Bruker Corporation (BRKR) Earnings Call Transcript & Summary

All right. We'll go ahead and get started. Thanks, everybody, for being here. Welcome to the Jefferies 2022 London Healthcare Conference. I'm Brandon Couillard. I cover the tools and diagnostics space. It's my great pleasure to have Bruker with us back at the conference this year here to share an update on all their progress, CFO, Gerald Herman; as well as Justin Ward, Head of IR in the audience. I will turn it over to Gerald for some prepared remarks, and then we'll jump into Q&A. Gerald?

Well, thank you, Brandon, and it's great to be here. This is my third year, and it seems busier than ever, I would say, this year. So I thought we'd start just with a little bit of background on Bruker. I'll pass over the safe harbor materials that's -- my colleague usually reads those. But just to give you a little bit of update on the performance, the financial performance of Bruker over the last 9 months. Some of you have been following us for a while realize that we're starting to trend up from an organic revenue performance. This is the third quarter in a row in which we've seen good solid organic revenue growth. On a 9-month basis, we posted 10.7% organic revenue growth on a 9-month level on some fairly good comps in 2021. We're now, through the 9 months, $1.8 billion. We're on a very good trajectory, I would say, both on the gross margin lines and on the operating margin performance. We saw some very solid mix and volume leverage that came through in the 9-month period across most of the portfolio. But in particular, I would highlight that in our life science mass spec area, we saw a really good strong performance over that period. Over on the right, you may see that we increased our overall guidance for the full year 2022. We increased our organic revenue growth to 8% to 10%, up about 1 percentage point from where we were. That's on the basis of that strong performance we've seen here at this 10.7% level through 9 months. And we also improved or increased our operating margin expansion. We were 30 to 60 basis points, and we now moved it to 60 to 90. In addition, we held our EPS levels, which I think were pretty solid to start with. Some of you may know we had a fairly significant foreign exchange headwind in the third quarter, which is dampening our overall reported revenue. But from an EPS perspective, that -- it's a headwind when the U.S. dollar strengthens for us. On the revenue line, we get improvement in the gross margin and operating expense categories because of our foreign footprint. And after you get down to the EPS line, you still do have some foreign exchange headwind. So holding at this $2.29 to $2.33 level is pretty solid from our perspective. So what I thought I would do is give you a little bit of historical perspective on some of the innovation and transformation that's gone on at Bruker over the last few years. And just to orient you to the slides, the slide on the section on the far left represents revenue growth, in the middle is operating margin, and on the right is EPS. And in the blue -- dark blue areas really of the charts really represent the actual performance for those years, and light blue is our guidance at the midpoint. So just to talk about this slide for a moment. The transformation that Bruker undertook back in the 2014 to 2016 areas really started to bear fruit significant. You see the overall CAGR on a 5-year basis at 8.5%, and we're starting to move up that curve. I would say, generally speaking, you can see our guide at this 8% to 10% -- 9% at the midpoint on the revenue performance. And overall, we've been able to not only deliver organic revenue growth but very solid operating margin expansion. Over that 5-year period, we're talking about an average of 90 basis points, and we'll talk about this further, I think, in the Q&A. But fundamentally, we've been able to post solid operating margin performance. And even in a very difficult headwinds in terms of our cost pressures from an inflation perspective and other headwinds in 2022, we're still expecting to post around 80 basis points for 2022. And then on the EPS line, we're posting double-digit CAGRs across those years, and I think we'll continue to expect to do that. What I thought I might do is just recap the overall strategy of the company. We have 2 pillars. The first is Project Accelerate 2.0. This is an evolution of identifying particular growth markets in our end market states that we are focused on. These particular initiatives, and you can see them listed here, I won't go through them in specific detail, we'll talk about a little bit more of them in the Q&A. But fundamentally, they are targeted end markets for which we expect to have higher revenue growth, organic revenue growth and also higher margin performance. And what we've seen over time is the Project Accelerate 2.0 mix in the overall portfolio has overtaken the core elements of our portfolio and improved our overall gross margin performance as well as our revenue organic performance. On the left, another significant area that doesn't get quite as much attention is what we describe as operational excellence, and this is Lean Six Sigma. This is areas of focus around productivity enhancements and, to a certain extent, a focus on very disciplined management within the organization. And I would say we're having a lot of success in this area, particularly around productivity and our manufacturing operations. I spend a significant amount of time of my world around operational excellence, and I'm pleased to say that it's contributing significantly to the overall performance of the company. Just to give you a little bit of insight here around what we would describe as new and exciting areas of development from a portfolio perspective. The first relates really specifically to unbiased proteomics and multeomics. This is an area we began to move into more seriously about, I would say, 2-plus years ago. We introduced initially a product, which has now become one of the flagship products of Bruker, the timsTOF Pro, and we'll talk a little bit about that. But more fundamentally, we've