Revvity Inc (RVTY) 2014 Q1 法說會逐字稿

Thank you all for joining. Welcome to the first quarter 2014 PerkinElmer earnings conference call. My name is Lisa, and I will be your coordinator for today. Today's conference is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Mr. Tommy Thomas, who is the Vice President of Investor Relations for opening remarks. Please proceed, sir. Thank you.

Thanks, Lisa. Good afternoon, and welcome to the PerkinElmer first quarter 2014 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 investor section on our website at www.PerkinElmer.com. Please note that this call is being webcast live, and will be archived on our website until May 8, 2014.

Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release issued earlier this afternoon, and also those in our SEC filings. Any forward-looking statements made today representing our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change, but you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call, to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent, we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly.

I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?

Thanks, Tommy. Good afternoon, and thank you for joining us today.

I am pleased to report that PerkinElmer is off to a solid start in 2014, delivering strong performance in the first quarter. Our financial results exceeded expectations, with organic revenue growth of 5%, strong operating cash flows, and a significant increase in operating margins, and adjusted EPS growth of 28%.

We are benefiting from strong demand for our differentiated solutions and improving trends in many of our end markets compared to last year, productivity improvements we made in 2013 to simplify and strengthen our operational footprint, and effective operational execution by the entire organization. While Andy will discuss our end markets in Q1 results in detail, I would like to highlight the progress we made during Q1 to improve our core capabilities of detection, imaging, informatics and service, enabling us to grow our share in key end markets.

Turning first to imaging, we launched the IVUS Spectrum BL, which features a patented optical imaging technology that increases in vivo throughput in pre-clinical imaging for drug, efficacy, safety and toxicology. We also jointly opened a new in vivo imaging demo lab in Fudan University in Shanghai Medical College. This first Center of Excellence at APAC, with the ability to provide direct demonstration and training for pre-clinical animal models. Researchers at the lab will use PerkinElmers bioengineering technologies to advance the understanding of biology, and find improved alternatives for disease treatment.

In detection, we broadened our leading prenatal and neonatal diagnostic offerings both in the US and in China, including setting up additional lab-in-a-lab testing for severe combined immunodeficiency syndrome, where we embed a full-service operation and several PerkinElmer technicians directly into a customer's laboratory to screen newborn samples using PerkinElmer's assay. We also recently signed an agreement with the National Health and Family Planning Commission in China to be the exclusive partner in a three-year newborn screening project to cover more than 600 rural communities, and train more than 3,000 doctors and lab technicians. This unique collaboration, which employs PerkinElmer's technologies, knowledge and infrastructure, will not only grow our market share, but more importantly help to save millions of lives.

Additionally, we announced an exclusive partnership with Good Start Genetics, who sells Good Start select genetic carrier screening tests to our maternal fetal health customers in the United States. This partnership further expands our prenatal menu, and enables us to leverage an already strong market for us. Also, as a prime example of how we can deliver greater customer value through linking together our complementary capabilities to introduce the NexION 350 ICP mass spec instrument, and pair it with new workflow-based software called Syngistix.

This solution enables superior levels of nano material detection, and is significantly faster than anything on the market, making it ideal for a single particle detection, and for applications within the environmental food and pharma markets. This product further demonstrates how the breadth of our product offerings can be brought to solve real issues facing our customers.

Turning to Informatics, a strong driver behind the businesses growth in Q1 was our ability to further deploy our Spotfire data visualization software across our instruments platforms. For example, we won business with the Genomics Institute of Singapore to provide a bundled solution consisting of our JANUS liquid handling technology, EnSpire plate reader, and Spotfire software. This integrated solution will enable the efficient discovery of next-generation cancer therapeutics and personalized genomics.

We also launched Elements, our first cloud-based scientific collaboration tool that will revolutionize how students and researchers collect and share data. Early feedback from several data research users at large universities has been very positive. We also continued our investments in mobile platforms, with the INconX application to our Optima spectrometer, which enables users to remotely monitor and control the operation and analysis from anywhere in the world.

In addition, we added mobile capabilities to our OneSource offering to allow the scheduling and monitoring of service calls, and access to a complete history of the service records through the use of an iPhone. While innovating across our core capabilities is critical to accelerating growth, so is providing an exceptional customer experience.

During the quarter, we began to put together better processes to ensure that PerkinElmer is the easiest company to do business with in the industry, from the time the customer purchases a product through installation. Our renewed focus this year on improving the customer experience will generate even greater customer satisfaction and build long-term brand loyalty.

In closing, it was a great kickoff -- it was great to kick off the year strong, and build momentum heading into Q2. Most of our end markets are experiencing improving trends, with the remaining stable. Diagnostics was strong, reflecting our market leadership, in the attractive segments we serve.

Solid mid single-digit growth in our research business reflects some recovering pharma, and the continued uptake in our informatics offerings. And our environmental business experienced robust service growth, and strong interest in our upcoming new product launches. Our focus on delivering differentiated innovations and serving our customers well, will continue to fuel our growth, and provide a competitive advantage for PerkinElmer.

