Revvity Inc (RVTY) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 PerkinElmer earnings conference call. My name is Jasmine, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. 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, Jasmine. Good afternoon and welcome to the PerkinElmer second-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 the 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 August 13, 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 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 the attachment, we will provide reconciliations promptly.

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

Thanks, Tommy, good afternoon, and thank you for joining us today. I'm pleased to report we delivered a strong quarter financially, achieving good growth on the top line and continuing to expand both gross and operating margins, enabling us to exceed the high end of both our revenue and EPS guidance range.

In addition, we made notable progress against our operational and strategic priorities positioning us to deliver on our longer-term objectives of accelerating revenue growth and profitability. While Andy will provide details on our financial performance, on a constant-currency basis revenue grew 8%, consisting of 4% organic growth and 4% from recent acquisitions, while our adjusted earnings per share grew 12%. Through the first half of the year, adjusted operating margins have increased 90 basis points and adjusted EPS is up 15%, both on a constant-currency basis.

Against this backdrop of strong financial results, I would like to briefly discuss some of the highlights from the quarter as well as touch on a few areas of potential macroeconomic headwinds. First, I would like to emphasize the growth of our new products. We continue to be very pleased with our research and development efforts as investments made over the last year or so are starting to manifest in a number of successful new products.

Through the first half of the year, we increased R&D spending by over 10% on a constant-currency basis and continue to believe driving innovation into the market will be a key component to accelerating our longer-term growth. In particular, many of our recently introduced products within the research market are gaining traction, including the Opera Phenix high-content imager and our LabChip Touch microfluidic offering for NGS sample prep, which resulted in our research business growing high single digits last quarter.

In addition to the growth in new products, our OneSource services business once again delivered very strong results. Our Pharma customers continue to view OneSource as a trusted partner capable of meeting their needs for a wide range of services from instrument maintenance, asset management and lab relocation, to scientific and lab IT consulting services.

Our growth in Pharma and Biotech has also been bolstered by our decision earlier in the year to integrate OneSource and our Informatics offerings into our research sales organization. This allows us to more effectively deliver complete innovative solutions tailored to the specific needs of our customers while building even stronger longer-term customer relationships.

During the second quarter, we grew revenue from our top 20 global Pharma and Biotech accounts double digits versus the second quarter of last year. And the recent announcement of our strategic collaboration with Albany Molecular Research is a prime example of the early success from this approach.

PerkinElmer will be providing scientists working in AMRI's Drug Discovery Center at the Buffalo Medical Innovation and Commercialization hub with solutions to support cutting-edge research. Most importantly, these offerings span the breadth of our capabilities and include cellular imaging solutions, analytical and visualization software, and on-site technical and service support.

Another highlight in the quarter was the continued global expansion of our diagnostics business, which achieved key milestones in supporting the rapid adoption of newborn screening in emerging markets. As you may recall, four years ago we helped Egypt establish the world's largest newborn screening lab, and we are pleased with their recent decision to expand the screening menu to include PKU testing for over 2 million births each year.

Also during the quarter we continued to see strong demand in China for our newborn screening offering. And we experienced sequential growth in our Haoyuan blood screening business in China. We are closely tracking order rates as government mandates for nucleic acid blood testings take effect, and we continue to believe we're well-positioned to capture a significant share of this market.

On the Environmental Health side, all of our new products introduced at Pittcon are now in the marketplace and customer demand is encouraging. In addition, our ICP-MS has experienced good growth as demand remains high for our unique nanoparticle detection solution and multi-element analysis capability. Furthermore, the integration of Perten is effectively complete and our consolidated food analysis offerings are capturing greater mindshare with customers in this attractive segment.

While we are excited about a myriad of opportunities we see going forward, we are mindful of a macroeconomic environment that, while consistent with our outlook from the beginning of the year, still presents some challenges and concerns. In China, while we continue to expect double-digit growth from our diagnostics offerings, ordering patterns with environmental end markets and government tenders continue to be choppy. Additionally, Japan's academic funding environment has also become difficult to predict, and Europe remains soft but stable, as it wrestles with a mixed economic outlook and the implications from a Greek bailout.

But macro concerns aside, I remain confident in our ability to execute and drive both revenue growth and margin expansion in the second half. Therefore, looking at our guidance, we are reconfirming our previously stated guidance of mid-single organic growth for the full year and modestly raising the bottom end so that our adjusted earnings-per-share guidance is now $2.55 to $2.60, which represents 13% to 15% constant-currency adjusted earnings-per-share growth.

