Revvity Inc (RVTY) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 PerkinElmer earnings conference call. My name is Sarah and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Tom Thomas, Vice President of Investor Relations. Please proceed, sir.

Thank you. Good afternoon and welcome to the PerkinElmer third-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 investors section of our website at www.PerkinElmer.com. Please note that this call is being webcast live and will be archived on our website until November 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 we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measure is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly.

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

Thanks, Tony. Good afternoon and thank you for joining us today. I'm pleased to report that we had a strong quarter. We grew organic revenue by 4%, expanded adjusted operating margins by 110 basis points, achieved good operating cash flow, and increased adjusted earnings per share by 14% to $0.57, coming in at the high end of our guidance.

As Andy will discuss the Q3 financial results in greater detail, I would like to mention a few highlights from the quarter and comment on trends currently impacting our end markets. In the quarter we continued to grow market share and further strengthened our already solid positions in core areas of the business, such as diagnostics and service. Our strategy to further increase our adjustable markets in these areas continues to be through geographic expansion and broadening our capabilities to meet growing demand.

In diagnostics we grew low double digits as we continue to benefit from improving birth rates and increasing purchasing power of the middle class outside the US, which is creating a nice tailwind for our newborn and prenatal screening and infectious disease testing solutions. During the third quarter these three product lines actually generated more revenue outside the US than within, whereas several years ago over 60% of the revenues were US-centric. We expect this trend to continue as we've recently secured a number of new international customers, and are driving an expansion of our diagnostics business deeper into new markets.

In our service business, which grew high single digits in the third quarter, we are experiencing strong growth as our customers continue to seek innovative partners like PerkinElmer to help improve productivity and outsource their lapsed services. Our OneSource solutions are playing a vital role in meeting this demand.

Our recently announced acquisition of Ceiba Solutions will help expand our deep software and services solution with lab IT capabilities, focused on lab computing, applications management and scientific development. Similar to our diagnostics business, service grew faster outside the US, with high teens growth in the Asia-Pacific region.

On the innovation front, our recently launched new products have been gaining interest among customers. And we're on track to meet our goal of $15 million to $20 million in the second half new product revenue.

Specific application areas where we are gaining traction include the food, forensics and environmental markets with our new mass spec, the biotherapeutic drug discovery area with our new microfluidics and multimode plate reader products, and the preclinical cellular analysis space with our new high-content imaging offering. In the research and environmental markets, new innovations are critical to driving growth, as these end markets are currently experiencing modest overall growth rates as certain geographies face more challenging macro economic headwinds.

In particular Europe experienced low single-digit growth, consistent with recent declines in broader European economic indicators. And in China, while we grew high single digits, we continued to encounter headwinds in the environmental business due to delays in converting tenders to orders. Despite these delays we remain bullish on our long-term outlook, but the demand for our solutions in analyzing and monitoring environmental conditions in this market continues to grow.

The US remains an area of increasing strength as we grew mid single digits in the quarter and experienced accelerating order patterns as we exited the quarter. So, overall, our performance within the major geographies was consistent with our expectations, except for Asia-Pacific where China, which fell slightly below our expectations of low double-digit growth.

In addition to our revenue growth, we were also quite pleased with our operational execution in the quarter. Despite the impact of foreign exchange, our incremental revenue to adjusted operating income came close to 50%, reflecting good leverage of our operating expenses and improving mix. Furthermore, our operating cash flow was roughly equal to our adjusted net income, demonstrating our effective operational execution.

So, in summary, we feel very good about our results for the quarter and our progress through the first three quarters of the year. On the top line, despite less favorable than expected macroeconomic conditions, reported revenue increased about $60 million or 4% organically, representing a 300 basis point improvement over our nine-month growth rate this time last year. Additionally, adjusted operating income increased $32 million to $264 million, translating into a 150 basis point improvement in adjusted operating margins, and resulting in a 19% increase in adjusted EPS despite this year's significant foreign exchange headwinds. And free cash flow to date is significantly higher than this time last year, reflecting a greater than 90% conversion of free cash flow to adjusted net income.

However, arguably more important than our financial success has been the progress we've made improving our growth profile through introducing more new products and strengthening our organizational capabilities in key growth markets. This progress positions us extremely well to take advantage of the attractive opportunities we see through advanced smart solutions, enabling better screening for adulterants in food and contaminants in water and air, early and more accurate disease detection, and more efficient drug discovery.

I would now like to turn the call over to Andy who will cover our Q3 financial performance and guidance for Q4, and then we'll open the call for your questions. Andy?

Thanks, Rob. And good afternoon, everyone. As I've done in previous quarters, I'll provide some color on our end markets, a financial summary of our third-quarter results, and I'll provide some details around our fourth-quarter guidance. Then we'll open up the call, as Rob mentioned, for questions.

