Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Okay. Great. Welcome, everyone, to the SVB Leerink Global Healthcare Conference. I'm Puneet Souda, SVB Leerink tools and diagnostic analyst. It's my pleasure to be hosting the Bruker management team. We had a last-minute change in the schedule. Frank won't be able to make it today due to an unforeseen last-minute scheduling issue, and Gerald is joining us. So CFO, Gerald Herman, and also from the Investor Relations team, Justin Ward. So Gerald, great to have you at our conference.

Thank you. Pleased to be here.

Okay. Great. So just a housekeeping item for folks online. If you could submit your chat -- submit your questions into the chat, then I'll cover them as they come through. So with that, let me ask, Gerald, if you have any prepared remarks. Otherwise, we can jump into Q&A.

I'll just start by saying, we think Bruker represented very strong financial performance for the full year of '21. We posted some excellent revenue performance, I think, overall. Got a really good step-up in our overall profitability picture as well. So I think exceptional year for Bruker relative to our previous performance and even relative to 2019 in the pre-pandemic period. So, yes, just pleased to be here and be able to answer some questions if investors have them.

That's great. So maybe just sort of two cents from my end about how I'm seeing Bruker and then we can jump into Q&A. I mean Bruker has been really at the forefront of technologies and leading the charge with this Project Accelerate. That's been quite a transformation for you over the last few years. Helped margins as well as those new products have come on board. The NMRs, the UHF technology breakthrough that you had with GigaHertz, that's helping, obviously. Helps in the gross margin line, too. And on the proteomics and the timsTOF platform has been a clear winner in the mass spec space. So that's great to see. And beyond that, there's microbiology franchise and now spatial that Frank likes to talk about and your growing position in the semiconductor metrology as the world needs more and more chips and electronics. So wonderful to see all that. I know you highlighted building backlog on the call and supply chain issues. So we'll get into some of that. So maybe just to kick off what you said, Gerald, on the quarter, 11% organic growth that you delivered here. Maybe just talk to us, at a time when all of us were worried about Omicron and you do have large capital equipment, you were successfully able to deliver this. So maybe just talk about sort of some of the drivers there and then we can jump into guide and a couple of other questions.

Sure. So we did have a terrific fourth quarter, I think, relative to a very strong fourth quarter of 2020. Actually, from a revenue perspective, the fourth quarter of 2020 was a record for Bruker, and we upset that record for the second time in the fourth quarter, moving to about $684 million. So strength generally very broad across most of the market segments. Our some of the key franchise items you already mentioned, Puneet, we've continued to perform well and timsTOF product continues to have above corporate average growth, very strong MALDI Biotyper performance. This is our pathogen identification product that's kind of the gold standard at this stage. Very healthy markets in semi metrology area, not surprisingly based on what we see from a demand perspective, with continued performance strong there. Our biopharma business continued to perform extremely well in the fourth quarter. This is following several quarters of strength there. As you may know, we are somewhat underrepresented in the biopharma segment. And so it's great for us to see some strength there as well in the fourth quarter. I mean, overall, basically, all healthy markets, even industrial and industrial research areas, the academic markets continued to perform well. So very pleased to be able to put up pretty strong numbers, I think, on the organic revenue growth side. It's several quarters in a row also where we've had very strong order bookings performance. Actually, I think it's the fifth quarter in a row where our order bookings performance has been greater than double digits. So we seem to be firing on a number of cylinders all at the same time and hopeful that this economic growth is going to continue.

Got it. Yes, I agree. And on the 2022 guide, the expectations of 6% to 8% organic growth, I think you mentioned about 30 to 60 bps of margin expansion. Walk us through what it assumes for the supply chain situation that you talked about versus the growth in the Project Accelerate that you have? And what does this all sort of mean? And I know this is more of a near-term dynamic, but what does it mean for the 5% to 7% organic growth guide for the sort of the longer term? Given sort of the demand that you're seeing in the market today, does it help you? I guess, the simple question is does it -- some of the backlog help you in the outer years, too?