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

Thanks, Rob, and good afternoon, everyone. Consistent with previous quarters, I'll provide some additional color on our end markets, provide a financial summary of our second-quarter results and details around our third-quarter and full-year 2015 guidance. Given the impact of foreign exchange on a comparability to our results, I will once again provide much of my commentary on a constant-currency basis in order to better portray the results in the quarter.

As Rob mentioned, we reported 8% constant-currency revenue growth and 4% organic revenue growth in the quarter, with foreign-exchange representing a headwind of approximately 7%. Adjusted revenues were $564 million in the second quarter, as compared to $557 million in the same period a year ago, exceeding the high end of our guidance revenue range driven by broad-based demand.

Second-quarter adjusted earnings per share was $0.60, up 12% on a constant-currency basis from $0.59 in the comparable period a year ago. Our quarterly results were $0.02 above the mid-point of our guidance range, driven by favorable mix and continued operating leverage.

Looking at our geographic results globally, we experienced mid-single-digit organic revenue growth across all major geographies and end markets. We saw improved results in Europe and stable demand in China, where we continue to be encouraged by the resiliency of our served markets.

And to our operating results, second-quarter adjusted gross margins were 47%, up 50 basis points on a constant-currency basis driven primarily by volume leverage, mix and productivity gains. Second-quarter adjusted SG&A was 24.2%, 50 basis points below the same period a year ago, the result of continued operating leverage from our indirect spend initiatives.

Research and development spending in the second quarter as a percentage of revenue was up 40 basis points as compared to the same period a year ago, driven by continued investments in innovative new product development and incremental investment at Perten. We expect full-year R&D spending to increase over 2014 levels by 30 to 50 basis points.

Overall, we were pleased with our operational performance in the second quarter as we expanded our constant-currency adjusted operating margins over 50 basis points. For the first half of 2015, constant-currency adjusted operating margins have expanded approximately 90 basis points. Net interest and other expense in the second quarter was approximately $11 million, up from $9 million in the comparable period a year ago, driven primarily by the impact of foreign currency. Our adjusted tax rate for the quarter was approximately 20%, and we expect our adjusted tax rate for the full year to be approximately 21%.

Switching to the segments, second-quarter organic revenues at our Human Health business increased approximately 5% and Environmental Health organic revenues grew approximately 3%. From an end-market perspective, our Human Health business represented approximately 61% of reported revenue in the quarter, with diagnostics contributing 28% of segment revenue, and research generating 33% of segment revenue.

Organic revenue growth from our diagnostic business increased mid-single digits despite a high single-digit comparison in the second quarter last year. Our results were driven by strength in our newborn and infectious disease testing solutions, which continue to see strong uptake throughout emerging markets. Offset by low single-digit organic decline in Medical Imaging due to difficult prior-year comparisons and customer ordering patterns. While we remain encouraged by the broad acceptance of our new cassette and CMOS offerings, we believe the second half will remain challenging for Medical Imaging.

We experienced a strong performance in China, growing double digits in the quarter due in part to the continued ramp of our Haoyuan business. We believe the conversion of ELISA base testing to nucleic acid testing for the screening of blood represents a significant opportunity for PerkinElmer, and we are somewhat more optimistic on our outlook for the second half of 2015, as the government begins to enforce regulations to better secure China's domestic blood supply.

Organic revenue in our research business grew high single digits in the second quarter, driven by ongoing success from our recent new product launches including the Opera Phenix, strengths from our automation systems offerings, strong growth in OneSource multi-vendor services and a somewhat easier prior-year comparison. As Rob mentioned, we are pleased with the early success from our new go-to-market strategy in research and the increased traction we have started to see with our Pharmaceutical and Biotech customers.

We're seeing an improvement in global, academic and government end markets, with Japan being the exception, while Pharma and Biotech remain stable. We continue to expect research sales to grow low single digit for the year, primarily impacted by the steep declines in Japan.

Moving to our Environmental Health business, which represented approximately 39% of reported revenue in the quarter, revenues grew 3% organically in line with our expectations. Our second-quarter reported results benefited from increased demand in and around environmental and food applications, driven to a large extent by success from our inorganic and Chrom offerings and the addition of Perten. We are pleased to report that Perten had a solid quarter as their sales cycle closely follows the harvesting season. We expect sales and profitability to increase sequentially in the third quarter as a result of this seasonality.

Turning to the balance sheet, we finished the second quarter with just under $1 billion of debt and approximately $200 million of cash. We exited the quarter with a debt-to-adjusted-EBITDA ratio of 2.2 times and a net-debt-to-adjusted-EBITDA ratio of 1.8 times.