Critical to this are our many employees located across the globe, who in the first quarter not only executed well operationally to achieve revenue and margin expansion, but also continued to drive our strategic priorities while remaining passionate about serving our customers. Consequently, I feel good about our ability to accomplish both our short-term goals and long-term objectives, as we have an incredible opportunity to grow and innovate, and most importantly, make a difference. 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 first quarter results, and details about our second quarter and full year 2014 guidance. And then, we will open up the call for your questions. We were pleased with our performance in the first quarter. Reported adjusted and organic revenues all increased by 5%, with essentially no top line impact from acquisitions or foreign exchange. Adjusted revenue for the quarter was $533 million, as compared to $507 million in the first quarter of 2013. By segment, our organic revenue in human health grew approximately 6%, while organic revenue in our environmental health business grew 4%.

Looking at our geographical results, organic revenue increased mid teens in Asia, mid single-digits in the Americas, and flat in Europe due in part to the timing of shipments in the fourth quarter of last year. We expect to see low to mid single-digit organic revenue growth in Europe for the full year, driven in part by new product introductions, and an improving economy.

In China, organic revenue increased low double-digits. We continue to see positive demand trends in our key environmental and diagnostic offerings, specifically our infectious disease, newborn and prenatal screening, as well as applied market applications focused on food, air, soil and water detection capabilities.

Looking at organic revenue growth by product category, recurring revenue, which includes reagents, consumables and service, grew high single-digits in the quarter. Organic revenue for our instrument and component offerings grew low single-digits in the quarter. From an end market perspective, our human health business represented approximately 56% of reported revenue in the quarter, and consist of diagnostics which represented 29% of reported revenue, and research which represented 27% of reported revenue. Organic revenue growth from our diagnostics business increased high single-digits during the first quarter, primarily driven by demand for our newborn screening and infectious disease solutions, with particular strength in emerging markets.

Not only are birth rates beginning to rebound in China, as evidenced by prenatal trends we saw in the first quarter, but demand for greater access to newborn screening in rural areas is also increasing. Additionally, we continue to gain share in infectious disease testing in China, having won over 30 new SYM-BIO customers during the quarter.

Medical imaging was essentially flat in the period, but an improvement from our guidance provided in January. We continue to expect solid organic revenue growth for the year, driven by emerging market investments in healthcare infrastructure, and the rising trend to advance medical diagnostic x-ray capabilities.

Our research business delivered mid single-digit organic revenue growth in the first quarter, versus the comparable period in 2013. The pharma and biotech segment contributed to this performance, and is in line to grow mid single-digits for the year. In academia and government, the funding remain somewhat choppy in the developed regions, impacting CapEx decisions, yet there are indications that the market should rebound, and lead to greater opportunities in the second half. The tone coming from our customers is definitely more upbeat at this time than last year, and we remain optimistic on the outlook for the year.

Moving to our environmental health business, which represented 44% of reported revenue in the first quarter, we serve three end markets: laboratory services, which represented 20% of reported revenue, environmental and safety which represented 16% of reported revenue, and industrial which represented 8% of reported revenue. As I mentioned earlier, organic revenue in our environmental health business grew 4% in the quarter, driven by continued strength in our services offering, which was up low double-digits.

On the product side of the business, organic revenue was flat in the quarter, as growth in Asia was offset by softness in the US, while Europe was essentially flat. We are excited about our new product pipeline, which will ramp up in the second half, and meet strengthening demand. For the AxION iQT mass spec in particular, we continue to receive customer orders, and expect to ship the first several instruments in the second quarter.

Turning to our margin performance in the period, adjusted gross margins in the first quarter of 2014 were 46.8%. A higher service revenue mix, initial OneSource start-up costs related to a number of new contracts in the quarter, and FX headwinds negatively impacted gross margins by more than 100 basis points. We expect moderate improvement in adjusted gross margins for the year, as we launch our new products, and as our revenue mix returns to a more normalized rate.

Adjusted operating margins in the first quarter were 14.7%, as compared to 12.6% for the same period a year ago. SG&A and R&D contributed approximately 160 and 120 basis points to our margin improvement, respectively, most of which is the result of prior-year restructuring efforts, as well as a shift of R&D resources to China.

I would like to note that approximately half, or 60 basis points, of the year-over-year R&D improvement, is due in large part to the timing of new hires, and to our R&D Center of Excellence in Hopkinton. Thus our R&D expense for the balance of the year will increase approximately $2.5 million per quarter. The 2013 consolidation of R&D facilities into Hopkinton, along with the consolidation of shared service operations in Krakow, Poland, affords the opportunity to more efficiently and effectively manage our SG&A and our R&D spend going forward.

By segment, adjusted operating margin in our Human Health business increased approximately 320 basis points to 21% as compared to 17.8% in the first quarter of 2013. The increase is primarily the result of volume leverage, prior year productivity initiatives, and restructuring activities. In our Environmental Health business, adjusted operating margins expanded approximately 80 basis points to 11.2% in the first -- as compared to 10.4% in the first quarter of 2013, due primarily to these same factors.

