Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Hi. Good morning, everyone, and welcome to the 2020 Bank of America Healthcare Conference, our virtual Vegas. I'm Derik De Bruin, the senior life sciences and diagnostic tools analyst. Our next company presenting is Bruker Corp. And here from Bruker is President and CEO, Frank Laukien. Frank, good morning, welcome.

Thank you, Derik. Pleasure to be on the line.

Great. I think you want to make some opening remarks, and then I've got a question that's to go through, but I'll turn the floor over to you.

Yes. Thank you very much, Derik, and again, complements on pulling off this virtual conference. Good morning, everybody. I'm here with Miroslava Minkova also if you have follow-on questions. She's the Director of IR and Corporate Development at Bruker, I'm sure you all know her. So you've seen the Q1 results. You've seen our Q2 scenarios. We've been getting some questions, wow, we thought Q2, you guys might be down 30% to 40% or something like that. And I think one of the misconceptions that had been out there is that universities are closed. Their educational parts and their students are not at the universities and universities work from home, professors work from home, procurement departments work from home. So most of the -- there are some countries, India and France and a few, where universities indeed were essentially closed. But in most of the world, academia and the research enterprise is just moving at a much slower pace. China is coming back a little bit, and I'll come to the U.S. and Europe in a moment, but it's not that we can -- that our business, our academic business has simply ceased to exist or gone in pause, it's just at a reduced level. That's why we even got some feedback from buy side and sell side, okay, we thought you'd get hit harder in Q2. We're getting hit pretty hard, but not as hard as perhaps the worst-case scenarios were. Because the important point here is professors are at home. They're writing papers, they're writing grant proposals. University procurements are working from home. They're placing order, they're accepting deliveries, not everywhere and everything is a lot slower, but it hasn't come to a grinding halt. That's just a comment on Q1 and Q2, really. The really big question right now is when our university labs -- I'm not talking about Cal State and whether they have students or not, it really doesn't matter for us. When our university labs, those are -- that are doing COVID research are working 24 hours -- 24/7, probably anyway. But when are the other life science research and materials research labs, when are they coming back into their labs? And I'm actually pretty optimistic, and I have some inside information from academics that are on our Board where some of our management team serves on academic advisory boards that they're all in extensive planning phase, and they're all with procedures similar to what Bruker has done to get back to work separating shifts, having people mostly work from home as much as possible, all the distancing, cleaning, temperature measurements, you name it, all the procedures that people have implemented to return to work safely that, that will happen gradually and in a phased approach over the summer in most of Western Europe and in the United States, and China is ahead of the curve. So I think you'll see some high-profile universities, some of those that were among the first to lock down and close most, not labs, so that do not do COVID-related research, that they will announce gradual opening in May, June, July. And I wouldn't be surprised if by August or so, 90-plus percent of academic life science research labs were in this new normal operating in shifts, not overlapping, working from home, cleaning and all of that, but essentially being effective again in the lab, perhaps not at 100% productivity. That, for us, is the biggest single thing that will determine how we will have -- pretty sure we will have a sequential recovery in Q3, Q4, maybe not year-over-year growth. I really don't know yet, but certainly, sequential from Q2, probably being the deepest dip. Academia reopening and the signals that I'm getting on research reopening are that, that's happening and is likely to roll out over the next 2 to 4 months in most of our important markets. So with that, I'll pause because I'm sure we'll touch on many other issues. But that was sort of the -- maybe the big picture item for us, and that's one of the most important gating item for our recovery.

Great. Thanks, Frank. Yes. And certainly, just having -- I mean, Nature was running article series on basically dispatches from Italian labs during the lockdown. And the Italian researchers were doing exactly that. They were working staggered shifts and people were staying out of the labs. I mean things were not shut down completely, but just reduced workload capacity. So I think that's -- your comment is certainly in line with what we're hearing -- and yes. And since most of the work is done by post docs and graduate students as opposed to undergrads, that's a different sort of labor pool who needs to sort of like this to really advance their career to go forward and science doesn't stop. I think -- I agree. I mean it certainly is in line with how -- what my friends are sort of talking about in the academic labs. So I think your intelligence is in line with our channel checks as well on that. So before we sort of like do that, I just wanted to -- I just wanted to ask you one question on the business because I think it's important. It's like Frank, you have the distinction of being the only CEO remaining from when I started covering the life sciences space in early 2000. So you're the last senior manager of all the companies. I know that -- and you think about all the iterations of the companies, which you're the last man standing out of all these. I bring this up because you're -- this is not Bruker Daltonics from when I started covering the company years ago. And I guess, can you talk a little bit about your transformation? And I bring this up in the context of this is going to segue into your end market exposures, your cyclical exposures. Because right now, on top of the academic and government stuff, there's also the concern on the cyclicality of the business and as we head into recession, and is that like an additional complicating factor? So 2 questions there, a little bit of a history on Bruker and then your sort of recession expectations and when where you are from a cyclical perspective?

