Good evening, ladies and gentlemen. Thank you all for joining. Welcome to the First Quarter 2014 PerkinElmer Earnings Conference Call. My name is Lisa, and I'll be your coordinator for today. Today's conference is being recorded. At this time, all participants are in listen-only mode.

Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions) I'd now like to turn the conference over to Mr. Tommy Thomas, who is the Vice President of Investor Relations, for opening remarks. Please proceed, sir. Thank you..

Thanks Lisa. Good afternoon and welcome to the PerkinElmer first quarter 2014 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 Web-site at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our Web-site until May 8, 2014.

Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today.

We disclaim any obligation to update forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures.

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

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

Rob?.

Thanks Tommy. Good afternoon and thank you for joining us today. I'm pleased to report that PerkinElmer is off to a solid start in 2014, delivering strong performance in the first quarter.

Our financial results exceeded expectations with organic revenue growth of 5%, strong operating cash flows, a significant increase in operating margins and adjusted EPS growth of 28%. We are benefiting from strong demand for our differentiated solutions and improving trends in many of our end markets compared to last year.

Productivity improvements we made in 2013 to simplify and strengthen our operational footprint, an effective operational execution by the entire organization.

While Andy will discuss our end markets and Q1 results in detail, I would like to highlight the progress we made during Q1 to improve our core capabilities of detection, imaging, informatics and service enabling us to grow our share in key end markets.

Turning first to imaging, we launched the IVIS SpectrumBL which features a patented optical imaging technology and increases in vivo throughput in preclinical imaging for drug efficacy, safety and toxicology.

We also jointly opened an in vivo imaging demo lab in Fudan University's Shanghai Medical College, the first center of excellence in APAC with the ability to provide direct demonstration and training for preclinical animal models.

Researchers at the lab will use PerkinElmer's bio-imaging technologies to advance the understanding of biology and find improved alternatives for disease treatment. In detection we broadened our leading prenatal and neonatal diagnostics offerings, both in the U.S.

and in China, including setting up additional lab in a lab testing for severe combined immunodeficiency syndrome where we embed a full-service operation and several PerkinElmer technicians directly into a customer's laboratory to screen new born samples using PerkinElmer's assets.

We also recently signed an agreement with the National Health and Family Planning Commission in China to be the exclusive partner in a three-year newborns training project to cover more than 600 rural communities and train more than 3,000 doctors and lab technicians.

This unique collaboration which employs PerkinElmer's detection technologies, knowledge and infrastructure will not only grow our market share, but more importantly help to save millions of lives.

Additionally, we announced an exclusive partnership with Good Start Genetics to sell its GoodStart Select genetic carrier screen tests to our maternal fetal health customers in the United States. This partnership further expands our prenatal menu and enables us to leverage an already strong market for us.

Also as a prime example of how we can deliver greater customer value through linking together our complementary capabilities, we introduced the NexION 350 ICP-MS spec instrument and paired it with new workflow-based software called Syngistix.

This solution enables superior levels of nano material detection and is significantly faster than anything on the market making it ideal for single particle detection and for applications within the environmental food and pharma markets.

This product further demonstrates how the breadth of our product offerings can be brought to solve real issues facing our customers. Turning to informatics, a strong driver behind the business' growth in Q1 was our ability to further deploy our Spotfire data visualization software across our instruments platforms.

For example, we won business with the Genome Institute of Singapore to provide a bundled solution consisting of our JANUS liquid handling technology, EnSpire Plate Reader and Spotfire software. This integrated solution will enable the efficient discovery of next-generation cancer therapeutics and personalized genomics.

We also launched Elements, our first cloud-based scientific collaboration tool that will revolutionize how students and researchers collect and share data. Early feedback from several beta users at large universities has been very positive.

We also continued our investments in mobile platforms with the INconX application for our Optima spectrometer, which enables user to remotely monitor and control the operation and analysis from anywhere in the world.

In addition, we added mobile capabilities to our OneSource offering to allow the scheduling and monitoring of service calls and access to a complete history of the service records through the use of an iPhone. While innovating across our core capabilities is critical to accelerating growth, so is providing an exceptional customer experience.

During the quarter, we began to put together better processes to ensure that PerkinElmer is the easiest company to do business with in the industry, from the time a customer purchases the product through installation.

Our renewed focus this year on improving the customer experience will generate even greater customer satisfaction and build long-term brand loyalty. In closing, it was a great to kickoff the year strong and build momentum heading into Q2. Most of our end markets are experiencing improving trends with the remaining stable.

Diagnostics was strong reflecting our market leadership and the attractive segments we serve.

Solid mid single-digit growth in our research business reflects some recovering pharma and a continued uptake in our informatics offerings, and the environmental business experienced robust service growth and strong interest in our upcoming new product launches.

Our focus on elevating differentiated innovations and serving our customers well will continue to fuel our growth and provide a competitive advantage for PerkinElmer.

