Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Good afternoon. Welcome to Cowen's 42nd Annual Health Care Conference. I'm Max Masucci from Cowen's Life Science and Diagnostic Tools Research Team. We're pleased to be joined today by Bruker, which is one of the 3 large cap names in our coverage and a diversified participant in several life science tools, diagnostics and other markets. And joining us today is EVP and CFO, Gerald Herman. Gerald, great to see you.

Great to see you. Thanks for the invitation.

Absolutely. And for anybody on the line, feel free to lob in questions via the box at the bottom of the screen. So let's jump in here. Life science tools and diagnostics industries, they've really exploded over the past half decade, initially driven by major breakthroughs in omic research, major advances in platform technologies, maturity in end markets and later boosted by the COVID-19 pandemic. So Bruker has been on the cutting edge, and it would -- so it would be great to hear, from a bird's eye view, what are the biggest differentiating factors between the Bruker you joined 4 years ago and the Bruker of 2022 and beyond?

Yes, it's a very interesting question. So fundamentally, there's been some really interesting strategic changes, particularly in the development of our Project Accelerate 2.0 initiatives. Those are the high revenue growth, high-margin performing initiatives that we developed back -- sometime back. I think those have really moved significantly. But I guess I'd highlight, for me, having been with the company a bit over coming in 5 years, that the -- probably the more significant element is around our operational excellence initiatives. And we've kind of developed now 2 pillars of our strategy: one, Project Accelerate 2.0 initiatives; and two, our operational excellence. And it's really taking a whole different scale or operational excellence initiative. And I think that's one of the key elements that I would highlight relative to where we were 5 or 6 years ago. And what do we mean by that? Largely around the integration of Lean management deep into the organization, the development of planning and forecasting financial capabilities in a way that didn't exist at that time. And I think fundamentally, also expanding our functional areas and then talking about sales and marketing, our R&D activities and as well our G&A infrastructure elements in a way just gave us more bench strength and the ability to introduce new concepts like this in the management. And then I think the other thing that I need to mention is we do run a relatively significant balance year-by-year on what we describe as a disciplined entrepreneurialism. So the company has a strong legacy of really creative, innovative products. And I think one way we do that is through our agility and responsiveness to the market. And that's part of -- building some structure around that has really been really critical, I think, for us in the long term. So hopefully, we're starting to see very strong financial management and very strong operational excellence across the whole organization. I'd say those are the key differentiators from my perspective.

That's great. Great synopsis and just very relevant, I would say, given the macro-driven weakness we've seen in the market, blanket multiple compression. It can be really important to understand how the story looks different going forward compared to looking backwards. But the next question that I have is actually somewhat similar to a question we received from an investor. So this past fiscal year, I want to say around 38% of revenues came from Europe. So with the situation we're seeing in Ukraine, is there any rippling impact that you're seeing in the European region, whether it's from a customer or supply chain perspective? And I'll wrap in the question from the investor here. The question is just, is helium supply an issue for NMR?

So let's back up a little bit. So clearly, our hearts and prayers go to those that are impacted by the Russian-Ukrainian conflict. It's a tragic event, and we're hopeful that it will resolve itself favorably at some point here soon. I would say, just to clarify from Bruker perspective, the Russian-Ukrainian revenue elements for Bruker is relatively small. It's around 1% of our total revenue picture. Having said that, of course, it does have more significant effects relative to the overall management of the business. We do have a sizable footprint in Europe. And of course, there's a lot of concern relative to that particular region. But I would say what we see on the ground in terms of overall demand for our products and solutions in Europe remains quite strong. And there is even, during and up to this point -- since the conflict has begun, we have not seen any drop-off at all in that overall demand. Relative to the more specific question around supply chain. Clearly, there's going to be some impact as this moves forward. I'm hopeful that this is going to get itself resolved over time more quickly than we're seeing at the moment. But relative to the overall supply chain elements, it's clearly aggravating an already challenging supply chain condition. But I would say that our teams have had quite a bit of experience, particularly under the COVID-19 pandemic experience, in navigating through difficult supply chain issues, and they continued to perform extremely well, for sure, in the fourth quarter relative to that topic. And as far as helium goes, I mean there are a number of commodity-related elements that are impacted by the supply chain issues, even notwithstanding the Russian-Ukrainian conflict. So I think we have been able to navigate quite well around -- issues around helium, around copper and some of the other commodity-based elements that go into some of our products. And I don't expect that to be more severely impacted here in the near term. What happens? It's hard to predict exactly what this all means from a supply chain perspective if this conflict widens, worsens or gets more parties involved. But at this stage, we have a relatively modest impact, as I said, given our overall revenue picture for Russia and Ukraine at the moment.

