Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to day 1 of the JPMorgan Health Care Conference. I'm Julia Qin. I work on the life science tools and diagnostics scheme at JPMorgan. It's my great pleasure to introduce you to our next company session by Bruker. As a reminder, the breakout session is in the Sussex room. And with that, I'll turn it over to Frank. Welcome.

Thank you very much for the introduction. It's a pleasure to be here on day 1 when everybody is smiling and all relaxed. Thank you very much for being here today, ladies and gentlemen. I'm here with members of our management team, Miroslava Minkova, who runs our Corporate Development and Investor Relations; and of course, our CFO, who will also give you a bit of a financial and debt restructuring update. So he and I will -- Gerald and I will share this presentation a little bit. I would also like to acknowledge some of my directors and colleagues -- management colleagues who are in the audience. So anyway, let me give you a bit of a very brief overview of Bruker. So I mostly assume that many of you are familiar or perhaps are familiarizing yourself with the story, so I won't go into great background details. And then many of you are here for a little bit of an update, what's new at Bruker, what's our perspective, and so I can give you a few nuggets of new information and business updates. That's my goal for the day. Of course, I'd like to draw your attention to safe harbor statement. Very important. I would also like to point out that consistent with our prior practice, we are not doing a pre-announcement. We haven't done that in the last few years. We're not doing a quantitative pre-announcement today nor are we giving 2020 guidance, we tend to do that when we report our Q4 earnings, which we expect to do in early to mid-February, and then we'll also give guidance for the full year. We did issue an 8-K this morning, simply for the quality -- so to facilitate the discussions that we're having here in many one-on-one meetings as well as in this room. And we did acknowledge that we were pleased with the revenue trends in our Q4 of 2019. And specifically, that our organic revenue growth for the full year 2019 looks like it is at or near the high end of our full year 2019 organic revenue growth guidance. If you recall, our growth guidance was 4.5% to 5.5%. We had reiterated that at the end of a very good Q3, but Q3 was a little bit above average quarter. And so overall, I think that's a positive sign and a sign of confidence that we're very comfortable with our full year guidance, and we expect to be -- when we finally report earnings, we expect to be at or near the high end of that organic revenue growth guidance. That's all we share today specifically, but we're advised there would be best to have an 8-K on that. This slide isn't really new, but that's maybe a fun slide for anybody who's learning more about Bruker, and that, indeed, yes, we have been at this for almost 60 years, a performance-driven culture, a culture of integrity and very much also a focus on being close to our customers and on driving innovation. Other than us celebrating 60 years, what does that mean to you as investors, perhaps? I think we've really been accelerating in our transformation of our portfolio under good portfolio management tools and product life cycle management tools towards more resilient, higher growth margins that also have sustainable high margin opportunities. And our scientific and diagnostic solutions and new instrument product innovations in the last few years in NMR, but also in mass spectrometry in new areas like super resolution or light sheet multiphoton fluorescence microscopy and other areas in infectious disease diagnostics and clinical microbiology as well as other areas has really been quite good and perhaps second to none in this industry. And innovation and new fields -- new growth fields being enabled by novel solutions and instrument development, something that really is advantageous for a company like Bruker that does not only follow the market via aftermarket, which is nice and stable but rarely enables you to really innovate and create, together with your customers, new fields. So we feel very good about how we've repositioned the company. It's about the new product and growth drivers, and we'll talk more about that during the presentation. This is one of these other overview slides for those of us who have either followed us for a very long time and used to think, "Well, aren't you 70% academic and 50% Europe?" Not anymore. No, we actually have a very nice balance, not only between the groups, the BioSpin, Nano and CALID Group, which each are about 30% of our business, we've also grown our Americas and APAC business quite -- even faster. And of course, we're still quite strong in Europe, but we really have a very nice balance. We, of course, have also grown in applied and pharma markets and in diagnostics. And we expect those trends to continue, which overall gives us a very good defensible balance and also makes us much less -- it doesn't insulate us completely, but it much -- makes us much less of a macro place. So if I go into meetings these days and all I get is macro questions, I sometimes get bored and say, "Hey, let's look at the exciting growth drivers. Look at the things that aren't so macro dependent and what we have to offer there." Our last overview slides. Yes, we put