PerkinElmer Inc

LSE:0KHE

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 PerkinElmer's Earnings Conference call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Bryan Kipp, Vice President of Investor Relations. Please go ahead, sir.

[Bryan Kipp, executive]

Thanks, Catherine. Good afternoon, and welcome to the PerkinElmer Fourth Quarter and Full Year 2019 Earnings Conference Call. With me on the call are Prahlad Singh, President and Chief Executive Officer; and Jamey Mock, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the Investors section of our website at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until February 10, 2020.

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. Statements or comments made on this call may be forward-looking statements, which may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change, so you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During the 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 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 President and Chief Executive Officer of PerkinElmer, Prahlad Singh. Prahlad?

[Prahlad Singh, executive]

Thank you, Bryan, and good evening, everyone. I'm pleased to report that PerkinElmer had a strong finish to 2019 with reported revenue in the fourth quarter increasing 6% year-over-year and adjusted earnings per share growing 14%, beating both the top and bottom line of our previous guidance. Our revenue in the fourth quarter was $806 million, representing organic growth of 5%, and our adjusted earnings per share was $1.35.

As I reflect on 2019, the rapid transformation we made as an organization has put us in an excellent position to accelerate profitable growth and advanced outcomes around the world in 2020 and beyond. I have no doubt that these positive changes will become increasingly apparent to external stakeholders over the coming quarters and years.

From a financial perspective, we delivered strong performance in 2019 across our businesses despite evolving macro headwinds. We delivered organic growth of 5%, 170 basis points of margin expansion and 14% adjusted earnings per share growth. Jamey will discuss our financial results in greater detail.

As you are familiar, last summer, we aligned our go-to-market approach and combined our R&D teams, empowering our regional commercial leaders to make decisions closer to customers and encouraging our R&D team to think differently and leverage the breadth of our capabilities across the end markets we serve to develop full workflow solutions that address evolving customer needs.

We entered 2020 as a new, highly collaborative organization that has significant opportunity to leverage our differentiated capabilities to accelerate positive outcomes for the betterment of people and their environment. All in all, I'm extremely proud of all of our 13,000 employees who come to work everyday with enthusiasm around our mission of innovating for a healthier world, our relentless focus on transformative innovation and operational excellence and a strong commitment to meeting the ever-changing needs of our customers.

I'll just share a few examples from the fourth quarter where we've seen our transformation efforts pay off. Our targeted focus on solving critical issues impacting the future of science and health care enabled us to achieve new milestones by working with our customers and partners. Within the Diagnostics business, the FDA approval of our GSP Neonatal Creatine Kinase-MM kit has resulted in first commercially available assay for screening newborns affected by Duchenne muscular dystrophy. PerkinElmer's kit is specifically designed for screening newborns is a cost-effective way to screen for DMD with a 2-tier testing approach using the CK-MM assay and then DMD gene analysis.

Screening newborns not only prevents DMD patients and their families from an unnecessary diagnostic odyssey, but it also ensures timely treatment for a disease that could otherwise go undetected for years. Via our proprietary DMD kit, PerkinElmer is participating in parent project muscular dystrophy's consented pilot program to screen newborns in New York State for Duchenne. The program aims to screen 100,000 babies, about half of all those born each year in New York over a 2-year period.

Taking a step back for a moment. When we think about positive and accelerated outcomes, we are looking at the whole human care cycle, not just siloed points along the diagnostics and therapeutics spectrum. Our advancements in newborn screening such as the DMD kit, for example, play into a larger strategy focused on the full continuum from family planning to maternal, fetal to newborn health, childhood and family health. To this end, we are excited about some of the truly novel solutions that we have in our pipeline today, and hopefully, we'll be discussing more in the months and years ahead.

Turning to DAS, our new go-to-market strategy is fundamentally shifting how we are approaching new analytical market opportunities. As I mentioned at a recent conference, cannabis is an early win example of this new go-to-market approach that we hope to replicate going forward. We have progressed from a relatively nascent business in early 2018 to $26 million in revenue from cannabis testing in 2019, thanks to our efforts to really understand the voice of the customer and provide an end-to-end workflow solution including sample prep, quality and safety testing and analytics capabilities. To continue to show our strong commitment to this rapidly expanding market and to broaden our distribution reach, this past December at MJBizCon, we announced that Emerald Scientific, a leading cannabis and hemp lab technology player and testing standard leader, will now offer our cannabis and hemp testing portfolio to their North American customers.

Our success in developing complete workflow solutions is also serving as a key differentiator across our life sciences portfolio. With the acquisition of Cisbio, for example, which is tracking ahead of our deal model, we now can provide end-to-end solutions in the discovery stage on target identification, lead generation and optimization in preclinical for both pharma and biotech research. During the fourth quarter alone, we introduced several new Cisbio kits for phosphorylate and total protein and biomarker detection. And with our reagent R&D for all PerkinElmer technologies now consolidated at our site in Codolet, France, we expect an uptick in drug discovery screening reagent innovation in the future.

A final example of our new strategy coming to life is within the fast-growing food market where we are already reverse integrating some PerkinElmer food assets into the Meizheng sales channel to take advantage of its commercial breadth, customer intimacy and local domain expertise. One example of this in action is with our recently introduced PaddyCheck PC 6800 technology from Perten, which automates analysis and increasing testing accuracy of paddy rice for key quality markers.

The new solution also eliminates the need for traditional labor-intensive steps and delivers accurate results with 5 to 10 minutes. With rice serving as a key staple in people's diet, helping to ensure the quality of this mega grain is important for the increasing research and planting demands of the ever-growing global food chain.

