Bruker Corporation (BRKR) Earnings Call Transcript & Summary

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Great. Thank you, and thank you, everybody, for joining the Bruker fireside chat today. We're lucky to have with us Gerald Herman, CFO; Dr. Falko Busse, President of Bruker BioSpin; and Miroslava Minkova from Investor Relations. This will be a fireside chat format. So if you have questions, please e-mail them to me at [email protected] or you can use the question tab on your conference portal. And with that, welcome Team Bruker. Thanks for joining.

Thank you, Dan. Thanks for having us.

So we'll start off with a high-level question. Gerald, can you talk about the business environment currently and the business conditions? The business conditions, which were contemplated in your 14% to 16% revenue guidance for the year and how things are trending vis-a-vis those assumptions?

Yes. It's a good market demand at the moment, very encouraging on most levels. I guess I'd say our order bookings performance historically in the first half was really encouraging for us across almost all of our business lines. You understand I know that we have a solid academic government research market segment that we play in, and those are very healthy markets at the moment. We see some very good signals on the funding side, particularly in the Americas, but also true in China and certainly in other markets as well, including stable markets in Europe. I'd say, generally speaking, we feel like we're pretty much on track. The market dynamics are clearly more than just a bit of a catch-up. It seems to us that this is more than just recovery at this stage being industrial markets improving, academic, solid biopharma still very solid for us as well. All these point to a pretty encouraging performance for us, I think, for the rest of 2021. There are a few things we baked into our guidance, specifically around supply chain risks, and there are clearly some supply chain risks in the system. This is more than just chips. We have some transportation, logistics challenges. There are some challenges going on in China as well at the moment. But nothing that we see at the moment that's going to move us off of the position that we have now on our organic revenue growth targets or our profitability levels as we lay them all for the full year. So pretty healthy, I'd say, Dan. Very pleased with what we see thus far.

And a couple of specific questions that came up yesterday for your peer group. One, the semiconductor industry. So what are the signs you're seeing in the semiconductor industry right now? How durable is the strength of the order book there?

Yes. Well, it's very solid. And we've been now in, let's say, probably our second year of really good net order bookings performance and actually revenue performance in the semi metrology and microelectronics area. It is a cyclical business. So we don't expect that to be a perpetual experience, but the good news is what we see on the horizon for us is pretty promising as well. It seems as if events like this and many other Internet-related activities are driving semi demand up shortly. And our quality control instruments and others, microelectronics pieces that we produce, services markets is really very positive for us. So generally, we're pretty encouraged and we -- the flip side is we have a number of chips and some elements in a number of our products, software elements and a number of our products get more sophisticated, we include those products. So we're balancing that piece of it. So far from the supply chain side, we're feeling pretty good about it, and we're benefiting on the demand side.

And is your semi metrology portfolio more research-driven or production-driven?

It's both, although we're -- I would say, we have a very solid footing in the quality control side, but we do have a number of products that would also focus on the research element. So I think it's pretty encouraging on both sides at the moment.

And then the other question that came up yesterday, before we move on, is China. So China has been a source of strength for many, but the PMIs have weakened there of late. They've had some regional COVID responses that have impacted business for some folks. So can you update us on your thinking in China?

Sure. Getting a lot of questions on China today. It's just generally, our -- first of all, China is a very substantial market for us. We do not have production and research operations in China, so we're less exposed than some of our peers with respect to that. But I would say, we're still seeing very solid order bookings demand in China. There's a few logistics and sort of tax-related -- tax exemption and certificate-related hiccups along the way, but we've been navigating through those relatively well, I would say, and continue to do that. Still a strong market for us, and I'm expecting it to continue well throughout the rest of '21.

Okay. So with that, let's pivot a bit to BioSpin. First question on BioSpin. Falko, can you walk us through the supply-demand trends in ultra-high field NMR?

Yes. So let me give you 2 perspectives. The one is, of course, that we have been collecting orders for quite some time. So we have a pretty solid backlog of systems. And 2 years ago, we have then finally started to ship and install these systems and build up the capacity in our factory to do so. And we are now still, let's say, about 1/3 through our backlog. So there's still significant number of systems left. So that's the one view, which gives us confidence that we are able to sustain and even grow the delivery and installation of these systems. The second view is then more the funnel of existing projects. And here, we see kind of a regional sequence. So the first wave of orders came from Europe, 9 or 10, and then now we have seen the first orders coming from North America. So I think there's 3 orders now in and there's funding for at least one more system. And then now we also see interest going up in Asia Pacific, very solid projects there as well. So as we continue to deliver on our backlog, of course, we are investing heavily in these new projects and filling the pipeline with new projects. So we see that demand is still there. North America increasing in demand, still some projects in Europe as well and then Asia Pacific coming up with demand as well.

