Revvity Inc (RVTY) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 PerkinElmer earnings conference call. My name is Joyce, and I will be your operator for today.

(Operator Instructions)

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

Thank you, Joyce. Good afternoon, and welcome to the PerkinElmer fourth-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 the earnings press release, you may get one from the Investor 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 February 12, 2015.

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 other 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 the 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'm pleased to report that we delivered very good performance in the fourth quarter, capping off a successful year in which we've made significant progress against our strategic priorities and delivered strong financial results. Over the past year, we've expanded our organizational capabilities, introduced new innovative solutions for our customers, focused our investments on the most attractive end-markets, and exceeded our financial forecast, despite challenging macro economic conditions.

Turning to our financial performance in the fourth quarter, we keep hearing a general strengthening of the business, as we saw good growth throughout all products and geographies, with organic revenue growing 5%. We expanded adjuster operating margins by 200 basis points to 21.5%, delivered strong operating cash flow of $97 million, and increased adjusted earnings per share by 15% to $0.85, coming in at $0.06 above the high end of our guidance.

I'll mention a few commercial highlights from the fourth quarter. In the diagnostic markets, we were proud to receive market authorization from both the FDA and Health Canada to offer the first commercially available newborn screening test for SCIDs in the US and Canada. Testing for SCIDs, which is an inherited metabolic disease that impacts an estimated 1 in 58,000 newborns each year, represents yet another important milestone, as we expand our newborn screening menu.

Moreover, as we aggressively spread our footprint to meet demand for prenatal, neonatal and infectious disease screening, we announced the opening of PerkinElmer's state-of-the-art clinical testing lab in Suzhou, China. This new facility will offer a complete solution for hospitals and patients, and supports the country's investments toward detection and prevention of birth defects and infectious disease.

Also during the fourth quarter, we made significant traction against our strategy to further penetrate the multi billion-dollar global food-testing market through our acquisition of Perten Instruments Group, a leading supplier of analytical instruments for quality control food, grain, flour and feed. We're excited about the opportunity to combine Perten's product portfolio, customer relations and technology with ours, and make a greater impact on the world's supply of safe food.

In the life sciences market, our new innovations are creating incremental market demand. Including our Opera Phenix High Content Screening system, which is experiencing outstanding order rates since launching in the third quarter.

Contributing to the Opera Phenix's success is its ability to work seamlessly with our High Content Profiler, a powerful new scientific analysis and visualization application powered by Spotfire. The High Content Profiler helps customers better interpret their high-dimensional big data, and drove critical insights more quickly. Customers are finding that by pairing these two capabilities, they have line of sight towards moving into the next stage of gene targeting for personalized medicine drug discovery.

Finally, in our efforts to adopt a more market- and customer-focused organizational approach, earlier this month, we announced the move of our OneSource service group from the environmental health business into our Human Health business. With the predominant OneSource customer base being in the pharma and biotech markets, this realignment will better equip us internally to serve our life science customers with complete solutions targeted toward their needs.

Reflecting on the full year, I am very pleased with our financial performance, especially in light of the current macro environment. In 2014, we grew organic revenue by 4%, expanded adjusted operating margins over 160 basis points, increased adjusted EPS by 18% to $2.47, and generated strong operating cash flow of $282 million. With that said, 2014 marked the final year of the plan we set five years ago to generate significant adjusted operating margin improvement through both productivity and growth investments. Adjusting for the recent stronger dollar, we would have exceeded our goal of the 18% operating margins.

More importantly, since establishing this goal in 2009, we've increased revenue at an 8% CAGR, and EPS at an 18% CAGR. Furthermore, throughout the last five years, we have elevated our leadership positions within the markets we serve. Today, 75% of our total revenue derives from products that hold one of the top three positions in their markets.

All in all, our portfolio today is better focused on those areas where we can deliver exciting capabilities targeted towards meeting demand in the fast-growing markets and geographies. In that regard, we were pleased to be recently named by Instrument Business Outlook as the Company of the Year for 2014, in which they highlighted our ability to commercialize innovation as a key strength. Building on our track record, I'm confident that we have the right road map as we head into the next five years to continue to expand operating margins and grow our top line.

Before I turn the call over to Andy to cover our fourth-quarter financial results in more detail, I would like to briefly share some perspectives around the current growth environment. From a geographic standpoint, the outlook in APAC remains stable, with China experiencing continued growth in diagnostics, and some recovery in the research environmental industrial markets. Europe continues to face a weakened economy, and should pose similar challenges in 2015 as it did during the majority of last year.

The US economy, on the other hand, is improving, although the stronger dollar is creating new challenges, especially in emerging markets. We do anticipate material headwind to growth in 2015 as a result of the unfavorable FX impact.

Looking at our end-markets, pharma is stabilizing as customers move back into development mode and away from restructuring. We also expect to see strong biotech growth for Europe and the US in 2015. In particular, we are pleased to benefit from investments in the area of cancer immunotherapy, as well as the rising trend of outsourcing instrument maintenance and scientific services. The academic and government sectors most likely will stay flat over prior-year, driven by soft funding in the US and austerity in Europe.

In the environmental industrial markets, growth is expected to remain at similar levels as in the second half of 2014, depending on impending global environmental regulations and macro GDP growth rates. We are optimistic about the rapidly expanding food market, which has become one of the fastest-growing segments of the analytical instrument sector.

