Bruker Corp (BRKR) 2002 Q3 法說會逐字稿

Ladies and gentlemen, welcome to your Bruker Daltonics third quarter earnings call conference. My name is Ron, and I will be your coordinator. At this time, all lines are in listen-only mode. Should you require operator assistance while on this call, key star, zero and we will be happy to assist you. As a remainder this call is being record for replay purposes. The host of today’s conference and CFO of Bruker Daltonics, John Hulburt.

Thank you, Ron. Thank you and good afternoon, everyone. I am John Hulburt, Chief Financial Officer for Bruker Daltonics. I'm here with Frank Laukien, our president and CEO. Before we begin the discussion of our third quarter results, I would 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, risk 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 not be rebroadcast, recorded, transcribed or otherwise used without the written consent of Bruker Daltonics.

I will now give you some highlights and some additional explanations of our earnings release a short while ago. Our third quarter and year to date 2002 product revenues were 29.7 million and 83.4 million respectively as compared to 23.6 million and 67.6 million respectively, for the comparable period in 2001. This translates to a year over year product revenue growth rate of 23.2 percent for the third quarter or 20.2 percent for the first nine months on a constant currency basis. With 23 percent revenue growth year to date, we are exceeding our previously stated guidance of product revenue growth for the full year 2002 and in the range of 18 to 22%, and our FX adjusted growth is well within the guidance.

A particular strong component for the quarter and for the nine months ended September 30th, 2002 is our significant increase in operating income before special charges and continued strong EPS growth before special charges. Operating income was 2.7 million for the quarter and 4.4 million for the first nine months as compared to 1 million for the third quarter 2001 and 2.2 million for the first nine months of 2001.

Net income from operations for the quarter was 1.7 million or 3 cents per diluted share compared with .9 million or 2 cents per diluted share for the comparable quarter a year ago. Net income from operations, excluding special charges for the first nine months of 2002, was 3.5 million or 7 cents per diluted share compared with 2.7 million or 5 cents per diluted share for the comparable period in 2001. Again, EBITDA, excluding the restructuring charge, was 4.7 million for the quarter and 11.4 million for the nine months ending September 30th, 2002 respectively, as compared to 2 million for the quarter in 2001 and 6.1 million for the nine months ended September 30th, 2001. This translates to an increase of 131% and 87% respectively. We continue to show significant increases in our operating profitability year over year.

Our breakout of revenue between life science systems revenue, substance detection systems revenue and after market revenue as a percentage of product revenue was 70%, 15%, and 15% respectively for the nine months ended September 30th, 2002. This compares to 75%, 7%, and 18% respectively in 2001. A large increase in substance detection revenue relates to a CBMS contract with the U.S. Department of Defense. Delivery of these CBMS systems is urgent for the army, as the U.S. may be preparing for war. Therefore, in the fourth quarter of this year, we expect much less revenue from this contract. As previously announced, a life science new order bookings growth year over year continues to be above 20% and, therefore, we anticipate that our life science systems revenue will finish strong in the fourth quarter of this year.

A final comment about our cash flow expectations. Now that our facility expansions in Germany and in the United States have been completed, we anticipate that we will begin to be cash flow positive in Q4, 2002 and into 2003. Currently, our cash on hand is 50 million.

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

Thank you, John. This is Frank Laukien. We are, indeed, very pleased with our third quarter operating and financial performance. As mentioned in our early October press release, we continue to see good demand across our life science platforms, our life science systems, new order bookings in the third quarter grew 22% compared to the third quarter a year ago, and this, again, gives us continued good top line visibility for the remainder of this year and, also, into Q1 of 2003.

In the third quarter, we were pleased with the continued excellent acceptance of our ultraflex TOF\TOF systems by new and by repeat customers. During the quarter we did receive an order for more than 10 ultraflex TOF\TOF systems from a large European pharmaceutical company. We are happy to report that our protanear (ph) complete system is paying off and in the third quarter we received a million dollar plus order from a research hospital in Asia for a complete proteomic solution which we call protanear (ph), including our robot, digest and prepare robot, MALDI-TOF TOF, Ion Trap, and, of course, our protein saip (ph) integrated proteomic software that ties all this in together.

