, I think, this is Mike. There is three drivers behind the overall operating margin improvement and as you may have seen already, we committed to a three point operating margin improvement over the next three years, hitting 22% by 17%. And as we've also indicated, FY ‘15 is a significant transition year for us in terms of working all the synergies but also significant in terms of underlying improvement to the operating performance of the company. And the three key components of our margin improvement plan. One is the portfolio transformation that I highlighted earlier in my comments. And one example of that is the new ICP-OES, which through new product design and capability has a 20 point better gross margin position than its predecessor product. So you will continue to see us coming to market and driving, not only topline growth with improved offerings, but also a better margin structure just based on the inherent design and platform design of the product. The order fulfillment transformation program is still centered on what you saw at the March Analyst Meeting last year, where Henrik is driving overall consolidation of manufacturing sites and more importantly a drive towards lower cost of our supply chain, as we have moved our manufacturing into low-cost parts of the world, such as Penang, Malaysia where the next phase of that program is to start to move our material supply chain, which as you know, represents actually a higher element of cost of the manufacture products. And the third aspect of the plan is SG&A and R&D. R&D cost structure leverage and you will start to see in FY ‘15, particularly on the SG&A line, as we leverage that and it starts to decline as percent of overall revenue, again, adjusting for the synergies will absorb in year one.

Okay. And in the comments you called out some of the pathology headwinds, can you maybe just talk a little bit about when you think those bottom out and how much of the headwind was impacting the quarter?

If you don’t mind, I think I will pass this question over to Fred. I’m so sorry. I’m going to pass this over to Fred Strohmeier and Fred, the question was related -- the question was related to the pathology business. When did you see the headwinds perhaps turning on that business, Fred?

Yeah. Thank you for the question. I think in pathology, we are seeing at the moment a flat revenue, closer if you look through the last two quarters and I think particularly in Q4, we have a tough compare in Europe. I think we are seeing a slowdown in the U.S. and Europe and due to healthcare reforms, lower investment and also consolidation of lapse and also in AsiA - Pacific, stricter regulatory controls. And internally as Mike already mentioned, we are seeing also some reflection of our FDA program on the revenues we are seeing in Q4. But we are optimistic that we are able to turn the situation around for next year. The companion diagnostic is doing quite well, so it’s growing nicely, OEM is on plan, OEM and other reagent partnership is on plan. And what we are hearing from our customers in the fields concerning on this and our products is pretty encouraging.

Okay. And then lastly, you left M&A out of the capital deployment discussion, any reason you wouldn’t consider tuck-ins that became available?

Yeah. Our focus really in FY ‘15 is really to launch the new Agilent Technologies, really go after some of the operational opportunities. We are improving I discussed earlier. And as you heard from Didier and myself, we do have a plan to return capital to the shareholders this year.

Okay. Thank you.

The next question comes from Isaac Ro with Goldman Sachs. Your line is open.

Good afternoon. Thank you. A question for you on capital allocation. There was obviously a focus on shareholder returns, as it relates to repurchasing dividend but wondering if you can comment a little bit about your interest and appetite for M&A. if we look across the portfolio, there are some gaps. My view particularly in diagnostics and genomics where you theoretically deploy some investment dollars to round out your offering, so just curios, how are you thinking about M&A in the near to medium-term?

I will go ahead and take those questions. So, as I mentioned earlier, we’ve made a sizeable bet in our Dako acquisition and we think it has a tremendous amount of promise working through some short-term operational challenges. So our focus right now for FY15 is not to pursue large M&A but really to focus on -- realize the potential of the acquisition we have made.

Great. And then if I could just ask one question on the shorter-term basis regarding some of the regional trends. I think you mentioned some softness in, I think Europe. And then in food safety, I think it was the mid-single-digit growth rate. And curious on the latter item in particular, it seems like in China, the industry in general this quarter has seen a little bit of pressure, mostly tied to some reshuffling in the government, though hopefully be a transient issue. So I was just wondering if number one, you share that view on China, and then secondly in Europe, can you maybe give us a mark-to-market on how that trended at the end of the quarter? Thank you.

