Revvity Inc (RVTY) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the PerkinElmer fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Tommy Thomas, Vice President of Investor Relations. Sir, you may begin.

Thank you, Takiya. Good afternoon and welcome to the PerkinElmer fourth-quarter and full-year 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 that this webcast is on -- webcast live and will be archived on our website until February 16, 2017.

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

As a reminder, we have announced the divestiture of the Medical Imaging business in the fourth quarter of 2016, moving the operating results of that business into discontinued operations. Our results will not be comparable to our previously issued guidance. To help reconcile the differences, we have posted a deck to the Investor Relations section of our website to help bridge your results and our results. 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. The fourth quarter of 2016 was a busy one for PerkinElmer as we announced a number of changes to better position the Company strategically and operationally. As a result, as Tommy mentioned, we put together several charts to help guide investors through our financial results and attempt to clarify those results and minimize confusion given the number of moving pieces.

While Andy will walk through the details shortly, in summary I was very pleased with our performance in the fourth quarter. Revenue for the fourth quarter, after adjusting for incremental foreign exchange headwinds, came in as we expected. However, our operating margin expansion, adjusted EPS, and cash flow all exceeded our expectations, reflecting better operating efficiency in our manufacturing facilities and improving mix with increased sales of consumables.

As you've seen this afternoon, our financial results now have our Medical Imaging business classified in discontinued operations and our segment reporting now reflects the new organizational structure we announced in Q4 last year. Based on this split, our Diagnostics segment grew organic revenue by 7% in the fourth quarter; and Discovery & Analytical Solutions, or DAS, declined 1% organically, resulting in the overall Corporation growing organic revenue by 1%. For the full year, we grew organic revenue by 2% as Diagnostics grew 8% and Discovery & Analytical Solutions was flat.

During 2016, we expanded adjusted operating margins by 140 basis points to 18.6%. At the same time, we increased R&D spending as a percentage of sales by 50 basis points to further fuel innovation and increase our ability to introduce solutions-focused new products. I was also particularly pleased to see that we drove significant gross margin improvement of 110 basis points which we have highlighted as a critical component to our future margin expansion plans.

On the bottom line, we grew full-year adjusted earnings per share by 12% to $2.60, or $2.76 if the results of Medical Imaging are included. Moreover, in 2016 we delivered very strong operating cash flow of $350 million, or $324 million from continuing operations. Overall, our positive performance last year was the result of both our strategic investments and operational initiatives, even amid pockets of challenging macroeconomic conditions and incremental foreign exchange headwinds. Since 2010, our adjusted operating margin has expanded 600 basis points, resulting in an increase in adjusted EPS and cash flow of over 130% during this period of time.

During the year, we returned over $180 million in cash to our shareholders in the form of dividends and share repurchases, and signed or closed four acquisitions, representing about $350 million in value. We closed Vanadis in July last year, giving us access to a potentially disruptive technology in the area of non-invasive prenatal screening, and we have since significantly ramped up the investment and market awareness of this exciting technology. We acquired Bioo Scientific, expanding our food detection capabilities as well as our genomics offerings for enabling next generation sequencing. Our acquisition of Delta Instruments also broadened our food franchise with market-leading analyzers for dairy testing.

In December, we signed a contract to acquire the Tulip group, which closed this week, positioning PerkinElmer as a significant in vitro diagnostic provider in India. Based in Goa, Tulip is one of India's largest domestic providers of diagnostic reagents, kits, and instruments to a customer base of 30,000 diagnostic labs, and government and private healthcare facilities.

As you'll recall, we have been actively examining our portfolio to more acutely position PerkinElmer for accelerated growth. I feel we made significant progress in 2016 in our evolution, as we took important steps to fundamentally shift our portfolio and organizational focus. We've become much more discriminating with incremental investment dollars and are directing more resources towards our key focus areas of reproductive health, emerging-market diagnostics, food safety, and pharmaceutical services. During the year, we announced three divestitures, NTD Labs, LabWorks, and Medical Imaging, to better sharpen our focus and allow us to redeploy $300 million in areas more aligned with our growth priorities.

To facilitate and accelerate this evolution, we created a more effective operating structure to align with our customer requirements. By forming two distinct segments, Discovery & Analytical Solutions, and Diagnostics, we have created larger, more unified R&D commercial teams in DAS to better facilitate a realignment of the business. Diagnostics can now focus its effort on our clinically oriented customers and opportunities to expand our addressable market.

In addition, by combining our key capabilities and talents in the genomic space, we are already unlocking technical and commercial synergies in a meaningful way. This allows us more precision in our commercial structure and customer approach.

From a global accounts perspective, because we now sell into and service our end markets with one Organization, we are better equipped to offer a full suite of solutions for our top customers. For example, our OneSource Service and Informatics teams now seamlessly work together with what was once our former Environmental Health Commercial team to strategically partner with key pharmaceutical accounts regardless of the number of departments or labs that might be involved and the spectrum of customer business challenges to address. The power of our combined Service and Informatics offerings is helping bring drugs to market faster while also improving the productivity and capabilities of 8,000 labs around the globe.

Another important priority last year was to continue to step up our efforts in fostering innovation. As I mentioned previously, in 2016 we increased our spending on R&D, as well as made a number of organizational changes and invested in new tools to facilitate growth. During 2016 we launched several novel products, building upon our core capabilities in detection, imaging, informatics and service, including the QSight Triple Quad, the Operetta CLS High Content Imaging System, Avio 200 ICP-OES, Signals for Translational, and a cloud-enabled version of ChemDraw.

In addition, we are expanding both our menu for newborn screening and our geographic reach as we win new and incremental business around the globe. Most recently, we won our first contract for SCID testing in Spain. And as I reflect on the year, we are most proud of the difference we are making on the lives of newborns and their families, having now cumulatively screened 560 million babies and helping save an average of 70 babies every day.

