Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Well, again, welcome to TD Cowen's 43rd Annual Healthcare Conference. I'm Max Masucci, one of the life sciences and diagnostic tools analyst here. We're pleased to be joined today by Bruker, one of the 3 large cap names in our coverage and a diversified participant in several of the tools, diagnostics and other markets. And so with us is EVP and CFO, Gerald Herman. And for anybody that has questions, feel free to send me an e-mail, and I'll check it periodically. It's great to see you. Thanks for being here.

I'm delighted to be here in person.

All right. So maybe just to kick off with a big picture question. You just wrapped up a strong year, both on the top and bottom line in an unique market environment. And for those that haven't been tracking the companies closely this past year, what would you consider the headline takeaways for Bruker over the past 12 months and maybe in Q4, in particular?

Sure. Well, thanks. It's great to be here, and thank you for all coming. I guess in terms of headlines for 2022, probably the biggest headline is that we navigated through a pretty challenging supply chain and macro environment in the year. We did have some initial disruptions, especially in the second quarter related to supply chain issues and they were somewhat severely impacted our actual overall performance. But we recovered nicely. I think we navigated well through in the fourth quarter. Just in terms of overall headlines for full year '22, I think the key would be that we delivered organic revenue growth of 10.2% for the full year and also very strong order bookings performance, and that exceeded 10% in 2022. And that's coming off of a very strong 2021, rather. And I would say it's a maybe somewhat understandable, we've delivered 19% organic revenue growth in '21, 10% in '22. And our expectation, which we'll talk about in a moment, is in the 8% to 10% organic revenue growth for '23. And I'm very pleased to say that we, for the first time, as a company, hit a 20% operating margin performance in '22. And that's an all-time record for Bruker. We've been marching our way forward over a decade of improving operating margin expansion and did, I think, just that about 60 basis points improvement in '22 under very difficult circumstances. So I think the only other item I would add is the order bookings performance for the fourth quarter was quite strong for us. And as some of you may know, we made some comments last week regarding a continuation of that order bookings performance in the first couple of months of '23 so far.

Yes. Okay. Great. Yes. So I mean that parlays into the traditional guidance question. So the '23 guide, it'd be consensus from the top line and the high end of the EPS range was in line with analyst expectations. So maybe starting with revenues. So organic revenue growth of 8% to 10%. So if we separate what you would consider the legacy or core business, what would you consider that baseline organic growth will look like if you excluded the Accelerate 2.0 product line?

Yes. So just to frame it for everyone, we've identified Project Accelerate 2.0 is essentially some initiatives that are targeting specific end markets that deliver higher organic revenue growth and higher operating margin performance. If you -- that represents a little over 50% now, about 56% of our overall revenue mix. And so if you take that piece out, the remaining has actually been very healthy. And I would say we've seen significant growth in that area, particularly driven by our organic order bookings performance. So relative to the non-Project Accelerate 2.0 areas, we continue to think that those will perform quite well in '23, largely due to the large backlog that we have associated with those products. I think for '23, that's going to probably be potentially at the low end of that 8% to 10% range, maybe even a little bit lower than that. But fundamentally, we still see good solid growth coming out of that. And I would say those that are not that familiar with the story, the company is very focused on innovation even in our core markets. So it's not just about some of these other breakout related opportunities, which we'll talk about, I'm sure, but it's more fundamental. It's even in our core business, we continue to innovate strongly and we contribute a significant amount of R&D activity even into the core business to drive that innovation. And ultimately, that organic revenue growth in some areas are performing extremely well in that portfolio despite the fact that they don't meet the market of the Project Accelerate 2.0 initiative.

Yes. That's a good representation. And I actually am surprised. I thought that the percentage of total revenues should be a little bit lower. So that's great. But -- so it's safe to say that the 56%, is that number?

Of Project Accelerate, yes.

Yes. So that would be where -- there could be variability in the guide, right? Is that a safe assumption?

Well, I would say there's -- I mean, we baked in a lot of pluses and minuses in our overall guidance outlook for '23. I would say if there's going to be upside is more likely to be in the Project Accelerate area than it is to be in the core elements of the business, but there's a lot of variability, including supply chain, macro, I won't go into all the details, but you know where I'm going with that.

Yes. I know that this is a recent acquisition, but Inscopix is, I believe, accretive to overall company gross margins, but is still low revenue contributor, but at this point in time, but we've got some M&A questions. So maybe we'll touch on that there.

Sure. Happy to talk about those.

All right. So just moving to just additional detail around margins and EPS assumptions in '23. So you're lifting your R&D spending to roughly 10% from around what?

9.3% for '22, yes.

And so that incremental R&D spend will be focused on the proteomics and spatial offerings. Proteomics and spatial, I think are used broadly as terms. And so it would be great to hear some additional detail around specific areas of focus within proteomics or spatial or specific areas of focus for the incremental spend.

