Bruker Corporation (BRKR) Earnings Call Transcript & Summary

All right. Well, thanks, everybody, for being here. And Gerald, thank you so much for being here and joining us. For everybody, I'm Jack Cassel, I'm Nasdaq's Senior Vice President, and excited to have our conversation today about Bruker and everything that's going on and the road ahead. So I know you have a few slides. So maybe I'll start off with you introducing yourself to the audience, and then we can get into the slides and then some Q&A from there.

Sure. Hello, everyone. I'm Gerald Herman. I'm an Executive Vice President and Chief Financial Officer for Bruker Corporation, been with the company about over 7 years and 6-plus years in the CFO position. Excited to share a little bit of the Bruker story with you. I thought I would begin just with kind of a broad overview of the company. Not everyone is familiar with the organization. But fundamentally, this is a slide of Bruker at a glance. I won't highlight too much on this slide. I have just less than a handful of slides to just orient you to the organization. We're about a USD 3.2 billion, USD 3.3 billion business. We have over 11,000 employees. And probably the most dominant part of our organization is kind of the innovation elements that are associated with our instruments and our solutions. And I'll talk a little bit more about that in a moment. On the lower left of the screen, you can see the end market positions that we hold. We have a fairly heavy overweight in the academic and government research markets. This is a global company. And what you can see over on the far right-hand side of the slide, we have a pretty balanced portfolio. Our revenue mix is about 1/3 in the Americas, 1/3 in Europe and about 1/3 in the APAC region. And fundamentally, it's a very well-balanced portfolio. You can see over on the left, we're heavily weighted in academic and government research, but we have an interesting exposure in a number of other fields, some of which are kind of unique for a life science-related tools diagnostics company. We have a relatively modest profile in biopharma. It's about a 15% exposure, relatively small compared to most of our peers. And we do have a unique part of our business, which services and supports the semiconductor industry. There's only one other peer in our peer set that actually has semi exposure. We have mostly QA/QC and R&D-related instruments that go into the semi business. But nevertheless, that's a very interesting positive secular trend business. The other areas that I would highlight is we have a fairly interesting exposure to material science, industrial and clean tech or green tech categories. So these tend to be more sort of insulated from dramatic economic cycles in those categories. We have a number of other pieces you can see here on the screen, but the only other point I wanted to make with respect to introducing you to the company is about 4 years ago, we introduced what we call Project Accelerate. We're now on the 2.0 version of that. But essentially, that identifies 6 areas of high growth from a revenue perspective and high growth from a margin perspective initiatives that we've targeted around specific end markets, and I'll show you those in a moment. The middle of the slide shows that the basic mix for our revenue is now slanted, leaning now more directly towards Project Accelerate 2.0 revenue. It's making up about 58% of our total revenue piece. On this slide, you can see in the middle of the slide, these are those 6 initiatives. They include microbiology, infectious disease, biopharma. These are markets, as I said, generally, that we're targeting specifically as part of our strategy to strengthen the overall growth profile of the business. Over on the left, you can see some of the more unique characteristics of Bruker. We have leading market positions in a number of key areas of the market. We typically are in the #1 or the #2 market share in those markets in which we play. And generally speaking, we have a very, I would say, unique position that our innovation, generally speaking, allows us with some more pricing flexibility and gives us kind of more opportunity, I think, for operating margin growth in the bigger picture. I already mentioned Project Accelerate 2.0. And I think generally speaking, we have strong platforms in a number of key areas. You can see them listed here. On the right-hand side, we speak a lot about what we describe as sort of dynamic disciplined entrepreneurialism. This is kind of the roots of our organization. We're quite decentralized. Most of our organization is focused around innovation. And down at the market level, we're highly entrepreneurial as an organization. I think generally speaking, we've talked quite a bit about, with the Street, some of our financial targets. We have a high profile, I think, on growth for both revenue, and we have great opportunities in the operating margin category. On the revenue side, we've mostly discussed with the Street that because of our innovation capabilities, we expect to be generally at this 200 to 300 basis points above the market growth levels. And I would say, generally, we have delivered on that. Over the last 3 years, we've delivered organic revenue growth of double digits, and we expect to be in that same category on a constant exchange rate basis for 2024. On the other operating margin targets, we are experiencing some initial dilution on a temporary basis from some of our recent strategic acquisitions. But beyond that, we are targeting to move back up to this 19% to 20% operating margin level as we march forward. We are expecting also to be continuing to deliver significant EPS growth. It ranges in between that 15% to 20% depending on the year as we look forward. That's being driven largely by the flip of our more dilutive acquisitions to be more accretive over the next few years as we've turned those businesses to be more profitable. So EPS growth, quite strong. We are also focusing the considerable effort on free cash flow as we look forward. A lot of that has been impacted more recently by some of the more unprofitable acquisitions we picked up, but key strategic acquisitions nonetheless. And also, we've built some buffer inventories that's increased our working capital to protect against some downturns in the marketplace. So we've got some opportunities on the free cash flow area, and we intend to use that free cash flow basically to delever where