Revvity, Inc. (RVTY) Q3 2008 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Third Quarter 2008 PerkinElmer Earnings Conference Call. My name is Stacey and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mike Lawless, Vice President of Investor Relations. Please proceed.

Good afternoon. Welcome to the PerkinElmer third quarter 2008 earnings conference call. I am Mike Lawless, VP of Investor Relations for PerkinElmer. With me on the call today are Rob Friel, President and CEO and Mike Battles, VP and Interim CFO. If you've not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com or from our toll-free investor hotline 1-877-PKI-NYSE. Please note this call is being webcast live and will be archived on our website until November 23, 2008. Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I am now pleased to introduce the President and Chief Executive Officer of PerkinElmer, Rob Friel.

Thanks Mike. Good afternoon and I appreciate you joining us this afternoon. I'm pleased to report that the third quarter was another strong quarter for PerkinElmer. Sales grew 8% organically, adjusted earnings per share grew 15% and cash flow was up significantly. The strong performance was relatively broad based with virtually all of our businesses showing good growth and improved profitability year-over-year. Our Q3 performance is a reflection of the fact that we have repositioned PerkinElmer in recent years around higher growth market opportunities where we believe that we have strong capabilities and a competitive advantage. This has translated into organic revenue growth averaging 10% over the past four quarters. Rather than spend a lot of time this afternoon on the results of Q3, I would rather address the question on many peoples minds, which is how will PerkinElmer perform in these uncertain economic times. And since Mike Battles will review Q3 in more detail, I will talk about the outlook for our key end markets given the uncertainty in the global economy. Let me first turn to our diagnostic businesses, which include new born and prenatal screening and cord blood storage as well as medical imaging. Our diagnostic businesses benefit from compelling long-term growth opportunities as the rising cost of healthcare is driving earlier detection of disease as it saves money and provides better outcomes. Year-to-date, both of these businesses have seen organic revenue growth in the high teens. Historically, our screening businesses have performed well in virtually every economic cycle. As once screening initiated, it is rarely curtailed. An increased screening [ph] has an excellent economic payback. However, as the current economic events are negatively impacting some state budgets here in the U.S., we anticipate that the expansion of some state training programs may be pushed out several quarters which could reduce our growth in these businesses to high single digits. Our imaging business has also been fairly insulated from economic cycles as it has been facilitating a technology update from film-based to digital x-ray panels. With the severity of the credit crisis impacting hospital budgets, we are seeing some growth slowing in high-end imaging systems. However, we think this will be relatively shortlived as credit markets turn to normalcy. Turning to bioparma, the end market is also less impacted by an overall economic slowdown. However, the big pharmaceutical companies continue to be cautious about spending levels. Our expectations are that pharma spending levels remain relatively flat over the next several quarters. However, we believe that biotech and large academic centers are continuing to invest in instruments, software and reagents. Many of the larger academic institutions are supported by well funded endowments and are more insulted from external financial factors. For us in particular we were benefiting from recent new product introductions in the reagent area as well as increasing adoption of cellular imaging and analyses products and are therefore seeing good growth in this area. Our analytical instrument business continues to benefit from a focus globally on clear air and water, food and consumer product safety and alternative energy. During the third quarter, we saw continued growth in the need for solutions to address environmental problems and challenges. As I think about the slowing economic environment on this business, the impact will be both company and geographic region specific. We expect to continue to see good growth in the Pac Rim, although moderating slightly. Whereas in North America and Europe, we see customers more cautious about capital spending. Our service business experienced good growth in Q3 and we would expect this business to be minimally impacted by the slowdown in economic conditions. In fact, with the increasing pressure on the labs to outsource, we are seeing more opportunities to take on outsourcing work from our customers. Finally, the Photonics business will experience some impact from the slower GDP growth. However, we are working hard to drive these businesses in higher growth applications like health, security and environmental monitoring, which longer term will reduce economic sensitivity to these businesses. Before turning the call over to Mike, let me briefly touch on our Q4 priorities. While we will tightly manage capital and expenses, we will continue to manage our business to create long-term value. Consequently, our focus will be keeping our new products and innovation engines on track as well as being aggressive on business development activities. I believe now may be a great opportunity for tuck-in acquisitions that add complementary products and technologies as well as additional stock buybacks. And you may have noticed today that our Board approved an additional $10 million authorization. In addition, we will continue to invest in applications and workflow solutions for many of our customers, which takes advantage of our breadth of products, software and services. So in summary, we believe our organic growth for full year 2008 will be solidly in the 6 to 8% range even with Q4 potentially below that range. And we believe our adjusted EPS for 2008 will be up 14 to 18%. Now I will turn over to Mike to discuss our Q3 financial results in more detail.

