Bruker Corporation (BRKR) Earnings Call Transcript & Summary

All right. We'll go ahead and get started. Thanks for bearing with us for a minute. Welcome to the Wells Fargo Healthcare Conference. I'm Brandon Couillard, I cover tools and diagnostics. Sorry for the slight delay, but we do have a special guest this morning. Chairman and CEO, Frank Laukien; as well as CFO, Gerald Herman. So thank you both for being here. And Frank, thanks for the surprise visit.

My pleasure.

My first question directed to you. I mean, just off the jump. I mean, you've had the best organic growth for 2 or 3 years in the sector that's true again in '24. Understand like the story has gotten a little noisier recently, but the stock is now the cheapest in the group by a long shot. Just -- I'll leave the floor open to you. What do you think people are missing about the story right now?

Yes, it's remarkable, right? Thank you for your initiation. Thanks for following us for 10 years, right, with different business cards and so great initiation piece. I am pleasure to be here. Yes, people are -- I think maybe what could be more useful than -- and to your question, rather than discuss proteomics or spatial or NMR, whatever it may be, let's talk a little bit about the Bruker management process because that's really something and you followed that we really established that a decade ago, about 2014, with your predecessor, Charlie Wagner, and top talent from Juergen Srega running the Cali Group. He had been at Thermo for 2 decades. People from [indiscernible] should be an Emerson Electric and in the start-up world. We really build an excellent Bruker management process. That I think it's just as good at executing and being reliable and doing margin expansion as what a thermal PPI or a DBS that Danahar does, but it is also more entrepreneurial. And I know people have these buzzwords. If you don't mind, maybe I'll give you a couple of case studies, right? So for instance, for previous acquisitions, we acquired the AXS business from Siemens. It was a #3 in its market. Today, it's the market leader. It has -- was about a $50 million business. Today, it's a $300 million business. So it's almost 10% of Bruker, right? At the time, it was consistently losing a little bit of money every year. Today, it's one of our medium performers. It's at about a 20% operating margin. We had some bolt-ons. We invested a lot in bringing its gross margins. It was only at about 40% -- low 40% gross margin. So this isn't just an OpEx cutting story. We invested it. We made them a leader. We made them more competitive today. They're just 50%, as I said, one of our medium performers but really, really good application of the Bruker management process. A more recent -- a little bit more high flyer is our metrology X-ray, metrology business, which was an acquisition of Jordan Valley Semiconductor in 2015. That was a tiny business, $20 million. Today, it's about a $100 million business. In its segment within metrology, it is the market leader today. Its gross margins went from 40% to well over 60%. Its operating margin went from minus 10%. I remember that round number to today, well over 30%. So Bruker management process in exciting markets. This is very much enabling than Nvidia chips that you need today out of TMSC or Samsung. And maybe just as a third example, and that's more of an organic one, something where we started from scratch and then did the ELITech acquisition. So highly relevant to your question. The MALDI Biotyper business, we started from scratch, completely organically almost two decades ago. Today, we're the clear market leader, over 7,000 of these systems out there for clinical and nonclinical microbiology. And then we added one of the largest -- the largest acquisition in terms of price we paid for -- over $900 million recently with the ELITech acquisition, which was sample to answer, where we found a niche that we think could be as exciting as the Cepheid niche, one of the best acquisitions that Danaher ever did or the BioFire syndromic panel niche that BioMerieudid, that's a $1.5 billion business. We found another defensible molecular diagnostic sample to answer niche with its ELITech business. So we just acquired that. We use our Bruker management process to obviously integrate and bring that into even higher margins. But even today, the combined business, about $0.5 billion in revenue. Well over 60% gross margin, well over 30% operating margin. So we really have great confidence in sort of the punch line that our Bruker management process that has been at work that has transformed the company over 8 years. So '22 gave us 1,000 bps of margin expansion, about 3/4 gross margin, 1/4 of that from OpEx is an incredibly powerful management system, and I'm very confident that with the about $500 million in revenue of the recent strategic acquisitions that we will meet our medium-term outlook and then develop them into high -- into market leaders with high margins and good ROICs. That's the big picture.