Sure, Isaac. So let me make some comment first on China. Just back about six weeks ago from visit at China and how the opportunity to kind of see firsthand and draw my own conclusions on what’s happening in the marketplace, and I think a characterization is spot on in terms of there's been a significant reshuffling of ministries within the food safety arena. And I think it's a temporal slowdown that we’ve seen in this space. And as we pointed to an earlier call, this actually had a pretty significant pull down in terms of overall order growth rate. We did see in the fourth quarter some initial signs that we maybe transitioning to some higher levels of growth in the food space in China. I would caution it is still subdued but is trending in the right direction. So I think this is clearly an area of great interest in Chinese government, but they also want to make sure that they're investing efficiently. And I think they had drawn the conclusion they had way too many ministries kind of overlapping one another in terms of jurisdictions. So they are getting themselves better organized, but I do believe you'll start to see a return to growth and investment in the food space. I would also add that the prospects for investment in the environmental testing in life science research are also bullish longer-term in China. The pull-through on Europe is continued sluggish conditions in Western Europe. But as we report the number, our European business also includes what we call the idea or Eastern Europe part of the world as well as the Middle East. And despite some of the political noise that you see in terms of what's going on in the Middle East, our business is holding up quite well there and has continued to be a area of strength for us.

Got it. Thanks a bunch.

Our next question comes from Dan Arias with Citigroup. Your line is open.

Good afternoon, guys. Thanks. Didier on the warning letter for Dako manufacturing with the $9 million this quarter, is that issue now behind you from a P&L perspective or should we look for some of that to carry over into 2015?

No, we are planning in, in our guidance. We are including some further expenses throughout 2015, obviously from a lower -- going lower after Q1.

But the expenses will be flat in Q1 and potential in the Q2 from the Q4 run rate that we have. Situation in Denmark is complicated. There have been quite a few warning letters more than us inside of Denmark. And as a result of that, we've had to source resources from other parts of Europe and even from the U.S. to help out on the mitigation. And so the expenses will continue into Q1.

Okay, thanks. And just a follow-up, wondering if you can comment on manufacturing and how that factors into gross margin improvement? I guess if you look across next year to with what you have going on, how much of gross margin gain that you think you'll see is expected to come from what you might consider fix for a particular issue, whether it would be NMR or Dako versus what you just come from more opportunities to become incrementally more efficient?

Yes, it’s a great question. And this is Mike. And that’s why I pointed to three aspects of the programs under operating margin, the supply chain transformation which you’re referring to, the portfolio transformation and then our rationalization and leverage of SG&A and R&D investments. I think it's probably legal spread across the three. It’s a little bit hard to quantify.

Got it, okay. Thanks very much.

Our next question comes from Ross Muken with Evercore ISI. Your line is open.

Hi, good afternoon, guys. So can you just give a little sense on the order pacing? You talked a little bit about some late orders and such. And just give a sense for how if the NMR announcement also had any impact on any of the other legacy spectroscopy businesses?

Hey, Ross, this is Mike. Thanks for the question. And to maybe address the last part of your question first. No impact at all on the other aspects of the portfolio growth rates from the NMR announcement. In fact, we had a really fantastic quarter in terms of topline order growth in our spectroscopy business fueled by introduction of the new products I mentioned to you earlier. In terms of the overall order flow through the quarter, we were actually quite pleased with how the quarter finished. Orders coming in higher than forecast, and so always bit hard to project exactly what your win loss ratios maybe in a particular deal situation, but obviously we are pleased with the win loss ratios where we’re higher than we had forecast. And new products were above targeted ramp rates. And then as I mentioned earlier, the China orders were solid at 8%. So I think there was a geographic dimension as well to our order flow.

Great. And maybe if you guys could just give us sort of a first flush of where the pro forma balance sheet is now, obviously a number of moving parts in the quarter in terms of debt paid out and how think about the optimized kind of leverage ratio for this business?

Well, right now, as I said in my comments that the leverage in the company is consistent with our present credit rating and we feel very comfortable with where we are between BBB and BBB+. And I will remind all of the investors in the last five years, we have returned 62% of our free cash through dividends and share repurchases. So the framework of where we are is I think very, very solid and we have a proven track record of tax effectively returning excess cash to our shareholders.

