Good afternoon, ladies and gentlemen, and welcome to the Quarter 2 2019 PerkinElmer Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. I would now like to turn the conference over to your host, Mr. Brian Kipp.
Please go ahead.
Thanks, Don. Good afternoon, and welcome to the PerkinElmer's Q2 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 do so from the Investors section of our website at www.perkinelmer.com. Please note this call is being webcast live and will be archived on our website until August 12, 2019.
Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward looking statements made today represent our views as of today. We disclaim any obligation to update forward looking statements in the future even if our estimates change. So you should not rely on any of today's forward looking statements as representing our views as of any date after today. During this call, we will also be referring to certain non GAAP financial measures.
A reconciliation of the non GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. To the extent we use non GAAP financial measures during this call that are not reconciled to GAAP in that attachment, we will provide reconciliations promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?
Thanks, Brian, and good evening, everyone. I'm pleased to report PerkinElmer had an excellent second quarter as we continue to make significant progress against our key long term priorities, while also generating strong financial results. More specifically, our focused growth areas continue to do extremely well as we disproportionately invest to build additional capabilities and further differentiate ourselves. Financially, we achieved mid single digit top line growth and double digit EPS growth despite very strong year over year comps. Finally, and potentially most important, we completed the implementation of a more effective operating structure to facilitate alignment with our customers' requirements and accelerate innovation.
Looking first at our 2nd quarter results, while Jamie will discuss them in more detail, our revenue was $723,000,000 representing organic growth of 5%. Adjusted operating margins expanded 50 basis points and adjusted EPS of $1 represented growth of 10% over the Q2 last year. These results are particularly encouraging given the very strong Q2 last year, where we grew revenue 10% organically, increased adjusted EPS over 30%, and expanded adjusted operating margins 180 basis points. During the Q2, we also continued to implement a multifaceted approach aimed at simplifying processes, improving our supply chain and becoming a more agile organization. Given that adjusted operating margins have increased 90 basis points year to date, we continue to expect to increase adjusted operating margins for the year by at least 120 basis points and remain confident in our goal of 22% adjusted operating margins next year.
Similar to the Q1, our 5 focused growth areas continue to experience strong demand. EUROIMMUN delivered the strongest top line growth since our acquisition and also generated strong operating margin improvement. Within pharmabiotech, we experienced high single digit growth from our informatics and imaging and detection areas, and the recently acquired Cisbio business grew high teens in the quarter. Both our genetic testing and cannabis businesses have generated more revenue in the first half of this year than they did all of last year. And finally, Vanadis, while not a large revenue contributor this quarter, remains on track and we continue to see compelling clinical data and very positive feedback from early adopters.
From an end market perspective, trends continue to be mostly constructive and consistent with our expectations with the exception of the applied market in China. While this space represents only about 6 percent of our revenue during the Q2, it created a significant headwind. While some of this dynamic is market related, we are accelerating the expansion of our production capabilities in China to further enable local manufacturing. As you know, Prahlad has been driving the organizational change to better leverage our breadth of capabilities and deliver cross company synergies. So I've asked him to discuss some of the specifics of this effort and the positive impacts we are already seeing.
However, before I turn the call over to Prahlad, I would like to summarize the first half of the year as delivering solid financial results that are on track with our plan. Customer demand patterns and overall end market conditions are good, with the exception of segments in China, and we continue to make excellent progress evolving the company to deliver higher growth, greater resiliency and increased profitability. I would now like to turn the call over to Prahlad.
Thanks, Rob. I echo Rob's enthusiasm and I'm excited to convey that we are well on our way to executing the 3 priorities we've discussed in our recent earnings calls: providing an exceptional customer experience, being recognized as an innovation leader and making people and culture a competitive advantage. While our performance continues to be in line with expectations through the first half of the year, I'm happy to report that we continue to make tremendous progress in shaping the organization internally to leverage our capabilities across PerkinElmer and provide a better customer experience. Since the start of the year, we have reduced organizational complexity across three fronts: businesses focused on end market segments commercial teams focused geographically across end markets and support functions centralized, creating centers of excellence. All this puts customer needs and their experiences at the forefront as we become a nimbler organization that can respond swiftly to evolving market trends.
I'm confident that collectively, these actions will be instrumental in propelling us towards a long term growth and profitability goals. A key initiative this year has been a shift to aligning our commercial structure by region with a goal to deliver geographically focused sales and support teams that cut across all our end markets. In the process, we are empowering the regions with decision making that will be closer to the customer. We have already experienced some early success in the Q2 with this model, where we won a multimillion dollar order from a large integrated health system in the U. S.
