Good afternoon, ladies and gentlemen, and welcome to the Q3 2019 PerkinElmer Earnings I would now like to turn the conference over to your host, Mr. Brian Kipp, Vice President of Investor Relations. Please go ahead.
Thank you, Angela. Good afternoon, and welcome to the PerkinElmer 3rd 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 Jamie Mok, 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.parkandalmer.com. Please note this call is being webcast live and will be archived on our website until November 13, 2019.
Before we begin, we need to remind everyone of the Safe Harbor statements that have outlined in our earnings press release issued earlier this afternoon and 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 other date after today. During this call, we will be referring to certain non GAAP financial measures. A reconciliation of the non GAAP financial measures we plan to use during this call to the most directly comparable GAAP 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? Thanks, Brian, and
good evening, everyone. The Q3 was a busy one for PerkinElmer in which we continue to take important steps to position the company for acceleration of our growth and profitability, while also delivering strong financial results. Turning first to our financial results in the quarter, revenue was $707,000,000 representing organic revenue growth of 5%. Adjusted EPS was $1.06 an increase of 18% over Q3 last year and significantly exceeding our forecast as the benefits of our new operating model and increased contributions from our growth businesses delivered very significant operating leverage. This strong margin expansion has given us the confidence to raise our full year adjusted EPS growth to 13% despite stronger than anticipated headwinds from foreign exchange and a challenging macroeconomic environment.
While Prahlad and Jamie will discuss the specifics of our performance in the end markets, overall market conditions for the majority of our portfolio are consistent with our previous outlook. And except for 2 areas we will discuss, our businesses are performing well. Importantly, our key growth areas are continuing to gain traction and scale and remain on track to achieve or exceed our previously communicated goals for 2019. At the start of this year, I discussed the opportunity we saw to increase our impact in growth by better leveraging the intersection and synergies of our technical and commercial capabilities across PerkinElmer. During the Q3, we completed a fairly significant organizational realignment to create a more unified approach to customers and better facilitate collaboration across the company.
In addition, during the quarter, we announced the appointment of Prahlad as CEO effective the end of this year as well as several other business and functional leadership changes. These actions are the final steps in the execution of a multiyear strategy to position the company organizationally for the next phase of its evolution in growth. During the quarter, we also added a key strategic asset to our food capabilities with the addition of the Meisheng Group, increasing our product and technology breadth as well as commercial resources in China. Prahlad will go into the acquisition in more detail. However, strategically, this deal is consistent with our recent Cisbio purchase as it is focused in an attractive end market, increases our consumable mix and expands our scientific and technological capabilities and adjacent technologies.
Also similar to Cisbio, we believe Meijin will provide very attractive financial returns given the natural channel and geographic synergies between our two companies. Additionally, during the Q3, we issued an $850,000,000 10 year bond and extended the term of our revolving credit facility. These actions strengthen our financial position by securing long term capital at very attractive rates, while also increasing our capacity for both organic and inorganic investments. The last item I will highlight for the 3rd quarter is a significant operating leverage we experienced this quarter. As we outlined previously, the key actions for 2019 2020 to meet our operating margin objectives we're focused on increasing the incremental margin flow through on revenue growth to 28% with an emphasis on improving EUROIMMUN's margins and reducing our SG and A to 24% of revenue by 2020.
As many of you know, driving sustainable margin improvement often requires efforts to simplify processes and improve supply chains that must be implemented several quarters before they are evident in financial results. Consequently, it is great to see that the many actions we have taken over the prior several quarters are beginning to translate into improved profitability. Specifically, our incremental margins for the Q3 and full year are tracking significantly above our plan and in particular EUROIMMUN margins year to date are over a year ahead of our acquisition model. Similarly, in the Q3 adjusted SG and A as a percentage of revenue was below 24% and year to date we are trending ahead of our 2020 plan. And while we are proud of the progress we've made this year, we view this as a never ending journey to become a more efficient and streamlined organization.
However, the results this quarter further reinforce our belief that there is a significant opportunity to further increase operating margins at the company, while maintaining ample capacity to appropriately invest in growth. So to summarize both the Q3 and performance year to date, our organic revenue growth of 5% has been about 100 basis points below our guidance due to market headwinds in the applied markets and some timing of revenue in diagnostics, neither of which we believe present mid or long term challenges to our high single digit revenue growth model. In addition, despite the lower revenue, operating margins and adjusted EPS are tracking ahead of plan as our margin improvement plans are yielding greater benefits than anticipated. Therefore, as we put our plans together for the next several years, we are quite optimistic as our growth businesses like EUROIMMUN, Vanadis, our genomics business, service, informatics and cannabis continue to do very well. Also, the 3 bolt on acquisitions completed this year, the completion of our commercial realignment, as well as our improved operating leverage should further increase organic revenue growth and profitability.
I will now turn the call over to Prahlad, who will discuss in more detail some of these specific items and our optimism about the future of PerkinElmer. However, before I introduce Prahlad, I did want to recognize that as I will be stepping down as Chairman and CEO at the end of this year, this will be my last earnings call for PerkinElmer. Therefore, I would like to take this opportunity to thank all of you for your support of me and the company over the years. I feel very fortunate to have had the opportunity to get to know and work with all of you and I wish you all continued success. I'm now very happy to turn the call over to the next CEO of PerkinElmer, Prahlad Singh.
Thank you, Rob. Before I begin my prepared remarks, I wanted to take a few minutes to acknowledge and thank Rob for his leadership and service to PerkinElmer. As you know, Rob will be retiring from the company and this is his last quarterly earnings call. For those of us keeping tabs, this is his 84th earnings call with PerkinElmer. Rob has evolved PerkinElmer into a strong company with a legacy of sustainable and profitable earnings growth and optimize the portfolio towards high growth end markets.
