Bruker Corporation (BRKR) Earnings Call Transcript & Summary

All right. Great. Let's get started. I'm Puneet Souda. I cover Life Science Tools and Diagnostics here at Leerink. And it's my pleasure to be welcoming Frank Laukien from Bruker. Frank. Great to have you at our conference.

Pleasure to be here. Thanks for the great conference and the view.

All right. Wonderful. So I think you're already expecting the topic, and I'm going to talk about it's on everyone's mind. And when I look at it, first of all, I have to say U.S. academic ecosystem and biomedical research is truly #1 in the world. So one wouldn't want to lose that at the end of the day. So that, I think, has to be in the mind for longer term and for participants. But maybe just on the NIH point, a lot of discussions on February 7 indirect cuts. The news every week is not exactly improving, either if it's Columbia or if it's CSR or if it's NIH intramural layoffs, we just continue to get sort of a series of negative news. But just maybe help us understand how you're framing the U.S. academic challenge here. It's not just NIH. Maybe just help us frame that? And how are you thinking about the orders and the sort of -- what you're seeing in the current quarter, just given the capital equipment -- heavy capital equipment that you have?

Right. Yes. Thank you, Puneet. You can all hear me, right? Yes. Okay. So the way we frame that is that NIH funded revenue is only 3% to 4%, but that's not the right measure. As you said, all of U.S. academia and government spending is about 8% of our revenue. Remember, there's the other 92%. This is U.S. academic spending in post-genomic tools outside the U.S. is strong. China stimulus is stronger than what we had anticipated. I'm sure we'll talk about that as well. Europe is doing well. And of course, nonacademic government is doing well. But back to the elephant in the room, U.S. academia, 8%, we're trying to model what that might mean, I mean it's nice to -- last year, we had 2 significant headwinds. Remember that, we had China as a significant headwind. China was slowing way down. And we also had biopharma slowing way down. So those have both turned into tailwinds. The U.S. academic headwind this year, there is no certainty about how long and how deep that interruption or turbulence will be. I don't think it's not fully knowable. Right now, if you have the most pessimistic scenarios, you get that's the best clickbait out there. I don't necessarily subscribe to that, remodeling it. So maybe to your earlier remark, I think there is no evidence whatsoever from RFK Jr., from the Jay Bhattacharya confirmation hearings, from the Marty Makary confirmation hearings that anybody wants to dismantle the U.S. preeminence in biopharma or in U.S. academic life science and disease research. So I think whatever we're looking at here, I think, is a temporary disruption in turbulence this year. It's pretty significant turbulence right now. gets amplified at conferences like this. But I don't think it's fundamental. I think by my outlook for '26 and beyond doesn't change at all, but '25 is a question mark. For '25, we're presently modeling as the most probable scenario, something like an 8% downturn. So now you've heard the #8 coincidentally twice, 8% downturn on 8% of our revenue. That might be about $30 million this year. that type of revenue headwind we could accommodate within our existing guidance. We might -- this might then -- because I -- you know you have a lot of conservatism built into the guidance, that conservatism and upside, therefore, may be challenged, right? This might not be the year for beats and raises in guidance. And you could also argue that this could be pushing us towards the low end of our guidance. That's what we probably regard as guidance and our is the most probable scenario. Then invariably today at the conference, at another conference yesterday and last week in Boston, people ask, well, what could be the worst-case scenario. So and then you model or you ask what could -- with us with having 7 months plus of backlog and so on, a worst case, but pretty unlikely scenario in our opinion is that but it helps in ring-fencing the issue would be that U.S. academic, that 8% of our revenue, what if that came down 25%. So that's not our guidance, although some people have misinterpreted that, and there are some notes out there that have misconstrued that even though I've been incredibly precise and will again be very precise that that's a good modeling exercise because with that modeling exercise, that's easy numbers. That would take 2% -- that would be a 2% headwind to our revenue. That would be about $75 million or thereabout $70 million, $75 million. That would mean still growth for Bruker. Instead of 5% to 7% constant exchange rate revenue growth this year, it would imply 3% to 5%. And that would still mean very significant margin expansion, hopefully, at or very close to the 140 bps that we've baked in right now because that was a quite conservative number. And that also would still mean very significant EPS growth, perhaps near the low end or near the low end. Because this isn't guidance, we haven't modeled through all these scenarios, and I will not because there is no data to support the 25% or is it 15% or is it 8%, or is it more benign than that. Last but not least, even within this year, there is a timing element. There is going to be some delays, but these budgets have not been taken away from NIH. What are they going to do with these budgets where they have delayed grants? Is there going to be a significant budget flush with orders in August, September. It's also a plausible scenario, but nobody quite knows. For us, admittedly, that would probably make for a strong Q4, but some of that revenue would then also go into the first half of next year. So ironically, it could strengthen next year and weaken '25. It's unclear to me to see -- I don't see any scenario where these budgets complete. I could -- we can imagine anything, but it doesn't seem likely that approved budgets for NIH would not be spent at all, but some of that could shift into next year. So that's, I think, the different angles on this topic.

