Revvity Inc (RVTY) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2015 PerkinElmer earnings conference call. My name is Whitley, 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. Tommy Thomas, Vice President of Investor Relations. Please proceed.

Thank you, Whitley. Good afternoon and welcome to the PerkinElmer first-quarter 2015 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 May 14, 2015.

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

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during the call to the most directly comparable GAAP measures is available 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'm 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 had a good start to what we believe will be a successful 2015.

Our financial results were strong with organic revenue growth within our expectations and adjusted EPS significantly beating our guidance. Adjusted revenue in the first quarter was $527 million, representing constant currency adjusted revenue growth of 5% comprised of 2% from acquisitions completed last year and 3% organic revenue growth in the quarter.

While Andy will provide additional color on our revenue performance in the quarter, I was pleased that we experienced growth in every business and across all major geographies. While the strong US dollar offset some of the operating performance in the quarter, constant currency adjusted operating margins expanded 130 basis points, and constant currency adjusted earnings per share grew 19%.

During the quarter, we also made significant progress on our growth initiatives across each of the businesses. In environmental health, we launched a number of new innovative products across our three product platforms, including the first entirely corrosion-resistant flame atomic absorption spectrometer available on the market.

The new PinAAcle 500 helps scientists working with highly corrosive environmental samples detect minerals and metals for a variety of applications including testing drinking water and detecting elements in food samples for nutritional labeling. In addition, we introduced the first fast flame autosampler which allows dramatically higher throughput and the lowest cost per element of any similar analyzer on the market today. We also launched the Spotlight 150 and 200 series microscope IR analyzers incorporating innovative flexible automation and software analytics, allowing for simpler, faster contaminant analysis.

Many of our new environmental health products were launched at the March Pittsburgh Conference under our theme of Instruments of Change, which focused on how PerkinElmer makes a positive impact on the world through innovative science platforms and exceptional service. Reinforcing our growing reputation for innovation, a number of our scientists and products were recognized for outstanding achievements, including the award for best new spectroscopy product.

Also during the quarter, we announced a strategic alliance with Waters Corporation to strengthen our chromatography portfolio for PerkinElmer's non-pharma customers. Of note, our new HPLC and Altus UPLC liquid chromatography solutions will help scientists in the environmental, industrial and applied markets better detect adulterants, contaminants and flukes.

In addition, PerkinElmer will standardize on liquid chromatography and gas chromatography portfolio on Waters' Empower software. This will enable customers to simplify their workflows by unifying their chromatography data onto one platform and providing greater confidence in their analysis.

We were also pleased by the traction we are seeing in the successful integration of Perten Instruments and our progress in further penetrating the multibillion-dollar global food testing market. In addition to driving strong growth in the quarter, Perten was recently selected by the Canadian Grain Commission as its preferred near infrared grain analyzer.

In human health, we received a market authorization from the China Food and Drug Administration to offer our automated high-throughput genetic screening processor, the GSP, as an assay for the detection of congenital hyperthyroidism. We have additional GSP assays pending approval with CFDA that will further expand our menu for newborn screening in China and enable a wider range of testing for life-threatening disorders in newborns. We continue to make good penetration in other emerging markets with additional recent wins in India where we now expect to screen nearly 1 million babies this year, and our recent contract win in Mexico is ramping up nicely.

In March, we announced an exciting collaboration with Johnson & Johnson's innovation. J&J's new life science incubator labs or JLABS chose PerkinElmer to outfit its entire lab in South San Francisco, California. By providing our imaging and detection solutions, plus on-site staff, training and support for the resident biotech companies, we are helping to kick start the research. This new venture is a testament to J&J's belief in our capabilities and applications expertise to help advance cutting-edge science.

From a commercial perspective, our decision early in the quarter to move the OneSource services group into our human health business is already paying off. As you may recall, the intent of this move was to better serve customers in the growing pharma and biotech markets by delivering more complete solutions targeted towards their specific needs. Early success in aligning our internal expertise and leveraging our strong customer relationships indicates that this will change -- this change will contribute to solid organic growth in 2015.

Stepping back and assessing the broader macro environment, growth across our geographies is fairly mixed but remains in line with our expectations at the start of the year. In the US, while the strong dollar is posting substantial headwinds against the topline, it is proving to be the healthiest geography as growth steadily returns. Europe is stable and showing some increased demand, but the region is still working through its current economic challenges.

APAC remains stable overall; however, Japan and Korea faced weakened environments. And despite China's overall economy slowing, we continue to believe we will grow high single digits there given the critical segments of the economy we serve.

Consequently, I remain confident that we can continue to leverage market opportunities across our businesses and drive profitable growth. Based on our performance in the first quarter, we are raising our expectations for constant currency adjusted EPS growth for the year to 12% to 15% from the previous 11% to 13% while maintaining our outlook for constant currency adjusted revenue growth of 7% to 8% and organic growth of 3% to 5%.

I would now like to turn the call over to Andy.

Thanks, Rob, and good afternoon, everyone. I will provide some additional color on our end markets, a financial summary of our first-quarter results and details around our second-quarter and full-year 2015 guidance.

Due to the recent volatility and movement in foreign currencies, I will be providing my commentary on a constant currency basis, which assumes FX rates are the same year-over-year in order to better portray the results in the quarter. Reconciliations of these non-GAAP measures are included in our first-quarter press release and have been posted to our website.

I'd like to begin by saying we are off to a solid start in 2015. As Rob mentioned, we reported 5% constant currency adjusted revenue growth and 3% organic revenue growth in the quarter with unfavorable foreign exchange rates representing a headwind of approximately 6%.