On a non-GAAP basis, our adjusted tax rate for the quarter was approximately 22%, versus our guidance of 21%. Adjusted earnings per share was $0.46 in the first quarter of 2014, approximately $0.03 above the midpoint of our guidance range, as higher sales and strong incremental margin flow through, more than offset a higher tax rate and incremental foreign currency headwinds, that combined negatively impacting results by approximately $0.02 versus our guidance provided in January.

Turning to the balance sheet, we finished the first quarter with approximately $930 million of debt, and approximately $224 million of cash. We exited the quarter with a debt-to-adjusted EBITDA ratio of 2.3 times, and a net debt to adjusted EBITDA ratio of 1.7 times. Looking at our first quarter 2014 cash flow performance, operating cash flow from continuing operations was $68 million. Free cash flow, defined as operating cash flow less capital expenditures was $62 million, representing a free cash flow to adjusted net income conversion of 118%.

Looking to the second quarter of 2014, adjusted revenues are expected to be in the range of $565 million to $575 million. Adjusted earnings per share for the second quarter this year are expected to be the range of $0.57 to $0.59, which represents growth of 12% to 16% from prior year levels. Assuming the midpoint of our second quarter guidance range, adjusted earnings per share growth for the first half of 2014 are expected to grow approximately 20%, as compared to the same period year ago, giving us greater conviction in our ability to meet or exceed our adjusted operating margin expansion guidance for the year.

For the full year 2014, we continue to expect our adjusted revenues to grow in the mid single-digit range. We are raising our adjusted earnings per share guidance range to $2.42 to $2.46, from our previously guided range of $2.40 to $2.45.

This concludes my prepared remarks. And operator, at this time we would like to open up the call to questions.

(Operator Instructions)

And your first question is from the line of Doug Schenkel, Cowen and Company.

Hello, this is actually Chris Lin in for Doug today. Thanks for taking my question.

So congratulations on a good quarter. My first question is, your incremental margin was strong this quarter, and clearly, the quarter came in ahead of expectations. How we should we think about your operating margin guidance, in context of this solid quarter? Should expect you to take advantage of this strong start, and perhaps accelerate some investments?

Well, I think at this point, we only have one quarter under our belt. We feel good about it. Some of it is, as I mentioned in my prepared remarks is related to the timing of some hiring in R&D, and some spend in the R&D area. So that will actually be a bit of a headwind in the second through the fourth quarters. But I think we still, I think we have more conviction now that we can deliver possibly north of 130 basis points. But I think it is still early days.

I think if we end up significantly outperforming in the first half, we might look at some investment. But I think at this point, we feel good about where we are, and I think we feel good about our margin expansion opportunity. And so, I think, as we said in the prepared remarks, I think we feel good about possibly exceeding the 130 basis points. But have -- made no decision on spending anything back yet.

Okay. And just one more. So OneSource in the pharmaceutical end market have been consistent areas of growth. Given the recent flurry of pharmaceutical activity, can you give us an update on what the expected impact on your business would be?

So as you mentioned, we have seen strong growth in OneSource. And I think the reason is, is because our customers are doing more outsourcing, and we are seeing greater customer penetration. And when you really think about it, it makes sense for our customer, it helps them to drive productivity. When you think about the potential for further pharma consolidation, there really -- it just more further supports this outsourcing model. Because when you think about it, OneSource can be helpful in harmonizing practices or simplifying your supply chain. And so, we think it probably continues to drive strong growth in OneSource.

Great. Thank you so much.

Okay.

Your next question is from the line of Dan Leonard of Leerink. Please go ahead.

Thank you. I just want to talk a little more about gross margin. I am trying to think about how to balance the benefits of all the heavy lifting you did in manufacturing last year, with the secular trend that your service business is a faster grower than the corporate average, and that is a lower margin business. And you do, you have done a couple distribution relationships on the diagnostic side lately, and perhaps those are lower margin. So just in light of the gross margin results of the quarter, I am wondering if you could elaborate a bit more on the trajectory there? Thank you.

Well, I would say one other thing, Dan, and I think as the new products start to come out in the second half of 2014, I think that will be a big contributor to expanding gross margins. So I think you are right from the standpoint, that one the reasons you are seeing the service business outperform the product business right now, is because they haven't seen a lot of the benefits of the new products coming out yet. So I think with the benefits of the new product, our expectation is you will see stronger gross margin.

Okay. Thank you. And my one follow up: today is another example that the market is wiling to pay for deals right now. I am hoping you can comment on your M&A pipeline, and your ability to do transactions in 2014?

Well, as Andy mentioned, we had another good quarter of strong cash flow. So we are fairly active. We have got a pretty full pipeline here, so we are hopeful that we will be able to get some deals done this year. But again, as we talked about in the past, probably nothing of significant size. I think we would be more comfortable in the sort of bolt-on, but hopefully, we will get a couple across the goal line this year.

Got it. Thank you.

Our next question is from Paul Knight of Janney Capital Markets. Please go ahead.

Hello, Rob. I know the software business and informatics, so software specifically has been a long time in development. Do you think you are finally there with Spotfire, and surrounding technologies?