Turning to cash flow, we had a strong quarter with adjusted operating cash flow from continuing operations of $71 million, versus $54 million in 2014, despite higher working capital, primarily a result of the timing of additional inventory requirements supporting our new product introductions. As we get to the seasonally stronger second half, we expect inventory levels to moderate and our working capital metrics to improve.

Looking ahead to the third quarter and the balance of the year, we believe we are well-positioned to deliver a solid operational performance. As we exit the second quarter, and move into the second half of 2015, we are mindful of the mixed macroeconomic picture. Our dollar strength is continuing to present modest headwinds in emerging markets, specifically South America and parts of Asia, while instrument demand continues to be mixed in Japan and China. As a result, we expect reported revenues for the year to be in the range of $2.25 billion to $2.3 billion, which represents approximately 7% constant currency growth at the mid-point.

Our guidance continues to reflect organic revenue growth of approximately 3% to 5%. We are tightening our adjusted earnings-per-share guidance for 2015 to be in the range of $2.55 to $2.60, with a mid-point of approximately $2.57, which represents constant currency earnings-per-share growth of 13% to 15%. Implicit in this guidance range is adjusted operating margin expansion of 30 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%, with a flat weighted average share count of approximately 113.5 million shares. For the third quarter, we were forecasting reported revenues to be in the range of $550 million to $560 million, which represents approximately 7% constant-currency revenue growth and organic revenue growth of 4% to 5%. Adjusted earnings per share is expected to be in the range of $0.58 to $0.60, which represents 12% constant currency adjusted earnings growth at the mid-point.

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

(Operator Instructions)

Dan Arias from Citigroup.

Afternoon, guys. Rob, I wanted to just -- I wanted to talk a little bit about China and ask if you could take us through a little bit of what you saw in the environmental side? And then on the blood screening side of things, it sounds like things are picking up there. At this point are you thinking that you actually will have all of the donated blood in China tested molecularly? Is the assumption that compliance does go to 100?

I think our view is it goes to 100 but it is probably going to take 18 months to two years to get fully implemented. And as you know, the law was supposed to be effective the first of this year, but our view is it's taking some time to get all the labs set up to be able to do that and so I would say the enforcement at this point is fairly lax.

But I would say probably late 2016 is our best guess of when that will occur. And probably what you will see is it will occur first on the East Coast and then you will see it move it across to the West. But we are starting to see -- as we mentioned on the last call, we saw the move from the regional governments to the federal government and while we think that is delayed a bit in the implementation, what you will see is bigger tenders. And we are starting to see that come out, and as mentioned in the prepared remarks, we feel good about our ability to win share there.

With regard to the broader China, I would say, first of all, we continue to believe that both access to healthcare and the clean water and food will be high priorities and continue to support through strong organic growth, so I would say we continue to feel like high single digits probably make sense for us for 2015. If you just go by end markets for us, diagnostics -- I think Andy talked about this -- continue to be strong. We saw good double-digit growth in diagnostic supported by really all three pieces of the business, newborn, infectious disease, and blood screening.

On the research side, also pretty good growth there. I think it was mid-single, maybe a little bit better than that. And Environmental was up low single and what we saw was really almost a tale of two cities. In the area of food and Environmental we saw strong growth mid-teens.

And in the area of more industrial we actually saw some headwinds there from the standpoint that they are -- our business there was not significant declined in the quarter. So when you put it all together you saw Environmental in the low single digits.

Okay, that is great color. I appreciate that. And then, Andy, on the expense line, if I remember correctly, I think you were optimistic about the ability to drive some savings on the indirect spending side of things this year. Are you realizing the level that you were hoping for there? And I guess when you look to the back half of the year to the extent that you are seeing the savings, are you more likely to invest those or might you let those flow through? Thanks.

Sure. Well, I think halfway through the year I feel like we are on track. We were looking at a $10 million bogey year over year. We exited the first half at $6 million. I think we're starting to gain some momentum. The rollout is now global. And we're seeing a fairly significant uptake with the organization around it. We're spending a lot of time now on outside services.

And I think what you're going to see is the impact of that, not only on the expense side, but you should start to see it on the working capital side, because I think if you look at our payables, we saw a little improvement in accounts payables. And part of that's due to our renegotiation of some contracts with the vendors as part of this indirect spend process.

So I think we feel like we're pretty much on track at this stage.

Brandon Couillard from Jefferies.

This is Sachin in for Brandon. Will you give us an update on the M&A pipeline? How are you thinking about your capital deployment priorities here, with the balance sheet position under two turns of net leverage?

