Good day, ladies and gentlemen, and welcome to the Q3 2017 PerkinElmer Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call maybe recorded. I would now like to introduce your host for today's conference, Tommy Thomas, Vice President of Investor Relations. Sir, you may begin.

Thank you, Heather. Good afternoon and welcome to the PerkinElmer third quarter 2017 earnings conference call. With me on the call are Rob Friel, Chairman and Chief Executive Officer; and Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note that this call is being webcast live and will be archived on our website until November 16, 2017. 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 view 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 the attachment, we'll provide reconciliations promptly. I'm now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?

Thanks, Tommy. Good afternoon and thank you for joining us today. I'm very pleased with our performance in the third quarter as PerkinElmer delivered revenue and EPS at the high end of our previously communicated guidance range, and we continue to make excellent progress on our strategic priorities. Similar to previous quarters, I will briefly review our financial results, discuss overall market conditions and update you on our progress during the third quarter relative to our strategic priorities, while Andy will discuss our financial results and future guidance in more detail. Turning to our financial results, we generated revenue of $550 million during the third quarter, which represents growth of 8% over Q3 last year on a reported basis and 5% growth organically. Adjusted operating margins expanded by 30 basis points to 19.3% and adjusted earnings per share was $0.73, representing growth of 14% over Q3 last year. Year to date, our financial results are tracking favorably to our original guidance in the beginning of the year. And based on our fourth quarter guidance, we are on track to exceed our full-year guidance communicated back in January for both the top and bottom lines, delivering organic revenue growth of 4% and increasing adjusted earnings per share by low double-digits. Markets continue to be favorable. For the first time in over five years, during the third quarter, we experienced positive organic growth in every region of the world and every end market in which we operate. Looking specifically at our end markets, pharma biotech grew mid-single digits as strength in service and high content imaging was offset from continuing headwinds in our radionucleotide business. Diagnostics also grew mid-single digits as emerging markets continue to outpace developed markets. Our food business was very strong, growing over 20% due to several key customer…

Thanks, Rob, and good afternoon, everyone. Consistent with previous quarters, I'll provide some additional color on our end markets, a financial summary of the third quarter and first nine months of 2017, as well as details around our guidance for the fourth quarter. We were pleased with our continued performance in the third quarter, as adjusted revenues from continuing operations grew 8% to $555 million. Foreign exchange represented a tailwind of approximately 100 basis points, with acquisitions adding approximately 200 basis points resulting in an organic growth of approximately 5%. By business, Diagnostics, representing 30% of total sales, grew 5% organically both in the third quarter and year-to-date, driven by growth in our emerging market diagnostic offerings and sales of our advanced genomic solutions. Discovery & Analytical Solutions, representing 70% of total sales, grew 4% organically in the third quarter and 3% on a year-to-date basis, driven by new product introductions and an improving macro environment. I'll provide some additional color on both businesses in a moment. We experienced healthy growth across all major geographies with high single-digit organic revenue growth in Asia, mid-single digit organic revenue growth in the Americas, and low single-digit organic revenue growth in Europe. In the BRIC regions, we continue to expect strong and broad based organic revenue growth with continued double-digit organic revenue growth in China. As to our operating results, third quarter adjusted operating margins expanded 30 basis points to 19.3%, driven by continued SG&A leverage, partially offset by increased R&D investment in the quarter and year-to-date. Adjusted operating margins have expanded over 40 basis points year-to-date. As a result, adjusted earnings per share from our continuing operations for the third quarter of 2017 was $0.73, a 14% increase versus the prior year and at the high end of our guidance range. Year…

Thank you. Your first question comes from William March with Janney. Your line is open.

Hey, guys. How are you?

Good.

First question, could you maybe just talk a little bit about the whole genome sequencing business that you just launched, specifically, who are your target customers for this product? Are there some cross-selling opportunities with the existing diagnostic portfolio? And then, maybe just the margin profile of this business versus the core diagnostic business?