Yes. Yes. I do want to dig into each one of those deals in more detail. The single biggest question I've gotten in the last week is really how comfortable are we, are you with the core business? You are coming off of three just phenomenal years in which instrumentation for everyone else was not so great. But your book-to-bill is not really flashing red lights. So how comfortable are you that there's not a delayed reset coming in the core business? And I guess, how do you sort of characterize your visibility on the back half, maybe relative to what it's been for the past year. What, I guess, some of the puts and takes in market-wise.

Yes. No. I mean there is a slowdown in the markets out there, right? We're not immune to that, but we're still the three years of double-digit organic growth '21 through '23, we won't repeat in '24 and probably pretty sure not in '25. On the other hand, in '24, wherever we end up, we still at 500 or 600 bps higher organic revenue growth this year. If you take the middle of our guidance and if you -- whatever number you want to pick, the markets are flat or down 1% or 2%, whatever is right for the numbers. We're still outperforming very significantly. And so I don't know, 500 bps outperformance this year, even though it's not double-digit organic growth, I think it's still excellent, right, with the present conditions. And that's, of course, because of the competitiveness of our portfolio and then the transformational positioning that we've had. At our 2017 conference in New York, we announced Project Accelerate, and then we evolved that to Project Accelerate 2.0. And the way Bruker has transformed and reset its portfolio without giving up on NMR and without giving up on multi biotype and many other things, getting into other parts, a much broader view of the proteomics market than just looking at mass spec-based proteomics. We want software. We want automation, we want services, et cetera. We want pull-through going into single cell, into spatial biology. I think, has positioned us in this emerging post-genomic era and to my friends at Illumina and elsewhere, I would say the genomic era isn't over, but I think it's in the later stages of the S curve. And we're now at the areas where proteomics is absolutely taking off spatial biology interactions, glycomics are still early stages, but we're positioned beautifully with a portfolio of different areas that really like no other company address this post genomic era. Now its our time for the next decade or 2, and I'm sure Illumina and others will still do well with NGS. And of course, the key will be to combine all of that in a multi-omic systems biology approach. But it's much more than just in -- I think the allocations towards non-NGS, nongenomic applications because NIH and everybody else in pharma companies completely get that you have to have special. You have to have proteomics and a bunch of other things greatly favors us. So our secular trends are much healthier than the average industry trend for chromatography or whatever it may be.

I want to dig into the end markets a bit. Biopharma is your I think smallest piece. You're probably not the best proxy, but would you just unpack what you're seeing in biopharma from a capital perspective and your expectations for that end market in the second half?

Yes, muted, right? We -- so biopharma for us, where it's NMR, mass spec, now also single cell and spatial tools they acquired tends to be in mid-teens, maybe 15% of our overall revenue. It's been growing very nicely. I would consider -- continue to consider it one of our most important investment areas. The Beacon platform from Berkeley Lights is almost all into CRO and biopharma. So even if there is a weakness right now, there's a good time to invest because fundamentally biopharma is a terrific market. But I think as we've gone through the year, we've all realized that with the -- with price controls under the IRA and CROs still being reluctant and maybe still some back-end of destocking. This doesn't really affect Bruker all that much, but some of our peers, that this isn't a clear turnaround by midyear yet for the biopharma and CRO and CDMOs. So that's a little bit as we've gone through the year. I think our objective that's been for all of us, a little bit disappointing that that's slower and the turnaround is now hopefully in '25, but it doesn't seem like it's '24. So that's why we've been a little bit more cautious this year. But again, it's the relative performance that's still very, very good. And the long-term belief in the -- that our tools are highly applicable and then in fact, we've doubled down in many investments. The Beacon investment for stable cell line development and antibody development, that's the Berkeley light platform for those of you who are not familiar with it. Maybe about 1/3 of the spatial biology tools, so the NanoString go into biopharma research. It's not all academic and cancer centers. And that's actually a very healthy mix, 1/3 of our [indiscernible] proteomics going to biopharma. It's slower this year. There's just -- people are spending money much more reluctantly. When they do spend money, it does favor our tools because the post-genomic tools are get seeing more investment than some other things where they can say, look, I don't have to refresh that or have all the capacity I need.

