Good day ladies and gentlemen and welcome to the PerkinElmer Q3 2015 Earnings Conference Call. I would now like to introduce your host for today's conference, Mr. Tommy Thomas, Investor Relations. Please go ahead sir..

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

If you have not received a copy of today's earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until November 19, 2015.

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

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

A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release.

To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in the attachment, we will provide the reconciliations promptly. I'm now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel.

Rob?.

Thanks, Tommy. Good afternoon and thank you for joining us today. I am pleased to report that we delivered strong financial results during the third quarter. We grew revenue on a constant currency basis by 10% and grew organic revenue by 6% with 7% growth in Human Health and 5% growth in Environmental Health.

Adjusted earnings per share increased by 16% on a constant currency basis, and we continued to expand adjusted operating margins. Through the first nine months of 2015, we are tracking well to our financial guidance provided in January despite some incremental headwinds in a few end markets.

The success we saw in the third quarter reinforces PerkinElmer's strategy of innovating across our core capabilities of detection, imaging, software and service, which allows us to build strong market positions and attractive end markets.

Our deep market knowledge and breadth of scientific capabilities means we can deliver targeted solutions to our customers, fueling breakthroughs that help improve quality and longevity of life.

I would like to highlight a few examples from the third quarter, where our unique capabilities continued to support our customers in the critical work they perform.

In the area of imaging, we are working with a number of top-tier research institutions in cancer immunotherapy through advanced research and the interaction between mechanism of host and disease.

Using PerkinElmer's vector multispectral imaging platform combined with our novel multiplex labeling reagents and image analysis algorithms, these customers are now able to visualize and quantify the complex relationships between cancer and immune cells in samples of diseased tissue.

Critically, these interactions are shedding light on important biological pathways at the heart of immuno-oncology such as PD-1 and PDL-1 that are enabling some of the most promising new cancer treatments. Additionally, during the third quarter we expanded our relationship with the Monash Institute of Pharmaceutical Science in Victoria, Australia.

Researchers there are relying on a number of our analytical instruments and lab automation systems to study the impact of inhaled oxytocin on preventing or treating postpartum hemorrhage, a leading cause of mental mortality or maternal mortality.

In the area of research, one of the largest pharmaceutical companies recently purchased our suite of high content imaging and informatics solutions to screen their vast libraries of compounds and assays, the activity of small molecules and biologics on suther (4:33) phenotypes.

PerkinElmer scientists and engineers have developed a way to read out this activity at the cellular and sub-cellular levels and combined with our advanced machine learning based software, we're enabling this customer to automate and rapidly deploy image analysis across large numbers of samples.

The key element behind our ability to meet customers' big data challenges has been the development and validation of enterprise informatics solutions to enable the integration and management of these rich, complex, multivariate data sets.

I've shared this particular example because it reinforces the value of offering unique imaging and detection capabilities as well as the analysis visualization and collaboration software to understand, interpret and share relevant information.

Increasingly, our research customers are realizing the value in our full solutions that draw upon our entire portfolio, including informatics, OneSource services and advanced imaging and detection products. In the third quarter alone, business with our top research global accounts, which comprised about 10% of our sales grew mid teens.

This ability to combine detection analysis software and service has been one of the cornerstones of our newborn screening business for many years and is why PerkinElmer solutions and expertise are vital components in global healthcare agendas.

Our newborn screening franchise continued to make good progress in the quarter to support customers' needs to expand screening. In Kyrgyzstan, a new program was established that will serve about 250,000 births per year.

We also helped to bring skin testing to more countries piloting menu expansions, and in our medical lab in Suzhou, China is meeting pent-up demand for neonatal, prenatal and infectious disease screening across China.

During the third quarter, we continued to introduce new products into the market, as we are committed to both responding to and anticipating change through a relentless focus on innovation to solve customer challenges.

In the third quarter, we debuted our Opal tissue staining kits, which are part of our new Phenoptics workflow offering and includes staining capabilities, imaging technologies and image analysis software to help customers in the fast growing area of quantitative pathology.