Adjusted revenue was $527 million in the first quarter as compared to $532 million in the same period a year ago. And since we last provided adjusted revenue guidance back in January, unfavorable foreign exchange rates have negatively impacted our topline results by an additional $4 million.

First-quarter adjusted earnings per share was $0.50, up from $0.47 in the comparable period a year ago, and we had constant currency adjusted earnings per share growth of 19%. Our quarterly adjusted EPS was $0.05 above the midpoint of our guidance range, driven by strong incremental margins, favorable geographic and product mix, as well as the timing of certain expenses in the current quarter.

Looking at our geographic results, we were encouraged by balanced growth across all major geographies and end markets with improved results in Europe and stable demand in China. Our first-quarter organic revenue increased mid single digits in the Americas, low single digits in Europe and Asia, with China growing at a high single-digit rate as expected.

As to our operating results, first-quarter adjusted gross margin was 47.7%, representing constant currency adjusted gross margin expansion of 100 basis points. Our results were driven primarily by favorable mix, success with our Asia supply chain initiatives, and year-over-year improvement in our OneSource business primarily related to new customer startup costs in the first quarter of last year. For the full year, we continue to forecast constant currency adjusted gross margin expansion of 70 to 80 basis points.

First-quarter adjusted SG&A was 25.9% of adjusted revenue and a constant currency adjusted SG&A reduction of approximately 70 basis points from the prior period as we continue to benefit from the impact of successful indirect-spend initiatives. Research and development spending in the first quarter was 6.1% of adjusted revenue and a constant currency adjusted R&D increase of approximately 50 basis points from the prior period, driven by our ongoing investments in innovative new product development. The majority of the increased development spend came in our environmental health business, supporting a number of new product introductions and incremental investment at Perten.

As Rob mentioned, we launched a number of new products at Pittcon earlier this year. We're excited about the second half revenue opportunity, and we continue to expect full-year R&D spending to grow over 2014 levels.

Overall, our operational performance in the first quarter was strong as we expanded constant currency adjusted operating margins by approximately 130 basis points, driven by an improved gross margin and a success with the previously mentioned indirect-spend initiatives. We continue to feel good about our ability to expand constant currency adjusted operating margins in the 80 to 100 basis point range for the rest of 2015.

Net interest expense in the first quarter was approximately $9 million, flat versus the comparable period a year ago, and our adjusted tax rate for the quarter was approximately 22%, which was slightly higher than we previously guided due to the geographic mix of our profits in the quarter. We continue to expect our adjusted tax rate for the full year to be approximately 21%.

Switching to the segments, first-quarter organic revenue increased approximately 4% in our human health business and approximately 2% in our environmental health business. From an end-market perspective, our human health business represented approximately 62% of reported revenue in the quarter with diagnostics representing 29% and research representing 33% of reported revenue. As a reminder, we now report our OneSource multivendor services business in research.

Organic revenue growth from our diagnostics business increased mid single digits off a high single digits comparison in the first quarter a year ago. Our results were driven primarily by strength in our newborn and infectious disease testing solutions, which continue to garner strong demand throughout emerging markets, as well as medical imaging which had organic revenue growth of mid single digits. In addition, birthrates in the US stabilized, showing modest growth versus a year ago.

We have strong performance from our diagnostics business in China with double-digit organic revenue growth in the quarter, while our high-end business continues to ramp. We remain optimistic around the Chinese nucleic acid testing opportunity ahead of us, but the near-term uptake is moving slower than expected, a result of the government moving to a centralized purchasing model versus the traditional provincial model.

Organic revenue in our research business grew low single digits in the first quarter, driven by recent new product introductions including the Opera Phenix as well as improved demand for our innovative automation systems and our OneSource and informatics offerings. We're currently seeing moderate improvement in the academic and government end markets but feel that we have not yet seen an inflection point while pharma and biotech remain stable.

We continue to expect research sales to have low single digit organic growth for the full year. Human health adjusted operating margin in the quarter was 22%, up 270 basis points over the first quarter of last year, due primarily to a positive mix shift into informatics and reagents and improvement in OneSource profitability and the timing of expenses in the quarter.

Moving to our environmental health business, which represented approximately 38% of reported revenue in the quarter, we had organic revenue growth of 2%, in line with our expectations. Strength in the US was partially offset by softness in Asia-Pacific, in spite of the good performance in China.

From an application perspective, our first-quarter reported results were driven by improved demand in the industrial end market, driven to a large extent by success in our [matcar] offerings and Perten. As Rob mentioned, the integration of Perten Instruments continues to go very well, and we are on track to deliver the $0.04 of accretion from the acquisition for the full year as previously guided.

Environmental health adjusted operating margins in the quarter declined 270 basis points versus the first quarter a year ago, driven primarily by foreign exchange headwinds, the seasonality of Perten's profitability and the timing of selling and R&D investments supporting the new product launches previously mentioned at Pittcon. For the full year, we expect environmental health adjusted operating margins to expand 80 to 100 basis points.

Turning to the balance sheet, we finished the first quarter with approximately $1 billion of debt and approximately $170 million of cash. We exited the quarter with a debt to adjusted EBITDA ratio of 2.3 times and a net debt to adjusted EBITDA ratio of 1.9 times.

Adjusted operating cash flow from continuing operations was $62 million. This performance excludes $24 million in voluntary pension funding payments made in advance of upcoming interest rate and mortality table assumption changes. We do not forecast making additional voluntary funding payments in the year.

Looking into the second quarter and the balance of the year, we're well-positioned to drive significant operational performance. We anticipate similar market and geographic growth rates as in the first quarter. As in 2014, our strong incumbent positions coupled with the annualization of new product launches from the second half of 2014 and additional launches in the second half of 2015 give us confidence in our ability to deliver mid-single-digit organic revenue growth in the current economic environment.

