Bruker Corporation (BRKR) Earnings Call Transcript & Summary

[Audio Gap] and health care analyst. It is my pleasure to welcome Bruker. From the company, we have Gerald Herman, who is the CFO; and Miroslava Minkova, who is Head of HR -- IR, sorry about that. And then I think Gerald has a few minutes of prepared remarks, and then we will jump into the Q&A session. So with that, why don't I hand it over to Gerald?

Well, thanks very much, Chris, and delighted to be here. Thanks for inviting us. I just had a couple of introductory slides. I thought it would be helpful for your audience to get a little bit of information about Bruker. So I've got Miroslava driving the slides, if you can just move to the next slide. I want to begin with just an overall introduction to Bruker, and this is the safe harbor statement, which we'll pass through. Just generally speaking, Bruker's offering significant leadership in the life science and tools and diagnostic solutions area. Many of you that follow the company may know that we've -- we introduced what we describe as Project Accelerate a few years ago. Those are strategically focused high-revenue and high-margin profile initiatives that were intended to drive overall growth in the company, both at the top line and at the bottom line. We recently announced expanded strategic initiatives in 3 specific areas, which we will spend a bit more time talking about in the conference. The first is unbiased proteomics and multiomics, which we estimate to be a $5 billion to $6 billion total addressable market. The second is spatial biology and single-cell multiomics. We estimate that to be a $3 billion to $5 billion market. And then on the microbiology and molecular diagnostics space, we think that's in about the $20 billion TAM level. As you may know, we've got significant offerings in each of these areas, and we are expanding our offerings, specifically. On the lower part of the slide, you see some of our leadership and our applications expertise. This -- many of you, I hope, have heard about some of our products in the space, fairly well-known around the MALDI Biotyper, which is a microbial identification tool, as well as the timsTOF platform, which we'll talk a little bit about in the conference, that focuses largely on the proteomics space. We also have leading market positions in NMR and in mass spectrometry. And of course, we have strong nanotechnology tools as well as some next-generation semi metrology applications that we market globally. If you go to the next slide, please? Here are the Project Accelerate, we call, 2.0. This is the expanded version. We have a hexagon in here which just demonstrates, at a very high level, kind of the core areas that we are targeting from a high growth at the revenue level and significant expansion on the margin level. So I won't spend too much time on this because we will talk a bit more about this in the conference itself. But fundamentally, we are focused on unbiased 4D Proteomics and 4D multiomics. You may know, we have a significant amount of offerings in the NMR space in this space as well as in the mass spectrometry space. We think we offer differentiated solutions to our customer base, and we'll talk a bit more about that as we go into the conference. We have a relatively lighter mix of biopharma and applied currently, but we are moving strongly in that direction. And we have introduced a number of exciting new products in that space recently. In the microbiology and molecular diagnostics space, as I mentioned earlier, one of our primary products there is the MALDI Biotyper. We recently talked more about our offerings in the spatial biology and single-cell multiomics, which is down in the bottom of the hexagon in this gold color. We recently did an acquisition of Canopy Biosciences, which takes us squarely into this space, and we'll talk a little bit more about that in the presentation as well. We have a strong reputation in next-generation nanotechnology, largely in our NANO business. We also have a significant business in semi and microelectronics. And then finally, an area that's been growing significantly for us is in the aftermarket. This includes consumable products, service, software, including scientific software that support a number of our other tools. Let's go to the next slide, please. This slide simply presents the historical view of both revenue growth, operating margin performance and EPS over time over a 5-year time horizon. We have a very solid performance, I think, on each of these categories historically from 2016 to 2019. 2020 is a bit of a data mark off the mark, I guess, I would say, largely driven by the COVID-19 pandemic and the economic slowdown associated with that. Overall, we're very pleased with the revenue growth profile that we put up over the last 4 years, tracks to about a 4.5% organic CAGR during that period. When you look at operating margin as well as operating margin performance, over that same period, we've put up very significant operating margin expansion, about 260 basis points during the 2016 to '19 period. We think there's more runway there, and I'll talk a bit more about that when we get into the fireside chat with Chris. I'm very pleased with the performance actually of our operating margin performance delivery over that 4-year period. And then on the non-GAAP EPS side, we have posted roughly a 9% to 10% EPS growth on a non-GAAP basis during that same period, again, a bit of a drop-off in 2020 largely due to COVID-19. But you can see the drivers of some of those growth factors down below. I won't cover them in too much detail now. If you move to the next slide. In -- as a part of our Q4 and full year 2020 earnings release, we covered -- we reinstated our 2021 guidance, and it demonstrates a pretty solid revenue growth on a reported level and an organic revenue growth of between 7% and 9%. We're targeting 150 to 190 basis points of operating margin expansion on a year-over-year basis. That's pretty solid growth, particularly considering the fact that we will have -- we're estimating a tailwind -- I'm sorry, a headwind of about 80 basis points on the operating margin line. And despite that, plus some delivery investments in R&D and select investments in sales and marketing, we still expect to deliver 150 to 190 basis points of operating margin expansion. Our EPS guide that we set out in January, February was $1.72 to $1.77. That's up sharply 27% to 31%. Even in the mid-range of that guide, that gets us well above our 2020 EPS performance and still above, actually, even at the midpoint, our 2019 EPS performance. So overall, we feel like we've got good momentum coming into 2021. I'll talk about that in a bit. But that's all the overview slides we have. So Chris, maybe we'll turn it over to you for starting the chat.