Another important aspect of our growth priorities last year was an increased focus on our customers. During 2016 we made a number of investments to get closer to our customers, including the opening of customer knowledge centers in Taipei and Singapore, and the launch of our Diagnostics Lab in Chennai, India. During 2016 we achieved a 10-year milestone with our largest pharma customer, surpassing 300,000 service events and 6,000 eNotebook users at 14 global sites. And in China, our clinical lab in Suzhou, which provides hospitals and patients with lab services for newborn, prenatal, and infectious disease testing, reached a run rate of 160,000 tests annually by the end of 2016.

Our continued success requires us to consistently improve how we manufacture and deliver solutions to customers. And I'm pleased to report that we have made significant progress this year in advancing operational excellence. Our Global Operations team's goals to reduce waste, lower material cost, infuse lean principles into our processes, and increase productivity across manufacturing have contributed to meaningful product quality improvements, gross margin expansion, and improved customer service.

As I mentioned previously, we experienced a significant gross margin increase through a number of actions, including a reduction in material costs by 4.5%, the localization of production to China, and supplier consolidation. Other cost of sales was reduced by 50 basis points as a percentage of sales due to increased focus on quality, better absorption, and reduced cost. Through the implementation of lean manufacturing principles, over 50,000 square feet of space and 117,000 labor hours have been freed up to create capacity for growth and to in-source selective components.

Clearly, 2016 was a year in which we elevated PerkinElmer's technological, operational, and organizational capabilities. We entered 2017 with a number of exciting developments that will strengthen PerkinElmer's future growth and profitability. The sale of our Medical Imaging business will strengthen PerkinElmer by reducing revenue volatility and enabling us to focus our efforts and investments on core Diagnostics, and Discovery & Analytical Solutions opportunities.

For 2017, our strategic priorities have evolved, and not only enable us to meet our financial objectives but just as importantly, help us increase our impact on the world. First, this year we are amplifying how we innovate through a more targeted R&D as well as innovating alongside external collaborators across our end markets. A key differentiator for PerkinElmer is the incremental value we bring to our customers by providing them with complete solutions, uniquely developed to meet business-critical needs. We remain committed to innovating across our core capabilities and product lines to maintain and grow share across our served markets.

Second, essential to creating breakthrough solutions is understanding our customers' most difficult problems and most challenging needs. By evolving and innovating how and where customers need us, we will be better positioned to enhance the customer experience and increase long-term customer loyalty.

Third, from an operational standpoint, we will continue the implementation of lean to support product quality improvements, expand gross margins, and even augment our customer service processes. Furthermore, this year, our goal to advance our operational excellence will pair with our objectives to widen PerkinElmer's global reach and diversity of talent.

Turning now to our guidance, we are forecasting overall end market conditions to be similar to what we experienced in the latter part of 2016. However, we are increasing our organic revenue forecast to 4% to reflect a strong pipeline of new products and the fact that the majority of the organizational realignment is behind us. Consistent with our goal to achieve 22% adjusted operating margins in 2020, we are forecasting adjusted operating margin expansion of 70 to 90 basis points, and at the mid-point of our guidance, adjusted earnings per share growth of 11% on a constant-currency basis, or 8% on a reported basis.

So before I turn the call over to Andy, let me reiterate our takeaways from the year. We executed well to deliver strong financial performance, continuing a trend of significant margin expansion and EPS growth. Through organization and portfolio changes, we are better positioned to grow, and we have strengthened our operational capabilities. And I'm confident that we have built a strategic and leadership foundation to accelerate the evolution of PerkinElmer while, at the same time, delivering on our commitments to all of our stakeholders. I'd now like to turn the call over to Andy.

Thanks, Rob, and good afternoon, everyone. Consistent with previous quarters, I'll provide some additional color on our end markets, a financial summary of our fourth-quarter and full-year 2016 results, as well as details around our 2017 guidance for the first quarter and full year.

Given that we have announced a new segment reporting structure of Diagnostics, and Discovery & Analytical Solutions, as well as the pending divestiture of our Medical Imaging business, we've uploaded restated historical financial data onto our website at perkinelmer.com to help you reconcile our results with your models. In addition, as Rob mentioned, we posted a brief slide presentation entitled, Fourth Quarter 2016 Earnings Release, which I'll be referring to in my prepared remarks. Both of these presentations can be found in the Investors section of our website.

My commentary today will focus on these new segments, and unless specifically noted, will exclude the results of Medical Imaging, which is now reflected in discontinued operations. As a reminder, effective October 3, 2016, the Company's Diagnostics business focused on reproductive health, infectious disease, and oncology became a standalone segment, seeking to better meet the needs of clinically oriented customers in regulated markets.

In addition to our chemagen DNA extraction portfolio, our oncology offering incorporates a combination of NGS-enabling technologies, including microfluidics and automation, previously accounted for in our Life Science and Solutions business. The remaining products within the legacy Life Science and Solutions business were combined with our Environmental Health business to form the Discovery & Analytical Solutions segment, focusing on life sciences, food, industrial, and environmental markets.

For the fourth quarter of 2016, we reported organic revenue growth of approximately 1%. As we mentioned on our earnings call in January of last year, we had a significant licensing revenue in the fourth quarter of 2015 that created a headwind of approximately 1%. FX negatively impacted revenue growth by 1.3%, and the net impact of acquisitions and divestitures in the quarter was de minimus.

Referring to the slide presentation I just mentioned, if you turn to page 3, adjusted revenue from continuing operations was $567 million. On a pro forma basis, including $35 million in revenue from the discontinued Medical Imaging business and the negative impact of approximately $10 million of incremental currency headwinds versus our original fourth-quarter guidance, adjusted revenues would have been $612 million.

