Revvity Inc (RVTY) 2005 Q3 法說會逐字稿

. Please stand by for PerkinElmer conference call.

Good day, ladies and gentlemen. Thank you for your patience and welcome to the third quarter, 2005, PerkinElmer conference call. My name is Bill, and I will be your conference conference coordinator for today. At this time all participants are in a listen-only mode: However, we will be facilitating a question-and-answer session towards the end of today's conference. If at any time during our conference today you require assistance, please key star followed by zero and an operator will be happy to assist you. As a reminder today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's presentation, Mr. Dan Sutherby, VP of Investor Relations and Corporate Communications. Please proceed, sir.

Good evening and welcome to the PerkinElmer third quarter 2005 earnings conference call. If you have not received a copy of our earnings press release you may get one from our Web site at PerkinElmer.com, or from the First Call Network, or from our toll free investor hot-line, 877-PKI-NYSA. This call is being webcast this evening from our Web site and we are providing a slide presentation accessible from the Web site to facilitate the discussion of our Q3 results. For your information during the call, the pages on the webcast can be advanced from your computer as we proceed through the presentation. Before we begin, we need to remind everyone of the Safe Harbor statement that we have outlined in the front of the Q3 earnings call presentation and also those in our SEC filings. We encourage to you read those Safe Harbor statements. Also, any forward-looking statements 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 the call to the most directly comparable GAAP measures is available in our earnings press release issued today, this evening, and we have also provided reconciliation in the appendix to this evening's presentation on our Web site. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in the press release or in the appendix. we will provide reconciliation promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Dan. Good evening everyone. I appreciate you joining us this evening to review PerkinElmer's third quarter 2005 results. With me tonight is Rob Friel, our Chief Financial Officer. I will begin by reviewing the highlights of the quarter. Rob will provide more detail on the financial results. We will then break for questions and answers and close the call. We had a very good third quarter. Our profit growth was excellent. Our organic revenue growth was good. We further strengthened our balance sheet and we have accelerated our business portfolio shift to focus on health sciences and Photonics. We also announced two key management appointments that further strengthen the depth of our leadership. If you turn to page three of the slide presentation, I will review some of the financial highlights for the quarter.

Our GAAP earning per share including discontinued operations were $0.24, up 33% compared to $0.18 in the third quarter of last year. Our cash EPS was $0.28, up 27%, which exceeded the first call estimate of $0.27, and also our guidance of $0.26 to $0.27 for the quarter. At the bottom of this slide you can see our revenue mix and growth for the quarter. Revenue in the third quarter was $362 million from continuing operations which excludes Fluid Sciences as it is reported in discontinued operations starting with this quarter. On an end market basis, health sciences grew 8% and comprised just over 80% of our revenues. On a business unit basis, LAS., that is Life Analytical Sciences, grew 6% both reported and organic growth, our highest quarter of organic growth since 2001. Optical Electronics grew 5% on a reported base, and 2% organically.

This is below where this business should be, but as we foreshadowed at the end of Q2 we had a capacity shortage in medical imaging this quarter and several product transition timing issues. We expect medical imaging to be back in the double-digit growth range in the fourth quarter. Turning now to page four for other highlights, earlier this month we announced our intention to divest the Fluid Science business to narrow our strategic focus. We are under agreement with the Eaton Corporation to sell our aerospace business and are in discussions with other third parties to sell our semi-conductor and fluid testing businesses. This is an exciting step, as it allows to us focus on leadership and financial resources on our health sciences and photonic businesses where we have some very attractive growth opportunities.

