Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Thanks, everyone, for joining this morning. I appreciate it. My name is Matt Sykes, life science tools and diagnostics analyst at Goldman Sachs. I had a pleasure of hosting Bruker this morning. We have Frank Laukien, Chairman, President and CEO of Bruker; and Justin Ward, Head of IR. Frank, Justin, thanks so much for joining us today.

It's a pleasure to be here, Matt.

Thank you.

I thought maybe we'd start out sort of high level, Frank, when you think about sort of all the acquisitions and changes and you've had a lot of recent updates to midterm guidance. Maybe just set the stage for everybody and talk about Bruker as it stands today, the growth opportunities ahead of you, and how you're thinking about sort of that midterm growth algorithm for the company?

Yes. Gladly, Matt. So our Project Accelerate and Project Accelerate 2.0 transformation has really gone extremely well, and we've turned the company into a fast growth company with 3 years of consecutive double-digit organic growth. We're continuing at a very healthy with core business this year. Our 5% to 7% organic growth guidance for this year, 2024. We always try to be 200 to 300 bps above market. While we have not raised that guidance, it starts to look better and better as perhaps it's hard to predict. Is there a second half recovery or not? That's a debate that affects perhaps other companies much more than us. But it is possible that the rest of the industry is not growing this year or growing in 1% or 2%. So we might have a bigger differential again this year, at our 5% to 7% organic growth guidance, which we confirmed after Q1 and then confirmed again in middle of May, as you know. Looking out further, assuming a recovery of the markets and assuming that maybe the markets are growing 45% in '25 and beyond. Our goal has been that maybe not on average, but hopefully almost as a baseline that we can outgrow organically the markets by 200 to 300 bps, that's our stated goal, that's in our medium-term guidance. So we have modeled 6% to 8% organic growth for '25, '26, '27. On average, of course, it depends on how the markets will grow. Very, very healthy. And that healthy core business has then allowed us to take some entrepreneurial decisions and make some significant acquisitions, while the valuations were reasonable or in some constrained and unusual Chapter 11 situation with NanoString, as you know, and add on top of that, things that, while dilutive by themselves this year, overall, our EPS growth -- our EPS isn't going down this year. It's actually still going up 2%, which isn't much, but at least it's not going down. And with that, we then have fundamentally a set up that if you look at the -- of the medium-term '27 guidance that we've just given in middle of May imply 15% plus EPS growth for '25, '26, '27, which will be among the fastest EPS growth probably in this -- in our industry -- so that's the big picture financially, yes.

I think staying kind of high level, I wanted to -- I would love to hear how you think about when you make these acquisitions into newer markets like space spatial, where you do have exposure to, but it seems like you're going after high-growth niche markets where you can succeed with some level of market share. How has that strategy evolved at Bruker over the past number of years? And how do the acquisitions you made recently fit into what may be sort of that emerging strategy of really trying to dominate high growth niche areas of the market with your expertise?

That's an excellent way of putting it, right? You look at where in this broader picture of wanting to be a leader in the post-genomic era. We are -- organically, we have a lot going in proteomics with our timsTOF platform, and you know who we compete with, and it's kind of a 2-horse race and that in some adjacent areas like glycoproteomics, lipidomics, all in 4D. We're doing very well organically. We did acquire a couple of companies called PreOmics, a couple of years ago that give us all the consumables and automation that we need for growing. It's not only the mass spectrometer in proteomics, very important as we launched that enrich plus at ASMS to have very, very deep and cost-effective plasma proteomics. And we acquired a company called Biognosys a year ago, a Swiss CRO company that also happens to have, in our opinion, the best proteomics software out there. So now we really have a pretty complete automation, consumables, software services. And yes, of course, the timsTOF platform for proteomics. So that's not quite an organic play because we needed the automation and the consumables and the software, and we acquired that. In spatial biology, which we think has tremendous growth potential, our ambition and what we actually had, Matt, was a little bit at a dissonant, right? We had a rather small Canopy spatial proteomics business, which had a lot of growth potential. And over many, many years, would also have grown to $50-plus million, $70-plus million, but it would have taken us a lot of OpEx that we are now avoiding. There's a lot of cost avoid and synergy in the NanoString acquisition where we get that entire not only very good spatial transcriptomics products, right, which about $100 million in spatial and $70 million in nCounter that was the 2023 revenue makeup of NanoString that we now acquired, but it also gave us a very large commercial and field channel, field application service sales, of course, where we can plug in and not ramp tens of millions of cost. So it may be a lot of chess moves together, but it really adds up to us all of a sudden having a very significant -- I mean, next to 10x in Akoya being 1 of the 3 leading spatial biology companies. Transcriptomics perfectly complementary to our proteomics product line. We have our acuity product line for spatial genomics really at the chromosome, something nobody else does, still to launch at the end of the year, and we now have a channel to pull it together. So now we really have all the pieces together to execute on a larger spatial strategy before that, it was a little bit aspirational.

