Revvity, Inc. (RVTY) Q1 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the PerkinElmer Q1 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference Tommy Thomas, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sara. Good afternoon and welcome to the PerkinElmer first quarter 2018 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 that this call is being webcast live and will be archived on our website until May 14th, 2018. Before we begin, we need to remind everyone of the Safe Harbor statement said 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 measure 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’ll 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 PerkinElmer had a very good start to 2018 delivering excellent progress in revenue and earnings. Revenue for the first quarter was $644 million, representing reported growth of 25% and organic growth of 6% comprised of 5% growth from our base business and 1% growth from EUROIMMUN's incremental organic growth. Adjusted earnings per share was $0.63, representing growth of 15% over Q1 last year and $0.03 better than the mid-point of our guidance. The [EPS beat] was attributable to the higher organic revenue growth in the quarter and the slightly lower tax rate than planned. In addition to the impressive financial performance, each of our two businesses made notable progress on our objective to invest in high growth areas, while shifting our portfolio towards those opportunities that are best aligned with our capabilities and expertise. Given our results and positive expectations, moving ahead we feel confident in raising our full year revenue and profit guidance, which I'll speak to you in a few minutes. Turning to end markets, Diagnostics, which now represents 40% of our revenue and our largest end market grew 62% on a reported basis and 7.5% organically with core Diagnostics business growing mid-singles organically and EUROIMMUN growing mid-teens organically. Within Life Sciences, which represents about 35% of our revenue and includes sales of our pharma, biotech, academic and government customers, revenue grew 12% on a reported basis and 7% organically. Sales to pharma and biotech increased high single digits organically and academic and government sales increased mid-single digits organically. The remaining 25% of our revenue is in the applied markets and includes our industrial, food and environmental customers and increased 7% on a reported basis and organically 2%. Sales to environmental and food customers grew mid-single organically, but were offset by some softness in the industrial markets. We are very pleased to see our two largest end markets Diagnostics and Life Science growing high single digits through a combination of favorable market conditions, as well as our respective strong market positions and excellent execution. So in addition to being pleased with the breadth of our growth this quarter, I am also very excited with the progress on our initiatives to increase profitability. While operating margins contracted in the quarter as we anticipated, we've made very good progress on both reducing product costs through low cost sourcing and supplier consolidation and collaboration. In addition we are on track to deliver over 15 million savings in manufacturing costs in the next two years through the deployment of our lean processes and footprint optimization. As a result I remain confident we will achieve the operating margins goal of 70 to 90 basis points of improvement for this year, as well as 22% operating margins by the year 2020. Also during the first quarter, we continue to make very good progress on the key growth initiatives we outlined earlier in the year that we expect we’re able to achieve high single digit organic growth by 2020. The integration of EUROIMMUN continues to go very well. In the U.S. the combination of our commercial and regulatory resources is already yielding some nice wins, as evidenced by recently placing in number of our new automated ELISA workstations with one of the large reference labs. In addition, we received FDA approval for two lupus detection assays as our combined regulatory resources continue to submit new test, and we now expect an additional 12 new assays to improve this year. We’ve also transitioned to service of all EUROIMMUN equipment from third parties to PKI engineers, which will reduce costs and improve response time with consumers. And while we continue to prioritize integration of U S portion of EUROIMMUN, the technology and commercial groups globally are identifying many additional gross synergies across the portfolio between EUROIMMUN, the greater reproductive health business, our China Diagnostic business, applied genomics and our tool of immuno diagnostics business in India. I look forward to updating you on these opportunities on later calls. One of the key drivers to our future growth in diagnostics is for Vanadis non-invasive prenatal testing solution. A research study recently published in Nature Scientific Reports detail the first clinical proof-of-concept data demonstrating the ability to apply Vanadis assay in the detection of trisomy 21 in maternal plasma. We look forward to receiving CE Marking shortly with shipments commencing in second half. The third focus area in our Diagnostic business is our whole genome sequencing service from PerkinElmer Genomics. In the first quarter, we processed about 5000 samples and remain on track to reach the $8 million to $10 million of revenue for 2018 at attractive margins. The ramping of some exciting partnerships with other leading organizations in the genomics field that together make new inroads in the areas of rare disease research, as well as genetic testing of healthy populations. To mention just a couple of recent highlights, we announced the Parent Project Muscular Dystrophy as selected PerkinElmer genomics as its partner to perform full genome sequencing of the entire [Duchenne gene] using a new comprehensive assay. We are also collaborating with Helix, also one of the first clinical products with the initial product being the 59 gene panel that the American College of Medical Genetics and Genomics identifies as genetic conditions with established interventions aimed at significantly reducing morbidity and mortality. Turning to Discovery and Analytical Solutions or our DAS business. As I discussed in January, the priorities of the business are shifting from [pre-new processes] in organization in place to operate as a single cohesive business to both accelerating growth and being more consistent. One of the key components of that strategy is to continue to leverage our informatics and OneSource service offerings to improve our pharmaceutical customer’s lab productivity. A number of our customers is discussing a lab service model with us where the requirements for connected systems to avoid data silos, linked distributed research, manage complex data sets, and ensure compliance are driving them to a unique OneSource and informatics capabilities. Some of the investments we made last year are starting to fuel growth this year. For example, at the end of last year we launched our new PerkinElmer Signals Application for research, translational, clinical development and enterprise analytics and search, which has led to one of our top global pharma customers selecting our analytics platform to power its in-house clinical trial review program. Also we launched the new version of [Kendro] with significantly increased functionality, including biologics, which has experienced good uptake in the market. Going forward, we believe the Kendro offering, which is used by 35,000 scientists can be better leveraged to increase connectivity and ultimately revenue with our scientific customer base. Another important component of the DAS growth strategy is to accelerate our growth in China and emerging markets with increased investments to build local capabilities that address unmet needs. In the first quarter, the DAS organization continued improving localization in emerging markets by expanding manufacturing capabilities. We are now producing three product lines in China and expect soon to close on a small acquisition in China and to expand our elemental analysis products. For the DAS business, China grew high-teens in the first quarter with broad base growth across life sciences and applied market. Finally both businesses will continue to develop innovative new products to support our customers and help solve their most pressing challenges. We are again targeting $50 million of incremental revenue from new products, exclusive of EUROIMMUN, and through the first quarter we generated $14 million from products introduced in the last year. So to summarize the quarter, we are off to a great start. Our end markets for the most part continue to be robust. The organization is executing well and we feel good about our ability to deliver on our financial forecast for this year. However, more importantly, we continued to make very good progress on our strategic priorities that should accelerate both the growth and profitability of the company and achieve the financial profile we have outlined for 2020. In recognition of both the progress made in the first quarter and the continuing opportunities available to us, we have increased both our revenue and adjusted EPS guidance for the year. While Andy will discuss the details, we are increasing our revenue forecast for the year to $2.8 billion, reflecting slightly stronger organic growth in both our base business and EUROIMMUN, as well as changes in foreign exchange rates since our prior guidance. We are also increasing our adjusted EPS guidance to $3.60, which is $0.10 above our previous guidance and represents an increase of 24% over 2018. Before I turn the call over to Andy, I'd like to remind everyone that this will be Andy's last PerkinElmer's earnings call. I would like to take a moment to thank Andy for not only his leadership and oversight of our financial function, but also for the significant role he has played in the transformation of PerkinElmer over the last nine years. During Andy's tenure, we were able to significantly strengthen PerkinElmer's financial profile, evolve our portfolio, and increased the value of the company. On behalf of the entire senior leadership team and all the employees of PerkinElmer, I'd like to express our sincere gratitude to Andy for his leadership and wish him well. I also appreciate Andy's commitment to ensure a smooth transition. Our new Chief Financial Officer, Jamey Mock's first day will be tomorrow. However, he has joined us this evening. I'll now like to turn the call over to Andy.

