Bruker Corp (BRKR) 2002 Q2 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the second quarter earnings call of Bruker Daltonics conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one, on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Hulburt, you may begin your conference, sir.

Thank you.

Thank you and good morning, everyone.

I'm John Hulburt, the Chief Financial Officer of Bruker Daltonics. Calling in today on a trip to Europe is Frank Laukien, our President and CEO. Before we begin the discussion of our second quarter results, I'd like to review our safe harbor statement.

This discussion will include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, including but not limited to risks and uncertainties relating to technological approaches, product development, manufacturing, market acceptance, cost and pricing of our products, dependence on collaborative partners, suppliers, competition, intellectual property, litigation and other risk factors discussed from time to time in our filings with the Securities and Exchange Commission. We expressly disclaim any obligation to release publicly any revisions to any forward-looking statements. These statements may be not be rebroadcast, recorded, transcribed or otherwise used without the written consent of Bruker Daltonics.

As most of the call participants have read our earnings from yesterday, I'll just go over some of the highlights, and a few additional explanations. As previously announced, our life science new water bookings for the second quarter showed a growth rate of approximately 22 percent year over year. Our second quarter 2002 product revenues came in at 27.9 million, as compared to 22.3 million a year ago, which translates to a growth rate of 25 percent. On a constant currency basis, our second quarter 2002 product revenues would have been approximately 26.9 million, corresponding to a product revenue growth of 21 percent, in line with our previously stated revised guidance of 18 to 22 percent for the full year 2002.

Also previously announced during the second quarter, we incurred a restructuring charge related to our cost cutting program and personnel reduction in our U.S. and German operations. The total charge for the second quarter was 1.5 million pre-tax. Operating earnings excluding this special charge was 1.9 million, as compared to .6 million for the second quarter of 2001. EBITDA, excluding the restructuring charge, was 3.7 million for the quarter, and 6.8 million for the six months ended June 30th, 2002, as compared to 1.9 million for the comparable second quarter in 2001, and 4.1 million for the six months ended June 30th, 2001. This translates into an increase of 96 percent and 66 percent respectively.

We continue to show significant increases in our operating profitability year over year. During the quarter we analyzed our investments in several proteomics content companies, and reduced the carrying value of our investments by approximately 4.4 million pre-tax. Without the investment write-down, and the restructuring charge, our diluted cash operating EPS would have been two cents per share for the second quarter, or four cents for the first six months of the year. We expect that our recently announced cost cutting program will enable us to meet our previously stated cash operating EPS goals of eight to ten cents per share for the full year 2002, and 12 to 15 cents per share for the full year 2003.

We maintain our guidance of 18 to 22 percent top line revenue growth for the full year 2002. Also during the quarter we refined our inventory reserve methodology for slow moving and excess inventory levels, and increased the current reserve by approximately .7 million. This charge is reflected in across the sales for the quarter. This charge was offset by the reduction in our patent litigation accrual of .8 million, shown as the separate line item in our income statement.

I would like now to turn the discussion over to Frank to talk about certain highlights and new developments that transpired during the quarter and our current expectations for the year 2002.

Thanks, John. This is Frank Laukien.

A few comments before we open the Q&A session. I believe we have proven now and again that our organic growth is really quite resilient, even in a weak economy and we remain optimistic about our future growth prospects. Fundamentally, our life sciences research and pharmo-biotech markets have healthy, long-term trends and we continue to see strong funding for our life science systems.

We continue to be one of the fastest growing life science tools companies and certainly in terms of organic growth, and I'm also very pleased with our solid improvement in operating earnings and EBITDA before the special charges that John has discussed in the second quarter and really in the first half of 2002.

Our research and development investment and our SG&A expenses are continuing to decline as a percentage of revenue, as has really been part of our plan, financial plan for steady, significant improvements in cash operating earnings for some time.

Nevertheless, our R&D investment in Q2 at 18 percent is still quite high and obviously we continue to invest in our future products and growth.

Over time we expect our research and development investment to leverage off to the 10 to 12 percent of revenue range and we also expect further leverage from declining SG&A expenses as a percentage of our revenue, as a percentage of our growing revenue.

As you already know from previous press releases, at ASMS in early June 2002 our ongoing R&D investment has again resulted in several important new product introductions. Demand for our life science systems continues to show robust growth overall and the order bookings are in good shape, and we have more and very good top line visibility now for the third and the fourth also even into parts of the fourth quarter for 2002.

So given our continued strong organic growth in revenue and our significant up improvements in operating earnings, we are disappointed by our disproportionate decline in stock price since the beginning of this year.

