Good day, ladies and gentlemen, welcome to the PerkinElmer Q1 2018 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. If anyone should require operator assistance, please press star and then zero on your touchtone telephone. I would now like to introduce your host for today's conference, Tommy Thomas, Vice President of Investor Relations. Sir, you may begin.
Thank you, Sarah. Good afternoon, welcome to the PerkinElmer first quarter 2018 earnings conference call. With me in the call are Rob Friel, Chairman and Chief Executive Officer, Andy Wilson, Senior Vice President and Chief Financial Officer. If you have not received a copy of our earnings press release, you may get one from the investors section of our website at www.perkinelmer.com. Please note that this call is being webcast live and will be archived on our website until May 14, 2018. Before we begin, we need to remind everyone of the safe harbor statement that we have outlined in our earnings press release issued earlier this afternoon, also those 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.
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 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 measure 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'll provide reconciliations promptly. I'm now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Rob Friel. Rob?
Thanks, Tommy. Good afternoon, thank you for joining us today. I'm pleased to report PerkinElmer had a very good start to 2018, delivering excellent growth in revenue and earnings. Revenue for the first quarter was $644 million, representing reported growth of 25%, organic growth of 6%, comprised of 5% growth from our base business, 1% growth from EUROIMMUN's incremental organic growth. Adjusted earnings per share was $0.63, representing growth of 15% over Q1 last year, $0.03 better than the midpoint of our guidance. The EPS beat was attributable to the higher organic revenue growth in the quarter, the slightly lower tax rate than planned.
In addition to the impressive financial performance, each of our two businesses made notable progress on our objective to invest in high-growth areas while shifting our portfolio towards those opportunities that are best aligned with our capabilities and expertise. Given our results and positive expectations, moving ahead, we feel confident in raising our full-year revenue and profit guidance, which I'll speak to in a few minutes. Turning to our end markets, diagnostics, which now represents 40% of our revenue and our largest end market, grew 62% on a reported basis and 7.5% organically, with core diagnostics business growing mid-singles organically and EUROIMMUN growing mid-teens organically. Within life sciences, which represents about 35% of our revenue and includes sales to our pharma, biotech, academic, and government customers, revenue grew 12% on a reported basis and 7% organically.
Sales to pharma and biotech increased high single digits organically, and academic and government sales increased mid-single digits organically. The remaining 25% of our revenue is in the applied markets, and includes our industrial, food, and environmental customers, and increased 7% on a reported basis and organically 2%. Sales to environmental and food customers grew mid-single organically, but were offset by some softness in the industrial markets. We were very pleased to see our two largest end markets, diagnostics and life science, growing high single digits through a combination of favorable market conditions as well as our respective strong market positions and excellent execution. In addition to being pleased with the breadth of our growth this quarter, I'm also very excited with the progress on our initiatives to increase profitability.
While operating margins contracted in the quarter as we anticipated, we made very good progress on both reducing product costs through low-cost sourcing and supplier consolidation and collaboration. In addition, we are on track to deliver over $15 million in savings and manufacturing costs in the next two years through the deployment of our lean processes and footprint optimization. As a result, I remain confident we will achieve the operating margins goal of 70 to 90 basis points improvement for this year, as well as 22% operating margins by the year 2020. Also, during the first quarter, we continued to make very good progress on the key growth initiatives we outlined earlier in the year that we expect will enable us to achieve high single-digit organic growth by 2020. The integration of EUROIMMUN continues to go very well.
In the U.S., the combination of our commercial and regulatory resources is already yielding some nice wins, as evidenced by recently placing a number of our new automated ELISA workstations with one of the large reference labs. In addition, we received FDA approval for two lupus detection assays as our combined regulatory resources continue to submit new tests, and we now expect an additional 12 new assays to approve this year. We have also transitioned to service of all EUROIMMUN equipment from third parties to PKI engineers, which will reduce costs and improve response time with customers. While we continue to prioritize the integration of the U.S. portion of EUROIMMUN, the technology and commercial groups globally are identifying many additional growth synergies across the portfolio between EUROIMMUN, the greater reproductive health business, our China diagnostic business, Applied Genomics, and our Tulip immunodiagnostics business in India.
I look forward to updating you on these opportunities on later calls. One of the key drivers to our future growth in diagnostics is our Vanadis non-invasive prenatal testing solution. A research study recently published in Nature Scientific Reports detailed the first clinical proof of concept data demonstrating the ability to apply the Vanadis assay in the detection of trisomy 21 in maternal plasma. We look forward to receiving CE marking shortly, with shipments commencing in the second half. The third focus area in our diagnostic business is our whole genome sequencing service from PerkinElmer Genomics. In the first quarter, we processed about 5,000 samples and remain on track to reach the $8 million-$10 million of revenue for 2018 at attractive margins.
We're ramping up some exciting partnerships with other leading organizations in the genomics field that together make new inroads in the areas of rare disease research, as well as genetic testing of healthy populations. To mention just a couple of recent highlights, we announced The Parent Project Muscular Dystrophy has selected PerkinElmer Genomics as its partner to perform full genome sequencing of the entire Duchenne gene using a new comprehensive assay. We're also collaborating with Helix to offer one of their first clinical products, with the initial product being the 59-gene panel that the American College of Medical Genetics and Genomics identifies as genetic conditions with established interventions aimed at significantly reducing morbidity and mortality. Turning to Discovery & Analytical Solutions, or our DAS business.