Finally, the global diagnostic markets that we participate in continues to be very good, driven by higher US birth rates, prenatal and neonatal screening menu expansion, and the long-term emerging market demand, especially in China. From an innovation standpoint, we exceeded our goal of achieving $15 million to $17 million in new product revenues during the second half of 2014. Market response to our new offerings has been quite positive, and we anticipate that new innovations will help contribute to continued growth this year.

Notably, in incremental health business, a robust pipeline of novel products will start to launch in the first half and gain scale in the back half of 2015. As we drive innovation forward, our focus will increasingly center on developing solutions that leverage capabilities from the full breadth of our portfolio, with the goal to enable critical insights and discovery in human and environmental health.

As we enter 2015, we are optimistic about our opportunities to accelerate growth and further drive competitive differentiations. We remain cautious, however, given the recent PMI data indicating a decelerating global economic growth, which is somewhat tied to China's lower near-term outlook, drop in oil prices, and foreign currency headwinds.

While Andy will get into more detail, I want to give a high-level overview of our 2015 guidance. Due to the significant impact of foreign exchange changes relative to the average rates last year, I will discuss our forecast on a constant currency basis, assuming exchange rates remain where they are currently. On a constant currency basis, we are forecasting top-line growth of 6% to 8%, with organic revenue growth of 3% to 5%, and about 3% of revenue coming from acquisitions completed last year. Based on this top-line performance, we believe we can grow adjusted EPS 11% to 13% on a constant currency basis.

We expect the impact of the stronger dollar will reduce revenue by about $100 million, and reduce the bottom line by about $0.15 relative to our forecast, based on the current currency outlook. Consequently, our reported revenue guidance is $2.28 billion to $2.32 billion, which would represent 2% to 4% growth over 2014. And our adjusted EPS guidance is $2.58 to $2.64, which represents growth of roughly 5% to 7% off the $2.47 we delivered in 2014.

I would now like to turn the call over to Andy to walk through our financial results in greater detail.

Thanks, Rob, and good afternoon, everyone. As I've done in previous quarters, I'll provide some additional color on our end-markets, a financial summary of our fourth-quarter results, and I'll provide some details around our first-quarter and full-year 2015 guidance. And then we'll, as usual, open up the call for questions.

I'd like to start by saying we had a very strong finish to the year. Organic revenue growth in the quarter was 5%, with recent acquisitions adding approximately 1%. This was offset by unfavorable exchange, which represented a headwind of approximately 3%.

Reported and adjusted revenues each increased 3% in the fourth quarter. Adjusted revenues were $609 million in the fourth quarter as compared to $593 million in the same period a year ago. Since we last provided adjusted revenue guidance back in October, foreign currency has negatively impacted our results by an additional $7 million.

Fourth-quarter adjusted earnings per share grew 15% to $0.85, with full-year adjusted earnings per share growing 18% to $2.47. Our quarterly results were $0.06 above the high end of our guidance range, the result of both volume leverage and strong incremental margins, driven by favorable geographic and product mix, as well as a modest impact from Perten. I'd like to note that approximately $5 million of revenues recognized in the fourth quarter related to sales that had originally been forecast in the first quarter of 2015, but were shipped prior to year-end at the request of our customers.

Looking at our geographic results, we experienced broad-based growth across all major geographies and end-markets, with improved results in academic markets and stronger analytical instrument demand in China. Our fourth-quarter organic revenue increased high signal-digits in the Americas, mid single-digits in Europe and Asia, with China also growing at a mid single-digit rate.

As to our operating results, fourth-quarter adjusted gross margins were 49.5%, up 30 basis points from the prior period. Volume leverage, along with geographic and product mix, including new products, were the key drivers offsetting the negative impact of foreign exchange. Fourth-quarter adjusted SG&A was 23%, down 110 basis points from Q4 of 2013, benefiting from the impact of successful productivity initiatives and foreign exchange.

Fourth-quarter research and development spending was down approximately 50 basis points for the same period a year ago, due primarily to efficiencies resulting from the consolidation of our R&D activities, and to our research center of innovation in Huntington. We expect modest increases in R&D spending throughout 2015 as we continue to invest in innovative new product development.

Our operational performance in the fourth quarter was very strong, as we expanded adjusted operating margins by 200 basis points to 21.5% -- this in spite of the negative impact of foreign currency. Net interest expense in the fourth quarter was approximately $9 million, in line with guidance and lower than the prior period by approximately $5 million, due primarily to costs associated with the retirement of our product placement notes a year ago. And the resulting lower interest cost resulting from refinancing at a lower interest rate.

During the fourth quarter, we repurchased 600,000 of the Company's outstanding shares for consideration of $26.5 million. For the full-year 2014, we repurchased 1.35 million shares, for a total consideration of $61.3 million. Our adjusted tax rate for Q4 was approximately 20%, and 20.5% for the full year, essentially in line with our guidance.

Switching gears, I'd like to walk through the performance of our business segments for the fourth quarter. By segment, Q4 organic revenues in our Human Health business grew 3%, and the Environmental Health business grew 7%. From an end-market perspective, our Human Health business represents approximately 55% of reported revenue in the quarter, with diagnostics representing 26% and research representing 29% of reported revenue.

Organic revenue growth from our diagnostic business increased mid single-digits during the fourth quarter. Our results were driven primarily by strength in our newborn prenatal screening and infectious disease testing solutions, which continue to garnish strong demand throughout emerging markets.

In addition, birth rates in the US grew at a 2% rate, showing a modest improvement from a year ago. This performance was partially offset by expected decline in our medical imaging business, due to customer ordering patterns.

