Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Third Quarter 2020 PerkinElmer Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session At this time, I'd like to turn the conference over to Mr.

Bryan Kipp, Vice President of Investor Relations. Sir, please begin..

Thank you, operator. Good afternoon, and welcome to the PerkinElmer third quarter 2020 earnings conference call. With me on the call are Prahlad Singh, President 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 this call is being webcast live and will be archived on our website until November 11, 2020..

Thank you, Brian. And good afternoon, everyone. Our 13,000 employees continue to go above and beyond, and our year-to-date results further reinforced that reality. As I have previously mentioned, improving lives is in our organization's DNA. It is what impassions our team.

I remain humbled by and immensely proud of how everyone within PerkinElmer has rallied together throughout 2020.

While the guiding principles that we outlined at the onset of the pandemic remain on North Star, keeping our employees and company safe, utilizing our expansive capabilities to join in the fight against COVID-19, serving our customers with excellence during this difficult period and emerge from this crisis as a stronger company.

We are also actively positioning the organization for what a post COVID-19 world might look like. The environment will undoubtedly be different from the future we imagined a year ago. Over the past 12 months, we have expanded into market adjacencies, built new business lines and dramatically enhanced our commercial relationships..

Thanks, Prahlad, and good evening, everyone. To start, I echo Prahlad. I could not be prouder of our team and more confident that PerkinElmer is well positioned into 2021 and beyond.

Over the past year, we have won dozens of new products, build significant equity with our partners, foster new customer relationships and expanded our presence in multiple markets, and our organization is not slowing down. We are all laser-focused on the opportunities in front of us and truly excited about the future.

To that point, we plan to host a virtual life sciences deep dive for the investment community on December 9. We have teed up exciting topics for this session, where we will walk through our discovery, informatics and enterprise businesses. Additional information on the event specifics will be communicated in the coming weeks.

Before I begin discussing our financial results, I want to remind people that our third quarter earnings call presentation has been posted on the Investors section of our website under financial information.

As always, I will begin my prepared remarks by highlighting the third quarter, then I'll provide some additional color on our served end markets and financial metrics, and I will end with fourth quarter guidance..

Our first question or comment comes from the line of Vijay Kumar from Evercore ISI. Your line is open..

Hey, guys. Thanks for taking my question. Maybe one quick one on the guidance. And I had a follow-up on a big picture question.

Turning to Q4, one, Jamey, the $350 million to $450 million, does have any California contracts baked in? And when you look at the base business, why is the guide assuming mid-single declines, maybe parser? Because, I guess some of your peers are seeing flattish to perhaps positive on the base business..

Yeah. Thanks, Vijay, and hope you're doing well. So generally speaking, I'd say we're taking a similar approach entering the fourth quarter, as we did when we entered the third quarter. We've looked at order trends.

We've looked at our backlog, which has grown versus when we entered the third quarter, and we feel very comfortable with our guide, and I'll kind of break it down non-COVID versus COVID. So non-COVID, we are seeing the market improve, but the exit rates are not quite as fast as they accelerated at the end of the second quarter.

However, if they continue, we think we'll be at the high end. And if they don't continue or if something happens, they'll be at the low end. It's also worth noting, Vijay, that in the fourth quarter of 2019, we had two very material product lines growth for us. Cannabis was quite substantial in the fourth quarter.

We're assuming no cannabis revenue in the fourth quarter of 2020, as well as informatics was substantial in the fourth quarter last year. So if you exclude those two, we think we'd probably be better by three points. So instead of down 4% to 6%, we'd probably be down 1% to 3%. So DAS came in minus 3% in the third quarter.

It will probably be in the same vicinity due to those comps. However, if you exclude those comps, DAS would be positive in the fourth quarter. And then Diagnostics ex-COVID revenue was down 11% or 12%. And we've seen it start an uptick over the last few months. And so we are assuming that, that will be down high single digits.