As I discussed in January, the priorities of the business are shifting from putting the processes and organization in place to operate as a single cohesive business to both accelerating growth and being more consistent. One of the key components of that strategy is to continue to leverage our informatics and OneSource service offerings to improve our pharmaceutical customers' lab productivity. A number of our customers are discussing a lab service model with us, where the requirements for connected systems to avoid data silos, link distributed research, manage complex data sets, and ensure compliance are driving them to our unique OneSource and informatics capabilities. Some of the investments we made last year are starting to fuel growth this year.
For example, at the end of last year, we launched our new PerkinElmer Signals application for research, translational, clinical development, and enterprise analytics and search, which has led to one of our top global pharma customers selecting our analytics platform to power its in-house clinical trial review program. We launched a new version of ChemDraw with significantly increased functionality, including biologics, which has experienced a good uptake in the market. Going forward, we believe the ChemDraw offering, which is used by 35,000 scientists, can be better leveraged to increase connectivity and ultimately revenue with our scientific customer base. Another important component of the DAS growth strategy is to accelerate our growth in China and emerging markets with increased investments to build local capabilities that address unmet needs. In the first quarter, the DAS organization continued improving localization in emerging markets by expanding manufacturing capabilities.
We are now producing three product lines in China and expect soon to close on a small acquisition in China to expand our elemental analysis products. For the DAS business, China grew high teens in the first quarter, with broad-based growth across life sciences and the applied markets. Finally, both businesses will continue to develop innovative new products to support our customers and help solve their most pressing challenges. We are again targeting $50 million of incremental revenue from new products exclusive of EUROIMMUN, and through the first quarter, we generated $14 million from products introduced in the last year. To summarize the quarter, we're off to a great start. Our end markets, for the most part, continue to be robust. The organization is executing well, and I feel good about our ability to deliver on our financial forecast for this year.
More importantly, we continue to make very good progress on our strategic priorities that should accelerate both the growth and profitability of the company and achieve the financial profile we have outlined for 2020. In recognition of both the progress made in the first quarter and the continuing opportunities available to us, we have increased both our revenue and adjusted EPS guidance for the year. While Andy will discuss the details, we are increasing our revenue forecast for the year to $2.8 billion, reflecting slightly stronger organic growth in both our base business and EUROIMMUN, as well as changes in foreign exchange rates since our prior guidance. We are also increasing our adjusted EPS guidance to $3.60, which is $0.10 above our previous guidance and represents an increase of 24% over 2017.
Before I turn the call over to Andy, I'd like to remind everyone that this will be Andy's last PerkinElmer's earnings call. I would like to take a moment to thank Andy for not only his leadership and oversight of our financial function, but for also the significant role he has played in the transformation of PerkinElmer over the last nine years. During Andy's tenure, we were able to significantly strengthen PerkinElmer's financial profile, evolve our portfolio, and increase the value of the company. On behalf of the entire senior leadership team and all the employees of PerkinElmer, I'd like to express our sincere gratitude to Andy for his leadership and wish him well. I also appreciate Andy's commitment to ensure a smooth transition. As you know, our new chief financial officer, Jamey Mock's first day will be tomorrow. He has joined us this evening.
I'll now like to turn the call over to Andy.
Thanks for the kind words, Rob, and good afternoon, everyone. I also want to express my appreciation to the many inspirational people who've helped me throughout my time at PerkinElmer. I'd like to wish you all, and especially our new CFO, Jamey Mock, continued success in the future. I'll now move on to the results for the first quarter of 2018, where I'll provide some additional color on our served end markets, a summary of our financial results for the first quarter, as well as details around our 2018 guidance for the second quarter and full year. We were pleased with the start to 2018 as reported revenue increased 25% and adjusted earnings per share increased 15% over the first quarter of last year, exceeding our expectations set back in January.
Adjusted revenues in the first quarter grew to $644 million, with organic growth of approximately 6%, foreign exchange representing a tailwind of approximately 5%, and acquisitions adding approximately 14%. By business segment, diagnostics represented approximately 40% of total sales, with organic revenue growth of approximately 7.5% for the first quarter, driven by solid organic revenue growth in EUROIMMUN. Discovery & Analytical Solutions, representing approximately 60% of total sales, grew approximately 5% organically in the first quarter, highlighted by strength in the life sciences end market, specifically from our informatics and OneSource offerings. We were pleased to see continued solid order demand in the quarter, and as a result, we were able to build additional backlog, giving us momentum entering the second quarter. I'll provide some additional color on both businesses in a moment.
We experienced healthy growth across all major geographies, with high single-digit organic revenue growth in Asia, mid-single-digit organic revenue growth in the Americas and in Europe. This represents three consecutive quarters of growth across all major geographies. In the BRIC regions, we experienced high teens organic revenue growth, driven by continued strength in Brazil, a very strong performance in India, and mid-teens organic revenue growth in China. Moving to the details of our operating results, first quarter adjusted gross margins were 48.6%, up 20 basis points from the prior year on a reported basis and up approximately 100 basis points on an FX neutral basis. Reported results were favorably impacted by EUROIMMUN and benefits from our productivity initiatives, partially offset by unfavorable mix and the dilutive impact of foreign exchange.