Adjusted earnings per share from continuing operations for the fourth quarter was $0.83 as compared to $0.81 in the comparable period a year ago. On a pro forma basis, we delivered $0.89 per share, reflecting approximately $0.03 per share for the discontinued Medical Imaging business, as well as approximately $0.03 a share for incremental foreign exchange headwinds since we last gave guidance.

As Rob mentioned, the trends we saw through the first three quarters of 2016 continued through the fourth quarter, specifically ongoing strength in our four key areas of focus, including reproductive health, emerging market diagnostics, food, and biopharma services. We saw improving demand as well in the academic and government markets. Analytical Equipment sales into industrial and environmental end markets remained sluggish but stabilized somewhat in the quarter.

Looking at our geographic results for the fourth quarter, we experienced high single-digit organic revenue growth in Asia, flat revenue growth in Europe, and low single-digit declines in the Americas, with continued weakness specifically in industrial. In the BRIC region, fourth-quarter organic revenue increased high-single digits versus the same period last year, driven by continued strength in China Diagnostics and Analytical Equipment sales, as well as double-digit organic DAS sales growth in India, offset by declines in Brazil and Russia. On a positive note, organic revenue declines in Brazil and Russia look to be stabilizing.

To our operating results, fourth-quarter 2016 gross margins were up 90 basis points, driven primarily by mix and continued productivity improvements, a result of our successful lean initiatives. For the fourth quarter, adjusted SG&A was down 80 basis points, driven by the success of our indirect spend initiatives while R&D spend was up 120 basis points as compared to the same period a year ago, primarily a result of ongoing investments in Vanadis. As a result, our overall adjusted operating margin from continuing operations expanded by [60] basis points.

Switching to the new reporting segments for the quarter, Diagnostics organic revenue growth grew approximately 7% as compared to the same period a year ago. Strength in reproductive health in both China and the Americas was a key driver of this growth, and was augmented by demand for our Advanced Genomics Solutions which was up high-single digits. Organic revenue in our Discovery & Analytical Solutions business was down modestly as compared to the prior period. Overall revenue was impacted by low-teens growth in food, mid-single-digit growth in academic markets, with expected declines in industrial and environmental. Pharma biotech experienced low single-digit growth, driven once again by strong OneSource results.

As Rob mentioned earlier, we've made significant strides in reshaping the Company in 2016 for all of our stakeholders, and I'd like to go over some of the highlights for the year. Turning to slide 4 of the presentation materials, for the full-year 2016 we reported approximately 2% organic revenue growth, with foreign exchange representing a headwind of approximately 1%, with minimal impact from acquisitions and divestitures.

Full-year adjusted revenue from continuing operations was approximately $2.12 billion as compared to $2.11 billion in 2015. On a pro forma basis, including $146 million in revenue for the discontinued Medical Imaging business and $10 million from incremental FX headwinds, adjusted revenue would have been $2.27 billion.

Full-year adjusted earnings per share from continuing operations was $2.60, up 12% from $2.33 in 2015. On a pro forma basis, including $0.16 per share for the discontinued Medical Imaging business, and $0.03 per share from the incremental FX headwinds, full-year adjusted earnings per share would have been $2.79 per share.

Looking at our geographic results for the year, we experienced double-digit organic revenue growth in Asia, flat organic revenue growth in Europe, and a low single-digit organic decline in the Americas, again, driven largely by softer industrial sales. In the BRIC region, full-year 2016 organic revenues increased low-double digit compared to 2015, with low- to mid-teens organic revenue growth in China and India, flat revenue in Russia, and soft demand in Brazil which was down double digits. Looking at our total emerging market sales, organic revenues were up high-single digit for the full year, and sales in these regions have been consistently resilient over the last four years, a testament to the criticality of the products we sell into these parts of the world.

Turning to slide 5, as to our operating results, full-year reported adjusted gross margins were 49.4%, up 110 basis points. As Rob mentioned, this increase was driven primarily by a continued mix shift into our focus growth areas and productivity gains which contributed to a mid-single-digit reduction in material cost as we shift procurement activities to lower-cost countries and continue our ongoing supplier consolidation.

Strategy deployment and lean activities further expanded gross margins by an additional 50 basis points, as we were able to drive better out-of-the-box quality and reduce overall manufacturing expenses. We are in the early innings of strategy deployment and lean, and we remain confident in our ability to continue to expand gross margins by more than 50 basis points per year.

Full-year reported adjusted SG&A was 24.9% of adjusted revenues, down 80 basis points over the same period a year ago, driven by indirect spend initiatives and prudent cost controls. As noted earlier, full-year research and development spending was higher by approximately $12 million as compared to 2015, driven primarily by investments in innovative new products, including the Vanadis non-invasive prenatal screening offering and the IONICS Mass Spectrometer focused on food and environmental safety applications. We are very excited about the potential these technology acquisitions represent, and continue to be encouraged by the progress made in expanding our addressable market.

Overall, we were pleased with our operational performance for the full year as we expanded our reported adjusted operating margins over 140 basis points in spite of incremental R&D investments of 50 basis points, as referenced earlier. Below the line, full-year net interest and other expense was up modestly to $45 million, and our full-year adjusted tax rate was approximately 18%.

Turning to the balance sheet, we finished the year with approximately $1 billion of debt and nearly $360 million of cash. We exited the quarter with a net-debt-to-adjusted-EBITDA ratio of approximately 1.6 times.