Thank you Rob and good afternoon everyone. I am going to review our Q3 financial performance in more detail and discuss some key drivers of the performance. Then I will provide updated guidance on our outlook for 2008 before we open the call for questions. Before I get into the specifics, I want to clarify that whenever I talk about a particular measure being up or down, I am referring to an increase or decrease in that major during the third quarter of 2008 as compared to the third quarter of 2007. To the extent I use any non-GAAP measures, those numbers have been reconciled to the comparable GAAP measures in our financial tables of the press release and posted on our website. As Rob discussed earlier, Q3 was a very strong quarter of financial performance. We had strong growth in sales, earnings per share and cash flow that were all well ahead of our expectations. Let me review the financials in greater detail. By segment, sales growth was 17% for LAS and 13% for Optoelectronics. Of the LAS sales growth, approximately 2% came from foreign exchange and approximately 7% came from acquisitions. Optoelectronics increased approximately 1% from acquisitions and approximately 2% from the impact of foreign exchange. The remaining sales analysis is presented on a reported basis, which includes the impact of foreign exchange and acquisitions. Starting with Life and Analytical Sciences. The business that showed the most growth in Q3 was Bio-discovery with mid-teen growth driven by good performance in cellular imaging and reagents as well as improved instrument sales for lab automation and detection equipment. Laboratory services had low-teens growth in Q3 with continued strong performance driven by growth in our OneSource offering and in our core service contracts. In Analytical Sciences, sales increased high single digits due to strong... continuous strong performance in emerging markets, partially offset by softness in North America and Western Europe. By end market, we continue to see growth in food safety, consumer product safety and renewable energy. Finally, genetic screening had strong double-digit growth, driven by the acquisition of ViaCord and the neonatal testing lab from Pediatrix. In Optoelectronics, medical imaging grew strong double digits with good yields and our expanded capacity better allowing us to meet the needs of our customers in diagnostics, radiation therapy and non-destructive testing. In specialty lighting, growth was strong double digits, primary due to demand for the Xenon Flash modules for mobile phone cameras. Is sensors, sales was flat, driven by growth in environmental and energy management applications, partially offset by applications more economically sensitive. Turning to gross margin, we saw 70 basis points of gross margin expansion in Q3. This was driven primarily by the favorable impact of the ViaCell acquisition and productivity gains, partially offset by sales mix and inflation. Research and development expenses were flat versus last year as we have improved efficiencies by bringing more development in house and reducing external spend. We continue to build strong momentum in our pipeline of new product introductions. Selling, general and administrative expenses increased as a percentage of sales, primarily due to the impact of the ViaCell acquisition as that business carries higher SG&A expense as a percent of sales. For the quarter, we also recorded a $7.2 million restructuring charge primarily related to head count actions in an effort to redirect our efforts to higher growth product lines. GAAP operating profit was 9% of sales for Q3 of 2008 versus 10.5 of Q3 2007. On a non-GAAP basis, adjusted operating profits increased 50 basis points year-on-year to 13.8% of sales. In Q3, we had an income tax benefit of $4.5 million which included a $14 million tax benefit on the settlement of several large income tax audits from recent years. Excluding these settlements, our non-GAAP tax rate for adjusted EPS was approximately 28% for the quarter. GAAP EPS from continuing operations was $0.37 compared to $0.26 in Q3 2007. Adjusted EPS was $0.38 in Q3 2008, an increase of 15% over the prior year, exceeding our prior guidance of $0.36 to $0.37. Turning to the balance sheet. We have a very strong financial position. We finished Q3 with $355 million in net debt, which we define as short and long-term debt minus cash. We have excellent liquidity with $189 million in cash on our balance sheet and approximately $250 million of undrawn availability under our revolving line of credit. We also have no mandatory maturities of debt until 2012. We also expect to generate approximately $90 million of free cash flow in Q4, which we define as cash flow from operations minus capital expenditures. This leaves us in a very strong financial position as we head into Q4 and into 2009. Looking at the cash flow statements, during the third quarter of 2008, we generated operating cash flows from continuing operations of $33.6 million, which is an increase of 42% over the prior year. Our focus on working capital continues to show very good progress as we achieved working capital turns of 5.3 times for the quarter, primarily due to improved inventory management. Today, we also announced that the Board had approved a new plan to repurchase up to $10 million shares of common stock. We believe share repurchases is a very important tool for us to return capital to shareholders and improve our corporate returns on capital. Additionally, we believe that shares remain an excellent value and a good investment for our cash flows. In summary, we are quite pleased with our financial performance for the first nine months of 2008, particularly in light of the slowing global economy and turmoil in the credit markets. Now let me outline our update guidance for the full year of 2008. Given the uncertainty in the macroeconomic conditions and difficult credit markets, we feel it's prudent to expand the range of our earnings per share guidance. For the full year 2008, we expect GAAP earnings per share from continuing operations in the range of $1.19 to $1.24 and our non-GAAP adjusted earnings per share in the range of $1.48 to $1.53. Our new guidance would represent a 14 to 18% increase in adjusted EPS for 2007. For the full year, our adjusted EPS excludes stock-based compensation of approximately $0.05. So our guidance on a basis equivalent with First Call translates into the range of $1.43 to $1.48. I would now like to open your call... open the call to your questions.

