Revvity Inc (RVTY) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PerkinElmer Q2 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Tommy Thomas, Vice President of Investor Relations. You may begin.

Thank you, Kathryn.

Good afternoon, and welcome to the PerkinElmer second-quarter 2016 earnings conference call. With me on the call are Rob Friel, Chairman and Chief Executive Officer, and Andy Wilson, Senior Vice President and Chief Financial Officer.

If you have not received a copy of our earnings press release, you may get one from the investors section of our website at www.perkinelmer.com. Please note: This call is being webcast live, and will be archived on our website until August 18, 2016.

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 at any other date after today.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we'll provide reconciliations promptly.

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

Thanks, Tommy.

Good afternoon, and thank you for joining us today. As we reach the mid-point of 2016, I'm pleased with PerkinElmer's performance year to date, having successfully driven growth, expanded margins, and generated strong cash flow. Specifically, during the second quarter, we increased adjusted earnings per share by 12% to $0.67 per share, expanded adjusted gross margins by 90 basis points and adjusted operating margins by 50 basis points, and came in at the mid-point of our guidance, with revenue of $573 million.

Our solid results reflect excellent operational execution from an outstanding team of employees around the world, as well as our focus on the most compelling growth investments, and our continued commitment to outstanding service for our customers. Consequently, despite the ongoing mixed macroeconomic environment, we are confident in our ability to drive double-digit adjusted EPS growth this year, and achieve our top-line growth target.

In addition to our financial results, I was also pleased with the progress made on our strategic priorities during the second quarter. As a reminder, the majority of our efforts this year are focused on three areas. First, driving innovation collaboratively with our customers to better leverage combined technical and application knowledge to create truly differentiated solutions, resulting in tangible customer value.

Second, investing where we believe we have the most significant opportunity to increase, maintain, or capture leading share positions. And third, continuing to drive operational effectiveness to advance our competitiveness and improve profitability.

Turning first to innovating with our customers, a good example of this approach is a recent collaboration with the Genome Institute of Singapore, focused on advancing precision oncology. The Institute aims to develop a high-throughput screening platform to predict therapeutic sensitivity in tumor models in real time, with the ultimate goal of translating precision oncology research results into the clinic. To do this, its researchers are utilizing a number of PerkinElmer products, including our automation and liquid handling solutions, as well as both our tissue and cellular imaging platforms.

In China, a major dairy company will now use our solutions to verify nutrients, test vitamin content, and detect heavy metals in their products. This is an excellent example of where we were successfully expanding our addressable market in the food quality and safety area by leveraging the collective strength of our inorganic capabilities with Perten and Delta's expertise into new applications and products.

In the fast-growing area of reproductive health, we are working with a number of states in the US to facilitate the screening of Lysosomal Storage Diseases, or LSDs, enabling early detection of these rare inherited metabolic disorders, in compliance with the HRSA recommended newborn screening panel.

We also recently introduced several new products that strengthen our core offerings. These include the AVIO 200 ICP spectrometer, which is the smallest analyzer of its kind on the market. The AVIO 200 helps the lab professionals perform complex multi-elemental inorganic analysis for applications in food quality, soil, and water testing.

Additionally, in our research business, we continue to launch new assays, with over 25 new biochemical and immunoassays supporting drug discovery applications brought to market this year alone. During Q2, we launched an NGS 3K assay, which runs on our LabChip Touch microfluidic platform. This assay delivers the highest sensitivity at the lowest DNA sample concentration, providing customers with improved sample quality control for their sequencing experiments.

We also expanded our NGS capabilities with the recent acquisition of Bioo Scientific, a company based in Austin, Texas, that provides biotechnology solutions for food and feed safety testing, and life science research. The acquisition builds upon our food franchise, with the addition of immunoassay-based technologies that detect pathogens, toxins, and other contaminants. Additionally, Bioo's laboratory preparation offering for next-generation sequencing broadens our NGS workflow solutions.

To drive innovation, we once again increased our R&D spending in the second quarter, and are on track to increase R&D as a percentage of sales by 50 basis points for the full year. As we have communicated previously, we are concentrating a greater portion of our growth investments in four priority areas. These areas include food quality and safety, pharma services and solutions, reproductive health, and emerging market diagnostics, and represents roughly 40% of PerkinElmer's total revenues.

The benefits of this strategy are already paying off. In the second quarter, organic revenue for all four of these areas grew by greater than 10%. And in each of these areas, the rate of growth increased sequentially.

Andy will cover this in more detail, but the strong growth we experienced in these businesses helped to offset headwinds in the industrial end markets, as well as declining demand in medical imaging. Going forward, one of the keys to our ability to accelerate top-line growth rates will be further expanding these priority areas as a percentage of total Company revenue.

