Good day, ladies and gentlemen, and welcome to the Q3 2018 PerkinElmer Earnings Conference Call. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Tommy Thomas, Vice President of Investor Relations. Please go ahead, sir..

Thanks, Chris. Good afternoon and welcome to the PerkinElmer third quarter 2018 earnings conference call. With me on the call are Rob Friel, Chairman and Chief Executive Officer and Jamey Mock, 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 November 14, 2018.

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 measure is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in 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 all for joining us today. I'm very pleased to report that PerkinElmer had another strong quarter, delivering revenue growth of 22% on a reported basis and core organic revenue growth of 7% with each of our core businesses growing organically 7%.

Including the impact of EUROIMMUN, our Diagnostics business grew organically 8% as EUROIMMUN once again grew double digits.

While our organic growth exceeded our guidance, total adjusted dollar revenue of $675 million only equaled our guidance as changes in foreign currency rates relative to the dollar since the end of last quarter reduced revenue by approximately 2% or $10 million.

We're also pleased with our adjusted earnings per share growth in the quarter, which increased 23% over Q2 last year to $0.90 per share.

This was $0.02 lower than our original guidance as the incremental income from the greater organic growth was more than offset by the negative impact of the foreign exchange movements previously mentioned as well as higher long-term compensation costs caused mostly by the strong growth of our stock price during the third quarter.

If we adjusted for the impact of these two unforecasted items, our adjusted EPS would have been $0.97 which would have beat our guidance by $0.05. While Jamey will discuss our financial results in more detail, we continue to be very pleased with both the breadth and level of organic growth as well as with our significant adjusted EPS growth.

As has been the case all the year, our strong top line organic growth is attributable to both favorable end market conditions and the benefits of focusing our portfolio on fewer technologies and higher growth end markets where we have differentiated capabilities and excellent customer relationships.

During the third quarter, we continued to make minor adjustments to the portfolio as we completed the sale of our multispectral imaging product through Akoya Biosciences, a portfolio company owned by Telegraph Hill Partners.

We will continue to partner with Akoya on advanced tissue imaging technology to realize the potential of this technology to benefit immuno-oncology and other areas of disease research and treatments. Also, we recently closed the acquisition of DANI Instruments.

Based in Milan, Italy, DANI brings advanced capabilities in gas chromatography to help accelerate our workflow solutions in food, pharma and environmental end markets.

We also continue to add access to a broader suite of potentially disruptive technologies and capabilities through our ongoing investments in smart technology companies and licensing efforts.

While both our organic and inorganic investments over the last couple years have been largely focused on increasing our growth profile, these moves have also resulted in our portfolio of technologies that are increasingly more synergistic and capable.

It is clear to us that technologies, applications and customer needs are converging across DAS and Diagnostics as our customers' businesses evolve an alliance between therapeutics, diagnostics, food and digital health are intersecting.

As we continue to both add and focus our capabilities, the opportunities across PerkinElmer expand, allowing DAS to become an enabler of the sciences of diagnostics and vice versa.

Creating a culture and organizational nimbleness to facilitate this as seamlessly as possible and respond quickly to these opportunities will provide, in our view, another lever to further support our customers and enable incremental growth.

To that end, we recently brought together our top 175 scientists, engineers and product managers with a particular emphasis on our new acquisitions to discuss opportunities to accelerate collaboration around several key areas including assay development, genomics, automated workflows and digital solutions.

To give a sense of these opportunities, we see the ability to more comprehensively pull together our immunoassay development capabilities across the company, including our life science lyse reagents, our EUROIMMUN antibody and antigen development expertise, our automated newborn screening assay platforms and our lateral flow technologies from both Bioo Scientific and our Tulip immunodiagnostic business in India.

Another example of this is the development of assays for Zika, Dengue and Chikungunya viruses using our dried blood spot technologies as well as rapid lateral flow tests created by combining EUROIMMUN's antigen capabilities with lateral flow technologies from Tulip.

These arboviruses are a substantial health threat in emerging markets and the introduction of these tests are enabling customers in rural areas to more broadly screen potential patients at risk for these dangerous infectious diseases.

In the food segment, we're looking at ways to leverage and combine our diagnostic focused applied genomics technologies in automation, liquid handling and molecular testing with our broader DAS food analysis capabilities.

For example, we are developing genomic and molecular solutions to enable new applications including the rapidly growing area of cannabis testing, where we are creating a comprehensive analysis suite from extracting to analysis for pathogen detection and for active ingredient and strain characterization.

With the recent legalization of cannabis in Canada and other countries expected to follow soon, we see a significant market opportunity to support both the testing and basic research around cannabis.

As I've mentioned previously, this convergence of technologies applications and customer demands will be ignited by the move to digital and the power of data. Therefore, we are also looking at ways to build and expand our digital capabilities across the company.

This includes establishing common instrument and big data platforms to collect data and then discover insights that will ultimately better inform us and our customers. An important part of generating these new insights is use of artificial intelligence or AI.

We've made several investments across the company in this area both in terms of external partnerships and collaborations as well as internal projects in building out our own AI capabilities.

We are now driving AI across almost all of our DAS and Diagnostic businesses including for image analysis in our high-content screening and immunodiagnostic businesses, for better determining the quality of grain in our food business and for applying AI in our services business to help to optimize our customers' laboratory productivity.

By taking advantage of our capabilities and technology platforms that span applications, strong operating capabilities and joint marketing opportunities, we are confident that PerkinElmer can meaningfully help lead this industry transformation.