Yes. Makes sense. So we'll stay tuned probably for a more formal update around how that plays into guidance. That's all about it, right? All right. So let's move on. So Bruker is -- it's 1 of 5 companies in our coverage with positive earnings and EBITDA. So that's likely a reason why your stock is not as far off its 52-week high as some others in the coverage. So that said, clearly, some unique factors in play for gross margins this year. We have an inflationary environment. We have logistics challenges. We have the new factor with Ukraine-Russia. So is there any way to frame the range -- I guess, the range of outcomes -- or the puts and takes just for 2022 gross margins? I mean I feel like it's going to be -- this will be a very unique year and case study for supply chain and gross margins.

Yes. So I guess I'd say more generally, the supply chain issues that we're experiencing are not terribly different than any of the other companies. It's largely focused around chip, microelectronics around some of the commodities, its logistics-related issues, of course. And we're navigating through those. We are seeing, of course, some cost pressures, and our expectation is that we'll continue to see those, particularly given the current set of events. I would say that, from an inflation perspective, the company has been quite proactive historically around pricing actions, where we can take them, and we will continue to take those actions. Fundamentally, in prior years, historically, we've taken pricing actions which are similar to relatively modest, similar to what the inflation levels are. And in 2021 and in 2022, our expectation is, we'll take those increases as well, but we'll do them more frequently. So I think our intention is to really try to keep up with those cost pressures, where we can move those into the marketplace because of our stronger market positions, we will clearly do that. And the goal, of course, is to continue to sustain the level of demand that we have in our products, continue to support our customers and, of course, sustain our operating margin performance to the extent that we can. Again, I'll just reiterate that our view at the moment has been that the global demand for our products and solutions continues to be quite strong. It's very healthy across all the markets, not only Europe, but also in Asia and in the U.S., and we can talk a little bit more about those and some -- any other questions that you might have. But fundamentally, our expectations will navigate through the supply chain. We may see some bumps quarter-to-quarter, but the expectation is that some of those supply chain issues will persist in the first half and, hopefully, we'll start to see some relief as we move into the second half of 2022.

Got it. So yes, some degree of offset, a little bit control around the pricing. So there are certain things that are within your control and...

Sure.

Okay. Got it. So -- I mean -- so what about -- we're -- there's scarcity value across the whole life sciences ecosystem. Talent acquisition, talent retention is driving higher compensation and rising OpEx. So just curious if that's something you've experienced thus far. And what's contemplated for '22?

So first of all, we did contemplate in our 2022 guidance. We baked in above normal wage inflation into our guidance, and the expectation is that we are experiencing that as most of our other peers are in the space. I mean you and I talked about this before, Max. I think that Bruker has an outstanding reputation in the academic scientific life science community, the quality of the products we put out and innovation that we introduce makes us an attractive employer. We've also, of course, got some interesting growth opportunities, in particular, breakout opportunities that I think are also very attractive for individuals that are interested. So I think we've factored in what we know at this stage and I'm pretty comfortable with what that means. I think our overall talent program has been pretty robust historically, and we continue to expect to see us play through that in 2022.

Got it. Moving on from margins to growth. Last Friday, we hosted a KOL event with a medical director at a clinical microbiology lab. But one of the things that he did indicate was that he thought that few instruments have had a more profound impact on his lab than the MALDI Biotyper. So I want to start with the placement opportunity and if you can help us understand what the -- how the sales force might be different entering 2022 compared to 2021 or even customer-targeting initiatives as you try to drive exposure in different -- like in different regions, that would be helpful.

Sure. So I guess I'd say we appreciate and share the view of that individual. We do believe that, that was a transformative technology that was introduced into clinical labs in a way that didn't exist before. So it is a -- remains an exciting technology, one where we saw significant growth globally and exceptional growth in the United States on a year-over-year basis. I think our expectation on a global level is that we will see some of that growth moderating a bit into the high single digits, low double digits growth profile for that particular product. It also has above-average gross margin -- above average, for Bruker, gross margin performance and I think that we would continue to expect to see that. It also has terrific consumables pull-through. So we have 5,000-plus units installed across the world. And as I think you and I have discussed, Max, we're a little bit underrepresented in the U.S. in terms of that penetration level. And so our expectation is that we'll continue to grow sharply in the U.S. It will continue to be a strong driver for us. And that's why we're investing more heavily into our sales and marketing infrastructure in the U.S. and other markets where we're somewhat more underrepresented. We're creating teams that target these markets, particularly biopharma and clinical markets. And there's just a really interesting opportunity for us with some of the other elements that have been added to the MALDI Biotyper to give us more growth going forward, including -- subset type of workflow, which we think is going to add significant features to that on a pretty strong product portfolio.