Reported adjusted and organic revenue each increased 4% for the third quarter of 2014. Adjusted revenue was $543 million as compared to $523 million in the third quarter of 2013. I want to note that foreign currency exchange rates had a negative impact of approximately $3 million versus our third-quarter adjusted revenue guidance provided in late July.

By segment, organic revenue in both our Human Health and Environmental health businesses grew 4%. Looking at our geographical results, all of the regions performed better on a sequential basis, as organic revenue increased high single digits in Asia, mid single digits in the Americas, and were up low single digits in Europe.

Across China, organic revenue increased high single digits driven by strong demand in our diagnostics business and renewed strength in our research business. While we believe that much of the government activity impacting our environmental business over the last couple quarters is winding down, funding continues to be delayed. Despite these challenges, as Rob mentioned, we continue to believe that our product portfolio is well positioned. And we expect to see a high single to low double-digit organic revenue growth in China for the year.

From an end market perspective, our Human Health business represented approximately 56% of reported revenue in the quarter, with diagnostics representing 29% and research representing 27% of reported revenue. Organic revenue from our diagnostics business increased low double digits during the third quarter. And, as Rob mentioned, strength in our newborn and prenatal screening and infectious disease testing solutions was driven by healthy demand throughout emerging markets, bolstered by key wins in Thailand, Brazil and Mexico during the quarter.

Once again we saw solid performance from our SYM-BIO business as infectious disease testing in China grew double digits organically. Our Haoyuan business had another solid quarter, capturing a number of new tenders in the Chinese blood screening market. We are now beginning to see earlier wins translate into revenue as some provinces have begun to rollout screening ahead of the mandated 2015 start date.

Medical imaging organic revenue growth was up double digits in the period, driven by growth in our new wireless cassette detector used in diagnostic imaging and veterinary applications, and an easier comparison. We expect to see somewhat more moderate growth in the fourth quarter as a result of OEM buying patterns as well as softer European demand.

Our research business declined low single digits in the third quarter. Low single-digit growth in pharma and biotech was offset by continued softness in academic end markets which declined low single digits. A bright spot within the research business was the performance of our microfluidics franchise, up double digits in the quarter. As we look to the fourth quarter we expect to see sequential improvement in our research business, driven by our new product introductions, focused on high content screening and microfluidics.

Moving to our environmental health business, which represented 44% of reported revenue in the third quarter, we serve three end markets -- laboratory services, which represented 21% of reported revenue; environmental and safety, which represented 15% 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 within our service offerings which increased high single digits.

In our industrial, environmental and safety end markets, organic revenue was up low single digits in the quarter, as funding delays in China were the primary drivers impacting our instrument revenues. While the volume of tenders being released is modestly improving, we expect to see instrument revenue growth in the fourth quarter similar to what we saw in the third quarter.

As Rob mentioned, we recently acquired Ceiba Solutions, a leader in lab IT. The acquired capabilities from Ceiba will help extend our multi-vendor software and services offering with enhanced information technology focused on lab computing, applications management, and scientific applications development. Ceiba will have a de minimus impact on our financial results in 2014.

Turning to our margin performance in the quarter, adjusted gross margins in the third quarter of 2014 was 47.3%. As our new product introductions continue to gain traction we expect to see sequential improvement in the fourth quarter offset by the negative impact from foreign currency and certain revenue mix.

Adjusted operating margins of the third quarter expanded 110 basis points to 16.8% as compared to 15.7% for the same period a year ago. We continue to experience strong leverage from SG&A and R&D productivity initiatives. As we noted on our second-quarter call our R&D spend is still expected to ramp in the fourth quarter as we continue to efficiently add resources and investment in our Center of Innovation and Hopkinton.

By segment, adjusted operating margins in our human Health business increased approximately 50 basis points to 23.2%, as compared to 22.7% in the third quarter of 2013. The increase was primarily the result of productivity actions and volume leverage.

In our Environmental Health business adjusted operating margins expanded approximately 140 basis points to 12% as compared to 10.6% in the third quarter of last year. The increase was primarily the result of sales mix and ongoing productivity initiatives.

On a non-GAAP basis our adjusted tax rate for the quarter was approximately 20%, and our full-year guidance is expected to remain at approximately 21%. Adjusted earnings per share of $0.57 was at the high end of our guidance range, despite being negatively impacted by just over $0.01 from foreign currency.

Turning to the balance sheet, we finished the third quarter with approximately $860 million of debt and approximately $204 million of cash. We exited the quarter with a debt to adjusted EBITDA ratio of 2.0 times and a net debt to adjusted EBITDA ratio of 1.6 times.

We are pleased with our cash flow performance year to date, as our operating cash flow from continuing operations was $63 million in the third quarter and $186 million for the first nine months of 2014. I'd like to note that the Board has approved a new two-year 8 million share repurchase program to replace the existing program which expired last week.