Turning to our progress on operational execution, we've experienced excellent gross margin expansion during the first two quarters of this year. Our multi-faceted approach to achieving cost excellence, enhancing quality, and providing customers with a superior experience continues to pay off with incremental efficiencies and productivity improvements. First, we made good progress in the second quarter with a new team implementing Lean throughout our manufacturing sites. Second, we just launched design for excellence and product lifestyle engineering initiatives to both enhance our new product development approach, as well as deploy new standards for product reliability. These initiatives involve R&D and manufacturing working together, and will enable us to deliver greater customer value and competitiveness through designing and manufacturing our products more cost effectively.

As we move into the second half of the year, we anticipate an economic environment that will provide both opportunities and challenges. On the positive side, we continue to see accelerating growth for our diagnostic business, as a number of our initiatives are expanding both our share and addressable market. In addition, our OneSource business continues to benefit from the growth in pharma spending and increased outsourcing; and our food analysis business is benefiting from increased synergies across our portfolio, as well as the overall growth of the market. However, creating headwinds to these trends are continuing concerns about the industrial end markets, as GDP and PMI numbers remain concerning, as well as medical imaging continues to face declining market demand. As a result, we are maintaining our second-half organic revenue forecast, and our adjusted EPS guidance remains unchanged as well.

I would now like to turn the call over to Andy to discuss our Q2 financial results and forecast in more detail. Andy?

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 second-quarter results, as well as details around our third-quarter and full-year outlook. Starting with the second quarter, we continue to be pleased with our operational execution. The success from key Lean and indirect spend initiatives have afforded us the opportunity to make meaningful growth investments across the portfolio, and still deliver solid financial results to our shareholders.

For the second quarter, adjusted revenues were $573 million, approximately the mid-point of our guidance range of $570 million to $575 million. Adjusted earnings per share were $0.67, up 12% from the comparable period a year ago, and above the high end of our guidance range of $0.65 to $0.66.

Overall, the quarter played out essentially as expected. Looking at our end markets, we saw accelerating diagnostic demand, healthy pharma and biotech sales, and strong growth in food. This strength, however, was partially offset by softer-than-expected industrial end market demand, and a weak performance in academic and government, primarily in the US, due in part to a difficult double-digit prior year comparison.

Looking at our geographic results for the second quarter, we experienced double-digit organic revenue growth in Asia, low single-digit growth in Europe, and low single-digit declines in the Americas. We continue to be pleased with our results in emerging markets, where second-quarter organic revenue increased mid-teens compared to the same period a year ago, driven by a strong performance in China, which more than offset weak demand in Brazil. Overall, our emerging market demand continues to remain resilient.

As to China specifically, organic revenues grew double digits in the quarter, with broad-based strength from both our human and environmental health segments. Within environmental health, our Haoyuan blood screening business had another solid revenue performance, with strength expected to continue into the second half of 2016. On the environmental side, food and environmental testing solutions were the key contributors to environmental health's solid performance in China.

As to our operating results for the quarter, adjusted gross margins were 47.9%, up 90 basis points over the same period a year ago, driven by successful Lean initiatives, volume leverage, and mix. We remain encouraged by the progress we're seeing from our Lean activities. Adjusted SG&A was 24.3%, essentially flat over the same period a year ago as a percentage of adjusted revenue. We continue to believe that we can successfully leverage our G&A at a rate approximately half the pace of our revenue growth.

Looking at research and development, second-quarter spending was approximately $2 million higher than the same period last year, driven by ongoing investments in our four strategic initiatives -- emerging market diagnostics, pharma and biotech services, food, and reproductive health -- including R&D funding supporting Vanadis, an acquisition we announced in the first quarter. Overall, we were encouraged by our operational performance in the second quarter, as we also expanded adjusted operating margins by approximately 50 basis points, while still funding incremental R&D investments.

Looking below the operating line, second-quarter net interest and other expense was approximately $5 million, and our second-quarter adjusted tax rate was just over 18%. Our first-half 2016 adjusted tax rate was approximately 19.7%, and remains in line with our expected full-year adjusted tax rate of approximately 19.5%.

Turning to the balance sheet, we finished the quarter with approximately $1.1 billion of debt, and nearly $250 million of cash, and we exited the quarter with a net-debt-to-adjusted-EBITDA ratio of 1.8 times. In July, we announced the successful completion of a EUR500 million senior note offering. With a 10-year [tenure] and a 1.875% coupon, we have efficiently extended our overall weighted average debt maturities by approximately 3.8 years. While we do expect some modest dilution related to this offering, we anticipate covering the incremental interest cost through our ongoing operational initiatives.

We were also pleased with our strong cash flow generation in the second quarter. Total operating cash flow for the first half of 2016 was $128 million, as compared to $101 million in the same period last year. For the year, we remain confident in our ability to deliver on our adjusted free cash flow commitment of $300 million. I'd also like to note that our Board recently approved a new two-year, 8 million share repurchase authorization that will replace the current repurchase authorization that was set to expire in October of 2016.