Critical to this are our many employees located across the globe, who in the first quarter not only executed well operationally to achieve revenue and margin expansion but also continued to drive our strategic priorities while remaining passionate about serving our customers.

Consequently, I feel good about our ability to accomplish both our short-term goals and long-term objectives as we have an incredible opportunity to grow and innovate, and most importantly make a difference. I would now like to turn the call over to Andy..

Thanks, Rob, and good afternoon everyone. I'll provide some additional color on our end markets, the financial summary of our first quarter results and details about our second quarter and full-year 2014 guidance and then we'll open up the call for your questions. We are pleased with our performance in the first quarter.

Reported, adjusted and organic revenues, all increased by 5% with essentially no top line impact from acquisitions or foreign exchange. Adjusted revenue for the quarter was $533 million as compared to $507 million in the first quarter of 2013.

By segment, our organic revenue in Human Health grew approximately 6% while organic revenue in our Environmental Health business grew 4%. Looking at our geographical results, organic revenue increased mid-teens in Asia, mid single digits in the Americas and flat in Europe due in part to the timing of shipments in the fourth quarter of last year.

We expect to see low to mid single-digit organic revenue growth in Europe for the full year driven in part by new product introductions and an improving economy. In China, organic revenue increased low double digits.

We continue to see positive demand trends in our key environmental and diagnostic offerings, specifically our infectious disease, newborn and prenatal screening as well as applied market applications focused on food, air, soil and water detection capabilities.

Looking at organic revenue growth by product category, recurring revenue which includes reagents, consumables and service grew high single digits in the quarter while organic revenue for our instrument and component offerings grew low single digits in the quarter.

From an end market perspective, our Human Health business represented approximately 56% of reported revenue in the quarter and consist of diagnostics which represented 29% of reported revenue and research which represented 27% of reported revenue.

Organic revenue growth from our diagnostics business increased high single digits during the first quarter, primarily driven by demand for our newborn screening and infectious disease solutions, with particular strength in emerging markets.

Not only are birth rates beginning to rebound in China as evidenced by prenatal trends we saw in the first quarter, but thereafter greater access to newborn screening in rural areas is also increasing. Additionally, we continue to gain share in infectious disease testing in China having won over 30 new Sym-Bio customers during the quarter.

Medical imaging was essentially flat in the period, but an improvement from our guidance provided in January. We continue to expect solid organic revenue growth for the year driven by emerging market investments in the healthcare infrastructure and the rising trend to advanced medical diagnostic x-ray capabilities.

Our research business delivered mid single-digit organic revenue growth in the first quarter versus the comparable period in 2013. The pharma and biotech segment contributed to this performance and is in line to grow mid single digits for the year.

In academia and government, the funding remained somewhat choppy in developed regions impacting CapEx decisions, yet there are indications the market should rebound and lead to greater opportunities in the second half.

The tone coming from our customers is definitely more upbeat at this time than last year and we remain optimistic on the outlook for the year.

Moving to our Environmental Health business which represented 44% of reported revenue in the first quarter, we serve three end markets, laboratory services which represented 20% of reported revenue, environmental safety which represented 16% of reported revenue and industrial which represented 8% of reported revenue.

As I mentioned earlier, organic revenue in our Environmental Health business grew 4% in the quarter driven by continued strength in our services offering which was up low double digits. On the product side of the business, organic revenue was flat in the quarter as growth in Asia was offset by softness in the U.S. while Europe was essentially flat.

We're excited about our new product pipeline which will ramp up in the second half and meet strengthening demand. For the NexION [indiscernible] team aspect in particular, we continue to see investment orders and expect to ship the first several instruments in the second quarter.

Turning to our margin performance in the period, adjusted gross margins in the first quarter of 2014 were 46.8%. A higher service revenue mix, initial OneSource startup cost related to a number of new contracts in the quarter, and FX headwinds negatively impacted gross margins by more than 100 basis points.

We expect moderate improvement in adjusted gross margins for the year as we launch our new products and as our revenue mix returns to a more normalized rate. Adjusted operating margins in the first quarter were 14.7% as compared to 12.6% for the same period a year ago.

SG&A and R&D contributed approximately 116 and 120 basis points to our margin improvement respectively, most of which is the result of prior year restructuring efforts as well as our shift of R&D resources to China.

I would like to note that approximately half or 60 basis points of the year-over-year R&D improvement is due in large parts to the timing of new hires into our R&D center of excellence in Hopkinton. Thus R&D expense for the balance of the year will increase approximately $2.5 million per quarter.

The 2013 consolidation of R&D facilities into Hopkinton along with the consolidation of shared service operations in Krakow, Poland afford us the opportunity to more efficiently and effectively manage our SG&A and R&D spend going forward.

By segment, adjusted operating margin in our Human Health business increased approximately 320 basis points to 21% as compared to 17.8% in the first quarter of 2013. The increase was primarily a result of volume leverage, prior year productivity initiatives and restructuring activities.