The customer bought a suite of discovery, automation and service solutions as a result of a focused team effort across business segments as part of our new go to market regional customer solutions approach. Prior to rolling out this approach across PerkinElmer, we had demonstrated success with the regional go to market strategy during my time leading the diagnostics business, accelerating growth from a low to mid single digit CAGR to a high single digitcaggerbusiness. We believe we are now in a position to replicate the model across PerkinElmer by establishing a unified regional structure focused on customer needs. Underneath the regional structure, we will have 4 key end market segments: Diagnostics, Life Sciences, Applied Markets and Food. Each segment will drive specific strategies, managing our solutions offerings and investment plans.
Complementing the end market segments will be PerkinElmer Genomics, Informatics and Services businesses that will enable us to deliver even greater value to our customers. During my time leading the diagnostics business, we implemented a similar customer centric organizational structure, which focused on end market segments. A prime example is our reproductive health franchise, where we have leading menu breadth, instrumentation and software supported by incomparable customer service. We also built the immunodiagnostics franchise through the acquisition of EUROIMMUN and Tulip, which had similar strengths in the infectious disease, autoimmune and allergy spaces. We plan to replicate the playbook that we use in diagnostics across the newly established 4 end market segments, where customers are increasingly seeking fully automated sample to answer workflows for increased lab efficiencies.
On the last earnings call, we discussed our initiative around integrating our technical capabilities across businesses and geographies under 1 R and D team. We are very encouraged to see that this is already bearing results in furthering our stated priority to be recognized as an innovation leader. In Life Sciences, with the combination of our automation, detection, consumables and informatics platforms, along with the addition of Cisbio's homogeneous time resolved fluorescence, we can now provide complete workflow solutions. Our announcement in April of joining Accenture's open partner ecosystem is another illustration of how PerkinElmer's solutions are integral in helping researchers to quickly and easily connect insights that lead to new therapies. Not only are we integrating capabilities from across our portfolio to create new solutions, but we are also partnering with other leaders in the segment to creatively go to market.
In our recently announced partnership with EverlyWell, we have achieved both combining capabilities across the organization. PerkinElmer Genomics has developed tests for food sensitivity and Lyme diseases using EUROIMMUNE platforms that can be physician ordered direct to consumer through the EverlyWell online marketplace. With further tests planned in the pipeline, PerkinElmer is well placed to expand into consumer driven healthcare diagnostics as people take more control over their personal health. We have several key initiatives underway in affecting simplification and standardization from improving our order fulfillment process, which will reduce our cycle time to customers to under 24 hours to design for cost, which will reduce our new product cost by a couple of 100 basis points relative to prior years. Finally, supporting all these programs are our continued efforts to implement an improved internal forecasting, audit and data analysis system, which is critical for a successful transformation towards a unified organization.
In closing, I'm inspired to witness the immense talent in our organization rallying together to achieve the vision of becoming a truly differentiated player providing a flawless customer experience, leveraging capabilities across our organization to help solve the most significant macro trends, while simplifying and streamlining how we operate to get it done. I believe we are in a good position heading into the second half, and I look forward to sharing ongoing progress with you as we achieve our mission and accelerate profitable growth. I will now turn the call over to Jamie.
Thanks, Prahlad, and good evening, everyone. I want to start with the highlights for the Q2 of 2019. Next, I'll provide some additional color on our served end markets and detail on other financial metrics. Lastly, I'll finish by providing a brief update on how we are thinking about the second half of twenty nineteen. Starting off, we are pleased with our 2nd quarter and first half performance.
Market conditions have been roughly in line with our expectations entering the year. We have achieved organic growth and EPS targets through the 1st two quarters, and we remain focused on executing our full year targets. Our growth accelerators have performed well through the 1st 6 months of the year. EUROIMMUN performance continues to beat our initial deal model. Vanadis remains on track and strong results from a multi site study analyzing 1200 pregnancies is set to be published in a leading medical journal in August.
Finally, as Rob mentioned, both cannabis and genomics testing revenues year to date have already outpaced all of 2018. Turning to the Q2 results, we continue to be pleased with the strength in our business as organic revenue grew 5%, Reported revenue grew 3% to $723,000,000 and included a 3% foreign exchange headwind and a 1% net acquisition tailwind. By business, diagnostics representing 40% of total sales grew 9% organically driven by our reproductive health and immunodiagnostics business lines. Discovery and analytical solutions representing 60% of total sales grew 2% organically, highlighted by strength in life sciences and offset by weakness in applied markets. I will provide some additional color on both businesses in a moment.
On a geographic basis, organic growth trends during the Q2 remained mixed, similar to what we experienced in the Q1. The Americas continued to lead the way with high single digit organic revenue growth, Asia Pacific grew mid single digits, and Europe grew low single digits. Operationally, we were pleased with our performance in the 2nd quarter, and we continue to see excellent potential to improve our profitability going forward. Adjusted operating margins expanded 50 basis points in the 2nd quarter to 20.2 percent driven by continued cost out actions and solid operating expense leverage. Year to date, we have expanded adjusted operating margins by 90 basis points year over year.