The management team at PerkinElmer will build on his legacy to progress PerkinElmer to its next level as a growth focused company providing high quality earnings. Today, I'm excited to update everyone on the continued progress we have made on our strategic priorities during the Q3. But to start off, I want to begin with some details of our recent acquisition of the Meizhang Group. We are extremely excited to welcome the team from Meizhang to PerkinElmer. Meizhang is a highly attractive and strategic asset, one that will play a pivotal role in our domestic food strategy in China, as well as our broader long term food strategy across the globe.
Mei Xiang has developed a reputation as a leading food safety testing company in China due to its current portfolio breadth, strong culture of innovation and unparalleled customer intimacy. The company is headquartered in Beijing and has a broad commercial presence in China, supported by over 140 direct sales and marketing feet on the street. Mezanc's comprehensive technology and product portfolio covers immunoassay, microbiology and molecular testing for food safety in prioritized end markets, grain, dairy, meat and seafood. With the addition of Meizhang, we estimate that the total addressable market for our food portfolio in China is now $1,000,000,000 to $2,000,000,000 and we have the most extensive set of capabilities across the food testing value chain. For example, in dairy, we now have the broadest set of food quality and safety capabilities, which span from up stream herd management to midstream collection center testing to transfer station and storage testing.
Additionally, we also now serve the QA and QC labs at processing facilities and third party safety and regulatory adherence testing customers. We estimate that the overall China food safety testing market has been growing at a low double digit CAGR over the past 5 years, driven by increasing government regulation and enforcement, changes in local dietary preference and a rising middle class. And we expect that the market to continue to grow at a healthy high single to low double digit clip for the foreseeable future. Since Meizhang was founded in 2,009, the company has grown its top line revenues at a greater than 25% CAGR. More importantly, 75% of Meizhang's revenue comes from reagents and consumables and is resilient to macro cyclicality.
With the addition of Meizhang, we will now have more than $80,000,000 food quality and food safety testing business in China. We see significant synergy opportunities from a portfolio, channel and regulatory standpoint. Mei Xiang has developed strong connections with major regulatory bodies and key opinion leaders and the company counts many of the leading local food companies as customers, all of which we view as critical in a country still in the early innings of establishing national and industry standards. While the downstream food quality end market has been soft globally this year, upstream food safety testing has been solid and we continue to view overall food quality and safety testing as one of the most attractive end markets globally due to its long term structural tailwinds, its regulated nature and the fact that the market is highly fragmented with no dominant player across the value chain. We believe the acquisition of Meizhang, we are now in a prime position to establish ourselves as a leader in food quality and safety testing over the coming years.
Switching over to the Q3 performance and an update on our strategic priorities. I echo Rob's enthusiasm. We continue to make tremendous progress shaping our organization internally to leverage our capabilities across PerkinElmer and provide a better customer experience. On the customer experience front, the team has made good progress leveraging cross functional expertise across PerkinElmer's focused business segments, food, diagnostics, life sciences and applied markets as well as informatics. For example, we are now able to provide turnkey solution for cannabis customers that cover all testing, analytical, lab management and data analytics need to ensure the quality and safety of their products and meet compliance requirements.
There are still some elements of these cannabis workflow solutions that will be rolled out over the coming quarters, but the team has had early success during the Q3 cross selling additional PerkinElmer products. To share one example, recognizing that faster turnaround times and higher accuracy sample prep are increasingly important needs in the cannabis industry, our internal cannabis team leaders connected customers with members of our applied genomics team, who in turn developed a cannabis specific workflow to sell alongside our complete analytical offering. The Janus G3 liquid handling workstation was recently adopted by Anandia's new testing lab in Vancouver to automate the primary sample transfer and sample setup for the analysis of contaminates, such as mold spores and pesticides in cannabis, which is extremely important for medical users who could potentially have compromised immune systems. Turning to our priorities around people and culture. We finalized our commercial organizational realignment during the quarter.
As I mentioned on our last earnings call, aligning our commercial structure by region has been a key initiative this year. We firmly believe that empowering the regions with decision making closer to the customer is the right playbook as it puts the voice of the customer at the center of our commercial strategy. Finally, on innovation, Vanadis continues to gain traction. Inbound inquiries have increased following the prenatal diagnostics publication in late August. There is significant interest in our technology as Vanadis' high sensitivity and specificity and low no call rate resonates with clinicians.
Year to date, we have 19 systems installed or in the process of installation and we remain on track to achieve our year end goal of 30 installations. Our pipeline of opportunities over the next 6 months remains very healthy. Additionally, as we announced in a press release yesterday, our Pittsburgh and Malaysia labs can now receive samples to perform NIPT testing in support of our maternal and fetal health customers. In the U. S, the aim of the Pittsburgh lab is also to serve as a backup for clients requiring overflow capacity as well as an outsourced service lapse for small customers who need to scale before they bring technology in house.
We also will be offering carrier screening and preeclampsia testing, which along with Vanadis as a first to market combined offering will serve to further differentiate us in the U. S. Market and provide a much better customer experience. As Vanadis is now up and running at our Pittsburgh lab, we are excited to announce that we will be hosting a tour at that facility in the near future. Given the capacity constraints at the lab, we will only be hosting the cell site during the day, but we hope to be able to host investors at the facility down the road as well.
We'll send out official invites in the coming weeks. As I said on our last call, I'm inspired to witness the immense talent in our organization, rallying together to achieve the vision of becoming a truly differentiated player by leveraging our capabilities across our organization to provide a flawless customer experience. I believe we are in a good position to close our 2019 on a solid footing, which will set us up well heading into 2020. 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 Jamie.
Thanks, Prahlad, and good evening, everyone. As always, I want to start with the highlights for the quarter. 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 4th quarter. Overall, we are pleased with our Q3 results and year to date performance.
To start, market conditions were largely in line with our expectations entering the quarter and our growth accelerators continued to perform well. For example, EUROIMMUN continued to grow at a double digit clip due to strong demand in China. Cannabis and genomics testing remain on pace to meet or exceed our initial goals for 2019 and Vanda's momentum continues to build following the prenatal diagnostics publication in late August. As Rob and Prahlad mentioned, we completed and are excited about the acquisition of Meijin, which I will cover in greater detail later. Additionally, prior actions to reduce our organizational complexity have made us a nimbler organization moving forward.
