Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Great. Good morning, everybody. Thank you for joining the 2021 Bank of America Health Care Conference. I'm Derik De Bruin, the Senior Life Sciences and Diagnostic Tools analyst. My colleague, Mike Ryskin, is also here. Our next company up for presenting is Bruker Corp. With us today from Bruker is Chief Executive Officer, Frank Laukien; President, Bruker Nano Group, Mark Munch; and Head of Investor Relations, Miroslava Minkova. Frank, Mark, Miroslava, welcome. Thank you for being here.

Thank you for having us.

Great. So Frank, I don't know if you want to make some opening comments before we get started or I can trip right into the questions whatever you would like to do.

Yes. I'd love to kick things off for a moment. As you've seen how we've started the year out very strongly, strong first quarter with about 24% organic growth. Our BSI scientific instruments segment bookings were up in the -- organically in the mid-teens. So that looked really healthy. Our gross margins were up 460 bps, and our operating margins were up over 1,000 bps, if you like, because it's really not meaningful at that point, but we were at 18.4% non-GAAP operating margin, and our non-GAAP EPS essentially tripled from last year. So a very, very strong start and continued good orders and backlog. Also for the second quarter, we've given some color as we call it, and admittedly, still with a weaker comparison from last year. We're guided to greater than 15% organic revenue growth also in the second quarter. With that, we have very substantially increased our guidance for the year. We're now instead of 8% at the midpoint for organic revenue growth, we're now guiding to 11% to 13% , which is 12% at the midpoint. So we increased that by -- basically by 4% very significantly. And we've also increased our margin expansion. We had previously looked at, again I'll just talk about the midpoint because it's easier, 170 bps expansion, and now we're looking at 60 bps more, 230 bps expansion of our non-GAAP operating margins. And finally, our non-GAAP EPS, we've increased at the -- [ well the ] range and at the midpoint by $0.10. So it looks like a strong year, looks like a good setup. And then maybe just briefly on some of the areas other than spatial and single-cell biology because that's for Dr. Mark Munch, the Bruker Nano Group President will talk -- make a few opening comments in a moment, but our Project Accelerate 2.0 and our operational excellence, the 2 key pillars of our strategy are really all working. I think they're working really well right now. So if you look at unbiased proteomics, timsTOF data, both orders and revenue grew north of 30%. If I look at some of the biopharma solutions for which we use both primarily NMR and mass spec that organically grew more than 30%. Our semiconductor and microelectronics tools, which are also in Mark's group Nano business, although we're not going to talk about that as much today, also grew more than 30%. So really very -- quite healthy. We don't have that much of a PCR COVID testing headwind. We have some. It did go down sequentially from Q4 to Q1 from about [ $14 million ] to about [ $7 million ], but overall, that's very manageable for us. And with that, I'll turn things over to Mark because today, if you don't mind, Derik, we'll put a little bit of more emphasis on spatial biology and sickle cell biology.

Absolutely, it was on my question list. So go ahead at it.