One of the best examples of the potential of our cohesive portfolio is the story of our Vanadis non-invasive prenatal testing solution. The Vanadis solution leverages unique highly sensitive rolling circle amplification and our validation expertise of Diagnostics with the leading image detection capabilities of the DAS business.

Furthermore, this system is totally integrated workflow that leverages our current software being used in the biochemical prenatal screening today, thus allowing lab technicians to operate Vanadis with less than one week of training.

As we have been working with our customers to install and validate Vanadis in their labs, the reaction so far has been very positive and we expect to receive CE IVD approval very soon.

Because this solution removes the technical complexity of NIPT while breaking down the cost barriers, we're excited to enable more women to have access to an accurate, low-cost method of screening trisomies and improve the standard of prenatal care on a global level.

As we begin to establish our priorities for 2019, our focus will continue to be on innovation and improving our customer experience within DAS and Diagnostics. However, we are increasingly looking at driving synergies across the businesses as well.

Looking ahead, we see significant opportunities from these additional cross PerkinElmer synergies to both expand our addressable markets and drive incremental revenue growth.

We also believe that this will provide opportunities for efficiencies, and most importantly, enable us to innovate at an unprecedented pace, thereby facilitating continued acceleration of top line growth and operating margins. Before turning the call over to Jamey, I want to briefly mention our end markets and touch on our guidance for the full year.

As I mentioned previously, from a macro perspective, our markets continue to experience good demand. Diagnostics, which represents 40% of our revenue, is continuing to benefit from a growing prevalence of infectious and autoimmune diseases, particularly in emerging markets.

In addition, the increasing demand for earlier diagnosis and the rising adoption of new technologies are fueling growth across all three segments of reproductive health, immunodiagnostics and genomics. Slightly offsetting this is the continued decline in birth rates, particularly in China and the U.S.

In life sciences, which represents about 35% of our revenue, we continue to see robust demand in both product sales and services within the pharma and biotech markets, particularly in the U.S. and Asia.

Within our food analysis business, strong growth is being driven by the rising outbreaks of foodborne illnesses, advances in technology for food safety testing, increasingly stringent regulations and the globalization of food supply.

Lastly, our environmental and applied markets generally track macroeconomic conditions and as such, experienced stronger growth in Asia and the Americas this quarter.

As a result of these favorable market conditions as well as our product portfolio and capabilities, through the first nine months of this year, every geographic region as well as all six market segments are growing 5% or better. Now turning to our guidance.

As you recall, our original forecast back in January for this year was full year organic growth, revenue growth of 4% to 5% and adjusted EPS of $3.50. Since then, we have raised our top line guidance each quarter and again this quarter we are now guiding full year core organic revenue growth of 6.5%.

On the bottom line, we are guiding to $3.60 for the full year, which on a foreign exchange adjusted basis is $0.21 higher than our original January guidance and $0.02 higher than guidance the last quarter and represents adjusted EPS growth of 24% versus 2017. I'd now like to turn the call over to Jamey..

Thanks, Rob, and good evening, everyone. I want to start with the financial highlights for the third quarter of 2018. Next I'll provide some additional color on our served end markets and detail on other financial metrics. I'll finish with the financial summary for the fourth quarter and the implications on our revised 2018 guidance.

Starting with the third quarter results, we continue to be pleased with the strength in our business as core organic revenue ex EUROIMMUN in the third quarter of 2018 grew approximately 7% on tougher prior-period comparisons.

Adjusted revenue in the third quarter grew 22% to $675 million, matching our revenue guidance as higher organic revenue growth offset incremental foreign exchange headwinds. Acquisitions added approximately 16%.

By business segment, Diagnostics representing approximately 40% of total core sales grew 7% organically, driven by our immunodiagnostics and applied genomics business lines. Incorporating EUROIMMUN, Diagnostics would have grown 8% organically.

Discovery & Analytical Solutions, representing approximately 60% of total sales, also grew approximately 7% organically in the third quarter, highlighted by good balance of strength in both life sciences and applied end markets. I will provide some additional color on both businesses in a moment.

Core revenues saw growth in all major geographies with double digit organic revenue growth in Asia, high single digit organic revenue growth in the Americas, and low single digit organic revenue growth in Europe. This represents five consecutive quarters of organic revenue growth in all major geographies.

In the emerging market regions, we continue to see double digit organic revenue growth once again driven by China and India. On a year-to-date basis, we are pleased to have delivered 7% organic revenue growth excluding EUROIMMUN and 8% organic revenue growth with EUROIMMUN.

As Rob mentioned, we have experienced broad based strength experiencing, mid-single digit organic revenue growth in all end markets and geographies. Moving to the details of our operational performance, third quarter adjusted gross margins were up 120 basis points, with year-to-date results up 140 basis points, largely driven by EUROIMMUN.

This strong expansion has enabled us to make targeted investments, specifically increasing sales and marketing resources and R&D for disruptive technologies like Vanadis, enabling a better organic revenue growth profile for 2019 and beyond.

We believe that continued mix improvements along with productivity and strong leverage continues to give us confidence in our 22% adjusted operating margin target laid out to investors in 2017.

Operationally, for the third quarter of 2018, we delivered 90 basis points of adjusted operating margins when excluding foreign exchange and unplanned incremental compensation expenses. As you may recall, when guiding future quarters, we utilize the ending exchange rates from the prior quarter.

Due to the volatility experienced in Q3, particularly in China and emerging markets, the actual year-over-year foreign exchange impact on adjusted operating margins was 20 basis points.

To help you more clearly understand this dynamic, we have provided a foreign exchange reconciliation sheet on our website that is part of the Q3 2018 reporting package.