Looking at the impact of foreign currency translation, the stronger dollar is now expected to negatively impact full-year adjusted revenues by approximately $137 million and impact adjusted earnings per share by approximately $0.23 in total or an incremental $37 million on the top line and approximately $0.08 per share on the bottom line from initial guidance. As a result, we now expect reported revenues for the year to be in the range of $2.24 billion to $2.29 billion and approximately 7% constant currency revenue growth at the midpoint.

Our guidance continues to reflect organic revenue growth for the full year of approximately 3% to 5%. We now expect adjusted earnings per share for 2015 to be in the range of $2.54 to $2.60 with a midpoint of $2.57 and constant currency adjusted earnings per share growth of 12% to 15%, up from 11% to 13% as previously guided.

Implicit in this guidance range is adjusted operating margin expansion of 30 to 50 basis points. Net interest expense and other is expected to be approximately $42 million to $44 million. Our adjusted tax rate is expected to be 21% with a flat diluted weighted average share count of approximately 113.5 million shares.

For the second quarter of 2015, we're forecasting reported revenues to be in the range of $550 million to $560 million, representing approximately 7% constant currency revenue growth with organic revenue growth of 3% to 4%. Adjusted earnings per share for the second quarter are expected to be in the range of $0.57 to $0.59 or 10% constant currency adjusted earnings per share growth at the midpoint.

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

(Operator Instructions)

Ross Muken, Evercore ISI.

Maybe on the environmental business, it seemed like in general, China had a pretty good quarter, but we only had the low single-digit growth. So if we look at some of the culprits on that side of the business, what are you pointing to, and how did it trend over the course of the quarter?

So I would say on the environmental side, first of all, within China, as you mentioned, we saw probably within the environmental mid-single, and that was pretty good strength on the environmental industrial side. But we continue to see slowing demand or challenging demand on the food side. So China, while it was up high single digits, for PerkinElmer it was more mid-single digits on the environmental side.

If you look across more globally, we saw good growth in the US. I would say low single-digit in Europe. As we think about it from a trending perspective, what we saw was fairly stable demand through the quarter. I wouldn't say it was necessarily improving through the quarter, but fairly stable. As we look to early Q2, here, we are seeing a little bit of an uptick.

Got it. And maybe, Rob and Andy, as you were thinking about -- obviously the core underlying performance was quite good on EBIT and earnings, the FX headwind obviously everyone's dealing with.

You guys took a lot of cost measures out last year, yet you obviously have a pretty robust still balance sheet capability. And as you were thinking about what measures you could do to offset that given how well the rest of the business is performing, how did you weigh trying to mitigate versus this is the reality of the strong dollar?

I would say on the margin, obviously we are trying to be prudent with our expenditures. But at the same time, to the extent that we see opportunities to either innovate with our products or to expand the markets we are going to continue to invest.

As you saw in our financials, R&D was up. That was our plan to increase R&D this year. So while I think we are cognizant of what's happening in the foreign exchange markets, at the same time, if we see strategic opportunities, we're going to continue to focus on those and spend the money. What Andy made some comments around was the indirect spend, and we will continue to focus and drive those.

So I would say the areas that are not customer-facing, the areas where we're not seeing opportunities to drive innovation in the marketplace, we're going to try and be prudent on. But I think for the strategic opportunities to increase the top line, we're going to continue to invest.

Great. Thanks, guys.

Isaac Ro, Goldman Sachs.

Just wanted to start off with a little bit of the comments you made regarding new products. Obviously you had a slew of them at Pittcon, and you mentioned them on the call. So wonder if you could maybe quantify how much top-line contribution you expect this year from new products?

So I think in the beginning of the year, we said probably something in the $30 million to $35 million range is what we thought we'd get from new products this year. I think we're still on track to do that. And maybe we will do a little bit better, but I would say that's the range that we are focused on for 2015.

Okay. Got you, and on the gross margin line, that was obviously pretty strong. And just wondering if you could break that down a little bit, number one, how much of the improvement year on year was due to mix?

And then as part of that conversation, wondering how much FX actually held back gross margin this quarter? I imagine it would have been even better if it hadn't been for currency. Thanks.

Currency was about 30 basis points, Isaac, so without the effect of currency, we would have been at 100 basis points of improvement. We're actually at 70 on a post-currency level.

I would say some of the efforts we had around supply chain were a piece of that. And I would say that's probably a little less than half of the remainder would have been the positive mix we saw into the diagnostics and informatics business as well.

Got it. Thanks so much, guys.

Dan Leonard, Leerink.

I have a working capital question. It looks like the inventory days were higher than they've been in quite a long time. Was there any specific driver for that?

There were a couple of things. On the working capital -- on the inventory side, we've initiated a project around reducing transportation costs, so there's a one-time pickup of inventory. It's really around ocean freight.

So we have a bit of an inventory build there. There was some related as well to Perten. But I think you should see, from these levels, those inventory turns should improve, each quarter.

In addition, we had, as Rob mentioned, we introduced a number of NPIs at Perten, and there's a fairly meaningful amount of demo inventory required as we roll those out. But I think overall, we still think we will make some pretty decent traction on inventory.

And then if you look at our receivables, we made some tremendous progress there. So it was able to offset some of the inventory, but we still have work to do.

Got it. And then my follow-up, can you quantify the anticipated benefit from the Waters collaboration? I know they made an attempt to quantify it on their call, and I was wondering what you thought the flow through would be for PerkinElmer? Thank you.