our money and our investments in OpEx and CapEx into innovation, together with our customers and collaborators, and we have a lot of IP and a lot of people that are highly qualified, really understand our markets and not only the technology but more and more also the proteomics, the microbiology, the semiconductor applications behind it. I think it's really been a further evolution at Bruker towards more of a solutions developer. We have achieved many market-leading positions, #1 or #2 positions. Those are many of the markets that we're focusing on. That's why, in those areas, we have as much scale or knowledge or customer insight and technology as anybody else that we compete with. That's why also, generally, we're not really ever at a significant or meaningful disadvantage, but in those areas often have an advantage from having deeper insights into these markets, customers and applications. Our dual strategy, this is not a new slide. Maybe that's reassuring. We didn't have to reinvent our strategy, but it's been one that's been evolving over the last few years and is really what I call this dual strategy of Project Accelerate, our 6 high-growth, high-margin initiatives, which I always think of as the pull. They accelerate our organic growth rate. They accelerate our margin increases and margin improvements, while we also push with operational excellence in our core areas with operational excellence in R&D, in product launches, in commercial operations and, of course, in the traditional areas of operations and manufacturing, and a lot of good things are going on in those areas as well. We're moving a lot of our production to lower-cost, lower-tax areas in Penang, Malaysia. We're consolidating our traditional BioSpin factories in Europe for more efficiency, higher productivity for the capacity and the cost-effective, tax-effective setups that we will need in the future. We're pushing very much into -- on innovation and getting into new markets that are well supported, somewhat macro independent by healthy secular trends. Those are these Project Accelerate -- the 6 Project Accelerate initiatives, and we'll talk about some of them with an overall goal of sustainable, profitable growth. We set out midterm targets that we set out at our Investor Day in June in New York City last year. And I think we're really in -- I'm here to report that we think we're very much on track with our strategy. And there are many elements to it. We're now, for the first time, in infectious disease diagnostics and in proteomics, which is still in the life science research phase, really for the first time in our corporate history, even seeing some areas that I would characterize as breakout opportunities. As proteomics, for instance, ultimately may be as important as genomics, but quite honestly, it's at least a decade or 12 or 15 years behind genomics because it hasn't been as reproducible, as sensitive, as industrialized, as what Illumina has achieved in genomics, but that doesn't mean that proteomics is any less important. We're going to be a big part of enabling the proteomics' inflection point and the fast growth acceleration in that field. And I'll come back to that, of course. Here are some of the fields that I will not speak to this slide. Again, it's more of an overview slide, studied at your leisure. But from single-cell biology to clinical proteomics to clinical metabolomics to precision medicine to trends in food authenticity analysis to pharma, biopharma, R&D and development, in particular, there's many, many areas where we've really nicely positioned ourselves to be less macro dependent. And to be set up in areas where funding, even academic funding, academic funding in Europe for us, we say it's excellent. It's excellent for the tools that we -- where we have positioned ourselves in important areas of life science or diagnostics research or pharmaceutical research and development that are sought after and where we're not driven primarily by is macro up and down. Is China demand up and down? I don't worry about Brexit. I worry about proteomics. I worry about single-cell biology. I worry about precision medicine and what plasma proteomics can do for that. That's what's driving Bruker these days. Here, the Project Accelerate initiatives. We've updated this rather busy slide. I promise I will not speak to that, but I know many of our investors were sometimes confused, what are all these different initiatives, it's hard to keep track of all of that. So we finally put that out as a road map that we're very committed to, and we're updating it annually. This is our annual update for that. First of all, let me state what we promised in 2019 actually happened exactly like that. When, a year ago, when we introduced that roughly. Yes, proteomics grew for us and became a meaningful part of the business. Yes, ultra-high field gigahertz NMR for structural biology with crucial functional information became a contributor to our revenue. And yes, we made progress in fluorescence microscopy with some very good and unique product and technology launches that are now ramping further. So what we promised in 2019 did make sense, and we did deliver on that, and it was a contributor to 2019 results that we'll eventually -- that -- on which we've given guidance, and we'll report in February. Now what's new in 2020. In 2020, the timsTOF Pro and proteomics launch will continue. It's still only 2 years