As I mentioned previously, these capabilities are enabling researchers, oncologists and pathologists to better characterize immune cells and tumor cells within tissue in ways not previously possible.

During Q3, we also launched Signals for Translational, which is a cloud-based informatics platform for pharmaceutical researchers that aggregates, manages and analyzes experimental and clinical data from multiple sources.

Signals for Translational helps scientists better progress from data acquisition to biomarker discovery and validation as they develop drugs tailored to patient's individual needs. And with the growing majority of top global pharmaceutical companies engaged in translational work. We see PerkinElmer's Signals platform as a key enabler in this field.

In addition, we introduced the TGA 8000 analyzer for advance materials characterization. This is a prime example of how we are evolving our detection capabilities so that PerkinElmer customers can better progress from samples to answers and insights. The TGA's range of applications includes determining contaminates in products or in their packaging.

To answer an increasing need across the customer base, this instrument runs on new software for high sensitivity thermal analysis and features remote status monitoring. As we move ahead, we see clear opportunities that benefit from positive long-term trends across human and environmental health.

In the near-term however, we are balancing our long-term enthusiasm, while closely monitoring several areas of uncertainty. Among the strongest tailwinds are the biotech and pharma markets, where our global account approach and product offerings give us access to attractive areas bolstered by heavy customer investment.

Additionally in China, while the overall economy is slowing, the criticality of our solutions directly address long-term priorities for the country. Last week's announcement of the end to the one child policy should noticeably boost our business over the next several years.

Furthermore, the government's focus on ensuring a cleaner environment, safer food and overall access to healthcare will hopefully translate into positive impacts for both local funding and China's next Five Year Plan.

In Europe, a number of countries' economies are stabilizing, although the current immigration issue could redirect spending in certain sectors. And lastly, the US is on track for solid growth as we close out the year.

On the other hand, a significant headwind in the short-term is Japan's deteriorating economy as funding delays are causing very weak academic and government spending. Our medical imaging business also faces tougher market conditions than it has in years past.

More recently, customer ordering patterns for this business have become incrementally challenging, creating further softness in the fourth quarter. Furthermore, as you're all aware, the strength of the US dollar is posing challenges for emerging countries such as Brazil.

This is coupled with the drop in oil prices, forcing oil-producing countries to normalize demand, potentially softening future revenues and curtailing research and spending on improving healthcare. On balance, we are optimistic about the macro conditions but recognize some markets remain challenging.

Based on our guidance for the fourth quarter of 3% to 4% organic revenue growth and adjusted EPS of $0.86 to $0.89, we would deliver full-year results of 8% revenue growth in constant currency, organic revenue growth of 4% and adjusted EPS on a constant currency basis of approximately 13%.

However, just as important as these financial results, we continue to make excellent progress in advancing the strategic priorities of the company and improving our operational and technical capabilities.

Our success to date positions us to deliver on our commitments to our customers and shareholders while driving our mission to improve human and environmental health. I would now like to turn the call over to Andy to give more color around our Q3 results and fourth quarter guidance..

Thanks, Rob, and good afternoon everyone. Consistent with previous quarters, I'll provide some additional color on our end markets, a financial summary of our third quarter results and details around our fourth quarter 2015 guidance.

Given the continuing impact of foreign exchange on the comparability of our results, I'll once again provide much of my commentary on a constant currency basis in order to better portray the results in the quarter.

For the third quarter, we reported approximately 10% constant currency revenue growth and 6% organic revenue growth with foreign exchange representing a headwind of approximately 6%. As we have previously communicated, there was an extra week in the third quarter and we estimate the impact of that extra week on organic revenues was approximately 2%.

Adjusted revenues were $563.6 million in the third quarter as compared to $542.9 million in the same period a year ago, driven by broad-based demand. Third quarter adjusted earnings per share was $0.60, up 16% on a constant currency basis from $0.57 in the comparable period a year ago.

Looking at our geographic results, we experienced mid single digit organic revenue growth in the Americas and Asia and high single digit organic revenue growth in Europe. Year-to-date, organic revenue growth has been mid single digits across all three regions.

