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Agilent Technologies (NYSE:A)
Q4 2017 Earnings Conference Call
Nov. 20, 2017 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. If anyone should require assistance during the program please press * then 0 on your touchtone telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Alicia Rodriguez -- Vice President, Investor Relations

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 Science 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'll 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 31. 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.

Mike McMullen -- Chief Executive Officer and President

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 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 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 improvement resulted in a Q4 adjusted EPS of $0.67, an increase of 14%. Looking to full year, we delivered our highest growth rate since the 2014 launch of the new Agilent. Our 2017 revenues of $4.47 billion are up 6.7% on a 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 FY '14'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 a 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 and look closer what's driving our stellar results.

From an end market perspective, our chemical and energy revenue grew 15%. This is the third consecutive quarter of double-digit revenue growth. Growth is broad-based across the spec of exploration, refining, and chemicals. We are encouraged by the uptick in 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 expectation. Growth was broad-based across product lines with particular strength in Europe and the Americas. Our higher-than-expected growth is a result of an improved funding environment and market share gains. Food revenue grew 10% against a difficult compare of 10% in Q4 of last year.

From a product perspective, strength is broad-based, led by services, consumables and mass spectrometry. Regionally, Europe and Asia drove the gains. Pharma revenue declined 5% against a difficult compare of 16% growth in Q4 of last year, which itself came on top of a 19% growth the Q4 before. We have been anticipating continuous strong pharma investment levels, with difficult compares slowing our reported market growth rates to mid-single digits.

Some additional specifics on our Q4 results. As expected, the LC replacement cycle continues in the small molecule market segment but at a slowing rate. NASD revenue also was 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 timing of customer acceptance.

Market demand, however, for the NASD API offerings remained strong. Our product and geographic mix also contributed to the result. We experienced strong order demand from Europe and from higher-end mass spectrometry technologies. The order to revenue reflects those longer for Europe in these types of products.

We expect these revenues to materialize in Q1 and Q2 of FY '18. The biopharma segment of our pharma business remained strong, along with services and consumables across the entire end -- pharma end market. Diagnostic and clinical grew by 9%, led by pathology and companion diagnostics. Continuous 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 continue to drive the market in Asia. Geographically, our company results are driven by high 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 the highlights from our business groups. The Life Sciences & 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 drivers to reported growth.

LSAG had a tremendous year in 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 of the recent acquisition of Cobalt Light Systems is going very well as CrossLab Group's strong performance continue this quarter with 8% core revenue growth.

Growth was healthy across services and consumables, most regions and end markets. Our CrossLab service, the polarization, 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 the services business into a key, differentiated offering for Agilent. Through these services, we can work 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 advanced biocolumn portfolio for the fiscal year.

The Diagnostic 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 for our PD-L1 and molecular products. As expected, our nucleic acid solutions business was down for the quarter given the project-driven nature of the business.

As previously mentioned, market demand for APIs for RNA-based therapeutics remained strong. DDG 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 our 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's OPDIVO. We have been closely collaborating with both companies.

Our GenetiSure Dx Postnatal Assay received 510(k) clearance. This is our first hepatogenomic hybridization assay approved by the FDA for diagnostic use. Our R&D investments continue to yield differentiated new products. At The American Society for Human Genetics conference, we introduced our first expansion of a 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 selected through online nomination and voting by scientists around the world. This demonstrates how we are meeting our customers' needs with products that win their trust.

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 specifics. 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 for 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, on 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 the 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 an expectedly strong 2017 growth, we will cautiously guide to a lower growth in FY '18. A level of clinical and economic uncertainty persists across the globe, providing less visibility into second half '18.

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 launch 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 are busy improving our operating results, we have 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're delivering to the market truly differentiated offerings and augmenting our internal investments with acquisitions. These acquisitions are bringing into Agilent new capabilities and unique new offerings. We then leverage our company's scale to drive revenue and create cost synergies.

Our One Agilent call for transformation is changing the way we work, improving the customer experience. It's a key driver of our excellent results. We 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 a winning 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?

Didier Hirsch -- Chief Financial Officer and Senior Vice President

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 key sites, 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 '16, reflecting our 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 '18. 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 of fiscal year 2018. Although we are comfortable with the present revenue and EPS consensus estimates, we believe, as we did in fiscal year '16 and fiscal year '17, that it is appropriate to have a cautious first guidance of the year. Our fiscal year '18 revenue guidance of $4.72 billion to $4.74 billion corresponds to core revenue growth of 4% to 4.5%.