I'd say, first of all, we feel good about the pipeline. Our hope and expectation is we will be able to do something, here, hopefully toward the end of the year. It's always difficult to predict those types of things. But I think we feel like we'll be able to put some capital to use there on the M&A, which I would say we have a preference deployed in that manner, but if we find ourselves in a situation where we're unable to do that for, I'd say for a period of time, then we'd look to probably do share buybacks.

Thanks. Very helpful. And will you give an update on the Waters Partnership? How is that initial rollout progressing? And do you still envision that being a roughly neutral to net revenues for the year?

Yes, we mentioned last quarter. The Waters Partnership, I really think of that as more of a longer-term strategic move. I think there was a number of reasons to do that.

One was, first of all, it enabled our partners to simplify their work flow around one software, which is Empower. It allows us to focus our resources in areas where we can be more differentiated and hopefully it allows us to drive some incremental revenue by, first of all, supplying Waters LC products to some of our customers, maybe driving more incremental products by allowing us to package arrangements with our customers where there's multiple analytical techniques.

And also with getting GC on Empower, I think there is an opportunity, hopefully, to sell more into the pharmaceutical industry. Having said that, in the short term there's some investment. There's clearly some disruption. There's training required of the salespeople. So, as I think we mentioned last quarter, we don't really expect to see much of an impact in 2015, and really look toward 2016 and post to really drive some incremental revenue growth.

Ross Muken, Evercore ISI.

You spent a lot of time on the macro and you were cautionary and it's helpful, because it's obviously something a lot of us would look at a broader spectrum or focus on. But was there anything pasting in the business, whether it was in China or elsewhere, that gave you a bit of caution or maybe in some of the traditional industrial markets or is it just a recognition of all the data that we've looked at and not wanting to get ahead of yourself, given some of those volatility standpoints?

Well, I would say there is a couple things. We mentioned the fact that Japan still seems to be difficult to predict on the academic funding side. While the budget's been approved, our experience has been that's been spotty and challenging. So while it's not a big part of our business, it's something that we're a little cautious about.

I would say the other area that we're cautious about is on the Medical Imaging side. And we're seeing some of the revenue challenges there, particularly in the back half. So those are the two areas that I would say we're a little concerned here. The Medical Imaging is probably not macro; it's probably more customer ordering patterns, but I would say on the Japanese side, that's a macro indicator.

And I would say the other one I would probably put out there again -- small for us, but obviously the economic condition in Brazil is challenging. And so those are two I would spike out on the emerging markets that are -- just looking at ordering patterns, we're a little concerned about.

And on the research side, if you had to tease out boxes versus reagents versus services, anecdotally, how would you feel about those three buckets?

I would say we were pleasantly surprised on the box side. I mentioned some of the new products, but if you look at our cellular imaging, the microfluidics and automation, we saw very strong growth there. So we are pleased with that.

Service also did well. OneSource had a strong quarter, and I would say the reagents was the sort of laggard in the quarter.

Andy, just remind us, the days' impact in Q3. I thought that was where you guys pick up quite a big of volume, or at least the extra week. How do we think about that in the context of the core guide?

Yes, I think that, first off, it's very hard to predict exactly what the impact of that's going to be. It happens every six years and I would say it's factored into our guidance. I think that if you look at the mix of our revenue, a lot of it's not impacted by the days. So I would say that, in my opinion, it's in the numbers. It may be a percent or so, but if we do better than that, obviously we'll -- we're not going to be gated by our existing guidance.

Ross, you know what I would tell you, there's a lot of debate on this internally, and as Andy pointed out, we do this every six years, so I would say this isn't a core competency of ours, trying to predict what the impact will be. But our view is, even when you look at our reagent business, a lot of our business isn't daily or weekly orders.

Even those -- look at the newborn screening side. It's sort of bundled purchases. So I would say we're -- and maybe we're being conservative here, but we're assuming that we're not going to see a significant pickup from the additional days, particularly when you look at the -- how they fall within the calendar.

Bill Quirk, Piper Jaffray.

Great. Thanks, and good afternoon, everybody. Just a quick question for you, going back to Japan. You mentioned a couple times on the call that it's obviously a pretty difficult research environment to predict. So I guess two-part question. One, I assume that, that guidance assumes some ongoing challenges there.

And then I guess the second piece of that is, how are you thinking about the longer term here? Are you inherently assuming that we should see some release of funds and bounce back in 2016?

So I would say the answer to your first question is yes. We've assumed fairly modest revenue for Japan for the remainder of the year. And I would say beyond 2015, we will assess that when we get there.

It's a fair assumption to say that at some point the funds will be released and maybe we will see a catch-up. But we will call that as we get into 2016, but our assumption for the remainder of 2015 is that we will continue to see challenges and we've got basically no growth assumed for the remainder of the year.