Yes. So interesting remark. We've known each other for quite a while now. So indeed, we've really -- there's been 2 very significant phases in the last 8 years at Bruker that I would like to highlight, and you're familiar with that, of course, Derik. Between about 2013 to 2016, '17, it took a little bit longer than we thought, we really did -- we really put the company on a new foundation in terms of leadership, in terms of processes, in terms of systems, from ERP to CRM system to the new group organization structure with new leadership that has a lot of experience at other very successful major companies in our industry, to compensation practices, to taking a lot of cost out, doing a lot more outsourcing, leaning out the balance sheet where it makes sense. You can't do it everywhere, still got to do NMR magnets in-house. And it's really -- it's been a somewhat -- sometimes a little bit painful, transformation process, but it really has helped us to grow with nice margin expansion and not only for growth's sake. So I think today, we have a management process. We have a unique culture of innovation. We've -- that has survived all of this transformation. We continue to be very close to our customers and to our ecosystem of collaborators, which is why we often can capitalize on new technologies or new unmet needs or new scientific questions or unmet clinical needs earlier than other companies. And -- but it fundamentally has made us a profitable growth story, which where we've had really an excellent record then from 2015 to 2019, a bit side track this year, but I hope we can resume on that previous trajectory by 2021. In addition, we've really focused on Project Accelerate on accelerating organic growth on the 6 high-growth, high-margin initiatives and investing heavily in them in the last 3 or 4 years. It started even earlier, but it became more visible to investors perhaps 3, 4 years ago. And that next phase, that growth acceleration phase that is combined with continued investment in productivity and operational excellence, really makes us a very well-rounded company. We don't have a branded business system or management system. But I think our culture and perhaps somewhat unique culture of disciplined entrepreneurialism of seizing organic or in adjacent market, sometimes with some small bolt-on acquisition, new profitable growth opportunities and over time, make further progress not only in accelerating organic growth, but also in bringing us to fundamentally new margin levels and making those sustainable with steady progress delivered each year, has really been a very good recipe. And fundamentally, we're taking this year as a dip, but we're continuing to invest. We're taking temporary OpEx and other cost measures in Q2 and a little bit into Q3. But fundamentally, we're continuing to invest in Project Accelerate and operational excellence to continue on the previous 3, 4, 5-year trajectory of accelerating growth with good margin expansion to continue on that trajectory into '21 and beyond.

Yes. I mean, certainly, what struck me on the first quarter call and your second quarter guide was the fact that despite the significant organic revenue growth declines you're forecasting, the company's margins are actually holding up and you're looking for breakeven-ish on the second quarter. I mean that certainly is a big difference from a decade ago, where that sort of growth would have hurt you. So the question that we continue to get from investors is, and I think even though the free cash flow has gotten better, are there any issues with liquidity, if things last longer? How strong is the balance sheet right now? Are you okay if there -- if things last longer than expected?

Yes. I mean there, we are in incredibly good shape. We always have been because of our modest leverage. But then coincidentally in November or December, we closed sort of a major strategic debt restructuring and refinancing. Putting -- adding more debt, more flexibility, more unused lines of credit, bringing our interest rates down by mostly getting that debt tied to European interest rates at the time. So right now, at the end of March, we were at over $800 million in cash, and we have unused lines of credit. There is -- I mean -- and even in Q1, we were slightly free cash flow positive despite significant investments. And so we expect to be free cash flow positive this year. Sorry, I probably shouldn't give this, not exactly guidance, but it's just the way that -- we're not going to go down in cash unless we make investments in M&A or in -- and then our CapEx is all budgeted for that. So liquidity is really no concern for us at all. And I -- there's almost no scenario other than a 2-year complete shutdown, which isn't going to happen but what's happening now, and even if there was a second wave, liquidity is not a concern for us at all. And our balance sheet is very strong and relatively conservative. So that's just -- that you can take off your list of concerns for Bruker. We really are in an excellent position there.