Yes. So just generally speaking, our -- what we consider to be our breakout opportunities relative to many products in our portfolio are largely in the proteomics and the spatial biology area. We define proteomics fairly broadly. We're talking about deep proteomics unbiased or even in some cases, biased. We have very targeted proteomics product. We can talk more about those. I mean, generally speaking, our view is that the -- these are really significant opportunities for Bruker and largely for the life science space generally. There's been a wide view initially that genomics was really going to be the solution to the most disease biology understanding, and we've concluded, I think, over the last few -- almost a decade now that while genomics has made an enormous difference to this space, that has not answered many of the significant issues associated with disease biology. You and I can have the same gene, but not necessarily have the same disease. And we believe that that's largely due to proteomics and more generally multiomics when you start to look at cell structures and how they express themselves and a better understanding of that is really critical. So in this space of proteomics, we introduced a series of tools largely in the mass spec space, especially with our timsTOF Pro product about 4 years ago, and that product is really taken on a whole different dimension in terms of understanding of the proteome. And we've, since that time, introduced a series of other products in the portfolio in the timsTOF area that really added another level of understanding. So we have a high throughput instrument. We have a kind of a workhorse product we call timsTOF Pro 2. We have a single cell proteomics product, which is a high-end product targeted specifically around high-end research into what was targeted to be high-end research institutions, but it's now even moved into the biopharma space. So just generally, our view on proteomics is that we want to be known as a broad-based proteomics organization that offers solutions, not just instruments, and some of that has driven some of the acquisitions we've done, and we can talk about that more specifically in a bit, if you'd like. But also, we believe that there's real opportunity to not only gain market share in the proteomics space, but also to expand the market. And that's a lot of what our tools do is they generate insights that were never there before. You can look at more proteins, you can look at them differently. You can look at protein expression in a way that didn't exist literally even 2 years ago, that's permitting broader, larger cohort studies from a research perspective that you never saw in the past. And then on the spatial side, we have introduced a number of products. We're still in fairly early innings in the spatial biology space. It's a hot area. Fundamentally, we believe, as usual, we bring technological advantages into that space that don't exist there today. We tend to be disruptive when we introduce these products, these new technological advances into the marketplace, the MALDI Biotyper in more clinical settings. We've done it now, I think, in the timsTOF environment, and we expect to do this more broadly in the spatial area. So we have spatial proteomic elements. We have key pieces which have yet to be even launched with genomics offerings and a series of other products that we will be introducing and, I think, again, do some of the same things we've done on the proteomics side in the spatial biology area. I would say that it's fairly early innings in the spatial area for us. It's -- we have the technology, I think, and the strategy to execute on that. We don't have as much in the commercial infrastructure, and that's part of what we're doing in terms of our overall spending is focusing on continuing to fund the proteomics area and continuing now to build our commercial and our R&D infrastructures around the spatial biology area. Sorry, that's a long answer, but I think it helps people to understand the targets that we're going after in these particular spaces.

Yes. No, that is helpful because you can have spatial phenotyping. There's a range of different types of spatial offerings. And there can be different call points, right?

Yes, for sure. No, absolutely.

So I mean, I guess, in the early sales interactions for some of the spatial offerings, how have those interactions gone? Have they been largely competitive displacing or first-time adopters?

Yes. I would say in the spatial area, our focus has been kind of -- first of all, we've only launched the -- we've got some offerings already in the spatial area before we launched the Canopy CellScape instrument, which is kind of one of the, I think, probably cutting-edge instruments that we talk more about. But essentially, some of our other instruments have been focused more on phenotyping and being able to use biomarkers in a specific way. I think for the first time, our CellScape instrument really gives us different capabilities in this space. We think this goes up against some of the best that are offered in the industry, both in terms of high dynamic range, the sensitivity, our resolution capabilities and just insights in a way that we think quantitation in particular, and this is something we probably should talk a little bit about. Bruker's famous for not just delivering high-technology instruments but also being able to reproduce experiments over and over again and have you get quantitation in the way this is meaningful from a research perspective. So our target in the spatial area has been focused on key opinion leaders and identifying who those players are, having introduced the CellScape product into them and then allowing them to use that product in their environment. And it's a really, I would say, very positive reaction so far. We've got a number of orders. We launched the product in late Q2 of '22. We've got a number of orders in a very significant pipeline at this stage. So I think the differentiated technology makes a big difference here. Our biggest challenge at the moment is really just commercial, getting the channel structures put in place and being able to execute on that. And again, we've got some experience in doing this in other parts of our portfolio. We just have to execute well, and it has to be funded. Hence, the investments that we're planning to make in this space in '23. We think it's the right time to make significant investments in this space in both spatial and in the proteomics area.

