Revvity Inc (RVTY) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 PerkinElmer earnings conference call. My name is Whitley, and I'll be your for operator for today. At this time, all participants are in listen only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over for your host for today, Mr. Tommy Thomas, Vice President of Investor Relations. Please proceed, sir.

Thank you, Whitley. Good afternoon, to welcome to the PerkinElmer fourth quarter 2013 earnings conference call. With me on the call are Rob Friel, Chairman and Chief Executive Officer and Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.PerkinElmer.com. Please note this call is being webcast live and will be archived on our website until February 13, 2014.

Before we begin, we need to remind everyone of the Safe Harbor statement 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 will be referring to certain Non-GAAP financial measures. A reconciliation of the Non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use Non-GAAP financial measures during this call that are not reconciled to the GAAP statement in the attachment, we will provide reconciliations promptly. I am now pleased 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 achieved very good performance in the fourth quarter. During the quarter, organic revenue grew 3% and expanded adjusted operating margins by 90 basis points, resulting in adjusted EPS of $0.73, a 12% increase relative to Q4 in 2012. Operating cash flow was also strong, increasing significantly over Q4 last year to $71 million. All of these financial metrics exceeded our expectations, and while it is rewarding to close the year with strong financial results, more importantly, we end 2013 a stronger Company.

During 2013 we made excellent progress on our productivity programs to rationalize our production footprint, shift production to lower-cost regions, better leverage our G&A expenses and both simplify and strengthen our organization. In addition, we continue to make strides in expanding our capabilities into targeted high-growth markets with a number of innovative new products launching in the first half of this year. We enter 2014 much better positioned to accelerate profitable growth and deliver innovative solutions to meaningful improved human environmental health.

As Andy will describe our Q4 results in detail, I will focus my comments on our end markets of discuss our guidance for 2014. Starting first with diagnostics, our specific end markets continue to be positively influenced by two major factors. The first is the desire by healthcare professionals to identify potential health problems as early as possible because of both the clinical and economic benefits of early diagnosis. Second, introduction of new technologies, products and analysis tools, particularly in emerging markets, is providing opportunities for us to leverage our knowledge and infrastructure. More specifically, we expect newborn screening to continue to expanded the new markets globally, additional expansion of the newborn testing menus in certain geographies and noninvasive prenatal testing to grow sequentially as reimbursement trends improve.

In China, we continue to introduce new products, expand our product and service capabilities and gain market share in the areas of infectious disease testing. For example, we won nearly half the nearly Chinese tender for nucleic acid blood screening last year. Solidifying our position is one of the top two providers in China. Due to our unique value proposition in emerging markets, our strong positions in newborn and prenatal screening, and the overall market expansion of the segments, we are forecasting our diagnostic business to grow mid to high single-digits in 2014.

In life science research, market conditions are clearly better than a year ago. The certainty concerning the NIH budget should avoid the funding delays we experienced last year, and its 3.5% budget increase will improve public spending on research. In addition, biotech companies are increasing R&D spending, and we are seeing modest improvements in selected foreign accounts.

In addition to the improved market conditions, we introduced several new products this month and expect to launch several more midyear which will provide incremental revenue growth. Two of the new products I would like to highlight are the Opera Phenix launched at SLAS last week, which is a high content screening system using a proprietary technology called Synchony Optics, employing dual view confocal optics for significantly better speed and sensitivity by eliminating crosstalk between channels for four different markers simultaneously.

In addition, we are introducing a multi label slide scanner for research pathology called the lamina. That leverages our proprietary technology to reduce autofluorescence and improve the visualization of disease marker expression. Based on the forecast and impact of our new products and the improved end market conditions, we are forecasting mid single-digit growth for the non-rad portion of our life science portfolio with continued headwinds from radio chemicals resulting in overall growth in our research business of low to mid single-digits.

In our environmental end markets, overall conditions also seem to be improving as capital expenditures in the developed world are recovering with PMI data in most of Europe and levels above the average for 2013 and continuing to indicate expansion. CapEx spending also appears to be improving in the US, but we are cautious given the likelihood of continued tapering by the Fed. We are also watching the implications of the Fed tapering on certain emerging markets. However, we saw no impact in Q4 as growth continued to be double-digit and to date we have seen no signs of a decrease in the order demand.

Looking at specific application areas, food analysis continued to be an attractive market as increasing regulation on food control and production and brand protection from adulteration is increasing demand for food testing mid to high single-digits. The environmental monitoring labs continue to consolidate and restructure, but regional areas of growth exist due to new order regulations in Europe and increased air monitoring in China. Demand from our industrial customers is largely tied to macro GDP growth, however, we do see opportunities for strong growth in materials research and testing applications, particularly in alternative energy.

Finally, we can continue to see our pharma customers outsourcing non-core activities, providing significant opportunities for our OneSource business. Based on outlook for our end markets, combined with the introduction of the IQT mass spec and several other new products, we believe our environmental business should grow mid single-digits this year. A further contributor to our growth this year will be expanding the adoption of Spotfire visualization software. Recently we introduced SciStream, which is a new configuration of Spotfire that allows direct collection of data from instruments, bypassing the need for additional programming. Initially, we are focusing this product on our line of plate readers, but eventually we will deploy across the majority of our instrument platforms, providing a significant competitive advantage to our detection and imaging products and improving our customers' ability to visualize and analyze samples.