It is based on October 31 exchange rates, and currency has a 1.3% positive impact on revenues. We project fiscal year '18 adjusted operating margin of 22.2% to 22.7% and fiscal year '18 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 '18, please consider the following 10 points.

First, annual salary increases will be effective December 1, 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 a 10b5-1 in September that includes two tranches with a 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 a diluted share count at about 326 million shares; 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 NII 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 a core basis, and EPS will grow 6%. As customary, Q1 EPS is negatively impacted by the December salary increase, the frontloading of stock-based compensation and the increase in payroll taxes due to the disbursement of the variable and incentive pay of the previous year. With that, I'll turn it over to Alicia for the Q&A.

Alicia Rodriguez -- Vice President, Investor Relations

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

Questions and Answers

Operator

Certainly. Ladies and gentlemen, if you have a question at this time please press * then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the # key. Our first question comes from the line of Derik De Bruin from Bank of America Merrill Lynch.

Your question, please.

Derik De Bruin -- Bank of America / Merrill Lynch -- Analyst

Hi, good afternoon. Can you hear me?

Mike McMullen -- Chief Executive Officer and President

Hey, good afternoon, Derik. Sure can.

Derik De Bruin -- Bank of America / Merrill Lynch -- Analyst

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

Mike McMullen -- Chief Executive Officer and President

Sure. Happy to do so, Derik. So I'd point you to three comments on the -- our Q4 results in pharma. So 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, and then we had 19% Q4 the prior year. The second piece is the revenue recognition timing, so -- 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 and kind of depends on when the customer wants to finish up their batch, but the overall market demand looks really good for these products. And then as you're indicating, we had really strong results in mass spec and in Europe.

And typically, we don't -- there will be order results. Typically, we don't talk about order, but we want 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 the expected slowing of the LC replacement cycle in the small molecule side. So those are the three major drivers of our -- behind our Q4 performance in pharma.

Just as a reminder, 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'd say the bulk of the downward trend in the quarter had to relate to the LC replacement cycle and the shift in European business, probably less than 15%, 20% with NASD, right?

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Correct. NASD accounted for about one percentage point.

Mike McMullen -- Chief Executive Officer and President

Yes. One percentage point.

Derik De Bruin -- Bank of America / Merrill Lynch -- Analyst

Great. That's really helpful. And just sort of following up on this. I mean, last quarter, people were sort of having questions about inventory stocking in the biotech and pharma space just because of some mixed results.

There's, like, also a little bit of that this quarter but not as pronounced. So you're still not seeing anything other than tough comps that's making you nervous in terms of the pharma, biotech end markets?

Mike McMullen -- Chief Executive Officer and President

No. No. And in fact, that's why we went on our way to give you some additional detail in this call because the 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 called that out in our script as well.

Derik De Bruin -- Bank of America / Merrill Lynch -- Analyst

Great. I'll get back in queue. Thank you

Mike McMullen -- Chief Executive Officer and President

Sure.

Operator

Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan. Your question, please.

Tycho Peterson -- JPMorgan Chase -- Analyst

Hey, thanks. The guidance for next year of 40 bps of operating margin expansion, you know, you guys have obviously been trending above that. We had been modeling about 100 bps for next year. Just, you know, is that all the offset from the API investment? Or are there areas you're reinvesting?

Mike McMullen -- Chief Executive Officer and President

So I think the question related -- good afternoon Tycho. And the question of Tycho was we've got about 40% -- 40 basis points of the of improvement in our guide. He'd been modeling more like 100. Is it the API investments that are causing the gap there?

Didier Hirsch -- Chief Financial Officer and Senior Vice President

No. No. API had no -- the nucleic acid facility had no impact there. No, we just, you know, as we did last year at the same time, are, you know, cautious overall and have been operating margin that is -- that ties with all our cautious revenue growth first guidance.

So it's consistent, and hopefully, we'll do it the way we did last year.

Mike McMullen -- Chief Executive Officer and President

Yes. And I guess, I'd also add, 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.

Tycho Peterson -- JPMorgan Chase -- Analyst

Okay. And then can you maybe comment on chemical and energy where you're incrementally more positive? I think you said exploration is now growing. Are there some nuances there you can call out? And as we think about the year ahead, how should we think about chemical and energy?

Mike McMullen -- Chief Executive Officer and President

Yes. Sure. Sure. Happy to do, and then I'll invite Patrick in the call -- on the Q&A if I have missed anything.