Our direct Ion Trap mass spectrometry sales are going nicely worldwide, and as we expected, our fairly knew new product line of electrospray time of life (ph) and electrospray Q Q-TOF systems is experiencing dramatic growth, probably doubling which year, although, as you probably know, from a smaller basis as we are relatively new to this market segment.

Last but not least; we have received initial orders for our new development of proteomics optimized high field, high magnetic field STMS systems for both a high field 9.4 Tesla proteomic STMS system, for a French pharmaceutical customer and a 12 Tesla – first 12 Tesla STMS system, which will go to a major U.S. medical research institution next year.

For 2003, expect continued additional product introduction, primarily at Pittcon (ph) at ASMS, which you are familiar with, and we expect our continued R&D output turning our technologies into new products will continue next year and we will have additional products which will further fuel our growth and our profitability.

Finally, John and myself were very happy to mention that we are in our new offices. We have now moved into our new 90,000 square foot Massachusetts customer demonstration, customer training, R&D manufacturing facility. We will be having our grand opening on Friday, November 15th, in the morning and we cordially invite all shareholders or analysts to this event. Our new and expanded facilities, both in Germany and the U.S. are expected to accommodate our continued growth for the next four to six years, and we believe they are a solid investment in our company as we strive to grow to become eventually a profitable $200 million revenue company.

We would now be happy to answer any of your questions. If Ron, our coordinator, could invite and coordinate questions at this point, please.

Certainly. If you have a question, please key star, one on your touch-tone phone. If you would like to withdraw your question, key star, two. All questions will be taken in the order received. Again, star, one for questions. The first question is from Thomas Flatten (ph) of RBC Capital Markets.

Thomas Flatten (ph): Good afternoon, guys. Congratulations on a good quarter. Couple questions. You mentioned you had some -- the implication was you had some large shipments under the CBMS contract in the third quarter. If we take that out, is that why you are sticking to 22%, even though that doesn't imply sequentially down quarter.

Yeah. Basically, we are trying to, you know, kind of consistently have the quarters fall in line, basically, according to our manufacture and production schedule. Basically, the new orders that continue to come in for life sciences, if the CBMS orders were not there, then it would ship more to the life science.

Thomas Flatten (ph): Any -- could you give us any detail on how big those shipments were in the third quarter.

Basically, they were pretty even for Q2 and a little bit more in Q3. Roughly Q3, ABCDE revenue was about 6.3 million. The CBMS made up probably about 80, 85% of that.

Thomas Flatten (ph): Great. Then, Frank, one quick question for you. On the ultraflex. I'm assuming the 10 systems were for Roche, given the realignment or details you provided earlier. Could you give us a sense of who else is buying a customer segmentation. Is it primarily pharma, primarily academic.

That large pharmaceutical company now how a total of 15 or 16 TOF\TOF, including the latest orders. Not all have been delivered so far. To answer your second question, the customer segmentation is somewhat to our surprise. It is as many academic and nonprofit research institutes like medical schools, research departments of medical schools and so on as they are industrial customers. It is about 50/50 between biotech pharmaceutical companies on the one hand and academia, including medical schools, on the other hand. It is also international. It is just a very strong demand for TOF\TOF worldwide this year

Thomas Flatten (ph): Great. Appreciate it. Thanks.

Our next question is from Larry Mibore (ph) from Robert W. Baird.

Larry Mibore (ph): Thank you. Has the Ion Trap market changed for you since competitor launched a new ion trap, Qtrap?

Larry, I'm sure marketing wise it has changed a little bit. We have seen some Qtrap sales, although so far in package details, in Qstar from the other company. We haven't had any real meaningful direct one-on-one comparisons yet where a customer would take their sample and really measure all the performance parameters on that new competitive product and our esquire 3000plus. We are, obviously, looking forward to that. If you look at published specifications and published details, we, basically, exceed the performance of that new system in every aspect, but, you know, it is being pushed heavily by our competition and they are getting some sales. It is not dramatically changed as far as we can see on the ground. Our sales force has not seen it that much yet. We mostly compete, as you know, with Thermal Finnigan (ph).