increased our overall portfolio to tackle the proteomics and multiomic markets in a way that we have not done in the past. We're having very good traction here. Some of you may know, the proteomics market or omics in general, some have estimated that to be a $100 billion market. Our estimates are for what we think are Bruker-related TAMs are probably in that high single-digit billions. So it's a very significant opportunity for us. We introduced our products back in 2018, 2017, and we've started to see some really significant uptake in that. Here is sort of a more detailed review of our existing portfolio, specifically in the timsTOF area. And for those of you that have followed Bruker for some time, this has really become one of the flagship products for the company. We have double-digit growth both in terms of order bookings performance as well as at the revenue level. And we do think that this particular product has leapfrogged the existing technologies in this space and is providing higher resolution, a better sensitivity, greater throughput, the ability to really take proteomics to a whole other level. What I would say just generally, and I've had a lot of conversations today about what that all means, it means that we're not only expanding our market penetration into an existing market, but with a number of the complementary tools and adjacent related products that we're introducing in this space, we're actually expanding the market. And I think the takeaway for us is we've continued to add significant elements to our portfolio. We now have a single cell proteomics product, which we did not have 2 years ago. It's getting incredible reviews from the academic community. The other element that's really quite important in the timsTOF area has been the focus of -- a lot of our products typically focus on academic and government research institutions. These are high-end operations that focus largely in the proteomics and multiomics space. We have now, with this particular product portfolio, seen significant uptake in the biopharma space. So typically, that comes 5-plus years later. We've now -- I think, with the nature of the product we've introduced with the sensitivity capabilities and the ability to look at proteins, both their expression and how they're co-located, it's really a meaningful step up. And we've started to see biopharma picking up these instruments, sometimes multiple instruments to support their discovery, their drug discovery. As some of you may know, we are moving into an era where you're talking about more precision medicine for drugs, whether they're vaccines or others, that are targeting particular diseases through proteins as using that vehicle to get to a particular cell in disease biology. So we believe this area to be really quite significant for us going forward, not only historically, it's been a major growth driver for us, including in 2022. The other area that I just wanted to highlight here is another area, specifically around spatial biology. We have characterized proteomics or the omics world together with spatial biology is essentially the breakout opportunities for Bruker. And we do -- we've introduced a number of pieces of equipment, including this MALDI HCI product on the left, which has a lot of characteristics that I won't go into a lot of the technical details. But essentially, it allows us to use MALDI technology into looking more broadly at the spatial environment. So mass spec tends to be focused more on mass and location. Now we're starting to look at co-location dynamics that are going on, on the spatial side. We also launched on the right-hand side here, you see our Canopy Biosciences team launched the CellScape product. This is a product specifically new advanced generation of chip cytometry, which allows you to use the same sample over and over again, and gives you dynamic range, extremely good sensitivity and resolution down at the subcellular level. So we are now entering an era, I think, of dynamic capabilities on the spatial side. So you're looking at protein expression. You're looking at how the cells interact with each other in a way that was not possible literally even 2 or 3 years ago. This is a space that's relatively new to Bruker, but we do have deep experience in imaging and high-resolution capabilities and our ability to take this high degree of science and translate it into commercial products that ultimately are used significantly for commercial applications. So -- and finally, I just wanted to end these brief comments around an acquisition that we announced a week or so ago, a company called Inscopix. This is a company that is really a market leader and really created this category around miniature microscopes that are mounted on animals and track what we describe as free behavior and their ability to move. And what these microscopes do is they basically link to neural circuitry. So you're able to actually look at neurons firing as this animal, mouse, rat, whatever, is moving. And fundamentally, understanding the neural circuitry is really going to be key to understanding more neurodegenerative diseases, whether we're talking about Alzheimer's or even schizophrenia and other depression-related disease. The ability for us to be able to learn more about neural circuitry and watching natural behavior is really, really a significant step forward. Our -- this particular company was spun out of Stanford University by Dr. Kunal Ghosh, who is the CEO and founder of this business. We've acquired this business together with his team, including him. He's going to continue to lead this business. Fundamentally, this neuroscience business fits neatly into our existing neuroscience portfolio, which is largely multiphoton equipment that's used for neuroscience research. We think this, combined with another one we announced yesterday, is really going to add to our whole neuroscience portfolio. This is another area where we think there's really a significant market opportunity in an area where our imaging and circuitry capabilities are going to be highlighted. So with that, I'll leave it at that and go to the Q&A if I can.