Paul, I think we have made good progress in Spotfire. But I think we still see a significant opportunity, continue to expand Spotfire on -- with our instrument platform. We introduced something fairly recently called Skystream, which really helps pull data directly in this case, plate readers right onto Spotfire, without having to download data to a server. And then, subsequently upload it.

So there is a lot more work we can do in making Spotfire more applicable to our instruments. And then, of course, building out Spotfire application in some other areas. So good progress, but I think we still see a pretty good runway, to continue to build on our capability in informatic.

Rob, you are more optimistic sounding than most regarding China on these conference calls. Is it because all the high diagnostics and environmental exposure? The tougher question is, is private sector such a small part that you don't see that impact?

Well, I think it really speaks to where we are, and the selective markets that we serve. So when you talk about diagnostics, we are obviously in and around newborn and prenatal. And so, we are getting the benefit of increasing growth. Obviously we have nice share there. And then, I think we have got a great product offering in the infectious disease, and so we are continuing to take share there. So specifically on the diagnostic side, we feel great about that.

On the environmental side, there just continues to be more focus and emphasis on cleaning up the environment. You may have seen something that just came recently. I think it was either in the last day or two, where they are now putting a more difficult or more stringent penalties for environmental violations across the government. So whether it is monetary or actually jail time. And so, I think you are going to see much more monitoring of the environmental. Of course, that is driving some of our growth as well. So I think potentially, we are optimistic because of both the positions that we have in China, as well as the markets we serve.

Yes, okay. And then lastly, is big Pharma, specifically big Pharma? Are they stable, growing, or what is your color there?

Yes, I think they stabilized, and maybe even we are seeing a bit more of an optimistic tone there. I mean, if you look at our research business, particularly the areas that we focused over the last 24 to 36 months, in the areas of imaging and informatics and microfluidics, all those areas actually grew double-digit in the first quarter.

Great. Thank you.

Thanks.

Our next question is from the line of Ross Muken of ISI Group. Please go ahead.

Good afternoon. So I wanted to dig in a little bit more on the gross margin line. So in terms of the year-over-year comparable pull-through, is that more of a function just with some of the mix from last year, given some of the disruptions you had. Maybe there was a higher software component or something? Because it seemed like the pull-through was a little less I would have expected, given sort of the revenue outperformance.

Well, I think, as Andy talked about, we have a couple dynamics going on in the quarter. First of all, at least looking at gross margin, the service business, it has lower gross margins, but have very good operating margins. So, but the gross -- with the service business growing sort of low double-digits, that is going to put pressure on gross margin. The other thing is, because we won couple fairly significant OneSource contracts in the first quarter, there is an upfront investment associated with those contracts often in the first couple of months when win those. And so, we are making investments, et cetera. And of course, that flows through gross margin.

I think another a big component was any of those sort of 30 or 40 basis points of impact from foreign exchange. So when you think -- when you sort of strip that out, the core actually expanded gross margin is probably 60 to 70 basis points.

Okay. That is helpful.

When we gave guidance and talked about the year in the fourth quarter, we had indicated that we thought service and instruments were both going to grow about 5%. So that mix shift as Rob said, does have a significant impact.

And the investment, and that makes sense. What -- lot of folks have highlighted weather and days impact, all sorts of messiness in the quarter. It seemed like your consumable recurrent revenues were kind of strong. I guess, in your mind is that just a function again of some of the markets where you are seeing extra-normal growth or in certain non-US-based? I am just curious, like the pacing in your consumable business is in sort of the US versus ex-US, did you see any difference, month on month?

No, not really. It might of had a minor impact, but not anything of significance. So I don't think I would spike that out. The other thing to keep in mind, is that a big part of our reagent revenue is the flow-through on newborn screening, and babies are not impacted by weather.

(Laughter). I am about to have one, so I am hoping not. And then, lastly, sorry just to be quick. I know we talked cap deployment quickly, where are we on sort of openness to kind of the buy back. I mean, the -- you obviously are running at a leveraged position, where you have some flexibility. And you haven't done a ton of deal work. It has been a tough market for that in general, up until recently. How are you thinking about the trade-off right now with the stock, between M&A and share repo?

So I think what we have said, Ross, is our preference is to try and do some of these deals, build out our capabilities. But at the point that we don't see that as likely in the pipeline, we would probably get a little more impressive -- or aggressive on the stock buyback. I would say, the only the thing that is out there is, we continue to be on negative watch for Moody's, and we would sort of like to get that behind us. But at some point, that becomes less relevant.

Got it. Thanks, Rob.

Our next question is from the line Isaac Ro of Goldman Sachs. Please go ahead.

Good afternoon. Thanks.

Just I want to ask a question on academic spending. We have obviously seen some expectations set by other management teams in the space, that maybe first quarter was a little soft, but hopefully we will see a pick up as the year progresses. So I am wondering if you share that sentiment, number one. And if so, kind of what would the anecdotal items you could share if any, to support that view? I just think we are all struggling with the reading the tea leaves on the academic picture, at least in the US?