Let me talk a little bit about what's going on here at Bruker spatial biology. To put it in context, if you people remember about 8 or 9 years ago, there was this epiphany that all cells don't behave the same, not kind of spawn the single cell revolution of scientific discovery and a lot of companies grew through that. That was all [indiscernible]. You were studying single cells, you were taking out of context. Recently, there's great excitement. This great growth is around spatial biology or spatial omics, where you want to leave the cells in situ in context and look at cell neighborhoods and what's going on. So Bruker here -- I'll talk about 3 areas where we participate in that space. So on Slide 7, that everybody has, you'll see through our Canopy acquisition that we closed in September 2020, that enters us into acquire spatial biology, you can call it spatial proteomics. So we do targeted spatial proteomics where you can do cell genotyping, identify cells in the cell neighborhood, what kind of cells do you have and what concentration do you have them at, really important. What differentiates us in there is that we are very quantitative. To be quantitative, you have to be high resolution, you have to see the single cells, if you're missing cells, how can you be quantitative? You actually don't see everything. So you want to be single cell, but then you also have to have high dynamic range in your detection. So we're 8-log dynamic range in detection, which means you can see almost -- or feel something very bright, high concentration objects, you can still see the low concentration, so you don't miss information. So that, plus our artificial intelligence algorithms really deploy and leverage that 8 log, the combination of the single cell resolution we have is high-resolution plus this high dynamic range with artificial intelligence, really makes us very unique, very quantitative. So that's -- there can be a lot of pretty pictures in the field, you can [indiscernible] in situ things, but really for the scientists, it's about getting quantitative information. So that's what we do with Canopy. It's targeted spatial proteomics. It has applications in immunology, immuno-oncology, neuroscience. And so we're very excited about that in Canopy targeted spatial proteomics. On Slide 8, just briefly, we -- through our fluorescence microscopy efforts, we have a great [ conversable ] platform. It's the Vutara VXL, and it's really a spatial biology workstation. We do a number of things, but we have integrated with the -- integrated software for imaging, we've integrated the fluidics. And everything in the spatial biology space is about doing high-plex, bringing in new markers, imaging, washing them out and bringing in new markers again and getting to high-plex situation. So we've built here a Swiss Army Knife type platform, where you can do a number of spatial omics on it. And that can allow you to do spatial genomics, do chromatin tracing, do transcriptomics like ? Leading-edge OligoSTORM, ORCA, and DNA PAINT, smFISH or you can do spatial proteomics. And so some of the slides here, actually, the slide on the graphics there are spatial genomics. [ We've ] generated a lot of very high resolution spatial proteomics on this platform. So it's really this very versatile, affords many experimentation avenues for the research scientists, very much targeted at the research scientists, and that's the Vutara VXL. So it spans a number of the omics fields. And then lastly, very quickly, is we formed a new venture called Acuity Spatial Genomics, and it's to really move into this new frontier of spatial -- in situ spatial genomics, right? So DNA is not just a static linear strand. So back in the Human Genome Project in 2003, everybody was very excited to understand [indiscernible] what's the entire sequence? But that's just kind of the [ ladder ], if you will. You got to take 1.8 meters of DNA and get it into a 5-micron or 6-micron nucleus. So how does it do that? And it has to fold and it folds with a very defined structure. It's dynamic, the structure. And so those interactions in that structure are really important. And so this is a very new frontier. That's called in situ spatial genomics. So we formed this new venture. We'll be offering instruments, [indiscernible] and analytical project services, a very exciting field. It comes out of our collaboration. We've had a multiyear collaboration with Harvard Medical School with Professor Ting Wu. And -- so we have worked jointly as they kind of supply the chemistry and the biology, we supplied the imaging and fluidics and the software work and then that great combination is kind of work we've done over this multi-year journey to [ spawn ] and launch this company. Very excited about it. It's really a whole new frontier in spatial biology, but in particular in spatial genomics.

So just to ask some questions on this, is the Acuity, is that -- is this is -- is there instrument platform that goes with it or is it used on your existing platforms...

Yes, there'll be -- there's an instrument platform that goes with it. So it'll have its own unique kind instrumentation hardware [indiscernible] reagents that kind of makes the protocol very easy [indiscernible].

And a lot of this is certainly -- when you look at Canopy, and these other ones, I mean a lot of that [indiscernible] developing content, developing the probes [indiscernible]. What are you -- who are you working with in Canopy, for example, to validate your antibodies? Can researchers send you things and then you can turn that into it. I'm just curious on like how you're developing the content for what is there? Because obviously, the next question is, there's a lot of protein. But how do you choose -- what do you [indiscernible] focus on?

Yes. It's actually -- it's a great question because we have an open system. So we -- in terms of the biomarkers and antibodies, so we validate, we have 214 validated antibodies that researchers can pick and choose from. And so they can come from a variety of sources. And this is very different than people -- companies that have closed systems where you can only use their spatial antibodies. So what researchers really love, and this is really another differentiating factor for Canopy is they can come to us and say, "Hey, we love this panel that you have of, say, 20 or 25 biomarkers that we use for immuno-oncology. Can you add, please, 3 or 4 more." And for us, they love that about our system because it's just very open system and you go source these biomarkers from a number of places and then we validate.