We are pleased to report that our results in Europe have shown positive organic growth in the last five quarters and we expect demand in Europe to remain stable for the balance of the year. In China, revenues grew high single digits organically and we remain comfortable with our full year outlook of high single digit organic revenue growth.

As to our operating results, third quarter adjusted gross margins were $47.2%, up 40 basis points on a constant currency basis, driven primarily by volume leverage, mix and productivity gains. For the nine month period, gross margins improved by 50 basis points on a constant currency basis.

Third quarter adjusted SG&A was 24.8% of adjusted revenues, essentially flat over the same period a year ago. For the first nine months of 2015, SG&A is down 50 basis points on a constant currency basis, the result of continued operating leverage and from our indirect spend initiatives.

Research and development spending in the third quarter was up modestly as compared to the same period a year ago, driven by continued investments in innovative new product development and incremental investment at Perten.

Year to date R&D spending is up approximately 30 basis points on both a reported and adjusted basis as the impact from FX was immaterial. Overall, we were pleased with our operational performance in the third quarter as we expanded our constant currency adjusted operating margins over 50 basis points and approximately 70 basis points year to date.

We're encouraged by our third quarter margin expansion given the difficult comparison from the prior period. Net interest and other expense in the third quarter was approximately $12 million, impacted by higher than expected foreign currency losses in the period offsetting a favorable adjusted tax rate for the quarter of approximately 19%.

We expect our adjusted tax rate for the full year to be approximately 20.5%, which is consistent with our performance year to date. Switching to the segments, third quarter organic revenues in our Human Health business increased approximately 7% and Environmental Health organic revenues grew approximately 5%.

Year to date, organic revenues have increased 5% in our Human Health business and 3% in our Environmental Health business. From an end market perspective, our Human Health business represented approximately 61% of reported revenue in the quarter with diagnostics contributing 28% of revenue and research 33% of revenue.

Organic revenue growth from our diagnostic business increased high single digits off a double digit comparison in the comparable prior year period. This was driven by continued strength in our newborn screening franchise offset by flat organic revenue in medical imaging due to difficult prior year comparisons and customer ordering patterns.

We continue to be encouraged by the broad acceptance of our new cassette and CMOS offerings, but expect a challenging fourth quarter due to softening demand within the radiology and radiation oncology end markets.

We expect these conditions to persist through the first half of 2016, but anticipate the softness to be partially offset by demand for our new cassette and CMOS product launches.

We once again experienced strength across our diagnostics offerings in China, growing double digit in the quarter with a strong performance in our newborn screening and prenatal business.

As Rob mentioned, we're pleased that China has announced the elimination of the one child policy, and we believe that this should have a positive impact for our diagnostics offerings over the next several years. Our Haoyuan blood screening business had an excellent quarter of growth, albeit off a low base.

We're hopeful that the adoption and enforcement of nucleic acid testing begins to ramp more quickly in the coming months, but visibility as to the exact timing remains unclear.

Organic revenue in our life science solutions business grew high single digits in the third quarter, driven by strong instrument sales and high content screening and imaging, strength from our informatics offerings and robust growth at our OneSource multi-vendor services in spite of a very difficult prior year comparison.

We continue to be pleased with the double digit growth we're seeing with key global pharmaceutical and biotech customers, the result of our efforts since early this year to better combine our research, informatics and OneSource multi-vendor service offerings into targeted solutions.

Globally, we continue to see stability in academic and government end markets, while pharma and biotech markets have improved with the exception of Japan, which continues to experience weak demand. Moving to our Environmental Health business, which represented approximately 39% of reported revenue in the quarter. Revenues grew 5% organically.

Our third quarter results benefited from increased food and environmental demand with stability in industrial end markets, driven to a large extent by success from our inorganic, Perten and material characterization offerings. We're pleased to report that Perten had another good quarter.

I recently visited with the team in Sweden and came away more bullish about the opportunity to expand our addressable market as we look to develop more dedicated food analyzers combined with our FTIR capabilities with Perten's core technology.

We believe there are a number of additional cross-business opportunities as Perten benefits from the broader global reach and footprint of PerkinElmer. Turning to the balance sheet, we finished the third quarter with approximately $1 billion of debt and nearly $200 million of cash.