Adjusted SG&A was 26.6%, up 60 basis points from the prior year, with the addition of EUROIMMUN being the primary driver of the increase. Research & Development expenditures were 7.1% of adjusted revenue, up approximately 70 basis points, driven by continued investments in Vanadis and the inclusion of EUROIMMUN. As a result, adjusted operating margin was 14.9%, down 110 basis points on a reported basis. On an FX neutral basis, adjusted operating margin was consistent with our plan and down approximately 20 basis points, due mostly to the seasonality of EUROIMMUN profitability. Please note that as of January 1st, 2018, we adopted recently issued pension accounting standards and have restated prior years. The impact versus our prior guidance is an increase in operating costs of approximately $2 million per quarter, with an offsetting increase in other income. There's no net impact to adjusted EPS.
Because foreign exchange is having a greater impact on our forecasted revenue relative to our guidance and EUROIMMUN's cost structure significantly changes our earnings flow-through from changes in foreign exchange rates, I wanted to briefly describe this dynamic. Prior to the acquisition of EUROIMMUN, changes in our euro and Chinese yuan-denominated revenue resulted in a mid-teens operating margin flow-through based on the global distribution of our production costs and operating expenses. As we have discussed, roughly 75% of EUROIMMUN's revenue is in Europe and China, and is split approximately 45% in Chinese yuan and 35% in euro. However, as most of EUROIMMUN's production and R&D expenses are in Germany, over 70% of their expenses are in euros. As a result, this affects PerkinElmer's overall margin flow-through on changes in the value of the euro, as our euro expenses now slightly exceed our euro revenue.
An increase in the value of the euro relative to the dollar increases our revenue, but results in a slight reduction in operating profit. We are now more exposed to movements in the Chinese yuan relative to the euro, so that a change in the Chinese yuan-euro rate will now flow through at a roughly 25% impact on operating profit. Given the foreign exchange movements in the first quarter, we experienced significantly more reported revenue, but a slight headwind in the P&L as the euro appreciated much more against the dollar than the Chinese yuan. For the full year, the foreign exchange impact on our revenue based on current FX rates will be approximately $80 million or $55 million more than we estimated at the beginning of the year. This additional revenue will add less than $0.01 of operating earnings based on current rates.
The flip side of this dynamic is that if the dollar strengthens versus the euro, reducing our reported revenues, our income will not be materially impacted to the downside. Despite the current FX environment putting some pressure on operating margins, we continue to expect to deliver strong adjusted operating margin improvements over the remaining three quarters to meet our guided range of 70-90 basis points of margin expansion in 2018. Turning to adjusted earnings per share in the first quarter, we exceeded the midpoint of our guidance range by $0.03 to $0.63, driven primarily by better organic growth and a lower tax rate. The lower tax rate is a result of recently passed Treasury Department guidance on the new tax law that provides a more favorable outcome than we originally anticipated.
Looking further into the key drivers within our segments for the first quarter, let's start with our Discovery & Analytical Solutions business, where first quarter results exceeded our expectations, driven by strong, high single-digit organic revenue growth in life sciences, versus low single-digit organic revenue growth in the applied market verticals. Life sciences strength was driven by double-digit growth in both OneSource and our informatics business, as well as strong drug discovery sales and high-content screening. Applied market growth experienced mid-single-digit growth in food and environmental, but was partially offset by softness in the industrial end markets, which we attribute to the timing of instrument orders. Switching to diagnostics, core diagnostics revenue grew 4% organically, consistent with our expectations as we experienced strong, high single-digit growth in the first quarter last year.
In our core diagnostics business, our infectious disease business, which exclusively served the emerging markets, continues to show strong growth as it increased mid-teens during the first quarter, with particular strength coming from Haoyuan and Tulip. The reproductive health business grew mid-single digits as strength in newborn screening in China was partially offset by difficult comparisons in the U.S. Finally, our Applied Genomics business was down slightly in the quarter as expected due to strong microfluidic sales in Q1 of last year. Broad-based growth across all disease states helped EUROIMMUN exceed organic revenue growth expectations for the quarter up mid-teens. Geographically for EUROIMMUN, China and Germany were strong, and in the U.S. during the first quarter of this year, we delivered over half of the amount sold during all of last year.
We remain confident of future revenue opportunities driven by a focus on innovation, time to market, and strong customer focus. I hope that you've had a chance to read the "Nature Scientific Reports" article on the feasibility of our rolling circle amplification technology from Vanadis for trisomy 21 detection, which we believe to be as accurate as current generation gene sequencing methods. As Rob mentioned, Vanadis is gathering clinical data for all three trisomies as part of their CE mark application, and we continue to expect a second quarter 2018 filing and commercial launch shortly after approval. Looking down the income statement, adjusted net interest and other expense for the first quarter was approximately $12 million, and our adjusted tax rate was approximately 17%, which I referenced previously.
