PerkinElmer Inc

LSE:0KHE

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Quarter 2 2019 PerkinElmer Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Bryan Kipp. Please go ahead.

[Bryan Kipp, executive]

Thanks, Dawn. Good afternoon, and welcome to the PerkinElmer's Second Quarter 2019 Earnings Conference Call. With me on the call are Rob Friel, Chairman and Chief Executive Officer; Prahlad Singh, President and Chief Operating 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 do so 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 August 12, 2019. Before we begin, we need to remind everyone that 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 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 also be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?

[Robert Friel, executive]

Thanks, Brian, and good evening, everyone. I'm pleased to report PerkinElmer had an excellent second quarter as we continue to make significant progress against our key long-term priorities, while also generating strong financial results. More specifically, our focus growth areas continue to do extremely well as we disproportionately invest to build additional capabilities and further differentiate ourselves. Financially, we achieved mid-single-digit top line growth and double-digit EPS growth despite very strong year-over-year comps. Finally, and potentially most important, we completed the implementation of a more effective operating structure to facilitate alignment with our customers' requirements and accelerate innovation. Looking first at our second quarter results, while Jamey will discuss them in more detail. Our revenue was $723 million, representing organic growth of 5%. Adjusted operating margins expanded 50 basis points and adjusted EPS of $1, representing growth of 10% over the second quarter last year. These results are particularly encouraging, given the very strong second quarter last year, where we grew revenue 10% organically, increased adjusted EPS over 30% and expanded adjusted operating margins 180 basis points. During the second quarter, we also continued to implement a multifaceted approach aimed at simplifying processes, improving our supply chain and becoming a more agile organization. Given that adjusted operating margins have increased 90 basis points year-to-date, we continue to expect to increase adjusted operating margins for the year by at least 120 basis points and remain confident in our goal of 22% adjusted operating margins next year. Similar to the first quarter, our 5 focus growth areas continue to experience strong demand. EUROIMMUN delivered the strongest top line growth since our acquisition and also generated strong operating margin improvement. Within pharma biotech, we experienced high single-digit growth from our informatics and imaging and detection areas, and the recently acquired Cisbio business grew high teens in the quarter.

Both our genetic testing and cannabis businesses have generated more revenue in the first half of this year than they did all of last year. And finally, Vanadis, while not a large revenue contributor this quarter, remains on track, and we continue to see compelling clinical data and very positive feedback from early adopters. From an end-market perspective, trends continue to be mostly constructive and consistent with our expectations, with the exception of the applied market in China. While this space represents only about 6% of our revenue during the second quarter, it created a significant headwind. While some of this dynamic is market related, we are accelerating the expansion of our production capabilities in China to further enable local manufacturing.

As you know, Prahlad has been driving the organizational change to better leverage our breadth of capabilities and deliver cross-company synergies. So I have asked him to discuss some of the specifics of this effort and the positive impacts we are already seeing.

However, before I turn the call over to Prahlad, I would like to summarize the first half of the year as delivering solid financial results that are on track with our plan. Customer demand patterns and overall end-market conditions are good, with the exception of segments in China, and we continue to make excellent progress evolving the company to deliver higher growth, greater resiliency and increased profitability. I would now like to turn the call over to Prahlad.

[Prahlad Singh, executive]

Thanks, Rob. I echo Rob's enthusiasm and I am excited to convey that we are well on our way to executing the 3 priorities we've discussed in our recent earnings calls: providing an exceptional customer experience, being recognized as an innovation leader, and making people and culture a competitive advantage.

While our performance continues to be in line with expectations through the first half of the year, I'm happy to report that we continue to make tremendous progress in shaping the organization internally to leverage our capabilities across PerkinElmer and provide a better customer experience. Since the start of the year, we have reduced organizational complexity across 3 fronts: businesses focused on end market segments; commercial teams focused geographically across end markets; and support functions centralized, creating centers of excellence. All this puts customer needs and their experiences at the forefront as we become a nimbler organization that can respond swiftly to evolving market trends. I'm confident that collectively, these actions will be instrumental in propelling us towards a long-term growth and profitability goals. A key initiative this year has been a shift to aligning our commercial structure by region, with a goal to deliver geographically focused sales and support teams that cut across all our end markets. In the process, we are empowering the regions with decision-making that will be closer to the customer. We have already experienced some early success in the second quarter with this model, where we won a multimillion-dollar order from a large integrated health system in the U.S. The customer bought a suite of discovery, automation and service solutions as a result of a focused team effort across business segments as part of our new go-to-market regional customer solutions approach. Prior to rolling out this approach across PerkinElmer, we had demonstrated success with the regional go-to-market strategy during my time leading the Diagnostics business, accelerating growth from a low to mid-single-digit CAGR to a high single-digit CAGR business. We believe we are now in a position to replicate the model across PerkinElmer by establishing a unified regional structure focused on customer needs. Underneath the regional structure, we will have 4 key end market segments: diagnostics, life sciences, applied markets and food. Each segment will drive specific strategies managing our solutions offerings and investment plan. Complementing the end market segments will be PerkinElmer genomics, informatics and services businesses that will enable us to deliver even greater value to our customers. During my time leading the diagnostics business, we implemented a similar customer-centric organizational structure, which focused on end market segments. A prime example is our reproductive health franchise, where we have leading menu breadth, instrumentation, and software, supported by incomparable customer service.