In our Environmental Health business, adjusted operating margins expanded approximately 80 basis points to 11.2% as compared to 10.4% in the first quarter of 2013, due primarily to these same factors. On a non-GAAP basis, our adjusted tax rate for the quarter was approximately 22% versus our guidance of 21%.

Adjusted earnings per share was $0.46 in the first quarter of 2014, approximately $0.03 above the midpoint of our guidance range as higher sales and strong incremental margin flow-through more than offset a higher tax rate and incremental foreign currency headwinds that combined [maybe] (ph) impacting results by approximately $0.02 versus our guidance provided in January.

Turning to the balance sheet, we finished the first quarter with approximately $930 million of debt and approximately $224 million of cash. We exited the quarter with a debt to adjusted EBITDA ratio of 2.3 times and a net debt to adjusted EBITDA ratio of 1.7 times.

Looking at our first quarter of 2014, cash flow performance, operating cash flow from continuing operations was $68 million. Free cash flow, defined as operating cash flow less capital expenditures, was $62 million representing a free cash flow to adjusted net income conversion of 118%.

Looking to the second quarter of 2014, adjusted revenues are expected to be in the range of $565 million to $575 million. Adjusted earnings per share for the second quarter this year are expected to be in the range of $0.57 to $0.59 which represents growth of 12% to 16% from prior year levels.

Assuming the midpoint of our second quarter guidance range, adjusted earnings per share growth for the first half of 2014 are expected to grow approximately 20% as compared to the same period a year ago, giving us greater conviction in our ability to meet or exceed our adjusted operating margin expansion guidance for the year.

For the full year 2014, we continue to expect our adjusted revenues to grow in the mid single-digit range, so we are raising our adjusted earnings per share guidance range to $2.42 to $2.46 from our previously guided range of $2.40 to $2.45.

This concludes our prepared remarks, and operator, at this time we would like to open up the call to questions..

(Operator Instructions) Your first question is from the line of Doug Schenkel, Cowen and Co. Please go ahead..

This is actually Chris [indiscernible] in for Doug today. So congrats on your quarter. My first question is, your incremental margin was strong this quarter and clearly the quarter came in ahead of expectations.

How should we think about the operating margin guidance in context of the solid quarter, should we expect you to take advantage of the strong start and perhaps decelerate some investments?.

I think at this point we only have one quarter under our belt. We feel good about it. Some of it, as I mentioned in my prepared remarks, is related to the timing of some hiring in R&D and some spend in the R&D area. So that will actually be a bit of a headwind in the second through the fourth quarters.

But I think we still – I think we have more conviction now that we can deliver possibly north of 130 basis points, but I think it's still early days.

I think if we end up significantly outperforming in the first half, we might look at some investment, but I think at this point we feel good about where we are and I think we feel good about our margin expansion opportunity.

And so I think as we said in the prepared remarks, I think we feel good about possibly exceeding the 130 but have made no decisions on spending anything [indiscernible]..

Okay, and just one more. So OneSource and the pharmaceutical end market have been consistent areas of growth.

Given the recent [flurry of] (ph) pharmaceutical activity, can you just give us an update on sort of what expected impact on your business would be?.

So as you mentioned, we've seen strong growth in OneSource, and I think the reason is because our customers are doing more outsourcing and we're seeing greater customer penetration, and when you really think about it, it makes sense for our customers, it helps them to drive productivity.

When you think about the potential for further formal consolidation, that really just more further supports this outsourcing model, because when you think about it, OneSource can be helpful in harmonizing practices or simplifying the supply chain. So, we think it probably continues to drive strong growth in OneSource..

Your next question is from the line of Dan Leonard of Leerink Bank. Please go ahead..

Just wanted to talk a little bit more about gross margin.

I'm trying to think about how to balance the benefits of all the heavy lifting you did in manufacturing last year with sort of the secular trend that your service business is a faster grower than the corporate average and that's a lower margin business, and you have done a couple of distribution relationships in the diagnostics side lately and perhaps those are lower margin.

So just in light of the gross margin result of the quarter, I'm wondering if you could elaborate a bit more on the trajectory there..

I would say one other thing, Dan, I think as the new products start to come out in the second half of 2014, I think that will be a big contributor to expanding gross margins.

So I think you're right from the standpoint of one of the reasons you're seeing this service business outperform the product business right now is because we haven't seen a lot of the benefits in the new products [yet] (ph). So I think with the benefits of the new products, our expectation is you'll see stronger gross margin..

Okay, thank you. And my one follow-up, I guess today is another example that the market is willing to pay for deals right now.

What can you comment on your M&A pipeline and your ability to do transactions in 2014?.

As Andy mentioned, another good quarter, strong cash flow, and so we're fairly active, we've got a pretty full pipeline here. So we're hopeful that we'll be able to get some deals done this year.

But again as we've talked about in the past, probably nothing of significant size, I think we'd be more comfortable in sort of bolt-on, but hopefully we'll get a couple of [indiscernible] this year..

Got it, thank you..

