Bruker Corporation (BRKR) Earnings Call Transcript & Summary

Okay. Welcome, everybody, to the 2024 Stifel Healthcare Conference. I'm Dan Arias. I'm the Life Sciences and Diagnostics Analyst here at the firm. We're kicking things off this morning with Bruker Corporation. We have with us Gerald Herman, Chief Financial Officer. Gerald, I enjoy our conversations on the phone and Zoom when we have them, I find them to be very helpful. So I'm happy to have you here this morning to chat a little bit.

Well, thanks. Delighted to be here. Great to be in New York, as always. Nice to see you.

Yes. For sure. Good finish to the year. I think maybe there's lots of stuff to talk about in Life Sciences, topical and longer term. I think maybe we'll start with some growth commentary we can work our way into China and NIH and vaccines and all those things at some point later. But maybe just as sort of a backdrop. When I think about Bruker, I think about a company that has enjoyed an above-average growth rate for an extended period here. If I go back and look at growth through 2023, it was in the 14%, 15% range, it was mid-teens, which is well above the peer level. And I think 2024 is headed towards something like 4%, which is lower but still above where our peers are coming in for this year. Obviously, tailwinds and headwinds that are in place. Can you just maybe describe where you see the company when you net out the puts and takes, where you see the growth backdrop as being right now?

I think we're still performing well above the market conditions. Our third quarter performance gets us on our Scientific Instruments segment at about 3.8% organic revenue growth, and that's well above what most of the peers are posting even for the third quarter. And if you look at the story more broadly across the full year of '24, and we still expect to be well above the market conditions. And I remind folks that we're -- we have very challenging comps, comparables between the years. And we put up about 11% organic revenue growth in the third quarter '23 so even to put 4% on top of that is pretty substantial. And I think the same thing is true at the fourth quarter. We're guiding to a more modest growth for the fourth quarter of '24, the number that we're looking against is close to 16% organic revenue growth. So the numbers are pretty staggering, relative to some of our peers who I think are looking at down years and then even a modest amount of growth really seems remarkable. So I think if you take a 2-year stack growth for Bruker on '23 and '24, we're still really right in the midpoint of our general medium-term growth guidance. And I think that's what I would think investors should be thinking about is that we're tracking in that range. Our expectation is that we'll always be in that sort of 200 to 300 basis points above the market. And if the market is flat, you see this 4% projected growth for us for '24. And if the market starts to move back up, and we're hopeful that it will, then you start to see even stronger organic revenue growth.

Yes. Okay. If I think about 4Q, there are issues for the industry for sure and China and Biopharma are 2 of them. How much of the revision that you made because you did change the outlook for the finish of the year. How much of that relates to China and how much of that relates to Biopharma?

I would say about 2/3 of the impact of our adjustment on our guidance for '24 is China. The rest of it, I would say, about 1/3 of it is the softening that we see in Biopharma. Now we've been experiencing some of that softness in earlier quarters. But fundamentally, we started to see it sort of accumulate both in the third quarter and our expectation is that will continue in the fourth quarter.

Okay. Can you maybe make a comment on Biopharma? Where are you most represented? That's been an area of the business where if I think about what your strategic vision has been over the years, it has been to increase your exposure to Biopharma because long term, that is the best end market in town. How successful have you been there? Where are things good? Where are things less good there?

Yes, it's a good question. So it's true. I mean our Biopharma exposure is around 15% to 20% depending on the quarter. So relatively low compared to most of our peers. I think that's helpful or was helpful for the last year or 2. I think going forward, our target is to move that up into the 20% to 25% range. And if you look at some of the acquisitions we completed recently, most of them play in that space. So I mean, our target is to be closer to 25% and hopefully beyond that. Where do we play? We're not in bioprocessing. So I think that's important for investors to understand. We're not playing in that whole market space. But we do have a significant amount of opportunity in the drug discovery area, mostly in the research discovery area. We do have some instruments that play in translational research as well, and in some cases, with our MALDI Biotyper, we do have some experience in clinical environments. I would say just generally, we totally agree with you, Dan. We like the Biopharma markets for the long term even if there's a little choppiness at the moment, a little turbulence going on. I think it's a very good market for us. We have high-end instruments that generally play in this discovery world. If you really want to do high-end discovery in protein or even RNA or transcriptome elements, you really need most of our instruments. So we think it's a good space for us, and we need to just keep pushing in that direction.