In health sciences we have excellent growth prospects in genetic screening, medical imaging, service, environmental, and molecular medicine and in our Photonics business, especially lighting and sensors, which are synergistic with our health science end markets. For example, there are a number of medical lighting applications and also sensors used in analytical and life science instrumentation. But beyond that we have attractive growth opportunities in the consumer electronics end market such as flash or camera phone and projection television. Talking about a couple of these, this quarter we saw terrific growth in genetic screening. It was up 25%. We were very pleased that seven additional states have selected PerkinElmer for their expanded newborn screening programs that will involve 30 or more screens for early detection of disorders at birth. There are other states still in the tendering process that we cannot comment on. You will recall that we won the California contract in late 2004, and we started shipping under that contract during the third quarter: We feel terrific about our ongoing growth potential in genetic screening, not only neonatal screening, both in U.S. and around the world, but also in the areas of prenatal screening and maternal health, for example, pre-term births, pre-eclampsia, and chromosomal defects.

Our service business also had another quarter of strong growth, coming in at 11%. Our service business, which is branded OneSource, has averaged 10% growth over the past ten quarters. Our capability to offer third party and end higher value add service continues the position as well, in consolidating the service market. It is with a lot of pride that we announce two key management promotions this evening, Rob Friel who has been our Chief Financial Officer for seven years has been promoted to Vice Chairman and a member of the Board of Directors. In his new role, Rob will focus on corporate-wide operational improvement including cost productivity and Six Sigma initiatives and will be continue his responsibilities in business development. I'm also pleased to announce that Jeff Capello who has been our VP of Finance, responsible for treasury and corporate control for the last four and a half years, will be our new Chief Financial Officer. Rob and Jeff's promotion provide each with fresh challenges and strengthen the depth of our management bench. And these appointments will be effective January 1.

After our strong results so far this year, our momenttum in Q3 provides us with the confidence to increase our full year 2005 total cash EPS guidance to a range of $1.10 to $1.12. You'll recall at the end of Q2 that guidance was $1.07 to $1.10. I'm now going to turn to call over Rob Friel who will give you more specifics on our third quarter results. Rob?

Thank you, Greg, and good morning. So this evening I will provide some details on our revenue, cost, and cash flow for the third quarter of 2005. Then I will provide some guidance on Q4 and the full year 2005 and then open the call to your questions. Before I get into our specific financial results for the quarter ,I want to remind everyone that the results of our Fluid Sciences business segments are accounted for as a discontinued business. This is consistent with our press release on October 6, when we announced our intention to sell the three businesses that make up the segment. Therefore, most of the discussion tonight will focus on our continuing operations. Also during the call whenever I talk about a particular measure being up or down, I am referring to an increase or decrease in that measure during the third quarter of 2005, compared to the third quarter of 2004. And to the extent that I use any non-GAAP measures these have been reconciled to the comparable GAAP measure in the appendix to this presentation on our Web site. If you would now turn to page five of the webcast you see a summary of the P&L from our continued operations.

As Greg mentioned, Q3 revenue of $362 million increased $20 million or 6%. With the health sciences end markets expanding 8% and the photonic end markets down slightly. The financial results for this quarter really highlight the significant leverage we can achieve from revenue growth. During Q3 our gross margin increased $14 million from the incremental $20 million of revenue, thereby increasing our gross margins 160 basis points. While some of this increase is related to continued improvement in operating efficiencies, the majority of the gross margin improvement is due to the higher volume. R&D dollars were up about 7% in the third quarter and up 20 basis points as a percentage of sales. As we have an objective to increase our research and development spend as a percent of sales over time. SG&A was up about 5% over last year but down as a percentage of sales by 20 basis points. The net of these three increased operating margins excluding intangible amortization to 13.2% in the third quarter this year, an improvement of 170 basis points. This improved operating margin, combined with the 6% revenue growth, expanded net income from continuing operations 42% over the third quarter of last year, and as a result, the total EPS for Q3 we reported today, beat the First Call consensus for EPS by a penny.