Turning to our segment results, for the second quarter, human health organic revenue grew approximately 6%, with environmental health declining 1% as compared to the same period a year ago. From an end market perspective, our human health business represented approximately 62% of adjusted revenue for the second quarter of 2016, with diagnostics representing approximately 29% of adjusted revenue and life sciences solutions representing approximately 33% of adjusted revenue.

Second-quarter 2016 organic revenue from our diagnostics business was driven by double-digit growth in our core diagnostics franchises, with China and India both up over 25%. As mentioned, we continue to make significant progress in our Haoyuan business, with strengthening reagent demand now supporting recent instrument [placements] highlighted in previous quarters. In addition, we successfully captured a number of key neonatal wins in Pakistan, Jordan, and Poland, which also contributed to this performance.

Within medical imaging, we see increasing demand for a number of new CMOS applications, as diversification efforts within the portfolio gain traction. However, the business overall declined high single-digits in the quarter, due to continued weak hospital CapEx demand.

As expected, organic revenue in our life sciences solutions business grew low-single digits in the quarter, driven by strength in pharma and biotech, and further bolstered by broad-based demand at our OneSource and Informatics franchises. As mentioned, academic and government spending in the US was soft in the quarter, due in part to a very strong double-digit comparison to the second quarter of 2015.

Moving to our environmental health business, which represented approximately 38% of adjusted revenue, organic revenues declined 1% for the second quarter. Growth was once again led by our food testing offerings, which grew double digit in China, but was offset by softer-than-expected industrial demand. We continue to forecast improving, but modest, growth for the second half, bolstered by a number of new product launches that Rob mentioned earlier.

Looking at operating segment margins, the results were essentially in line with expectations. Environmental health margins expanded 160 basis points, as strong mix, prior year restructuring actions, and solid operational execution all contributed to this performance in the quarter. Human health margins were essentially flat, largely due to planned growth investments and mix, partially offset by the positive impact of pricing initiatives implemented at the end of last year.

Looking ahead to the third quarter of 2016, we believe we are well positioned to deliver another solid financial performance, with an expectation for continued stability in the majority of our end markets, partially offset by softer demand from industrial end markets. As a reminder, we are cycling up against an extra week in the third quarter of 2015, which contributed a benefit of approximately 200 basis points to our revenue performance last year.

Accordingly, for the third quarter of 2016, we are forecasting reported revenues to be in the range of $570 million to $575 million, which represents organic revenue growth of roughly 2% to 3%, which is consistent with our previous outlook. Third-quarter 2016 adjusted earnings per share is expected to be in the range of $0.65 to $0.67.

Looking at our outlook for the full year, the majority of our businesses are expected to deliver solid results. And while we expect that the soft industrial demand experienced in the second quarter will continue, we continue to expect our organic revenue growth to be approximately 4% for the year. And we are maintaining our outlook for adjusted earnings per share to be in the range of $2.75 to $2.85, with a mid-point of $2.80.

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

(Operator Instructions)

Bill Quirk, Piper Jaffray.

Great, thank you. Can you provide an update on the China blood screening, is there future placement opportunities there, how is it ramping with the existing instruments that were placed mid 2015?

So the China blood screening business had another strong quarter. In Q2, it actually more than doubled. And so, we're starting to see the reagent flow through of the instrument placements in the tenders that we won in 2015.

And to add to that, we are probably two-thirds of the way through the tender process, but there are still tenders out there. We continue to capture our fair share of those, and we continue to believe that we will be able to see increasing reagent flow through, and that obviously is helpful for the margin.

Okay, got it. And then, I know Brazil newborn screening is a small piece of the business, but are you seeing any impact from the birth rate slow down from Zika?

Yes, I would say, clearly, our Brazilian business has been hit fairly significantly there. I think it was down greater than 25%. I guess, if there's any good news, the Brazilian business is getting so small, that it's becoming somewhat irrelevant. But yes, there's been a severe impact on the newborn screening business there.

Dan Arias, Citigroup.

Good afternoon, guys. Thanks.

Hi, Dan.

Rob, it looks like you might have been a little bit light relative to your 4% organic forecast for the quarter, maybe a 0.5 point or so by my math. So I mean, without splitting hairs, would you say that was due to environmental health, or more of a split between environmental health, and some of the declines you saw in medical imaging, just trying to see where you had your model (multiple speakers)

Yes, I would say it was probably -- it's a combination of both of those. I would say environmental was a little light, and we continue to see challenges on the industrial end markets.

I think in the beginning of the year, we highlighted that we were a little concerned about there, and I think we said that could be down mid-single digits. We're actually seeing a little bit greater headwind than that. And then medical imaging also, I think we handicapped that as down slightly, and we're seeing again probably something like high single-digit growth declines there.