So when you look at sort of like the spatial offering, that you have, how are you sort of looking at this? I mean, since we're all financial people here, it's like, how are you looking at the market opportunity and sort of like the growth opportunity for those? Just some broad pictures in terms of the financial metrics?

Yes. It's clearly a very dynamic area, high-growth area. What the market is seeing is pushed into spatial proteomics and spatial transcriptomics. And the proteomics expression and transform expression are important. Those are things that have already happened. And so how we see it is we're also going to bridge and get the full context to the spatial genomics where it all starts. Blueprint is in the DNA in the nucleus. And then building this portfolio where you can actually look at the expression, for example, in the targeted spatial proteomics. And so very -- the whole area is very high growth, as everybody's seen, wide range of TAM is since out there, you've seen in our slide. We've put in the kind of $3 billion to $5 billion TAM. You'll see larger numbers out there. We've, I think, taken a very prudent approach to that. But both -- the whole spectrum is high growth, the spatial genomics to transcriptomics to the spatial proteomics.

And Mark, since you're here, I'm going to switch and take advantage of you being here and staying on Nano. So how are the microelectronics and the semiconductor metrology markets bearing? I mean, we're obviously in some sort of [ chip ] shortage, how does that translate to Bruker for being a player? I mean, are all these big capacity expansions that are happening [indiscernible] the company, I would assume they would be.

Yes. Yes, [ they've ] been great. Great way to think about the semiconductor market is there are technology buys and there's capacity buys, right? So the technology buys where you're pushing the edge, you're trying to get to 5 nanometer, 3 nanometer. So a lot of our business has been propelled by that in 2020, 2021, which is really for those major foundries pushing the latest nodes in technology. So we -- 2020, 2021 are propelled by that. But then on top of it, due to some of the dynamics we saw in 2020, this thing is going massively digital and people having to go digital through the pandemic, then you start seeing these capacity buys on top of it with a very strong. The demand for chips going into server farms, data farms as we're trying to pump more information at a rapid rate around the world or smartphones or personal devices, those are -- all those segments were up. It truly was across everything from front-end semi to back-end packaging for us, hitting on all cylinders in 2020 and continuing into 2021. It's a very good time to be in semi here right now. And we do semiconductor metrology. So what we do is we characterize the goodness of the manufacturing as they're making these chips and as they package the chips. So it's really good.

So Frank, I want to switch topics and go to -- talk a little bit about some of your other segments. Can we talk a little bit about BioSpin? We're seeing a bunch of money coming in to the life sciences markets. BioSpin NMR was a beneficiary during the financial crisis when there was a lot of funding going on for support. It's been 10, 11 years since that time. Are we at a new era of NMR and people upgrading, how do sort of like some of the new funding environment look for the NMR market?

Yes, I would think so. Certainly, in terms of the science, the disease research, the fundamental discovery in cell biology, molecular biology and disease research, NMR is -- ultra-high field NMR is having a renaissance, if you like. I think there's so many more additional biological and disease biology questions from neurodegeneration to cancer to COVID drug discovery that we can address with NMR with what I call structural -- or functional structural biology, which you don't get from cryo-EM. Cryo-EM is tremendously important, but in frozen structures. Similarly you have crystallized structure. So the closest to physiological conditions is NMR, for sure. And quite honestly, the cryo-EM NMR combination is particularly powerful for doing functional structural biology with real biological insights, it's not just structures, that's not the end, right, you really want to have biological and disease biology insights. So interestingly, as you know, Europe has gone first. Europe has invested very, very heavily into GHz-class NMR, and we have mostly European backlog until about middle of '23 with good -- we expect 4 to 5 systems this year to we already did in Q1. The rest will happen -- we expect to have in the second half of this year. But to your question, probably, while it's not clear yet, we think there is a very good chance that the U.S. will perhaps take major steps in the next year or 2 in funding to have that fundamental -- for disease biology, very fundamental infrastructure and capability. U.S. researchers can't just fly over to Europe and spend a couple of weeks there running their samples. So we need this here in the U.S., and I think it's becoming very, very clear to many researchers, but also to the federal funding agencies. So I am guardedly optimistic that the U.S. will begin to catch up in the next 1 or 2 years, at least within initial orders. Deliveries of these systems would then go later into '23 and '24, which gives us a pretty good runway. Only one country in Asia, South Korea to be specific so far moved into that direction as well. So I think all of all -- essentially all of Asia still, which is usually 1/3 of the world market for us, also is still coming alive, although I predict that the U.S. will go first.

