Q3 2020 PerkinElmer Inc Earnings Call

Fishermen are your line is your conference call will begin momentarily. Thank you for your patience.

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At this time all participants are in listen only mode. After <unk>.

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This time I would like to turn the conference over to Mr., Brian <unk>, Vice President of Investor Relations. Sir Please begin.

Thank you operator, good afternoon, and welcome to the Perkinelmer third quarter 2020 earnings Conference call with me on the call are per lot thing, President and Chief Executive Officer, and Jamie mock senior.

Vice President and Chief Financial Officer.

If you have not received a copy of our earnings press release, you may get one from the Investor section of our website at Www Dot Perkinelmer Dot com.

Please note this call is being webcast live and will be archived on our website until November 11 2020.

Before we begin.

Need to remind everyone of the safe Harbor statements that Weve outlined in our earnings press release issued earlier. This afternoon and also those in our SEC filings.

Statements or comments made on this call may be forward looking statements, which may include but are not necessarily limited to financial projections or other statements of the company's plans objectives expectations or intentions.

These matters involve certain risks and uncertainties.

The Companys actual results may differ significantly from those projected or suggested by any forward looking statements due to a variety of factors, which are outlined in detail in our SEC filings.

Any forward looking statements made today represent our views only as of today, we disclaim any obligation to update forward looking statements in the future even if our steep even if our estimates change. So you should not rely on any of today's forward looking statements as representing our views as of any other date after today.

During this call we will refer 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 attach.

Matt we will provide reconciliations promptly.

I'm now pleased to introduce the president and Chief Executive Officer of Perkinelmer a lot. Thanks a lot.

Thank you, Brian and good afternoon, everyone.

I've heard been calls and employees.

I need to go above and beyond.

Our year to date results for the reinforced our geology.

As I have previously mentioned improving lives in our organization's DNA it.

It is worth impressions RPM.

I mean, how boot barn and immensely proud.

Hi, everyone within Perkinelmer has rallied together to out 2020.

Why is the guiding principles that we outlined at the onset of fundamentals remain or not star.

Keeping our employees on company sales.

Utilizing our expansive capabilities to join in the fight against Gold 19.

Solving our customers' excellence during this difficult period.

Earn emerge from this crisis as a stronger company.

We are also actively positioning the organization for what the postcode 19, what it might look like.

Yeah, and vitamin will undoubtedly be different from the future, we imagined a year ago.

Over the past 12 months, we have expanded into market adjacencies been new business lines and dramatically enhance our commercial relationships.

Due to our resiliency responsiveness and agility as an organization. We are moving ahead from a position of strength.

I could not be more confident that we as an organization I headed in that I detection and positioned to tackle the challenges of tomorrow.

Why did you not even sure the beaters all financial results overall, we once again delivered strong financial results in the <unk>.

Revenue of $964 million, you, 44% organically.

Driven by our corporate related sales, which contributed $288 million and the 6% decline, but then on Noncovered portfolio.

There's not far surpassed the guidance communicated during our second quarter earnings call.

Moral work, we achieved significant profitability during the current quarter.

Adjusted operating margins of nearly 32 person expanded approximately a cows in basis points Yodle what are your.

Uh-huh watermark for the company and outstripping last quarters multi decade high.

Our adjusted earnings per share almost doubled and adjusted free cash flow grew 100% compared to the third quarter of 29.

Uh-huh beacon reinforced through all 2020.

Walking them or are all core leads with funds.

Well go to discover novel product introductions unique my pad development automating workflows, Oh publishing impactful research.

Leading with science is a fundamental part of our history and success.

Our teams are constantly thinking about how we can narrow the chosen between experimentation to discovery to real world insights he.

It is a reality that resonates with our customers and it is something that I'm personally passionate about and I view as it ever do culture <unk> ideology and the next chapter of the Balkan and most story.

Good good good solutions for example.

You don't extensively over the past few months about how leading with science has propelled our efforts to help combat the pandemic.

Last month.

Yes, you are booking Mers Sars school due to us as number one out of somebody six best syndrome, so lowest limit of detection.

If you recall even.

We were not forced to markedly the PCR assay in February.

Why speeders, often important and innovation our goal was never to launch a person ask quickly as possible to be in the corporate Dustin conversation.

Our aim was to double up pretty hard quality test that can and will address the needs of our customers and help how or why does come back to growing pandemic.

Over the past few months the clinical community has begun to recognize that not all <unk> are created equal.

And Ah this shift has occurred booking of him or her story certainly stood out.

Additionally, over the past year Yep consciously made and therefore to significantly increase the velocity of studies led by poking around muddied members.

Accepted a published and reputable scientific journals.

It is an important metric that we are beginning to talk more frequently as we continue to shift our focus to the future.

We have to work done studies, except Oh published during the quarter and there are several additional Antonio next on new studies find for the fourth quarter.

A decade ago. It was there to see a life Sciences dues company published cutting edge research and leading scientific journals.

Studies were almost entirely done in the academic foremost setting however.

However, today those lines are increasingly blurry.

We'll go first to covert related product and more than 20, non corporate related products launched your today as.

That's right and more than a dozen new products prime for commercialization during the fourth quarter.

Our new product pipeline is certainly the richest I've experienced in my career.

To just give you a sense of the kind of breakthrough innovations we are focused on.

