Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Really pleased to be joined here on stage with Gerald Herman, EVP and Chief Financial Officer for Bruker. So Gerald, welcome. I said last meeting in [indiscernible], I'll check my e-mails for questions, and I actually didn't. But I will try during -- hopefully, if anyone's earning questions, feel free. Sorry, I didn't see some of the revenue questions. So anyway, Gerald, listen, welcome.

Let's start off with the recent pull forward of your '26 targets, right? That was pretty impressive for revenue and earnings to '25. By our math, it implies 7% organic growth over '24 and '25. Obviously you have been growing a lot faster recently, right, 9% the last 5 years, 12% the last 2 years. So 7% is no doubt impressive, given what we've seen in the broader market. But maybe just talk a little bit about like that pull forward kind of what's implied and kind of why you guys did it.

Yes. So first of all, great to be here. We love the conference. It's good to be local I would say, just generally in our world, it's a -- our focus has been mostly on over delivery. We've seen this sort of double-digit organic revenue growth here for the last 3 years. I mean I think as we look out into the forward years, especially '24 and '25, I mean we still believe we're going to have 200 to 300 basis points of growth above the market. And currently, as some of you know, the market is being impacted particularly by some challenges in biopharma space, including bioproduction areas. We're not heavily exposed in those areas. So I think our overall position is pretty well positioned from a portfolio perspective. And then just more broadly, when we look at our overall core business, which has been quite healthy, actually, over the last year, 1.5 years, and top that off with some of our more exciting products in the portfolio, I think the expectation is that we'll continue to outperform the market. The idea of -- it's just simply math when you look at the growth rates, and what we laid out for medium-term targets at both the revenue and the EPS line, we are clearly going to exceed that core business where we typically play in the #1 or #2 share position has really evolved. And I think with the level of innovation that we're funding right now, this is around 9.5% to 10% a year. It's really very fundamental for us to be able to continue to innovate, not only in these very flashy, sexy areas, particularly in proteomics, for example, but also in the core business, and I think that's made a huge difference to that. So if I were going to highlight a few things, I'd say, health of the core business has been really very solid, and, historically, including '23, I think the other areas are strong secular growth trend areas, AI, semi-metrology and proteomics, our overall multiomics businesses, here, we're talking now about faster-growing areas in spatial and cellular analysis. And then I do think NMR has been a very solid contributor over '23, and our expectation is that it continue to grow. I mean, one final comment, I think most folks understand our portfolio position, but particularly relative to the market position, our end market, particularly for the academic and government research area is outsized. And we have seen very strong bookings performance, particularly relative to that sector.

So maybe just on margins. Back at your Investor Day, you got it at 70 basis -- I think it was an implied 70 basis points a year roughly in the [indiscernible], but they've been pressured by the M&A that you've done, right? So you basically didn't pull forward your margin target for '26 because I think some of the M&A. So just as we cycle through these M&A headwinds, is it going to be back on 70 basis points, or when you look at the portfolio that you'll have underneath the Bruker umbrella, is it going to be something greater than that, less than that? Just how do we think about that?

It's a good question. So first of all, just to calibrate it, our '23 numbers, organic operating margin expansion was quite strong. I mean it was around 130 basis points. We have strong foreign exchange and M&A headwind in '23. But fundamentally, the core organic growth of our operating margin area has been quite solid. So I think, for the forward years, our expectation has been somewhere between 30 and 60 basis points, and I think that's probably a reasonable level given what we delivered, especially in '23. But even beyond that, as some of the acquisition headwinds started to abate, particularly through '24, as some of you know, we have and about a $0.10 dilution on EPS levels of coming from the PhenomeX acquisition what we now describe as BCA, Bruker Cellular Analysis business. We have a number of other acquisitions that where we're making significant investments into Biognosys is a proteomic specialty CRO that we acquired. We're just establishing some new facilities here in the United States related to that business. So there's some headwinds on the M&A side for sure in '24, our expectation is that, that flips when we get into '25 and '26. And with our performance, I think even at the gross margin line, we see opportunities for us to hit the operating margin targets that we set on the medium-term level.

Okay. Okay. So the guide this year is 5% to 7%, definitely above peers, but you've been consistently beating numbers. You've got the strong backlog. You have accelerated momentum. Is -- I mean, is it fair to think the 5% to 7% similarly incorporates a lot of conservatism? Or how would you characterize it?