Our next question is from Paul Knight, Janney Capital Markets. Please go ahead..

Rob, I know the software business and informatics was, software specifically, has been a long time in development.

Do you think you're finally there with Spotfire and surrounding technologies?.

Paul, I think we've made good progress in Spotfire but I think we still see a significant opportunity, continue to expand Spotfire with our instrument platform we introduced something fairly recently called Skystream which really helps pull data directly, in this case plate readers, right on the Spotfire without having to download data to a server and then subsequently upload it.

So there's a lot more work we can do in making Spotfire more applicable to our instruments and then of course building out Spotfire application in some other areas. So good progress but I think we still see a pretty good runway to continue to build on our capabilities in informatics..

And Rob, you're more optimistic sounding than most regarding China on these conference calls.

Is it because of the high diagnostics and environmental exposure, I guess the tougher question is, is private sector such a small part that you don't see that impact?.

I think it really speaks to where we are in the selective markets that we serve. So when you talk about diagnostics, we're obviously in and around newborn and prenatal and so we're getting the benefit of increasing growth. Obviously we have nice share there.

And then I think we've got a great product offering in the infectious disease and so we're continuing to take share there. So specifically on the diagnostics side, we feel great about that. On the environmental side, there just continues to be more focus and emphasis on cleaning up the environment. This is something that just came out recently.

I think it was either in the last day or two, we're now putting a more difficult or more stringent penalties for environmental violations across the government, so whether it's monetary or actually jail time. And so I think you're going to see much more monitoring of environmental. Of course that's driving some of our growth as well.

So I think potentially we're optimistic because of both the positions that we have in China as well as the markets we serve..

Okay.

And then lastly, is big pharma specifically big pharma, are they stable growing or what's your color there?.

I think they have stabilized and maybe even we're seeing a little bit more of an optimistic tone there. If you look at our research business, particularly the areas that we focused over the last 24 or 36 months, in the areas of imaging and informatics and microfluidics, all those areas actually grew double digit in the first quarter..

Our next question is from the line of Ross Muken of ISI Group. Please go ahead..

So I wanted to dig in a little bit more on the gross margin line, so in terms of the year-over-year comparable pull-through, is that more a function just with some of the mix from last year given some of the disruptions you had, maybe there was a higher software component or something, because it seemed like the pull-through was a little less, I would have expected given sort of the revenue outperformance?.

I think as Andy talked about, we have a couple of dynamics going on in the quarter. First of all, at least looking at gross margin, the service business has lower gross margins but have very good operating margins. So with the service business growing sort of low double digits, that's going to put pressure on gross margin.

The other thing is because we want to couple fairly significant OneSource contracts in the first quarter, there is an upfront investment associated with those contracts often in the first couple of months that we win those, and so we're making investments, et cetera, and of course that flows through gross margin.

I think another big component was I think it was sort of 30 or 40 basis points of impact from foreign exchange. So we think when you sort of strip that out, the sort of core actually expanded gross margins probably 60, 70 basis points..

Okay, that's helpful..

When we gave guidance and talked about the year and the fourth quarter, we had indicated that we thought service and instruments were both going to grow about 5%, but that mix shift as Rob said does have a significant impact..

And the investment, that makes sense. A lot of folks have kind of highlighted weather and days impact, all sorts of messiness in the quarter. It seems like your consumable recurring revenues were kind of strong. I guess in your mind is that just a function again of some of the markets where you're seeing extra-normal growth or sort of non-U.S.

based? I'm just curious like the pacing in your consumable businesses and sort of the U.S.

versus ex-U.S., did you see any sort of different month on month?.

Not really. I mean it might had a minor impact but not anything of significance. So I don't think I'd spike that. The other thing to keep in mind is that a big part of our reagent revenue is the flow-through on newborn screening and babies are not impacted by weather..

I'm about to have one, so hopefully not.

And then lastly, sorry just to be quick, I know we talked [indiscernible], where are we on sort of open the kind of buyback, I mean the sale – you buys obviously are kind of running at a leveraged position where you have some flexibility and you haven't done a ton of deal work, it's been a tough market for that in general up until recently.

How are you sort of thinking about kind of the trade-off right now with the stock between M&A and share repo?.

So I think what we've said, Ross, is our preference is to try and do some of these deals to sort of build out our capabilities, but it's a point that we don't see that as likely in the pipeline, we probably get a little bit more aggressive on the stock buyback.

I would say the only other thing that's out there is we continue to be on sort of negative watch for Moody's and we'd sort of like to get that behind us, but at some point that becomes less relevant..

The next question is from the line of Isaac Ro, Goldman Sachs. Please go ahead..

Just want to ask a question on academic spending.

We've obviously seen some expectations set by other management teams in this space that maybe first quarter was a little soft but hopefully will pick up as the year progresses, so I'm wondering if you can share that sentiment number one, and if so, kind of what will be sort of the anecdotal items you could share if any to support that view? [indiscernible] struggling with reading the [indiscernible] on the academic picture at least in the U.S..