We did see some offsets though. China was clearly stronger than we thought, and the majority of the diagnostic business was stronger than we thought. But as you said on balance, it was a relatively minor impact there. And maybe Andy, you just want to cover that for a second?

Yes, we gave guidance at the end of the first quarter for the second quarter of $570 million to $575 million. And if you look at the midpoint of the range which is where we came in, really to get to 4% organic, you needed to be slightly north of the midpoint. And in addition, in the quarter, we have a little bit of a tailwind from FX. I mean it was maybe $1 million.

But in order to round up to the 4% versus the 3%, we really needed to be at the high end of the range. But just to be clear, we're talking about $2 million, a little less than $2 million or about 3/10 of 1 percentage point, which is really along the difference between 3[%] and 4[%].

Okay, got it. So less than 0.5 point there, is what we're talking about, okay. And then, maybe just as a follow up. Rob, I think last quarter you quantified new product revenues as $18 million or so. Would you care to comment on just on how, A, this looked, it looked for this quarter for new products, and then maybe how that number tracks through 3Q and 4Q?

Yes, so a similar number. I think actually for the second quarter, it was around $17 million, from an incremental perspective. I mentioned the fact that the AVIO 200 came out really toward the latter part of the quarter, so we're excited about that. We're starting to see early traction.

And then, as we get into the second half of the year, some of the new products coming out of the research area, is just starting to gain some traction. So one of the reasons I think we feel optimistic about the back half, and a slight acceleration in the organic growth rate, is because of the new products and the expectation that they'll accelerate, from an incremental revenue contribution perspective.

Matt Mishan, KeyBanc.

Good afternoon, and thank you for taking my questions

Sure.

Around medical imaging, I know you guys supply into the OEMs, but do you have a sense of which regions are driving the weakness? I think the US, on the US capital spending, hospital capital spending side has been pretty stable and robust. But the emerging markets, Europe have been fairly weak. Do you have a sense what's really causing it for you?

Yes, I would say our weakness is largely more in Europe, than it is in the US. And then again, as we've tried to expand out the breadth of our medical imaging capabilities, I would say clearly on the CMOS and the industrial side, we continue to see good growth. The challenge has been really more in both oncology, as well as radiology. So it's sort of limited in those areas, but outside there, we continue to see pretty good growth.

And then just to clarify, I think you said, you thought that core diagnostics was up double-digits. When you say core diagnostics, is that just excluding the medical imaging? And if you're able to get medical imaging back to flat, you run it at a double-digit rate there? I'm just trying to understand what --?

Well, yes, the fact, the difference between core diagnostics is, it excludes medical imaging, and that was double-digit organically in the quarter.

All right. Thank you.

Steve Beuchaw, Morgan Stanley.

Hi, good afternoon, and thanks for the time here. Just a few clarifications on my end. One, the new repurchase authorization, can you give us a sense for the pace at which you're thinking about executing on that? And then second, maybe also for Andy, could you give us in dollars or in basis points what the contribution was in the quarter for M&A? And then I had one for Rob.

Well, I can answer probably the first two, and then I'll let you ask Rob's question. On the M&A it was basically immaterial so for modeling purposes, we will not have anything to really report there.

As far as the other question, I just blanked on it. What was your first question?

The share count.

Yes, we tend to be fairly opportunistic with our share repurchase. Our first preference continues to be around M&A, and we feel like we've got a pretty good pipeline. So as far as capital deployment that is and will continue to be our preference.

I think, it's just really it's more of a matter of timing. We had the Board together last week. So we elected to get it re-approved. It is a two year time frame for those, and so we do re-up those. But there isn't any formalized program that is being contemplated at this point.

And then Rob, just to dovetail with that. On the last call, you made a comment about a medium-term plan for mid-teens earnings growth. And I believe there is a clarification that, that was excluding cap deployment. And now that we have a little bit more clarity on cap deployment with the buyback authorization, I wondered if you just care to -- talk us through how that might, or might not impact your thinking about medium-term earnings growth? Thank you

Yes, I think what you were mentioning is, on the last call we talked about the business model. And I talked about, I would say through the cycle, we'd like to be at mid-single, call it 5% revenue growth, or organic revenue growth. And if we were to achieve that, what kind of bottom line improvement we would see there? And we said, probably mid-teens.

And then depending on what we did with our cash flow, whether we bought back shares, or made incremental acquisitions, to what extent that would add to the EPS growth or accretion. And I think we still feel good about that model. What you're seeing in the first half of the year, is at sort of 3%, 4% organic growth, we're generating 12% EPS growth. So I think we feel confident, if we can get that organic growth up 100 basis points or so, that we can make that [15]% EPS growth sort of achievable.

Jonathan Groberg, UBS.

