Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Friends, I'm Brandon Couillard. I cover the life science tools sector here at the firm. Very happy to have Bruker with us back at the conference again this year and here to kick it off this morning, Executive Vice President and CFO, Gerald Herman. Gerald?

Hello. Thank you.

Thanks for being here.

Great to be here. Thanks.

Maybe to kick things off with the third quarter results. I mean this is the third quarter in a row Bruker has beaten and raised guidance on an organic basis for the year. Your outlook for '23 is 300 basis points higher than it was when you started the year. Every single one of your peers has spent the last 2 or 3 quarters slashing numbers. Can you just unpack for us what you saw in the third quarter, and maybe help us kind of understand how Bruker has been able to deliver such differentiated results?

Sure. Well, we had a terrific quarter, actually 10.9% organic revenue growth following a few quarters of double-digit growth as well. We put up solid EPS growth, about 12% for the quarter. I guess, I think the primary difference between Bruker and some of our peers that have reported somewhat different results is -- I mean, I think part of it is, of course, our differentiated products. I think we have very unique products that tend to hold and are stickier in more challenging macro environments. But more fundamentally, I think it has to do with the mix. As you probably know, a lot of noise in the system around China, specifically softness in China at the order level. We saw some of that as well. But more of our mix in terms of the portfolio is really driven by academic and government. And that's largely insulated by some of these other trends, I would say. So we did see some softness in biopharma just as others, but because the mix for us is more like 17% of our total portfolio, the impact is much, much smaller. And at the same time, most of our other elements of the business, particularly from a revenue perspective, have performed extremely well. And I'd say material science, green tech, industrial-related items have performed quite well for us. We did extremely well in the academic government research area in proteomics. Our BioSpin business performed well. So overall, I think it has a lot to do with the mix and less to do with the biopharma impact. We do have impact from China, and we can talk about that further. But I think we did see some softness in China, but a lot of pull forward from H2 into the first quarter of '23, which gave us a substantial bolus of orders in the first quarter. So I think, generally speaking, we are very optimistic about where we stand right now, both in end markets that we play in, and I think relative to our peers.

I think you said on the call, your book-to-bill, year-to-date BSI is running about 1, right? You did call out some softness in China. We're seeing that across the board and everyone else. Do you still expect orders in China to be up double digits this year? And, yes, are you seeing anything, I guess, different end market-wise within China compared to peers?

Yes, I -- we -- first of all, relative to year-to-date, we are above 1 on our book-to-bill. We did -- we do expect that to be the case also for China. As I mentioned earlier, we had a significant pull forward in orders related to the China stimulus loan program in the first quarter and some spillover of that into the second quarter. I think fundamentally, we've got very strong order bookings performance year-to-date and expect it to be that way through the end of the year. Looking out forward, again, we continue to believe that the academic government funding environment across the board, but including in China, it continues to be pretty solid. So while we have more difficult comps going forward, I think it's likely that we'll still perform quite well in China, again, mostly due to the mix, not so much biopharma, but significantly more academic and more material science and industrial.

Which areas of the portfolio, if you look within BSI, we're talking about BioSpin, Nano, are seeing the strongest order trends? Or are they equal across the board, if you had to unpack by segment?

I'd say, generally speaking, we continue to see good, strong order growth in BioSpin. Again, that's largely fueled by the academic government area. We had good order performance in our Nano business. There are some elements of the -- I call them, secular tailwinds that come from our semi-metrology-based business, which is seeing some AI-related trends that are very positive. So fundamentally, the Nano business has performed extremely well during '23, and we would expect it to continue to do that. We saw good order growth and business performance by the CALID organization, particularly our optics organization has done extremely well during this period. That's a molecular spectroscopy business, and we have solid market positions there.

You said on the call, so you expect for the full year, your book-to-bill to be about 1, meaning that double-digit revenue growth this year is not coming from backlog burn, right?

Yes, that's right.

So what operationally keeps you from bringing down that backlog? And where does it sit today compared to...

