Bruker Corporation (BRKR) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. I'm Tejas Savant, and I'm the life sciences analyst here at Morgan Stanley. Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. So it's my pleasure to host Bruker this afternoon. And on behalf of the company, we have Gerald Herman, CFO; and we also have Justin Ward, Head of Investor Relations here in the audience.

Maybe, Gerald, just to kick things off, I just wanted to get a pulse check in terms of most of your peers being impacted by software pharma funding, headwinds in China. You actually had a pretty solid second quarter of growth in bookings in both biopharma and in China. You raised your organic growth outlook by 50 bps as well. So just set the stage, I mean looking back, what drove the strength in the quarter for you?

Yes. So we had a very even performance across most of the portfolio actually in the second quarter. We put up some very strong organic revenue growth. Actually, if you look at the full first half of '23, we're putting up over 15% organic revenue growth. And that's across a number of different end markets,. Our academic and government research markets, which are quite significant for Bruker, were quite solid, both on the order performance as well as on the revenue side. I think just generally, our biopharma experience was pretty positive, and we can talk more about why that's a little bit different than what some of our peers are seeing. We did see a little bit of softness in order performance in some of the more cyclical areas in the real, in the applied markets, and a little bit of deceleration in our order performance on the semi base, but I'd be happy to talk more about that as well. There's certainly some encouraging signs, I'd say, on the semi side as well.

Got it. So let's start with the geographies. Starting with China, topic du jour, I'm sure you've not gotten a single question on it all day, so...

No, not at all.

What are some of the stronger end markets there? And where are you beginning to see, if at all, sort of signs of weakness? Does your current backlog essentially mean that you won't see China decelerate at all this year? Or has something changed relative to the second quarter?

Yes. So China is a really interesting story for us. I think, again, somewhat different than some of our peers. Overall, we had a significant order bolus in the first quarter of 2023, driven largely by the low interest rate loan stimulus program from the Chinese government. We would have probably had an outsized benefit relative to that. And so in China, we did see some deceleration against a very, very strong first quarter order performance in China in the second quarter. And then in the third quarter so far, we continue to see solid growth in China from an order perspective. And so we had thought that we would see a kind of pull forward of orders resulting from that first quarter strength. But actually, it doesn't seem like that's entirely the case. So fundamentally, when you look at our full year expectations around China in orders for the full year '23 and compared against the full year '22, we're still expecting double-digit order growth in China. And that's being driven largely by our strength in the academic government research markets in China. We don't have as much -- we're somewhat underrepresented, I think, in the biopharma space. So we're not experiencing the same countercurrents that some of our peers are. But fundamentally, our overall performance in China has actually been quite solid. So the way we see it, another considerable important element to highlight here is kind of the strength of our backlog in China for a variety of reasons, supply chain, COVID. We are experiencing some import-export restriction delays coming out of the U.S., in particular, but outside there as well. So our ability to execute on some of our backlog in China has been more challenging than in some areas. So our backlog levels in China are quite high. And so our expectation is the revenue performance in China will continue to hum nicely through at least -- this is a multiyear challenge for us, to get our backlog down in China. So our expectation is improved -- continued strong performance in China on the revenue line. And it remains to be seen. There's been some chatter more recently around potential economic stimulus programs being proposed in China. We don't have any definitive -- anything further specifically to add to that, except that we're hearing some of that on the street as well in China in that market.

A couple of things to follow up on there. So on the stimulus, if we do get one in the back half of the year, are we in a situation where we might see sort of diminishing marginal returns on that stimulus where that activity led to a spike in ordering and then placements earlier on the last round?

Yes. It's hard to tell. I mean we don't have any specifics about what the stimulus might be. If it's directed largely to business investment, which we're hopeful of as opposed to consumer investment, then I think there's certainly a possibility that we will continue to see an outsized element of benefit from a stimulus program like that. I don't -- we're not seeing any -- I don't think we expect to see pull forwards or reordering under those kinds of conditions. And typically, these are very project or research project specific. So it happens to come in over a period of time. Even if the stimulus is identified and at a certain point, the benefits start to improve over at least a quarter or two, I would expect to see some benefit coming out of that.

Got it. Another sort of theme we picked up on, in some cases, is local competition, particularly local competition that got qualified over the course of the pandemic. And customers, I guess, have gotten habituated to those instruments, and they don't feel the need to pay a premium for a better instrument. Is that something you see at all?