Turning to the full year 2014 guidance for the Company, we are forecasting organic growth of mid single-digits for the full year with slightly higher growth in the second half due to the timing of new product introductions. As a result of the productivity projects completed last year and the higher volume, we should experience a significant adjusted operating margin expansion and are forecasting adjusted EPS in the range of $2.40 to $2.45, which represents adjusted EPS growth of 15% 18%. EPS growth should be evenly distributed throughout the year as the slightly higher revenue growth in the back half is compensated by the easier comps in the first half. Also, I should mention that our financial guidance does not assume any impact from the deployment of capital.

Before I turn the call over to Andy to share more details on our 2013 results and 2014 guidance, I wanted to briefly mention our three key leadership objectives for the year. The first is accelerating profitable revenue growth by executing on our strategic plans. This incorporates increasing our leadership position in key end markets by leveraging our capabilities in detection, imaging, informatics and service. Second is achieving sustainable best in class quality by producing superior products and driving efficiencies and all our processes. And third is building employee engagement and organizational strength through collaboration and investing in our people.

We believe that engaging our employees and achieving these priorities will lead not only to a very successful 2014, the will also be fundamental in fortifying the Company for sustainable long-term growth and shareholder value creation. I would now like to turn the call over to Andy.

Thanks, Rob, and good afternoon, everyone. I will provide some additional color on our end markets, a financial summary of our fourth quarter results and details around our Q1 and full year 2014 guidance, and then we will open the call for questions.

As a Rob mentioned earlier, were pleased with our performance in the fourth quarter. Reported revenue increased by 4% while adjusted and organic revenue both increased by 3%. Adjusted revenue for the quarter was $594 million as compared to $577 million in the fourth quarter of 2012. By segment, our organic revenue and human health business grew 4% while organic revenue in our environmental health business grew 1%. Looking at our geographical results, organic revenue increased high single-digits in Europe and Asia, but declined low single-digits in the Americas, primarily the result of a difficult high single-digit year over year comparison.

We were pleased with our performance in China as organic revenue once again increased double-digits despite a difficult year over year comparison of more than 20%. We continue to be encouraged by the demand trends for our key environmental and diagnostic offerings in China, which help address critical needs in that part of the world. Looking at organic revenue growth by product category, recurring revenue which includes reagents, consumables and service, grew low single-digits in the quarter on a high single-digit organic growth comparison, while organic revenue for our instrument component offerings was up mid single-digits in the quarter.

From an end market perspective our human health business represented approximately 57% of reported revenue in the quarter. We serve two end markets in human health, diagnostics, which represented 27% of reported revenue and research, which represents 30% of reported revenue. Organic revenue from our diagnostics business increased high single-digits during the fourth quarter, primarily driven by strength in our newborn screening and infectious disease solutions and our medical imaging offerings.

As we guided on our third quarter earnings call, the medical imaging business returned to our mid single-digit organic revenue growth in the quarter, and we saw strong demand from key customers in the oncology, diagnostics and industrial verticals. Our research business delivered low single-digit organic revenue growth in the fourth quarter versus the comparable period in 2012. We experienced solid demand in our In Vivo imaging, microfluitics and radiometric detection business, which were notable standouts in the quarter with double-digit organic revenue growth.

Moving to our environmental business, which represented 43% of reported revenues in the fourth quarter, we serve three end markets; laboratory services, which represented 19% of reported revenue, environmental and safety, which represented 17% of reported revenue and industrial, which represented 7% of reported revenue.

As I mentioned earlier, organic revenue in our environmental health business grew low single-digit in the quarter, 1%, driven by continued strength in our lab services business. Organic revenue from industrial end markets grew mid single-digit, while environmental and safety revenue declined low single-digits. Turning to our margin performance in the period. Adjusted gross margins were 49% as compared to 48.8% in the fourth quarter of 2012. We are beginning to really savings related to the completion of our manufacturing consolidation and productivity initiatives, driving improved gross margins in the quarter despite foreign currency headwinds in our continued investments, primarily in software. As a reminder, [of essence] and Spotfire software are charged to gross margin as opposed to R&D and SG&A, and therefore negatively impacted adjusted gross margins throughout the year.

Adjusted operating margins in the fourth quarter were 19.2% as compared to 18.3% for the same period a year ago. Restructuring efforts and recently completed productivity initiatives helped to drive profitability in the quarter. By segment, adjusted operating margins in our human health business increased approximately 100 basis points to 24.9% as compared to 23.9% in the fourth quarter of 2012. The increase was primarily the result of positive product mix and the completion of the number of productivity initiatives.

In our environment health business, adjusted operating margins increased approximately 60 basis points to 15.9% as compared to 15.3% in the fourth quarter of 2012. The increase was primarily the result of savings from our restructuring actions and operating expense controls. GAAP operating income from continuing operations was $84.7 million in the fourth quarter of 2013 versus an operating loss of $30.8 million in the same period a year ago. GAAP earnings per share from continuing operations in the fourth quarter of 2013 were $0.58 compared to a loss of $0.14 in the fourth quarter of last year. Recall that the fourth quarter of 2012 was negatively impacted by non-cash charges related to pension mark-to-market and our trademark name rationalizations.

