Good day, ladies and gentlemen, and welcome to the Q1 2015 PerkinElmer Earnings Conference Call. My name is Whitley, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. I would now like to turn the conference over to your host for today, Mr.

Tommy Thomas, Vice President of Investor Relations. Please proceed..

Thank you, Whitley. Good afternoon and welcome to the PerkinElmer first quarter 2015 earnings conference call. With me on the call are Rob Friel, Chairman and Chief Executive Officer; and Andy Wilson, Senior Vice President and Chief Financial Officer.

If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note that this call is being webcast live and will be archived on our website until May 14, 2015.

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

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

A reconciliation of the non-GAAP financial measures we plan to use during the call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during the call that are not reconciled to GAAP in 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 we had a good start to what we believe will be a successful 2015. Our financial results were strong with organic revenue growth within our expectations and adjusted EPS significantly beating our guidance.

Adjusted revenue in the first quarter was $527 million representing constant currency adjusted revenue growth of 5%, comprised of 2% from acquisitions completed last year and 3% organic revenue growth in the quarter.

While Andy will provide additional color on our revenue performance in the quarter, I was pleased, that we experienced growth in every business and across all major geographies. While the strong U.S.

dollar offset some of the operating performance in the quarter, constant currency adjusted operating margins expanded 130 basis points, and constant currency adjusted earnings per share grew 19%. During the quarter, we also made significant progress on our growth initiatives across each of the businesses.

In Environmental Health, we launched a number of new innovative products across our three product platforms, including the first entirely corrosion-resistant flame atomic absorption spectrometer available on the market.

The new PinAAcle 500 Health Science is working with highly corrosive environmental samples, detect minerals and metals for a variety of applications including testing drinking water and detecting elements in food samples for nutritional labeling.

In addition, we introduced the first fast flame autosampler, which allows dramatically higher throughput and the lowest cost per element of any similar analyzer on the market today.

We also launched the Spotlight 150 and 200 series microscope IR analyzers incorporating innovative flexible automation and software analytics allowing for simpler, faster contaminant analysis.

Many of our new Environmental Health products were launched at the March Pittsburgh Conference under our theme of Instruments of Change, which focused on how PerkinElmer makes a positive impact on the world through innovative science platforms and exceptional service.

Reinforcing our growing reputation for innovation, a number of our scientists and products were recognized for outstanding achievements, including the award for Best New Spectroscopy Product.

Also during the quarter, we announced a strategic alliance with Waters Corporation to strengthen our chromatography portfolio for PerkinElmer's non-pharma customers.

Of note, our new HPLC and Altus UPLC liquid chromatography solutions will help sciences in the environmental, industrial and applied markets better detect adulterants, contaminants and plumes. In addition, PerkinElmer will standardize on liquid chromatography and gas chromatography portfolio on Waters Empower Software.

This will enable customers to simplify their workflows by unifying their chromatography data onto one platform and providing greater confidence in their analysis.

We're also pleased by the traction we're seeing in the successful integration of Perten Instruments and our progress in further penetrating the multibillion dollar global food testing market.

In addition to driving strong growth in the quarter, Perten was recently selected by the Canadian Grain Commission as its preferred near-infrared grain analyzer.

In Human Health, we received market authorization from the China Food and Drug Administration to offer our automated high throughput Genetic Screening Processor, the GSP, and an assay for the detection of congenital hyperthyroidism.

We have additional GSP assays pending approval with CFDA that will further expand our menu for newborn screening in China, and enable a wider range of testing for life threatening disorders in newborns.

We continue to make good penetration in other emerging markets with additional recent wins in India where we now expect to screen nearly one million babies this year, and our recent contract win in Mexico is ramping up nicely. In March, we announced an exciting collaboration with Johnson & Johnson's Innovation.

J&J's life science incubator labs or J-Labs chose PerkinElmer to outfit its entire lab in South San Francisco, California. By providing our imaging and detection solutions plus onsite staff training and support for the resident biotech companies, we are helping to kick start their research.

This new venture is a testament to J&J's belief in our capabilities and applications expertise to help advance cutting edge science. From a commercial perspective, our decision early in the quarter to move the OneSource Services group into our Human Health business is already paying off.

As you may recall, the intent of this move was to better serve customers in the growing pharma and biotech markets by delivering more complete solutions targeted towards their specific needs.

Early success in aligning our internal expertise and leveraging our strong customer relationships indicate that this will change – this change will contribute to solid organic growth in 2015.

Stepping back and assessing the broader macro environment, growth across our geographies is fairly mixed, but remains in line with our expectations at the start of the year. In the U.S., while the strong dollar is posting substantial headwinds against the top line, it is proving to be the healthiest geography as growth steadily returns.

Europe is stable and showing some increased demand, but the region is still working through its current economic challenges.

APAC remains stable overall; however, Japan and Korea face weakened environments and despite China's overall economy slowing, we continue to believe we will grow high single digits there, given the critical segments of the economy we serve.

Consequently, I remain confident that we can continue to leverage market opportunities across our businesses and drive profitable growth.

Based on our performance in the first quarter, we are raising our expectations for constant currency adjusted EPS growth for the year to 12% to 15% from the previous 11% to 13%, while maintaining our outlook for constant currency adjusted revenue growth of 7% to 8% and organic growth of 3% to 5%. 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, a financial summary of our first quarter results and details around our second quarter and our full year 2015 guidance.

Due to the recent volatility of movement in foreign currencies, I'll be providing my commentary on a constant currency basis which assumes FX rates are the same year-over-year in order to better portray the results of the quarter.

Reconciliation of these non-GAAP measures are included in our first quarter press release, and have been posted to our website. I'd like to begin by saying; we're off to a solid start in 2015.

As Rob mentioned, we reported 5% constant currency adjusted revenue growth and 3% organic revenue growth in the quarter, with unfavorable foreign exchange rates representing a headwind of approximately 6%. Adjusted revenue was $527 million in the first quarter as compared to $532 million in the same period a year ago.

And since we last provided adjusted revenue guidance back in January, unfavorable foreign exchange rates have negatively impacted our top line result by an additional $4 million.