While Meizheng was only consolidated for part of the fourth quarter, we were pleased with its double-digit growth and early synergies. As we look ahead, critical to our success will be our ability to execute across the company on 3 key priorities we have laid out for our organization this year: ensuring a customer-first mindset; innovating to address critical health and scientific challenges; and evolving our employee experience. From the customer standpoint, providing exceptional experiences with PerkinElmer means that we are improving our tools, processes and responsiveness to deliver solutions when, where and how our customers need them. On the innovation front, this year, you will see us further our partnerships with customers and industry organizations to accelerate the visibility and development of new offerings across our end markets. And internally, we will continue to work on creating a culture that drives greater cross-company collaboration than ever before.

Before I hand it over to Jamey, I want to briefly provide an update on Vanadis. Earlier this month, our team hosted people from the investment community at our lab in Pittsburgh, Pennsylvania, where we discussed Vanadis and the broader PerkinElmer genomics strategy. Specific to Vanadis, the key messages that we try to drive home were: Vanadis NIPT is a test for every woman due to its high precision and low no-call rate; The system has clear workflow advantages over NGS; Customer feedback continues to remain positive; and the NIPT market is sizable and growing rapidly. We truly believe that Vanadis NIPT will play a pivotal role in helping to democratize noninvasive prenatal testing across the globe over the next few decades.

In terms of placements in 2019, we achieved 28 systems, and we continue to have a healthy funnel. For 2020, our plan is to end the year between 50 to 55 installations in total, which would imply another 22 to 27 systems this year, up from 10 placements in 2018 and 18 placements in 2019.

All told, I'm confident that we are on the right path as an organization. While there were a lot of internal changes in 2019, we are now well positioned as we turn the page to the next chapter of the PerkinElmer story. I look forward to sharing our continued progress throughout the year.

I'll now hand it over to Jamey to discuss our Q4 and 2019 financial results in more detail as well as our 2020 guidance.

[James Mock, executive]

Thanks, Prahlad, and good evening, everyone. Before I start, I want to point everyone's attention to our fourth quarter earnings call presentation, which has been posted on the Investors section of our website under Financial Information. The goal of this document is to drive additional transparency and simplicity around the company and our quarterly performance.

Today, I plan to begin by highlighting the fourth quarter. Then I'll provide some additional color on our served end markets and financial metrics. Lastly, I'll finish by providing a look back on our 2019 performance and our financial outlook for 2020.

Jumping in, we are pleased with our fourth quarter results and full year 2019 performance. Market conditions were in line with our expectations entering the fourth quarter. As they have all year, our growth accelerators continued to perform well led by EUROIMMUN, which grew at a double-digit clip on broad-based global demand; and cannabis, which more than doubled year-over-year. Our genomics testing business remains on track to complete the Branford to Pittsburgh consolidation by the end of the first quarter, and Vanadis momentum continues to build. As Prahlad mentioned, the recent ramping of the Vanadis NIPT PLA code by the American Medical Association was an important development in December that favorably positions Vanadis Diagnostics for 2020. Our 2019 acquisitions of Cisbio, Meizheng and Solus all performed well during the quarter and concluded the year well positioned to be strong incremental contributors in the years ahead.

From an operational standpoint, prior actions to reduce organizational complexity have undoubtedly made us a nimbler organization. Our 50% organic incremental margin in 2019 is a direct product of the increased transparency and accountability across the organization.

Turning to the fourth quarter results. We achieved 5% organic revenue growth with broad-based momentum across our portfolio. Adjusted reported revenue grew 6% to $806 million and included a 1% foreign exchange headwind and a 2% net acquisition tailwind. By business, diagnostics, representing 38% of total sales, grew 5% organically driven by our immunodiagnostics and reproductive health business lines. Discovery & Analytical Solutions, representing 62% of total sales, also grew 5% organically due to continued strength in life sciences and a rebound in our core food business. I will provide some additional color on both businesses in a moment.

On a geographic basis, organic growth trends largely parallel with what we experienced during the third quarter. Asia Pacific and Europe both grew mid-single digits, while the Americas grew low single digits. Operationally, we are extremely pleased with our performance in the fourth quarter, and we continue to see significant potential to improve our profitability moving forward. Adjusted operating margins expanded 210 basis points in the fourth quarter to 23.9% driven by productivity, mix, cost-out actions and some timing.

As Prahlad mentioned, adjusted earnings per share of $1.35 was an increase of 14% versus the fourth quarter of 2018 and $0.03 ahead of 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 5%, which was off a strong 14% organic growth comparison in 4Q '18. Immunodiagnostics grew low double digits. EUROIMMUN led the way with a mid-teens growth rate, which was broad-based from both a geographic and product basis. Geographically, the U.S. and Western Europe both grew over 20%, and China grew at a healthy mid-teens clip. Reproductive health grew low single digits organically driven by expanded coverage in Asia Pacific. We highlighted expanded newborn screening in the Philippines on our last earnings call. Additionally, we also benefited from expanded screening programs in Japan and Vietnam in 2019.

Paralleling the third quarter, our applied genomics business remains soft, declining high single digits in the fourth quarter. Momentum in our NGS and nucleic acid extraction reagents was more than offset by softness in automated workstation and robotics products segments.

Turning to Discovery & Analytical Solutions, organic growth of 5% in the fourth quarter was driven by our life sciences and food franchises. By end market, we experienced high single-digit organic revenue growth in pharma biotech propelled by our discovery and informatics product lines.

Our informatics business continues to perform well, growing double digits in the fourth quarter. PerkinElmer signals solutions are increasingly gaining traction amongst the top pharma, biotech and contract research organizations as signals helps drive increased collaboration, improve efficiencies and accelerate time to discovery for R&D scientists.

The applied markets were up mid-single digits in the quarter driven by an improvement in our core food business, continued strength in our cannabis solutions and a modest sequential improvement in Asia Pacific industrial and environmental safety demand. Overall, industrial and environmental grew approximately 1%. Food was up mid-teens with core food up mid-single digits and cannabis up over 150% year-over-year.

Shifting to below-the-line items. Adjusted net interest and other expense for the fourth quarter was approximately $13 million, and our adjusted tax rate was approximately 16%.