We also built the immunodiagnostics franchise through the acquisition of EUROIMMUN and Tulip, which had similar strength in the infectious disease, autoimmune and allergy spaces. We plan to replicate the playbook that we use in diagnostics across the newly established 4 end market segments, where customers are increasingly seeking fully-automated sample to answer workflows for increased lab efficiencies. On the last earnings call, we discussed our initiative around integrating our technical capabilities across businesses and geographies under one R&D team. We are very encouraged to see that this is already bearing results and furthering our stated priority to be recognized as an innovation leader.

In life sciences, with the combination of our automation, detection, consumables and informatics platforms, along with the addition of Cisbio's Homogeneous Time Resolved Fluorescence, we can now provide complete workflow solutions. Our announcement in April of joining Accenture's open partner ecosystem is another illustration of how PerkinElmer's solutions are integral in helping researchers to quickly and easily connect insights that lead to new therapies. Not only are we integrating capabilities from across our portfolio to create new solutions, but we are also partnering with other leaders in the segment to creatively go to market. In our recently announced partnership with EverlyWell, we have achieved both combining capabilities across the organization. PerkinElmer Genomics has developed tests for food sensitivity and Lyme diseases using EUROIMMUN platforms that can be physician ordered direct-to-consumer through the EverlyWell online marketplace. With further tests planned in the pipeline, PerkinElmer is well placed to expand into consumer-driven health care diagnostics as people take more control over their personal health. We have several key initiatives underway in effecting simplification and standardization. From improving our order fulfillment process, which will reduce our cycle time to customers to under 24 hours, to design for cost, which will reduce our new product cost by a couple of hundred basis points relative to prior years.

Finally, supporting all these programs are our continued efforts to implement and improve internal forecasting, audit and data analysis system, which is critical for a successful transformation towards a unified organization. In closing, I'm inspired to witness the immense talent in our organization rallying together to achieve the vision of becoming a truly differentiated player, providing a flawless customer experience. Leveraging capabilities across our organization to help solve the most significant macro trends, while simplifying and streamlining how we operate to get it done. I believe we are in a good position heading into the second half, and I look forward to sharing ongoing progress with you as we achieve our mission and accelerate profitable growth. I will now turn the call over to Jamey.

[James Mock, executive]

Thanks, Prahlad, and good evening, everyone. I want to start with the highlights for the second quarter of 2019. Next, I'll provide some additional color on our served end markets and detail on other financial metrics. Lastly, I'll finish by providing a brief update on how we are thinking about the second half of 2019.

Starting off, we are pleased with our second quarter and first half performance. Market conditions have been roughly in line with our expectations entering the year. We have achieved organic growth and EPS targets through the first 2 quarters, and we remain focused on executing our full year targets.

Our growth accelerators have performed well through the first 6 months of the year. EUROIMMUN performance continues to beat our initial deal model. Vanadis remains on track, and strong results from a multisite study analyzing 1,200 pregnancies is set to be published in a leading medical journal in August. Finally, as Rob mentioned, both cannabis and genomics testing revenues year-to-date have already outpaced all of 2018. Turning to the second quarter results. We continue to be pleased with the strength in our business as organic revenue grew 5%. Reported revenue grew 3% to $723 million and included a 3% foreign exchange headwind and a 1% net acquisition tailwind. By business, diagnostics, representing 40% of total sales, grew 9% organically, driven by our reproductive health and immunodiagnostics business lines. Discovery & Analytical Solutions, representing 60% of total sales, grew 2% organically, highlighted by strength in life sciences and offset by weakness in applied markets. I will provide some additional color on both businesses in a moment.

On a geographic basis, organic growth trends during the second quarter remain mixed, similar to what we experienced in the first quarter. The Americas continued to lead the way with high single-digit organic revenue growth, Asia Pacific grew mid-single digits and Europe grew low mid-single digits.

Operationally, we were pleased with our performance in the second quarter and we continue to see excellent potential to improve our profitability going forward. Adjusted operating margins expanded 50 basis points in the second quarter to 20.2%, driven by continued cost out actions and solid operating expense leverage. Year-to-date, we have expanded adjusted operating margins by 90 basis points year-over-year. As Rob mentioned, adjusted earnings per share of $1 was an increase of 10% versus the second quarter of 2018 and was in line with our guidance.

Looking further into the key drivers within our segments, let's start with our diagnostics business. As mentioned in my earlier remarks, organic revenue grew 9%, driven by broad-based momentum across our portfolio and consistent performance across all regions. Reproductive health grew high single digits organically, driven by our genomics testing business, which continues to track toward our full year goals.