First quarter adjusted earnings per share was $0.50, up from $0.47 in the comparable period a year ago, and we had constant currency adjusted earnings per share growth of 19%.

Our quarterly adjusted EPS was $0.05 above the midpoint of our guidance range, driven by strong incremental margins, favorable geographic and product mix as well as the timing of certain expenses in the current quarter.

Looking at our geographic result, we were encouraged by balanced growth across all major geographies and end-markets with improved results in Europe and stable demand in China. Our first quarter organic revenue increased mid-single digit in the Americas, low-single digits in Europe and Asia with China growing at a high single-digit rate as expected.

As to our operating results, first quarter adjusted gross margin was 47.7% representing constant currency adjusted gross margin expansion of 100 basis points.

Our results were driven primarily by favorable mix, success with our Asia supply chain initiatives and year-over-year improvement in our OneSource business primarily related to new customer startup cost in the first quarter of last year.

For the full-year, we continue to forecast constant currency adjusted gross margin expansion of 70 basis points to 80 basis points.

First quarter adjusted SG&A was 25.9% of adjusted revenue and a constant currency adjusted SG&A reduction of approximately 70 basis points from the prior period as we continue to benefit from the impact of successful indirect spend initiatives.

Research and development spending in the first quarter was 6.1% of adjusted revenue and a constant currency adjusted R&D increase of approximately 50 basis points from the prior period, driven by our ongoing investments in innovative new product development.

The majority of the increased development spend came at our Environmental Health business, supporting a number of new product introductions and incremental investment at Perten. As Rob mentioned, we launched a number of new products at Pittcon earlier this year.

We're excited about the second half revenue opportunity and we continue to expect full year R&D spending to grow over 2014 levels.

Overall, our operational performance in the first quarter was strong, as we expanded constant currency adjusted operating margins by approximately 130 basis points, driven by an improved gross margin and the success with the previously mentioned indirect spend initiatives.

We continue to feel good about our ability to expand constant currency adjusted operating margins in the 80 basis point to 100 basis point range for the rest of 2015.

Net interest expense in the first quarter was approximately $9 million flat versus the comparable period a year ago, and our adjusted tax rate for the quarter was approximately 22%, which was slightly higher than we previously guided due to the geographic mix of our profits in the quarter.

We continue to expect our adjusted tax rate for the full year to be approximately 21%. Switching to the segments. First quarter organic revenue increased approximately 4% in our Human Health business and approximately 2% in our Environmental Health business.

From an end market perspective, our Human Health business represented approximately 62% of reported revenue in the quarter with diagnostics representing 29% and research representing 33% of reported revenue. As a reminder, we now report our OneSource multi-vendor services business in research.

Organic revenue growth from our diagnostics business increased mid single-digits off a high single-digits comparison in the first quarter a year ago.

Our results were driven primarily by strength in our newborn and infectious disease testing solutions, which continue to garner strong demand throughout emerging markets as well as medical imaging, which had organic revenue growth of mid single-digits. In addition, birth rates in the U.S. stabilized showing modest growth versus a year ago.

We had strong performance from our diagnostics business in China with double-digit organic revenue growth in the quarter, while our Haoyuan business continues to ramp.

We remain optimistic around the Chinese nucleic acid testing opportunity ahead of us, but the near-term uptake is moving slower than expected, a result of the government moving to a centralized purchasing model versus their traditional provincial model.

Organic revenue in our research business grew low single digits in the first quarter, driven by our recent new product introductions including the Opera Phenix as well as improved demand for our innovative automation systems and our OneSource and informatics offerings.

We're currently seeing moderate improvement in the academic and government end market, a field that we have not yet seen an inflection point, while pharma and biotech remain stable. We continue to expect research sales to have low single-digit organic growth for the full year.

Human Health adjusted operating margin in the quarter was 22%, up 270 basis points over the first quarter of last year due primarily to a positive mix shift into informatics and reagents and improvement in OneSource profitability and the timing of expenses in the quarter.

Moving to our Environmental Health business, which represented approximately 38% of reported revenue in the quarter, we had organic revenue growth of 2% in line with our expectations. Strength in the U.S. was partially offset by softness in Asia-Pacific in spite of the good performance in China.

From an application perspective, our first quarter reported results were driven by improved demand in the industrial end market, driven to a large extent by success in our Mat Car (15:30) offerings and Perten.

As Rob mentioned, the integration of Perten Instruments continues to go very well and we're on track to deliver the $0.04 of accretion from the acquisition for the full year as previously guided.

Environmental Health's adjusted operating margins in the quarter declined 270 basis points versus the first quarter a year ago, driven primarily by foreign exchange headwinds, the seasonality of Perten's profitability and the timing of selling and R&D investments supporting the new product launches previously mentioned at Pittcon.

For the full year, we expect Environmental Health adjusted operating margins to expand 80 basis points to 100 basis points. Turning to the balance sheet, we finished the first quarter with approximately $1 billion of debt and approximately $170 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 1.9 times. Adjusted operating cash flow from continuing operations was $62 million.

This performance excludes $24 million in voluntary pension funding payments made in advance of upcoming interest rate and mortality table assumption changes. We do not forecast making additional voluntary, funding payments in the year.

Looking into the second quarter and the balance of the year, we're well positioned to drive significant operational performance. We anticipate similar market and geographic growth rates as in the first quarter.

As in 2014, our strong incumbent physicians coupled with the annualization of new product launches from the second half of 2014 and additional launches in the second half of 2015, give us confidence in our ability to deliver mid single-digit organic revenue growth in the current economic environment.

Looking at the impact of foreign currency translation, the stronger dollar is now expected to negatively impact full-year adjusted revenues by approximately $137 million and impact adjusted earnings per share by approximately $0.23 in total or an incremental $37 million on the top line and approximately $0.08 per share on the bottom line from initial guidance.

As a result, we now expect reported revenues for the year to be in the range of $2.24 billion to $2.29 billion and approximately 7% constant currency revenue growth at the midpoint. Our guidance continues to reflect organic revenue growth for the full-year of approximately 3% to 5%.