The unplanned compensation expense, which had a 60 basis point impact on our adjusted operating margins, was driven by a significant share price increase during the third quarter and higher projected performance driven by stronger revenue growth and an improved gross margin outlook.

As Rob mentioned, operationally, adjusted earnings per share would have been $0.97, however, the impact from foreign exchange headwinds of $0.03 and unplanned compensation expenses of $0.04 resulted in adjusted earnings per share of $0.90, an increase of 23% on a year-over-year basis.

Looking further into the key drivers within our segments for the third quarter of 2018, let's start with Discovery & Analytical Solutions. Our results were driven by balanced strong high single digit organic revenue growth in life sciences coupled with mid-single digit organic revenue growth in the applied market verticals.

Life sciences strength was driven by continued performance in the pharma biotech end market. Core pharmaceutical sales in our spectroscopy and chromatography product line saw good growth and we are especially enthused to see our customers focus more on their core drug discovery efforts, an area of strength for our portfolio.

Our reagent products and instruments for high throughput screening have benefited from a renewed focus on small molecule research. Our new in vivo imaging products launched late last year at the World Molecular Imaging Congress saw a very strong quarter of growth and were a key driver of the over-performance in DAS.

Finally, we once again saw strength in our OneSource service business. We experienced solid growth in Q3 from applied markets, driven by strong food product performance in spectroscopy, LC mass spec and Perten. Total food was up low double digits. The environmental and industrial segments combined to deliver strong organic revenue growth of 6%.

Switching to Diagnostics, core organic revenue growth grew 7%, driven by double digit organic revenue growth in immunodiagnostics and applied genomics with low single digit organic revenue growth in reproductive health.

Looking further within our Diagnostics business, we continue to see strong results at Tulip and Haoyuan, driving high teens growth in our immunodiagnostics segment. We experienced a good quarter in our genomics business as strong front-end sample prep results helped drive double digit organic revenue growth.

We continue to build on our momentum in the genetic testing business despite the near-term disruption from the implementation of a new lab information management system and feel good about the progress we've achieved toward our $50 million revenue goal by 2020.

EUROIMMUN continues to impress with low teens organic revenue growth through the first three quarters of 2018. Looking at disease modalities, autoimmune is approximately 60% of sales and their core capabilities helped drive 16% organic revenue growth through the third quarter.

Autoimmune diseases unfortunately remain under-treated and under-diagnosed and some studies have shown that the annual incidence rate to be approximately 10%. Infectious disease, allergy and instrument sales for antigen detection represent the balance of EUROIMMUN sales and were also steady growers with combined double digit organic revenue growth.

For the full year of 2018, we continue to expect approximately 15% organic revenue growth from EUROIMMUN. Geographically for EUROIMMUN, high incidence rates and incremental global customer wins helped China and Germany experience organic revenue growth of low double digits and high teens respectively and combined with building momentum in the U.S.

driven by menu expansion at a large reference lab, has enabled the organization to see continuing revenue growth into 2019. Looking at below the line items, adjusted net interest and other expense for the third quarter was approximately $15 million and our adjusted tax rate was approximately 12% driven by discrete items.

Looking ahead, we now see a full-year adjusted tax rate at 15% and 14% in the fourth quarter of 2018. As Rob mentioned, we have sold our multispectral imaging business to Akoya Biosciences for approximately $37 million, resulting in a GAAP pre-tax gain of approximately $13 million.

This business had year-to-date revenues of approximately $23 million and we have posted another reconciliation on our website to help you adjust your financial models. Based on certain ongoing service agreements, interest expense reduction and other revenues, we expect negligible adjusted EPS from this transaction in 2018.

Turning to the balance sheet. We finished the quarter with approximately $1.9 billion of debt and $150 million of cash. We exited the quarter with a net debt to adjusted EBITDA ratio of approximately 3.1 times, and we remain on track to finish the year below 3 times.

Turning to our cash flow performance, our third quarter operating cash flow from continuing operations saw strong sequential and year-over-year improvement.

However, on a year-to-date basis, higher inventory levels driven by stronger organic revenue growth, overseas production moves to further increase our manufacturing localization and added inventory needed for our distributions center strategy as resulting in increased working capital use in 2018.

We expect to make further progress in the fourth quarter, but forecast some of this improvement in inventory normalization to extend into 2019.

To wrap up the third quarter and year-to-date results, we continue to be enthused by our performance, which has resulted in 7% year-to-date core organic revenue growth and 25% adjusted earnings per share growth.

Looking ahead to the fourth quarter of 2018, we continue to believe that we are well positioned to drive solid organic revenue growth and provide strong financial results for our key stakeholders.

For the fourth quarter 2018, we are forecasting reported revenues of $745 million, representing 16% reported revenue growth versus the comparable prior period.

Our guidance assumes approximately 5% core organic revenue growth, $102 million in sales from EUROIMMUN and core foreign currency headwinds of approximately $12 million on a year-over-year basis. EUROIMMUN had approximately $14 million of sales in Q4 2017 stub period that you need to back out to arrive at our quarterly revenue guidance.

In terms of adjusted earnings per share guidance, we are forecasting $1.16 for the fourth quarter, which represents 20% growth versus the comparable prior period. This forecast includes an additional $0.04 headwind from foreign exchange versus our August guidance as you will see on the foreign exchange reconciliation sheet posted to our website.

We are once again raising our full year 2018 core organic revenue growth guidance to 6.5%. This guidance continues to exclude EUROIMMUN which would add another 100 basis points.