So that kind of explains non-COVID. It is closer to low - minus low single digits, but we have those two comps. From a COVID standpoint, you asked the question specifically on California. Yes, it is in the number at about $50 million to $75 million.

The way we derived the $350 million to $450 million is the base business was $288 million in the third quarter.

We're assuming the base business is mostly in that range, call it $250 million to $300 million, and then we're adding an extra $50 million to $75 million for each of the California labs and the UK labs, which overall gets you to the $350 million to $450 million.

I think all of this is worth noting that none of this assumes any significant block down, obviously, COVID positivity rates are going up across the world. And right now, we are not planning on any significant lockdowns in any of this guidance.

Should they happen, it could have material upside to our COVID revenue and material downside to our non-COVID revenue. But in general, that's how we kind of thought about the guidance, Vijay..

That's extremely helpful, Jamey. And then one big one for Prahlad. I think some of the comments you're making, as you look forward towards the next chapter here in the Perkins story. I guess, I'm curious, Prahlad, because I'm looking at some of these numbers, right, 100% growth in earnings. I mean, some of these numbers were astronomical.

But the market isn't giving you guys the credit, right? The stock hasn't acted well. And the biggest question here is sustainability. Are these COVID revenues going to be some headwinds for next year? Maybe talk about sustainability, one from a base COVID perspective.

And when you think about these, the incremental cash flows that's come through for the company, right, to your point, Perkin was not a player in molecular like 12 months ago. What is the right way to think about capital deployment? And does it strengthen your position in the diagnostic space? Thank you..

It's a very good question, Vijay. I mean I think the way I would look at it, obviously, we have been giving a lot of thought to it.

Over the past few months, where I personally have focused my attention on and maybe that will sort of throw some light into how we are thinking of it, right? As I talked about, the team has been focused on the three guiding principles extremely well, that allows me to focus most of my efforts on positioning the company for the future.

And we sort of - I'm looking at it from three primary areas, right? Number one is innovation. I mean, looking at opportunities across the organization, both on COVID and non-COVID, but fundamentally driving innovation in a very different way and three key areas that I'm focusing on. NPI acceleration, focus on quality and disruptive ideas.

And this is where we are having regular reviews, deep dives and what the cadence of NPIs will be over the next 2 to 3 years? And what I can tell you confidently that it will be no doubt very strong.

There are lots of exciting things that we are building upon the strength that we have now, the muscle that we have exercised through COVID, we need to now expand that into new and adjacent markets. The second one around capital deployment, right? We are in a great position. We have firepower now.

And over the past year, we have gained share and expanded our presence in new markets, as you mentioned, around molecular diagnostics.

So we are actively looking to deploy this capital to further bolster both on the diagnostic side and on the life sciences franchises, so that we can layer additional capabilities that enhances our current positions in the market.

Let me give you an example, right? As we look at - from a disease target characterization, we have a leading position with high content screeners and in vivo imagers.

Cell selection and separation tools would go hand-in-hand with the imaging and detection capability that we have, that would allow researchers to investigate which cells have changed in a population versus the subcellular level. So additional these tools around cell detection, separation or manipulation is a natural adjacency for us.

So that's an example that we would continue to bolster our efforts around capital deployment. And the last one is on the people front. I've been focused on building an organization that has the diverse talent and deep bench stream. Over last year, if you recall, we combined our commercial teams from DAS and DX, the United R&D.

Now our focus is how do we take these opportunities within commercials and bring that under one umbrella. How do we focus on the alliances and partnerships that we have built across the globe because of COVID? So those are the three focus areas that we have - that I personally am putting my attention on.

And that's why we feel confident about the future..

That's helpful, guys. I think the only thing you missed up a lot of was adding maybe a single ahead of cell separation and detection, perhaps that's probably worth another $5 billion to market cap. Thanks, guys..

Thank you. Our next question comment comes from the line of Dan Arias from Stifel. Your line is open..