Turning to the balance sheet. We finished the year with approximately $2.1 billion of debt and $192 million of cash. Free cash flow in the quarter was $192 million, and adjusted free cash flow in the quarter was $193 million. As a reminder, the difference between the reported and the adjusted number is due to cash payments associated with prior acquisitions.

For the year, we achieved an adjusted free cash flow conversion of 70%, which was an improvement versus 2018. While this was short of our 80% estimate, we understand the fundamental levers of the shortfall, and we feel confident that we have the right action plans in place to improve the conversion rate over the coming years. Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 2.8x.

Turning to the full year results. We are very pleased by our performance, the progress we made aligning our organization and the relentless focus of our entire organization displayed during times of internal change and external macro uncertainty. For 2019, we posted 5% organic revenue growth and 14% adjusted earnings per share growth. Except for core food, end markets performance played out as we expected entering the year and conditions were consistent throughout the year. From an adjusted EPS standpoint, we beat the midpoint of our initial guide by $0.07 due to our strong margin performance and improved tax benefit, which more than offset a slight organic shortfall.

As we transition to 2020, we remain excited by the prospects for growth given the portfolio transformation over the past few years, including our recent acquisitions, the momentum of our growth accelerators and our new organizational structure. Consequently for 2020, we expect 5% to 6% organic growth and reported revenue to be between $3.05 billion and $3.09 billion, including $12 million from foreign exchange headwinds and approximately $35 million of contributions from acquisitions. We are forecasting full year adjusted EPS guidance of $4.50 to $4.60, up 10% to 12% and including a $0.02 headwind from foreign exchange. We expect to expand our operating margin -- adjusted operating margin by 80 basis points.

Finally, we anticipate $54 million in adjusted interest and other expenses, a 16% tax rate and our share count to average 112 million for the year. Embedded in this full year guide is the impact from a 53rd fiscal week in 2020. As most of you know, PerkinElmer operates on a 364-day fiscal calendar. Therefore, similar to the year 2015, every fifth year includes a 53rd week. For 2020, we anticipate the impact of the 53rd week will be approximately $10 million to $15 million of revenue. However, given the extra week of expenses, the extra week will dilute our adjusted operating margin by 25 to 30 basis points and adjusted EPS by a negative $0.03 to $0.05. For modeling purposes, the extra week falls into the first quarter.

We anticipate adjusted free cash flow conversion of 75% to 80% during the 2020 fiscal year, which would represent a 5% to 10% improvement year-over-year. We are acutely focused on improving our free cash flow conversion in a prudent way while balancing growth and profitability. It is going to be a 2- to 3-year process to get back to the 85% to 90% range.

Turning to the first quarter of 2020. We are forecasting reported revenue of $700 million, representing 6% organic revenue growth, including a foreign exchange headwind of approximately $8 million versus the comparable prior period. In terms of adjusted earnings per share guidance for the first quarter, we are forecasting $0.70. We expect the impact from the extra week to dilute our first quarter operating margin rate by 90 to 110 basis points. Excluding the extra week, foreign exchange headwind and higher tax rate, earnings in the first quarter would be up 9% to 12%. Again, all of this is noted in the last page of our fourth quarter earnings presentation, which I mentioned earlier.

Before I hand it back to the operator, the growing coronavirus outbreak is a concern on multiple fronts. First, our thoughts and prayers go out to those impacted. Teams across PerkinElmer are actively working to develop solutions to control and hopefully help stop the spread of this infection. That said, we have not embedded any financial impact in our first quarter or full year guidance. If the epidemic continues to grow, it could negatively impact our EUROIMMUN and SYM-BIO franchises given patients in China may avoid going to the hospital for immunology and infectious disease testing. There are currently a lot of unknowns. Therefore, we think it is prudent to highlight this risk going into the year.

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

[Operator]

[Operator Instructions] And our first question comes from Catherine Schulte with Baird.

[Catherine Ramsey, analyst]

I just wanted to go back to that first quarter guide. If we back out that extra week, I think the first quarter comes in closer to 3.5% to 4% despite having a fairly easy comp with the government shutdown we saw last year. So can you just walk us through the pluses and minuses off of what you think a normalized growth rate should look like in that first quarter?

[James Mock, executive]

Yes. Thanks, Catherine. I'll take this one. So I think if you back out the extra week, it's more like 4% to 4.5% in the first quarter, which is down versus everything to every quarter in the year 2019 we reported 5% organic growth. So it's a similar comp throughout the year. I think there's 2 things largely that are affecting us in the first quarter. First is genomics testing. If you remember 2019, we started off very high, particularly in the sequencing part of that business. And so that had a great first half and a little bit softer second half due to the consolidation. We expect that to continue into the first quarter, so that's probably 0.5 point of organic growth by itself what we're planning out in the first quarter here.

And the second area is applied genomics. Similarly, what I mentioned on robotics and automated workstations that had a stronger first half, weaker second half, we're expecting that to continue into the first half year. And so those 2 things really are the only difference between our 5% organic run rate that we saw throughout the year, including the fourth quarter and walking into the first quarter here.

[Catherine Ramsey, analyst]

Okay. And on that applied genomics business, we've seen a number of data points suggesting that DTC microarray industry will continue to have some meaningful headwinds this year. I know you have some exposure there. So how do you think about that business returning to better growth?

[Prahlad Singh, executive]

Yes, Catherine, this is Prahlad. So I think our exposure to the DTC market is not much. Most of our relationships there are pharma and on newborn screening side. The thing that we are just going through is the consolidation piece that we -- as we've pointed out earlier, by the end of Q1, that should be resolved. So we don't -- we, at this point, don't see that as our exposure to DTC is not too much.

[Operator]

Our next question comes from Dan Arias with Stifel.

[Daniel Arias, analyst]

Maybe just on Vanadis since Prahlad touched on it and we were just out there. What kind of revenues are you thinking that the placements and utilization will yield for 2020? And then along those lines, can you just sort of talk to the visibility that you have when you think about the labs that will get you there? Is there a volume trajectory that you feel confident about at this point? Or is it still kind of fluid in terms of what the ramp will look like?