You are over-indexed to academic and government. Budgets, there are slower this year if you look at age, the NSF budget. China, a little bit softer. You've talked about some money is being reallocated towards defense in certain European countries. Geographically, is that an environment which you can still generate growth? And I guess, what is your expectations for ANG as you look out kind of 6, 12 months?

Yes, acagov is actually pretty healthy. The acagov that we have today is very different from 10 or 20 years ago, then we served the science departments, right? Physics, chemistry, biology, more chemistry, geosciences, material sciences. That is not growing very fast right now because of budget constraints. So Europe is recovering a little bit. China had been excellent, and let's see what the new China stimulus budget does in those areas where we've really -- we're really much more into academic medical centers today. So major cancer research center, major autoimmune research center, neurodegeneration, Alzheimer's, Parkinson's, ALS, there's a few others. So those, in addition to NIH budgets have this incredible capability of raising philanthropic amounts. And those -- I mean, if you look at here in Boston, and there's many examples elsewhere. But the Dana Farber Cancer Institute, there have a record-setting campaign. Their annual philanthropic budgets are -- they're all -- these numbers are all out there. They're enormous. There's hundreds of millions that they raise every year. So -- and where do they allocate? They quite honestly, they are allocated in proteomics. They're allocated in spatial biology. They look at antibody development and whatnot, either external or internal. So again, how they allocate the money is very good. And those parts of academic governments are really our big growth drivers. So those -- yes, Brandon, those are growing. They are growing in North America. They're growing in Europe and Japan, Pacific Rim and then big time in China, perhaps even bigger next year depending on where that stimulus spreads. Within the stimulus budget in Japan, not only is the big ticket items that are being favored. But I think, again, China completely gets the proteomics and post-genomic story. And they have their own nice sequencing company that they acquired a decade ago, right? So they like sequencing and they've done a massive investment, but now the bigger investments that are being planned are, again, favoring the types of tools that we provide.

Well, since you mentioned China, Gerald, could you remind us what's embedded for China growth for the year in '24? And Frank or Gerald, what are you seeing in terms of stimulus-related interest? Do you expect that to maybe fall as soon as the fourth quarter? How is just the funnel there developing over the last couple of months?

Sure. What I'd say, Brandon, is that the overall position for Bruker, just to remind folks, it's about 15% of the total revenue performance for Bruker China. So the China Stimulus program -- some of you may recall the '23 numbers were quite favorable for us. one quarter Q1 of '23 were a substantial bolus of orders coming out of the stimulus program. This particular program seems to be a bit different. What we know at the moment is we're receiving a lot of interest from an activity level, both in terms of RFPs, proposals, elements that people are clearly interested in our instruments and packaging and for purposes of submitting proposals to the government. You may recall also that this stimulus program in China is different in that not being administered specifically by Beijing, but by individual provinces. So we expect the order flow, which we've not seen a lot of activity in the third quarter, don't expect to. But I think in the fourth quarter...

Lots of activity, but no order.

Sorry, not orders, but I would say we expect to see significant order activity as we march through the fourth quarter and more likely even into the first quarter of '25 and beyond. So this is more for us a '25, '26 story in terms of revenue performance. We expect to see something in orders in the fourth quarter and the first quarter. The only other thing I would say is this does look like it's going to stretch out longer over multiple quarters. The prior '23 stimulus was really very much focused on one quarter, Beijing controlled and managed. This is totally different in the sense that each province is identifying what funding they're going to provide into whom. So the process we expect to take longer, but I think we generally have had sort of an outsized benefit from because of the nature of our instruments with respect to the China stimulus programs going forward.

The activity is enormous. The boost in opportunities and to use our CRM terminology is enormous, but I'm sure they won't get all funded. So I know one other company recently tried to put a numerical estimate on it. We're not prepared to do that. We think it will be meaningful, but whether that's a 50 or 100 or 150 bps head tailwind or something, I think it's going to be meaningful, but I think it's too early to say. The traditional average percentage is I can look at my opportunity funnel and have an average number here on the back of my hand, roughly, on average, how many of them turn into orders and eventually into business for us. And because the opportunities have gone up so much with our NMRs with some of our nano tools, mass spectrometers, even spatial. It's hard to predict how much of that will get funded. So we're not trying to -- when we give '25 guidance, hopefully, we'll have an idea of how much of next year's growth and probably some of that will go even into may get into '26. We think it's going to be a meaningful tailwind, but giving out numbers for us seems a little bit a little early. We'll get a few orders in September, but most of it is Q1 and then H1 of next year in orders. And then with Bruker typically from orders, it's on average 6, 7 months or so, especially because they're not buying benchtop instruments with those -- they're buying big ticket items. So I think it will again be very -- it will be disproportionately favorable for companies like Bruker that sell big ticket items. This is the one shot they have to buy something for $5 million or for $1 million or something like that. So probably be particularly good for NMR.

