Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Perfect. Hi, everyone. This is Rachel Vatnsdal from the Life Science Tools and Diagnostics team at JPMorgan. Today, I have the Bruker team with me. This session will start off with a 20-, 25-minute presentation followed by 20 to 15 minutes of Q&A. So with that, I have Frank to kick it off with their presentation. Thank you.

Thank you very much, Rachel, for having us here. Thank you to all of you to braving the elements and coming here somehow this morning at this early hour. Our CFO, Gerald Herman, is here, our President of our Bruker Nano business. Mark Munch, he will also be joining Q&A and one of the. If you have any questions about IR, Senior Director, Justin Ward's in the audience, I'd like to acknowledge 2 of our Board members, Bonnie Anderson and Adelene Perkins. Thank you joining us. Good to see so many of you here. Well, let me jump right in. This will be more of an update presentation. It's not really an overview of Bruker. If you're really new to the story, we are happy to take the time and walk you through it. But more of an update. We are not preannouncing really results, but we're going to give a little bit of directional color on Q4 and where we think 2023 is going because you're interested in that. So therefore, I'd like to draw your safe harbor statement, and also it has some language about it that we are giving some color on Q4, which is, of course, preliminary because we're really announcing our Q4 results. And we'll then give for more guidance for 2023. We expect to do that in early to mid-February. So a bit of a review. Year-to-date, the actual reported results up to -- including the third quarter had very good organic growth with solid margin expansion. We're very pleased with that. On the left-hand side, if you take a look at that, You -- as a reminder, perhaps despite the fact that, in 2021, we had 19% organic growth, so this isn't exactly an easy comparison or something like that, in Q3 year-to-date, the first 3 quarters of the year, we had over 10% organic growth and very pleased also. I think it's an important number. Usually, we don't highlight it as much. Our gross margin -- our non-GAAP gross margin expansion has been well over 100 bps, actually about 160 bps, while our operating margin expansion is also quite satisfactory at 80 bps. It's actually a message in there that shows you that we're really making continued very significant and thoughtful and intentional investments in our Project Accelerate 2.0 initiatives. I'll talk more about that in a moment. And they are, of course, in R&D, but also in marketing and sales, in particular. So very good progress year-to-date. Q4 2022 preliminary revenue estimates not with numbers but just directional and a bit of a 2023 outlook. So for -- our preliminary revenue estimate for Q4 '22 is mid to high single-digit organic growth. We had given color on our November Q3 earnings call towards -- is a subtle upper mid-single-digit organic growth. This is mid- to high single-digit growth. So it's inching up a little bit. And we -- looking at the consensus, we think we'll very comfortably report -- reported revenue above the consensus. We also see continued solid demand in Q4 '22 and for our BSI. Remember, that's our Bruker Scientific Instruments segment. That's really the combination of 2 segments. It's 90% of what we do. It's what you know us for primarily life science tools and diagnostics solutions. We again expect book-to-bill also greater than 1, which is quite good for a Q4 because obviously, Q4 is almost our heaviest revenue quarter. With that, our BSI backlog remains quite high. In fact, it's inching up a little bit. Some of that has to do with continued supply chain constraints, Maybe the worst of the supply chain crisis is over, but sometimes it doesn't feel like it's still a struggle to get revenue and everything. So -- but it's -- I think that will continue at least towards the middle of the year. But it is easing a little bit, as you probably have heard elsewhere, but that's why our backlog is still inching up, and our book-to-bill has remained excellent. With that, and with our -- more fundamentally with our strategy, our dual strategy that I'll talk about in a moment, our Project Accelerate 2.0 initiatives plus operational excellence, those really go together plus the excellent momentum we've had of 19% and now over near 10% organic growth for the year. I think our guidance is 8% to 10% for the year. For 2023, we actually think we have a strong outlook for 2023. And again, with numbers, which will satisfy you more, hopefully, we'll intentionally then in early February, but we're looking at mid- to high single-digit percentage organic revenue growth for 2023. I think that's a really solid setup, knowing all the moving pieces and concerns about the economy and all of that. It just shows how while our strategy is working, how desirable our products are, how we're really leveraging our breakout opportunities in proteomics and spatial biology but also the other project Accelerate 2.0 initiatives. And I'll detail for you a little bit how they're doing organically. I'll give you some examples, but also how we're investing in them inorganically. Lower right-hand corner, if you haven't -- if you followed us for years, you'll be particularly surprised by that because we used to be very Europe heavy, right? And Europe is still a very strong market for us. A lot of our R&D is in Europe, but we really have a very nice balance. And this is particularly because of the fast growth of our U.S. business. So we've grown the fastest and continue to grow the fastest in the U.S. in North America and they are particularly strong growth in biopharma, both our NMR and our differentiated mass spectrometry, proteomics and other tools have been growing tremendously. So that's a very nice balance, and that's maybe something that not all of you have seen. Or if you followed us for years, maybe you have other numbers in mind. So let me continue here. This is our dual strategy. That's sort of the overview slide, although there are a few new things on this page. We continue with -- our strategy is really working very well and has for a number of years, and it's incrementally evolving, and we're refreshing it. It's not stagnant at all. But our high-value innovation, our