Finally, we are raising our 2019 earnings estimate to the high end of our prior range or $4.07 per share, which represents a $0.03 increase versus the midpoint of our prior range. In summary, the team has done a great job executing on our near and long term priorities. Turning to the 3rd quarter results. We continue to be pleased with the strength in our business as organic revenue grew 5%. Reported revenue grew 5% to $707,000,000 and included 2% foreign exchange headwind and a 2% net acquisition tailwind.
By business, diagnostics representing 40% of total sales grew 6% organically driven by our immunodiagnostics and reproductive health business lines. Discovery and analytical solutions representing 60% of total sales grew 4% organically highlighted by continued strength in life sciences and offset by ongoing tepid demand in the applied markets. I will provide some additional color on both businesses in a moment. On a geographic basis, organic growth trends remained mixed as they have throughout the year 2019. Asia Pacific and Europe grew mid single digits, while the Americas grew low single digits.
Year to date, the Americas and Asia Pacific are up mid single digits, while Europe is up low single digits. Operationally, we are extremely pleased with our performance in the 3rd quarter and we continue to see significant potential to improve our profitability going forward. Adjusted operating margins expanded 250 basis points in the 3rd quarter to 21.6%, driven by productivity, mix and cost out actions. Year to date, we have expanded adjusted operating margins by 150 basis points year over year. As Rob mentioned, adjusted earnings per share of $1.06 was an increase of 18% versus the Q3 of 2018 and $0.05 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 6%, driven primarily by our immunodiagnostics and reproductive health franchises. On the immunodiagnostics front, EUROIMMUN and Tulip led the way as both grew at a healthy low double digit organic growth EUROIMMUN was broad based with autoimmune allergy and infectious disease testing all growing double digits during the quarter. Geographically, China remains strong, while EUROIMMUN's U. S.
Business also continues to scale, rapidly growing at a very healthy double digit Testing went live during September at a large reference lab. Therefore, we continue to expect EUROIMMUN's U. S. Market share for ANA testing to reach 50% as testing ramps up moving forward. Reproductive health grew mid single digits organically driven by our genomics testing business and expanded coverage in Asia Pacific.
As one example from earlier this year, the Philippines implemented an expanded newborn screening program. The national insurance company, Phil Health, announced that it will provide 100 percent public insurance reimbursement for all newborns. Previously, only 12% of newborns were screened and payment was all out of pocket. By the end of September, an estimated 85% of newborns were screened under the new program. Applied genomics growth moderated versus the first half trends down mid single digits in the 3rd quarter.
Comparisons in the business were difficult due to the timing of some high AFP large automated workstation purchases last year. We continue to see a healthy expansion in our opportunity funnel, which keeps us encouraged that this business will return to healthy growth. Turning to Discovery and Analytical Solutions, organic growth of 4% was a 2% uptick versus the first half performance. By end market, we experienced high single digit organic revenue growth in pharmabiotech propelled by our imaging and detection and informatics product lines. Both were up double digits in the quarter.
Our informatics business continues to perform well as leading pharma and biotech companies actively shift to modern, future proof workflow solutions like PerkinElmer signals to accelerate their R and D insights. The applied markets were flat in the quarter, driven primarily by softness in China and Europe, which were down mid single digit and low single digits respectively. Combined overall industrial and environmental was flat and improvement sequentially. However, we think the improvement is a function of easier comparisons on a sequential basis, not a fundamental improvement in the underlying market trends. Food was up low single digits bolstered by strong cannabis demand.
Shifting to below the line items, adjusted net interest and other expense for the Q3 was approximately $15,000,000 and our adjusted tax rate was approximately 14% driven by benefits from global tax planning actions. Turning to the balance sheet, we finished the quarter with approximately $2,300,000,000 of debt and $393,000,000 of free cash flow of cash. Free cash flow in the quarter was $90,000,000 and adjusted free cash flow in the quarter was $96,000,000 As a reminder, the difference between the reported and adjusted number is due to cash payments associated with prior acquisitions. Actions to improve working capital have been put in place and as a result sequential usage has improved versus first half performance. We anticipate additional improvement in the Q4 and into 2020.
As mentioned, we are excited about our Meijin acquisition. The net purchase price was approximately $152,000,000 We expect a double digit return on invested capital by year 4. We estimate Meijin to approximately have $30,000,000 of revenue in 2019 with accretive operating margins. For the Q4, we expect Meijin to contribute less than 1% to PerkinElmer revenue growth and negligible EPS accretion. For modeling purposes, the acquisition officially closed October 17.
Over the course of the last 45 days, we refinanced a substantial portion of our debt. We were pleased with the pricing of our new $850,000,000 10 year bond and the extension of our revolving credit facility. We reduced our cost of debt by 50 basis points, more than doubled our overall maturity profile and alleviated our 2021 maturity cliff risk. Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 2.8 times we expect to end the year at approximately that same level. Closing the books on the 1st 9 months of 2019, we remain pleased with our performance including 5% organic growth, 13% growth in earnings per share and continued success of our growth accelerators.
The additions of Meijin and Cis Bio will help accelerate our growth in coming years and improve our reagent portfolio and capabilities. The new organizational structure will further strengthen our ability to execute on a consistent basis. For the year, we now expect 5% organic growth and reported revenue to be approximately $2,880,000,000 including $68,000,000 from foreign exchange headwinds and approximately $41,000,000 of contributions from acquisitions and divestitures. We are increasing our full year EPS guidance, adjusted EPS guidance to $4.07 which includes an incremental $0.02 headwind from foreign exchange compared to
our prior
guidance. Additionally, we now expect to expand our operating margins by 150 basis points. Finally, we anticipate $60,000,000 in adjusted interest and other expenses, 14% to 14.5% tax rate and our share count to remain at slightly under $112,000,000 for the year. For the Q4 of 2019, we are forecasting reported revenue of $800,000,000 representing 5% organic revenue growth, including a foreign exchange headwind of approximately $11,000,000 versus the comparable prior period. In terms of adjusted earnings per share guidance for Q4, we are forecasting $1.32 Before I turn the call back to the operator, I'd also like to congratulate Rob on an enormously successful career.
