Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Thanks, everybody, for joining us. Man, it feels great to be back in person at the Jefferies London Conference. I'm Brandon Couillard. I cover the life science tools and diagnostics sector here at the firm. Very happy to have Bruker with us back at the conference in person this year. And joining us for this conversation, CFO, Gerald Herman. Thanks for being here.

Hello, everyone. Yes, pleasure to be here. Thanks for all of you for being here.

Maybe just to start off the conversation, I think it would be helpful just to sort of level set the year, which has been pretty impressive in terms of you've been putting up successive series of big beats and raises. If we look at where you're kind of expecting organic growth for the year, you're talking kind of 17% at the midpoint, which is double where you started the year in terms of initial guidance for more like 8% organic growth. What markets have most surprised to the upside? And just kind of what are you seeing from a big picture view kind of across the business?

No, it's been an interesting recovery, kind of rebound, I guess, I would say, more broadly, it's very clearly beyond what we would describe as a rebound from the COVID-19 experience. We've seen very strong recovery from an economic perspective in a number of different markets in the end market space. Brandon, I'd say the first is around the industrial elements. This is true not only in the United States but across -- more broadly across most of the markets. Industrial markets, industrial research, the applied markets, we performed very well in the biopharma space beyond actually what our expectations were after a very solid 2020 in the biopharma space. And I would say also, our performance in the academic and government research space has been really encouraging. There's a lot of solid growth in the European markets historically, and this tends to be part of a trend as we see economic challenges occur. The academic, government funding markets continue to strengthen, and that was the case for Europe. And now we're starting to see funding strengthening across the U.S., as well is continuing to perform very well in the APAC markets, China in particular. We do have some pockets where I'd say not quite as exciting as we had hoped. India, Japan, but generally speaking, broad-based demand across most of our markets geographically and in these end markets.

Is there a way to segment, if we look at the top line this year kind of 17%, how much of that is market? How much of that is new product introductions, for which you have a lot going on?

We do. We do.

And maybe share gains, is there a way to sort of frame kind of the sources of growth?

Well, I think it's all of those. We're clearly picking up market share in a number of key areas. And I would say, in our case, actually, because we're somewhat underrepresented in the biopharma space, I would say we're starting to move more dramatically into that space. The other areas, I don't know, it's hard to exactly parse out how much is new product portfolio elements versus current economic conditions. It's really encouraging for us to see broad-based strength across most of the portfolio. This is true across all of our business groups. So fundamentally, it suggests to us that a good part of the growth that we're seeing is coming from the refresh of our product portfolio. The strength that we've seen in the Project Accelerate 2.0 initiatives, for those of you that aren't familiar with that, that's our high-growth, high revenue growth, high-margin growth opportunities that we targeted several years ago, that seems to be really performing well, well above our corporate average growth. So that broad-based economic recovery combined with good, strong strategic opportunities within the Project Accelerate elements and then getting some market share in some important markets, particularly in the biopharma space, largely around proteomics but certainly in other markets as well, I would say those would be the key players.

Top line, as we've discussed, obviously been pretty good.

Yes.

But your third quarter order book was also -- stood out to me as a highlight. I think organic BSI orders were up 22% third quarter. Despite lapping, I think, like a plus single-digit comp in third quarter last year, as we sort of think about sustained order book strength, how does that sort of inform your view kind of around initial '22 expectations in terms of that being sort of translating into revenue growth perhaps over kind of the next 6 quarters?

Yes. Well, I can say we're very pleased with the order bookings performance throughout 2021, actually, through the 9 months ended September 30, 2021, where we're up over 20% order growth. And that's very broad-based. It's across most of the portfolio in each group, actually. So very pleased just to see that. I mean what that's doing essentially is giving us backlog and pretty good confidence that, that backlog will carry at least at some level through the fourth quarter and for sure into the first half of 2022. I mean it's a little early for us to talk too much about 2022 until we finish the fourth quarter. But I would say that our overall order bookings performance gives us quite a bit more confidence that '22 looks pretty solid at this stage.