Great. Thanks, Gerald. That's a great overview, and I'm sure we will dig into some of those very shortly. But before we do that, maybe I just want to start with a high-level question here. So I mean, we covered Bruker for I think about 10 years now, and over the past decade, Bruker has transformed significantly. Just thinking back to 2010, the early 2010 period, Bruker has always been known for strong science, though that didn't always translate into strong revenue growth or just sustainable margin expansion. I think that certainly has changed over the past few years. And even last year, you executed very well, just given the unprecedented macro backdrop. So with that in mind, could you just talk about what have been the biggest structural changes to Bruker over the past decade? And how do you see these changes supporting the future outlook?

Well, hey, it's a really interesting question, Chris. I mean from my perspective, and you likely know, I've been with the company about 4 years. So a lot of the structural changes, some of them came before my time. But I would say one of the more significant changes that I have seen was our factory consolidation. Bruker was composed of a number of different separate entities that gradually were consolidated, not only operationally, but from a factory perspective. So our production began to get consolidated. And that was a meaningful step forward, I think, for Bruker, helped us to really develop, I think, productivity enhancements in a way that we didn't have the ability to, helped us to scale in a way that we're now benefiting from. So I think that would be number one. I think number two was we made significant investments in the decade in developing our leadership bench tree. So not only is it simply Frank, we now have a much stronger leadership team that's across the board, across all of our segments, all of our divisions. And it isn't only at the group president level, we have really developed very strong leaders within each of the divisions and in particular, addressing some of the market segments. So I think that was also a very significant change over the last few years, in particular. I think the other area that was really structurally critical to us was the identification of the Project Accelerate initiatives. That came in a few years. Actually, just as I joined, the strategic thinking started to form around those initiatives. And why that was important, Bruker has an enormous breadth of technologies across the spectrum. And why Project Accelerate became important was it helped us to focus on particular initiatives that can drive growth both at the revenue level, but just as importantly, at the margin level. And fundamentally, I think that was part of what was the challenge for us in historical years, where we had a lot of growth at the revenue line, but we weren't paying enough attention really to how the margin performance was going to get delivered. So I think having that focus and now even the expanded focus of Project Accelerate 2.0 has made a significant difference for the company in our ability to execute and concentrate on areas that were important. And then finally, I would just say, and I live in this world around infrastructure, building more infrastructure around the organization has really been critical and talking about the Bruker management process, some of the activities that we instituted around strategic planning. Our normal corporate financial reporting was very well-developed in the last number of years. I would also say, adding more structural elements around our project life cycle management, the way we approach the market in terms of market intelligence and then even just as simple as things like our lean processes that we introduced into a number of our factory operations and across many of our business processes really made a significant difference. And for me, also, as I think you may know, Chris, we introduced shared services, which helped us to concentrate a number of processes into more concentrated locations. That's helped not only from the margin side, but also from a controls and process perspective. So I think those would be sort of a few of my favorite things when I look back on what I think has really made the difference structurally to the company.