In addition to Pralad's remarks on Rob's transformation of the company, he's also positively impacted the lives of thousands of employees and their families along the way, including myself. From all of us, we thank you and wish you a relaxing and retirement. This concludes my prepared remarks. Operator, at this time, we would like to open the call for questions.
And your first question comes from the line of Derik De Bruin with Bank of America. Please go ahead.
Hi, good afternoon. Good afternoon. Hi, Derek. So I'm still not clear on the Diagnostics slowdown in the quarter. I mean, you did 9% in the first half of the year, 6% this quarter and it was on easier comp.
Can you just walk through what the sequential deceleration was in the quarter? Yes.
There are 2 aspects to it, Derek. 1 is as we are moving the genomics testing lab, we had 2 facilities, 1 in Brantford and 1 in Pittsburgh, and we are consolidating that into Pittsburgh. So from the move, that has resulted in a backlog of samples, which were not read through and that contributed to some of the slowdown on the diagnostics one. The second one was around the Applied Genomics business. We had last year a lot of capital based systems on the automatic on the automation side of it, which did not come through and that has postponed over to the next few quarters.
Again, these are things that we it's not that we have lost these, but they have moved on into the next couple of quarters. So that essentially has accounted for the slowdown that we saw in Q3. Again, coming back to it, our reproductive health franchises and immunodiagnostics, those continue to do very well despite the slowdown in birth rates.
Right. So if you adjust for those two items, what was that about? What was the hit on growth in the slide? Is it about 3%?
Yes, that's right, Derek. That would get you back to about the 9% run
rate. Great. Thank you. And I guess one follow-up question on this one You look at the margin expansion, which is really impressive. I mean, is that SG and A number sustainable going forward?
Yes. Let me take that, Derek. Yes, I mean, when I think about margin expansion, I think this has been, as Rob mentioned in his prepared remarks, years of planning around this. And a lot of times, it just takes time to kind of show up in our margin line. And I think we talk about 3 general levers, all of them playing a role, SG and A, to your point, being one of them.
But I mean, I think mix has been better, so a little bit more diagnostics. Even within DAS, our life sciences business is growing, informatics and reagents continue to grow. With regards to leverage, to your question, yes, I mean, I think we have made the necessary investments in years prior, and we anticipated that we'd be able to take down the and A as a percent of revenue. And we also had some improvements due to the synergies in our reorganization, and so that helped a little bit here as well. And then on productivity, I think we've got a lot going on both from a shop perspective, a services perspective as well as indirects as well.
So we can elaborate more on those. But I think it is sustainable here. There might be a little bit of timing, but not much of it.
Great. Thanks. Rob, happy trails and good luck.
Thank you.
And your next question comes from the line of Paul Knight with Janney. Please go ahead.
Hey, Rob, congratulations. And when I first started covering you 19 years ago, 5% organic or mid single wasn't even on the horizon for Perkin. Could you kind of replay what you did as you became CEO? And as you stand here today, could you kind of reflect on where you think Perkin stands and kind of take a bow for what the investment you've done on R and D and M and A and divestiture, if you could can summarize that up, it'd be awesome.
Yes, I'd be happy to do that.
And Paul, you're probably one of
the few people that sort
of remember the old days there in the early 2000s. But anyway, as you can imagine, not surprisingly over the last couple of weeks, I've been a little bit more reflective on my tenure here. And I would say, I feel really good about what we've been able to accomplish at the company during the sort of almost 2 decades. And I really want to emphasize the we part of that statement as I've been extremely fortunate to work with really some outstanding people over the years. And as I think about the most important accomplishments, there's probably 3 or 4 I'd sort of just spike out quickly.
1, obviously, that's relevant for this audience is the value we've created for our shareholders. If I go back to when I started as CFO in 2019, the company had a little north of $1,000,000,000 in market cap. When I became CEO in early 2008, it had grown to 3. And today, we sit at just under 10, with an enterprise value of close to 12. And to put that in perspective, if you had invested $1,000,000,000 in the market in $99,000,000 you'd be at about $3,000,000,000 meaning over that period of time we've created about $7,000,000,000 in incremental value, dollars 4,000,000 of which was during my tenure as CEO.
And I think an important component of that value creation as you mentioned Paul was the dramatic shift in the portfolio and capabilities of the company. And it's been particularly I would say in the last 6 or 7 years. And I feel particularly proud that we've been able to do that with fairly minimal disruption. And for those of you that have been around for a while, it's really dramatic change of our end markets, our geographic footprint, our technological capabilities. And while that not only provides, I would say, a better platform to accelerate the growth and profitability, it's created a more unifying mission and purpose for the company around improving health globally.
And that really takes me to the 3rd area where I really feel great about the organizational capability we've built and that sort of things like work environment and culture and why people to come to PerkinElmer. And in the past, I would say, I felt like the company attracted people because more or less the job and it was sort of a transactional relationship and they came here to work and receive a paycheck and that was sort of it. I now think people come to PerkinElmer as a place to participate in a mission at the same time pursue sort of a career. And as a result, I think what really starts to differentiate us is how our employees take a more caring and longer term approach to what they do and how they do it. And then probably the last thing I'd just mention is as I so we sort of reach this transition point, I feel extremely proud of the condition of the company.
I think we're fortunate to have Prahlad as our next CEO. He knows the company well. He's been part of the significant changes at the company over the last 5 years. I feel like he'll be supported by an excellent leadership team. And as Jamie and Plaid talked about the recent commercial realignment, I think it'll allow us to better serve our customers and in fact infuse more simplicity in how we operate.