We now expect adjusted earnings per share for 2015 to be in the range of $2.54 to $2.60 with a midpoint of $2.57 and constant currency adjusted earnings per share growth of 12% to 15% up from 11% to 13% as previously guided. Implicit in this guidance range is adjusted operating margin expansion of 30 basis points to 50 basis points.

Net interest expense and other is expected to be approximately $42 million to $44 million. Our adjusted tax-rate is expected to be 21% with a flat diluted weighted average share count of approximately 113.5 million shares.

For the second quarter of 2015, we're forecasting reported revenues to be in the range of $550 million to $560 million representing approximately 7% constant currency revenue growth with organic revenue growth of 3% to 4%.

Adjusted earnings per share for the second quarter are expected to be in the range of $0.57 to $0.59 or 10% constant currency adjusted earnings per share growth at the midpoint. This concludes my prepared remarks. Whitley, at this time, we'd like to open up the call to questions..

Our first question comes from the line of Ross Muken with Evercore ISI. Please proceed..

Good afternoon, guys..

Good afternoon..

So maybe on the environmental business, seemed like in general China had a pretty good quarter, but we only had sort of the low single-digit growth.

So if we look at some of the culprits on that side of the business, what are you pointing to and how is it, how did it sort of trend over the course I guess of the quarter?.

So I would say on the environmental side, first of all, within China, as you mentioned we saw probably within the Environmental mid-single and that was pretty good strength on the Environmental industrial side, but we continue to see sort of slowing demand or challenging demand on the food side.

So China while it was up high-single digits for PerkinElmer was more mid-single digits on the Environmental side. If you looked across more globally, we saw good growth in the U.S. sort of I would say low-single digit in Europe (20:18). And think about it from a trending perspective, what we saw was fairly stable demand through the quarters.

I wouldn't say it was necessarily improving through the quarter, but fairly stable, as we look to early Q2 here we're seeing a little bit of an uptick..

Got it. And maybe, Rob and Andy, as you were thinking about the obviously the core underlying performance was quite good on EBIT and earnings. The FX headwind obviously everyone's dealing with, you guys took a lot of cost measures out last year.

You obviously have a pretty robust still balance sheet capability and as you were thinking about what measures you could do to kind of offset that given how well the rest of the business is performing, how did you sort of weigh maybe trying to mitigate versus this is sort of the reality of the strong dollar?.

Well, I would say on the margin, well, obviously we're trying to be prudent with our expenditures, but at the same time, to the extent that we see opportunities to either innovate with our products or to expand the markets, we're going to continue to invest. As you saw in our financials, R&D was up. That was our plan to increase R&D this year.

So while I think we're cognizant of what's happening in the foreign exchange markets. At the same time, if we see strategic opportunities, we're going to continue to focus on those and spend the money. What Andy made some comments around was the indirect spend and we'll continue to focus and drive those.

So I would say the areas that are not customer facing, the areas where we're not seeing opportunities to drive innovation in the marketplace, we're going to try and be prudent on. But, I think for the strategic opportunities to increase the top line, we're going to continue to invest..

Great. Thanks, guys..

Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed..

Yeah. Good afternoon, guys. Thank you..

Hi, how are you doing?.

Hey. Just wanted to start off with a little bit of the comments you made regarding new products. Obviously, you had a slew of them at Pittcon and you mentioned them on the call.

So I wonder if you could maybe quantify how much top line contribution you expect to see from new products?.

So I think in the beginning of the year, we said probably something in the $30 million to $35 million range is what we thought we'd get from new products this year. I think we're still on track to do that and maybe we'll do a little bit better. But, I would say that's the range that we're focused on for 2015..

Okay. Got you. And then, on the gross margin line, that was obviously pretty strong and just wondering if you could break that down a little bit.

Number one, how much of the improvement year-on-year was due to mix? And then, as part of that conversation, was wondering how much FX actually held back gross margin this quarter? I imagine it would have been even better if it hadn't been for currency? Thanks..

Yeah. Currency was about 30 basis points, Isaac. So without the impact of currency we would have been 100 basis points of improvement. We were actually at 70 basis points on a post currency level.

I would say, some of the efforts we had around supply chain, were a piece of that and I would say, that's probably a little less than half and the remainder would've been the positive mix we saw and to the diagnostics and informatics business as well..

Got it. Thanks so much, guys..

Okay..

Your next question comes from the line of Dan Leonard with Leerink. Please proceed..

Thank you. I have a working capital question.

It looks like the inventory days were higher than they've been in quite a long time, was there any specific driver for that?.

Yeah. There were a couple of things. On the working capital – on the inventory side, we've done – we've initiated a project around reducing transportation costs so there is a one-time pickup of the inventory. It's really around ocean freight so we have a bit of an inventory build there. There were some related as well to Perten.

But I think you should see from these levels, those inventory turns should improve each quarter. In addition, we – as Rob mentioned, we introduced a number of NPIs at Perten and there is a fairly meaningful amount of demo inventory required as we roll those out.

But I think, overall we still – we still think we'll make some pretty decent traction on inventory. I mean if you look at our receivables, we made some tremendous progress there so it was able to offset some of that inventory, but we still have work to do..

Got it. And then my follow-up. Can you quantify the anticipated benefit from the Waters collaboration? I know they made an attempt to quantify it on their call and I was wondering what you thought the flow through would be for PerkinElmer? Thank you..

Well I think, when we look at 2015, we think for us, it's going to have a relatively modest top-line improvement. Now as we get past 2015, we're quite excited about the collaboration.

But keep in mind, in most instances at least early on this is a substitution for us because we provide effectively our own HPLC today and we're going to swap that out for Waters. So when you really think about that collaboration, it was done, I would say for sort of three reasons.

One is, it really enables our customers to simplify their workflow by unifying their chromatography data on one platform, which is Empower. So going forward now when we sell our DC or LC, it'll be sort of standardized on Empower. The other was to sort of give our non-pharma customers access to UPLC from Waters.