I probably agree with that. I would say we didn't see it in the first quarter. Clearly it was better than it was in Q1 of '13. I would probably define it as – or describe it as more stable, but I think in the discussion, in the dialog with the customers, it does seem like there is more of an advertiser spend.

I would say the pipeline, we probably have the greatest visibilities in the in vivo area and there seems to be a pretty good pipeline there in the U.S. And so, in our sense it probably improves a little bit here in the back half of the year..

And actually on that product line, [that wasn't] (ph) really what you had of in vivo imaging product line. You had a bit of a challenge there, first quarter last year.

Can you sort of talk about how that's doing year to date and maybe – what some of the key drivers are, not only for that product but also the microfluidics business, just sort of thinking about the rest of the instrumentation portfolio you guys got from Caliper, mark-to-market on that?.

So I mentioned it briefly. A couple of the areas that we've sort of really emphasized over the last couple of years, actually we did see good growth in the first quarter, so both microfluidics and the in vivo imaging grew greater than 10% or double digits. So we are pleased with that.

If you look at in vivo specifically, it was very strong in U.S., not as strong in Europe. And so that's the one area where we are seeing a little bit of weakness let's say specifically in vivo area and as well in Asia. So overall double digits but a little bit of a weakness on the European side. Microfluidics again, we saw a nice growth there.

That was pretty much across the board geographically..

Our next question is from the line of Jon Groberg of Macquarie. Please go ahead..

Congratulations on a solid quarter.

So, Rob, can I actually – over the last call it 12 months or so you obviously made a deal with Verinata, this quarter you did a deal with Good Start, I'm just curious, I mean you guys have your own genetics lab and sequencing lab, you have other capabilities, can you maybe just talk about how you evaluate some of these newer technologies and product offerings, when to be just a distributor for a test and why not just offer the test yourself?.

I think there's obviously a number of factors that go into that. One is how quickly the market will ramp up and probably more specifically how quickly the reimbursement will ramp up. so there is a trade off there. With some of these cases there is intellectual property that's involved.

I would say that's probably more the case in the non-invasive prenatal testing area. So I would say it's a number of things we look at, which is how quickly do you think this thing has become, the market becomes sort of a contributor from a profitability perspective and our own internal capabilities and where we want to focus those.

So I would say that's what we think about..

And where are you today or when do you expect these to potentially be meaningful contributors to your top line relief?.

I think we have talked to a fair amount about the Verinata and the non-invasive prenatal area, and I would say we continue to see a relatively slow ramp-up on the reimbursement. That sort of continues to be a challenging area. So we're not forecasting a significant impact for 2014 from that area.

I think contrast that a little differently with carrier screening, because there you've got a fairly well-established medical policy, pretty good reimbursement. And that sort of fits well into our channel or call point. So I think in that instance we would be say disappointed if we didn't see $5 million to $10 million of that in the back half..

Okay.

And then, Andy, can you just clarify, I just want to make sure I understood what you were saying about R&D again, so I think they were supposed to increase $2.5 million I think you said per quarter, but I was trying to make sure I understood exactly what you were saying, and putting that in context like, looks like your guidance for the second quarter is just a little bit light of the street, although the revenues are in line, so maybe just kind of talk to me a little bit about what you expect for margins in the second quarter?.

Specifically around R&D, we did a lot of work on consolidation which included quite a bit of R&D consolidation into our [indiscernible] in Hopkinton. As you can imagine, as we shift that facility, as we get to hire in the Hopkinton facility, that takes time. So there was a timing effect of that in the first quarter.

We hope to be fully hired in the second quarter. The impact of those hires and related expenses is about $2.5 million and that's per quarter.

So the spend that you see this quarter will go up about $2.5 million each of the successive quarters this year and so that will obviously have a little bit of a headwind on the margins going forward but that's factored into our full-year outlook..

So just to be clear on that, so on an absolute level it's going to go up $2.5 million and then kind of stay at that level for the next couple of quarters?.

Yes, that's exactly right. It's $2.5 million in the second quarter and it will be stable at that level in the third….

Okay, I think there was some confusion about going up $2.5 million every quarter, okay.

And then what's your margin expectation for the second quarter, your operating margin?.

We said 130 for the year but I think operating margin we think is pretty much in line with that. Maybe – yes, I would say in line with that. Perhaps we're looking at a slightly faster ramp than we had guided in January..

Our next question is from the line of Peter Lawson Mizuho Securities. Please go ahead..

Just back to the pharma consolidation question, how do you see the benefit playing out, do you see it as kind of an initial dip the first few months when consolidation is announced and then you kind of see long-term effect?.

I think you have to separate it between the service business and the product business.

I think what I mentioned before is really directed more on the service side with OneSource, and historically what we've seen is almost growth right out of it because not only do we do the OneSource on the sort of maintenance and repair of instruments but we do summary location efforts and recalibration certification of the instruments.

So generally, when there is consolidation, the service business does better.