What is your view of where Biopharma is right now and where they might be 2, 3 quarters. I mean it feels like things are improving. It doesn't feel like there's some step function change coming in the coming quarters, although I'll let you tell me whether you think that's different. So what is your view on just the trajectory of Biopharma into 2025?

Yes. Our view is that it's still struggling. I mean I would say we are not expecting and have not seen any kind of snapback in this area. I think our CEO, Frank Laukien, has noted that we don't expect that to be a snapback to the previous days of Biopharma. I mean, we actually think that the market conditions are going to moderate a little bit for Biopharma going forward. And this is not to make commentary about the new administration coming up. I think just fundamentally, we continue to think that, that will be while it's an important field for most of our research instruments that it will not be quite as strong as it was historically. And I think in our case, looking at positioning our instruments to be more focused on high-end discovery is really, really meaningful. And we've got some really good examples of particularly our timsTOF instruments we can talk about, but those are focused on proteomics specifically. And we've seen very significant uptake by Biopharma in those high-end research discovery areas. So I mean I think we're positive about it, but we are more -- I would say more moderated in terms of what we think the overall return back will be. And that's probably going to be several quarters out.

Yes, sure. Just to make sure that I understand your comment there. So moderating Biopharma from here, is that in your mind because of the comps that you're talking about because it's been stronger in past periods or because you believe end market conditions are set to moderate further into 2025?

It's the latter. We think the end market conditions are going to remain softer for a period of time. How long that is? I mean many of our peers have been talking about snapbacks in early '24 then it was in H2 of '24. Now maybe it's H1 of '25. It's not clear to us quite yet, we're not seeing evidence of signals, but it's going to snap back.

Okay. And the second half of the year, though would be -- there will be time for us to talk all about 2025, but it's November, you can't help but be asking the '25 questions at this point. Do you feel like by the end of the year, you're back in a more stabilized or at least inflected place not with a trajectory that's straight up, but at least headed in the right direction? Or is your view that overall 2025 Biopharma is just not going to be a great year?

I think it's going to be a mixed story. I mean we do have some elements of our business that are really performing quite well, and we can talk more about that. But for example, in the semi metrology area in the industrial, clean tech areas, there's a bunch of other parts of our core business that are performing quite well. So I think fundamentally, it's not a question of whether we'll perform well, I think it's more how about that end market, the Biopharma end market. And I think it's going to take several quarters for that to be realized. Maybe that's the latter part of H2, and that's our -- we don't have any significant signals right now that, that's a snapback out to the first half.

Okay. Let's talk about China. I mean, I look at this clock and it goes by pretty quickly. And if I were to get through 30 minutes and we hadn't touched on China. I don't know if they would let me come back next year. Obviously, there's a lot to be said about what's going on in China. The tariff conversation is most in people's faces, I would say. How do you think about that as a company that has a relatively complex supply chain? You have high ASP items, but you also have market shares where it's not easy to look for alternatives. You serve some of these markets that are potentially disruptible from the conversation. So I threw a lot at you there, but like in your mind, what is the early conversation on what tariffs might mean to Bruker?

Look, I mean, maybe 3 comments here. First, it's a little early for us to project exactly what the tariffs are going to be. We have had some experience with the Trump administration 1.0. And that version was not always clear to us exactly what those tariff structures are going to be. I mean we did have a situation several years back, where we did have to rescrub some of our backlog for some tariff-related items specifically addressing our semi metrology area where we produce really high-end instruments. And there was some concern about it from the U.S. government about largely X-ray-related technologies. Having said that, I mean, we don't have any information so far that gives us any concern or question mark around what's going to happen into the China market. Just to calibrate this, China is about 15% -- a little under 15% of our overall revenue performance. So it's a big market for us, and we'll continue, I think, to be that. We do have instruments even outside of the semi space where particularly for high-end proteomics research work, our instruments are pretty unique. It's not -- there's no local competitor in the Chinese market for some of our instruments. So fundamentally, we think that this will continue to be a tailwind for us going forward. But it's pretty hard to tell right now until we get some better visibility from the Trump administration, on which particular areas of industry, they're going to target and what those tariffs will be, it's just too early, I think, for us to say. I mean we've weathered storms around tariffs historically quite well, I think. So I'm pretty confident we'll do it again. But fundamentally, it's not clear yet.