Thanks for the kind words, Rob. And good afternoon, everyone. I also want to express my appreciation to the many inspirational people who have helped me throughout my time at PerkinElmer. I'd like to wish you all and especially our new CFO; Jamey Mock continued success in the future. I'll now move on to the result for the first quarter of 2018, where I'll provide some additional color on our served end market, summary on our financial results for the first quarter, as well as details around our 2018 guidance for the second quarter and full year. We were pleased with the start to 2018, as reported revenue increased 25% and adjusted earnings per share increased 15% over the first quarter of last year, exceeding our expectations set back in January. Adjusted revenues in the first quarter grew to $644 million with organic growth of approximately 6%. Foreign exchange representing a tailwind of approximately 5% and acquisitions adding approximately 14%. By business segment, diagnostics represented approximately 40% of total sales with organic revenue growth of approximately 7.5% for the first quarter driven by solid organic revenue growth in EUROIMMUN. Discovery and Analytical Solutions representing approximately 60% total sales grew approximately 5% organically in the first quarter highlighted by strength in the life sciences end markets, specifically from our informatics and OneSource offering. We are pleased to see continued solid order demand in the quarter and as a result we were able to build additional backlog giving us momentum entering the second quarter. I'll provide some additional color on both businesses in a moment. We experienced healthy growth across all major geographies with high single digit organic revenue growth in Asia, mid single digit organic revenue growth in the Americas and in Europe. This represents three consecutive quarters of growth across all major geographies. In the BRIC regions we experienced high teen’s organic revenue growth driven by continued strength in Brazil, a very strong performance in India and mid teen’s organic revenue growth in China. Moving to the details of our operating results. First quarter adjusted gross margins were 48.6%, up 20 basis points from the prior year on a reported basis and up approximately 100 basis points on an FX neutral basis. Reported results were favorably impacted by EUROIMMUN and benefits from our productivity initiatives, partially offset by unfavorable mix and the dilutive impact of foreign exchange. Adjusted SG&A was 26.6% up 60 basis points from the prior year with the addition of EUROIMMUN being the primary driver of the increase. Research and development expenditures were 7.1% of adjusted revenue, up approximately 70 basis points driven by continued investments in Vanadis and the inclusion of EUROIMMUN. As a result, operating - adjusted operating margin was 14.9% down 110 basis points on a reported basis. On an FX neutral basis, adjusted operating margin was consistent with our plan and down approximately 20 basis points due mostly to the seasonality of EUROIMMUN profitability. Please note that as of January 1st, 2018 we adopted - recently issued pension accounting standards and have restated prior years. The impact versus our prior guidance is an increase in operating costs for approximately $2 million per quarter with an offsetting increase in other income. There is no net impact to adjusted EPS. Because foreign exchange is having a greater impact on our forecasted revenue relative to our guidance and EUROIMMUN's cost structure significantly changes our earnings flow through from changes in foreign exchange rates, I wanted to briefly describe this dynamic. Prior to the acquisition of EUROIMMUN changes in our euro and Chinese yuan denominated revenue resulted in a mid teens operating margin flow through based on the global distribution of our production costs and operating expenses. As we have discussed roughly 75% of EUROIMMUN's revenue is in Europe and China and is split approximately 45% in Chinese yuan and 35% in euro. However, as most of EUROIMMUN's production and R&D expenses are in Germany over 70% of their expenses are in euros. As a result, this affects PerkinElmer's overall margin flow through on changes in the value of the euro, as our euro expenses now slightly exceeds our euro revenue. Consequently an increase in the value of the euro relative to the dollar increases our revenue, but results in a slight reduction in operating profit. Also we are now more exposed to movements in the Chinese yuan relative to the euro because the change in the Chinese yuan, euro rate will now flow through at roughly 25% impact on operating profit. Given the foreign exchange movements in the first quarter, we experienced significantly more reported revenue, but a slight headwind in the P&L as the euro appreciated much more against the dollar than the Chinese yuan. For the full year, the foreign exchange impact on our revenue based on current FX rates will be approximately $80 million or $55 million more than we estimated at the beginning of the year. However, this additional revenue will add less than a penny of earnings operating earnings based on current rates. Of course, the flipside of this dynamic is that if the dollar strengthens versus the euro reducing our represented revenues our income will not be materially impacted to the downside. Despite the current FX environment putting some pressure on operating margins, we continue to expect to deliver strong adjusted operating margin improvement over the remaining three quarters to meet our guided range of 70 to 90 basis points of margin expansion in 2018. Turning to adjusted earnings per share in the first quarter, we exceeded the midpoint of our guidance range by $0.03 to $0.63, driven primarily by better organic growth and a lower tax rate. The lower tax rate is a result of recently passed Treasury Department guidance on the new tax law to provide some more favorable outcome than we originally