Revvity, Inc. (RVTY) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2015 PerkinElmer Earnings Conference Call. My name is Jasmine, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Tommy Thomas, Vice President of Investor Relations. Please proceed.

Thank you, Jasmine. Good afternoon and welcome to the PerkinElmer second quarter 2015 earnings conference call. With me in the call are Rob Friel, Chairman and Chief Executive Officer; and Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until August 13, 2015. 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 the call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I’m now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?

Thanks, Tommy. Good afternoon and thank you for joining us today. I’m pleased to report we deliver strong quarter financially achieving good growth on the top-line and continuing to expand both growth and operating margins, enabling us to exceed the high-end of both our revenue and EPS guidance range. In addition, we may notable progress against our operational and strategies priorities positioning us to deliver on our longer term objectives of accelerating revenue growth and profitability. While Andy will provide details on our financial performance, on a constant currency basis revenue grew 8% consistent of 4% organic growth and 4% from recent acquisitions while our adjusted earnings per share grew 12%. During the first half of the year, adjusted operating margins have increased 90 basis points and adjusted EPS is up 15% both on a constant currency basis against this factor of the strong financial results, I would like to briefly discuss some of the highlights from the quarter as well as touch on a few areas of potential macroeconomic headwinds. First, I’d like to emphasize the growth of our new products. We continue to be very pleased with our Research & Development efforts as investments made over last year or so are starting to manifest in a number of successful new products. During the first year for the year we increased R&D spending by over 10% on a constant currency basis and continue to believe driving innovation into the market will be a key component through accelerating our longer term growth. In particular, many of our recently introduced products within the research market are gaining traction including the upper Phoenix high content imager and our labchip touch Microfluidics offering for NGS sample prep which resulted in our research business growing high single digits last quarter. In addition to the growth of new product, our OneSource services business once again delivered very strong results. Our former customers continue to view OneSource as a trusted partner capable of meeting their needs for a wide range of services from instrument maintenance, asset management or lab relocation to scientific and lab IT consulting services. Our growth in pharma and biotech has also been boosted by our decision early in the year to integrate onesource and a room for nice offerings into our research sales organization. This allows us to more effectively deliver complete innovative solutions tailored to the specific needs of our customers, while building even stronger longer term customer relationships. During the second quarter, we grew revenue from our top 20 global pharma and biotech accounts double-digit versus the second quarter of last year and the recent announcement of our strategic collaboration with Albany Molecular Research is a prime example of the early success from this approach. PrekinElmer will be providing scientists working in AMRI's drug discovery center at the Buffalo Medical Innovation & Commercialization Hub with solutions to support cutting edge research. Most importantly these offerings scientists working in AMRI's drug discovery center at the buffalo medical innovation and commercialization up with solutions to support cutting edge research. Most importantly these offerings span the breadth of our capabilities and include cellular imaging solutions, analytical and visualization software and onsite technical and service support. Another highlight in the quarter was a continued global expansion of our diagnostics business which achieved key milestone in supporting the rapid adoption of newborn screening and emerging markets. As you may recall, four years ago we helped Egypt establish the world's largest newborn screening lab and we are pleased with the recent decision to expand the screening menu to include PKU testing for over 2 million birth each year. Also during the quarter, we continue to see strong demand in China for our newborn screening offering and we experienced sequentially growth in our Haoyuan blood screening business in China. We are closely tracking order rates as government mandates for nucleic acid blood testing take effect and we continue to believe we are well positioned to capture a significant share of this market. On the environmental health side, all of our new products introduced at Pittcon are now in the marketplace and coaster new manage is encouraging. In addition, our ICP-MS has experienced good growth and demand remains high for our unique metal particle detection solution and multi element analysts capability. Furthermore, the integration of Perten is effectively complete and our consolidated food analysis offerings are capturing greater mindshare with customers in this attractive segment. While we are excited about our myriad of opportunities, we see going forward, we are mindful of the macroeconomic environment that while consistent with our outlook from the beginning of the year still presents some challenges and concerns. In China while we continue to expect double-digit growth from our diagnostics offerings, ordering patterns with environmental end market and government tenders continue to be choppy. Additionally, Japan's academic funding environment has also become difficult to predict and Europe remained soft but stable as it wrestles with the mixed economic outlook and the implications from a Greek bailout. The macro concerns aside, I remain confident in our ability to executive and drive both revenue growth in margin expansion in the second half. Therefore looking at our guidance, we are reconfirming our previously stated guidance of mid-single organic growth for the full year and modestly raising the bottom end so that our adjusted earnings per share guidance is now $2.55 to $2.60 which represents 13% to 15% constant currency adjusted earnings per share growth. I would now like to turn the call over to Andy.