Turning to cash flow, I'm very pleased to report that we once again had a record quarter of operating cash flow from continuing operations and a full-year $324 million, up 22% over the comparable period in 2015. We experienced continued working capital improvement with better cash collections and lower inventory requirements. Free cash flow for 2016, including Medical Imaging, was also very strong at $319 million, up 23% versus the prior year and 6% ahead of our full-year free cash flow commitment of $300 million. As we look ahead to 2017 and beyond, we believe we can continue to realize additional gains in this area through the expanded use of lean tools to more effectively leverage our working capital needs.

To wrap up 2016, we're pleased with our strong operational progress in a slow growth environment, driving adjusted earnings per share growth from continuing operations of 12%, as reported. Looking ahead to 2017, we continue to believe we are well positioned to deliver another solid financial performance and see a path to improving organic growth, driven by continued mix, new product introductions, and more favorable comparisons.

As a result, looking at slide 6 of the presentation, we expect full-year 2017 reported revenue to be in the range of $2.19 billion to $2.2 billion, and as Rob mentioned, this represents organic revenue growth of 4%, which includes approximately $40 million in foreign exchange headwinds and approximately $30 million from our recent acquisition of Tulip, an India-based diagnostics company.

Full-year adjusted earnings per share is expected to be in the range of $2.75 to $2.85, which represents approximately 8% to 12% constant-currency adjusted earnings per share growth from continuing operations. On a pro forma basis, including 16% of earnings per share related to our Medical Imaging business which is now in discontinued operations, adjusted earnings per share would have been $2.91 to $3.01.

Implicit in this guidance range is adjusted gross margin expansion of approximately 60 basis points and continued SG&A leverage with a modest increase in R&D resulting in adjusted operating margin expansion of 70 to 90 basis points. Our full-year guidance assumes net interest expense and other of $50 million, an adjusted tax rate of 18%, and a weighted average share count of approximately 110 million shares.

For the first quarter of 2017, we are forecasting reported revenue to be in the range of $500 million to $510 million, which represents organic revenue growth of 2% to 3%, with FX representing a headwind of approximately 2%. Note that in the first quarter of 2016 Medical Imaging's contribution to revenues and adjusted earnings per share was approximately $41 million and $0.05, respectively. As a result, our first-quarter 2017 adjusted earnings per share are expected to be in the range of $0.52 to $0.54. This concludes my prepared remarks. We would like to open it up for questions at this time.

(Operator Instructions)

Our first question comes from Jack Meehan with Barclays.

I wanted to get your perspective on the industrial end market and just what the performance was in the quarter and then your outlook for 2017 and whether -- within that, whether you saw any improvement in terms of the order book in the fourth quarter?

So for us, the industrial end market was down in 2016 depending on whether it's Q4 or the full year, somewhere between 3% and 5%. And as we mentioned in the beginning of the year, we experienced strong growth in the industrial market in 2015. We were up mid-single digits so we actually anticipated industrial being somewhat flat to low-single digits.

But I would say we're disappointed by the fact we ended the year down, like I said, in the 3% to 5% range. I would say part of that was market, part was execution on not getting a couple new products out, particularly in the back half of the year as we would have liked so consequently, that costs us a couple points of growth.

As we think about 2017, we're forecasting industrial to grow low-single digits and I would say that's not as much of a market phenomena, although I would say we are seeing early indications that, that market is improving but we attribute the improvement in 2017 more to our own execution from the perspective of getting the new products out.

One of the products that actually slipped was the NexION, which is a new ICP-MS. That was actually launched two weeks ago so we feel good that's out in the marketplace and it's getting good receptivity in the market so I would say for 2017, we're anticipating an improvement in the industrial growth but the majority of that should come from our own execution as compared to market.

Great. That's great color and, Andy, I caught the share count guidance of $110 million. Maybe could you just walk through some of the proceeds for Medical Imaging and what you're assuming in terms of capital deployment for the year?

Well, at this stage, we are anticipating closing sometime after April, so we still have some time to decide what we want to do with those proceeds. It's about $265 million proceeds we've been [offset] and at this stage, we noted the dilution that was provided. We believe we will cover the majority of that dilution either through share buybacks or through acquisitions, and that will probably have more to say on that as we get closer to closing on the sale. And we'll be very transparent with that communication.

Our next question comes from Tycho Peterson with JPMorgan.

Thanks. I'm wondering if you could talk a little bit more about the 4% organic growth expectations for the year? How much do you expect from new products? You usually do a pretty good job typically quantifying that and it sounds like, Andy, you mentioned academic got better, which is somewhat in contrast to what we hear from peers so just wondering if you can elaborate on that?

As I think about the move from call it, 2% in 2016 to 4% in 2017, the majority of that is going to come from, like I said, execution and getting new products out. So we talked about 2016 of a number around $40 million. I would say we, probably at the end of the day, fell a little bit short of that. I would say we felt pretty good clearly through the first nine months.

But as I alluded to before in the back half of the year, we had a couple things slip, two particular products. One actually shipped, as I mentioned two weeks ago, and one actually started shipping this week. So we feel good about the fact that they are out. But I would say as we think about 2017, really starting with the product set that are shipping now and really looking more into Q2, we think we are going to have another strong year of new products and actually probably something closer to $50 million as compared to the $40 million that we expected in 2016.

So that is a big contributor to the improvement in the growth year over year. As we think about it by market, I mentioned the fact that we're looking for a fairly significant improvement on the industrial side. I would say the other market that we're looking for is environmental, which historically has been a good market for us. It was also down in 2016 and our expectation is that returns to a positive grower, so I would say that's really the majority of the improvement when you think about the 2016 to 2017 increase in organic growth and a lot of that, we believe will be fueled by new products.

On the academic side, we had a fairly easy comp. We did see some -- and some of our instruments are typically high value instruments. We saw some growth in our High Content Screening [technology] products, which were beneficial in the quarter, but that was probably our best quarter in academic for the year.