What is your thought on pricing? And what you -- I mean, one of the concerns is that inflation will tick up as all of this transpires and you'll find yourself in a situation where stuff is just a lot more expensive. Pricing in Life Sciences tends to be in a generally fairly tight range for 100, 200, 300 basis points a year. I think you've been in that range. But I also know that like over the years, one of the things that you guys have tried to do has been smarter about supply chain, kind of integrate these businesses that have been separate at points in the past, so that you have a, I guess, a more holistic view of what's going on. Has that translated to you thinking that you might be able to price differently in certain parts of the portfolio if you needed to or at the end of the day, is like, hey, Dan, look, this is a business where we think we can drive 200 basis points of price regardless of what we have right now.

Yes, I think from a pricing perspective, historically, we were very moderated. Even during inflation periods, our strategy relative to our market position was unless we hold a dominant or a more significant market share in those markets that we should be pretty moderated in our pricing. One of the things that I think we have done really well over the last, I'd say, maybe 3-plus years is to have more individual variable pricing frameworks across the end markets. So it isn't only we may price differently in an area like China versus Europe versus in the United States. So I think we have -- with our higher ASPs and our more innovative instruments, we have a lot more flexibility to be more flexing those prices when we need to. So I think we played that well historically. If you look at 2020 through 2022 during an inflationary period, our overall net price realization was really quite favorable for Bruker historically. And I would expect to see something similar if that's where we land from an inflation perspective going forward. And of course, I think you know this, Dan, we're very conscious of our cost pressures in our supply chain network. We have really taken some major steps I would say, over the last 2-plus years to recalibrate that network. We've got -- we're putting serious downward pressure on that cost structure, and I would expect to continue to do that going forward. So a little different game than it was, I would say, even 2 years ago from where we are today. Our process excellence activities have really helped us to manage those costs. I would say this is particularly relevant for some of these acquisitions we did. We now have a much -- we have a larger business and we have a larger supply chain framework to work with. And so I'm pretty optimistic about our ability to continue to grow gross margin performance from a year-over-year basis, and that's going to drop more down into the operating margin line for Bruker. Inflation or no inflation, that's kind of part of our strategy.

I have a specific investment question related to some of your deals in a minute. But before I go there and leave China, on the stimulus side of the China conversation, you have been one of the companies that's talked about seeing a little bit of something going on there, some activity that's percolating. I think Frank mentioned BioSpin is the area where things have popped up first. Is that -- should we think of the stimulus effect being mostly taking part in BioSpin? Is that going to represent a majority of what you think comes to you? Or are there some CALID and Nano elements that you think come up as well?

Here's what I'd say. I mean, first of all, it's still early. We have communicated with respect to the third quarter that we've seen some activity, meaning mostly RFP arrangements and a lot of queries around our instruments that would be supportive for brand applications in the China stimulus program. We have not seen a significant amount of orders and we did not see a significant amount of orders in the third quarter. So our expectation is that, that's now going to be moving into the fourth quarter or potentially even into the first quarter of 2025. So I think there's lots of activity, I'm talking here about what's in the funnel. But we've not seen that translated actually into real orders in a meaningful way in the third quarter. Hopeful that we'll see more of that in the fourth quarter and certainly into Q1. I would say just generally, our instruments because of the nature of the innovation that is associated with those instruments and our ability to actually -- we don't have a lot of local competition from many of those instruments. We expect that some of our instrument areas will be more sort of heavily weighted in the stimulus program. That was the case in the program in 2023. And there, if you look at it historically, it was mostly our BioSpin business, our X-ray technology business in AXS and our CALID business in the timsTOF proteomics area. And I don't have any data that would suggest that those would not be the cases again in 2024. I mean we already know from the quoting activity that our BioSpin business has got a lot of activity right now. So we'll see how that all translates in Q4 and hopefully Q1.