We are excited about our collaboration with FDNA announced this past June, which enables PerkinElmer genomics to pair next-generation phenotyping technologies with our genomic services business. While we are only weeks in, the pairing has already reduced the time to diagnose incidence of rare disease in suspected newborns by an estimated 25% and the early clinical feedback of the dual diagnosis has been extremely positive. On the immunodiagnostics front, all product lines performed well in the quarter, leading to mid-teens organic growth for the segment. We are particularly excited about our recently launched SuperFlex platform. This chemiluminescence benchtop system can be used in fields such as cardiovascular, infectious disease and gynecological testing. As described by 1 clinical director from a major university hospital in China, the SuperFlex has the reliability and high efficiency of large chemiluminescence equipment and the convenience of point-of-care testing. It has ushered in a new era of point-of-care with its advanced methodology and precision testing system.

Applied genomics grew mid-single digits, a solid performance overall. And on Vanadis, we now have 15 installations and remain on track for 30 by year-end. We think the upcoming publication will serve to further validate our technology and the unparalleled simplicity of our workflow, as well as increased customer awareness and help shorten the validation time for new adopters as they become more comfortable with the assay performance with each additional clinical publication. Turning to discovery and analytical solutions. The second quarter was impacted by tough conditions within the applied markets. By end market, we experienced high single-digit organic growth in pharma/biotech. While imaging and detection continues to do well, we are particularly excited about the future potential of our reagents business following the acquisition of Cisbio. One quarter in, Cisbio's integration is progressing well, and the business grew double digits in the second quarter.

We're now the leading reagents platform that generates more than $200 million in annual revenues and we expect it to grow mid- to high single-digit rate on an annual basis. The applied markets were flat in the quarter, driven primarily by softness in China and industrial end markets globally. Combined, industrial and environmental was down mid-single digits. Food was up double digits due to strong cannabis demand.

In China, applied markets were soft, particularly in our legacy analytical, instrument portfolio. Longer-term, we remain bullish on China and believe that a lot of these issues are short-term in nature and are mostly related to ongoing delays in export-controlled product approvals as well as the global trade war rhetoric. For additional context, I spent the back half of June in China meeting with our teams as well as their government officials.

After having lived in China many years ago and visiting several times recently, I still find myself amazed by the speed and size of growth in the region after every visit. I was there ahead of the G20 meeting, and while there was a lot of talk about the trade war and rhetoric on both sides during my time in China, it was clear in my meetings with government officials, which included provincial leaders, the National Health Commission, and the Ministry of Commerce, that they all value PerkinElmer's 5 decade-plus history in China and our ongoing local commitments. Universally, the officials had ideas on how we could collaborate more and all were open to exploring new opportunities to tighten our bonds to drive a better tomorrow. While the U.S./China trade tension creates additional risk and uncertainty to our business in the short-term, I'm candidly excited about the country's commitment to health care investment, our business prospects in the region, and our reputation and standing with local and national government offices and the team we have on the ground.

Now shifting to below-the-line items. Adjusted net interest and other expense for the quarter was approximately $17 million and our adjusted tax rate was 13%, driven by quarterly timing of international tax planning initiatives.

Turning to the balance sheet. We finished the quarter with approximately $2.1 billion of debt and $150 million of cash. Free cash flow in the quarter was $30 million and adjusted free cash flow in the quarter was $39 million. As a reminder, the difference between the reported and adjusted numbers is due to cash payments associated with prior acquisitions. Let me take a minute to explain a few working capital dynamics we are seeing in the areas of receivables and inventory. First, we are seeing a greater percentage of in-quarter shipments occurring later in the quarter due to customer demand patterns. As a result, we have less selections in the period and carry more inventory to meet our customer needs.

Second, we are seeing stronger growth in some of our evolving business models. As an example, greater subscription growth in our informatics business creates less cash in the short-term, but a stronger annuity in the business longer-term. Another example relates to cannabis, where customers require short-term liquidity as they commence operations. Third, due to the growth in our EUROIMMUN business and NPI pipelines, we now expect inventory levels to be higher than anticipated at the outset of the year. As a result of these changes, we now expect adjusted free cash flow to net income conversion of approximately 80% and increased longer-term growth. Finally, we exited the quarter with a net debt-to-adjusted EBITDA ratio of approximately 3.1x, and we now expect to end the year at approximately 2.6x leverage. Closing the books on the first half of 2019, we are pleased with our performance including 5% organic growth, 10% growth in earnings per share, and continued success of our growth accelerators. As we transition to the back half of the year, we expect diagnostics to continue at a similar high single-digit pace. As a result of more short-term uncertainty in China applied markets, we are broadening the organic growth range in Discovery & Analytical Solutions segment to 3% to 5% for the full year compared to our prior mid-single-digit forecast.