we are currently to a gross leverage ratio of under 2.5 turns. And that's what we intend to be doing over the next year or so until we get to that sort of 2.5 turns level. And then finally, the company is very proud of its return on invested capital. We've generally been in the 20-plus percent range historically, very high returns, mostly because we've generated a lot of those returns organically through our large and high level of R&D spending as a percentage of revenue. We're usually in about that 10% level. Just turning to the next slide. The other area that we focused pretty significantly on over the last 2-plus years is trying to build the portfolio and transform the portfolio into kind of a leader in what we describe as the post-genomic era. The language is a little bit specific, but we believe that the genome sequencing era is largely over. Most of the benefits that have been derived from sequencing of the genome, while it has been important, it hasn't led really to significant disease biology developments. And we believe that going forward, the post-genomic era is actually where it's going to be at, both from a strategic perspective and from a growth perspective. The company is already very well established in the proteomics area with a number of our instruments. This is the study in research of proteins. And we think that there's a whole range of other elements in the omics field that are going to be driving significant growth moving forward. We also acquired a company in the cellular analysis area, which we believe is going to support a lot of gene and cell therapy moving forward. Some of you may be familiar with Vertex, which is a Boston U.S.-based company that focuses now on cell and gene therapy, specifically for sickle cell disease. We think that cellular analysis is a whole other branch of more precision medicine that will actually be a significant growth driver for us going forward. So I just want to highlight that you'll hear more about the post-genomic era and some of the tools, instruments and solutions that we offer in that area moving forward. A lot of our strategic acquisitions are targeting opportunities in this post-genomic field. And then finally, I've fielded a number of questions here and in other parts of the world where I'm communicating with investors on both the dynamics around the U.S., especially post election, and the China dynamics. And I thought it might be helpful to just address this sort of head-on in my early remarks. So with respect to the United States, I think because we're a U.S.-based company, generally speaking, people assume that we have an outsized proportion of our revenue being driven from U.S.-based activities, and that's actually not true. Almost 70% of our revenue is actually outside of the U.S. You can see here, the U.S. represents only about 28% of our total revenue. And then post election, with the incoming Trump administration, we've fielded a lot of questions about U.S. government funding. As I mentioned earlier to you, we have an outsized weighting towards academic and government research funding. So it's natural for investors to wonder are we going to be more impacted in the event that there's restrictions or reductions in overall government funding. And I highlight the fact that in our definition of academic and government research, there's actually 4 categories that we play in. The first is academic research funding. And that's largely here I'm talking about the Yales, the Harvards, the Queen's Colleges of the world that are largely funded by endowment activities that go along with those universities, not by direct government funding. Then the second category is medical research hospitals and institutions, and this would include institutions like the Max Planck Institute, Dana-Farber Cancer Institute, the Mayo Clinic in the United States. And those institutes are largely privately funded. They're not specifically government funded. And then a third category is philanthropic funding, which many investors aren't aware, but that's probably the fastest-growing basic science research funding mechanism. And that would include the Gates Foundation, the MacArthur Foundation and others that are targeting specifically on basic science research. And finally, the fourth category, which is actually the smallest of all of those, is direct government funding. This is NIH direct funding, National Institute of Health funding, in the United States, for example. And that turns out to be less than 5% of Bruker's overall global revenue. So I think there's been a fair amount of sort of misunderstanding of the overall funding environment. Not only is the U.S. not the largest portion of our funding, the NIH portion is actually a relatively modest portion of our overall revenue profile. And then on the right-hand side, especially under the new incoming Trump administration, there's a lot of conversation about incoming tariffs. And I wanted to clarify with you all that there is a significant sort of misunderstanding about this area as well with respect to Bruker. While it is true that we do have a fair amount of exposure from a revenue perspective into China, it's an important market for us, on a normalized basis, it's about 15% of our overall revenue. Generally speaking, we have navigated through the Trump 1.0 term with not any significant impact from a tariff perspective. So first of all, most of the revenue that we generate in China is not driven by U.S. manufactured products. Most of our products are actually manufactured and distributed out of the European marketplace or in Asia. So roughly under 2% of the total market dynamic for Bruker on China is really coming from the U.S. directly to China. We have no Chinese content in any of our products. We do not manufacture products in China. We have no R&D activity going on in China. So the exposure from a tariff perspective for Bruker is actually relatively small. I'd say, again, less than 2%, certainly an immaterial amount for a company that's driving to about a $3.5 billion business. So it's a relatively small impact. We successfully navigated through some tariff experiences under the earlier Trump administration and expect we'll be able to do that pretty effectively in 2025 once the inauguration actually occurs. So those are my opening remarks to give you a little bit of background and some hopefully helpful context around China and the U.S. And I think I'll move back to answer any questions.