Contrast that with the product side of things and that's where we have seen sort of a temporary dip because what will happen or at least historically what has happened is, when two large pharmaceutical companies come together they are sort of [appraising] (ph) almost of the purchasing and then it sort of sorts out and hopefully returns to some more normal level.

So I would say again based on history, service can see a little bit of a bump and we probably see a little bit of a negative impact on the product side..

Thank you, that's helpful.

On the diagnostic side, is there any color you can give us around pricing and utilization trends you're seeing with diagnostics?.

First of all I would say PerkinElmer generally pricing was sort of flattish when you look across the corporation, sort of depending on the business. I would say in diagnostics it's probably a slight help but it wasn't significant.

Utilization for us is not that significant of a measure and because where we're focused on, it is in the sort of newborn and prenatal areas, and it's not as relevant on the [churn in] (ph) infectious disease area..

Our next question is from the line of Brandon Couillard of Jefferies. Please go ahead..

Rob, we've heard from a handful of companies about there being some slowness in the release of funds from government customers in China.

To what degree are you seeing any of that in your environmental business, if at all?.

I wouldn't say that's – we haven't seen that or maybe we've seen a little bit but insignificant..

Understood.

And then, Andy, are you able to quantify the – of the $20 million of productivity and cost savings expected this year, how much of that was captured in the first quarter?.

I think in the margin expansion we provided for the year, if it was linear, we would have captured certainly the 100 basis point the carryover. There is somewhat of a ramp in the margins during the year because of some of the supply chain initiatives we have that will improve as the year goes on.

But I think of what we communicated we thought we could do, we actually did that and a little bit better and that's after taking into account the R&D upside we had..

Okay, and then one more, are you able to quantify the impact of the lower pension and royalty payments, the benefit to operating cash flow from those, and then how should we be thinking about the free cash flow conversion for the full year after a pretty good start?.

If you look at cash flow and the income statement or the statement of cash flows, it's actually – operating cash flows are $68 million versus $11 million and essentially the difference between those is the pension which we talked about was about $47 million and the rest was a mixture but the majority of that was what was royalty.

So when we talked last year about adjusted operating cash flows, we added those back.

Are you still there?.

Yes, I'm good. Thank you..

The next question is from the line of Tycho Peterson, JPMorgan. Please go ahead..

A follow-up on the commentary on prenatal screening.

I understand obviously some of the reimbursement [indiscernible] verified, because obviously you've been talking about that moving [low-risk] (ph), can you maybe just talk about your thoughts on the trajectory of that business as it moves into [indiscernible] and how you might be able to benefit there?.

So I guess, so our point of view on that is, I mean we don't think that's going to happen in the short term, but we think for the foreseeable future that is going to stay in high-risk and that you're not going to see a low risk for I would say a number of years..

Okay. And then just as we think about the product portfolio….

I want to say, Tycho, the way we think about [indiscernible] I think the growth is really coming from the replacement of [indiscernible]. I think that's really driving the adoption. So I don't see it, I guess in the short term here in the next couple of years really getting into the low risk [indiscernible]..

Okay.

And then as we think about just kind of the suite of products you've introduced and obviously you had a busy year last year with these introductions, any of these [indiscernible] the ability to move the needle more? Just trying to kind of rank order some of the introductions whether it's the NexION, the AxION or the [iQT] (ph)?.

I think we'll first of all would say there's been a couple of introductions in the first quarter but I would say the more meaningful sort of needle moving [indiscernible] or probably really coming out more in the latter part of the second quarter here.

I would spike out the iQT, I would also spike out the Opera Phenix, which is a new high content imager. And then probably getting into the third quarter you'll see a new suite of microfluidic products coming out that we have sort of branded touch. So I would spike those three out of the significant contributors to our revenue growth..

And then, Andy, just one on the operational initiatives. You've talked in the past about the premature [indiscernible] expense in the year.

Can you maybe just quantify what you think you can get from the direct spend initiatives and how much working cap [indiscernible]?.

We set the initial goal for this year of $10 million. It actually – the leader of the indirect initiative reports directly. I think we have made good progress.

I think we see our ways to hopefully that numbers if not more, and I think this is going to be an ongoing initiative that will continue to help us both in the gross margin on the indirect side but as we do get in to expend there, but for sure on the is SG&A..

Our next question is from the line of Bill Quirk, Piper Jaffray. Please go ahead..

First off, can you elaborate on the comment you had [indiscernible] regarding the new [indiscernible] China contract, maybe just help us frame that in terms of timing, duration, time?.

I don't think it's going to have a significant revenue impact in the short term.

I mean what I would think about that is it's – we're giving them some capabilities, we're training them and I would in fact it's probably even in 2014 more of a cost than it is profit, but I think when you look out two, three years, and we've done this in other situations as well, we sort of plant some seeds and then we see probably revenue in '15 and beyond..