Well, look, there's some puts and takes with respect to that. I mean, as you likely know, Dan, we generally start off with an initial guidance at a relatively conservative level. And as we see how the year progresses, we begin to move that up, and we'll see how that all progresses for 2024. But I think, fundamentally, when you add the contribution from acquisitions together with that 5% to 7% organic level, you're still up in the higher end, almost reaching 10% on a constant exchange rate basis for sure. So I don't think it's a major adjustment for us. I think it's just sort of how we see the year starting. There's clearly a lot of macro elements in the mix as well. So I think some of the risks from the macro levels are higher this year than they were in other years. But we're pretty comfortable with where we are right now.

So NIH, you talked about like the strength just earlier in your commentary about, I guess, the demand that you've been seeing, but the budget is flat after 3 to 4 years of high-single-digit growth and you've got this continuing resolution. Just wondering, just have your customers felt any pressure from NIH constraints as your outlook incorporating the risk from this dynamic?

So look, let's talk about a couple of things. First of all, NIH funding for Bruker overall on a revenue basis is relatively modest. It's in that 5% to 7% level. But what's really important is that the overall academic government funding area has been quite stable and actually growing over time. And that's not just coming from NIH. There's NSF, National Science Foundation, there's DOE, there's collaborative arrangements with other biopharma companies. There's clearly demand in other, what I might describe as more independent research institutions that have their own funding momentum. So I think just broadly, that academic and government research market, no matter where you look, and I'm not just referring to the U.S., but also even in the European markets have been really quite stable and growing. And what we see is that if you're in the hot areas relative to what government research institutions are really trying to fund. And here, we're talking about kind of the post-genomics era elements here, proteomics, focusing on areas that are really instrumental in terms of overall fundamental research, I think you're going to continue to see that to be well funded in the markets, including in the U.S., I actually think our infrastructure is really well suited towards that academic and government research channel and whatever form it takes. And I think you're going to see that in the U.S. as well.

Do you feel like -- I mean, we've heard this at this conference and in some survey work, but this shift towards proteomics. I mean, do you see that kind of in your business? Like do you feel like there's a notable tilt that maybe some of these foundations you just mentioned are kind of allocating more to proteomics. I mean we did some work with our Washington Research Group, and we got genomics and proteomics research, proteomics a bit from a funding basis and wasn't like dramatic. I don't know what kind of you guys see from your own diligence.

Well, look, we're deep in that world. I think from a -- we're talking here about deep collaborations with core academic and research institutions. We have deep insights into those. I mean our experience is that while there's still some basic genomic sequencing activity going on, a lot of the activity is really shifting into mRNA and into the whole protein discovery area. And we talk about this at another conference last week, but if you look at the overall protein discovery world, I mean, instruments like ours and others, are just yielding enormous opportunities to understand the protein, the proteomics in a much deeper way. So we have been able to identify more proteins today than you've seen even in the last probably decade. I think that leads to more discovery. And I think that's going to continue to be the case going forward.

So you guys have bucked the trend in China. You have the tools peers [indiscernible], right? You've been delivering really strong growth, really impressive backlog. Just -- maybe just why have you been able to do so well? I'm sure it's going to come back to your products while others have suffered, are there any specific segments that have been key drivers over there? And just remind us for '24 implicit in your 5% to 7% kind of what have you guys incorporated for China?

Yes. So China is an interesting market for us. First of all, it's an important market for us in most other life science tools companies. Fundamentally, our portfolio is quite different in China for most. We have an underrepresented proportion in the biopharma space. It's about 10% of our portfolio in China. And the numbers for the rest of the portfolio in China is mostly 50%, for example, of our portfolio is in the academic and government research area. The rest of it largely is in material science, if I can describe it that way, loosely called industrial in our category. So I think generally speaking, we were very well positioned, especially in '23 because a lot of the challenges in the biopharma area, while we saw it, we were not really widely exposed to it and certainly weren't very significantly impacted by it. Whereas in the academic government research side, especially in likely '22 and early '23, lots of demand a part of it from low-interest stimulus. But more fundamentally, I mean we continue to see China as a very strong player and leader to a certain extent, in proteomics research. I mean if you look at the KOL activity surrounding China, they are really leading, and their funding environment is really almost equal to many other countries combined. So I think we happen to be really well positioned in China historically, and I think that's going to continue. What we hear now in China is that there's continuing funding going to be focused on more Tier 2 and Tier 3 cities. And a lot of that, again, is coming out of government funding in that space, turned a little bit away from biopharma in China more fundamentally in that country. So I think we've factored into the '24 guidance, some more conservatism in that space, partly due to the macroeconomic conditions that are ongoing in China. But fundamentally, it feels like it's still quite a strong market for us. And of course, I think you know this, Dan, but we have very high-end instruments that are used, particularly in the proteomics space, these instruments are not available typically from the local markets. And generally speaking, we're on the cutting edge of that technology. So if you really want to do cutting-edge research, you need our instruments.