Yes, for sure. So as you likely know, Puneet, we posted record backlog for 2021. We've never had numbers at this level. We think it really derisks to a large extent that sort of medium term outlook for Bruker. We are still optimistic about the performance in 2022. As you mentioned, we believe on the organic revenue growth online at 6% to 8% is a pretty significant move for Bruker, especially earlier in the year. We think that, that's very achievable, given the backlog level and the order bookings performance we've seen as a company quarter-after-quarter here. I mean to your question on supply chain, I mean I don't mean to minimize it. It's very real. We've navigated through it very carefully through the fourth quarter, I would say. You saw the performance that we put up in the fourth quarter even despite some of those supply chain issues. I would also indicate that relative to the first half of 2022, I mean our expectation is we're going to more return to our historical profile, which is, tends to have a somewhat softer first half, both from a revenue perspective and also from a margin and profitability perspective, than we see in the last -- second half of the year. But fundamentally, I mean supply chain, we've navigated our way through it. We've got outstanding procurement and operational teams. And that's what they're doing. They're working their way through it. They did a terrific job, as I said, in the fourth quarter, and the expectation is they'll continue to do that relative to 2022.

Got it. And talking about that backlog and order book that you have, as you said, the strongest in years, and I think you gave a number on the call, it was about $2 billion or so in order book that Frank talked about. So maybe -- help us understand sort of the dynamics of sort of placing those, getting those into revenue given the supply chain situation right now and sort of the longevity of that order book and the strength. I mean it seems like that's really strong for this year. But again, sort of how long does that go? And again, more -- I'm sure more orders are going to be coming into this order book as well.

Yes. So look, our book-to-bill, which is a measurement of our ability to convert those orders into real revenues, continue to build for the quarter. I think it was 1.13. It's very strong. So our expectation is that the backlog is going to refill. Hopefully, we'll start to bring that backlog down a little bit. As a CFO, my goal is to convert that into revenue faster and improve those numbers that we've put out on the guidance to the extent that we can. Fundamentally, I'm pretty positive about what we see. I mean the order bookings performance after 5 quarters continue to be strong. We see broad-based strength. It's not across one particular geography or one particular market segment. It's largely across all of them. And so I think to the extent that we experience supply chain turbulence, the expectation is that we would be able to make it up in another -- from another product part of the portfolio. And that's pretty much what we did, I think, in the fourth quarter and that played out quite well. So my expectation is that we'll play through that in a similar way in 2022.

Okay. Okay. That makes sense. And another question that we've been getting, obviously, the 50 -- 500 to 600 op margin difference in the first half versus second half. Maybe you could just walk us through that a bit. And there seems to be a little bit more lift on the gross margin side that's not translating easily to the op margin side. So just talk to us about sort of operating expenses thereof through the year.

Yes. So the 500 to 600 basis points that we've commented on relative to '22's first half, we expect it to be lower in the first half than it was in the second half. This is actually just a return to kind of our historical norms relative to the pattern between first half, second half performance. If you look back at '17, '18, '19, pre-pandemic period, that pretty much was the pattern. And our expectation for '22 is as we normalize this, again, we're going to get back to that pattern. Our typical pattern is that it's a little softer in the earlier parts of the year and we gain momentum as we move through the third and the fourth quarter. As you know, Puneet, fourth quarter is not a quarter of our overall revenue, it works out to be much higher than that. So fundamentally, we think we're going to catch it back up. And to your question on the gross margin, I mean our expectation, even though we've guided towards this 30 to 60 basis points of margin expansion, I mean, historically, the company has been putting up significant margin expansion year-over-year, if you exclude 2020. We've been posting pretty solid margin expansion all along. The decision is being made, particularly, given the opportunities that the company has in front of it right now around the proteomics and spatial biology area and the healthy market conditions we see in front of us. We made a decision to accelerate some of our Project Accelerate spending in those key opportunities. And fundamentally, that's where we're going to go. So what that does is, even though we expect to see significant continuing improvement in our gross margin performance, which is being driven largely by our Project Accelerate mix, and as we shift more towards that, it pulls up that gross margin. The expectation is we'll absorb more of that gross margin through some of this accelerated spending in these OpEx elements, largely in the commercial infrastructure area that is building out our marketing and sales teams to address some of these breakout opportunities from a market perspective. And again, you'll likely know, we're still carrying a fairly high R&D as a percentage of revenue. We are very technology focused in our R&D engine as part of the -- engine that drives our growth. So we're tracking around 9% to 10%. The expectation for '22 is that we'll be around 10% of our total revenue in R&D. So when you combine accelerating investments in commercial infrastructure on that sales and marketing line as well as some fairly significant R&D, we see a little moderation in the operating margin for '22. But we believe those to be very important investments as we continue to strive to gain market share and capitalize on those breakout opportunities. So that's kind of the way I would say it plays, Puneet. We're very excited about those opportunities and we're prepared to invest in it.