As Rob mentioned, Adjusting's earnings per share of $1 was an increase of 10% versus the Q2 of 2018 and was in line with our guidance. Looking further into the key drivers within our segments, let's start with our Diagnostics business. As mentioned in my earlier remarks, organic revenue grew 9% driven by broad based momentum across our portfolio and consistent performance across all regions. Reproductive health grew high single digits organically driven by our genomics testing business, which continues to track toward our full year goals. We are excited about our collaboration with FDNA announced this past June, which enables PerkinElmer Genomics to pair next generation phenotyping technologies with our genomic services business.
While we are only weeks in, the pairing has already reduced the time to diagnose incidence of rare disease in suspected newborns by an estimated 25% and the early clinical feedback of the dual diagnosis has been extremely positive. On the immunodiagnostics front, all product lines performed well in the quarter, leading to mid teens organic growth for the segment. We are particularly excited about our recently launched Superflex platform. This chemiluminescence bench top system can be used in fields such as cardiovascular, infectious disease, and gynecological testing. As described by one clinical director from a major university hospital in China, the Superflex has the reliability and high efficiency of large chemiluminescence equipment and the convenience of point of care testing.
It has ushered in a new era of point of care with its advanced methodology and precision testing system. Applied genomics grew mid single digits, a solid performance overall. And on Vanadis, we now have 15 installations and remain on track for 30 by year end. We think the upcoming publication will serve to further validate our technology and the unparalleled simplicity of our workflow, as well as increased customer awareness and help shorten the validation time for new adopters as they become more comfortable with the assay performance with each additional clinical publication. Turning to Discovery and Analytical Solutions, the 2nd quarter was impacted by tough conditions within the applied markets.
By end market, we experienced high single digit organic growth in pharmabiotech. While imaging and detection continues to do well, we are particularly excited about the future potential of our reagents business following the acquisition of Cisbio. 1 quarter in, Cisbio's integration is progressing well and the business grew double digits in the 2nd quarter. We now have a leading reagents platform that generates more than $200,000,000 in annual revenue and we expect it to grow mid to high single digit rate on an annual basis. The applied markets were flat in the quarter, driven primarily by softness in China and industrial end markets globally.
Combined, industrial and environmental was down mid single digits. Food was up double digits due to strong cannabis demand. In China, applied markets were soft, particularly in our legacy analytical instrument portfolio. Longer term, we remain bullish on China and believe that a lot of these issues are short term in nature and are mostly related to ongoing delays in export controlled product approvals, as well as the global trade war rhetoric. For additional context, I spent the back half of June in China meeting with our teams as well as our government officials.
After having lived in China many years ago and visiting several times recently, I still find myself amazed by the speed and size of growth in the region after every visit. I was there ahead of the G20 meeting and while there was a lot of talk about the trade war and rhetoric on both sides during my time in China, it was clear in my meetings with government officials, which included provincial leaders, the National Health Commission and the Ministry of Commerce that they all value PerkinElmer's 5 decades plus history in China and our ongoing local commitments. Universally, the officials had ideas on how we could collaborate more and all were open to exploring new opportunities to tighten our bonds to drive a better tomorrow. While the U. S.-China trade tension creates additional risk and uncertainty to our business in the short term, I came away excited about the country's commitment to healthcare investment, our business prospects in the region, and our reputation and standing with local and national government offices and the team we have on the ground.
Now shifting to below the line items, adjusted net interest and other expense for the quarter was approximately $17,000,000 and our adjusted tax rate was 13%, driven by quarterly timing of international tax planning initiatives. Turning to the balance sheet, we finished the quarter with approximately $2,100,000,000 of debt $150,000,000 of cash. Free cash flow in the quarter was $30,000,000 and adjusted free cash flow in the quarter was 39,000,000 As a reminder, the difference between the reported and adjusted number is due to cash payments associated with prior acquisitions. Let me take a minute to explain a few working capital dynamics we are seeing in the areas of receivables and inventory. First, we are seeing a greater percentage of in quarter shipments occurring later in the quarter due to customer demand patterns.
As a result, we have less collections in the period and carry more inventory to meet our customer needs. 2nd, we are seeing stronger growth in some of our evolving business models. As an example, greater subscription growth in our informatics business creates less cash in the short term, but a stronger annuity in the business longer term. Another example relates to cannabis, where customers require short term liquidity as they commence operations. 3rd, due to the growth in our EUROIMMUN business and MPI pipelines, we now expect inventory levels to be higher than anticipated at the outset of the year.