In turn, we now expect PerkinElmer to grow 5% to 6% organically versus our original guidance of 6%. We expect reported revenue for the year to be approximately $2.91 billion, including $53 million from foreign exchange headwinds and approximately $35 million of contributions from Cisbio. We are maintaining our prior full year adjusted EPS guidance range of $4.02 to $4.07, which includes an incremental $0.02 headwind from foreign exchange compared to our prior guide. We also remain committed to our adjusted operating margin expansion target of 120 to 150 basis points. Finally, we anticipate $60 million in interest and other expense, a 15.5% tax rate and our share count to remain slightly under 112 million for the year. For the third quarter of 2019, we are forecasting reported revenues of $724 million, representing 6% to 7% organic revenue growth, including a foreign exchange headwind of approximately $7 million versus the comparable prior period. In terms of adjusted earnings per share guidance for 3Q, we are forecasting $1.01.

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

[Operator]

[Operator Instructions] Your first question comes from Patrick Donnelly.

[Patrick Donnelly, analyst]

Maybe just on, to start on the China side. Can you just talk -- give some more color on the shortfall there? The magnitude of the impact? Which business segment it hit specifically? And then just also what's baked into the back half for your expectations there?

[Robert Friel, executive]

So Patrick, I'll start, then maybe Jamey will chime in. So we continue to be very bullish on China, overall. We saw good growth, particularly on the diagnostic side. And I would say that was fairly broad-based or there was the immunodiagnostics or the reproductive health. I think we continue to feel good about that. And I would say that was despite some challenging birthrates that we saw in China. Life sciences continues to do well there, in addition.

The challenge, we are running into, as Jamey alluded to, is really on the applied area, particularly on the industrial end markets. And as Jamey mentioned, we think some of that is sort of macro slowdown overall in China. Some of that may be a little bit, we're starting to see some anecdotal evidence that there is starting to be a little bit of bias against U.S. companies, particularly in some of the tenders. But that's fundamentally where we saw the challenge in China.

And so I think to some extent, maybe this is out of caution, we're concerned about the back half and that's ultimately what's causing us to widen the range in DAS from mid-single to sort of 3 to 5. It's really the applied markets, largely, in China. But I would say even outside of China. The China -- the applied markets are challenging.

[James Mock, executive]

I would agree, yes. I mean with regards to your question on the back half, Patrick, we're not expecting much uplift. It's probably, maybe, a little bit in DAS, but overall, we're planning for much of the same in the second half in our guidance there.

[Patrick Donnelly, analyst]

Okay. That's helpful. And then, just on the DAS business, in general. Rob, I appreciate the color about the applied. What can you guys do to reaccelerate growth there? I know you've talked a decent amount about some new products there catalyzing some growth. But I guess with the headwinds in applied, how should we think about growth going forward?

Last year, you had a really strong year there, particularly in the mid part of the year. So I guess on the go forward, what can you guys do to kind of reaccelerate back to some of those...

[Robert Friel, executive]

Yes. I think a piece of it is what you referred to, is we continue to get new products out into the marketplace. And we've got some coming out sort of late '19 and early '20 that we think will be helpful there.

I think the other thing, and obviously, this has been a theme for the last couple of years, is just continue to sort of shift away from the industrial markets because they have a tendency to be a little bit more cyclical and so continuing to invest in life sciences, continuing to expand our informatics and service offerings. I think those are all -- and of course, food as well, I think those are all helpful because we think longer-term growth rates there are not only higher, but we think are more resilient and less cyclical.

So I think it's, for me, going to be a combination of continuing to shift into those more attractive end markets, but also, at least in the short-term, driving more new products into the marketplace.

[Operator]

Your next question comes from Steve Willoughby.

[Steve Willoughby, analyst]

Two things for you. One, I guess could you just help us frame up, maybe put in perspective, can you talk about China applied being 6% of your revenue? Applied, globally, being flat, that's despite food being up double digits. Can you just kind of remind us how big you're considering that food bucket to be so we can sort of either you can tell us or we can back into how much your kind of in applied or industrial business was down in the quarter? And I have a follow-up.

[Robert Friel, executive]

Yes. So is the question specifically on food, Steve?

[Steve Willoughby, analyst]

I mean, I guess it's really like we're trying to look at how much the industrial business was down for the applied business to be flat.

[James Mock, executive]

Yes. That's a good point, I think. So industrial and environmental is down mid-single digits in the quarter. So I actually think that speaks to the portfolio evolution of PerkinElmer, so being up 5% when industrial and environmental is down mid-single digits, again, is I think another example of how we transformed the portfolio. But to specifically answer your question, it's not about the benefits...

[Steve Willoughby, analyst]

Yes, it does. And...

[Robert Friel, executive]

I mean, I think that's to a point it just sort of reinforced. If you go back a couple of years ago, I think one of the -- I used to hear from investors, the concern was how tied was PerkinElmer to sort of the industrial sort of macro growth side? And then, of course, the other question was, how tied is PerkinElmer to newborn screening? Said differently, birthrate?

And if you look at this quarter, as Jamey pointed out, this is a good sort of indication of the changes we made in the portfolio. So as Jamey said, industrial was down mid single. And if you look at birthrate, they were down in U.S., they were down in Europe and they were down in China. And as you heard earlier, our reproductive business was up high single and diagnostics grew 9%.