disciplined entrepreneurialism, that's part of our culture and really of our formal Bruker management process, drive stronger and stronger revenue growth and also, of course, ultimately, non-GAAP EPS growth. Those are our primary objectives from a financial point of view. This all goes along with a long-term commitment, which we've had on which we've delivered and which we will continue to deliver for continued sustainable margin improvement, big focus on gross margins, continued investments but also continued operating margin improvements. So the 2 pillars of our strategy are the Project Accelerate 2.0 initiatives. Visually captured in that beautiful hexagon that you may have seen there used to be -- we introduced that in 2017 or '18. And then we've really updated that with new elements to the Project Accelerate 2.0. These are the high-growth, high-margin initiatives that are -- then I'm not going to list through all of them, some of them I'll mention today, and you can read them. I think of them as pulling up our margins and pulling up our growth rates and so continued margin expansion, getting into much, much larger TAMs. -- we've very successfully in a way, transformed gradually, but transformed the company and continue to do so towards some very large TAMs. And in some areas, particularly in proteomics and spatial biology, we think we have very, very large opportunities. I think we're also leading that transition and, in fact, to some extent, enabling it, not only surfing the wave but really also creating it. This is very -- it's not quite as exciting, but operational excellence in our core business. And actually, in everything we do, including the new initiatives is really the other part. Think of that as pushing up the margins and pushing up the growth rates and, of course, being excellent not only in operations, logistics, but also on the commercial side, in product R&D, driving gross margins. As you know, we're pretty differentiated among the larger players and that we consistently for many years and expect to continue to have ROIC well above 20%. So we're not bad at using capital and investing it. It goes with a differentiated approach to how we grow our business primarily organically, but also, of course, with smart and thoughtful M&A or majority investments. So maybe the only last point on this slide before I move on in the interest of time. In addition to the 6 Project Accelerate initiatives, and for some of these things, you'll get a quick hint today. Other things are maybe for future investment -- Investor Day or Analyst Day if we have one later this year. They are also preparing new high-growth, high-margin opportunities. They're not completely new and additive they really emerge from what we're doing in proteomics in spatial biology and related areas with an important research on cancer research tools. You may have heard that. We've been at AACR meetings and so on and cancer research pays for a lot of what we're doing. We've been in microbiology for some time. You may be familiar with that, but much bigger push into cancer research. Quite new or relatively new. We've done some of that before neuroscience research, including the Inscopix and Neurescence acquisitions that I'll talk about in a moment. And then -- and this will be a passing remark. We won't have time to talk about it, really also clean tech. Some of you, Bruker has some industrial business. We have some very good industrial business with very sustainable funding for some of those markets and clean tech research in a recent press release that may have raised eyebrows wow, we had no idea. Bruker is doing that, yes, this was for FUSION research and for FUSION projects, big projects in Europe and ITER and in China, big FUSION projects, where we announced in -- over a short period of time, we had over $50 million of orders. Multiyear deliveries, this won't all be 2023 revenue for FUSION research and of course, many other aspects of wind and battery and other research. In addition to the semiconductor metrology, which has been excellent, continues to be excellent for us. Our industrial research businesses are really very, very healthy. And I know that's a concern for this year. there will be a slowdown or a recession, we shall see. But I think we're very, very resilient and robust also in that area. So let's talk about proteomics and 40 proteomics, the proteomics revolution that we are driving and participating in. I mean this will be a very big decade or 2 decades for proteomics. I think it will be as important and from a pathology or disease biology research as important or possibly more important than genomics. And genomics is pretty important in all its different flavors of epigenetics and transcriptomics and so on. But at the end of the day, enzymes, that's where the rubber hits the road and proteomics is important. It was much, much harder to understand, and we're driving that both at the unbiased fundamental research way. We're doing that in tissue, in cell lines, now also much more in plasma. And of course, we're also doing that in targeted proteomics, particularly then in -- when we look at the spatial distribution. So I'll come back to that in the spatial biology section. So our timsTOF, which is a very unique proprietary technology, that has done really, really well and continues to accelerate. We're now -- it has now 4 family members. They are listed here. I won't go through them all. Well, in the other top are the 2 core proteomics, more and more also non-plasma proteomics, which is very important for us and where we work with various important partners but also single cell unbiased proteomics, a pretty unique capability and this rather flexible instrument that can also do MALDI imaging, that's what you will see when I talk about some of these high plex IHC research panels and tissue multiomics that can be done on that instrument. And even these million instruments that you see at the bottom, we tend to sell more than 20 of each of them as well in addition to the core proteomic systems. So more than 600 units out there growing very well. And really, with the fourth dimension, the -- and I know it's a technical term, collision cross-section, how is that for a Monday morning, but it really makes a big difference. It just allows a much better dissection of the complicated