Organic revenue in our research business grew low single-digits in the fourth quarter. Our Q4 results were driven by a number of new product introductions, including the Opera Phenix, [Insight] and Touch, as well as improved demand for our innovative automation, quantitative pathology and informatics platforms.

Moving to our Environment Health business, representing approximately 45% of reported revenue in the quarter, analytical instrument sales represented approximately 25%, and service represented approximately 20% of reported revenue.

As Rob mentioned earlier, effective in 2015, we will be moving our OneSource multi-vendor service offering into the research segment within Human Health, to better serve our customers in the pharma, biotech end-markets. As a result of this change, we will be restating our historical financial results ahead our first-quarter 2015 earnings call. And non-GAAP reconciliation will also be posted on our website in the next few weeks to help you with your models.

Environmental Health organic revenue increased high single-digits in the fourth quarter and mid single-digits for the full-year 2014. Our fourth-quarter results were driven by strong demand in both food and safety end-markets, with particular strength from our ICP-OES product portfolio and continued stream in our service offerings.

Turning to the balance sheet, we finished the fourth quarter with approximately $1 billion of debt and approximately $175 million of cash. We ended the quarter with a debt-to-adjusted EBIT ratio of 2.4 times, and a net debt-to-adjusted EBIT ratio of 2.0 times. This compares to a net debt-to-adjusted EBIT ratio in the fourth quarter of 2013 of 2 times, as we essentially utilized our operating cash flows to fund acquisitions and share buybacks during the year.

Operating cash flow from continuing operations was $282 million versus $157 million in 2013. Improved working capital efficiency and completed operational investments were key drivers to this significant level of improvement. Free cash flow for the fourth quarter was a record $90 million.

Looking back at 2014 results, we feel very good about our performance. Our mid single-digit organic revenue growth was encouraging, particularly in light of economic headwinds in Europe and China, aided in part by successful new product launches.

As I mentioned, we are very pleased with our operating margin expansion as we exit the year at 17.6%, despite facing almost 50 basis points of currency headwinds during the year. The represents almost 500 basis points of margin improvement since we first communicated our longer-term operating margin expansion goals in early 2010. In summary, we have delivered strong results over the last five years, culminating in a very successful 2014.

Turning to 2015, we ended the year with significant operational momentum. We anticipate market and geographic growth rates in 2015 to be somewhat similar to what was experienced in 2014. As in 2014, our strong income positions -- coupled with the benefit of a full year of new product revenue coming from launches in the second half of 2014, and additional launches in 2015 -- give us confidence in our ability to deliver organic revenue growth.

As Rob mentioned, the stronger dollar is expected to negatively impact revenues by approximately $100 million, and impact earnings per share by approximately $0.15. As a result, we expect reported revenues to be in the range of $2.28 billion to $2.32 billion, which represents organic revenue growth of 3% to 5%. Adjusted earnings per share for 2015 is expected to be in the range of $2.58 to $2.64, which represents earnings-per-share growth of 6% at the midpoint.

Implicit in this guidance is adjusted gross margin expansion of approximately 20 basis points to 30 basis points, and adjusted operating margin expansion of 30 basis points to 50 basis points. Net interest expense is expected to be approximately $42 million to $44 million, and our adjusted tax rate is expected to be 21%. We also expect a flat weighted average share count of approximately 113.5 million shares.

Given the significant strengthening of the dollar in the latter part of 2014, we also believe year-over-year comparisons will be more difficult in the first half of the year. Consequently, for the first quarter of 2015, we're forecasting reported revenues to be in the range of $530 million to $540 million, or essentially flat, but represent organic revenue growth of 3% to 4%.

As a result of the flat revenue, combined with the impact of the timing of sales recognized in the fourth quarter, which mentioned earlier, we now expect adjusted earnings per share to be in the range of $0.44 to $0.46 for the quarter. This concludes my prepared remarks. Operator, at this time, we'd like to open up the call for questions.

(Operator Instructions)

Doug Schenkel, Cowen and Company.

Good afternoon, thanks for taking the questions. My first question is, this is clearly a nice end to a year marked by some quarter-to-quarter volatility. One way you managed operational spend in the context of this volatility was cutting R&D expense.

And to be fair, a lot of this was expected, given the Hopkinton consolidation. But you did come in, I think, a little bit lower than many of us expected.

With this in mind, can you talk about what's baked into 2015 guidance, specifically for new product contributions to revenue growth? And will you likely increase R&D spend a little bit, looking ahead, given you are seemingly expecting a little bit of a pick-up in sales growth over the next few quarters?

Yes, first of all, our plan is to ramp up R&D. And I would say when you look at 2014, as you point out, part of that was a purposeful slowdown in spending.

But probably the bigger impact was our ability to hire the engineers, or find the engineers that we were looking for. And so as we talked about, I think in the beginning of 2014, we had a significant ramp-up of employment planning in Hopkinton. And quite frankly, it's taken us longer to find the qualified people to fill those slots. So hopefully, we'll continue to succeed in that area.

The other area we've been focused on ramping up is informatics software engineers. And again, they have been somewhat troublesome to find. We've seen some good progress here, we'll, probably in the last 30 days to 60 days. So I think it's fair to expect an increase in R&D spending in 2015, and we'll continue to layer that in.

Your other question with regard to new product revenue, clearly we would expect a utilization of the revenue we saw in the second half. So I would say we're probably looking for something in the $30 million to $35 million benefit from new products for the entire 2015.

Okay, thanks for that Rob. And a question on M&A.