Geographically, each of the three regions experienced growth in Q3. Revenue from the Americas, representing about 45% of total revenue for Q3, was up 7%. Revenue in Europe, which represented about 37% of our revenue for the quarter, was up 6%. And Asian revenue, representing about 18% of our revenue for the quarter, was up 3%. Since the exchange rate for the dollar against most of the major currencies in Q3 of this year is approximately the same as Q3 last year, the foreign exchange rate movement year over year did not have a material impact on the regional growth rates. If you'd now turn to page six, I will discuss some revenue and operating highlights by each of the segments. In LAS, revenue in the third quarter was $259 million, up 6%. Excluding intangible amortization, LAS operating profit for the third quarter of 2005 was $33 million, an increase of 30% over the operating income of $25.5 in Q3 of last year. As a percent of sales, operating income excluding intangible amortization was 12.8% in Q3, up 230 basis points. You can see on the rate of the slide some details on the businesses within LAS.

In genetic screening, which was about 12% of LAS revenue in the quarter, revenue was up 25% as we continue to see good growth opportunities in both neonatal and prenatal screening. Service, as Greg mentioned, which represented about 23% of our LAS revenue in Q3, '05, grew 11%, as we continue to see good traction in both the maintenance of PerkinElmer equipment, as well as our OneSource business, which takes on service for an entire lab. In the environmental business, which represented about 27% of our LAS revenue in the quarter, revenue was up 7% with particular strength in thermal analysis and gas chromatography. During Q3 in BioPharma, we experienced good growth in screening and pharmaceutical QA and Q. see particularly in the large pharma, and biotech customers, but delays in the purchases of several proteomics systems into the academic research markets resulted in BioPharma down 1% in Q3.

Turning now to electronics, revenue for the quarter was $103 million, up 5%. The inclusion of the Elcos acquisition increased revenue in Optoelectronics by 3% in the quarter. Optoelectronics operating profit for Q3 of '05, excluding intangible amortization, was $21 million, an increase of 16% over $18 million in Q3 of last year. As a percentage of sales, operating income excluding intangible amortization exceeded 20%, up 200 basis points over Q3 of last year. As you can see on the right side of the slide, within Optoelectronics, specialty lighting revenue was about 34% of total Opto revenue for the quarter and was up 11% compared to Q3 of last year, due mainly to increases in our Cermax xenon light engine business and the inclusion of Elco's revenue. Total imaging revenue was about 33% of total Opto revenue for the quarter and grew 5%. As Greg mentioned, we were expanding capacity during Q3 to meet very strong demand in this area, which negatively impacted the growth rate this quarter.

Even with the slightly lower growth this quarter, the medical imaging business is up 17% year-to-date. Sensors revenue was about 31% of Opto's revenue for Q3 and was up 2%, driven by growth in our general, industrial, and safety and security end markets, offset by the timing of several military programs. Finally, the lithography business, which services the PCB market, was about 2% of Opto's revenue in Q3 and was down 41% in the quarter. Turning to slide seven, you see the details of our cash flow for the quarter and year-to-date. On the left side of the slide, you see that sources of Q3 '04 operating cash flow from continuing operations comprised of net income of $26 million, and depreciation and amortization of $17, for a total of $43 million. Partially offsetting this was an increase in net working capital of $5 million outlays relatintg to payroll and other accruals of about $20 million, resulting in operating cash flow of $18 million. Capital expenditures were about $6 million for the quarter, and the Fluid Sciences business generated $5 million of cash flow in the quarter so the total free cash flow in the quarter was $17 million.

In the middle of slide seven, I've shown our working capital turns in Q3 last year and Q2 and Q3 of this year. Once again, we have made nice progress on our working capital turns this quarter, improving 0.4 turns, compared to Q3 last year. However, due to the significant progress we made in Q2 this yea,r with us achieving 5.2 turns, sequentially our Q3 turns are down slightly, resulting in a slight use of cash. On the right side of the page, you will see that operating cash flow from continuing operations through the first nine months of this year is $108 million, the same amount as last year. Working capital is essentially flat even though revenue is up 6% due to the improved turns. And the higher net income this year is being offset by the timing of accruals. For the full year we are tracking well to our plan of providing total cash flow of at least $180 million for the full year. Slide eight provides a summary of our income statement from continuing operations for the first nine months of 2005. Revenue for the first nine months of this year was about $1.1 billion, up 6% over the same period of 2004. On the upper right of the slide you can see that LAS and Opto are up nicely year-to-date, with growth of 6% and 7% respectively.