Good afternoon, thank you. Prahlad, I wanted to sort of follow-on on some of those ideas that you were talking about and kind of hit on Vijay's point on sustainability. Just on the top line, maybe starting with diagnostics. You highlighted a couple of times, just being in good shape in a post COVID world.

Can you talk to some of the early thoughts that you think you might have on how you could look in 2021 when you think about the non-COVID portions of that segment and how they're expected to drive growth? What's your expectation on a recovery in immuno DX, again, outside of COVID? And on the reproductive health side, leaving birth rates aside and what that brings, how do you feel about accelerating growth on the back of some of these initiatives that you have there? And I guess, ultimately, where is your confidence in diagnostics being a double-digit organic growing segment once we move pass the COVID period, and get into normalized periods?.

Yeah. No, great question, Dan. And let's start with the reproductive health, right? As you said, we don't expect the current birth rate pressures to be a headwind of this magnitude for the foreseeable future. We expect that this will moderate at some point as conditions normalize.

But outside of that, just like I gave you the example of EONIS during my prepared remarks, that is a particular segment where we can bring that product portfolio into the molecular diagnostics arena because it uses the same workflow that is currently being used for COVID, right.

You use the same PCR, you use the same liquid handling, and you use the same extraction components that are already in place now at all these installed base.

And as we look forward to the menu expansion around reproductive health, Dan, most of the new disorders that are either being looked at or thought off from the RUS panel as an example, DMD, SMA, they are all molecular based.

So again, the methodology or the technology is moving away from immunoassay to molecular diagnostics, which sort of matches well with the new and expanded installed base that we have put together across the globe.

Similarly, as we look on the immune side, immunoassay side, there are several other new immunodiagnostic assays that we are either working on in-house or also looking at inorganic opportunities. Now moving on to the autoimmune and allergy side that comes from the EUROIMMUN portfolio, right.

Autoimmunity, as I have said, the rate of detection of autoimmune diseases is not slowing down, and we've started already seeing signs of recovery of that even in China. And I think we'll continue to expand that portfolio by bringing in a new platform that we've - that we have named Excentis And that should be out probably sometime in the next year.

Adding - continuing to add to that portfolio is going to be an important factor for our growth. The one place where we will see some pressure in the short-term is around allergies. And that's just because people are being very productive, wearing masks, and that's the portfolio that we see a pressure on it.

So sort of there are various ways that we are looking at expanding our portfolio around the installed base that we've already built today with our extraction portfolio, Dan..

Okay. That's a helpful bit of explanation there. Maybe just kind of sticking with a similar idea. I mean, it sounds like one of the hopes that you have is that the awareness and the mind share you're creating in areas creating in areas like sample prep and Genomics is going to sort of elevate the business for the longer term.

Are you seeing signs on strategic partnership opportunities or longer term deals that make you think that, that's going to happen, that you'll see some stickiness with what you're selling now during a time when labs, quite honestly, are buying because they can get it, but once things come down and there are multiple options, you'll be the choice that they go to..

Yeah. I mean we have put more than 1,000 units that have been installed. Now while these labs are focused on COVID, they're also aware that - look, we have put this infrastructure in place. Now we've got to be able to put plans in place to leverage this installed base and competency that we have set up beyond COVID.

So absolutely, the partnerships, those that we have announced and several that we have not announced. Those customers are already discussing with us, hey, what else can we put through this - what else can we put through this workflow.

And again, in fact, this has gone to an extent that in Jamey's team we are now establishing a function around alliances and partnership, that will be focused solely around these efforts of taking this forward..

Okay. Thanks a lot. Appreciate it..

Thank you. Our next question comment comes from the line of Derik De Bruin from Bank of America. Your line is open..

Hi, good afternoon. Can we talk a little bit about sort of how you're thinking about - I mean I know it's early and there's a lot of moving parts. Can we think about just a rebound in the core business in '21? And particularly on the DAS side, I mean I think Dan took care of the diagnostics sides we're thinking about there.