Well, we saw a few acquisitions last year that were more related to the consumables, right?

Yes, some adjacent markets associated with some of our proteomics space.

I would imagine with some of the expanded capabilities in spatial, I mean how -- is that going to come at a premium price, I guess, and...

I guess I'd say, relative to the M&A activity, we did -- we've done a number of smaller tuck-in acquisitions, which are either technology feeds or synergistic acquisitions, largely in the proteomics space, but certainly in others. And on the spatial side, we completed a $80 million -- I'm sorry, $100 million acquisition of Inscopix, which you mentioned earlier. And this is a very interesting acquisition for us because this is a company that established essentially a niche market in brain circuitry and tracking free roaming animal behavior against brain neural activity. And it's the first company that we're aware of that actually has sort of, I recall, this spatial tracking of neural activity connected to directory to behavior. And why is that important? I think from a neuroscience perspective, it's hugely important for looking at neurodegenerative diseases, whether we're talking about Alzheimer's, dementia or even more specific neurological disorders, including some of the more challenging elements that are out there. So moving into that area is significant for us. It allows us to really explore the neuro area more fully than we have previously -- we have some products in that space, but this is now a much broader application of that. I think it has significant growth opportunities. And while it's accretive at the revenue and the gross margin line, it still needs some work on the operating margin line, and we'll be working hard to feed some R&D and infrastructure -- sales and marketing infrastructure into that business. So that's one area. The other that we have yet to launch, but as a company, we've developed in conjunction with Harvard Medical School associated with genomics. It's a company we call Acuity Genomics. And for those of you that are really interested in this, I encourage you to come into our Investor Day, which is going to be scheduled for June 15th in the Boston area and where you'll see more details around the genomics offerings that we will then have combined with some neuroscience some of our -- for us and microscopy tools that are already in the spatial area. So I'd say those are significant acquisitions. We did a small acquisition of a different technology in neuroscience as well, very well-funded markets. I think there's really significant growth opportunities there.

Yes. So it just seemed like the right time to maybe narrow in on neuroscience and also cleantech.

Yes. We'll talk more about that in June. But I mean, we do have some interesting technologies that are already used mostly in our -- some of our other smaller core elements of the business that we are now developing those into more significant technologies that we think can be really significant in the cleantech or green tech area. I mean one of them is around the production of superconducting cavities that are used in wind farms. We see this as -- we received some orders in the fourth quarter related to that. We also have received an order for some fusion-related activities that are largely China-based interestingly, we're a U.S.-based company. But very interesting dynamic going on there. Those are relatively small elements in our portfolio right now, but those could grow to be significant over time for sure.

Yes. And of course, a proactive approach towards ESG offering.

Yes, for sure. Absolutely.

So maybe going back to margins, profitability and whatnot. Outside of the slight uptick in the R&D spend, what are the other variable factors that could impact your ability to meet the target of 50 basis points of organic operating margin expansion in '23?

Yes. Well, certainly, there's ups and downs here. The upside we've talked a little bit about already in terms of our Project Accelerate initiatives and hopefully, those will deliver or overdeliver from what we originally planned. I mean the downsides, of course, are some of the macro elements associated with what's going on from an inflation and from a recession, potential recession perspective in some geographies. Of course, there's still the supply chain issues. We have not -- we're not passed that at this stage in my mind. We experienced some supply chain issues in the fourth quarter of '22. And so far, we haven't seen anything thus far in the first quarter, but I think it's going to take some quarters for this to level out. So I think there's some risk with respect to that side. And then there's the other piece, which we haven't spent a lot of time talking about here, but I've been talking to investors about, which is more price realization versus the inflation elements. And just to talk about that for 10 seconds, we -- in fiscal year 2022, we mentioned the fact that because of our backlog levels and the fact that we tend to have fairly long cycles in our products, generally speaking, we were very proactive in our pricing actions to increase prices to accommodate inflation increases, both at the wage level but at the materials level as well in '22. And we estimate that we had about 100 basis points of headwind in fiscal year '22 related to that. That's net of price realization and inflation, inflation overtaking it. And we estimate that in '23, that's still going to be a headwind. We estimate that to be about a 50 basis point headwind to margins in '23. So there are some risks associated with that. But right now, with the backlog that the company has in place as well as what I think are really interesting technological advances in a number of our key markets, together with what we've seen even in the fourth quarter around biopharma growth, particularly here in the U.S. but in other places as well. We think there's some ups and downs. But when you bake it all in, we get to this 8% to 10% organic revenue growth and very solid EPS growth for the year.

Yes. I was spot checking the installed base exiting '22 versus '21, and it expanded, I think, 41% in both years.

Yes.

Right. So I was curious, within timsTOF, if you could maybe call out any of the -- is it the workhorse? Is it the single cell? Which of the platforms seem to be either gaining momentum or sustaining that strong biopharma growth you saw in this past year?