And the third one was we – it allows us to focus our R&D and software resources in the areas where we can better differentiate ourself. So I think that's how we think about to get it (26:06).

Again, it's hopefully a lot of benefit to our customers, but I think in the relatively short-term here at least as we think about 2015, it's probably more of a substitution than it is incremental..

Got it. Thank you..

Your next question comes from the line Dan Arias with Citigroup. Please proceed..

Yeah, hi. Thanks for the question. Rob, just wanted to ask a little bit on OneSource. You mentioned that that move was paying off already.

So I guess, what is the expectation for growth there this year?.

Well, I think, if you look at OneSource I think, we continue to believe it's a sort of mid to high single digit grower, but I think the opportunity we see is to really pull some of the products through, because historically, we've had I'll call it enterprise relationships with our customers at both the OneSource level and at the informatics level.

And I think, what we're seeing now again, it's early days, but by combining OneSource and informatics and getting those enterprise level relationships we think, there's an opportunity to pull through some of our products in the research.

So while we're always looking to try and drive more growth within OneSource, I think the real opportunity from a growth perspective I think will be from more pull through from the product side..

Got it. Okay.

And then maybe on the blood screening business in China, can you just sort of give an update on how that's tracking, how are you finding pricing to be there? I think you're kind of positioned in between the high-end pharma guys and the local so has there been any attempt by the other players to sort of adjust based on what you're seeing in the market? Thanks..

Well, I would say, first of all, we continue to be very enthusiastic about that opportunity. The tenders are being delayed a little bit. So I would say, the growth was strong in Q2 – or Q1, but we continue to see that be a significant ramp into the back half of the year.

As far as our competitive situation, we continue to serve – win probably more than our fair share from the standpoint of – as you know there's five competitors. We're probably winning at a 30% to 35% of the tenders.

And so, we feel good about that and we think this could be a significant opportunity, not only in the back half of 2015, but going into 2016 and later on. With regards specifically to pricing, we are not seeing dramatic pricing changes by either the international competitors or the local competitors for that matter.

So I think we still feel like we've got a great spot relative to, as you pointed out, being in between those two sort of competitors..

Got it. Thanks very much..

Your next question comes from the line of Miro Minkova with Stifel. Please proceed..

Good afternoon guys. Rob, a question on guidance. Your guidance for the full year, maintaining the organic revenue growth outlook of mid single-digit implies perhaps a bit of an acceleration the second half relative to the first half.

Help us understand what is driving the acceleration – possible acceleration?.

Yeah. I think the majority of that's coming from new products and – as I alluded to a little bit in the prepared comments, particularly on the Environmental side, we're pleased that at Pittcon and this is the last quarter, we're able to introduce some 12 new products.

So I think that's really what we're attributing to the majority of the pickup in the back half..

Okay. Thanks so much. And on the newborn testing initiatives in India, I think you mentioned you plan to screen about a million newborns.

Is this a change from your expectations and then maybe update us on where that screening initiative is?.

Yeah, I would say it's a little bit better than we thought going into the year, and of course India presents a terrific opportunity from a newborn screening perspective. 27 million children or babies are born there every year.

And so, we've had discussions with the national government there and we're cooperating in what I would call a sort of a private-public relationship or partnership where we're trying to encourage them at sort of the federal level, but at the same time it's administered at the state level. And so, I would say historically we've had some small pilots.

But what we've seen in the first quarter is this ramp up to sort of a bigger volume. And as I mentioned, we're now probably going to do close to a million children, so a huge opportunity out there.

But like anything, this probably will take a little time to sort of ramp up, but I would say relative to the beginning of the year, this is probably better than we thought..

Okay, sounds good. And I'll get back in queue. Thank you..

Great..

Your next question comes from the line of (31:09). Please proceed..

Hi. Thank you for taking the questions..

Yeah..

Congrats on a good start to the year.

So if we think – just sticking with the theme of the back half weighting, are those new products that you introduced – are those actual orders in the funnel or is that in anticipation of building the funnel over the next couple months here? And when we think about the impact kind of flow through on margins, again it seems like the back half EPS weighting on the updated guidance is a bit heavier in the back half.

How do you think about product mix kind of affecting the gross margin in the back half of the year?.

Well, first of all on your initial question, those products were introduced at Pittcon, a majority of those are shipping now or will be shipping in May, several of them we started to take orders.

And so, I would say we feel pretty good about the acceptance out in the marketplace and the ability to sort of drive that incremental growth in the back half of the year.

With regard to margins, I think anytime you introduce new products, clearly the objective is to put products out there that have better cost positions or better features for which we can hopefully get better gross margins or better price, and clearly that's the intention with these products.

So I think some of that is, the new product coming out with higher gross margins. I think the other thing is just, naturally if you look in the fourth quarter because our calendarization suggests that we've had higher volume.

Historically, you will see higher operating margins in the fourth quarter of the year just because of the seasonality of our revenue. So I think it's part of that and I think it's the new products..

Okay. Great. And then from a strategic perspective, how are you thinking about the business into this year, maybe a little bit more volatility we've heard some of your competitors saying things might be brightening up in terms of competition with some of the private investment firms, in terms of looking at the M&A funnel.

Are you guys in a mode where all options are on the table or things might be getting a little bit better or still looking at kind of strategic tuck-ins into the organization?.

You know, first of all, I think we look at everything. We look at all opportunities to sort of make PerkinElmer better. I think generally we focused on smaller bolt-on acquisitions because quite frankly I think the probability of that happening is higher.

But quite frankly we will look at small deals, we'll look at medium deals, we'll look at large deals. I just think as I said, the probability of the smaller deals happening are probably higher.

Having said that, I think there is – for a long period of time there has been a lot of competition in the marketplace and I think what we've historically said is, for us to be able to successfully acquire and integrate deals that make sense for PerkinElmer and their shareholders is, we've got to have good synergies and those synergies have to either be from a channel perspective or operations or technology or et cetera.

And so what we're generally looking at is acquisitions that are close to what we do today or adjacencies where we can leverage the current assets of PerkinElmer. And I think in those instances we can be very competitive on price..