Yes. So when you're rallying the sales force and talking about priorities for 2022 in molecular diagnostics, is the messaging more like we saw a major placement opportunity for MALDI Biotyper in the U.S.? Or we do have a major opportunity. There's still a lot of runway before the annuity per analyzer starts reaching that upper limit. How are you sort of prioritizing the placement versus the consumables opportunity?

Yes. I'd say, so there's a number of real opportunities. We've talked a little bit about the opportunity in the United States, in particular, but also in the APAC region. I would also say there's an opportunity for replacement units in Europe. That's because we started there earlier. We have some legacy systems there, which we benefit from a newer system. These newer systems also have more different features. So I think there's a real exciting opportunity for many labs to pick those up. And then as I said, we do have what we hope is going to be more drop through with our higher consumables level with this particular product line. It's -- this is a product that's now north of $100 million on its own. So it's really with a larger base as we grow it, getting more consumables pull-through with that larger base is really the strategy. And we're very optimistic about that right now.

Yes. So if you are not providing this breakout, it's fine, but I'm just curious if you look at the gross margin on the consumables for MALDI Biotyper and where that could be in the next 2 to 3 years versus the instrument gross margins. I think, overall, blended, that segment is above the overall company average for gross margins. Is there any detail we can compare on that?

Yes. We don't provide those details at the portfolio level, but I can say you're right. I mean between the consumables pool plus the overall instruments gross margin performance, it's a very strong performing portfolio for us. It's part of the total picture.

Great. Let's move to timsTOF. So you exited 2021 with timsTOF installed base of, I believe, 425, and you did eclipse $100 million annual revenue milestone for that product this past year. So strong growth from biopharma companies, strong growth coming from the CRO channel, driven in part by the field of more complex biologic drugs, right? So can we spend some time talking about the timsTOF demand, usage you're seeing from the biopharma community and how you would compare that demand for biologic -- complex -- companies focused more on complex biologics versus traditional small molecule drug types?

Yes. I guess I'd say the uptake in the biopharma is really quite solid. And normally, what you would expect with a product in this life cycle early on, you'd see significantly more pull-through coming from the academic research side and not so much from the biopharma side. But I think this product has got a number of unique, differentiated features that introduced into the marketplace at the right time. I think we're growing strategy and maybe the expectation is that, that's going to continue. We've seen a really good uptake. As you already know, I think, Max, we've now broadened our portfolio of timsTOF products. We have the Pro, we have the fleX. We have the single-cell proteomics capabilities. And so we're starting to focus more attention on a market opportunity that's very significant for us and in an area where we think the market is expanding rather quickly. So I would say biopharma has turned out to be really a great success story for us even early on and the expectations that we'll continue to perform well from a demand perspective as that goes forward.

Yes. I think it's, I guess, big picture parallel that we sometimes drawn, there's always limitations, but if you think about the ecosystem of technologies that enabled next-gen genomic, there's multiomic-based diagnostic testing, there's a similar ecosystem of technologies that are enabling the next generation of therapeutics, cell and gene therapies, complex biologics. So we cover a few other -- we categorize them as cell and gene therapy tools companies and clearly seeing a continued rise in the number of clinical programs. We saw another CAR-T gain approval pretty recently. So the momentum is strong. So I guess, curious if there's anything you can offer about the trend line of that biopharma demands.

Look, I think it's somewhat similar to what we did in the MALDI Biotyper environment, where we started off with sort of high-end research and moved more into more clinical settings and labs. And I think there's real opportunity. Here, it's early days in terms of that. The proteomics market is really starting to evolve in a major significant way. I think if you think about translational or clinical work over time, I see no reason why a product like this with broaden portfolios and future capabilities wouldn't play really well in that space. I think it's just going to take a bit of time for the results to evolve just as it did in the environment that genomics has set.

Yes, absolutely. Recent acquisitions, PreOmics, Prolab, PepSep. So all relatively small deals, but I think the goal or the idea is that they can accelerate Bruker's consumable strategy for timsTOF. So I know the combined revenue is somewhat immaterial. I think it was -- $10 million was the range that -- was this quarter, but can we just talk to the strategic rationale behind these deals and the incremental value that they can unlock over the next couple of years just as a complement to timsTOF today?