We now expect reported revenue for the year to be approximately $2.768 billion, a reduction of $12 million from the previous revenue guidance of $2.78 billion due to incremental foreign exchange headwinds of $21 million offset by improved organic growth in the third quarter.

Our revenue guidance incorporates EUROIMMUN sales of approximately $364 million, essentially the same as our previous guidance.

We now forecast adjusted earnings per share of $3.60 for 2018, a reduction of $0.05 from the previous adjusted earnings per share guidance of $3.65, driven by unplanned compensation expense of $0.04 and incremental foreign exchange headwinds of $0.07 offset by improved organic revenue growth of $0.02 and a lower tax rate of $0.04.

As I recap on our full year adjusted earnings per share guidance, we improved on our initial $3.50 guidance with $0.15 from better organic revenue growth, $0.15 from lower taxes offset by unfavorable foreign exchange of $0.11, $0.06 from higher interest expense and $0.03 from a higher share count to arrive at $3.60 of adjusted earnings per share or 24% adjusted earnings per share growth for the full year.

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

Thank you. And our first question comes from Daniel Brennan with UBS. Your line is now open..

Great, guys. Thanks for the question and congrats on the quarter..

Thank you..

So Rob and Jamey, so on the DAS business, again another really strong quarter, another acceleration on a stat comp basis.

You gave a lot of details in the prepared remarks, but could you tease out a little bit more what's enabled this growth? Because I kind of think this collection of businesses wasn't normally a 5% plus grow and that's what you've been putting up.

How much of it's dependent on new products? How much of it is maybe a different commercial strategy, maybe some acquisitions? Maybe you can just tease out some of the drivers and how sustainable that is?.

Yeah, Dan, thanks for the question. And I think you had a couple. But first of all, I would say, as Jamey mentioned, the performance first of all was broad-based, with really all the key end markets growing sort of high single digits or better. But I think to your point, it's really broader than that.

There's a lot of factors that are impacting the performance. I would say first of all, the markets are good. Obviously pharma and biotech are increasing spending, particularly, we're finding, in the drug discovery area. Food continues to see good growth because of whether it's expanded regulations or increasing consumer awareness.

But it's really broader than that for things like we're seeing nice growth from new products. We mentioned a couple particularly in the life science area this quarter. And the way I would think about it is, 2017, we really focused on significantly refreshing the analytical portfolio and that's continuing on nicely in 2018.

And then earlier this year, we really focused on the life science area. So you saw some new products come out in the imaging area. Clearly on the reagent side, we've sort of refreshed there.

I would say the other thing that's helping our performance is our decision to narrow our focus on selected end markets where it's really contributed to both a more concentrated marketing and customer engagement approach. And again, focusing on those areas that inherently are higher growth.

And then finally, on the execution side, I would say particularly in the commercial organization, we've created much better alignment between product management. And actually, during the earlier part of this year we completed a – we trained the entire global sales force on a standardized, what I'll call is a lead-to-close process.

And we're seeing that really improve our win rates. So it's really a combination of things, but at the end of the day we feel very good about the performance of DAS. The team's executing well. They're at 7% organically year-to-date. And I think they go into 2019 with terrific momentum..

Great. Thank you for that, Rob. And then maybe just as one follow-up kind of unrelated. But just can you just elaborate a bit on EUROIMMUN in the U.S.? Certainly Germany and China were strong and U.S. represents such a big greenfield opportunity. So now that you've had the business for a while, how should we think about the U.S.

opportunity unfolding? Because I think when you did the deal, you contemplated this could be as much as like a $300 million market eventually for you. Thank you..

Yeah, I think we continue to feel very good about the opportunity in the U.S. and I think it is a significant market opportunity. I think the question is how long it takes to ramp up, and of course, it's coming off of a relatively small base. So we continue to see very strong growth rates in the U.S., unfortunately off their relatively low base.

But I would say as we sort of go into the anniversary here, we haven't seen anything that diminishes in any way the opportunity, and probably in many ways, we see greater opportunity, I would say globally, but specifically in the U.S..

Great. Thank you..

Thank you. And our next question comes from Tycho Peterson with JPMorgan. Your line is now open..

Hey, thanks. I'll start with one for Jamey on operating margins. About 150 basis points below with what we've been modeling.

I guess that was all stock-based comp, is that the right interpretation? And how should we think about that going forward? And any guidance you can give us on the tax rate for 2019 given the leverage you saw this quarter and what you talked about for next?.

Yeah. Sure, Tycho. Yes. On the operating margins, it was about 60 basis points in the quarter related to stock-based comp and then another 20 basis points of pressure related to foreign exchange. So absent that, we would have been at about 19.9%..

Okay. And then on the....

Yeah, on the tax rate moving forward?.

Correct..

Yeah. So as I said in my prepared remarks, I think we're now at 15% for the year, which is down 200 basis points since 2017. Some of that is more profits in low tax jurisdictions and some of that are some discrete items. So we're looking at it for next year, but it's a little too soon to call the actual guidance for next year I'd say..

All right. And then, Rob, just a follow-up on EUROIMMUN. Oh, go ahead..

No. I was going to say, I know you asked a question relative to the incentive comp and how do we think about that sort of going forward. And maybe I'll just take a second to explain it because it may be a little unique.

But so, if you think about our incentive comp for our officers, it's very largely performance-based; probably depending on the officer, anywhere from 60% to 70%. And we're talking about these three-year long-term performance based. It's all tied to the stock price, or at least some portion if it's tied, and it's mostly equity.

However, there is a component of it that is paid in cash. And unlike the equity component, our accounting policy requires us to revalue the cash component each quarter depending on changes in our stock price. So if you look at that cash component, and as I know you're well aware, our stock price increased over 25% in the third quarter.