Yes, these are good questions. So we have a significant amount of backlog in the company we're tracking about, and we call it seasonally adjusted about 8 months of backlog, which is very high compared to our normal, which is around 5.5 to 6 months. It's particularly more significant in other markets. I guess, I would say some geographies, it's more significant. So what's causing that? I mean, some of it, of course, has to do with the pandemic supply chain issues as we worked our way through those. We're still experiencing some supply chain issues, but not nearly as significant. The more significant issue for us right now is production capacity and our ability to meet the demand that we have. Secondly, we've had some import-export challenges with respect to our transfer of products into China. That's largely due to geopolitical risk related to the U.S. and China, but also we see some of that in Europe. So fundamentally, it's taking us just longer to get some of our more high technology-related instruments into China, for example, in other markets as well. So I think it's just been more challenging than we initially expected to be able to pull that down. But this is now more a multi-year backlog takedown. I mean that's our thinking at the moment. With our existing production capacity, it appears that we will take multiple years in order to pull that backlog all the way down to more normalized levels. So interestingly, some of us, myself included, would like to see a few book-to-bill quarters where it's a below 1, so we started to eat into that backlog. Obviously, it's important for us and for our customers to deliver that more quickly.

I mean, inevitably, at some point, that's going to...

That's going to happen.

May actually happen, right? So don't be surprised when you say book-to-bill is sub-1 in a quarter. But within BSI, which of the 3 segments has the most excess backlog? Is it fairly spread across the 3?

It is reasonably spread, but I would say that probably the highest backlog level is with BioSpin. BioSpin carries some fairly sophisticated instruments that take longer to both build and to deliver, especially the ultra-high-field systems, for example, where we have multiple-year backlog. But generally speaking, I think the rest of the backlog levels are somewhat equal between our other groups.

I think you've described backlog as being 8 or 9 months, right?

Yes, yes.

And so if we sort of play this out in terms of scenarios for '24, let's say you shave a month of that off and the base business is flat, so that extra month will be worth maybe $240 million. So like theoretically, if the core business were to be flat next year, and you shave a month off the backlog, you can still grow high-single digits next year. Is there something flaw in that logic?

No, I think that's the math. I mean, the reality is that we aren't actually seeing significant order declines. And our forecast is not to have those. So I think that, combined with the existing backlog, provides us with a fair amount of confidence on what it looks like for '24. We commented on the earnings call that our expectation for '24, we're only going to provide some qualitative commentary. But really, we talked about solid growth in '24, and I expect that to be the case, not only on the backlog, but on the basis of our existing order a bit. Some people have asked -- some investors over the last day or so have asked about order experiences in certain geographies. And I mean, fundamentally, we're still seeing good order performance outside of China and Japan. So even if we have some continuing issues in China, for example, which is a sizable market for us, we still have some backlog there to burn through.

If we look at the industrial and applied markets, that's about 35% of Bruker's mix.

Sizable part.

About 20% of that you described as industrial and green tech, maybe another 10% in semi-metrology. Can you just kind of unpack what you're seeing in that end market? And if there was one area that would be most at risk of slowing in '24, would it be these markets?

Well, what we have determined with respect to industrial markets, and we loosely -- maybe we need to recharacterize those markets a little bit. So you've described green tech, which we're quite active in at the moment. We have a number of technologies that address that particular area, including lithium battery activities. For example, we have a number of technologies that allow us to go deep into battery kind of molecular structures and how to extend those battery lives. So that's one area that I think is very positive. The other piece is we tend to be more characterizing -- people think about industrial as strictly sort of the Wall Street Journal Industrial list. But in fact, much of our work is being done in material science research. So these tend to be more niche or even more durable elements of industrial. From a sector perspective, you're looking at everything from material science for paints, for chemicals, for concrete, for other elements. And I think those tend to be much more durable under more challenging market conditions. Everyone still continues to do research work in these areas. And for those of you that have done work in your homes or elsewhere you start to understand, paint is completely different today than it was 5 years ago or 10 years ago. Those require a lot of research tools in order to look at the molecular structures of some of those chemicals. And so we have a lot of tools that are able to do that.

Within the semi-metrology business, it's obviously not an end market, a lot of healthcare people spend a lot of time looking at it. So help us understand exactly what your applications serve there. And I think you described that as maybe a $300 million basis today. You touched on some AI exposure, which is, I think, $75 million or so within that. What type of growth rates are you seeing in that piece of the semi-market?