Yes, sure. So we are really quite excited about these acquisitions. We completed them in January of 2022, so pretty recent. The expectation we have for these is that they have to complete some of our proteomics solutions that we offer to our customers. So PreOmics gives us simple automation prep capabilities. We have other liquid chromatography capabilities that we're trying to employ. And these are on the front end of our instruments. These are elements that we didn't offer in the past, that we were using other vendors to satisfy those needs. Now we have what we think are superior tools that will complement our timsTOF products at all levels of the portfolio. So I think these are really quite strategic. And the idea is that they complement our existing instrument and get us a more complete solution. And that also allows us, as you correctly pointed out, Max, a more fundamental way for us to build more consumables in the timsTOF portfolio, and that's part of the program. So it's quite exciting from my perspective that we'll see where this all leads us over time.

Yes, absolutely. Maybe we can discuss at a higher level, some of the recent updates in Canopy Biosciences around spatial. I think it's probably worth getting your point of view around the launch, how excited everybody is internally. There's been a lot of commentary around spatial and this is a big milestone.

Yes, sure. I'm happy to make some high-level comments. It's -- you're absolutely right. We're pretty charged up about it internally. We think that spatial biology is another breakout opportunity for Bruker. And fundamentally, together with our proteomics opportunities, gives us real growth opportunities beyond the kind of normal level. And the product that we introduced last week is pretty exciting. It's a benchtop spatial biology tool. It is, we think, very unique in its own respect. It's going after targeted proteomics. So it's another element in our proteomics portfolio, more broadly. We think it has some very unique capabilities, particularly around quantification of data in a way that doesn't exist from an accuracy perspective. So fundamentally, we're pretty excited about it. It has a number of different features One of them is around high resolution. We have a very high dynamic range relative to other products that are in the marketplace. It allows us to look at tissue in multiple levels and at a range that wasn't -- didn't exist before. When we talk about resolution capabilities, it's really quite powerful. We have flexing levels that are beyond what's out there in the marketplace. A typical flexing requirement is in the 15 to 30 flex range, and we've run experiments way beyond that into the 50 and beyond levels. So we think that the flexing capability is really quite powerful. We also have a very significant sort of optimized scanning capabilities in a way that allows you to look more deeply and more broadly at the areas of interest. I think that's really quite critical. I think the other piece that's quite important is that we have an open source reagent capability with this product. So if you're doing research and you have a specific set of reagents that you've used in the past with no problem, then you can use those with the CellScape product line. So this is really quite powerful, I think, in terms of where our general corporate philosophy, which is to widen the ecosystem to allow what is in. And then finally, it's what we call a walk-away product where you put your chip in and you put your reagents in, you walk away and it does its business. It's sort of more than enough to have necessarily the broad Ph.D. in order to handle all of the management of it. So some really cool important technology features that are going to distinguish that product to the market.

Yes. So democratizing access beyond highly specialized personnel, right? So what's the best way to manage the cash balance and think about capital deployment in an inflationary environment? Just looking at the macro, there's so many areas that you could probably bolt things on, but just curious how you think about that in this environment?

So our capital deployment strategy has been pretty consistent year-over-year, and it hasn't really changed in '22. Our focus is largely on investing heavily in the business. That's around R&D activities, sales and marketing activities. Our CapEx focus on opportunities for productivity and expansion. And then, of course, we have a modest dividend program and the buyback program, and M&A to the extent that we see assets that look like they fit into the portfolio on quite neatly or some game changers. I mean I think there's some really interesting assets out there today in a way that we may be looking at a little bit differently than we did a couple of years ago when the multiples were quite different. So I think that's a -- we've got good, solid cash on the balance sheet, and we're going to deploy it in a financially prudent way as we had in the past.

Yes. I mean when you see the blanket multiple compression, everything getting hit pretty hard. Obviously, unequal levels of innovation in a historic period for the omic space, the life sciences space. So I guess the question becomes, for those targets that you do approach that you think are worth tucking into your portfolio, are they ready to pursue that?

Yes, we'll see. I mean the public markets have seen some come out of the bubble and hopefully some private as well. And then I think, in our case, we've locked in a fair amount of fixed capital with our last financing that we did 10-year structure with fixed rates. So given the inflation environment, we feel like we may be positioned nicely to be able to capitalize on some of that.

Great. Well, that's all the time we have. Really appreciate it. Great discussion, and I hope we can get together in person soon in Boston.

I hope so as well. Thanks again. Pleasure being with you.

Great.

Take care. Bye.