[Prahlad Singh, executive]

Yes, Dan. In fact, as a matter of fact, we have a very healthy funnel, and we are actually currently in the process of shipping and installing several systems. As we've said earlier and I have, our focus right now continues to be that the earlier adopters have flawless experience. If you just look at what I pointed out earlier, 50 to 55 installations, Dan. We've placed 10 systems in 2018, 18 systems in 2019 and the implied range between 22 to 27 in 2020. So from our perspective, we think installations are an important metric to track early on in the product's life cycle. But in the end, eventually, as I've said, our goal is to democratize Vanadis NIPT. So that's where we are focusing. And also with the NIPT PLA code, that gives us several advantages in the U.S. once that is issued. So for priority perspective, we are looking at the number of installations, getting the clinical data out and working on the PLA code.

[Daniel Arias, analyst]

Okay. So it sounds like that's a TBD on the forecast for Vanadis.

[Prahlad Singh, executive]

Yes. I think from a revenue perspective, our guidance will be to continue to monitor the number of installations.

[Daniel Arias, analyst]

Okay. Okay. And then just secondly, Jamey, if I just think about the top line guide and I take out the 0.5 point or so that you're getting from the extra week, that's 5% organic at the midpoint, which is in line with 2019, which is a year where you had some organizational issues and then either one-off or maybe somewhat unlikely to repeat elements. And then I think at the end of this year, you should also be getting a little bit of juice from Meizheng. So I guess how much of the outlook for 2020 on the organic side is conservatism to start the year versus maybe something that's underappreciated about either the DX ramp or the factors that are play in DAS?

[James Mock, executive]

Yes, good question. So I mean maybe we just kind of talk through the end markets here, Dan. So I would say where we have a little bit of incremental caution is around life sciences and immunodiagnostics. I'll start with immunodiagnostics. Obviously, EUROIMMUN leads the way there. They have been mid-teens for quite some time, but I think we're pretty consistent in saying that we're going to model them at 12% organic growth. So I think we expect a little bit of downtick there.

Life sciences, I don't think we've seen anything, but funding levels have remained very strong. And so we're hopeful that it continues. But I'd say there's probably more downside than there is the upside. So I'd say that's where we're cautionary. Conversely, if you look at food and applied genomics, food, if -- what we've talked about in terms of some kind of rebound in the core and we had at least 1 data point here in the fourth quarter should provide some upside. Offsetting that, I don't anticipate cannabis being as large and incremental contributor this year, so those kind of offset a little bit there. And then applied genomics, once we get through the first half, we'll see how it's going. But hopefully, that has a little bit of an easier comp this year from this comp as well in the second half here. So overall, I -- to answer your question, probably a little bit cautious in life sciences, immunodiagnostics, maybe a little bit of upside in food and applied genomics. The others, pretty steady.

[Operator]

Our next question comes from Derik De Bruin with Bank of America.

[Derik De Bruin, analyst]

So a couple of questions. I think the first one, did -- I think some companies -- but maybe you don't have as much exposure here, but I think some companies were flagging that they didn't expect a significant budget flush during the fourth quarter from some of their customers as in prior years. I'm just wondering what you saw in terms of incremental spending and just sort of what was sort of like the year-end budget activity.

[James Mock, executive]

Yes, it's always difficult to tell, Derik, but I don't think we saw much. In terms of life sciences, actually it was a little soft in the Americas in the fourth quarter. Applied markets hung in there in the fourth quarter, so maybe there's a little bit off there, but I'd say it's difficult to tell. And overall, nothing out of the ordinary here.

[Derik De Bruin, analyst]

Okay. And just on the China, I appreciate the comments on the coronavirus, but I mean we've been getting some questions today just given that you do have an infectious disease testing business that you've got. I'm just -- I think people are wondering would you -- are you testing for it? Are you going to see potentially any incremental headwind -- sales into your diagnostics products to potentially offset some of the headwinds you're referring to?

[Prahlad Singh, executive]

Yes. And maybe I'll take that. So Derik, we are in the process of developing a PCR and an antibody assay. PCR is generally a front-line assay during an outbreak, and we are making strides. But we do have to take it through the CFDA, which is now the NMPA approval process. And they are working with us and with several other entities to get a front-line testing assay out. Again, most of the focus right now is doing it from a CSR perspective just to make sure that we have an assay that we can use for testing. What the commercial impact of that, I would say at this point is unknown.

[Derik De Bruin, analyst]

And Jamey, if I can squeeze one more in. So if you adjust for the extra week, about 105, 110 basis points of implied op margin expansion in 2020, I guess is that a -- I mean how sustainable is that sort of like 100 basis points number on a go-forward basis? I mean is there incremental -- I mean you're sort of at your 22-ish percent operating margin target that you put out there a few years ago. Is there upside to that number?

[James Mock, executive]

Yes. I mean like we've been saying that we see a lot of room for continued expansion and profitability here. And I don't think 22% was ever a stopping point. We see that ultimately over time, getting up into the mid-20s. How much can be done in the year 2020? We think 100 basis points ex the extra week is a pretty healthy clip coming off 170 in 2019. To your point, I mean we guided in 2019 120 to 150 and ended up beating that at 170. So could there be upside to the 80 basis points that we're guiding? Sure, but I think we're more focused on the long term and putting programs in place to get this to the mid-20s.

[Operator]

And our next question comes from Vijay Kumar with Evercore ISI.

[Vijay Kumar, analyst]

Jamey, if I could just touch on the margin question. Extra week incremental revenues, can you walk us up like why margins would be down? I would have thought the extra revenues benefited margins.

[James Mock, executive]

Yes. And you're talking for the quarter, Vijay, or for the year?

[Vijay Kumar, analyst]

Quarter and for the year. I'm just curious why incremental revenues have lower margins.