During the current quarter I honestly screening assay received CE Ivy de Abreu.

This assay simultaneously best of all newborns.

<unk> spinal muscular atrophy that's for me.

Severe combined immuno deficiency scared.

An excellent he gamma globally Menier exelate in one multiplex RT Pcr assay.

The combination of DNA extraction multiplexing and automation allows for a maximum efficiency vote flow why not increasing the daily hands on work and complexity.

Driven by recent advances in treatment skid innocently increasingly being included in mandated screening partners around the world.

Bringing this asset to this point once a multi year process.

We hope it will have a positive impact on improving the quality of life for patients afflicted with these three debilitating genetic disorders.

In terms of coverage related new product launches and approvals.

We were pleased to recently received CE, marking for a multi analyte become respiratory Sars go do RT PCR panel.

Well be deterred detection of Golden 19, influenza, a influenza b and respiratory since the deal virus RSV.

In a single test head off the upcoming fall flu season.

Commercially the traction book in the <unk> is making the academy institutions healthcare systems.

When it comes to the border trees governments and other key partners across industries also positions us well for the future.

Our yard to go walking on mobile is a nascent bleed into molecular diagnostics industry.

However over the past nine months, you have more than tripled our installed base and nucleic acid extraction instruments.

Oh, what a thousand instruments worldwide and.

And huh added hundreds of high throughput liquid handlers.

Our sizable installed base.

We are taking share in the magnetic beat on the extraction market. That's a high binding affinity magnetic beat technology.

That's become recognized as the best in class solution for auditing extraction, and blood and saliva samples.

Oh earlier this week.

Visited the state of California, New lab in Valencia.

The spoken on my has fully outfitted as one off off lobbing lab offerings.

And running a full sample sample to answer Golden 19 destined work flow to support expanded testing locally.

In a matter of eight weeks since signing the contract we set up a fully accredited lab and not ready to process up to 40000 samples per day starting November one.

It is an impressive feat that was only made possible by the sacrifices made by our employees from various departments.

In partnership with the state of California, as well as various Exterran partners.

To give you some perspective in a normal environment this whole process Greg.

Breaking ground <unk> accreditation typically would have taken 12 to 18 months.

And in the United Kingdom are forced Stonepeak lighthouse lab began running samples earlier this month.

Spotter for unique collaboration the department of health and social care.

Why not think it is important to reinforce that we do not intend to proactively expand our clinical aboard be presence.

Beyond our peak gold its goal in a post golden born.

Breadth of capabilities and expertise puts us in a unique position to help our partners during a time of extreme.

We are living in an exceptional times and we believe that it is argued to help combat this brendan make any baby care.

Well it has certainly been a challenging year for many of us on multiple fronts.

I personally find myself, reflecting on how proud I am to be walking that booking elemer.

From top to bottom organization, especially about helping people.

We want to be part of the solution in this ever changing world.

As I've said before it is personally for Oh.

Last month, our employees around the world participated in fucking on most annual impact day.

Special day on which we volume to get in the communities, where we live and work.

Although the base to be volunteered very different this year due to the pandemic.

Our goal remains the same to make a difference in communities across the globe.

From collecting trash and donating blood to planting trees and hosting what's your glasses for children in rural areas.

Out in fact, most folks globally.

I also want to take a moment to update people on us TSR efforts.

Why do we just released our latest CSR reporting and this past June.

We are already consolidating data for our next CSR update.

Our teams are currently salveen stakeholder groups, including employees customers suppliers and investors.

To ensure that the CSR priorities, we put in place on in line with all of our stakeholders interests and concerns.

As we expand the redness throughout our markets and geographies around who booked another <unk> is.

And what we stand for.

We hope that customers and partners will increasingly want to align with booking number.

Because of the kind of company VR.

We do what we say stand for what is right and what People's lives for us.

With our own employees or the millions of people around the world, who will be indirectly impact every day.

In closing I read today, that's why in the future is complex and the new normal means living bed and learning to go the challenges.

From an individual.

Business and global perspective it.

It is also filled with new possibilities and the chance for science and community to make a difference.

Through new scientific innovations both the ones, we can develop ourselves must the ones, we can generate through partnerships and collaborations.

We will continue to drive impactful solutions.

Well, that's the most important challenges on the planet.

And with the community off our employees customers and partners working together.

Even make the seemingly unbelievable happen.

We have already seen glimpses of this as the old rose to the location during the pandemic.

But that is much more we can do as we move into 2021 and beyond.

I'm inspired humbled.

And ready for the final quarter of the year and already gearing up to continue making an impact in the quarter that funnel.

I'll now turn the call over to Jamie.

Thanks, a lot and good evening, everyone to start I Echo prologue I could not be prouder of our team and more confident that perkinelmer is well positioned in a 2021 and beyond.

The past year, we have launched dozens of new products built significant brand equity with our partners Foster new customer relationships and expanded our presence in multiple markets and our organization is not slowing down.

We're all laser focused on the opportunities in front of us and truly excited about the future.

Point, we plan to host a virtual life Sciences deep dive for the investment community on December nine we.

We have teed up exciting topics for this session, where we will walk through our discovery informatics and enterprise businesses.

Additional information on the event specifics will be communicated in the coming weeks.