Great. As far to speaking to the U.S., I mean, Bruker relative to some of your other life sciences peers is -- you're marked -- you're less exposed in the U.S. market than some of your peers, just by the legacy of the company. It's like -- what are you doing to sort of increase your exposure in the U.S.?

Yes. Historically, that is true. And in some areas like in mass spectrometry, you still notice that in MALDI Biotyper, you still notice that the adoption, there's about 2,000 MALDI Biotypers in Europe and about 1,000 roughly in the Americas, rough numbers. So there's a lot of additional potential in the U.S. In the U.S., we think that the -- for the MALDI Biotyper, we develop on that topic first, we think that the FDA approval at the very end of last year for the MALDI Biotyper Sepsityper kits, which allows nearly universal bacterial and fungal identification from positive blood culture in cases where a patient is going and has gone into sepsis can be a tremendous boost because in addition to the already very good economic arguments, it's faster, better, cheaper, it's more universal, it also adds this potential life-saving or at a minimum, ICU time-saving, faster recovery for patients. So that is a non-strictly quantifiable financial, but very, very important driver. And our initial adoption of existing MALDI Biotyper customers in the U.S., they're literally right now waiting in line to get this new workflow onto their instruments or from a consumables workflow from a consumables growth that will be good. But I think it will also lead to a much more significant penetration and adoption of MALDI Biotyper systems in the U.S., where there's a lot of catch-up compared to Europe, as the need should be about the same. Similarly in mass spectrometry, we had traditionally not -- our market share had been weaker than in Europe, and you've seen that even weaker, quite honestly, than in China or Japan, for that matter. And that's changing with the timsTOF franchise being so differentiated, allowing this 4D unbiased proteomics as well as lipidomics and some other cool new applications in imaging, mass spec imaging or lipids and metabolomic tissue imaging, another type of spatial biology, if you like. So with that and our strong push into biopharma, we have seen the tide change or at least the beginnings of the tide change. So our U.S. market share from a lower level is also now growing pretty nicely. But we have some -- we have a long runway to go before we have a similar market share in the U.S. as we have in Europe. But it is a priority for us not only great new products and operational excellence and productivity, but also commercial coverage in the U.S., we've been expanding that steadily, and these are 2 good examples.

I mean do COVID give you a different -- I mean, given that some of the sales and service infrastructure has sort of changed, I mean, does sort of COVID give you an opportunity in the U.S. that maybe you didn't have previously that maybe those markets are a little bit more amenable now to some openings.

Certainly, the new normal, which I don't think -- even as we take the masks off and are vaccinated, I think that a lot more meeting like that salespeople can cover more customers and more geographies have less windshield time or airplane time and more time face-to-face, by Zoom or Webex or Teams or whatever with customers. I think that has -- that's beneficial for everyone. That's just efficient. That will help us quite a bit. It may also help us incrementally in the U.S., as you have suggested. But I think we'll never go back to the 2019 levels. I think all marketing and sales and even service delivery and training delivery will -- irreversibly have become much more efficient by doing more of it remotely. I think that will be part of the new standard. So everybody expects to go back to some sort of a hybrid between 2020 and pre-COVID 2019, and we are no exception to that. We're very much planning for that.

So Frank, you've -- Bruker has a very long history of doing a lot of interesting technology, tuck-in M&A. I mean you don't -- Bruker always seems to find these little companies that are out there and sort of bring them in. Can you talk a little bit about your capital deployment strategy? Is there still a big playing field out there of technologies that are of interest to you? And just a little bit about the capital deployment philosophy?