Larry Mibore (ph): Right.

That may change. It is early in the ramp up. We will see.

Larry Mibore (ph): I think you are going to get a new competitor in the STMS area next year or early strengthened competitor. How are you preparing for the entrance of a new major competitor in that market?

It seems we will have two competitors. Two larger mass spec companies being involved in STMS. First of all, we think that is a healthy sign for the field as it validates that STMS has become a main stream technology not only for small molecule mass analysis, but we think increasingly also high throughput economic analysis. We think it would get more competitive, but we also believe it will generate more excitement and public and private funding for STMS systems in general. We believe it will be a rapidly growing market in 2003. Obviously, our market share in that field with two additional competitors will be slightly lower than the dominating share we have now. Overall, we think the field will grow and it is a healthy sign ultimately.

We, obviously, -- there are other things that deal with future product plans. You have seen what we have introduced this year already, the small molecule analysis. We have introduced 4.7 Tesla and 7 Tesla, very compact systems with price points that go into the Q-TOF level, even below 500 K. On the other hand, on the more differentiated STMS product line, for the large molecule proteomic application, you need the high field magnets and we are the leading of 9.4 Tesla and 12 Tesla, which are a must for the proteomic applications and our research is not standing still. That's all I can say about next year, I suppose. So we think we're going to be prepared and we think it is going to be an exciting time in STMS.

Larry Mibore (ph): Great. One final question. John, could you give us the other revenue breakdowns besides the 6.3 million for the substance detection group.

Yeah. Basically, if you break it down year to date…

Larry Mibore (ph): For the third quarter, please.

About 18.8 for life science and about 4.4 for after market.

Larry Mibore (ph): Great. Thank you very much.

the next question is from Edward Gelibeck (ph) from Grayson.

Edward Gelibeck (ph): Hey, guys. Bang up quarter. Way to be. Anyway, I just have one quick question. I saw from the numbers you guys actually spoke about, the substance detection went from 7% in on ‘01 to 15% in '02. Do you see that growth in the next four to eight quarters? It doubled from a year ago. What do you see going forward?

No, Ed (ph). Thanks for the comment. This is a one-time large order. Our substance detection business is always a bit lumpier than the other steady growth in bookings for the life science business, for instance. So we would expect that life science, which in the last few years, has shrunk -- excuse me. I misspoke. Our substance detection business, which has shrunk as a percentage of our revenue. It had lower growth than the life science business -- in the future will be able to keep up with the faster growth of our life science business, but we do not expect it to grow further as a percentage of revenue. In fact, for the full year, it will be less than 15% because the fourth quarter, our production, shipment in the fourth quarter will be heavily dominated by life science systems again.

So by the end of the year we will have substance detection, perhaps, in the 10 to 13% range. I don't have an exact figure. That perhaps is what we might expect for next year. So healthy growth in the substance detection but I don't thing it will grow further as a percentage of revenue.

Edward Gelibeck (ph): Okay. One quick thing to add. I apologize for cutting you off. What about existing products you have out as of right now in your mass detection? I'm talking about upgrades and retraining. Apparently, you guys put out a new line of products more recently. Do you see any revenue coming from those?

Does your question relate to substance detection or to -- is it for all systems?

Edward Gelibeck (ph): No. Substance detection.

In the substance detection or defense business we always have very long-term support and service requirements. There is always significant training and consumables business for some of our products, and that continues to be quite healthy and gives a steady baseline. That is a good margin business for us, and our install base, having been in this particular part of the business for nearly 20 years, is, indeed, helping us to pull in some good after market revenue.

Edward Gelibeck (ph): Once again, great job, guys. You should be awarded for your quarter.

the next question is from Jason Williams (ph).

Jason Williams (ph): Yes, thanks. I had two quick questions. Could you get the cash flow from operations number for the quarter as well as the cap ex number.

Yeah. The cap ex year to date is roughly 15-1/2 million. Therefore, it translate for the quarter of about 5.1 million, and cash flow from operations was a use of cash of about 900,000 for the quarter, which brings us year to date of about 8.1 million.