During the quarter, we repurchased 1.5 million of our outstanding shares for a total consideration of approximately $72 million. We exited the quarter with a debt to adjusted EBITDA ratio of 2.3 times and a net debt to adjusted EBITDA ratio of 1.9 times. Turning to cash flow.

We continue to see strong cash collections, offset by additional inventory requirements. Year to date adjusted operating cash flow from continuing operations was $189 million, essentially flat versus the same period a year ago.

The increase in working capital reflects additional inventory related to new product launches, including our relationship with Waters, as well as normal seasonal patterns.

We expect these levels to decline over the balance of the year and continue to expect our full year adjusted free cash flow to net income ratio to be consistent with our guidance provided earlier in the year.

Overall, we are pleased with our year to date performance as revenues grew organically 4%, gross and operating margins expanded 50 and 70 basis points respectively and adjusted earnings per share grew 15%, all on a constant currency basis.

Looking ahead to the fourth quarter, we believe we were well positioned across the majority of the portfolio to deliver another solid top and bottom line performance despite a couple of areas of softness, specifically medical imaging in Japan as well as the strengthening of the dollar.

As a result, we now expect our fourth quarter reported revenues to be in the range of $610 million to $620 million, which represents approximately 7% constant currency revenue growth and organic revenue growth in a range of 3% to 4%.

Adjusted earnings per share is expected to be in the range of $0.86 to $0.89, which represents approximately 9% constant currency growth at the midpoint.

For the full year, we're narrowing the range of our adjusted earnings per share to $2.56 to $2.59, with the midpoint maintained at $2.57, representing 13% constant currency adjusted earnings per share growth.

For modeling purposes, you should focus on the midpoint of the revenue adjusted EPS guidance ranges, as our most likely view for the fourth quarter. This concludes my prepared remarks. Christy, at this time we could open up the call for questions..

Thank you. Our first question is from Doug Schenkel of Cowen. Your line is open..

Hey, good afternoon and thank you for taking the questions. I guess my first question is really on capital deployment. So Rob, you've talked about having $1 billion of M&A capacity for the next few years. You've talked about the deal pipeline being robust, but acknowledged that valuations are still pretty high.

I think while it's only been a few quarters since you outlined some of the criteria, the activity has been somewhat limited.

Would you be willing to share how you're thinking about the deal pipeline today and when you might pivot to other ways of deploying capital, if the opportunity to pursue M&A remains limited?.

Sure. So as you mentioned, we continue to feel like we've got a good pipeline. I would say it's again as you mentioned, I think some of the valuations have been a little challenging. So one of the things, I think Andy talked about it, we did buy some shares back in the third quarter. I think it was about $70 million or so we spent on share repurchasing.

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

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

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

I think we continue to feel pretty optimistic about our ability to do some things on the M&A perspective.

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

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

Hey guys. Thanks for taking the question. This is actually Joel Kaufman in for Issac. Just to start off first with margins. Obviously the margin story has progressed nicely over the past couple years.

Could you maybe just clarify exactly what are the key operational initiatives you guys are focused on going forward to drive that next leg of margin expansion aside from driving just top line growth?.

Well, I think a key part of it is the leverage we're going to get from the top line. We've always said that's really about half of what we think we can deliver from a margin expansion perspective. We also have talked quite a bit about indirect spend.

Year to date we actually on a constant currency basis have saved $10 million year over year on our indirect spend initiative. So we're actually a little ahead of schedule there.

Obviously, all this has been impacted somewhat by the change in FX rates, but I think overall we still feel comfortable with that cadence of 60 to 80 basis points, 70 to 100 basis points of margin expansion going forward, assuming reasonable growth. We also have rolled out some lean initiatives.

I think that's going to help drive some of the progress on the gross margin side, specifically within the factory. So I think you're going to see really three pieces, continue tight controls over SG&A. I think you'll, it continue to see margin expansion on the gross margin side through factory enhancements and efficiencies.

