Revvity Inc (RVTY) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PerkinElmer Q3 2015 earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Tommy Thomas, Investor Relations. Please go ahead, sir.

Thank you, Christy. Good afternoon and welcome to PerkinElmer's third-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 today's earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until November 19, 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 this call that are not reconciled to GAAP in the attachment, we will provide the 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've delivered strong financial results during the third quarter. We grew revenue on a constant currency basis by 10% and grew organic revenue by 6%, with 7% growth in human health and 5% growth in environmental health. Adjusted earnings per share increased by 16% on a constant currency basis, and we continued to expand adjusted operating margins.

Through the first nine months of 2015 we are tracking well to our financial guidance provided in January despite some incremental headwinds in a few end-markets. The success we saw in the third quarter reinforces PerkinElmer's strategy of innovating across our core capabilities of detection, imaging, software, and service which allows us to build strong market positions in attractive end-markets. Our deep market knowledge and breadth of scientific capabilities means we can deliver targeted solutions to our customers, fueling breakthroughs that help improve quality and longevity of life. I would like to highlight a few examples from the third quarter where our unique capabilities continued to support our customers in the critical work they perform.

In the area of imaging, we're working with a number of top tier research institutions in cancer immuno-therapy to advance research in the interaction between mechanism of host and disease. Using PerkinElmer's Vectra multispectral imaging platform combined with our novel multiplex labeling reagents and image analysis algorithms, these customers are now able to visualize and quantify the complex relationships between cancer and immune cells in samples of diseased tissue. Critically these interactions are shedding light on important biological pathways at the heart of immuno-oncology such as PD-1 and PD-L1 that are enabling some of the most promising new cancer treatments. Additionally, during the third quarter we expanded our relationship with the Monash Institute of Pharmaceutical Science in Victoria, Australia. Researchers there are relying on a number of our analytical instruments and lab automation systems to study the impact of inhaled oxytocin on preventing or treating postpartum hemorrhage, a leading cause of maternal mortality.

In the area of research one of the largest pharmaceutical companies recently purchased our suite of high content imaging and informatic solutions to screen their vast libraries of compounds and assays, the activity of small molecules, and biologics on cellular phenotypes. PerkinElmer's scientists and engineers have developed a way to read out this activity at the cellular and sub-cellular levels. And combined with our advanced machine learning based software, we are enabling this customer to automate and rapidly deploy image analysis across large numbers of samples.

A key element behind our ability to meet customers' big data challenges has been the development and validation of enterprise informatic solutions to enable the integration and management of these rich, complex, multivariate data sets. I've shared this particular example because it reinforces the value of offering unique imaging and detection capabilities as well as the analysis, visualization, and collaboration software to understand, interpret, and share relevant information. Increasingly, our research customers are realizing the value in our full solutions that draw upon our entire portfolio, including informatics, OneSource services, and advanced imaging and detection products. In the third quarter alone business with our top research global accounts, which comprise about 10% of our sales, grew mid teens. This ability to combine detection, analysis software, and service has been one of the cornerstones of our newborn screening business for many years and is why PerkinElmer's solutions and expertise are vital components in global healthcare agendas. Our newborn screening franchise continued to make good progress in the quarter to support customers' needs to expand screening.

In Kyrgyzstan a new program was established that will serve about 250,000 births per year. We also helped bring skin testing to more countries piloting menu expansions, and in our medical lab in Suzhou, China is meeting pent up demand for neonatal, prenatal, and infectious disease screening across China. During the third quarter we continued to introduce new products into the market as we are committed to both responding to and anticipating change to a relentless focus on innovation to solve customer challenges. In the third quarter we debuted our Opal tissue staining kits which are part of our new Phenoptics workflow offering and includes staining capabilities, imaging technologies, and image analysis software to help customers in the fast growing area of quantitative pathology.

As I mentioned previously, these capabilities are enabling researchers, oncologists, and pathologists to better characterize immune cells and tumor cells within tissue in ways not previously possible. During Q3 we also launched Signals for Translational, which is a cloud-based informatics platform for pharmaceutical researchers that aggregates, manages, and analyzes experimental and clinical data from multiple sources. Signals for Translational helps scientists better progress from data acquisition through biomarker discovery and validation as they develop drugs tailored to patients' individual needs. And with the growing majority of top global pharmaceutical companies engaged in translational work, we see PerkinElmer's Signals platform as a key enabler in this field.

In addition, we introduced the TGA 8000 analyzer for advanced materials characterization. This is a prime example of how we're evolving our detection capabilities so that PerkinElmer customers can better progress from samples to answers and insights. The TGA's range of applications includes determining contaminants in products or in their packaging. To answer an increasing need across the customer base, this instrument runs on new software for high sensitivity thermal analysis and features remote status monitoring.