Yes. So -- I mean I can only provide some qualitative data here because we're not breaking out that particular segment. But we're one of a couple of companies in this sector that have semi-metrology-related businesses. And interestingly enough, our focus is mostly on technology buys and QA/QC related elements in that space. And for some of you that follow this even anecdotally, there's been a major shift of fabrication activities out of places like simply Taiwan because of political and geopolitical risk and starting to onshore or reshore those back to the U.S. and Europe, and we've now even seen some in Japan. So fundamentally, there's that, combined with AI, which is driving major tailwinds in that sector. There's a lot of upside potential, we think, in that space. Generally speaking, we've seen really good order bookings performance and revenue growth in a sector which was supposed to be in the downturn in the last year or 1.5 years. So fundamentally for us, it's a very good business. It's high-margin performance. We are in sort of a niche area where we're looking at really high-end technology elements, and also the QA/QC, which puts us neatly into place to support the infrastructure building that's going on in that semi metrology space right now in those continents. It's a very unique business for us. But I think, generally speaking, we have excellent leadership there and very strong overall financial performance. So I would expect that to continue, especially with these secular tailwinds that pushed that overall performance probably higher as we move forward into '24 and '25. I mean, for some of you there, just one other titbit here, some of you follow government funding supporting the semi business. The U.S. put up a big, giant CHIPS and Science Act a year or so ago. Funding hasn't even occurred with respect to that particular element. So there's another funding benefit. And of course, in Europe, there's still significant funding activity going on to onshore those fab facilities back into Europe. So we think pretty good tailwinds to support that business going forward.

I want to shift gears over to the PhenomeX acquisition. I think this is the first public company maybe Bruker has ever acquired. Small deal in the scheme of things. But -- how it fits in the portfolio? Why did you need to acquire a business that was losing money? And how fast can you rationalize that $100 million or so of OpEx that sell you may have?

Yes. So interesting opportunity for us. As some of you may know, we moved 1.5 years or so ago more deeply into spatial biology, which we think is a major trend forward. There's a lot of work being done, not only in proteomics, which we have a fairly significant positioning in the marketplace. But more fundamentally, as we started to look at the whole Omics area, it looked like spatial biology was really a hot area, and we didn't have as much technology or footprint in that space. So we acquired about 1.5 years or so ago, a company called Canopy Biosciences, and we put out instruments that are being well received in the marketplace right now. And combined with that, when you start to look at spatial biology, this gets down to the cellular level. We discovered that we really could use a complementary technology around cellular analysis. And what does this do? This particular company is very focused on, what I would call, phenotyping of cell activity, looking at antibodies, and how they fit within the cell structures. And also, cell colonialization, cell therapy, gene therapy, elements similar to that. They have a number of instruments coming out of the Berkeley Lights and IsoPlexis merger that are really quite attractive in the space. So we saw an opportunity to pick up what we think are really excellent assets at a very good price. But to your question about the business, I mean I need to say 2 things. First of all, we think it's a really attractive acquisition. It is going to take us a year or more to sort of rightsize this business. We've taken pretty aggressive cost actions in the fourth quarter and this quarter to rightsize the business. We still are expecting a $0.12 dilution on EPS for the fourth quarter, but that's going to come down radically as we've done our rightsizing. We expect this now to be roughly a $0.10 dilution in '24. That's a fairly small piece in the overall scheme of our $2-plus of EPS over a full year. So not a terribly material story from a dilution perspective. But just a couple of more things I'll stress on this acquisition. We have taken aggressive cost action, but I think more fundamentally, we still believe that the core elements of the revenue performance in this business, while we've given a bit of a haircut for purposes of the Street, we still think that it's a very viable business, and it's going to perform well going forward. We are expecting double-digit organic revenue growth, high growth in this particular sector over time. So ultimately, when we package it all together, rightsizing with the organic revenue growth we're expecting, and our ability to supplement some of this technology together with the channel synergies we see with it. We think it's going to generate a very high ROIC for Bruker over time. So it looks like a really good acquisition for us as we look at it long term.

And just to clarify, the $0.10 of dilution you mentioned in '24, that is relative to the pre-deal baseline and not incremental to...

Yes, exactly. It's not on top of the existing $0.12. That's the full-year performance relative to 2024 as far as we have visibility at this stage, so...

Perfect. Thanks for clarifying that. Just on proteomics, I'd say it's the one end market that Frank is most excited about and has been for some time. Update us on the size of that portfolio today as a percent of your book.

Sure. It's a sizable market for us. It's about $750 million worth of business at this stage. We have a number of technology tools that are focused on proteomics and in the broader Omics area. The one that gets a lot -- most attention is the timsTOF portfolio, but we have a number of other products that focus on proteomics and we target that specifically. It's a big end market for us, and we think we have a solid market position now and hope to continue to grow that.