I have also presented year-to-date growth by business, and you can see genetic screening, service, and medical imaging have all grown double-digits through the first nine months of 2005, environmental is up 7% year-to-date, while BioPharma and Photonics were flat to down slightly. Year-to-date gross margins have expanded 120 basis points with R&D dollars up about 10% over last year and SG&A down 30 basis points as a percentage of sales. This has resulting in our operating margins excluding intangible amortization expanding 120 basis points to 11.5%. Net income from continuing ops has increased to $72 million, up 61% from $44 million through the first nine months of last year. Slide nine shows our forecast for Q4 this year. We enter Q4 with some good momentum within most of our businesses, which should result in comparable growth to what we have seen in Q3. However, our reported financial results may show a lower number for two reasons: First of all. based on the current exchange rate the U.S. dollar is 8- to-9% stronger than it was in Q4 of last year, which could impact our reported growth by 3-to-400 basis points.

In addition, as we pointed out last year, our fourth quarter last year included an extra week of revenue that favorably impacted our revenue about 1%. Consequently as you can see at the top of slide nine, while we expect the underlying businesses to grow 5-to-6% on a comparable basis to last year, reported revenue assuming the dollar stays where it is, would be in the 1-to-2% range. However, since the FX rates do not materially impact our bottom line, we are forecasting another quarter of greater than 100 basis point margin expansion and EPS growth of approximately 20% as well as strong cash flow. These forecasts do not consider the impact of any gain from the sale of Fluid Sciences or the cost of tendering for the sub notes that we announced this evening. Assuming we achieve these forecasted results in the fourth quarter, slide ten shows our results for the full year. At the top of the page, you see that revenue from continuing ops would be just over $1.5 billion, up around 5%. Operating margins would be up about 120 basis points to roughly 13%, and EPS would be up a little over 25% with strong cash flow. The bottom part of the page shows total EPS and free cash flow and, as Greg mentioned, we have recently increased our EPS guidance to $1.10 to $1.12, and reaffirmed our free cash flow forecast for the year of at least $180 million. So as we look to finish the year strong, we feel terrific about the number of exciting growth platforms. We have excellent organizational capability, good momentum operationally, and a strong balance sheet with significant financial flexibility. I would now like to open the call to your questions.

[Caller Instructions]. Our first question comes from the line of John Harmon of Needham and Company. Please proceed.

Hi, John.

Hi. Good afternoon. A couple of questions. One, I was wondering if you could give us an update on where your consumer flash business is? I think you were talking about having some samples or shipping towards the end of this calendar year.

Yeah, let me talk about that. First of all I think it is on track. Most of our volume in that, in the camera phone flash marketplace we are anticipating to be kind of back half of '06. We have a number of lead customers that we have been sampling in like quantities and have design-ins with. And the timing of it has really been kind of modulated by how quickly the camera phone manufacturers have stepped up the resolution of the imaging. When it hits about two, two megapixels or beyond, we see them stepping up intoflash. So I think everything we've seen reconfirms the need to move into the high energy that a flash provides as opposed to the LED structure that's in most of those cameras today. And we see that as a back half of '06 volume market.

Were you saying that the megapixel -- number of megapixels keeps increasing on you? Is it requiring a bigger flash and pushing out the opportunity? No, the megapixels are the driver for the flash because with a low resolution camera they can use the energy from an LED.

No, the megapixels are the driver for the flash because with a low-resolution camera they can use the energy from an LED. And so as the resolution moves up into higher and higher megapixels the camera phone needs more energy. And the only way to get that energy is to move to the flash units. And so that's what's been driving it. The other part, of course, of what's been gating it is our ability to provide the right form factors for these cameras. So it's been sort of a march of both and therefore we expect this to be principally a back half and I think that's fairly consistent with where we've been, back half of '06 volume market. There are small volumes in there today, and there will continue to be through that period of time. But that's where we see the ramp up coming.