As we move ahead, we see clear opportunities to benefit from positive long-term trends across human and environmental health. In the near term, however, we're balancing our long-term enthusiasm while closely monitoring several areas of uncertainty. Among the strongest tailwinds are the biotech and pharma markets where our global account approach and product offerings give us access to attractive areas bolstered by heavy customer investment. Additionally, in China, while the overall economy is slowing, the criticality of our solutions directly addressed long-term priorities for the country. Last week's announcement of the end to the one-child policy should noticeably boost our business over the next several years. Furthermore, the government's focus on ensuring a cleaner environment, safer food, and overall access to healthcare will hopefully translate in the positive impact for both local funding and China's next five-year plan.

In Europe a number of countries' economies are stabilizing, although the current immigration issue could redirect the spending in certain sectors. And lastly, the US is on track for solid growth as we close out the year. On the other hand, a significant headwind in the short term is Japan's deteriorating economy as funding delays are causing very weak academic and government spending.

Our medical imaging business also faces tougher market conditions than it has in years past. More recently customer ordering patterns for this business have become incrementally challenging, creating further softness in the fourth quarter. Furthermore, as we're all aware, the strength of the US dollar is posing challenges for emerging countries such as Brazil. This is coupled with the drop in oil prices forcing oil producing countries to normalize demand, potentially softening future revenues and curtailing research and spending on improving healthcare. On balance we're optimistic about the macro conditions, but recognize some markets remain challenging.

Based on our guidance for the fourth quarter of 3% to 4% organic revenue growth and adjusted EPS of $0.86 to $0.89, we would deliver full-year results of 8% revenue growth in constant currency, organic revenue growth of 4%, and adjusted EPS on a constant currency basis of approximately 13%. However, just as important as these financial results, we continue to make excellent progress in advancing the strategic priorities of the Company and improving our operational and technical capabilities. Our success to date positions us to deliver on our commitments to our customers and shareholders while driving our mission to improve human and environmental health.

I would now like to turn the call over to Andy to give more color around our Q3 results and fourth-quarter guidance.

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

For the third quarter we reported approximately 10% constant currency revenue growth and 6% organic revenue growth, with foreign exchange representing a headwind of approximately 6%. As we have previously communicated, there was an extra week in the third quarter and we estimate the impact of that extra week on organic revenues was approximately 2%. Adjusted revenues were $563.6 million in the third quarter as compared to $542.9 million in the same period a year ago, driven by broad-based demand. Third-quarter adjusted earnings per share was $0.60, up 16% on a constant currency basis from $0.57 in the comparable period a year ago.

Looking at our geographic results, we experienced mid-single digit organic revenue growth in the Americas and Asia and high-single digit organic revenue growth in Europe. Year to date, organic revenue growth has been mid-single digits across all three regions. We're pleased to report that our results in Europe have shown positive organic growth in the last five quarters, and we expect demand in Europe to remain stable for the balance of the year. In China revenues grew high-single digits organically and we remain comfortable with our full-year outlook of high-single digit organic revenue growth.

As to our operating results, third-quarter adjusted gross margins were 47.2%, up 40 basis points on a constant currency basis, driven primarily by volume leverage, mix, and productivity gains. For the nine-month period gross margins improved by 50 basis points on a constant currency basis. Third-quarter adjusted SG&A was 24.8% of adjusted revenues, essentially flat over the same period a year ago. For the first nine months of 2015, SG&A is down 50 basis points on a constant currency basis, the result of continued operating leverage and from our indirect spend initiatives.

Research and development spending in the third quarter was up modestly as compared to the same period a year ago, driven by continued investments in innovative new product development and incremental investment in Perten. Year to date, R&D spending is up approximately 30 basis points above the reported and adjusted basis as the impact from FX was immaterial. Overall, we were pleased with our operational performance in the third quarter as we expanded our constant currency adjusted operating margins over 50 basis points and approximately 70 basis points year to date. We're encouraged by our third-quarter margin expansion, given the difficult comparison from the prior period.

Net interest and other expense in the third quarter was approximately $12 million, impacted by higher than expected foreign currency losses in the period, offsetting a favorable adjusted tax rate for the quarter of approximately 19%. We expect our adjusted tax rate for the full year to be approximately 20.5%, which is consistent with our performance year to date.