Are the competitive dynamics in the Asia Pacific region different than in the other 2 regions?

No. You mean for ultra-high fields or general?

Yes, ultra-high field.

No, they are not so different. There is -- we are the only supplier of these systems as we speak. So this is really about demonstrating the value for research and then getting the funding from the local agencies in place.

Okay. I think the one competitor over there has talked about a 1.3 gigahertz, but I can't recall if that's a white board or if they've launched it, if they've announced plans and if that had any impact on customer dynamics.

Yes. So that is a research project that they announced that had a time line of 10 years. So that -- if successful, that is going to deliver only in 2028. And I guess, at that time also, Bruker, we will have an answer to that one.

Okay. I'll worry about 2028 in 2027. How would you describe the supply-demand dynamics in the sub-1 gigahertz NMR market?

Yes. So we typically look at the end markets there. For us, there's the academic and government research market, but then we also have the biopharma market, we have industrial markets and so on. So in the end, it's a mix of all of these, or a blend. The academic and government research market, we see for a couple of years now a relatively stable growth in the low single-digits range, which is also we expect that to continue or maybe even accelerate a bit because there is some pickup, as Gerald said earlier, also in the academic funding side. But then we have the pharma business, which is very strong for us. Miroslava mentioned that. And even in 2020, but continues in '21, it's really very strong growth. And it's a sizable business for BioSpin at this point already. We also see some good growth in other markets like industrial markets, in the food industry but also we are entering -- or we have entered clinical research, which is also growing at a nice pace. So overall, I think our expectation is that the market for NMR will grow at the same rate as our, let's say, corporate average, which is, I think, very healthy. What I also wanted to add is that increasingly aftermarket gets more and more important for our business as well. It's growing faster than the rest of the business for us. And that also is first a very nice business because it also delivers very healthy margins, of course.

Okay. Is there any replacement cycle to speak of in the NMR market? I know a couple of years ago, I think Frank talked about the AVANCE NEO and dimensionalize the console replacement opportunity. I haven't asked for an update on that in a while. So perhaps you could offer one. If that's something even worth spending mental calories on, you tell me.

There's a significant replacement business. So typically, we launch major new consoles every 7 to 10 years. The last one we launched about 4 years ago. So that is in the middle of that replacement cycle and it actually is a very healthy business as well. So of course, we can address our own installed base for replacements, but also competitors' installed base, and we have a very strong product to do so, and it's also a high-margin business for us. So yes, this is interesting for us and it's actually going well.

Okay. What's your current thinking on wallet share between NMR and cryo-electron microscopy in the structural biology field?

So cryo-EM has received significant funding over the last years, and it's a very worthy competitor in some areas because there we address the same questions, but there's other areas where NMR has unique capabilities. So there the funding is also not challenged. We have seen -- we have run some studies in North America and Europe. Also in cryo-EM, you see certain funding cycles. Our observation is that the funding overall for cryo-EM seems to be stable in North America and also in Europe. So there's no -- let's say, no dynamics towards cryo-EM in my point of view. We continue to emphasize the strength of NMR because only NMR can really determine in the end the very important, let's say, structural and dynamics information, which is needed in many applications. And that gives us also confidence that we will continue to compete well in this space.

Okay. And circling back to a point you made earlier that the pharma business was strong in both 2020 and 2021. I know increasing penetration of NMR and pharma has been a focus of Bruker for years now. How would you describe your progress and how much further work you have to do to increase penetration of this technology in that end market?

So [Audio Gap] in biopharma had 3 axis. The first axis is we wanted to support the ongoing trend towards what's called biologics. So large biologic molecules, which are used as pharmaceuticals, so develop the tools to support that part of the pharma value chain. The second axis was to also move from, let's say, big pharma towards more CRO and CMO type of companies to support them in their business. And the third one was then to move along the value chain in pharma from the early phases. So the discovery phase into development, but then also in manufacturing. My perception is that actually all 3 axis work. We see our business in CROs picking up significantly. We have launched several solutions to support biologics. And now with our Benchtop, we are also entering the quality control and manufacturing domain.

Okay. So quality control for large molecule drugs is something I hear your mass spec competitors talk about a lot. Is that -- help me -- can you elaborate further on the NMR opportunity in QC and what products adequately address that? And what types of molecules are best assessed and characterized by NMR versus other modalities?