Looking back on our results through the first nine months of 2014, we are encouraged by the resiliency of our organic revenue growth, particularly in light of the somewhat softer global economic backdrop. Productivity initiatives and volume leverage remain key contributors to our year-to-date adjusted operating margins expansion of approximately 150 basis points and working capital improvements that helped contribute to a strong year-over-year cash flow performance.

Turning to the fourth quarter, foreign currency is expected to negatively impact adjusted revenue by approximately $13 million, and adjusted earnings per share by approximately $0.03. As a result, we expect reported revenue to be in the range of $595 million to $605 million, driven by improved demand in the US and a slightly weaker Europe, a result of a difficult prior-year comparison. Our outlook for APAC is consistent with our performance in the third quarter, as strength in our Human Health business is offset by soft environmental and safety demand which continues to be negatively impacted by longer government funding cycles.

We remain confident in our ability to deliver 130 basis points of adjusted operating margin expansion for the year. And our guidance assumes a fully diluted share count of approximately 113.8 million shares.

Taking all of these items into account, adjusted earnings per share for the fourth quarter this year are expected to be in the range of $0.77 to $0.79. For the full year, our adjusted earnings per share guidance is expected to be $2.39 to $2.41, with a mid point of $2.40, a result of the negative impact of approximately $0.04 of foreign currency headwinds in the second half.

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

(Operator Instructions)

Doug Schenkel, Cowen and Company.

This is Chris Lin on for Doug today. Thanks for taking my question. Despite revenues coming in, I think, a bit lighter than expected, you still delivered a solid operating margin expansion on a year-over-year basis. As I look at your OpEx, you were able to control R&D and SG&A spend quite well. And overall OpEx declined year over year, even though the prior-year quarter you decreased operating spending as you went through your restructuring. My question is, can you talk about how many more levers are there left for you to pull on operating expense side given that you've had two impressive years of operating expense control?

Sure. We have obviously done a lot over the last couple years that is really driving that improvement. And I think as we look forward we feel like we will continue to get the benefit of a smaller footprint, we'll continue to get the benefit of leveraging our back-office facility in Poland.

And we also on top of that have other things we're looking at. We've mentioned before our supply chain opportunities in China are still ramping. We feel like that's going to provide us with some upside over the next couple of years.

In addition we also have an issue around indirect spend. Our goal this year was to take $10 million of indirect spend costs out of the system. I think we're going to have equally if not greater goals for next year. And so I think we can continue to see good leverage from that.

I think I did mention on the R&D side we are going to continue to build out the R&D facility. So, some of that upside that we saw in the second, third quarter will start to dissipate in the third quarter. But I think overall, we are a much more efficient on the R&D front, and we will continue to be very diligent on the G&A front.

Okay. And maybe just one more question. I think at today's spots rate it looked here FX represents about a 2% headwind for revenue for FY15 revenue. Is that about right? And I think you guys have a decent natural hedge in most geographies with a few exceptions. Does the revenue headwind via FX trickle down to EPS at slightly above the net margins?

It is slightly higher flow-through. It is a slightly higher flow-through than we have seen in the past, primarily because most of the volatility has been with the euro where we do have a fairly significant cost base. So, we are somewhat naturally hedged.

I think if you look of the strengthening of the dollar, if you look at the spot rates, the dollar strengthened at about 6%. And a lot of that is in areas where we don't have a significant cost position such as Japan and some of the emerging economies. So the flow through on that top-line headwind from FX is a little bit higher, and that's why you're seeing the $0.03 on top of the $13 million of revenue headwind.

Sorry, could you just comment on what the FX headwinds for it on 2015 would be at today's rates?

We will probably talk to you a little bit more about that when we talk about 2015 guidance. And things could change between now and then so I'd probably prefer that until that time.

Great. Thanks for taking my questions.

Paul Knight, Janney Montgomery.

Rob, can you talk about the service business a little? And specifically the question I have is, some of your competitors are focusing on service as more of an offering. Is it because you've taken share? What are the dynamics going on with some of your peers trying to be a little more focused, and are you worried about it, is my first question.

First of all, I would say within our service business, as I mentioned, we continue to see good growth there. What we're focusing on is continuing to expand out, particularly in the emerging markets.

What we saw in Q3 was strong growth clearly across all the regions, but particularly strong in the Europe and emerging markets area. I think I mentioned high teens in the APAC area. Our approach is to continue to expand in the emerging markets.

I would say, with regard to why the competitors are focusing more on service, first of all, I think you've got to talk to them about that, but I think what we've always felt is the service engineer creates much more relevance with the customer. And as you become more relevant with the customer, hopefully that allows you to pull through additional products.

From our perspective, what we're looking to do is to continue to build out our capabilities. And, so, the Ceiba solutions acquisition, which we've announced fairly recently, is an example of where we're continuing to add, in that case lab IT, to hopefully differentiate our offering on the services side relative to just repair and overhaul.

And you mentioned that China was, I think, showing better bookings? Could you talk about that you're not actually guiding to higher China growth, though, in Q4.