We believe that it was triggered in part by one very large stock sale by a single institutional investor, previously our largest investor, as well as perhaps, and this is admittedly somewhat speculative, but perhaps by incorrect short seller assumptions that our growth rate, perhaps like that of other companies, would drop dramatically, which they have obviously come down somewhat but they have not dropped dramatically, given the present environment.

So based on our actual results and continued guidance, we hope that people will take an independent look at our top line and operating earnings growth relative to our present valuations.

Additional events during the quarter, you have seen recently our press release, joint press release with Waters in which Waters was granted a sub license to an important IP portfolio affecting MALDI-TOF mass spectrometry. We have not disclosed financial details on that and, obviously, some of the financial benefits of the sublicense in both the up-front payment and ongoing royalties. We will also share that with Indiana University and with .

And with that introduction, we'd be happy to answer some of your questions at this time. So I would like to open the Q&A session of this call.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one, on your telephone keypad. We'll pause for a moment to compile the Q&A roster.

Your first question comes from the line of Matt Geller, CIBC.

Hi Frank.

Can you break down your business and talk about which ones do you think have the most growth potential going forward, which ones you're most concerned about? And in terms of revenues, you know what programs you're looking at in terms of, you know, optimizing growth?

Yes. Hi Matt.

Really, you know in last year and so on, as you knew, we were a little bit concerned about our or business. Obviously, this year this business is healthy and, accordingly, also, a slightly higher percentage of sales again. As always, that business has a lot of opportunities, but growth is somewhat unpredictable and lumpy. However, for the remainder of the year, as we have some big contracts that we are delivering, we think it's going to do very well. It has a lot of upside for the future, as we all know, but it's hard to predict.

I think the life science systems business really all of our - the MALDI-TOFs, the and the Ion Trap, there isn't one that stands out as doing particularly much better than the others or more poorly than the others. Obviously our growth rate is highest right now in , but that is merely due to the fact that we're fairly new to this market segment and, therefore, start from a small basis.

And our - last but not least, our consumables and service, our market shares, if you like, are growing. We expect them to grow somewhat faster than our composite growth rate into the next few years and become eventually more than 20 percent of our revenue in the next one or two years.

Great. Thanks a lot, Frank.

You're welcome, Matt.

Your next question comes from the line of Larry Neibor, Robert W. Baird.

Good morning. Hello?

Hi.

Hi. systems sales quarter was

Larry, we have trouble hearing you. There

Hello? Can you?

Go ahead Larry please.

Mr. Laukien, there's a lot of static coming off of that participant's line.

OK.

Your next question comes from the line of Kenneth Goldman, Lehman Brothers.

Good morning Frank. You gave a six-month breakdown of the three different business segments as a percentage of sales. And it looks to us that sequentially lifelines business did not grow significantly. Year-over-year, we have it at approximately nine percent. Could you comment on that, and specifically tell us if there are any competitive issues where you think perhaps one of the mass spec systems is seeing more competition or slowing down?

I don't follow the percentage calculation of the ...

Well, I think you said that, I think in a press release you said that at six months the percentages of your sales life science systems section and aftermarket had changed somewhat, and that we get for the quarter that as a percentage of sales life sciences were approximately 70 percent.

For the first half they were, life science systems were 73 percent of our overall sales, and that compares to 75 percent for the comparable half year period last year.

Great. So we did our calculations and again, I'm asking if that's correct. So we get for this quarter life science sales were approximately 70 percent of total sales, and it seems as though the pace of life science sales, if that is correct, that the pace of the life science sales may have slowed?

I don't have the exact percentage for the quarter. Our sales of life science sales obviously is in the, I mean obviously our sales of life science sales in our guidance we have reduced that previously, from the mid 20's to around 20 percent. And I believe that in the quarter as well as in during the first half year the, our life science sales are in, are comparable to our overall guidance for growth, although I don't have an exact figure. But I just don't understand the nine percent figure.

Yes. Our life science product revenue for the six months, 2002, grew at about 19 percent compared to the six months for 2001. So it's pretty much in line with kind of what of our guidance of 18 to 22 percent top line revenue growth. Because for the six months we would have been 2001 about 33 million in life science product revenue, as compared to the 39 and a half million for the six months 2002.

OK. I'll take a look at it and if I need, speak to you offline. Thanks.

OK, thanks.

Your next question comes from the line of , Robert W. Baird.

Hi, can you hear me better this time?

Yes, there you go .

Fantastic. Could you give us some idea of what, excuse me, what your cash use was in the quarter, and your forecast for cash use for the rest of the year?