So those speak a little bit to the migration of the portfolio. And of course, that's something we've talked about to not only being sort of higher growth, but more resilient.

[Steve Willoughby, analyst]

I appreciate that, Rob. Jamey, just one follow-up for you, on margins. Operating margins are up 50 basis points year-over-year this quarter -- or sorry, 70 basis points this year on the quarter. And it looks like gross margins were down. Just any color there at all?

[James Mock, executive]

Yes. So a little bit of this, Steve, was foreshadowed in the first quarter when we expanded margins 130 basis points. And if you remember, we said that we were going to have -- that we had a greater mix of EUROIMMUN reagents in the first quarter and that we would have a greater mix of instruments in the second quarter. So much of that entire explanation down from, I think, 51.3% to 51.0%, is just due to the EUROIMMUN instrument mix that is coming through. And it's quite strong in the quarter.

So EUROIMMUN was up mid-teens, and we're thrilled with the performance, but it had a little bit of impact on a quarter-over-quarter. Through the first half, I think we're up about 40 basis points on gross margin and I think that's how we're kind of penciling it in for the year, it's about 40 to 50 on the gross margin line.

[Operator]

Your next question comes from Doug Schenkel.

[Chris Lin, analyst]

This is Chris on for Doug today. Just to follow-up on China, I believe you noted that the China weakness is expected to be transitory. So with that in mind, when do you expect China to recover? And then, longer term, how does this impact your 2020 organic revenue growth target?

[James Mock, executive]

So some of this is transitory, to your point, Chris. I mean, MOFCOM approvals are difficult for us to control here. Some of the shift in labs from government to third parties also quite transitory. Right now, we're just assuming that second half, that we're not going to bank on a giant change there. A little bit of uptick versus what we've seen in the applied markets there in the first half, but it's not a lot. It's not a significant portion of the DAS increase in the second half versus the first half.

[Robert Friel, executive]

Yes. And I would just say, what you're picking up in the sort of transitory is that, we think, longer term, China is still a great place to be. It's the second largest economy in the world. We think it's going to grow, particularly in the segments that we operate in.

So I think what you're hearing is, while for the second half, we're not assuming any change, but when we start thinking about this longer-term, we still think China is a good place to be. And we're continuing to sort of increase our investments and our presence there.

[Chris Lin, analyst]

Okay. Got it. Then Rob, in your prepared remarks, I think you noted that EUROIMMUN had the strongest top line growth quarter since the acquisition. Could you just provide a bit more detail in that comment? Really, what enabled this record quarter? And I am particularly curious on how the North America operations contributed to that performance.

[Robert Friel, executive]

Yes. So EUROIMMUN, in the quarter, again, I think it was up 17% on an organic basis, so very strong. And it was broad-based. I mean, we saw it sort of across the globe, whether it was Europe, China, or in Americas. Americas was particularly strong, and I think it was reinforcing for us to see that some of the things we've talked about in the past and some are the synergistic aspects of the acquisition are starting to come through now.

So clearly, we're seeing EUROIMMUN do a good job of penetrating new markets, new geographies. Their NPIs are continuing to kick in. I think Prahlad mentioned the fact that we're cooperating or doing a joint venture between our genetic testing business and EverlyWell to sort of expand out into the food intolerance. And they had some new products.

And of course that was one of the things that we liked about EUROIMMUN, is that they're very innovative. We introduced a new random access analyzer to the market this quarter. So there's really a host of things. But particularly in the Americas, which I know was one of your questions, it was very strong in Americas in the second quarter.

[Operator]

The next question comes from Bill Quirk.

[Daniel Macek-Alwell, analyst]

This is Dan on for Bill. So my first question is, in terms of the NIPT commercial execution ramp, it sounds like the strategy to differentiate your offering is softer this entire cycle of reproductive products. Can you just speak to how this strategy is attractive to different geographies, different payers? And then, maybe just speak to if you're focusing on gaining mind share within the OB/GYN community as well as the patients' community, and then the importance of that as well?

[Prahlad Singh, executive]

Yes. So the question around NIPT and Vanadis first. We continue to see that to be on track for what we have said around 30 installations for the year. The data our customers are generating, in fact, what we are seeing is either better than what we've generated in our own labs for CE Marking study. So we feel really good and the ramp process for early adopters is going well.

In regards to the overall OB/GYN mind share, most of our focus right now has been in Europe and in the APAC market and we are seeing very good feedback from our customers and KOLs.

[Robert Friel, executive]

And then I would just reinforce, the value proposition for Vanadis is fundamentally, it's easy to use. We think it's low cost, and it's very accurate. And so while it won't work for everyone that want to get a lot of detail relative to the genetic makeup, I think for the large majority of our customers, and again, we have a lot of familiarity with screening versus diagnostic testing. We think Vanadis is a very effective product when you are looking for accurate, easy-to-use, sort of low-cost screening.