Yes, I think that's correct. As I think about China, what we've seen there is diagnostics has continued to do very well, really unimpacted by any of the, say, overall slowdown. We saw in the research market in Q3 that come back. And so we actually saw good growth in the research.

The area that has lagged a little bit -- and I think we talked about this last quarter -- is particularly around the food safety area that continued to be down. We did see decent growth on environmental. And so given that that has not snapped back, particularly in Q3, we're being somewhat hopefully conservative and cautious into Q4.

But Andy did mention we are seeing a little bit of improvement on the orders and the tenders. But again, this continual delay in funding has led us to be more conservative into Q4.

Thank you.

Bill Quirk, Jefferies.

It's actually Dave Clair from Piper Jaffray. I was just hoping to get a little bit more color on the global academic markets. It sounds like those were a little weak this quarter. Can you give us some more input there?

I would say for us, the academic markets declined, let's say, low single digits. But what I would point out a couple things there is, this is where our radiochemical business is. And of course that continues to be a drag on the academic markets.

And the second thing I would point out -- and I think we've talked about this on prior quarters -- in our in vivo imaging business, in the third quarter, some of the royalty revenue or licensing revenue that we had received historically has come off. And so when you look at our low single-digit decline in the quarter, it was really driven by those two things -- the radiochemical business and the reduction in our licensing revenue in the in vivo business.

Okay. And then I know you guys aren't giving 2015 guidance today, but how should we think about 2015 operating margin expansion?

I think we have communicated fairly consistently that we believe we can drive 60 to 80 basis points of margins expansion on mid single-digit growth. And I think that calculus still holds. I think we're always looking ways to accelerate that. In some cases we may end up expanding margins faster, and in some cases we may spend it back. But I think that's probably a pretty good proxy going forward.

Okay. And then just one last one for me. It sounds like you're making some good headway on the China and AT opportunity. Can you just give us a little bit more color on the number of tenders that you're winning? And it sounds like actually testing might be starting on a regular basis in some areas a little bit faster than expected.

I think we continue to feel good about the blood screening market in China. We talked about the fact that we continue to do a nice job on winning tenders there. We're continuing to build out our production capacity in China. So, I think we feel good about the opportunity that that presents itself.

I think as I've mentioned in the past, it's currently single-digit millions for us from a revenue perspective. But we would expect, when you look out a couple years, this is probably a $20 million or $30 million business for us in a couple years.

Thank you.

Ross Muken, ISI Group.

Maybe on the capital allocation side, obviously, you re-upped, put out the 8 million share buyback. Can you talk about how we should think about pacing there, and transpose that against the more recent activity over the last few years which has been more tuck-in driven? You've obviously gone through a period here where you've probably been a little less active than maybe you wanted, but valuations have also been up. So, help us put that puzzle together.

I would say, Ross, first of all, I think our preference is to do the tuck-ins if they obviously make good strategic sense and have good financial returns associated with them. As you mentioned, that's been a little challenging in this environment. I will tell you, more recently the pipeline looks -- I would say we're more optimistic with our pipeline. And so I think that was one of the reasons why in Q3 we weren't as active in the share buyback as maybe we could have been.

But at the same time, we want to have the flexibility so that if we're not successful with the tuck-ins, we want to be aggressive on the share buyback area. So, that was really the basis behind or the background behind asking the Board to not only re-up the historical 6 million shares but actually increase it to 8 million.

With regard to how we would specifically pace that out, I think that's going to be largely dependent on what kind of success we have with the bolt-ons or the tuck-ins.

And as you look at your core dev activity the last 6 or 12 months or year to date, do you feel like you've wanted to be more active and you've just seen assets trade away from you? And has that been more on the higher growth areas? Maybe just give a little bit of color what's transpired over the course of the year because it's been a fairly inactive year for you in general.

Yes, I would say probably the single biggest reason for our lack of doing some of the deals is probably valuation. And of course that would be largely around the higher-growth assets. So, when we looked at some things that we thought were particularly attractive from a strategic perspective, we were just challenged by coming up with the valuation numbers.

I think one of the things that hopefully we'll continue to be is disciplined in the returns that we look at from an acquisition perspective. I think we've tried to point out in the past that, while we will be opportunistic and we will look for bolt-ons, we don't feel like there's anything that really we have to do. And, so, I think we can be a little bit disciplines.

At the same time, we recognize that if it's a good asset, if it's got good growth prospects, that in this environment people are paying up for it and to be competitive we'll have to be aggressive. And so we've got to make sure that that asset sits well with us strategically, that we can drive good synergies, and that one plus one is greater than two.

Got it. Thanks, Rob.

Dan Leonard, Leerink.

It looks like your gross margin is going to be down pretty sharply in the fourth quarter. How much of that is foreign currency versus other factors? And are there any actions you can implement to help offset?