Thanks Rob and good afternoon everyone. Consistent with previous quarters, I will provide some additional color on our end markets, provide a financial summary of our second quarter results and details around our third quarter and full year 2015 guidance. Given the impact of foreign currency on the comparability of our results I will once again provide much of my commentary on a constant currency basis in order to better portrait the results of the year. As Rob mentioned we reported 8% constant currency revenue growth and 4% organic revenue growth in the quarter with foreign exchange representing a headwind of approximately 7%. Adjusted revenues were 564 million in the second quarter as compared to 557 million in the same period a year ago exceeding the high-end of our guidance revenue range driven by broad based demand. Second quarter adjusted earnings per share was $0.60, up 12% on a constant currency basis from $0.59 in the comparable period a year ago. Our quarterly results were $0.02 about the mid-point of our guidance range driven by favorable mix and continued operating leverage. Looking at our geographic results globally, we experienced mid-single digit organic revenue growth across all major geographies in end market. We saw improved results in Europe and stable demand in China where we continue to be encouraged by the resiliency of our serve markets. As to our operating results, second quarter adjusted gross margin were 47%, up 50 basis points on a constant currency basis driven primarily by volume leverage, mix and productivity gains. Second quarter adjusted SG&A was 24.2%, 50 basis points below the same period a year ago, the result have continued operating leverage from our indirect spend initiatives. Research & Development spending in the second quarter as a percentage of revenue was up 40 basis points as compared to the same period a year ago driven by continued investments and innovative new product development and incremental investments at Perten. We expect full year R&D spending to increase over 2014 levels by 30 to 50 basis points. Overall, we were pleased with our operational performance in the second quarter as we expanded our constant currency adjusted operating margins over 50 basis points. For the first half of 2015, constant currency adjusted operating margins have expanded approximately 90 basis points. Net interest and other expense in the second quarter was approximately $11 million, up from 9 million in the comparable period a year ago, driven primarily by the impact of foreign currency. Our adjusted tax rate for the quarter was approximately 20% and we expect our adjusted tax rate for the full year to be approximately 21%. Switching to the segments. Second quarter organic revenues and our Human Health business increased approximately 5% Environmental Health organic revenues grew approximately 3%. From an end market perspective, our Human Health business represented approximately 61% of reported revenue in the quarter with diagnostics contributing 28% segment revenue and research generating 33% of segment revenue. Organic revenue growth from our diagnostics business increased mid-single digit despite a high-single-digits comparison in the second quarter last year. Our results were driven by strength in our newborn and infectious disease testing solutions, which continue to see strong uptake throughout emerging markets offset by a low-single digit organic decline in medical imaging due to difficult prior year comparisons and customer ordering patterns. While we are really encouraged by the broad acceptance of our new [indiscernible] offerings, we believe the second half will remain challenging for medical imaging. We experienced a strong performance in China growing double digits in the quarter during part to the continued ramp of our Haoyuan business. We believe that the conversion of a ELISA base testing to nucleic acid testing for the screening of blood represents a significant opportunity for PerkinElmer. While we are somewhat more optimistic on our outlook for the second half of 2015 as the government begins to enforce regulations to better secure the China’s domestic blood supply. Organic revenue and our research business grew high-single-digits in the second quarter driven by ongoing success from our recent new product launches including the Opera Phenix strengths from our automation systems offerings, strong growth in OneSource multi-vendor services and someone easier prior year comparison. As Rob mentioned, we are pleased with the early success from our new go-to-market strategy and research and the increased traction we started to see with our Pharmaceutical and biotech customers. We are seeing an improvement in global academic and government end markets with Japan being the exception while pharma and biotech remain stable. We continue to expect research sales to grow low-single digit for the year primarily impacted by the steep declines in Japan. Moving to our Environmental Health business which represent approximately 39% of reported revenue in the quarter, revenues grew 3% organically in line with our expectations. Our second quarter reported results benefited from increased demand in an around environmental and through the applications driven to a large extent by success from our inorganic and chrom offering in the addition of Perten. We’re pleased to report that Perten had a solid quarter as their sale cycle closely follows the harvesting season, we expect sales and profitability to increase sequentially in the third quarter as a result of these seasonality. Turning to balance sheet, we finish the second quarter which is under 1 billion of debt and approximately 200 million of cash. We exit the quarter with a debt to adjusted EBITDA ratio of 2.2 times and a net debt to adjusted EBITDA ratio of 1.8 times. Turning to cash flow we have a strong quarter with adjusted operating cash flow from continuing operations are 71 million versus 54 million in 2014. Despite higher working capital, primarily result of the timing of additional inventory requirements supporting our new product introductions. As we get to the seasonally stronger second half, we expect inventory levels to moderate in our working capital metrics to improve. Looking ahead to the third quarter in the balance of the year, we believe we’re well positioned to deliver a solid operational performance. As we exit the second quarter and move into the second half of 2015, we’re mindful of the mix macroeconomic picture. Our dollar strength is continuing to present modest headwinds and emerging markets specifically South America and parts of Asia while [indiscernible] demand continue to be mixed in Japan and China. As a result, we expect reported revenues for the year to begin the range of 2.25 billion or 2.3 billion which represents approximately 7% constant currency growth at the mid-point. Our guidance continues to reflect organic revenue growth from approximately 3% to 5%. We’re tightening our adjusted earnings per share guidance for 2015 to be in a range of $2.55 to $2.60 with a mid-point of approximately $2.57 which represents constant currency earnings per share growth as 13% to 15%. Implicit in this guidance range is adjusted operating margin expansion of 30 to 50 basis points. Net interest expense is expected to be approximately $42 to $44 million and our adjusted tax-rate is expected to be 21% with a flat weighted average share count of approximately 113.5 million shares. For the third quarter, we're forecasting reported revenues to be in the range of $550 million to $560 million which represents approximately 7% constant currency revenue growth and organic revenue growth of 4% to 5%. Adjusted earnings per share is expected to be in the range of $0.58 to $0.60 which represents 12% constant currency adjusted earnings growth at the midpoint. This concludes my prepared remarks. Operator at this time we’d like to open up the call to questions.