No, that's very helpful. Maybe on the point of 8% reduction, maybe can you clarify? I mean this is -- isn't this time more different than -- the COVID times, obviously, we saw a sharp decline there, somewhat of a freezing. There weren't these anxiety prone researchers and labs, and they're just a constant sort of drumbeat of negative news. It was just frozen type of situation and people were then trying to return back to the labs. When they did, they ordered those products. So maybe there was a little bit -- it seems like there was more certainty. I just wanted to understand sort of thinking behind the 8%.

Well, in March 2020, there was not more certainty either, right? By later in the year, then there was some more certainty and people began to figure it out, but it took a couple of quarters to get from extreme scenarios to, okay, more a narrower range of scenarios, not that everybody then knew the future, but from this extreme uncertainty, which is somewhat comparable psychologically with what we have right now, this extreme uncertainty and turbulence. In this particular segment, I think there's some analogy. Of course, it's not an exact comparison, which is why the 8% isn't -- this isn't a precise figure. It could be 5%, it could be 12%, but it gives you a range, right? So having said that, a company that has 7 months of backlog. Now 7 months of backlog in revenue really means it's more like 10 months of instruments backlog, and we also have $1 billion per year of revenue that is recurring in consumables and software, service and services. Most of that goes forward, but I understand from, I guess, Techne's CFO made a comment yesterday, and I know from a privately held [ Promega ] that indeed there is a reduction in spending on consumables and life science. That's obviously those guys would notice that first. And that's not surprising, right? That's totally to be expected that, that might be down. I don't know what it is down. Is it down 10% or something like that. I've seen various universities who tell all of their departments, say, we're going to have a hiring freeze for staff, not for faculty necessarily, and every department has to cut their budgets or their spending this year by 5% or by 10%. Well, so that those are reasonable numbers. Nobody is at 40%, by the way. So I don't see that anywhere either. So the numbers that come out of that anecdotal various universities doing cost cutting, it's in that high single-digit range, which again supports a high single-digit assumption. Although it may be dampened for us, maybe for companies with consumables, it is down 8% or 10%, maybe for a company that has a backlog of over 7 months, maybe it's done less than that. This tends to dampen up swings. It also tends to dampen a 1- or 2-quarter dip. If it is 4-quarter dip, which I would not expect because it is correct that these budgets have been approved. I don't think Jay Bhattacharya will get confirmed and say, hey, great, I'm going to give these $4 billion back to the treasury. He'll probably say, but I don't know, once confirmed, which might be soon if Senate hearings look reasonable. Okay, guys, let's get this out. And then we can ask for an increase in spending for -- with a focus on chronic diseases, which is what RFK Jr. wants to tackle, all things that we -- neurodegeneration, autoimmunity, cancer, these are all examples. There's other chronic diseases. All things where our tools would be very, very applicable for disease research. So I think this is completely overblown and this people freaking out and going to whoever gives them the lowest number and the scariest number. I mean this is -- this does attract clicks, but I think it's bull shit. You can quote me on that.

Okay. All right. That's very clear. Okay. So maybe just then switching gears to the potential -- there was some news on the German side in terms of the Chancellor talking about potential incoming German spending -- on the defense spending side and Fusion research in Germany, maybe just help us understand sort of how large that opportunity. It doesn't look like it's going to be this year, but maybe just help us understand sort of the timing of that.