Thanks. I was just hoping maybe because we didn’t get any pro forma balance sheet, et cetera. If you could just give us a sense of where kind of the net cash or the leverage is just on a rough dollar basis?

Absolutely. So for Newedge loans, we have about a little bit over $2.2 billion in cash and $1,650 million in that. And as Bill mentioned, our adjusted leverage is about little over 2.1, 2.2 adjusted debt to EBITDA ratio.

And the large percentage of that cash of course is trapped overseas.

Yes, 80% of the cash is trapped overseas. We have about $400 million in the U.S. The rest is trapped overseas.

Great. Thank you, guys.

Sure.

The next question comes from Tim Evans with Wells Fargo Securities. Your line is open.

Hi, thank you. I wanted to return to the diagnostics business for just a second. You guys have forecasted that you expect that market to grow 8% to 10%. This year you certainly didn’t get there. And obviously there are some issues happening, including the warning letter but also some things that are out of your control on a regulatory front and reimbursement front. What gives you the confidence that you can get back to that high-single-digit growth rate which I guess is kind of what it would take to get to the appropriate hurdle rates that you need on a Dako acquisition?

All right. Do you want to take that Fred?

Thank you. I think this is a very good question. I think first of all, I believe, we will get back to the goals by the promise we had made over the last couple of quarters to automate the pathology business, I think we are really good on the consumables piece, I think the automation will be key of it -- will be key, so Omnis will be one of the element. And we have seen a couple of really good responses in the meantime. One of the biggest regions just as an example in Denmark has picked Omnis as the prime diagnostic tool in order to cancel diagnostic, number one. Number two, I think we are also making really progress with our new products we have introduces like the SureFISH, which has been growing in this quarter about over 100% really significant. We have a couple of new products on the market like the ClearSeq AML, this is leukemia cancer diagnostic tool, which is looking at cancer variations and cancer research that is the new HER2 FISH-IQ on Omnis available in the meantime, which allows another set of cancer diagnostic test. So from the product perspective, I think, we are fueling the pipeline in order to grow the business overtime.

Okay. And then just one quick housekeeping question for Didier. When did those transitional services for Keysight and how exactly do they wind down post 2015?

So the IT services will wind down by the end of -- before the end of our fiscal year -- first half of fiscal year ’15, so by April. And then the rental services, those are about $15 million and those are ongoing. And by the way, Keysight, we are also buying from Keysight an equivalent of the $15 million also of rental services. I’ll remind you the way we want about splitting our real estate is more less balance, one of the two companies ended up being the landlord and in each side there was one of the two companies ended up being the landlord and subleasing some of the space to the other company if needed. And the two things offset each other will be receiving of about $15 million of rental income and we’ll pay about $15 million of rental expense to Keysight.

Okay. Thanks.

Our next question comes from Steve Beuchaw with Morgan Stanley. Your line is opened.

Hi. Good afternoon. Thanks for taking the questions. I wonder if you could build on, some of the commentary that you made here on the call, regarding some of the new product launch traction? Could you give us a sense in fiscal ’15, not necessarily byproduct, but maybe with the focus on geographies or customer types, where future product launches will be targeted most directly?

Yes. Sure, Steve. So this is Mike. I’ll provide some color on some of the instrumentation around our separations and mass spectrometry offerings, and then, Fred, I’d ask you to jump in and talk little bit about some of the diagnostics and genomics products that come out. So, as I mentioned in my comments, in our core liquid chromatography, our leading platform the 1290 was replaced by an even stronger platform the 1290 Infinity II series. This allows the capture opportunities in Pharma, Biotech and across the implied markets space. So this is a broad-based tool that will go across all of our key end markets. The GC Triple Quad, the GC/Q - TOF, the mass spectrometry products that discussed are heavily focused towards food safety, pesticide analysis, environmental testing, but also increasing adoption in the Life Sciences Research arena as well. And then, finally, the new ICP-OES is targeted toward the Environmental, Pharma and Material Science space and in terms of -- that would be in terms of the end market usage. Obviously, we’re encouraged by what we saw as an uptick in growth in China because these products will play very strongly into this geography, as well as replace the market in the U.S. and Europe. And Fred, maybe some additional comments on the LDG side?