As Andy mentioned, a lot of our academic exposure is more in the Medical Imaging area, which is if you can think of large ticket items so you can from a quarter to quarter, you can see things move around because of the lumpiness of those orders in sales.

And then lastly, can you maybe give us a framework for M&A this year as you think about it?

Well we wanted to -- we mentioned the fact that we did four deals in 2016, with about $350 million of value and that includes the earn-outs as well. We would like to do more than that this year. As Andy mentioned, we think we've got a very strong balance sheet. We'll have the cash coming in from Medical Imaging so we think we're well positioned financially to be aggressive.

The other side of it is we feel very good about this operational capability and organizational capability we have so that we could take on additional complexity so we've got pretty full pipeline. And I would be disappointed if we weren't able to do more significant M&A in 2017 than we did in 2016.

Our next question comes from Doug Schenkel with Cowen and Company.

My first question is on the fourth quarter and then I want to come back with a follow-up on new products, so first on the fourth quarter. Under the new reporting segment structure, organic growth was 1%. This was with Medical Imaging eliminated as a drag on growth. You guided investors to model low single digit organic revenue growth and most were looking for around 2% with Imaging as a drag.

So I'm sorry if I missed it, but could you just walk through where you came up a little light of growth expectations in the quarter or were there timing dynamics. Is that why you feel, at least in part, confident that you can see the acceleration in growth that you're guiding to in 2017?

Actually, if you look at the guidance that we put out, it was in November, we talked about low single-digit growth. Actually, the numbers were zero to 2%, is actually what we were guiding to do. So when we came at 1%, we felt like we came in about where we guided. To your point, Medical Imaging was a headwind but it really doesn't round either up or down.

We would have been 1% with or without Medical Imaging but having said that, we guided $610 million to $620 million, and Andy showed a chart that said we're $612 million so I would say we're at the bottom end of our guidance but within the amount we talked about. I would say to the extent things were a little light, they were on the DAS side.

And clearly, some of the end markets we had seen all year, so industrial was down mid-single digits, environmental was down mid-single digits so those are the two that have been the challenging headwind all year and that was again the case in the fourth quarter. I contrast that with the areas that we saw good growth and continue to do very well.

So we talk about the fact that Diagnostics was up strong; OneSource had a good quarter, again, even against a pretty tough comp. And Food was strong in the quarter as well, so the areas that have done well continue to do well and the areas that were challenging continue to be challenging in Q4.

And as I mentioned before, the idea is to turn that around. Some of that will be helped by having the realignment behind us and the other thing will come from getting some of these new products out into the marketplace.

Okay, super helpful, Rob, and then actually good segue to the new products. I just want to see if, one, you'd be able to just provide a little more specificity on what the key new products drivers will be in 2017 in the context of looking at growth?

And then just from a math standpoint, it sounds like you did something like $30 million to $40 million in new product revenue in 2016, and you're targeting something like $50 million in 2017. So that's obviously around $20 million incremental on that line. That's 75 Bps of revenue growth so is the balance of the 4% target for the year just attributable to better execution and end-market improvements; is that the right way to think about it?

Yes, that's exactly the right way to think about it and again, when I talk about the improved end markets, my assumption is most of that's going to come from better execution. So again, we're not really building a lot of, I would say, market improvement relative to external factors. With regard to the big drivers, I would say in 2017, so we mentioned the fact that two weeks ago, we introduced a product called the NexION 2000. We're quite excited about that, that's the new ICP-MS.

There's been some interesting write-ups about it in some of the trade articles so we're excited about that. We actually introduced the Operetta CLS, which is a High Content Imager and that came out in September of last year and that started gaining very nice traction in the marketplace. It's got some unique, I would say, competitive differentiation.

It's got this water immersion lens and very fast mechanics and harmony software so we feel good about that. We introduced the Avio 200; it was also in the back half of 2016. That's an ICP-OES, and we think that's got the lowest cost of ownership on the market and probably the best analysis [of all] time.

So we're excited about that one and again, that will continue into 2017 and then another product that we're just introducing now is a new quantitative pathology called the Vector Polaris, and we've got significant expectations.

It's the only platform in the market that can detect up to seven colors or, in essence, six biomarkers on a single tissue section so that's another one that we feel good about. So there's a couple other ones later in the year but those are the ones that will -- should drive the majority of the $50 million of incremental revenue.

Our next question comes from Steve Beuchaw with Morgan Stanley.

Wow, that's a new one. So a couple for me; one on tax and then one on Vanadis. Andy, I wonder if you could just give us a little bit of scenario analysis or word gaming on the possibilities as you think about the potential impact for tax reform. Are there scenarios that we might be concerned about, including order adjustability? And can you give us a sense for what you think is the middle-of-the-road outcome is?

And then I guess for Rob on Vanadis. You guys continue to sound excited about the products. It sounds like you're getting more excited about it as you see more data. You saw a pretty significant amount of data here within the last couple months. Can you remind us how you frame up the Vanadis opportunity and strategy? Is this an emerging-markets product, a global product, is this a product for a subset of disorders or is this a broad NIPT offering? Thanks so much.

Maybe I'll start with your question around taxes. There's still not a lot of clarity around how this is going to settle although we do hope that there is some movement on tax reform. Right now, we've looked through and done an analysis of the three plans out there, the Trump Plan, the House Plan, and there's a third and they are all fairly similar.

We do feel like there will be a lower tax rate overall, corporate tax rate. Whether it's 25% or 15%, no one really knows. Obviously, that's going to be a net positive for us. We do pay taxes in the US. As far as being a net importer/exporter, we are a net exporter. We have a fairly large significant amount of revenue that is exported out of the US so that will also be a net positive. And then the third piece is around repatriation, a repatriation holiday would obviously be helpful.