I want to touch on proteomics just broadly. It's seems to be the most advanced of your post genomics portfolio led by timsTOF, includes other products, biogenesis and services, one of them. But timsTOF now has completely built out portfolio. You've got 5 or 6 instruments. You just launched a new Ultra 2 at ASMS. You've got 1,000 instruments installed now, I think, is the latest update from maybe 700 at the end of last year, still growing nicely. What are the, I guess, macro forces that continue to push that business forward? Is it innovation? Is it timsTOF moving more into biopharma? And how do you feel about your competitive position relative to the number to or incumbent in the market, let's say, in mass spec proteomics.

Exactly. Perfect questions, yes. Thank you, Brandon. So proteomics, I would agree with your characterization. That's now getting on to the steeper part of the S curve, right, and mass spec-based proteomics, there are other types of flavors of doing discovery and then multiplex proteomics. Of course, there is more and more also spatial proteomics something we're pursuing with our Canopy cell scape instrument. And yes, for proteomics, we don't want to sell mass specs. It's great to have 1,000 plus out there. But the PreOmics acquisition in Munich a couple of years ago. They do a lot of automation. They do all the consumables for PreOmics as well. It's really pre-proteomics, that's primarily what they're focusing on. And diagnosis is has the best software in the business for proteomics and also provides key services in out of Switzerland and now here out of Massachusetts. There are new aspects. So the innovation there will be -- we're in the very steep part of the innovation curve. The Astral has been a step in innovation that was a nice by our competitor, right? And the incumbent in proteomics and mass spec-based proteomics, if you like. We've caught up on some of the things where they leapfrogged us a little bit in some areas. We've maintained our advantage in sensitivity for single cell or subcellular proteomics now even with the new TimofUltra-do launch, looking at immunopeptidomics. There are so many -- it used to be proteomics. And now all of a sudden, you peel the onion and there's more and more fields. There is new fields where we're only launching next year, which is proteoform is when you basically look at native or top-down proteins and try to characterize them without first doing this digest, which we normally do and bottom-up proteomics as it's called. For that, we have this Tims omni platform. It's not launched, but it's the talk of the town at all these scientific conferences because we're showing a lot of data on that. So that's launching presumably next year and over the next 2 years, there is new versions now where we've actually consumables have been key to get to much higher numbers and much greater depth in plasma proteomics. Plasma proteomics, a lot of that is what goes into biomarker discovery for liquid biopsies, for cancer, but also for neurodegeneration. So the big trend towards more -- one of the questions you asked, when biopharma has adopted it quite a bit, more will come. I think the -- getting into -- from discovery science into translational and clinical research with higher throughput, better robustness, reproducibility, and, quite honestly, lower cost per sample because then you want to study cohorts of thousands or 10 thousands of samples. That's all evolving as we speak. That's why the non-instrument launch of this new plasma enrich plus enrichment kits, with automation, yes, it goes on our timsTOF has been commercially, probably one of the most significant launches at ASMS and more to come. There's a HUPO meeting in October, where we'll launch even more capabilities in Dresden. So it remains on the -- it's in the S curve. It's growing. It's growing nicely. We have a very formidable competitor, which isn't always bad when you have a towards race. It really develops the field. And it's -- I think it's a beautiful growth for them and for us. And there is just a further and further expansion and differentiation even more complexity and therefore, even more opportunity in genomics yet. DNA, then you had methylation, epigenetics, you did transcriptomics and a bunch of variants in proteomics, it's another -- it's more complicated with more opportunity. Glycomics, incredibly important, but there hasn't been a good lamppost, no good tools. We now have a glycobiology business that, of course, uses the timsTOF and then has all sorts of specialized consumables and workflows and softwares for that important field from biopharma research and other research. So it's very vibrant, but you're right, it's further ahead in the S curve than some others that are still in the early flat part of the S curve. This is clearly getting into the deep is in the steep part of the S curve. And so proteomics is the single most important growth driver perhaps.