Great. Thanks for letting me in. On the debt you raised, Andy, is that primarily for the buyback, or also just meant to be opportunistic for other things that might come up?

Well, when we initially went into this, we were looking at our capital structure, we really felt like we wanted to have more fixed term debt, especially given the rates. And if you looked at the euro rates of recent, they seemed very attractive. And so, the purpose at this stage, or the use of the funds at this stage, is really to pay down the revolver.

And if you read some of the filings, we're also amending and extended the revolver. So we'll end up with about $1 billion, of what I consider fixed term debt, the tenure of this is 10 years. So we have increased those terms by about 3.8 years in total for the two debt offerings we have out there. And that leaves us with about $1 billion on the revolver for whatever purposes we might use that for.

Okay, thanks. And then, Rob, is there -- it feels like from everyone that has reported to date, we're hearing mixed messages on industrial. And I recognize that the specific exposure of each companies, are not always comparing apples-to-apples.

But when you think about industrial, and expand that to include food and environmental and the like, can you just give a little bit more clarity on what you're seeing? Well, I know we all see the PMIs, but just what you're seeing or feeling there in that broader market? Thanks

So I would say, first of all, just for clarification, we talked about industrial, we're talking about a more limited subset. So we would consider food really separate, and we would consider environmental, which for us is largely (inaudible) would be separate as well. So our industrial is really around petrochemical, chemical, a little bit of semicon, and a little bit of oil and gas, but that's sort of majority of our industrial.

I think if you recall, in the beginning of the year, we were a little concerned, not only about the macroeconomic trends, but also in 2015 our industrial grew mid single-digits. So we suspected we were going to have a difficult comp. And so, I think we modeled in something with sort of mid single-digit declines.

And as I mentioned previously, we're actually seeing something more like high single-digit low -- high single, low double digit declines. And our indications, and the information we're looking at, would not suggest that's going to change for the foreseeable future. So one of the things we're assuming in the back half of the year is that in fact, industrial headwinds continue as they have in the first half of the year.

Paul Knight, Janney Montgomery.

Hey, guys. This is actually Bill on for Paul. How are you doing?

Good.

I wonder if you could just talk a bit about the food safety business? What are you seeing in that end market, and have you seen any pickup in demand, or conversation since the last FSMO law went online in May?

So I think as we mentioned previously, food was very strong for us in Q2, it grew double-digits in the mid teen area. I would say that's a combination of probably three factors.

One is, I think the overall market is strong and growing and I think a lot of that is just continued awareness, and media recognition of some of the issues around food. So clearly, the food companies are investing in that area.

I would say the second area is, we continue to see significant investments coming out of China. So if you look at the food in China specifically, that was very strong.

And the third area I think is, unique to PerkinElmer. And I think the combination of the offerings we had historically in environmental, combined with Perten and combined with Delta, and I gave an example specifically with a dairy company we are working with in China, is allowing us to better penetrate and provide some novel solutions to the customer. And so, I think it's a combination of all three of those, that's driving this very strong growth we're experiencing.

Great. And then, maybe just one on the industrial side. With oil prices kind of stabilizing, what are you seeing in terms of that end market? Is that part of the headwind you're facing, or is it maybe other sub segments of the industrial market?

I would say, as I mentioned previously, oil and gas is relatively small for us. It's a small subset of our industrial., so it doesn't really drive a lot. I think what you're -- the impact on the oil price, and in fact, we've seen a little bit of a decline here, I would say more recently, is probably more just in general confidence, and the impact it has on the macro effect. I think there's a general view, as oil comes down, it does have a dampening effect on the overall economy, at least from a business perspective. But as far as direct exposure for us, the oil and gas, it's small.

Got it. Thanks, guys.

Tycho Peterson, JPMorgan.

Hey, thanks. Rob, if I go back to the beginning of the year, you were one of the few companies talking about a potential recovery in Europe in the back half of the year. Can you maybe just share your latest thoughts on that? I mean, I know some of its dependent on new products, but are you still expecting a pick up in the back half of the year?

Yes, I would say, when we look at the geographic split of our revenue growth, actually Europe was pretty good in the second quarter. I think Andy talked about mid single-digit.

And if you look at where research was strong, diagnostics was strong. And the thing that sort of the depressed that to a large extent was medical imaging.

So we're seeing some pretty good growth already in Europe, and our expectation is we'll continue to see some good growth in the back half of the year. So I would say from our perspective, Europe has stabilized, and actually picked up a little bit relative to what we saw in the latter part of 2015, and in the first quarter.

And then now that you've had Vanadis for a few months, any updated thoughts on how that's going, and other milestones, I guess, we can track ahead of maybe 2017 or 2018 launch?

So I would say we continue to be enthusiastic about the progress we're seeing there. I think, as I've mentioned in the past, we think we've got a terrific team. They continue to make progress on the development of the offering there.