Turning to the balance sheet, as we announced, we finished the quarter with approximately $2.1 billion of debt and $180 million of cash. We exited the quarter with a net debt to adjusted EBITDA ratio of approximately 3.4 times. Turning to our cash flow performance, our first quarter operating cash flow from continuing operations was impacted by the timing of pension payments and earn-outs related to Tulip, coupled with a temporary increase in working capital from higher receivables due to new OneSource contracts initiated in the period, as well as higher inventory levels supporting production moves in Singapore and China in the first half of the year. We remain confident in our ability to deliver our full-year free cash flow commitment of approximately $365 million.
To wrap up the first quarter, we're very pleased with the solid start to the year as we delivered better-than-expected organic revenue growth, including a stronger than expected performance from EUROIMMUN, which continues to outpace the market. During the quarter, Vanadis achieved all key milestones, and we remain on track to our launch timeline later this year. Our end markets continue to be very healthy in both our core and focus areas, and we're encouraged by our ability to build backlog in the quarter. In addition, we continue to have a good line of sight on adjusted operating margin expansion and free cash flow generation for the remaining three quarters, all of which we believe will contribute to a successful 2018 fiscal year for our key stakeholders. As Rob mentioned, given our results in the first quarter, we are increasing our 2018 revenue and adjusted EPS guidance.
We now expect full-year 2018 reported revenue to be approximately $2.8 billion, which represents 5% organic growth in the base business, coupled with EUROIMMUN generating approximately $380 million of revenue, which now reflects slightly stronger organic growth and the impact of the current foreign exchange environment. For the full year, we now expect foreign exchange to be a $65 million tailwind exclusive of EUROIMMUN revenues, which is $40 million more than we estimated in January. Our organic revenue growth guidance assumes 6% organic revenue growth in diagnostics excluding EUROIMMUN, and 5% in DAS driven by a mix of life sciences and applied markets. Geographically, we continue to expect mid-single-digit organic revenue growth in the Americas and Europe, with mid to high single-digit organic revenue growth in Asia. We are taking up our full-year adjusted earnings per share to $3.60, which represents approximately 24% adjusted earnings per share growth.
Our new guidance incorporates the first quarter outperformance of $0.03, slightly higher organic growth, which adds approximately $0.02, and we now anticipate a full-year tax rate of approximately 17%, versus our initial guidance of approximately 18.5%, which adds an incremental $0.05 to the remainder of the year. For the second quarter of 2018, we are forecasting reported revenues of $680 million, which represents 6% organic revenue from the base business, 15% growth in EUROIMMUN, and foreign exchange of 5%. In terms of adjusted earnings per share guidance, we are forecasting adjusted earnings per share of $0.86 with minimal benefit from foreign exchange headwinds. This concludes my prepared remarks. Sarah, at this time, we would like to open up the call to questions. Sarah?
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. We ask that you limit yourself to one question and one follow-up question. Our first question comes from Tycho Peterson. Your line is now open.
All right. Thanks. I guess I will kick it off, Andy, and just say congrats and wish you the best on the transition.
I appreciate that.
As it relates to EUROIMMUN, a couple quick questions here. Can you maybe talk about what we should be assuming for contributions from the U.S. ramp for the business? Then are you willing to comment at all on the headlines around buying some assets from Siemens in Europe?
Tycho, the ramp in the U.S. will continue to be fairly significant, but of course, it's off a relatively small base. What we're seeing in the U.S. is growth in the sort of 40%-50% range for the year. I think as we've said in the past, it'll take a little while before it sort of ramps up to the level of significance. They're making good traction. With regard to the Siemens discussion, I think at any point in time, the people at EUROIMMUN, and particularly Winfried Stöcker, who, as you know, is the founder, is continuing to look at ways to invest in the future and to support the significant growth. In any given year, EUROIMMUN hires anywhere from 175 to 200 engineers to support the growth that they've had historically, which as you know, has been in the sort of the high teens.
What happened in the Siemens situation is apparently they are looking to exit a facility in the southern part of Germany. Winfried had some discussions with them where we might assume some of those engineers or, in fact, some of the facilities. It's only at a discussion phase right now, the way I would think about it is he's just sort of thinking out a couple of years and saying to the extent that we need to continue to get engineering capability and space, this may be a way to do that. By the way, we're also wondering if the German government might sort of participate in those transition costs. Nothing definitively. This is just as a discussion phase right now.
Okay, that's helpful. For the follow-up, you called out the softness in industrial. I know it's only 17% or so of the DAS business , but can you maybe just talk a little bit about where you think things are headed for that part of the portfolio?
Yeah, I think it's a little bit of timing, particularly in where we saw a little bit of weakness was in the chemical sector. I would say industrial for us was just down slightly in the quarter, and I would attribute it to more sort of timing of instrument orders. It seems like the market overall is pretty good. We actually saw growth in the U.S., and the weakness was really more in Europe and Asia.
Okay. Thank you.
Thank you. Hey, Sarah, before the next call, I just want to clarify something I said, and you can attribute it to old age being my last call, the guidance for Q2 top line is $695 million, and I believe I said $680 million, I want to make sure that I confirm that our top-line guidance for the second quarter is $695 million. Thanks.