If we sort of look at where -- what your guidance implies in terms of exiting the year now. So for the fourth quarter, I think you've talked about maybe mid-single-digit organic growth against a flat comp, a little bit tougher comp. But as you just kind of talked about, orders are up strong double digits still, right? So just help us kind of understand kind of the puts and takes in your mind as you sort of established the fourth quarter guidance and some things we should sort of keep in mind that kind of inform that view.

Sure. So just in terms of overall, we typically don't guide for each quarter. We just provide a little color on each quarter. We guide for the full year. But our thinking at the moment in the fourth quarter is we do have a few factors that we baked in. First and probably foremost, there are supply chain challenges and risks out there, and that's not just a general conversation. Those are real. We navigated quite well through the third quarter. There are still significant supply chain risks around chips, microelectronics, in the logistics area. And that can play a role in our overall revenue recognition for the fourth quarter. So I think that was one key element. I think the second is that you may have heard a little bit about we had some acceleration from the fourth quarter into the third quarter related to China. There were some particular sort of Bruker-unique elements specific to that, but we ended up with pulling in around $10 million more for our BioSpin-related group into the third quarter that was not originally planned. So that's one -- second factor. A third is that we had quite a bit of COVID-19 revenue in the fourth quarter of 2020. You may recall we were sort of an early entrant into the COVID-19 testing experience. I think that's about $8 million of headwind. That's also a reality. And then the fourth factor would just be our prior year comparison. We actually put up a very strong fourth quarter 2020, so our comparison being always more challenging as it relates to the fourth quarter. So we think mid-single digits, especially if we put up a full year 17% organic growth rate, is really quite commendable. I think it's a good story for us, and it just derisks our overall medium-term outlook as we think about it.

I just want to stick with the supply chain comment, just to make sure I sort of understand what you're saying. And so to date, it sounds like you've been able to manage it pretty well, minimal impact on the business so far. But understanding that unknown unknowns as far as various supply in different product lines just leaving some handicap for the potential disruption. But so far, you've been able to sort of manage around.

Yes, that's true. I mean the third quarter, well, I think we navigated very well. We have a history, I think even 2020, we had significant supply chain risks associated with the pandemic, and we navigated those quite well from a supply chain perspective. But look, Bruker has some very large, high-scale pieces of equipment. And to the extent that we have a logistics challenge and a piece of equipment doesn't get delivered on time or can't be accessed for some other reason, from an installation perspective, I mean, there's real possibilities of that. So we baked that into our fourth quarter overall color for the quarter. And I think it's reasonable to do that. There are many companies that are suggesting that their supply chain risks are not significant. It's interesting to hear that because we see it across shipping lanes, across logistics challenges, microelectronics that go into software. I mean it's hard to believe that there aren't more disruptions actually going on. So it's a tribute to the teams, our procurement function in the way the business has handled it so far. But I do think it's prudent to bake in some little conservatism from a supply chain perspective into the fourth quarter at this stage.

Is there one BSI segment that would be perhaps more at risk than another? And if I think about BioSpin, you make your own wire, so...

Yes. I'd say maybe the NANO Group would have some more risk relative to supply chain. It tends to be focused more in the industrial research end markets. So that might be a factor. The other area that is still an issue is, from a raw materials or commodity supply perspective, we do use some significant commodities in a number of our products, particularly in the BEST segment. So disruptions in those commodities could have a factor as well. So far, as I said, we've been able to navigate successfully through that in the third quarter, but there's still a lot of risk out there.

How is the global helium supply today?

It's been good. I mean for us, what we've been doing, it's a market that continues to be volatile. We've -- we are a large consumer of that particular product. We've used and installed a lot of reliquefication (sic) [ reliquefaction ] facilities within our production activities. So we're reusing helium again, as need be, in our production facilities. So that's been part of our broader strategy. It's still a product that is challenging, I would say, and continues to rise in terms of pricing, but it's improved partly due to our own kind of management of it.

You can reuse helium?

We can, yes.

I did not know that.

We have production activities within our plants that allow us to reliquefy it. Pretty cool.

Maybe shifting gears a bit and just focusing on your China business.