Before I begin discussing our financial results I want to remind people that our third quarter earnings call presentation has been posted on the investors section of our website under financial information.

As always I will begin my prepared remarks by highlighting the third quarter.

Then I'll provide some additional color on our served end markets and financial metrics and I will end with fourth quarter guidance.

A high level, we are extremely pleased with our third quarter and year to date results.

The organization continues to execute well.

As expected customer engagement and business activity improved sequentially versus the second quarter. During the third quarter revenue grew 36% to $964 million compared to the third quarter last year.

Included 1% foreign exchange and 1% net acquisition Tailwinds.

Organic revenue increased 34%, which is 1% better than what we had previously communicated.

That's a lot of mentioned earlier overall kobin related products contributed $288 million in the quarter prepay.

Propel primarily by our PCR tests and aren't extraction solutions with each contributing in excess of $100 million during the third quarter.

In total we have help serve over 1000 customers in their fight against Kobe 19, since the onset of the pandemic a milestone we are all certainly proud of.

Hi business diagnostics, representing 56% of total sales increased 92% organically.

Strengthen our immuno diagnostics and applied genomics businesses more than offset ongoing modest declines in our reproductive health franchise.

Discovery and analytical solutions, representing 44% of total sales declined 3% organically a.

Strengthen our life Sciences business was more than offset by pressures in food and applied markets.

We were pleased to see all death end markets performing better than originally anticipated header headed into the quarter.

On a geographic basis, both Americas and Europe grew strong double digits in Asia Pacific grew mid single digits.

China remained in negative territory as non coated diagnostic trends continued to be adversely impacted by birthrates and safety measures in place to fight the pandemic.

Operationally, we are extremely pleased with our performance this quarter.

Adjusted operating margins expanded approximately 1000 basis points to 31.6%.

By volume leverage business mix and productivity programs.

Adjusted earnings per share up $2.09 in the third quarter increased 97% versus the third quarter of 2019.

Looking further into the key drivers within our segments, let's start with our diagnostics business.

As mentioned in my earlier remarks, organic revenue increased 92% as robust growth in Europe, and the Americas drove the momentum with both regions more than doubling on an organic basis compared to the third quarter of last year.

Our applied genomics business led the way posting over 360% growth on broad based momentum across all geographies with strengthen our nucleic acid extraction and liquid handling product lines.

Nucleic acid extraction, and automated liquid handling through 17 times and six six times, respectively versus the third quarter of 2019.

Both have gained share and position our applied genomics business well to expand into a broader molecular testing in a post cobrand world.

Meanwhile, immuno diagnostics growth increased over 90% with your own million growing high single digits.

Demand for our portfolio RT PCR assays was particularly strong across the globe, while surajit demand declined sequentially as expected.

Reproductive health declined mid single digits organically, driven by lower newborn and prenatal testing in Europe and Asia Pacific.

Americas increased mid single digits, while Asia Pacific and Europe declined double digits.

Newborn utilization rates rebounded to prior year levels in North America, and Western Europe, while China rates continued to be impacted by birth rate declines and COVID-19 related safety measures.

Early indications are that year to date birth rates are down high single to low double digits worldwide.

Turning to discovery and analytical solutions organic revenue declined 3% in the third quarter versus the same period last year.

By end market, we experienced mid single digit organic revenue growth in life Sciences.

I'm, a biotech was up mid single digits, driven by strength in informatics and enterprise services.

Academic and government declined high single digits, a 10% sequential improvement.

And discovery reagent utilization improved to positive organic growth pointing to increased reopening activity for benchtop researchers.

We estimate that pharma biotech activity is approximately 90% to 100% back to normal.

An academic and government is not far behind at approximately 80% to 90%.

Applied markets declined approximately 10% with Americas, and Europe experiencing double digit declines as funding delays continue to impact demand.

Food declined over 20% in the quarter, however, excluding cannabis, which was a strong contributor during the third quarter last year food declined 9%.

Improving sequentially from down 14% in the second quarter.

Pardon grew high single digits as midstream food processing companies made investments to enhance productivity by upgrading inline solutions.

Meanwhile, industrial environmental safety declined high single digits.

All regions improved sequentially by more than 5% led by the Americas and Asia Asia Pacific.

While Europe declined double digits.

Trends were consistent exiting the quarter and we currently do not anticipate any material budget flush in the fourth quarter.

Shifting to below the line items net interest and other expense for the third quarter was approximately $14 million and our adjusted tax rate was 19%.

Turning to the balance sheet, we finished the quarter with approximately $1.9 billion of debt and $258 million of cash free.

Free cash flow was $191 million in the quarter we.

We achieved an adjusted free cash flow conversion of 82%.

Finally, we exited the quarter with a net debt to adjusted EBITDA ratio of approximately 1.8 times down over one full turn since the beginning of the year.

Closing the books in the first nine months of 2020, we are extremely pleased with our performance, including 16% organic growth 50.

57% adjusted earnings per share growth.

And over 180% adjusted free cash flow growth all compared to the first three quarters of last year.

Year to date adjusted free cash flow conversion was 74% up from 42% from the comparable period last year.

The Dsos reduction has been a function of improved monthly linearity process improvements and co bid related demand.

Overall, we are encouraged by our year to date progress and anticipate 2020, adjusted free cash flow conversion of at least 75% excluding potential, California, COVID-19 related milestone payments.