high stack. And it's not only more informative and more differentiated and a deeper look at the proteome and at post-translational modifications, it also actually has turned out to give us greater sensitivity, higher throughput and higher robustness. Let me give you 3 stories very briefly. These slides will all be posted later on together with an 8-K and things like that. One of them is from the Technical University of Munich. Bernard Kuster is one of the very well-known pioneers in proteomics. He also does things a little bit differently. He does things with clever chromatography, higher flow rates, micro -- microliter flow rates that tend to be very robust, very suitable for clinical applications or high throughput. The brain proteome is actually one of the tougher proteomes to measure and to do that from FFPE brain tissue and looking at thousands of samples in this case at more than 2,000 samples, and he's just getting going. This was sort of the pilot feasibility phase. He's been -- had tremendous success, a lot of proteins measured in a very short period of time, half an hour. This is no longer to our measurements and over 9,000 proteins in 13 brain regions. This just wouldn't have been possible and not to quote him, I'll just read what he says. He said, "the speed and robustness of the timsTOF HT", that's the latest high throughput version with higher dynamic range, "with our innovative higher flow rates, that's what they're innovating in," in particular, many other things, "allow our lab to think about projects involving large sample cohorts that simply would have taken too long with previous generations of mass specs." Hanno and Judith Stein at the Children's Hospital in Boston, they did a large plasma proteomic study on COVID-19 patients, over 4,500 samples of 1,000 patients, some very innovative sample prep, bioinformatics. They use this DIA that you may hear that's again a bit sort of apologize for the technical jargon. That's data-independent. That's the hardest way to do mass spectrometry with high throughput and great depth for proteomics on the timsTOF platform. And again, they all have other instruments in their labs. They have only adopted timsTOF in recent years, right? But the timsTOF platform was critical to our lab completing a demanding study of thousands of samples, something that was not achievable previously. And they're looking forward to larger projects. And let me finish off with a single-cell proteomic example of Professor Nikolai Slavov, he's at Northeastern, an Allen distinguished researcher and is also, I think, getting funded a very sizable focused research organization that he will announce pretty soon. A pioneer in single cell proteomics done some fantastic record-breaking work here that's listed above. And then he is really combining this DIA, this data independent stuff with multiplexing for higher throughput and, in fact, without sacrificing depth and sensitivity, some very, very breakthrough work. You think he's now 2 of our single-cell proteomics already and is very, very excited and showing how it's clearly outperforming anything else that's out there. And in fact, it is an enabling tool. That's what we are, all right? Switching to spatial biology and single-cell omics, tissue biology, there is a number of products that go into that. A lot of that is driven by my colleague, Mark Munch, who is also joining us for the Q&A and then later for the one-on-ones. He and his team, the -- Canopy's Biosciences team out of St. Louis, they launched the CellScape instrument. It's a smaller box, for once something less than $0.5 million from Bruker. Can you believe it? This but it's really a very high throughput walkaway automation with the best performance that's out there. You all know that single cell and true single-cell biology is a very crowded market with a lot of competing claims. We think this is the real thing now with the best performance out there and the best -- on very high multiplexing. That's what one people want to do in targeted proteomics, best-in-class resolution, absolutely single cell below 0.2 microns resolution, lateral resolution. Very key beyond pretty pictures that everybody sees on the cover of nature and cell, you really want to have quantitative biology. We're big believers in that on all of our customers ultimately need quantitative results, including very small cells, small immune cells, maybe with a low express protein that may be really very important for maybe your disease biology you're trying to research. And so there's a very unique capability, a proprietary high dynamic range that gives us 10 -- 8 orders of magnitude of quantitation, completely unique. And really, again, we think where the rubber meets the road along with all the ability to look at much larger fields of view, this is not a sequential technique where you measure 1 point at a time and some other spatial biology. You measure them as an array, all at one time. You can have large fields of use or it's translational and pathology research and ultimately probably also towards LDTs. This is a fantastic, very important new instrument. So in addition to MALDI Biotyper and NMR and timsTOF, remember CellScape, it's going to be important. However, I have to talk about MALDI for a moment as well. On the right is more the $1 million research instrument of which we sell more than 20 a year. This does -- it's not single cell, but spatial tissue, multiomics uniquely combining for the first time. It's a bit of a niche but a very important niche where you can combine spatial proteomics with small molecule information, lipids, metabolites [ glycosylations ], glycans, very, very important, very exciting. This is what gets cell in nature and science papers and so on and some very good fundamental biology -- so that's a little bit differentiated more on the discovery side of spatial biology. I've said a lot of this. So sorry if I'm -- I'll just let you review that in addition to the highest resolution and this very unique ability to quantitate at orders of magnitude more dynamic range, which really is important for biology. The high throughput, the walkaway automation is a beautiful instrument. It also -- some people really like that. You can pick your antibodies that have the best selectivity and integrate them into our workflow. Of course, we also