Sure.

There's been kind of 2 separate dynamics last 2 quarters, right? In the second quarter, you talked about delayed tax exemption certificates, whatever that means.

We could talk about that.

In the third quarter, it was the timing dynamic that benefited kind of the third quarter. Just big picture, maybe an order growth figure might be more helpful in terms of framing kind of what that market is doing on a year-to-date basis and kind of what are you seeing macro-wise?

Yes. So let's start with the macro first. So first of all, China is a very big market for us. It represents a little over 15% of our total revenue. We have no production or R&D facilities in China, so we are subject to the normal kind of Chinese market conditions. We have seen very good order bookings performance in China historically over the first 3 quarters have been quite strong. It gets a little lumpy for us because we do have some larger pieces of equipment that are part of that mix but, nonetheless, very solid order bookings performance during the year. What's been a bit more challenging are some of these other kind of twists and turns, and we can -- I'll talk a little bit about those. The first is around these tax exemption certificates. So these relate specifically to VAT exemption certificates connected to our academic and government research customers. And in these instances, they need these certificates. They can place an order. They can get it funded. But in order for it to actually get properly installed and to avoid VAT, they need a tax exemption certificate. Several quarters ago, the Chinese government modified their VAT structure, including the categories of products that go into those structures. And so it's taken multiple quarters for the Chinese to actually define those categories specifically for our products, and we have a broad product portfolio. So this isn't exactly surprising. I would say fundamentally, what's happened over the last couple of quarters is their categorization timing has been slowed down. And so for a variety of reasons, we thought that's going to get resolved in the second quarter. And then we thought it was going to get resolved in the third. What we did see was some progress in the third quarter related to one province, and this is more specific to province by province. So why that's important is there was some concern about whether the Chinese would be using these certificates as a way to differentiate between foreign and Chinese-based suppliers. And that has turned out not to be the case. So we now have movement in one province, and the expectation is that this issue will resolve itself over multiple quarters by province. That's encouraging for us at this stage. The second issue which created some benefit for us in the third quarter was we had a certain element of one of our NMR portfolio that required a customs clearance because of the nature of the materials. And that got delayed and delayed for several quarters. And initially, we thought that, that was going to continue to be delayed into the fourth quarter or even beyond that. But fortunately, that was cleared by Chinese customs in the third quarter and were able to release those. So that pulled in some additional revenue into the third quarter for us that we were planning on for the fourth. But just more broadly, there's also been some pockets of lockdowns or logistics challenges in China, mostly in the Shanghai area, but more fundamentally, we've navigated our way through most of that. And we will expect to see some of that in the fourth quarter, and that's part of the supply chain challenges associated with China. And it's a big market, so there's going to be significant challenges there. But more broadly, we're very encouraged by the supply, the work that our procurement teams have done on the supply chain side. And then the broader portfolio performance in China has been very, very good for us overall.

Is it fair to say that government academic may be half of your China business?

Almost, yes.

And sort of given these delays with the VAT certificates and being able to install equipment, should we expect kind of a bolus to just sort of fall in a catch-up to hit in 1 quarter? Or you think it will be more drawn out?

I think it's going to be more drawn out, and I think that it's likely to be over multiple quarters as each of these provinces issues these certificates or other items get worked out. I mean there's been just some paperwork challenges. So I think it's going to take longer than a quarter or 2 is my assessment at this stage.

Got you. Okay. Maybe shifting gears in terms of your end markets. You alluded to strength in the biopharma space, which has been a priority for yours for a while. You're relatively underrepresented there. Can you just give us a sense of kind of like what that end market maybe did last year, kind of relative growth this year? And what are kind of some of the key drivers of that in terms of product or commercial strategy to that above average?