Turning to the fourth quarter guidance, we are forecasting reported revenue of $1.12 billion to $1.23 billion.

Presenting 37% to 52% organic revenue growth.

Including a 2% benefit from foreign exchange.

Embedded in this guidance is $350 million to $450 million of cobot related revenue, representing approximately 43% to 56% growth.

And an organic demand decline of 4% to 6% from our non coated product lines.

In terms of adjusted earnings per share guidance for the quarter, we are forecasting a range of $2 and $63.

We are assuming a 21% tax rate due to increased profits in higher tax rate jurisdictions. All of this is detailed in the second to last page of our third quarter earnings presentation.

For the full year, we now anticipate a negligible foreign exchange headwind.

Approximately $47 million in adjusted interest and other expenses the tax rate of 20% and our share count to average 112 million.

In closing Perkinelmer has made significant progress over the past year to better position on the organization for the future.

We are excited for what is ahead and how we will better serve our customers. We are operating from a strong foundation and I have no doubt the coming years will be even more fruitful for all of our stakeholders. Operator at this time, we would like to open the call to questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue simply press the pound key.

In an effort to accommodate as many questions participants questions as possible. We ask that you. Please limit yourself to one question and one follow up.

Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

Our first question or comment comes from the line of VJ Kumar from Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question, maybe one not quick one on the guidance and now I had a a follow up on a big picture question.

Turning to about Q4.

One no JV at the time.

52 fourth if he doesn't have any California contract take then when you look at the base business. So why is the guidance you I mean, a mid single decline. So maybe parse out because I guess, so if you are seeing flattish to perhaps positive on the base business.

Yeah, Thanks, VJ and hope you're doing well so generally speaking I'd say, we're taking a similar approach entering the fourth quarter as we did when we entered the third quarter. We've looked at order trends, we looked at our backlog, which has grown versus when we entered the third quarter and we feel very comfortable with our guidance you know kind of break it down noncovered versus cobot.

So non coated we are seeing the market improve and but the exit rates are not quite as fast as they accelerated at the end of the second quarter. However, if they continue we think we'll be at the high end and if they don't continue or if something happens it will be at the low end.

It's also worth noting VJ that in the fourth quarter of 2019, we had two very material product lines go for US cannabis was quite substantial in the fourth quarter. However, assuming no cannabis revenue in the fourth quarter of 2020 as well as informatics was substantial in the fourth quarter last year. So if you exclude those two.

We think we'd probably be better by three by three points. So instead of down 4% to 6%, we'd probably be down 1% to 3%.

So daft came in minus 3% and the third quarter. It will probably be in the same vicinity due to those comps. However, if you exclude those comps das would be positive in the fourth quarter, and then diagnostics ex Covidien revenue is down 11, or 12% and we've seen it start to uptick over the last few months and so we are assuming that that will be down.

Hi single digits, so that kind of explains non covered it is closer to the low minus low single digits, but we have those two cops.

I'm a kobin standpoint, you ask the question specifically on California, Yes. It is in the number at about 50 to 75 million. The way we derived a 350 to 450 million is the base business was 288 million in the third quarter were assuming the base business is mostly in that range call. It to 50 to 300 million.

And then we're adding an extra 50 to 75 million for each of the California labs, and the UK labs, which overall gets you to the 350 to 450.

I think all of this is worth noting that none of this assumes any significant block down obviously covis positivity rates are going up across the world and right. Now we are not planning on any significant locked down in any of this guidance should they happen it could have material upside to our cobot revenue and material downside to our noncovered.

Revenue, but in general that's how we kind of thought about the guidance VJ.

That's extremely helpful. Jim and then one not big one for us for a lot I think of some of the comments you're making as you look forward of course next chapter here and the Perkins story, I guess I'm curious for a lot because.

Looking at some of these numbers right at 100% growth and earnings.

I'm in some of these numbers for astronomical.

But the market isn't giving you guys to try to persuade the stock hasn't acted well then and then the biggest question here a sustainability.

Are these colored revenue is going to become headwinds for next year, maybe talk about sustainable at a one that you know from a base.

You know call it perspective, and when you think about the so the incremental cash flows.

No that's come to for the company and wait to your point working with not a player in molecular 12 months ago.

What is the right way to think about capital deployment and does it strengthen your position in the diagnostics space. Thank you.

Thats very good question rich or I mean, I think the way I would look at that you know obviously, we have been giving a lot of thought to it then you know over the past few months, but I personally have focus my attention on and maybe that was sort of throw some light into how we are thinking offering right now as I talked about.

The team has been focused on the T. guiding principle, it's extremely vote that allows me to focus most of my efforts on positioning the company for the future and we've sort of I'm looking at it from three primary areas number one innovation I mean looking at opportunities across the organized.

Station, both on covered and non covered but fundamentally driving innovation in a very different way and key areas that time, focusing on and be I acceleration focus on quality and disruptive ideas and this is where we are having the regular reviews deep dives and what the cadence.

So npis will be over the next two to three years and what I can tell you confidently that it would be no doubt very strong.

Lots of exciting things that VR building upon the strength that we have now the muscle that we have exercised through corporate be need to now expand that into new and adjacent markets.