I would say the one sort of significant milestone is, what we wanted to do with the Vanadis technology, was not only to continue to develop that to a commercial product. But also to integrate it with some of the PerkinElmer offerings.

So it uses imaging capability, and we have been able to integrate the Operetta. It obviously uses some sample preparation for the NGS side of things, and we're using chemagen. And so, that's been sort of a great win, to move a lot of their capabilities onto the PerkinElmer products. But we still feel on track and probably late 2017, is when you will start to see the product come out with sort KOLs and a beta, and probably be revenue in early 2018.

Okay. Thank you.

Derik de Bruin, Bank of America Merrill Lynch

Hey, good afternoon. (multiple speakers) A couple housekeeping questions. Hello?

Yes.

Okay, great. So a couple housekeeping questions. So first of all, what's your expectations for FX, for the remainder of the year, and sort of full year impact, top and bottom line?

For next quarter it's probably $3 million or $4 million on the top line, and de minimis on the bottom and I think that's probably maybe it's going to be neutral on the top and the bottom in the fourth quarter. So I would say right now, based on the rates today, it's not much of a change from what we've seen. Obviously, if there's volatility, we would update that if that changed, but as of right now, I don't see a big swing.

Great. What was the $5.5 million gain on the -- the gain you had on investments?

That was related to the sale of the NTB business earlier in the quarter.

Got it. Okay. And I guess, just going on with Tycho's question. LS, you were looking yet for low LS, negative low single-digit growth in the US this year. I guess, sort of what, in this quarter, can you talk about sort of like the pacing for the remainder for US, and [sort of the gain for that] market?

Well, I mean, if you look at the declines in the US, it was in the largely industrial side that we talked about, a little bit in the research area. Now as we look at the first couple of weeks of July, or at least the month of July, we are starting to see a little improvement in bookings in those areas, so we're cautiously optimistic, I would say as we think about the US for the latter part of the year, we think it probably maybe stabilizes to flat, but we're not forecasting significant growth.

Jack Meehan, Barclays.

Hi, thanks. Good afternoon, guys. I want to started ask a little bit more color on OneSource, how the service revenue was in the quarter? And then, are there any notable contracts you're evaluating at this point, just through the end of the year that we should be looking for?

So OneSource had another good quarter. I mean, even though it comped against a strong mid teen growth last year, it continued to grow double-digits, so we continue to see nice progress there. As we've talked about in the past, we think to a large extent, our differentiation revolves around not only our capabilities and proven track record, but also the analytical capabilities we have with our Informatics offering.

With regard to contracts, I would say any given time, we have a number of contracts that are coming through, and the back half of the year is not any different. So rather than spike out any particular ones, I would say it's a continual process.

I think we've mentioned in the past, that a number of these contracts, or I would say a majority of the contracts are a three-year tenure. And so in any given quarter, we probably have a couple that are coming to, and we continue to be optimistic about our ability to either maintain the ones we have, or win the ones we don't.

Great. And then, just a two-parter on margins. Nice growth in the human health business. I thought there might be a little bit more margin expansion, I know you talked about some of the business investment there. Could you maybe quantify the amount of the new R&D going toward that business, versus environmental health? And was there any change to your guide on R&D for the full year? Thank you

I think that -- this is Andy. The majority of our incremental R&D is going towards human health, and a big piece of that is with the Vanadis acquisition.

That will continue. I think you're going to continue to see our R&D year-over-year certainly higher. This quarter, we were up [2%]. I think that type of level of [6%] --or just north of 6% will probably continue in the second half, at least that's what the current outlook is. And again, we're not focusing all of our R&D in human health, but a big portion of the incremental R&D spend is in human health.

I think the way to think about for the full year, we're assuming that R&D as a percentage of sales goes up about 50 basis points.

Ross Muken, Evercore ISI.

Good afternoon, guys. I guess, in the context, it's something we've talked about before. You had a few parts of the business that have fantastic results. You have a few parts of the business that are struggling, some have struggled for some time, like panels.

I mean, as you think about portfolio reconstruction, and how you're feeling about your general mix of assets. And I guess, you've not done much recently on the M&A side. So do you feel like you're making enough progress?

Obviously, you're doing a lot of internal investment to get the growth rate higher, but to get this mix to an optimal level, I mean, is there stuff where you look, and say, well, I would maybe contemplate that not being part of the Perkin portfolio, but I haven't been able to find the right asset yet? I'm just trying to figure out how you're think about the whole portfolio construction?

Yes, I think that's a fair observation and I would say, not only we haven't found the right asset yet, but in a lot of instances, we're looking at what is the appropriate time to sell the asset? So I wouldn't be surprised if two years from now, there's parts of PerkinElmer that probably aren't -- continue to be part of the portfolio.