Yes. So biopharma is about -- we are relatively underrepresented compared to our peers in the biopharma space, but I'd like to think we're catching up fast. The mix at the moment is about 14% of our overall revenue base is biopharma. We're expecting -- I mean, it's a very significant focus area for us. We have a really interesting suite of products that are targeting the biopharma space. I mean a lot of them you already know about, Brandon, but many of them are in the -- in sort of the hotter spaces now related to our NMR franchise, also our mass spec franchise, specifically around the proteomics area. What's interesting about biopharma is, normally, when we launch products, for example, in a relatively recent focus is we see that gets a quick uptake in the academic and government research institutions, but takes a little bit longer for it to get adopted into the biopharma space. But what we're really seeing more recently, especially with the timsTOF Pro and the related products there, that that's been moving more quickly into the biopharma space than we've seen in the past, which is really encouraging. More broadly, we've expanded our portfolio of assays and products in the diagnostics space. There, our whole focus around consumables is also putting more focus into the biopharma area. I would also add, we've put some more infrastructure in place particularly in the U.S., which I would say was probably underrepresented as well. So sales and marketing resources, these are resources -- so for those of you that have worked in the biopharma space, they talk a different language than the academic community more broadly. So we put resources in place to be able to actually focus those resources into that space, into the market particularly. And we're starting to see some really good uptick. We had good performance in 2020 despite the COVID experience, and we've seen solid growth. It's in high single-digits growth at the moment in the biopharma space but has been well beyond that in other quarters. So a good story there, I think, for us and more products to come, by the way.

Do you have a longer-term goal of where you'd like that to be or where you see that settling out?

Well, for sure, we want it above where it is. And I think the target for us is to continue to introduce kind of disruptive products into the marketplace and gain market share there. So I think it's certainly north of [ 20% ] as a total of our revenue mix. And the goal would be to keep marching it higher.

If we shift gears maybe over to the [ industrial ] market, you serve a lot of different subsegments there.

We do.

Can you just remind us where the biggest areas of concentration are? And would be particularly interested in kind of what your latest view is on the semi market.

Yes. Well, I'll start with semi metrology, which -- where we have about 5%, 6% of our total revenue base. It's been a very hot market. As you likely know, all these virtual events and all the equipment related to it is driving demand in the semi metrology area. As you likely know, all these virtual events and all the equipment related to it is driving demand in the semi metrology area. As you likely know, we're not producing chips specifically, but we are producing products that are used in fabs for the production of chips, largely in quality control-related areas. So that's seen very good demand as these fabs continue to expand and demand continues, we're doing well with respect to that. That's also a highly profitable marketplace for us as well, so we're very pleased about that kind of growth. But more broadly, in the industrial markets, Bruker is -- kind of one area I get a lot is what's probably the least understood part of our business, and it's probably that. I mean it's part of our core business, and it's a successful, healthy part of that business. Fundamentally, we're in areas like cement, petrochemicals, chemicals specifically polymers. And what we do essentially is we're a really premier instruments company that focuses on measuring quality, depth, the nature of the consistency of the materials and largely focused in the quality control elements of those [ than ] industrial production. So what you're seeing right now with the increased demand across the globe, and I would say this is particularly acute in China, but we're also starting to see it in North America specifically as well. As that demand increases, our core business is healthy. And we've taken some steps more recently to refresh some of the products moving into that marketplace. So some of you may know, we try to stick with the #1 or #2 market position for most of our products. And in some of these cases, we're trying to leapfrog over with new technology that gets us kind of into those kind of #1 position. And so overall, product refresh, economic demand, the overall industrial recovery has played nicely and driven a good part of our overall growth thus far.

I want to open it up for any questions in the audience, if anybody would like to chime in, happy to throw it out. Got a mic at the back?

Do you plan just -- are you focusing on -- exclusively on organic growth? Or are you like in the pipeline something?

Yes, that's a good question. So many of our peers have focused more attention on the inorganic elements, and Bruker's fortunately blessed with a lot of innovation inside the organization across the broad portfolio. And we do have a broad portfolio of products. So I'd say, generally speaking, the growth that we see in the future is going to be driven mostly organically. We do have interest in a number of other M&A opportunities. They're typically bolt-on opportunities that fit neatly into our already existing portfolio. We don't typically make big bets on M&A. And I think as I said earlier, we've been able to drive pretty solid organic revenue growth not only in '21 but historically through our portfolio generally. So I'd say that's the short version is mostly organic. We'll do a little bolt-on here and there where we think it fits strategically or fits neatly into an existing business.