Yes , from a cash flow perspective, we've just finished up, basically the expansion in Bremen, Germany is possibly about 98 percent complete. So we had some finishing up expenses there. And then the new U.S. facility, which is expected to be finished near the, sometime the end of August, so our, we basically for the six months we've used in cap ex about, you know, 10.3 million related to basically expansion. And then in, from a cash flow perspective from operations, basically the cap, the cash flow from operations was mainly driven by inventories.

And what was the operating cash flow in the quarter?

For the year-to-date we have a loss of about 7.1 and I can get back to you on what the cash flow from operations for the quarter was.

Okay. And getting back to the previous question, you know, it seemed like your life science sales were up about 28 percent in the first quarter, so if you get to 19 percent growth for the year-to-date that means your growth in life science sales in the second quarter was somewhere around 10 percent. So I was wondering why your shipments trailed your bookings in the quarter.

Are you comparing Q1 2002 to Q2 2002, Q1 and Q2 of 2002?

Right, and the last -- well, in the conference call for the first quarter your life sciences growth rate in the high 20s was announced and now year-to-date it's 19 percent, so, I mean --

As you may know, we have one factory that produces all types of systems, whether they're for life science systems, sales or for ABC systems. And in the first quarter we had virtually no major ABC systems, whereas in the second quarter, according to for the U.S. Army customer, the Department of Defense order, we had rather significant shipments to the U.S. Department of Defense.

So our overall output for the factor and what we shipped grows somewhat steadily from quarter to quarter. How the mix looks in a given quarter I think that that can obviously vary quite a bit as the factory output doesn't vary greatly from quarter to quarter, but the mix of what we actually ship depends obviously on when orders come in and when deliveries are expected.

So it is correct that in the second quarter there was a significant ABC systems component to our revenue simply because we needed to ship to those customers, to the Department of Defense on a timely basis from the same factory that does those types of systems.

Do your recent capital expenditures address that issue, so that you can ship on a timely fashion to both life science and substance detection customers?

Well, we are shipping on a timely basis to both types of customers. We just plan our capacity and our revenue so that what we manufacture, final test and ship during a quarter goes in line roughly with our financial plan.

The new facilities don't address really the fact that the mix between different types of systems will vary from quarter to quarter. The new facilities just allow us over time to expand to overall larger capacity, not only in manufacturing and production but, of course, also in research and development applications and so on.

Okay. One final question, please. Could you give us some idea of the breakdown in terms of growth by geography and by customer type for the quarter for your life science sales?

I can certainly give you that in terms of - most easily in terms of new order bookings.

OK.

We've had very strong sales from in this - in new order bookings, I should say, in the second quarter from Asia; particularly from Japan, with growth in the U.S. somewhat weaker and in Europe sort of in-between. I had previously discussed that our - geographically, in terms of customer - I'm sorry, the second part of your question - we had last -- year-to-date so far for the first six months, the percentage of new order bookings coming from industry, from biotech life science customers, has dropped from about 42 percent last year for the full year versus about 37 percent for the half-year so far. Whereas universities, medical schools and government have grown accordingly from last year about 58 percent altogether for the full year to this year closer to 64 percent for the half-year.

OK. One more follow-up, please.

Sure.

It looks as if the growth and funding for academic research, at least in the U.S., is probably going to slow from the 15 percent type growth rate we've been seeing for the past few years once we get into fiscal year '04. How do you propose to offset that slowdown in funding?

Yeah. I mean we obviously - we don't just live from the NIH budget or something like that. First of all, there's a very large international component. in Asia we see accelerating funding; in Europe the funding is very strong. And in the U.S. it's the number that you just quoted.

I wonder whether that also - I mean there's also certainly budgets that are becoming - descent budgets not only for descent equipment, but also for much more fundamental biological and similar research. So, overall, we at least have not seen a significant impact on that.

And obviously, moreover, it's not only the total budget and the total budget increase that's available, but, more importantly, also what is being spent on. And generally our high information content , proteomics, small molecule systems have continued to see significant growth even as, you know, overall R&D spending, including industrial R&D spending of the life sciences, presumably have slowed down somewhat.

Great. Thank you.

You're welcome, .

Your next question comes from the line of , .

Good morning. It's , .

One quick housekeeping question. The write-down charge of $4.4 million, is the entire amount of that charge included in the interest and other income line?

Yes it is.

OK, thank you.

Your next question comes from the line of Sarah Michelmore, SG Cowen.

Good morning, Frank. Good morning, John.

Good morning, Sarah.

John, if you could just address on the balance sheet what was behind the jump in receivables and the drop in inventories?

Yeah. You mean the jump in inventories?