If you bundle all those together, is proteomics $600 million, something in that ballpark?

Yes, it depends if I use -- include crystallography and protein methods using NMR, it's approaching that, yes.

Okay. Great. I do want to touch on the NanoString briefly. Number one, why is Bruker the right ultimate owner of this asset? Like why did it land with you and not somewhere else. How do you get comfortable with the legal risk? And what is the EU injunction being reversed mean for the monthly revenue run rate, which you've talked about being $10 million, does $10 million go to $15 million?

No, that incorporates that for '24, but all -- again, all good questions. So we were in a small way with our Canopy business, the beautiful self-scape instrument for spatial proteomics there. We compete with Akoya and with Bio-Techne primarily. So there's really two little pillars to spatial biology. So we are in that in terms of really as a #3 initially, and we had ahead of us tens of millions of OpEx investments that were planned for the years to come to build out that channel, right? You need products and then you need a big channel, right? We were not at all in spatial transcriptomics, which is we're primarily -- it's who they are 10x and NanoString and a couple of smaller companies used to be 10 companies. Now it's basically two big ones and a couple of smaller private companies. So spatial transcriptomics, very complementary, completely the same channel, completely the same customers. They have one of each or maybe they have several of each. So we needed to be in that, and we wanted that channel quite honestly. That channel now sized appropriately with a lot of cost cutting that still happened under NanoString, although a bit laid right? And then the cost avoidance by us combining this into one Bruker spatial biology business, the NanoString part, the Canopy part. And if you remember, 3.5 years ago, we licensed in license from Harvard Medical School, that's Acuity spatial genomics. You forgot about it hopefully because it hasn't launched yet, but we have a terrific spatial genomics really looking at chromosome structures and chromatin interactions, totally different flavor. Nobody else does that's launching really at AGBT of '25 a little bit later this year. So these three all go into one channel. So it is highly synergistic for us. One channel, customer access, NanoString has a lot of customers. We get into front, even though we're Bruker, it doesn't help me that I have an NMR lab in the basement, if I need to talk to the nanos, the spatial biology people on the floor. So that channel synergy cost avoidance, it's absolutely ideal for us. In a second, we also bring a lot of software and experience and even chemistries to that field. So we will further improve the NanoString product lines over time. with things that we head up our sleeve, but they give us the ability to deploy that over time and make their products even better. So this is an absolutely perfect fit. Channel, cost avoidance, financially and then in terms of technology combinations that will be stronger than even what NanoString had by itself.

Is there a pipeline -- at NanoString, you've talked about some new products that are coming out and that this business will be back to growth maybe in '25. It's a long way from the $170 million or $180 million it did in '23 before the injunctions happen around the bankruptcy was kind of clarified like, is that you're kind of shooting for to get this business back to.

Well, we very much think we can go back to growth in 2025. This year, we'll just -- all these measures we're taking so much cost and new product ideas and new things on consumables and rebuilding the sales channel. When NanoString couldn't sell in Germany and then couldn't sell in the rest of Europe, now we can sell in all of them. All these injunctions have been lifted. The German patent asserted against us has been invalidated and the injunction was lifted. So we're back on these markets, but now you got to rehire the sales teams, right? They obviously haven't stuck around that NanoString. Even in the U.S., we had to reinject confidence and rebuild that team. And until you build the opportunity funnel in sales force and all of that. That's why I think it's a '25 growth story. This year for these -- few more months of this year, we think the $10 million -- the $10 million months bakes in that we're back on the European market. But until that have lots of activity until that really turns into orders and growth will be also '25. So whether we jump back to the previous level of $170 million all in one year or whether that's a 2-year step, kind of modeling it as a 2-year step, and that's fine. And then we are also looking at this over 5 and 10 years, it's going to be a big business for us. Especially including spatial proteomics, which we bring to the table into the same channel. And then the spatial genomics business that you will see the products launched at HGBT, something completely unique and nobody else has.