Adjusted earnings per share was $0.73 in the fourth quarter of 2013, about $0.03 above the midpoint of our guidance range on higher sales volumes and a lower tax rate. On a Non-GAAP basis, our adjusted tax rate for the quarter was approximately 18% versus our forecast of 21%, a result of the shift in jurisdictional profits. Turning to the balance sheet, we finished the fourth quarter with approximately $930 million of debt and approximately $170 million of cash. We exited the quarter with a debt to adjusted EBITDA ratio of 2.4 times and a net debt to adjusted EBITDA of approximately 2 times.

Looking at our cash flow performance, full year GAAP operating cash flow from continuing operations was $158 million as compared to $154 million in 2012. Note that our 2013 full year cash flow results were negatively impacted by approximately $87 million of pension and royalty payments in addition to higher working capital related to productivity initiatives. These payments are not expected to recur in 2014, and given the completion of our productivity initiatives in 2013, we expect significantly higher operating cash flows for 2014.

As to 2014 guidance, going back to Rob's earlier remarks on our serve markets and given the new products we expect to launch throughout the year, we anticipate adjusted revenue for the full year to grow organically mid single-digits of 4% to 6% with the full year impact from foreign currency being minimal. Given the timing of new product introductions, we expect growth to be slightly higher in the second half of 2014, but both has to should grow mid single-digits organically.

Regarding adjusted operating margins, the commission of the carryover productivity initiatives completed in 2013 of approximately 100 basis points and incremental margins on 2014 revenue growth will contribute approximately 160 to 180 basis points of adjusted operating margin expansion. Partially mitigating this expansion are higher variable compensation and benefits cost, due in part to a higher stock price and lower prior year payouts, as well as higher growth investments in the back half of the year.

These costs in total are expected to negatively impact adjusting operating margins by approximately 30 to 40 basis points for the year and as a result, we now expect operating margin expansion of at least 130 basis points for the full year 2014. Interest and other expense -- expenses are expected to be approximately $43 million, our adjusted tax rate is expected to be 21% and our weighted average diluted share count is expected to be flat, or approximately 113.3 million shares. As a result, we now expect full year earnings per share to be in the range of $2.40 to $2.45, representing mid to high teens earnings growth for the year.

Looking to the first quarter, revenues are expected to be in the range of $525 million to $535 million, adjusted earnings per share for the first quarter of this year are expected to be the range of $0.42 to $0.44, which represents growth of 17% to 22% for the quarter. This significant growth in EPS is a result of the impact of our prior year productivity initiatives, but will be impacted by the aforementioned compensation headwinds, currency, specifically the Japanese yen, as well as the negative mix impact from lower informatics and medical imaging revenues. This concludes my prepared remarks. Operator, at this time, I would like to open up the call for questions.

(Operator Instructions) Dan Brennan, Morgan Stanley.

Maybe to start off, Andy and Rob, as we think about 2014 and the margin expansion is significant that you are guiding to, however, just wondering, is 18% now off the table, given some of the investments that you are looking to make in the back half of the year plus some of the vertical comp?

I wouldn't say it's off the table. I think what we try and do is we guide where we think is realistic and achievable, and I would think about that. If we see a little bit improvement on the top line and we get a little bit better mix, I think there's a possibility we can get there. But we don't think it is prudent to guide to 18%, and as Andy said, we think we can get at least 130 basis points of margin expansion this year.

Okay, and then maybe on the environmental side, it was a bit weaker than we expected, human was stronger. Maybe, can you just talk to versus your expectations, maybe how did the environmental come in, and maybe anything on pacing in the quarter that might give us some visibility on how it's shaping up as we look into 2014?

I would say when we reflect back on 2013 and particularly in environmental, as you know, we had a lot of focus around improving our cost structure, particularly on the manufacturing side in the back office. And while I feel great about how we did relative to making all of those moves from the standpoint of very minimal customer disruption, I think in hindsight, one of the areas where we are probably impacted on was our ability to get innovation in the new products. And we talked a little bit about the delay that we have seen a new product introductions, particularly in the back half of the year, and I think it impacted our environmental business. Clearly, we spiked out the mass specs, slipping a little bit, and a couple other products that we would have liked to have seen get out in the latter part of the year, we didn't, and I think that clearly impacted the growth rates. I would say the good news is, obviously, all those activities are behind us. And I think from a management disruption perspective, we can now be singularly focused on driving growth and innovation in the marketplace.

Again, looking backward, we are a little disappointed on the growth, particularly on the instrument side. I think service continued to do well, but on the instrument side, of little bit disappointing. But as I mentioned in the remarks, we are quite excited about both the market trends as well as some of the new products and capabilities we have got coming out in 2014. And that is where we're fairly confident forecasting a mid single-digit growth for that business this year.

Doug Schenkel,. Cowen and Company.

My first question is, last quarter you mentioned some challenges in Southeast Asia and also some inspection related delays that prompted you to take, I believe about $10 million out of Q4 guidance. I may be off a little bit with that number, so please correct me if I am wrong. I am just curious, how did that play out in Q4, and is there any related backlog to those dynamics that you would expect to be part of Q1?