And then the leverage we get from the top line and hopefully that's also going to end up continuing to be a positive mix as we're seeing Human Health grow at a faster pace than Environmental Health and they have higher margins..

Thanks. And then just one on Europe, appreciate the comments you guys made earlier there and calling out the strength and in the region.

Should we be thinking about that as just easing comps or a broader improvement in underlying demand?.

I actually think it's a little bit of both. I mean clearly we're getting the benefit of a difficult 2014, but I think at the same time, we mentioned the fact that we are seeing some stabilization in demand, and so I think going forward, we feel pretty good about the pace of growth in Europe.

I would say the only area that we're sort of watching a little closely here, and again I think we called that out a little bit, is with the recent pressure on the immigration, we're a little concerned that you could see some shifting of prioritization and to the extent that that may impact some of the incremental spending going into healthcare and research.

But generally speaking, we feel pretty good about the demand profile in Europe..

Thank you. And our next question is from Bryan Brokmeier of Cantor Fitzgerald. Your line is open..

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

Are you seeing that as well? And then secondly you also I believe talked about having about $1 billion in capacity to do M&A.

Is that still how you'd look at it despite the recent share buybacks and sort of other things you've done with your capital deployment?.

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

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

Great. And what areas that you most focused on? You recently I guess that's been about a year now since you did the Perten acquisition.

But is food safety still an area where you're focused on or are you more taking a look at on the Human Health side such as diagnostics and your biopharma business?.

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

On the Human Health side, I think both the area of diagnostics, anything we could do to expand our franchise there. And selectively within the research areas again and then I would say the other area which really cuts across both is the area of software and informatics.

So I think across the majority of the businesses, we would looked to be adding there from a bolt-on acquisition perspective..

Thank you. Our next question is from Mira Minkova of Stifel. Your line is now open..

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

Good afternoon..

Maybe, let me start with your organic growth guidance for the fourth quarter. It seems like a bit of step down versus what you've done in the last couple of quarters, 3% to 4%. Appreciate that you had mentioned the comments on Japan, medical imaging.

Is there anything else that we should be considering that may be happening in the fourth quarter, and also what are you assuming for budget flush there?.

So first of all, we're not assuming any budget flush in the numbers that we are forecasting. But I would say probably three things, and you mentioned two of them. One is clearly medical imaging and Japan and we probably think those combined are probably a 150 basis point headwind.

And then I would say the third thing is if you recall, we had fairly strong Q4 last year. So we are cycling against a pretty strong comp. So, I would say the combination of those three things is something that we're considering when we give the guidance..

Okay. Got you. And on the change to the one child policy in China, obviously that you called it out, it must be a good thing for you.

Help us, if you could please remind us how big your China neonatal business is right now, and how would you think about the impact?.

So first of all, I would say I think the impact longer term is going to be very helpful. When you think about 17 million children born in China, the potential for that to grow and maybe grow fairly significantly I think is real.

I think the real question is, how long or what's sort of the ramp, and of course I think that's a difficult thing to quantify in the short term. One of the things we have done is we've gone back and you may recall in November of 2013, there was a relaxation of the one child policy for parents who were only children.

And if you look over the last two years, there has been about 1.4 million of those parents that have applied for second children. That represents a little bit more than 10% of the parents that were actually eligible to do that.

And if we go back and look at our business, that probably tracks pretty well that we think that had about a 12% to 15% impact on the growth in the newborn screening business. So again, if that's sort of a proxy of what's going to happen this time, you're going to see an increase, but it's going to be a fairly slow ramp. Hope that's helpful..

Thank you. Our next question is from Jeff Elliott of Robert W. Baird. Your line is open..

Yeah, with all the focus on new products, I guess can we get an update on what you're seeing in contribution from all the new products you launched earlier this year?.

Yeah, we feel very good about the progress there. We talked about it in the beginning of the year, about a $30 million or $35 million contribution incrementally in 2015, and we think we're going to exceed the top end of that range.

As we look at through the Q3 and what our expectations are for Q4, we think we'll be north of the $35 million incremental benefit..

Got it.