[Operator Instructions].

Operator, you want to open the call? Stacey? Question And Answer

[Operator Instructions].

Hello, operator, we may be having some technical difficulties. We are not hearing any questions on our end.

Please stand by. Your first question comes from the line of Vivek Khanna. Please proceed.

Hello, can you hear me?

Yes.

I just needed to test if was working. I couldn't believe nobody else was asking a question. But anyway, I have a... since I have been polled, I'll ask a question in terms of, Rob, what are you thinking... the biopharma seemed very strong in terms of mid teens I think growth. I am not sure that was organic or not. And just wondering what you are seeing in order activity or anything unusual at the end of the quarter patterns like one of your competitors mentioned. And just wondering as you look out into '09, maybe you don't want to give us guidance, but what kind of levers you can pull to drive some margin extension in --

So I would say that the mid teen was recorded. But having said that, the organic was strong as well. And I think what we were seeing is the large pharmaceutical companies are still being cautious from CapEx in particular are still spending on the reagent and the consumable side. I think what we are seeing in growth is really on the biotech and particularly on the academic side where, as I mentioned, they seem to be better funded, particularly some of the larger academic institutions. I think in particular this quarter, we saw some strength based on some new products that we brought out on the reagent side and quite frankly some catch up probably on some instruments. As you know some of these instrument sales can be a little lumpy. And so I think we saw some good growth in Q3. So as I think about at least Q4, and I'd say it's probably a little early in '09, I think it's probably growth as it's been, which is sort of low to mid single digits. I think that's probably how we would think about the biopharma growth prospects.

And would you talk about imaging in 4Q, are you expecting that business to be... because it's I think the strong double digits. Are you saying it's going to be growing in single digit?

The medical imaging business you mean?

Yes.

Yes. Well, I think that's going to... that seems to be impacted somewhat by this credit crunch. Because what we're hearing particularly with some of the larger end systems in oncology and stuff like that, I think there appears to be a pull back from the hospitals. I think concern about financing isn't available. And I think everybody is sort of pulling the reins in a little bit from budget perspective. So I think there will be some impact. As I said, though, I think that's fairly short lived because I don't think that's an economically sensitive business. I think it's just being tied up a little bit in this tight credit situation, which I guess I believe will be solved quicker than I would say the economic slowdown.

So did I interpret your comments right that if you expect 6 to 8 organic given that you've already done average of about 10 or so, give or take, for this year that you expect --

Yes.

That you expect negative --

So what've done this year is we've done 10, 11 and 8.

Okay.

And what we are saying is we are very comfortable that the year will be in the 6 to 8 range, clearly, at the higher end of that range.

Right.