So I feel like whether you look at the company from a financial perspective, strategic position or operations, it's just never been in a better place. And so it's an exciting time for the company and it should be for our shareholders, customers, employees. So anyway, I apologize for the long answer, but I feel like I've been here a long time and there's a lot of good things to talk about. So anyway, it's been a good run and I feel like it's turned over some great hands and excited about the future.
Thanks, Rob. And thanks for the incremental $7,000,000,000 and it's been a great run. Thank you. Thanks.
And your next question comes from the line of Steve Willoughby with Cleveland Research. Please go ahead.
Hi, good evening. Thanks for taking my question. And Rob, I wish you a wonderful retirement. A couple of questions for you. I guess first, Jamie, could you talk a little bit there are some larger one time charges this quarter.
The one that stuck out to me was the accelerated executive comp. Just kind of any color on that? And then just also if you could talk within the DAS business, kind of how your instruments business versus services grew in the quarter?
Instruments versus services, is that what you said on the second one there, Steve, on the stat?
Yes, exactly. Yes, exactly.
Yes. So with regards to the accelerated CEO charge, in conjunction with Rob's announced retirement, the Board agreed to accelerate the vesting of a portion of his equity awards. And so the accounting typically spread that over the required service period in the future. So let's say 3 years if that's what the vesting period is. And since Rob is now retired, we accelerated that and the Board granted that and that's the additional charge for some of those equity awards and that increased compensation.
Does that make sense?
It does. Yes. Thank you.
And with regards to DAS instruments versus services, I mean, I think we saw a good mix, I kind of mentioned it earlier, in DAS. So greater pharmabiotech, greater reagents, software was great. So our informatics business did extremely well. Cisbio continues to do very well. So the mix in that business was positive.
The applied markets were flat. So overall, we're seeing a improved mix change to greater service software and reagents in that business, which helped contribute to if you see the gross or the margin expansion in DAS up 3.40 basis points in the
quarter. Okay. And then if I could just squeeze in one last one. Just Jamie, how are you thinking about the it seems like there are a couple different moving pieces within the earnings guidance for this year. Have you broken out or can you walk through how you're thinking about kind of the EPS bridge versus your old guidance to guidance today?
It just seems like tax rate is moving around, organic growth is moving around, margins are moving around, etcetera.
Yes. I mean, if I were to simplify it, going up $0.03 is largely on the back of extra margin expansion. So I'd call that kind of up $0.06 to $0.07 versus our prior guidance for the rest of the year. Organic growth is coming down, so 5% versus kind of a 5% to 6% organic guidance range. So that's maybe down $0.04 to $0.05 So up $0.02 margin versus organic growth.
And then really all the other items, FX is a headwind of $0.02 and tax and interest expense is probably better by $0.03 So that gives you maybe an extra penny as well. So greater margin expansion more than offsetting organic growth shortage here and a little bit extra tax benefit more than offsetting foreign exchange.
Perfect. Thanks, Jamie.
Thank you.
And your next question comes from the line of Tycho Pizzan with JPMorgan. Please go ahead.
Hey, thanks. I want to dive into the margins a little bit more. You did have a restructuring during the quarter. Can you just talk on how much of that was from kind of the RIF versus stuff that had been in the works ahead of the quarter? And then as we think about next year, you're sticking with the high single digit organic growth targets by the lower base this year.
I'm just wondering how you think about the comfort level in hitting that?
Yes. So maybe I'll touch on restructuring first. So I mean much of this has been planned. So it's really in 2 broad areas. 1 is our services organization.
I've mentioned in the past that we've invested in a software platform called ServiceMax, which basically allows us to schedule and dispatch our field service engineers better, control contracts, control pricing, etcetera. So we've known that that's been invested in over the last couple of years and up and running well. So we were able to do a little bit of rightsizing in our services organization. And then the other part was also related to the reorganization of a company. So we think of the company transformation much more as a growth oriented change, but it definitely provided a little bit of synergy as well and that those two things really comprise the restructuring charge.
In terms of the high single digit growth next year, I mean, 5% this year is still strong. We still think a lot of the organic growth accelerators will come next year and some of these things that are going on right now is timing. So I think we mentioned Applied Genomics is still a strong market. Some of that backlog we see visibility to in 2019 or 2020. The PerkinElmer Genomics testing item is a short term issue as we transfer from one facility to a different facility.
It's not a demand issue. In fact, we're having to turn away demand. And DAS, we expect it did improve quite a bit. So DAS came from 2% to 4%. We've said 5%, academic government came through, one source came through, but the applied markets were still a little bit softer than we anticipated.
I think if you head into next year, Vanadis hasn't contributed a lot this year, cannabis and all of our growth accelerators, we think will kick in even more. So we're still quite confident in the future trajectory here.
And then a question on the China strategy here around food. There's obviously a lot of turmoil. You alluded to that in your comments. Can you just talk to your visibility into that market? And how what's the strength of upstream versus downstream for you guys?
And what's your comfort level that you want to run into some of the problems with the privatization that we've heard about from some of the other tool
peers? Yes, Tycho. I mean, I think the number one thing that to point out is that from Meijiang's perspective, they have a very strong hold on the local customers and 70% to 75% of their revenue comes from consumables. So it's not playing in like a very capital intensive market. The installed base is already there.
They are providing more of the consumables and the reagents. So that trajectory is one that we haven't seen slowing down while we've been talking to Meizhang. And again, the strategy that we had used for this acquisition was not dissimilar to what we've done with EUROIMMUNUSISBIO. We worked with the principal owner for more than a year and a half and understood and studied the market. So we feel really good about it.
All right. And then one last one for Jamie, on cash flow, your $95,000,000 or so year to date, can you just talk on where you think that could be headed as we think into next year? I'm just curious if there's an opportunity to improve on that.