But we -- actually, we now have seen a much more broader-based growth scenario across the entire spectrum of the chemical and energy end markets. In prior calls, we really have been focusing on that 60%, which is the chemical side of that space. We're now seeing reinvestment and are currently also in refining as well as exploration. Anything to add to that, Patrick?

Patrick Kaltenbach -- President, Life Science and Applied Markets

Well, you're absolutely right. We see now really that pent-up demand is kicking in, and we see the replacement coming as expected.

Mike McMullen -- Chief Executive Officer and President

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

Tycho Peterson -- JPMorgan Chase -- Analyst

Okay. And then last one. You increased the dividend. It was a small increase, small dividend.

But anything to read in that in terms of capital allocation and particularly as we think about M&A landscape where your deal price is still pretty high?

Mike McMullen -- Chief Executive Officer and President

I think that 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 an increase in the cash dividends, up almost 50% over the last, last three. So no read-through on the M&A.

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

Operator

Okay. Thanks. Thank you. Our next question comes from the line of Steve Beuchaw from Morgan Stanley.

Tycho Peterson -- JPMorgan Chase -- Analyst

Your question, please.

Mike McMullen -- Chief Executive Officer and President

Hey, Steve, go ahead.

Operator

You might have your phone on mute.

Steve Beuchaw -- Morgan Stanley -- Analyst

Sorry about that.

Mike McMullen -- Chief Executive Officer and President

No problem. Good afternoon.

Steve Beuchaw -- Morgan Stanley -- Analyst

My question is actually on cost takeout and incremental margins. If we go back to the financial plan I introduced subsequent to the introduction of the Agile Agilent program, you introduced a series of plans taking out some number, tens of millions of dollars cost per year. Some of those plans were into 2018, 2019 and then more recently have heard more about shared services savings. So I wonder 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, succeeding on hitting those objectives where they would have had an '18, '19 impact.

Are we assuming that those targets get hit? Or are we assuming that they don't get hit and we're taking a wait-and-see approach on execution?

Mike McMullen -- Chief Executive Officer and President

No, I think we're really quite pleased with our ability to execute. I think three years ago, we laid out I think a pretty audacious goal at the time to do 410 basis points, and you saw us through those following three years how we -- through a -- the same constant drumbeat of execution, we're able to deliver on that 410 basis points. We have that same operational discipline today. It still exists and it exists going forward.

So we have a whole series of plans inside the company continuing to sustain this ability to improve the operating margins. As you know, we've indicated in our prior AID that it would be greater than '22 and this guide is consistent with that. But we're quite confident in the ability to hit the guide that Didier just gave you.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

And just -- if I -- 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 a 50 basis point improvement in operating margin, which is the same thing as this year. We ended it by beating our operating margin first guidance by 80 basis points to 22%. And obviously...

Steve Beuchaw -- Morgan Stanley -- Analyst

Okay. 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 wonder if you could spend a little bit more time on thinking about the buyback, the scale of the buyback.

The balance sheet is obviously very strong. How do you make the decision about whether you allocate more to the buyback or not as -- or perhaps potentially expand it? Thanks.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Yes. We -- 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 the business as well as dividends and buybacks. So $380 million, with a big chunk of that being automatic, seemed in line with our balanced capital deployment policy.

Mike McMullen -- Chief Executive Officer and President

Yes. We've been talking on the various scenario about a percent of the outstanding shares. That $380 million would represent that. And then as we've mentioned earlier, our continued primary focus for the use of cash and the strength of our balance sheet is investing in business, either through M&A we think that makes sense with the right valuation.

And then as you know, we're investing fairly heavily on the CapEx side right now.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Yes. And if there would be more opportunity as part of the U.S. tax reform to repatriate more cash, RMS would need to allocate it under a similar fashion and to maintain our present policy.

Steve Beuchaw -- Morgan Stanley -- Analyst

Okay. Thanks so much.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Hope that helps.

Operator

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

Brandon Couillard -- Jefferies -- Analyst

Thanks. Good afternoon.

Mike McMullen -- Chief Executive Officer and President

Hi, good afternoon, Brandon.

Brandon Couillard -- Jefferies -- Analyst

Didier, maybe to start off, one for you. Could you walk us through your core growth assumptions for '18 by segment and as well as the SPU sort of end then between LSAG, CrossLab and DGG?