Is there a risk in your mind that if it takes until the beginning of the year for order activity to really pick up, that the lead times that we know are associated with NMR and the things in BioSpin that, that could take you to the end of the year or to 2026. How do you think about capturing stimulus impact in '25, given multi-quarter lead times?

Yes, it's an important question. The short answer is, yes, we think it could ultimately impact the '25 performance. And again, we're not communicating any guidance or specific outlook right now for '25. But I would say, generally speaking, that would imply that the impact, if we got orders in the fourth quarter of '24 or the first quarter would mostly impact H2 of '25 and maybe give us some tailwind on '26.

What about the lower-end NMR devices? I always remember these examples of some of the smaller magnet systems being used for applications like Honey assessment and wine, et cetera. Or what you -- is what you expect out of BioSpin and '25 more large magnet usage and orders? Or will both sides of the portfolio benefit?

I think both sides will benefit. And I think the -- you're talking about the 4880, which is more of a benchtop NMR system, which has got -- we've had a really good take up with respect to the industrial side of the business. I would say that business continues to perform well. The other one that will give, I think, some tailwind to BioSpin moving forward is we have a really interesting opportunity within the software and automation, digitalization area for both pharma labs, but outside industrial labs as well. This is part of our Chemspeed acquisition and some of the software acquisitions we've completed more recently. And those businesses are growing well above the corporate average. And I think our expectation is that those would continue that going forward. So BioSpin has, I think, a really good opportunity to be a solid grower in '25 even without some of that China stuff.

Okay. So the point is there are smaller systems that could be installed in less than 3 or 4 quarters could help BioSpin, not necessarily in November, December, actually earlier than that?

Right.

Okay. Let's talk about NanoString, and then I'll ask you about some higher level P&L questions and we'll see what we have time for. NanoString was on a $10 million a month trajectory pretty consistently, I'd say, out of the acquisition of yours. Recently, it stepped down. Biopharma demand is a part of that. Can you just maybe comment on what the new trajectory might be into 2025?

So I was in Seattle, which is where NanoString is based earlier last week, I mean, and it's really exciting to see the organization and how it's kind of reengaged coming out of Chapter 11 and the restructuring activities. So the teams, particularly on the R&D side and certainly on the sales and marketing side, very fully charged, I guess, I would say, especially coming out of an opportunity to work with Bruker. So what I'd say is this, you're correct, Dan. I think our target was around $10 million a month for that particular business. We did not hit that target in the third quarter and mostly due to the Biopharma weakness or softness, we see that continuing into the fourth quarter. As far as the prospects for that business, I mean, we're pretty optimistic about that business on a whole range of -- first of all, the synergies related to -- we've created now a spatial biology division, which includes our Canopy business as well as our Acuity, which is a more genomics-based product, focusing on spatial biology. We see significant opportunities there. We're now reestablishing the business in the marketplace. That's true in the U.S., but more particularly now that injunctions have been lifted in Europe, there's real opportunities in Europe. I've had some interactions with a number of customers recently as well, and people are very excited about the collaboration activities between our research capabilities at Bruker and the R&D activities that are going on. So I think the business performance, we'll talk more about that as we march into 2025, and we've seen how the fourth quarter performance is going. But overall, we're very, very positive about that acquisition.

Where does the enthusiasm come from? I realize Frank and Joe are not sitting here with you to help the case. But for anyone who went to AGBT in 2024, even outside of the conversation around litigation or just investment behind the company, the conversation on platform comparisons and competitive strengths and weaknesses was not in favor of NanoString. So what did you guys see that makes you think that you can completely turn around a research base and drive uptake that NanoString wasn't able to?