[Daniel Macek-Alwell, analyst]

Great. That's helpful. And then, just one more. Just shifting over to the cannabis opportunity, it sounds like it's doing very well. You said it outpaced 2018. That suggests it's tracking pretty well out of your target. First, do you think there's any adjustments that need to be made? And then, I'm just kind of wondering what's really driving the uptake? I know previously you mentioned that you received that Emerald Test badge and vendor status. If you could squash out some color there.

[Prahlad Singh, executive]

Yes. I think the fact that we are trying to bring customer a full total workflow solution to our customers. As they are setting up their lab, bringing in the front end and the full solution, along with the software, is really gaining traction with the marketplace. And then I think as the growth continues to go in that market via -- being an early provider of a full customer workflow solution is gaining traction. And in addition to that, if you look at the total breadth of offering that we bring to the table, it is also very amenable and attractive to the customer.

[James Mock, executive]

And in terms of the target you asked, Dan, we said that it could double this year from 10 to 20. So we're basically on pace with that. So maybe there's a little bit of improvement to that, which is why you might see the DAS second half pick up a little here.

[Operator]

Your next question comes from Brandon Couillard.

[S. Brandon Couillard, analyst]

Off on the DAS business, any chance you could quantify the impact of the MOFCOM export clearance delays and sort of piece that out to relative to sort of a broader macro environment? And secondly, do you think the rollout of the new op structure was a little disruptive to the business in the second quarter?

[Robert Friel, executive]

Sure. Yes. I'll start, and then Prahlad can jump in. So on MOFCOM, Brandon, we're trying not to track it all the time here. But it's probably $4-ish million to the quarter, so it might be 1 point for DAS and 0.5 point overall for PerkinElmer, just to answer that question. And TBD on when that gets resolved, we're obviously monitoring it. I mentioned that I've met with MOFCOM when I was over there. They're sympathetic in trying, and we'll see what happens there.

In terms of organizational disruption, I don't think that had any impact on the quarter whatsoever. I think most of the commercial and kind of product management moves were just made recently here. And I think before that, it was largely around R&D, which I think Prahlad talked about in the last call, in some operations and back-office functions. So I think people are excited about the organizational move, and its not an impact in...

[Prahlad Singh, executive]

Yes. I mean, and kind of, Brandon, the impact of the changes that we are bringing to the feet on the street is really very minimal. The idea, actually, has emanated from the field. What we are really putting is the tools and processes in place that maximizes the opportunities that we have in front of us.

[S. Brandon Couillard, analyst]

A follow-up for Jamey. Just on the working capital items you spiked out in terms of the elongated ship cycles, the higher inventory levels at EUROIMMUN. Why is that occurring now? And do you think those are structural and is 90%-plus conversion still a relevant number to think about perhaps for 2020?

[James Mock, executive]

Yes. I think it's -- some of this has been happening a lot over time, but a lot of this is just we're evolving, so and we're growing faster. I mean, if you look at informatics, we like the subscription model. So historically, and I think we've mentioned this also with the ASC 606 discussion, we used to sell perpetual license. We'd much prefer to have a subscription model that kind of brings in an annuity for years to come.

So we continue to push that product, and I think it's performing very well. Similar on cannabis. So cannabis is probably surpassing our expectations a little bit here. And I think those customers might require something like 90 days term. So a lot of this is related to growth, Brandon, which I think is a good thing. EUROIMMUN inventories, the same way. Our NPIs we're trying to accelerate in the second half of the year, so we can hit 2020 with a head of steam here. So I think much of this is just related to the fact that we're growing faster.

[Operator]

Your next question comes from Derik De Bruin.

[Derik De Bruin, analyst]

So I've got 4 questions. So here we go. So first one, let's start on gross margin. So the gross margin for the quarter was below what we had forecast by quite a bit. But yet, your SG&A was also quite a bit lower, so that offset. How should we think about this pacing for the rest of the year? And I would have thought the gross margin would have been higher, just given the lower DAS contribution and the higher EUROIMMUN contribution in the quarter?

[James Mock, executive]

Yes. So I tried to answer that just a little bit ago here. But if you remember, we tried to foreshadow, and we've been out there externally as well recently that said, the first quarter was a little high on the gross margin side and on the operating margin side. And that now second will be lighter because we knew the EUROIMMUN instruments were going to be coming in the second quarter.

So that's the drag on gross margin, at least from a year-over-year standpoint. And some of our new businesses, like genomics testing is performing extremely well. That adds a little bit of drag. But in general, we're kind of in line with where we thought through the first half here.

As to the sequencing for the second half, I think it's pretty similar. I think the way we think about 2019 is probably 40 to 50 basis points on the gross margin line and then 120 to 150 on the operating margin line. So there's a decent amount -- we've been saying that we've invested a lot in people. We've invested a lot in our sales force, and therefore, we don't -- we can really leverage that now. So you're seeing some of that base cost leverage and some good cost control come through. And that's how I think about 2019.