Okay. Great. Thank you. I'll jump back into the queue..

Your next question comes from the line of Jon Groberg with UBS. Please proceed..

Hey, guys. Thanks for taking the question and congratulations on the quarter..

Sure. Thanks..

Rob, following up on your comments around Waters, I mean, and just if I'm interpreting it correctly, you're kind of saying look, we don't have as much scale specifically around chromatography, they kind of have better scale at least on the liquid side, you can better utilize your resources elsewhere where you have more differentiation.

I guess in that vein, just how are you thinking about scale generally as far as PerkinElmer goes and given what you've seen happen in the industry?.

I think generally what we look at is to have scale in the relative markets in the way that our customers buy products, and I think that's what we've been talking about for some period of time. So for us, it's scale is important, relative market share is obviously very important, but it's how do you define the market.

And I think in some instances, when you look at how we define the market, we think we have significant scale. And so, the obvious example is, we don't define the market that we think – or do we think the market should be defined as diagnostic testing.

We think the market should be defined as newborn testing or prenatal testing, because we believe that's how the customer buys. And in those instances, we have high. So if you look at diagnostic testing, we would have very small market.

If you look at newborn screening or newborn diagnostics, we have very high market, and similarly that's what we look at how the customer buys, or in the case of people want to do imaging. Again, we have very high relative market share.

When we moved into some of the environmental or analytical instrument applications, I think it was helpful to have some of these complementary detection capabilities. Of course we feel we have got good scale in ICP or ICP-MS or spectroscopy, et cetera.

But in the area of chromatography which I think is complementary in some instances to these techniques or technologies, we didn't have a lot of scale. And so therefore, we thought the partnership with Waters made a lot of sense. And again, it's focused in a market segment or market segments that they don't participate in today.

So it's in the sort of more industrial and environmental end-markets..

Sure.

So would you expect kind of what you did with Waters to be a one-off or are you kind of focused on the areas as you define them, you want to really be number one in those areas, and could we expect other types of agreements like the one with Waters?.

Well, I think generally what we look at is again based on how we define the relative markets we'd like to be one or a close number one. If we feel at some point we can't get there then we probably should either exit it or find a better or different way to get there.

And then in case of liquid chromatography we didn't see a path to get there and so this was an alternative way of sort of continuing to participate in the marketplace.

I think that is how I would sort of describe it, but as far as a one-off I would say there are many other opportunities to do this, but I would say it's probably more sort of in the minority generally speaking we would prefer to get there organically..

Okay. And if I could, just one quick one on China, again on the blood screening, I think one of the opportunities that exist in China wasn't there something like 400 different blood banks or just a bunch of tenders and I think Andy you mentioned that they are moving now to more centralized purchasing.

Is that a tailwind or a headwind for you guys in that market? Thanks..

So that is really more of a timing headwind. It's really not as far as our ability to catch those tenders it's really a neutral, but just as far as how quickly those tenders are issued and approved that gets slowed by this change..

Okay. Thanks..

Great..

Your next question comes from the line of Brandon Couillard with Jefferies. Please proceed..

Thanks. Good afternoon..

Good afternoon..

Andy, you mentioned timing of expenses in the first quarter benefiting EPS, can you elaborate on what those were and do those shift into 2Q now?.

Yeah, it's in our guidance, but it was basically continued hiring. We have a number of positions both on the commercial side and the R&D side we're continuing to ramp and we had forecasted that those would ramp a little bit quicker than they did.

We still expect to fill those as we move, and we have been filling some of those thus far in the second quarter. So I think that will normalize through the year and that additional cost is in our guidance..

And then in terms of the EPS guidance for the year, Andy could you help me reconcile something? So it looks like the GAAP EPS outlook went up by $0.02, but the non-GAAP number came down, I think, $0.05 or so at the midpoint and the amortization anticipated for the year is looks like meaningfully lower.

Can you help me just bridge the delta on those components?.

Yeah. Let me get back to you on that because I don't have that in front of me, but I can get that to you very quickly..

Okay.

And then, I guess, any update in terms of the operating or free cash flow metrics for the year? Had you previously contemplated the pension payment in the first quarter?.

We had contemplated a portion of the pension. We're still looking at $300 million for the year, and we still feel confident in our ability to generate that type of cash flow. So I think that's the overall metric hasn't change. As I mentioned earlier, we have some work to do around inventory. I think that's going to be helpful.

I think we've got plans and leadership in place to do that. So I think nothing has really changed overall. And the pension funding itself, we really like to stay at around 80% on a funding basis and that just gets us back to that kind of comfort zone on funding. We don't have any more mandatory payments until late 2017 early 2018.

So we're – but we're just trying to make sure we're conservative in our estimates around pension costs..

Super. Thank you..

Your next question comes from the line of Doug Schenkel with Cowen & Company. Please proceed..

Hi, hey. Good afternoon, guys..

Good afternoon..

So I guess my first question is a follow up on Waters.

You've indicated that you expect Waters or the Waters deal to not meaningfully impact guidance, because it's initially at least for this year, it sounds like a substitution, is how you phrased it I believe?.

Yes..

Our understanding is that, this allows you to move a bit upstream with your product offering, and the types of applied customers you are addressing in that channel. If I remember correctly, from a few days ago, Waters guidance includes, what sounds like about $20 million in revenue associated with this deal for the balance of the year.

When you kind of assume there is some sort of mark up here that would seem to translate into something like call it $22 million to $25 million in revenue for you guys.

If we're thinking about it the right way, I guess, what I'm wondering is there really that much revenue to substitute with overlapping products, and how does this substitution impact margins? And I guess kind of the final part of the question is, was this contemplated in original guidance or is this, should we view this as a new development in the context of the full-year?.

Okay. Let me try and hit a couple of those. So it was contemplated in the original guidance, I mean this is something we have been in discussions with Waters, and hopeful that we could get it sort of concluded before peak time which we were.

With regard to margins, we think this is going to be probably neutral maybe a little helpful to margins, and I think the reason for that is that, as I mentioned in the prepared comments is, from a gross margin perspective it's maybe neutral or a little lower, but of course we can eliminate a fair amount of operating expenses associated with that.