[James Mock, executive]

Yes. So if you look at it, Vijay, the -- and then we tried to lay this out in our earnings presentation, the exact numbers. So we feel like the extra week will provide $10 million to $15 million of additional revenue, which is not what we experienced if you just take our total year and divide by 52 weeks. But we think that that's the right amount of extra revenue coming into the year. However, if you look at the expenses for an extra week, that more than offsets that amount of gross margin. So if you take the $10 million to $15 million, you get a 50%, roughly thereabouts, gross margin. Then you add an extra week of operating expenses and an extra week of interest expense, it's actually dilutive to the year. Like I said, we tried to lay that out both for the quarter and for the year on that last page in the earnings presentation.

[Vijay Kumar, analyst]

Got you. And then maybe just a follow-up on that theme, the extra week math. One on Vanadis, is there -- are you guys in a position to compete for tenders in Europe? And related that actual week, the $10 million to $15 million, this sub-50 basis points on the top line, shouldn't it be just -- if you hit the 1 week or 53, something higher than what the implied on the extra week is?

[James Mock, executive]

Let me start with the extra week, then Prahlad's going to jump in on Vanadis here. So we think most of our customers, and we actually saw this back in 2015, operate on a calendar year, so January 1 to December 31. And if you look at where the extra days this year fall, they fall on the fringes. So take this quarter for example. December 31 and 31 for 2019 actually fall in this fiscal year 2020, but we think that the revenue from that is mostly going to be spent into 2019, and therefore, it was recorded in our 2019 revenue. So once you back out a couple of those days, you get down to, let's say, 3 more days. And a lot of that is CapEx. Some of that is scheduled professional services so not just a daily run rate. And so therefore, you get down to some recurring revenues that are, we believe, in the 10% to 15% range, which ends up being 1.5% to 2%, which was very -- in sort of the third quarter of 2015, we actually said that it was 2% impact to our organic growth. So it's kind of a similar operating assumption here.

[Prahlad Singh, executive]

And Vijay, to your -- for the first part of your question, yes, we are -- we can and are starting to participate in tenders in Europe.

[Vijay Kumar, analyst]

That's helpful, Prahlad. And just to be clear, the guidance has no assumptions around any potential wins in Europe on Vanadis?

[Prahlad Singh, executive]

Well, I think what we are assuming basically is, what, 22 to 27 installations. So some of it is in Europe. Some is in Asia, and some is in the U.S. We are not sort of focusing on which particular tender, Vijay, we could win or which we wouldn't win.

[James Mock, executive]

But there will be some CapEx revenue...

[Prahlad Singh, executive]

That will come from that.

[James Mock, executive]

In our year guidance as well as some sample ramp as well.

[Operator]

Our next question comes from Steve Beuchaw with Wolfe Research.

[Stephen Beuchaw, analyst]

I was hoping first if you could help unpack your thought process around reproductive in the 2020 guidance. Birth rates, particularly in China, were a headwind there in 2019. What do you expect for broader growth in that category? And how are you thinking about the birth rate dynamic prospectively?

[James Mock, executive]

Yes. So I think, Steve, overall, we think reproductive health ticks up a little bit. So we've got Vanadis that should kick in some, genomics testing that gets reported in there that should kick in some. I don't -- we're not anticipating any good news on birth rates. We think we've continued to see significant issues particularly in China. We expect that to continue. We had a lot of good APAC expansion that I mentioned earlier in my prepared remarks around the Philippines and Japan and Vietnam, so that has a little pressure. So net-net, there's probably a little bit of upside to reproductive health year-over-year. But we're definitely planning on birth rates impacting us, and we'll see where geographic expansion gets us.

[Stephen Beuchaw, analyst]

Okay. And then not just for 2020 but maybe even with a medium-term event, I wonder if you could speak for a minute about cannabis. You mentioned that the growth impact for cannabis in 2020, you expect to be somewhat smaller than it was in 2019. Can you put any numbers around that? And is that a market that's just somewhat matured? Or is there a competitive dynamic? Why would that be slower growth after a big 2019?

[James Mock, executive]

Yes. I mean we in cannabis this year performed extremely well. We're thrilled with the team, the solution that we bring. Prahlad mentioned that it was $26 million in revenue, which was off a $10 million base. That kind of incremental contributor is difficult to predict, and we are not banking on that in this guidance. We expect it to go up still at a double-digit rate, but to go up another $16 million just feels like a significant planning assumption that we're not -- it could happen, but that's not what we're banking on right now. So the market still seems great. We'll see how states roll out. I think there's a couple more that'll come online in 2020, but I don't think we're going to bank on that kind of incremental contributor this year.

[Operator]

Our next question comes from Tycho Peterson with JPMorgan.

[Tycho Peterson, analyst]

Sorry to go back to the 1Q guide. But you mentioned backing out the extra week, EPS would have grown 9% to 12%, $0.75 to $0.77. That's still below consensus. I would have thought with the recent reorganization efforts you would have at least been able to guide to consensus. So can you talk about if there are other offsets other than the extra week that are kind of weighing on EPS for the first quarter?

[James Mock, executive]

Yes. I mean Tycho, so in general, there's probably a little bit of a mix difference in the gross margin line versus what we kind of exited the last end of the year on as well as on the operating margin line. There's a little bit of comp timing year-over-year as well as some investments we're making in our growth accelerators in terms of Vanadis and cannabis, et cetera, to kind of set up the year. So overall, we think we'd be up about 40 basis points in the quarter excluding the extra week, and that continues to uptick throughout the year here.

[Tycho Peterson, analyst]

Okay. And then a couple of quick cleanups. It sounds like the Vanadis installed base went down. It was 19 last quarter and now you're saying 18. Was there something -- did a customer return? Or why did it go down?

[Prahlad Singh, executive]

Tycho, it's 28. So when we -- until the end of the third quarter we were 19, and that went to 28.