Okay. Okay. Okay. Makes sense. And 2 quick questions sort of on -- one side is just getting folks on board in terms of hiring. It's been across the industry, we're hearing. That's obviously a little bit challenged. So maybe just touch on that. And then on the sort of the -- kind of related to that somewhat, but maybe not exactly is inflation in the marketplace. So wage inflation and on top of it just overall inflation, how are you thinking about pricing?

Yes. So let's start with the hiring opportunities. First of all, I think Bruker is a remarkable organization. We have a very strong scientific community support. As you already know, we -- from a technical perspective, whether it's R&D resources or PHDs providing expertise to our customers and supporting those customers on the sales and marketing side, we actually have not had real major issues in this area. I think it's largely because we're such a science-based company, we are able to attract really top-notch talent. I'm not saying it's not difficult. But I think in terms of many others -- many other companies out there, we are really attractive place to work. So I think we will be pushing hard on head count, particularly in that commercial infrastructure side. And in our R&D area, have done, I think, remarkably well over the last couple of years under challenging conditions, including the pandemic. So I'm pretty confident we'll be able to spend up to these levels. And that's part of what's in our guide and, of course, in our business plans. To the question of inflation, I would say just fundamentally, as I think many of you may know, historically, we've put up annual inflation increases that have been relatively modest for our customers. I would say for 2022 and, to a certain extent, even in 2021, as we began to see inflation moving, we've been far more proactive, particularly in those markets where we can be. As you likely know, in many cases, we are in the #1 or #2 in a market position. So we do have some flexibility to put in some pricing increases on a proactive basis. And where we can, we already have in '21. And I think you'll see a part of that in our confidence relative to our operating margin expansion for the '22. In those markets where we are not exactly in that position, we will hold and try to, wherever we can, save those margins by operating expense management. We've got operational excellence programs that are designed to yield productivity improvements and some savings in the OpEx line, and that's the expectation here. So overall, I think our plan is to be proactive on the inflation side, and we are experiencing some cost elements that are putting pressure on that margin line, but our expectation is that we'll be able to either pass those along to our customers or realize still the level of margin by our operational excellence programs. That's our thinking at the moment.

Okay. Got it. Got it. And one -- another quick question that I don't get to ask Frank is on tax rate actually. You've outlined a tax rate of 28.5% here, I believe, again, lower somewhat versus maybe historical years. But again, what sort of efforts do you have on the tax? And -- because it is higher versus your peers. And part of it is one can explain maybe it's -- part of it is capital equipment and some other things. But the -- just want to get a sense from you from a repositioning of manufacturing and other things that you're thinking about over the longer run.

Yes, it's a fair question. So look, our overall tax rate is higher than many of our peers. That's being driven largely by the jurisdictional mix on the products in which we've developed and manufactured. So to a certain extent, these are high-tax jurisdictions. We're talking about Germany, Switzerland, France. And so one of the steps that we've been taking is to shift some of our activities [Technical Difficulty] specifically Switzerland, for example, related to its R&D. Tax credits in its Swiss patent box structure, which we think is very favorable for some of our sizable infrastructure that we have there. We've also looked at our experience relative to Malaysia, where we have a tax holiday. We've put a second factory into Malaysia, servicing mostly our -- some of our industrial in Nano-based business. So we are taking some steps there. But I have to say to a certain extent, the company is still being able to generate significant EPS performance and EBITDA performance on the basis of even a relatively high tax rate. So we've got a number of things in motion, and I'm optimistic that we'll have some further impact on the tax rate. But fundamentally, it's driving some pretty good innovation and very good overall performance for the company even as it stands.