Right. It's going to be for the next 3, 4 years. It's not going to be this year. But at a very high level, indeed, this isn't an approved plan yet. This is the coalition exploratory talks and agreements among the to 2/3 parties that are likely to form the next German governing coalition that should come together in about a month under presumed new Chancellor, Friedrich Merz. Actually, at a very high level, very encouraging that guy because he has also been in industry. He for the first time in 3 decades in Germany, I can complain because I'm from Germany originally, there's really anything that resembles an innovation strategy or an interest in an innovation strategy. It's something that Germany just hasn't had. They don't even have R&D tax credits and things like that, that all other European countries have, the U.S., of course. Anyway, so investment in innovation and R&D was part of this proposed $500 billion, they don't call it stimulus, initially it was geared at defense and beefing up defense spending, which had been neglected for a long time in Germany. And then in infrastructure and innovation, $500 million package -- $500 billion package presumably for the next 4 years that this government will be in power before the next elections. Defense spending is good. Even that might modestly benefit Bruker. We don't talk about it very much, but we don't have anything that shoots but we have stuff that measures. So we have defense and homeland security detection equipment, about a 50 -- that business from being smaller has grown to about $50 million in order run rates because of the Ukraine and that business, which has very good margins, mostly sells into Europe, not only into Germany, into Finland, Czech Republic, Romania, all sorts of customers in Europe that are beefing up their defense detection capabilities. And we think that business could, over the next 3 or 4 years, perhaps go from $50 million to $75 million to $100 million, not hugely moving -- needle moving, but yet another one of these healthy growth drivers at Bruker that comes out of technologies. The second part, which was fusion energy. Why would I care about that? It actually turns out that Bruker in our best segment and its research instrument subsidiary as well as the superconducting materials we make invest has had of the order or more than $100 million cumulatively, not per year of fusion-related technology revenue or contracts. A lot of that goes into ITER, but some of that also goes into German [ Wendelstein ] and similar plasma physics projects that are all fusion related. Some of that goes to China, some of that goes to the U.K., et cetera. So it turns out that if Fusion Energy does take off with more research funding, which was specifically highlighted in this positioning paper, and then the actually strategic proposal that surprised us. I mean, I was thrilled to read it that Merz and his imminent coalition highlighted that Germany wanted to build the first fusion power plant in the world. Wow, that's a cool proposition, right? Now other countries have the same plans, but at least there is a goal, and there presumably would be prioritized funding for that. That could be quite beneficial, not only in Germany, but in Europe and to some extent also the U.S. and Asia for Bruker. As I said right now, that well, $100 million cumulatively. Right now, that's about $25 million or so of revenues per year, again, good margins that we have. That could, of course, very dramatically increase. It won't -- none of that will happen in '25. But again, this research spending and pilot project technology could really be beneficial over the next 4 years. Until 10 billion fusion power plants and 200 of them are being built in Europe, that's going to be quite a while. But even during that ramp-up period as many country programs and then the 40 to 50 start-ups in the world, most of which are pursuing magnetic confinement fusion need. These plasma heating and diverter and cryopumps and superconducting materials tools, that could be a very, very -- just a little bit like semiconductor came up for AI a few years ago. That's a set of technologies that could, over time, also grow. I mean, it could become $100 million, $200 million business over 5 to 10 years. But it's there already. So it was nice. The most imminent thing that I think would benefit us in this new program is the innovation in R&D and they didn't specify proteomics or spatial biology, unfortunately, because it's too high level. That will take a year to turn into specific programs, which ministry gets what and then how do they allocate it. Germany has an excellent track record of being one of the highest biggest investors early on in proteomics and in related technologies. So I think they get the post-genomic era. So it bodes well at a very high level in terms of messaging for programs that will benefit this life science spend on the post-genomic era, this next chapter in life science and disease research for which we've rebuilt the transformation of Bruker as you very well understand.

Yes, indeed. The question around Europe, the other question that we're getting and as you would have expected, just given the challenges that we're seeing in the news in terms of steel, aluminum and other tariffs, to what extent those tariffs extend into instrumentation. You obviously use a lot of, I mean, if I could say, wires and things and capabilities that you have in order to manufacture in Europe. Your presence, I believe, BioSpin CALID presence in manufacturing, correct me if I'm wrong, it's Germany and maybe it's in Switzerland as well. Maybe just help us understand if there were further tariffs, things go back and forth and maybe in some situations. Help us understand the dynamic and how much tariff -- how much exposure do you have there?

Yes. It's multifaceted. So I'll take a couple of minutes. So first of all, Mexico, China doesn't affect us.

Mexico, Canada, you mean?