Right, so I would say, I think we indicated something in the $5 million to $10 million range, so I think $10 million was probably the upper range that we talked about. I would say when we look back at 2014, we clearly did not see the headwinds that we had expected.

As Andy talked a little bit in his comments, emerging markets continue to do well. We grew double-digits in emerging markets again. So, maybe a little bit of an impact, but not significant. And with regard to the government shutdown, while we didn't get everything out that we expected, it wasn't a material impact to us. I would say relative to the $5 million to $10 million impact that we were concerned about, we think it is probably in the $2 million to $3 million range to what we did not get out in Q4, and that spills over Q1.

And specific to Asia Pacific, Southeast Asia, we did actually see that return to modest growth in the quarter.

Okay, that's great, that's helpful. And then, two of the more challenging areas for the Company, and I would say especially in the early part of 2013 were In Vivo and medical imaging, the silver lining there as we look ahead to 2014 is that you have some favorable comps, especially early in the year. Could you talk about how those businesses have been trending the past couple of quarters, maybe from a sequential standpoint? And how would you describe visibility on those businesses heading into the new year?

First of all, let me take In Vivo Imaging, and as Andy mentioned, that was solid double-digit growth in the fourth quarter. Ever since Q1, we have seen a nice recovery in that business and in fact, it has been accelerating on a sequential basis. So actually, if you look at that business for the whole year, despite, as you know, a very significant decline in the first quarter, we still grew mid single-digits.

Looking forward, we think the pipeline looks strong. And clearly, with the NIH a budget going up a little bit and the certainty around funding being available, we think that businesses should have a strong 2014. Medical imaging was a little different situation where obviously we knew going into 2013 it was going to have some difficult comps. And what we saw in the fourth quarter is medical imaging return to mid single-digit growth, so that was great to see. As we go into 2014, we have got a little bit of an issue in Q1 because of some ordering patterns. So, we expect medical imaging to actually be down a little bit in Q1, but for the full year it will probably be growing in the mid to high single-digits.

Ross Muken, ISI Group.

Hello, this is Elizabeth Anderson in for Ross Muken. I have a question in terms of if you could give us an update. I know you have done a lot in terms of productivity enhancement in the past year in restructuring and what you are -- a little bit more color on what your plans are for those areas in 2014?

We -- as I said in my prepared remarks, we are entering 2014 with about 100 basis points of margin expansion. It's a bit north of $20 million of cost savings. Some of this is the annualization of some of the restructuring activities we had in the second quarter, and we have completed the three major projects in 2013 that we have been talking about over the last couple of years.

I think as we look into 2014, we obviously have leverage off the incremental volume. We also have a couple of areas that we have talked about that we are just beginning work on, which is really around our go to market strategy. And I think there's some real opportunity there, as well as our investment in indirect spend. We have consolidated all of our purchasing onto one ERP system. That affords us the ability to look across the Corporation at our spent. And our indirect spend is actually almost the equivalent of our direct spend. So, it's a fairly significant number, north of $400 million. And we believe that there is a lot of opportunity to consolidate vendors, really drive pricing savings, as well as better terms. Not only should help us on the bottom line, but should also help us in working capital. I think the combination of those with the volume leverage we feel like we have, potentially some additional upside, but those are the key areas that we will be focused on in 2014.

Jon Groberg, Macquarie.

Congratulations on a good end to the year. Rob, I guess just starting off, what is your expectation, if you had to layer it, what is your expectation for your underlying market growth? And what are the key things that you will be watching? It sounded like you mentioned blood screening, which I thought maybe would be more of a 2015 event,. Do you think you'll see some of that in 2014 in China? Maybe highlight some of the things you think can get you growing a little bit faster than the market?

First of all, I think you're right on the blood screening. I mentioned from the standpoint as we continue to see good traction in the market, but I think you're going to see a significant ramp up in 2015. I think that is largely being driven by funding than it is market dynamics. I would say when I think about the overall markets on a weighted basis, it is probably in the 3% to 3.5%. And I think we should be able to drive 150 basis points to 200 basis points additional growth this year, largely through our new product introductions.

As we have talked about probably now for four or five quarters, we have been making a number of investments in the businesses, and we think 2014 will be the year where you will start to see some of that throughout the year. I mentioned a couple that have come out now, you will see a couple more in the second quarter and then one or two in the second half of the year. I think that is really going to be a significant contributor to our growth. As markets recover here and probably don't get back to a full mid single-digit growth from an end market perspective until probably the latter on middle part of this year.

Okay, that's helpful. Rob, as you and Andy sad down and thought about this year, obviously, if I go back and look in 2012 get a lot of margin expansion. You made some investments in 2013, and then the market didn't grow as you expected, and so it did not work out. I am curious how you thought about the next three years and what your targets will be in terms of margin expansion and EPS growth and -- if that is all involved in your thinking about how much you want to spend this year, how much you on margins to expand this year?

I think what we have talked about on a multi year basis of revenue growth of starting off at mid single-digits and obviously trying to drive that up further. Operating margin expansion in the 75 basis points plus or minus range. And I think if we can get 5% top line growth, we should be able to grow the bottom line greater than 2X that. Think about a 12% to 15% EPS growth off of a mid single-digit organic growth. And as I mentioned in my prepared comments, none of that employee considers any deployment of capital. And clearly, what we would like to do is supplement that with anywhere in the 2% to 4% of additional growth through business development or acquisition activity. Again, when we think about 2017 I would like to be able to look back and say, 8% compounded growth, mid teens EPS growth, and that would be comprised of 75 or so basis points of operating margin expansion.