[James Mock, executive]

Maybe, Tycho, what we were saying was, in 2018, we delivered 10 systems. In 2019, we added 18 systems to get to 28. Next year, we're guiding somewhere in the 22 to 27. So we're taking a methodical approach to increase our placements every year and be prudent on how we roll out these systems.

[Tycho Peterson, analyst]

All right. And then on EUROIMMUN, mid-teens in the fourth quarter, you made a comment that that's maybe not sustainable and we should be back to thinking 12%, maybe 13%. What -- was there something in the fourth quarter that allowed us to overshoot to the upside?

[James Mock, executive]

No, no. I mean look, we hope that it's mid-teens. I think we've been consistent in saying that we're going to budget a year at 12% going forward. That's what we planned in the initial deal model. Throughout the first 2 years of having EUROIMMUN in the PerkinElmer family, it's grown mid-teens both years. Maybe it does again, but we've always been consistent in saying we'd like to plan this at about 12% based upon terrific product introductions, geographic expansion, including the U.S., and we just think 12% is a good operating assumption.

[Tycho Peterson, analyst]

Okay. And then just one last quick one on the genomics, the automation. It sounds like you're going to recapture half of it in the first quarter. Was that in line with your original expectation? Or were you expecting to recapture most of that in the fourth quarter?

[James Mock, executive]

No, not as much -- actually, Tycho, we're expecting that to persist into the first quarter. So some of the pressure we saw in the second half of 2019, we're expecting to persist. We keep seeing things pushed to the right here from a demand perspective, and we're not banking on that that will change in the first half year. Naturally, when you get to the second half, you get a different comp. If it's better than that, we're happy. But right now our operating assumption is that we're going to continue on with the growth rates we saw in the second half of 2019 into the first half of 2020.

[Operator]

And our next question comes from Patrick Donnelly with Citi.

[Patrick Donnelly, analyst]

Maybe just building on Tycho's question on EUROIMMUN. Can you just talk through how sensitive that business is to the China hospital volume? And then maybe just give us some color on what kind of the volume per day looks like and all the growth there.

[Prahlad Singh, executive]

Yes, Patrick, I think it'll be difficult to give a volume per day. I think as Jamey pointed out in his remarks, given the evolving situation right now, all we are doing is highlighting the coronavirus thing. We don't know what the impact of that will be. It all depends on how it plays out over the next few days or weeks. I think the point that Jamey made to Tycho's earlier question is that EUROIMMUN has done better than what we have forecasted in the deal model, which has been 12% over the past couple of years, and we hope that it continues to do that way. From our forecasting perspective, we have modeled it at 12%.

[Patrick Donnelly, analyst]

Okay. And then maybe, Jamey, just on the cash flow, I appreciate the 75% to 80% conversion guidance. Can you just talk about some internal initiatives you guys are focused on there? I know you had some headwinds around receivables and inventory kind of extended out some agreement terms. Can you just talk about the trends you're expecting in 2020 there, the focus points?

[James Mock, executive]

Yes, sure. Thanks, Patrick. So -- I mean we've learned a lot about cash flow over the last year here, and we've made some progress, not where we wanted it to go to but definitely some uptick. The 2020 operating assumption is that working capital turns are basically static. Unlike the last couple of years, where we've actually been reducing our working capital turns and it's been a headwind. So there's internal processes around things like filling and invoice accuracy and timeliness and collection efforts, et cetera. But really, when you look at receivables, it's in 3 or 4 different business models. And we expect some of that to somewhat plateau in 2020. We've seen terms changing, particularly in China and some of the emerging markets that are much more developed now. Informatics, we've started to sell subscriptions on a 3-year basis a couple of years ago, so we should expect some more cash from that. Cannabis, we've been leaning into a little bit here. So the fundamental embedded in the 75% to 80% is basically static from an efficiency standpoint, which would be great. Hopefully, there's upside, and certainly, over the next couple of years, we'll drive that.

The second thing I'd say is around capital expenditures. So capital expenditure's downtick I think about 20% this year. We didn't repeat some of the investments in genomics, and we've been kind of monitoring EUROIMMUN. I would say, over the next couple of years, there are 2 remaining areas that require capital expansion. That's EUROIMMUN in China. We're building out a facility there. And then our Tulip business in India is growing extremely well, and we got to increase some of the facilities or space there. But after that, I don't think we see a lot of capital expansion. So we've kind of reduced it a little bit here. It'll be static for a little while, and then hopefully, that downticks over time.

[Operator]

And our next question comes from Doug Schenkel with Cowen.

[Doug Schenkel, analyst]

I'm just going to ask 3 quick ones and then get back into the queue. I just got -- I'm on the train, and I don't want to add too much background noise. So first, following up on Patrick's question, has there been -- or is there any formal change planned for incentive comp as it relates to free cash flow conversion? Second, what assumptions for growth by geography are embedded into revenue growth guidance for the year? And three, what are your capital deployment priorities for the year? Do you have a target in terms of capital you intend to deploy? And what's the mix you expect between share repurchases and M&A?

[James Mock, executive]

Yes, sure. So I didn't catch the second one, but I'll answer the other 2, and then I'll ask you to repeat that one, Doug. So incentive comp is now in all of our financial plans. Free cash -- or, sorry, free cash flow is now in our incentive comp plans. So that answers that question. From a capital deployment perspective, we continue to remain acquisition first from a priority standpoint. And so I think if you look at the last couple of years, we did 4 acquisitions in '18, 4 acquisitions in '19. We always look at a healthy pipeline. I think you can expect us to be active there. The dollar amount might fluctuate, but I think that's still our priority here from a capital deployment.

We ended leverage a little bit down versus the end of last year, and our liquidity is much stronger after the refinancing. And then in terms of where it's always been pretty consistent, I think we're primarily focused on diagnostics and life sciences. And I think that's it. And we -- you cut out on the second question there, Doug. What was the second question?