Got it. So maybe we could move into some just near-term dynamics here. So starting with 2021 guidance here, you recently guided full year organic revenue growth guidance growth to 7% to 9%, and that's against a pretty favorable negative 6% comparison. You didn't provide formal quarterly guidance, but you did comment that Q1 growth should be at least 15% against a negative 8% comparison. If we just assume that growth further improves in Q2 to plus 18% against a year-over-year comparison as 5 points more favorable, I mean, it seems like the second half growth only needs to be a 2% to 3% to get to your full year guidance range. I mean, from our seat, it seems pretty conservative given that the comparisons are still relatively easy in the second half. And hopefully, the global economy continues to improve throughout the year. So maybe just with these observations in mind, would it be fair to assert that your revenue guidance is highly achievable, and that really barring a step back in a COVID-19 environment, that there should be probably decent upside if you execute well?

Well, look, I mean, I think the way I think about this is there's a number of different factors going on still in the business environment at the moment. First, of course, is the COVID-19 backdrop, the variance and kind of the whole vaccination rollout. From our perspective, that's not really a certainty quite yet, unfortunately. And so we've put up what we think our numbers for the full year based on that backdrop. I mean very clearly, it's still early in the year. We're optimistic, of course, that the vaccination activities will roll out accordingly. There's still some uncertainty about what's going to happen in terms of the industrial recovery at this point. We have seen real signals and signs that suggest that we're on our way there. How fast it occurs is going to largely be driven by how fast we get to a new normal. So I would say the way we think about it is that we're managing this guidance for the full year. We're not looking specifically at quarters. We offered a little bit of color on the first quarter. And we've got some distortion in the quarterly run that occurred in 2020, and clearly, we think that that's going to level itself out through the rest of 2021. I would like to say that if things navigate nicely and we move our way through the year comfortably, we will assess the guidance as we normally would on a quarterly basis. And I'm hopeful that there will be some upside here. It's just early for us to be talking about that, I think, at this stage.

Okay. Maybe just moving on to what you had talked about in your prepared remarks just a little bit. But last year, you increased investments in Project Accelerate 2.0 as you broaden the proteomics initiative, viral molecular diagnostics, spatial and single-cell biology. How should we think about these investments in the context of your 5% to 7% growth target? I mean do these really support the growth target? Or are they incremental to that?

Yes. So I think about it this way. I mean we're making -- we have made, and we'll continue to make, significant investments in Project Accelerate 2.0. Part of those are -- part of that's our core elements of the business. We're really well-positioned, I think, in a number of these areas. We can talk about each one of them individually, if you would like. But brokers spend a lot of time and money with highly innovative products. We're leading in many, many opportunities in front of us at the moment. So we think that there's really good growth opportunities for us in these areas. We'll talk more about the multiyear time horizon when we get into June in our Investor Day. We're going to deep dive into the proteomics field, into the spatial biology space. And certainly, into more detail around viral molecular diagnostics. And I think that will get us to a place where you'll see more clearly what the longer time horizon will yield, both in terms of revenue growth and in terms of margin profile and EPS, ultimately. I would just say, we -- we're doing this all-in for the long run, Chris. I mean it's a situation where I think, with Bruker, we -- because of our shareholder base and the way we think about operations, we're very long-term focused. So the investments we're making -- or the investments we made almost a decade ago relative to ultra-high field NMR, for example, are now paying off significantly for us in terms of revenue growth and margin accretion. And the same will be true for the investments we made from an R&D perspective in 2021. Most of that will benefit forward years. And that's just how we like to think about it. And we're going to play that out in a more public way in terms of our multiyear expectations when we move our way into June.