Yeah. Maybe, I just made a couple of comments on the new products on the pathology side. I think, just what I want to mention is, once we are improving the situation around the FDA letter, that by itself will stimulate some further growth, number one. Number two, I believe it is very important that we are launching products in where we are using the synergy with other things we have in our product line, which are the genomics product. But I think putting those things in a meaningful way together that we’re creating work flows which make a difference to the customer is one of the themes for next year. But I think a couple of those things we have started launching a new PCR, qPCR instrumentation, which will be in this market. We have launched some editing tools of synthetic biology or genome editing tools for synthetic biology the CRISPR/Cas solution, which come to the markets and is introduced to the market, which will pick up next year.

Thanks. Very helpful. And then one for Didier on currency. Historically, the company has had a pretty effective natural hedge, so the translation from the topline into the P&L was relatively muted. Is that still true for new Agilent? And if not, are there any currencies that we should look out for as potentially having an impact on margins? Thanks so much.

Yeah. It is still true. We have only one of the smaller flow through I would say of longer peer group, about -- with the current mix about 20% to 25%, so for reduction of a dollar in the topline $0.20 to $0.25 impact on the bottomline. It is not zero, even though we are structurally heads because we have a presence, well right presence. And we also have our financial hedging, but the financial hedging doesn’t provide one full year. So it really covers 100% of the coming quarter and then 75%, 50%, 25%. But overall, we believe, we are properly hedged knowing that the hedges, the financial hedges cannot really cover you forever. And then in terms of the mix, it’s clearly -- our flow through is even smaller in Europe for example where we have a strong presence with only 10% versus Japan where we have less of the presence. And therefore, an impact on the topline will not be totally offset by an impact to OpEx and cost of sales. So there is a mix difference, but on the present mix, it's about 20% to 25% flow through.

Very helpful. Thanks, everyone.

Our next question comes from Paul Knight with Janney Capital. Your line is open.

Good morning. As I do the back out on the capital redeployment, you're talking maybe 5 million decline in shares outstanding, which I think implies $165 million share comp number. Is that share comp number a little high because of the spin? And what should that share comp number be?

The math is a little bit complicated, but the speed is pretty much has no impact on our share count. What you have to consider every year is that the share count evolves because of grants of RSUs or long-term performance plans or exercise of stock options or the employee stock purchase plan. It also changes with the changes in valuation of our stock price or our TSR versus our peer group. And then we do buyback shares, so it’s a little bit complicated but no impact from the split.

Didier earlier in the call, you had mentioned that you kind of were talking about a 22% pro forma operating margin net-net. Do you think you’ll be talking 22% and higher same discussion as FY ‘15 rolls out?

So no -- Mike mentioned where we are extremely committed to improving our operating margins to 23% by 2017. But this is three years plan. Q4’s operating margin is always stronger because it’s where we have to realize the highest volume and the number that I have provided excluded the impact of NMR. I assume the NMR is exited and as Mike mentioned, we want to exit NMR until the end of 2015 and also it’s assumed it’s basically backed out the expenses related to addressing the FDA issues. And as we have also talked, we all spend money in 2015 to continue to spend money to address those issues.

And last Mike, what did you see or do at chemical analysis that you think you can do with the rest of Agilent?

Thanks Paul. Appreciate the question. And I think its really -- Bill and I have talked about this as well, which is to really take a view of the focus bets that you are going to make, be very selective on the bets you make. And I try to highlight a few of those earlier. And then drive an operational excellence around those focused bets and then couple that with what we’ve done historically which was meaningful M&A in the variant deal, for example. But I really think it’s all about picking right focus bets getting the organization aligned on those focus areas then drive in operational excellence around the activities.

Thank you.

Our next question comes from Miro Minkova with Stifel. Your line is open.

Hi Bill. Hi Mike. Hi Didier. Let me just start with the question on the academic markets. It seems like you are seeing some improvement there for the second quarter interval. I was wondering if you could comment if you’re seeing the funds flow in the second half of the year, the calendar year? And you do have unlike others in the industry, you have had the month of October in your quarter. So I am wondering if it is too early to speculate on a possible year end budget flush?