Yeah, sure. So, it's targeted at three customers. First of all, our reproductive health area, and in that area I think there is a lot of cross-selling opportunity. So, I think as we talked about last quarter, our newborn screening business very often is reflexed into NGS for confirmatory testing. So, one of the things we're doing is we're now doing some of the confirmatory testing with our newborn screening customers. The other area where we see good synergies with our reproductive health business is in the ViaCord area where we have some 350,000 cords that are stored, and of course, ongoing business, where we see interest very often where those customers would like to have some whole genome sequencing done. So, I would say that's the first area that we're focused on. The second area was the one that I mentioned in the prepared remarks where we're doing work with IDG and they're having us do some whole genome sequencing with regard to neurological disorders. And then the third area I would mention would be in the pharmaceutical area, particularly in the orphan drug, where we're working with several pharmaceutical companies to help them particularly identify potential patients for clinical studies. So, I would say that's the initial focus of the business. We're seeing early days but good update. And while it's a startup right now, we do anticipate as we get the higher volume that we can get the operating margins equal to or maybe even a little bit better than the company average.

Got it. And then, maybe just if you could talk a little bit more about what you're seeing geographically in terms of – I know you had a difficult comp last quarter in Asia, whether that low double-digits we saw this quarter, if that was a tough comp or just kind of more commentary on what you're seeing on each of the three geographies? Thanks, guys.

So as I mentioned before, this is one of the first quarters in a while where we actually experienced growth in all three regions, so whether it's the Americas, EMEA or APAC. And so, if I look at each of those, I think the U.S., we continue to see generally pretty good growth across all areas with maybe the exception of academia was a little light. But other than that, we see good growth in Diagnostics. So, I would say if you look at newborn, first of all, while births now have sort of more flat in U.S., I would say prior to this quarter, we actually saw them down a little bit, we think, now. At the end of the third quarter, if you look on a trailing 12-month basis, it's more sort of flat. But our ability to continue to expand the menu and expand what we do, also mentioned the genetic testing business that we're now seeing good growth on the Diagnostics side, pharma continues to do well and the environmental and safety areas. So, I think good demand within the Americas. I think when you look at Europe, again, probably not as strong as U.S. but good strength on the pharma aside, I would say we saw a pickup on the industrial markets in Europe and food was very strong. And then, of course, the highest growth area for us was in APAC, obviously, led by China. China was up sort of mid-teens for us, and that was pretty strong across the board with possibly the exception of industrial, and that was really more of a comp issue. I think last year, if you look at China, our industrial business was up high-teens. So as I sort of mentioned in my prepared remarks, we're seeing pretty good strength, again, across the globe and across all the application areas.

Thank you. Your next question comes from Dan Arias with Citi. Your line is open.

Hi, guys. Thanks. Rob, on Vanadis, as you guys get ready for commercialization there, can you just talk about how broadly you're thinking that will be in Europe? Is it going to be a meter rollout next year or should we kind of think about UK, France, Germany, all seeing availability fairly quickly?

Yeah. I think, as you mentioned, that will be Europe first. I think it will be somewhat metered by the tenders. That's one of the things we're looking at relative to the potential for revenue in 2018 and we want to try and time that at least as best as we can to some of the tenders in some of these countries. So I think initially, if you look at 2018, that'll be a large determinant to how quickly it gets ramped up in the market. But again, the intention would be pretty broad based across Europe. Again, one of the important aspects of this is because this goes in, as we've talked about, into more of the biochemical markets, we've got a very strong commercial footprint in those markets already, basically, the leader in biochemical screening. So, we think this will be something we can penetrate relatively quickly. So, it will really be more gated by the timing of, again, the tenders, more than anything else. Again, just to remind, our plan is to have CE marked, so it will give us access the markets actually, other than just Western Europe.

Okay. That's really helpful. And then, apology if you touched on this during the prepared remarks but how did EUROIMMUN do organically during the quarter? And now that you've had a chance to sort of think about that business, what are you thinking about in terms of the timeline associated with bringing that portfolio to U.S. in a meaningful way?

So, EUROIMMUN continues to do well. So if you look at the results through three quarters, they continue to grow organically in the high-teens area. I would say they're growing in 2017 in excess of what we assumed in the model. And so, one of the things we have been spending a fair amount of time on over the last several weeks is how we can be prepared to penetrate the U.S. market sort of as quickly as possible. And so, that will be clearly one of the top priorities that we've identified in the collaboration and synergy discussion. So, the plan would be to try and really drive growth in the U.S. relatively quickly.