Switching to the segments, third-quarter organic revenues in our human health business increased approximately 7%, and environmental health organic revenues grew approximately 5%. Year to date, organic revenues have increased 5% in our human health business and 3% in our environmental health business. From an end-market perspective our human health business represented approximately 61% of reported revenue in the quarter, with diagnostics contributing 28% of revenue and research 33% of revenue. Organic revenue growth from our diagnostic business increased high-single digits off a double-digit comparison in the comparable prior-year period. This was driven by continued strength in our newborn screening franchise, offset by flat organic revenue in medical imaging due to difficult prior-year comparisons and customer ordering patterns.

We continue to be encouraged by the broad acceptance of our new cassette and CMOS offerings, but expect a challenging fourth quarter due to softening demand within the radiology and radiation oncology end-markets. We expect these conditions to persist through the first half of 2016, but anticipate this softness to be partially offset by demand for our new cassette and CMOS product launches. We once again experienced strength across our diagnostics offerings in China, growing double digit in the quarter with a strong performance in our newborn screening and prenatal business. As Rob mentioned, we are pleased that China has announced the elimination of the one-child policy, and we believe that this should have a positive impact for our diagnostics offerings over the next several years. Our Haoyuan blood screening business had an excellent quarter of growth, albeit off a low base. We're hopeful that the adoption and enforcement of nucleic acid testing begins to ramp more quickly in the coming months, but visibility as to the exact timing remains unclear.

Organic revenue in our life science solutions business grew high-single digits in the third quarter, driven by strong instrument sales and high content screening and imaging, strength from our informatics offerings, and robust growth at our OneSource multi-vendor services in spite of a very difficult prior-year comparison. We continue to be pleased with the double-digit growth we're seeing with key global pharmaceutical and biotech customers, a result of our efforts since earlier this year to better combine our research, informatics, and OneSource multi-vendor service offerings into targeted solutions. Globally we continue to see stability in academic and government end markets, while pharma and biotech markets have improved, with the exception of Japan which continues to experience weak demand.

Moving to our environmental health business which represented approximately 39% of reported revenue in the quarter, revenues grew 5% organically. Our third-quarter results have benefited from increased food and environmental demand with stability in industrial end-markets driven to a large extent by success from our inorganic, Perten, and material characterizational offerings. We're pleased to report that Perten had another good quarter. I recently visited with the team in Sweden and came away more bullish about the opportunity to expand our addressable market as we look to develop more dedicated food analyzers combined with our FPIR capabilities with Perten's core technology. We believe there are a number of additional cross business opportunities, as Perten benefits from the broader global reach and footprint of PerkinElmer.

Turning to the balance sheet, we finished the third quarter with approximately $1 billion of debt and nearly $200 million of cash. During the quarter we repurchased 1.5 million of our outstanding shares for a total consideration of approximately $72 million. 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.

Turning to cash flow, we continued to see strong cash collections offset by additional inventory requirements. Year to date, adjusted operating cash flow from continuing operations was $189 million, essentially flat versus the same period a year ago. The increase in working capital reflects additional inventory related to new product launches including our relationship with Waters as well as normal seasonal patterns. We expect these levels to decline over the balance of the year and continue to expect our full-year adjusted free cash flow to net income ratio to be consistent with our guidance provided earlier in the year.

Overall, we're pleased with our year-to-date performance as revenues grew organically 4%, gross and operating margins expanded 50 and 70 basis points respectively, and adjusted earnings per share grew 15% all on a constant currency basis. Looking ahead to the fourth quarter, we believe we are well positioned across the majority of the portfolio to deliver another solid top and bottom line pro forma despite a couple of areas of softness, specifically medical imaging in Japan as well as the strengthening of the dollar. As a result, we now expect our fourth-quarter reported revenues to be in the range of $610 million to $620 million, which represents approximately 7% constant currency revenue growth and organic revenue growth in a range of 3% to 4%. Adjusted earnings per share is expected to be in the range of $0.86 to $0.89, which represents approximately 9% constant currency growth at the midpoint.

For the full year we're narrowing the range of our adjusted earnings per share to $2.56 to $2.59, with the midpoint maintained at $2.57, representing 13% constant currency adjusted earnings per share growth. For modeling purposes you should focus on the midpoint of the revenue and adjusted EPS guidance ranges as our most likely view for the fourth quarter.

This concludes my prepared marks. Christy, at this time we can open up the call for questions.

Thank you.

(Operator Instructions)

Our first question is from Doug Schenkel of Cowen.

Hey, good afternoon. And thank you for taking the questions. I guess my first question is really on capital deployment.

So Rob, you've talked about having $1 billion of M&A capacity for the next few years. You've talked about the deal pipeline being robust, but acknowledged that valuations are still pretty high.

I think while it's only been a few quarters since you outlined some of the criteria, the activity has been somewhat limited. Would you be willing to share how you're thinking about the deal pipeline today and when you might pivot to other ways of deploying capital if the opportunity to pursue M&A remains limited?