into what I would call a 15-year S-curve, so it's still early days in proteomics. We're making excellent progress, and I'll speak more to that. 1.2 gigahertz will begin to play a role, finally, after almost a decade of development, further ramp up in fluorescence microscopy in software, and we actually also think that maybe in the second half of this year, some of the new X-ray critical dimension for semiconductor metrology, which we think will be very important. We'll also have the macro background to where, hopefully, orders will pick up and maybe even then revenue next year. At a minimum, we don't expect that steep headwind that we had in semi in 2019. We expect that headwind to be gone, and that will feel nice, even if growth may not come till 2021. So a few business updates. A few selected business updates beyond the fact that we've acknowledged in our 8-K that our organic revenue growth for the year '19 will be at or near the -- near or at the mid -- the high end of our guidance. We're very pleased that a major technology achievement or milestone has been reached, which is the first 1.1 gigahertz system that we had installed and -- delivered and installed last year has actually been accepted. The installation has been completed, and that actually was part of our Q4 revenue. And this was not with federal funding, but with private funding at St. Jude's Children's Research Hospital and their new head of structural biology. Babis, as he goes by his nickname, has stated why they use NMR, why that's tremendously important, in addition to crystallography or cryo-EM. And of course, it has to do with getting functional and dynamic information and really understanding healthy cell biology and pathobiology at a level that without the dynamic and functional information that NMR can give you as a complement to other structural biology techniques. That's why they were so excited to have the first 1.1 gigahertz system in the world and is now been accepted. That, by the way, is the same hybrid technology, for those of you who are technologically inclined, that also uses high-temperature superconductors or HTS that we've essentially been developing for almost a decade. Thank you, investors, for being so patient with our major R&D effort here. But now that we have this technology, it's going to be very beneficial for the 1.2 gigahertz NMR systems. We'll talk about more about those in a moment. And it also separates us by probably more than 5 years from anybody else in the world who can do this type of work. So we have a very unique and high-margin niche here from a business point of view. Sticking to ultra-high field NMR, 1.2 gigahertz NMRs. We have a little bit of a few pieces of good news. First of all, a first U.S. order from -- federally funded by the National Science Foundation for a National Center at the Ohio State University, OSU, that order. The funding had come through earlier in the fourth quarter. We now have received an order in December, so we're pleased with that. We hope that will be an icebreaker. Obviously, we want 10 or 12 of these systems eventually in Europe, the U.S. will need more than 1 or 2, but we're very pleased that NSF has been very enlightened here to develop these -- to help the U.S. science community develop these capabilities that are urgently needed. Similarly, there's been an icebreaker in Asia with the first order interestingly from Korea, the Korea Basic Science Institute ordered the first one of these 1.2 gigahertz systems from Asia. And in Europe, where we sold a lot of these systems, at least we have them in backlog, we shipped our first unit. Remember, last August, we announced a lot of good new data. We had 2 systems at field, in the factory and in final test that all looked promising. There's no publications, but we also now shipped the first system that we expect to install in the first half of next year in Europe to a customer in Italy. So good progress in that part of the business. We expect that to be a growing, high-margin part of our business. It's one of our Project Accelerate initiatives or at least an element of that. We've made excellent progress in proteomics and with the timsTOF Pro system, in particular, and its sibling, the fleX, that also allows you to do non targeted spatialomics before you get into the proteomics' or lipidomics' workflow. It has those unique capabilities of measuring ion mobility, very, very precisely and accurately and even as a routine measurement. That's why it's a 4 dimensional -- novel way of doing 4-dimensional or 4D proteomics and lipidomics. And as soon as I talk about proteomics, I really have to start talking about the many subfields and even different -- in different subfields like plasma proteomics where you're going to have very different workflows. So there's many, many -- delightfully, there isn't one way to do proteomics or one flavor, but it's a very dynamic, very rapidly developing field. And if there is one statement that I'm making here at this conference that I will hopefully regret, it is my prediction that, that market in proteomics, which is about EUR 500 million for LC-MS MS-based proteomics, that will double in the next 5 to 7 years. I hope that will be an understatement when we look back at that in 5 to 7 years. At some point, about 12, 13 years ago, Illumina bought an NGS business and claimed that NGS will be big someday. It will be a $1 billion market someday. They