And do you have any anecdotes about the kind of synergies you now see (32:33) informatics and some of the other businesses? I know you've kind of moved around different pieces of the business lately, but an update on the synergies you're seeing there?.

Yeah well, a couple of them I sort of mentioned in my prepared remarks when I talked about the progress we're having with the sort of pharmaceutical companies.

When we think about historically, we would have provided them say imaging equipment and now by packaging that together, we have customers now that are not only ordering our imaging equipment, but ordering some of our software, specifically sort of high content imaging software as well as Spotfire licenses and even in some cases enterprise related software.

And if you look at the key global accounts, the top 20 global accounts where we've combined our informatics, OneSource and product offerings, those customers are growing mid teens through the first three quarters of the year..

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

Hi, guys. This is actually Bryan Kipp on behalf of Dan. Rob, question for you. I mean on the margin – Rob or Andy. On the margin front, I mean strong organic. I know the mix was probably a little bit less favorable just because it was 61% versus 62% last year.

But was still surprised by the soft incremental contributions here despite the strong organic pull through.

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

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

Again potentially benefited from the point earlier, where we're sort of combining it with OneSource in the product offerings and that has lower incrementals. I would say the other thing to point out is when we talked about the incremental higher revenue from the additional week, that also comes at relatively low margins.

Because if you think about it, you're amortizing the cost sort of again 1/52 over that period of time, and the revenue for those additional days is much lower. So again the flow through on the incremental revenue from the week and the incremental revenue from OneSource lowers the flow through.

Having said that, if you look at our EPS growth on a constant currency basis, it was still 16%..

Appreciate it, and a two pronged one.

One, the Europe comment that you had, are you guys seeing any softness because of a massive influx of refugees or is that just kind of a long tail? And the other thing is, can you just contextualize maybe the Opal tissue contribution cloud-based stuff, the launch that you did in 3Q with next year? Just early color, market, addressable market size, et cetera..

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

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

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

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

Rob, we've seen in the market more entries into the service side of the business.

Are you seeing greater competition because of your success in the service strategy you deployed quite a while ago?.

I don't know that we're seeing any more competition. I guess my view is the competition has always been pretty formidable. But as I sort of mentioned before, we continue to do quite well. OneSource had a very strong quarter in Q3. And if you look at sort of year to date, they're growing well in the sort of mid teens or better.

So we continue to do well and I think it has to do with not only I think the reputation and execution capability of the team, but also as we increase our capabilities around software informatics and again package it with this global account focus. We continue to see significant opportunity to grow that business..

And then lastly on the reagent side, I know that's been lower growth that you've liked in the past.

How do you feel about your product mix now on the reagent side of your portfolio?.

Well I would say on the Human Health side particularly on research, that's been a real area of focus from an R&D perspective, sort of late 2014 and 2015, and we saw nice traction this quarter. So I think our reagents were up about, I'll call it low to mid teens in the quarter. Obviously diagnostics was strong; we saw strong in research.

I think environmental is still an area, and it's less research and it's more consumables. We're seeing decent growth there, but we still need to get that up as a percentage of our revenue.

But we were pleased with the performance, like I said particularly on the research side this quarter as some the investments we made in research and development were providing us benefits..

Thank you. Our next question is from Derik De Bruin of Bank of America Merrill Lynch. Your line is open..

Hello..

Hello..

Hi, Derik..

Can you hear me? Hey..

Yeah..

Can you give a little bit more color on the medical imaging business? I mean are those products a little bit higher margin? and I guess what overall percentage of your sales is the medical imaging business?.

So medical imaging is probably I think call it 8% of our revenue, depending on the quarter, but in that sort of general range. If you look at medical imaging, you can think about it in three markets, there is the radiology market, there is an oncology market, and then there is I'll call it an industrial market.

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

First of all, obviously this is a business while we continue to think is very attractive, has a demand profile that's probably more volatile than the rest of the other PerkinElmer businesses, largely because it serves a more capital-intensive end market.

So again, while we think it's an attractive business, clearly differentiated capabilities and overall serving attractive markets, it is going to have a little bit more volatility because of the capital intensity of their customers..

Great. That's helpful.