Got it. Thanks, Rob. And then, secondly, back to newborn screening in China, help us think a little bit about some of the parameters of that growth. Is this still largely initial adoption or are you seeing any sort of menu expansion in some of the wealthier coastal areas? Thanks.

I would say it's a little bit of both. I mentioned last quarter we got our GSP, which is our automated platform certified by CFDA. And I think that is allowing us to obviously sell more of those and penetrate that, but by allowing an automated platform, it is allowing some of the areas within China to expand their menu.

And so it's a combination of the menu expansion as well as adoption. But I would tell you right now, China is probably close to 85% adopted, so we have been pleased to see that a good portion of the children in China are now being screened.

Doug Schenkel with Cowen and Company.

Good afternoon, guys. My first question is just really a follow-up on the macroeconomic dynamics in China and Japan that you've talked about and have come up a bit in the Q&A. Just to be clear, have you changed what you embedded into guidance for growth in these markets? And if so what are the offsets?

I would say China, no. Japan, yes. And I would say the offsets have been a little bit on the Pharmaceutical or research side. And where we have seen clearly some growth there -- and again some of that is, I think, new products and we believe our execution within the combined entity, now, some of that is clearly a stronger market.

I would say the strength on the research side is offsetting some softness in Japan and Brazil. But again, just to reiterate, Japan for us is probably going to be somewhere around 2%, 3% of revenue. So it's not a huge number.

And then this incremental uncertainty, if that's the right way to describe it, on the macroeconomic backdrop, does it impact how you think about spending heading into Q3? Do you hold back a little bit or is it really business as usual?

No, I think it's business as usual. If we look at the half, we feel pretty good about where we are right now. The organic growth, particularly if you look at Q2, came in arguably at the high side. We are looking at a back half that we feel pretty good about; we are getting good traction on the new products. I think we are still moving forward from an investment perspective, and we monitor it as we see bookings come in during the quarter.

Dane Leon with BTIG.

I just wanted to get more color in terms of the gross margin line for the quarter. I understand FX may have been a little bit more, but usually you are flattish, 1Q to 2Q. Anything -- kind of puts and takes in terms of what is maybe depressing that a little bit and expectations for the back half?

If you look at it on a constant-currency basis, we were up 50 basis points, which is a little more than we have seen, at least historically. A large piece of that are some productivity and issues we put in place, some of those around supply chain. We've talked about that before. We're starting to see some traction there. And that was enough to offset basically inflation and a slightly negative mix.

We feel pretty good about our ability to sustain that going forward as we continue to get traction with some of these initiatives. Some of those same people are working on initiatives around the SG&A piece. So we hope to drive productivity improvements on both gross and operating margin

Okay. And wanted to clarify the geographical comments. You said, I think, broadly mid-single digits across everywhere. Is there any more nuanced color you could provide? Americas versus EU versus APAC?

Well, we were pleased that we saw, across the globe, as I think Andy talked about, all the regions were in the 4% to 5% range, which was great from an organic perspective. Maybe to give you some color inside there, if you look within Asia, I think we talked about China.

India and Korea were strong; they were double digit as well. Japan, obviously, was down. We talked about that. And Brazil. I would say within the US, we saw good growth on the research side. I sort of alluded to that. But again it was pretty broad-based.

Steve Beuchaw with Morgan Stanley.

Two very fine points for me. One on the Altus transition. I am curious, number one, are you seeing any impact on the transition on the existing chromatography business? Are you working through anything there?

And then second question for me is actually on Caliper. What you seeing in terms of IP licensing trends there? Thanks.

On the chromatography side, on the liquid chromatography side, actually it is a headwind in the quarter. Because, as you can imagine, as we transition over, the ability to continue to sell our own liquid chromatography is challenging, so if anything it was a little bit of a headwind. On the gas chromatography side, we do expect in the future to be able to hopefully sell some incremental products there, but I would say not noticeably in Q2.

So again, overall, the transition in the short term is going to be a little bit of a headwind, but obviously we think longer term this makes a lot of sense, and hopefully drive some good incremental revenue, as well as I think it hopefully will be helpful from our customer perspective.

I think you also see a little bit of the issue in working capital. We've seen an increase in inventory, and as I explained earlier, some of the new products, this would be a part of that as we start to fill the channel with some of the new LCs.

On the caliper side, and I think as we've talked about this, we continue to see a little bit of a headwind every quarter as some of those royalties roll off. And I think in this quarter, as well, there was a little bit of a headwind of a couple million dollars, and that will probably continue till probably this year, maybe third quarter this year.

Dan Leonard from Leerink.