Mexico, Canada, thank you. Yes, I misspoke. Thank you. Yes, Mexico and Canada doesn't really -- doesn't affect us. China, we have an exceptionally beneficial set up there and we don't manufacture for our final test anything in China. We manufacture in the U.S., in Penang, Malaysia and in Europe, but not in China. So we're not importing anything that's affected by these increasing tariffs by the U.S. on things imported from China. China will have retaliatory tariffs, but of what we, Bruker, sell into China 90% comes from Europe or from Malaysia and only 10% comes from the U.S. and could therefore be subject to the increasing Chinese tariffs on U.S.-made goods. To your Europe question. So the post to truth social that I had seen from a cabinet meeting at some point by Trump was on tariffs on the European Union. So first of all, Switzerland is not part of the European Union, and a very big part, essentially all of our NMR business, some of our MRI and EPR business, although they could also come out of Switzerland very easily, comes from Switzerland, which with their Swiss neutrality does not seem to be implicated because they're not European Union. So that might be a good guy. That's a big chunk. The things that do come out of the European Union, mass spectrometers, X-ray equipment, things that we make mostly in Germany, but also in France and Belgium, that's all European Union. So if you look at tariffs on -- are there any European Union tariffs on scientific equipment made in America and coming into Europe and there are none -- none that I'm aware of. It's not like pickup trucks or SUVs or steel or aluminum. There aren't any. So there shouldn't be any retaliatory tariffs against that. Now it could be broader brush, right? Maybe they'll say, well, equipment coming in from the European Union, that could be very broad and that then could also include Bruker scientific equipment coming into the U.S. So there, I have -- we're not doing anything at the moment because this is also unclear. There, I have reasonable agility because we used to make X-ray equipment in Madison, Wisconsin . Now it all comes from [Carlsberg], Germany, but we could go back. We already have the facility there. And could -- for the U.S. market, I wouldn't move all my global manufacturing, but for the U.S. market, I could move it back to Wisconsin. And mass spectrometry and NMR, NMR comes out of Switzerland, but both of those used to be also made in Massachusetts at our Billerica headquarters site. That's where we did all the MALDI Biotypers. So we -- and we have a big mass spec R&D footprint. So we could bring our mass spec to Massachusetts and if needed, our Swiss NMRs to Massachusetts because we used to do final test over there. That doesn't happen overnight, but it also doesn't take -- so it probably would take maybe $10 million, $20 million in CapEx that are -- we're presently not planning, and it could take us maybe 2 or 3 quarters with rehiring and resetting everything up appropriately. But that's very different from, oh my God, I need a couple of hundred million in a greenfield site, and this will take me 2 or 3 years to execute. So we have reasonable agility there. And we have all the X-ray, NMR, mass spec experience on these sites that we could pull it off, and we still have manufacturing and even FDA regulatory systems in these sites. So we could move it within a few quarters. But we're not doing that right now because you don't know what to solve for, right? Some of these things get talked about, then they get talked down, then maybe they will focus on cars and pickup trucks and aluminum and not on scientific equipment because U.S. scientific equipment faces no tariffs in Europe, in the European Union, at least. So longish answer because there's a lot of moving pieces or a lot of presently nonmoving pieces. Overall, I think that's a pretty favorable and agile setup even with respect to Europe having such a big part in Switzerland.

Yes. What was -- could you just remind us your total European exposure overall? And I don't know if there's a way to fragment that into Germany versus Swiss...

So different ways of saying that maybe that's not what you're asking, but revenue-wise, Europe tends to be about 1/3, right? I mean, very roughly, Europe, the Americas and Asia Pacific are each at 30% to 33%. And then we have like 4%, 5% other Latin America, India, Middle East or so. So that's the revenue exposure in terms of R&D and manufacturing, Europe, but Europe, including Switzerland, which is not European Union, is more than 50% of manufacturing. The European EU only is probably 30% to 40% because Switzerland is a very large piece. By the way, I could also move my mass spec production to Switzerland because the TIMS cartridges and the LCs and a lot of the [ TIMS omni ] development are already happening in Switzerland with Swiss IP and other facilities there also to say, okay, all timsTOFs for the U.S. rather than coming from Bremen, Germany, they would now come from Zurich or near Zurich, Switzerland that also would be a relatively 2-quarter change or so with facilities and experience and know-how, their manufacturing systems, all there, they don't have to be created. Again, this is a fair amount of agility that allows us to respond to whatever the political and tariff developments might be.

Yes. So a number of ways to address, but it's going to take -- it could take some time 2 or 3 quarters, yes.

Yes. But it doesn't take 2 or 3 years. And it doesn't take hundreds of millions. It may take maybe $10 million, $20 million in CapEx to refurbish those sites to set them up for. And I wouldn't move all of production, I would move production for the U.S. market, that's about 23% of our revenue.

Got it. Okay.

Lots of details.

I appreciate all that. And just given the -- since majority of the discussion is still on macro. Just on the CHIPS Act, there's some discussions of sort of rebranding it maybe. Again, it seems like technology is still very much important to White House and given the presence and the dominance of U.S. and that. Maybe just does that -- are you hearing anything on that front? Or does that change any time lines in the way you provide your X-ray equipment into these facilities? And also maybe along the way, if you could talk about AI, if you're seeing any change in the sort of the demand dynamics there that you supply into some of the GPUs, I mean products that end up building that.