were not wrong. It's obviously much bigger than that. I think the inflection point of really industrializing proteomics, high throughput, robust sensitive systems, which led to the success of NGS in so many fields of biology and disease research, that, that inflection point is near, and we're not only beneficiary, but also one of the drivers of this trend. The new announcement. Very, very pleased that after 2 years into this ramp with a brand new technology. We now have over 100 systems out there. So that's one of the nuggets of information we wanted to share with you today. We think that's an excellent result after just 2 years with an entirely new technology. And I believe those 100-plus customers are all very, very satisfied and are out there being very positive in their word of mouth, either needing more systems or telling their peers, you should also have this new technology for your research, whether it's in pharma or in academic or single-cell biology applications. Microbiology and diagnostics are other big growth drivers. That's now, overall, more than a $200 million area for us. We -- here in San Francisco, launched the MALDI Biotyper next-generation instrument, the sirius. Yes, we're serious about this. It's also the brightest star in the visible universe. So the MBT sirius launched here, last summer at the American Society of Microbiology. It is also shipping. It started shipping in Q4. We're getting orders for it, I think, competitively and in terms of some new road map capabilities for things that are still research-use only. It's an excellent new system. For MALDI Biotyper, we now have about 3,800 systems out there. We're adding 400 or to 450 per year. Our growth, even for instruments, has returned to double digits, to low teens, which is quite pleasing. So we think there are many new capabilities that are listed here of how we further increase the TAM for that MALDI Biotyper technology but also more broadly for other infectious disease technologies that we're now more broadly, not only a MALDI Biotyper company, but a microbiology and infectious disease diagnostics company. The most important, and I'll speed things up a little bit before I turn things over to our CFO for a few minutes. The most important launch that we started in Europe, although the reimbursement is not as strong, is on also using the MALDI Biotyper technology for sepsis. For the fast identification, literally, in 20 or 30 minutes after a positive blood culture goes positive, you could have a result that once we get FDA clearance, and we've just finished -- our U.S. FDA studies have submitted to the U.S. FDA, and we're reasonably confident or hopeful that, hopefully, within the first half of this year, 2020, we will get U.S. FDA clearance where reimbursement for this fast sepsis identification is much more favorable. We think that will grow a further consumable stream for that Sepsityper technology. More importantly, we think it will increase the overall Sepsityper market. I hope that at some point, hospital administrator of big -- of medium and smaller hospitals will no longer say, "Well, does that calculate? Do I have enough sample? Can I justify having a MALDI biotyper? Do I have enough samples to justify that economically?" Hopefully, at some point, they will find it absolutely essential in order to reduce ICU times and costs but also to improve outcomes and to have fewer fatalities from sepsis in hospitals to be that blunt to say, "Well, we might be a smaller hospital, but we cannot afford not to have this technology if it can really save lives." The number of sepsis in Europe and the U.S., anywhere else in the world, is still horrible. 0.25 million people die per year in the U.S. of sepsis. Maybe half of that would be preventable with faster diagnostics. We're not the only part of the solution to faster sepsis diagnostics. But we're an important element, fast identification within an hour after positive blood culture saves infectious disease physicians a day or 2 in making the right more appropriate antibiotic decisions that can save lives or shorten ICU times. So I think this will be an important additional driver of our growth this year. Here, we're hoping we're -- again, we have European CE-IVD mark already. We're hoping for FDA positive review in the first half of this year. And with that, I'll maybe just leave it on an NMR slide, namely something that you probably haven't heard from us. I wanted you to hear something that you haven't heard already, and that's food authenticity testing by NMR, in an area where there's more fraud going on than in other -- any other area in the world, and that happens to be honey -- high-value honeys, which many of them have -- are mislabeled by origin. And very often, at 40% of what you're buying at the supermarket maybe just rice syrup. So there have been many scandals from Australia to British Columbia to India, to most recently in the U.K. with a big supermarket chain, and it's uniquely NMR that can do this many, many parameter testing in an automated way that defeats all fraud attempts so far. So a nice little growth area, that may only be $10 million plus of our revenue with good margins, but another area where we're doing very unique things that we think we have a sustainable growth and margin potential. With that, let me turn it over to our CFO to give you a bit of an update on our financial performance and our debt restructuring.