Our next question comes from Patrick Donnelly. Your line is now open.
Great, thanks. Maybe just one on China. I think guidance coming into the year was for high single, low double-digit growth there. Coming off another strong quarter with high teens growth. It has been well above kind of that guidance rate for a few quarters here. Maybe just update us on your thoughts in the region there. Obviously, has been some macro noise. Wondering how you are feeling about the environment, what markets you are feeling good about, and then again, just how you are feeling relative to the guidance.
Yeah, I think China continues to be a great market for us. When you look at the growth, as I think Andy mentioned, it was mid-teens. It was, again, pretty broad-based. If you break it into diagnostics, life sciences, and applied markets, they were all double-digit or better. I think we continue to be excited about the opportunities there. I think going into the year, we were a little cautious, and I think we still continue to look out to the back half and again, just be, I would say, cautious about it, but I suspect rather than high single, China will probably be at least double digits and maybe will get up into the mid-teens. The other thing I would say is EUROIMMUN continues to do very well there as well. I think in the first quarter, they were more in the high teens.
We continue to see good demand and like I said, pretty broad-based.
Okay. Maybe just on the capital allocation side, had a little bit of share repurchase activity this quarter in spite of the recent EUROIMMUN deal. I'm just wondering how you guys are feeling about where you are on the leverage landscape. Then with Jamey coming in, any changes we should expect on the capital allocation side?
I don't think there'll be a change. I think we still have a preference to add to the franchises with some bolt-ons, as I think I've said in the past. Unlikely that you would see us go and do what I would call a large deal right now. I think our preference is to continue to de-lever a little bit, but it'll be bolt-on acquisitions. I think, as we've said in the past, at a minimum, we'll try and keep the share count flat. To the extent that we see a little float up because of either stock price increases or option exercise, we'd probably take that out. I would say no intention right now to significantly reduce the shares outstanding.
Okay, thank you.
Our next question comes from Ross Muken. Your line is now open.
Good afternoon, guys. Andy, congrats.
Thanks, Ross.
Just in terms of the margin cadence, obviously after Q1, it's a pretty big sequential step up. Q2, at least on our math, doesn't imply a ton of expansion. So I guess, one, could you confirm my math that it seems sort of 2H-weighted , I guess we had some unique dynamics in 4Q of last year, so maybe that's an easy comp. Also, is it the math around just the timing of the EUROIMMUN business, which obviously is a weak seasonal Q1 and then steps up that the incremental drop-through from that piece kind of gets better sequentially, or is there something else at play on that cadence?
No, I think you have described it exactly as we anticipated rolling out. First quarter being EUROIMMUN seasonally lowest quarter had obviously a dampening effect as well as FX. I think we'll see as we get into the second quarter at that more at the higher end of the range, it will ramp through the year as we make progress with EUROIMMUN. As you can do the math, it will be over 100 basis points a quarter. Fourth quarter being a little bit of an anomaly where it's an easier comp. I think all the things you highlighted are kind of how we're thinking about it as well.
That's helpful. Could you just also confirm, because there's a bunch of different pieces because you gave kind of the organics and M&A contribution with or without EUROIMMUN. Was EUROIMMUN about $80 million or give or take in the quarter, including the organic growth?
Correct.
Okay.
It was actually $82 million. It'll be in our quarterly filing.
Got it. Just quickly on sort of the base diagnostic business. 4%, you came off of a 8% comp last year, sequentially much easier. I guess this will probably be the low point for the year. Is that sort of the view on that segment?
I think that's right. We're looking at sort of second quarter 6%, it sort of continues to sort of ramp up from there.
Thanks, Andy.
Thanks, Ross.
Our next question comes from Derik De Bruin. Your line is now open.
Hey, good afternoon. Once again, Andy, it's been a pleasure. Good luck.
Thanks. Yep.
Hey, just to follow up on Ross's question. The core diagnostics organic revenue number, the one that we all sort of, because we're not adding back pro forma organic contributions to EUROIMMUN, it's about 4% on the quarter. Is that what it was?
Yes.
Okay. The 4% number is up that.
The way I would think about that is reproductive health was sort of mid-single. To Ross's point, it was a little bit of a difficult comp in that area. Our infectious disease business, which is basically China and India, was up mid-teens. We saw sort of just a little slight degradation in what we call Applied Genomics. It was really driven by the microfluidics business, which had some difficult comps in the prior year. That can have a tendency to be a little bit cyclical because there's instruments involved. But reproductive was mid-single, infectious disease was mid-teens.
Okay, great. Just two follow-up questions on the diagnostics. I guess, what's the next milestone for Vanadis? The overall, what do you think the genomics business will contribute this year?
The next milestone for Vanadis is clearly getting CE marked. I think as we've said, we're expecting that, I don't know if it'll happen before the end of this quarter, but hopefully by early third quarter. The idea would be to then be able to sell that out in the back half of the year. We don't have huge sort of expectations for that business in the second half, but call it sort of $5 million-$10 million in that type of range. Your second question was with regard to the genetic testing business. Are you talking about with regard to 2018 or longer term? 2018.
2018, since it's a brand new business, right?