anticipated. Looking further into the key drivers within our segments for the first quarter, let's start with our Discovery and Analytical Solutions business, where first quarter results exceeded our expectations, driven by strong high single digits organic revenue growth in life sciences versus low single digit organic revenue growth in the applied market verticals. Life sciences strength was driven by double-digit growth in both OneSource and our informatics business, as well as strong direct discovery sales and high content screening. Applied market growth experienced mid single digit growth in food and environmental, but was partially offset by softness in the industrial end markets, which we attribute to the timing of instrument orders. Switching to Diagnostics. Core diagnostics revenue grew 4% organically consistent with our expectations as we experienced strong high single digits growth in the first quarter last year. In our core Diagnostics business, our infectious disease business, which exclusively serve the emerging markets continues to show strong growth as it increased mid teens during the first quarter with particular strength coming from Haoyuan and Tulip. The reproductive health business grew mid single digits. A strength in newborn screening in China was partially offset by difficult comparisons in the US. And finally, our applied genomics business was down slightly in the quarter as expected due to strong micro fluidic sales in Q1 of last year. Broad based growth across all disease states help EUROIMMUN exceed organic revenue growth expectations for the quarter up mid teens. Geographically for EUROIMMUN China and Germany were strong and in the US during the first quarter of this year we delivered over half of the amount sold during all of last year. We remain confident of future revenue opportunities, driven by a focus on innovation, time to market and strong customer focus. I hope that you've had a chance to read the Nature of Scientific Reports article on the feasibility of our Rolling Circle Amplification Technology for Vanadis for trisomy 21 detection, which we believe to be as accurate as current generation - gene sequencing methods. As Rob mentioned, Vanadis is gathering clinical data for all three trisomy's as part of their CE Mark application and we continue to expect the second quarter 2018 filing and commercial launch shortly after approval. Looking down the income statement, adjusted net interest and other expense for the first quarter was approximately $12 million and our adjusted tax rate was approximately 17%, which I refer to - referenced previously. Turning to the balance sheet. As we announced we finished the quarter with approximately $2.1 billion of debt and $180 million of cash. We exited the quarter with a net debt to adjusted EBITDA ratio of approximately 3.4 times. Turning to our cash flow performance. Our first quarter operating cash flow from continuing operations was impacted by the timing of pension payment and earn-outs related to Tulip, coupled with a temporary increase in working capital from higher receivables due to new OneSource contract initiated in the period, as well as higher inventory levels supporting production moves in Singapore and China in the first half of the year. We remain confident in our ability to deliver our full year free cash flow commitment for approximately $365 million. To wrap up the first quarter, we are very pleased with a solid start to the year, as we delivered better than expected organic revenue growth including a stronger than expected performance from EUROIMMUN, which continues to outpace the market. During the quarter, Vanadis achieved all key milestones and remain on track to launch - to our launch timeline later this year. Our end markets continue to very healthy in both our core and focus areas and we’re encouraged by our ability to build backlog in the quarter. In addition, we continue to have a good line of sight on adjusted operating margin expansion and free cash flow generation for the remaining three quarters, all of which we believe will contribute to a successful 2018 fiscal year for our key stakeholders. As Rob mentioned, given our results in the first quarter we are increasing our 2018 revenue and adjusted EPS guidance. We now expect full year 2018 reported revenue to be approximately $2.8 billion, which represents 5% organic growth in the base business coupled with EUROIMMUN generating approximately $380 million of revenue, which now reflects slightly stronger organic growth and the impact of the current foreign exchange environment. For the full year, we now expect foreign exchange to be at $65 million tailwind exclusive of EUROIMMUN revenues, which is 40 million more than we estimated in January. Our organic revenue growth guidance assumes 6% organic revenue growth in diagnostics, excluding EUROIMMUN and 5% in DAS driven by a mix of life sciences and applied markets. Geographically we continue to expect mid single digit organic revenue growth in the Americas and Europe with mid to high single digit organic revenue growth in Asia. We are taking our full year adjusted earnings per share to $3.60, which represents approximately 24% adjusted earnings per share growth. Our new guidance incorporates the first quarter out-performance of $0.03, slightly higher organic growth, which adds approximately $0.02 and we now anticipate our full year tax rate of approximately 17% versus our initial guidance of approximately 18.5%, which adds an incremental $0.05 to the remainder of the year. For the second quarter of 2018, we're forecasting reported revenues of 680 million, which represents 6% organic revenue from the base business, 15% growth in EUROIMMUN and foreign exchange of 5%. In terms of adjusted earnings per share guidance, we are forecasting adjusted earnings per share of $0.86 with minimal benefit from foreign exchange headwinds. This concludes my prepared remarks. Sara, at this time we’d like to open up the call to questions.