Well, we have pockets of our portfolio in -- that are marketed into China, where we have seen some local competition. But we're not really in the broad consumables markets in China. Our overall portfolio is more directed to high-end instruments, particularly in drug discovery and in high-end research. So our experience has really been that there aren't a lot of local competitors that can reach to that level of kind of science and complexity. So we haven't -- we see it in pockets, clearly, and we've talked about this on previous calls. For example, in the [ multi bio ] type release, we've seen some more local competition and some microbial identification tool, in case you're not familiar with it. And in a couple of other areas, but more fundamentally, we're -- with our high-end instruments, we don't see a lot of local competition that have any impact at [ diag stage ].

Do you worry that China is likely to reset to a structurally lower steady-state growth rate?

Yes. I mean we've heard quite a bit about that discussion today, I'd say, in a number of other investor questions. My perspective is that, like, this is a very significant market, particularly in overall research funding. If you look at -- if you rank the countries across the globe that are putting significant investments into research funding, and China is right up there, I don't see that as really, I mean structurally, I don't see that as turning away. China is a large, growing market in its broad, its just fundamental state, so I don't see a turning back on that. In fact, what we see at least locally, is the academic and government research markets continuing to be pretty solid there. I think that's a sign that the Chinese government continues to think that that's an important sector for them.

Got it. And just staying on the geographic theme, any sort of risk of contagion from a weak China to buckets in Europe? Or is that not something you really anticipate?

Yes. I mean at this point, with the nature of our portfolio, we're not really seeing a downturn in the China experience at the moment. I mean I know this has counter to some of the currents that other people are talking about, but in our portfolio, we're not seeing a significant decline. So we're not seeing any risk of that kind of moving into another environment. I'd say just generally around Europe and the U.S., good, solid European and U.S. budget funding is still there. And even when it isn't as dominant as -- in the press as others have discussed from time to time, we see a very stable environment there in the academic government space.

Got it. Switching to end markets, and nice segue on the comments you just made on the academic and government end markets. As we look to 2024 and academic budgets perhaps face a little bit of a challenging period here, your low to mid-single-digit decline perhaps, how does that impact your next year's outlook?

Yes. So we're still, of course, looking at how the '23 performance impacts the '24. I mean some of you may know, the fourth quarter for Bruker is more than just a quarter. It's more than 1/4 of our overall revenue base. So it's a little bit hard to give too much forecasting on '24. But just in the broader academic and government research markets, those tend to be even highly durable for us. Irrespective of what chatter goes on around NIH budgets up, down or around, it's -- our experience has been individual research projects get funding, and it's -- they tend to be the highest prioritized funding in a project. You need instruments in order to do your research. And if you're doing cutting-edge research, whether it's in proteomics, spatial biology or cellular analysis, you need instruments to be able to do that. So I think our expectation is the '24 outlook, just generally on the academic and government research side, will be stable and solid. I don't think we've -- even in relatively turbulent macroeconomic conditions, we continue to see the academic and government research markets stable and, generally speaking, growing.

Got it. And then shifting over to industrial, you told us you are seeing softer, more cyclical market conditions in semiconductor metrology and some other pockets. But then you also mentioned some green shoots and perhaps like signs of stabilization. Could you just like share some color on that?

So I think from the industrial -- so first of all, I mean we, like every other company, are subject to the macroeconomic environment. And certainly, we have certainly seen some softness in the industrial and applied markets, and that's true. In China, that's true across the U.S. and even in Europe. What is more unique about our portfolio is that we tend to focus on niche markets. In some of those, many of those in the industrial and material science area, for example, research activities for larger industrial companies still needs to go on. It's not so much about investing in a new plant facility as much as it is if I'm looking at new polymers for example, I need instruments that help me to do research in that space. And if I'm looking at chemicals, I need instruments that help me to analyze chemicals in a certain way, especially if I'm putting out new products. So our products tend to be a little more durable in these industrial downturns. I don't think that we can expect kind of the torrid growth rates of industrial applied markets that we saw in prior years. But I think our product portfolio positions us to be in a more durable place relative to those. So the dips may not be as deep as you see. And then I do think in some pockets, in particular, in the United States, lots of forecasting of recession and other experiences, that we seem to be moving closer to a softer landing in the United States, and that's a large industrial base clearly for us and for other companies in this market space. We do see real opportunities in those areas and particularly with the portfolio that we have developed. We think it's -- we're well positioned to capitalize on them.