The second one around capital deployment right if you're in a great position, we have firepower now and over the past year. We have gained share an expanded our presence in new markets as we as you mentioned around molecular diagnostics.

So we are actively looking to deploy this capital to further bolster both on the diagnostics side and on the life Sciences franchises. So that we can live with additional capabilities that enhance is cutting positions and in the markets.

Let me give you an example, right.

In a as we look at you know from a disease target characterized station, we have a leading position the hype on thin screeners and Nvvault imagers.

So this election, then separation tools would go hand in hand, with the imaging and detection capability that we have that would allow researchers to investigate which says have changed in the population versus the subset of 11.

So in addition to be stewards around sell detection separation no manipulation in natural adjacency for US. That's an example that we would continue to boost our efforts around capital deployment and the last one is on the people who fund I have been focused on building an organization that has.

The diverse talent and B bench than you know last year. If you recall, we combined our commercial teams from Das Mdx, the United R&D now our focus is how do we take these opportunities, but then commercials.

And bring that under one umbrella how do we focus on the alliances and partnerships that we have built across the globe because of corporate.

So those are the three focus areas up front, but we have that I personally I'm, putting my attention on and that's why we feel confident about the future.

That's helpful guys. Thank you I think that the only thing you misstep, along with adding Neviah single.

Ahead of fat in a sales separation in now and detection, perhaps that's probably worth another 5 billion to market cap. Thanks, guys.

Thank you.

Our next question or comment comes from the line of Dan Arias from Stifel. Your line is open.

Good afternoon, guys. Thank the appropriate I wanted to sort of follow on on some of those ideas that you were talking about and kind of hit on Bee Jay's point on sustainability.

Just on the topline maybe starting with diagnostics you highlighted a couple of times is being in good shape in a postcode world can you talk to some of the early thoughts that you think you might have on how you could look in 2021. When do you think about the non cobot portions of that segment and how they are expected to drive growth, what's your expectation on a recovery.

Dx again outside of coated and on the Rep reproductive health side, leaving birthrates aside and what that brings how do you feel about accelerating growth on the back of some of these initiatives that you have there and I guess ultimately where is your confidence in diagnostics being a double digit organic growing segment once we move pass.

Ask the covert period and get into sort of normalized period.

Yeah, No great question, Dan and you know, let's start to let's start with the reproductive how tight as you said you know we don't expect the current budgetary pressures to be a headwind of this magnitude for the foreseeable future. As you know we expect that this will moderate at some point does conditions normalize but outside of that just like I guess.

Gave you. The example of high on this during my you know my prepared remarks that is a particular segment read we can bring that product portfolio into the molecular diagnostics study now because it uses the same work flow that is currently being used for cold. It right. You use the same PCR use the same liquid handling and use the same extent.

And components that are already in place now at all these installed base and as we look forward to the menu expansion I found the reproductive health than most of the new disorders that are either being looked at our heart off from the rest panel as an example, DMD SMH there at all.

Let killer base. So again, you know b b the methodology or the technology is moving away from you know asset to molecular diagnostics, which sort of matches better would be new and expanded installed base that you have put together across the globe.

Similarly, as we look on the immune cell and immuno assay side. There are several other new immuno diagnostic assays that we are either working on in house or also looking at inorganic opportunities.

Now moving on to the auto immune and allergy side that comes from the you to immune portfolio right auto.

Auto immunity as I've said the rate of detection auto immune diseases is not slowing down and we have started already seeing signs of recovery of that even in China.

And I think we've continued to expand that portfolio by bringing in a new Oh, you know platform that you thought that you have named et centers and that should be out probably sometime in the next year.

I'd been continuing to add to that portfolio is going to be an important factor for our growth. The one place maybe we'll see some pressure in the short term is it on allergies and that's just because you know people are being very productive wearing masks and that's the portfolio that we see a fresher.

So sort of Davita surveys that we are looking at expanding our portfolio around the installed base that we've already begun to David about extraction portfolio Dan.

Okay. That's helpful I'm a bit of explanation there.

Maybe just kind of sticking with a similar idea I mean, it sounds like one of the hopes that you have is that the awareness and the mind share you're creating in areas like sample prep and genomics is going to sort of elevate the business for the longer term are you seeing signs.

On you know strategic partnership opportunities or longer term deals that make you think that that's going to happen then you'll see some stickiness with what you're selling now during a time when lads quite honestly are buying because they can get it but once things calm down and there are multiple options you'll be the choice that they go to.

Yeah. I mean, you know do you have put more than 80000 units that have been installed and now you know while these labs are focused on gold it there.

They're also aware that look we have put this infrastructure in place now we've got to be able to put plans in place to leverage this installed base and competencies that we have set up a you know beyond cobot. So absolutely you know you know the partnerships those that we have announced and several that we have.

None to announce.

Those customers are already discussing with us hey, what else can be put through this what else can be put through this work flow and you know and again in fact this is gone to an extent that you know in Ah Jamie's team, we have not establishing a function that on alliances and partnerships that will be focused solely on the.

Is that sort of taking this forward.

Okay. Thanks, a lot appreciate it.

Thank you. Our next question or comment comes from the line of Derik de Bruin from Bank of America. Your line is open.

Hi, good afternoon.

Hey.

Can we can we talk a little bit about.

Sort of how you're thinking about I mean, I know, it's early and there is a lot of moving parts can we think about just a rebound in the core.