Okay. Yes. Very helpful. In terms -- just touching on some of the other parts of the business sort of -- academic and Europe are big end markets for you. Maybe -- tell us, what are you hearing from your academic customers and maybe European academic customers and Europe overall in terms of the funding levels and where the demand for your products in 2022 and beyond?

Sure. So you're absolutely right. I mean the academic markets make up a large portion of the Bruker portfolio. But I have to say, and I think you've seen this as well. Over time, that percentage has actually declined as the strength of our biopharma business, our industrial businesses, applied businesses are really moving to another level in our aftermarket business in particular. So I would say, generally speaking, academic markets, both in Europe and more broadly in the United States and even in Asia and China, in particular, are quite strong. We've seen very strong performance, particularly in Germany and Europe in 2020, maybe a slight weakening in that area in 2021. But we think the market conditions are really quite solid there on the academic side. Especially following the pandemic scale that we have here, there continues to be major efforts at the government level to continue to pour funding into -- deep science academic research. And I do think that, that's going to continue in Europe. And we've started to see quite a significant strengthening of that academic research market in the United States as well. I think that's going to translate itself into higher performance on the NMR side as you start to see more academic institutions moving to ultra-high field systems, which are not yet really well advanced here in the United States. And of course, you know about the 5-year plan. In China, there's a great deal of effort and focus immediately on the research area, largely in the medical side. So I'm pretty confident the academic side of the -- of our equation is going to continue to remain strong and stable. I need to say that because, to a certain extent, academic markets tend to outperform in difficult periods. So even if they're not super performing in high-growth periods, we do have a pretty broad portfolio where we're able to pick up revenue growth performance coming out of the other market segments and at the same time, still have a very stable underlying base, which is what we get with our academic customer base.

Yes. No, absolutely makes sense on the academic side as we look into 2022. So -- maybe just briefly on China, correct me if I'm wrong, that's about 15% of your revenue. Any impact from this zero-COVID policy you saw there and sort of looking throughout the year sort of -- in terms of instrument placements and how are you thinking about overall growth contribution from China?

Yes. So you're right, China makes up about 15% of our total Bruker revenue across most of our businesses. We have a good -- we have a relatively light footprint in terms of -- we don't have manufacturing operations and we don't have R&D operational activities in China, but we do have a very strong sales and distribution structure in China and it performed very well, I'd say, in 2021. Both in terms of order bookings performance in '21, double-digit growth there as well. And even historically, from a revenue perspective. I would say in the fourth quarter, lockdown activity didn't really impact much of our performance in China specifically. And our expectation is that things appeared -- I was on a call yesterday with our teams in China and it appears as if post Chinese New Year here that the overall strength of the business is quite solid going forward. The lockdowns haven't really had much impact on our ability to navigate around. For example, when a port in China closes for some reason on COVID-related lockdowns or other logistics issues, we were able to kind of navigate around those to another port. Most of our distribution channels in China have been very active, even during these kind of zero tolerance lockdown structures in China. So we're very optimistic actually about our business in China. As you likely know, Puneet, we offer pretty highly differentiated products in China and other markets. We think they're very attractive to the research and industrial markets in China. We'll continue to do well there.

Okay. That makes sense. Getting a question here on -- what would you say is what percent of your total debt is variable and may be exposed to rising interest rates? Obviously, interest rates have been a concern for the entire market.

Well, that's a fair question. I'm pleased to say that we completed a sizable debt financing transaction in December of '21, where we locked in 10-year fixed rates on a $500 million note structure with -- on a private placement arrangement. So those are very favorable rates at around 1% fixed for a 10-year period. We also have around $300 million of debt financing that was completed back in 2019 at fixed rates. So we have variable rates that are included in our line of credit which we've, of course, not had to activate because we've got a fair amount of cash available. We have almost $1.2 billion of cash sitting on our balance sheet at the moment because of some of these steps. And I need to say, we did really proactively take action in advance of what we saw that is, like many other companies, we saw some advancing inflation signals, and we took the opportunity to put in place a more fixed debt structure that protects us against that.