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Yes. Overall, we have our slowest growth, I would say, for '18, which would be along academic and government and environmental forensics around 3%. And then the most important growth would be in DG -- diagnostics and clinical, so it's not exactly DGG, around 6%, 7%. And the rest is in between -- so you have chemical and energy.

[inaudible] exactly

Mike McMullen -- Chief Executive Officer and President

And pharma in the 4% to 5% range.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Guidance by group. But we -- obviously, DGG has a lot of overlap, but not only with diagnostics and clinical.

Brandon Couillard -- Jefferies -- Analyst

One for Mike. Curious to hear your thoughts on how you'd characterize the quality of the R&D pipeline right now. And I think of late, you've started implementing what you kind of refer to as a product cycle management system. Can you sort of walk us through exactly what that is and whether there are any P&L benefits associated with that kind of over time what we should expect?

Mike McMullen -- Chief Executive Officer and President

Yes. Happy to answer both questions. I'm going to invite again Patrick on the second as well as he's 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're seeing some great things come to market. And as I tell my team all the time, we're not done yet. So we have a nice rhythm of continued introductions we're planning over the next few years across all three groups.

So we're really pleased with how our teams -- the ideas we have but also how our teams are actually executing on delivering to the market. And you're 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 be a new one. It's 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 -- wait, why don't you share some of the details, Patrick?

Patrick Kaltenbach -- President, Life Science and Applied Markets

Thank you. Thanks, Mike, and thanks for the positive comment on the products? Yes. So the focus of this program is really on improving our R&D efficiency and new product introduction efficiencies that we will implement in the new product lifecycle management tool, which takes away a lot of the manual processes we still have today. Make sure that we're in full compliance also on a medically wise side as we bring more and more products from the -- our natal business into the clinical environment.

And with this focus on improving the tools and processes, we are really shooting for much higher throughput from our R&D products that we have at Agilent here. We're really pleased with the role that we have. And I would say we are definitely positioned well to continue to capture market share by bringing more of these breakthrough products to the market like we did over the last year's with the Intuvo, the Ultivo product, the Infinity II. You name them.

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

Mike McMullen -- Chief Executive Officer and President

And 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're investing to make it happen. It's not just a hope and a prayer.

Brandon Couillard -- Jefferies -- Analyst

Thank you.

Mike McMullen -- Chief Executive Officer and President

Thanks, Brandon.

Operator

Thank you. Our next question comes from the line of Doug Schenkel from Cowen. Your question, please.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Hi, Doug. Go ahead, please.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay. Didier, based on your cash flow guidance, it seems like after backing out CapEx, dividends and 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 as being there for M&A and the opportunistic buybacks you described? Is that what we should think of as at least the initial budget for those sources of cash?

Didier Hirsch -- Chief Financial Officer and Senior Vice President

No. We look at the M&A on a stand-alone basis based on the -- how much value we can create through those programs. We clearly are not limited by, for example, how much cash we will have left over from what we generate during the year. In any case, if it is U.S.

M&A, unless there's a tax reform, we'll have to borrow to fund the acquisitions. But we have much larger capabilities -- financial capabilities in terms of M&A than the number that you're reporting. And we have a very, very significant pipeline. All three presidents on a regular basis present to Mike and me a whole set of potential acquisitions and that -- beyond the number that in terms of the number that you're reporting -- you reported.

Doug Schenkel -- Cowen & Co. -- Analyst

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

Didier Hirsch -- Chief Financial Officer and Senior Vice President

It goes into outside of the U.S. That's the issue that we dealt with on an ongoing basis is that he, 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 in buyback, we still have opportunities. The board gave us back in May of 2015 a larger allowance to be used over 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 increase in U.S. debt.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay. 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?

Mike McMullen -- Chief Executive Officer and President

Yes. Happy to provide additional insights, Doug. So the first piece is that of the 5% decline we saw in Q4 '17 over Q4 '16, 1 percentage point of that came from NASD. The second piece of it is would we -- will we expect to have the revenue show up in Q1 and Q2? Yes, absolutely.

So these tend to have a 3- to 4-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 made clear that the pharma business remains quite, quite solid for Agilent and we have a nice backlog.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay. Thank you very much.

Mike McMullen -- Chief Executive Officer and President

You're welcome.

Operator

Thank you. Our next question comes from the line of Dan Arias from Citi. Your question, please.

Mike McMullen -- Chief Executive Officer and President

Hi, Dan.

Dan Arias -- Citigroup -- Analyst

Hi there, Mike. Thanks. 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 like would have been next year?