We have been very successful in the past without one. We've been able to utilize some of our tax attributes to bring money back overseas with very limited cash taxes so all in all, we feel like it's going to be a net positive. We've done some detailed analysis and based on what we know today, it's probably about one point to 1.25 points to our current tax rate.

And Steve, let me take the second one on Vanadis and you're probably interpreting our tone appropriately, we do get increasingly excited about the opportunity here. To answer a couple of your questions, we do see this as more of a broad-based offering as compared to going after specific disorders. And when I say broad based, it's really targeted at 13, 18, 21, the key aspects of prenatal screening.

The thing that excites us about it is the fact that we believe it's unique in that it's a product that's actually been designed from the beginning for screening. What we are finding -- what we believe is some of the applications now are things that we're, say, in the case of NGS, probably designed for an application that are being -- that are trying to be applied to NIPT, and a population screening and that -- it's got to meet a couple criteria, right?

It's got to be simple to use. It's got to be automated. It's got to be accurate and it's got to be fairly cost effective. And that was when Vanadis was put together and designed, they were after those characteristics so it's unique in that way relative to what's on the market today. Relative to our -- how we're thinking about rolling this out from a market perspective, it's going to be driven, to a large extent, by regulatory requirements.

And so the way we think today is initially, it will go into Europe as CE-IVD, and there's probably some 70 countries that provide some nice opportunity. Simultaneous with that, we'll be seeking CFDA approval in China and in fact, we're going to see if we can get this fast tracked because of the need there as well as we think the uniqueness of our offering.

And then probably, of course as you know, that's a significant market, and then probably the third market will be in the US and it will probably be offered there as a kit and -- but that's probably a little farther out. And then we're quite excited about it; we believe we're still on track. We'll see some initial beta units at key opinion leaders starting in mid-2017 and we still think we're on track for CE-IVD approval in early 2018.

Our next question comes from Dan Arias with Citigroup.

Rob, just going back to the 1% organic for the quarter, can you comment on growth, if you just look at the group of businesses that you're investing in heavily versus the group that's less of a priority. How does that split look?

It was high single, 8% to 9%.

And then if you care to touch on where -- obviously, if you can do the math on what that means but just maybe the outlook on the less prioritized stuff, how do you think about that in 2017 as you -- as the portfolio -- ?

Well, there's three ways to get that growth up. One is, we've got to get innovation and new products out. We've got to execute better in the marketplace. And probably the third aspect of it is, we will continue to look to prune some of the products that we think are just not a great strategic fit for where we want to take the Company. So it will be a combination of all three of those. It's obviously the first two are more within our control, but we will look to use all three of those levers.

Our next question comes from Jonathan Groberg with UBS.

So Andy, on the -- I just want to make sure I'm 100% good here. On the Medical Imaging, the $0.16 is your -- is discontinued so if the full-year impact is $0.16 and what you're assuming in your initial outlook here is nothing is done with the cash at this point?

That's correct. So the guidance we provide assumes no use of those proceeds, and as I mentioned earlier, we will -- as we get to the point where we close on the sale of the Medical Imaging business, we will be very clear as to how we deploy that. But our intention is to cover a majority of the dilution with either buybacks or acquisitions and we will be more transparent on that as we move forward.

Jon, the way I would describe it is that again, because we don't know when it will close. What we've said is think of it as $0.16 impact. So if it closes a third of the year, let's say, that means $0.05, assuming it's linear, will run through our earnings but through discontinued operations.

And so what Andy is implying is that, that $0.11 that's left, we'll look to cover the majority of that, either through acquisitions that we do or through share buybacks, so that if you look in total between the earnings that run through discontinued and things we do to offset the dilution when it's sold or maybe even before it's sold, that we're guiding to say, look the majority of that $0.16, we look to offset. It's just that we can't give you a specific split until we know when it closes.

I just want to make sure we're crystal clear on what that $0.16 was and then on the -- I know you've cut this a few different ways but did I miss -- if you just looked at it by new reporting segments, Diagnostics and DAS, how you're thinking about those growing to hit the 4% next year?

Sure. Right now, we see the Diagnostics business really growing at a 7% or so high single digit type growth rate and then 3% for the DAS business; that gets you to the 4%.

Our next question comes from Matthew Mishon with KeyBanc.

Could you give us a sense of where you're at now with the portfolio as far as the pruning and the divesting goes? Is there -- how much left do you think you have there and is it a big chunk or is it more a product line coming out here or there?

No, that question is always difficult to answer because as the Company evolves, we'll get -- we'll continue to get more discriminating against the products and the technologies that we have. So, I would say with regard to sales like Medical Imaging, I wouldn't anticipate as we think about 2017 here that we would see another divestiture of that size for 2017.

There will be some product line pruning but I don't think anything of the size of, call it, $150 million in revenue. When we get into 2018 and 2019, possibly, and that will also be dependent on how successful we are on the acquisition side.

The 70 to 90 basis points of operating margin expansion you're expecting in 2017, how much of that is just simply mix coming out of Medical Imaging? Was that at or above Company average margins?

When we moved Medical Imaging to discontinued now, it doesn't have any impact, right, because we're now comparing numbers in 2016 and 2017 that don't have Medical Imaging in them so the 70/90 has no impact from Medical Imaging leaving.

Our next question comes from Steve Willoughby with Cleveland Research.

Two different questions for you. First, just your thoughts on your outlook from a geographic standpoint and then secondly, last quarter, you talked about how some of your product lines were emphasized versus de-emphasized and you might have seen a little bit increased employee headcount turnover. Just was wondering if you continued to see that through the fourth quarter and if it had any impact on results? Thank you.

So I'll take the second one and then maybe Andy will do the geographic split. So, it's hard to tell that answer, right? We don't have a precise way of measuring but clearly, when we made a decision, call it, third quarter to start to focus on some areas and deemphasize some others, there was some transition within both the sales force and the product manager.