Thank you [Operator Instructions] Our first question comes from Tycho Peterson, JPMorgan. Your line is now open.

Hi, thanks. I guess, we'll kick it off Andy and just say congrats and wish you the best on the transition.

Thank you.

As it relates to EUROIMMUN a couple of quick questions here. Can you maybe talk about what we should be assuming for contributions from the US ramp for the business? And then are you going to comment at all on the -- the headlines around buying some assets from Siemens in Europe?

Tycho, the ramp in US will continue to be very significantly, but of course it's all a relatively small base. So what we're seeing in the US is growth in the sort of 40% to 50% range for the year. But I think as we've said in the past, it will take a little while before it sort of ramps up to the level of significance, but they're making good traction. With regard to the Siemens discussion, I think at any point in time the people at EUROIMMUN in particularly Winfried Stöcker, who is the founder is continuing to look at ways to invest in the future and to support a significant growth. In any given year, EUROIMMUN hires anywhere from 175 to 200 engineers to support the growth that they've had historically, which is as you know has been in the sort of the high teens. What happened in the Siemens situation is apparently they are looking to the exit facility in the southern part of [Germany and Winfried] had some discussions with them where we might assume some of those engineers or in fact some of the facilities. But it's only a discussion phase right now. The way I would think about it is, you just sort of thinking out a couple of years and saying to the extent that we need to continue to get engineering capability in space this maybe a way to do that, and by the way we’re also wondering if the German government might sort of participate in those transition costs. But nothing definitively, this is just as a discussion phase right now.

Okay. That's helpful. And then for the follow up, you called out the softness in industrial. I know it's only 17% or so the DAS business. But can you maybe just talk a little bit about where you think things are headed for that part of the portfolio?

Yes, I mean, I think it’s a little bit of timing particularly in where we saw a little bit of weakness was in the chemical sector. I mean, but I would say industrial for us, which is down slightly in the quarter and I would attribute the more sort of the timing of instrument orders. It seems like the market overall is pretty good. We actually saw - saw a growth in the US and the weakness was really more in Europe and Asia.

Okay. Thank you.

Hey, Sara before the next call, I just want to clarify something I said and you can attribute it to all there, it’s being my last call. But the guidance for Q2 topline of 695 and I believe I said 680. But I want to make sure and I confirm that our topline guidance for the second quarter is $695 million. Thanks.

Our next question comes from Patrick Donnelly, Goldman Sachs. Your line is now open.

Great. Thanks. Maybe just one on China, I think guidance coming into the year was for high single, low double-digits growth there, coming off another strong quarter of high teens' growth it's been well above kind of a guidance rate for a few quarters here. So maybe just update us on your thoughts in the region there. Obviously there has been some macro noise. So wondering how you're feeling about the environment? What market share you're feeling good about and again just so how you're feeling relative to the guidance?