I think when we look at 2015, we think for us it's going to have a relatively modest top-line improvement. Now, as we get past 2015, we are quite excited about the collaboration. But keep in mind, in most instances, at least early on, this is a substitution for us, because we provide effectively our own HPLC today, and we are going to swap that out for Waters.

So when you really think about that collaboration, it was done I'd say for three reasons. One is it really enables our customers to simplify their workflow by unifying their chromatography data on one platform, which is Empower. So going forward now, when we sell our DC or LC, it will be standardized on Empower.

The other was to give our non-pharma customers access to UPLC from Waters. And the third one was it allows us to focus our R&D on software resources in areas where we can better differentiate ourselves.

So I think that's how we think about it. Hopefully a lot of benefit to our customers, but I think in the relatively short term here, at least as we think about 2015, it's probably more a substitution and than it is incremental.

Got it. Thank you.

Dan Arias, Citigroup.

Rob, just wanted to ask a little bit on OneSource. You mentioned that, that move was paying off already, so I guess what is the expedition for growth there this year?

Well, I think if you look at OneSource, I think we continue to believe it's a mid to high single-digit grower, but I think the opportunity we see is to really pull some of the products through. Because, historically, we've had I will call it enterprise relationships with our customers at both the OneSource level and at the informatics level.

And I think what we're seeing now -- again it's early days, but by combining OneSource and informatics and getting those enterprise-level relationships, we think there's an opportunity to pull through some of our products and the research. So while we are always looking to try and drive more growth within OneSource, I think the real opportunity from a growth perspective I think we will bleed from more pull through from the product side.

Got it. Okay. And then maybe on the blood screening business in China, can you give an update on how that's tracking? How are you finding pricing to be there?

I think you're positioned in between the high-end pharma guys and the locals, so has there been any attempt by the other players to adjust based on what you're seeing in the market? Thanks.

I would say first of all, we continue to be very enthusiastic about that opportunity. The tenders are being delayed a little bit. So I would say that the growth was strong in Q1, but we continue to see that be a significant ramp into the back half of the year.

As far as our competitive situation, we continue to win probably more than our fair share from the standpoint of, as you know, there's five competitors. We're probably winning at a 30% to 35% of the tenders. And so we feel good about that, and we think this could be a significant opportunity, not only in the back half of 2015, but going into 2016 and later on.

With regards specifically to pricing, we're not seeing dramatic pricing changes by either the international competitors or the local competitors for that matter. So I think we still feel like we've got a good spot relative to, as you pointed out, being in between those two competitors.

Got it. Thanks very much.

Mira Minkova, Stifel.

Rob, a question on guidance. Your guidance for the full year maintaining the organic revenue growth outlook of mid-single digits implies perhaps a bit of a bit acceleration the second half relative to the first half. Help us understand what is driving the acceleration -- possible acceleration?

I think the majority of that's coming from new products, and as I alluded to a little bit in the prepared comments, particular the on the environmental side, we're pleased that at Pittcon, this is our last quarter, we were able to introduce some 12 new products. I think that's really what we are attributing to the majority of the pickup in the back half.

Okay. Thanks so much. And on the newborn testing initiatives in India, I think you mentioned you plan to screen about 1 million newborns. Is this a change from your expectations in any way? Maybe update us on where that screening initiative is?

I would say it's a little bit better than we thought going into the year, and of course, India presents a terrific opportunity from a newborn screening perspective. 27 million children or babies are born there every year.

And so we've had discussions with the national government there, and we are cooperating in what I would call a private/public relationship or partnership where we're trying to encourage them at the federal level, but at the same time, it's administered at the state level. And so I would say, historically, we've had some small pilots, but what we've seen in the first quarter is this ramp up to a bigger volume.

And as I mentioned, we're now probably going to see close to 1 million children, still a huge opportunity out there, but like anything this probably will take a little time to ramp up. But I would say relative to the beginning of the year, this is probably better than we thought.

Okay. Sounds good. And I will get back in queue. Thank you.

[Dan Leon], [BDIT].

Congrats on the great start to the year. So if we think -- just sticking with the theme of the back-half weighting, are those new products that you introduced, are those actual orders in the funnel, or is that in anticipation of building the funnel over the next couple months here?

And when we think about the impact of flow-through on margins, again it seems like the back-half EPS weighting on the updated guidance is a bit heavier in the back half. How do you think about product mix affecting the gross margin in the back half of the year?

Well, first of all, on your initial question, those products were introduced at Pittcon. A majority of those are shipping now or will be shipping in May. Several of them we started to take orders. And so I would say we feel pretty good about the acceptance out in the marketplace and the ability to drive that incremental growth in the back half of the year.

With regard to margins, I think any time you introduce new products, clearly the objective is to put products out there that have better cost positions or better features for which we can hopefully get better gross margins or better price, and clearly that's the intention with these products. So I think some of that is the new products coming out with higher gross margins.

I think the other thing is just naturally if you look in the fourth quarter because our calendarization suggests that we have higher volume, historically you will see higher operating margins in the fourth quarter of the year just because of the seasonality of our revenue. I think it's part of that. I think it's the new products.

Okay. Great. And then from a strategic perspective, how are you thinking about the business into this year, maybe a bit more volatility? We've heard some of your competitors saying things might be brightening up in terms of competition with some of the private investment firms in terms of looking at the M&A funnel. Are you guys in a mode where all options are on the table or things might be getting a little bit better, or still looking at strategic tuck-ins into the organization?

First of all, I think we look at everything. We look at all opportunities to make PerkinElmer better. I think generally we focused on smaller bolt-on acquisitions, because quite frankly, I think the probability of that happening is higher.