As a result of these changes, we now expect adjusted free cash flow to net income conversion of approximately 80% and increased longer term growth. Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 3.1 times and we now expect to end the year at approximately 2.6 times leverage. Closing the books on the first half of twenty nineteen, we are pleased with our performance including 5% organic growth, 10% growth in earnings per share and continued success of our growth accelerators. As we transition to the back half of the year, we expect diagnostics to continue at a similar high single digit pace. As a result of more short term uncertainty in the China applied markets, we are broadening the organic growth range in Discovery and Analytical Solutions segment to 3% to 5% for the full year compared to our prior mid single digit forecast.
In turn, we now expect PerkinElmer to grow 5% to 6% organically versus our original guidance of 6%. We expect reported revenue for the year to be approximately $2,910,000,000 including $53,000,000 from foreign exchange headwinds and approximately $35,000,000 of contributions from Cisbio. We are maintaining our prior full year adjusted EPS guidance range of $4.02 to $4.07 which includes an incremental $0.02 headwind from foreign exchange compared to our prior guide. We also remain committed to our adjusted operating margin expansion target of 120 basis points to 150 basis points. Finally, we anticipate $60,000,000 in interest and other expense, a 15.5 percent tax rate, and our share count to remain slightly under $112,000,000 for the year.
For the Q3 of 2019, we are forecasting reported revenues of $724,000,000 representing 6% to 7% organic revenue growth, including a foreign exchange headwind of approximately $7,000,000 versus the comparable prior period. In terms of adjusted earnings per share guidance for 3Q, we are forecasting $1.01 This concludes my prepared remarks. Operator, at this time, we would like to open the call for questions.
Your first question comes from Patrick Donnelly. Your line is open.
Great. Thanks guys. Maybe just on to start on the China side, can you just talk give some more color on the shortfall there, the magnitude of the impact, which business segment it hits specifically? And then just also what's baked into the back half for your expectations there?
So Patrick, I'll start and maybe Jamie will chime in. We continue to be very bullish on China overall. We saw good growth, particularly on the diagnostic side, and I would say that was fairly broad based, or there was the immunodiagnostics or the reproductive health. I think we continue to feel good about that. And I would say that was despite some challenging birth rates that we saw in China.
Life Sciences continues to do well there in addition. The challenge we are running into as Jamie alluded to is really on the applied area, particularly on the industrial end markets. And as Jamie mentioned, we think some of that is sort of macro slowdown overall in China. Some of that may be a little bit. We're starting to see some anecdotal evidence that there's starting to be a little bit of bias against U.
S. Companies, particularly in some of the tenders. But that's fundamentally where we saw the challenge in China. And so I think to some extent, maybe this is out of caution, we're concerned about the back half and that's ultimately what's causing us to widen the range in DAS from mid single to sort of 3% to 5%. It's really the applied market, largely in China, but I would say even outside of China, the China the applied markets are challenging.
I would agree, yes. Maybe with regards to your question on the back half, Patrick, we're not expecting much uplift. It's probably maybe a little bit in DAS, but overall, we're planning for much of the same in the second half in our guidance here.
Okay, that's helpful. And then just on the DAS business in general, Rob, appreciate the color about the Applied. What can you guys do to reaccelerate growth there? I know you've talked a decent amount about some new products there catalyzing some growth. But I guess with the headwinds in Applied, how should we think about growth going forward?
Last year, you had a really strong year there, particularly in the mid part of the year. So I guess on the go forward, what can you guys do to reaccelerate back to some of those? Yes.
I think a piece of it is what you referred to is we continue to get new products out into the marketplace. And we've got some coming out sort of late 2019 early 2020 that we think will be helpful there. I think the other thing and obviously this has been a theme for the last couple of years is just continue to sort of shift away from the industrial markets because they have a tendency to be a little bit more cyclical. And so continuing to invest in life sciences, continuing to expand our informatics and service offerings, I think those are all and of course food as well. I think those are all helpful because we think longer term growth rates there are not only higher, but we think are more resilient and less cyclical.
So I think it's going to be a combination of continuing to shift into those more attractive end markets, but also at least in the short term driving new products into the marketplace.
Your next question comes from Steve Willoughby. Your line is open.
Hi, good evening. Thanks for taking my question. Two things for you. 1, I guess, could you just help us frame up, maybe put it in perspective, you talk about China applied being 6% of your revenue, applied globally being flat and that's despite food being up double digits. Can you just kind of remind us how big you're considering that food bucket to be?
So we can sort of either you could tell us or we can back into how much your kind of applied or industrial business was down in the quarter? And then I have a follow-up.
Yes. So is the question specifically on food, Steve?
I mean, I guess it's really like we're trying to look at how much the industrial business was down for the applied business to be flat.
Yes, it's a good point, Anthony. So industrial and environmental was down mid single digits in the quarter. So I actually think that speaks to the portfolio evolution of PerkinElmer. So being up 5% when industrial and environmental is down mid single digits, again, as I think another example of how we've transformed the portfolio, But to specifically answer your question, it's not about
Yes, it does.