Yes. I mean if I step back and just talk about cash flow a little bit, I mean if you go back a few years, I think it's clear that the company has been focused on improving our revenue growth and expanding our margins. I think we've done a lot of things to do that. We've changed incentive plans. We've leaned into working capital to better serve our customers.
We've invested in capital expenditures in EUROIMMUN and other parts of PKI. And we felt that during that time period, it was important to change the trajectory of the company and it also happened to coincide with the low interest rate environment. So we thought it was a good trend. As we look forward, I mean, certainly, we understand that all three metrics have to go well together. So increasing our growth rate, increasing our margins, I think we've been able to prove that over the last couple of years.
And I think cash flow will come along well, so I'm confident in improving. But I think it's going to take a little bit of time. It's not going to be an overnight change. We've got some things underway and some process improvements underway, largely in the areas of receivables and inventory. I think if you look year to date, CapEx is down 10%, that was an easy one to help fix or invest it a little bit differently, I'd say.
So I think it's confident. I won't guide on next year, but very confident that we will get this up to a 90% plus business.
Okay. Thanks and best of luck with everything, Rob. Good working with you.
Thank you.
And we have a question from the line of Steve Beuchaw with Wolfe Research. Please go ahead.
Hi, thanks for the time here. I'd echo
the well wishes, Rob. It's been great working with you.
Great. Thanks.
I
guess, what I might like to do first is just probably for Prolad is ask if you could give us a little bit of an update on some of the commercialization efforts around Vanadis. I think it's a 2 parter. One is, have you seen progress on Vanadis reimbursement in Europe? And if not, can you talk about like when you might be ready to talk about progress there? And then we saw, of course, the news about the Vanadis strategy in the U.
S. And Asia. You mentioned it in the prepared remarks. I just want to clarify. I mean, do you still intend to seek FDA approval, CFDA approval for Vanadis to work on that as a system that goes into both of those markets as something that people will run on-site?
And then between now and then, are you taking a meaningful number of samples as something of an LDT? And then I have one follow-up. Sure.
Let me start with the regulatory strategy in the U. S. And China. So in the U. S, our strategy is not going to be dissimilar to our peers.
It's going to be an RUO. Under a CLIA, it will be an LDT, just like most of the other tests are there. We currently, we do not have any plans to go under a PMA or get a regulatory approval in the U. S. In China, we are pursuing CFDA regulatory approval.
We are done with type testing. We are in the regulatory perspective, that's our strategy. In the U. S, the benefit that we have is we will be able to differentiate in terms of providing preeclampsia and carrier screening and providing it as one test. So it results in a better customer experience as there is only one prick and one report out in a simplistic manner to our customers.
So that's from a regulatory perspective. In terms of EU reimbursement strategy, that is mostly controlled by the countries where it is operated in. As you know, some countries initially where we have already put the system in, there is government approval around €250 So that is already available and it's out there. It's not a specific Vanadis code, but it is available for NIPT reimbursement. So that's from a EU perspective.
Feedback that we continue to get from our customers is the ease of use, workflow, automation and obviously cost is an important factor. And again Steve, as we've said earlier, our focus this year is to ensure that we get 30 installations, make sure that they work flawlessly and well and our customers present and publish from there.
Okay. So sorry if I'm being a little dense, but is it the case that you don't believe there's any additional work you need to do to get reimbursement in Europe?
In Europe, no.
Okay, great. And then my follow-up is actually going back to a point that came up on last quarter's call, where there was a discussion around some back and forth in China dynamics that popped up there where some tenders were pulled away. Just wondering if I could get an update on how those dynamics were progressing and if you got any of that back. And then maybe as a corollary to that, more on the diagnostic side in China, how you're seeing the sort of pricing competitive dynamics there? Thanks again.
Yes. So let me take the first one there? Thanks
again. Yes. So let me take the first one on the tender. Again, the tender was a very small one. It was really not that material.
It probably got a little much more attention than it should have. So I don't think it is significant enough for us to talk about. And it did not materially impact what we are what our business is in China. Specifically now switching to your second part around diagnostics in China. Despite low birth rates in China, our reproductive health franchise continues to do well.
Our immunodiagnostic franchise continues to do well. So I don't know, Jamie, what was our Q3 diagnostic?
Yes, up mid single digits. It was
up mid single digits. So we Steve, from a diagnostics perspective, China continues to do well for us.
Okay, great. Again, thanks. Really appreciate
it. Yes.
And your next question comes from the line of Doug Stinchol with Cowen. Please go ahead.
Thank you. And Rob, thanks for all your efforts and good luck in your next chapter.
Thank you.
So I guess 3 or 4 questions. Starting on DAS, how impactful were the 3 transitory dynamics you pointed to in Q2 that you expected to reverse in the Q3. One of those is the one that Steve just asked about, the $4,000,000 in revenue you didn't book in Q2 due to the China import approvals. I think you expected half of that to come back. The second was expected changes you made in the academic government leadership team is having the potential to reverse which reverse what was a year.
And the third was, enterprise services backlog converting. You thought that could give you a 50 to 100 basis points of growth this quarter. So I'm curious if you could just provide updates on those things within DAS. On diagnostics, I think you attributed the Q3 moderation in diagnostic growth relative to trend to a couple of things you positioned as one timers such as lab consolidation. I'm just wondering if they're one timers, why doesn't full year guidance imply that comes back in the Q4?
The third is on 2020 targets. Prahlad, I know you're not new to PKI, but you're going to be new to the CEO role. Based on Jamie's response to one of Tycho's questions, it looks like you're good with the 2020 financial targets that Rob outlined a few years ago. I just want to make sure that's right. And my last question is on free cash flow conversion.
Last quarter, you set new adjusted free cash flow conversion guidance to around 80%. Is that still the case? Thank you.
So since we were furiously writing down to make sure we didn't forget the list.
Yes, I'll chime back in if I went too fast. Sorry about that.