I do want to dig in on a few of the key components of Project Accelerate. But before I go there. Last year, Project Accelerate represented about 50% of total revenue and grew high single digits in 2020, though I think that did benefit from just some COVID-19 revenue. But how should we think about Project Accelerate's growth going forward? I mean is it reasonable for us to continue to use the high single-digit rate?

I think it is. I mean look, we're very focused on this. As I said earlier in my earlier remarks, we're laser-focused on making sure that these are the areas that drive the growth. I think there may be upside there, certainly. And as we start to see the aftermarket growing at rates that are above the corporate average, we're clearly making a dent in some of the proteomics market opportunities. We have an established base in the Microbiology side already. You heard, I think, earlier, that we've built a pretty good molecular diagnostics space for COVID-19 testing. That turned out to be about $30 million for 2020. There's -- we don't see that as a sharp dropoff, actually. Going forward, there will still be COVID-19 testing even in other maybe smaller markets, but still markets that we play in. So there's still really, I think, significant opportunity for us in a number of these Project Accelerate initiatives, and I think it's across the board. You may also have heard, in our earnings call, we also see some pretty good opportunity in the microelectronics in the semi space. It's -- it showed a bit of a rebound in 2020, and we're expecting to continue to see that in 2021. So there's certainly hope for high single digits there and maybe something beyond that.

Got it. I want to touch on just timsTOF here. I mean this is, I think, one of the more important launches for Bruker and certainly has been very successful thus far. I mean I think the installed base is now up to $250 million and generated probably north of $50 million of revenue last year. But how do you think about the sustainability of the timsTOF opportunity? And I think Frank mentioned that it's serving a market of $750 million to close to $1 billion. So there seems to be lots of runway for growth ahead. I mean would that be a fair way to characterize it?

Yes. I think so. I mean we're very, very pleased with the launch of the timsTOF product back in 2017. It's early days for us. And a lot of papers are coming out, particularly around the proteomics opportunities. The technology that we offer, increased robustness, the speed, our sensitivity, I mean, it's got market-leading characteristics. So I guess I would say, at this point, we're still in early days. I think there's -- we have not defined the length of the runway quite yet. You may also understand that we're adding a number of additional features and elements to the platform. Some of those would be announced in HUPO as we move into the latter part of March here. So we've got some exciting elements in that portfolio, and we're just going to keep playing them through. I think the runway has got a long distance. Certainly, in other products, we've seen decades of opportunity here in some of our other product launches like this.

Okay. Maybe just moving to the GigaHertz NMR side of things. So I think you and Frank have estimated that could be possibly a $100 million market -- business. I think that was at the time of your Analyst Day. How do you think the market is developing relative to that target? And maybe just related to that, historically, this has been primarily a Europe play, but you're getting more placements in Asia and U.S. What do you think is necessary to drive more demand in Asia and U.S.?

Well, let's talk about each of those elements first. So first of all, I do think that the NMR to high-field space is clearly in the $70 million to $100 million target range for it as a market. It's premium product, as you likely know. It focuses on high-end research. So it's not like we're going to have thousands of these products in the marketplace. But fundamentally, it is really getting incredible adoption. You likely saw that we have a significant backlog of these units, mostly from Europe, you're correct. But the order backlog is continuing to build. We think that there is -- you probably saw, we have identified 3 units that we recognized in revenue in 2020. We're targeting 4 to 5 in 2021. We believe we have backlog, and we can execute on that backlog for the next couple of years and likely beyond that. And then to the latter part of your question, what do we think is driving this. So first of all, there are some very good signals, especially in Europe, but also, I would say, in the U.S. and particularly in China, that there's a lot of interest in core structural biology research and certainly, even in the proteomics space, where there's been some significant funding, for example, from the German government around particular research in proteomics. We benefited from some of that, I mean, funding. And I don't expect that that's going to disappear. In fact, I expect it's actually going to improve. We saw some signals here in the U.S., in particular, which has been underrepresented in that order backlog that you were talking about earlier. So I think, from our side, there's a lot of disease biology that still needs to be studied, and we think that the NMR ultra high-field tools are perfectly suited to do that. Remember, this isn't about freezing samples or crystallizing samples. This is a more natural state. So this tool allows us to look at binding characteristics, the dynamics, that has features and functions that other tools don't offer. So we think it's going to be significant going forward. And I would expect that to continue, especially for the U.S. and likely for the Asian markets in the future.