I think that's a good point to just sort of reinforce. If you go back couple of years ago, I think one of the I used to hear from investors, a concern was how tied was PerkinElmer to sort of the industrial sort of macro growth side? And then of course the other question was how tied is PerkinElmer to newborn screening and said differently birth rates. And if you look at this quarter, as Jamie pointed out, this is a good sort of indication of the changes we've made to the portfolio. So as Jamie said, industrial was down mid single.
And if you look at birth rate, they were down in the U. S, they were down in Europe and they were down in China. As you heard earlier, our reproductive business was up high single and diagnostics grew 9%. So it does speak a little bit to the migration of the portfolio. Of course, that's something we've talked about to not only being sort of higher growth, but more resilient.
I appreciate that, Rob. Thank you. Jamie, just one follow-up for you on margins. Operating margins are up 50 basis points year over year this quarter sorry, 70 basis points this year quarter and it looks like gross margins were down. Just any color there at all?
Yes. So the little bit of this, Steve, was foreshadowed in the first quarter when we expanded margins 130 basis points. And if you remember, we said that we were going to we had a greater mix of EUROIMMUN reagents in the Q1 and that we'd have a greater mix of instruments in the Q2. So much of that entire explanation down from I think 51.3 to 51.0 is just due to the EUROIMMUN instrument mix that is coming through and it was quite strong in the quarter. So EUROIMMUN was up mid teens and we're thrilled with the performance, but it had a little bit of impact on the quarter over quarter.
Through the first half, I think we're up about 40 basis points on gross margin and I think that's how we're kind of penciling it in for the year is about 40 to 50 on the gross margin line.
Perfect. Thanks so much.
Your next question comes from Doug Schenkel. Your line is open.
Hi, good afternoon. This is Chris on for Doug today. Thanks for taking my questions. Just to follow-up on China, I believe you noted that the China weakness is expected to be So
some
So some of this is transitory to your point, Chris. I mean, Ofcom approvals are difficult for us to control here. Some of the shift in the labs from government to third party is also quite transitory. Right now, we're just assuming the second half that we're not going to bank on a giant change there, a little bit of uptick versus what we've seen in the applied markets there in the first half, but it's not a lot it's not a significant portion of the DAS increase in the second half versus the first half.
Yes. And I would just say what you're picking up in the sort of transitory is that we think longer term, China is still a great economy in the world. We think it's going to grow, particularly in the segments that we operate in.
So I think what you're hearing is,
while for the second half, we're not assuming any you're hearing is while for the second half we're not assuming any change, but when we start thinking about this longer term, we still think China is a good place to be and we're continuing to sort of increase our investments and our presence there.
Okay. Got it. And then Rob, in your prepared remarks, I think you noted that EUROIMMUN had the strongest top line growth quarter since the acquisition. Could you just provide a bit more detail on that comment, Really what enabled this record quarter? And I am particularly curious on how the North America operations contributed to that performance?
Thank you.
Yes. So, EUROIMMUN in the quarter, again, I think it was up 17% on an organic basis, so very strong. And it was broad based. I mean, we saw it sort of across the globe, whether it was Europe, China or Americas. Americas was particularly strong.
And I think it was reinforcing for us to see that some of the things we've talked about in the past and some of the synergistic aspects of the acquisition are starting to come through now. So clearly, we're seeing EUROIMMUN do a good job of penetrating new markets, new geographies. Their MPIs are continuing to kick in. I think Claude mentioned the fact that we're cooperating or doing a joint venture between our genetic testing business and EverlyWell to sort of expand out into the food intolerance. And they had some new products.
And of course, that was one of the things that we liked about EUROIMMUN is that they're very innovative. We introduced a new random access analyzer to the market this quarter. So, there was really a host of things, but particularly in the Americas, which I know was one of your questions, it was very strong in the Americas in the second quarter.
Great. Thanks for taking my questions.
Your next question comes from Bill Quirk. Your line is
open. Great, thanks. This is Dan on for Bill. So my first question is, in terms of the NIBT commercial execution ramp, it sounds like the strategy to differentiate your offering is to offer this entire cycle of reproductive products. Can you just speak to how this strategy is attracted to different geographies, different payers?
And then maybe just speak to if you're focusing on gaining mind share within the OBGYN community as well as the patients' community and then the importance of that as well?
Yes. So the question around NIPT and Vanadis for us, we continue to see that to be on track for what we have said around 30 installations for the year. The data our customers are generating, in fact, what we are seeing is either better than what we've generated in our own labs for CE Marking study. So we feel really good and the ramp process for early adopters is going well. In regards to the overall OBGYN mind share, most of our focus right now has been in Europe and in the APAC market, and we are seeing very good feedback from our customers and KOLs.