Even subsequent to the completion of Perten, you guys have a pretty good, clean balance sheet. The rating on the Company is higher now. So I was wondering if you wouldn't mind refreshing your financial criteria, including ROIC hurdles, accretion requirements, maybe areas of prioritization and size limitations.

And building off of this, would you describe the competitive environment in M&A? It does seem like leverage ratio limits have come down a bit for PE, which would seemingly be good for you. But beyond that, how would you describe the competitive environment for adding assets?

First of all, from our perspective, I think we feel pretty good about the capability we have to continue to do acquisitions, and potentially buy back share as well. I think our slight preference is to do both on acquisitions that add good capability, both from a technology and organizational capability. To the extent we can't find appropriate assets or the valuations are challenging, we would buy back stock.

When we think about over the next couple of years, we feel like we've probably got $1 billion of capability. Between the free cash flow we generate and the capacity we have on the balance sheet, we would be comfortable probably at 2.5 times EBITDA, maybe stretching it a little bit above that. But I think when you look at the combination, that's probably $1 billion of capability.

With regard to the competitive environment, as I alluded to before, I would say valuations are -- continue to be high. It makes sense relative to the cost of capital. So my sense is, increasingly to make good assets work, you've got to have good synergies. And it's got to make sense relative either from a technology or from a market accessing customers.

We still see pretty good assets out there, and we've got a pretty full pipeline. One of the things we did do in 2014 is, we significantly ramped up our internal capabilities around business development. And so consequently, I think we've seen -- we've built a nice pipeline here. And we continue to feel optimistic about our ability to continue to bring in some great assets over the next couple quarters.

Okay, that's helpful. And if I could sneak one more in for Andy, and then I'll get back in the queue.

Andy, you mentioned about $5 million in revenue that was pulled forward into the quarter. Would you be willing to just provide a little more color on how broad this was? Things like -- was it one customer, was it a bunch of customers? And was it in one specific end-market versus another? Thank you.

Sure. It was, really, within two businesses. It was within our diagnostics business and with our informatics business, both of those being high-margin businesses. It was less than 10 customers, but it was split probably pretty evenly among those two businesses.

Okay, thank you.

Yes.

Ross Muken, Evercore Partners.

Maybe I missed it, I think, on Environmental, I was trying to get some of the extra color on how growth looked between Environmental and Industrial. Can you give us a flavor for how those two pieces trended on a core basis?

And then, was there any notable change geographically? It seemed like your commentary as a whole, as it looked forward, was more conservative because of PMIs. But it looked like the business actually had some pretty good results in some of the some cyclically oriented areas. I'm just trying to figure out --

First of all, on a geographic basis, in the Environmental, we saw pretty good growth across all the geographies. Whether it was Europe, Asia or Americas, it was all around mid single-digits. Maybe Europe was a little bit higher. But within those three geographies, the growth of Environmental was between 5% and 7%, so it was pretty broad-based.

However, when you look at the segments, industrial was lower than the core environmental and food. So if you look at industrial, it was low single-digits, whereas environmental food and water were again closer to the mid to high. There was bifurcation from an end-market perspective, but geographically, it was fairly broad-based.

And again, just even within China, we saw some nice recovery. And within Environmental, Greater China grow high single-digits.

And on the margin cadence, obviously, the currency environment has have been tricky this year, and obviously it bit away at your earnings. As you think about various levers -- I mean obviously Doug touched upon the balance sheet -- you've got plenty of capacity there.

But as we think about -- you obviously just are coming off a year where you had pretty spectacular expansion. It seemed like some of the heavy lifting is already underway. How much wiggle room do you have if we see either FX or something macro-oriented happen to flex that line, to make sure that you can manage within the earnings range?

I still think we see a number of opportunities to improve the efficiency of the operations. We've talked in the past about the fact that we've done a lot around our factory consolidation. But purposely why we were doing that, we were not as focused on switching our supply base out, for example. Because we didn't want to be both moving the factory and moving the supply base.

We think there's opportunities to continue to get better leverage there. I know Andy has been talking about a big initiative around direct spend, we continue to get good traction there. And doing some things on how we go to market, whether it's more effectively utilizing the web or some of our back-office capability.

We continue to see a number of opportunities to drive efficiencies and improve margins that way. But quite frankly, I think now that we're at the level of -- call it 18% -- we do want to shift our focus a little bit more to growth.

And so, going back to Doug's original question, I'm hopeful that we will be able to take up our spend around innovation. And we talked about opening up the China lab. There's a number of great opportunities we see to take advantage of what we think are some terrific market positions that we have.

Great, thanks Rob.

Tycho Peterson, JPMorgan.

Just wanted to actually follow up on the M&A discussion. Can you give us a sense of how you're prioritizing different areas? Obviously the two recent acquisitions, Perten Instruments and Ceiba, speak to some of the industrial or applied markets. Could you talk a little bit about software versus other areas that you might prioritize, from an M&A perspective?

I'd start off by saying, I think the great thing about PerkinElmer right now is, if you look at research, if you look at diagnostics, if you look at environmental, all of those, I think, are attractive end-markets. So we've got potential targets in all of those.

From a prioritization standpoint, though, we would probably put diagnostics a little bit higher. We like the macro trends there, particularly in the areas we operate in. When you think about what's potentially the rising middle-class -- particularly in the emerging markets -- and the continued pressure that's going to put on access to healthcare and aspects of newborn and infectious disease. I would say that has a little bit of a higher priority for us.