And one of the things we're looking at, as we continue to focus on the higher priority areas, we're challenging ourselves on let's say, some of the core product offerings. And particularly, to the extent that we think, in order to be more competitive, it requires either greater scale, or significant inorganic investment -- to say, either accelerate market diversification or product diversification.

And so, obviously we evaluate the potential return on those investments versus possible commitments to over drive other areas, right? And so, ultimately if we determine those investments don't make sense, relative to our other alternatives, there probably should be another owner. And to your point, I think we focused a lot of time over the last maybe 24 months, in making sure that we're optimizing the profitability and the growth prospects as we own it, at some point, to take it to the next level, it probably requires a different owner, who will be willing to invest more inorganically in the business.

That's fair. Thanks, Rob.

Steve Willoughby, Cleveland Research.

Hi, good evening, guys. Two questions for you. First, I was wondering if you could just provide any color on some of the recent smaller acquisitions you've made, and how those fit in with the business? And then, secondly if you could remind us what drove the strong academic and government spending in the US a year ago, that you're comping against this quarter?

So I'll take the first one. I mentioned one in particular, we made a -- I'll call it a relatively small acquisition here recently, a company called [Bio Scientific]. Revenue for this year will probably be, I don't know, $11 million, $12 million, something like that. But we're excited about it because it brings two capabilities.

It has a portfolio of NGS library prep kits, and they go on both [Illumina and Torrent]. They're particularly good at nucleic acid isolation, and their expertise, particularly in increasing enzymatic efficiency. So we like that capability. They also bring some strong capabilities around the food area, and in particularly the area of detection of microbial and industrial contaminants, and we like that portfolio with assets as well.

So small deal from a revenue perspective, but we're excited about the capabilities that they bring. And again, complementary with two of the higher growth areas that we've identified in the past, and we'll continue to look for those types of things.

As I've said in the past, my [preference would be something a little bigger], but clearly those capabilities are things that fit nicely into the PerkinElmer portfolio, and we'll continue to look for those. And hopefully, that we'll be able to accelerate their growth, and drive higher profitability.

And the answer to your second question, last year we saw significant growth in our In Vivo imaging business. There was quite a bit of funding that came out during the quarter a year ago, and that really was the key driver to what was essentially double-digit growth in the prior year.

Isaac Ro, Goldman Sachs

Good afternoon, guys. Thank you. The first one was on the medical imaging business, you guys commented on some of the pressure you're seeing there. And I was hoping you could maybe dissect a little bit, what end markets might have driven those? You said it might have been narrow or broad-based? And second to that, what's baked into your guidance for the balance of this year in that business?

Yes. So the headwinds are really in two areas, it's in radiology and it's in oncology. And on the flip side of that, we continue to see strong growth in -- I'll call it the non-medical applications, as well our CMOS business continued to do quite well. And that's largely in surgery, and increasing, going into dental. So those markets continue to grow nicely. Unfortunately, they're not large enough to more than offset the challenges we see in the oncology and radiology area.

And sort of mention, I would say during the first half, we've seen mid to high single-digits declines and to a large extent, that's what we're expecting in the back. And that is a change, because I think previously clearly, in the first quarter, we thought there would be some moderation of the pressure and that our expectation was that in the back half of the year that we get medical imaging to flat maybe growing low single-digits.

Got it. Thank you. And just to follow up on the services side to your portfolio. You called out some of the strength in OneSource and Informatics. And I'm curious if you could maybe update us on your go-to-market strategy for those two businesses?

I'm wondering if you're in a position where you're cross-selling those to the same accounts, or perhaps selling them in a bundle? Just thinking about how you are monetizing those growth opportunities? And as part of that, the margin contribution as Informatics in particular grows, I imagine the gross margin is quite attractive, so I'm wondering if it's starting to move the needle on operating [margin] as well?

So last year, we announced the creation of LSS, which was really taking the product business on research, our Informatics business and our OneSource business, and combining them under on front end structure. As a part of that, we also established a global account team, and we've been building and investing in that team for the last -- now it's probably been 18 months -- and if you look, I think we commented in 2015, we saw nice growth in the global accounts.

If you look at the second quarter, the global accounts are up about 10%. And so, it's a combination of going to our Informatics customers, and introducing them to OneSource, and than vice versa on the OneSource side. And then also, to the extent possible, trying to drive some product revenue as well. I would say at this point, we're seeing much better cross-selling between Informatics and OneSource, than we are on the product side. But we'll continue to drive that, and I think it's an opportunity down the road.

Brandon Couillard, Jefferies.

Thanks. Good afternoon. Rob, more of a bigger picture question. I mean, do you guys track or do you have a statistic around, what you view as your current vitality index, and where is that today, relative to maybe where it was three years ago or so? Because you're increasing the spend, but it seems like the core growth still in the 4% range. How do you think about the returns that you're getting on that incremental investment?