And again, I would just reinforce, the value proposition for Vanadis is fundamentally, it's easy to use. We think it's low cost and it's very accurate. And so while it won't work for everyone that wants to get a lot of detail relative to the genetic makeup, I think for the large majority of our customers, and again, we have a lot of familiarity with screening versus diagnostic testing, we think Vanavis is a very effective product. We're looking for accurate, easy to use, sort of low cost screening.
Great. Thanks guys. That's helpful. And then just one more. Just shifting over to the cannabis opportunity.
It sounds like it's doing very well. You said it outpaced 2018. That suggests it's tracking pretty well out of your target. First, do you think there's any adjustments that need to be made? And then I'm just kind of wondering what's really driving the uptake?
I know previously you mentioned that you received that Emerald test badge and vendor status. If you could just flush out some color there? Thanks guys.
Yes. I think the fact that we are trying to bring customer a full total workflow solution to our customers as they are setting up their lab, bringing in the front end and the full solution along with the software is really gaining traction with the marketplace. And then I think as the growth continues to go in that market, being an early provider of a full customer workflow solution is gaining traction. And in addition to that, if you look at the total breadth of offering that we bring to the table, it is also very amenable and attractive to the customer.
And in terms of the target you asked, Dan, we said that it could double this year from 10% to 20%. So we're basically on path with on pace with that. So maybe there's a little bit of improvement to that, which is why you might see the DAF second half up a
little here. Thank you. Your next question comes from Brandon Couillard. Your line is open.
Hey, thanks. Good afternoon. Back on the DAS business, in terms of you can quantify the impact of the MofCOM export clearance delays and sort of piece that out relative to sort of the broader macro environment? And secondly, do you think the rollout of the new op structure was at all disruptive to business in the Q2?
Sure. Yes. I'll start and then Prahlad can jump in. So on MOPCOM, Brandon, we're trying not to track it all the time here, but it's probably $4,000,000 $4 ish million to the quarter. So it might be a point for DAS and a half a point overall for PerkinElmer, just to answer that question.
And TBD on when that gets resolved, we are obviously monitoring it. I mentioned that I met with the Mofcom when I was over there. They're sympathetic and trying and we'll see what happens there. In terms of organizational disruption, I don't think that had any impact on the quarter whatsoever. I think most of the commercial and kind of product management moves were just made recently here.
And I think before that it was largely around R and D, which I think Prahlad talked about in the last call, and some operations and back office functions. So I think people are excited about the organizational move and it's not an impact.
Yes. And in fact, Brandon, the impact of what the changes that we are bringing to the feet on the street is really very minimal. The idea actually has emanated from the field. What we are really putting is the tools and processes in place that maximizes the opportunities that we have in front of us.
Okay. Thanks. And then a follow-up for Jamie. Just on the working capital items you spiked out in terms of elongated ship cycles, higher inventory levels at EUROIMMUN. Why is that occurring now?
Do you think those are structural? And is 90% plus conversion still a relevant number to think about perhaps for 2020?
Yes. I think it's some of this has been happening a little over time, but a lot of this is just we are evolving and we are growing faster. I mean, if you look at informatics, we like the subscription model. So historically, and I think we've mentioned this also with the ASC 606 discussion, we used to sell a perpetual license. We'd much prefer to have a subscription model that kind of brings in an annuity for years to come.
So, we continue to push that product and I think it's performing very well. Similar on cannabis, so cannabis is probably surpassing our expectations a little bit here. And I think those customers might require something like 90 days term. So, a lot of this is related to growth, Brandon, which I think is a good thing. EUROIMMUN inventory is the same way.
Our MPIs, we're trying to accelerate in the second half of the year, so we can hit 2020 with a head of steam here. So I think much of this is just related to the fact that we are growing faster.
Good. Thank you.
Your next question comes from Derek Gebruin.
Hey, so I've got I got 4 questions. So here we go. So first one, let's start on gross margin. So the gross margin for the quarter was below what we had forecasted by quite a bit, but yes, your SG and A was also quite a bit lower, so that offset. How should we think about this pacing for the rest of the year?
And I would have thought the gross margin would have been higher just given the lower DAS contribution and the higher EUROIMMUN contribution in the quarter?
Yes. So I tried to answer that just a little bit ago here. But if you remember, we tried to foreshadow and we've been out there externally as well recently that said the Q1 was a little high on the gross margin side and on the operating margin side and that the second quarter would be lighter because we knew the EUROIMMUN instruments were going to be coming in the 2nd quarter. So that's the
drag on gross margin at least from a
year over year standpoint. And then some of the margin at least from a year over year standpoint. And then some of our new businesses like genomics testing is performing extremely well, that has a little bit of drag. But in general, we're kind of in line with where we thought through the first half here. As to the sequencing for the second half, I think it's pretty similar.