So I talked about sort of R&D that we spend today, also software engineers that we have that are associated with our, we have our own chromatography software.

So we think from an operating margin perspective it could be neutral to accretive to us largely because of the operating expenses that we can reduce as a result of not having to support both the software and the production and R&D of the product.

With regard to the sort of how much incremental revenue is to us versus Waters, it's really difficult for me to comment on Waters. So I'll leave that up to them and I don't know if it's $20 million for 2015 or $20 million annualized, but again that's – again I'll leave that to them.

I just I think when we look at the opportunity in 2015, and again I emphasize, I think we're excited about the opportunity. We just – I guess, we're being somewhat cautious in sort of trying to build in a lot of revenue upside.

Now, as we get into 2016, I think we are quite excited about the opportunity from the standpoint as you point, we can go upstream a little bit particularly with the UPLC and selling more of our GC that will be tied to Empower, but I think for 2015 right now, we don't see this is a huge incremental..

Okay. That's really helpful color. Maybe just a couple quick ones on the quarter. Obviously, a really strong growth in operating margin quarter despite coming in at the lower end of your organic revenue growth guidance.

Can you comment on whether there was anything notable that benefited margin? One thing that's come up a little bit over the last few quarters is lumpiness in licensing revenue, as we think about microfluidics and imaging, anything notable as it compared to say Q4 or Q1 levels of last year?.

Well, specifically on licenses, actually that was a headwind for us in the quarter. So that as I mentioned before certainly around gross, around mix and the other items, I think were the primary drivers. And actually one other item I didn't mention was OneSource.

There was fairly significant improvement in OneSource gross margins from the first quarter of last year to the first quarter of this year.

If you look at or listen to an earlier question about, have we done anything? We really tried to accelerate some of the initiatives around supply chain on the gross margin side and around the indirect spend so that we can reinvest back in R&D and selling. So, I think we were particularly successful in the first quarter.

Hopefully that'll continue through the next three quarters, but those were kind of the key drivers..

Okay. That's great. Thanks for taking the questions..

Sure..

Your next question comes from the line of Bryan Brokmeier with Maxim Group. Please proceed..

Hi. Thanks for taking the questions..

Thanks..

More on the Waters agreement, just wondering you talked a little bit about moving upstream, but I was curious in terms of geographies. Do you see the U.S.

or China or what geographies do you see as being the greatest opportunity for you to sell into?.

I think we feel good sort of from a global geography. I mean if you look at the distribution of our business, clearly we've got strength in U.S. and Europe and China. So I think this is going to be hopefully helpful business across the globe.

So I don't think I would spike down in any particular region or geographic area where I think this is going to be helpful..

Okay.

And given the currency environment, have you made any changes to your capital spending or operating expense changes, and how easily can you make changes in the near and intermediate term?.

I think Andy alluded to a couple things. I think we've accelerated some of our actions around trying to get after sort of indirect cost and supply chain. But I would say, generally speaking, our approach has been, let's continue to stay on plan relative to our investments particularly in the areas of growth..

Okay. Thanks a lot..

Good..

Your next question comes from the line of Paul Knight with Janney Capital Markets. Please proceed..

Hi guys this is actually Bryan Kipp on behalf of Paul. Rob I just want to dig in a little bit into your research commentary.

I think that you said for the full year low single-digit growth and I'm just thinking in context to your commentary around OneSource and Opera Phenix, if I just kind of do back of the envelope suggests that close to 50% of incremental could come from that 20% contribution on that side, so what's kind of the underlying dynamics going on there? Is it just academic and government pressure or is it kind of a new product cycle you guys need to have or go through to kind of reignite growth there?.

Well, I think as we've talked about research in the past I think the thing to recognize is we've got a big radio chemical business that creates a fair amount of drag. As we get into the back half of the year we did have a nice introduction of Opera Phenix in the back half.

We're going to cycle up against that now, hopefully we'll continue to grow that. And I would say the third area I would speak on when you're talking about research is Japan.

I mean we didn't talk a lot about Japan, but clearly when I think about the first quarter the area that was and although we were at our sort of guidance range it was at the bottom end of the guidance range I would probably attribute that to a weaker Japan than we had expected.

I mean we would have forecasted Japan sort of flattish for the first half, and it was down high single digits. And so we're a little cautious about how quickly that returns.

I know the budget was recently approved here in April, but again based on what we're seeing and also when we sell into Japan that's probably one of the areas where the currency change is impacting us strategically.

I would say if I was going to spike out one area where the strength of the dollar has been somewhat challenging from a strategic or a competitive perspective I would say Japan..

If you get Japan to kind of come back around, I mean you can't control that, I understand, but, and the currencies kind of stabilize, can you get it back to the mid single-digit with your underlying portfolio or you think it kind of stays....

Yeah, I think we can. And I think one of the things that we'll be able to, hopefully if we do that it'll be because we'll get the traction on the OneSource informatics and pull through of the products. I think that will be clear and then we continue to see good traction on the new products.

So if our goal is to get that up to single digits – mid single digits. But I think for purposes of guidance, we continue to sort of forecast it in the low single digits..

All right. And I just, one quick additional one.

Did you guys see any net benefit from extra days in the quarter? And kind of what pricing conversations are you having? Are you more skewed towards new products or are you able to get some pricing here with the FX volatility?.

We did not have any extra days in the quarter, I think we communicated it on our January call that we would have extra days in the third quarter of this year. But from a pricing perspective, we continue to be able to get pricing specifically on the reagent consumable side, it becomes a little tougher on the instrument side.

But I think overall, it was fairly modest in the first quarter but we continue to try to get it wherever we can..

Appreciate it. Thanks again, guys..

Good..

Your next question comes from the line of Jeff Elliot with Baird. Please proceed..

Yeah. Thanks guys. Just a follow up on OneSource.

Can you talk about the competitive environment there? I guess what are you seeing from a win rate or a retention perspective?.