But can we talk about the DAS side and just sort of thinking about what you think is pent-up demand? What do you think is potential for bounce back on that one? I'm just trying to get a sense for how much of the core business we should sort of modeling for a rebound for next year?.

Yes. Sure. Hey, Derik, hope you are doing well. So I mean, I think we're, in general, coming off fairly reasonable comps this year to start with. I think life sciences, we've seen a continued uptick throughout the year.

I mentioned in my prepared remarks that the Discovery business is now positive, and I think we will continue to see that moving forward here. Informatics, we think, is still a strong grower heading into 2021, OneSource.

So the life sciences business, we expect, A, you should have relatively easy comps; and B, is we're starting to see the spending and that's probably 55% to 60% of the DAS business. So feel good about that. Food, we will not have the cannabis issue year-over-year. So cannabis in 2018, if you remember - or 2019, I guess, if you remember, was $25 million.

And this year, it's next to nothing. So we will not have that comp issue. And in fact, depending upon where the election goes and where it's funding levels are, that might start to rebound again.

And in addition, food and if it starts to open up a little bit, it's hard to understand what will happen with processors and restaurants and whatnot, but at least we will have already kind of lived through probably the significant shutdown. And then industrial and environmental has been relatively stable and steady.

I don't anticipate a big snapback or whatnot. But I think you've got life sciences, it should be an easy comp. But I think life sciences has; A, an easy comp and should be growing nicely, particularly Informatics. Food will not have a difficult comp anymore and should start to uptick industrial and environmental as well.

The only thing I'd say on DAS, in general, is we do have a fair amount of NPI. So Prahlad mentioned it earlier, he's been holding weekly reviews with all of our segment leaders. We are up ticking our R&D. It's up 10% in the third quarter. We plan to further uptick in the fourth quarter.

So there is a cadence of improved NPIs coming out that should bode well in 2021 and beyond for the DAS business..

And just to add to that, also on the life sciences side, Derik, we've started seeing some increased investments from governments and CDCs around Life Sciences Research, looking at viral path and immune responses, so I think that will also bode well for the life sciences business on the research side..

Got it. And thinking about the - it's an interesting comment. I mean, one of your competitors in the RNA extraction space was sort of maintain the fact that automated sample extraction is - it was a headwind for them. It seems like you're certainly benefiting from that one.

Can you talk about the dynamics of that market? And also, just how you're sort of thinking about the evolution of - there's more people going to like heat, lay bile, sample preps and RNA extraction free going on with it. So like how do you - once again, it goes to the sustainability question that Vijay was asking about.

How do you sort of think about your RNA extraction business going, and market share shifts and things of that nature?.

The way I would look at it, Derik, is that there are three parameters that our customers look for. And that is what is important. Getting a higher extraction yield, having an easy workflow at a low cost. And I think what COVID has definitely proved from our customers' base.

I mean, if you just - all you've got to do is look at the numbers over the past three quarters, is that what we are able to provide with our product portfolio is the right - the extraction use that they want, the right workflow that they want at the cost that they want.

But more importantly, I think what becomes more relevant is that as we move beyond COVID, there will be a need for continued surveillance into the future. And that's why the stickiness of this installed base is going to be very relevant and important.

COVID might go away and we can debate till the cows come home, whether it goes in three months or six months or nine months. But the surveillance of infectious diseases like COVID is here to stay. And I think that's where the stickiness of our installed base that gives us the confidence of the stickiness around our installed base..

Great. Thank you. I'll turn back in the queue..

Thank you. Our next question or comment comes from the line of Tycho Peterson from JPMorgan. Your line is open..

Hey, thanks. I'm going to take the other side and actually ask on some of the COVID tailwinds. And maybe start with the two labs, California and the U.K. I know you talked about 40,000 samples to start in California. Can you just remind us where those could go from a capacity standpoint? I think, I read California could get up to 150,000 tests.