Sure. As you mentioned, we continue to feel like we've got a good pipeline. I would say again, as you mentioned, I think some of the valuations have been a little challenging.

One of the things, I think Andy talked about it, we did buy some shares back in the third quarter. I think it was about $70 million or so we spent on share repurchasing.

The way we're thinking about this is, obviously as the deployment of the capital from an M&A perspective gets delayed, obviously, in the quarters we continue to generate more cash flow. So we're getting more comfortable with the idea of saying we can take shares out and still maintain significant capacity to do M&A.

So that's why you saw on third quarter we started to get a little bit more aggressive on the share buybacks. I think if we continue to be unable to do some things on M&A perspective, we would continue to return the cash back to shareholders through share buyback.

Is there some point where you might think about doing something more meaningful in the form of a buyback?

I think we continue to feel pretty optimistic about our ability to do some things on the M&A perspective. Hopefully we'll see if things change.

But as of right now I think given our view that we think we can get some things done here, probably unlikely to see something where it would be a big share buyback. But I think doing a little bit of both I think is probably what I would expect going forward.

Thank you. Our next question is from Isaac Ro of Goldman Sachs.

This is actually Joel Kaufman in for Isaac. Just to start off first with margins, obviously the margin story has progressed nicely over the past couple years. Could you maybe just clarify exactly what are the key operational initiatives you guys are focused on going forward to drive that next leg of margin expansion aside from driving top line growth?

I think a key part of it is the leverage we're going to get from the top line. We've always said that's really about half of what we think we can deliver from a margin expansion perspective.

We also have talked quite a bit about indirect spend. Year to date we actually on a constant currency basis have saved $10 million year over year on our spend initiative. So we're actually a little ahead of schedule there. Obviously, all this has been impacted somewhat by the change in FX rates, but I think overall we still feel comfortable with that cadence of 68 to 80 basis points, 70 to 100 basis points of margin expansion going forward assuming reasonable growth.

We also have rolled out some lean initiatives. I think that's going to help drive some of the progress on the gross margin side, specifically within the factory.

So I think you're going to see really three pieces continue, tight controls over SG&A, I think you'll continue to see margin expansion on the gross margin side through factory enhancements and efficiencies, and then the leverage we get from the top line. Hopefully, that's also going to end up continuing to be a positive mix as we're seeing human health grow at a faster pace than environmental health, and they have higher margins.

Just one on Europe. Appreciate the comments you guys made earlier there in calling out the strength in the region. Should we be thinking about that as using comps or a broader improvement in underlying demand?

I actually think it's a little bit of both. Clearly we're getting the benefit of a difficult 2014, but I think at the same time we mentioned the fact that we are seeing some stabilization and demand.

And so I think going forward we feel pretty good about the pace of growth in Europe. I would say the only area that we're sort of watching a little closely here, and again I think we called that out a little bit, is with the recent pressure on immigration, we're a little concerned that you could see some shifting of prioritization and to the extent that that may impact some of the incremental spending going in to healthcare and research. But generally speaking we feel pretty good about the demand profile in Europe.

Thank you. Our next question is from Bryan Brokmeier of Cantor Fitzgerald.

Hi, good afternoon. Furthering the question on M&A, have you seen -- you said you've seen challenging valuations. But some other companies in the space have talked about seeing some of those valuations come down -- start to pull in a little bit. Some companies are starting to be a little bit more reasonable given the pullback in the space. Are you seeing that as well?

And then secondly, you also I believe talked about having about $1 billion in capacity to do M&A. Is that still how you would look at it despite the recent share buybacks and other things you've done with your capital deployment?

I would say on the valuations side possibly. Probably for us the fact that the IPO market is getting a little bit more challenging probably with the smaller private companies, I think that's helpful. I think for some of the more public companies, I don't think the valuation expectations have changed much, at least for my perspective.

With regard to the $1 billion, the way we think about that is both our borrowing capacity as well as our free cash flow generation over the next couple years. I think the combination of those two leads us to believe that we could probably spend up to $1 billion.

And what areas are you most focused on? You recently -- I guess it's been about a year now since you did the Perten acquisition. Is food safety still an area where you're focused on, or are you more taking a look at the human health side such as diagnostics and your biopharma business?

First of all, one of the good things I think about PerkinElmer is both businesses I think have attractive aspects from an end market perspective. So clearly the environmental side, whether it's food or even some of the applications within water, I think we continue to be very attractive.

On the human health side, I think both the area of diagnostics, anything we can do to expand our franchise there and selectively within the research areas again. Then I'd say the other area which really cuts across both is the area of soft [around] informatics. So I think across the majority of the businesses we would look to be adding there from a bolt-on acquisition perspective.