We like the environmental area, particularly food. And even within the research area, there's some areas that, from a technology perspective -- the great thing about informatics, and why we also have been focused on informatics is, we believe they leverage across all three markets. So again, we're looking for targets in all those areas. But like I said, probably diagnostics and certain aspects within environmental have a little higher priority for us.

And you talked at our conference about trying to monetize synergies between Environmental and Human Health. Can you talk to what specifically that entails? Is that investments around software or --? Just talk to what that means from your perspective.

I think some of it is in software, but it's broader areas. There's areas like certain technologies -- I think I mentioned, specifically, optics.

If you look at whether it's diagnostics and research or environmental, we do a number of things that require -- obviously when you're in detection and imaging, optics is a big component of that. If you look at algorithms, right? Again, because when you're taking reads off of instruments and converting that into data and information, there's algorithms, there's service benefits across the portfolio.

I think there's a number of technologies that leverage across -- obviously there's software that leverages across. And then things like brand and financial capability and organization. We like being about human environmental health. It gives us access to customers and information that we can leverage across the businesses.

Thanks. And just lastly, on China, you talked about things getting better on the analytical instrument side. Can you quantify what your expectations are in 2015, and your confidence in the stabilization recovery there?

We look at China -- for us, in 2014, it was in the high single-digits. But as I think I talked about before, there was fairly big disparity between Human Health and Environmental Health.

I would say for 2015, we would say similar top-line growth for the Company. So again, high single-digit growth. Our expectation now is it would be closer linkage between Environmental and Human Health. So similar growth that what we saw in 2014, but hopefully, a little closer linkage between Human and Environmental Health.

Okay, thank you.

Okay.

Paul Knight, Janney Capital Markets.

This is actually Bryan Kipp on behalf of Paul. Just want to dig in a little bit more on the environmental industrial side.

Did you see any budget flush, in context to you saw there? I know with the FX volatility and just year-end strength there, it just seems a little surprising.

I know you also said there was strong bookings at the end of 3Q. So did most of those convert, and does that account for it?

We don't believe that a significant contributor was budget flush, quite frankly. If you look at within the specific growth of 7%, again, we saw higher growth on the service side. The service was stronger than the product. The product was still growing nicely, but we saw it higher on the service front.

Again, as we alluded to before, it was pretty broad-based across geographies. I think some of that is attributable to better execution, quite frankly, within the businesses, and maybe some improved market conditions, particularly in China.

Okay. And any color on how it's paced so far this quarter, bookings, end of Q4?

In our view right now, market conditions for the early part of 2015 being very similar to what we saw in the fourth quarter.

All right. Last one, quick, for me is, last quarter, last call, you cited $400 million in indirect spend that you highlighted, and eventually pull out a little bit of leverage here and there. I think you said you would like to pull out $10 million there. Are you seeing additional opportunities that you could pull from on that indirect spend that could support 2015 above and beyond where you were prior?

We absolutely do. It's about $420 in total.

And we've put a lot of effort around the tools and the education across the organization. We've actually hired a dedicated procurement person, dealing strictly with indirect spend.

So our hope internally is to drive an even higher savings off of that total. And I think we may just have to spend some of that back or flow it through, but I think that gives us a little bit of hedge on further currency deterioration. So I think we feel very good about that particular initiative at this point.

Will you give the hard numbers down the road?

I think as we progress through the year, we'll provide some additional color on how we're doing.

All right. Thank you very much.

Sure.

Bill Quirk, Piper Jaffray.

This is actually Alex Nowak filling in Bill. Can you describe the progress you're making in China with the increase in the newborn screening menu? I know you previously mentioned moving it from two to four tests.

Based on my question is how far along are you in this adoption to go into four tests? And should we expect this to go to five or six tests in the future?

First of all, we saw very nice growth in China in newborn in the fourth quarter, and in fact, for the entire year. But I would describe the growth in China as more testing more children than expanding the menu.

I think right now, at least in our discussions with the government officials there, I think there's a higher priority around getting all the children screened at least at two to four, before you'll see a big push on expanding. Some of that may happen in parallel. But if you look at our growth in 2014, it was probably more screening more children than it is absolute menu expansion.

Okay, perfect --.

As we get into 2015 and 2016, I think then you'll hopefully see some more menu expansion where, as we mentioned, we go two, four, five, and get into maybe even some mass spec screening. But clearly what we saw in 2014 was less menu expansion and more screening more children.

Okay, excellent. And then staying on China, real quick, how is the NAT conversion going for blood screening? Is it basically a national rollout at this point, or is it still province by province?

It's still province by province. And it's starting to roll out, but as I think we suggested earlier, it is a slower ramp than anticipated. So I think we talked a lot about probably seeing the uptick more in the back half of 2015 as compared to early 2015.

All right, perfect. Thanks, guys.

Steve Willoughby, Cleveland Research.

I have one on 4Q and then one on 2015. First on 4Q, the $5 million of additional revenue -- is there any way to quantify what that translated into earnings for the quarter? I'm mostly curious just with margins here in the fourth quarter, both gross and operating margins were better than I was looking for.

So I was wondering what drove the -- when I look at it -- 12% quarter-over-quarter increase in revenue but only a 3% quarter-over-quarter increase in SG&A? I don't know if they're related at all or not. And then I'll follow up with my question on 2015.

As far as the overall EPS impact of the $5 million, it's probably a couple of pennies.