Thank you. [Operator Instructions]. And our first question comes from the line of Dan Arias from Citigroup. Please proceed.

Good afternoon guys. I want to talk a little bit about China as we just take, as to little bit of what you saw on the environmental side and then on the blood screening side of things, it sounds like things are picking up there, I just point that you are thinking that you actually will have all of the donated blood in China tested molecular I mean as you assumption that compliance does go to a 100?

I think our view is it go to 100, but its probably going to take 18 months to two years to get fully implemented. As you know the law was suppose to be effective at the first of this year, but I think our view its taken some time to get all the labs setup to be able to do that and so I would say the enforcement is fairly lacks, but I would say probably late ’16 is our best guess of when that occur and probably what you will see is it will occur first on the east coast and you will see it move it across to the west. But we’re starting to see as I think if we have mentioned on the last call, we saw the move from sort of the regional governments to the federal government and while we think that's delayed it a bit in the implementation which you will see is bigger tender and we’re starting to see that coming out and as sort of mentioned in the prepared remarks we feel good about our ability to win share there. With regard to it sort of the border China, I would say first all, we continue to believe that both access to healthcare and the clean water and food will be high priorities and continue to strong organic growth, so I would say we continue to feel like high single-digits probably make sense for us for 2015, and we just go buy end market for us diagnostics, I think Andy talked about this continue to be strong we saw good double-digit growth in diagnostic supported by [audio gap] three pieces of the business, newborn, infectious disease and blood screening. On a research side also pretty good growth there and it was sort of mid-single maybe little bit better than that and environmental was up low single and what we saw was really almost a tale of two cities. In the area food and environmental, we saw strong growth sort of mid-teens and in the area of sort of more industrial, we actually saw some headwinds there from the stand-point that they are -- our business there was not significant decline in the quarter. So we just sort of put really together you saw environmental in the sort of low single-digit.

Okay. That's great color appreciate that. And then Andy on the expense line if I remember correctly I think you are kind of optimistic about the ability to drive some savings on the indirect spending side of things this year, are you realizing the level that you are hoping there and I guess when you look at the back half of the year to the extent that you are seeing in those savings, are you more likely to invest those or might you let those flow through? Thanks.

Sure, well I think half way through the year, I feel like we’re on track, we were looking at $10 million boggy year-over-year. We aggregated the first half at 6 million, I think we’re started to gain some momentum the roll out is now global and we’re seeing a fairly significant uptake with the organization around it we are spending a lot of time now on upside services, and I think what you are going to see is the impact of that not only on the expense side, but you should start to see on the working capital side, because I think if you look at our payables we saw little improvement in accounts payables and part of that's due to our renegotiation, some contracts with vendors as part of this indirect spin process. So I think we feel like that we’re pretty much on track I would say.

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

Hi [indiscernible] Will you give us an update on the M&A pipeline? How are you thinking about your capital deployment priorities here, with the balance sheet position under two turns of net leverage?