I'm just trying to take forward a little bit into 2021.

And then separately on the respiratory - multi analyte respiratory panel, how much of the volume do you think goes to that versus the stand-alone PCR test? And then when do you think also serology starts to pick up again?.

Yes. So you're right, Tycho, in that the capability of the California lab could go up to 150,000. And I think we will be ready next week, in fact, where we would be up to a start-up to building up to a capacity of around 40, 000..

40,000. I think the state we're working with them. By the end of the quarter, it might be at something like 80,000. And then in the first quarter, be ready for 150,000 at some point during the first quarter..

And around flu pack, Tycho, as you asked, we've gotten CE mark. We are awaiting FDA approval. And once we have that, I think what we have not yet thought through, it depends to a large extent on how the state decides, around which segments go under the flu pack and which ones go under a pure RT-PCR test.

There might be school kids or school populations or healthcare populations that might go on the flu pack, whereas, the others might go into RT-PCR. And I think that the capability has been set up that we can deviate up within the labs and have different workflow for the two tests, but the proportion of that is yet to be determined..

Okay.

And then on serology, when do you think that starts to pick up again? Is that mid-next year? Or what's your outlook there?.

I think it probably is - I mean, first quarter, sometime in the first quarter as the vaccines start taking effect. I think that's the serology trend will start picking up along with the vaccine efforts, Tycho..

Okay. And then shifting gears, you're - I think the only company we've heard from so far that's still negative in China. Can you just - and obviously your levered birth rates and other factors there.

But can you just talk on when you think China may return to growth for you?.

Yes. I mean, I think if you - even as we look at China now, while it has been pressured for us, there are two things to think of, right? One, we have a stronger DX, a diagnostics weightage in China than DAS. And in that, again, autoimmune and as I mentioned, respiratory, those have been the ones that have seen impact.

But we have started seeing flow through now in China from our distributors. So as we as we look forward, our distributor - the flow-through or sell-through from our distributors has continued to increase. So I would say that as we look into this quarter and next quarter, that continues to improve and it will continue to improve..

Yes, I would agree. And then on the DAS side, Tycho, I mean, we've already seen life sciences turn positive in China. Food and Applied has been kind of down low single to mid single. So I would anticipate by the first quarter of next year that - with easier comps and continued uptick.

And we have seen an uptick, particularly in industrial and environmental, that it has steadily grown throughout the year that I think we turned positive in DAS and Diagnostics will be influenced by the things that Prahlad talked about, but birth rates obviously matter. Allergy is a bigger share in China for EUROIMMUN.

And if everybody is wearing a mask, there's a little less allergy uptake there. But DAS would turn positive and Diagnostics, we'll see. But the long term....

And then last one - and then just last on the DAS operating margins. You flagged pulling forward some investments. A, should we think about those margins to continue to be under some pressure as you're investing for the DAS business and other particular areas you can call out? I guess you called that cellular analysis earlier.

Was that kind of the main area of incremental investment?.

That's a great question on the - you're speaking specifically to DAS, though, Tycho?.

Correct. Correct..

Yes. Yes, DAS has been under pressure for two reasons. One is, you'll see in the quarter, we're probably down 500 basis points or something like that. And about half of that is both of them are conscious decisions. On the OpEx side, it's about half of that, and we've increased our R&D.

We've mentioned earlier that we want to get ready for our analytical portfolio, our life sciences portfolio, our food portfolio. So we continue to increase R&D. We continue to work on our sales and marketing channels, particularly on food. I've mentioned that in the past that we had some work to do there, and people in general.

So about half of this is a conscious decision on OpEx that should be fine, and we're making that investment now. And as soon as the volume upticks, we should be okay.

Similarly, on the gross margin line, which is probably the other half, we've made a decision, which was part of the 4 principles that Prahlad outlined earlier, to keep our employees safe, and we've had no layoffs at any of our plants across the globe.