And -- just a couple of more questions that I'm getting here. On the -- given the cash position, obviously, markets -- valuations have come down in the marketplace. You guys have been doing some tuck-ins, Prolab, proteomics, couple of acquisitions on the spatial side. Maybe just talk to us, overall, at this point in time, what's the M&A philosophy? How are you sort of evaluating these assets? And just given the pullback in the valuation, I don't know if you're seeing some of that in the private market side as well, but what areas maybe remain in focus for Bruker as you look at the look at the M&A approach?

Yes. So just to step back a bit, we have a fair amount of cash available to us as a result of some of the steps we've taken on the debt financing side. Our general capital deployment strategy is pretty straightforward, and it's been pretty consistent. Our goal is to continue to fund organic or inorganic opportunities and investment in the business. You probably have also seen -- we've got substantial $100 million-plus capital expenditures that are designed really to hit our productivity and the capacity expansion programs to meet growing demand. But fundamentally, that's where we put most of our cash. When you look at it from an M&A perspective, we -- there were a lot of transactions that came across our desks, Frank and I, over the 2020 and 2021 period. And our general view was that especially in '21, we saw some pretty inflated multiples, I guess, I would say, and generally speaking, we saw deals that we thought, which might have been attractive at lower multiples. And we passed on most of those. In many cases, we just decided that we have a relatively strong ROIC philosophy, where we believe in investing -- increasing stakeholder/shareholder value as a result of some of these investments, and we think we've done this really well historically. So on the M&A front, we passed on a number of opportunities and assets that looked attractive to us a while back. To be honest with you, we got a fairly full pipeline at the moment on the M&A side, and it's going to be clear and we've got to decide on whether or not this is the time. There's going to be real opportunities for us, particularly in some of these breakout opportunities that we've already seen in the last -- in the month of January, we did these 3 proteomics-based assets that we acquired. I think these are really strong elements that help to fill out some of our proteomics strategy. These are certainly related to liquid chromatography columns, sample prep elements. These are terrific kind of tuck-ins to an already strong proteomic strategy. So I think there's a possibility, of course, that if we can get the right valuations on future assets that we will make, we certainly have sufficient capital to be able to exercise that. We are more focused, and I think you know this, Puneet, but we're more focused on kind of bolt-ons. We've not historically done a large -- very large deals. But clearly, if the price is right and we think there's an enormous opportunity to bolster our existing strategy, then we will certainly go there.

Got it. Very interesting thought. That's helpful. And given the time here, let me just ask the last question on -- we didn't get to dive into sort of the ultra-high frequency capabilities and the timsTOF. Those have been strong growth drivers for you, even on the microbiology end. Maybe just if you could, are there any parts of the business that you think are underappreciated? And what are -- what would you say are some of the things that will -- on the horizon that are going to sort of potentially lift the organic growth rate? Any thoughts there just given the timing?

Sure. Well, here's what I'd say is relative to -- I mean you've already heard some of this, but I do think that the markets are favorable for the ultra-high field side. We've put out in our guide of roughly 4 systems for 2022. I do think that there's still a possibility relative to the ultra-high field markets in the United States delivering more than that. I think the other issue for us is really around the timsTOF portfolio. It's not just a product anymore. We put out the timsTOF Pro 2, the fleX, the single cell proteomics equipment. We've now, as you just heard, adding to some of our sample prep and early-stage elements with the proteomic space. So I do think that there are real opportunities for us to continue to drive strength coming out of both of those. And then finally, I need to mention, we are catching up fast on the biopharma space. And we have a lot of products in our portfolio that target specifically the biopharma area. We've had very good uptake in that recently, and we're putting some more feet on the street to tackle that market. So I do think there are some significant upside opportunities for us, assuming that the markets continue to hold the way they have been.

Okay. Great. Well, with that, thank you, Gerald. Wonderful to have you at our conference. Thanks for doing the session.

Yes, of course. Thanks for having us. Terrific. Thanks again.

Okay. All right.