Thank you, first of all, we feel good about the pipeline I think our hope and expectation is -- we able to do something roughly toward the end of the year. It’s always difficult to predict those types of things, but I think we feel like, we will be able to put some capital to use here on the M&A, which I would say we have a preferences deployed in that matter, but if we find ourselves in a situation where we are unable to do that for let say for a period of time then we got to probably do share buybacks.

Thanks very helpful and we give an update on the water partnership, how is that initial rollup progressing and do you soon vision that being roughly mutual to net revenues for the year?

Yes, we mentioned last quarter I mean water partnership I really think that is more of a longer term strategic move, I think is a number of reasons to do that one was, first of all enable our partners to simply their workflow around sort of one software which is in power, it allows us to focus our resources in areas where we can be more differentiated and hopefully it allows us to drive some incremental revenue by first of all supplying waters LC products to some of our customers maybe driving more incremental products by allowing us to package arranges with our customers where there is multiple analytical techniques and also was getting GC on in power I think there is an opportunity to hope for the -- to sell more into the pharmaceutical industry. Having said that in the short term there is some investment, there is clearly some disruption, there is training required of the sales people, so as I think we mentioned last quarter, we don't really expect to see much of an impact in 2015, and really look towards ‘16 and post to really drive some incremental revenue growth.

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

You spend a lot of time on sort of the macro and you are cautionary and it is helpful because it’s obviously something more or less look at broader spectrum and focus but was there anything pasting in the business whether is in China or elsewhere that gave you a bit caution or maybe in some of the additional industrial markets or is it just sort of recognition of all the data that we’ve look at and now one into coming ahead of yourselves given some of those volatility standpoints?

Well, I would say those are couple of things we sort of mentioned affect Japan still seems to be difficult to predict on the academic funding side. Well, the budgets been improved our experience has been that’s been sort of spotty in challenging. So well, it’s a not a big part of our business it’s something that we’re a little cautious about. I’d say the other area that we’re cautious about is on the medical imaging side and we’re seeing some of the revenue challenge is there particularly in the back half. So that was other two areas that I would say we’re little concern. The medical imaging is probably not macro, it’s probably more customer ordering patterns. But I would say on the Japanese side that’s macro indicator. And I would say the other one I would probably put out or again small for us, but obviously the economic condition in Brazil is challenging. So those are two I would expect on the emerging markets that we’re just looking at order and patterns we’re little concern about.

And on the research side, if you had to tease out boxes versus reagents versus services, anecdotally, how would you feel about those three buckets?

Well, I would say we were pleasantly surprised on the box side. I mentioned some of the new products, but if you look at our cellular imaging, the microfluidics and automation we saw very strong growth there. So we are pleased with that service also did well OneSource at a strong quarter and I would say the reagents was just sort of laagered in the quarter.

And Andy just remind us days impact in Q3, I talk that was where you guys pickup quite a bit of volume or at least the extra week. How do we think about that in the context that the core guide?

I think that first half is very hard to predict exactly what the impact of that’s going to be, I mean what happens every six years. And I would say its factor into our guidance, I think that you look at the mix of our revenue a lot of it’s not impact of other days. So I would say that in my opinion it’s in the numbers, it maybe a percent or so. But if we do better than that obviously we’re not going to be engage by our existing guidance.

See in our opinion there is a lot of debate on this internally is any point we do this every six year. So I would say this is under core competency I was trying to predict what the impact will be. But our viewer is even when you look at our reagent business. A lot of our business is in sort of daily or weekly orders. Even though is look at the newborn screening side, it sort of bundle purchases. So I would say we’re enabling we’ll be conservative year, but we’re assuming that we’re not going to see a significant pick-up from the additional days, particular when you look at the how they fall within the calendar.

And our next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.

Just a question for you, I guess going back to Japan. You mentioned couple of times in the call, it’s obviously a pretty difficult research environment to predict. So I guess two part question, one I seen the guidance assumes some ongoing challenges there? And then I guess second piece of that is I guess how you thinking about the longer term here are you inherently assuming that we should be some release the fund to bounce back in 2016?

So I would say the answer your first question is yes. We’ve assume fairly modest revenue for Japan for the remainder of the year. And I would say beyond 2015 will just sort of assess there when we get there. I mean is it fair assumption to say that some point the funds will be released and maybe we’ll see a catch up. But I guess we’ll just sort of call that as we get in the ’16, but our assumptions for the remainder of ’15 is that we’ll continue to see challenges and we’ve got basically no growth assumes for the remainder of the year.