I love that. That was great and comprehensive and took a lot of my questions. So we'll have to figure this out. So maybe we'll start off with just kind of the third quarter trends that we saw. So it was great to see the BSI orders increase the MSDs year-over-year and really increasing sequentially. That said, you had guided towards lower sales and a lower EPS, the majority of that due to FX. Maybe let's start there with just kind of framing the Q3 trends and where we go from there.

Yes. So with respect to the third quarter '24, we had, I think, an excellent quarter in terms of overall organic order bookings performance. As you mentioned, we had what we describe as high mid-single digits, which has translated somewhere in the 6% to 7% organic order bookings growth. That's very significant for us, both sequentially and certainly against the 2023 backdrop. So it's solid. I would say what we experienced there is significant strength in industrial, clean tech, academic and government research end markets, and fairly good strength in the semiconductor markets. We did not see strength in China, and we did not see strength in biopharma. And to answer the second part of your question, we adjusted our guidance for the full year of 2024 down accordingly because these two areas, both China and biopharma softness, were impacting our overall picture. I would say the other thing that was somewhat encouraging about Q3 order performance is we continue to see a pretty good strength in many of the other end markets other than biopharma and China. And maybe one other comment, so far, when you look at the fourth quarter, we're into early December here, at this stage, we've now started to see some further activity from an order perspective on China. Many of our life science tools peers, including Bruker, have been waiting for stimulus program initiatives that were announced sometime back in China for 2024 to really be realized. I would say in the fourth quarter, we started to see activity, from an RFP perspective, begun to be realized in actual orders in the fourth quarter. As I've said kind of privately, we're not calling out a large avalanche of orders expected in the fourth quarter, but it is really quite encouraging for us to see that we've actually started to see some orders from the China stimulus program in the fourth quarter, which we did not see much of at all in the third quarter. So more positive trends, I guess, I would say, particularly in China around orders. And we've also started to see a little bit of improvement in the biopharma area in the early parts of the fourth quarter from an order perspective as well.

Okay. And can you remind everybody how you think about orders and how that feeds into your revenues and kind of what that timing is?

Yes. It's an important point. Because we're working with highly innovative, very developed instruments, generally speaking, this takes anywhere between 2 to 3 quarters for us to actually execute on an order, I mean, depending on the nature of the product. But for example, with respect to the stimulus program, most of the orders that we received in the fourth quarter of '24 will not be executed until the second half of '25. It takes us a quarter, at least 2 to 3 quarters usually, to execute on those orders. So orders we see in Q4 will benefit H2 of '25 and perhaps even into '26. So it's a good indicator that we're starting to see some movement there. And I expect to see some further movement as we move into the first quarter, largely likely around just before the Chinese New Year on the stimulus program.