Thank you. Our next question is from Mira Minkova of Stifel.

Hi. Good afternoon, guys. Thank you for taking my question.

Good afternoon.

Maybe let me start with your organic growth guidance for the fourth quarter. Seems like a bit of a step down versus what you've done in the last couple of quarters, 3% to 4%.

Appreciate that you mentioned the comments on Japan, medical imaging. Is there anything else that we should be considering that may be happening in the fourth quarter? And also what are you assuming for budget flush there?

First of all, we're not assuming any budget flush in the numbers that we are forecasting. But I would say three things, and you mentioned two of them. One is clearly medical imaging and Japan.

We probably think those combined are probably 150 basis point headwind. I would say the third thing is if you recall we had a fairly strong Q4 last year.

So we are -- it's a pretty strong comp. I'd say the combination of those three things is something that we're considering when we give the guidance.

Okay. Got you. And they changed the one-child policy in China.

Obviously, you called it out it must be a good thing for you. If you could please remind us how big your China neonatal business is right now, and how would you think about the impact?

First of all, I would say I think the impact longer term is going to be very helpful. When you think about 17 million children born in China, the potential for that to grow and maybe grow fairly significantly is real. I think the real question is, what's sort of the ramp?

And of course I think that's a difficult thing to quantify in the short term. One of the things we have done is we've gone back, and you may recall on November 13, there was a relaxation of the one-child policy for parents who were only children.

And if you look over the last two years there's been about 1.4 million of those parents that have applied for second children. That represents a little bit more than 10% of the parents that were actually eligible to do that and if we go back and look at our business, that probably tracks pretty well that we think that had about a 12% to 15% impact on the growth of the newborn screening business.

So again, if that's sort of a proxy of what's going to happen this time, you're going to see an increase but it's going to be a fairly slow ramp. Hopefully that's helpful.

Our next question is from Jeff Elliott of Robert W. Baird.

With all the focus on new products, can we get an update on what you're seeing from contribution from all the new products you launched earlier this year?

We feel very good about the progress there. We talked about it in the beginning of the year, about a $30 million or $35 million contribution incrementally in 2015 and we think we're going to exceed the top end of that range. As we look through the Q3 and what our expectations are for Q4, we think we'll be north of the $35 million incremental benefit.

Got it. Do you have any anecdotes about the synergies you're now seeing between informatics and some of the other businesses? I know you've moved around different pieces of the business lately, but I'd like to know the synergies you're seeing there?

A couple of them I sort of mentioned in my prepared remarks when I talked about the progress we're having with the pharmaceutical companies. When we think about historically we would have provided them say imaging equipment.

Now by packaging that together we have customers now that are not only ordering our imaging equipment, but ordering some of our software, specifically high content imaging software, as well as spotfire licenses and even in some cases enterprise-related software. If you look at the key global accounts, the top 20 global accounts where we've combined our informatics, OneSource, and product offerings, those customers are growing mid-teens through the first three quarters of the year.

Thank you. Our next question is from Dan Arias of Citi.

Hi, guys. This is actually Bryan Kipp on behalf of Dan. Rob, question for you. I mean on the margin -- Rob or Andy.

On the margin front, I mean strong organic, I know the mix was probably a little bit less favorable just because it was 61% versus 62% last year. But still surprised by the soft incremental contributions here despite the strong organic pull through.

What were the dynamics there that maybe softened that? Was it one-time items, was it mix, or was there something else in there?

I would say first of all if you look at the bead on the top line that fundamentally came in two areas. One is OneSource, and I think Andy talked about this, it was very strong.

We saw very strong growth in the OneSource offering. Again, potentially benefited from the point earlier where we're combining it with OneSource in the product offering, and that has lower incrementals.

I would say the other thing to point out is when we talked about the incremental higher revenue from the additional week, that also comes at relatively low margins. Because if you think about it you're amortizing the cost again, [1/52] over that period of time.

And the revenue for those additional days is much lower. The flow through on the incremental revenue from the week and the incremental revenue from OneSource lowers the flow through. Having said that, if you look at our EPS growth on a constant currency basis it was still 16%.

Appreciate it. Two-prong one. One, the Europe comment that you had, are you guys seeing any softness because of the massive influx of refugees, or is that just kind of a long tail?

And the other things is can you contextualize the Opal tissue contribution cloud-based stuff that launched that you did in 3Q into next year? Just early color, market, addressable market size, et cetera?

I would say first of all, I don't know that we're seeing anything directly from an orders perspective, but I'd say we're hearing it in discussions with customers so I would say it's a concern. At least it's a concern of the customers, but I wouldn't say we're seeing any hard evidence of that today.