I think FX is clearly a piece of it. I would say it's maybe not quite half. The rest of it is clearly ongoing mix, with very strong service revenues that we think will continue into the fourth quarter. Which is fairly consistent with what we've seen historically.

I think the one thing that could change that is the uptake in our new products. We are seeing very strong gross margins of the new products we've launched. So, if we can see a pickup there, I think that will be a positive.

And, again, some of the things I talked about for operating margin also affect gross margin, which are around our supply chain. I think going forward we hope to start to see some pick up on our procurement in Asia in the fourth quarter, but more so in the second half we should see some benefit from that.

I think the other thing I would mention is -- and we've talked about this in the past -- as we continue to grow in emerging markets, the dynamic there from a P&L perspective is it usually puts a little pressure on gross margins but is accretive from an operating margin perspective, because our operating expenses in that region of the world have a tendency to be lower. So, again, this growth in emerging markets is also putting pressure. As I said, it's accretive to operating margin but it does have the impact of being dilutive to our gross margins.

And my follow-up, I feel like your services business has been growing faster than the corporate average for years. But the negative impact on gross margins seems to have shown up more recently. Is that fair? And if it is, is there maybe, to the extent that -- are people just needing more things repaired now than previously to the degree it's an insurance business and folks need to --?

I would say, first of all, as you pointed out the service business has been growing well. And as we've talked about in the past, the service business is, for the most part, accretive to our operating margin. So that's actually been one of the contributors when you look at the significant operating margin expansion that we've had over the last couple years. Depending on the type of service that's done and whether it includes our spare parts or not will get to the point of whether it's accretive or dilutive in the gross margin area.

Okay. Thank you.

Isaac Ro, Goldman Sachs.

On Europe, I wanted to spend a minute on that region. Just curious how your paced throughout the third quarter, just given what we're seeing in the macro picture here. And curious what is baked into your expectations for the fourth quarter this year.

Sure. We actually saw Europe get a little bit better through the third quarter. But what we've built in is actually down a little bit in Europe relative to the growth we saw in the third quarter. And that's fundamentally driven by comparisons or comps.

If you look at our fourth quarter in 2013, we had a very strong Europe. I think it was up high single digits. And so, again, hopefully we're being conservative. But given the comp that we have in the fourth quarter, in our guidance we're assuming Europe actually is down low single digits.

Got it. And then just on the newborn business, as we think about the overall trend globally on birth rates, at least in the US, it seems like things have gotten better throughout the year. And I'd be curious if you guys are expecting that to accelerate into the end of this year and into next year, or if we're on a slow but steady improvement?

I would say the US birth rates for us, while they're increasing they're not improving at an increasing rate. So, US birth rates, the ones that we track, are probably at 1%, 1.5% increase year over year.

The growth that we're really seeing in the newborn area is really outside the US. Some of that is birth rates but, quite frankly, more of that is adoption. I think Andy mentioned a little bit of this in his prepared remarks, but what we saw in the third quarter were significant wins in Thailand, Brazil. We've recently signed a big contract in Mexico. China grew over 20% in newborn. So, newborn is really expanding outside the US. Some growth in Europe, but again it's largely in the emerging markets.

Understood. Thanks a bunch.

Miroslava Minkova, Stifel.

Let me just start with the new product. I'm curious if you could give us some color on how your new products are doing in the marketplace, particularly the AxION iQT. And you did mention in the script that you're comfortable with a $15 million to $20 million contribution. Did the new products help in the third quarter? And where are you with the launches?

As I mentioned, we feel very good about the progress with the new products. What we think we're tracking well for the 2015-20. If you look at Q3, we think the benefit was probably in the high single millions, probably call it $8 million to $9 million is what the benefit was in Q3. So, again, tracking well to the high teens for the back half of the year.

If you look across -- I think we feel good traction on all of them -- the Phenix, the EnSight, the Touch and the AxION, the iQT. I think that continued to see good feedback from customers. So I think we feel pretty good about that.

Okay. Great. And a follow-up, I was wondering if I could get you to reflect a little bit on overall growth trends in your business towards that mid single-digit growth trajectory targeted organic growth rate. You came close to that this quarter but you are still at the low end of it. What will it take for you to get more consistently towards the 5%-ish growth rate? Is it all about China?

I think that was probably a little bit of an issue relative to our guidance. But I think for us, let's say through the cycle, is we've got to get some growth out of Europe. I think it's going to be difficult to get to 5% or 6% growth if Europe continues to be flat or low single digits. So, I would say that's the biggest contributor from a geographic perspective.

I think from an end market perspective, we are seeing nice growth in diagnostics. We're seeing decent growth in the pharma area. Academic is still a little slow and I think that's probably attributable to the government funding side. And then, again, in some of the emerging markets, some of the areas of industrial and environmental, if we saw a pick up there I think that would be helpful. That's how I would think about getting this mid single digits.

Okay. Great. Thank you so much.