Business.

In 21 in particular on the gas side, I mean, I think Dan.

Took care of the diagnostics sites are thinking about everybody talking about the Djs side and.

Just sort of thinking about what you think is pent up demand. What do you think is potential for bounce back on that one I just I'm just trying to get a sense for how much of the core business, we should sort of modeling for a rebound for next year.

Yeah, sure Hey, Dan I hope, you're doing well so I mean, I think we're a in general coming off fairly reasonable comps. This year to start with I think life Sciences, we've seen a continued uptick throughout the year I mentioned in my prepared remarks that the discovery business is now positive and I think.

We will continue to see that moving forward here.

Informatics, we think is still a strong grower heading into 2021, one source. So the life Sciences business, we expect.

You should have relatively easy comps and be as you know, we're starting to see the spending and that probably 55% to 60% of the das business. So feel good about that.

Food, we will not have the cannabis issue year over year. So cannabis in 2018, if you remember 2019, I guess, if you remember it was 25 mission million dollars and this year. Its next to nothing so we will not have that comp issue and in fact.

Depending upon where the election goes and where it's you know funding levels are that might start to rebound again and in addition, food and if it starts to open up a little bit you know its hard to understand what will happen with processors in restaurants and whatnot, but at least we will have already kind of lived through.

Really the significant shutdown.

And then industrial environmental has been relatively stable and steady I don't anticipate a big snap back or whatnot, but I think you've got life sciences. It should be an easy comp, but I think life Sciences has a an easy comp and should be growing nicely, particularly informatics.

Food will not have a difficult comp anymore and should start to uptick industrial environmental as well. The other thing I'd say on das in general as we do have a fair amount of Npis. So provide mentioned it earlier he's.

And holding weekly reviews with all of our segment leaders, we are taking our R&D, it's up 10% in the third quarter. We plan to further up ticket in the fourth quarter. So there is a cadence of improved npis coming out that should bode well in 2021 and beyond for the Das business.

No just to address started bonds on the life Sciences side direct we've started seeing some increased investments from governments on cdcs at on the life Sciences research looking at viral type of immune responses. So I think that will also bode well for the life Sciences business on the research side.

Got it and.

And.

Thinking about.

The you know it's interesting comment I mean, you'd be in one of your competitors any aren't extraction spaces sort of lamenting. The fact that automated sample extraction is had to put in it and we haven't for them. It seems like you're certainly benefiting from that when can you sort of talk about the dynamics that market and also just how you're sort of thinking.

About the evolution of you.

There's more people going to like he lay by all sample perhaps in R&D extraction free so I only did it through like how do you <unk>. Once again it goes to the sustainability question it'd be Jay was asking about how do you sort of think about your own extraction business going and market share shifts and things of that nature.

You know the way I would look at it there is that there are three parameters that our customers look for and that is what is important getting a higher extraction, you're having an easy work flow at a lower cost.

And I think what gold it has definitely moved from our customers base. You know I mean, if you just got to do is look at the numbers over the past two quarters is that what we are able to provide with our product portfolio is that I you know the extraction to use that they want that I work flow that they want to cross that they want.

But more importantly, I think what becomes more relevant is that as we move beyond cobot.

They believe me there will be a need for continued surveillance into the future.

And that's why the speaking this all this installed base is going to be very relevant and important goal with my goal. Then we can debate the cows come home, whether it goes in three months or six months or nine months, but the surveillance off infectious diseases like gold. It is here to stay and.

I think that's where the stickiness of our installed base that gives us the confidence of the stickiness at online installed base.

Right great. Thank you I'll jump back in the queue.

Thank you. Our next question or comment comes from the line of Tyco Peterson from JP Morgan Your line is open.

Hey, Thanks, I'm going to take the other side and actually ask on some of the covert tailwinds and maybe start with the the two laps, California in the UK I know you talked about 40000 samples to start in California can you just remind us where those could go from a capacity standpoint, I think I read, California ticket up 250000 tests I'm, just trying to think for a little bit into 20.

21, and then separately on the respiratory multi analyte respiratory panel how much of the volume you think goes to that versus the Standalone PCR test and then when do you think Ah also surajit starts to pick up again.

Yeah, so the you're right Tyco and I'd be the capability of the California lab could go up to 150000 and I think we will be ready next week in fact very would be up to a startup to building up to get past capacity Opex because 40000 40000.

Thank you know the state we're working with them by the end of the quarter it might be something like 80000, and then in the first quarter be ready for 150000 at some point during the first quarter and their own FLUEPAC Tyco as you as you know we've started we've gotten CE Mark we are awaiting FDA approval, you know and once we have that I think what we have not.

Yes, part part through it depends to a large extent on how this state decides on which segments go under the FLUEPAC and which ones go under a pure RT PCR test there might be you know schools kids our school populations, our health care populations that might go into flew back.

But as the others might go into RT, PCR and I think that the capability has been set up that we can divvy. It up but then the labs and have different work flow for the two tests, but but that the the proportion of that is yet to be determined.

Okay, and then on strategy when it when do you think that start to pick up again is that kind of the next year or what's what's your outlook. There I think it probably is up I mean for.

First quarter sometime in the first quarter as the vaccines I start picking up in fact, I think that's the serology trend the start picking up along with the vaccine efforts cycle.