So the way we look at this is we really look at it as a portfolio generally, meaning every year, we add another instrument into that portfolio and develop broader solutions as the market demands. And we've been really responsive to that, I think. And overall, our growth rates in this space have been really remarkable. I guess I would say we start off typically in the early discovery institutional -- I'm sorry, in the very sort of academic institutions or the government research institutions. But with this portfolio, we've actually started to see migration rapidly into the biopharma space. And this, I think, is a result of -- on the strength of the instruments and some of the solutions we're offering but also the fact that there's so much interest in the overall proteom as a vehicle for understanding better disease biology. And I think that's driving some very significant growth. We think that we're still on the early stages of that S curve from a growth perspective. To answer your question directly, Max, I think the workhorse has been the primary driver. I think the timsTOF Pro 2 is the product that we've seen the most uptick on. But I have to say, I was actually surprised in a single cell proteomics space to see as much interest and purchase activity in that instrument. It's carries about $1 million price tag. So it's not a cheap instrument, but we've seen very, very strong growth in that particular instrument. We have a range of others. We have some with high throughput. We have a fleX instrument that has multi characteristics. So there's a whole range essentially suited to a particular application, but we're targeting a pretty significant growth in that space, and this has been kind of our leading product to get into the biopharma marketplace more directly and certainly continue our strength in the academic government research side.

Yes. And I did just receive a question. That's on my list. So -- before I get to that, I just want to ask -- for the single cell conversion of timsTOF, is there anything you can offer on maybe the gross margin on the instrument and then what you've seen for early use in terms of utilization?

Yes. We don't talk about margins by product, generally speaking. But I can just tell you that the good thing about the timsTOF portfolio more broadly is it's above the margin -- the gross margin and operating margin profile of the company on average. And that's really important for us because what this means is over time, as that growth continues, the mix of these types of products helps to pull up the gross margin performance for the company. And that's, of course, what's funding a lot of our ongoing R&D activities and more commercial infrastructure. So it's a quite important piece, but that's all I can say for that.

Yes. Maybe I'll try one more before lobbying this question in. But for the CellScape, for example, I mean, would that be a product that would require a customer to reach a certain level of utilization before it's accretive to total company gross margins? Or is it off the bat capital?

I think off the bat these products, especially where we have pricing flexibility around kind of the technological advantage that's offered there, we want to be market competitive, but the flip side is we need to generate the margin profile, especially at the gross margin level in order for us to continue to fund research development on an ongoing basis. And so we price them accordingly, I guess, is the way I would put that. But we expect that product to be accretive at both the gross and the operating margin quickly as soon as we start to see more uptick.

Great. All right. So I'm going to lobby in the question now. [ Adam Lasalle ] also e-mailed. And it's around regional exposure in China in particular.

Sure.

I know it's been less than a month since your earnings call, but the headlines around the China COVID policies continue to dominate the headlines. So how are you previously contemplating your performance in China in the -- at the time you introduced the '23 guide. And then have you observed any recent trends in that region that might be outside of the bounds of what you're expecting?

Sure. So first of all, China is an important market for us. It's about 16% or 17% of our overall revenue base. We don't have any production operations there. We have no R&D activities there. We do have a large and growing commercial activities there, and China remains a very important market for us and for many of our peers for sure. I guess I would say just to level set it, 2022 was a significant year of growth for us in China. We saw a teens level of growth at the revenue level and at the order bookings level for the year. And we continue to see strength in China in the fourth quarter. I would also offer that there's a lot of -- even having worked through all that COVID-related lockdowns and navigated through that in '22, we posted some pretty good numbers. So I think that speaks to the level of differentiation of our product line in China. There's a lot of conversation -- I get a lot of these questions about how do you deal with [ One China ] versus your products. And we do have some products that are head-to-head with Chinese products. But generally speaking, because our products are at the leading technological edge, if you really want to do cutting-edge research, you need our instruments, you're not going to get those necessarily very locally. And then the other thing I would add on China is there was a recent stimulus package introduced by the Chinese government in Q4. We did -- it's early days, but we did start to see some strength coming -- order bookings performance coming out of China in the fourth quarter, and we continue to see that so far in the first quarter. I would expect to see that throughout some of '23. This takes a long time to trickle its way down into individual research projects. And the first thing that they -- if you're applying for a grant or a loan at low interest rates in China is you need to have kind of shovel-ready instruments, and we qualify with that with most of our instruments. So we do think that will yield a tailwind over time here, especially as we move through '23.

Well, that's great. I think we -- that's great because the way the e-mail is worded, I wasn't sure if STIM was short-term impact or stimulus. You answered both. So thanks for joining us. I think we're out of time.

Well, thank you all.

And thanks for everybody for joining. Thank you very much.