So normally in any given quarter, if our stock's moving around a little bit, it's not a material item, but because of the magnitude of the move, it's required us to record an expense as Jamey talked about. Going forward, we generally don't model a lot of expense in there because obviously it's tough to predict our stock price.

So going forward, we really wouldn't normally model much and again if the stock price moves 5%, it's not material. So, but like I said with the strong movement in the third quarter, that's what yielded the significant incentive compensation expense..

Okay. And then just one follow up on EUROIMMUN, you talked about I think some assay development initiatives at the beginning of the call.

Was that specifically EUROIMMUN and any you're moving already to chemiluminescence versus ELISA given that's where kind of the majority of the market is today?.

Yeah, so my comment on the assay development, although I talked about a specific instance where we're using EUROIMMUN antigen.

It was really more broad based that says, say to imply that we're looking more across the company now and largely because some of the acquisitions we've made recently, so whether it's Bioo, whether it's Tulip, whether it's EUROIMMUN, we're finding that we've got significant opportunity to leverage those businesses whether it's their diagnostic businesses, the capabilities can go into DAS, so for example in the food area on the molecular side and vice versa.

And the specific example was one where we took capabilities from EUROIMMUN, capabilities from Tulip and our blood spot capability in newborn and really created not only a new product, but a new application that allowed us to go into a market that we're seeing nice growth in. So we're going to continue to look at opportunities to do that.

Specific to EUROIMMUN, the one thing that were quite excited about, and I think we've talked about this a couple times, they have very good capabilities in recombinant antibodies and antigens. So it allows us to get very specific antibodies for our assays, furthermore allows us to drive in the sort of new novel targets and gets faster time to market.

So the point was just to say we're increasingly looking to leverage that and we think there's a significant opportunity as we go into 2019 and 2020 to benefit from that..

All right. Thank you..

Thank you. And our next question comes from Doug Schenkel with Cowen. Your line is now open..

Hi, good afternoon. This is Chris on for Doug today. Thanks for taking my question..

Hi, Chris..

So I just want to start in Diagnostics. Diagnostics core revenue growth excluding EUROIMMUN has been accelerating as well.

I know you have a number of new growth initiatives in the segment such as NGS testing, Vanadis and Tulip, so I'm curious as to how these are contributing to the solid core revenue growth rate? And can you also speak to just the sustainability of these trends?.

Yeah, so as I mentioned it's coming from a number of areas. So our core, what I'll call our core immunodiagnostics which does not include EUROIMMUN grew high teens. And as I think you know that's mostly focused in emerging markets.

So Tulip continues to grow double digits and our historical, call it Sym-Bio business or China diagnostic business continues to do quite well. In the applied genomics, we're also seeing very strong growth. That also grew double digits. That was fairly broad based geographically. And so I think those contributed the majority of the growth.

I would say when we look at our reproductive health, newborn only grew, I think it was 3% this quarter. I think year-to-date it's sort of mid-single and that's fundamentally because we're seeing some fairly significant headwinds from birthrates. So, the U.S. is down low single digits.

Europe is down low single digits, China, we think is down, depending on the region of the country, anywhere from mid to high single digits. So, the fact that newborn is growing, let's say, year-to-date in the mid-single digits, we feel pretty good about because clearly it's not sustainable to have those types of negative growth rates.

So we're actually sort of as we go into 2019, we think we've got pretty good comps relative to the birthrates and we combine that with the success we're seeing this year with menu expansion and further penetration of newborns. We're quite excited about that.

So, we think the bottom line is it is sustainable and when you put in the areas like the genetic testing and some of the other things we're doing, we think it potentially accelerates into 2019..

Great. Thanks. And just one follow-up question. To be clear, has there been any change in margin expectations separate from FX and compensation? Just based on your prepared remarks, it sounded like you were making some incremental investments due to the core revenue strength. Thanks..

No. No change in expectation. As I mentioned, foreign exchange had a significant impact as well as the incentive compensation, but the fundamentals are still there and we still see strong operating margin expansion in the 70 to 90 basis point range excluding foreign exchange and incentive compensation.

As for the investments we made, yes, I mean we are increasing R&D and sales and marketing resources, so R&D has gone up from 6.3% of revenue to 6.8% this year and then sales and marketing has also increased year-over-year. So we're continuing to think that that's going to improve the organic growth profile of the company..

Thank you. And our next question comes from Dan Leonard with Deutsche Bank. Your line is now open..

Thank you. So, starting off, Rob, appreciate the comment that Diagnostics could accelerate into 2019.

Would you care to comment on DAS into 2019? Is there anything we should be mindful of from a comparison standpoint whether it be on the pharma services business or anywhere else? Or do you think, or anything on the new product cycle front that we should be thinking about as we look at our models?.

I don't think so. As Jamey alluded to, it's a little early to talk about 2019. But I think from a trend perspective, we think the markets still look attractive here. We're continuing to come out with new products. We've got some clearly that we expect to get out in the earlier part of next year.

I would say, obviously, the second quarter has got a little bit of tough comps and say did 10%, but I don't see anything sort of systemic that should create any significant headwinds for DAS..

Thank you. And then for my follow-up, Rob, I appreciate those comments on the cannabis industry at the start.

So I was hoping you could perhaps quantify the opportunity there from an analytical instruments standpoint?.

Well, I would say we're seeing very significant growth. But again sort of similar to the EUROIMMUN U.S. number, it's starting off of a relatively low base. But we think we've got probably, if not the, one of the most expansive capabilities when you look at the need to look at pesticide analysis and quality control of the cannabis.