Mike McMullen -- Chief Executive Officer and President

I think it's a very, 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 aspects of our gas chromatography portfolio as our product has 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 a -- we've got our guide outside of the clinical and diagnostics market. We have chem and energy as our second strongest market next year in terms of our initial thinking for overall growth rate. So Intuvo is expected to be a contributor there.

Dan Arias -- Citigroup -- Analyst

Okay, thanks. Maybe just a follow-up for you were Didier. Just on the outlook. I believe the comment there was that you were comfortable with the consensus number for '18.

So I mean, I guess, if we were to think about you getting to core growth, that's more like six than four next year. What businesses seem like -- most likely to have gotten you there? Which -- where do you feel the segments are most conservative in the outlook? Thanks.

Mike McMullen -- Chief Executive Officer and President

I would just reemphasize a few points I made in my call script. I think -- and by the way, I started off my narrative kind of reminding 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 this 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 growth rates in Europe sustained at these expected levels we've seen in the quarter; and the other one is chemical energy.

So I think they're 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 rates we've seen over 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.

Catherine Schulte -- Robert W. Baird -- Analyst

Hey, guys. Thanks for the questions.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Sure, Catherine.

Catherine Schulte -- Robert W. Baird -- Analyst

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

Mike McMullen -- Chief Executive Officer and President

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

The team really hit a major milestone of achieving significant improvement in operating margin for the business. And I 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.

Jacob Thaysen -- President, Diagnostics and Genomics

Yes. Thank you for that. And and I see -- as '17 was strong, I continue to see also that '18 is going to be strong. Actually, across all our five divisions and just started 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 '18. But I see that also very much in the combination with our old technologies. We will, of course, continue into the ELISA, which is the former Cartagenia platform. So combining our bioinformatics pipeline with our strong presence in [inaudible] investment, Multiplicom being one, but clearly also SureSelect and HaloPlex, that will 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 is 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're continuing to be really limited by our capacities. I'm really pleased to see that the announcements coming out in the market about the RNA -- RNAi blocks are getting close to coming to the station, and we start to see a lot of interest for a lot of other pharma companies out there. So I see a lot of opportunities in the space, and again, a good future for DGG.

Mike McMullen -- Chief Executive Officer and President

Thanks, Jacob

Catherine Schulte -- Robert W. Baird -- Analyst

Great. Thank you so much. And then any hurricane impact on the quarter to call out?

Mike McMullen -- Chief Executive Officer and President

Catherine, nothing of materiality for the company.

Catherine Schulte -- Robert W. Baird -- Analyst

Right. Great. Thank you.

Mike McMullen -- Chief Executive Officer and President

You're quite welcome.

Operator

Thank you. Our next question comes from the line of Tim Evans from Wells Fargo Securities. Your question, please.

Tim Evans -- Wells Fargo -- Analyst

Thanks.

Mike McMullen -- Chief Executive Officer and President

Hi, Tim.

Tim Evans -- Wells Fargo -- Analyst

Hi. 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 this -- the replacement cycle in LC might be the driver of that.

I guess, the first question is, 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 a line to as a major factor there?

Mike McMullen -- Chief Executive Officer and President

Sure, Tim. Happy to provide perspective. First of all, I would actually characterize it a little bit differently. I wouldn't characterize it as a pharma issue.

For the last 12 to 18 months, we've been calling this. We've been saying that when we think about the pharma market, we 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's going to be a slowing of a growth rate because you get to difficult compares and the investment levels aren't going to keep increasing at those 15%, 19% kind of growth rate.

So we actually don't see it as a pharma issue at all. This is actually developing exactly as we had thought. That's why I mentioned earlier that our full year guide last year had us at 6%. And Didier, I think we ended up pretty close to 6% for the year.

And then there are some good fundamentals. I mean, there is the NASD business, which we know is batch based and we know that the demand is there for '18. There are 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, well, a continued area of strength for the company. But we've been signaling for some time that there'd be some moderation of overall growth rates in this segment, primarily because of this -- the large numbers and difficult compares.

Tim Evans -- Wells Fargo -- Analyst

Great. Okay, thanks for the color.

Mike McMullen -- Chief Executive Officer and President

You're quite welcome

Operator

Thank you. Our next question comes from line of Jack Meehan from Barclays. Your question, please.

Jack Meehan -- Barclays -- Analyst

Hey, thanks, good afternoon.