have ready panels for neurological in immuno-oncology and other research. But if you're working with mouse antibodies and you want monoclonal, you can use those. And if someone also only has a human library, they won't do very much for your research and many, many other examples. Usually customers take our libraries, take our kits and then say, "Hey -- have a few markers that are really dear to me and where I know we have very good antibodies. I want to include that." Enough on that, this is the CellScape chip cytometry as opposed to mass cytometry instrument. It's going to be very important for Bruker in spatial biology. And here is an example of -- pay attention to the small cells that have slow expression levels. Yes, we can see those 2, and we see them with absolutely terrific results, something that we have now, and that's really impressing a lot of customers, and we're doing it with throughput and robustness and automation. Right. Let me wrap things up in the next 2 or 3 minutes with a bit of an outlook of some of the M&A and majority investment strategy, including some recent M&A transactions that are actually quite important and support both spatial or in tissue biology as well as proteomics. So yes, we do M&A for the right reasons. We're not one of these core compounders. Others in the industry do that beautifully. We really focus on our Project Accelerate initiatives on driving margins, driving growth, driving EPS, of course. But M&A often gives us more complete solutions. It allows us to get into adjacent markets where we can leverage our technology if we have some additional software, consumables or automation. And of course, it's really opened up also some very large markets in cases where we acquire and then further develop a new platform like the CellScape chip cytometry platform. I'd like to focus on the 2 breakout areas, proteomics on the left, we acquired a software company, 2 chromatography and columns companies in the last few years. We also -- automation and sample prep company, PreOmics. You heard about that a year ago. And today, I'll talk to you about, a Swiss specialty company that is really doing fantastic work with specialty high-value CRO services. Rachel, I know you cover CROs. We're not becoming a CRO company, but we have, in some areas, in spatial biology and proteomics, we have specialty CRO capabilities that usually also have tools and software, so they enhance our tools portfolio. And they just enable people -- a lot more -- a lot of people would have a budget to buy timsTOF, but maybe they don't have group or the expertise, they can now go to an expert like Biognosys or some other CRO customers, of course, that we have and can do the great work there. We've also entered with additional platforms consumables and software in spatial biology. We've done quite a bit of work, and that also is getting us into neuroscience research solutions. So here is Inscopix, we announced that they're here in Mountain View. They were started by a Stanford electrical engineer who doesn't think molecular. He thinks circuits, and that's actually very, very complementary view of brain, and Inscopix has become a very -- about $20 million revenue company, excellent margins, excellent growth profiles, highest level of scientific recognition and innovation recognition of having unique solutions for animal model, preclinical, rodent brain circuitry research. And here, Francis -- none other than Francis Collins has said, look, a big intermediate zone in brain and neuroscience research. We want to understand entire circuits, not only molecules and genes and not only behavior and functional MRI on the other hand, and that's exactly that hot area in between that neuroscience offers using microscopy, real life brain circuit microscopy with this solution that you see here. They've done a great job in not only having a tool or a microscope, but really also the complete solutions supporting customers in doing this type of preclinical work, all the way to data processing and AI very much the way we want to approach things with complete life science solutions, they're neuroscience experts, they're not just a bunch of microscopists. They're beautifully done. And last but not least, I'd like to acknowledge Dr. Oliver Rinner, the CEO and Co-Founder of Biognosys, thanks for being here today. Biognosys, we've made a majority investment in this company. And we're also doing some additional primary investment to enable them to open a second laboratory in the United States, probably in Massachusetts. They really are a premier company in the proteomics CRO services space. They also have some very cool tools, the Spectronaut software and various other flavors of that, that are very, very highly regarded in the industry, highly and broadly used and among the most innovative. They also tend to bring out the best in our timsTOF platform. So yes, we acquired more than 80% in -- very early in January, just last week. Biognosys, just to give you scaling, about $15 million in revenue. We expect them to grow very fast, particularly with a further push in the U.S., so we expect double-digit growth, very strong synergies with our proteomics business. And initially, this will not be accretive yet, but we think it will be accretive to EBIT within 3 years and then have a nice double-digit ROIC. So happy to discuss more details, but I think we're running out of time. It's a terrific company. It's probably the premier proteomic CRO company out there in terms experience. Here's a little bit of their background. They've really been at this for a while. They were an ETH spin-off, Ruedi Aebersold, one of the pioneers in proteomics continues to be a small investor and very supportive. I got a nice e-mail from him the other day. And this is just a terrific group and really, really enhances our proteomics business. So last slide, and I'll stop here. Our strategy, including the Project Accelerate initiatives, is really working. The 2 breakout opportunities are going to be not only give us optimism for 2023 but really for this decade, and there are new things where we're more and more going also into new disease areas, neuroscience research, cancer research. You'll see us becoming more and more differentiated in areas that I think are very, very good for our financial profile. Thank you very much.