And I think it speaks a little bit to the leverage we get on volume growth. One of the things that you look at as PerkinElmer starts to do $600 million in revenue, or north of that, we can produce a lot of incremental profitability. In the quarter, we're 21.5% operating margin. That it speaks to the leverage we get, particularly off of SG&A, but also on some of the other fixed costs.

Obviously that's going back to my prior comments around trying to get the growth cranked up. If we can get to the point where we're generating revenues significantly above the breakeven, we start to see very high flow-through to profitability. Because clearly, the SG&A and a lot of our costs do not scale with the revenues.

Okay, thanks so much. And then on 2015, I may be off on this, but I believe in 2015, you're going to have 53 selling weeks versus 52 in past years? I was wondering a couple of things.

One, if that's correct? Two, if you could quantify the impact from that? And then three, what quarter those extra days will hit in 2015?

First of all, that is correct. Every six or seven years we have an extra week. That's to some extent why you saw in 2014 we closed on the 28th and not the 31st.

This year we'll have an extra week. I believe, Andy, it's in the third quarter?

Yes

And I think we factored that into our guidance. We don't think it's going to be a significant impact on the top line because fundamentally what you're doing is, you're picking up a couple of days at the end of the 2014 and a couple days at the early part of 2016. So that the week we get is really the 29th, 30th and 31st of December in 2014, and the 1st, 2nd, 3rd and 4th of January.

Our sense is maybe that's $15 million to $20 million of revenue, and some associated profit flow-through from that. And again, we factored that into to 3% to 5% growth guidance.

Okay, thanks so much, guys.

Dan Leonard, Leerink.

You talked a couple times about achieving, for all intents and purposes, your 18% operating margin target in 2014. Previously you had offered another target of greater than 20% in 2017. Is that still the plan, or are you stepping back from that plan?

I would say it's our goal. I think what makes that more challenging is where the dollar is right now. And particularly if it's going to continue to strengthen.

So while we still have to go out there and try to get to 20% by 2017, I think in a year we're at 112. And like I said, and if it continues to march toward parity, I think 20% operating margins -- I don't think they become impossible, but it gets a lot more challenging.

But Dan, I think the activities that we had laid out and have in place through 2017 will continue. And I think we'll continue to make good progress on that.

But we can't control FX. But I think you'll continue to see us expand margins, and if FX does head the other way, it does make it a little bit easier.

Okay. And then my follow-up question on Human Health. I'm trying to reconcile some of the positive new product commentary in that category with a result that was a little lower than we were looking for, at a low single-digit number.

So what were the offsets? And what assumptions do we need to make to assume that, that segment accelerates to a mid single-digit growth range after a couple years of low single-digit?

If we're talking specifically about Human Health, the offset was medical imaging, as we mentioned, was down mid-single digits. That's why you're seeing Human Health pull down a little bit from the 5 to 6 it's been historically, down to 3.

If you're talking more specifically around research and what needs to happen there, I think a couple of things is, as we continue to get new products out in those areas that we're focused, like micro flinics and imaging -- and what will move is -- radiochemicals become a smaller percentage of the whole. So obviously that's a drag.

And I think the other thing is, we talked about informatics, which is in the research area, had a very strong 2013. In the back half of 2014, it wasn't as strong, because of difficult comps, but also because we've been investing a lot in a new offering from the cloud.

And so we're optimistic that for 2015, you'll see informatics return to a high-single low double-digit growth. It's a combination of getting new products out. Second thing is getting informatics growing again at a double-digit rate, and averaging radiochemicals down to a smaller percentage of the business.

Got it, thank you.

Isaac Ro, Goldman Sachs

I wanted just start off with the margins. I think in the beginning, you or Andy talked about the long-term goals, that you just had to hit 18%. And obviously it's been a pretty successful run here.

As we look to the long-term from here forward, I was wondering if you could talk a little bit about where you think margins will go? And realize you probably won't want to give specific guidance, but trying to get a sense of where you think the opportunities are, and how much you have to work with?

Going back to the comment earlier, we had set a goal of 20% by the end of 2017. And we felt fairly confident we could get there, based on both the success we've had previously and the opportunities we see going forward. As I mentioned before, that's still a goal of ours, it's just a little bit more difficult, given the headwinds associated with foreign exchange.

We haven't come out with a new goal relative to the 20%, because we're waiting to see whether the strength of the dollar is a short-term, long-term and where it goes. But I would say for now, the 20% is the goal that we've got out there.

As I said before, I think our plans have not changed. The only thing that's really changed is FX. And if you look at re-investment, we're actually covering probably 8% to 10% increases in R&D for this year, for 2015.

So I think all the dynamics in the framework will continue to be executed against. And again, it's really going to depend on where the FX rates head over the next three or four years.

But as a general rule, the idea of 75 basis points a year, plus maybe some benefit from acquisitions or capital deployment, et cetera, I think still holds.

That's very helpful. It all makes make sense. Thank you.

Second one was on newborn screening. I was curious just if the underlying growth trend you saw domestically versus abroad -- how did that do? I'm assuming the US improved a little bit sequentially, but wondering if that, in fact, was the case. And then, if you look at 2015, are you assuming that continues to trend better and better?

Yes, so your assumption is correct. US has improved incrementally, as did outside the US. We saw growth across both. As you can imagine, in the US, it was more menu expansion, whereas outside, it was more -- we continue to get good penetration.

I think the other opportunity as we look out is, you probably saw, we just got FDA approval for our SCID assay. And we're very excited about that. We've actually started some pilot programs actually outside the US. For example, France is doing a pilot program.