Super.

Thank you.

Thanks for those detailed remarks, Gerald. Maybe just starting off with a couple of the portfolio highlights. You spiked out unbiased proteomics and multiomics and then spatial and single cell. Help us contextualize how big that portfolio is today, ballpark kind of growth rates. And what's kind of blue sky, I guess, in 3 or 4 years?

Yes. With respect to spatial, you mean? Is that -- you're referring to...

I guess you want to segment it, whether it's just like proteomics, which I guess is the kind of the most established, timsTOF out there for a while. Spatial's a little more earlier stage, I would say.

So relative to the proteomics area, we've launched a whole series of products now, and it's not just in the timsTOF portfolio. We have a whole range of products across the portfolio, and the target really is these are significant market opportunities for us. As some of you know, at least in the timsTOF space, we've kind of leapfrogged over the incumbent and are moving more directly into the expanding market share. There's some significant opportunities there, I think not only in the study of the proteome, but also in other omics areas, whether we're talking about the transcriptome and others. We also have -- these are more focused on unbiased proteomics, so you basically do an unbiased sample looking for specific elements, and then you fundamentally can get down to targeted proteins as you go down further from the broader population. We are focusing some attention on targeted proteomics specifically with some of our more recent, I guess I would say, the CellScape instrument, for example, that allows you to get into biology at the subcellular level and look specifically at proteins and other omics elements. And what's cool about that really is the ability to look more specifically at targeted areas and then the expression of proteins in those areas. So fundamentally, we start now to understand better about what's going on with proteins and which protein should be carrying particular drugs, for example, and which will not express themselves in the way you want to target. So I'd say generally speaking, this is a high market opportunity for us. We've seen upwards of $200 million to $300 million in the space already, coming largely from our LSMS part of the business, but there's clearly way more opportunity. The spatial biology area is very new to us. We have a relatively modest revenue portfolio there with the addition of Inscopix and the new CellScape equipment, which is now being marketed in -- commercially. Our expectation is that that's going to improve dramatically. We haven't talked a lot about it, but in the other area of omics, we also have our acuity genomics venture, which has not -- at the moment, we're mostly doing research and development and commercialization of products, but that is a whole other area under which we will be launching products in '23 and '24. So that gives you kind of the scope of our focus of attention on this space.

Maybe just to zoom out a little bit at a higher level. Your BSI segment orders have been strong to quite strong for several quarters now. If we kind of leave BioSpin alone, put the NMR-heavy segment alone, could you talk about the order growth rates year-to-date for CALID and Nano specifically? Have those been above the corporate average?