Okay. And can you talk about timsTOF a little bit and just that competitive environment and what that's like?

Sure. So timsTOF, for those of you that aren't familiar with it, Bruker, one of the points I made earlier was we have kind of a leading market position in proteomics research. This is high-end research in the discovery area of proteins. And for those of you that aren't familiar with it, we, as a population, generally have discovered about 6,000 of 20,000 protein groups that exist in the human body. So very early stages in protein discovery, I would say. So the timsTOF product is a kind of a leading mass spectrometry product that we introduced about 4 or 5 years ago. That product was targeted specifically at proteomics research. It has high sensitivity, high throughput capabilities. And it was a really unique instrument at the time, which kind of leapfrogged over the incumbent in that space. What's happened over the last, say, like 4 years is Bruker has introduced 4 products in that portfolio. And fundamentally, each of them is targeting particular protein elements. One is more of a workhorse product. Another is focused on single-cell protein analysis. Another is focused on specific high-end proteomics research. I would call it sort of the Ferrari of protein discovery elements. And in that space, there has been the incumbent. We call them the red team. You probably know who I'm referring to. This is Thermo Fisher, who has had largely the lion's share of the market in that proteomics research area. And with the timsTOF, we kind of leapfrogged over their existing technology, and they introduced about a year or so ago a more competitive instrument. And we now have what we are describing largely as a 2-horse race, where there are 2 companies that are essentially competing for the strong #1 market position in proteomics research. The way we expect this to go, I mean, just fundamentally, we have seen significant organic revenue growth from the timsTOF portfolio, including the Ultra 2, which is that high-end Ferrari. And we think we've now overtaken the Astral, which was the Thermo instrument, in terms of both features, throughput and capabilities. There will likely be another back and forth between the 2 companies as this all settles out. One way or another, I think it's important for the investors to understand that there's still a significant amount of market growth in the proteomics area, huge total addressable markets. As I said, we've only discovered a small portion of the overall proteins. Once you discover a protein, you need to understand what it does, how it functions, how it turns on and off, how it is modified over time in the human body. So a huge amount of research opportunities going forward, plenty of space for 2 major players to continue to innovate. And I would say, I think, generally speaking, Bruker's got an innovation history. It's kind of in our DNA. We've clearly demonstrated not only with the timsTOF, but it's true with our NMR systems, it's true with our MALDI Biotyper products. I mean, fundamentally, the company has a long rich history of introducing disruptive technologies to kind of take a strong market position and then surround that product with solutions that helps to protect that market position. So it's still early days, I would say, kind of in the timsTOF story, but I would say that we're competing very strongly with the competitive products that are out there at the moment today and expect to continue to introduce new products not only in the short term, but certainly in the long term in this exciting space.

You touched upon, obviously, the acquisitive nature of Bruker, and I think you've done about 10 deals or so up until October. I guess what's your outlook on remaining acquisitive? And maybe walk us through just kind of how you continue that inorganic growth.