But I think, obviously, something we're aware of. I think with regard to the imaging opportunities, I think the way we think about that today is largely in the research use only, and I think in that it's probably a $30 million to $40 million market opportunity for us.

I think the greater market potential is to get it into the clinic and that's something we're talking about and discussing internally, whether we make that investment or partner. I think the significant growth opportunity there would be more on the clinical side, but having said that we do see a nice $30 million to $40 million market on the research use only.

Thank you. Our next question is from Paul Knight with Janney Montgomery.

Rob, we've seen in the market more entries into the service side of the business. Are you seeing greater competition because of your success in the service strategy you deployed quite awhile ago?

I don't know that we're seeing any more competition. I guess my view is that competition has always been pretty formidable, but as I mentioned before we continue to do quite well.

OneSource had a very strong quarter in Q3, and if you look at year to date they're growing well in the mid-teens or better. So we continue to do well, and I think it has to do with not only, I think the reputation and execution capability of the team, but also as we increase our capabilities around software, informatics, and again package it with this global account focus. We continue to see significant opportunity to grow that business.

And then lastly on the reagent side, I know that's been lower growth than you've liked in the past. How do you feel about your product mix now on the reagent side of your portfolio?

I would say on the human health side, particularly on research, that's been a real area of focus from an R&D perspective, late 2014 and 2015. And we saw nice traction in this quarter.

I think our reagents were up about, I'll call it, low to mid-teens in the quarter. Obviously diagnostics was strong. [Wisonas] was strong in research.

I think environmental is still an area -- and it's less research and it's more consumables. We're seeing decent growth here, but we still need to get that up as a percentage of our revenue. We were pleased with the performance particularly on the research side this quarter as some of the investments we made in research and development were providing us benefits.

Thank you. Our next question is from Derik de Bruin of Bank of America Merrill Lynch.

Hello. Can you hear me? Can you give a little bit more color on the medical imaging business?

Are those products a little bit higher margin? And I guess what overall percentage of your sales is the medical imaging business?

Medical imaging is probably I think 8% of our revenue, depending on the quarter, but in that general range. If you look at medical imaging you can think about it in three markets.

There's the radiology market, there's an oncology market and then there's, I'll call it, an industrial market. Roughly speaking we'll call that one-third, one-third, one-third.

We continue to do very well in the industrial market. I think that's a combination of some new products we've gotten out there and I think we continue to capture share there. I think the challenge that we face is more in the radiology and oncology and I would point out a couple things.

First of all, obviously, this is a business, while we continue to think it's very attractive, has demand profile that's probably more volatile than the rest of the other PerkinElmer businesses largely because it serves a more capital intensive end market. While we think it's an attractive business, clearly differentiated capabilities and overall serving attractive markets, it is going to have a little bit more volatility because of the capital intensity of their customers.

Great. That's helpful. And Doug, if I hear you correctly, you felt like the medical imaging business would be down at least to the second half of next year?

I think we believe it will be down in Q4, and we're not really getting in the 2016 guidance now, but I'd say it's probably going to be stronger in the back half of 2016 than it is in the front half. Unclear whether it will actually be down in the first half of 2016.

Thank you. Our next question is from Dane Leone of BTIG.

Thank you very much for the update. So a bigger picture question here. You guys have a good diversity of businesses where you're a leader in those businesses, and that's served you guys pretty well especially last couple quarters versus peers in terms of some volatility.

guess the strategic question is, you guys have flexibility and can be pretty nimble into moving in to new markets. What's the appetite for moving into some of the higher growth, higher margin markets more aggressively like clinical diagnostics, perhaps point of care, molecular, or more of the core genomics base?

I guess the way I would describe that is when we think philosophically the portfolio and businesses that we're sort of attracted to, we think about a couple things. Is it a business that fits well with PerkinElmer? And what I mean by that is it doesn't -- is it consistent with our mission and vision around human environmental health?

The second thing is, is it attractive from the end market? Again, does it have differentiated capabilities, are the financial returns attractive?

And then finally are we appropriate owners? Meaning can we make it better or willing to invest in it? And what does it do for the overall portfolio?

So I think a number of the areas that you mentioned I think probably fit all of those from the standpoint it's consistent with the mission, obviously attractive growth. In some cases we'd have to understand and make sure the financial returns are appropriate, and I think a lot of them would fit well with what we do.

So whether it's additional investments in clinical diagnostics or et cetera. It's just finding the right assets and making sure the returns make sense relative to the price, but I think all of those areas, the majority of those areas are ones that I think we would find attractive if we thought the asset fit well with what we're trying to achieve and we could make sense out of the financial returns.