You also just raised the dividend by 25%.

We did. Yes, I'm happy to be able to do that actually.

Maybe switching gears to probably 2 of the most exciting open-ended growth verticals for Bruker, that being in proteomics, in multiomics and spatial biology. If we split out those buckets, just give us a sense of like where that revenue base is today and kind of the opportunity as you look out kind of 3 to 5 years.

Well, so we -- some of you may know, when we did our Investor Day in June of 2021, which we did virtually, and we talked a little bit about these as breakout opportunities to view as we have a good core business, we supplement that with some of our Project Accelerate initiatives and those products are performing well also, but we believe that the proteomics in the spatial biology area are really breakout opportunities for us. And why we call them that is largely because we think that the growth rates in those areas are significant there. The proteomics market itself is really emerging at this stage. We think that there's a very significant opportunity for us with the product portfolio we have today and the products we're going to put forward. And I'll talk in a moment about what some of those products are. But fundamentally, it is an early-stage business in the sense that it's somewhat analogous to maybe where the genomics world was a decade ago, where there wasn't enough technology to be able to really identify the genome in a more robust way to study it, analyze and do research in a way that now seems to be fairly common. But that was a decade ago. Our view, generally speaking, is relative to the proteomics market is that there's a similar structure going on here. The study of proteins, which are hundreds of thousands, not tens of thousands, hundreds of thousands of proteins that are used for a number of biological functions are really critical. And there has really not been a lot of significant instruments to be able to identify the proteins and understand the dynamics, the structure and the functioning of them. So from not being a scientist, I won't give you all the scientific details, but the opportunity is pretty significant that over time, this market will expand pretty dramatically. And we have put up some numbers in terms of the total addressable market in the proteomics space of somewhere in the $5 billion to $6 billion range. And we think the serviceable market for us is likely in the $2 billion range. And just to scale this, when you add our entire portfolio of products focused on proteomics, we're well -- we're in that $200 million range and below. And so there's a lot of runway here from our perspective. We are -- at the moment, we've introduced a number of products into this marketplace that are somewhat disruptive. We had X-ray crystallography, for example, in the proteomics space previously. We have fluorescent microscopy tools a couple of years in that are focused on super resolution microscopy that allows you to go deep into the cell structures or subcellular structures. We also have our NMR franchise, which has the ultra-high field systems. These are the super 1.2 gigahertz ultra-high field systems that allow you to look at structural biology in the dynamic state. And that's very, very attractive in the proteomic space. And finally, kind of the flagship product which we launched back in 2017, '18 is the timsTOF. And that product has now expanded into a number of different elements in the portfolio which are pretty exciting. And that's a more disruptive technology that focuses on higher throughput, higher resolution, the ability to do cross-sectional is sort of another dimension that you can attach to and do. And the other elements are just reproducibility. So you've been able to do higher throughput and look at larger cohort studies and research in a way that wasn't possible before. So we've seen very significant order uptake in the timsTOF Pro and Pro 2 and fleX and now we are also offering a single-cell proteomics product that is at a higher end but for sort of more high research work done in this proteomic space. So we think this is a hot market. We're introducing a number of really interesting products not only into the unbiased proteomics space, but also we have a series of products which we're introducing into the biased or more targeted proteomics field. So we think that we have a good starting point for entering into the marketplace with good products. And ultimately, the goal is for us to continue to take market share in the existing market. And then the goal, of course, is to expand the ecosystem and hopefully broaden that market to be significant, similar to what I was referring to relative to the genomics analogy. So that's the proteomic space. We think there's a lot of runway there. I mean it really depends largely on how quickly we get adoption in some of our products. We have certainly seen part of our order bookings performance is partly driven by the proteomic space, so we're encouraged at this stage on how that's all performing. And on the spatial biology side, the second area of breakout opportunities, we're relatively new into that space. You may know we have a rich history of taking innovative products and disruptive products and commercializing them into things that can actually be used in a practical way not only from a research perspective but, in many cases, even on a clinical environment. So we do have a good history with respect to that. So in the spatial space, relatively new, I'd say, and relatively modest revenue, the numbers with -- we have 3 products that are already in the marketplace. One is this fluorescent microscopy tool we call Vuxara VXL, it is a -- Vutara VXL rather. It is a super resolution microscope that allows us to go deep into the entire DNA and into the genome structures. We have a second product which we -- technology which we introduced as part of our acquisition of Canopy Biosciences, and this is an interesting product in the sense that it allows you to do more omics capabilities. So you're not only looking at the genome or the proteome but also the dynamics surrounding those. That's a chip cytometry-based business which has capabilities around reusing samples and being able to -- from an efficiency perspective, to run longer. We've got some differentiating products. And then finally, we launched a new business called Acuity genome, which is a very interesting business for us. It focuses largely on the ability to identify, even down to the chromosome level, elements of the dynamics of these -- elements in the chromosome. And interestingly enough, there's a bunch of elements that we didn't understand about the chromosome earlier, and we're hoping to be on the cutting edge of that. [ This is an ] -- going to be an instruments-based offering, which will include some solutions around consumables and assays as well. So I think there's a lot of runway there, too. There's a lot of talk and jazz activity going on around spatial biology. And our goal is to commercialize, continue to commercialize products, introduce them into the marketplace and take some share there.