But quite frankly, we will look at small deals, we will look at medium deals, we will look at large deals. I just think, as I said, the probability of smaller deals happening are probably higher.

Having said that, I think there is -- for a long period of time, there's been a lot of competition in the marketplace. And I think what we've historically said is for us to be able to successfully acquire and integrate deals that make sense for PerkinElmer and their shareholders is we've got to have good synergies. And those synergies have to either be from a channel perspective of operations or technology, et cetera.

What we are generally looking at is acquisitions that are close to what we do today or adjacencies where we can leverage the current assets of PerkinElmer. And I think in those instances, we can be very competitive on price.

Okay. Great. Thank you. I will jump back in the queue.

Jon Groberg, UBS.

Congratulations on the quarter.

Thanks.

Rob, following up on your comments around Waters, and just if I'm interpreting it correctly, you're saying, look, we don't have as much scale specifically around chromatography, they have better scale at least on the liquid side. You can better utilize your resources elsewhere, where you have more differentiation. In that vein, how are you thinking about scale generally, as far as PerkinElmer goes, and given what you've seen happen in the industry?

I think generally what we look at is to have scale in the relative markets, in the way that our customers buy products. And I think that's what we've been talking about for some period of time.

So for us, scale is important, relative market share is obviously very important, but it's how do you define the market? And I think in some instances, when you look at how we define the market, we think we have significant scale.

And so the obvious example is we don't define the market that we think or that we think the market should be defined as diagnostic testing. We think the market should be defined as newborn testing or prenatal testing because we believe that's how the customer buys. And in those instances, we have high -- so if you look at diagnostic testing, we have very small market.

If you look at newborn screening or newborn diagnostics, we have very high market. And similarly, that's what we look at, how the customer buys. Or in the case of people want to do imaging, again we have very high relative market share.

When we moved into some of the environmental or analytical instrument applications, I think it was helpful to have some of these complementary detection capabilities. Of course, we feel we've got good scale in ICP or ICPMS or spectroscopy, et cetera, but in the area of chromatography, which I think is complementary in some instances to these techniques or technologies, we didn't have a lot of scale.

And so, therefore, we thought the partnership with Waters made a lot of sense. And again, it's focused in market segment or market segments that they don't participate in today, so it's in the more Industrial and Environmental end markets.

Sure. So would you expect what you did with Waters to be a one-off? Or are you focused on the areas that you define them, you want to really be number one in those areas? And could we expect other types of agreements like the one with Waters?

I think generally what we look at is, again based on how we define the relative markets, we would like to be one or a close number one. If we feel at some point we can't get there, then we probably should either exit it or find a better or different way to get there.

And in the case of liquid chromatography, we didn't see a path to get there. And so this was an alternative way of continuing to participate in the marketplace.

I think that's how I would describe it, but as far as one-off, I would say there may be other opportunities to do this. But I would say it's probably more in the minority. Generally speaking, we would prefer to get there organically.

Okay. If I could one quick one on China, on the blood screening, I think one of the opportunities that exist in China, wasn't there something like 400 different blood banks or a bunch of tenders? And I think, Andy, you mentioned that they're moving now to more centralized purchasing? Is that a tailwind or a headwind for you guys in that market? Thanks.

It's really more of a timing headwind. It's really not -- as far as our ability to capture those tenders, it's really a neutral. But just as far as how quickly those tenders are issued and approved, it does get slowed by this change.

Okay. Thanks.

Brandon Couillard, Jefferies.

Andy, you mentioned timing of expenses in the first quarter benefiting EPS. Can you elaborate on what those were and do those shift into 2Q now?

It's in our guidance, but it was basically continued hiring. We have a number of positions, both on the commercial side and the R&D side we are continuing to ramp. And we had forecasted that those would ramp a little bit quicker than they did.

We still expect to fill those as we move, and we have been filling some of those thus far in the second quarter. So I think that will normalize for the year. And that additional cost is in our guidance.

And then in terms of the EPS guidance for the year, Andy, could you help me reconcile something? So it looks like the GAAP EPS outlook went up by $0.02, but the non-GAAP number came down I think $0.05 or so at the midpoint. And the amortization anticipated for the year looks like meaningfully lower. Can you help me bridge the delta on those components?

Yes. Let me get back to you on that because I don't have that in front of me, but I can get that to you very quickly.

Okay. And then I guess any update in terms of the operating or free cash flow metrics for the year? Had you previously contemplated the pension payment in the first quarter?

We had contemplated a portion of the pension. We're still looking at $300 million for the year, and we still feel confident in our ability to generate that type of cash flow.

So I think that the overall metric hasn't changed. As I mentioned earlier, we have some work to do around inventory. I think that's going to be helpful.

I think we've got plans and leadership in place to do that. So I think nothing has really changed overall.

And the pension funding itself, we really like to stay around 18% -- 80% on a funding basis. And that just gets us back to that comfort zone on funding. We don't have any more mandatory payments until late 2017, early 2018, but we're just trying to make sure we are conservative in our estimates around pension costs.

Super. Thank you.

Doug Schenkel, Cowen and Company.

So I guess my first question is a follow-up on Waters. You indicated that you expect Waters or the Waters deal to not meaningfully impact guidance because it's initially -- at least for this year it sounds like -- a substitution is how you phrased it I believe.

Our understanding is that this allows you to move a bit upstream with your product offering and the types of applied customers you're addressing in that channel. If I remember correctly from a few days ago, Waters guidance includes it sounds like about $20 million in revenue associated with this deal for the balance of the year. When you assume there's some markup here, that would seem to translate into like call it $22 million to $25 million in revenue for you guys.