I would say the majority of that is behind us. Now we've communicated it, to the people that it impacted and they didn't like it. A majority have left or got comfortable with the situation so that's the majority behind us. It clearly impacted us in Q3 and it probably had a residual impact in Q4 as well.

One of the things I'll mention before is one of the reasons we announced the realignment on October 1 was we wanted to try and get all this behind us so as we entered 2017, any disruption as a result of it, and it's -- again it's hard to make the disruption zero, but to a large extent, that's behind us.

So as we forecast here and as we enter 2017, our assumption is the organization is well aligned in support of how we are running the Company right now and I don't anticipate any disruption in 2017 as a result of the strategic decisions that were made last year.

I'll answer the other part of the question. By major geography, our expectations, at least that are reflected in our guidance, are the Americas essentially mid-single digit with the US part of that being really low- to mid-single digits. Europe, we're assuming is going to be low-single digit, with high-single-digit growth in the APAC region.

Our next question comes from Isaac Ro with Goldman Sachs.

Andy, hoping to get a little bit of color from you as you think about the post-divestiture portfolio. What the incremental margin framework we should put in mind as we think about a long-term model for the business? Obviously, the fixed cost coming out of the Company with the Imaging sale will be pretty reasonable and just thought it would be helpful to have a framework for incrementals.

As Rob may have mentioned, as we look forward, we still believe we can drive 70 to 90 basis points of operating margin expansion consistently. If you look at this year, it was a bit higher and that there will be years where we are able to drive more than that.

I don't think the framework has really changed dramatically with Imaging on the bottom line but it has on the top. We're going to have less volatility and net-net over time, we're going to have a steadier and hopefully, a better growth rate organically.

So I would say the incremental flow through is within the Company is largely dependent on where the growth is coming from. So one of the reasons why the operating margins was as strong as it was in 2016 was because the growth was coming from the Diagnostic side. So I -- when you see growth on the diagnostic side, generally that's got a 45% incremental flow through associated with it.

When the growth occurs on the DAS side, it's lower than that. It's probably in the low 30%s. So as -- and, of course, Medical Imaging is different but that's [out of things]. So that's really the determinant of the incremental flow through. It's really where the growth is coming from.

And our expectation is that most of the growth is going to come from our focus areas and those are typically higher margin.

That's really helpful. Thank you, guys. A follow-up here would be on the food safety business. Obviously, it's a great place to be. You have done well there. Can you give us a bit of a mark-to-market in terms of roughly how big that business is today for you as a percentage of total sales or something in that neighborhood?

It's about $175 million for us right now. To your point, I wish it was a lot larger.

All right. Well, you have time for that to happen. You keep working on it. Thank you.

Our next question comes from Bill Quirk with Piper Jaffrey.

Couple questions for me. First off, in China, have you, by any chance, see any impact from some of the new food regulations? And if so, was this contributing to some of the food safety strength, if not, potential driver in the future? And then I have a follow-up. Thanks.

No, I do -- it's hard because it's so new. The regulations are now require them to almost farm-to-table type of analysis and our leaders there think there has been some incremental growth attributable to those regulations. So we're fairly optimistic that, that will continue to be a driver to the food business in China, but I would say that it's in the fourth quarter probably some of the strong food revenue growth was attributable to, and clearly, it was in China. Some of it was the new regulatory standards that have come out.

Got it. Okay, fantastic and then just staying OUS, appreciate the Tulip color around the contribution for 2017. Can you help size the total opportunity in India for us, Rob? Thanks.

Well, when you think about the Diagnostic market in India right now, it's a relatively small in the scheme of things, right? We've seen some number that says, if you look at the Diagnostic tests per capita in India, they are 100th the size that they are in the United States so when you think about the size of the population as the technology evolves and costs come down, that could be a significant opportunity.

But just to give you a sense, the Diagnostic market in India is probably $1 billion and growing very quickly. So the nice thing we like about Tulip is it gives us significant distribution capabilities. I mentioned in my prepared remarks, some 30,000 customers and so we see two great opportunities. One is, at some point, to take some of the product offering that we have in China and run that through the channel in India.

And then also use that channel to help drive our reproductive health growth and then we'll continue to be aggressive to look at other types of products that we can go through the channel but we thought it was important to get good access to a market that we're quite excited about.

Our next question comes from Ross Muken with Evercore ISI.

Hi guys. It's Luke in for Ross. Just looking at, now that you have a greenfield in front of you with 2017 and you're looking at bolstering your high-growth businesses, I guess looking at the Diagnostics, I know you're not going to give framework on the size of the deal but just areas where the portfolio you'd like to fill in?

So, Luke, to your point, Diagnostics is a high priority for us. If you look at the three areas that we play in right now, anything you can do in reproductive health, we would like to do it. We've got a nice franchise there. I would say also in infectious disease and emerging markets, so we talked a little bit about Tulip. Anything we can continue to bootstrap those capabilities.

And then we'll continue to look for opportunities in the oncology area around enabling technologies. So we think we've got nice capabilities in the front end of the sequencers, whether it's DNA extraction or automation or sample preparation. So I would say those are the three areas that we're focused on.

The other thing that we continue to look at is opportunities to expand our addressable market. I would say, when I think about our Diagnostic business, it's a very strong business but the addressable market needs to be bigger than it is and so we'll look for adjacencies that we can leverage some of our capabilities into some markets that allow us to grow. I would say right now, our addressable market in Diagnostics is probably in the $3 billion range and we've got to make that much larger.

Great, that's very helpful and turning to biopharma, its been really strong across all of your peers and with you as well. Can you just talk about the order trends that you've been seeing there at the end of the quarter? If you saw any pause within the larger pharma versus smaller pharma or CapEx spend versus consumables? It would be great.