And then secondly, I guess back to newborn screening in China. Just help us think a little bit about I guess from a parameters of that growth. Is this still largely initial adoption or are you seeing any sort of menu expansion maybe in some of the wealth your coastal areas?

So I would say, it’s a little bit of both. I mentioned this quarter that we got our GSP which is are automated platform certified by CFDA. And I think that’s allowing us to obviously sell more those and penetrate by allowing in automated platform, it’s allowing some of the areas within China to expand our menu. And so it’s a combination of the menu expansion as well as adoption. But I would tell you right now is that China is probably close to 85% adopted so we have been pleased to see that good portion of the children in China now been screened.

And our next question comes from the line of Doug Schenkel with Cowen & Company. Please proceed.

My first question is just I guess a follow up on the macroeconomic dynamics in China and Japan that you have talked about and have come up a bit in the Q&A, just to be clear, have you changed what you embedded into guidance for growth in these markets? And if so what are the offsets?

I would say China, no; Japan, yes. And I would say the offsets have been a little bit on the pharmaceutical and research side. And we have seen clearly some growth there and again some of that is I think new products and we believe our execution within the combined entity now, some of that is clearly a stronger market. So I would the strength on the research side is offsetting some softness in Japan and Brazil. But again just to reiterate, Japan for us is probably going to be somewhere around 2% to 3% of revenue. So it's not a huge number.

Okay. And then this incremental and sovereignty is the right way to describe it on the macroeconomic backdrop. Does it impact how you think about spending heading into Q3, hold back a little bit or is it really business as usual?

No, I think it's been usual I mean if we look at the half I mean we feel pretty good about where we are right now, I mean the organic growth is particularly, if you look at Q2 came in a little bit at the high side. We are looking at a backhit that we feel pretty good about, we are getting good traction in the new products. So I think we are still moving forward from an investment perspective and we monitor it as we see bookings from it during the quarter.

And our next question comes from the line of Dane Leone of BPIG. Please proceed.

Thank you for taking the question. I just want to maybe get some more color in terms of the gross margin line for the quarter. I understand FX may have been a little bit more, but usually you guys are kind of flattish 1Q to 2Q, I guess anything kind of puts and takes in terms of what's maybe depressing that a little bit and expectations for the back-half?

I think if you look at it on a constant currency basis we were 50 basis points, which is a little bit more than we have seen historically, a large piece of that some productivity initiatives, we put in place some of those items, supply chain we have talked about that before. We are starting to see some traction there. And that was enough to offset basically inflation in a slightly non-GAAP mix. So I think we feel pretty good about our ability to sustain it going forward as we continue to get traction with some of these initiatives. And then some of those same people are working at initiatives around the SG&A piece. So we hope to drive productivity improvement on both groups and operating margin.

Okay. And just want to clarify the geographical comments. You said, I think broadly mid single digits across everywhere. Is there any kind of more - color you could provide Americas versus EU versus APAC?

Well, I mean place that we saw sort of across the globe is I think when you talked about all the regions sort of in the 4% to 5% range which was great from an organic perspective maybe just to give you some color inside that if you look we are seeing Asia, but if you talk about China, Indian career was strong, they were double-digit as well, Japan obviously was within we talked about that. And so I would say within the U.S. we saw a good growth on the research side as sort of alluded to that. But again it was pretty broad based.

And our next question comes from the line of Steve Veechow with Morgan Stanley. Please proceed.

Two verifying points for me. One on the office transition, I am curious are you seeing any impact on the transition on the existing chromatography business you are working through anything there. And then second question for me is actually on - what are you seeing in terms of IP licensing trends there? Thanks.

So on a chromatography side I guess I -- liquid chromatography side actually is a headwind in the quarter, because you can imagine as we transition over the ability to continue to sell on the chromatography is challenging so if anything it was a little bit of a headwind on the gas chromatography side, we do expect in the future to be able to hopefully sell some incremental products there but I would say not noticeable in future. So again if your overall the transition in a short term is going to be a little bit of a headwind but obviously we think it won’t it makes a lot of sense and hope we drive some good incremental revenues as well as I think its roughly it will be helpful from our customer perspective.

I think you also see a little bit of the issue in working capital, we’ve seen as increased inventory and as I explained some of the new products, this would be a part of that as we start to build the channel with some of the new LCs.

On caliper side, and I think as we talked about this we continue to see a little bit of a headwind every quarter at some of those royalties roll off and I think in this quarter as well there is a little bit of headwind of a couple of million dollars and that will probably continue to probably this year maybe third quarter this year.

And our next question comes from the line of Dan Leonard from Leerink. Please proceed.