And did I hear you correctly, you felt like the medical imaging business would be down in at least until the second half of next year?.

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

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

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

I guess the strategic question is, you guys have flexibility and can be pretty nimble into moving into new markets.

What's the appetite for moving into some of the higher growth, higher margin markets more aggressively like clinical diagnostics, perhaps point of care, molecular or more of the core genomic space?.

So I guess the way I would describe that is, when we think about sort of philosophically the portfolio in businesses that we're sort of attracted to, I would say we think about a couple things. First of all, is it a business that fits well with PerkinElmer.

And what I mean by that is, is it consistent with our mission and vision around human, environmental health.

The second thing is, is it attractive from the end-market, again does it have differentiated capabilities, are the financial returns attractive, and then finally, are we appropriate owners, meaning can we make it better, are we willing to invest in it and what does it do for the overall portfolio.

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

So whether it's additional investments in clinical diagnostics or et cetera. Just finding the right assets and making sure the returns make sense relative to the price.

But I think all those areas and a majority of those areas are ones that I think we would find attractive, if we thought the asset fit well with what we're trying to achieve and we could make sense out of the financial returns..

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

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

Thank you. Our next question is from Steve Beuchaw of Morgan Stanley. Your line is open..

Hi, guys. Thanks for all the color here and thanks for taking the questions. Just two pretty simple ones from me, one for Rob and one for Andy. Rob, the commentary that you gave on the health of the different end markets was really thorough and really helpful.

Would it be fair to say that as we roll it all up, I mean thinking about where we are at health end markets as we look out over the next several months, is it in total roughly the same in terms of the end market growth outlook as a year ago, the moving parts or the sub-components just differently mixed in terms of what's a growth driver or not? And if not then how might you compare the profile, the aggregate end market growth now to a year ago? And then my second question for Andy, I wondered if you can give us any sense, based on what you're seeing right now in terms of currencies, what the currency impact on the model might be in 2016, broad strokes, top line margin, earnings impact.

If you have any rough sense, it would be very helpful. Thanks guys..

So let me take the first one. So I would say, if we're talking about markets from a geographic perspective, I would have a tendency to agree with you, which is there is sort of pluses and minuses.

But I would say the geographic end markets, meaning sort of North America, Europe, emerging markets, sort of puts and takes, but they're probably fairly consistent with what we would expect it in total.

When I think about the sort of application or the end markets from a customer's perspective, the one exception I would say would be in medical imaging. So I think diagnostics is probably about what we thought, maybe marginally a little bit better. I think research maybe is marginally a little bit better.

I think environmental is probably okay and maybe the industrials are a little bit more challenged. So maybe that all balances out. But I do think particularly in the back half of the year, medical imaging is probably being a little – we're finding the markets a little bit more challenging.

So on the margin, if you think about that being 8% of our business or so, it's creating a little bit of a headwind, call it 50 to 100 basis points..

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

I will say for the fourth quarter, given where the euro is right now and where some of the other currencies, larger buckets are, it's probably a $0.015 to $0.02 of headwind for us in the fourth quarter that's factored into our guidance. But that's how I would characterize it at this point..

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

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

It seems a bit tough to figure out with the US stronger and obviously all the emergings challenged.

I mean I guess one, how has it made you think about the positioning of that part of the business longer term, and where you want to play and where you don't want to play? And two I guess, how does it make you think about investments in some of those emerging markets that are kind of going through a recession or recession-like behavior as we speak?.

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

And so consequently, what we've talked about and what you've seen us do is to become more focused on where we're going to invest. So if I go back a number of years ago, we were investing across the broad range of technologies and capabilities with environmental.

And we would argue that we probably had 12 different product lines across environmental and of course the service applications as well.

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

So obviously our move with partnering with Waters, where we just said, it doesn't make sense for us to continue to invest in liquid chromatography. We're not strong there. And so that's how I sort of think about it.

So I think on the environmental side, what you will see us is more focused, invest in areas where we think we have strong market shares or strong technology capabilities. And in the other areas, we'll either partner or sort of deemphasize..

Perfect. Thank you guys..