Yeah, 2018, we're targeting sort of $8 million-$10 million.
Okay, great. Thank you very much. I'll get back in the queue.
Sure.
Our next question comes from Doug Schenkel. Your line is now open.
All right. Good afternoon. First off, I want to welcome Jamey, I also want to thank Andy for all his hard work and help over the years. Congratulations on moving into the next stage of things. In terms of my questions, just I guess a couple end market questions to start. Following up on the industrial end market commentary and an earlier question, was weakness more pronounced in any specific geography? Would you be willing to comment on bookings in the segment in the quarter and whether or not you've changed your assumption for that end market growth in the context of full year guidance?
First of all, industrial was down about 1%, just to sort of calibrate things a little bit.
Yeah.
It was up around mid-single digits in the Americas. It was sort of flattish in Europe, it was down a little bit in APAC. That was the geographic split, I think I mentioned before, it was probably most pronounced in the chemical, sort of petrochemical, side of the business. Again, I think that was probably just timing of instrument orders. I would say for the year, we think industrial is probably low to mid single-digit growth.
Okay. Super helpful. In terms of the organic outperformance in the quarter, it sounds like generally speaking, life sciences was the key contributor by end market. Is that right? If so, can you talk about whether a big part of this is your new products potentially tracking ahead of plan in terms of their contribution to the quarter?
Yeah. First of all, you're correct. It was life sciences. It was particularly in the pharma and biotech area. Having said that, though, our academic and government was up 6%, which was nice to see. Really, the overperformance came in pharmaceutical, specifically in the service and informatics side of the business. I sort of talked a little bit about that, is some of that was new products. It was ChemDraw, it was the new Signals offering. We are starting to get some nice traction as we think we're somewhat uniquely situated with regard to being able to sort of meet this need that some of the pharmaceutical companies are seeing to sort of what the buzzword is digitization of the lab. It's really trying to make sure that they're getting the right information out of their instruments.
It's a combination of having the ability to provide the sort of OneSource capability, at the same time, some of the analytics and electronic notebook capabilities that we've had historically. That really what drove some of the upside performance in the first quarter.
Okay. Lastly, I guess a similar question on EUROIMMUN. Could you break down how much of the strength in the quarter was a function of, say, new assays, new customers, and I guess those two things versus existing customers increasing utilization?
I don't have the visibility into the customer. What I can tell you, though, is the growth was broad-based geographically, whether you look in China, EMEA, or North America, it was all sort of double digits. I would also say that the growth was pretty broad-based across their sort of diseases. If you look at autoimmune, or if you look at allergy, if you look at infectious disease, they also saw a nice growth. It was pretty, like I said, broad-based, but I couldn't tell you what the split was between new or existing customers.
Okay, got it. Thank you very much.
All right.
Our next question comes from Steve Beuchaw. Your line is now open.
Hi, good afternoon.
Yes, hi, Steve.
I'll certainly go ahead and echo the thanks and congratulations, Andy. Really appreciate everything.
Sure. Thank you.
I wonder, just as we try to tune up our models one last time, if you could give us any more quantification on the impact of EUROIMMUN at the EBIT margin line in the quarter, and maybe some updated thinking on how that progresses over the balance of the year, given the seasonality for EUROIMMUN.
Yeah, as we talked in my prepared remarks, it was around 30 basis points, 20-30 basis points of headwind on the corporation. That will flip as we make progress through the year, and it will ramp through the year. The fourth quarter for EUROIMMUN will be the largest impact. It'll go from, let's say, negative 30 to, I would say something in the 50-75 basis points, as we exit the year.
Perfect. Rob, I wonder if you could take the conversation around Vanadis a couple more steps. Maybe the data that you saw in the "Nature Communications" article weren't particularly surprising to you. They were certainly better than we had even hoped for. How is the data that you've seen so far, and in some of your preliminary conversations, impacting your thinking on how that assay ought to be priced and how big the potential market is, where Vanadis would be a logical fit? Thanks.
I think here, Steve we were pleased to see the success of the study. I think from a pricing standpoint, and I know everybody's been anxious to see that, and we'll have that out soon, is we've said for a long period of time that the purpose of this product is really to replace screening as compared to a diagnostic test. We want to make sure, and again, the goal here is to really go out into the biochemical labs or the labs that are doing biochemical screening today with both a simpler workflow as well as a cost structure that is close to that. Again, stay tuned, but that's our thought process around that. Again, the whole theory here is to make sure that the sensitivity of Vanadis is at least similar to the current NGS assays.
I think we have some arguments as to why we think it's actually better in a number of areas, but we want to make sure at a minimum that it's similar, and the argument is it's easier from a workflow perspective and much more economical. With regard to the market, I think we feel, just as a rough guide, we've said if we can take 15%-20% of the market, we think that's close to $1 billion.
Our next question comes from Dan Arias. Your line is now open.
Good afternoon, guys. Thanks. Rob, on the diagnostic side, can you just add a little color to what you're seeing in the genetic testing expansion? How much of that early business is just due to having the samples in hand and being able to leverage that? Is that something that you're finding is working for you? I know that the thesis going in was kind of that exact idea, just that you would be able to benefit from some of the other business that you're doing.