Got it. Same sort of question really on biopharma. I think it's about sort of mid-teens in terms of revenue exposure for you. What is your sort of cap or pre-revenue company exposure there? And what's providing you more insulation against a softer funding environment?

Yes. So we don't really have as much visibility into the maturity levels of each of our biopharma companies. We tend to be more focused on the end-user customer, which doesn't always give us that kind of visibility, and any of those could be in a collaboration environment where we don't see the end user. So I can't comment so much specifically on the early-stage biotech-based companies. But what I can say generally is we -- our tools are designed specifically for high sensitivity, high performance, high throughput, whether -- and that's -- there's a broad spectrum of tools that we've introduced into the biopharma markets, everything from NMR to our proteomics product portfolio. So I think just generally, our exposure is a bit lower than other peers. And we're trying to grow, and we had -- we saw a really good acceleration in biopharma in '22, and again in the early part of '23. So some -- even some softness in biopharma is not really as troubling for us as it might be for some other companies. I would say, though, that we continue to think that the biopharma market -- end market itself is really important for our long-term growth. It's an area in which we have targeted solution packages, not just instruments, but solutions in the front end and the back end, including sample prep, including automation tools, including digitization and software-related applications that will make a difference, ultimately, for the full lab program for biopharma companies. So the prospects are really good. I think it's just a question more of kind of the timing and what is the current environment. I do think the environment in the United States seems to be improving slightly as well, moving from what we've seen historically. And I would say the European markets continue to be a little bit soft for us there on the biopharma side.

Switching to segments, and let's do nano within BSI first. I mean clearly, the PhenomeX acquisition has been a point of conversation. Maybe just to frame that decision, can you talk about how it fits into your portfolio and how you sort of went about the thought process?

Yes. Well, first of all, we have had quite a bit of attention on this particular opportunity, and I'll just talk about what it is and why. So PhenomeX is the company that you're referring to. We made a tender offer for all the shares of that company. We are in a public tender offer process right now. It is a process that is developed and going on at the moment, so I can't say too, too much about it. But what I would tell you from a strategic perspective, PhenomeX is a combination of IsoPlexis and Berkeley Lights. These are 2 companies focused on cellular analysis. We think that this is a really interesting strategic asset for Bruker. It has 2 key elements for us. The first is that it has the ability to actually do phenotyping at the cellular level, both DNA, RNA and antibody genotyping, which we think is ultimately a really important element in the cellular analysis space. And then secondly, it has a really powerful set of platform called the Beacon platform, which focuses on cell isolation capture and further on analysis. We believe that to be also really quite critical for further study in the cellular space. We think it's really interesting for us because it has lots of synergies with a number of our other instruments, particularly in the spatial area. But not only that, when you complement some of our portfolio and the proteomics area, as a number of our instruments that could be follow-on after cell isolation and capture, for example. So it's an attractive asset to us. It fits neatly and squarely into our Project Accelerate 2.0 initiatives, which is why we think it's an attractive opportunity. Now the topic that's been getting the most attention is really the cash burn of this particular target. And I guess what I can say is we will be going through the traditional process through a public tender process. Once that's completed, our expectation is that we will close the transaction in the fourth quarter. And once we do that, we will talk more specifically about the dilutive and accretive framework of that acquisition on Bruker going forward for both 2023, if it completes in '23, and then in 2024 and there beyond. More importantly, it's important for the investor community to understand that we are on and will be on -- assuming this closes in the fourth quarter, we will be on an accelerated path, multiyear likely, in order to bring this particular asset to breakeven in a meaningful, profitable position. It is like every other acquisition Bruker has done historically, it's going to need to hit the profitability targets that we set. We have a target framework that's fairly well known since our Investor Day. And fundamentally, all our acquisitions are going to have to hit those targets over time So I think that's what I can tell you about that opportunity. Very excited to hopefully close on it and talk more about it in the fourth quarter.

Got it. Just one follow-up there. In terms of the development road map for these instruments, I mean especially on the Beacon side of things, there's a little bit of rejigging going on in terms of the original instrument and then having a more circumscribed version at a lower price point and so on. Do you have any sort of like early insights into plans for both the Beacon as well as those follow-on sort of instruments?

I think it's early for us to talk about that. I think once we own the asset, looked at the R&D pipelines and our whole how it fits with our overall broader portfolio, we'll be able to talk more intelligently about that. And we will communicate that.