Great. And another question that I've got, and I actually just had a client ping me on this one. You're talking about in your opening remarks, have you seen any cancellations right now as potentially some universities put some of their building plans on hold? Because, I mean, in some cases, if you've got a big, high-megahertz NMR, they may need new facilities? And can you also talk a little bit about the order book and -- given that your sales and marketing team was shut down for a good function of the first quarter?

So no cancellations, 0, that I'm aware of. Same in 2008, 2009, we just didn't have cancellations. I mean was there a cancellation of one or an order somewhere? Probably. But it's less than 0.1%. It's not even visible, neither Gerald nor I are aware of any cancellations, and I don't see any threats or negotiations of cancellation. Just doesn't happen when academic funding is committed, you have purchase orders, there is really almost no scenario where there ever would be cancellations. And also we didn't get pharma or industrial or any cancellations like this. So no, we do not see cancellations very -- just 0 or the -- and that's have been our historical pattern in 2008, 2009. Some other industries, they saw cancellations. We didn't see cancellations or they were absolutely de minimis. So our backlog looks incredibly solid. And we did not have to remove anything from backlog and don't expect to do so going forward, at least nothing that would be immaterial anyway. I'm sorry, there was the second part to your question...

Yes, it was basically on the order book.

Yes, all right.

Given the sales and marketing teams were hampered, and I'm just wondering if you did move to more digital, how is your order book shaping up? Because I mean, just thinking about the lead time on your products, it's -- you were delayed in sales and marketing in Q1. Did that have an impact later on, given the long lead time?

Yes, it slows things down. We were never closed down. I mean people work from home. Some people were 80% instead of 100%, but our sales and marketing teams are working. We're doing a large number of webinars, a large number of customer presentations. It's just all online and virtual. I'm not saying it is as effective as being at conferences and visiting customers, especially for sort of the more missionary work that has more of a medium- to longer-term effect that is occurring and has gone online and customers because they have no choice, and they're at home anyway, probably, have reacted well to that. And sort of the ongoing -- getting quotes out, getting orders placed, getting orders confirmed, all of that is happening and has happened throughout March and April even. However, sometimes just at a slightly lesser pace. But it's not been shut down. So our order book in Q1 for the BSI segment, if you recall, BEST had some enormous 5- to 7-year orders last year that will carry BEST for a long time. So the other 90% of our business, meaning our scientific instruments business, the order rates were a little better than revenue. Revenue declined 8% in Q1. The order rates were flat year-over-year as reported. So that -- we'll see how that plays out in Q2. But I wouldn't be surprised if the order rates were also a little bit better for the -- putting it another way, the decline -- year-over-year decline in orders was somewhat less than the year-over-year revenue decline.

Got you. So I think Bruker has always been viewed more as a high-end research industrial instrument company, but you do have a fairly significant microbiology business centered around the MALDI Biotyper. Can you talk about your microbiology business, your diagnostics business, given that, that's high on people's minds right now, and you are doing some pathogen work around the COVID situation. Just a little bit of a reminder that you're just not high-end in the local instruments?