I can bundle the answers because they're tightly related. They're closely related to TMSC (sic) [TSMC] and chips and packaging. Let me explain. So this wipe against the CHIPS Act, we've noticed, and quite honestly, we don't know what that means, but we so noted. Very clearly, there was this -- I assume it was at the White House, announcement with the U.S. President and the leadership of TMSC (sic) [TSMC] that TMSC (sic) [TSMC], in addition to their significant investment in Arizona that they've started a few years ago and where we were plugged in, that they spend an extra $100 billions in the U.S. I would assume that's like a 5-year time frame. So it's not going to be over 2 or 3 years, but because they can spend it that fast even, although they are a company that moves at remarkable speed. We are -- that's really good news for Bruker. We are plugged more into TMSC (sic) [TSMC] because they need the most advanced semiconductor metrology equipment for smaller nodes, more layers, more metallic layers in chips, but also more stacking going into 3 dimensions on memory or particularly in this case, GPU chips. They make all the advanced chips for AI, others trying to get into that, but it's almost all TMSC (sic) [TSMC] right now. And they completely -- they -- we were very, very deeply entrenched in that in Taiwan. And also in the advanced packaging because that was one of the sub headlines that people probably didn't pay attention to. As part of that $100 billion investment, they also would bring advanced packaging into the U.S., which is also very good news. There's really only 2 companies, KLA-Tencor and us that have the White Light Interferometry advanced equipment. We think we have the best, which is why we've been selected typically by TMSC (sic) [TSMC] for advanced packaging. So in addition to more chips in the U.S., also bringing advanced packaging, TMSC (sic) [TSMC] packaging, that was music to our ears. As you can imagine, that would bode well for, I don't know, orders maybe '26, '27, deliveries, '27, '28, '29, et cetera. So very, very good trend there. And focusing on TMSC (sic) [TSMC] is smart. I mean, they're far ahead of Samsung, and they're way, way for ahead of Intel and many other chip manufacturers, particularly for this high-performance computing, which supports AI, we see that trend unbroken.

Got it. Listen, given all the questions that have been doing, unfortunately didn't get enough time to touch into or touch base into the proteomics, the [next] post-genomics era, but maybe at a high level.

We still do that.

Yes. You do plenty of that. And that's why we have another conference. We always spend a lot more time on that.

That's right.

Maybe just at a high level, I mean, I saw you at AGBT. One of the products that really was interesting at AGBT for a lot of folks was from the customer side was PaintScape that's an evolution. It's a new innovation in that space. Maybe just talk to us about that and overall if there are any thoughts on the spatial side that you'd like to add?

I mean, Bruker, without any question, I think it's just objectively had by far the most product announcements in spatial biology from further improvements in the CellScape spatial proteomics, which now has much higher flexibility in antibodies that you can select, which has higher throughput and can really do plexing without damaging tissue or epitope, something nobody else can really do. I think we're in the premier product position there. We now have the NanoString channel and CellScape is now growing very rapidly. Big announcements on the Whole Transcriptome from -- on the CosMx from the old NanoString, we still use that brand name. It's just very recognizable within Bruker spatial biology. On the plexing side, being able to scale to a full transcriptome, which is about 19,000 transcripts is absolutely remarkable. The other system on the market really is good at 1,000 to 2,000 and they claim they can do 5,000, but they just doesn't scale their rolling circle amplification or RCA does not scale and becomes very inefficient. When people have shown what they can actually measure -- I mean these are just headline numbers when you measure with a 5,000 or 6,000 set, you don't measure each one, you measure some of them. It turns out we could measure 3 to 5x more for comparable plexing. We've now rolled that to the next level. I think it is almost an unfair advantage now in the spatial transcriptomics battles. And then, yes, PaintScape is a brand new thing. That's a completely new technology. That's the type of technologies academia will invest in because they can answer new cancer biology and infectious disease and just basic cell and genome biology questions. You could never address the genome isn't just a long sequence string, 1D string. It has three-dimensional position. It has 3-dimensional interactions. It has a lot of stuff going on that we all thought, my God, that's got to be cancer and a [indiscernible] or translocation or extracellular DNA, all of a sudden showing up outside the chromosomes and the nucleus turns out, wow, this stuff is all there, all the time, and we really had no idea and some of it will be cancer and some of the immune system will be taken care of, hopefully. And some of that is just new windows into genome biology. So very, very exciting, very big drivers. At some point when we get back to those fundamentals, that bodes really well for that entire Bruker spatial biology, including NanoString to see very good growth and good margin growth with good pricing power because these tools are way ahead or completely unique.

Okay. We'll look forward to that later. But thank you again, Frank.