So it would suggest Q4 we think is probably going to be in the sort of mid to maybe low single digits?

Okay, right. Because if... right, right. Because you are already at let's say 10, 11, 8, 9, okay, I got it. Thanks. And nice job on the quarter. Thank you.

Thank you.

Your next question comes from the line of Derik De Bruin with UBS. Please proceed.

Hi, this is Dan in for Derik. Just wondering if you could give us on update on ViaCell and sort of how you're seeing the synergies playing out there. And then also that seems to be a business that's pretty heavily impacted by consumer discretionary spending. So I was wondering how you are sort of thinking about that business in '09 as we enter what could be a tough year.

Yes, so the ViaCell revenue growth has been around sort of 10% in Q3, probably similar to that in Q4. That's down from the first half where it was sort of in the high teens, low 20%. So I think it is being impacted to some extent by the economic pressures on the consumer. Having said that, at 10%, it still is pretty good growth and still generates some good profitability. Actually in Q3, it was accretive to the operating margins for the company. So I think that we are seeing... what we expected was both the synergies as well as the higher revenue growth is accelerating the operating margin expansion in that business relatively quickly. So... and I would say from a sales synergy side, organizationally, that's been completed now and we expect all the ViaCell people to be trained on the NTZ [ph] products by the end of this year. So I would say we're not seeing a lot of sales synergy yet, but hopefully as we go into 2009, we will.

Okay, great. Have there been any developments in strategic decisions for the non-cord storage portion of the business?

Yes, they were actually discontinued and shut down at the end of Q2. So the therapeutic businesses have been shut down.

Okay, great. Looking at the ecoanalytics business, how would you characterize the magnitude of the effect that you guys see in your business to lower or higher energy costs? Is that a pretty modest change in demand for sparely [ph] drastic changes in energy prices or is it more so?

I would say from a... in a short-term basis probably not much of an impact at all because I think where we see the benefit is in the biofuel area. And my sense is even though we are seeing a pullback in oil,prices I think people think longer term, it makes sense to come up with alternative energy solutions. So we are not seeing really any pull back from that perspective because I think longer term, people still want to invest in biofuels, and that's really what drives our business mostly from an energy cost perspective.

Okay, that's helpful. Let me actually go back to the consumer spending and ask about the flash business, whether or not in '09 with the same type of situation that we were taking with ViaCell, you see the phone... spending on phones materially impacting the ramp up there or the growth there.

Yes, it's sort of early to call '09 right now, but I would say my sense is there is going to be some impact in that business because the strategy with this business was as xenon flash got ramped up into handsets in the phones, our business would grow significantly. And of course xenon flash is going into higher end phones, and I think when you see what's happening with consumers, our view is that's probably going to be delayed as we go into '09.

Okay, thanks. Is it fair ... is it proper to ask what percentage of overall phones would be high-end phones, kind of the ballpark --

Well I could tell you the percentage of phones that have a xenon flash is probably less than 2%.

Got you. Okay, thank you.

Your next question comes from the line of Ross Muken with Deutsche Bank. Please proceed.

Hi Rob.

Hi Ross, how are you?

Pretty good. It's good to finally be back on one of these calls. In terms of the sort of emerging markets, your spectroscopy business has obviously had some success in that area. Can you talk a bit about sort of the outlook there? Has there been any sort of notable change in demand shift at all in any of those end customer basis, specifically in kind of the emerging countries? And then also on the environmental business as well in terms of spectroscopy, what's sort of the outlook relative to kind of funding globally for those types of applications?

So I would say if we're looking historically, those businesses have done quite well, particularly in the developing areas. So our growth in sort of the China and Pac Rim areas are sort of... all been sort of north of 25%. So going forward, I think the real question is there a slow down and to what extent does credit play into that? Virtually all the customers we sell to we require a letter of credit. And I think there has been some delay in getting those. So I think there is going to be a little bit of abatement of growth in those areas. But maybe slowing down from sort of the high 20s to maybe the high teams or low 20s. I think our belief is it will still be, relatively speaking, strong. But I think if you look at sort of sequentially, probably down a little bit.

Okay. And on the opto business, what about sort of the traditional sensors business, some of those defense systems and industrial smart devices and all the sort of military aerospace? I think Boeing is a customer there. What's kind of the near-term and then sort of medium-term outlook there and has sort of Boeing's struggles had any sort of impact on that business?