Let me go with the one that was for me because the other 3 were for Jamie. So let me take the one around 2020 CEO. Look, as to Tycho's question, I don't want to give guidance on 2020. We'll be happy to do that as we get to our Q1 call. But I will look forward to Tycho's conference in San Francisco and be able to give more of an update on our strategy and how we see next year and the next several years coming in.
But what I will say that our thesis holds, our growth accelerators continue to do very well and we are very confident in what we have talked about earlier in the year.
Yes. Hey, Doug. So first one with regards to DAS bridge from the first half to the second half here. So I would say 2 to the 3 of those came through as expected. So academic and government did turn around as anticipated.
We definitely saw a significant uptick versus the first half being down over double digits as you mentioned. One source I had mentioned that we definitely had visibility to a lot this backlog, so that did see an uptick as well. And then the applied markets did not though. So that's why we're at 4% versus 5%. Applied markets continues to be soft.
We did mention some of our food NPIs. Those actually are performing pretty well or better than the first half. That said, the overall market is just not where we see it to be. And I think you called out the China items on Mofcom or maybe the tenders or whatnot. But I think that's such a small amount now.
We just talked to the overall applied markets and that has not recovered as we talked about earlier. 2nd on the DX bridge in the Q3 versus the Q4 with regards to lab consolidation. So late in Q3, we did start our move into a different facility. That will impact the Q4 as well, which we that's why we're guiding a similar organic growth rate heading into the Q4. This is not a demand issue, as I mentioned earlier.
We have plenty of demand, and we are actually having to turn away samples just as we kind of pull through this. So it will impact Q4, but we anticipate heading into 2020, we'll be fine. And then the last one around free cash flow. Yes, we called out 80% not coming off that. I would say, if you look at the Q4, there's really 2 areas that we've got a lot of focus on.
One is it's our highest sales quarter, so inventory does normally deplete through the quarter here and we fully expect that as well. We've also done a lot of work around demand planning to make that better. And then receivables, receivables needs a lot of focus. As I mentioned earlier, it is not a turn of the switch here, but we've got a lot of good actions in place, both from a billing process perspective, additional resource is calling on customers, engaging our commercial teams. So we're still hoping that 80% is still the right answer here, but we are it's a lot to do in the Q4 here.
Okay. Thank you very much. Thanks, Doug.
And your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead.
Thanks. Good afternoon. Maybe for Perhala, just on the Mayzinc acquisition. Can you talk about what technologies they have that you didn't already have in the Perkin portfolio? And what's proprietary about any of the technology if anything and when or what timeline do you have to perhaps take some of those outside of China for the export market?
Yes. Good question, Brandon. I think from a technology perspective, more than the uniqueness in the technology that they provide, what was important for us that they had the regulatory approvals and they already had the products in the marketplace. So it was not that there was significantly a unique technology or differentiated. It was the ability to have a broad product portfolio that they had taken through the regulatory approvals and it was entrenched in the marketplace.
I think the more important fact was the second point that you pointed out, Brandon. The ability for us now to take this product portfolio and combine it with our existing product assets, food assets from Bayou, Delta and Porton acquisitions allows us to present a more comprehensive workflow solutions to our customers, not just in China, but also in other markets.
Thanks. And then a 2 part question for Jamie. The corporate expense stepped down quite a bit to about $13,000,000 in the Q3. Is that a good run rate to kind of assume going forward? And then could you give us the impact of FX on the gross and operating margin lines in the period?
Thanks.
Yes. I mean, I think in general, our overall cost base is a pretty similar cost base we expect moving forward into the Q4. I mentioned there's a little bit of timing. So I don't know the exact split off the top of my head between corporate or the divisions. But we had a little bit of timing in R and D, which probably shouldn't hit the corporate milestone, a little bit of extra marketing expense that we want.
So there's probably a slight uptick there in the Q4, maybe some of that comes through the corporate. And then with regards to foreign exchange, I think it was 20 basis points on the gross margin line in the quarter, which flowed through to the same amount on the operating margin line as well.
Great, thanks. Thanks.
And your next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.
Hey guys, thanks for taking my question. Rob, congrats on a career. It's coincidental that this is my first call and happens to be your last and after a lot, maybe this is going to be a journey for us, this being your, I guess, first call coming in as the inbound CEO. So maybe I'll start with the 2020 outlook questions. The base business here, we're looking at doing mid singles.
Is it right to think that the key to get to high singles for next year's Vanadis and the food business on the cannabis side? And between those two drivers, if I'm on the right track, is there one versus the other, which is going to be a more significant driver from a 2020 perspective? And for 2020, should we be assuming some of these applied markets or macro, any of those end markets maybe improving or should they be stable, where they are right now?
So, Vijay, I look forward hopefully to a long journey together. But I think to the answer to your question without specific guidance is that the resilience now as we have realigned our portfolio is that there is not one growth driver. There are about 7 to growth accelerators that we have that we are not now becoming dependent on any one thing clicking. It's Vanadis, EUROIMMUN, our enterprise business, genomics, cannabis. We've got several growth levers that gives us the level of Inventories
seems like it Inventories seems like it's ticked up and maybe some of this is timing issues given the acquisitions, maybe comment on inventories?
Yes. So you're right. Some of that is M and A related, but I think year to date it's about a $45,000,000 cash flow usage, I think. And a lot of that is seasonal. So if you look at the last few years, it's similar where we build in the first half and kind of get ready for a larger second half.
So a large part of that is seasonal. Some of that is choice. I mentioned that we've invested in working capital to improve our customer experience. So BJ, on prior calls, I've talked about our distribution center strategy, which we think is going well. And I think as we turn into 2020, that's something that hopefully we can start to depress the level of finished goods that we have on hand.
But some of that's a choice in terms of how the fill rate and how quickly we service our customers. And but overall, that number that you're seeing year to date should come down substantially in the Q4.
Got you. Thanks, guys.
And your next question comes from the line of Dan Brennan with UBS. Please go ahead.
Great. Thank you. Rob, congrats. It's been great spending time with you, working with you through the years.
Thanks, Dan.
Appreciate it.