Yeah, this is Mike. I’ll jump in with my perspective then Fred, feel free to add your view as well. But I think the answer to your question, Miro, I think it’s too early to call a year end budget flush, if you will. We were encouraged by the results but keep in mind the U.S. government closes off at September a lot of their spending. And we also had a closing of our own sales cycle at the end of October, which sometimes doesn't always mimic the spending patterns of our customers. So while encouraged, I think it’s too early to call a significant global recovery here in this segment. And Fred, I don’t know what you are hearing from your field teams.

Yeah. Our field team is pretty consistent with what I'm hearing. I think academia and government markets remain soft even so we are seeing a gradual improvement. And the result we are seeing at the moment are impacted predominantly by NMR as such because this is going mainly through the academia and government market, we see a funding growth in China as Mike pointed out the results are showing that. So this is certainly impacting the growth in next year. We see a stable funding in SAPK. Japan is weak and maybe remains weak given in all of the missing stimulus from last year. You are seeing demand in HPLC, GC-MS and LCMS, what’s really hard to sub checks and this is probably driving some of the growths next year, cell biology, stem cell research and next generation sequencing. These are areas which will drive some of the growth. NaH is spending about plus 2%. This year, hopefully, we see something like that next year as well. Europe already, we heard about it, very tight. And if you look to the distribution of the countries, it’s a completely mixed bag. China reorganizing even so, I talked about the growth is reorganizing the academia of the Chinese Academy of Science, which certainly also will have some impact on the spending pattern and we talked about Japan already.

Okay. Thank you. And secondly on the gross margin it did decline slightly year-over-year, I was wondering if you could help us understand the puts and takes? And for the neoadjuvant going forward, despite the dys-synergies that you have this coming year, can you drive margin, gross margin expansion in ‘15?

Didier, why don’t I make some initial comments and then you can build on it. So if you look our year-on-year gross margin, I believe the FDA remediation work is part of our cost to sales number. I also would point to a change in our overall business model. We haven’t talked about in this call yet. But with the creation of the CrossLab services, consumer informatics group, you are going to hear me talk a lot more about what’s going on across the enterprise in our laboratories and our services business is becoming an increasingly larger part of the company. It’s got a very nice operating margin story. But as the mix changes, it does have a different gross margin structure relative to instrument business. So when you look at just at the gross margin line, you are going to see a mix effect of the increasing portion of our business coming from services. Didier, I don’t know if there is something else you would add to that?

Yeah. I mean, in terms of the gross margin, I will say, I mean, the other negatives you mentioned are the dis-synergies and as we already talked about the impact of currency on a year-over-year basis. And so that would be the main reasons why on a gross margin bases, on an adjusted operating margin basis, we are going to see some slight improvement year-over-year even with all those negative, all those headwinds. But on the gross margin, it’s going to be slightly down year-over-year.

Yeah. I don’t know whether I really clearly answered the other part of your question. This is Mike again, which is we do see, we have the ability to improve our overall gross margins and move forward because obviously we are going to get the FDA remediation work behind us. We talked earlier about the new products coming out and as well as our supply chain transformation. So we do believe that we can improve our overall gross margins, but we are also working through some one-time transition challenges around NMR, the FDA industry, the separation, if you will to synergies.

Currency has a particularly big impact on gross margins because it’s offset by the lower operating expenses. So when I said, $400 million, you have net-net $20 million to $25 million impact to the bottom line. The impact to the gross margin is more significant and then this offset in OpEx.

Okay. Sounds good. Thank you very much.

The next question comes from Richard Eastman with Robert W. Baird. Your line is open.

Yes. Good afternoon. Mike, could you just talk for a minute or two about the petrochem energy chemical markets? I think you mentioned they were up 1% in the quarter and quite frankly all year, they’ve been low single-digit. But maybe, what's your assessment there as we move into ’15, are we in early innings of our commodity driven down cycle there in demand, or were orders and orders better in the fourth quarter here heading into ‘15?