Yes, I think China continues to be a great market for us. When you look at the growth as I think Andy mentioned it was mid teens. It can be pretty broad based all of this, if you break it into diagnostics, life sciences, and applied markets, they are all double-digit or better. So, I think, we continue to be excited about the opportunities there. I think the only year we were a little sort of cautious and I think we still continue to sort of look out for the back half and again just be - so I would say cautious about it. But I suspect rather than high single, China will probably be at least double-digits and maybe we'll get it up in the mid teens. The other thing I would say is EUROIMMUN continues to do very well there as well. I think in the first quarter they were more in the high teens. So we continue to see good demand and like I said pretty broad based.

Okay. And then maybe just on the capital allocation side, you had a little bit of share repurchase activity this quarter, in spite of the recent EUROIMMUN deal. So I'm just wondering how you guys are feeling about where you are on the leverage landscape and with Jim coming in any changes we should expect going on the capital allocation side?

Now I don't think there will be a change. I think we still have a preference to add to the franchises with some bolt-ons, as I think I’ve said in the past, unlikely that you would see us go into - what I would call a large deal right now. So I think our preference is to continue to delever a little bit, but it will be bolt-on acquisitions and then I think as we said in the past at a minimum we'll try and keep the share count flat. So to the extent that we see a little flowed up because of either stock price increases our option exercise, we probably take that out. But I would say no intention right now to significantly reduce the shares outstanding.

Okay. Thank you.

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

Good afternoon, guys, and Andy congrats.

Thank you, Ross.

And just in terms of the margin cadence, obviously after Q1 it's a pretty big sequential step-up and Q2 at least in our math doesn’t imply a kind of expansion. So, I guess, one, could you confirm my math it seems sort of too equated, I guess we had some unique dynamic in 4Q of last year, so maybe that's - maybe easy comp. But is it the math around just the timing of the EUROIMMUN business, which obviously is a weak seasons no Q1 and then steps-up at the incremental drop through from that piece and it gets better sequentially or is this something else that play on that cadence?

No. I think you have described it exactly as we anticipate it rolling out. First quarter being EUROIMMUN’s seasonally lowest quarter and had obviously a dampening effect as well as the FX. I think we'll see as we get into the second quarter - at the higher end of the range it would ramp through the year as we made progress with EUROIMMUN. And as you can do the math it will be over 100 basis points in the quarter. Fourth quarter being a little bit of an anomaly where it's an easier comp. So I think all the things you highlighted are kind of how we're thinking about it as well.

That's helpful. And could you just also confirm because there's a bunch of different pieces as you gave kind of the organics and M&A contribution with or without EUROIMMUN. Was EUROIMMUN about $80 million or give or take in the quarter including the organic growth?

Correct.

Okay.

It was actually $82 million. It will be in our quarterly filing.

Got it. And just quickly on sort of the base Diagnostics business. So 4%, so you came off a 8% comp last year, sequentially much easier. So I guess this will be probably the lower point of the year is that sort of the view on that segment?

That's right. We’re looking at sort of second quarter six and then it sort of continues to sort of ramp up from there.

Thanks, Andy. Thanks, Rob.

Our next question comes from Derik De Bruin, Bank of America Your line is now open.

Hey, good afternoon. And once again, Andy it’s been pleasure. Good luck.

Thanks.

Hey. Just to follow up on Ross's question. So the core diagnostics organic revenue number, the one that we also [bid] because we're not adding back pro forma contribution EUROIMMUN it’s about 4% on the quarter, is that what it was?

Yes.

Okay. So the 4% number is...

And the way we think about that is reproductive health was sort of mid single and to Ross's point it was a little bit difficult comp in the area. Our infectious disease business which is basically China and India was up mid-teens and we saw sort of just a little slight degradation in what we call applied genomics and it was really driven by the micro fluidics business which had some difficult comps in the prior year. That can have the tendency to be a little bit cyclical because there is are instruments involved. But reproductive was mid single ad infectious disease was mid-teens.

Okay. Great. And then just two follow-up questions on the diagnostics. I guess what's the next milestone for Vanadis? And the overall I mean, what do you think the [genomics] business will contribute this year?

So the next milestone for Vanadis is clearly getting CE Marked. And I think as we've said we're expecting that -- I do know before the end of this quarter, but hopefully by early third quarter. And so the idea would be that - and be able to sell that out in the back half of the year. We don’t have huge sort of expectations for that business in the second half, but call it sort of $5 million $10 million in that type of range. Your second question was referred to the genetic testing business, are you talking about with regard to 2018 or longer term…

2018, since it's a brand new business.

Yes. 2018 we're targeting sort of $8 million to $10 million.

Okay. Great. Thank you very much. I’ll get back in the queue.

Thanks.

Our next question comes from Doug Schenkel, Cowen. Your line is now open.