And so I think we could probably double the business going into 2019 off of right now it's probably about a $10 million business. It probably doubles in the 2019. Ultimately though, it's probably a $50 million to $100 million opportunity for us..

And that's helpful context. Thank you..

Thank you. And our next question comes from Patrick Donnelly with Goldman Sachs. Your line is now open..

Hey, guys. This is Charlie on for Patrick. Appreciate the guidance raise for organic growth. Just curious as we look out to 4Q, obviously a bit of a step down.

Is that mostly just a product of the comp from last year? Or are there any kind of changes you're making in terms of the outlook by end markets?.

No. I would say, it's mostly attributable to comp. We're going up against I think a 7% number in fourth quarter of 2017. So we just want to be cognizant of that..

Got it. Thanks. And then for Vanadis, recognize that the CE Mark hasn't come in yet, but are you still expecting, I think you'd called out a $5 million contribution previously for this year? And then as we think about going into 2019, what kind of ramp should we be thinking about for next year? Thanks..

So let me just spend a second on Vanadis. So I would say, we continue to go through the normal process for CE Mark approval. We've received I would say a couple of recent questions from the regulatory body and we've responded as quickly as possible. And I would say at this point we don't anticipate any problems with approval.

Right now we understand the instrument and reagent reviews are complete. But the software is taking a little bit longer. And I think as we've mentioned previously, we decided to use our LifeCycle software for Vanadis result reporting.

And we felt this would provide an easy transition of the technology for recurring customers who use the LifeCycle for their biochemical prenatal testing.

So the software now will not only incorporate risk factors, biochemical data and relevant maternal information, but also have the Vanadis data and we think this will give very complete information to the health care providers. Unfortunate as I said, I think that's slowing down the approval a little bit, but we do think it's imminent here.

But relative to the revenue side, I would say while its timing is somewhat later than at least originally anticipated, we continue to ramp up both the operations, the service capabilities. We're still on track to install the Vanadis in I think it's 10 labs this year. And beyond that, we'll work with biochemical customers in Europe to convert.

I would say on a revenue standpoint, we, in the fourth quarter forecast, we have taken it down a little bit. And what we're doing is we're focusing more on placing the instruments into the labs and I think as we mentioned before, a lot of these are reagent rental based, so we do think the revenue will be lower than what we initially anticipated.

We don't think it impacts the 2019 ramp, and of course it's built into our forecast that Jamey talked about. With regard to the 2019 revenue, again as we mentioned before, it's a little early to start talking about specific numbers in 2019. But clearly when we give guidance, we'll try and be specific as to what numbers to assume for Vanadis..

Thank you. And our next question comes from Brandon Couillard with Jefferies. Your line is now open..

Thanks. Good afternoon..

Good afternoon..

Rob, nice to see I guess more portfolio pruning if you will. Would be curious to what extent you see an opportunity or scope for additional divestitures similar to the multispectral imaging unit.

And then given the balance sheet should be coming in south of 3 turns of net leverage at the end of the year, be curious how you're thinking about the M&A pipeline here?.

So yeah, I mean, I think we've talked about before that somewhere in the sort of $50 million maybe $100 million revenue. So we continue to sort of I would say pressure test the portfolio to make sure that we've got the right group of assets. Could there be another one or two product lines that go, possibly, but I think I've been fairly consistent.

I don't see any significant divestitures of the assets that we have today. With regard to the pipeline, I think we continue to look at sort of bolt-on deals. I mentioned the DANI acquisition.

It's a relatively small company in Italy, but we're excited about the capabilities they have, particularly around gas chromatography and more specifically in sort of headspace and auto sampling technologies. So we'll continue to do a number of those things. I mean if you look at we did SSI in China, we did RHS in Australia a little earlier.

I mean we'll probably spend $100 million this year. And hopefully in 2019 we'll step it up a little bit. As you point out, we're getting very comfortable with the balance sheet as we expect to end year under 3 times EBITDA. And particularly on the DAS side, we're focused in food and building out our reagent capabilities..

Thanks. And then a couple of housekeeping items for Jamey.

What should we pencil in for free cash flow for the year as well as CapEx? Would be curious what's pulling that CapEx number higher this year and if you expect that to continue in 2019? And then any update on net interest expense for 2018?.

Yeah so, Brandon, as I mentioned on the last call with regards to cash flow, we always have a stronger second half and in the third quarter that played out with adjusted free cash flow of just over $80 million versus the first half of $50 million.

So penciling in for the year, there's probably a little bit of pressure versus our original 365 due to what I talked to in my prepared remarks. We've got the moves in Singapore, which is now planned to move in the first quarter, the moves in China, higher organic growth rate.

Now we're not giving up on the goal but there might be $25 million to $50 million of pressure to that number. But we don't think it's anything structural and it should be corrected in the coming quarters here. With regard to CapEx I'd pencil in $75 million to $80 million.

I think we're roughly $60 million through the first three quarters so it shouldn't be too different from that.

And then the last one was interest expense, is that right?.

Yeah. Net interest and other..

Expense, yeah. So I think it will be pretty similar to the third quarter here. So, net $14 million or $15 million that we experienced in the third quarter, interest expense and other income, that is..

Very good. Thank you..

Thank you. And our next question comes from Jack Meehan with Barclays. Your line is now open..

Thanks. This is actually Mitch Petersen on for Jack this afternoon. It looks like Europe took a step down in the quarter in terms of growth. I was just hoping you could unpack what you saw by end market there. And comment on if you're seeing any particular areas of weakness there. Thanks..