Mike McMullen -- Chief Executive Officer and President

Good afternoon, Jack.

Jack Meehan -- Barclays -- Analyst

Hello. So one, in terms of cash. I think you're coming up on a decision related to the final Lasergen payment. Is that something we should embed in the 2018 forecast? And then just any updates on the development of a clinical NGS workflow?

Mike McMullen -- Chief Executive Officer and President

Yes. So what I'll do is provide you some comments around the guidance inclusion or exclusion. And then maybe, Didier, if 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, a call lay option into 2018. Just like any other M&A possibility, it's not included in our guidance at this point in time.

So Jacob, a few comments on how things are going?

Jacob Thaysen -- President, Diagnostics and Genomics

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

So the whole workflow works together. And I see that very -- that we have very good momentum here. And I think we'll move forward according to our expectations.

Jack Meehan -- Barclays -- Analyst

Great. And then maybe one more for Jacob. While we're on it, the margin expansion on DGG. Obviously, another great year there.

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

Mike McMullen -- Chief Executive Officer and President

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

Jacob Thaysen -- President, Diagnostics and Genomics

A lot of customers say that I'm very proud of the team that delivered over the last three years of 700 basis point improvement with a 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're out there with industry and with the average of the industry, and obviously, we'll continue to improve, but we will also make sure that we invest into the business going forward.

Jack Meehan -- Barclays -- Analyst

Thanks, guys.

Operator

Thank you. Our next question comes from the line of Paul Knight from Janney Montgomery. Your question, please.

Paul Knight -- Janney Montgomery Scott -- Analyst

Hi, Mike. Is the nucleic acid facility on schedule? Or where are you with the timing on that?

Mike McMullen -- Chief Executive Officer and President

Paul, right on schedule. So just as a reminder, the plan has been to complete the construction in our 2018 and then move into a validation process, which will probably be 9 to 12 months, we think, take up. Then we're looking at maybe second half '19 back half is when we'll start to see some revenue coming out of that facility. And just as a reminder, the first full year capacity would add probably another $100 million of revenue to the company.

It's really quite an impressive new facility we're building. I've had a chance to visit, and we're -- the construction is moving along 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.

Paul Knight -- Janney Montgomery Scott -- Analyst

And then also you would mention on the diagnostic side, your FISH panel that won an award. Now, are you getting traction in your FISH panel for PD-L1 due to automation accuracy? But I know automation had been an issue in the past years. I guess that's solved? Or what are -- what is the color around that?

Mike McMullen -- Chief Executive Officer and President

Yes. Let me just 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 a new platform almost, I guess, three years ago and really have been well accepted in the market. You've seen us talk about some big wins like the Quest one here in the U.S. And I think that's been on -- part of it has been on the strength of the new automation platform. So anything else you'd add there, Jacob?

Jacob Thaysen -- President, Diagnostics and Genomics

I will say that all our IC on the PD-L1 is automated on one platform or the other, and we obviously have the strategy of having P-L1 automated on both of our platforms going forward. The same on FISH, the -- on this platform was built primarily for IC, but also for the FISH assays. And it's actually automated -- the FISH is automated on this today, so you can actually do that already today.

Paul Knight -- Janney Montgomery Scott -- Analyst

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...

Mike McMullen -- Chief Executive Officer and President

Yes, absolutely, Paul. So what we had said was slight moderation. I think we're in the 4 to 5-ish percent for next year.

Paul Knight -- Janney Montgomery Scott -- Analyst

European linked?

Mike McMullen -- Chief Executive Officer and President

I mean, I'm not sure I understand the last comment, Paul.

Paul Knight -- Janney Montgomery Scott -- Analyst

Slower due to European budgets? Clear? Uncertain?

Mike McMullen -- Chief Executive Officer and President

Oh, no. We just -- the main reason on this, 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 there -- that one would continue but not at the a high double-digit rate. So it is more a question of really tough compares. The overall fundamentals are really, really, really solid.

The comments around Europe, it really had to do with the timing of why we believe that will have the kind of numbers we've talked about in pharma next year because it could be some questions raised, right, which is minus 5% Q4 '17, is there something fundamentally of concern there. And we've gone out of our way in this call and really tried to indicate no. And in fact, the order backlog is quite solid in a number of product categories, which has not yet seen revenues for it, and that we've been thinking this is exactly how the market would develop. So this is not at all a surprise to us.

Paul Knight -- Janney Montgomery Scott -- Analyst

Okay. Thank you.