If we are thinking about it the right way, I guess what I'm wondering is, is there really that much revenue to substitute with overlapping products? And how does this substitution impact margins? And I guess the final part of the question is, was this contemplated in original guidance, or should we view this as a new development in the context of the full year?

Okay. Let me try and hit a couple of those. So it was contemplated in the original guidance. This is something we had been in discussions with, with Waters, and hopeful that we could get it concluded before Pittcon, which we were.

With regard to margins, we think this is going to be probably neutral maybe a little helpful to margins. And I think the reason for that is that, as I mentioned in the prepared comments, is from a gross margin perspective, it's maybe neutral or a little lower. But of course, we can eliminate a fair amount of operating expenses associated with that.

So I talked about R&D that we spend today, also software engineers that we have that are associated with -- we have our own chromatography software. So we think from an operating margin perspective, it could be neutral to accretive to us, largely because of the operating expenses that we can reduce as a result of not having the support both the software and the production in R&D of the product.

With regard to how much incremental revenue is to us versus Waters, it's really difficult for me to comment on Waters, so I will leave the help to them. And I don't know if it's $20 million for 2015 or $20 million annualized, but again, that's I will leave that to them. I think when we look at the opportunity in 2015, and again I emphasize I think we are excited about the opportunity, we just -- I guess we're being somewhat cautious and trying to build on a lot of revenue upside.

Now as we get into 2016, I think we are quite excited about the opportunity from the standpoint as you point, we can go upstream a little bit particularly with the UPLC, and selling more of our GC that will be tied to Empower. But I think for 2015, right now, we don't see this as a huge incremental.

Okay. That's really helpful color. Maybe just a couple quick ones on the quarter. Obviously a really strong gross and operating margin quarter despite coming in at the lower end of your organic revenue growth guidance.

Can you comment on whether there was anything notable that benefited margin? One thing that's come up a little bit over the last few quarters is lumpiness in licensing revenue. As we think about microfluidics and imaging, anything notable as compared to Q4 or Q1 levels of last year?

Well, specifically on licenses, actually that was a headwind for us in the quarter. So, as I mentioned before, certainly around gross, around mix and the other items I think were the primary drivers.

And actually one other item I didn't mention was OneSource. There was a fairly significant improvement in OneSource gross margins from the first quarter last year to first quarter this year.

If you look at or listen to an earlier question around have we done anything? We really try to accelerate some of the initiatives around supply chain on the gross margin side and around the indirect spend so that we can reinvest back in R&D and selling.

So I think we were particularly successful in the first quarter. Hopefully that will continue through the next three quarters, but those were the key drivers.

Okay. That's great. Thanks for taking the questions.

Bryan Brokmeier, Maxim Group.

More on the Waters agreement, I was just wondering -- you talked a little bit about moving upstream, but I was curious in terms of geographies. Do you see the US or China -- or what geographies do you see as being the greatest opportunity for you to sell into?

I think we feel good from a global geography. If you look at the distribution of our business, clearly we've got strength in US and Europe and China.

So I think this is going to be hopefully helpful business across the globe. So I don't think I would spike out any particular region or geographic area where I think this is going to be helpful.

Okay, and given the currency environment, have you made any changes to your capital spending or operating expense changes? And how easily can you make changes in the near and intermediate term?

I think Andy alluded to a couple things. I think we've accelerated some of our actions around trying to get after indirect costs and supply chain. But I would say generally speaking, our approach has been let's continue to stay on plan relative to our investments, particularly in the areas of growth.

Okay. Thanks a lot.

Paul Knight, Janney Capital Markets.

This is actually Bryan Kipp on behalf of Paul. Rob, I just want to dig in a little bit into your research commentary.

You said for the full year of low single-digit growth, I'm just thinking in context of your commentary around OneSource and Opera Phenix. And if I just do back of the envelope, suggests that close to 50% of incremental could come from that 20% contribution on that side.

So what's the underlying dynamics going on there? Is it just academic government pressure? Or is it a new product cycle you guys need to have go through to reignite growth there?

I think as we've talked about research in the past, I think the thing to recognize is we've got a big radiochemical business that creates a fair amount of drag. As we get into the back half of the year, we did have a nice introduction of Opera Phenix in the back half, we're going to cycle up against that now. Hopefully we will continue to grow that.

And then I would say the third area I would speak on when you're talking about research is Japan. We didn't talk a lot about Japan, but clearly when I think about the first quarter, the area that was -- although we were in our guidance range, it was at the bottom end of the guidance range. I would probably attribute that to a weaker Japan than we had expected.

We would have forecasted Japan flattish for the first half, and it was down high single digits. And so we are a little cautious about how quickly that returns. I know the budget was recently approved here in April, but again, based on what we are seeing.

Also, when we sell into Japan, that's probably one of the areas where the currency change is impacting us strategically. I'd say if I was going to spike out one area where the strength of the dollar has been somewhat challenging from a strategic or competitive perspective, I would say Japan.

If you get Japan to come back around -- you can't control that, I understand -- but and currencies stabilize, can you get back to the mid-single digit with the underlying portfolio? Or do you think it stays --?

I think we can. One of the things we will be able to -- hopefully if we do that, it will be because we will get the traction on the OneSource informatics and pull through of the products. I think that will be clear. And then we continue to see good traction on the new products.

So our goal is to get that up to single digits, mid-single digits. But I think for purposes of guidance, we continue to forecast it in the low single digits.

All right. One quick additional one. Did you guys see any net benefit from extra days in the quarter, and what pricing conversations are you having? Are you more skewed towards new products, or are you able to get some pricing here with the FX volatility?

We did not have any extra days in the quarter. I think we communicated on our January call that we would have extra days in the third quarter this year.