Okay, and then shifting gears here I think the only company we've heard from so far that's still negative in China can you just and obviously your leverage birth rates and other factors there, but can you just talk all when you think China may we're trying to grow three.

Yeah, I mean, I think if you even if even as we look at China now you know while it has been a pressured for US there are two things to think off right. One you have a stronger bx diagnostics visionchina send us and in that again auto immune and as I mentioned respiratory.

Those have been the ones that have seen impact, but we have started seeing flow through now in China from our distributors. So as we see fall and as we look forward our distributor.

The flow through our sales grew from our distributors has continued to increase so I would say you know that as we look into this quarter and next quarter, but continues to improve and to continue to improve yeah I agree and then on the das side.

Well I mean, we've already seen life Sciences turn positive in China, food and applied has been kind of down low single to mid single. So I would anticipate by the first quarter of next year that with easier comps and continued uptick and we have seen an uptick, particularly in industrial and environmental that it has steadily grown throughout.

The year that I think we turned positive in das and diagnostics will be influenced by the things that bill talked about but birthrates, obviously matter.

Allergy is a bigger share in China, a four year old Munich, and if everybody's wearing masks theres, a little less allergy uptake, there, but that should turn positive and.

You know diagnostics, we'll see.

But the long term and then last one.

And then just last on the Das operating margins you flag pulling forward some investments ASE should we think about those margins to continue to be under some pressure as you're you're investing.

The das business and are there particular areas you can call out I guess you call that cellular analysis earlier is that kind of the main area incremental that's it [laughter] great question on the you had said you're speaking specifically to data Tech correct correct, yes, yes, it's been under pressure for two reasons. One is you will see in the quarter were probably down a 500 basis points or something like that and it.

About half of that is both of them are conscious decisions on the opex side, it's about half of that and Weve increased our R&D. We've mentioned earlier that we want to get ready for our analytical portfolio or life sciences portfolio or food portfolios. We continue to increase R&D we.

We continue to work on our sales and marketing channels, particularly on food I've mentioned that in the past that we had some work to do there so up in people in general so about half of this is a conscious decision on opex that should be fine that we're making that investment now and as soon as the volume upticks, we should be okay. Similarly on the gross margin line, what's probably the other half we've made a decision which was part of the.

Four principles that for lot outlined earlier to keep our employees safe and we've had no layoffs at any of our plants across the globe. So even as the volume has declined we've had unfavorable variances due to the factory overhead and whatnot haven't laid anybody off and so therefore as the volume comes back we think that workforce will be ready.

We're just seeing a little bit of short term on favorable variances.

Okay. Thank you.

Once again, ladies and gentlemen, we ask that you. Please limit yourself to one question and one follow up our next question or comment comes from the line of Steve Beuchaw from Wolfe Research. Your line is open.

Hi, Thanks for the time here I think most of the ground has been covered but I want to come back to a couple of things with maybe a little bit of a different angle. If that's okay.

First on the California contract I appreciate all the clarity of disclosure here.

And frankly really congratulations on getting that done.

I Wonder, though if you could talk about that initiative and the extent to which you see more of that sort of initiative popping up in 2021, I mean, the logic here, it's pretty obvious.

But I'm a little surprised that haven't seen more headlines or that sort of thing happening. So could you speak to what you see on that front not necessarily just in the U.S., but globally. A second is I wonder if you could talk a little bit about you know within the context of overall screening.

As Derek mentioned you know your one of your competitors made a lot of comments today and one of the comments. They made was that they think next year as it relates to testing the market kind of split half and half between PCR antigen I Wonder if you could speak to that dynamic and then I have one follow up.

Okay, well on the first one Steve I think you know it's a good question right that there are there are some other discussions going on than there are some other partnerships that we have across the globe, which you will be haven't publicly announced because of our partners to Chris So.

So I think alliances such as these big.

Larger importance during times of you know crises and pandemics like that and state government states and governments sort of get into action and gear.

But I think one these alliances forged our longer term partnerships and our focus really is on you know how do we do these I'm in California as I said in my prepared remarks right within eight weeks, we've done what should I take an 18 months. So no. The focus is really how do we execute flawlessly on these.

And and build and build on build on it beyond that but really what we are not are our strategic intent is not to become a reference lab that is not no that is not something that is part of our strategy. We are doing this because we've got.

A P decade old relationship with the state of California, and this is building on that partnership around lab in labs.

So I think that's the way I would that's the way I would look at that for your second question around the the split between and Pigeon and RT PCR. Our belief is that RT PCR is the gold standard level of detection that you get and especially when you look at our kids with the lowest level of detection you know you.

Good pimco fit from a perspective of.

Moving on beyond a single attest to pooling immuno research shows that there isn't done first and then fold increase in the level of the limit of detection of Workover diagnostic test.

And it's expected to increase the false negative grade by parting percent. So does this data out there that by having an important highly accurate sensitive test is going to continue to play a role.

You know, having an antigen test, which is in the high eightys or even if its early ninetys you know the impact of false negative, especially for pandemic and floor for infectious diseases that are so contagious does have an impact and I think the vitamin Lords may be missed by those assays.

Did you have another question.

Uh huh.

A very fair and then my follow up actually relates to Surajit. Its a two parter one is you've talked in the past about getting some clarity on.