So even as the volume has declined, we've had unfavorable variances due to the factory overhead and whatnot haven't laid anybody off. And so therefore, as the volume comes back, we think that the workforce will be ready, and we're just seeing a little bit of short-term unfavorable variances..

Okay. Thank you..

Our next question and comment comes from the line of Steve Beuchaw from Wolfe Research. Your line is open..

Hi, thanks for the time here. I think most of the ground has been covered, but I want to come back and do a couple of things with maybe a little bit of a different angle, if that's okay. First, on the California contract. I appreciate all the clarity of disclosure here, and frankly, really congratulations on getting that done.

I wonder, though, if you could talk about that initiative and the extent to which you see more of that initiative popping up in 2021. I mean the logic here, it's pretty obvious. But I'm a little surprised that I haven't seen more headlines of that sort of thing happening.

So could you speak to what you see on that front, not necessarily just in the U.S., but globally. Second is, I wonder if you could talk a little bit about, within the context of overall screening, as Derik mentioned, one of your competitors made a lot of comments today.

One of the comments they made was that they think next year, as it relates to testing, the market kind of splits half and half between PCR and antigen. I wonder if you could speak to that dynamic. And then I have one follow-up..

Okay. On the first one, Steve, I think it's a good question, right? But there are some other discussions going on, then there are some other partnerships that we have across the globe, which we haven't publicly announced because of our partner's request.

So I think alliances such as these, take a larger importance during times of crisis and pandemics like that when states and governments sort of get into action and gear. But I think what these alliances forge are longer term partnerships.

And our focus really is on how do we do these, I mean California, as I said in my prepared remarks, right, within eight weeks, we've done what should have taken 18 months. So the focus is really how do we execute flawlessly on these and build on it beyond that.

But really, what we are not - our strategic intent is not to become a reference lab, that is not something that is part of our strategy. We are doing this. Because we've got a three decade-old relationship with the state of California, and this is building on that partnership around lab and labs. So I think that's the way I would look at it.

To your second question around the split between antigen and R-TPCR. Our belief is that RT-PCR is the gold standard. The level of detection that you get, and especially when you look at our kit with the lowest level of detection, you could think of it from a perspective of moving on beyond a singular test to pooling.

And research shows that there's a 10% - 10-fold increase in the level of - limit of detection of a COVID diagnostic test, and it's expected to increase the false negative rate by 13%. So there is data out there that by having an important, highly accurate, sensitive test is going to continue to play a role.

Having an antigen test, which is in the high 80s or even if it's early 90s, the impact of false negative, especially for pandemic and flow for infectious diseases that are so contagious, does have an impact. And I think the viral loads may be missed by those assays.

Did you have another question?.

Very fair. And then my follow-up actually relates to serology. That's a two-parter. One is, you've talked in the past about giving some clarity on - I don't know if it's multi-pronged is the right term, but a multi-layered approach to serology, where you're looking at residual immunities from a number of different ways.

I wonder if you could update your thinking on that? And then I know you've made some comments around timing around the uptake of serology.

But could you give any comments around what you think the scale of it might be? I know a lot of us are contemplating the possibility that there's a fair amount of serology uptake within the context of clinical trials. But do you think that it goes beyond that? Thanks..

Yes. See, so I think what I've talked earlier about is looking at the immune insight, right? And I think on that, we are looking both at the quantitative antibody testing and a neutralization assay as an example. But the idea really is that investigating T cell responses for cellular immunity, I think we think that it's going to be important.

And hopefully, we'll have a couple of COVID-related products in the pipeline that we can talk about more over the next few months. To your second question around how big or what the impact of serology? I think it's - my guess would be as good as yours.

And honestly - and the reason I'm saying that is because the crystal ball on that is really based on the impact and how important it being a partner for vaccine vaccination and vaccine will be. So I think it will gain importance and more relevance as we move from where we are today to vaccines and then beyond that for epidemiological testing.

That's where I think serology will have the biggest impact..