But, from a pricing perspective, we continue to be able to get pricing specifically on the reagent consumables side. It becomes a little tougher on the instruments side. But I think overall, it was fairly modest in the first quarter, but we continue to try to get it wherever we can.

Appreciate it. Thanks, again, guys.

Jeff Elliott, Baird.

Just to follow up on OneSource, can you talk about the competitive environment there? What are you seeing from a win rate or a retention perspective?

OneSource was strong in the quarter. One of the things that clearly with the restatement of this answer is you get pretty good transparency into what OneSource was doing. But I think what you would see is that OneSource on a currency-neutral basis grew mid-teens.

And so, clearly, we think we are continuing to do well there. We did have a couple wins from the standpoint of Gilead and Behringer. And so I think the competition continues to be tough and challenging. But I think we continue to do well.

Got it. Andy, can you provide any color on the indirect spend initiative? How much are you forecasting this year in terms of improvements? And is there opportunity on the direct side of spending? You talk about indirect a lot, but how about on the direct side?

Well that is actually the natural next step, and we've created a team that actually start to generate some efforts around the direct side, which we do think that there is opportunity. And I think on the indirect side, we looked for a $10 million-plus savings year over year.

I think we are well on track for that, hopefully we can exceed that. But we've got dedicated resources, dedicated purchasing people, and I think we've got an organization that's really rallied around this because it really does allow us to reinvest back.

So I would say I feel as good if not better than I did going into the year on the indirect spend side. And I think the additional opportunity, as you mentioned, is the direct side, so hopefully we will have more to talk about that in the next couple of quarters.

Thanks.

Tycho Peterson, JPMorgan.

Can you comment on performance of the recent acquisitions, Geospiza and Perten, and are you still assuming 7% to 8% growth for Perten for the year?

As I mentioned in my prepared remarks, we were very pleased with Perten. We think the acquisition is going well. Perten actually grew low double digits in the first quarter.

So we think they're well on track to probably exceed the model we set out there. And I think Andy mentioned the fact that we expect to probably do a little bit better than the $0.04 accretion that we talked about.

So I think things are going well with Perten, and I think we continue to see more opportunities with the synergies between what Perten does and what PerkinElmer does. So historically, they've been a significant player within the grain area we see rolling out in the things like edible oil and a number of other areas where the combined competencies of the two companies can be quite powerful in the marketplace.

And then just looking at some of the businesses, medical imaging rebounded a little bit. I think you called out mid single-digit organic growth. I feel like that business hasn't grown in a while. How much of that was a comp issue versus potentially a recovery in the market?

I think most of it, Tycho, was more of a comp issue. I think, obviously it's a fairly choppy market, and I think second half they are seeing some headwinds. But overall, if you look broadly at the market, it's under some pressure, but I still think we feel like we can have positive growth for the year in that business.

And I think the first quarter last year, Tycho, they were flat to down slightly.

And then, just lastly, a general question on the informatics business. I'm trying to string together a couple points here. But I think you've talked about the need to hire additional software folks, and maybe that's taking a bit longer.

We periodically get questions about the fact that a lot of your software isn't up in the cloud and how do you apt adapt, and do you need to evolve faster on software informatics side? And a third segment of that line of questioning, you obviously have a tomo product with Dexela I think. Maybe just talk about expeditions for tomosynthesis.

Okay. I didn't hear what you said on the third one. With regard to the informatics strategy, I agree with you. We've talked about the fact that we've got to get a cloud product with regard to our electronic notebook, and quite frankly, most of what we do.

We have a product right now out with the academic customers. We're working on one that was called in process with regard to pharma, so we continue to make progress on there.

And to Andy's point earlier, we continue to look to hire software engineers to accelerate. That's an area where I think we clearly want to accelerate our spending from an R&D and engineering standpoint because we continue to see significant opportunities within the informatics business.

I would say both to drive more of historical PerkinElmer products, but also to build out and continue to expand the core informatics capabilities and business. So we will continue to invest on that.

And last question was on the tomo product? I think that's a relatively small product for us, and we really haven't been pushing that, to tell you the truth.

Okay. Thank you.

Zarak Khurshid, Wedbush.

As we think about all the productivity enhancements ongoing and planned for this year, Andy, how impactful do you think they may be relative to the big productivity initiatives over the past few years?

I would say the heavy lifting we did in 2013 and part of 2014 were probably the high watermarks. But I would say we're probably at -- if you want to do a relative, we're probably 70% of those types of levels. It's just a different area that we're focused on, whereas in 2013 and 2014, we're really looking at strengthening the footprint and rightsizing the organization.

This is really looking at spend, and given we have the flexibility now to look at it on a corporate-wide basis, we see a lot of opportunities there. I think it's opportunity that we will see over the next certainly couple or three years as we start to move, as I mentioned earlier, into the direct side as well.

Very helpful. Thanks for that, and just a follow-on, a lot of questions today on the M&A strategy. What about the divestitures? How do you think about simplifying the business?

I think we were always challenging ourselves from the standpoint of the portfolio and whether the rightful owner of assets. My preference would be is I'd like to buy before we sell. So if we can be successful with some sizable acquisitions, I think we might look at a couple product line prunings.

But quite frankly, when we look across the portfolio, we think most of the things fit pretty well. But like I said, I don't know that I want to get smaller before I get bigger.

Makes sense. Thanks. And just a follow-up on China. Can you give us a rough sense for how large the Chinese infectious disease business can get and how much runway you think you have there over the next couple years? Thanks, guys.

So I think on the infectious disease side or the newborn -- infectious disease. Right? I would say that can be a significant business for us. Depending on the timeframe, clearly north of $100 million.

Great. Thank you.