Okay. Secondly, sorry, you mentioned this a couple times but could you elaborate a little on what happened in medical imaging? You said you were increasing capacity but yet --

No, medical imaging which is a -- it's a semi-conductor fab type of operation for the amorphous silicon panels, and at the end of Q2 we signaled that we were going to be short of capacity in the second quarter because we are bringing additional capacity on line. Some of these tools are quite elaborate.They can take up to two years between the order cycle, the installation, and then you have to validate the tool for different process steps. And so as we looked at our capacity planning, we were short of capacity in the second quarter. So our underlying growth around amorphous silicon was in a 7% -- as opposed to in the strong double-digits, but the capacity has now been validated and so we expect that to be back up in the double digits in the fourth quarter. That was something we had foreshadowed at the end of the second quarter because clearly we saw this coming, this merger, the shortage.

It wasn't a yield problem or anything. No, no, it's not a yield problem. It's just, bottlenecks, capacity around particular bottlenecks of the process.

No, no, no. It's not a yield problem. It's just bottlenecks -- capacity around particular bottlenecks in the process that take a fair -- like I say it can take up to two years and some of these -- to add capacity in some of these areas, and we just got pinched in the quarter.

Okay. And just one last one, please. I'm trying to reconcile the numbers. The year-to-date numbers, the Photonics business was down 1%. Is that mostly the result of the steep decline in the lithography portion offsetting the single-digit growth in the remaining part of Optielectronics?

Yeah, John, I would say the lithography, and of course also that's where the photo flash hits. So that also has the flash business in it.

And the photo flash is the product transition from analog to digital, as the analog cameras have continued to decline, the digitals haven't been as fast on the ramp up. I think you see this in the Kodaks and so forth out there in the world.

Okay, that's it. Thank you very much.

Thank you very much. Ladies and gentlemen, your next question comes from the line of Darryl Pardi of Merrill Lynch.

Good evening, guys. Can you give us, or do you have any more insight into the sale of the aerospace business to Eaton, and the remainder two pieces of Fluid Science, when that might happen during the quarter?

No, I think we would like to stay away from being too specific on that, but we anticpate those to go in the fourth quarter, so it's regulatory review and other things. I would hesitate to try to tie it down too tightly.

Okay. That's fair. Rob, with the cost for the tender, do you have a sense of current rates, what that is going to come in at.

We would estimate at t-plus 50 to be in the 112.3 range.

Okay. Great. Rob, with your expanding role, I think this is the second time you've taken a more senior role towards business development, and in this case some other things, too, and clearly M&A is -- or acquisitions, strategic initiaitives with other parties is important to PerkinElmer's growth strategy, any thoughts on adding additional personnel, particularly some folks that might have background in the life sciences or diagnostic areas that you are interested in.

Within the business development?

Yes.

Rob, why don't you comment?

Yeah, I think we are looking at adding some incremental resources to the business development -- your point, right? I think that is a critical piece of the strategy going forward, and I think we are looking both externally as well as internally and using some more of internal resources focused on business development.

Okay. Great. Sorry, you mentioned there are seven states that you guys have wins with in neonatal screening. Are any seven of those Texas or Florida?

Florida was. So the states are Kentucky, Missouri, South Carolina, Louisiana, Alabama, Pennsylvania, and Florida. Those are ones that we've won. And there are others under the tender process that we don't comment on while they're in the tender process but suffice it to say we feel good about our momentum in this market.

Is Texas still in that tender process.

Texas is still in a discussion mode, yeah.

Thanks.

Thank you very much. Ladies and gentlement, our next question comes from the line of Paul Knight of Thomas Weisel Partners.

Hi, could you talk about spectroscopy, what markets were good, like geographies, and where do you stand in terms of market position in these more industrial markets, Second? Third? First? I know had you a long history there? And was it the best growth, wasn't that one of your best spectroscopy growths in a while?