So like the BIOSECURE bill, we brought it up with the revenue we'll try to bring it up with most of the speakers here. It's targeting some of the technologies in China that the government feels like are going into the events, and our DC experts feel it's going to probably morph into something a lot more tangible where the government -- we did a call a month ago with a staffer who said mass spec was something that the government is focused on as maybe a critical U.S. technology. So I guess the question is, do you guys have any sense of kind of where this thing could go just in terms of maybe the government becoming more restrictive on allowing certain key technologies to get into China? And just kind of any thoughts on how impactful that would be to your business?

Yes, it's difficult to assess exactly particularly proposed legislation until it moves through some of the legislative process. I mean our general view is, first of all, I think most know, we're a global company. It's not just a U.S. story for sure. And many of our products are manufactured and distributed through other parts of the world. So I think, generally thinking, we're not overly concerned about that. You may know, Dan, we went through a process, particularly in our semi space, where we had some more advanced technologies that were, I think inappropriately, but for some reason, highly targeted. And we either stripped those out of our backlog about 1.5 years ago because we couldn't order or we couldn't deliver on those orders. Or where we found through an approval process to go through the regulatory process here in the United States, and we're able to secure those. I mean, to state the obvious, we're not involved in any military or defense-related research work. We're a life science tools company, and obviously, we push very hard to make sure that our instruments get to the right places, including in China. So I think it's early days. Hopefully, the U.S. government will understand where most companies are space really are.

Okay. Can you discuss typical visibility in your backlog, I think, is maybe how big is your backlog today versus typical? And how long would you expect -- I think you have 7.5 months of backlog or some of that typical like, how long will I think to burn that down? What kind of backlog conversion is kind of incorporated into your guidance for '24?

Sure. Let's talk about that. So right now, our backlog level is about 7.5, 8 months. It's an average. So we do have some products or some divisions that are higher and some that are lower. But fundamentally, that's higher than our average. We're typically in the 5.5- to 6-month level. So we've been carrying significant backlog. Of course, it's moving, but we've been carrying significant backlog now for about 2.5 years. Part of that was driven by supply chain constraints. But over time, because of the level of demand for our products, being able to pull through that backlog has really been challenging for us. And actually, I think the same is likely going to be true for '24. I do think backlog conversion is going to improve in '24. As long as the demand for our products continues to be strong, it's going to be challenging to bring that down. So I think our view generally has been that we will have a multiyear backlog conversion. Some of you may know, we've expanded our overall production facilities to try to bring that backlog down to what I would -- want at a more normalized level from a customer experience perspective. So I think, over time, over the last 2 years, we've attempted to bring that backlog down and the demand level has just made it really challenging for us to do. I expect we'll probably have something similar to that in '24. And it's a little early to talk about '25.

So basically, what the implication is -- and you think like your orders will probably go in line with your top line, I guess, is what you're saying...

Yes. And it's worth repeating to you here that we have had record revenues year after year. These last 3 years have been really record revenue for Bruker. So for us to have solid demand, keeping up with that, which is essentially what backlog means, you have to have exceeded that overall revenue performance. And even in the fourth quarter, we had some moderation generally in demand, but we're still at a level above our revenue performance. So it's quite encouraging at the moment, just the level of demand we see across most of our products, including the ones most know about.

So you've had a steady cadence of M&A, including the $1 billion ELITech deal, right? Maybe just start with that deal, molecular diagnostic sample-to-answer. I think most of their business is OUS. Just any background on the deal, how it developed? Was it competitive? And just how do we think about the financial implications? I know you guys haven't been kind of closed, or you haven't like put those out, but just any color from a high level you could provide that will be great.

Sure. Well, here's what I can say, Dan. So first of all, we have been tracking this opportunity for a year or 2. I'd say it's been -- it's a really interesting business. We're talking here about EUR 150 million annually from a revenue perspective, good double-digit organic revenue growth. Our expectation is that it's a good, strong business. It focuses largely on mid-sized hospitals. So it's not bumping up against some of the larger players like Roche or Abbott in that space, and good solid growth accretive to both operating margins and EPS on day 1. So I very much like this acquisition. Our expectation is we still have a few hurdles to go over in terms of regulatory approval, and we have a bit of a carve-out that's going to happen as a part of their clinical chemistry business, which comes off before we do the acquisition. So we're hopeful that now that we've signed a purchase and sale agreement that, that will transpire and occur, hopefully in the second quarter. And at that time, we'll provide much more detail around the financial story of the business. But fundamentally, I think it's a good, healthy business. We believe that it fits squarely in our Project Accelerate 2.0, microbiology and infectious disease area. This is an initiative that we've had underway. What's really cool about it from my perspective is we have a very strong franchise in the MALDI Biotyper. 6,000-plus instruments all across the globe, kind of a gold standard for microbial and fungal identification. And this now would give us access into a viral-related infectious disease franchise. So it's very strategic. We're quite excited about it. And hopefully, we'll be able to provide a little more. Our expectation is that when we close, we'll actually do a street call because of the size of the transaction, we feel like, well, we'll be in a good place to talk more about it then.