I think that's part of it, but I would say when you look at the ramp up, it's been not only in the newborn and the ViaCord business, but we are attracting pharmaceutical companies. We are attracting collaborations. I think the reason for that is what we had mentioned before, is that we provide not only the genetic analysis, but we show the protein or biochemical analysis. What we're finding is that's distinctive in the marketplace, and I think that's becoming very attractive to a number of the collaborators and customers.
Okay. Maybe, Andy, if I could just ask you one final question before you go. I guess it would just be, what are you expecting for interest income this year?
I think right now we're looking at net interest income at about $60, just north of $60 million.
Oh, expense.
Expense.
Expense is $60.
Yes, expense. Net interest expense. Net interest income, was that the question? Sorry.
That's right.
That's going to be around $10 million.
Okay, thanks.
I'm sorry.
Net interest income and other.
Our next question comes from William March. Your line is now open.
Guys, how are you?
Good.
On EUROIMMUN, could you just talk a little bit about the U.S. opportunity with it coming off of a small base and saying that it's going to take some time to develop, is that kind of driven by getting approvals of a critical mass of assays or an instrument? Just maybe what are some goalposts to think about for that becoming a more significant contributor?
Yeah, I think that's a piece of it. Part of it is getting the regulatory approvals. I think as we had talked in the past, that was not an area that EUROIMMUN had invested significantly in. I think combined now we have a much more formidable regulatory capability, and I think we've already filed, since the closing, some 18 submissions to the FDA, and I mentioned we're excited about getting two of them out already. That's a big piece of it. I think the other piece of it is just expanding their commercial presence in the U.S. market. I think the sales force within EUROIMMUN was probably 10 people or something, that's just getting, they're sort of opening, helping them open some doors, getting them a little bit more sort of brand recognition out there.
I mentioned the other piece was, we've now transitioned all of their, the service of all their instruments to PerkinElmer. I think that's helpful, from the standpoint of not only cost, but responsiveness to the customer. I think there's a number of components, just increasing awareness. In some of the trade shows, the combined presence of PKI and EUROIMMUN, I think is helpful as well. Branding, presence, regulatory, I think those are the main drivers.
Great. Then on the whole genome servicing business, can you maybe just talk a little bit about that opportunity in terms of the $8 million-$10 million in revenues? You've talked about the collaboration with Helix. As you think about that offering, is it more about trying to drive that as a standalone business or part bundling that with some of your other products and services to try and drive maybe more incremental revenues? Thanks.
It's really both. I think one of the reasons we were sort of comfortable starting this is because we have a bundling opportunity. We've talked about in the past that, as you know, we do the screening for newborn, and very often the confirmatory test is done through sequencing. By us now doing the sequencing, we can do both the screening and the confirmatory. I think that was sort of a natural bundling opportunity that was sort of captive business we could go after. Similarly with ViaCord, we've had a number of customers approach us to see whether or not that was something we could do. We started the business with the understanding that we had sort of some captive business we could go after.
At the same time, we thought that there was an opportunity to go out and get incremental business, and that was some of the things we talked about before, was working with pharmaceutical companies and working with the Helixes of the world, et cetera. We're starting to see that ramp nicely. I think if you look at our $8 million-$10 million of revenue this year, it could be fairly evenly split between both of those opportunities.
Thanks.
Our next question comes from Steve Willoughby with Cleveland Research. Your line is now open.
Hi, good evening. Two questions for you. I guess first, regarding your comments regarding the pharma strength being driven by service and informatics. I was just wondering if you could provide a little bit more color there on whether that's kind of penetrating existing customers more, share gains, or more greenfield opportunity.
In the informatics area, I think it was penetrating new customers. A little bit of, I mentioned we had some new products come out with ChemDraw in particular, and we saw a nice renewal from existing customers. I would say in the informatics, a little bit of both. I would say on the service side, it's probably mostly with existing customers where we continue to expand what we're doing with those customers. Having said that, we do get periodically some nice wins, and one in particular we're ramping up in 2018.
Okay. I think at least one or two times you made the comment regarding building backlog and just trying to see if there's any more color on that related to your other comments, talking about some timing of orders within your more industrial business. I guess a follow-on to that is just some of your newer equipment system products. Was just wondering if there's any comment on how those are doing out of the gate so far?
I would say the timing in the backlog was probably more in reference to some of the markets that were a little slower in the quarter, most notably the industrial. I would also say food, as we talked about, was mid-single. I think as we sort of look out for the year, I think that'll be a little bit better than that. I would say the third area was, I mentioned in our core diagnostic business that our Applied Genomics business was actually down a little bit. I think for the year that's probably going to be a high single, low double-digit grower. That's where we saw some pretty good bookings in the first quarter, and we think that'll build through the year.
Great. Thanks very much.
Okay.
Our next question comes from Brandon Couillard with Jefferies. Your line is now open.
Thanks. Good afternoon.
Good afternoon.
Quick one for you, Andy. In terms of the recent EUR 300 million note offering, are you assuming that you're not paying down any incremental debt with that? Otherwise, I think there would've been some benefit to the net interest expense outlook for the year. Secondly, the CapEx spike in the first quarter, was some of that EUROIMMUN timing related, and what should we pencil in for the full year?