Operator

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

Puneet Souda -- Leerink Partners -- Analyst

Hi, Mike. Thanks for that. Just a quick question on the GST. Was there impact from that in the quarter from India?

Mike McMullen -- Chief Executive Officer and President

Okay. Go ahead, Didier.

Didier Hirsch -- Chief Financial Officer and Senior Vice President

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

Mike McMullen -- Chief Executive Officer and President

And it did have some impact on the pharma report numbers because we're heavily weighted toward pharma in India, but that didn't have some impact on our Q4 pharma results, although the business is coming.

Puneet Souda -- Leerink Partners -- Analyst

So if I could ask a bit of a strategy question on the LSAG business, I mean, traditionally, the LC/MS instruments competed more on the sensitivity and 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 wins? I know this is early. Still, the instruments just started getting out.

Are these the same customers that are appreciating the same product? Or are they -- are you getting new customers into the mix?

Mike McMullen -- Chief Executive Officer and President

Why don't you take that, Patrick?

Patrick Kaltenbach -- President, Life Science and Applied Markets

That's actually a very good question. When we launched the Ultivo, we really launched it with the perspective that we want to dominate what we call the routine applications out there. And we are going first for food environmental spaces right in the mass range that product has. It is a product that is really tailored toward ease of use and meeting the sensitivity needs that you mentioned as well for the target applications.

I think this product will display a lot of strength in other areas as well. So we will extend the range around here, too, Ultivo going forward. But when you talk about the overall strategy for LC/ MS, we are not entirely focused just on the routine markets. We have -- as you know, we have launched a [ BioTuitive ] solution very successfully, which drives a lot of growth in the biopharma market well.

So it's both a play in the a triple quad as well as the Q-TOF space where we think where we have plenty of opportunity to still gain market share. And to Mike's comment on the strong R&D pipeline, LC/MS is definitely one of the big bets we have within the company and very heavily invested on R&D.

Mike McMullen -- Chief Executive Officer and President

Absolutely

Puneet Souda -- Leerink Partners -- Analyst

All right. Thanks, Mike. Thanks, Patrick.

Mike McMullen -- Chief Executive Officer and President

You're quite welcome.

Operator

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

Steve Willoughby -- Cleveland Research -- Analyst

Hi, good afternoon. And thanks for taking my question. Two questions for you. First, just following up on the Ultivo.

It just started shipping this month. 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

Mike McMullen -- Chief Executive Officer and President

Yes. So I think relative to -- if the question about capacity is from a manufacturing standpoint, no issue at all. So we've -- in fact, we're right on our launch plan with -- our manufacture lease having occurred as scheduled. And you may noticed in the call, they have actually 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 part of our formula. So for the last three years, we've been outgrowing the 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 that new Agilent. But I think that's part of our formula of success, and 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 last 12 to 18 months plus the products we know that are going to come out in '18 will to 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?

Steve Willoughby -- Cleveland Research -- Analyst

Sure. Just was wondering if you could comment on the competitive environment within the CrossLab or 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.

Mike McMullen -- Chief Executive Officer and President

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

Mark Doak -- President, CrossLab

Well, thanks, Steve. And as far as, first, the business is concerned, we continue to see very robust demand for our services. And as you look at the deals that come and go, there's nothing particularly material that we haven't played that would actually change our trajectory for growth. So for us, we see -- continue to see not only opportunity for the services and pharma that we're seeing this stretch now into the broader aspects of commercial laboratories.

And as Mike has said, we continue to bring to market a robust set of capabilities into next year. So from a broader market perspective around services labwide, demand is still there, and we expect good demand going forward.

Mike McMullen -- Chief Executive Officer and President

Yes, Steve, I'm glad that you asked that question because, as you know, the creation of the Agilent CrossLab Group was one of the major initiatives that came out with -- three years ago. And I can remember at the time when we got off to a really good start, you had asked, is it sustainable? And I think you've seen Mark and the team have been able to deliver a high single-digit growth for quarter in, quarter out. I think it really speaks to the power of the value prop to the customers.

Steve Willoughby -- Cleveland Research -- Analyst

Thanks very much.

Operator

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

Patrick Donnelly -- Goldman Sachs -- Analyst

Thanks, guys. Sorry to harp on this. But in terms of revenue or push-out on the pharma side, I mean, is that what's driving -- I don't know, you talked about recognizing it really in fiscal '18. Is that what's driving the 1Q growth higher than the rest of the year? Call it 5.25% in 1Q; the rest of the year, close to 3.5%.