Yes, I'll kick things off, and then I'll turn things over to Mark, who's done a lot of M&A within the Bruker Nano Group that got us into some of these new fields, but also some traditional just bolt-ons that are just good for margins and growth. Our capital deployment strategy hasn't changed. So first and foremost, we invest in the business. And you've seen our R&D investment has gone from 9% to 10%. We may even keep it there for a while because we have these incredible opportunities in proteomics, in spatial biology, in diagnostics and elsewhere. We've had significant $100 million per year CapEx for productivity, operational excellence for the capacity for the next 10 years. We do fund our dividend. It's modest. Then we look at M&A. If we find good M&A -- we often have found good M&A that also has good medium to long-term ROICs and have got less into key new fields. And of course, last but not least, when the timing is right, and we don't need our cash elsewhere with a conservative balance sheet and maintaining that we do, we also do share buybacks. But Mark, why don't you give maybe a couple of examples of M&A that you've been doing within your group because it's a good example.

Yes. There's kind of 2 categories, I guess, I can flavor, if we go back pre Canopy, that was the, I guess, the latest one. We do very successfully these bolt-on these financials where we can find a company that -- where we can use our global reach and our sales presence. And these have gone very well. So these are companies like Hysitron and nanoindenting or JPK and Bio-AFM, Alicona in noncontact, surface metrology or even in RAVE mask repair. So all those are kind of more close to home in our market segments, very good financially, gives very accretive operating profit and add revenue growth, of course and accretive to earnings and great returns. And so those are one category that we do. And those are -- we'd like to be in the midst of both those. And then the strategic ones, getting us into the areas like Canopy Biosciences or Luxendo and light-sheet to study 3 dimensional [indiscernible] and cell cultures. So we've done a lot of ones that are in both camps successfully and truly kind of having -- both categories works very well.

Frank, you've got an Analyst Day coming up at the end of June, so I don't want to steal any of your thumb from that one. But how should we sort of think about the margin progression in the company as Project Accelerate kicks in?

Yes. No, we remain committed to margin expansion. This year, we'll take a bigger step, of course, after a bit of a step down last year, admittedly. Yes, that's correct. But we remain committed to margin expansion. We never try to maximize it because we, first and foremost, want to invest into these new Project Accelerate initiatives and operational excellence into our growth and productivity, but we remain committed to steady margin expansion. And yes, we'll give a new multiyear outlook. We expect to do that on June 17. But we always solve for that. We deliver margin expansion and then, hopefully, good growth and good strategic moves elsewhere. So we remain committed to that with -- and then other than that, hopefully, you will join us on June 17 online.

I will be there. The final question, Frank, it's the same what I always ask companies, it's like, what do you think is still underappreciated about the Bruker story that you think [indiscernible] still misses?

Well, I think right now, there -- I think, finally, it's becoming clear that proteomics is important. That's also now a major investor theme. I think the fact that we're both in targeted and untargeted unbiased proteomics and the untargeted unbiased, of course, also taking us into the epiproteome, which is the post translational modifications that are almost as important as epigenetics is to genetic. So phosphorylation in signaling and cancer, glycosylation of cell surface again in cancer and shielding viruses and shielding cancer cells against the immune system, there are so many things that you can only do with unbiased proteomics and there, I think the 4D timsTOF proteomics platform is just tremendous. But Canopy with targeted single cell proteomics today for both tissue and suspended cells, like I wouldn't want to just bet on one. I think they're both really very, very important. And I think we're playing a major role in that. And then underappreciated because it's still really -- under development and under construction is our big push into spatial and single cell biology. You've seen some elements. You'll see a lot more product launches coming out of Canopy and then as Acuity with its 3D spatial genomics, basic discovery gets going with services and products in the years to come, plus additional drivers, I think it's going to be incredibly exciting and gets us into among the larger, more established companies, probably the one that is in the most exciting growth areas while delivering revenue and margins and margin improvements. So I think that's a good combination.

And with that, we're out of time. Thank you, Frank, Mark, Miroslava. Appreciate it. Investors, thank you for listening. [indiscernible] coming up [indiscernible]. We appreciate it. And thank you, everybody. Have a great day.

Thank you so very much.

Thank you.