And then beyond just the financial aspects, which we'll get a lot more color on, but just maybe could you just give us just a very quick [indiscernible] -- or kind of what made the technology kind of differentiated because it is a competitive market, right? Certainly, but just are other a couple of key facets to it, like why it's done well and kind of maybe why it beats out some of the other competitors?

Well, I think, again, we can save some of that for the call, but I would say just generally, it's a sample-to-answer system. It has really quite esoteric panels. And I think maybe we'll provide a little more detail on that at the tea, folks, but it's valuable to have a deeper conversation with our teams on that. But financially, we're pretty excited about it -- that opportunity.

Sure. And then as we discussed before, the Berkeley Lights deal is one that it's been a drag on the bottom line, but why you see a nice kind of top line. Maybe just speak to just -- in terms of the other M&A deals that you've done, how do we think about the impact of like which ones would you call out as if we look at the next 2 to 3 years, are there any particular that we're going to be hearing more about?

Well, for sure, I should mention at least the PhenomeX acquisition, which we rebranded as the Bruker Cellular Analysis business. Terrific business. The Beacon series, which is a series of really sophisticated instruments in the market very favorably received in that space and specialized in cellular analysis. I think it's a -- it does have some dilution, at least in -- we had it in '23. We have about $0.10 dilution expected in '24. But fundamentally, a really good core element of growth for us, I think going forward. In the other business that I would probably call out is the Chemspeed acquisition, which we've now announced. So that's a $40 million to $50 million business annually. It's really in the lab automation and digitization business. It's a very -- I think, again, quite strategic for us in the sense that it helps us -- we're going to surround that with some other software-related activities that we've already established in place through some acquisitions. Very interesting business. So I think for us, it's going to complement some of our entire BioSpin focus. This is our NMR franchise. So I think there's really a lot of interest in that. We've got a transition period. It's mostly a European-based business, and it's mostly -- it's largely a percentage of completion. So we've got some accounting-related transition work we'll do in '24. But once that is completed, our expectation is that that's a good, strong growth driver for us and certainly good, ultimately, will have much better margin performance.

Okay. We have about 8 minutes or so left. Maybe we're digging in some of the businesses a little bit. So there's -- I mean we really touched upon in the top a little bit, but there's always a focus on the backlog and the book-to-bill, things of that nature. So maybe just on BSI I know you called out at 4Q, I think the BSI backlog was 7.5 months, which had come down from 8 months, then the book-to-bill was above 1. Just trying to reconcile if the backlog came down like maybe I was misconstrued. But just -- and again, it's in the weeds, but since it does come up with investors.

Yes, I guess I'd say, look, I think there's a lot of -- been a lot of dialogue around backlog and book-to-bill. I think what I would focus more attention on is really the demand story. I mean, the growth of the business, I mean, over a 3-year period, the level of our -- well, we've got some acquisition and foreign exchange drag for sure in '23, and to a certain extent in '24. And the overall picture has been really promising. I think it's more about the product and the business itself and less about individual numbers from a book-to-bill. I mean for a company that's been able to grow its revenue performance at the level it has and to be able to have strong enough demand to be above that and still build backlog. I think that's kind of the main message from my side.

So maybe just on NMR, I think you placed 3 gigahertz NMR in the fourth quarter, very strong. Just remind us, I know you talked about it a little bit on the call, the outlook for '24. Was there any -- I forget if there was any pull forward of those 3, but just how do we think about that business and the contribution outlook?

Yes. So we've been tracking 3 to 4 ultra-high field systems on an annual basis. So I think our expectation is that, that will be the case again in 2024. I mean some of you may know, we're trying to expand our capacity to build those faster. We do have backlog there. And for sure, we'd like to be able to execute more than that. But at the moment, our guide includes that 3 to 4. As you likely know, Dan, there's consequences that are more on the customer side. You need larger facilities. They need to be prepared. So that takes longer. I mean, generally speaking, it's not just about our ability to produce and deliver. It's much more about -- often, it's much more about customers' ability to get facilities in place in time for those deliveries. So I think it's a relatively -- it's a good business. It's got terrific margin performance that comes out of those instruments. But fundamentally, it's a relatively small piece of the overall puzzle as we reached to this $3.3 billion target size. It's a relatively small part of the overall business.