So if we think about the success that you've had with the Caliper transaction, moving into new markets or adjacencies, do you think it's a better strategy to work in maybe a smaller part of the market and then broaden out? Like starring in single cell, and then broaden out, or go with a very broad platform technology to make the first footprint there?

It's a little hard to generalize overall, but I would say our success has been generally more in areas that are sort of more niched where we can be differentiated based on capability, rather than taking on some of the larger players in, let's say, molecular diagnostics or broader areas.

Thank you. Our next question is from Steve Buchan of Morgan Stanley.

Thanks for all the color here and for taking the questions. Two pretty simple ones for me. One for Rob and one for Andy.

Rob, the commentary that you gave on the health of the different end markets was really thorough and really helpful. Would it be fair to say that as we roll it all up and we think about where we are at the end markets as we look out over the next several months, is it in total roughly the same in terms of the end market growth outlook as a year ago; the moving parts or the subcomponents just differently mixed, in terms of what's a growth driver or not?

And if not how might you compare the profile, the aggregate end market growth now to a year ago? And then my second question for Andy, I wonder if you can give us any sense based on what you're seeing right now in terms of currencies, what the currency impact on the model might be in 2016, broad strokes, top line margin, earnings impact, if you have any rough sense it would be very helpful.

So, I would say if we're talking about markets from a geographic perspective I would have a tendency to agree with you, which is there are pluses and minuses, but I'd say the geographic end markets meaning sort of North America, Europe, emerging markets, sort of puts and takes but are probably fairly consistent with what we would have expected in total. When I think about the sort of application or the end markets from a customer's perspective, the one exception I would say would be in medical imaging.

So I think diagnostics is probably about what we thought, maybe margin a little bit better. I think research maybe is marginally a little bit better. I think environmental is probably okay, maybe the industrials are a little bit more challenged.

Maybe that all balances out, but I do think particularly in the back half of the year, medical imaging probably being -- if I were finding the markets a little bit more challenging. On the margin if you think about that being 8% of our business or so, it's creating a little bit of a headwind, 50 to 100 basis points.

And Steve, on your second question, we're in the midst of rolling up our annual plan right now. And obviously, the distribution of that revenue and profit is going to have a significant impact on the impact of FX.

I will say for the fourth quarter given where the euro is right now and where some of the other currency's larger buckets are, its probably a $0.015 to $0.002 of headwind for us in the fourth quarter. That's factored in to our guidance. That's how I would characterize it at this point.

Thank you. Our next question is from Ross Muken with Evercore ISI.

Hey, guys. Rob, you've been around the business for a long time. How would you characterize where we are in this cycle? I'm thinking more in the environmental businesses and maybe some of the industrial pieces?

Where we are in this cycle versus maybe the last cycle, it seems a bit tough to figure out with the US stronger and obviously, all the emergings challenged. I guess, one, how has it made you think about the positioning of that part of the business longer term and where you want to play and where you don't want to play. And two, I guess how does it make you think about investments in some of those emerging markets that are going through a recession or recession-like behavior as we speak?

I'd say if you're talking about environmental specifically, and we can talk about the other, but environmental specifically, I think there's parts of that market that continue to be challenged. So we talk about the industrial end markets.

Consequently what we've talked about and what you've seen us do is become more focused on where we're going to invest. If I go back a number of years ago, we were investing across the broad range of technologies and capabilities with environmental, and we would argue that we probably had 12 different product lines across environmental, and of course the service applications as well.

I think as we've gotten more concerned about the -- and I would say most importantly the industrial side, when you look at things like -- although we're not big on oil and gas, obviously petrochemical and fine chemicals is an area for us. And some of the off chutes of those that we want to get more focused in areas both from a technology perspective and application.

Obviously, our move with partnering with Waters where we said it doesn't make sense for us to continue to invest in liquid chromatography. We're not strong there. That's how I think about it.

I think on the environmental side what you'll see is a more focused invest in areas where we think we have strong market shares or strong technology capabilities. And the other areas we'll either partner or sort of de-emphasize.

Perfect. Thank you, guys.

Our next question is from Bill Quirk of Piper Jaffray.

Good afternoon, everyone. This is actually Alex Nowak filling in for Bill today.

We've seen some slowing US birth rates in our recent checks. I was just wondering can you offset the slowing growth in your menu expansion within the state or from an increase in the number of tests that you do for the Affordable Care Act.

I would say our data doesn't necessarily support a declining birth rate. Our data would suggest birth rates are sort of stable, maybe increasing slightly.

Butt the answer to your question is that yes, we're always looking to continue to expand the menu. And we've got broader offerings that we can provide, whether it's on the software side or you continue to build out additional capabilities that we can offer the lab.