Bill Quirk, Piper Jaffray.

This is actually Alex Nowak on for Bill. In follow-up to your previous comment, what are your Japanese research funding assumptions going forward? Are you still expecting flat growth? Did you bring these down in the quarter?

I think what we've got for the remainder of the year is flat, and we may be even be actually a little negative in the second quarter quite frankly. So I would say low single and then flattish in the back half.

Okay. All right. Excellent. And then in US newborn screening, you said the growth rates were slowing. Do you still see that there's -- you can still continue your growth there with menu expansion, or do you think there could be an uptick in Medicare coverage with the Affordable Care Act?

I want to correct. I don't know that we said it was slowing. We might have said it was low single, but I think for at least the data we look at says that the US birthrate is stable, but it's the 1% to 2% range. I don't know that we're seeing anything significantly slowing.

If we are talking specifically in the US, I think the opportunity to grow there is to expand the menu, and we've talked about skids in the past. We continue to see that being adopted by states.

I think if you look out a year or two probably the next series of tests are probably around LSD. But I would say for the next couple quarters, I think the majority of the growth in newborn is going to come probably outside the US and probably specifically within newborn.

One of the areas we are actually quite excited about, as I mentioned, the fact that we got the China FDA approval of our GSP, which is our automated analyzer. And I think what that does is two things for us. One is it, first of all, allows us to take the number of tests today that are done manually and put them on automated platform. And as we continue to get approval of the assays, I think it will accelerate the ramp of the menu.

Second, it starts to really differentiate us from the competition. So I think we've talked about in the past that we have 70% market share in China, and in most cases what we are competing against is local homebrews or others that are doing manual.

We don't think -- clearly there's nobody else who has a regulated or approved automated analyzer. And again, as more and more of China moves to an automated, which we think they will in order to get higher throughput, it provides us a huge differentiated advantage and allows us to ramp screening much quicker.

Okay. Excellent. Real quick, how big was the OneSource business in the quarter? Thanks.

I think it was $29 million? But -- $35 million.

Okay. Thanks.

Derik de Bruin, Bank of America.

You talked about some contract wins in OneSource, but is there anything coming up for renewal? I believe your Merck contract is coming up soon. And just talk about is there anything we need to watch out for on the headlines going forward in that business?

Derik, I'm not aware of any significant contracts that are coming up in 2015. So in any given year, we've probably got some that -- I think as you know, most of these are on a three-year cycle. So there may be some small ones, but I don't think there's anything significant.

Great. And could you -- how big is your Japan business?

I think it's $50 million or so.

Great. And speaking of currencies, some of your competitors have made some comments about customers losing some purchasing power because they didn't have enough cash basically to buy products and so things were delayed. Did you see any of that in the quarter?

No. Not that I'm aware of.

And Andy, you talked about some of the expenses being delayed a little bit in the quarter. So should we expect those expenses in Q1 going into Q2?

They will gradually go through to Q2 in the balance of the year. It's really around hiring. At any point in time we're constantly hiring, but I guess it will be a slow ramp as we continue to bring the informatics and the R&D resources on board.

Derik, let me correct. The $50 million I gave you was the human health. For PerkinElmer it's $80 million for Japan. Sorry about that.

Got you. Great. And that was down -- you said that was down high single digits?

Yes.

All right. Great. Thank you very much. That's helpful.

Sure.

Peter Lawson, Mizuho.

Andy, just long term, where do you think margins can eventually go?

I think on the operating margin front, we felt all along that we should have a two handle in front of our operating margin. I think we had set a goal of getting to 20% plus in 2017. I think with the volatility of currency, it makes it a bit tougher.

It's still our goal, but I would say in that timeframe or maybe just slightly longer, we still see our way to doing that. And I think we have plans in place, FX aside, that will help continue to improve our margins. So I don't think there's anything structural that would keep us from hitting those types of goals.

Steve Willoughby, Cleveland Research.

A lot of them have been asked, but two things. First, on Perten, can you discuss if there's any seasonality in that business?

The revenue there looked a bit lighter than I was expecting. And then just if you could also reconcile the 2% addition of revenue from acquisition versus the 3% that's shown in the latter part of your press release? And then I have one follow-up.

Okay. Let me take the first one, then I'll give the second one to Andy. So clearly there is seasonality in Perten. To your point, when we look historically the first quarter is light.

Second quarter starts to pick up a little bit, but their real strong quarter is the third quarter, and it ties to the harvest season. So clearly there is some cyclicality. And that's both on the revenue side and clearly on the profitability side as well.

The only difference I think on the reconciliation, and I will double check for you, Steve, but there's some purchase accounting adjustments in the numbers as well as the revenues that roll out to that 3%. There could be some rounding in there, but I will double check that and get back to you.

Okay. Thanks. And then my other follow-up, and I apologize if you already discussed this topic, was just on the In Vivo imaging business and how that's performing. I know that there are some patents that rolled off last year, and if you guys have any color or commentary on that, that would be helpful.

I think on the product basis, that did well this quarter, and our expectations are for it to continue to do well, as you mentioned. There will be -- there was some patents or some royalties that rolled off in the first quarter.

There will continue to be some that will create a headwind in the second quarter, and then by the third-quarter, they're gone effectively. Right? Because we anniversary the patent for expiring in the middle of last year. So if you look at just the product, I think it continues to do well, high single digits.

There are no further questions in queue. I will now turn the call over to Rob Friel for closing remarks.

Great. First of all, thanks for all your questions. And in closing, let me just reiterate that we feel very good about the accomplishments in the first quarter and believe we're well positioned to deliver another strong year for PerkinElmer. So thanks for joining us for the call, and have a great evening.

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