Steve Tosha, Morgan Stanley.

I wonder, Rob, if I could ask you to reflect for another minute on the comment that you made about the strength in the US. You made comments specifically indicating that the US picked up through the quarter, exited a little stronger. Was that a comment more on the end markets or was that a comment on Perkin? Was there any contribution from new product flow embedded in that comment about the US?

The comment specifically was about PerkinElmer, so I was talking about our specific ordering patterns. We did see it increasing through the end of the quarter there, so we felt good about that.

By the way, it does feel like the end markets seemed to be improving, as well. And if you look at some of the macro indicators it does seem like US economy is improving -- maybe not as quickly as everybody would like. Our forecast for Q4 actually assumes the US improves over Q3. And to some extent, going back to my prior comment where we are assuming Europe comes down a little bit, fundamentally because of the difficult comps, we're looking to offset that or replace that with a little higher growth coming out of the US.

Got it. Really helpful. And then I wonder if you could think about the path forward in China for growth. We are all focused on the potential for these budgetary constraints to be resolved. But I wonder if we're in a scenario where the budgetary constraints are resolved how we should think about growth. You could argue that there's a potential for China to return to something akin to its prior growth profile, but then in the next few quarters we'll have easy comps.

So, if you just do a really simple arithmetic you might argue that it could be a strong double-digit growth driver. Should we take the view that maybe the growth recovers or maybe it's healthy growth on top of easy comps? Thanks, Rob.

I think when you look at our China business you've really got to break it into the three components. First of all, our diagnostic business has consistently been growing, call it, 20%, maybe even a little bit better. I think for the foreseeable future that continues because we're getting good penetration, as I mentioned before, on both the newborn and prenatal. We're seeing infectious disease continue to grow nicely. Some of that's new products. And of course we've got blood screening coming on we think more significantly in 2015.

If you look at research, we've started to see some good recovery there in Q3. We think that continues into Q4. So, again, I think that's going to be a more modest increase over the next couple quarters and maybe return to double-digit or mid-teen growth there.

I think the area where your comments are more germane is really around the environmental, or more specifically for us, the food area where we have seen a declining revenue over the last couple quarters as these tenders have backed up. And there's a possibility it could snap back very quickly. My sense is when it does open up, it will open up the funnel and it will be more measured.

Now, you will have easier comps in that area but I don't think there's going to be a huge snapback in growth, and you won't see it pop up in one or two quarters. I think it will be more measured over a longer period of time.

That's perfect. Thank you so much.

Dan Arias, Citigroup.

Rob, on blood screening in China, as we move towards 2015, how are you thinking about the pacing of revenues there as the mandate becomes effective? Do you see that being pretty metered or are you expecting a bolus one way or another as everyone --?

Dan, our sense is it's probably more in the back as this thing gets ramped up. I think, as you know, it's supposed to start 1-1, but we think there will be probably a little bit of delay, and not all the provinces will probably start at the same time. So, we think by the time you get to Q3 you'll probably be where we probably need to be. So, as we're thinking about it now, it paces out somewhat in the first and second quarter, but by the time you get to the back half, you've probably got everybody complying with the requirements.

Okay. That's great. And then if I could just go back to China once more, last quarter you quantified the scope of the tender delays by saying that, I think, 35% of the Environmental Health business was affected by that dynamic. So, based on the way that you just talked about the different end markets where would you put that number at this point?

I think that's probably still a pretty good number. If you look at the environmental business right now, again it's really focused for us in the food area, what we would call safety and security. And that's probably in the 35% to 40% of our business in China. That's the one that's been slow.

Actually, environmental grew fairly significantly in the quarter. And industrial was flattish. So, I would say it's probably 35% to 40% of our Environmental business, which right now is about half of China, just to give you a calibration there.

Yes. Okay. Thanks very much.

Jeff Elliott, Robert W. Baird.

My question is for you, Andy on the indirect spend side. You mentioned the savings there, $10 million you targeted this year. Can you talk about the areas you're targeting? And how much flexibility do you have to perhaps step that up next year?

I think we have a lot of opportunity to step it up. Really what we were trying to get across this year is really exposing the entire workforce to the initiative. We put tools in place. We have all kinds of opportunities that we're going after at a facility level.

But I think, if you look at our overall indirect spend it's well north of $400 million. So, if you just look at a percentage improvement year over year, it doesn't take much to get to $10 million-plus.

I think it's interesting, as we end up rolling out initiatives across PerkinElmer, we tend to have a great uptake. And I think there's been a lot of work around this. And I think as we start to put together our plans for next year, I think you'll see something hopefully well north of that $10 million target for next year.

Got it. And just to clarify, how much of that is volume dependent? Is that all independent of what the top line looks like next year?

Some of it does have a volume dependency, but I would say a large swath of it is not volume dependent. It depends on how you want to classify it. Travel is a very significant expense. It's somewhat volume related but office supplies and so forth tend to be less so.