No. Certainly, I think we appreciate that this brings unique functions, unique features to structural biology. Maybe just one more on Project Accelerate here. On molecular diagnostics, Bruker is a much smaller player in the global molecular diagnostics market. How do you see yourself fitting into this competitive landscape just because it's been dominated by the likes of Roche and Hologic and others? Now what areas of molecular diagnostics do you expect to participate with your initiatives?

Well, it's a fair question. Look, we've made a living off of being niche players in some cases, and that has worked out reasonably well for us. What I would say is we target particular areas both within the market and even in the geographies. And we have a pretty solid channel. I think I'm sure you likely know, we have a very strong base in the microbiology area with our MALDI Biotyper microbial identification tools. And we have over 4,000 units in place there. We have a solid consumables business that supports that, and we have a pretty good channel associated with it. So we think introducing in more infectious disease assays, delivering COVID-19 tests together with flu assays, together with some microbial panels that work either together with or are complementary to some of our other MALDI Biotyper equipment is really an exciting opportunity for us. And we think that we'll be able to capitalize on that. And don't forget, even within the microbial -- microbiology space as well as in the molecular diagnostics space, we do have a fairly healthy business in a number of other areas, maybe not all on the viral side. But aside from COVID-19, we have tuberculosis testing. We have HIV testing activity still underway in very significant markets, both in Africa and in Europe, including in Central Europe. So we still think there's a fair amount of runway here. When you combine the channels with our sort of niche strategy, it feels like it's a positive for us.

Great. So we only have a few minutes left, and I want to make sure we touch on some key end markets here. Maybe just starting with the academic government end market, Bruker is over-indexed here. It's about 45% of your total revenue. Could you just give us an update on what you're seeing in terms of labs reopening globally? Or at this point, are most research labs open to some extent?

Yes. I would say that's true for sure in Europe and Asia, generally. Here in the U.S., we've seen some ongoing restrictions, but the labs themselves are open. It's a matter of how they're functioning. And our expectation is, particularly with the rollout of vaccines in the U.S. at the phase that it's going, that that's going to open up even further. So overall, pretty positive about the academic markets themselves and what it means from a lab perspective from the research side of it at least.

What about just the longer-term perspective? I mean there seems to be various pushes and pulls here on global research funding in the U.S. And the U.S. NIH funding, federal funding seems pretty strong, but maybe some institutional budgets are under pressure. Now HORIZON Europe and China funding seem pretty solid, too. So I would love to get your take on the longer-term funding environment.

Well, look, I think, particularly post-pandemic here, the funding, particularly on the academic research side is going to continue. I see no other way but up from here. I mean the market environment, particularly in Europe, continues to be quite stable. We saw that even in 2020 with the very significant backdrop of COVID-19. Our expectation is that, that will continue to perform well. And China, in particular, we think has got a strong academic research funding in place, and particularly under the circumstances, we wouldn't expect that to fall off sharply at all. And in the U.S., we're still seeing very good signals coming out in NIH. There's a full range of opportunities for the U.S., I think, on the whole spectrum of research funding. There's a lot of attention in this patient biology space right now. There's a lot of attention in the proteomic space. And I think the academic one is going to continue to be healthy going forward.

Great. So I think we are, unfortunately, out of time here. We had an ambitious question list, but we covered a lot. So thanks again for joining us, Gerald, and thanks, Miroslava. And thanks, everyone, for joining us on the line.

It's a pleasure. Thanks again.