I think the way we think about 2019, it's probably 40 to 50 basis points on the gross margin line and then 120 to 150 on the operating margin line. So there's a decent amount we've been saying that we've invested a lot in people, we've invested a lot in our sales force, and therefore, we don't have we can really leverage that now. So you're seeing some of that base cost leverage and some good cost control come through. And that's how I think about 2019.
Great. Hey, Rob, could you talk a little bit more about the pressure and the anti U. S. Bias in China? I just sort of like that was a sort of a striking comment.
And can you provide any specific examples? And I guess that sort of also leads to the question, are you then starting to see more price competition in some of the Chinese markets from other non Chinese vendors that are sort of playing there?
Yes. So, Derek, I would say there's been sort of 3 instances where we've heard of specific tenders that we were told that we won. These are sort of government businesses. And then in the process of documentation or whatever, it got flipped to a local. And I would say at this point, it's a couple of points.
So I wouldn't say we're greatly concerned about it, but it's I would say in the Q2, it's the first time where we can point to specific examples of where we think there's been a little bit of an anti U. S. Bias. What we're doing to deal with it is continuing to move as much manufacturing as we think makes sense over to China because what they in essence say is a lot of it is because it's not produced in China. So we're trying to alleviate that concern first.
Ultimately, whether it's U. S.-owned, obviously, going to be difficult for us to deal with. But that's how we're dealing with it in the short term.
Great. And on the going back to you since you've mentioned cannabis a number of times and I'll jump on that wagon too. So can you talk about how big that market opportunity is for the life sciences space? And just sort of like I haven't really seen a good estimate for the TAM on that one that's addressable by the tools market. And your idea on what that market is growing?
You can put me in the camp of I don't know that we have a great handle on the total market. I mean, we tried to estimate what it is. I think right now, it's probably $100,000,000 $150,000,000 market, something like that. But I think it's growing very quickly. And I think it's growing because you're seeing 2 opportunities.
I would say on the, I'll call it the marijuana side, which is probably growing the slowest, is you're seeing opportunities for analytical instruments to help with sort of efficacy, quality and safety. On the sort of more hemp and CBD side, you're seeing a lot of growth in being able to control how much THC is in the product so that it doesn't run afoul of the regulations. So it's really and that's probably growing faster actually.
Great. And finally on Banadis, I guess, revenue expectation for 2019, if you care to share that and sort of like how should we think about that accelerating into 2020?
Yes. Derek, I think as we talked about in the past, we're trying to stay away from 2019 from a revenue perspective and really talk about installations. And I think the reason for that is we want to get the installations out there. And again, it's a little bit because it's early days, hard to predict how much you're going to sort of buy the instruments and how many of them are going to do a reagent rental. And of course, that has a significant impact on the revenue side of things.
So we said for 2019, let's really focus on getting it out there. We set a goal of 30 installations. As we said, we're sort of halfway through the year. We think we're right on track. And so, we continue to be very bullish on Vanadis.
I think the revenue, the significant revenue should occur starting in 2020.
So then let me just ask, so if you look at 30 installations and what should we think about as a relative revenue per box in terms of consumable pull through?
Yes. Derek, I think we need a little bit more experience with the sort of volume through the lab before I want to commit to a number there.
Okay. That's great. Thanks.
Your next question comes from Kathleen Scholl. Your line is open.
Great. Thanks for the questions. First on EUROIMMUN, on last quarter's call, you talked about the goal of getting to 50% market share in the U. S. Autoimmune screening business.
Has that played out as you expected?
Yes. Katherine, with the new with the recent buy that Rob mentioned and the recent win we had, we are going to get to 50% screening in the ANA market.
Great. And then on China, Jamie, you mentioned your conversations with some officials there on ways that you guys could work together further. Are any details on specific steps you're taking to improve that DAS Applied business absent any change in market dynamics? And then for the focus on local manufacturing in China, are there any particular product lines that you're prioritizing for that?
Well, first, the I'll talk a lot we talked a lot to the National Health Commission around diagnostics and expanding newborn screening. I know you asked about DAS, but that's primarily where they ask for the most help. So we've been working with them. We've been investing in training for all the physicians, particularly as you go west and frankly through the One Belt, One Road all the way down into Africa. So we think that opens up geographic expansion in China as well as menu expansion if we can get some of our Q sites and mass spec in there because that was just CFDA approved recently.
I'd say from a localization standpoint, we bought SSI, which is a localized AA spectroscopy manufacturing site. So I'd say we have 5 or 6 facilities now. EUROIMMUN is localizing more. SSI on the analytical side is localizing more. We have Taichang, which is doing well.
So, we're doing pretty well and we're trying to go as fast as we can here.
Great. And then, are you guys still confident in at least 7% organic growth in 2020? And assuming that you'll need to get DAS back to mid single digit growth to do that, do you think you can get it there just through the new product introductions? Or will you see need to see market improvement in area like China applied as well?