Got it. If we can kind of dig a little bit into the end markets and start with academic and government exposure, an area that you've had high exposure to and been very successful in area. There's obviously some concerns about funding NIH. You've talked a lot about -- and telling investors don't necessarily look at the overall level of look at what the components with it at AHR in terms of where the funding is going. Proteomics is a great example. If you just look at it over the last couple of years, and I also understand the private institutional funding [indiscernible], whatever is also making a large part. Could you talk about sort of those concerns about academic funding over the course of this year into next. It has been a pretty good end market. So comps are a little bit tougher. But then the underlying dynamics of sort of where spend is going within those budgets and then the private institutional funding that's starting to come up? And kind of help us understand how we should be thinking about the academic end market.

Yes. Yes, academic end markets are not far from 40% for our company. So it's pretty significant. It used to be 50%, 60% or higher, but over the years as other areas have been growing. It's a nice balance now -- those are great markets because that's where you pick up a lot of the initial innovation in spatial in proteomics in other fields, and then we can deploy them into biopharma. We did that very successfully with the proteomics, 1 sort of our timsTOF systems by now go into biopharma. Anyway, to NIH and related U.S. academic funding. First of all, we've shifted very much to academic medical center funding. It's not so much the Department of Chemistry or Biology. We still sell to those, but much more of the funding comes from cancer research and neurodegeneration research and other medical center research, healthy funding, tremendous philanthropy, cash generation machines for all these major research institutions. Keep in mind that the U.S. for that is only 25% of the world market. It's very strong in Europe, in China, in Japan, but really everywhere else as well. So this is not a great year for NIH or NSF budgets. We realize that. But overall, it's still very healthy, secular trends for -- towards the post-genomic era, very strong for proteomics, I think is a 10-, 15-year trend. So what you said, Matt, sequencing, I mean [Audio Gap] consumables have run -- has become less expensive for instruments, but also for consumables and operations available for the post-genomic era and particularly for proteomics, we're clearly seeing that. We think -- therefore, we've positioned ourselves for very large and long-term secular healthy growth trends. And much more important whether things are then whether thing up 1% or 3% or 5% in a year is the allocation as much more funding gets prioritized for the various tools, including protein-protein interaction and other dynamically -- not only a bunch of mixes next to each other, but also the complexity of biology is a huge opportunity for Bruker as our instruments address structure and interactions and drug grinding and all the way to chemical proteomics and targeted protein [ degree ]. So we're really sitting not statically but sitting and endeavoring to add more to these to our exposure to these very healthy long-term markets. And that's why I'm also optimistic about this year with weaker academic funding.

Got it. Just talking about sort of the underlying organic growth for the business. If we because a lot of the acquisitions, there's some accretion dilution on -- below the line. But on the top line, they are contributive. But if we look at the underlying organic growth of the business ex acquisitions, kind of out to '27. How does that look? And how is it trending this year?

Yes, that's the other 90% of the business -- that's the core business, right far from legacy, that's the core business. Yes, we expect this year, organic growth of 5% to 7% again. That's something we've confirmed and that this is a weaker year for the whole industry. So relatively speaking, I think the 5% to 7% is still a very good number. As perhaps the industry this year is more or less flat. We'll see whether the second half, there is a pickup. And longer-term, we have looked at organic growth as also some of these acquisitions become organic of 6% to 8%, assuming the markets recover to 45% market growth.

Got it. And then could you talk about maybe using ELITech as an example, [Audio Gap] in sales force. I know there's the [ multifranchise ] before. And I remember when Project Accelerate 2.0 was kind of introduced, there was proteomics and diagnostics. I think proteomics has been a home run. Diagnostics might have been a little bit tougher relative to proteomics. But now with ELITech, how does that accelerate that diagnostics avenue for you in terms of recurring revenue, but then how are you leveraging existing sales force to drive that?