All right. Good afternoon. Well, first off I want to welcome Jamie and I also want to thank Andy for all his hard work and help over the years. And congratulations on moving onto the next stage of things. So in terms of my questions just I guess a couple end market questions to start. Following up on the industrial end market commentary and then earlier question, was weakness more pronounced in any specific geography? And would you be willing to comment on bookings in the segment in the quarter and whether or not you’ve changed your assumption for that end market growth in the context to full year guidance?

So first of all industrial was down about 1%. So just to sort of calibrate things a little bit, it was up around mid single digits in the Americas. It was sort of flattish in Europe and was down a little bit in APAC. So it's a geographic split. And I think I mentioned before, it was probably most pronounced in the chemicals or petrochemical side of the business. And again I think that was probably just timing of instrument orders. I would say for the year, we think industrial is probably low to mid single digit growth.

Okay. Super helpful. And then on - in terms of the organic out-performance in the quarter, it sounds like generally speaking life science was the key contributor by end market is that right and if so, can you talk about whether a big part of this is your new products potentially tracking ahead of plan in terms of their contribution to the quarter?

Yes. So first of all you're correct it was life sciences. It was particularly in the pharma and biotech area. Well, having said that, there academic and government was up sort of 6% which is nice to see. But really the over performance came in pharmaceutical and specifically in the service and informatics side of the business. And so I talked a little bit about that is some of that was new product, it was Kendro, it was the new signals offering. But we are starting to get some nice traction, as we think we're somewhat uniquely situated with regard to being able to sort of meet this need that some of the pharmaceutical companies are seeing - the buzz word is digitalization of the lab. But it's really trying to make sure that they are getting the right information out of their instruments. And so it’s a combination of having ability to provide the sort of OneSource capability, but at the same time some of the analytics and electronic notebook capability that we’ve had historically. And so that really what drove some of the upside performance in the first quarter.

Okay. And lastly, I guess a similar question on EUROIMMUN. Could you break down how much of the strength in the quarter was the function of I guess you new assays, new customers and I guess those two things versus existing customers increasing utilization?

No. I don't have the visibility into the customer. What I can tell you though is the growth was broad-based geographically. So whether you're looking China, EMEA or North America, it was also double-digits. So I would also say that the growth was pretty broad-based across the sort of diseases. So if you look at EUROIMMUN, if you look at allergy, if you look at infectious disease they also saw nice growth. So it was pretty - like I said broad-based, but I couldn't tell you what the split was between new or existing customers.

Okay. Got it. Thank you very much.

Our next question comes from Steve Beuchaw, Morgan Stanley. Your line is now open.

Hi. Good afternoon.

Good afternoon.

I'll certainly go ahead and echo the thanks and congratulations to Andy, really appreciate everything.

Sure. Thanks.

I wondered just as we try to tune up our models, one last time, if you could give us any more quantification on the impact of EUROIMMUN at the EBIT margin line in the quarter? And maybe some update thinking on how that progresses over the balance of the year given the seasonality for EUROIMMUN?

Yes. We talked in my prepared remarks, it was around 30 basis points 20 to 30 basis points headwind on the corporation. That will flip as we make progress through the year. It will ramp through the year, the fourth quarter for EUROIMMUN will be the largest impact. So it will go from, let's say negative 30 to I would say something in the 50 to 75 basis points as we exit the year.

Perfect. And then Rob, I wondered if you could take the conversation around Vanadis a couple more steps. Maybe the data that you saw in the Nature Communications article weren't particularly surprising to you. They were certainly better than we had even hope for. How is the data that you've seen so far in some of your preliminary conversations, you are impacting - you are thinking on how that assay, how do you priced and how big the potential market is where Vanadis would be a logical fit? Thanks.

So I think you're - we were pleased to see the success of the study. But I think from a pricing standpoint and I know everybody's nice to see that and we'll have that out soon is we've said for a long period of time that the purpose of this product is really to replace screening, as compared to a diagnostic test. So we want to make sure, and again the goal here is to really go out into the biochemical labs, so the labs that are doing biochemical screening today with both a simple workflow, as well as a cost structure that is close to that. So again, stay tuned. But that's our thought process around that. And again, the whole theory is to make sure that the sensitivity of Vanadis is at least similar to the current NGS assays. I think we have some arguments as to why we think it's actually better in a number of serious. But we want to make sure at a minimum that it's similar, but in the argument, easier from a workflow perspective and much more economical. With regard to the market, I mean, I think we feel - I mean, just as a rough guide, we said, if we can take 15% to 20% of the market we think that's close to $1 billion.

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

Good afternoon, guys. Thanks. Rob on the diagnostics side, can you just add a little color to what you're seeing in the genetic testing expansion? How much of that early business is just due to having the samples in hand and being able to leverage that. Is that something that you're finding is working for you? I know that the thesis going was kind of that exact idea just you would be able to benefit from some of the other business that you are doing?

I think that's part of it. But I would say when you look at the ramp up it's been not only in the newborn and the bio group business, but we are attracting pharmaceutical companies, we are attracting collaborations. And I think the reason for that is what we have mentioned before is that we provide not only the genetic analysis, but we show the protein or biochemical analysis. And what we're finding that's distinctive in the marketplace and I think that's becoming very attractive to a number of the collaborators and customers.