Got it. Gerald, not sure you can answer this, but I'll ask it anyway. In terms of -- we used to cover Berkeley Lights and IsoPlexis, and then putting those 2 companies together and we were at roughly around $110 million in OpEx for the combined company. Do you see sort of significant room to sort of cut that and sort of fold it in into your sales infrastructure, et cetera, as Bruker?

Well, again, I think we'll talk more about the financial and strategic synergies. Clearly, there are some. I think it's important for the Street to know that. And clearly, our perspective is that there's going to need to be some rightsizing in order to hit some of those profitability targets I mentioned earlier, but we'll flush that out in a little more detail as we go through it.

Got it. And then touching upon some of the earlier stuff you mentioned on the spatial opportunity. How are you thinking about the proteomics base sort of in CT imaging market? You've got [ a corollary ] now, Techne acquired Lunaphore, et cetera. And then same question really on the transcriptomic side, where you have a bunch of NC2 imaging players, 10x, NanoString, et cetera. Where do you kind of like see yourselves in that space?

Well, so first of all, it's an emerging market, right? I mean there's a lot of players. There's going to be some consolidation. You're starting to see some of that playing itself out already. I think what Bruker has done historically, from a legacy perspective, has been able to introduce high-end, sophisticated, science-based instruments into very complex areas and be highly successful at that. In our experience in being disruptive in markets, we can give you many examples of those. But I think that our expectation is that we will continue to deliver that kind of disruption into the spatial biology area. And I think the market itself is evolving. There's going to be the winners and losers. It's very early to call that. I mean everyone is chasing market position and trying to jockey for what -- where they're ultimately going to stand. I think we do have an interesting portfolio already with the Canopy CellScape product. It has very high sensitivity, throughput, field of view. There's some characteristics and features of that particular instrument, but that we think is going to get us an advantage. It's going to take a bit of time. There's a traction element that's required. We've gone through this process multiple times with some of our other more sophisticated instruments. You get connections with KOLs, key opinion leaders, and then you've moved to -- they move to research papers, and that's how you kind of develop over time your broader market position. And I think that's what everyone is attempting to do at the same time. So I think there's going to be a shakeout. It's going to be a matter of time, which tells who's going to win. But in our case, I think we just have a history of really strong science imaging capabilities. And I think you'll see that played out over time. You combine that with our -- we have a genomics product portfolio which will be launched at some point in '24. And I think you start to see more of those dimensions fulfilling themselves in a different way.

Got it. One question on the NMR side. Where do installation lead times stand today? And what internal sort of process improvements are you looking to bring those down? And just in terms of visibility into '24, right, you had a few pushouts over there. How are you thinking about that?

Well, interestingly, with a product that's sophisticated as these ultra-high field systems, there's always a twist to return. It is often about the facility readiness of our customers. In some cases, they think they're ready and then they discover that they're not. And some of you may know, for the ultra-high field systems, the 1.2 gigahertz systems, you need a 2-story facility in order to house the instrument. So fundamentally, there are times when people think they're ready and they're actually not. So there's a little disruption from the customer side. And then secondarily, but still importantly, these are highly complex instruments, not only in terms of their size, but their scale, their -- the complexity of our magnet activities, the wiring production inside them, the probes that are used in them are very, very sophisticated instruments in their own right. So from time to time, there are issues that occur there. We test them at the factory, and from time to time, where we get them delivered to the customer location, they need more rework. And so they have to go back to the factory. So we do have some fits and starts in this space. And I think we've seen historically that we work our way through those. It spills sometimes one quarter into another or in this particular case, in the second quarter into the latter half of the year, but we work our way through those. Both the customer issues and certainly our -- the technical issues get resolved. And so it tends to be a little more lumpy, but the fact of the matter is that these particular instruments carry significant ASPs, usually in the $9 million to $15 million range, depending on the futures, and they have a very strong margin profile for us. So it's important that we make sure that those instruments are properly installed and accepted at the customer level. It's important for many reasons.

Switching to CALID and specifically the Ultra launch SMS. Can you just highlight some of the new features of the platform and what initial customer feedback has been? And how do you sort of think about the competitive landscape and where the sort of locked in?