Gerald, is -- of all of the acquisitions, I think NanoString is the only one that's lost generating, would it take on top line for that business to get to breakeven? And how are you tracking, I guess, relative to your initial expectations on things like cost out, how important is the legal spend coming down, relative to your initial deal model, which I don't think assumed breakeven on the accretion until '26, right?

Correct. That's correct. I mean our model at the moment, first of all, for '24, we're pretty comfortable with what we baked into our original guidance numbers for NanoString. There we're pretty much on the target. We said $10 million a month, and we've been tracking that. That's the expectation we have for '24. And the dilution is $0.15 to $0.20, that's been planned and discussed and we've been talking about that publicly. So we're pretty much on that track. A lot of the cost actions that Frank was describing have already been taken and there maybe some other further tweaking. He mentioned we need to build and rebuild some elements of sales and marketing channels in some geographies, and that's clearly part of our '24 approach. But as far as the longer-term plan for that business, and some of you may know, we acquired that business in a court supervised Chapter 11 bankruptcy process. And fundamentally, we paid down to $400 million for that business. So if we take a couple of years for us to navigate to get this business to be accretive, that's going to obviously be very beneficial to our overall EPS performance. As we march forward in 2025, '26 and beyond. So we're still expecting that business to meet the Bruker ROIC targets, which as some of you may know, is probably leading in the industry. We're targeting still at 20% ROIC levels. So we're very optimistic about this particular business. I've said this publicly as the CFO, I totally supported it, even though it had some dilution for years or a couple of years or so, it's still a very strategic acquisition for Bruker and a critical one in the overall portfolio, I'd say.

I'll actually add a couple of tweaks, namely on cost actions as we own the business, not only do we have more product and road map ideas, where we combine our expertise with what NanoString at. But there also are additional cost opportunities, which we're implementing now with the Bruker management process. So we found from site consolidation, literally going from 5 to 2 sites essentially in the Seattle area, including getting rid of some expensive sites. We don't need to be always downtown with everything. They weigh -- there's like a $5 million to $8 million savings opportunity and the way they have done their cloud computing in an extremely expensive way. There's a way of doing that, that we're implementing now. They had begun and we're continuing the CosMx in-sourcing. They hadn't done this for cost effectiveness, but with an original design firm. So that will probably bring the gross margins for that CosMx product, up by about 15% plus a big step, meaning they're also not really good right now, but they'll be a lot better. We can just make money on consumables. You also have to make it money on instruments. So there's actually additional steps that we didn't know on May 6 when we acquired it out of Chapter 11 that we found through our management process, not only for, hey, better margin rate, gross margin, great or better performance products. That's good pricing power, gross margins, but also really for additional cost out. Now none of that cost out will hit Q3, Q4. These are all things we're doing right now in Seattle primarily and Seattle baffle. And that will begin to show up in Q1 of '25.

Lastly, we only have 30 seconds, Frank, relative to the $310 million in EPS for 25 that you talked about back in May at the update -- are there 2 or 3 things that need to go your way macro-wise for that to happen? Or would you characterize it as like mostly inside of your control especially in the context of the backlog that you're still operating with?

A lot of it is under our control. There's always moving pieces. So I think our medium-term forecast that we gave, May '17 is completely comfortable and confident with that. I hope I was able to illustrate that with the Bruker management process. We have the experience and the tools and a really amazing track record, quite honestly, to build profitable businesses. There is some assumption that China will be a tailwind next year as opposed to a headwind and that biopharma will come back somewhat compared to being -- the two significant headwinds this year are biopharma in China. We assume that those headwinds will abate into -- going into '25. We do need about $1 billion of our business is aftermarket. And that, of course, reacts immediately that doesn't have that 7 months backlog time. So there is some assumption that things -- and then there is also assuming that there is no great deterioration. I'm pretty optimistic that AI is improving. I think we're bottoming out in the LST markets. And there is some assumption that China will not be a stiff headwind next year and biopharma will not be a stiff headwind. Those are the two major headwinds this year.

Super. Well, we'll have to leave it there. Frank, thank you for being here. Gerald, thank you. Everybody have a great day.