So I have a follow-up on inventory, I appreciate the commentary on new products sales I’m curious in the first quarter I think you called supply chain effort, I think the driver have increase the inventory and I’m wonder if you can give us an update on those efforts?

No it was not supply chain effort, it was actually, it was the new product launches that we put out it at Pittcon then demo inventory and the build around that, what I called out on a first quarter I believe was around Ocean freight. And that ocean freight is the build of inventory that basically stay but it happened in the first quarter, so that -- and that allows us to reduce our overall freight cost, so I think from a P&L perspective it's a good thing, but there is a pickup of inventory as you put the stuff and ship it overseas.

Okay. Understood and then my follow-up question, do you have any update on the long term growth outlook from medical imaging, it seems like it has been lumpy for a couple of years now?

I think our view as -- that's a business that shouldn’t probably grow mid single-digits when we look at the sort of adoption rate of digital and x-ray and then the growth prospects with our CMOS business, I think unfortunately we’ve had a situation where some of our customers most notably of -- so built some inventory and start work out off a little bit as you know this is the one business in PerkinElmer really the only business in PerkinElmer where we’re component supplier as compared to sort of an end system supplier so we’re at a little bit of the mercy of the customers and sort of how well they are able to sort of predict their end market demand and so I think that's why you see some of these lumpiness, orders, in hindsight they are artificially strong because our customers are sort of building inventory and then we have to work some of that off and so I agree with you its clearly more lumpy than we would like I think the underlying market is probably not as lumpy as that but again being a component supplier it makes a little challenging.

And our next question comes from the line of Paul Knight with Janney Montgomery. Please proceed.

Hi Rob and Andy and Tommy. Congratulations what I’m sure was not an easy operating environment I think Dan had touched on the environmental side and the operating margin you are posting that was 13%, what are you shooting for in that business in a normalized environment?

Paul, I mean it depends the time horizon we’re talking about here but I think ultimately we like to see this business get up and 17%, 18%, obviously that's going to take some time to do that but we look at the opportunities within this business and I think one of the big drivers will be and we’ve talked about this in the past as we’ve got a get a greater consumable component to the business and something that the team is working on but I think for us to those types of operating margins, it will take a better mix between instruments and consumables.

Can you talk about consumables in service Cross Lab growth was [what again] and is it M&A or what you want to do on the consumable side Rob?

Yes, so one source was up double-digits, in the teens, we continue to see good progress there and I will be like to do is trying to pull in more consumables that are supportive of our instruments in some cases may you have to be on others, but I think because we have the one source engineers in the lab the ability that sell consumables, present some opportunities for us and so some of that organically but I think a lot of we’ll have to be done inorganically.

And our next question comes from the line of Miro Minkova from Stifel. Please proceed.

Let me start with the environmental health products, do you have announced that Pittcon and that you are rolling out, maybe tell us or help us understand was there any benefits from these products in the quarter that you just reported and when might we see it and what are you expecting for the back half of the year?

Yes, I would see in the most recent Q2 there is minimal benefit on the environmental side, most of the new products were the ones that were launch late ‘14, early ‘15 on the human health side, and we’re starting to see some good traction in this, you can appreciate a lot of times when you come out with these new products it will take a quarter or two to really get some traction in the market place. So minimal impact in Q2, I think you will see the majority in the back half what we’ve said with new products for the full year it was [indiscernible] made it in the 30 to $35 million impact with all company, I think we feel very good about that and just expect will be at high end and maybe even higher than that and so rather get into specific products I would just say we continue to feel very good about the progress and I would say we’ve not be surprised to do better than hop into the range here.

Sounds good and the medical imaging business is going back to the question asked by Dan earlier, can you help us understand do you need this in your portfolio and how does it actually fit in with the rest of what PerkinElmer does?

Well, I think when you think about imaging is an important component of what we do, so if you think about it sort of high level, where I think about PerkinElmer, we take samples we do take in analysis and then we provide answers and knowledge and so anything we can do to continue to drive our capabilities around the ability to [indiscernible] image I think its helpful and so leveraging that capability across as many end markets as possible I think its helpful.

Thank you. And our next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.

Hi guys thanks for the question, its Joe in for Isaac. Just back to the macro and maybe just focusing on Europe, can you just talk about what’s the big thing your expectations for the region for the second half of the year?

I think when we went into the year, we saw that and Environmental was up low single-digits and we saw little bit of improvement here relative to that in the second quarter. So what our expectation in the back half is similar to what we saw so to low single.