So maybe Prahlad, just maybe an early question. I know it's Q1 in here or really first call in, but I'm just interested in any early insight about the type of different perspectives that you might bring to the CEO role.
I think the I mean, I would rather than say different, I would say you would probably look on building on what Rob's done. And there are 2 areas, I think, if we were to look at this from a differentiation perspective, is the focus on bringing the organization together, bringing the commercial alignment, which has already happened now, gives us more wherewithal to push our workflow solutions across end markets, leveraging a combined commercial organization. So I think that's a big, I would say, differentiation that we are implementing in and which has been completed now. And the second aspect, I would say is, as we look forward, is a lot more around technology and continue to build on innovation. I would say those are the two areas where you probably will see some differentiation.
Great. Thank you for that. So maybe, I don't know, Jamie, I guess, just on DAS, I know it's come up a few times, but just on the applied weakness, I guess, what gives you the confidence that you captured this in the trend with the new guide? And anything we should look at to help us assess kind of when maybe some of this weakness will turn, whether it's PMIs or any end market indicators you can help us with?
Yes. Thanks, Dan. I mean, I think what we're guiding here is pretty similar to the last three quarters really. It's been 5 percent every quarter. I think applied markets in general has been flattish for the entire year.
And so we aren't embedding really at this point any additional uptick on the DAS side. I think it's going to be more of the same in the Q4 here really is the way to answer that.
Great. And then maybe final one just on the deal on the amazing deal, I guess, and I apologize if I missed this, but A, was this a competitive deal? B, any color how long you've been in the company for? See, I think you mentioned 25% growth in the prepared remarks back to 'nine, but how should we think about what's a reasonable level of growth going forward? And then the final one is, I think post the deal now your China exposure is close to maybe 25% or so at a time when the countries, the relations are showering a bit, and the company seems country seems excuse me, seems to be getting more inward looking.
So I guess, how do you think about in terms of from a control perspective, just having such a big portion of business over there like any changes or additions you need to make sure you're staying on top of things over there? Thank you.
Yes. So maybe I'll talk about the deal piece first. Again, it is very similar to the ones that and I think I mentioned it earlier, very similar to what we have done with Cisbio and EUROIMMUN is it was not competitive. In fact, the principal was not looking at divesting the company, but we worked with him for about 18 months to 24 months and convinced him that a partnership with us is probably in the best interest for him and for his business. So that's to that.
In terms of China per se for sorry, going back to the growth aspects, we expect this to continue to grow at a healthy pace of about 20% plus over the next few years because it's really got a unique product portfolio, lot more focus on consumables and that gives us the confidence that it will continue to have traction. On the 3rd aspect around China and the noise around it, Look, I feel and we feel very confident that this is essentially eventually when the noise slows down, things are going to go back to being normal. From our perspective, again, we have not seen any discernible change in our business there. There might be 1 or 2 noises here or there, but there is no discernible change. Our strategy in China is in China for China and that has worked well for us over the past decade with the SymBio and Haoyuan acquisition, and we see it to be no different for Meizhang.
Great.
So the Meijin business is $30,000,000 in revenue. So that should increase it by about 1%, and we're right around now about 20%.
Excellent. Okay. Thanks, Jamie. Appreciate it.
And our final question comes from the line of Bill Quirk with Piper Jaffray. Please go ahead.
Great. Thanks. Good afternoon, Rob. Obviously, best of luck to you in the future and congratulations to Prahlad.
Thank you.
So I guess couple of questions. First off, with respect to the I think the couple of comments Jamie has made about turning down business on the diagnostic lab side of things. Can you just give us a little comfort that as you consolidate into Pittsburgh, help us think about any sort of capacity expansion that you'll have there such that you're not turning down volume? And if so, when is that? And then I have a follow-up for that.
Thanks.
Yes. Maybe I can take that one, Dan. As we Bill, sorry. As we look at I mean, just talking more specifically, we had 2 or 3 NovaSeqs, which were in Brantford. Just getting them packed up, moving them, revalidating them and getting them up and running, it's the process more than anything else.
From a funnel perspective, the issue here is not about having making sure that we have a strong funnel. The issue here is to just getting those NovaSeqs back in, installing them, validating them and getting them up and running. From a capacity perspective, I don't think that from a 2020 till 2021, we are going to have an issue that from off capacity utilization. And you know again, Bill, as we do the Vanadis tour in Pittsburgh, you will have an opportunity to see the infrastructure and lab there yourself.
Okay, perfect. I appreciate the clarification. And then I guess just staying in diagnostics, can you remind us where we are on the EUROIMMUN FDA approvals? In other words, kind of what percent of the portfolio at this point is through FDA? And if we're not all the way there, again, maybe you can give us a road map in terms of when your organization has effectively an equivalent portfolio in the U.
S. To what they have in Europe? Thank you.
Yes. Well, I think it will probably take a couple of years before it has the same level of approvals in the U. S. That it has from CE Mark perspective. But at this point, we initially, if you recall, post a close, when new approvals would come through, we would send out a trade release.
But now these happen every a couple every quarter or 3 or 4 every 6 months. So we've stopped doing that and we've essentially stopped cracking. I mean the business there is a small base. It's growing. It's doubling every year and we continue to see it as a one of the fastest growing markets for EUROIMMUN.
And I don't think that's going to slow down in the near future.
Got it. Thank you very much.
Yes.
And we've reached the top of the hour. I will now hand the call back to Rob Phil for closing remarks.
Great. Well, first of all, thanks everyone for your questions and continued interest in PerkinElmer. It's been a genuine privilege to lead the company over the last 12 years and I'm proud of what we've achieved, but proud of still the people who carry our mission forward in the years to come. As I mentioned before, I think the company is very well positioned from a financial perspective, but also to provide important solutions that help create healthier families and improve the health and longevity for people around the world. So I truly believe the best days are ahead for PerkinElmer and I look forward to celebrating the ongoing success.
Good night and have a great evening.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.