Yeah. Richard, thanks for the question. And this has been a -- I have to say, a segment of the market has been quite curious for me over the last several quarters because at the very macro level, you would expect to have seen stronger business here as you think about particularly United States where you’ve had lower feedstock cost coming down and some of our major customers actually taking about investment in the plant and infrastructure and new capacity in the U.S. So, I think what we saw in this most recent fiscal year, and a continuation of the quarter was continued challenges in industrial side of the Chinese economy where we haven't seen as much capacity been out of that we had seen in prior quarters. I believe the real wild card and this is why I think we’ll start to see some moderate return to growth in FY ‘15 in this segment is the replacement market in the private sector particularly in the U.S. The industry outside of the exploration side is actually finding itself much more profitable, the age of the assets and equipment has really moved up over the last several years. So we think that the combination of the aged assets plus the lot of our customers, who are going to need to move on to new data system because of the obsolescent by Microsoft of several of their core operating systems. I think this would point to an improved replacement market in FY ‘15 albeit I said it’s been much slower to develop than I had anticipated.

Okay. All right. And when I look at the CAG business and LDG business heading into ‘15 and I know the core growth is kind of -- at the midpoint is 4.9%, call it 5%. Is the LDG business expected to grow above that number and CAG kind of low single digits. So how do you see the mix by end market playing to that 5% core growth number?

Richard, a great question. I think you really picked up the insights we were trying to share on the call today which was the strength of the underlying core business you strip out such as the business such as NMR. So Fred and I haven’t compared exact growth rate assumptions between the two segments. But I would say in general, we’d expect both to enjoy growth. But we’d expect to see high levels of growth in the life sciences side of the house just given what we seem to be a stronger backdrop of pharma, biopharma, some government spending and just our overall share position in those segments. And again also keep in mind that part of the story here isn’t just instruments and technology, part of the story here is the services business. And in fact, after Fred makes a few comments, I’ll invite Mark, you’re not going to get away from this call without making some comments on your first call to talk about what’s going on the pharma space, life sciences relative to the services business. So Fred, if you would, maybe just add a little bit additional color.

Yeah. I mean, the pharma industry is only at the moment growing in the area of around 3% to 5%. I mean we are seeing a lot of instrument refresh as Mike explained it out. That’s particular in pharma, a huge opportunity for services and consumables. The most growing segment within that is at the moment the biological -- biologics, which is growing about 18% and the overall size is about 20% of the entire pharmaceutical market. I think we are well-positioned with all products. Mike has just highlighted before our core products in LC, LC MS. So I think this is fueling the growth. The refresh in this business I think it’s not as homogeneous as ours. I mean, Americas has a difficult compare because we had a good business last year. I think Europe is picking up at this point in time also on generics. So overall, I think this is one of the drivers and academy and government you talked about before, I think this is also certainly slightly picking up. So from that perspective, this should fuel across the next year.

And Mark, just closing off this question, just your view on what's going on in the services side in pharma in particular?

Sure, Mike. And as you alluded to, I think we see both the areas across CAG and LDK being strong, but in the pharma area in particular continued strong demand for our enterprise services and those particularly targeted at helping customers with operational efficiencies. And to that end also, if you add the consumables side of it too, a continued focus on our biocolumns and sample prep area that I think heading into next year we will continue to service well.

Thanks. Does the op profit contribution of flow through today to Agilent’s P&L, is it north of 20% on the services side?

I don’t know whether we’ve disclosed the actual operating percentages externally, but I would just say we’re in the range of our instrument business. So it’s not a drag on company performance. You want to see us grow our business here.

Okay. And then I am sorry one last question, the NMR business year-over-year in the fourth quarter, was there a revenue delta that was meaningful fourth quarter of '14 versus fourth quarter of '13?

Do you remember the year -- Didier do you remember the year on year change?

On a year-over-year basis, it’s about -- there a 22% reduction in revenue for the full year and on the quarterly basis, it was 49%.

Was down 49% year-over-year?

Revenues, yes.

Okay. Thank you.

Our next question comes from Derik De Bruin with Bank of America Merrill Lynch. Your line is open.

Hi. Good afternoon. It’s Rafael in for Derik and thanks for the questions. Just first on 2015 guidance, just wondering what the expectation for growth is by geography on the Americas, Europe, AsiA - Pac and China as well? Thanks.