Okay, got it. And just staying on the topic, first [indiscernible] changing geographies, early diligence around sort of the [indiscernible] birth rates in two largest states in the U.S. are continuing to be pretty positive.

So can you talk guys just as a category assuming that we see these trends continue kind of what that kind of translates into for the U.S.

franchise?.

Our data would suggest that if you look over the last 12 months, the U.S. is, birth rates are expanding in sort of 1% to 1.5%. And the way I would think about that is it's single millions of dollars for revenue for us..

Okay, got it.

And then shifting gears last question here, just thinking about the Caliper and microfluidic business and I guess specifically around the NGS [indiscernible] side, we have certainly seen an increasing interest outside of the traditional areas of sequencing here really going back over a year now, Rob, can you just talk a little bit about how you look at that from a sales gain standpoint? Do you have to bring in some new hires to get back on some of these non-traditional accounts, they deleverage the existing team, just help us think a little bit of that..

When you think of non-traditional accounts, you're thinking more into [indiscernible] and those types of areas, is that trying to….

Both [indiscernible] but then also certainly the interest within the clinical lab has been certainly for initially a lot of oncology applications for example?.

No I mean I think we feel right now that we've got a team that's sort of calling those accounts and so I think we don't see a big investment at this point in sort of expanding the front end there.

Our decision if demand starts to pick up, we'll take a look at that, but we think we've got the appropriate capabilities to be able to going to those accounts..

Our next question is from the line of Zarak Khursid of Wedbush Securities. Please go ahead..

As we think about this Good Start strategy and in the event that NIPT starts to move into the average risk setting, I'm just curious how you would characterize or quantify your ability to drive adoption within those plain vanilla [OB] (ph) practices out there? I know there's quite a few of them..

As I said before, that sort of fits right into our sort of wheelhouse from a call point perspective. So we've got I think very good distribution into those doctors. And so I think that's the benefit of the collaboration.

We feel good about their test and their capabilities and technology and we think it's a strong combination with our distribution capabilities. So before – well established medical policy, I think it's good reimbursement, so I think we're fairly optimistic on the adoption rate and to be a pretty good business for us..

How many reps do you have?.

About 40..

Got it, great, thanks.

And then just to follow-up on the lab services side of business, anything happening to potentially leverage your business there into completely new areas of manufacturing or chemicals or anywhere else?.

I would say that the bigger focus is really sort of trying to build out the informatics side to allow us to sort of continue to expand what we're doing with existing customers. I mean we continue to try and we've had for some time move OneSource into markets outside of pharma. I would say up to this point, we've had sort of limited success there.

So our focus has really been more on sort of building more businesses with our existing customers, and I think we've seen some nice success with sort of lab IT offerings I talked a little bit in the prepared remarks about, I think some mobility and mobile applications to what we're doing with OneSource, and so that's probably been a more area of focus with [indiscernible] verses expanding into other end markets..

Our next question is from the line of Bryan Brokmeier, Maxim Group. Please go ahead..

You commented on the prepared remarks about the positive trend you're seeing and the birth rates in China.

Do you expect that strength to accelerate as we go further into the year? And also, is the positive trend you're seeing largely due to the Chinese calendar or are you seeing any impacts from the one child policy that you're able to identify?.

So the answer to your first question is, yes. We think that continues to accelerate into the year, and of course one of the advantages we have is being a significant player in prenatal we have some good insights to what happens in newborn.

I guess that's sort of I'd say synergies of the two businesses, but we believe the trend is more driven by calendar than it is by changing the policy. I mean it's a little hard to determine precisely but we had a pretty good sense that how should we turn to a much stronger growth rate because of the calendar.

And [indiscernible], the question about the one total policy is probably more anecdotal than statistical but we don't think that's having much of an impact..

Okay thanks.

And I don't know if I invested, but did you provide the organic growth rate of the individual end markets in the Environmental Health business?.

We typically don't provide that level of detail but we did have some – in the prepared remarks I did talk about gross rates broadly..

I mean the way to think about it is, service was strong, product was basically flat and it was pretty much flat across most of the end markets I mean up down a little bit, but fundamentally you're up a little bit or down a little bit but whether it is industrial environment or safety, they are all around zero..

Our next question is from the line of Derik DeBruin, Bank of America Merrill Lynch..

So you have a really interesting sort of aspect in the baby and women's healthcare, I mean between you've got the newborn screening business, the NTD lab, you got the core blood business, Signature or Verinata, the Good Start relationship, I guess are you trying to sort of round it out with doing like in pre-implementation generic screening and I guess Signature is done okay but I don't know how big a product that is, I mean do you need to get even bigger in the cytogenetics market, could you just talk about how you sort of want to build out the baby business?.

So we actually do some of the pre-implementation outside the U.S. So sort of add that to your collection.

But yes, I mean I think as we've talked about this before, I mean the diagnostic business for us is sort of mixed, alright, and the way we think about it is at one level [indiscernible], we want to do a lot of things in and around whether you call it births or reproductive health, whatever term you are using, our view is we've got a nice position there and so we want to leverage that to continue to build that out and we've talked about at times even maybe going into early childhood with some screening analysis.