That's correct. I'm sorry.

Yeah. With the, we'll start with the accounts receivable first. Accounts receivable actually from a timing issue at the very last week of June we had some shipments to U.S. Army Department of Defense of about three and a half million, which made up probably the big change in accounts receivable. But also the swing from 331 to 630 in the exchange rates, there was probably about a 12 to 13 percent swing, so basically there's about two and a half million in accounts receivable that is purely driven by foreign currency translation.

The inventory swing of about 5.1 million, basically 4.1 million was pure currency because more than half our inventory is over in our German subsidiaries, denominated in euro. So basically when you convert the balance sheet, it doesn't really have an effect on your P&L, but it basically can change, strengthen or weaken the balance sheet, you know, depending on where the euro goes. So most of the big change in those key numbers was purely foreign currency translation driven.

OK. That's very helpful. Was hoping you could talk about NIH spending. We had heard from other manufacturers during there in Q2 that some of the budget distribution, if you will, was slower to get to the customers than they had expected. I was wondering if you had seen any of that during the quarter?

Yes. It's not such, because it's one of many, you know, buckets of funding, we don't really discern those trends clearly. I can't exclude that it may have played a role, I mean, we stated that, you know, in the second quarter qualitatively at least, new order bookings in the U.S. were slower, and in Asia they were very hot, you know, they grew faster, and in Europe somewhat in between. It may be that NIH budget may have played a role on that, but not something very, it's not a very significant fact for us.

OK. And can you talk about, you know, Frank, what do you, what do you think about the U.S. bookings? I mean, is this something that you expect to sort of drag on for a few quarters, or is there any, you know, signs of things lifting near term, or before the end of the year?

I, you know, I think we're obviously observing that quarter-to-quarter. There'll be the interest at ASMS and after ASMS, which is an international conference, but of course particularly dominated by U.S. customers, seem very strong. And, you know, I mean funded interest. So we are actually somewhat optimistic for the third and fourth quarter, for U.S. bookings as well. And for growth in U.S. bookings, but it's very difficult to predict the timing of these things.

So I don't really have a, you know, a prediction for any particular segment. Sometimes you can't control that from quarter to quarter. But more in the aggregate our overall, our overall expectation worldwide for worldwide order bookings is such that they would support the, you know, the top line guidance that we have, that we have given previously, and repeated here in this call.

OK. As part of the change in the GeneProt contract that you guys negotiated, when are you expecting to do the upgrades in the Swiss facility? Is there a time period you're looking to do that?

Yes. GeneProt has requested that this occur in two windows that are whatever, that work well with their project they're doing with Novartis and other customers. So we'll do about half of those upgrades just at the kind of just around the September, October, so I cannot predict whether it will be Q3 or Q4 or a little of both revenue, and the remainder will be done in Q1 of next year.

Okay.

So about half perhaps spread over Q3 and Q4 and the other half approximately in Q1 of '03.

Great. That's helpful. And my last question, I think on previous calls you have talked about the number of orders that you've received for the Ultraflex TOF TOF and also the bioTOF Q and working towards your targets for the year.

Yes, let me just -- starting with the bioTOF II and bioTOF Q we have reached approximately our order level of last year, so starting from a lower level but we expect to approximately double our ElectroSpray TOF and Q TOF business this year and on MALDI we have this year, despite the cancellation of the New Jersey TOF TOF order, which was then converted, as you recall, into this upgrade for Geneva, this year we have already sold of the order about 30 Ultraflex systems.

Okay, great. Thanks so much.

Okay.

If you would like to ask a question at this time, please press star then the number one on your telephone keypad.

Your next question comes from the line of Paul , Thomas Weisel Partners.

Hi, Frank. On the gross margin it went down. Could you address that?

Yeah, Paul, this is John Hulbert.

Margins went down purely as when we looked at our inventory we refined our inventory reserve methodology and we increased the current inventory reserve by about .7 million and that went straight through the cost of sales. So margins was about 50 percent. If you included the .7 we'd be in the range of where we historically are, around 52 percent.

We actually expect this to be a one-time effect.

Okay. And, Frank, the other question is in a market, which does not favor a small cap and companies that used to get big revenue multiples and in this type of environment what are your thoughts about share repurchases, other options you might have?

Yeah, that's something we're considering and observing, quite candidly. Obviously there have been a number of announcements, , , others. And we're observing whether that has any effect and if we think this is more than a one-day prop and effect. We are considering that. We have not made any decisions on that but we are considering that. We've been asked about that not only by you, Paul, but by others and it's something that we're observing right now and that we would consider potentially.