So as we think about biopharma I would say the OneSource side or the service aspect of our business has been very strong. The product side of it is a little mixed so we don't -- we have not enjoyed the growth that I would say some of our peers have and to some extent, that's a function of our product mix, right?

So I'd say on the imaging side, things are going well and some of the [reagent] areas and things are going well but when you get into the plate readers and the radio chemicals and radiometrics, that becomes a little bit more challenging. So our growth for biopharma has been low-single digits maybe in some quarters mid-single digits. But we, unfortunately, have not seen some of the growth as I mentioned that others have.

So but to answer your question specifically, we have not seen any indication that it's slowing. We continue to see -- we believe pharma will continue to have a strong 2017. It will probably manifest for us again more on the service and informatics side than on the product side.

Our next question comes from Derik de Bruin with Bank of America.

So could you just give us -- first, a housekeeping question? So based upon your commentary on Medical Imaging's impact on organic revenue growth in Q4, is it safe to assume that when we look at the organic revenue growth in the prior quarters in Q1 to Q3, it's similar to what you reported?

Yes, in a given quarter, it may have caused a percent but think of it about it as 7% or 8% of our revenue. And it was generally down anywhere from mid-single digits to low-double digits, so when obviously, when it's down mid-single digits, it's less than 1%, but there was, Q3 in particular, it may have been down low-double digits.

And you know, at that point, it probably moved it 1% or so. So again, depending on how it did in the quarter, it could have moved our organic growth one point.

Okay and can you just give a little bit more color on Tulip and the opportunities there and long-term goals? What you can do with the margins and just a little bit more color on that business?

Well, it's about, it was $35 million in revenue or so. And as I mentioned, it closed this week, so we'll get 11 months or so of the revenue. The margins are, I would say better than around corporate average, maybe a little bit better than the corporate average. Maybe there's an opportunity to improve those but really, the focus is going to be on growth.

How do we accelerate the growth? As I mentioned, we think the IVD market is around $1 billion or so and we think that's going to grow fairly significantly. Their offerings are really around, call it, prevention screening and diagnosis for infectious disease. So things like malaria, HIV and hepatitis so very synergistic with what we do in China with our SYM-BIO acquisition we did a number of years ago. And as I mentioned, the strong products in China has access to over 30,000 customers, diagnostic labs, government, private healthcare facilities, et cetera. So we're quite excited about it.

I'd say the other thing is, the last couple of years, we built a nice team within India within PerkinElmer. And so we feel very good about the ability to integrate this and leverage the capability there and they've got 350 sales people and so we'll look to grow that quite significantly. It's a business that's growing that has been growing adding low-double digits and we'll look to accelerate that.

Our next question comes from Bryan Brokmeier from Cantor Fitzgerald.

You had previously indicated in the past that you had about $1 billion in M&A capacity. Now you have the additional $265 million from the Med Imaging business, or you will soon. Would you say that you have $1.3 billion in capacity or is it even higher than that since you've strengthened your balance sheet and cash flow over the last year?

Well, we have approximately just under $1 billion of leverage through our revolver and then we've talked about our cash as being north of $350 million. So you layer on top of it the $265 million so we're really around $1.5 billion of available. And then if you throw on top of that our free cash flow generation, it's higher by another $300 million or so.

Great. And staying on M&A, are you focused on accretive deals and could you more broadly remind us of what the criteria is that you focus on?

So I would say it starts with obviously strong strategic fit and then we generally look at returns so we think about it as cash over cash returns. We generally are looking at something that exceeds our cost of capital and depending on the size of the deal, it would be anywhere from three to five years, even for larger deal, you might stretch out for a period of time.

Our cost of capital is probably in the mid to high 8%s, so we'd probably look to find something that gets us returns of 10% or so in that time horizon. In this environment, with interest costs where they are, most things are accretive, so it's -- I would say it's unlikely that we would do something that wasn't accretive. But again, the real criteria is what kind of financial returns? And how does it improve our businesses?

Our next question comes from Katherine Ramsey with Robert W. Baird.

Can you say newborn screenings contributed from a revenue -- ?

Katherine, could you speak up a little bit? I can just barely hear you.

Yes, is this better?

Yes, much better.

All right. I was curious what newborn screening contributed from a revenue perspective in 2016? And then could you walk us through your assumptions there for 2017? And what kind of China menu expansion and India penetration embedded in those?

The newborn screening grew low-double digits in 2016, so it was a significant contributor to the growth of Diagnostics. It is the largest business within Diagnostics, so it's done quite well and our expectation is it will continue to grow in 2017.

We are expecting to see a moderation of growth in China. We saw mid teen birth growth in China, birth rate growth and that was partly due to the relaxation of the one child but probably more significantly, as a result of, what I'll call, the Zodiac year. And what our expectation is, as we think about 2017 as the year of the Rooster, that it will be -- it go back to a moderate normal growth rate, probably in the low- to mid-single digits.

Okay, that's helpful. And then just quickly looking at the fourth quarter organic decline in DAS. Can you parse out that performance in instruments versus recurring revenue? I know you touched on pharma briefly but was the decline there mostly capital purchases getting pushed out?

Yes, it was mostly on the instrument side where we saw growth was on the service side. Insurance was negative and consumables and reagents on the DAS side was up slightly. A majority of the growth on the read is in the consumables guide, comes from the Diagnostics side.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. I would like to turn the conference back over to Rob Friel for closing remarks.

Great. Well, first of all, thank you all for your questions and your interest in PerkinElmer. So in closing, let me just emphasize the sense of enthusiasm that exists across the Company to both provide significant value for our shareholders as well as advance our mission to make the world healthier. Again, thanks for joining us for the call and have a great evening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.