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

Hey, good afternoon.

Good afternoon.

Hey, on the newborn screen aspect, I believe that you historically have partnered with Waters in the area of mass spec for that market. I'm just curious, could you just remind us on that relationship, and I guess, does anything about that relationship change as you sort of launch your own system?

Yeah. So, you're right. The relationship historically was that we used the Waters mass spec in our solution. I mean, fundamentally, everything else that was in the solution, and again, when we service our customers, we go from the filter paper to the puncher to all of the sample preparation information to the detection information as far, and then, also the software and informatics. So moving forward now with the QSight, the plan would be to replace the Waters mass spec with the QSight. And so, going forward, it will be an exclusively 100% PerkinElmer solution.

Great. And I guess, just sort of staying on that as a follow-up, it's like how much of the market is mass spec-based versus biochemical-based, the typical immunoassay screen-based for that market? These questions are like penetration mass spec in that market and what's the opportunity.

Are you talking about globally or China? I'm sorry...

I'm talking about globally, on where mass spec is on a global basis in terms of being used...

So, I would say if you look outside the developed markets, mass spec is relatively small from a penetration perspective. But of course, today, the developed markets are a large piece of it. So from an opportunity perspective, I would say roughly 30% of the market today is probably covered by mass spec, and again, the current market, and probably 70% is more biochemical. When you look at the opportunities going forward to expand the market, most of the emerging markets don't do mass spec today. They do just biochemical.

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

Yeah. Hey, guys. This is Charlie Steinman on for Patrick. Thanks for taking the questions. Just regarding OneSource, was hoping to get a sense of an increased penetration of potential customers who hadn't outsourced before? And then, also on OneSource, if you've seen any pull-through on the product side from those relationships?

So on the first one, yes, we continue to see penetration of incremental customers particularly outside the U.S. And so, I think that's a good significant component of the growth going forward. And on the second question is it's sort of early days there. I think that's a more significant opportunity for us going forward. So, we're hopeful, as we get into sort of 2018 and later, that we'll be able to get more pull-through on the PerkinElmer products.

Okay. Great. Thanks. And then, maybe a little more of a high level question, but you've had a nice acceleration on the Diagnostics side of the business and clearly, that's been a focus. I'm curious just what, on the DAS side, ramps that growth up over the next one or two years?

So, I think it's combination of things. And first of all, as we've been focused on new products, so we've got to get some new products out into the marketplace, and I mentioned I think over the last nine months or so, we've got 11 new imaging and detection products out in the marketplace (32:26). That's one. The other thing is I think disproportionately investing in those areas where I think we've got both greater growth opportunities and stronger competitive positions. And the ones I would specifically spike out would be food, in the pharma services area, some of our imaging capabilities, and maybe, finally, the inorganic applications like ICP and ICP-MS. So, making sure we're really sort of focusing in those areas. And then, the other area is just expanding our capabilities. So, I mentioned the fact that we just very recently opened up a manufacturing line in China for our DAS products. And I think locating more of our capabilities closer to our customers where else to be more nimble and respond more quickly, and also, starting to adopt more of our products to the needs of those specific geographic regions. So, I think those are the three key areas that I think we can sort of drive higher organic growth for DAS.

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

Hey, thanks. A couple of things. Rob, how much of the logistics shortfall came through this quarter? Can you just quantify that? And then, your guidance implies doing 5% organic against a modestly tougher comp in the fourth quarter. Maybe if you could just tell us where you're seeing the improvement in trends coming out of the quarter and what gives you confidence in hitting the fourth quarter bar?

Yeah. So, I think we felt like we got all, if not, 95% of the revenue that we missed in Q2. I think I mentioned last quarter is because the majority of the shortfall was on the instrument side, I think we felt actually by the latter part of July and maybe it spilled into early August, we had shipped all that. So, I think that was helpful to achieving our sort of the top end of our guidance relative to this quarter. I think relative to the areas we're seeing, I think it starts off with getting the traction on the new products, and so, that's driving food. I think we mentioned a couple or at least one nice win in OneSource, so I think that'll help us here in the fourth quarter as we start to ramp that program up. And I think some of the things that we've got in place on the Diagnostics side. I think we'll see it on the genetic testing side, some improvements, where we've got some expectations at QSight, starting to see some nice growth in the fourth quarter. So, we think we've got pretty good alignment to the growth targets that we've laid out for Q4.