[Derik De Bruin, analyst]

Great. Rob, could you talk a little bit more about the pressure and the anti-U.S. bias in China? That just sort of like -- that was sort of a striking comment. And can you provide any specific examples? And I guess that sort of also leads to the question, are you then starting to see more price competition in some of the Chinese markets from other non-Chinese vendors that are sort of playing there?

[Robert Friel, executive]

Yes. So Derik, I would say there's been sort of 3 instances where we've heard of specific tenders that we were told that we won, these are sort of government businesses. And then in the process of documentation or whatever it got flipped to a local. And I would say at this point, it's a couple of points, so I wouldn't say we're greatly concerned about it. But it's -- I would say, in the second quarter, it's the first time where we can point to specific examples of where we think there's been a little bit of an anti-U.S. bias.

What we're doing to deal with it is continuing to move as much manufacturing as we think makes sense over to China. Because what they, in essence, say, is a lot of it is because it's not produced in China, so we're trying to alleviate that concern first. Ultimately, whether it's U.S.-owned, obviously, going to be difficult for us to deal with. But that's how we're dealing with it in the short term.

[Derik De Bruin, analyst]

Great. And on the -- going back, since you've mentioned Canada several times, and I'll jump on that wagon too. So can you talk about how big that market opportunity is for the life sciences space? And just sort of like, I haven't really seen a good estimate for the TAM on that one that's addressable by the tools markets, and your idea on what that market's growing?

[Robert Friel, executive]

Derik, you can put me in the camp of I don't know that we have a great handle on the total market. I mean we tried to estimate what it is. I think right now it's probably $100 million, $150 million market, something like that. But I think it's growing very quickly. And I think it's growing because you're seeing 2 opportunities. I would say on the, I'll call it the marijuana side, which is probably growing the slowest, is you're seeing opportunities for analytical instruments to help with sort of efficacy, quality and safety.

On the sort of more hemp and CBD side, you're seeing a lot of growth in being able to control how much TSC -- THC is in the product so that it doesn't run afoul of the regulations. So it's really -- and that's probably growing faster, actually.

[Derik De Bruin, analyst]

Great. And following on Vanadis, I guess, revenue expectation for '19, if you care to share that. And sort of like how we should think about that accelerating into '20?

[Robert Friel, executive]

So Derik, I think as we talked about in the past, we're trying to stay away from '19 from a revenue perspective and really talk about installations. And I think the reason for that is, we want to get the installations out there. And again, it's a little bit, because it's early days, hard to predict, how much are you going to sort of buy the instruments? And how many of them are going to do a reagent rental, and of course, that has a significant impact on the revenue side of things.

So we said for '19, let's really focus on getting it out there. We set a goal of 30 installations. As we said, we're sort of halfway through the year. We think we're right on track, and so we continue to be very bullish on Vanadis. I think the revenue, the significant revenue should occur starting in 2020.

[Derik De Bruin, analyst]

So then, let me just ask though, if you look at 30 installations, then what should we think about as a relative revenue per box in terms of consumable pull through?

[Robert Friel, executive]

Yes. Derik, I think we need a little bit more experience with the sort of volume through the lab before I want to commit to a number there.

[Operator]

Your next question comes from Catherine Schulte.

[Catherine Ramsey, analyst]

First on EUROIMMUN, on last quarter's call, you talked about the goal of getting to 50% market share in the U.S. autoimmune screening business. Has that played out as you expected?

[Prahlad Singh, executive]

Yes. Catherine, with the recent buyer that Rob mentioned in the recent win we had, we are going to get to 50% screening in the AMA market.

[Catherine Ramsey, analyst]

Great. And then on, China, Jamey, you mentioned your conversations with some officials there on ways that you guys could work together further. Any details on specific steps you're taking to improve that DAS supply business absent any marked change in market dynamics? And then, for the focus on local manufacturing in China, are there any particular product lines that you're prioritizing for that?

[James Mock, executive]

Well, first, the -- I'll talk about -- we talked a lot to the National Health Commission around diagnostics and expanding newborn end screening. I know you asked about DAS, but that's primarily where they asked for the most help.

So we've been working with them. We've been investing and training for all the positions, particularly as you go west, and frankly, through the One Belt, One Road all the way down into Africa. So we think that opens up geographic expansion in China as well as menu expansion, if we can get some of our QSights and mass spec in there because that was just CFDA-approved recently.

I think from a localization standpoint, we bought SSI, which is a localized, AA, spectroscopy manufacturing site. So I'd say, we have 5 or 6 facilities now. EUROIMMUN is localizing more. SSI on the analytical side is localizing more. We have Taichung, which is doing well. So we're doing pretty well and we're trying to go as fast as we can here.

[Catherine Ramsey, analyst]

Great. And then, are you guys still confident in at least 7% organic growth in 2020? And assuming that you'll need to get DAS back to mid-single-digit growth to do that, do you think you can get it there just through the new product introductions? Or will you see -- need to see market improvements in area like China applied as well?

[Robert Friel, executive]

So I would say we continue to be confident in our ability to get the high single digits in 2020. Obviously, we're not giving guidance, but I would say, given the market conditions we see right now, I think we could still achieve high single-digit.