I think what we talked about, Paul, this is Rob, we talked about very strong in the thermal and in gas chromatography which go into the environmental and industrial markets. So I think both of those were in excess of 10%. So we feel good about that. I think geographically, as I mentioned, we saw growth across all the regions. We had particularly strong growth in China. That was up over 35%. So we continue to make good inroads into the China market and that is particularly in the analytical instrument area.

And in India I would add to that, China and real India were real stars for us.

When's the bond repurchase going to be completed, Rob?

Well, you may have saw in the note we sent out this evening we are asking for people to tender initially on November 8. If you tender on November 8, there's a slight benefit in doing that. And then the tender should be completed no later than the 22nd.

Thanks.

Yeah.

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Aaron Geist of Robert W. Baird. Please proceed.

Good afternoon, gentlemen. Can you talk a little bit more about the BioPharma market? You talked about couple academic customers delaying proteomic systems, is that delays or cancellations? And can you give an update on the current state of that market?

I would say BioPharma continues along like it has for us. And that is with, I will call it a slowly improving trend. And within pharmaceutical, we see a mix issue. We see some pharmaceutical companies have gone through a bit of restructuring themselves. Others are more aggressive on the spending. We see the biotech market continuing to get stronger. We see the academic market continuing to strengthen for us, principally because there's been more of a shift into drug discovery. And out of research. So we see this as a slowly strengthening marketplace for us, and our strategy here is to continue to drive this through new products. And as you know there's been a number of them coming out this quarter, whenever it's JANUS or CellLux or LumiLux or others that is we introduced into this marketplace or even a shift from some of the rad to nonrad reagents. So we see that as a good market, as a very valuable market that the underlying demand is not going away. So for us there hasn't been any change in that marketplace. I would say, throughout the year, which has been from our perspective a slowly improving environment within that market, and we expect that to continue on. Ultimately I think of course, the comparables start to get a little bit easier there.

Sounds good. In terms of the seven new states coming on line, it's taken a little while for new states to put testing in place. Can you give us a sense of how long you think it's going to take for these new states to begin testing?

I think most of them kick in in the, certainly they all kick in in the 2006 time frame. And it's a matter of putting instrumentation into the labs, making sure that the software programs, and getting everything installed. Because of course data integrity is just critical in these institutions. And then providing the sort of ramp up and off they go. California went up, went live beginning of July, which was the original target. They stayed with it and went into volume product then. And the states typically go into volume production all at one time because once they startprocessing the samples they want to process all the samples. So we expect all of those to be well underway in 2006.

Would you expect most of those states to come on line at the early half of 2006 or it wouldn't have a big impact until the back half of the year?

I think most of them will be in line in the first half of 2006.

Great. You talked about the Asian market being up 3%, strong growth in China for environmental testing at 35%. Can you talk a little bit more about the areas of softness specifically in the Asian?

In Asia we have our photo flash businesses in Asia, the lithography businesses in Asia. So the two areas we spiked out were weak were, just because of the customer base for those marketplaces for cameras, and for the PCB inspection business are both in Asia. So those are really the two areas of weakness. Clearly we saw much better -- from a distribution standpoint, we saw much better growth in China and India. We saw decent growth in southeast Asia. Japan was kind of okay.

Okay. One last question if I could. You are growing R&D about 10%. Can you talk about expectations for R&D investment going forward as you look to bolster your position in the life sciences area? Are you going to step up that growth or we should look at year on year growth of 10% for R&D?

We have not made a firm decision on 2006. We are in a detailed operating plan process now. Our intention is to be able to increase our R&D spending as we go forward but we have not made. So I would say that's the general environment and it's wrapped around the growth platforms we have because we think we get a good return out of that, and we want to be driving this internally from an internal growth perspective, but we haven't given any specific guidance yet on 2006.