Okay. And then maybe Andy if I could just ask you one final question before you go. I guess it would just be, what are you expecting for interest income this year?

I think, right now we're looking at net interest income at about $60 million - just north of $60 million.

60.

Yes. 60, that’s net interest expense. Net interest income, was that the question, sorry?

That's right.

That's going to be around $10 million.

Okay. Thanks.

Our next question - I’m sorry…

Net interest income and other.

Our next question comes from William March. Your line is now open.

Guys, how are you?

Good.

On EUROIMMUN, could you just talk a little bit about the America opportunity with a coming off a small base and saying that it's going to take some time to develop? Is that kind of driven by getting approvals of a critical mass of assays or an instrument? Just maybe what are some goalposts to think about for that becoming a more significant contributor?

Yes. I think that's a piece of it. I mean, part of it is getting the regulatory approvals. I think as we talked in the past that was not an area that EUROIMMUN had invested significantly And so, I mean, combined now we have a much more formidable regulatory capability. I think we've already filed, since the closing, some 18 submissions to the FDA. And I mentioned we're excited about getting two of them out already. So that's a big piece of it. I think the other piece of it is just expanding your commercial presence in the US market and I think the sales force within EUROIMMUN was probably in 10 people or something. And so that's just getting - sort of opening - helping them open some doors, getting a little bit more sort of brand recognition out there. And then I mentioned the other piece was, we've now transitioned all of their - the service of all of their instruments to PerkinElmer. So I think that's helpful from the standpoint of not only cost, but responsiveness to the customer. So I think there is a number of components, just increasing awareness, so in some of the trade shows the combined presence of PKI and EUROIMMUN, I think, is helpful as well. So branding, presence, regulatory, I think, those are the main drivers.

Great. And then on the whole genome servicing business, can you maybe just talk a little bit about that opportunity in terms of the $8 million to $10 million in revenues? You've talked about the collaboration with Helix. As you think about that offering is it more about trying to drive that as a standalone business or bundling that with some of your other products and services to try and drive maybe more incremental revenues? Thanks.

So it's really both. And I think one of reasons we were sort of comfortable starting this is because we have a bundling opportunity. We’ve talked about in the past that, we do the screening for newborn and very often the confirmatory test is done through sequencing. So by us now doing the sequencing we can do both the screening and the confirmatory. I think that was sort of a natural bundling opportunity that was sort of captive business we could go after. Similarly with ViaCord, we've had a number of customers - customers approached us to see whether or not that was something we could do. So we started the business with the understanding that we had sort of some captive business we could go after. But at the same time, we thought that there was an opportunity to go out and get incremental business. And that was some of the things we talked about before is working with pharmaceutical companies and working with the Helixes of the world, et cetera. And we're starting to see that ramp nicely. So I think if you look at our $8 million to $10 million of revenue this year, it could be fairly evenly split between both of those opportunities.

Thanks.

Our next question comes from Steve Willoughby with Cleveland Research. Your line is now open.

Hi. Good evening. Two questions for you. I guess, first regarding your comments regarding the pharma strength being driven by service and informatics. I just wanted you to provide a little bit more color there on whether that's kind of penetrating the existing customers more, share gains or more Greenfield opportunity?

So, in the informatics area, I think it was penetrating new customers and a little bit of I mentioned as new products come out with ChemDraw in particular and we saw a nice renewal from existing customers. So it's in the informatics a little bit of both. I would say on the service side, it's probably mostly with existing customers where we continue to expand what we're doing with those customers. But having said that, we do get periodically some nice wins and one in particular we're ramping up in 2018.

Okay. And then I think at least one time or two times you made the comment regarding building backlog and just trying to see if there's any more color on that related to your other comments talking about some timing of orders within your more industrial business? And I guess I'll follow on to that as just some of your newer equipment system products, so just wondering if there's any comment on how those are doing out of the gate so far?

I would say the timing in the backlog was probably more in reference to some of the markets that were a little slower in the quarter, mostly notably the industrial. I would also say food as we talked about is mid single. I think we sort of look at the year, I think, that will be a bit better than that. And then I would say the third area was I mentioned in our core diagnostics business that our applied genomics business was actually down a little bit. I think for the year that's probably going to be high single-digit, double-digit grower. So that's where we saw some pretty good bookings in the first quarter and we think that will build through the year.

Okay. Thanks very much.

Okay.

Our next question comes from Brandon Couillard with Jefferies. Your line is open.

Thanks. Good afternoon.

Good afternoon.

Quick one for you Andy. In terms of the recent €300 million note offering, you're not paying down any incremental debt with that? Because otherwise I think there would've been some benefit to net interest expense outlook for the year? And secondly the CapEx spike in the first quarter some of that EUROIMMUN timing related and what should we pencil in for the full year?