Yes. So I mean, I think historically, the company has really driven its organic growth through its own internal growth. There's been a limited number of acquisitions that we did. We did a larger bolus of those acquisitions in 2023/'24. Most of those, they sort of all came together for various different reasons. In some cases, we were analyzing those targets for quite some time, and they just fell into the first or the second quarter of '24. In other cases, we were we were targeting those for multiple years. And finally, we got either the right valuation or we had the right opportunity. And then certainly, the NanoString acquisition, which seemed to be the most interesting and perhaps controversial one on the markets, was one that I would say is more opportunistic. And we didn't really determine the timing on that. We really were excited about that target. It came out of a Chapter 11 reorganization in the United States and the courts determined when that asset was going to be available, not Bruker. So we had to grab that one when we grabbed it. But more fundamentally, I guess what I'd say is we have, I think, made significant important strategic acquisitions. Those acquisitions got completed in 2024. We've publicly stated we're pretty much on a deal diet for the next 3 to 4 quarters. We do have opportunities still in the pipeline. None of those will be exercised fundamentally by Bruker over the next year. There continues to be some really interesting opportunities for us. We'll look at this. I mean, the idea of a deal diet is we have a number of acquisitions which we're absorbing and integrating. I think the integration activities are going on really well right now. But fundamentally, our primary target for the moment is to continue the integration, absorb these businesses into Bruker and delever from the debt that we put up as a result of these acquisitions over the next, let's say, 3 to 4 quarters, get us down into a gross leverage ratio of about 2.5, I mentioned earlier in my slides. So a lot of our free cash flow right now is being targeted towards the delevering process, which will happen over the next year. And after that, if we see important strategic opportunities that we need to pick up, we will pick those up. But I think you're more likely to see a more settled and steady acquisition profile with smaller transactions and more technology-related tuck-ins over the next, let's say, year to 1.5 years and see what the market conditions bring. Certainly, for us, it's a great time for us to be kind of focusing on our business and performing so that the Street sees the performance at this stage.

Great. I will pause here to see if there's any questions from the audience. We've got one here.

Can I ask you why you think now we are at this important point where finally we got into proteomics? I mean we saw this year the Nobel Prize went to the deep mind team at Google with AlphaFold. So there is a recognition of the importance of protein, and you have done this investment well in advance. But what's making it now, finally, we're going to see area of research going?

It's a very good question. I mean I'd say maybe a decade ago, people really thought that genomics was the way forward. That was the "blueprint of life" and that everything important from a biological disease perspective was going to be answered when we finally sequence the genome. Sad to say that provided more linear sequencing, and I don't mean to understate the importance of genomics, but it didn't actually yield significant scientific research development in terms of the overall disease biology elements, I think, unlike proteomics. I think proteomics took a decade while that was going on and very little kind of drug discovery or understanding of proteins occurred. And I think it had a lot to do with the instruments and the visibility into actual proteins. I've been describing this to some investors this week, it's sort of like the Hubble telescope. If you look into the universe, you know there's more stars, you know there's more planets, but you didn't really have the technology and the visibility to actually identify what it is and where it is. And I think this is also true on the proteomics side. So with the introduction of the timsTOF product and now others, including other competitive products, we now have visibility into a number of new protein types. And there's different proteins in the brain versus in the liver. And so there's a whole range of protein discovery opportunities out there right now. Do I think AI -- I mean, I answered the question earlier today with an investor who said, "Well, I mean, why will you need further instruments if AI solves all these and it can develop complex proteins without any real discovery?" Ultimately, everything that goes into your body in terms of drug toxicity and so on will ultimately have to be validated. There's going to need to be work both in the, I would say, high-end proteomics research area and in the drug development and discovery area within biopharma that will have to validate anything that comes out of simulated applications that come off of a computer. So I think over time, and I'm talking here now a decade, there needs to be more significant proteomics research in order to actually develop what I would call meaningful disease biology solutions to address disease biology problems. And what we know is that I think disease biology is largely going to be unlocked from proteins. They are a key building block in the human body, whether it's to transport vaccines to a target or whether it's oncology-related elements to bring targeted drugs to specific tumors. Whatever it is, I think you're going to see proteins or elements of proteins are going to be a key element in that. So that's why we're fundamentally quite positive about that as a significant growth driver. And I had in some of my previous slides, I don't know if I can go back to this, but you can see that in the middle of this slide, there's a whole range of other proteomics-related elements. There's protein modifications, there's glycoproteins, there's plasma proteins. We're just starting to unlock the subcategories of proteomics in a deep way. And then I think the other acquisition that we did around spatial and/or cellular analysis is yet another element that's connected to cell and gene therapy. I think these are important fields going forward, but will yield something significant from a disease biology perspective. And we want and believe that we are one of the leading players in this space right now. And certainly, a lot of our strategic acquisitions recently and our organic internal research and development activities are targeting this whole space.

Great. We're out of time here, but any other burning last questions before lunch? Cool. All right. Well, with that, we'll conclude.

Well, thank you very much.

Gerald, great job. Thank you all.