That's right. We've changed that very dramatically as well. And in fact, our -- maybe after talking about diagnostics, our bio -- our pharma and biopharma business based on NMR and mass spec also has grown quite nicely in recent years. And right now, in terms of orders, that's booming really in just about all geographies. But coming to the MALDI Biotyper and microbiology and then, of course, also PCR molecular testing for -- and consumables for COVID assays, that microbiology business, as you know, Derik, has grown over the last 15 years, mostly organically. Our total diagnostics business at the end of last year was around $200 million. So it's becoming sizable. It has grown very nicely in Q1. We were a little bit concerned, hey, MALDI Biotyper doesn't do viral detection, will that be down like other elective medic procedures or so? And to the contrary, because you also need to rule out or alternatively diagnose bacterial infections. That business has done very, very well in Q1. Not as well as viral testing per se, but it is one of the few other medical or clinical diagnostics specialties that actually has held up -- not only held up but grown, and we expect that to continue to grow maybe slightly more modestly. Q1, there was a big -- there was a lot of orders from China, which was wonderful. So that business is doing well. The consumables growth there is well into the double digits. Even instruments and service growth was in the double digits. We expect that business to continue, particularly, we're waiting for U.S. FDA clearance of our Sepsityper direct identification from positive blood cultures in sepsis, approved a year ago or so in Europe with CE-IVD, we had gone through all the clinical trials submitted to the FDA. And now it's gotten a little quieter and slower. I'm pretty sure they're busy with COVID diagnostics. But hopefully, when we get back into that market, that will give us an additional clinical microbiology driver, particularly here in the U.S. That business is doing fine and growing with very good margins. In addition, we acquired Bruker-Hain about 1.5 years ago. Initially, we acquired 80% and coincidentally, good fortuitous timing, at the end of January, we went to 100%. So we now own it completely. That's our molecular diagnostics business that does viral detection, focus on Europe. We launched -- well, we greatly ramped up our output of nucleic acid extraction kits. We're sold out. We can sell just about anything we can produce, same for the robots that support that. We have also launched a COVID-19 active disease real-time PCR kit in the end of March. Now this isn't as big as it is for Qiagen or for Thermo. So in the first 5 weeks of that business that maybe was incremental $1 million. So it's a little bit of a tailwind. But as that ramps up. And as we double capacity, hopefully, by June, July, it will be a nice multimillion tailwind that doesn't overcome all the other headwinds in the first half of the year, but it's something where -- we have acquired a $40 million business, that's now into -- well into double-digit growth. So we'll actually get via COVID and follow-on tests that are under development, sort of next-generation, more refined tests that also are suitable for next winter when this comes back and other flu and other common colds are still out there, some more differentiated tests. We're actually building a nice little European franchise in PCR COVID testing and in general, viral testing for respiratory diseases that typically occur in the winter. So that's actually growing very nicely, and it's one of our tailwinds. We are working on some antibody serology assays, sort of next generation beyond what's on the market already. We're not among the first to market. But we're trying to be clever about it, doing some things that we think will be sustainable in the market beyond the first batch of tests that have now arrived. So we'll be pursuing this more broadly.

Well, that's actually a great segue into the next portion of the questions I want to ask, which is on the portfolio. Assuming that the end markets actually cooperate. I mean you've got one of the better new product portfolios in the life sciences sector. There's a lot more interest lately in translational research and proteomics over the last couple of years. Can you talk a little bit about the timsTOF and the proteomics market and here -- your position there? And obviously, the antibody development being a key part of proteomics research?

Right. We do bottom-up proteomics. We also have other mass spec tools that are actually timsTOF and others that are very good at antibody characterization or looking at antibodies or antigens, their glycosylation levels, looking at intact proteins, how they might interact, drug antibody conjugates and so on. So there's a biopharma set of mass spec tools that's really quite differentiated beyond the traditional proteomics tool. So both of them are doing very well right now. Indeed, the proteomics market, probably $0.5 billion market last year, dominated by an incumbent who had probably more than 90% market share in that and had very successful Orbitrap technology for 15, 20 years. We've offered and are offering now a second differentiated complementary, partly competitive, partly complementary technology with a timsTOF. That's grown nicely, and we're gaining in market share, albeit from a modest level initially. We started out probably at 5%, and we've been going very nicely in the last 2 years. And the growth in orders for that product line and revenue in Q1 has still been very good and sort of in the double digits or low teens or something like that, but it continues to grow. So that -- there'll be more things that we'll be doing in terms of new workflows and capabilities that we'll be announcing later this year. Proteomics for us is one of the most important growth trajectories, especially as we believe it will be a very, very good market. I think proteomics could benefit maybe as much as the early days of NGS benefited in 2008, '09, 10 from stimulus funding. Proteomics is at an inflection point, where it's not only tremendously important to do it, but also finally feasible to do it at throughput and reproducibility and with the sensitivity that you need. And there isn't going to be one technology that wins. There'll be multiple mass spec. There'll be other SpatialOMx techniques. There'll be things that look at proteomic interactions and networks. We're doing some of that, but it's also some non-mass spec technologies. So -- but I think they'll probably be, in the end, in a very rapidly growing proteomics market. Maybe it will double in the next few years, but it could also grow tenfold in the next decade. Those are all plausible scenarios. There'll probably be a handful or 2 handfuls of very successful companies, and we hope to be one of them.