Okay. Thank you.

Tycho Peterson, JPMorgan.

I won't ask about China. On neonatal I'm wondering if you can just talk on that. You've talked about -- or, actually, prenatal, I'm sorry -- you're 20 months into this Verinata collaboration. Maybe just talk about how that's trended relative to expectations. And, then, are you getting any traction from the Good Start collaboration, as well?

I would say prenatal for us grew, I think it was high single digits in the quarter. A lot of that was outside the US. I would say, as we've talked about in the past, specifically in the US, the Verinata arrangement, it really gets down to how quickly the cash payments flow from the payers. We are, I would say, over the last 90 days we have seen good progress there. So we are at a point now where I think the cash collections are getting much more I would say, reasonable.

I would say the other thing in the quarter, we reached agreement with Alumina on a couple issues, and we've now extended our contract for another two years. So, we feel good about that.

And I would say the third thing that's, I think, helping us to some extent is we've seen a lot historically some of the competitors in the space do some things with regard to guaranteeing minimum payments or out-of-pocket. And we're starting to see some of the payers impose what I'll call a more level playing field there. And I think the combination of those things I think make us feel much better about the business as we go into 2015.

Okay. And then going back to the question on M&A before, you don't have a lot of leverage. You are focused on tuck ins. Can you maybe just talk about the thought process for not looking at larger deals. I understand there's maybe some valuation disconnects out there but it's still a very fragmented industry. And maybe talk about the maximum leverage you could consider taking on if larger deals did hit your radar screen.

I would just say, one of the things that when you look at larger deals our sense is it's much more disruptive to the enterprise, whether you can manage that or not. But probably more importantly, when we look out there, we're not necessarily looking to build scale for scale's sake. What we're really looking for is where are there opportunities for us to build significant relative market scale?

And, so, we want to look for acquisitions that build in the spaces where we're strong. And it's just hard to find big targets that do that. I think that's probably the bigger issue, is that there isn't something out there, at least from our perspective, that is attractive that's large that builds in our areas of strength. So, take, for example, newborn screening or imaging or any of the areas where we think we're differentiated and focused. I think that's fundamentally the challenge for us.

Okay. Then one last one since you did mention imaging. Any thoughts on the flat-panel market? It looks like CapEx budgets are freeing up a little bit in the US. Has that business picked up for you at all?

I think we mentioned we had a very strong Q3. We think we're going to do probably mid single in Q4. We are seeing some push outs from a timing perspective.

But I think as we've talked about historically, we think this is a business that probably grows mid to high single digits. We've introduced some new products, most notably around the cassette. And we're also starting to get some FDA approval of our panels, which will open up adjacencies into the clinical market.

So, I think we feel still feel good about this business. And like I said it can grow high single digits.

Okay. Thank you.

Brandon Couillard, Jefferies.

Rob, early in the script you mentioned market share gains in the quarter. Could you elaborate on exactly which verticals you experienced that most acutely?

I would say specifically in the diagnostic and service area where we're seeing double-digit growth rates there. Our view is we're able to go in and take some share. In some cases it may be the case of service, it may be customers that are outsourcing internal, or it may be the case of in our diagnostic business where we are taking business away from local competitors. But clearly, at double-digit growth rates we feel like we're growing faster than the market.

Thanks. Andy, a two-part question for you. You made some nice progress on the working capital front. Can you remind us if you've made any or plan any US pension contributions this year? And then, secondly, what type of free cash flow conversion ratio would you expect is achievable for 2015?

We, I think, noted on a previous call we did make a fairly significant pension contribution last year. And we don't really have a need for a pension contribution in the US plan over the next year or so. So I don't foresee any cash outflow in that regard.

I would say, if you back out some of the restructuring activity as we go forward, and I think you will see that abate somewhat, I think there's no reason we shouldn't be at that 100-plus free cash net income conversion. We're about 92% year to date. And that's certainly our goal. That will certainly be our target as we go into 2015.

And I think some of the improvement -- and there's still a lot more improvement left to be done on the working capital side. I don't see any reason why we shouldn't be reporting that 100-plus in the near future.

Super. Thank you.

Derik de Bruin, Bank of America.

You didn't specifically say an organic revenue growth target for the year. It was 4% to 6%. You didn't really update that. I assume, just given some of the headwinds in China and Europe, we're probably for the full year tracking closer to the 4% to 5% range rather than the 5% to 6%?

Yes, I think that's a fair assumption.

Right. Do you think it's still achievable? Do you think the higher end could potentially happen if things go away? Or is that out of the question?

I'd hate to say it's out of the question but we would need some fairly significant growth in the fourth quarter to be able to get to 6%.

Great. And doing the math here, do you have impact relative to where your initial explosions were, of what Europe and China are in terms of where you thought you were going to be on an organic growth basic basis to where you ended up? Basically are those weaker markets cutting you buy 1 point, 1.5 points? Just some color.