Yeah, well OneSource was strong in the quarter. I mean one of the things that now clearly with the restatement of those answers you get pretty good transparency in what OneSource was doing. But I think what you would see is that, OneSource on sort of a currency neutral basis grew mid-teens. And so, clearly we think we're continuing to do well there.

We did have a couple wins from the standpoint of Gilead and Boehringer. And so I think the competition continues to be tough and challenging, but I think we continue to do well..

Got it.

And then, Andy, can you provide any color on the indirect spend initiative, I guess how much are you forecasting this year in terms of improvement? And then is there opportunity on the direct side of spending? You talk about indirect a lot, but how about on the direct side?.

Well, that is actually the natural next step and we're – we've created a team to actually start to generate some efforts around the direct side, which we do think that there is opportunity in. I think on the indirect side, we've looked for a $10 million plus savings year-over-year.

I think we're well on track for that, hopefully we can exceed that, but we've got dedicated resources, dedicated purchasing people, and I think we've got an organization that's really rallied around this, because it really does allow us to reinvest back.

So I would say, I feel as good if not better than I did going into the year on the indirect spend side, and I think the additional opportunity as you mentioned is direct side, so hopefully we'll have more to talk about that in the next couple of quarters..

Great. Thanks..

Your next question comes from the line of Tycho Peterson with JPMorgan. Please proceed..

Hey, thanks.

Can you comment on performance of the recent acquisitions Ceiba and Perten, and are you still kind of assuming 7% to 8% growth for Perten for the year?.

So as I mentioned in my prepared remarks, we were very pleased with Perten. We think the integration is going well. Perten actually grew sort of low double-digits in the first quarter.

So we think they're well on track to probably exceed sort of the model we set out there and I think Andy mentioned the fact that we expect to probably do a little bit better than the $0.04 accretion that we talked about.

So, I think, things are going well with Perten and I think we continue to see more opportunities with the synergies between what Perten does and what PerkinElmer does. So historically they've been a significant player within the grain area.

We see rolling out then to things like edible oil and a number of other areas where the combined competencies of the twp companies can be quite powerful in the marketplace..

And then just looking at some of the businesses, medical imaging rebounded a little bit. You guys have called out mid-single-digit organic growth. I mean I feel like that business hasn't grown in a while.

How much of that was a comp issue versus potentially a recovery in the market?.

I think most of it, Tycho, was more of a comp issue. I think it's obviously it's a fairly choppy market and I think second half they are saying some headwinds. But overall if you look at – broadly at the market, it's under some pressure, but I still think we feel like we can have positive growth for the year in that business..

Yeah. I think the first quarter last year Tycho, they were sort of flat to down slightly..

Yep. And then just a little – lastly a general question on the informatics business. I mean I'm trying to string together a couple points here, but I think you've talked about the need to hire additional software folks and maybe that's taking a little bit longer.

We periodically get questions about just the fact that a lot of your software isn't up in the cloud and how do you kind of adapt? And do you need to kind of evolve faster on the software informatics side? And a third segment of that line of questioning, you do obviously have a tomo product with Dexela I think, maybe just talk about expectations for that for tomo synthesis..

All right. Okay. I didn't hear what you said on the third one. Okay, so with regard to the informatics idea, I agree with you. We've talked about the fact that we've got to get a cloud product with regard to our electronic notebook and quite frankly most of what we do.

We have a product right now out with the academic customers who are working on one I would call it sort of in process with regard to pharma. So we continue to make progress on there and to Andy's point earlier we continue to look to hire software engineers to sort of accelerate.

That's an area where I think we clearly want to accelerate our spending from an R&D and engineering standpoint because we continue to see significant opportunities within the informatics business I would say both to sort of drive more of historical PerkinElmer products, but also to build out and continue to expand the core informatics capabilities and business.

So we'll continue to invest on that. And the last question was on the tomo product. And I think that's a relatively small product for us and we really haven't been pushing that tell you the truth..

Okay. Thank you..

Okay..

Your next question comes from the line of Zarak Khurshid with Wedbush. Please proceed..

Hey. Good afternoon, Rob, Andy, Tommy..

Good afternoon..

Thanks for taking the questions.

As we think about all the productivity enhancements ongoing and planned for this year, Andy, how impactful do you think they may be relative to the big productivity initiatives over the past few years?.

I would say the heavy lifting we did in 2013 and part of 2014 were probably the high watermarks. But I would say, we're probably in a – if you want to do a relative, we're probably 70% of those types of levels.

It's just a different area that we're focused on whereas in 2013 and 2014, we were really looking at shrinking the footprint and rightsizing the organization. This is really looking at spend and given we have the flexibility now to look at it on a corporate wide basis, we see a lot of opportunities there.

But and I think it's opportunity that we'll see over the next – certainly a couple to three years, as we start to move, and as I mentioned earlier into the direct side as well..

Very helpful. Thanks for that.

And then just a follow-on – a lot of questions today on the M&A strategy, what about divestitures? How do you think about kind of simplifying the business?.

Yeah, I mean, I think we were always challenging ourselves from the standpoint of the portfolio and whether the rightful owner of assets. I guess my preference would be is – I'd like to sort of buy before we sell.

So if we can be successful with some sizable acquisitions, I think we might look at a couple product line prunings, but quite frankly, when we look across the portfolio, we think most of the things fit pretty well, but like I said, I don't know that I want to get smaller before I get bigger..

Makes sense. Thanks. And then just a follow-up on China. Can you give us a rough sense for how large the Chinese infectious disease business can get and how much runway you think you have there over the next couple years? Thanks, guys..

So I think on the infectious disease side, or is it newborn? Infectious disease, right? I would say....

Yeah..

I think that can be a significant business for us, and depending on the timeframe, clearly north of $100 million..

Great. Thank you..

Your next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed..

Great. Good afternoon everyone. This is actually Alex Nowak on for Bill..

Good afternoon..

All right, and to follow up to your – in follow up to your previous comment what are your Japanese research funding assumptions going forward? Are you still expecting flat growth – did you bring these down following the quarter?.