[Operator]

The next question comes from Ross Muken.

[Luke Sergott, analyst]

This is Luke on for Ross today. Just real quick on to China. So there's been a lot of issues with several of your peers going on there, particularly in the food market. Are you guys seeing opportunity for share gains? Or is it just paying to every U.S. company right now?

[Robert Friel, executive]

I think when you talk about China food, at least from our perspective, you sort of need to separate it into 2 different markets. So what we're seeing is, where we're supplying products to the producers of the food, and this probably falls more in the sort of grain and dairy area. We continue to see pretty good growth there. Where we are seeing sort of headwinds is when you're supplying the labs. And I think the dislocation there is we're seeing a move from that being fundamentally, historically, done by public labs, now moving out into more private labs. And I think that's the disruption that at least some of the other peers have talked about, and we're seeing that as well. It's just that because we have the other aspect of it, we have, probably, a little less of an impact. But of course we are seeing it on the lab side.

[James Mock, executive]

And with regards to China Food, we're very bullish, Luke. So I mean if you look at that, we think that safety market is going to grow. We think quality will grow. If you look at the rising middle class there, the number of exports they have coming in, I think, longer-term, China Food is a place that we're very bullish on. I think we're just going through some short-term headwinds there.

[Luke Sergott, analyst]

Yes. That makes sense. And I guess, trying to -- just following up on that and your focus on improving the overall workflows around their different markets and customers, the -- I guess, reproductive would be an example of this and showing how that's grown versus the -- you used to be just tied to birthrates. Can you just talk about other businesses where you're focusing on that? And how much, going forward, can we look at for new contracts like you saw the multi-million one that you guys called out?

[Prahlad Singh, executive]

Yes. The applied genomics, Luke, is another example where now we have a validated flexible workflows all the way from sample to sequence. So the ability to provide the front end extraction, liquid handling, reagents and kits and library prep is another example that sort of allows us to do that. Similarly, cannabis is another example where we now -- I can -- we can add the front end to it. Sort of the front end that goes along with the whole workflow and the software that provides the solution. So those are a couple of examples.

In the life sciences and other arena we're in now, with the inclusion of Cisbio in our portfolio, we can add our readers and our reagents and provide a whole portfolio of fluorescence, whether it's around HTRF, Alpha or DELFIA technology that gives the customer the flexibility to choose and pick as to what they want to. So these are a few examples where the total workflow solution comes into play.

[Luke Sergott, analyst]

Okay. And I guess is there a chance to even accelerate EUROIMMUN using this strategy as well?

[Prahlad Singh, executive]

So EUROIMMUN is already sort of -- as Jamey pointed out, alluded to it, it's already -- we can see the benefits of it, not just from a technology, synergy perspective, which we have talked about around antibodies and antigens earlier. But now the capability of bringing EUROIMMUN, Tulip, and Cisbio gives, us an opportunity where we have sort of centers of excellence around antibody and antigens. And then leveraging that to develop assays across different end market segments.

[Operator]

The next question comes from Jack Meehan.

[Andrew Wald, analyst]

This is Andrew Wald on for Jack. Sir, you called out high single-digit growth in the Americas. Could you provide some more commentary on strength in the region?

[Robert Friel, executive]

Sure. Yes. I mean, it's pretty broad-based, Andrew. So diagnostics is up high single digits and DAS is doing pretty well at mid-single digits as well. So I think I'll start with the DAS side because that's a little bit different than the low single digits we're seeing. I mean, a lot of that is driven by cannabis. A lot of that is driven by life sciences. So we think, in particular, life sciences in the Americas is going quite well. We mentioned imaging and detection and informatics and our enterprise business all performing nicely.

So I think that kind of covers DAS. And then in diagnostics, we've got the genomics testing business we highlighted. So that's going well. That's largely U.S.-based. EUROIMMUN we highlighted in terms of the instrument order. So hopefully, that gives you a flavor, but Americas has been performing quite well.

[Andrew Wald, analyst]

And could you provide more of an update on Tulip? Maybe you can touch on some of the new offerings or synergies, especially with EUROIMMUN?

[Prahlad Singh, executive]

Yes. So the one example that we talked about earlier is the lateral flow technologies. Tulip itself continues to grow high single digits, from an opportunity perspective, but really what we are now working on is the next generation of offerings around lateral flow for infectious diseases, leveraging the antibodies and antigens that are developed at EUROIMMUN. And putting that through the Tulip channels, not just in India, but into other emerging markets.

[Operator]

I'm showing no further questions at this time. I would now like to turn the conference back to our speakers.

[Robert Friel, executive]

Well, thank you, everyone, for your questions. And just to summarize, we feel great about the first 6 months. As I mentioned, solid financial results, but probably, more importantly, we continue to make terrific progress under the sort of long-term strategic priorities. And we look forward to updating you next quarter on our progress in continuing to drive PerkinElmer to higher growth, increased resilience and greater profitability.

Thank you, and have a great evening.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect. Presenters, stay online for a post-conference.