Yeah. No, I mean, a little bit of this was a tougher comp year-over-year. But we had softer – it was a little softer in applied markets. Industrial down 3%. Food, we had some droughts in Europe, so that took a hit. So while food was up 10% or double digit overall, in Europe it was down pretty significantly due to the droughts in the summer here.

And then we had pretty tough comparisons in pharma biotech year-over-year and in informatics. So I don't think anything structural though..

Okay. That's helpful. And then on EUROIMMUN, I was hoping you could provide some more detail just on the cost and margin opportunity there. Where are margins today in relation to the Diagnostic average? And where do you think you can get those longer term? And what are some of the cost levers that you can pull to get you there? Thanks..

Yes. So, I think as we mentioned, when we acquired EUROIMMUN, it was around 20% operating margins. Our Diagnostics business last year was in the low 30s, so that gives you a sense of sort of the opportunity.

I would say throughout the year, and I would say this has largely been through the volume leverage, because I think as we've talked about, we haven't really done much from an integration perspective there, particularly on the cost side.

So, we've seen a couple hundred basis points of margin expansion in EUROIMMUN just from the volume leverage and they continue to have very favorable mix. About 90% or 91% of their revenue is reagent based. So, I think we can just through volume leverage get that up to sort of mid maybe even high 20s.

And then as we get into sort of maybe not 2019, but into 2020, we'll look at driving some synergies across the business from a cost perspective..

Very helpful. Thanks..

Thank you. And our next question comes from Dan Arias with Citigroup. Your line is now open..

Good afternoon. Thanks. Follow-up on Vanadis, Jamey, what is the assumption for the margin impact from that platform when it launches? I think it carries a pretty good profile once it's up and ramped. But I'm just curious about what you should expect on profitability in the immediate term when we do see the regulatory announcement..

I think it will depend, Dan, on how much we – as Rob mentioned, we think it's going to be more of a reagent rental model. But we're really figuring that out with customers right now, and it depends on how much they'll take on instrument sales versus reagent rentals. If it's more reagent rentals, we think that's accretive.

If it's instrument sales, we might have to wait a little bit until some of the samples get processed. So, it's a little tough to tell for 2019 at this point..

Okay.

If you just had to use your baseline guess right now, I mean, what do you think the chances are that post the announcement, you end up talking about there being some dilution from the product just based on previous expectations?.

If you're referring to the fourth quarter, Dan, I don't think it's going to be very material at all. As Rob mentioned, he said we're going to be less than $5 million. We've taken that down quite a bit. So in the guidance for the fourth quarter, it's very, very nominal. If you're referring to next year, that's a little tough..

Okay. And then maybe, Rob, on the expanded sequencing business, can you just touch on where you are with the validation of the NovaSeqs that you bought? I don't think you mentioned that.

Is capacity a bottleneck there at all? And then how do you think you exit the year just in terms of the split between samples that are coming from patients versus pharma? And then maybe how does that change in 2019?.

Yes. So, we're clearly at a run rate sort of north of the $10 million that we talked about. So the demand for that business continues to be very strong. Jamey mentioned the fact that we put a new LIMS system in and that sort of closed a little bit of a bottleneck, but we're catching up with that. The five NovaSeqs have been added to the lab.

They're in the process of being validated. I mean, I think that's probably going to come online either late in the fourth quarter or early 2019..

The only thing I'd add to that on the LIMS is – so that is how we work with customers from a receiving of a sample perspective. So that helps open up the intake. We still have one piece of software on our reporting system that won't be done until the first quarter, which really kind of rounds out our software implementation..

Okay. Appreciate it..

Thank you. And our next question comes from Steve Beuchaw with Morgan Stanley. Your line is now open..

Hi, good afternoon here. And thanks for the time..

Good afternoon..

I had a question on EUROIMMUN.

I wonder, Rob, now that you've had the business for roughly a year, if you could just take a step – I mean, we've talked about some of the regional opportunities, automation opportunities, a lot of the skill set there that might have been incremental to your thinking when we, back in the summer of 2017, were talking about the growth outlook for that business.

Can you just talk about how your thinking has evolved on a medium-term growth outlook for EUROIMMUN? And then, sorry, while we're at it, Jamey, any chance you have the EUROIMMUN ex currency or core growth for the quarter?.

You want to...?.

Yes. Core growth for the quarter ex currency was up 11%. And then year-to-date we're up 13%..

So, Steve, with regard to the growth, I mean, we've said for a fair amount of time that we think EUROIMMUN probably grows mid teens and our expectation is they'll achieve that in 2018. So, we don't see, or at least I don't see any reason why that changes over the next couple years.

With regard to growth, I would say the one thing that has changed since we've owned EUROIMMUN is our belief that the EUROIMMUN capabilities can drive incremental growth in the core PerkinElmer businesses.

And I think that's been the biggest change as we sort of have a better appreciation for what their capabilities are, and as I sort of tried to give an impression in my prepared remarks is, we think increasingly that these assets as well as some of the other acquisitions we've made are very synergistic across whether it's therapeutics, diagnostics, food.

I mean, there's clearly a blurring of the capabilities and technologies being used in those end markets. And I think we feel better about the opportunity for EUROIMMUN to enable incremental growth in what historically were the PerkinElmer markets..

Got it. And then just one clarification for Jamey. Jamey, and I should say thanks, Rob, for all the detail that you gave on the impact of the LTPP on comp expense in the quarter.

Jamey, I just want to make sure that as you make the comment about expectations for the company to hit the 20%, beyond 2020 that is, margin goal, that number one, we expect this comp issue to be something of a one-off; we're kind of back to trend beyond this year.