I have a follow-up on inventory. I appreciated the commentary on new product build. Curious, in the first quarter, I think you called out supply chain efforts as being the driver of increased inventory and I'm wondering if you can give us an update on those efforts?

No, it was not supply chain effort. It was the new product launches that we put out at Pittcon and the demo inventory and the build around that. What I called out on the first quarter, I believe it was around ocean freight.

And that ocean freight is a build of inventory that basically stays, but it happened in the first quarter. And that allows us to reduce our overall freight costs. So I think from a P&L perspective it's a good thing, but there is a pickup of inventory as you put the stuff on ships and ship it overseas.

Okay, understood. And then my follow-up question, do you have any update on the long-term growth outlook for Medical Imaging? It seems like it's been lumpy for a couple of years now.

I think our view is that's a business that should probably grow mid-single digits. When we look at the adoption rate of digital and x-ray and then the growth prospects with our CMOS business. I think, unfortunately, we've had a situation where some of our customers most notably have built some inventory and we've got to work that off a little bit.

As you know, this is the one business in PerkinElmer, really the only business in PerkinElmer where we are component supplier as compared to an end-system supplier. So we are at a little bit of the mercy of the customers and how well they are able to predict their end-market demand. And so I think that's why you see some of this lumpiness, orders -- in hindsight they are artificially strong because our customers are building inventory.

And then we have to work some of that off. And so I agree with you, it's clearly more lumpy than we would like. I think the underlying market is probably not as lumpy as that. But again, being a component supplier, it makes it a little challenging.

Okay. Thank you.

Paul Knight with Janney Montgomery.

Hi, Rob and Andy and Tommy. Congratulations on what I am sure was not an easy operating environment. I think Dane had touched on the environmental side and the operating margin you are posting there of 13%. What are you shooting for in that business in a normalized environment?

Well, it depends the time horizon we are talking about here, but I think ultimately we would like to see this business get up into the 17%, 18%. And obviously that is going to take some time to do that. But, when you look at the opportunities within this business, and I think one of the big drivers will be -- and we've talked about this in the past -- is we've got to get a greater consumable component to the business.

And something that the team is working on, but I think for us to get to those types of operating margins, it will take a better mix between instruments and consumables.

Can you talk about consumables and service? Cross-lab growth was what again? And is it M&A or what do you want to do on the consumable side, Rob?

OneSource was up double digits. It was in the teens. We continue to see good progress there. And what we would like to do is try and pull in more consumables that are supportive of our instruments and in some cases may even have to be on others.

But I think because we have the OneSource engineers in the lab, the ability to sell consumables presents some nice opportunities for us. And so some of that is organically, but I think a lot of it will have to be done inorganically.

Okay, thanks.

Mira Minkova from Stifel.

Hi, good afternoon, guys. Let me start with the Environmental Health product that you announced at Pittcon and that you are rolling out. Help us understand, were there any benefit from these products in the quarter that you just reported? And when might we see it, and what are you expecting for the back half of the year?

I would say in the most recent Q2, there was minimal benefit on the Environmental side. Most of the new products were the ones that were launched late 2014, early 2015 on the Human Health side. And we are starting to see some good traction in this. As you can appreciate, a lot of times when you come out with these new products, it will take a quarter or two to really get some traction in the marketplace.

So minimal impact in Q2; I think you'll see the majority of it in the back half. What we have said with new products for the full year, we've estimated in the $30 million to $35 million range. In fact, for the whole Company, I think we feel very good about that and suspect we will be at the high end and maybe even higher than that.

And so rather than get into specific products, I would just say we continue to feel very good about the progress, and I would say we would not be surprised to do better than the top end of our range there.

Sounds good. And the Medical Imaging business, going back to the question asked by Dan earlier, help us understand. Do you need this in your portfolio, and how does it actually fit in with the rest of what PerkinElmer does?

I think when you think about Imaging is an important component of what we do. If you think about at a high level, the way I think about PerkinElmer is we take samples, we do detection and analysis, and then we provide answers and knowledge. And so anything we can do to continue to drive our capabilities around the ability to detect or image, I think is helpful. And so leveraging that capability across as many end markets as possible I think is helpful.

Okay. Thank you very much. Congratulations on the quarter.

Thank you.

Isaac Ro with Goldman Sachs.

Hi, guys, thanks for the questions. It's actually Joel in for Isaac. Back to the macro and maybe focusing on Europe. Can you talk about what is baked into your expectations for that region for the second half of the year?

I think when we went into the year, we thought that Europe was going to be low single digits. And we saw a little bit of improvement here relative to that in the second quarter. But our expectation in the back half is similar to what we saw, so low single.