Yes, great question. So are over the last 15 years, essentially, completely organically, our MALDI Biotyper franchise, including consumables, has grown to about $3 million, so about 10% of our business and varies [indiscernible]. It's now growing more in the high single digit or maybe consumables double digits and instruments single-digit size, single digits -- disease specialists, right? And we had a smallish $30 million, $40 million molecular diagnostics business. This is post-COVID, during COVID, it all spike, but let's take out that spike. And we did not have the sample-to-answer technology that is in the InGenius, BeGenius sample to answer with throughput systems with the Esoterica content that ELITech is bringing to us. So with that, all of a sudden, you'll have a -- at a run rate, $220 million acquired and Bruker legacy molecular diagnostics business. So now you look at $500 million to $550 million of being still a Tier 2, which is fine. We respect to Roche and Hologic and who the really big players are, right, and Abbott, of course. But that's a very sizable, not far from 15% to 20% of our business. That gives us for infectious disease as a specialist, a molecular diagnostic sample-to-answer capability, with the right to exist, that long tail of esoteric that Roche and the big players don't want to touch, and they often include us in their tenders at the ELITech business in that case, plus our very strong market-leading, higher-margin MALDI Biotyper infectious disease or microbiology platform. So that's a really good setup for us. No, we're not also in neurodegeneration diagnostics or in cancer diagnostics. But it's a pretty -- and we're also not in commoditized immunoassays or clinical chemistry. I really like how we're positioned there, right to exist, always a good thing, good pricing power, very good margins, high single-digit, double-digit business. That's now a very solid infectious disease by agnostics business between 15% to 20% of our revenue. And we really are there in terms of expertise and market knowledge. I think we're second to none because we're a specialist in that area. And maybe second to none, I should say, well, we actually are second to none. In that case, we really are the specialist and it doesn't threaten the really big players, so I think we have a good niche there.

And how do you see continued growth with ELITech being adding -- diagnostics being adding to recurring revenue and margins for the business? ELITech is already coming in at accretive level of margins to where you are today...

That's right.

And also the recurring revenue in diagnostics is just simply better than in sort of the more capital-intensive instruments. So maybe talk about how diagnostics can help drive higher recurring revenue and margins over time?

Yes, I said that earlier -- and glad to. So we -- years ago, not before the pandemic, we're at 25% to 7% aftermarket revenue for our BSI segment, which is 90%. This is now -- this year, with a run rate, it's going to be 31%, 32%, including the spatial business, which is primarily aftermarket, and including the ELITech business, which is more than 80% consumables. So we're probably on a trajectory that by the end of this medium-term fiscal year '27 outlook, we'll be at about 30% -- sorry, I misspoke. 35% aftermarket from 27%, 25%, not so long ago. And yes, we're still very much happy to be an instruments company because we're a very innovative instrument company, that can open up new markets like proteomics or NMR structural work and so on. But it's a nice trend. It gives us a better balance. This is the first year where we have $1 billion plus revenue in aftermarket. That's a bit of a milestone for Bruker, right? So it's becoming a healthier and healthier mix. And of course, the advantage of that, if I will put in a little bit of a [indiscernible], we -- because of our long backlog, we're not living hand to mouth, right? If May -- if April is weak or May is weak as some of the bigger companies are worried about, quite honestly, I don't worry about it where I'm looking at the quarter, and I'm looking at the next few quarters, and I have enough backlog that it doesn't affect me. So in some ways, ironically, a more CapEx heavy company is more stable and sometimes when it gets to do these choppier times as we've seen recently. And we get to innovate in new areas where we can really create new growth markets. Have to do the land grab first in spatial biology and proteomics timsTOF. But then once you have consumables in automation and service and software upgrades, you really build up over time, you then pull through a very nice consumables business as well -- in the MALDI Biotyper, that's a great example of that. Today, that's already at more than 50% aftermarket.

Got it. Okay. And then just kind of going off your comments on the backlog, you have -- had this elevated backlog. Can you kind of talk about where that stands versus historical average -- and kind of give any color what type of instruments are still seeing that elevated backlog, which have come down to more normalized levels? And how should we be thinking about the backlog and perhaps book-to-bill trends over the course of this year?

Yes. It's not coming down as quick. A year ago, we said, well, it will come down over 2 years. Here, I said today and they said, well, it'll come down over the next 2 years. It's come down a little bit. We were at 8 to 8.5 months of backlog in BSI. We are now at 7.5 months. And until that normalizes at the 5 to 5.5 month level, that's probably going to be a couple of years from now. So -- but when we have -- of course, that implies -- sometimes that imply some quarters where you have book-to-bill below 1. But otherwise, it will -- you will never get to the lower that backlog even with growth. And when we had book-to-bill, for instance, in Q1, it's not 0.8, it's 0.97, in other quarters, we have book-to-bill at or above 1. So it's -- the good news is it's coming down more slowly that's what we anticipated a year ago, which just is another reflection of our transformation into a fast-growth company that continues to have really very solid bookings as well.

