PKI
#Thanks, <UNK>
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 wins and strong performance from recently introduced new products
Both environmental and industrial markets grew low single-digits as environmental is continuing to see strong growth in Asia, positive results in Americas, offset by declining revenue in Europe
Our sales to academic customers are – also grew low single-digits and recovered from a slow start to the year as funding outside the U.S
has improved
Turning now to our performance against our strategic initiatives, within Diagnostics, we continue to make good progress strengthening our core areas, while expanding our addressable markets
In Q3, we launched our new mass spec platform, QSight, for the clinical market and have received a very positive response from our customers
During the third quarter, QSight was registered as a Class 1 instrument with the FDA
In addition, we have completed CE marking for the European market, enabling the instrument to be used in clinical applications beyond newborn screening, and we are diligently working to extend our existing and new clinical assays on QSight
Moreover, our Diagnostics portfolio continues to address the escalating demand for greater access to quality healthcare across emerging regions
The performance in our Tulip Indian diagnostics business is encouraging on both the top and bottom lines as we expand Tulip's in-vitro diagnostics offerings throughout India
These solutions add in the prevention, screening and diagnosis of communicable diseases such as malaria, HIV and hepatitis, which are critical issues in that part of the world
Turning briefly to our cord blood and cord tissue banking business, you may have seen earlier this year the announcement of newly published research that shows encouraging developments related to the use of a child's own cord blood to treat cerebral palsy
The Phase II clinical trial led by Duke University, and with participation from some of our ViaCord families, will hopefully drive greater awareness around the potential of cord blood and cord tissue by helping further penetrate this market over time
We also continued to make good progress on the key growth initiatives for our Diagnostics business that I've discussed previously and thought I would provide a quick update
As I've mentioned before, Vanadis is our solution for prenatal screening that leverages high precision imaging in an automated platform, enabling a much more efficient and less expensive option versus current NGS-based NIPT testing alternatives
In the last month, we have submitted an article with data demonstrating its performance, which should be published before year-end, and we expect another article to be submitted before year-end
One research system has been installed in Europe and another will be installed shortly
These units will continue to generate more data on the Vanadis platform as we continue to validate the assay
To date, the results look very encouraging and compares very well to the current commercial NGS alternatives
As a result, we continue to be very enthusiastic about the potential for Vanadis and remain confident that our commercial launch date for the first half next year will be met
Our PerkinElmer Genetics offering of whole genome sequencing services has begun testing samples and we have already signed a number of contracts with both academic institutions and rare disease pharma companies
During the third quarter, we also announced our collaboration with In-<UNK>pth Genomics or IDG
PerkinElmer Genetics is supporting IDG's program which brings genetic diagnosis to patients across a wide range of neurological conditions
We will provide clinical whole genome sequencing, interpretation services and diagnostic reporting to IDG and IDG will then use the de-identified genomic and clinical data to support their R&D, generating a better understanding of the cause of hundreds of rare diseases
We continue to be excited about our pipeline of opportunities as we focus these capabilities around our reproductive health business and rare diseases
And finally, one of our major priorities for the remainder of the year is the closing of our acquisition of EUROIMMUN, which will augment our immunodiagnostic offerings with autoimmune and allergy testing
Over the past few months, we've made great progress working towards this closing and we have also used this period to facilitate collaborative discussions between employees of both companies to explore future opportunities
It has been an exciting time and we are very much looking forward to uniting as one organization
The only remaining hurdle is regulatory approval in China and we are still planning for a Q4 closing
As currently, our commitment for EUROIMMUN's minority shareholders continues until the end of this year
If we determine this is unlikely to occur, we will either purchase those shares outright or simply extend the timing of the shareholder commitment
I look forward to communicating the closing as soon as it happens
And after spending time with leaders and employees at EUROIMMUN, I am ever more encouraged by the opportunities presented by this combination
Moving to the DAS business, which was created about one year ago, we've undertaken a number of significant actions to achieve our objective of accelerating profitable growth by disproportionately investing in the most attractive market opportunity, while continuing to improve commercial execution
Year to date, we have launched 11 new imaging and detection instruments which are generating significant interest among customers across the environmental, food, industrial and life science research markets
Several more are still in development and slated to launch over the next couple of months
Looking specifically at our food franchise, which is focused on adulteration, quality and safety testing capabilities, we continue developing new innovations while also seeking to acquire attractive assets to expand our $200 million-plus food portfolio
During the quarter, we won a number of large tenders spanning the U.S
, Australia, Europe and China that reflect a high demand for unique applications utilizing Perkin and <UNK>lta technologies
These include whole grain analysis, the establishment of product quality grading based on sugar content, and the measurement of food fermentation for textile production, just to cite a few
On the services side, our OneSource business continues to win competitive tenders with key pharma customers due to the breadth of our offerings which range from asset management to scientific services and lab location
A strong indication of the faith the market has in our offering was evidenced by a recent significant win, which represents the largest initial contract in the history of OneSource
Also, during the third quarter, we have initiated the implementation of new technology-based solutions to improve our customers' experience and provide additional insights into their lab operations, as well as facilitate our ability to expand in the higher margin service offerings
From an operational execution standpoint, we are making good progress on the third component of our strategy, which is focused on continually improving our operational execution and strengthening our margin profile
In particular, our utilization of lean manufacturing methods has resulted in a 13% reduction in our manufacturing floor space globally since the end of 2015. In addition, during the same timeframe, material costs have been reduced as a percentage of revenue by 700 basis points to 24% of total cost of sales
Through these initiatives and others, we remain confident in our ability to improve product gross margins significantly over the next several years
Also, I recently attended the opening of an important expansion of our Chinese manufacturing facility to broaden our capabilities to produce several of our DAS product families
By better aligning our manufacturing footprint with the location of our customers, we should facilitate future growth in this important area of the world
These operation improvements, as well as our ability to leverage our SG&A costs, have enable us to make additional investments in R&D in 2017, which we believe will translate into increased revenue from new products in 2018 and beyond
Relative to last year, investments in research and development have increased 12% or 40 basis points as a percentage of revenue, enabling us to accelerate R&D innovations for solutions and serve higher growth markets
So to summarize, during the quarter, we continue to meet or exceed our financial commitments
However, more importantly, the combination of the successful execution of our strategic growth initiatives, favorable market conditions and the opportunities afforded by the upcoming EUROIMMUN acquisition, reinforces our belief that the growth of both our top and bottom line should accelerate in 2018 and beyond
I'll now like to turn the call over to Andy
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
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
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
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
Good afternoon
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
Are you talking about globally or China? I'm sorry
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
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
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)
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
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.
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.
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
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
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
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
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.
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 <UNK>lta, 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 <UNK>lta through or vice versa
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
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