Just to be clear, that would be on average over the years. I am just curious if this year, let's say you do 150 basis points because you had a tough year last year. Do you still see a path for expanding margins in 2015, or do you get a -- this lumpiness or choppiness --

No, I think we see a path every year. Again, with the revenue growth in mid single-digits of getting a 75 basis point margin expansion. I think if you go back prior to 2013, what you saw was something more on average north of 100. I think that is because we were being as of the more aggressive on the production side. And while Andy talked about some of the other activities were focused on this year, I think as we look forward, we 75 basis points per year is probably a better average. But clearly, we will continue to get operating margin expansion going forward.

Paul Knight, Janney Capital Markets.

Did we see the full effect of the facility consolidation in the fourth quarter?

This is Andy, but no, we did not. We will see the full impact of that in the first quarter of this year. There was still some carryover. Really, there is no carryover expense. There some remaining restructuring carryover that will hit our cash flow that will go through 2014, but from a profitability perspective and a return, that will hit in the first quarter of this year.

What are the major things you want to get done on the environmental side to get that margin a little higher?

I think it is a couple things. First of all, it's obviously getting these new products out into the marketplace because they will bring higher margins with it. I think when you look at our margin profile, environmental, we've talked about it in the past, we have got to get more consumables or make consumables a higher percentage of our business, so obviously changing the mix a little bit. And then as I also mentioned, driving the informatics and software capabilities that we have into that business as well. And I think if we can do those things, and obviously get the top line growth, you will see improved operating margin in that business.

And then last Rob, I think all of us see a stacked up pipeline of diagnostic startup out there. Are you getting approached to more and more for companies trying to leverage your distribution channel? What are the dynamics happening there?

I think that's fair. As I mentioned, clearly, there is an emphasis on earlier detection. Clearly, our capabilities and our share in prenatal and newborn are very attractive. We do get good looks, particularly with some of the exciting new technologies because in many instances, and you are clearly seeing this on the NGS side, that some of the early adopters will be in that portion of diagnostics.

Amit Bhalla, Citigroup.

I wanted to dig into two things on the guidance. First on the instrument side, can you help us with what is the embedded instrument growth rates in guidance? And then second on that spec, can you help us with the supplier issues you have been having on the mass spec side, just to get us comfortable on the timing of the launch of the new products there?

Sure, the -- within the guidance is an assumption of mid single digit-growth. It is also mid single growth on the services side as well. And again, a lot of that is driven by the new products we have talked about, as well as just general market conditions.

With regard to the mass spec, I think we feel better about the supplier issues. And so we continue to feel like it is late Q1, early Q2 launch.

Just a quick follow up on the first quarter guidance. Andy, can you go through again the hit to EPS in the first quarter? Obviously, the EPS is a little bit lower than we were expecting. And I was hoping you could break apart the -- quantify the hits.

Sure. I talked about some items at the beginning -- or at the end of my prepared remarks, rather. We have some compensation headwinds and some benefit funding that is really more first quarter specific. Some of the compensation headwinds will continue through the year. That is a piece of it. As you realize, our comps, in some cases it is tied to the share price, and the share price has gone up, so that has created a headwind.

In addition, we had a lower payout in 2013 than we are currently assuming in 2014. Currency for the year is minimal top and bottom, but in the first quarter is about $0.01 on the bottom line, and it is specifically the Japanese yen. We are very little expense in Japan to offset the revenue FX change. And then really, the third thing is the mix of income. Because of customer ordering patterns, med imaging, as Rob mentioned, will be softer in the first quarter, as will informatics, and that is the third piece. I think all in, those three pieces are about $0.04-$0.05 of headwind on the quarter.

Isaac Ro, Goldman Sachs.

On the bio pharma spending comments you had earlier, could you give us of the color on where in your product portfolio see the most benefit? And just try to get a better sense of how broad based that is. We have obviously seen some of that elsewhere in the sector, and at the same time, you're seeing drug companies with some renewed pipeline productivity. Trying to figure out how much of this is really secular versus maybe one time in nature.

If you look at Q4 specifically, let me start there, we saw it in Asia, we saw it in Europe, less so in the US. We believe in Europe there was clearly a -- we got a benefit for some of the budget flush. I think as we talked to customers there was some money available, and I think they were spending that before the end of the year. However, we look forward to talk to our customers, I think the benefit will get going into 2014 is clearly in the academic area. And that will benefit obviously the imaging area and some of the more capital intensive products that we sell. Then I would say the other area clearly is in the informatics area. We continue to see nice order growth there, particularly in the fourth quarter was strong. And as Andy said, while the first quarter will be a little slow, we do expect strong growth coming out of informatics and a lot of that is going into the pharma markets.

While you're talking on the informatics, maybe to expand on that one a little bit, we did see an acquisition of the one independent publicly traded company. And at the same time, you have seen some active M&A with the other players in the NGS space. So (inaudible) very big picture. You mentioned Spotfire. Across the entire portfolio, that that you put together here, how do you guys look at your competitive advantage in informatics relative to some of the other companies who are now getting in?