So I would say we continue to be confident in our ability to get to high single digits in 2020. Obviously, we're not giving guidance. But I would say, given the market conditions we see right now, I think we could still achieve high single digit.
Great. Thank you.
Your next question comes from Ross Muken. Your line is open. Please ask your one question and one follow-up.
Okay, thanks. This is Luke on for Ross today. Just real quick on the China. So there's been
a lot of issues with several
of your peers going on there, particularly in the food market. Are you guys seeing opportunity for share gains? Or is it just pain to every U. S. Company right now?
I think when you talk about China Food, at least from our perspective, you sort of need to separate it into 2 different markets. So what we're seeing is where we're supplying products to the producers of the food, and this probably falls more in the sort of grain and dairy area. We continue to see pretty good growth there. Where we are seeing sort of headwinds is when you're supplying the labs. And I think the dislocation there is we're seeing a move from that being fundamentally historically done by public labs.
It's now moving out into more private labs. And I think that's the disruption that at least some of the other peers have talked about. And we're seeing that as well. It's just that because we have the other aspect of it, we have probably a little less of an impact. But of course, we are seeing it on the lab side.
And with regards to China Food, we're very bullish, Luke. So, I mean, if you look at that, we think that safety market is going to grow. We think quality will grow. If you look at a rising middle class there, the number of exports they have coming in, I think longer term, China food is a place that we're very bullish on. I think we're going through some short term headwinds here.
Yes, that makes sense. And I guess kind of just following up on that and your focus on improving the overall workflows around the different markets and customers. I guess reproductive would be an example of and showing how that's grown versus the you used to be just tied to birth weights. Can you talk about other businesses where you're focusing on that? And how much going forward can we look at for new contracts like you saw the multimillion one that you guys called out?
Yes. The applied genomics look is another example where now we have a validated flexible workflows all the way from sample to sequence. The ability to provide a front end extraction, liquid handling, reagents and kits and library prep is another example that sort of allows us to do that. Similarly, cannabis is another example where we now I can we can add the front end to it sort of the front end that goes along with the whole workflow and the software that provides the solution. So those are a couple of examples.
And the life sciences is another arena, wherein now with the inclusion of Cisbio in our portfolio, we can add our readers and our reagents and provide a whole portfolio of fluorescence, whether it's around HTRF, alpha or Autodelphia technology that gives the customer the flexibility to choose and pick as to what they want to. So these are a few examples where the total workflow solution comes into play.
Okay.
And I guess is there a chance to even accelerate EUROIMMUN using this strategy as well?
So EUROIMMUN is already sort of as Jamie pointed out alluded to it, it's already we can see the benefits of it not just from a technology synergy perspective, which we had talked about around antibodies and antigens earlier. But now the capability of bringing EUROIMMUN, Tulip and Cisbio gives us an opportunity where we have sort of centers of excellence around antibody and antigens and then leveraging that to develop assays across different end market segments.
Okay, great. Thanks.
Your next question comes from Jack Meehan.
Hi. This is Andrew Wald on for Jack. So you called out high single digit growth in the Americas. Could you provide some more commentary on strength in the region?
Sure, yes. I mean, it's pretty broad based, Andrew. So diagnostics is up high single digits and DAS is doing pretty well at mid single digits as well. So I think I'll start with the DAS side because that's a little bit different than the low single digits we're seeing. I mean a lot of that's driven by cannabis, a lot of that's driven by life sciences.
So we think in particular life sciences in the Americas going quite well. We mentioned imaging and detection and informatics and our enterprise business all performing nicely. So I think that kind of covers DAS. And then in diagnostics, we've got the genomics testing business we highlighted. So that's going well.
That's largely U. S. Based. EUROIMMUN, we highlighted in terms of the instrument order. So hopefully that gives you a flavor, but Americas has been performing quite well.
Thanks. And could you provide more of an update on Tulip? Maybe you can touch on some of the new offerings or synergies, especially with EUROIMMUN? Thanks.
Yes. See, the one example that we've talked about earlier is the lateral flow technologies. Tulip itself continues to grow high single digits from an opportunity perspective. But really what we are now working on is the next generation of offerings around lateral flow for infectious diseases, leveraging the antibodies and antigens that are developed at Euronium and putting that through the Tulip channels not just in India, but into other emerging markets.
Thanks. I'm showing no further questions at this time. I would now like to turn the conference back to our speakers.
Well, thanks, everyone, for your questions. And just to summarize, we feel great about the 1st 6 months. As I mentioned, solid financial results, but probably more importantly, we continue to make terrific progress under the sort of long term strategic priorities. And we look forward to updating you next quarter on our progress and continuing to drive PerkinElmer to higher growth, increased resilience and greater profitability. Thank you, 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.