They have. And I would say generally speaking, just so for those of you that aren't familiar with it, CALID houses our molecular spectroscopy business, our life science mass spec in our microbiology and diagnostics businesses, molecular diagnostics businesses. And so the growth rates there have been really quite significant. We're talking about double-digit order growth and generally speaking against very significant comps in 2021, some very solid revenue growth. In the Nano space, we have a relatively diversified portfolio in that particular group. That includes semi metrology and microelectronics. It includes a number of material science and industrial research-focused products. It also has a sizable applied market position. Actually, and historically, our Nano business has not performed absolutely at the organic revenue growth level in the past. But in '21 and '22, we have seen with a really strong tailwind from the semi metrology and microelectronics area, very significant double-digit growth. Again, same story, double-digit growth at the order bookings level and also double-digit growth at the revenue line. These 2 areas combined with some other pieces have really helped to drive the overall organic revenue growth for the company over the last 9 months.

In your prepared remarks, you highlighted the margin expansion that you've been delivering. That's true this year as well. Despite price/cost being a headwind year-to-date, when do you expect that to flip into a tailwind match that will at some point? And how do we think about pricing, which has only been about 200 basis points year-to-date as we've kind of see you work through the backlog? Could that be 4, 5 points next year?

Well, look, I think there's a number of elements to this. Let's sort of parse them out. The first piece is around price realization and our pricing capabilities. So we're very, very conscious of our customer base. We're clearly sensitive. We really keep our customers for a very long time, and the goal is not to do anything other than, generally speaking, protect our margin position. So where we've seen cost inflation, our pricing measures have been, I think, pretty reasonable, but we had previously taken pricing positions or increases once a year. We're now taking those largely every quarter. And as some of you may know, we have a very large presence in both Europe and the Americas. Those are very high inflation environments at the moment. That's true for the supply chain. And so we -- where market conditions permit, we have moved forward with pricing actions. So as Brandon points out correctly, those pricing actions don't necessarily get reflected immediately in our existing revenue because we have a sizable backlog. We actually have the largest on record backlog in our history. So we do expect and we had some improvement in the third quarter from price realization, and we will expect to see something similar in the fourth quarter. As we move into 2023 and hopefully clear some of that backlog, we would expect to see better price realization as that goes forward. Now on the cost pressures and overall margin expansion, what I would say is the company is really dedicated to very carefully managing costs. That's across all the portfolio. We do have some of our operational excellence activities focused exclusively on cost-down measures, so we're always looking very carefully at that. This has put more pressure in that space, so we are working our way through that. I would expect to see some overall compression over time, especially as we continue to invest heavily. Especially in the Project Accelerate 2.0 initiatives, we're spending a significant amount of money in the -- in that space. So this is around R&D activities to support the proteomics and spatial biology breakout opportunities and also funding just in sales and marketing infrastructure to support the growth that we are experiencing at the moment. So those elements between cost pressures, there's also some headwinds we should mention. Talk a little bit about China, for example, which is going to create a little bit of a headwind in our semi business, we expect. We estimated 1 to 2 percentage points in the future on that. This relates specifically to the U.S.-China sanctions experience, and that was announced a few weeks back. So our early estimate is you're going to have some headwinds on cost. You're going to have some headwinds, specifically around some of the China-U.S. sanctions. And clearly, we are creating headwinds on our investments relative to the Project Accelerate initiatives. When you add that all up, I do think you're likely going to see some moderation in the overall operating margin expansion as we move forward. That does not mean we're not dedicated to margin expansion. We are and have, I think, proven that even in a very challenging environment, both in 2021 as well as in 2022. So that's a long answer. But I think overall, the prospects are really quite good. Our focus is largely around gross margin performance, but we are spending some of that gross margin performance in OpEx to drive better and larger higher growth over time.

To maybe near term. This year, it's 60 to 90 bps of expansion. Maybe next year, maybe it steps down a little bit from that level is kind of what you're saying.

We continue to invest heavily in our -- these Project Accelerate initiatives. The kind of growth levels we're driving here are a direct result of our investment in both the R&D side and also in the sales and marketing channels.

Got it. I'd actually like to focus on BEST for a minute which doesn't get much attention. Are you gaining share in low-temperature superconducting wire? Have you seen some competitors kind of exit the market the last 2 years or so through COVID now coming out?