Yes, I would probably agree with that. It is -- I would say we didn't see it in the first quarter. Clearly, it was better than it was in the quarter in Q1 of 2013. I would probably define it, or describe it as more stable. But I think in the discussion and the dialogue with the customers, it does seem like there is more of an appetite to spend. I would say the pipeline that we probably have the greatest visibility is in the in vivo area, and there seems to be a pretty good pipeline there in the US. And so, our sense is it probably improves a little bit here in the back half of the year.

Got it. And actually, on that product line that was an area where you had in vivo imaging product line. You had a bit of a challenge there, first quarter last year. Can you talk about how that is doing year to date, and what some of the key drivers are, not only for that product, but also the microfluidics business. Just sort of thinking about the rest of the instrumentation portfolio that you got from Caliper, if you have mark to market on that? Thanks.

So I mentioned it briefly. A couple of the areas that we sort of really emphasized over the last couple of years, actually we did see good growth in the first quarter. So both microfluidics and the in vivo imaging grew greater than 10% or double-digits. So we were pleased with that.

If you look at in vivo specifically, it was very strong in the US, not as strong in Europe. And so, that is the one area where we are seeing a little bit of weakness, let's say specifically in the in vivo area, and it was -- and it did well in Asia. So overall, double digits, but a little bit of a weakness on the European side. Microfluidics again, we saw nice growth there. That was pretty much across the board geographically.

Got it. Thanks.

Thanks.

Our next question is from the line of Jon Groberg of Macquarie.

Hello, and good afternoon, and congratulations on a solid quarter. So Rob, can I ask you -- on the last call -- a month or two, you obviously you did a deal with Verinata. This quarter you did a deal with Good Start. I am just curious, I mean you have your own genetics lab and a sequencing lab. You have another capabilities. Can you maybe just talk about how you evaluate some of these newer technologies and product offerings, when to be just a distributor for a test, and why not just offer the test yourself?

I think, there is a -- obviously, a number of factors that go into that. One is, how quickly the market will ramp up, and probably more specifically how quickly the reimbursement will ramp up. So there is a trade-off there. Obviously in some of these cases, there is intellectual property that is involved. I would say that is probably more the case, in the noninvasive prenatal testing area.

So I would say, it is a number of things we look at, which is how quickly do you think this become -- the market becomes a contributor from a profitability perspective, and our own internal capabilities, and where we want to focus those. So I would say, that is what we think about.

And then, and where are you today, or when do you expect these to potentially be meaningful contributors to your top line at least?

Well, I think we have talked a fair amount about the Verinata, the noninvasive prenatal area. And I would say we continue to see a relatively slow ramp up on the reimbursement. That sort of continues to be a challenging area. So we are not forecasting a significant impact for 2014 from that area.

I think, contrast that a little differently with carrier screening. Because there you have got a fairly well-established medical policy, a pretty good reimbursement, so and that sort of fits well into our channel and our call point. So, I think in that instance, we would be say disappointed if we didn't see $5 million to $10 million of that in the back half.

Okay. And then, Andy, can you just clarify -- I just want to make sure understood what you are saying about R&D again -- I think it was supposed to increase $2.5 million -- I think you said per quarter, but I was just trying to make sure I understood exactly what you were saying. And putting that in context. It looked like your guidance for the second quarter was a little bit light of the Streets, although the revenues were in line. So, talking little bit about what you expect from margins in the second quarter?

Yes. Specifically around R&D, we did a lot of work on the [Silvis] consolidation, which included quite a bit of R&D consolidation into our Center of Excellence in Hopkinton. As you can imagine, as we shut down facilities we have to hire in the Hopkinton facility, and that takes time. So there was a timing effect of that in the first quarter. We hoped to be fully hired in the second quarter.

The impact of those hires and some related expenses is about $2.5 million, and that is per quarter. So the spend that you see this quarter will go up about $2.5 million each of the successive of quarters this year. And so, that will obviously have a little bit of a headwind on the margins going forward. But that is factored into our full year outlook.

Would you -- just be clear on that. So on an absolute level, it is going to go up $2.5 million, and then stay at that level for the next couple quarters? (Multiple Speakers).

Yes, that is exactly right. (Multiple Speakers). It is about $2.5 million in the second quarter, and it will be stable on, at that level from third --

Okay. I think there was some confusion by going up $2.5 million every quarter. Okay. And then, what is your margin expectation for the second quarter? Your operating margin?

Well, we said [130] for the year, but I think our operating margin, we think is pretty much in line with that. That may be, yes, I would say line with that. For the half, we are looking at a slightly faster ramp than we had guided in January.

Okay, thanks.

Our next question comes from the line of Peter Lawson of Mizuho Securities. Please go ahead.

Just going back to the Pharma consolidation question. How do you see the benefit of that playing out? Do you see it as an initial dip for the first few months when the consolidation is announced, and then you see long-term effects?

Well, I think we have got to separate it between the service business and the product business. I think, what I have mentioned before is really directed more on the service side with OneSource. And historically, what we have seen is almost growth right out of it. Because not only do we do the OneSource on the sort of maintenance and repair of instruments, but we do some relocation efforts and recalibration, certification of instruments. So generally, when there is consolidation, the service business does better.