Perfect. So now we're going to start the Q&A portion of the session.

I'll stay here and pass any questions on.

[Operator Instructions] So maybe just to kick it off here, Frank, just regarding the order book. So great to hear that you guys beat expectations for 4Q. You exited 3Q with 8 months of backlog. You said that the order book grew with B2B over 1 for this most recent quarter. So how should we think about that backlog and where it stands today? And then what is the right level of order growth for bookings going forward?

Yes, it is -- I mean, more typically in the past and pre-pandemic since then, nothing has really been a typical year, right. Each year has its special idiosyncrasies. We tend to have longer backlog because some of it is our instruments business, but it typically tends to be more just below 6 months or something like that. So it being over 8 months is unusually long. That's driven by very, very healthy order book, on the one hand, and then, of course, some continued supply chain constraints. Now that's not all going to come off in 6 months. That's going to come off -- that's going to come to a lower level eventually. So far, it's not happening yet simply because the orders and the momentum are so strong. So it's a problem, but it's a good problem to have. And so I expect that, that will ease from a number of months in backlog over multiple years, but it does support, of course, -- and it gives us an additional -- we can sleep at night and I think well positioned for 2023. But we're not just working off our backlog. We really have continued very strong momentum with our solutions and products.

Great. And then maybe if you could just spend a minute talking about supply chain constraints. I thought that was part of the reason why that backlog grew this quarter. So how much longer until we're kind of out of the woods on the supply chain and the availability of componentry? And then has it improved really? And how much has it improved?