Thank you. Our next question is from Bill Quirk of Piper Jaffray. Your line is open..

Great. Good afternoon everyone. This is actually Alex Nowak filling in for Bill today. So we have seen some slowing US birth rates in our recent checks.

And I was just wondering, can you offset the slowing growth with either menu expansion within the space or from an increase in the number of tests (49:50) the Affordable Care Act?.

So, I would say our data doesn't necessarily support a declining birth rate. Our data would suggest that birth rates are sort of stable, maybe increasing slightly. But the answer to your question is that, yeah, we're always looking to continue to expand the menu.

And of course we've got broader offerings that we can provide, whether it's in the software side or continue to build out additional capabilities that we can offer the lab. So I think there is always an opportunity, or we believe there is always an opportunity to continue to grow the business almost irrespective of the birth rate.

But having said that, our data would suggest that US birth rates are, like I said, flat to up slightly..

Okay great. And then this one might be a little hard to tease out since China is ramping so rapidly. But two questions. First in China, did you see any slowdown in the birth rates because of the Year of the Goat.

And then second, does it set you up for an easier comp to allow you to repeat the screening performance from this year or even accelerate it?.

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

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

Hi there everybody. Thanks for taking the questions. First on the macro tone in the Chinese business, we've seen some wobbles there from a number of other players.

Can you just talk us through the hospitals and end markets there and why you may or not be as sensitive to a harder landing in the region?.

So if you think about our diagnostic business in China, it's fundamentally – I'll call it four businesses. You have the newborn business, which I think continues to grow because you've got adoption rate. So more children are being screened and you've got menu expansion, almost irrespective of birth rates. And we talked about that on the prior question.

So I think we can continue to grow there because as we've said on calls in the past, they're still doing only a handful of tests in China. And we're optimistic there for a couple of reasons. We're starting to get some traction around mass spec.

And we've mentioned in the past that we got CFDA approval for our GSP which is our automated workstation there. So we think we can continue to drive good growth there and in fact we've seen – I think in third quarter was sort of mid teens. So we feel good about that. Similarly, same dynamics I would say on the prenatal side.

So I think we continued both the penetration and the ability to do more there. And similarly, we saw similar type growth on the prenatal side. And then the third area would be in blood screening. And as Andy mentioned, it's off of a low base.

But we're going into we think a pretty significant tailwind as the government will start to enforce the mandate of that screening and of course we're one of five that have the capability to do that. So last year, it would be on the infectious disease.

That's probably the one area where potentially you'll see some slowing on if there was an overall sort of economic slowdown potentially. But again, we see a lot of opportunity to continue to penetrate and expand there.

So, but I would say of the areas that we operate in, in the event there was a – use your words – hard landing, I would think that's the one that probably is most susceptible to some impact..

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

Well of course, the two ones you mentioned weren't great, although I think NTD had done okay. I think the issue with Signature was not necessary the lab per se, it was the reimbursement side of things. So I don't know that we would have a particular issue with a service lab per se. I think we just got to make sure that the reimbursement is clear.

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

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

Hey guys. This is Steve Breman (54:52) on for Tycho. Thanks for taking the question..

Sure..

First wanted to ask on the softer spending just in Japan, which is obviously continuing to be felt throughout the sector.

Can you just give us some more color on what you're seeing kind of on the ground floor and is there any hope for any type of recovery in 2016?.

So yeah, I think there's hope for recovery in 2016. I would say we're not very optimistic with hope in 2015, because it just seems like the spending is just not being released. And so particularly on the research side is where we see it challenging. And so I would say at this point, we're not expecting any recovery or clearly in Q4.

And like I said, we're in the process right now of thinking through 2016. But yeah, I think there's a possibility you could see some recovery in 2016. So we'll just have to wait and see, but I would say clearly not for the last quarter here..

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

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

Our sort of intelligence and the people on the ground tell us that some of the key areas that we're focused on will continue to be a high priority, so whether it's environmental, whether it's food safety, access to healthcare.

So we feel pretty confident that will continue to be key priorities for the government, but probably until March or if they start to leak some of the information out, we really don't have any particular insight..

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

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

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