I would say couple things, first of all, our approach in informatics is not to be necessarily focused on one type of technology or application and to be more of a platform. If you think about Spotfire, Spotfire is a visualization and analysis capability that ultimately think will go into research, it will go into environmental, it will go into diagnostics. I think that's, we believe advantageous for us. And then obviously, the other thing is because we have the underlying source of the data, so whether it is detection, whether it's informatics on whether it's some of our diagnostics screening test, I think that provides a significant advantage to better understand what the customer is trying to do. And again, it is the interaction or the interconnectivity of having the detection and imaging providing the informatics and also through some of our service capabilities, understanding what our customers -- the information and answers that our customers are trying to drive. Again, you are seeing a lot of more activity in this, but I like our competitive advantages relative to the assets we have in informatics, and also, again, the breadth of our capabilities.

And then lastly, for could sneak one in with Andy on the deployment of capital, you mentioned your guidance doesn't really factor that in, and you guys have obviously been pretty opportunistic on tuck-in M&A over the last couple of years. But can you maybe today refresh us on your rank or priority use of cash between M&A and maybe a small buyback? Just wondering why something like that would not be on the table as well.

I think right now we have said were going to hold our share count flat. I think obviously we have the opportunity to do something different. We are still working with Moody's on our credit rating, so we have been on the negative watch, so hopefully that will get behind us at some point. But I think M&A is really our primary focus and will continue to be. There's a number of what I would consider attractive bolt-on and tuck-in transactions, really across the portfolio. Maybe a few more in human health but I think that is really probably where you're going to see most of our capital deployment in 2014 and actually in 2015 as well.

Dan Arias, UBS.

Rob, any way can help us with the contribution you expect from the Verinata collaboration for the year?

I would say we, as I have said in the comments, I would say long-term, we feel good about NIPT. You can see the ramp up in the coverage has been very good. The real question is, how quickly the payers and the payment occurs. One of the things that, we look back at even at our NTD business and the biochemical screening, and it does take a couple years for that test to ramp up until we get a sustainable reimbursement rate. I think that is the question for us. It is being adopted, it is being picked up by contract, but I still think it is going to take a little while before you will see consistent repeatable reimbursement.

Okay, and then maybe on the newborn side, what is the outlook for getting things going on the increases in the number of screening tests offered internationally? Do think you can have some meaningful discussions there this year? And I guess when do you think you could start seeing those menus begin to expand?

I think we are in those discussions now, and I think I mentioned a couple of weeks ago that we have seen an increase in China now that's on average going from 2 to 4. There are actually some provinces that are doing 6, and we're actually in some discussions that are actually doing some things around mass spec. We're clearly seeing in China. I think in Europe, we're quite excited, we just got the [skids] test that we deployed in the US, now CE marked. So, we are in discussions with a number of countries there. As you said -- as we said in the past, these things never go as fast as we would like, but we are in a number of dialogues where we think we will continue to see good movement on the menu expansion and hopefully, we will see some step moves here in 2014.

Okay, and then if I could sneak one more in on the informatics efforts, to what extent do you think you can leverage OneSource as a vehicle there to make an impact with the accounts that that business touches?

I think OneSource is having and will continue to have an impact on that. One of the clear synergies we saw with, for example, CambridgeSoft, is they had relationships with some companies where we weren't a significant owner, OneSource size and vice versa. I would say over the last year we've been leveraging those. I think we have got good energies on that. And now with the Asset Genius and another couple of other products that we have developed from the informatics side, think we are seeing good traction. And we have a number of customers now where we are in beta test with some interesting informatics capabilities that supplement what we do or complement what we do on the OneSource side.

Tycho Peterson, JPMorgan.

Actually kicking off on the last one on OneSource, we saw the Merck news. Maybe just talk about your visibility with that business and growth assumptions for this coming year in light of, obviously some pipelines being rebuilt, but obviously restructuring as well?

So, first of all, I would say OneSource continued to do well in the back half of 2013. It had a good mid single-digit growth in the fourth quarter. While clearly you see some of the large pharmas like Merck restructuring, at the same time, you are continuing to see other pharmaceutical companies recognize the benefits of outsourcing some of their non-core activities. In addition, even with our existing customers, as we mentioned, whether it is informatics or some of the other capabilities that we have developed, we continue to win new business with existing customers. I think the combination of new customers starting to outsource more of their non-core work, as well as getting more business with existing customers, we still think OneSource can grow mid to maybe high single-digits in 2014.

That's helpful. And then, obviously there's been a lot of focus on margins, but on the flip side, can you talk about where you are making incremental investments in 2014? Either channel wise in terms of, you mentioned the pathology system, do you need to do more there? And then conversely, if you could talk on R&D and their priorities. At one point, I think it was mentioned you could add an LC maybe to the IQT. And how do you think about opportunities like that?