And then number two, I wonder if you could sort of elaborate on what it is you've seen in your first several months here as CFO that gives you comfort giving us commentary about confidence in the medium-term margin plan? Thank you..

Yeah, sure. With regards to the LTPP being a one-off, assuming a normal stock price increase, then it will be a one-off. If it drastically increases like it did in the third quarter then obviously we'll have an additional expense to that.

But what gives me confidence is, I mean, if you look at this year, we're going to be up well over 100 basis points excluding foreign exchange. And if you look at what we posted on the website, our foreign exchange this year will have an impact of an increase in revenue of $20 million and then a $0.10 pressure on EPS.

So absent that, we're in the 120 to 150 range. So assuming that happens two more years in a row here, and we have full expectations that we're going to continue to grow, then that should replicate in the next couple years. And I'd say it's driven by three things. One is the mix of businesses.

So as the Diagnostics business grows faster, a la EUROIMMUN and the rest of the core, then that should have increased opportunity on our op margin line. Number two is the volume leverage. I've mentioned in the past that we don't have a lot of infrastructure that we need. We have a good base to be able to take advantage of.

And three, we've got a lot of discipline around cost out. We've got a whole team, particularly on the DAS side, but also on the DX side that's working on product pare downs, different sourcing, value engineering.

And so I think as we look at the margin expansion, we think it's about a third, a third, a third in each of those categories, mix, leverage and then our cost out activities that we're driving..

Thank you. And our next question comes from Derik de Bruin with Bank of America Merrill Lynch. Your line is now open..

Hi. Good evening..

Good evening..

So actually I just wanted to follow up on Steve's question there. So I thought you said earlier in the quarter call that EUROIMMUN was tracking at 15%.

Did I mishear that? Or that I think?.

Yes. For the year, we're expecting 15%. So in the fourth quarter we're expecting it to be north of 20% in EUROIMMUN because we've got, as we look at our order book, we think that that's what it'll deliver. So year-to-date 13%, the fourth quarter in which we expect, as I said, I think is $102 million of sales. That gets you to the year of 15%..

Thanks. Okay. And just you've done those three acquisitions and you gave us the divestiture amount.

Can you tell us what incremental revenues are from the three acquisitions that you've done?.

Yes. So I think DANI is like about $10 million. SSI is less than that, probably more like $5 million..

RHS..

And RHS was....

$1 million or $2 million..

Yeah, less than $5 million..

Great. And pretty much everything else I wanted was asked so I'll leave it there. Thanks..

Perfect. Thanks..

Thank you. And our next question comes from Catherine Schulte with Baird. Your line is now open..

Hey, guys. Thanks for the question. Just one from me. With the guidance range for core organic revenue growth for the year, what are the new assumptions for DAS versus Diagnostics? It sounds like most of the upside is in DAS.

Is that right?.

You mean for the year or for the fourth quarter?.

For the year..

You mean relative to the original guide, that's correct. I mean, where we're seeing most of the over-performance is in the DAS side relative to our guidance at the beginning of the year. That's correct..

Great. Thank you..

And our next question comes from Steve Willoughby with Cleveland Research. Your line is now open..

Hi. Good evening. I have two questions for you. First, there was a comment regarding the LIMS system install in your genomic services business.

Is the disruption that you've mentioned, are you through that now or is that something that lingers into the fourth quarter? And then secondly, Rob, the increased stock comp expense, that it looks like you've done most mark-to-market, at least a portion of it.

Will you get some of that back here in the fourth quarter now that the stock is lower than probably where it was during the third quarter?.

I'll take the LIMS one. Hey, Steve. So as I've tried to mention earlier, there's really two portions to really complete our software package in genomics testing. One is the LIMS system which is up and running now. That will increase sequentially from the third quarter to the fourth quarter, the ability for us to take intake samples.

And we do have a little bit of extra revenue in the fourth quarter as a result of that. But we're really not humming until the first quarter when we finalize our, what we call our ODIN system, which is really a reporting system. It's as opposed to the geneticist looking and writing out separately one by one every single sample.

It's more of an automated system. So once that's really up and running, then it's kind of the flood gates open here, let's say..

To answer the second question, yes, theoretically, if the stock stays exactly is where it is, we're down, I don't know, 6%, 7% from when we closed the quarter, at least when we closed the books. And so yes, the way it works is every quarter we revalue the cash compensation liability to whatever the stock price is..

Thank you..

Thank you. This does conclude today's question-and-answer session. I would now like to turn the call back to CEO and Chairman Rob Friel for any further remarks..

Well first of all, thanks for your questions and your interest in PerkinElmer. As we head into the end of the year, I continue to be very confident in our ability to drive our strategy and build upon the terrific momentum we've seen so far, which I think sets us up for an even more successful 2017.

Before I close the call though, I would like to mention that as I think some of you know, Tommy has recently been promoted to the CFO of our service business within DAS. And therefore this could be his last earnings call as Vice President of Investor Relations.

I wanted to thank him publicly for his terrific efforts over the last six years, as he has both contemporized our Investor Relations function as well as increased the visibility of PerkinElmer within the investor community.

And while he tries to take more credit for the stock appreciation than he deserves, I must admit his impact was not insignificant. While he leaves big shoes to fill, we hopefully will have someone in the role by early next year. In the meantime, we've asked Tommy to do double duty.

However I'm confident our service business will get lots of Tommy's attention, as I know he has many ideas to help elevate its performance. With that, let me close the call. Thanks again for joining us this afternoon and have a great evening and hope you enjoy what's left of Halloween..

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