Thank you, everyone. Thanks, Frank. Welcome. I'm just going to quickly go through some of the revenue performance, the top line performance of Bruker very briefly here. Some of you have seen some of these slides earlier. But just generally, on the left side of the slide, we show the revenue performance historically for the last 3 years. And in green, we're showing the 12 -- trailing 12 months of our performance through September 30, 2019. What's interesting about this is we're starting to see pretty significant revenue growth momentum at Bruker. The CAGR that's reflected here in this chart is about 8%. In addition, I would say that we're augmenting some of that overall reported revenue growth with recent acquisitions. Some of our more recent acquisitions, including Hain, Alicona and others, are now contributing significantly to our reported revenue growth at about 7% contribution for the first 9 months of 2019. I'll just comment very briefly on the other pie charts. Frank has mentioned our balanced portfolio across both the groups and the geographies. I would just comment here that just generally, what that allows us to do is navigate more successfully some of the natural economic cycles that impact either the geographies or the groups, and that's making a big difference for us in terms of our consistency in our quarterly revenue results on a year-over-year basis. Turning to profitability. We used 2 basic metrics around operating margin as well as EPS. And I think what's important on this slide, in particular, is the level of our operating margin expansion has historically been very, very strong. Over the period from 2016 to 2019, you see about 250 basis points of operating margin expansion. More recently, that operating margin expansion is coming largely from product mix, as we reorient our portfolio further into the Project Accelerate initiatives. They carry higher margin profiles and are starting to lift our overall operating margin performance. But in addition to that, we are also moving with some very disciplined operating expense management, and that is also driving better operating margin performance. Also, one final point on this slide is we do have a 9% investment in R&D built into our overall operating margin performance. So we carry some of the highest R&D investment across our industry, and this is driving our innovation engine. And finally, on the non-GAAP EPS side. We're reflecting double-digit EPS growth in most of these years. That is part of the priority we place on revenue growth. It has to come with profitability, and we're beginning to show excellent bottom line performance with significant room for growth. Just touch quickly on the debt financing. The company completed a series of important steps to position the company to have better financial capacity and also to fund our significant key corporate strategic objectives. I won't spend too much time on these, except at the moment to say that we've staggered some of our debt maturities out from 2022 across to 2029. We've mostly fixed our rates across 60% of our borrowing capacity. We've swapped some of our U.S.-based interest rates into European rates, all of which is going to be accretive to EPS going forward, starting in 2020 and beyond. And finally, just one comment on capital deployment strategy. I would say we're continuing to present our top priority as investing in the core elements of the business, including funding our Project Accelerate initiatives. That means funding significant R&D, continuing to push capital expenditures related to our products, our plants and our operations as well as disciplined M&A. And finally, I'll just say relative to returning capital to shareholders, some of you may know, we have a modest dividend program. And we do have a $300 million share buyback program authorized by the Board. We're executing on those share buybacks as well. And finally, we do believe very strongly that we will be moving -- continuing to move forward with our R&D activities that support returns. So finally, just to wrap up, strong innovation culture, a very disciplined financial performance for the company gives us continued confidence that we will be able to move into this sustainable period of revenue and profitability growth for Bruker in the future. Thanks. I understand we're a little bit over. Thanks for your attention.