Great thanks and then maybe just back to the China diagnostics market, can you maybe parsed out the growth between the newborn and screening and over the contrition from blood screening that drove that double-digit number and then maybe how we should be thinking about that on a go forward?

I mean what I would say is all three components in China did very well, I mean if you look at the growth rate I mean clearly the blood screening is growing much faster but its all of a very low base, I don't know how meaningful that is but I would just say if when you look at double-digit growth in China you see that across all components. So its again fairly broad based.

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

A lot of my questions have been answered, so I'm going to ask some weird ones, so bear with me. So the -- I was at the AAC Speed conference earlier this week and I was struck by the number of Asian and Chinese diagnostic companies that were there. What is the landscape for -- in the blood screening market? And also for your other products that you sell? I'm just curious -- you talk about competing for large tenders, are you treated as a foreign company, even though you have a Chinese business? Is there some potential bias against you, given the number of Chinese companies that are there? I'm just wondering, are you at a disadvantage because you are not local or do they view you as local?

So specifically with blood screening, there have been five companies that have been approved by the Chinese government that can provide products for new clinic asset blood screening. Two of them are international and three of them are considered local Chinese. We are considered one of the local Chinese, because we ended this business through the acquisition of a Chinese company. One of the things we actually had some discussions with the government officials at the time with the acquisition that was clear that we will be treated as a local Chinese company. Because again what there, I think most interested in is employment and because the products are developed in Made in China and obviously with Chinese employees I think that’s my sense is that’s why we get the designation as we go.

And you’re talking about moving to molecular screening. I’m just curious, is that going across other segment with the diagnostic market for example, are you seeing a greater push for NIPT using molecular in China? And I’m just curious, also just on the NIPT, in general or I just on the newborn business in general. Are you seen any impact from NIPT screening going on in the states?

So I would say in the newborn side, no. We’re not seen much of push there. I think in the NIPT, I think still challenging from a cost perspective, so you’re not seeing huge adoption. However, we do believe that the NIPT market will be very attractive in China eventually, because there has not been a very large biochemical screening business. So consequently they don’t need to sort of swap, so they skip generation of products. And so we do think once the costs it’s down to an acceptable level within China, we think that’s going to be an attractive market.

And our next question comes from the line of Steve Willoughby from Cleveland Research. Please proceed.

I have a couple of here quick one for you. First Andy, what are your assumptions now as a relates to FX on both the top and bottom-lines?

No change from the guidance we provided at the end of the first quarter. The other mix and the rates are pretty much inline. So we’re sticking with the $0.23 of impact that we talked about in the first quarter.

And then secondly I know in the past couple of quarters, there has been some talk about which start expecting some increase in R&D spending. And why was up modestly versus what you spend in the first quarter I’m sure FX has some impact on that. Can you just maybe provide a little bit more color as a relates to your expectations and increasing R&D spend?

I think, I mentioned so if you look on a constant currency basis, we’re about little over 10% up for the year. And our goal is eventually get R&D to be about 6% of revenue. And so we’ll look it sort of move that up depending on how we feel about revenue and profitability. But that’s our goal, our goal is get up to 6% of revenue and then when you consider effect it service is about 25% that would take us to about 7.5% on product and we think that’s probably the right level. It varies a little bit by – it varies in some cases a lot by business and obviously application, but we think for PerkinElmer a sort of awaited average of 7.5% on product is probably good level.

And our next question comes from the line of Jeff Elliott from Robert W. Baird. Please proceed.

First question is on OneSource. You had some nice growth there. How much of that is the combination with the Informatics piece, versus other demand you are seeing in the market?

Well, it’s a little difficult to parts that out. I would say, my sense is probably more demand right now, because we feel good about the combination with informatics in the product side of the business. I mean, it’s difficult to say that because we just at the beginning of the year that we saw material impact in Q2. So but I mean, I think our expectation is and we’re having some good discussions with the customers and clearly what it’s allowing us to do is where were strong as an informatics customers to bring in OneSource in vice versa. And so I think going forward we’ve got some, where we’re optimistic, but I would say the impact in Q2 I would say it’s probably fairly minimal. But the reason why it’s hard to part out, right now as I said, I mean it’s a combined sales force So it's a little difficult to keep that way.

And then a follow-up on the China newborn market, you said, 85% adoption, but how many test per birth are you seeing right now?

About 4, I mean as there is a couple as I mentioned with JSPs now are and expanding that so we’ve got some that high single-digits but on average its probably about four.

And what do you think that has over the next two or three years?

I think those things are always difficult to do, because you are trying to predict the uptake but I think it goes up, it’s a acquisition of how quickly, I mean the other opportunity is mass specs goes into that market place as you know you have the ability to jump up fairly significantly but I would say in two years, I’ll be disappointed for not pushing low end to double-digits.