So I would say the business has been sort of low single-digit growth. But one of the things we have been doing, I mentioned this earlier, is we've been trying to do with this business is sort of shift the application from one that was more industrial to more that was one in... or more than one is sort of health and environmental and security based. And so we're trying to get more and more designed into the higher growth end markets. And we are seeing some success in that area. So I would say longer term, and again not to get into specific '09 guidance, but I think longer term, that's a business that can probably grow in the sort of 6 to 8% sort of up to the corporate average. At the same time, you mentioned defense. I think defense to some extent is probably more stable in this environment when you think about what's happening with the macroeconomics. And if anything, we are seeing some nice growth opportunities on the defense side.

That makes sense. And than lastly, how are you thinking about the cost base? I mean we are assuming that in year two of ViaCell, we are going to start to see some synergy flow through there are to the bottom line. In light of the current environment, I think people are trying to figure out how flexible certain costs are within the operating base. And how are you thinking about sort of margin expiation targets or what you would need to do in a tougher environment if some of your more sensitive businesses under performed? How much flexibility do you have to offset some of that and still be able to grow EPS significantly?

So I think we've got a fair amount of flexibility at a couple of levels. But first of all, if you think about, the organization right now is clearly biased towards growth. So we've got a lot of people really focused on [indiscernible] the growth. If the customer... if our customers were to sort of pull back, and I'm not suggesting, we are seeing a significant pull back, but if they were to pull back, that would give us a fair amount of organizational capability to focus on productivity. And so we could look at things like increasing our Far East production, maybe doing some plant consolidation, product line shifts, material sourcing, which we've gotten a little bit away from; I mean not that we ever get totally from, but we've got a little bit away from because we've been more focused on getting the growth. And of course you've seen that with the strong organic numbers we've put up over the last four quarters. So I would say it would just be sort of a redirection of the organizational focus from one of growth to productivity. But we think we see a fair amount of opportunities in the business if we were seeing some moderation of the top line.

Right, right. Thanks Rob.

Your next question comes from the line of Quintin Lai with Robert W. Baird. Please proceed.

Good afternoon.

Hi Quintin.

Looking at genetic screening, you talked about some of the state labs, what their funding and the macroeconomic issue. Some of the growth that you have also had is international. So could you kind of go through what are you seeing and what are you hearing? Is it more U.S.-based? Is it international or worldwide and I guess how much visibility do you have that... when do things return to normalcy for them or what would it take for things to get normal for them?

So I would say the push outs that we're starting to see is more U.S. ... a more U.S. phenomenon at this point. So I would say international screening still seems to do okay. I would say the one area, and it's early days, so we don't know, but we think there may be a little bit of a hesitancy to adopt. So if you think about the strategy to the genetic screening business, at one level, at least on the new born there is sort of two tenants [ph] of growth. One is to layer on more tests once we sort of capture the sample and then the other is to obviously test more babies. And I think the test more babies is really more of an international push. And to the extent that there is some hesitancy from an economic perspective or a funding perspective, you could see that delayed a little bit. And then I think in the U.S., you are seeing a little bit of a push out on the adoption of new tests. As I mentioned before, I don't know that we have ever seen an instance where this get curtailed. It just sort of delays or gets pushed out because of some of the pressures on the state funding. And of course this isn't true across all states, but there are a couple of states that we know are under fairly significant fiscal pressures and are looking at sort of maybe pushing it out a quarter or two in this type of environment.

Thank you for that. And then with respect to the fourth quarter and the guidance you've given, I know in the past that you've kind of talked about being more neutrally hedged on FX. What are the FX revenue headwinds that you are expecting and what, if any, are you expecting on the bottom line?

So it obviously depends on where the currency ends up. But as you know, we have seen I think a 13% change in the euro to dollar just in the last four weeks. So it's been a fairly dramatic change. So it's hard to predict at this point what the impact would be on reported growth. That's why I think we prefer giving our guidance really from sort of an organic perspective. Having said that, as you pointed out, the impact on the bottom line is not that significant because we do have a fair amount of expenses in Europe. And while it could move our top line revenue fairly significantly, particularly if we continue on the track that we been over the last four weeks, I don't suspect it will have a huge impact on the bottom line.