Does the combination of Olink and Thermo and SomaLogic in lab change the competitive dynamic? As far as you're concerned, does this kind of validate, I guess, your enthusiasm for proteomics?

Yes. I mean, first of all, it's -- when large players in the space surround companies that are performing well, we think that that's a validation of our existing strategy. And these are excellent companies, Olink and the Thermo, of course. So fundamentally, we think this is a really good move for the overall broader proteomics market. I mean I talk about this a lot with investors is it's not just about market share that Bruker gains in the proteomics space, it's really about expanding the market and having -- I think one of the things we did, certainly with the timsTOF portfolios, we introduced products into the research field that had never been there before and basically provided more throughput sensitivity and dynamic range in a way that didn't exist. And suddenly, you're able to see more proteins and have visibility into functionality of those proteins. So we think it's really healthy to have bigger players in the marketplace itself and broadly -- more broadly expand the focus of research that just makes the market larger over time. So we actually think this is a very good step for us and for them.

We touch on margins briefly. FX is actually 150 basis points...

Yes, significant. Yes.

This year. Will that be another headwind in '24?

Yes, we -- first of all -- well, we don't have good visibility into what the foreign exchange rates are going to be for 2024. If I did, I'd be towards burrows. But I mean, generally speaking, we're a global company. We have foreign exchange movements up, down. It hits us -- it sometimes hits a tailwind depending on where it is with the revenue line. Generally speaking, we've seen some headwind on the EPS line. I don't really have much visibility into what the rates are looking like between euro and franc against the U.S. dollar at this stage. But...

Just in terms of price cost, right? Yes. It finally flipped positive for you in the third quarter.

Yes, that's right.

Should it still be a tailwind to gross margins next year? And is pricing of a couple of hundred basis points a reasonable assumption for...

Look, I think irrespective of the foreign exchange movements, but certainly part of it may be that. But irrespective of that, I mean, our focus on gross margins is pretty serious. I think we've talked about this in the past, Brandon. I mean, fundamentally, we're very focused on gross margin expansion because it's the funding that gets us the fuel for a lot of our R&D spending. And some of you may know, we're spending at the R&D level at a very high rate. It's about 9.5% of total revenue. It's the highest level, I think, in our peer group. And that's mostly because our -- we're driving that technology innovation engine. So we need gross margin in order to fund that. So our gross margin targets are not so much based on foreign exchange performance, but really more based on overall price realization. Where we have pricing power in the market, we want to flex it. We're focused very significantly on operational excellence and driving costs down. You may know we're doing some significant productivity expansion in a number of our facilities, particularly in Germany and Switzerland to address the demand. But that also allows us to drive costs down with higher production volume. So the gross margin story is an important one for me personally, and I spent a lot of time talking about this with our leaders and driving better gross margin performance. Let's see what happens with the foreign exchange element to it, but that can be favorable for us in the long term depending on how it moves.

Last one, real quick. Your operating margins the last 8 or 9 years have basically doubled, 10% to 20%, yet your free cash flow as a percent of revenue has barely moved. What are you doing to improve free cash flow conversion? Where can that go in the next few years?

Yes. This is a very good question. So fundamentally, we have improved significantly the operating margin story. A lot of the more recent years of free cash flow are impacted by a couple of things. One, we've significantly stepped up our capital expenditure programs. So when I joined the company about 6 years ago, we were tracking about $35 million or $40 million of CapEx. Today, we're closer to $130 million or $140 million. So we are really pulling our free cash flow down by virtue of investing heavily in our production facilities, and that's largely targeted around our demand levels, which we have -- that really are unprecedented for Bruker historically. And then beyond that, we have had some challenges with respect to supply chain. We are at the high end of our technology base, and some of our supply chain is really very focused. We had some struggle with that actually in a couple of quarters in '22 in particularly, but also a bit even in '23. So we are carrying higher inventory levels than some of us would like. And it's time for us to readjust those down. So I think from a working capital perspective, we've got 2 target areas, particularly inventory and receivables, and we've focused a lot of attention on that at the business level now to bring those inventory levels down. That will pull in more operating cash flow, and ultimately, we'll be able to fund other things.

Great. Super. Well, we're out of time. So I'll have to leave it there. Gerald, thanks for being here.

It's a pleasure. Thanks. Thanks, everyone. Appreciate it.