And our next question comes from the line of Zarak Khurshid with Wedbush Securities. Please proceed.

Wondering if you could tell us how much, if any, of the research business is actually automation, sample prep, Informatics, or anything else, sold into more of a routine diagnostics or applied channel and if there is any positive trends related to that?

I would think in the diagnostic area, its relatively small and we’re starting to make some enrolls into the applied area but I would still say relative basis, still relative in minor.

Understood and then just a quick one on good start what’s happening with carrier testing? Thank you.

I would say we’ve been a little disappointed in the uptake there and I think we’ve talked about this in the quarter as well, I mean I think we’ve found a challenging from a pricing perspective where is some of the competitors are out there guarantying a low number relative to out of pocket and we find that to be challenging from a regulatory perspective, I’ll just put it that way. And so consequently we are having a difficult time finding it at least within our business practices to be competitive.

And our next question comes from the line of Peter Olsen with Mizuho Securities. Please proceed.

Hi Rob, just what worries you most when you look at the business then for the next 12 months what part of the business worries you the most? And just kind of a follow-up in the coming you might around the research side of the business? What will be the products that help you during the quarter? Thank you.

So I would say going back to my comment before I think the medical imaging always a little bit because I feel little bit less in control there, because again we’re a component supplier now we do have some insight, let’s say a quarter out but that one is again as we reference before is a little bit [indiscernible] than we would like and that's the one that if you little bit less in control from the standpoint of driving demand. The second part of your question was -- I am sorry when I was most excited about?

Just the research products that kind of help you during the quarter, you talked that research type in stronger and --

Yes, so I would say that there are couple of the Opera Phenix which is a imager, a high-content imager, we continue to see very strong adoption I think we’ve got a nice value preposition here for the customer I think we’ve gain a nice value proposition there for the customer, I think we very pleased with that. I spiked out the new microfluidics which is a larger touch, I think we’re seeing some nice adoption there in the area of biotherapeutics and also on the NGS side, because it goes into sort of quality control on the sample prep and obviously with the ramp up in all the NGS, that’s pointing nice demand as well and the other area is we’ve seen good growth in-vivo. So a number of areas that we’ve been very pleased with on the research side.

And our final question comes from the line of Tycho Peterson with JPMorgan. Please proceed.

Thanks, hey Rob just on the informatics business I know you talked in recent quarters about the -- to kind of build out there bit more and just hiring maybe just talk a little bit about where you are that build out and I guess you know competitively do you feel like you’ve got critical math, means it still going ASMS and seeing what others are doing in terms of pulling data off in NGS system and in that aspect, kind of aggregating it all. Do you need to be doing more along those lines?

So that’s in area we have been sort of investing both in sort of mostly in people and I’d say we’re making grew progress there, we still got way to go, I mean I still, these people are a difficult to find and attract, but I’d say we’ve made some progress there. I would say in summary we feel very good about our capabilities clearly on the analytic side and the visualization side, I think we’re very strong in the chemistry by the chemical side of things. I think the areas where we need to invest a little bit is on the biological side and as we’ve talked about in the past we’re trying to build a lot of capability in the cloud. But I think we feel good about the progress we’re making, I think they’re still more to do. I think the other thing is when you go to around the place is like ASNS or ACC. You continue to reinforce the importance of informatics and the capabilities that we’re building, because clearly and whether it’s research environmental or diagnostic it’s going to become increasing more important.

And then I guess as you mentioned ASBC, I mean one of the other big trends this year was just kind of to push to point of care by the [indiscernible] and others. Can you maybe talk about how you view that market? Is it an interesting opportunity to be doing more in the physician's office and is there risk of displacement for your plate readers, some of these former business competitors that are pushing into these markets?

So I mean, I think we view as an opportunity within emerging markets, I think the challenge for us has been trying to find a technology that is both sort of sensitive and output at the same time cheap enough and so the users low energy and all the needs that are require to work in the environment of emerging market. So I think it has a potential to be very attractive market. But I think it’s got to be the right product, the right technology and up at this point this it’s been challenging sort of find the right one that on.

That concludes today’s question. I’ll now like to turn the call back over to Mr. Robert Friel for closing remarks.

Well, thank you very much. And I want to appreciate everyone taking the time this morning. We feel good about our progress year-to-date and believe we are well position to deliver on our full year financial commitments and continue to make progress on our strategic priorities. Thank you for your interest in PerkinElmer and have a great evening.

Ladies and gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect. See you all, have a great day.