Okay. So then I guess mathematically, as we look out to not just Q4 but 2009, if you get a revenue headwind with respect to FX, the offsetting factor would be higher margins than because your cost basis in Europe would also adjust as well.

That's right. That's correct.

Okay. Thank you.

[Operator Instructions]. Your next question comes from the line of Isaac Ro with Leerink Swann. Please proceed.

Hi guys. Thanks for taking the question.

Okay.

So I think in the past, you may have talked about the number of states in U.S. that mandate neonatal testing of some kind. I'm wondering where is that number today and how do you think the number will look maybe under a Democratic White House next year. Just trying to get a sense of how the domestic market is shaping up?

Yes, so the best thing for that is you can go on the market time [ph] website and they have a map of the United States and they will show every state and the amount of testing that they do. Right now, virtually every state tests at least for one or two defects. And so it's a question of how much they're doing. And I think the last time I looked, I think 85% of the states now test for at least 21 things. So it's fairly high relative to the standard of care, which is 29. However, we've been working with a number of sort of regulators and sort of advisors. I think there is a possibility you could see the standard of care go up into the sort of mid 40s to low 50s here relatively soon.

Okay. And then on the camera flash business, just another time, are you seeing any pricing pressure, or do you think that that's something that you might have to build into your expectations next year as some of the phone makers are under a little pressure on their own margins?

You mean in the phone side specifically?

Yes.

Or just across the portfolio?

Well both actually, in the medical equipment industry as well.

Yes, I would say on the phone side, it's really volume dependent. So clearly, as the volume goes up, there is an expectation that there is some of that economic benefit given back to the OEM. So I think as volumes go up, I think there will be some pricing pressure. I think on the medical imaging side, again, that is really sort of a volume plan. As you may recall, that's really a fixed cost fab to a large extent. So it's the economics around as volume goes up, you get significant productivity and cost reductions. And usually with the number of our customers, there's some type of sharing arrangement with those economic savings

Okay. And then just lastly, how do you guys stand on the CFO status?

Continuing to see some good candidates, and I would say still fairly optimistic we could have somebody here in the seat probably in the next 60 days.

Okay. Thanks very much.

Your next question comes from the line of Chris Arndt with Select Equity Group. Please proceed.

Yes, I just wanted to follow up on your comments on productivity. You mentioned that if you started to see a slow down that you could focus on that a little bit more than growth. But it seems that you already have seem a slowdown to some extent and it would be reasonable to expect a slowdown going into 2009. And so I did want to follow up to see what initiatives you might be taking now.

Yes. So you may remember... and Mike mentioned the fact that that in Q3, we did take a $7 million restructuring charge. It was a little over 100 people.

Okay.

So we actually started sort of the end of Q2 beginning of Q3 started looking at in selective businesses, this clearly wasn't a sort of across the board type of thing. So we have already started to take a good look at our costs from that perspective. What I was really referring to was before where we started to see a slowdown, I would say where we thought it was sort of a longer term more sustained, we could shift some resources within the organization that are focus on growth. I would say at this point, we're not doing a lot that because you could argue, we have seen a slowdown from 10% to 8% in the third quarter. But I still think we see a lot of opportunities out there within the business. So it's really making a distinction between sort of more sustainable pull back from the customers that we might start to shift some resources within the organization. Having said that, I think we are always looking at trying to being more productive in our factories and always looking for more opportunities to be cost effective.

Okay, thanks a lot.

Your next question comes from the line of Jonathan Groberg with Merrill Lynch. Please proceed

Hi, good afternoon. Thanks for taking the call.

Good afternoon.

Congratulations on the quarter.

Thank you.

Just so you know, I was pressing star 1 upfront and somehow I got pushed to the back once they had to reset the system or whatever.

All right, sorry about that. It looks like we had a little technical glitch there.

There were people that were pressing star one if they are [ph] still listening. Can you just maybe talk about, first of all, as you look into '09, I think that's where a lot of peoples concern and you have two very difficult comps. You mentioned ViaCell was growing very fast at the beginning of the year. And while that was in acquisition revenue, and with the consumer slowdown potentially how you see that playing out at the beginning of the year, next year. And then also in the cell phone business, it sounded to me as though on that piece, you were actually talking about getting into some new areas outside of cell phones. And I was just curious if you made progress and maybe getting speced [ph] into some of the different models or kind of where you stand on that business as you anniversary some very rapid growth?