Rafael, this is Mike. Just make a few comments. I think you first of all saw in Didier’s narrative, he talked about an overall gradually improving economic environment in the second half of ’15, that’s sort of the backdrop behind my comments. What I’m just going to share with you at this general trend, I wouldn’t want to be able to present myself with being able to predict exactly the growth rates in every of the geographic markets. But the backdrop of our forecast beyond this gradually improving second half environment in ‘15 is we see an improving U.S., China and India, which we’ve not talked about today, continued weakness in Western Europe, Brazil and Japan. So what's really driving this is the overall continuation of the improvements in the U.S., China and India marketplace.

Okay. I appreciate that color. And just after exiting the NMR business, how should we think about the company's portfolio of review strategy and whether the company's planning on exiting on the other product lines in the near-term just thinking, I guess bigger picture of how content the company is with its existing portfolio? Thanks.

Sure. Great question. As Paul asked me earlier, when we talked about the experience I had, on the chemical analysis group was, we always constantly reviewed where our portfolio was, was it meeting expectations, did we see a path for to a viable business. So that discipline that we’ve had in the prior years in the chemical analysis business that will be carried forward with the new Agilent. And I think you saw one example of that with our decision around NMR, which we really didn't see a path forward to a viable attractive business for Agilent. I’m very satisfied and happy with the portfolio we have. But what I will commit to is a continued rigorous ongoing review of our portfolio relative to our expectations.

Okay. Thanks. I will jump back in queue.

Our next question comes from Justin Bowers with Leerink. Your line is open.

Hi. Good afternoon. Just in terms of the NMR exit, can you frame that in terms of the duration of the topline impact and then also the cost too coming out of that business?

The topline from 2015 will not be fundamentally much lower than really what we've seen in 2014 because we do have a big backlog, not just NMR business, but also the OEM business that we exited one year ago, we would say, we still have backlog to flush for big part of 2015. And then, the bottomline impact we have indicated that it is on an annualized basis its about $15 million, next year it will be about $10 million opening profit improvements because of the exit and $15 million in 2016.

And then, in terms of the topline in 2016, are you -- and maybe even ’17, are you still going to be delivering orders there or?

No, no. We are -- we will be done in 2015 with flushing the backlog and we are not taking any order.

Okay. Great. And then just…

We are seeing instruments.

Yeah.

I am sorry.

That’s an important build to Didier’s comments. We will retain the profitable NMR service business, both in terms of -- making sure we have the business continuity for our customers, as well as an attractive business segment for us as well.

Okay. Great. Thanks. I’ll take the rest offline.

Thank you. We have a question from Brandon Couillard with Jefferies. Your line is open.

Yes. Good afternoon. Didier, just one question for you, in terms of the free cash flow guidance implies about $480 million of free cash flow? I think, going back to the Analyst Day, you kind of pointed to more like a $620 million number? Can you just walk us through what the factors are there in terms of the delta in the free cash flow outlook?

Yeah. So, the $600 million of opening cash flow that we are projecting is after paying about $50 million of post-separation expenses and also $40 million of taxes related to the separation. So there is $90 million which will be pro forma, but there will be cash outlays in 2015. So really on the sustainable basis, you are talking $690 million.

So, it’s fair to say that those two numbers, the $90 million wasn’t contemplated previously at the Analyst Day?

Yeah. Because it was excluding the one-time items, really it was -- the sustainable cash flow contributions and we talked about 15% of revenues on an ongoing basis of three years period, excluding those one-time separation related items. They are both separation related items.

Okay. And one more on the NMR business, would you -- can you quantify the operating loss incurred from that business in ’14 for us?

Well, what happens is it will be misleading because it includes a lot of costs now basically absorbed from the share allocated from the shared services, but what we have stated this -- the exit will basically improve operating profit by $10 million next year and $15 million in 2016.

Fair enough. Thank you.

Thanks.

This ends our Q&A session. I will turn it back to Alicia Rodriguez for closing remarks.

Thank you, Patrick. And thank you everybody for joining us today. If you have any questions, please give us a call in IR and we'd like to wish you all a good day. Thank you.

Ladies and gentlemen, thank you for participation in today's program. This concludes the program. You may all disconnect.