[Doug Schenkel, analyst]

Yes. Sorry about that, Jamey. What are your assumptions for growth by geography in terms of what you embedded into revenue growth guidance for the year?

[James Mock, executive]

Yes, good question. So basically, we're pretty much mid-single-digit across the board. If you look at Americas and APAC, that's been mid-single digits all of 2019. Europe was low single digits. We expect the Vanadis kind of revenue to clip that over into maybe the mid-single digits range. I call it a weaker mid-single digits. So pretty consistent across the board and pretty consistent with what we saw in 2019.

[Operator]

Our next question comes from Jack Meehan with Barclays.

[Jack Meehan, analyst]

Wanted to start, maybe move back to DAS. I was curious what you're seeing from your industrial customers, what that grew in the fourth quarter and just given the current state of the macro, what the 2020 guidance assumes there in terms of progression.

[Prahlad Singh, executive]

So I think I'll -- talk about 4Q to start with, Jamey.

[James Mock, executive]

Yes, 4Q was flat, consistent with where it's been most of the year, Jack.

[Jack Meehan, analyst]

And then for 2020?

[James Mock, executive]

We expect no change. Industrial environmental has been remarkably consistent for us, pretty flat throughout the entire year. And I think that's our operating assumption going into 2020.

[Jack Meehan, analyst]

Great. Okay. And then back on the Diagnostics business, I wanted to follow up on the genetic testing lab just marking to market. What was the final contribution for 2019? What does the guidance assume for 2020 contribution? And given the pace of the transition, is there any additional timing dynamic there assumed for the first quarter as well?

[James Mock, executive]

Yes. So 2019 genomics testing did extremely well. Obviously, it was much stronger in the first half than the second half. It was probably a little under $20 million in total. In terms of 2020, I think we'd rather not give specific guidance here, but you can expect that it's going to grow substantially. And in terms of the cadence through the year, I mentioned in my earlier remarks that the first quarter will continue to be challenged because the consolidation is not supposed to happen until the -- well, it's happening right now. And the real roadblock there and it -- is hiring. We feel good about it, but sometimes it can take 2 to 3 months to onboard people in that space. And so we feel like the second quarter is when we'll start to ramp back up again. And so overall, we expect another healthy incremental growth driver from genomics testing in 2020.

[Jack Meehan, analyst]

Great. If I could squeeze in one more, what were the individual contributions from Meizheng and Cisbio? The acquired growth in DAS was a little bit higher than what we were looking for. Just was there anything outsized that contributed in the quarter?

[James Mock, executive]

No, not really, no. Cisbio and Meizheng both continue to do well. I think we said Meizheng had been growing into the 20%-plus range and continues to perform well. We got, I think, 11 out of 13 weeks or something in the quarter from them. And Cisbio has been double digit all year.

[Operator]

Our next question comes from Brandon Couillard with Jefferies.

[S. Brandon Couillard, analyst]

Prahlad, curious if you could just touch on the services business for a minute. I know you did some restructuring there in the third quarter. Just curious what your outlook is for the OneSource business, specifically enterprise services, as you look into '20.

[Prahlad Singh, executive]

Yes, Brandon. I think in terms of the services business, we did some restructuring as you say, and this was, again, with the implementation of ServiceMax, we continue to sort of see productivity coming out of there. I think as we look forward, we are in a good position for 2020, and we expect to win some tenders. And I think, as we have said, it will continue to be a high single-digit growth business for us.

[S. Brandon Couillard, analyst]

And then one just for Jamey, on tax rate ticking up a little bit this year. Is there anything specific behind that or just an added level of conservatism sort of embedded for the tax rate?

[James Mock, executive]

No. Yes, I mean it's a good question, Brandon. It had gotten down to about 14% in 2018. We guided 16% for the year and came in at 15%. So there is a little natural uptick in tax. I think if you look at where we are growing, you look at EUROIMMUN, you look at informatics, enterprise, a lot of those areas are higher tax jurisdictions. So therefore, we do anticipate that to go up a little. And then the offset to that, which is difficult to forecast, are some of the discrete items. We always have tax planning items. We had a lot in 2019, which basically brought us from the 16% down to 15%. But there is a little natural upward pressure there that makes us think that 16% is the right number.

[Operator]

Our next question comes from Dan Leonard with Wells Fargo.

[Daniel Leonard, analyst]

A couple of things. One, Prahlad, you teased us with some potential proof points coming in 2020 as a result of the combined efforts of the organization. Are these -- whether they be new product introductions or service efforts or what have you, are these things that would have an impact in 2020? Or are these things that would build and have a further impact in 2021 and beyond?

[Prahlad Singh, executive]

I think we started seeing some of the benefits already. As I pointed out, the whole cannabis workflow solutions that we have seen, there have been other examples of where we've combined our sample prep business from the applied genomics side with reagents from our life sciences business. So we've started seeing proof points of this. And I don't think it's going to be a discrete 2020 item. It will continue to be ongoing, and we expect to see more synergistic opportunities coming out of this.

[Daniel Leonard, analyst]

Okay. And then secondly, can you walk me through your strategy to go from -- you mentioned the PLA code. Can you walk through your strategy to go from that PLA code to getting that code included in medical coverage policies for NIPT?

[Prahlad Singh, executive]

I think just getting the code offers us the advantage that as a manufacturer we can negotiate reimbursement rates directly with payers and direct billing on a methodology that would be specific to Vanadis NIPT. And that hopefully offers better reimbursement rate for the laboratories. And also additionally, we can bill insurance without any risk of incorrect coding. So I think that's the level I want to share just given the competitive situations and for commercial reasons. But at this point, really, what I would say is that we are really excited about AMA's acceptance of our PLA code that came in at the end of December. And right now we are all hands-on to ensure that the submissions get in time and we get the code in hand.

[Daniel Leonard, analyst]

Okay. And then just final cleanup for Jamey. Jamey, the -- what was the China growth rate in Q4? Was it consistent with the mid-single digits of APAC? Or was it higher or lower than that?