Okay, thank you.

Your next question comes from the line of Thomas , RVC Capital Markets.

Good morning. Just a couple of quick follow-up questions. Frank, on the Ultraflex numbers you gave, are those the dual TOF or are those single and dual TOF numbers you put out there?

That is both. The majority of those are TOF TOF.

Okay. And then one quick question for John. John, I might have missed this earlier, but could you provide some more detail around the restructuring and what kind of impact that's going to have in Q3, Q4? Is it all done? And more specifically...

Let me just follow up actually on your previous question. Also the number that I had quoted was at the end of June, obviously, as opposed to, you know, right now.

OK.

Yeah, for the restructuring, basically, you know all the people have been notified. And basically have the reserve on the books of about $1.5 million. Most of those people will be gone by - you know have been gone at the end of July. And then some of them will be gone in August.

So Q3 won't have a major effect, but we'll start to see improvement into Q4. And then for the year 2003 we expect about a $2.5 to $3 million cost savings from the reduction in headcount.

And that...

Let me make an additional comment here. In the U.S., obviously that process is faster. In Germany, that process takes a longer time. And obviously more individuals percentage-wise about the same, but more individuals are involved in Germany, where it takes longer. It will take, to some extent, going into Q4 until the headcount reduction takes full effect.

Great. And those $2.5 to $3 million in '03, are they fairly evenly split between SG&A and R&D, or is it weighted significantly one way or the other?

It's really across the organization. We haven't really singled out any particular function, but really just on a out throughout the organization. It's not focused on one area in particular.

Great, thank you.

It probably has had the least effect, if any, on marketing and sales, because marketing and sales, if you like, was not effected. Everything else was about evenly effected: production, cost of s ales, R&D, administrative.

Great, thank you.

marketing and sales.

Your next question comes from the line of , .

Good morning, Frank and John.

Could you guys - Frank, you sort of touched on this, but could you give maybe a more detailed analysis of the competitive environment in the Ion Trap and the TOF MALDI-TOF business segments? Now there seems to be a lot of concern in the marketplace around those competitive environments there.

Thank you.

Thank you, .

The Trap market continues to be quite healthy for us and it continues to grow in that. Obviously, there is, you know, some new product announcements that may play - you know presumably will play a role in this market that came out at . But we haven't, you know, seen any, whatever, freezing of the market until people evaluate new models or anything like that.

So the Trap market has looked good for us. I believe it also continues to look good for our traditional Trap competitors as far as we can see.

On the TOF/TOF side, the second part of your question, obviously we've - our sales of these systems are exceeding our expectations in terms of numbers from, you know, when we first introduced the product. But, quite candidly, we understand that's probably the product, and is doing also well with that. So it may just be that the TOF/TOF market is growing - has grown and established itself faster overall than what we had anticipated probably a year ago.

And you know I think that's just a very healthy market. And I think that actually both TOF/TOF competitors are probably pretty satisfied with how that market is developing.

And, Frank, how about the cannibalization in the TOF/TOF off our own business?

Yes. There is, as you know, our ultraflex TOF only has replaced eventually our previous high-end reflex product line. And so it's actually for us, it works out for the product philosophy, it works out really well in that customers who would have previously budgeted for a high-end quality TOF can get that now without being excluded from going, you know, upgrading that to become a TOF/TOF later on. There undoubtedly are some customers that right away raise more budgets and might go for a TOF/TOF, so there may be some cannibalization going on. But overall clearly the high-end MALDI-TOF and MALDI-TOF/TOF segments, which we look at as one, as one area overall it has, it's very, very healthy, and has very nice growth rates right now.

And if there is any cannibalization going on Frank, how does that affect our gross margins?

Certainly gross margins on a TOF/TOF would be, you know, would be comparable or better than on a, on a, on a TOF only.

OK. Great. Thank you gentlemen.

Thank you .

Your last question comes from the line of from Stevens.

Hey guys. Actually my question was mostly answered. I just want to be, make sure I understand though. It sounds like the reduction of headcount that you have, that you've put forth has mostly been felt in non-sales and marketing operations. Can you just give a rough number for the, for the number of employees that you have that are in sales and marketing and service at this time?

First of all your assumption is correct, yes, and in service we put into another bucket, but in marketing and sales, generally we have approximately 90 to 100 people.

And that number is roughly unchanged. OK, thanks very much.

Right.

There are no further questions at this time. Mr. Laukien, you may proceed with your closing remarks sir.

We have no further closing remarks at this time, and we thank you all for participating in this earnings call. Thank you and goodbye.

This now concludes today's conference call. You may all disconnect.