There's 2 things. So of course, let's say, part of the drugs are still small molecules, and there you use NMR just for online or at-line quality control. But more and more in the pharma industry, especially for biologics, you have this concept of PAT, so Process Analytical Technology, where you design basically the quality into the manufacturing process, and then you need sensors to measure all the time what's going on into these bioreactors and then adjust the parameters inside. And that will be handled by a multitude of, let's say, analytical techniques, and NMR will be key in there to look at very specific parameters in these bioreactors.

Okay. So not necessarily a direct overlap with the mass spec characterization method, rather a complement in a suite of...

No. Actually it's complementary.

Got it.

Exactly, yes.

Understood. Can you offer an update on the preclinical imaging business?

Yes. So the preclinical imaging business actually is on average growing a little bit faster than the NMR market. So it's a healthy business right now. It has interesting opportunities, of course, on the academic side, but also there's new applications coming up, especially in neurology, looking at neurodegenerative diseases, for example. And we are actually keeping our very strong market position there. We have continued to innovate. And actually, the business is currently growing, I would say, above average.

Okay. And maybe one last one on BioSpin. Can you speak to BioSpin margins? I know you don't offer up segment level operating margins quantitatively. But qualitatively, I mean, you have a very strong market position in BioSpin. Do the margins reflect that compared to what we would expect from a business with your market position? And is there room for improvement?

I think we can say that the margins reflect our market position. So I think it's fair to say, news level, that our margins are above corporate average, and the -- as always, there's also room for improvement. The -- we continuously work on our gross profit margins. Looking at our operational excellence is one of the key things. We are continuously designing our products to be much more, let's say, easily manufacturable and also we reduce costs all along the value chain. So yes, we will continue to see margin improvements there. Also with the change towards, as I said, a more -- a higher level of aftermarket, be it replacements or also services, that will also drive margins further.

Okay. The concept of easy to manufacture just seems to be discordant with the ultra-high field NMR business, but maybe that's...

Yes and no. Actually, even in ultra-high field, we are looking into new designs that would make them much easier to manufacture in the end. Because that also then leads to easier installations and overall lower costs.

Okay. So moving on from BioSpin specifically, let's talk a little bit about Project Accelerate. And the first specific item within Project Accelerate I'd like to address is timsTOF. Could you discuss where you are in the adoption curve of timsTOF? How you think about and frame the adoption curve over time? What's the shape? Any elaboration?

Sure. I just want to add that I would echo what Falko said, there's always room for gross margin improvements in BioSpin.

Thank you, Gerald.

He knows how we all feel about that. In any event, relative to timsTOF, it's a exciting product portfolio we, as you likely know, introduced 3, 4 years ago. Terrific adoption, I'd say, on the scientific community, a lot of pull in the academic institutions to get more of this product into their space, focused largely on proteomics. Really kind of a game changer in some respects. I guess, I would say, coming in from a very sort of soft, very small market position, we've kind of elbowed our way in fairly quickly. I'd say we're still on the early part of that S-curve. We've got about 300-plus units in the marketplace now spread out across the globe. We do still see significant opportunities for growth and that we're starting to move -- starting to move that curve in a pretty significant way. I don't have crystal balls to say exactly where we are on the curve. But these products in the whole portfolio, I think you know, Dan, we're not just dealing with one product here, we've introduced a series of products, and we'll continue to introduce new products into the marketplace that address the needs of the scientific community. So I would say it's a sizable market opportunity for us. We're just starting to get into it in a deeper way. We've got terrific products that markets seem to be really interested in. We even have some customers that are ordering 3 and 4 of them for 1 lab. So this concept of tandem timsTOF playing in the marketplace is kind of exciting for some of us. So I think it's a multiyear S-curve, and we're in the early stages of it. So most of the products that come out with this scale, we talk about decades of performance, not just a few years of performance. So I think we're just getting started with it. Scientific differentiation is pretty significant. Miroslava, you can add more to that, if you'd like. But I think we're pretty confident that we're making a difference at the moment in this product portfolio, very well received.

Okay. So early innings of a 30-year S-curve, am I playing that back correctly?

Yes. It's clearly decades. I don't know how long that curve lasts. But if you look at our competitors, they've been playing on that curve for a couple of decades already.

And Gerald, could you remind me how you're framing the TAM, both from a research-only perspective and then what incrementally could occur if this technology migrated into diagnostics?