So I'm just wondering, does that make up that delta? I mean, is it adding as much as 1% or 2% 1Q?

Mike McMullen -- Chief Executive Officer and President

Patrick, thanks for that question. So 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 that story. But I think there's 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 guide. 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 or 2. And that's why you've seen us guide higher than our full year core growth guide. So, Didier, I think this is a departure from last year where we actually guided lower in Q1 '17.

So pharma is a part of that but is not the exclusive part. I mean, this European mass spec story is part of it, but not an exclusive story for the strength of our Q1 guide.

Patrick Donnelly -- Goldman Sachs -- Analyst

Okay. And then on China, high single digits is a bit on the low end of the recent range. It's been more of a double-digit grower for you guys. Anything to call out in the environment there? Or is it just purely a comp story?

Mike McMullen -- Chief Executive Officer and President

No. Thanks for this question as well. So you may recall, last year, Q4 '17, 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, a key contributor to growth and 10% growth this year for the full year off a very difficult compare. We're really quite pleased with the results. So going into '18, we're expecting us to be in that high single-digit growth rate for China. So it will continue to be an important contributor to the company's growth.

Patrick Donnelly -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Dan Leonard from Deutsche Bank. Your question, please.

Dan Leonard -- Deutsche Bank -- Analyst

Thank you. So Mike, now that the transformation is complete, there's no more new Agilent. You've hit your targets. How should investors think about the operating model going forward in a normalized year? Is your '18 guidance the right way to think about it, a mid-single-digit core revenue growth rate and high single-digit EPS growth rate?

Mike McMullen -- Chief Executive Officer and President

I think the way I'd -- first, I'd say the transformation is probably never done. What we've done is we hit some big milestones for the company because we put out some 3-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 that our operating margin expansion track will continue.

We've been very deliberate in terms of how we've improved the 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 served us well. So we've been taking costs out, 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 this company is set for continued outperformance. So I would just say that the way asked you to 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 called our Agile Agilent program inside the company, which is a mindset of continued process improvement.

So we think we're going to continue to be able to streamline the company and improve operating margin. We haven't, however, put out, as you know, long -- 3-year long-term goals beyond the fact that we're going to do better each year.

Dan Leonard -- Deutsche Bank -- Analyst

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' minds to the price of oil? Does that assume that oil goes back down to $45 and stays at $55, that you would do better than those numbers? Anything you can speak to on that front?

Mike McMullen -- Chief Executive Officer and President

No, I think if we were to comment, we're all kind of looking at each other and say, "No, that's probably not biggest driver, right?" I would look at PMI. And I think that's -- PMI is a better indicator of the overall growth in our chemical and energy business. Clearly, Pricewaterhouse has some impact, but PMI is a major driver. It has 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.

Dan Leonard -- Deutsche Bank -- Analyst

Okay, thank you.

Operator

Thank you and this does conclude the question-and-answer session today's program. I'd like to hand the program back to Alicia Rodriguez for any further remarks.

Alicia Rodriguez -- Vice President, Investor Relations

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 who will be celebrating it. Thank you very Much.

Operator

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

Duration: 59 minutes

Call Participants:

Alicia Rodriguez -- Vice President, Investor Relations

Mike McMullen -- Chief Executive Officer and President

Didier Hirsch -- Chief Financial Officer and Senior Vice President

Derik De Bruin -- Bank of America / Merrill Lynch -- Analyst

Tycho Peterson -- JPMorgan Chase -- Analyst

Patrick Kaltenbach -- President, Life Science and Applied Markets

Steve Beuchaw -- Morgan Stanley -- Analyst

Brandon Couillard -- Jefferies -- Analyst

Doug Schenkel -- Cowen & Co. -- Analyst

Dan Arias -- Citigroup -- Analyst

Catherine Schulte -- Robert W. Baird -- Analyst

Jacob Thaysen -- President, Diagnostics and Genomics

Tim Evans -- Wells Fargo -- Analyst

Jack Meehan -- Barclays -- Analyst

Paul Knight -- Janney Montgomery Scott -- Analyst

Puneet Souda -- Leerink Partners -- Analyst

Steve Willoughby -- Cleveland Research -- Analyst

Mark Doak -- President, CrossLab

Patrick Donnelly -- Goldman Sachs -- Analyst

Dan Leonard -- Deutsche Bank -- Analyst

More A analysis

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