Great, thanks. And maybe just back to the China diagnostics market. Can you maybe parse out the growth between the newborn screening and maybe the contribution from blood screening that drove that double-digit number? And maybe how we should be thinking about that on a go-forward?

What I would say is all three components in China did very well. If you look at the growth rates, clearly the blood screening is growing much faster, but it's off of a very low base. I don't know how meaningful that is, but I will just say when you look at double-digit growth in China, you see that across all components. So it's again fairly broad-based.

Thanks.

Derik de Bruin, Bank of America.

Hi, good afternoon. A lot of my questions have been answered, so I'm going to ask some weird ones, so bear with me. I was at the AACC conference earlier this week and I was struck by the number of Asian and Chinese diagnostic companies that were there. What is the landscape for -- in the blood screening market? And also for your other products that you sell?

I'm just curious -- you talk about competing for large tenders, are you treated as a foreign company, even though you have a Chinese business? Is there some potential bias against you, given the number of Chinese companies that are there? I'm just wondering, are you at a disadvantage because you are not local or do they view you as local?

Specifically with blood screening, there has been five companies that have been approved by the Chinese government that can provide products for nucleic acid blood screening. Two of them are international and three of them are considered local Chinese.

We are considered one of the local Chinese, because we entered this business through the acquisition of a Chinese company and one of the things -- we actually had some discussions with the government officials at the time of the acquisition that it was clear that we would be treated as a local Chinese company. Because again what they're, I think, most interested in is employment. And because the products are developed and made in China, and obviously with Chinese employees, I think that's -- my sense is that's why we get the designations we do.

Great. And talking about moving to molecular screening, I am just curious, is that going across other segments of the diagnostic market? For example, are you seeing a greater push for NIPT using molecular in China? And I'm just curious -- and also on the NIPT business in general -- or on the newborn business in general, are you seeing any impact from the NIPT screening going on in the states (inaudible)?

I would say in the newborn side, no. We are not seeing much of a push there. In the NIPT, I think it's still challenging from a cost perspective, so you are not seeing a huge adoption.

However, we do believe that the NIPT market will be very attractive in China eventually, because there has not been a very large biochemical screening business, so consequently they don't need to swap, so they can skip a generation of products. And so we do think once the cost gets down to an acceptable level, within China, we think that's going to be an attractive market.

Great, thank you very much.

Steve Willoughby from Cleveland Research.

Good evening; thanks for taking my questions. I just have a couple here, quick ones for you. First, Andy, what are your assumptions now as it relates to FX on both the top and bottom line?

No change from the guidance we provided at the end of the first quarter. The mix and the rates are pretty much in line. So we are sticking with the $0.23 of impact that we talked about in the first quarter.

Okay, great. And then, secondly, I know in the past couple of quarters there has been some talk about we should start expecting some increase in R&D spending? And while it was up modestly versus what you spent in the first quarter, and I'm sure FX have some impact on that. Could you maybe provide a little bit more color as it relates to your expectations and increasing your R&D spend?

I think I mentioned this. If you look on a constant-currency basis, we are about a little over 10% up for the year. And our goal is eventually get R&D to be about 6% of revenue. And so we will look to move that up depending on how we feel about revenue and profitability, but that's our goal. Our goal is to get up to 6% of revenue.

And then when you consider the fact that service is about 25%, that would take us to about 7.5% on product and we think that is probably the right level. It varies a little bit by -- it varies in some cases a lot by business, and obviously, application, but we think for PerkinElmer, a weighted average of 7.5% on product is probably a good level.

Jeff Elliott from Robert W. Baird.

Hi, thanks, guys. First question is on OneSource. You had some nice growth there. How much of that is the combination with the Informatics piece, versus other demand you are seeing in the market?

It's a little difficult to parse that out. I would say my sense is probably more demand right now, because while we feel good about the combination with Informatics on the product side of the business, it's difficult to say that -- because we just did it in the beginning of the year that we saw a material impact in Q2.

But I think our expectation is -- and we are having some good discussions with the customers. And clearly what it is allowing us to do is where we are strong, as an Informatics customer, to bring in OneSource and vice versa. So I think, going forward, we've got some -- we're optimistic, but I would say the impact in Q2, I would say, is probably fairly minimal. But the reason why it's hard to parse out right now, as I said, it's a combined sales force, so it's a little difficult to score-keep that way.

And then a follow-up on the China newborn market, you said 85% adoption. But how many tests per birth there are you seeing right now?

About four. There is a couple, as I mentioned, with the GSPs now are expanding that, so we've got some that are high single digits. But on average, it is probably about four.