And low-single digit growth in industrial, I guess, seems a little bit light relative to what we see on the PMI side. Is there room for improvement or upside on the industrial front (35:18)?

Yeah. I think there is. I mentioned before that we had a pretty tough comp in China relative to Q3 last year, it was up high-teens. So, I think a little bit of that was a comp issue. But I think your question implies that we're seeing some recovery in the industrial end markets and we would agree with that. So, I think we would be disappointed if we didn't see industrial start to pick up here, not only in Q4 but as we get into 2018.

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

Hi, good afternoon and thanks for taking the questions. First one is for Andy. Andy, I don't want to leave you out here. I wonder if, at the margin line, if you could give us a sense for the impact year-on-year from currency and from anything else inorganic, M&A or other, so we can get to an organic year-on-year margin.

Yeah. I think maybe I'll start with EPS and then – because I don't really have it quite cut by operating margin at that level. But from an EPS perspective, we went into the year expecting an FX headwind, and at this point in time, we expect FX to be an $0.08 tailwind. So, if you look at our guidance, with a midpoint of $2.88, it's about $0.08 higher than the January guidance we provided. So that, obviously, is a benefit. And then, we have spent back quite a bit on R&D which resulted in about $0.03, but we covered that with the operational beat thus far. So I think all in all, FX for us for the year will be $0.08. The amount of revenue year-to-date just, for example, on the M&A side, is a little over $40 million, and it's about $0.02 in the second half and I would think that will continue in the fourth quarter. The Bioo and the Delta acquisitions both fall off at that point.

And sorry, is that all inclusive of...

That was all in our guidance at the beginning of the year, yes.

Okay. Great. And then, there's been a lot of commentary on this call, in the Q&A and the prepared remarks about new products and great to see a lot of those coming through. In past years, at times at the outset of the year and over the course of the year, though, you've talked about the dollar contribution from those products. I wonder if you could put those numbers on the new product flow this year. And then, considering that some of these products have launched here relatively recently here during the second half, I mean, how is that driving your thinking about new product contributions for 2018? Thanks.

Steve, I'll take that. And that's a great question because it has been an important initiative of ours and a focus of ours. So if you look at new products, we started off the year and said, we're looking at about a $50 million help from new products, sort of incremental. And if you sort of track it through the year in the first quarter, we think it was in sort of the $13 million range. For the second quarter, it was about $21 million. We think the third quarter is maybe just a tad above that, maybe more like $22 million for the third quarter. So actually, through the nine months, we're now a little bit above our target of $50 million. So to your point, we feel good about the progress we're making here. And I think that, ultimately, is the lifeblood of our growth. The key is to make sure we're in attractive end markets and that we're bringing innovation to our customers to drive the incremental growth. And so, we continue to be very pleased with that. As we think about into 2018, I mean, we'll give 2018 guidance obviously, sort of in the earlier part of next year but we continue to be optimistic. And because as we get traction this year, it reinforces our confidence in, first of all, the process of how we're driving new products, and just as importantly, the team. So, the other aspect is over the last maybe 18 months, we have been upgrading the leadership of the R&D organization and it's great to see that it's making a difference.

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

Thank you. So, two questions. 2017 seems to be a bit of a reset year from an R&D as a percentage of revenue standpoint. How do you think about leverage on that line going forward? Are you thinking that will continue to go up and you're going to continue to aggressively invest or would you get leverage beyond 2017?