Contrast that with the product side of things, and that is where we have seen sort of a temporary dip. Because what will happen or at least historically what has happened is, when two large pharmaceutical companies come together there is sort of a freezing almost of the purchasing. And then, it sorts out, and hopefully returns to some more normal level. But so I would say again, based on history, service can -- sees a little bit of a bump, and we have probably see a little bit of a negative impact on the product side.

Thank you. That is helpful. On the diagnostic side, is there any color you can give us around pricing and utilization trends you are seeing for the diagnostic side?

So first of all, I would say, PerkinElmer generally, pricing was sort of flattish, when you looked across the Corporation, depending on the business. I would say in diagnostics, it is probably a slight help, but it wasn't significant. Utilization for us, is not that significant of a measure, and because where we are focused on is in the sort of newborn and prenatal area. So like -- and it is not as relevant on the China infectious disease area.

Thanks so much.

Our next question is from the line of Brandon Couillard of Jefferies. Please go ahead.

Thanks, good afternoon.

Good afternoon.

Rob, we have heard from a handful of companies about there being some slowness in the release of funds from some government customers in China. To what degree, are you seeing any of that in your environmental business, if at all?

I wouldn't say that is a -- we haven't seen that. Or if maybe we have seen a little bit, it hasn't been significant.

Understood. And then, Andy, are you able to quantify the -- the $20 million of productivity and cost savings expected this year, how much of that was captured in the first quarter?

Well, I think the margin expansion we provided for the year, if it was linear, we would have captured -- certainly the 100 basis point of carryover. There is somewhat of a ramp in the margins during the year, because of some of the supply chain initiatives we have that will improve as the year goes on. But I think, of what we communicated we thought we could do, we actually did that and little bit better. And that is after taking into account, the R&D upside we have had.

Okay. And then one more. Are you able to quantify the impact of the lower pension and royalty payments, the benefit to operating cash flow from those? And then, how should we be thinking about the free cash flow conversion for the full year, after a pretty good start?

Well, if you look at the -- if you look at cash flow in the income statement, or the statement of cash flows, it is essentially operating cash flows are $68 million versus $11 million. And essentially, the difference between those is the pension, which we talked about which was about $47 million. And then the rest was, well there was a mixture, but the majority of that was royalty. We talked last year about adjusted operating cash flows; we added those back.

Thank you.

Okay.

Our next question is from the line of Tycho Peterson with JPMorgan. Please go ahead.

Thanks for taking the question. To follow up on just the comments earlier on prenatal screening. Understand obviously, some of the reimbursement constraints are unverified. But obviously, you can't talk about that moving lower risk. But can you just maybe talk about your thoughts on the trajectory of that business as it moves into low risk, and how you might be able to benefit from that?

I guess, it is our point of view on that is, we don't think that is going to happen in the short term, that we think for the foreseeable future that is going to stay in the high risk. And that you are not going see any low risk, for I would say, a number of years.

Okay. And then, just as we think about the product portfolio --(Multiple Speakers).

What I would say Tycho, the way we think about noninvasive prenatal is, I think the growth is really coming from the replacement of amnio. I think it is really driving the adoption. I don't see it -- like I said in the short term here, in the next couple of years, really getting into the low risk pregnancies.

Okay. As we think about just kind of the suite of products you have introduced, and obviously you had a busy year last year, in terms of these introductions, any these that standout in terms of the ability to move the needle more? Just trying to kind of rank order some the introductions, whether it is the NexI or the AxI or the iQT?

Yes, I think, first of all there has been a couple of introductions in the first quarter. But I would say the more meaningful needle moving MBIs are probably coming out more in the latter part of the second quarter here. I would spike out the iQT. I would also spike out the Opera Phoenix, which is a new high content imager. And then, probably getting into the third quarter, you will see a new suite of microfluidic products coming out that we sort of branded Touch. So I would spike those three out, as sort of significant contributors to our revenue growth.

Okay. And then, Andy just one on operational initiatives. You have talked in the past about improvements around indirect spend for the year. Can you maybe just quantify what you think you can get on the indirect spend initiatives? And how much, in terms of working cap, and then bottom line improvement?

Yes, we set that initial goal for this year of $10 million -- I, it actually, the leader of the indirect spend initiative reports directly under to me. I think we have made good progress. I think we see our way to hopefully to that number, if not more. And I think this is going to be an ongoing initiative. It will continue to help us, both in the gross margin, on the indirect side, but as we do have indirect spend there, but for sure on the SG&A.

Okay. Thank you.

Our next question is from the line of Bill Quirk of Piper Jaffray.

Great, thanks. Good afternoon, everybody. First off, can you elaborate on the comment you had -- your comments regarding the new Center of Excellence China contracts; maybe just help us just frame that in terms of timing, duration, size? Thanks.

Yes, I don't think is going to be significant revenue impact in the short term. I mean, what I would think about that is, it is we are giving them some capabilities. We are training them, and I would -- in fact, it is probably in 2014 more of a cost than it is a profit. But I think when you look out two, three years -- and we have done this in other situations as well. It is, we sort plant some seeds, and then we will see probably the revenue in 2015 and beyond.