You preempted on -- you touched on one of my questions I had here, which was you were a beneficiary of some of the stimulation -- stimulus funding and during the financial crisis, there was a big money -- a lot of money went to NMR and instruments, then sort of like what are your thoughts? I mean are there other rounds of scientific instruments, stimulus funding coming? I mean I certainly think we're going to see more money spent on biomedical research over the next few years, but more specifically about sort of your -- the higher end analytical instruments, do you think you'll see some money coming in for that?

Yes. It's -- one of the experiences from stimulus funding, which did not only exist in the U.S., but in Europe, special supplementary budgets in Japan, China, in 2009, 2010, we were a major beneficiary of that. A lot of that stimulus funding, at least then, was focused on higher end instrumentation that may be normally a university or researcher could not purchase out of their operating budget. So that was a -- that was actually a sweet spot to be in the higher end instrumentation. And we saw tremendous tailwinds from that in academia and government and med school research in 2009 through '10, '11. It lasts -- it had quite a long tail because it always took a while for that money to get deployed and then really use for specific grants and acquisitions. We expect something -- it's going to be not exactly the same, but we expect something along those lines. I mean there's some healthy signs. I mean there's lots of stimulus money floating around. Some of it, of course, just compensates for the shutdown and won't help us or our industry. But there's some good news about additional incremental of several billion of COVID-19-related NIH funding, perhaps more will be added to that. I think that will actually help all -- I think that rising tide will lift all ships and not only very, very specific viral research. And of course, our NMR and mass spec techniques play a pretty important role, structural -- functional structural biology on these RNA genes and protein antigens or viral proteins, which are the antigens, of course, looking at the glycomics of that. Look, how they interact, look how they might be screened against various drugs that are out there. All the way to establishing via NMR, how do the body fluids, plasma and urine, how do they react? Can we predict from the host response? Meaning the patient response, the severity of the disease. So there are many, many angles where our NMR and mass spec technologies and our cell microscopy techniques as well may very well benefit significantly from directly COVID-related research. And then I think from just very strong life science research funding patterns in general. There's one example about a big NMR funding package in the Netherlands. That was one of the first one that I very specifically became aware of for high-end NMR instrumentation that the funding proposals were put in before COVID hit. So that's why it was shovel-ready, if you remember that term. But so there are some that took shape and the clear direction pretty quickly. Whereas others, there's large amounts of funding that's still somewhat diffusely and then eventually, we'll get into grant proposal -- into grant rounds and specific grant awards, that still needs to sort itself out over the next few quarters.

Great. And we're coming to the end of the time, but I just want to ask you one final question that I'm asking all the companies. I mean what do you think are going to be the long-term implications of the COVID crisis on your business and sort of like the way your customers do business? I think how do you sort of see the world changing going forward?

Well, there will be -- we're -- I don't think the world will stay virtual. And I think at some point, we'll probably be at conferences together again and maybe without handshakes, I don't know. But I think there are some things that in terms of reduced travel activity and doing -- getting used to doing things more virtually as we do it today will become obviously much more prevalent. That's not a unique insight from Bruker. We've managed internally to do our pretty efficient R&D and marketing and so many other programs with a lot more people working from home and a lot more people staring at each other on in Zoom or Webex or Teams meetings or whatever we use and others are using. I think for the next 5 to 10 years and then something else may take center stage again beyond digital revolution and AI and all of those things. I think the biological, the bio revolution will be very much in center stage now. And I think the funding for it -- if any funding in the next 5 or 10 years benefits disproportionately, I think it will be for biological capabilities very broadly, but I think it will be excellent for the life science tools and diagnostics industry, and for Bruker.

Great. The bio revolution will be televised, to paraphrase an old quote. Thanks, Frank. Always a pleasure to talk to you. Thank you, everybody, for listening. Have a great day. Be safe, and we'll talk to you soon. Thank you for your support. Bye-bye.

Thank you, Derik.