Well, there's two things going on. One is, we did pay down the revolver. The net impact on interest expense is offset by FX. There really wasn't much savings. As far as capital is concerned, a little bit of that is timing. We have a couple of fairly big initiatives that we started at the beginning of this year. I think that will normalize. Some of EUROIMMUN's capital hit in the first quarter. I think we still feel like that we're going to be within our guidelines on capital for the year. As a result, we still think we can get to 365. It's really mainly timing.
Great. Thanks.
Our next question comes from Bill Quirk. Your line is now open.
Great. Thanks. Good afternoon, everybody. First question, just thinking, Andy, about some of the comments you made around EUROIMMUN's European or euro-denominated cost base and revenue exposure in China. Have you guys considered at all moving some manufacturing to China, not unlike what you're doing with some of the DAS businesses?
Yeah, absolutely. EUROIMMUN had already been working on that, so they are in the process of finalizing a fairly large facility in Tianjin. Similar to our approach, which is to continue to ramp up manufacturing in China and sort of make products in China for China. That'll probably come online later this year, but because with the regulatory approval, we probably won't see a lot of revenue from that factory probably till 2019. That's exactly what we're trying to do, is to sort of shift some of those euro-based costs to Chinese yuan base.
Okay, perfect. Thanks, Rob. Secondly, just staying in EUROIMMUN for a moment, you talked about a number of regulatory approvals in the U.S. to try to expand the portfolio here. Can you help us think a little bit about, should we expect a fairly even metering of assays over the coming, call it three years? Are you trying to push a bolus out here in 2018? Just trying to get a sense, both from an R&D spend as well as how we should think about that U.S. franchise growth.
Well, I think there's initially a little bolus because quite frankly, there was a little of pent-up demand, if you will. We've been working hard to try and get those out as quickly as possible, and I think I mentioned we've filed some 18 or so in the last three months. I don't know that we'll see that type of pace going forward. Having said that, it's a little difficult, as you can appreciate, sort of determining how they hit the market because we're dependent on the FDA regulatory approval, which seems to be getting better, but we'll just have to wait and see. Clearly there was a much larger amount in the first quarter, but we hope it to be sort of a steady pace, but probably not at the level you saw in the last 90 days.
Okay, got it. Thank you.
Our next question comes from Dan Leonard. Your line is now open.
Thank you. Rob, can you update us on your thinking around portfolio pruning? Is there anything we should expect in the scope of 2018?
I don't think there's going to be anything of significance. We talked a little bit about pruning some things within DAS, I think we'll continue to look at those, I don't know that there'll be that material. If I had to give you a number, could it be $50? Could it be $75 million? It could be something like that, I don't know that it's going to be significant.
Secondly, on Vanadis, can you comment on what the publication waterfall looks like through the balance of the year? Are you expecting further papers, and what would the cadence look like?
I think there's two that are sort of in the works right now that we would hope to see in the next, again, this is a little difficult to predict, but probably in the next 60 days or so. I think there's a number that we expect to come out sort of latter in the year.
Okay.
Maybe in the course of 2018, we'll see three or four.
Great. Thank you.
Okay.
Okay, our next question comes from Jack Meehan. Your line is now open.
Thanks. This is actually Mitch Peterson on for Jack this afternoon. On the newborn screening business, could you just elaborate on what you're seeing in terms of birthrates, and then how test utilization is trending in some of the EM regions?
First of all, I would say the newborn business continues to do pretty well, it's not because of birthrates. It's because we continue to make either expansion of menus or expansion of penetration. If you look in the U.S., I think birthrates are probably trending down 1 point-1.5 points. If you look in China, for 2017 they were down, we would say sort of 3%. In fact, you may have seen the article in the journal today, and there was a recent article in The Economist that talks about the challenge that China has right now with their growth targets as their birthrates have sort of been suppressed here a little bit. That's something that obviously is a bigger issue than just newborn screening. The growth in the newborn business right now is not being driven by birthrates globally.
Like I said, on the other aspects of it.
Helpful. On tuck-in M&A, could you just elaborate on some of the areas where you would potentially like to add to the portfolio? Thanks.
I would go back and reinforce the areas that we've talked about, the sort of strategic priorities for growth. When we look across the diagnostic businesses, continuing to build out our capabilities in emerging markets is obviously something that's interesting to us. I think our Applied Genomics area is an area where we think there's significant opportunity to expand our capabilities. I would sort of spike those two out. In the DAS area, clearly in the pharma services area, where I think we've built a nice portfolio. Food, we believe is very attractive, and combined with the fact that it's a fairly fragmented industry, I think provides a lot of opportunities for us. I would say in the analytical instrument area, anything that could sort of build out our consumable revenue would be something we would be very interested in.
Thank you.
That concludes our question and answer session. I would now like to turn the call back over to Robert Friel for any further remarks.
First of all, appreciate and thanks for all your questions. In closing, let me just reinforce that we're all excited about the opportunities moving ahead and confident in the terrific team of employees around the world who are committed to not only driving our mission, but creating even greater value for our shareholders. Thank you for your interest in PerkinElmer, and have a great evening.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.