Would you be willing to give a stab of operating margin improvement that you think you can achieve next year or is it still too --

Well, no -- our view in this is that we ought to be able to get 100 points of operating margin, kind of year on year for the forseeable future.

Okay. Great. Thanks much.

Your next question comes from the line of Steve Salamon of Infinium Capital.

Thank you very much for taking the questions. Just wondering if you can help me to understand what's going on in some of the segments within imaging, to understand the breakdown between digital and the rest of imaging in terms of growth, as well as the mix of the two. And also if you can help me to understand the source of the strength in your Opto margins this quarter. Where is that coming from and how sustainable do you see that being? And then maybe finally, if you could talk a little bit about the sources of service growth? I mean obviously it's pharma-outsourcing to some degree, but if you can give a little bit more of a sense as to what the services actually are that are growing at the double-digit pace that would be helpful.

Yeah, I will take a couple of these and then have Rob comment. So I would say in medical imaging the principal components of that are, of course, the flat panel, the digital Xray flat panel and then there's some other assorted product lines in there inincluding image tubes. So it's, the big driver of growth is in the digital flat panel and that's by far and away the lion's share of it, call it three quarters lion's share of that growth. And the other products have their kind of ups and downs so if that gives you some -- was.

Was it 75% of growth this quarter even with the capacity constraints?

I would say and I don't want to get too specific.

I think what we said was medical imaging was up 7%.

Right.

And all of imaging was up around 5%. So that gives you perspective.

Okay. Thank you.

Thank you very much. Ladies and gentlemen, your next question --

Wait, wait, we are not finished with that question. So, and then on the service side, you can break it down in different areas, you can break it down into I will call it a better job of penetrating our install base of instrumentation, and then there was another area of consolidating third party. And there's an area of providing more value-added services. And our growth is distributed cross those three. But I would say it's heavily, the predominant portion of that has been driven about doing a better job of penetrating our install base so whether it's contract renewals or eliminating, sort of squeezing out other third party providers into our install base as opposed to us servicing third party equipment. Over time we expect that the broader range of us being able to service complete suites of equipment and the value-add services will sort of continue to ramp up because those come off of a small base so they don't drive the overall number that much at this point but that over the next couple of years we expect those to ramp up and ultimately that sort of mix of where the growth is coming from, the shift.

Okay. So at the moment you are squeezing more, or doing a better job of penetrating the install base, presumably there's a limit to how much you can continue to do that. Is that fair?

I think it's a mix of all three factors in there today, Steve, but I would say, call it two-thirds in sort of doing a better job with our install base, getting a higher market share in there. We think that continues for sometime. But that over time the other two elements, you kind of get a flip that this will go to one-third and then it will go to two-thirds. Over time and so that's where our investments have been. We have been, we formed our OneSource initiative about three years ago and so it's gotten a lot of great traction. We built a lot of good capabilities in all different areas of the world. I think that continues to get momentum. It just starts, those other two areas just start from a smaller base. They continue to grow but ultimately I think they will be will be the biggest drivers of this going forward.

The Opto margin strength this quarter.

The Opto margin strength is a combination of improved gross margins and I would say the majority of that is probably on the volume side. We do have some productivity as well and if you look at the head counts for the Optoelectronics business, it's down a couple percentage points as they continue to drive efficiencies and move more of their production offshore into lower cost areas.

So is it fair to say that Q4 and into '06, 20% is a number that we should put into the model for adjusted?

It's largely dependent on the level of volume. So if they can reach the level of volume which I would say over north of $100 or $105 million they should be able generate operating margin in the high teens, low 20s.

Okay. Thank you.

Okay. You're welcome.

Thank you very much, sir. Ladies and gentlemen. your next question comes from the line of John Sullivan, Leerink Swan. Please proceed.

Thanks for taking my call. A couple of quick questions in following up on earlier information regarding genetic screening. You talked about business wins in the U.S., a part of the genetic screening long-term opportunity is some of these second- and third-world countries coming to see the value of these tests. Are you seeing -- is part of the 35% growth in China, for example, to any extent -- to any extent progress towards those sort of, toward that sort of awareness?