Yes, so I would say it's a little early to get into specific discussions around '09. We are actually within the company, as we speak, sort of rolling up the '09 number. So I don't know that I can talk to the individual quarters. We do recognize that the first half of 2008 was particularly strong and a number of our business is that the same time a number of our businesses that have struggled in first half of 2008. For example, under if you call bio discovery acting was negative organic in the first quarter of 2008. So, I think when we rolled up or after the sort of look it the mix across the portfolio And see how that plays out relative to our guidance for the quarters particularly in the first half of the year. With regard to the cell phones and how we are getting as far as getting into other programs we actually won a number of other programs I would say in the last couple of months. However we are seeing as a result of what's happening from a consumer spending perspective those being pushed to the right. So it's really question of how quickly they ramp up but we have been successful in getting on some additional programs.

Okay, thanks for the color there. And then can we just clarify a little bit is well what your actually seen in the medical emerging side. There's some issues with some of that big equipment for a while that you, previously as said your pretty immune to it sounds like may be its catching up a little bit to you now and just may be you know expand on that one a little? And then on the screening, are you actually seeing states that are pushing things out or are you just kind of proactively thinking hey, if our funding is scares, this might be something that they decide to push out? Are you already seeing some of that?

So I would say on the imaging side, I think some of the problems that others saw before were really addressing different modalities. So it was really more CT and MRI, and I think a lot of that was driven by the Deficit Reduction Act. And so we were... really didn't impact us. So I think what you're seeing now is sort of a different phenomena, which is you're seeing a curtailment of orders I think largely because of credit market issues where the financing just isn't available. So I think it is a little bit different from what I think some of the others saw, let's say, in Q1 and Q2. I think with regard to genetic screening, I would say we saw sort of early indications of some delays by our customers. But I think at this point, we're being particularly cautious. Because I think... as I think about November and December, I'd just... my own view is I think markets get a little bit more difficult here before they get better. And I just think in this environment, it's good to be cautious. And so I think we're being a little cautious in our forecast of the fourth quarter viewing that. If we're too cautious, I don't know that there is a huge downside to that. And if things continue better and our customers do not push as we think, then we will do a little bit better. But I think we are being... I think we want to err on conservative here. I think it's the prudent thing to do in this environment.

Okay. And then finally, just one clarification question. You said ViaCell was actually accretive to the company margins in the quarter?

Yes, in the third quarter.

In the third quarter, okay, that's great. And congratulations on seeing some good margin expansion. On the new product side, on the screening, more on the prenatal side maybe. I know you've talked about some potential markers and things you're doing there. Obviously, you probably read the news of a number. It's a space where some competitors are going after things. Can you maybe update us where you're at in terms of some of the new potential markers and --

So on our side, I think we still make good progress from sort of the content in the markers. I think some of the timing in the marker is going to be dependent on FDA approval and put to all that's a difficult thing to predict. We're shooting for sort of mid to late '09 whether we achieve that or not is somewhat out of our hands. But I would say from our own performance, we feel good about that and I think we're making good progress.

Is that for the prenatal here?

Yes, that's where the prenatal markers.

Okay.

With regard to the competitive environment around prenatal screening generally. As you said, it's been sort of an active area. I guess the only thing I would comment with regard to that is if you think about what we do versus what things being suggested, it's a little different. We do sort of screening... population screening, if you will, relatively low cost, relatively simple to do. And I think what you're talking about is a much more involved process that is really sort of almost bordering on diagnostic. And so I really think they are different and not really competitive at this point.

Okay. Thanks.

Your next question comes from the line of Peter Lawson with Thomas W. Please proceed.

Rob, I wonder if I could just ask you about the weakness in some of the applied markets like oil and gas. Have you seen any weakness there with the drop off in CapEx investments?

So, Peter, oil and gas isn't a huge market for us. Probably petrochemical would be a little bit larger for us. We don't have a real big sort of revenue base in oil and gas. But I would say I don't know that we have seen anything noticeable there as far as a drop off.