I think there's always an opportunity, or we believe there's always an opportunity to continue to grow the business almost irrespective of the birth rate. Having said that, our data would suggest that US birth rates are flat to up slightly.

Great. Then this one might be a little hard to cheese out since China is ramping so rapidly, but two questions. First in China, did you see any slowdown in the birth rates because of the year of the goat? And then second, does it set you up for an easier comp, so while you repeat [proscreen] performance from this year or even accelerate it?

So the answer to this question is yes on both. We did see a reduction in birth rates because of the year of the goat. And we do believe that will provide an opportunity to accelerate growth in 2016.

Thank you. Our next question is from Zarak Khurshid of Wedbush.

Thank you for taking the questions. First on the macro tone in the Chinese business, we've seen some wobbles there from a number of other players. Can you talk us through the hospitals and end markets there, and why you may or not be as sensitive to a harder landing in the region?

So if you think about our diagnostic business in China, it's fundamentally, I'll call it, four businesses. You have the newborn business, which I think continues to grow because you've got adoption rate so more children are being screened.

And you've got menu expansion almost irrespective of birth rates, and we talked about that on the prior question. So I think we can continue to grow there because, as we've said on calls in the past, they're still doing only a handful of tests in China and we're optimistic there for a couple of reasons.

We're starting to get some traction around mass spec. And we've mentioned in the past that we got CFDA approval for our GSP, which is our automated work station there.

So we think we can continue to drive good growth there. In fact we've seen, I think in third quarter it was mid-teens. So we feel good about that.

Similarly same dynamics I would say on the prenatal side. So I think we continue both the penetration and the ability to do more there. And similarly we saw similar type growth on the prenatal side, and then the third area would be in blood screening.

As Andy mentioned, it's off of a low base. But we're going into we think a pretty significant tailwind as the government will start to enforce the mandate of that screening, and of course we're one of five that have the capability to do that.

The last area would be on the infectious disease. That's probably the one area where potentially you see some slowing on if there was an overall economic slowdown potentially.

But again, we see a lot of opportunity continue to penetrate and expand there. But I would say of the areas that we operate in, in the event there was, I'll use your words, hard landing, I would think that's the one that's probably is most susceptible to some impact.

Great. Thanks. A follow up on one of the last philosophical M&A questions. Given your experiences with Signature Genomics in the past and also NTD labs, what's your appetite to own a diagnostics lab service business?

The two ones you mentioned weren't great, although I think NTD has done okay. I think the issue with Signature was not necessarily the lab per se, it was the reimbursement side of things.

I don't know that we would have a particular issue with a service lab per se. I think we just got to make sure that the reimbursement is clear.

And of course outside the US we continue to be quite excited about opportunities in places like India and China. I think the service lab would be something we would look to invest in, as long as we had clarity around the reimbursement.

Thank you. Our next question is from Tycho Peterson of JPMorgan.

Hi guys, this is Steve Raymond on for Tycho. Thanks for taking the question. First, wanted to ask on your softer spending, you're seeing Japan which is obviously -- can't even be felt throughout the sector. Can you give us some more color on what you're seeing on the ground floor, and is there any hope for any type of recovery in 2016?

I think there's hope for recovery in 2016. I would say we're not very optimistic with hope in 2015, because it just seems like the spending is just not being released.

And so particularly on the research side is where we see it challenging. I'd say at this point we're not expecting any recovery here clearly in Q4.

Like I said we're in the process right now of thinking through 2016. I think there's a possibility you could see some recovery in 2016.

So we'll have to wait and see. But I would say clearly not for the last quarter here.

Got it. And I apologize if I missed this, but do you have any updated thoughts on China's new five-year plan as the broad themes begin to be disseminated? Obviously, it's still waiting on a lot of details that seems like environmental initiatives are going to be a key part, so if you could briefly talk about how that might benefit you?

That's our sense. As you probably know I don't think they're going to make it public until March I believe so we're waiting to see.

Our intelligence and the people on the ground tell us that some of the key areas that we're focused on will continue to be a high priority; so whether it's environmental, whether it's food safety, access to healthcare. So we feel pretty confident that we'll continue to be key priorities for the government, but probably until March or if they start to leak some of the information out, we really don't have any particular insight.

Thank you. That concludes our Q&A session for today. I would now like to turn the call back to Mr. Rob Friel for any further remarks.

Thanks for your questions. Let me just say in closing we feel good about our progress year to date and believe we are very well positioned to deliver both on our full-year financial commitment and continue to make progress on our key strategic priorities. Thank you for your interest in PerkinElmer and have a great evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.