[James Mock, executive]

Consistent with APAC, Dan.

[Operator]

And we have a question from Paul Knight with Janney Montgomery.

[Paul Knight, analyst]

The -- I know the product portfolio has clearly benefited from cannabis and food safety testing. Is there any goal you would have or point out on the R&D that you want to spend this year. Is it increasing faster than revenue? And what are some of the areas you'd like to develop further?

[James Mock, executive]

Yes, Paul. Overall, R&D, if you look at it in 2019, we actually saw a little bit of efficiency, and that was related to some of the organizational restructuring. We want that to be ticking up a little bit over time. And so what's embedded in this guidance is kind of a constant R&D as a percent of sales, if anything, maybe a little bit of uptick. You mentioned cannabis and food. That's one of the areas that we're increasing some of our budgets. And I think in general, we're putting a little bit more resources between -- behind life sciences, diagnostics and food, and I think you can expect that R&D as a percent of revenue will be at least flat, if not, up a little bit this year.

[Operator]

Our next question comes from Dan Brennan with UBS.

[Daniel Brennan, analyst]

Great. So Jamey or Prahlad, just wondering for DAS, I don't know if you guys broke out exactly what's baked in for 2020 guidance overall. And then maybe within that, I know you touched on applied environment. But could you break down a little bit food and biopharma, both for solid in the quarter, kind of what's baked in going forward and what's -- kind of what is the outlook?

[James Mock, executive]

Yes, I think we're optimistic that DAS upticks here, and maybe it's 1 point or 1.5 points. If you look at food, I mentioned it earlier. I mean we expect some kind of rebound in core food. Fourth quarter was a good data point. If nothing else, there's some good comp here. Obviously, it's difficult to predict weather and climate change, and if that impacts us, then that will be different than what we're planning on. But core food should rebound. I mentioned that cannabis will have a slight offset to that, though, that we're not expecting as much incremental contributors. But net-net, I think food ticks up a little bit.

Life sciences, I think, ticked up a little bit. We talked about -- Prahlad talked about some of our enterprise business going well and some extra tenders and an extra week here. I think Cisbio and informatics continues to be extremely strong, both were double digit this year. We're planning them more in the high single-digit range, so we haven't seen anything, but I just don't think we're going to plan in that double digits. So net-net, that probably upticks a little bit. And then industrial and environmental, we are planning flat, so no change from 2019. So if you mix a little bit of improvement in life sciences and food, we probably uptick a little bit in DAS year-over-year.

[Daniel Brennan, analyst]

Great. And then if you kind of pull the scope back a little bit, I know like a year or so ago, the conversation was maybe kind of high single-digit growth type of portfolio which obviously you guys still sound very constructive on the momentum that you have with all the business changes. But when you think about the 2020 guide, you've given a lot of color on the different businesses. But how would you characterize the 5% balance? Or is there a conservatism in it? And you had to call out a swing factor on the upside or downside, what would that be?

[Prahlad Singh, executive]

Yes. Dan, I think, look, again, we continue to be very excited about the portfolio and the prospects that we have for accelerating profitable growth. We've got a lot of fans in the fire. I think entering the year, we are trying to be balanced given there are some uncertainties that we see. And again, example that Jamey talked about just coming in is with the coronavirus. We don't know how that plays out. But essentially, the growth accelerators that we have are inherently the swing factors that will play a very important role as we look forward.

[Operator]

We have a question from Bill Quirk with Piper Sandler.

[William Quirk, analyst]

So a couple of questions for me. First off, Prahlad, really do appreciate all the Vanadis commentary. Is there any -- just I guess last question maybe on that. Any particular geography or customer type where you're seeing outsized interest and success in terms of placements. And then secondly, just staying in diagnostics for a moment. With respect to the coronavirus assay development, the CDC has some emergency procedures in place to be able to rapidly disseminate tests from a regulatory standpoint. Are you familiar or are you aware of a similar type of program in any of the other affected countries?

[Prahlad Singh, executive]

Yes. Just starting with your first question around Vanadis. I think from an interest perspective, we are seeing interest in all the 3 -- all the 3 regions. In APAC, ex China, given that we don't have approval in China yet, we are going through the clinical, in Europe and of course with the recent launch that we did in the U.S., we continue to see a broad spread interest on it.

In regards to your second question, yes, it's similar to the CDC, the NMPA and CFDA in China also has accelerated emergency processes that they have in place, and we are working with them to get a test out, hopefully, in a few weeks.

[Operator]

And we have a question from Derik De Bruin with Bank of America.

[Derik De Bruin, analyst]

Just one question. I just wanted to clarify some since I got a bunch of questions from investors. So typically, the rule of thumb when you look at extra days is about 0.5% organic revenue growth is a contribution for consumable-heavy companies. So the $10 million to $15 million seems a little bit light in terms of revenue contribution on the extra week. Did I hear you correctly in saying you saw some of that was pull forward into the fourth quarter? I'm just trying to say -- to make sure of that because it just seems like it's a lower number than I would have thought given your business mix.

[James Mock, executive]

Yes. Overall, it's 1.5% to 2%., so the rule of thumb of 0.5% times 5, we're only really, I guess, 0.5% to 1% off here. I don't think it's too different than what we saw in 3Q '15 nor the rule of thumb overall. I did say that, yes, I mean if you look at December 30 and 31, I think most customers operate on a calendar budget in that our sales force probably, much like every other year, looks at the CapEx spending and says, let's execute those before December 29 and I don't think that's any different than what we've done in most years. So I think it's pretty much noise around the fringes here.

[Operator]

There are no other questions in the queue. I'd like to turn the call back to Prahlad Singh for any closing remarks.

[Prahlad Singh, executive]

Thank you all for your questions. As we've shared today, we have a number of exciting opportunities on the horizon as we continue to drive towards our mission and accelerate outcomes for the betterment of people and the environment. I look forward to updating you on our continued progress in 2020. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.