Okay. And then just thinking about worst case scenarios, do you... how much organic growth do you need to drive up margin expansion or can you get that margin expansion next year without necessary needing organic growth?

Yes. So I would say, first of all, I mean obviously, there could be a scenario where we don't grow. But I think that's highly unlikely. What I was trying to sort of articulate earlier on is that a lot of our businesses are not that economically sensitive. Now they may be sensitive to other things, but they're not that economically sensitive. So I think we feel pretty good that almost in any economic environment, we're going to see positive revenue growth. Now the question of what level that is and whether that's mid single-digits or high single-digits. But I think we feel fairly confident. So I think the really question for us is on the margin growth is how much of that incremental profit from the growth is invested back in growth and how much of that flows through to the bottom line. And if you look over the last year or two, it's been sort of fairly balanced because we believe we have good businesses in good growth markets and we want to make sure that we're getting the new products, we're getting innovation out into the market, we are building the infrastructure, whether it's in the Pac Rim or wherever. So we've been balanced between that. I think if we saw a situation where the market growth was down fairly significantly, we would let more of that flow though to the operating margin and probably less need to invest. And so I think that's how I would think about our ability to get operating margin expansion in a slower growth environment.

And then sort of thinking about inflation, how much pricing power do you have? Is that 50% of the business you think you've got pricing power and if you've actually implemented any price changes?

So it varies by business as you sort of point out. I would say a good portion of our portfolio because of the strong market positions we have. I think we do have some pricing power. We have done some things particularly in the area of freight, and I think a lot of those have stuck. So I think on balance, we have pretty good pricing power in a number of our businesses.

Okay, Rob. Thank you so much.

Okay. Thank you.

Your final question comes from line of Tony Butler with Barclays Capital. Please proceed.

Thanks very much. Rob, you characterize Q4 organic revenue of 6 to 8%, but I am just curious... and you said perhaps that was really toward the upper end. But is there a scenario where you might be seeing some additional pressure where in fact growth could be negative?

Yes so, Tony, let me just sort of clarify a little bit. The 6 to 8 and our upper end was really was the full year. I think we're probably looking at Q4 growth in the low to mid single-digits at this point. And again, maybe I'm being conservative, but the 6 to 8 and let's say the higher end of 6 to 8 was really talking from the full year 2008.

Fair point. Thank you very much. And when you alluded to the north of 100 folks that were let go any particular area that you can characterize where those folks may resided and more importantly as you think about cost on a forward-looking basis is that same area or other areas being thought of is areas that you may also see some folks maybe let go.

Yes, so when we daily exercise we're really trying to focus on is those businesses or those areas that we did not see the growth prospects. So it was really in the businesses that we thought that we are not going to see the revenue expansion that we... see in the other businesses because really part of what we want to do is because in the businesses that are growing well, we want to continue to invest there. But we want to do it in a way where maybe the total dollars are not going out. So it was really over time merely a shift in our expenditures. Now of course if economic times get tough, we won't make those incremental investments. But it was really sort of a shift from slower growth businesses with the eventual reinvestment into the higher growth businesses yet to be determined on how the macroeconomic conditions play out.

Appreciate the color. Last questions around the Pac Rim. Did I understand your characterization as being more cautious in that region on a forward-looking basis? And if that were true, any particular reason why other than just simply credit and potential economic slowdown globally that you may have said that?

Yes, I think that's right. I think when I meant cautious was really just sort of a moderation in growth rates, but still probably pretty high when you think about the developing world. So we have experienced some very nice growth in those regions as I mentioned sort of north of 25%. And the view is if there is going to be pressure on credit, if there is going to a moderation of global economic growth, I think we would sort of plan for that coming into sort of the high teens, maybe low 20s. Again, very nice growth rate, but relative to what we have seen historically, I think down a little bit.

Thank you so much. Appreciate it.

Thanks.

With no further questions in the queue, I would like to turn the call back over to Mr. Friel for closing remarks.

Okay. Thank you everyone for your interest in PerkinElmer. As I mentioned, we are going through some difficult times, but I think we feel very well positioned to do well in these difficult economic times and look forward to reporting the progress in the fourth quarter in the latter part of January. Thank you and have a great day.

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day. .