So we think there is continued opportunity, even within the developed world, to expand the menu. We continue to be quite bullish on the newborn screening growth prospects.

If I could just sneak one in real quickly, do think the US volume environment for newborn can pick up this year as well? Just putting aside the nice menu additions as well?

Our statistics, as I think Andy mentioned, would indicate that birth rates are up about 2% on a trailing 12 months. Obviously that helps from a volume perspective.

Okay, thank you.

Miroslava Minkova, Stifel.

Let me just start with a question on the revenue and earnings cadence in 2015. Looking at your fourth-quarter outlook here, and it seems to suggest a somewhat slower start. I know there was the $5 million that got pushed forward into the fourth quarter. But there have been some comments from competitors as well that budgets tend to be spent a little later in the year, perhaps, more recently. How do think about the revenue and the earnings build as you go through the year?

We talked earlier -- we do feel like there is going to be a bit more of a shift to the latter half, from both a top and bottom line, from a cadence perspective. I think in the first quarter, in particular, we do have what I described as the $5 million in the fourth quarter. But in addition, we have some investments that we're making, which is also impacting our earnings per share, around the China lab and around some investments in informatics.

I think we're going to see some essentially flat margins in the first quarter, but I think that's because of investments and the impact of FX. I think for the full year, I think we still see revenue improving more in the second than the first half. And we think operating margins are going to be, after FX, in that 30 basis points to 50 basis-point range.

And I would say the other thing, I mentioned the fact that we are expecting to introduce some new product at Pittcon, which is the analytical instrument show in early March. And so we're looking to get some nice tailwinds from that, particularly in the back half of the year. So that's also skewing some of the growth and profitability in the back half.

Okay, great. And perhaps if I could go back to the Human Health business and the medical imaging, in particular, do you expect this to rebound in 2015? And why was the margin so strong on the Human Health side?

First of all, the answer is yes, we do expect medical imaging to be mid single-digits in 2015. I think Andy in his prepared remarks mentioned a little bit of some customer ordering patterns that created some difficulty, particularly in Q4.

I think the answer to your question about why the margins were so high is, first of all, we had some favorable mix during the fourth quarter. As I alluded to, newborn screening was very strong, and that's one of our highest profitable businesses.

I think the other thing, going to the overall point that I made before is, when volume increases, we create a lot of profitability on an incremental basis. And so that's particularly true in the Human Health, where you've got high reagent flow, which of course has very high gross margins associated with it.

Okay, great, thank you so much.

Thank you.

Derik de Bruin, Bank of America Merrill Lynch.

It's Raphael in for Derek. Thanks for the questions.

Just wanted to go back to the margins for 2015. Can you just actually provide what the margins would look like on a constant currency basis? What the margin expansion would be at the gross and operating margin level?

It' would probably be closer to around 30 basis points at the gross margin level, and probably 50 basis points to 70 basis points at the operating line.

Okay, helpful. And I just wanted to go back to the research markets. Can you remind us again where we are now in terms of what radiochemical represents as a percentage of the total sales? And in vivo imaging, how that business is trending?

The radiochemical business for us is -- I'll call it $90 million of revenue, to give you a sense of the size of that business. The in vivo imaging business, I would say, for the fourth quarter, was slow, relative -- and I think to a large extent, that was associated by, as I mentioned before, some of the [austerior] we're seeing around academic spending. We do believe, or we expect in 2015, we'll see that business be up again in the mid to high single-digits.

Okay. And just one last one on OneSource.

Can you speak to the competitive landscape here in terms of lead generation? And also the private pricing dynamics that you're seeing in the space? Thanks.

Yes, I think the multi-vendor service area has been one that's been fairly competitive for a period of time. There's a number of strong competitors out there.

I think we've got a little bit of first-mover advantage. And the other thing I think that helps us is that our informatics capability, which we've been leveraging -- the Ceiba acquisition helped bolster that as well. I think the combination of being incumbents in a lot of areas, having the strong software capability and being quite successful at it, continues us to take our fair share. But it is a very competitive environment.

Got it. Appreciate it, thank you.

Bryan Brokmeier, Maxim Group.

First question on M&A. You said that you like M&A opportunities in diagnostics. Obviously you're strong in newborn prenatal screening and strong growing in infectious disease.

Would you step outside of those core competencies? Or are those the areas where we should expect you to be the most focused on in potential M&A opportunities?

My sense is, that's the area you would expect us to be most focused on. There may be potential adjacencies to those areas, but unlikely that you're going to see us make a significant move outside.

Clearly, an area of molecular diagnostics might be one, where you think about the opportunity to take that into our current markets that we serve. But the things that we're going to look for is stuff that are adjacent to what we do, that are consistent with the channels that we have or the technologies we can deploy into our existing customer base.

Okay, thanks. And then, do you know what the screening rate in China is up to today? I've seen an estimate for Chinese births to decline as much of 30% in 2015. Even with the further expansion of screening, can that business still grow in 2015, with such a severe birthrate headwind?

So the current screening in China is in the 65% to 70% range. I think what you're referring to is, 2015 is the Year of the Goat. Apparently, Chinese do not want to have children in the Year of the Goat. There's negative implications to that.

And we have seen some of that impacting our prenatal business. Because that's a very good precursor to the newborn rate.

30% sounds like a pretty high number to me. And of course, what's offsetting that to some extent is the loosening of the one child policy. And so the answer to your question is, we do believe we can continue to grow the newborn business in 2015, despite it being the Year of the Goat.

Okay, thank you.