Yes. So we do track it, so our vitality index is in sort of the low 20[%]s. It's been relatively flat over the last couple of years. And so, what's happening is, while we're adding some new products, clearly into the marketplace, some of the ones from the 2010, 2011, 2012 vintage, in some cases were very strong growers for us, are coming off.

So it's actually requiring us to get a fair amount of incremental growth. I think we've talked about, in 2015 sort of $40 million of incremental. Now our expectation as we get into the 2017, 2018 time frame, we'd like to see that into the mid and high 20[%]s. But I would say it's taken a fair amount of work, just to offset what was a pretty strong class of new products in that 2010, 2011, 2012 time frame.

Thanks. And then, one for Andy. And the environmental health margins in the period improved pretty nicely, despite the modest organic decline. Were there any one-time benefits to that improvement? And then, secondarily, any update that you can share, as far as net interest expense expectation for the year?

There really were no one-times. If anything, they had stronger operating margin expansion, but they had some higher comp expense. The results were a bit better, so the compensation related to that was higher. So I don't think there were any unusual items. And I think we're going to continue to see good solid margin expansion in the second half in (inaudible).

As far as incremental interest expense, we said it's going to be the impact of about a $0.01, and we said we were going to essentially, cover that with our operating results. That would be just related to the incremental interest.

Bryan Brokmeier, Cantor Fitzgerald.

Hi, good afternoon. Thanks for taking the question. India is probably the largest newborn scanning market that you still have left relatively untapped. Would you provide us with an update on the status of your pilots and programs that you have established there, and the percentage of the market you've now penetrated, and any competition that you've encountered?

Yes. So as you point out, India is a significant, 27 million births. So we talked about three pilots that we started about a year ago. Two of those have moved into what I'll call active use.

In addition, we have several local states that have started newborn screening tests, really looking at six disorders. We've placed systems with two other states, but they haven't started their pilots yet.

If you look at our diagnostic revenue in India, it was up 51%. But having said that, it was over a very small base. So we're starting to see the traction there. But I think, as I think I've mentioned in the past, it's going to take some time to get that to a sizable number, but at least the trends and indications continue to be very positive.

How much of the regions, are the other regions within India looking at those pilots, and considering starting their own, or to go all out into routine use?

So our approach has been to, both talk at the federal level, because ultimately for this being broadly adopted, it's got to be sort of approved and suggested by the Indian Federal Health Ministry, as well as working selective states. So it's really working both of those. And we've got a fairly significant effort in driving that.

Doug Schenkel, Cowen and Company

Hey, good afternoon guys. So I guess, just a quick one to start, China and India both were strong in the quarter. Could you just give us what your expectations are for growth in the second half, in terms of what you embedded into guidance?

So I think in China we went into the year saying that we thought it was going to be low double. And given the strong growth we saw in the second quarter, we've taken that up a little bit. But we haven't sort of assumed that the 20% continues.

So I would say maybe, we've taken it from low teens to mid-teens. India again, because it's such a low base, I would say, India we're probably in the 15% to 20% range.

Okay. And I guess, sort of related, in the past, sometimes when we flip the calendar, and get into the early days of a new China five-year plan, there is a pause in demand. Ultimately, this is -- at least historically been followed by a pretty big ramp-up in demand, in areas that are prioritized within the plan.

You've looked really well-positioned, given the focus on a number of things, including but not limited to food and water testing, as well as increased funding for things, or increased focused on things like neonatal testing. I'm just wondering in the early days, are you hearing or seeing anything that suggests we should be contemplating this dynamic, and is that something you factored into guidance? Or at this point, are you thinking that things may be actually get going in the five-year plan, a little more smoothly than maybe we've seen the last couple of times?

Yes, our assumption is the latter. I mean, our assumption is that it's going be more amortized or smoothly built in. And again, because we've seen nice growth here more recently, our expectation is that we're not going to see any kind of incremental benefit from the rollout of a new five-year plan.

Emily Stent, Robert W. Baird

Perfect. Thanks for taking my questions. I just have one. So now that we're seeing local Zika cases in Florida, are you seeing any impact on birth trends in the US, or any other main geographies?

No, I mean, I mentioned earlier, that clearly Brazil, we've seen our business there, be reduced significantly, but we have not see any indications that this point, that it's impacting US birth rates. Our data would suggest that births in the US are still growing in the 1%, 1.5% range. But in the case of Brazil, we're seeing a significant decline.

Got it. Thank you very much.

Thank you. And there are no further questions in the queue. I would like to turn the line back over to Mr. Rob Friel for any closing remarks.

Great. So first of all, thanks for the questions, and I'd just like to conclude by reiterating that we feel great about our progress during the first half, as well as the long-term opportunities to accelerate growth over the next five years. At the same time, we continue to be inspired by the terrific impact that we continue to make for our customers, to improve lives, and the world around us. So thanks again 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 great day.