If we look at Q3, for example, I would say America is, call it, mid single digits. That's about what we expected. If you look at your low single digits, that's about what we expected.

If you look at APAC, which again was high single digits, that's about what we expected, maybe 100 basis points short. And it really gets down the China. And so I think as we mentioned, China came in at high single digits, which isn't a bad number but we had historically and actually expected it to be low double. So, that was really, when you cut through from an expectation to actual, it really gets down to a little bit light in the APAC, and it was fundamentally China.

Okay. And you mentioned the imaging royalties coming off. Does that create a significant headwind in 2015?

It creates a headwind. I don't know if it will be significant. But what I would say is we've got a fairly extensive intellectual property portfolio. And while there was some coming off on the in vivo side, we continue to make good progress in some of the other areas.

And, so, in any given quarter we've got probably $2 million of licensing revenue, maybe positive or negative. It's just something that we deal with in any given quarter. But I would say a headwind in 2015, I wouldn't call it a significant headwind.

And it's really more, Derik, in the first half because some of those patents fell off mid year. So, we've seen some of the impact of that in the second half. So, that V will really be a first-half V.

Great. Thanks.

Zarak Khurshid, Wedbush Securities.

Rob, how should we be thinking about the growth in the prenatal serum screening NTD business?

I think that's a business that probably over time, it's flat to maybe down a little bit. It's not as much from a volume perspective, but it's continued pricing pressure, I would say, when you talk about NTD in the US. When you go outside the US for the kits, we continue to see strong growth there. But I would say the NTD business over time is flat to down slightly.

Got it. Then, how should we be thinking about NIPT potentially eating into that average-risk market? And just generally, how big of a long-term headwind is the NTD business long term? Can you give us a sense just of the size of the business?

I think eventually that probably occurs. I think we're still some time off that from NIPT going into average risk. But for us right now the NTD business is, I want to say it's $20 million or something. So, not a huge part of our business but I'll give you that rough size.

Got it. Thanks for that. And then last one, just while we're talking about the IP on the in vivo imaging side, how is the licensing revenue coming through on the caliper side of the business? I know they're pretty good at asserting that microfluidic IP. Thanks.

That's, to some extent, what I was referencing before when I was talking that with microfluidics, again, it's a little bit lumpy depending on any given quarter. For example, this quarter we did have some nice microfluidic licensing income come in that helped offset the in vivo runoff of the patent. So I think we continue to appropriately enforce our IP. And consequently, that periodically allows us to book some additional income in a given quarter.

Great. Thank you.

Peter Lawson, Mizuho.

Just thinking about 2015, which businesses excite you the most heading into 2015 and which new products could be meaningful?

I would say all of the businesses excite me going into 2015. And I hope all my business leaders are listening. But, seriously, I think we have nice growth prospects across the board.

Clearly the macro indicators would imply that the diagnostic business, I think, continues to do quite well. And probably the service businesses spike those two out earlier. But our expectation is that all the businesses should be able to get mid single-digit growth or better.

With regard to the new products, I think we continue to feel good about the products around the research area. We're making good progress there. The Opera Phenix has very strong demand, as do some of these other products. And we continue to feel good about the AxION with regard to the applications in so many end markets there.

And I would say clearly, while we've talked specifically about the products that we introduced in the back half of the year, our expectation as we get into 2015l, that we'll continue to rollout a significant amount of new products. And that will continue to be a big contributor to our growth next year.

Thank you. And just a quick question. Andy, I joined the call late. The EPS impact for 2015 what would that be on the bottom line?

We'll probably provide that when we give guidance for 2015, because obviously it could likely change. We just mentioned it was $13 million and $0.03 in the fourth quarter.

Great. Okay. Thank you so much.

Bryan Brokmeier, Maxim Group.

There appear to be a few more locations on the map for your Elm air-monitoring system. Are you generating interest in that system? I think the largest was probably in Massachusetts in Boston. How is that pilot program going? And any other comments that you have based on the early adoption of it?

I would say we continue to get a lot of interest. We were at the [analytico] over in Shanghai a couple weeks ago and got some good interest there.

And we're seeing good interest not only from the municipalities but also industrial companies, as well. We've got a couple pilots here we'll probably be kicking off in the latter part of the year or early 2015. So, we continue to be excited about it.

Again what we've tried to explain to people is we don't think it's any revenue in 2014 but as we get into 2015 here it could be incremental to our growth.

Okay. Thanks a lot.

There are no further questions in queue. So I'll turn the call back over to Rob Friel for closing remarks.

Great. First of all, thank you all for your questions. And I hope you got a sense that we feel great about our performance in the third quarter and year to date. And we believe we're in a great position to achieve a solid finish to the year, as well as continued long-term success. Thank you for your continued interest in PerkinElmer. And have a great evening.

Ladies and gentlemen, that concludes today's conference. You can disconnect. And have a great day.