Okay. Got it. And then, just to stay the topic for a second, albeit changing geographies. Some of the earlier diligence around sort of the preliminary birth rates that you have seen in the larger states the US, continue to be pretty positive. So can you talk guys into the category, assuming that we see these trends continue, what that can help translate into for the US franchise? Thanks.

Our data would suggest that if you look over the last 12 months, the USs birth rates are expanding in sort of the 1% to 1.5%. So and what I would think about that is, it is single millions of dollars for revenue for us.

Okay. Got it. And then shifting gears, last question here, just thinking about the Caliper microfluidic business, and I guess strategically around the NGS craft side, we have certainly seen an increasing interest outside of the traditional areas of sequencing here really going back over a year now. Rob, can you talk a little bit about how you look at that from a sales team standpoint? Do you have to bring in some new hires, to go tackle some of these nontraditional accounts? Do you leverage the existing team, just help us think a bit about that? Thanks.

When you are thinking nontraditional accounts, are you are thinking more into ag bio and those types of areas? Is that -- I am trying?

Both Ag and bio, but then also, there is certainly increasing interest within the clinical lab, is certainly for initially a lot of oncology applications, for example?

Yes, I mean, I think we feel right now that we have got a team that can call on those accounts. And so, I think we don't see a big investment up to this point in expanding the front end there. We will have to see. If the band starts to pick up, we will take a look at that. But we think we have got the appropriate capabilities to be able to go in into those accounts.

Understood. Thanks.

Our next question is from the line of Zarak Khurshid of Wedbush Securities. Please go ahead.

Thanks for taking the questions. As we think about this Good Start strategy, and in the event that NIPT starts to move into the average risk setting, just curious how you would characterize or quantify your ability to drive adoption within those plain vanilla OB practices out there? I know there is quite a few of them.

As I said before, that fits right into our wheelhouse from a call point perspective. So we have got a very good distribution into those doctors. And so, I think that is the benefit of the collaboration. We feel good about their tests and their capabilities and technology, and we think it is a strong combination with our distribution capabilities. So as I said before, low established medical policy, think it's a good reimbursements. So I think we are fairly optimistic on the adoption rate, and it could be a pretty good business for us.

How many reps to you have calling?

Probably about 40.

Got it, great. And just a follow up on the lab services side of the business. Anything happening to potentially leverage your business there into completely new areas of manufacturing or chemicals or anywhere else? Thanks.

I would say that the bigger focus is really trying to build out the informatics side, to allow us to continue to expand what we are doing with existing customers. I mean, we continue to try, and we have for some time move OneSource into markets outside of Pharma. I would say, up to this point, we have had sort of limited success there.

So our focus has really been more on building more business with our existing customers, and I think we have seen some nice success with the sort of the lab IT offering. I talked a little bit in the prepared remarks about adding some mobility and mobile applications to what we are doing with OneSource. And so, that is probably been a more area of focus with us, versus expanding in other end markets.

Understood. Thank you.

Our next question is from the line of Bryan Brokmeier, Maxim Group. Please go ahead.

You commented on the prepared remarks about the positive trends you are seeing in the birth rates in China. Do you expect that strength to accelerate as it gets further into the year? And also, is the positive trend that you are seeing largely due to the Chinese calendar? Or are you seeing any impacts from the one child policy that you are able to identify?

So the answer to your first question is yes. We think that continues to accelerate into the year, and of course, one of the advantages we have is being a significant player in prenatal. We have some good insight to what happens in newborn. I guess, that sort of, I would say synergies are the two business.

But we believe the trend is more driven by calendar than it is by the change in policy. I mean, it is a little hard to determine precisely. But we had a pretty good sense that births would return to a much stronger growth rate because of the calendar. And I mean, the question about the one child policy is probably more anecdotal than statistical. But we don't think that is having much of an impact.

Okay, thanks. Also do not know if I missed it, but did you provide the organic growth rates for the individual end markets in the environmental health business?

We typically do not provide that level of detail. But we did have some -- in our prepared remarks I did talk about growth rates broadly.

The way to think about it is, service was strong, product was basically flat, and it was pretty much flat across both the end markets. I mean, up, down a little bit. But fundamentally, they were up a little bit, or down a little bit. But whether it was industrial or environmental or safety, they were all around zero.

Okay. Thanks a lot.

Our next question is from the line of Derik De Bruin, Bank of America Merrill Lynch.

Good afternoon.

Hello, Derik.

So you have got -- you have a really set of interesting assets in the baby women's health area. I mean, between -- you have got the newborn screen business, the NTD labs, you have got the cord blood business, Signature, the Verinata, the Good Start relationship. Are you trying to sort of round it out with, doing like pre-implementation genetic screening? And Signature has done okay, but I do not know how big of products that is. I mean, do you need to get bigger inside of the cytogenics market? Could you talk about how you want to build out the baby business?

Well, so we actually do some of the pre-implementation outside of the US. So you can add that to your collection. But yes, I think I mean, and we talked about this before. I mean the diagnostic business for us is sort of niched. All right? And the way we think about it is one level, two niches. We want to do a lot of things in and around, whether you want to call it birth, reproductive health, or whatever term you want to use.