Yes. What I'd say is just for the benefit of those, I mean our BEST operation is we produce superconducting wire in cavities that are used in essentially MRI systems, but also magnet structures across the world. So what I would say is the overall level of demand for our superconducting wire has been very significant. You may have seen even in the third quarter, we were posting 18%, 19% year-over-year growth. So this particular area is fairly specialized. It does have very interesting markets. Some of the market opportunities are in Europe and in the Americas. But a lot of our more significant growth is actually also coming from China right now. And why is that? Part of that is, dare I say, some challenges in the Chinese market around the quality of the product as well as the reliability of supply related to that product. So if you think about the scenario where we're providing superconducting wire to MRI OEM customers, and you probably know who some of those are, if you've ever had an MRI, you can see the names of those companies on those instruments, we're providing superconducting wire for those instruments. And so fundamentally, it's a scenario where if you have an expanding demand ultimately in the MRI market and you need to satisfy that demand and you don't have really solid supply, that's a major issue for these companies. So what we've started to see is a -- we are one of the few companies that has established operations in both Europe and the U.S. that give a relatively reliable and high-quality supply of this wire. So that's been, I think, a -- I think we are gaining some market share in this space, perhaps from Chinese and other competitors at this point, which is why I think we're seeing the level of growth in that particular segment for us.

You're lapping mid-teens on mid-teens comps. Is it fair to say you're not worried about comps as you move into next year given that dynamic and what was also looked to be a big DOE budget release that came out last week as well that benefit BEST to?

Yes. I think -- look, we're a science-focused company. And I think fundamentally, we're performing very well in some of the high-end science areas. And certainly, this superconducting area is one of those. It's complicated physics, and I would say we're doing well in that space so far. And the funding will help. I think that's also going to ultimately be a tailwind.

Maybe in the last minute or 2 we have left. Just what's your view of kind of the macro picture in Europe? You're a European-centric company. A lot of noise going on with energy. How should we sort of, I guess, interpretate -- interpret the macro versus kind of your operations and what you're hearing from your customers right now?

We live in the real world. And certainly, we follow very closely the macro environment in Europe. There are clearly some headwinds on the energy front that are feeding inflation and certainly disrupting some supply chains for sure. So we're very conscious of that. What I would say is our business, generally speaking, has performed extremely well under challenging conditions, whether it's the supply chain side or even existing conditions as we see them today. Just to comment on the energy side. I mean we follow it very carefully. We have large operations in France, Germany and Switzerland and Belgium, for example. Those countries, we think, are going to navigate through the energy-related issues through the late fall here and into the winter. Our expectation is that there will be some maybe rolling blackouts, similar to what those of you that may be from the U.S. have seen in California when you get wildfires or other disruptions. But those are temporary elements, and we don't really think that those are going to affect all of our factory operations at the same time. So we may see some disruption, but I don't -- we're not expecting that to be really significant over time. And we do have very clearly a strong backlog position not only in terms of our inventory on the supply chain, but also our ability to manufacture in other places, including Malaysia and in the U.S. So I think from our perspective, we're concerned about it. We study it carefully. But overall, we believe it's manageable, and that's our expectation. And just one final thing. Relative to our position in Europe, I think there's a little bit of a misunderstanding. We clearly have significant footprint in Europe. But when you look at our overall revenue base, it's very balanced across the Asia Pacific area and Americas as well as the European markets. It's really almost 30, 30, 30 in that sense. So we do have plenty of other levers that we do pull. If we can -- if we are struggling in a particular geography, we have find ways to flex the channel, so we move it to another geography, and we've been quite successful in doing that. I'd say the most challenging quarter we had, at least historically in '22, was the second quarter where we had some supply chain disruption in Europe, and we were able to channel that to other places to still meet consensus. So we're much more agile, I think, today than we were a few years back in this framework. And hopefully, we'll be able to deliver it that way.

Super. Unfortunately, we're out of time, so I have to leave it there. Gerald, thanks for being here.

Yes, it's a pleasure.

Thanks, everybody in the audience, for being here, and we'll see you all tomorrow. Thank you.

Thank you.