Anybody else in the audience? If I could maybe just touch on kind of the financial profile briefly in the couple of minutes we have left. In terms of margin expansion, you've talked about, I think, 75 to 100 basis points of margin improvement a year. Where do you think gross margins can go? You've given an EBIT target, I think, of kind of 21% thereabouts by '24. Where can gross margins go? And is this top line driven? Or are there like cost outs and productivity initiatives underneath that?

Well, there are both. We focused a lot of attention on innovation, which allows us to price appropriately, I think, for the value that we offer in the product. That's kind of key. So looking at gross margin, the objective is to make sure that the selling price is fair and value-based. That's one piece of it. The second element is around driving costs out. And we do design for cost structures in our organization, and we're very good at that especially when we go through a second or third iteration of the product, the goal is to take cost out and improve our overall margin performance. And we've been doing that pretty successfully in a number of the spaces. I think the other piece is that we are very focused on operational excellence as a company more broadly. I'm talking about lean initiatives, trying to identify continuous improvement across all of our productivity initiatives. We have a group of people in each of our business groups that are very focused on that. So I do think gross margin performance is going to be solid, continues to improve. And we're -- that's part of what's driving our operating margin and overall profitability and performance. I don't see the end of the runway on that. As we continue to innovate, the expectation is that our margin performance -- our gross margin performance will strengthen. And we continue to control costs very carefully. You saw some of that in the third quarter. Our OpEx control is quite good thus far. We're very careful about making sure that we're not growing our overhead base higher than our revenue base. So I think overall, the margin profile is going to be good. The expectation is ultimately that as the company grows, we probably will scale back that 75 to 100 down to something in a lower range. But ultimately, it's still very good expansion. And compared to a number of our peers in the instrument space, we're now starting to reach levels that are very, very competitive in that respect.

Just in the last 30 seconds, going back to the Analyst Day, you talked about $500 million of buybacks, I think, by the end of '23.

'23, yes.

Yes, didn't buy anything in the third quarter. Is that still kind of the expectation that we should think about in the next 2 years?

Yes. I mean, look, we have a pretty strategic capital deployment approach. It starts with investing in the business, whether that's capital expenditures for facilities or R&D spending. And then we go to a dividend. We have a modest dividend program, which we just increased modestly here. And then we have a pretty dynamic program around share buybacks, if we don't have -- otherwise, M&A activities look attractive to us. So yes, we'll use that to the extent that we don't have anything else in the pipeline that looks appropriate.

Super. Unfortunately, we're out of time. So great to see you in person.

Yes, it's great to see you.

Thanks for being here.

Thanks again. Thank you, everyone, for joining.

Thanks, everyone, in the audience. Have a great day.

Appreciate it. Thank you.