Our view is we have got a nice position there. And so, they want to leverage that, to continue to build that out. And we talked about at times even maybe going in early childhood, types of screening and analysis. So I would say that is one. And the other is, infectious disease, but largely focused in emerging markets, and today that is mostly China. And so, that is the way we think about our business.

I guess, you could go upstream and do a partnership with eHarmony if you wanted to. But that would be there. So another question is, in the software space for [mass spec] sequencing, you acquired Geospiza a couple of years ago. I'm just wondering how you look at the bio informatics market and how you want to build out that -- does that become a bigger part, there more assets out there. How do you see that coming into the bioinformatics space, and how is the Geospiza products that competing without the ingenuity and some of the things that are out there?

Yes, so I would say generally speaking, we would like the bio informatics business to be a bigger part of PerkinElmer. I think when we look at our capabilities, it starts with detection and imaging. But increasingly as those products get more and more sophisticated and generate more data, it really gets to what do you do with that data? So that is a big focus of ours.

And rather than stay in one specific area, whether it is NGS or imaging or protein analysis, we are really looking to do it across all of those. And so, what we are try to develop is more of a platform that allows you to take various pieces of data from various pieces of instrumentation, and provide better information and analysis, and mix and sequencing is a piece of that. But it is only a component of what we think is a broader opportunity to be more sort of a informatics platform.

So more of a systems biology approach, integrated biology approach?

Yes.

Okay. Great, thanks.

Our next question is from the line of Jeff Elliott of Robert W Baird. PLease go ahead.

Yes, thanks for the question. My first question is on the revenue guidance. I understand mid single digits, you left that unchanged. But when I look at what you did in the first quarter, and then some of the new growth drivers that are coming on -- I am looking for some commentary on end markets. I guess, can you help me square the guidance staying unchanged, with all the different moving pieces there? It seems like that the guidance is pretty conservative.

I guess, I would say that we sitting in single-digit. We came in at 5% in the first quarter, sort of mid single digits, probably a little bit better than we thought. I think what we said was, we do 4% to 6%. We thought the first half would be a little on the 4% side, and the back half would be more on the 6% side.

We came in a little bit better. But I guess, from my perspective, it is a little early to take up the revenue guidance. So we will see how Q2 comes in. I would say we are sort of cautiously optimistic, but I would say this point it is a little early. I mean, there are a couple of headwinds out there that have us concerned.

And while it is not huge business for us, the Russian currency is impacting our newborn and prenatal business there. The Indian currency is having a little bit of an impact on it. So we would like to get a little bit more comfort around those types of things, before we would be prepared to take the numbers up.

Got it. And just to follow up on the incremental R&D spend. Can you talk about what areas you are hiring in?

So what Andy was talking about is is the fact that we took a number of facilities that were sort of disparate R&Ds, or mostly in the US, and consolidated them into Hopkinton. So we sort of let engineers go in California, Chicago places like that, and we are hiring them back in Hopkinton.

And so, it is a number of the skill sets that we had previously, we are just sort of replacing them, so it was more of a geographic split for us. But I would say the emphasis is really around our imaging capabilities, so in vivo imaging, the microfluidics capability is one that we sort of moved from the West Coast into Hopkinton. And we are continuing to look for both chemists and biologists.

Got it. Okay, thank you.

Our next question is from the line of Steve Willoughby, Cleveland Research. Please go ahead.

My apologies if you already talked about this. But I was wondering regarding Japan. I know a year ago, that was one of the three areas that you called out as an area of weakness, so theoretically it should have easier comps there, as well as the tax changes that are happening here, April 1. I was wondering if you could, if you haven't already talk about your performance in Japan. And then I have a follow up.

I would say, Japan grew for us. So I wouldn't call it was robust, it was sort of mid single-digits. So it was obviously a nice recovery, relative to the first quarter of 2013. But I would say with regard to the tax changes in April 1, I know some of the other companies talked about seeing some benefit for that. I wouldn't say that was material for us. But like I said, it was solid mid single growth for us in Japan.

Got you, okay. And then, on the OneSource business, I believe you mentioned you won some larger contracts more recently. Just wondering if you could provide me a little bit more color around that? And also, are those companies that you won the contracts from another competitor? Or that these are new companies that are finally consolidating their service?

I would say -- from a color standpoint, although we don't get into our specific customers, it was basically around -- it was large pharma. I would say in one instance, it was a competitive bid that we won. And in two other cases, it was where we picked up additional business with existing customers. And that is a generally the trend you see, where some of the customers will put us in a couple of sites, as we continue to do well they broaden it out.

Okay, got you. Thanks so much.

Ladies and gentlemen, that is all we have time for. I will now hand it back to Mr. Robert Friel for closing remarks. Over to you, thank you.

Great. Well, first of all, thank you for all your questions. So in closing, we just reinforce the fact that I am confident in our long-term plan to accelerate growth, and deliver strong financial returns. We have a clear path forward, and an outstanding team around the world that is committed to our mission of improving human environmental health. Thank you for your continued interest in PerkinElmer, and have a great evening.

Thank you. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. Have a good day. Thank you.