Yes. So I mean I think we've been reasonably -- maybe conservative is the wrong word, but I think we've been reasonable in our positioning on the TAMs to begin with. It's largely being targeted towards research markets. And you may have seen single cell proteomics instrument we've just launched. I mean that's a high-end instrument. It's really for kind of cutting-edge research work. So the plan and strategy is pretty straightforward. We get into cutting-edge technology labs. We collaborate with key opinion leaders. They produce papers and data and science comes out of it and that populates more demand across the way. So I think, generally speaking, it's an exciting opportunity for us. We look at this eventually moving more further in the clinical side in the diagnostics perspective. We've already seen quite a bit of uptake in the biopharma markets, which is kind of unusual for a product at this early stage. Normally speaking, our products don't move to biopharma until many, many, many years afterwards. Here, we've been able to play through both the research side and perhaps just the timing of COVID and some of the other sort of dynamics that are hitting the market at the moment put us in a pretty good place on the biopharma side. So we think that's going to position us pretty well for some other diagnostic elements that will come forward in some further developments as we look forward.

Okay. So moving to a different lever within Project Accelerate. How would you frame your midterm growth opportunity in microbiology?

I think it's quite solid. I mean you likely know, we have a significant installed base, particularly of our MALDI Biotyper equipment and consider it's the gold standard of microbial ID. And we have a really good solid foundation from which to build. We haven't finished with that building activity. And generally speaking, I think there's significantly more opportunity, particularly in the North American geography and also, I would say, even in the APAC region to the extent that it hasn't already been -- that demand hasn't yet been met. So in addition to that, we do have a series of other portfolio enhancements in that area, including antibiotic susceptibility testing. We have other workflows. We've now added into the marketplace a Sepsityper product workflow as well. So it's part of our broad strategy just adding to these successful product portfolios and expand them. The other thing I need to mention is, as Falko mentioned on his aftermarket side in his business, we see very significant aftermarket opportunities continuing that the microbiology business is now approaching this greater than 50% of that whole business is in the consumables and assays and aftermarket side. So that's a really interesting driver for us, not only from a growth -- revenue growth perspective, but also from a margin perspective as we look forward.

Maybe that's a good transition, before we run out of time here, I do want to address the margin side of the equation. What would you say are the biggest margin expansion drivers for Bruker over the next 2, 3 years?

Well, we've talked about a few of them already. I mean, to a large extent, it's just the changing mix of our product portfolio as we continue to drive higher revenue growth from these Project Accelerate 2.0 initiatives and the products associated with them, we pull up our overall gross margin performance. At the same time, I think you know, Dan, we're investing pretty heavily in our R&D activities, particularly in these initiatives. These are targeting particularly around proteomics, spatial biology and some of our NMR activities, and we're pretty optimistic that we're going to continue to innovate at the level we have. And what that does is it gradually moves that price point up because we have technological advantage in the marketplace and we can demand more higher prices. In addition, I think you know this, but we are pretty focused on operational excellence across all the businesses, and that's also pushing our -- those gross margin numbers higher. So the outlook from my perspective, and we have done quite a good job on operating margin expansion. Historically, I don't see the end of any innings on that either. We're still working really hard in those areas, both on product side increasing as well as on the production side and our gross margin performance. And of course, we have pretty good cost control on the operating expense line so far.

How big a difference is there in kind of rough strokes between gross margins on the Project Accelerate initiatives and what you have on some of the legacy business?

Yes, it's sizable. But what I would say, Dan, is it's -- we currently are in the marketplace where we've got pretty solid demand in a number of other areas. Even in the industrial markets, we've started to see better performance there than we have seen in several years. So I still think our Project Accelerate 2.0 product portfolio carries higher than corporate average margin performance, both at the gross margin or the operating margin level. But fundamentally, this happens to be a period where our industrial base is also contributing nicely.

Okay. And if you were to think about relative contribution from mix versus operational excellence, how would you frame that? Is it half and half, 2/3, 1/3? Like what would be a good way to think about it?

I'd say it leans more towards mix and less towards operational excellence. But I would tell you, we haven't given up at all on operational excellence initiatives. I'm very focused on them, and so is Falko and all our other group presidents. So we spend a lot of time from a management and leadership perspective improving that.

Okay. Well, with that, we're out of time. Falko, Gerald, Miroslava, thank you all for joining us today. We really appreciate your time.

Thanks a lot, Dan.

Thank you so much.

Thanks again. Bye.

Bye-bye.