Got it. And we've kind of heard from peers about sort of some of the challenges in terms of capital equipment demand and sales cycle is taking longer and conversions. Can you maybe give us an update on how conversations are trend your customers? You seem to be bucking a lot of these trends that other companies are seeing. So would love to get your kind of view as to kind of mark-to-market on how conversations with the customers are going and sales cycle conversions, et cetera, how those are going?

Yes, I think it depends very much in what markets you're in. I mean, I think these comments were for companies that have a heavy exposure to GC and LC and triple quad in more routine ICP-MS and similar type of analytical tools. We're not in those markets or there's tiny for us. In proteomics, in semiconductor metrology tools to support the AI metrology, the AI revolution in many of those areas, the order patterns are really very healthy. Proteomics, not that many companies participate in that not all mass spec companies participate in that. But those that do, I think I bet they're both seeing very healthy order patterns. So I cannot confirm that I -- I mean, to be blunt, Agilent or Waters or the old PerkinElmer or METTLER TOLEDO, just aren't good comparables for us anymore -- Bio-Techne or within the spatial part of 10x and parts of the Analytical Instruments business of Thermo in that -- not in that triangulation, that's probably not a bad predictor of how our markets are doing and they're just doing much better than what we've heard more recently from some companies that have different instrumentation than us.

Got it. If we pivot to China for a little bit, you guys have had pretty decent success in China. I think at least my view, a lot of that has to do with the level of differentiation, sophistication of your instruments. From a competitive standpoint, I think it would take quite some time for us to replicate. You're also focused more on the academic market in that area as well. We have the recently announced stimulus, which I think there's been some confusion about duration, timing, et cetera in terms of the transmission mechanism being a lending program takes a little bit longer time for people to understand. And it's a 3-year program, so there's no sense of urgency. What are you seeing so far today in China, one; two, any kind of conversations you're having about the stimulus program? And what's your expectation for when this could actually show up in revenues?

So to dampen expectations for us, I don't think it will show up in revenues until '25, '26, maybe into '27, which is fine because I think we're in good shape for this year. I also think until orders pick up for reasons that you just cited, this is a loan program. And I think it very much favors bigger projects. So a number of university, departments or professors, PIs are getting together, trying to raise together $3 million to $5 million or maybe $25 million. So those bigger projects take longer until you get the orders. But I think it favors academic and academic medical center research, which is where we're strong. China completely gets proteomics a year ago as though they put a white paper, they put out a white paper on their proteomic strategy, which essentially, if you took it without any haircut or discount would equal all the proteomics investments of the rest of the world. So they get that this is important. One probably has to give it a little bit of a haircut. It's still significant. It's very much likely to favor big-ticket items. But as I said earlier, I think until the orders come in maybe more Q3, Q4 and into next year. And until this hits our P&L via revenue and additional margin is probably a '25, '26 story. But of course, I don't mind that I get additional tailwinds for those time periods, right? And because we are, I think, for '24, we're just in good shape. I don't expect it to have a P&L impact in '24 or at least it could be very -- probably only very small, if at all, in Q4.

And what are the current trends in China now, forget stimulus, but for -- as you look for '24, is it still remain relatively healthy for you in terms of conversations, orders growth.

There is -- the conversation level and planning level right now is very high. A lot of customers and universities and medical schools are very excited about this 3-year opportunity of the stimulus. And it's not just stimulus, as I understand it, with primarily infrastructure, it's not, let's build another highway or another airport. It's very much innovation-driven. So it should be good for our tools industry. And then as I said, I think it's particularly positive for academic medical center and academic research, which is where we were close to 50% of our Chinese revenue. It's even higher in China. And then it very much just like former stimulus programs after 2008, 2009 here and in Europe and Japan. This is the time when people buy [ $1 ] million mass specs or $5 million or $10 million NMRs or big microscopes and things like that rather than $100,000 benchtop or a fridge full of consumables. So I think it's going to be very favorable for us. But it's still early days and there's just a lot of activity right now and a lot of planning, which I like to see, and I think it will be positive for '25, '26.

Okay. Pivoting to timsTOF platform, where you've had a lot of success in driving your proteomics franchise. Thermo came out with the Astral at last year's ASMS. You said publicly that it's a competitor, and there's been some customers trying to decide and it's been a viable competitor. You recently just introduced the Ultra 2. How you see the Ultra 2? And I know it takes a while for these things to kind of come into the market and be purchased and things like that. But kind of as a response to Astral, how do you feel about the timsTOF franchise competing against Thermo given their recent -- their launch last year?