So, I would say first of all, from an R&D perspective, we want to continue to keep our R&D at least at the same level as revenue, as a percentage of revenue, and maybe increase that it little bit. There are some technologies that we're focusing on, sort of expand out our capabilities, particularly in the imaging area. You mentioned pathology, I think the exciting thing about the new product, the scanner is it is being added to a growing range of what we would refer to as quantitative pathology solutions. We now have reagents and protocols for staining, we've got imaging instrumentation, we've got analysis software. That is an area that we think will provide nice growth.

As you point out, we are investing in the channel there, bringing in some additional capabilities there. I would say incrementally in some of the emerging markets, we are looking to add sales and distribution capabilities at the next level now beyond the bricks. So, South Africa, Turkey, some of the Middle East, some of the areas of eastern Europe. That is the area where we are investing, where we see nice opportunities to grow.

Along those lines, you mentioned the China net opportunity. Obviously, that is 2015, but can you maybe help us think about whether you need to make investments there? What the size of that opportunity could be in the next couple of years and then the other similar net based testing opportunities beyond China that you are going after.

First of all, in the China diagnostic area, that is an area where we have been investing fairly significantly, probably since the 2012 time frame. I think we now have over 100 engineers in our diagnostic business based in China. We will continue to invest there. I think the opportunity for blood screening longer term could be quite significant, probably in the $30 million to $40 million per year. That may take a couple of years to ramp up, but I think that's -- when you look at the amount of screening that is done in the US, the potential for China could be quite significant. And then of course, India I think is another area where we think we want to leverage what we are doing in China and move that into some of the other emerging markets.

Derek de Bruin, Bank of America.

Can you -- we haven't really talked about what the Caliper business has done, and I am curious in terms of how the (inaudible) portion of it is done, the automation portion of it. And have you thought about what the role is for the Caliper and some of the next generation workflows over the next couple of years as a number of other players is entering the market or people that actually sell equipment are starting to launch their own prep systems?

Let me start off with the first question. If you look at Q4 specifically, the caliber businesses all did very well. I mentioned In Vivo, microfluidics had a good quarter and the liquid handling portion associated with NGS, I think they were all were probably all high single, low double. If you look at the year, probably a little disappointing relative to the original model. But I think a large reason for that is just because obviously when we bought Caliper, we did not assume we were going to see the academic funding issues that we saw, particularly in the first part or the first half of 2013.

But overall, if you look at the couple years, I think we feel good about the returns and we feel good about the traction we are getting in the marketplace, and probably most importantly, the synergies that we have been able to drive by taking some of the Caliper products and combining it to what we have done historically at PerkinElmer. I think we feel good, Going forward, again the microfluidics work, we continue to move that into other applications. So, we have got an interesting product coming out probably in a month that will be more focused in the diagnostic area and to leverage what we do obviously in that area. I mentioned the fact that In Vivo was strong, I think you're going to see good pipeline of that in 2014. And we continue to believe there's an opportunity in next gen sequencing sample prep at the higher volume end. And I think that is clearly where we see the opportunity to continue the play, and continue to work the synergies with that in our informatics back end.

The -- there's -- it sounds like you are going to do whatever your M&A strategy is, a lot of it is going to be focused on the human health side of the business. And obviously the human health side of the businesses were a lot more of the more robust growth opportunities are. Does it make sense to contemplate divesting some of the environmental health businesses and maybe making it a pure play on human health? I guess I'm thinking, how do think about the strategy of the Company going forward?

First of all, I just want to say, while I think Andy mentioned that there is a bias to human health, there are a number of opportunities we are looking in the environmental health area, because we think, particularly in the area of, let's say air monitoring and food, there are some nice growth areas there. And we think we have got some good capabilities to pursue those, that is one. The second thing is, increasingly, when we look at the core capabilities of PerkinElmer like informatics, like imaging, and some of the other things we do, we see applicability both -- across both areas, environmental and human health. I would say unlikely that you would see a situation where we would split. If anything, we would like to create greater synergies across the businesses. When you think about the new mass spec coming out, that is going to have applicability in the environmental end markets, but we ultimately would like to see that also go into the human health. These capabilities around detection, imaging and informatics has applicability across, whether this research, diagnostics and environmental. And I think over time you're going to see us continue to leverage that and get benefits from the broader market opportunities.

One housekeeping question, Andy, the $12.6 million other expense net item, is that this debt extinguishment costs?

Yes, it is the May hole.

Bill Quirk, Piper Jaffray.

This is actually Dave Clair in for Bill. Sorry, I missed the first part of the call. I'm not sure if you addressed this already, but I was curious if you could give us an update on Japan? Are you seeing any impact from the stimulus over there?

Japan has continued to improve sequentially since the first quarter, and I would say slight benefit. We do think in 2014 we will see more of an impact from that, but Japan, I think for the year, is in the low to mid single-digit growth. And again, given the difficult first quarter, that was pretty good improvement.

And Andy, thanks for the color on operating margin. I was curious if you could talk about how you are looking at gross margin in 2014?

I think we have said all along that we feel like we can get almost an equivalent amount on the gross margin of the operating margin. If you look initiatives that we had last year, the move to Asia, primarily Singapore and China, were really to drive supply chain savings, and there is some labor arbitrage. That we will see, I think ramp over time as we build out the supply chain there. So, it's still early days. I think that the mix going into the year will be probably little more skewed toward the SG&A side than on the gross side, but we should improvement in both. And I think that gross margin side should start to ramp up as we start to really make progress on the procurement side.