I am sure your crystal ball is much, much more sophisticated than mine. But I appreciate all the help. Thank you..

Thank you. Our next question or comment comes from the line of Doug Schenkel from Cowen. Your line is open..

Hey guys. So you provided a lot of detail on ways you hope to offset any COVID-19 revenue that proves to not be all that durable in the long term. Thank you for that. I'm hoping we can get a lot more quantitative versus qualitative.

If it - how has been for the pandemic? And if we assume that EPS was going to grow at, say, a 12% to 15% annual CAGR, if you use 2019 as a base, you would have been on track to generate about $6 in 2022 earnings. So two simple questions.

One, pandemic related revenue were to go away by the end of next year, so at some point in 2021, do you think all the initiatives and relationships that are occurring as a result of COVID-19 would put you in a position to do a lot better than $6 per share in 2022? And secondly, in such a scenario, is there actually a path for you growing earnings in 2022 if the pandemic abates in 2021?.

So the answer to your question is that, yes, we will definitely benefit from the installed base that we have put in place. If you are asking us to give an estimate on what our EPS is going to be in 2022, Doug, I'm not going to give you that. I don't know....

Yes, of course, I'm not….

Yes, for a couple of reasons. For our install base, the additional markets that we're playing in, the customer base that we have. But also, we've generated a lot of free cash flow on back to Prahlad's earlier points, we are spending a lot of it on innovation, capital deployment. So I think it increases the flexibility of the company.

So I think we were already on that trajectory, but I think this should - to answer your question directly, further boost our ability to at least meet that, if not beat that, for sure..

Okay's. And then second question on free cash flow conversion, 82% in the quarter. I know you've talked about how that is, at least in terms of growth, much, much better than what we've seen for a while. So that's great. All that said, intuitively, I would have thought it would have been a lot higher, given what we're seeing at the operating line.

You're generating a ton of revenue without a ton of accompanying operating spend.

So could you maybe just walk through the disconnect? And why that number from a conversion standpoint isn't actually higher? And I might be making this up, I thought I heard in your prepared remarks, Jamey that, you actually were expecting that number to go down next year. Did I hear that right? And if I heard it wrong, sorry about that.

If I heard it right, why does this trend back down next year?.

Yeah. I don't think I said anything about free cash flow going down. So to put 74% into perspective, Dough, we've made a conscious decision, much like we do every year on the non-COVID side to build inventory, but we built $120 million of inventory, which is exactly 25% of our net income.

So absent the inventory build to which probably two-thirds of that is COVID related, we would be at 100% free cash flow year-to-date. And - that was because we look at the backlog, and we've got a substantial backlog walking into next quarter. And we think it's the right thing to do to have the COVID products available.

And we think that the non-COVID side will see an uptick as well outside of informatics and cannabis. So we think we're in shape. And actually, one more thing, just to further put a point on that. I mean the COVID related free cash flow conversion year-to-date, while it will be wonderful in the future, is actually a drag.

So if you think about $0.5 billion of volume, there's still a couple of hundred million and I assume 30 to 60 days payment terms, there's probably a couple of hundred million dollars of that on the balance sheet in terms of receivables. We built $80 million of inventory.

So we basically eroded much of the net income on the balance sheet and working capital. But that will prove to be future excess cash and none of this includes the $200 million that we funded to outfit the California lab that we believe we will collect in the fourth quarter..

Which should all benefit to you, Q4 and beyond..

That's right..

Okay. All right. Thanks guys..

Thank you..

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. At this time, I would like to turn the conference over back over to Mr. Singh for any closing remarks..

Thank you, operator. Again, thank you for your questions. As I said at the beginning, I'm gratified and I'm proud of the organization and how everyone has valued together. We really feel very confident that we are leading with science, and that is clearly resonating. I have no doubt that we emerged from this crisis as an even stronger company.

Thank you for supporting PerkinElmer, and I look forward to providing further updates on our fourth quarterly earnings call..

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