I'll let Mark talk to that. He runs a very big business for Bruker. He is as much in the trenches or more so than I am. And so you hear from someone else at Bruker.

Yes, it has improved, but the challenges are still there. We went from a period of pretty chaotic -- we kind of call it a controlled chaos now. So no new events do occur. But then I say less sporadic, the number of sporadic events has dropped. It spans a lot of components. It goes from -- everybody's kind of knows about the electronic components. PGA chips are hard to come by, but it goes into mechanical parts and cable assemblies and a number of things. Those kind of non-chip components are getting better. That's the part that's really we've seen improvement on.

And logistics get better. I mean half a year ago, we also had the logistics, and you couldn't get trucks and you didn't get containers, you couldn't get flights. That certainly has much improved.

Maybe just sticking on the topic of backlog here, can we just talk about cancellations and the risk there? You guys have mentioned that cancellations are really rare, just given the nature of your products and what's required for your customers to really buy and be able to install one of your instruments. So are you still thinking that, that's still really low risk, especially with the macro environment? Are you seeing any delays or pushouts of orders? Just what's the general environment look there?

I think it's a very, very minimal risk for us. I mean, sometimes when we have a longer backlog, maybe a customer will elect to buy an instrument where they have an alternative somewhere else, and that can happen. But everybody else has similar issues as well. So our market share and if anything, it keeps growing and just -- but also in our core areas, not only in proteomics and spatial biology. Once we have an order, I will acknowledge that every once in a while, a customer tells us ship it a quarter later. But from a materiality, it is so immaterial that I regret having said it. But yes, so it's really immaterial, and we essentially have no cancellations. So these are just the things that we juggle, okay? An instrument goes into the next quarter. We'll post something else, and we got plenty of backlog to do that. The short answer would have been, don't worry about it, that early. We got that. We do that all the time.

Perfect. What about on pricing? Where was pricing exiting 4Q? And how are you thinking about pricing heading into 2023? And then what's your ability to really reprice some of this backlog that you guys have in the book?

Yes. We don't reprice the backlog. But obviously, we've raised prices. We unfortunately -- we had to raise prices at least twice in some -- in the last 12 months or so. And so because we have a significant backlog, we had less of a pricing effect and benefit in margins. We had some pricing benefit in the second half of 2022, but we'll see more of that in 2023. And Yes, we've had very good desirability of our product. So I don't like that term, but we have pretty good pricing power. And we've just gradually and consistently increased our pricing to where we will have good price realization in addition to unit growth and market share growth. It comes together much better in '23. In '22, we had a bit of a delay compared to people that have consumables pricing where they get better pricing a week later.

Great. And then maybe looking at your instrument exposure by geography, that used to be much more weighted towards Europe, like you mentioned, today, it's roughly equal at low 30%. So can you kind of talk about the capital budget standpoint for instruments in both of those geographies? What are you seeing just given the macro environment for both?

So we'll have to change your research to where you don't call it an exposure but an opportunity to innovate and drive new fields. That's how we think about it. So being leading with instrument and innovating in new fields like spatial biology or proteomics is a good thing. And then you can pull in the aftermarket. But capital budgets, for what we're doing, I mean capital budgets, for us, it's always primarily a question of what percentage part of the budgets get allocated to us. And in life science research and disease biology research, we really are positioned to where our instruments in an NIH budget in similar budgets by Max Planck Institute in Germany. Whatever it might be in China, you name it, are really near the top or at the top of their buying list. So we're -- we've had good budgets. I assume that some of them will come down a little bit. Even the industrial budgets, most of the stuff we do is not just for capacity buys. So in a downturn, that may slow down a little bit. It's been on a fantastic growth pace for us. But we don't -- for instance, in semiconductor, a lot of it is technology buys. If you look at clean tech, companies will invest from fusion to wind turbines, offshore that may need superconducting materials all the way to battery research. They invest in that throughout the cycle. So our cyclicality on our maybe 20% industrial business is very muted. It's not 0. Obviously, that part may be slowing down a little bit this year. At least in terms of orders so far, we still have very high backlog. But so many of our other things that you see in the hexagon are really the funding situation is very good for us.