Jeff Elliott, Robert W Baird.

This is Ellie Propova filling in for Jeff. Can you walk us through some of the main components of your revenue growth assumptions? I know you already mentioned new products.

But are you able to share your expectations for volume and pricing? And particularly, pricing, in light of some of the large FX moves we've seen?

I would say, generally speaking, pricing for us has not had a material impact one way or another, if you look historically. And consequently, we haven't factored into having a large impact in 2015. I think if you look at all of last year, pricing was in sort of the 50 basis-point health.

So I would say for 2015, our assumptions are that similar level, maybe 50 basis points of increase in price. So that the majority of the growth is going to come from volume.

To give you a sense by business, I think it's fairly well-distributed. I think as we think about 2015 right now, it's probably Environmental and Human Health, similar growth trajectories, I would say, in the 3% to 5% range. When you look within Human Health, diagnostics will probably be a little at the higher end, so maybe that's in the 7% range. And clearly, research will be at the lower end of that, maybe in the 3% range.

Got it, thank you.

Brandon Couillard, Jefferies.

Andy, just in the terms of the outlook for next year, could you give us some metrics around what you're looking for in terms of operating cash flow and CapEx? And how you're thinking about the free cash flow conversion that's likely for the year?

Sure. I think we'll be in the mid to high $90 millions on free cash flow conversion. I think our operating cash flow should be around $315 million to $325 million. So we'll have a three-handle for the first time on our operating cash flow.

I think free cash flow, it will probably be high $200 millions, $285 million to close to $300 million, in that range. So I think we're going to see some continued improvement on the working capital side.

We've make some investments utilizing our SAP system. On the collection side, we think we can get some working capital taken out with that. And we also have some efforts around inventory. So we feel pretty good about the working capital piece, and I think with additional income, we see our way to getting to those numbers.

So just on the research business in the fourth quarter, can you give us a feel for the geographic performance, or if there was any -- I suppose it's mostly pharma -- but any customer-base color to share on the fourth quarter?

I would say if you look at the pharma-academic split, pharma was mid single-digits; academic was low-single. I alluded to the fact that the imaging business, the in vivo imaging was impacted by the funding environment. And of course, when I talk about research here, I'm not including the OneSource, which had a very strong fourth quarter.

I think what drove pharma to some extent was that the new products, particularly around the Opera Phenix and MLD, we came out with a new product called the Insight, which combines both detection capability and imaging.

Geographically, actually the strongest region was Europe. Europe was up mid single-digits; there was nice recovery there. So we were pleased with the performance there.

Americas was up low single-digits, and APAC was actually down a little bit, even though China grew. China grew mid-high single-digits. There was really some difficult comps we had outside of China that put pressure on that region. But again, it was low-single in the Americas, mid single-digit growth in Europe, and APAC was down just slightly.

Super. Thank you.

Reggie Miller, Citibank.

Thanks for taking the question. Most of them have been answered so far, but thinking big picture, Rob, you mentioned that you're playing a leadership position in more or less 75% of the business that you operate in today. How often do you look at the of the other 25% and evaluate those and potentially see if they're sub-scale, or look into divesting them?

We're looking at our businesses all the time. And at least on an annual basis, we're sitting down with the Board of Directors and going through a fairly thorough strategic review of the portfolio and the businesses. And so one of the questions we continue to ask ourselves, are we the most appropriate owner of the franchise or the business?

So it's something we go through in a fair amount of detail on at least an annual basis. But it's something we're always challenging ourselves and questioning the businesses and making sure that we can continue to create value owning those businesses.

Thanks very much.

Eric Criscuolo, Mizuho.

If you could talk about a little more about the Perten acquisition and the kind of growth rates it had when you acquired it. And where you think it could go under your leadership, and maybe the margin profile as well?

As I mentioned in my prepared remarks, we're very excited about the Perten Instrument acquisition. We think it brings us some terrific capabilities in and around broadly defined food, but more specifically, in grain and feed. And we think the combination of their technical capabilities, the product portfolio, and maybe most importantly, their access and customer reputation, combined with some of the things that we have the capability, will allow us to accelerate the growth in and around that business. And early indications continue to reinforce what we saw when we did the diligence.

With regard to specific numbers, they're growing around 7%, 8%, which we would expect to continue and maybe even improve a little bit. And it was a business that had 20% operating margins. So profitable business, good growth, great reputation in the marketplace. And we look to leverage that and continue to expand in obviously an important area -- food safety.

Thank you for that color there. Andy, on the FX issue, is there anything that you can do to be a little more proactive in making that hit a little less, as far as shipping costs or anything like that? Or is it something that you basically just have to weather through for a little while?

I think for the majority of the FX impact, we have to weather through it. I think what we're trying to do is accelerate some of the actions around some of the cost initiatives, around indirect spend and so forth, to pull as much of that in as we can, to try to somewhat offset it. But it's a fairly significant number, as we communicated.

And we're not going to hedge the P&L; it's a lot of risk, and you're wrong more than half the time. I think we'll just try to power through it. Unfortunately, there's not any magic dust to help us there.

Thank you.

At this time, there are no further questions in queue. I would now turn the call back to over to Mr. Rob Friel.

Great. Well, first of all, thank you for your questions.

And so in closing, I want to reiterate that I feel very good about our progress last year. And I remain excited about building upon our accomplishments to take advantage of the significant opportunities ahead to both create value for our shareholders and make a positive impact on human and environmental health around the world.

Thank you for joining us for the call, and have a great evening.

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