Where do you think that heads over the next, say, two or three years?

I think those things are always difficult to do because you are trying to predict the uptake. But I think it goes up; it's a question of how quickly. The other opportunity is mass spec goes into that marketplace. As you know, you have the ability to jump up fairly significantly, but I would say in two years, I would be disappointed if we are not pushing low end of double digits.

Zarak Khurshid with Wedbush Securities.

Super. Hey, thanks, guys. Thanks for taking the questions. Wondering if you could tell us how much, if any, of the research business is actually automation, sample prep, Informatics, or anything else, sold into more of a routine diagnostics or applied channel and if there is any positive trends related to that?

I would say in the diagnostic area it is relatively small. And we are starting to make some inroads into the applied area, but I would say on a relative basis, still relatively minor.

Understood. And then just a quick one on Good Start, what is happening with carrier testing? Thanks.

I would say we have been a little disappointed in the uptake there and I think we have talked about this in the quarters as well. I think we have found it challenging, from a pricing perspective, whereas some of the competitors are out there guaranteeing a low number relative to out-of-pocket.

And we find that to be challenging from a regulatory perspective. I will just put it that way. And so, consequently, we are having a difficult time finding it, at least within our business practices, to be competitive.

Peter Olsen with Mizuho Securities.

Hi, Rob. What worries you most? When you look at the business over the next 12 months, what part of the business worries you the most? Just a follow-up to the comment you made around on the research side of the business, what were the products that helped you during the quarter? Thank you.

I would say -- going back to my comment before, I think the Medical Imaging one is a little bit because I feel a little bit less in control there, because, again, we're a component supplier. We do have some insight, let's say, a quarter out, but that one is -- again, as we referenced before, is a little bit choppier than we would like. And that's the one that I feel a little bit less in control of from the standpoint of driving demand.

The second part of your question was -- I'm sorry, was what I was most excited about?

Just the researched products that helped you during the quarter. You talked about the research side being stronger and just wondered if --?

I would [spike] out a couple. The Opera Phenix, which is our imager, high-content imager, it continues to see very strong adoption. I think we have got a nice value proposition there for the customer. I think we have been pleased with that. I spiked out the new microfluidics, which is a LabChip touch. And we are seeing some nice adoption there in the area of biotherapeutics.

And also on the NGS side. Because it goes into quality control and the sample prep, and obviously with the ramp-up and all the NGS, that's pulling in nice demand as well. And the other area is we've seen good growth in in vivo. So a number of areas that we have been very pleased with on the research side.

Tycho Peterson with JPMorgan.

Thanks. Rob, on the Informatics business, I know you've talked in recent quarters about the need to build out there a bit more and do some hiring. Maybe talk a little bit about where you are in that buildout, and competitively do you feel like you've got critical mass? Even to going to ASMS and seeing what others are doing in terms of pulling data off and (inaudible) aspect, aggregating it all. Do you need to be doing more along those lines?

That's an area we have been investing both in -- mostly in people, and I would say we are making good progress there. We still have got a way to go. These people are difficult to find and attract. But I would say we have made some progress there.

I would say in some areas we feel very good about our capabilities. Clearly on the analytics side and the visualization side; I think we are very strong on the chemistry or the chemical side of things. I think the areas where we need to invest a little bit is on the biological side, and as we've talked about in the past, we are trying to build out a lot of capability in the cloud. But I think we feel good about the progress we're making. I think there is still more to do.

I think the other thing is when you go around the places like ASMS or ASCC, you continue to reinforce the importance of Informatics and the capabilities that we are building. Because clearly in, whether it is research, environmental or diagnostics, it's going to become increasingly more important.

And I guess, since you mentioned ASCC, one of the other big trends this year was the push to point of care by (inaudible) and others. Can you maybe talk about how you view that market? Is it an interesting opportunity to be doing more in the physician's office and is there risk of displacement for your plate readers, some of these former business competitors that are pushing into these markets?

I think we view it as an opportunity within emerging markets. I think the challenge for us has been trying to find a technology that is both sensitive enough, but at the same time, cheap enough and uses low energy and all the needs that are required to work in the environment of the [emerging] market.

So I think it has the potential to be a very attractive market, but I think it's got to be the right product, the right technology. And up to this point, at least, it's been challenging to find the right one to bet on.

That concludes today's questions. I'd now like to turn the call back over to Mr. Robert Friel for closing remarks.

Thank you very much, and I want to appreciate everyone taking the time this morning. We feel good about our progress year to date, and believe we are well-positioned to deliver on our full-year financial commitments and continue to make progress on our strategic priorities. Thank you for your interest in PerkinElmer, and have a great evening.

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