Yes. And the Astral was a big step forward for our competitor and a pretty innovative instrument in some areas, it caught up in throughput and so on in depth. In other areas, it moved a little bit beyond what we could offer a year ago. So to some extent, all agree that in some of those areas where we got leapfrogged a little bit, I think we caught up. In other areas like sensitivity for single-cell proteomics, for immunopeptidomics where we're probably 50% better. We're probably increasing the distance, the competitive distance with this timsTOF Ultra 2 launch. And -- but there are also some specialty areas where proteomics is now like a dozen subfields. In some of them, Thermo is better, in some of them, we're clearly better. In many of them, we basically compete neck-on-neck and it may be I'm estimating 50%, 50% or so in win rates. In addition to the timsTOF Ultra 2, we launched this plasma proteomics enrichment, ENRICH [ Plus ] from our PreOmics subsidiary and this very advanced Spectronaut 19 software, a lot of detail, but enrichment, advanced software and a new instrument together, which is, by the way, the Astral also was an instrument with Chimera software and with Seer consumables. So a similar packaging for us together, I think, will make an area where we had fallen behind in plasma proteomics make a big step forward where we catch up, but with much better economics that I think is affordable for population proteomics or large cohort plasma proteomics, which almost all plasma proteomics studies tend to be sizable cohorts. And there, the better economics is actually enabling larger studies. So this is something that will also be -- have a big impact on how we compete with the affinity-based methods of SomaLogic or Olink, which could do thousands of proteins in plasma and now we can do that as well with much lower false discovery rates and at a much lower cost. So I think there's a lot of moving dynamics and it's not just timsTOF versus Astral. It's also both of them against the affinity methods and in plasma. That's where we've made the biggest progress plus in single cell and subcellular proteomics a new field that we're now opening up with the timsTOF Ultra. A lot of moving pieces. And some areas we caught up, other areas -- but caught up with much better economics, which I think is enabling. And in other areas, we've increased the distance in our opinion.

You kind of answered -- my next question is to be on the NGS proteomics and how you compete with that. And clearly, 1 of your competitors has made a bet on that as well, or trying to close that deal. But do you feel like you have the necessary offerings to be able to compete with NGS if the market continues to shift that way.

In -- well, in genomics, transcriptomics, of course, we don't compete, right?

Just proteomics, yes.

Right, right. As it is being applied to proteomics, I think it's probably the affinity methods were always -- only for plasma proteomics, they only for human plasma proteomics, they don't have the antibodies for rodents or other things. So there's many other areas of proteomics. They don't play a role in targeted protein integrators. They don't play a role in chemical proteomics. They don't play a role in glycoproteomics. There really are that many subfields of proteomics and only in plasma proteomics, was it -- a competition, and they pulled ahead by looking at 3,000, 5,000 or 7,000 proteins that mass spec methods couldn't do until very recently. Now the competitive offer that you mentioned and ours, with a scientific certainty that I think you need, you can't afford 10%, 15% error rates. And you don't know which ones they are. And also simply at a cost point that is Factor 5 to 8 lower, which is really enabling and still allows us to have excellent margins but I think it's opening the field, and we'll probably pull a lot of that field back towards unbiased MS, whatever the brand, MS-based plasma proteomics, that's our opinion.

Got it. Maybe in a minute or so we have left, Bruker is a sophisticated and sometimes complicated company with multiple divisions, CALID and BioSpin and Nano. If you were to kind of leave investors with sort of a couple of thoughts of how to think about Bruker from a high level? And what are some of the strengths and sort of key takeaways you want people to have -- to hear that.

Yes. I mean from a risk point of view, we're rather diversified. We are complicated. I realize that you don't have to understand all the pieces. We do, but it's a very diversified geographically in terms of market. We're neither 1-trick or even 2-trick pony. That's a good news from a risk-rating mitigation point of view. The core, in which -- that's not a legacy business, we have a very fast growing, healthy margin improvement core, that's all going really well. The big, big opportunities are the post-genomic era primarily with proteomics and related fields and spatial biology. And then we happen to have this 8%, soon, 10% of our revenue in very advanced semiconductor metrology, which is supporting the AI revolution and high-performance computing. We'll still come to health care and life science conferences, I'm sure, but this is growing to 10% and probably eventually to 15%. It's sort of the cherry on top for us. That's a bit unusual for a life science company, but our tools are very applicable to high-performance computing. The main strategy is we want to be the leader. And right now, in terms of the tools that we have, now that we've covered spatial biology, I think we're the emerging leader for the post-genomic era. And that greatly simplifies it. We do a bunch of other things. We do them really well and with operational excellence, but not everybody has to dig into all these details to understand Bruker.

Got it. Well, I'll leave it there. Frank, Justin, thank you very much. Really appreciate it.