Sure. So the Ultra is part of a broader proteomics portfolio. It's a platform. There's multiple products that sit in that platform. The Ultra in particular, is the high end. It's the Ferrari of our portfolio as it relates to the proteomics and both throughput sensitivity and our ability across multiple dimensions to be able to see the proteome and discover it in a completely different way. So we think it's the high-end product that we launched recently. There will be other launches relative -- one of the great things I think about our innovation cycle at Bruker is that we're constantly innovating, even in those market positions where we have a solid position. And as to the competition, very clearly, the competitor is a very strong player in this space, has a lot of experience historically in the proteomics space, including in the mass spec world. So we have a lot of respect for that competitor. And then generally speaking, we continue to believe we have a strong instrument relative to theirs. That's what I guess you would expect us to say, but we believe that to be -- will ultimately be borne out by our customers, what they say and how they continue to look at our instruments going forward. And again, the other point I have been making to a number of investors today around the proteomics space is having competition is not always a bad thing, particularly in an emerging market. In the case of proteomics, what we see is good, strong, I think responsible competitors like the one we have in this particular case is really, really healthy for the market itself because what it does is it allows for expansion of a market at a rate faster than you might otherwise see, because these instruments theirs, ours and others, provide insight into the proteome that you might not be otherwise able to see. And fundamentally, if you look at the overall performance of visibility into the proteome over even the last 18 months, you're starting to see proteins and protein expression in a way that wasn't possible even 2 years ago. What that allows for is a deeper understanding of the proteome and the elements within it. And so we're starting to see specific study and research areas pop up in the study of the proteome that weren't even considered or thought of 2 years ago because there was no visibility to it. So I think competition helps us to -- generally to expand the market faster in a way that where certainly we, Bruker will benefit. But of course, others will benefit and mostly, hopefully, humankind will benefit from faster discovery, and that's really our goal.

Got it. A quick one on capital deployment. I mean following the PhenomeX acquisition, what are your capital deployment priorities? And as you think about assets, particularly those that are not yet profitable, including perhaps in proteomics, I mean there's a lot of interesting work doing that. How are you thinking about areas of interest and sort of size or the flavor of the transaction?

So -- and capital deployment is a really hot topic not only at the Street, but certainly even within Bruker. We've got a lot of competing demands for that capital. But generally speaking, our capital deployment strategy hasn't really changed. It's really about investing in the business. How we do that, we do that through a significant commitment in R&D, probably the highest rate of R&D spending across the peer space. I think the second area is continuing to invest heavily in CapEx. Capital expenditure levels have increased dramatically. That's really around driving productivity expansion and optimization in a way that's really important for the long-term growth for the company. And then we, of course, have elements of -- we have dividends we need to pay. We have share buybacks, actually, at some level. And of course, we have M&A opportunities. And from -- as long as our M&A pipeline, which is pretty full at the moment, I would say, interesting opportunities, those opportunities must fit into the strategic imperatives of our Project Accelerate 2.0, and they need to have kind of the profitability target achievement that I was describing earlier. So a lot of opportunity for us, and we're very selective. We've got a rather prescribed approach to that whole capital deployment program. But fortunately for us, we've got still quite a bit of runway, I think, in the picture.

Got it. One last painless one on the guide. Just in terms of what you've seen over the last couple of months here, you talked about not seeing the weakness in China, biopharma holding up better as well relative to peers. Is the step down in the organic constant currency growth in the second half forecast, do you view that as conservative or reasonable? And as a corollary to that, what are some of the knowns and unknowns to help us think about -- frame 2024?

Yes. So I can't do too much commentary on '24 because we're still working through '23. But -- and as I said earlier, the fourth quarter is quite important to us, relatively outsized compared to other companies. But what I would tell you is that when we look at the overall guidance positions here, we came off of a very strong H1. I think our expectations around moderating growth in the second half is pretty reasonable. We've seen a pretty solid order bookings growth even in the July and August period. Forecasting, it's all going to play out, but fundamentally, those are relatively good signs for us. And I would say, just generally speaking, the overall outlook for Bruker, if you look at us, compare it again to our peers, we're still at a -- if you look at our revenue guidance, which we lifted slightly, we're still at roughly a 10% organic revenue growth outlook for revenue for the full year '23. And as I think you know, we held our EPS guidance as well. So there's some puts and takes. Clearly, the macroeconomic backdrop is not what we would like it to see. But fundamentally, I mean our order performance has been quite solid. And I think we talked about this in the context of China, but more broadly across the portfolio, we still have a significant amount of backlog. And just execution on that backlog allows us to carry forward what we need to for, certainly, 2023. And then we'll talk about 2024 in February once we've had a chance to look at the overall performance for the full year of '23. But we're very positive about the outlook in the long term.

Got it. Fair enough. Thank you so much for taking the time, Gerald. I appreciate it.

Thanks for inviting us. It's a pleasure to be here.