Well, there is two things going on. One is we did pay down the revolver, but it is that the net impact on net interest expense is offset by FX. So there really wasn't much savings. As far as capital was concerned, a little bit of that is timing. We have a couple of fairly big initiatives that we started at beginning this year, I think that will normalize. And some of EUROIMMUN's capital hit in the first quarter, so I think we still feel like that we're going to be within our guidelines on capital for the year, and as a result we still think we can get to 365. So it's really mainly timing.

Great. Thanks.

Our next question comes from Bill Quirk, Piper Jaffray. Your line is now open.

Great. Thanks. Good afternoon, everybody. First question just thinking Andy about some of comments you made on EUROIMMUN, European or euro denominated cost base and revenue exposure in China. Have you guys considered at all moving some manufacturing to China not unlike what you're doing with some of the DAS business?

Yes, absolutely. EUROIMMUN has already been working on that. So they are in the process of finalizing fairly large facilities in Tianjian. And similar to our approach which is to continue to ramp up manufacturing in China and sort of make products in China for China. And so that will probably come online later this year but because with the regulatory approval probably we won't see a lot of revenue from that factory probably until ’19. But that's exactly what we're trying to do is to sort of shift some of those euro costs, euro based costs to Chinese yaun base.

Okay. Perfect. Thanks, Rob. And secondly and just staying in EUROIMMUN for a moment. You talked about a number of regulatory approvals in the states trying to expand the portfolio here. Can you just help us think a little bit about should we expect a fairly even metering of assays over the coming call it three years or you're trying to push a bolus out here in 2018? So just trying to get a sense both from R&D spend, as well as how should we think about the US franchise growth?

I think there is initially a little bolus because quite frankly there was a little pent-up demand if you will. And we've been working hard to trying to get those out as quickly as possible. And I think I mentioned we - I think we filed some 18 or so in the last three months. So I don't know that we'll see that type of pace going forward. Having said that, it's a little difficult as you can appreciate sort of determining how they hit the market because we're dependent on the FDA regulatory approval, which seems to be getting better, but we'll just have to wait and see. But clearly there was a much larger amount in the first quarter. But we hope it to be sort of a steady pace, but probably not at the level you saw in the last 90 days.

Okay. Got it. Thank you.

Our next question comes from Dan Leonard, Deutsche Bank. Your line is now open.

Thank you. Rob can you update us on your thinking around portfolio pruning. Is there anything we should expect in the scope for 2018?

I don't think there is going to be anything of significance. We've talked a little bit about pruning some things within DAS and I think we'll continue to look at those. But I don't know that they will be that material. If I had to give you number it could be $50 million it could be $75 million, it could be something like, but it’s not - I don't know that it’s going to be significant.

Okay. And then secondly on Vanadis, could you comment on what publication waterfall looks like to the balance of the year? Are you expecting further papers and what would the cadence look like?

I think there is two that are sort of in the works right now that we would hope to see in the next - again this is a little difficult to predict, but probably in the next 60 days or so. And then there is I think - there's a number that we expect to come out sort of latter in the year.

Okay.

So maybe in the course of 2018 we'll see three or four.

Great. Thank you.

Okay. And our next question comes from Jack Meehan, Barclays. Your line is now open.

Thanks. This is actually Mitch Petersen on for Jack this afternoon. On the newborn screening business, could you just elaborate on what you're seeing in terms of birth rates and then [how tax] utilization is trying to influence the EM regions?

So, first of all we’ll say the newborn business continue to do pretty well, but it's not because of birth rates. It's because, we continue to make either expansion of menus or expansion of penetration. If you look in the US, I think birth rates are probably trending down a point to 1.5 points. And if you look in China for ‘17 they were down, we would say sort of three, in fact, you may have seen the article in the journal today and there was a recent article in The Economist that talked about the challenge that China has right now with their growth targets as their birth rates have sort of been suppressed here a little bit. So that's something that, obviously, is a bigger issue than just newborn screening. So it's not been driven - sort of the growth in the newborn business right now is not being driven by birth rate globally, but like I said on the other aspect of it.

Helpful. And then I'm talking M&A, could you just elaborate on some of the areas where you potentially like to add to the portfolio? Thanks.

I would go back and reinforce here is that we've talked about this sort of strategic priorities for growth. So when we look across at the diagnostic businesses continuing to build out our capabilities in emerging markets, it's obviously something that's interesting to us. I think our applied genomics area is an area where we think there is a significant opportunity to spend our capabilities. I would sort of spite those two out in the DAS area clearly in the pharma services area where I think we built a nice portfolio. Food, we believe is very attractive and combined with the fact that it's fairly fragmented industry, I think provides a lot of opportunity for us. And I would say in the analytical instrument area anything that can sort of build out our consumable, revenue would be something we would be very interested.

Thank you.

That concludes our question-and-answer session. I would now like to turn the call back over to Rob Friel for any further remarks.

So first of all I appreciate and thanks for all your questions. And so in closing let me just reinforce that we're all excited about the opportunities moving ahead and confident in the terrific team of employees around the world who are committed to not only driving our mission, but creating even greater value for our shareholders. So thank you for your interest in PerkinElmer and have a great evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.