Yeah, I think what we've got for the remainder of the year is flat and may even be actually a little negative in the second quarter, quite frankly. So I would say low-single and then sort of flattish in the back half..

Okay. All right. Excellent. And then in U.S. newborn screening you said that the birth rates were slowing.

Do you still see that there is – you can still continue your growth there with menu expansion? Or do you think this even could be like an uptick in Medicare coverage with the Affordable Care Act?.

Yeah. I just want to correct. I don't know that we said it was slowing. I mean, we might have said it was slow single, but I think for – at least what the data we look at says that the U.S. birth rate is sort of stable, but it's a sort of 1% to 2% range. I don't know that we're seeing anything significantly slowing.

If we're talking specifically in the U.S., I think the opportunity to grow there is to expand the menu and we've talked about kids in the past. We continue to see that being adopted by states.

I think if you look out a year or two probably the next series of tests are probably around LSD, but I would say for the next couple quarters, I think the majority of the growth in newborn is going to come probably outside the U.S. and probably specifically within newborn.

One of the areas we're actually quite excited about as I mentioned the fact that we got the China FDA approval of our GSP which is our sort of automated analyzer. And I think what that does is, two things for us. One is, it first of all allows us to take the number of tests today that are done manually and put them on automated platform.

And as we continue to get approval of the assays, I think it will accelerate the ramp of the menu. Second, it starts to really differentiate us from the competition. So, I think we've talked about in the past that we have sort of 70% market share in China. And most cases, what we're competing against is local home brews or others that are doing manual.

We don't think – clearly, there is nobody else who has a regulated or approved automated analyzer. And so again, as more and more of China moves to an automated which we think they will in order to get higher throughput, it provides us a huge differentiated advantage and allows us to ramp screening much quicker..

Okay, excellent. And then real quick, how big was the OneSource business in the quarter? Thanks..

It was $29 million, but....

$35 million..

$35 million..

$35 million..

$35 million. $35 million..

Okay. Thanks..

Your next question comes from the line of Derik De Bruin with Bank of America please proceed..

Hi, good afternoon..

Hi Derik..

Hey, you talked about some contract wins in OneSource, but is there anything coming up for renewal? I believe your Merck contract is coming up soon and just talk about sort of, is there anything that we need to watch out for on the headlines going forward in that business?.

Derik, I am not aware of any significant contracts that are coming up in 2015, so I don't – I mean in any given year we probably got some of that because I think as you know, most of these are on a three-year cycle, so there may be some small ones, but I don't think there is anything significant..

Great.

And could you – just how big is your Japan business?.

I think it's $50 million or so..

Great. And I guess speaking of currencies, some of your competitors had made some comments about customers losing some purchasing power, because they didn't have enough cash basically to buy products and so things were delayed.

Did you see any of that in the quarter?.

No..

No. Not that I'm aware of..

And so Andy, you talked about some of the expenses being delayed a little bit in the quarter, so should we expect to see those expenses in Q1 going in Q2?.

They'll gradually go through Q2 and the balance of units. It's really around hiring, and at any point in time....

Got you..

We're constantly hiring, but I guess it'll be a slow ramp as we continue to bring the informatics and the R&D resources on board..

And so Derik, let me correct. So the $50 million I gave you was sort of Human Health, for PerkinElmer it's $80 million for Japan. Sorry about that..

Got you. Great.

And that was down – and that was down you said that was down high single digits, correct?.

High single-digits, yeah..

Okay. All right. Great. Thank you very much. That's helpful..

Great..

Your next question comes from the line of Peter Lawson with Mizuho. Please proceed..

Hi, Andy.

Just long term, where do you think margins can eventually go?.

Well, I think on the operating margin front, we've felt all along that we should have a two-handle in front of our operating margin. And I think we've set a goal of getting to 20% plus in 2017. I think with the volatility of currency, it makes it a bit tougher. It's still our goal.

But I would say, in that timeframe or maybe just slightly longer, we still see our way to doing that. And I think we have plans in place, FX aside, that will help continue to improve our margin. So I don't think there is anything structural that would keep us from hitting those types of goals..

Operator?.

Peter did we lose you?.

Your next question comes from the line of Steve Willoughby of Cleveland Research. Please proceed..

Hi, guys. Thanks for taking my questions. A lot of them have been asked, but two things.

First on Perten, can you discuss if there is any seasonality in that business as the revenue there looked a little bit lighter than I was expecting? And then just I guess if you could also reconcile the 2% addition of revenue from acquisition versus the 3% that's shown in the latter part of your press release? And then I have one follow-up..

Okay. So I'll only take the first one, and I'll give the second one to Andy. So clearly there is seasonality in Perten, and to your point, when we looked historically, the first quarter is light, second quarter starts to pick up a little bit, but their real strong quarter is the third quarter. And it ties to the sort of harvest season.

So clearly, there is some cyclicality. And that's both on the revenue side, and clearly on the profitability side as well..

Yeah, the only difference I think, on the reconciliation and I'll double check for you, Steve, but there is some purchase accounting adjustments in the numbers as well as the revenues that roll up to that 3%, so there could be some rounding in there, but I'll double check that, and get back to you..

Okay. Thanks. And then I guess, just my other follow-up and I apologize if you already discussed this topic was just on the in vivo imaging business and how that's performing. I know that there are some patents that rolled off last year and if you guys had any color or commentary on that would be helpful..

Yeah. I think on the product basis, that did well this quarter and our expectation is for that to continue to do well.

As you mentioned, there will be, there was some patents that rolled, or there's some royalties that rolled-off in the first quarter, there'll continue to be some that'll create a headwind in the second quarter, and then by the third quarter they are gone effectively.

Right, because we anniversary the patents, the patents were expired in the middle of last year. So if you look at just the product, I think it continues to do well sort of high single digits..

There are no further questions in queue. I will now turn the call over to Rob Friel for closing remarks..

Great. So first of all thanks for all your questions and in closing let me just reiterate that we feel very good about the accomplishments in the first quarter, and believe we are well positioned to deliver another strong year for PerkinElmer. So thanks for joining us for the call and have a great evening..

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