I think we feel very good about the awareness in both China and India which ultimately will turn out to be the largest markets for this business. And now this is a business where it comes on in kind of discernible chunks, in the sense of you have to build awareness and then you build a consensus around the standard of care and then the standard of care gets funded and adopted. So if you think about that kind of a marketing cycle that goes on. So just recently there's been a neonatal screening society formed in India that's associated with the international society and the U.S. society and there's been a number of other moves underway. We've provided Tandem mass spectrometers into both countries in selected labs, and so there's a number of sort of raising the visibility initiatives in there in selective funding initiatives from their part, in each of those countries in each of these areas. So we think it will continue to grow and will continue to get the awareness up, and the overall screening today is in the 5-to-10% range, so there's a lot of opportunity there over the longer term.

Okay. Thanks very much. Secondly with respect to genetic screening, can you just talk about how you['re fixed for manufacturing capacity over in Scandinavia, as I recall, for this business.

Yeah, the manufacturing comes out of Finland and I think we are in, at least for the reagent side. And the software is done both there and also in the U.S. So we are, we are in good shape from a capacity standpoint.

Okay. And then separately and lastly for me, regarding the services business, a persistently strong grower, is there business away from the pharmaceutical industry that you are seeing that's growing more quickly than the pharma-outsourcing segment of it?

I don't know that there is, Steve. I think it's, we see good business. We see good opportunities across the business. We see good opportunities, for example, in historically weaker service areas like Asia, where you are a bit fighting the kind of cultural phenomena in many of those countries where service was free or expected. It was an expectation wrapped around an instrument purchase. So we see some good growth initiatives in Asia. We see good in the pharma-has been pretty aggressive and will continue to be aggressive on the outsourcing. We see opportunities to continue to provide value-add services around validation and some other -- so some of that goes into the environmental labs. I don't know that there's a particular area I would spike out more than others.

Thank very much.

You're welcome.

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Vivek Khanna of Argus Partners. Please proceed.

I just had a question on the growth in the life and analytical sciences if you could tell us what the instruments and then the consumables grew.

For the quarter if you look at the detail, as I think we talked a little bit about, service was 11 percent, instruments was actually very strong. We had 7% growth in instruments in the quarter. And reagents was negatively impacted by our rad reagents and so reagents and consumables were up about 2% in the quarter.

Great. And so it seems then the industrial markets must have been strong if BioPharma was weak on the overall, in the instruments.

No, I would say it was both, because, as I mentioned a little bit, we had very strong growth on the instrument side in screening.

I see.

Particularly in the high-throughput screening, the ViewLux and the Envisiont had a very strong quarter.

Okay. Great. Thanks a lot.

Again, [Caller Instructions]. Our next question comes from the line of Paul Knight of Thomas Weisel Partners. Please proceed.

Now that you've looked at this Q3, what do you think your tax rate is going to be in '06?

Well as Greg said, we haven't given specific '06 guidance but I would say if you look at the rate that we are in Q3, and let me just talk about that a little bit, we were running about 27-to-27.5. Fluid because it was mostly a domestic business, had a tax rate in sort of 35, 36% range. So when you pull that out, the continuing Opto -- LAS and Opto are more in the sort of 24.5. That seems like a pretty good rate for us on a going forward basis. Obviously we will continue to work that down but I would say I think somewhere between 24 and 25 seems like about the right rate for the company.

Okay. Thanks very much.

Again, [Caller Instructions]. At this time we have no further questions. I would like to turn the call back over to Mr. Summe for closing remarks.

Thank you, Bill. Thanks, everyone, for your questions. We feel good about our progress for the third quarter and are optimistic about finishing strong for 2005. We believe our strategy of focusing on operational execution while increasing our investments in the growth platforms will continue to drive earnings and cash flow growth. So thanks for your time today and your interest in PerkinElmer. This call is adjourned. Have a good evening.

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.