So I would say that's one. And the other is infectious disease but largely focused in emerging markets and today that's mostly China. So that's how we think about our business..

I guess you could go upstream and do partnership with the Harmony if you wanted to but that will be there. So another question is in the software space for inspection sequencing. You acquired [indiscernible] a couple of years ago.

I'm just wondering sort of how you look at the bio informatics market and how you want to sort of build out that? It's like does that become a bigger part, are there more assets out there, how do you see sort of coming into the bio informatics space and how are [indiscernible] products competing with that from Ingenuity and some of the other things that are out there?.

So I would say generally speaking, we would like the bio informatics business to be a bigger part of PerkinElmer. I think when we look at our capabilities, it starts with detection and imaging, but increasingly as those products get more and more sophisticated and generate more data, it really gets to what do you do with that data.

So that's a big focus of ours and rather than say it in one specific area, whether it is NGS or imaging or protein analysis, we're really looking to do it across all those.

And so, what we're trying to develop is more of a platform that allows you to take various pieces of data from various pieces of instrumentation and provide better information and analysis and makes then sequencing as a piece of that but it's only a component of what we think is a broader opportunity that being more sort of an informatics platform..

So more of a systems biology but it's integrated [indiscernible]?.

Yes..

Our next question is from the line of Jeff Elliott, Robert W. Baird. Please go ahead..

My first question is on the revenue guidance.

I understand mid single digits, you left that unchanged, but [indiscernible] in the first quarter and then some of the new growth drivers that are coming on and looking at the commentary on end markets, I guess can you help me square the guidance staying unchanged with all the different moving pieces there? It seems like that the guidance is pretty conservative..

Yes, I would say that, [indiscernible] single-digit but we came in at 5 in the first quarter, so the mid-single digits, probably a little bit better than we thought. I think what we said was we would do 4 to 6, we thought the first half would be a little on the 4 side and the back half would be more on the 6 side, we came in a little bit better.

But I guess to my perspective, it's a little early to take up the revenue guidance. So we'll see how Q2 comes in. I would say we're sort of cautiously optimistic but I would say at this point, it's a little early. I mean there are a couple of headwinds out there that have this concern.

I mean while it's not a huge business for us, the Russian currency is impacting our newborn and prenatal business there, the Indian currency is having a little bit of an impact on it. So we like to get a little bit more comfort around those types of things before we be prepared to sort of take the numbers up..

Got it.

And just to follow up on the incremental R&D spend, can you talk about what areas you're hiring in?.

What Andy was talking about is the fact that we took a number of facilities that were sort of desperate R&Ds mostly in the U.S. and consolidated them into Hopkinton. So we sort of let engineers go in California, Chicago and places like that and we're hiring them back in Hopkinton. And so it's a number of the skill sets that we had previously.

We're just sort of replacing them so as more sort of a geographic split for us. But I would say the emphasis is really around our imaging capabilities. So even in vivo imaging, the microfluidics capability is one that we sort of moved from the West Coast into Hopkinton and we're continuing to look for both chemists and biologists..

Our next question is from the line of Steve Willoughby, Cleveland Research. Please go ahead..

My apologies if you already talked about this but I was wondering regarding Japan, I know a year ago that was one of the three areas that you called out as an area of weakness, so theoretically [indiscernible] your comps there as well as like the tax changes that are happening [here] (ph).

So I was just wondering if you could, if you haven't already, talk about your performance in Japan and then I have a follow-up..

I would say Japan grew for us. I wouldn't call it was robust. It was sort of mid single digits. So it was obviously a nice recovery relative to the first quarter of 2013. But I would say with regard to the tax changes in April 1, I know some of the other companies talked about seeing some benefit for that.

I wouldn't say that was material for us, but like I said, sort of solid mid single growth for us in Japan..

Got you, okay. And then on the OneSource business, I believe you mentioned you won some larger contracts more recently.

Just wondering if you could provide maybe a little bit more color around that and also are those companies that you won the contract from another competitor or that these are new companies that are finally consolidating their service?.

So I would say from a [indiscernible] standpoint, although we don't get into our specific customers. It was basically around, it was a large pharma.

I would say in one instance it was a competitive bid that we won and in two other cases it was where we picked up additional business with existing customers and that's [indiscernible] trends you see where some of the customers will put us in a couple of sites and as we continue to do well, they broaden it out..

Thank you for your question. Ladies and gentlemen, that's what we time for. I'll now hand back to Mr. Robert Friel for closing remarks. Over to you. Thank you..

Great. First of all thank you for all your questions, and so in closing, let me just reinforce if I could, we are confident in our long-term plans to accelerate growth and deliver strong financial returns. We have a clear path forward and an outstanding team around the world that is committed to our mission of improving Human and Environmental Health.

Thank you for your continued interest in PerkinElmer and have a great evening..

Thank you. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. Have a good day..