I don't know if it multi prong is the right term, though a multi layered approach to thoroughly so Roger where you're looking at a residual immunity is from a number of different ways I Wonder if you could update your thinking on that and then I know you've made some comments around timing around the up tick ups rohlicek, but could you give any comments around what you think the scale of it might be I know a lot.

All of US are contemplating the possibility that there is a fair amount of us royalty uptake within the context of clinical trials.

What do you think that it goes beyond that thank you.

Yeah. So.

Well I think what I've talked earlier about this looking at the commune insight state and I think one that we are looking both at the quantitative antibody testing and neutralization assay as an example.

But do you know the idea the leaves that investigating T cell responses for cellular immunotherapy I think we think that it's going to be important and hopefully we'll have a we'll have a couple of corporate related products in the pipeline that we can talk about more over the next few months.

To your second question around how big or how what the impact of said all the G. I think it's my guess would be as good as yours.

And you know honestly and the reason I'm, saying that is because.

The Crystal ball on that is really based on the impact and how important it being a partner for vaccine vaccination and vaccine that vaccine will be.

So I think it did gain importance and more relevant as we move from the every year to date two vaccines and then beyond that for epidemiological testing, that's red eye popping set on the GE will have the biggest impact.

Oh Baby I'm sure your Crystal ball is much much more ah so let's give them on but I appreciate all the help thank you.

Thank you. Our next question or comment comes from the line of Doug Schenkel from Cowen Your line is open.

Hey, guys I'm, sorry, you provided a lot of detail on ways, you hope cost that any corporate nights and revenue that cruise cannot be all that trouble in the long term that thank you for that I'm, hoping we can get a lot more quantitative or qualitative.

If it hadn't been for the pandemic and if we assume that.

Yes, you know, what's gonna grow at say, a 12% to 15% annual cake or not use 2019 as a base.

Would've been on track to generate about $6 and 2022 earnings. So so too so two simple questions one.

Pandemic related revenue were to go away by the end of next year. So you don't get some point of 2021.

Thank all the initiatives in relationships that are occurring as a result of Cove at 19 would put you in a position to do a lot better than $6 per share in 2022, and secondly in such a scenario is there actually a path growing earnings at 2022 at the pandemic of page 2021.

So the answer to your question is that yes. The V will definitely benefit from the installed base that we have put in place. If you are asking us to give an estimate on what our E. B S is going to be in 2022 done I'm not going to give you that.

I don't know.

Okay only help yeah.

Yeah for a couple of young <unk>.

The additional markets that we're playing in the customer base that we have but also we've generated a lot of free cash flowing back to prolog earlier points. We are spending a lot of it on innovation capital deployment. So I think it increases the flexibility of the company. So I think we were already on that trajectory, but I think this should to answer your question directly further boost.

Our ability to at least meet that if not beat that for sure.

Okay.

Then the second question on free cash flow conversion to <unk>, 2% in the quarter on I know you.

Talk about how that is.

At least in terms of growth much much better than what we've seen for a while so that's great. You know all that said intuitively I would have thought it would have been a lot higher than what we're seeing at the operating line, you're generating a ton of revenue without a ton of a company and operating spend so could you maybe just walk through kind of that disconnect and why that number.

Bergen standpoint is actually higher and I'd like to know desktop I thought I heard in your prepared remarks noted that you're actually were expecting that number to go down next year did I hear that right then and it's now if I heard it wrong I'm, sorry about that if I heard it right why does this trend back down next year.

Yeah on <unk>.

I think I said anything about free cash flow going down so could put 74% into perspective, Doug we've made a conscious decision much like we do every year on.

On the Noncovered side to build inventory, but we've built a $120 million of inventory, which is exactly 25% of our net income.

So absent the inventory build to which probably two thirds of that is coded related we would be at 100% free cash flow.

Year to date.

And that was because.

As we look at the backlog and we've got a substantial backlog walking into next quarter and we think it's the right thing to do to have the coated products available and we think that the noncovered side, we'll see an uptick as well.

Outside of informatics and cannabis [laughter]. So we think we're in very good shape and actually one more thing just to further put a point on that I mean, the co bid related free cash flow conversion year to date, while it will be wonderful in the future is actually a drag.

So if you think about doing a half a billion dollars of volume you know there's still a couple of hundred million to any assumed 30 to 60 days payment terms is probably a couple of hundred million dollars of that on the balance sheet in terms of receivables built $80 million of inventory. So we've basically eroded much of the net income.

On the balance sheet, and working capital, but that proved to be future excess cash and none of this includes the $200 million that we funded to outfit the California lab that we believe we will collect in the fourth quarter.

Which should all benefit that you Q4, and beyond index right or at least that would be okay. Alright. Thanks, guys. Thanks.

Thanks you.

Thank you.

Ladies and gentlemen that concludes our question answer session. At this time I would like to turn the conference over back over to Mr. thing for any closing remarks.

Thank you operator again, thank you for your questions as I said at the beginning I I'm gratified and I'm proud of the organization and how everyone has rallied together.

Dearly feel very confident that we are leading with science and that is clearly resonating.

I have no doubt that view much from this crisis as an even stronger company. Thank you for supporting book, another Mark and I look forward to providing further updates on our fourq.

Quarterly earnings call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.

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