Yes. I think the -- there's 3 things here. One is we are one of the leading players from an innovation perspective as a company, and I think NanoString will benefit from that. Here, I'm talking about resolutions, sensitivity, plexing our capabilities really in many of our other parts of the business are kind of unparalleled. And I think we're bringing that into the NanoString organization. Secondly, we're picking up a lot of their commercial infrastructure and rebuilding it. So I think where there are elements, for example, the nCounter gene expression business, which has really been kind of starved again, not being judgmental about how the previous management attacked this problem. But we think that, that's a really healthy business, the nCounter part of the NanoString portfolio. and rebuilding it and giving it a dedicated sales force that focuses in this area is really going to make a big difference to it. And then I think just in terms of profitability, this business has been largely restructured coming out of the bankruptcy. And we've done some additional work to actually even with a lower revenue base to kind of hold the operating margin dilution that we had discussed earlier, an EPS dilution we had discussed earlier from NanoString to kind of those levels. We've taken some really important steps to reduce the overall cost base. And I think I mean I was just in Seattle, where we're closing down some of their facilities and moving them and consolidating them. There's a bunch of actions that are underway right now. So we're pretty confident that this business -- and by the way, with respect to sort of the head-to-head comparisons, you're going to see a much more aggressive NanoString coming out of the box and talking about the capabilities of this -- of their technologies. And this is true particularly for CosMx but also for the GeoMx product. So I think stay tuned, there's a lot under the hood that people aren't seeing quite yet, but fundamentally, there's going to be some really exciting developments moving forward. And I do think that there's -- if you look at the competitive player sort of in that space, they're struggling at the moment now without all of the other elements that go into the NanoString story. We're pretty -- we're very positive about it, both from the R&D side, the sales and marketing side and more fundamentally to turn the business around from a profitability perspective.

Okay. That's helpful. Any update on the timing around the case for CosMx in the U.S. that's something you know about?

It's the spring. I mean, I don't have any more detail, but it's the spring of 2025, and we'll have some further feedback on that at that point.

Okay. Okay. Let me hit on just organic growth and EPS into next year with the obvious caveat being that we'll get the full look when you decide to give it either in January or February. But when I look at the model, I say to myself, okay, it feels like there could be like a 3% to 4% organic growth level that maybe you underwrite if you don't believe that stimulus comes into the picture. And that to your point on Biopharma, you don't see a major improvement next year. And then if you do see those things and you start to layer 50 to 100 basis points on top of that, would you disagree with that framework for growth next year?

No, I think it's the right way to think about it. I mean we're putting up this 200 to 300 basis points above the market. If you believe that the overall market is, let's say, flat in 2025, we still anticipate that we're going to be in that 3-plus organic revenue growth profile and layer on top some stimulus potentially from the China program and some recovery eventually in due course on Biopharma. I think you have a good story. Don't forget, we also have some tailwinds that come from our semi business, our industrial clean tech business continues to perform quite well. So we have other elements -- other dimensions that help to move the needle in '25. So we're generally pretty positive about the '25 story, even without the big snapback in Biopharma.

Okay. And then on the bottom line, I think you'll finish the year -- this year right around $2.40. At the Analyst Day, mid-teens EPS growth is one of those things that you kind of tried to orient us around. Is 2025 a year where you think that kind of idea works for you is such that if you look at Street numbers and you look these, there have been various numbers thrown around for 2025 for earnings for good reason. I mean, there have been things coming in and out of that story. But if I just think about $2.40 and 15% EPS growth on that number, is that sort of an underwritable base to begin with?

Yes, I think so. I mean we have been -- so first of all, we've been posting organic operating margin expansion of the 75 to 100 basis points annually. And we've been doing this now for 4-plus years. I don't see any reason why in 2025. We won't be able to continue to deliver that. Add to that, this impact from our acquisitions, as we start to turn those acquisitions from, like, for example, the total acquisition dilution on EPS is $0.15 to $0.20 for '24. We expect that to come down to $0.08 to $0.10 for '25. And then turn to be more accretive in '26. So the 15% plus sort of mid-teens EPS growth looks pretty encouraging. We could also get some favorability on the tax line. We could get some favorability on the financing costs. We are intending to pay down some of our debt over the next few quarters. So all of that, I think, points to something in that range from an EPS perspective. It's going to be a really dynamic profitability growth story going forward from '25 and into '26.

Okay. Look forward to it. That takes us to time. So Gerald, thanks a ton for spending some time on this. I'll tell you, I wish you an early Thanksgiving holiday, if I don't see you before then. We'll talk to you soon.

Thank you as always. Great to talk to you. Thanks again.