The one thing to mention on gross margin, and we spoke this out this out of the prepared remarks is the investment in informatics goes into gross margin. So, while Andy talked about productivity savings we are seeing, and we do expect to see gross margin improvement in 2014, that has a little bit of an offset because as we continue to build out, and that will be an area of investment in informatics, that does cause a little bit of an offset to what otherwise would be, I think fairly significant gross margin expansion in 2014.

That's correct. The accounting treatment does put it into cost of goods versus what traditionally would be put R&D or SG&A

Eric Criscuolo, Mizuho.

This is (inaudible] filling in for Peter. Do you see toward the end of the quarter and maybe even in the first couple of weeks of 2014, did you see any increase in US healthcare utilization rates?

No, I think that would probably be difficult for us to see it based on -- in the newborn or prenatal area. But I would say no, nothing that I would say would be significant.

Okay, and then given the turmoil that is happening right now in various emerging markets, whether they may be in Europe or Southeast Asia, has that changed your outlook in any ways? Or are you baking in any more risk in those markets in 2014?

I think we are monitoring it, but if we look at Q4, as I mentioned, it continued to do well in the ordering pattern, at least in the pipeline and discussions with customers. At least in the areas where we are focused, which is fundamentally environmental health care, we're not seeing that, but it is something we are keeping a watchful eye on. I think we mentioned in the prior call that obviously when you see the currency devaluations that you have seen in a number of these countries, that the initial impact of that is products that are based fundamentally in dollars become significantly more expensive. We have seen a couple of other countries obviously Turkey, et cetera have taken fairly aggressive actions from an interest rate to try to offset that. But that is something we're keeping a careful eye on. But I would say up to this point, we have not seen anything that indicates that it is impacting our business directly.

I think part of that is due to the products set, the offering that we bring over there. And if you think about your diagnostics and environmental tools, those are critical needs right now within emerging markets. So, as far as prioritization, we feel a little bit better about their ability to prioritize that spend versus others, but we will continue to monitor it.

Jeff Elliott, William W. Baird.

Looking at the free cash flow commentary, can you be more specific on what you're looking for in terms of free cash flow or cash flow from operations in 2014? And then can you give some color on the radiometric business? Could you update us on the size of that business and what you're seeing for growth there?

Sure, why don't I take the first one and I'll let Rob take the second one. On free cash flow, we always try to shoot for 100% net income. We've obviously made some investments as a part of our productivity initiatives in working capital, as well as with some of our informatics, and I think that has impacted our cash flow. But I think those are behind us. I think I said in my prepared remarks, we have about $87 million of cost in the year that we will not see next year. I think we're going to be that solid 90% free cash flow to net income range in 2014. I think the difference will be our ability to generate more working capital improvement to get to 100%, but we still have some restructuring that is a carry over from some of the productivity initiatives we had in 2013 that will dampen that a bit. I think if you look at operating cash flow, we talked about close to $160 million, we're looking at closer to $300 million going into 2014 operating (inaudible). But a fairly significant improvement year over year.

Let me talk a little bit about the radiometric detection business and the radio chemicals business. Radiometric detection business actually had a good fourth quarter. It has been fairly lumpy. Obviously, it had some issues in the first quarter. I think that is a business that can probably be flat to down slightly. We continue to come out with -- in 2014, potentially a refresh of that product line, and so we have some expectations. The radio chemicals business continues to be down in the mid to high single-digits. Again, we have seen that slowdown in little bit,but our expectations for 2014 at that will continue to be a head wind relative to the growth of the research business.

Steve Willoughby, Cleveland Research.

Two quick questions for you. First a housekeeping, Andy, the service business, did you mentioned how much that grew in the quarter itself?

It's single-digits. I don't think I did mention it, but it grew mid single-digits.

Okay, and then secondly, I just wonder if you could provide a little bit more color within the diagnostic business, both in the quarter and looking into 2014 as it relates to growth in newborn business versus growth in the infectious diseases?

Both of them, I think should have strong growth in 2014. If you look at the newborn business, we are anticipating that is probably going to be in the high single-digit growth. And it is fundamentally -- the couple drivers that a mentioned about before, we expect to see continued adoption in some of the countries, and we expect to see menu expansion. The other thing is, if you look in China in 2013, births were down about 15%. What caused that phenomenon is in 2012 you had the year of the dragon and in 2013, you had year of the snake. What we expect is in China you will see a rebound of births to a positive number, and again, that should be a contributor. And then of course, the last aspect of it, although we don't think it will be a huge driver, is obviously the relaxing of the one child policy in China will also be a contributor. In the case of infectious disease, that is a business that is consistently grown in the high teens to over 20% for us, and we would say we think that is going to continue to be a strong grower. It may moderate a little bit, but I think it is still going to be something in the mid to high teens growth for us.

That concludes our Q&A. I will now turn the call back over to Mr. Rob Friel. Please proceed, sir.

Okay, great. Well, first of all, thank you for your questions. Let me in closing just say we enter 2014 optimistic about our end markets and enthusiastic about our capabilities. We look forward to leveraging opportunities this year to deliver differentiated value to both our customers and our shareholders. Thank you for your continued interest in PerkinElmer, and have a great evening.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.