Okay. Maybe just on -- obviously, timsTOF it's been a great success story. Just where are you with penetration? I know you give some placement numbers. Just discuss a little bit about where you are with that. You've had a lot of continued innovation there on new products. And kind of what are you seeing from the Astral, from Thermo?

Yes. So I mean, just to calibrate this, introduce the product in 2017 and 2018, some very significant uptake initially in the academic and government research markets. What actually happened is that there was a lot of transition initially out of not only in the academic and government research but also in the biopharma area. So the uptake there suddenly was very, very rapid. And this, I think, it's neatly with a lot of the protein discovery work that I was referring to earlier, and the product is kind of leading edge. You may know, we've introduced not just one product, but a portfolio now. We have a workhorse, a really high throughput system together with high sensitivity in single-cell capabilities. So a broad portfolio, and we continue to build on that portfolio. In 2023, we introduced the Ultra, which had a competitor now with the Astral. I think the key point from -- we have around 800, I guess, in the portfolio, 800 units, greater than 800 units installed at this stage and good solid growth and demand. We are, I would say, continue to be one of the leading players in the sensitivity and throughput in this space. The proteomics market itself continues to expand. It's not just about our positioning within a small market. It's our focus on expanding the market, and we've been able to do that, I think, pretty successfully. As far as the competition goes, it's -- I mean, we, of course, love to see competition, especially Thermo is a very strong company with good competitive characteristics, including the right pricing at the right time in the right markets. I would say just generally that don't forget that Bruker is kind of the innovation leader in this space, and you can expect to see additional products in the portfolio, especially targeting sort of high-end proteomics research as you go forward.

Is there a spot -- I think we have 3 minutes. Is there a spot in the context of that timsTOF portfolio where you see a real opportunity or maybe the product doesn't meet certain part of the market?

No, I think that we've clearly got areas that we have real strength and areas that we could strengthen and we're going to continue to do that going forward. That's been our game plan from the very beginning when we launched that product. And now with the portfolio, the scale of what we have, it's pretty powerful at this stage.

So management was very bullish on spatial at your Investor Day. Just can you size that business today, kind of what kind of traction are you seeing in kind of -- yes. I mean we think over the next 2 to 3 years, what's the strategy in your spatial business?

Well, first of all, it's relatively modest at this stage. I think it's early days. Fundamentally, we've got some really interesting technology in that space, the Canopy CellScape instrument that we introduced in '23 is a really powerful instrument. I think it's probably leading in that space. I think the challenge for us at the moment is really there's a process that goes through KOLs and getting introduction into those KOLs. That's been our playbook. Historically, that's true for the timsTOF, and I think it's clearly going to be true for Canopy. But we have a number of focused areas I would call in the spatial area, and I lump our BCA technologies into that category as well, some very good growth opportunities in that area. It's -- I would say it's just early innings, and we'll be introducing some products, as you may know, even in the genomics era -- in the genomics area with our Acuity instruments, those will be coming out at some point in '24 here. So we're building the portfolio to be broader, just as we've done in other areas and fundamentally expect to see some further growth from that space.

Great. We have about a minute left. Maybe just in terms of you just haven't even closed the ELITechGroup deal yet, and that's a big one. Kind of what's your appetite for more M&A? Kind of what are the areas, and kind of, what kind of capital could you allocate over the next 12, 18 months?

So we have a whole series of acquisitions that mostly just fell into the first quarter, and most of those were deals that we've looked at for quite some time and just happened to be closed in the first quarter. So I think the level of particularly large transactions is we have an appetite for continuing inorganic activity, but fundamentally, I think that's not a sustainable level for us. But I would say, overall, our capital position -- we've got a healthy balance sheet, capital position is quite strong. So I think, fundamentally, the company is well positioned, whether it's through our own organic process where we reinvest that capital or whether it's inorganic. Multiples are down a little bit. It's a good opportunity and time for us to start looking at some transactions to the extent that they fit into our strategic profile.

So what would you say as we're out of time, like what's the message you want to leave investors with today?

I think it's largely around our innovation portfolio. I think the fact is that the company has delivered double-digit organic revenue growth, driven mostly by our innovation cycle within the organization, and it's across most of our portfolio. So transforming Bruker to be more a post-genomics era leader in an emerging sense is really what our strategy is really all about.

Terrific. Well, with that, we're out of time. So thank you for being with us.

Thank you all.