No. I mean, I think when we set the targets out for the 22% operating margin couple of years back, we targeted sort of 6%, 6.5% R&D spend. And I think year-to-date, we're at 6.3% or something like that. So, I think we're pretty comfortable with that number. And then, when you think about it relative to product revenue, it gets you up in the sort of 7.5%, almost 8% area. So, I think we're fine there now. Of course, with EUROIMMUN coming into the company, they do spend more as a percentage of R&D. So you will see, in fact, the R&D percentage go up, but I think that's just sort of a math exercise with EUROIMMUN coming in. But I think for the, I'll call it the historical PerkinElmer portfolio, I think where we are now seems pretty good relative to our ability to invest in the areas that we think are important and drive the organic growth that we've talked about.

And then, just to kind of expand on it a little bit, we have a framework and a road map to get to the 22% by 2020. And it's really, it's a combination of R&D investment, but it's also some of the gross margin expansion efforts that Rob discussed, as well as the accelerated organic growth from some of our R&D investments and we still think that we have room to really leverage SG&A. So, I think we're right in line, as Rob said, and I think we were able to make those investments and still achieve our longer term goal.

Okay. And then, just one follow-up question. So, I'm trying to understand all the pluses and minuses on the top line and it sounds like you're coming in better in 2017 year-to-date on new products, and that's a good guide, but year-to-date organic growth is about 3 points. What are the offsets? Is it something besides RAS, is maybe newborn screening a bad guy and that can turn into a good guy in 2018? What color can you offer there?

No. I don't think there's any bad guys in Diagnostics right now. I mean, generally, we feel like Diagnostics is on track to do the sort of 6% or 7% organic that we've talked about in the beginning of the year. I think the offsets are in the areas where we haven't sort of invested in the new products within DAS. So, we thought a fair amount about the organic portfolios, so ICP, ICP-MS, even AA. I think the areas that hopefully we'll be able to focus more on in 2018, in the areas like some of the chromatography areas, some of the areas around thermal and material characterization. So, I think there are some areas where we're probably may not making the – or we're not growing with the market because, again, we focus some of our investments in some of those other areas that support the food area or support pharma, et cetera.

Thank you. Your next question comes from Emily Stent with Robert W. Baird. Your line is open.

Hey, guys. Thanks for taking my questions. First off, looking at the pharma end market, can you break out how much growth you saw from capital equipment versus recurring revenue?

I would say if we include in recurring services, that would be basically the majority of the growth. I would say on a product basis, we were relatively flat, when you look at things like high content imaging doing well and a couple of other imaging products being offset by radiometric detection and sort of drug discovery. So, product was relatively flat. Services was the majority of the growth.

Okay. That makes sense. And then, with Andy set to retire next August, how's the CFO replacement search been going and when should we expect to hear an update?

Well, I'll start off by saying it's going to be impossible to replace Andy. But having said that, it's going well. I mean, it's early days. We've hired a search firm. We've seen some preliminary list of very qualified candidates. And so, I think we feel pretty good about the ability to get a very strong person in here. I think the nice thing is because of Andy's willingness to give us a fair amount of time, I think we should be in good shape as we get into sort of middle part of 2018.

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

Hi, thanks. Good afternoon.

Good afternoon.

So, wanted to focus on the growth in the food end market. So, I think I caught 20% in the prepared remarks. I think it was expected to swing into the teens but that feel be a little better than we're looking for. Maybe just elaborate on the trends you're seeing there.

Yeah. So we continue to see strong growth in China, which is probably expected. We saw a particularly strength in Europe this quarter, very strong growth. And I think we just continue – I think it's a combination of we bought Perten, we bought Delta, we bought Bioo, and we've been in the process of trying to get those integrated, and then, also, leveraging some of the channel, historical channels of PerkinElmer and it sort of takes some time to do that and I think we're starting to see some nice traction there. And we're getting into some of the larger food customers and once we're in there, we're able to leverage additional products. So, either PerkinElmer products or pulling Perten and Delta through or vice versa.

Do you think double-digit growth can sustain into the fourth quarter and may be into 2018?

I would say we target food in sort of high single. I think in given quarters, we could probably see something in the teens. But I would say built into our Q4 guidance is food in the sort of low double-digit range.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Rob Friel for closing remarks.

Great. Well, first of all, we appreciate your questions. And again, we feel good about our financial performance year-to-date, as well as the progress we continue to make on our strategic priorities. Thank you for your interest in PerkinElmer and have a great evening.

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