Jason Williams (ph): Great. Thank you so much.

the next question is from Scott Wilken (ph) from SG Cowen.

Scott Wilken (ph): Thanks, guys. Hey, just wondering, Frank, if you would take a swing at '03 guidance.

We're going to do '03 -- I don't want to swing at '03 guidance. I think we want to provide '03 guidance in early January. At this point our thinking is, more or less, what we have seen in '02, but we are not providing formal '03 guidance at this time.

Scott Wilken (ph): When you talked about the restructuring last quarter, you gave preliminary guidance. Are you saying it is appropriate at this point?

That is our goal. The guidance we’ll provide in early January.

Scott Wilken (ph): Just relative to the detection business, it sound like it is coming in in Q4 just under 4 million. You know, you said it is lumpy. Should we expect more -- I should say more contained or moderate growth in '03, or are there some other orders out there that could result in an uptake in growth there?

Well, I think at this point we would rather not speculate yet on the mix of substance detection versus life science for '03 when we are talking about growth numbers in this case, top line and revenue growth numbers, we are looking at the overall product revenue growth, including substance detection, life science and after market.

Scott Wilken (ph): Okay. Just relative to the broader market environment that you are seeing right now, we are sort of honing in on year end. Traditionally we see a lot of use it or lose it. We had some late in the year release of funds. Could you comment on, you know, what you are hearing, what you are seeing from your pharma customers relative to budgets year end or whether there will be some cutbacks there in not getting full funding year end.

Not only relating to pharma but, as you know, Scott (ph), more than 55% of our customer are not industrial. They are academic, medical schools and so on. Generally with various sales in the U.S. and recently in Europe, I think and in Asia, I think the activity in Q4, the interest, the level of sales activity is very, very good. Will we lose some of those orders, will they all close before the end of the year? Hard to say. The activity is really encouraging. That's my finger on the pulse of our sales organization. Can I -- I'm afraid I can't break this out more meaningfully specifically for the pharma industry. I'm not sure I have any real insight as to what their trends are compared to others. I notice the overall trends on three continents, so to speak, we have a busy fourth quarter.

Scott Wilken (ph): Great. Thank you.

the next question is from David Cohen (ph) from Fairlong Capital.

David Cohen (ph): Congrats on an excellent quarter. Could you give depreciation for the quarter? DNA depreciation.

Depreciation year to date is 5.8 million and for the quarter came in about 2.4 million.

David Cohen (ph): If you could talk about the negative cash flow, sort of 2.7 million EBIT, why negative cash flow, I guess, working capital slightly increased. Could you talk a little bit about that?

Basically, most of it relates to our inventory levels. We are -- we actually have certain things in place. Our inventory level jumped up from 12-31 and then to June 30th it jumped up rather quickly, but then in Q3 we have started to put some plans in progress to, basically, have better inventory management. So those plans are actually starting to kind of translate into a little positive on the inventory. The other component is really related to the accounts receivable and we had a big jump in the accounts receivable due from the U.S. Army and at 9-30 it was roughly about 6.5 million. I can say as of today we have collected almost 90% of that. They are just typical slow payers. From a working capital standpoint, the decrease is mainly related to AR and inventory.

David Cohen (ph): Great. Also, the margin is higher than expected. Is this a new base rate we should be thinking about?

Margins are relatively consistent. I think we had a jump from Q2. In Q2 we actually built in additional reserve to some of our slow moving and excess inventory. In Q2 our gross margin actually went down a little bit, and then we have kind of come to a more normal level of about -- we came into the quarter at 52.2.

David Cohen (ph): the operating margin is up quite a lot?

Oh, yeah.

David Cohen (ph): Is this sort of a rate we should view as a base or it was anomaly? It is higher than expected, which is great.

No. We hope it is something we can build on as opposed to a one-time -- we expect to continue to build our operating margins next year and the years to come.

David Cohen (ph): Great. Thank you very much.

As a remainder, star, one for questions. Our next question is from Larry Mibore (ph) from Robert W. Baird.

Larry Mibore (ph): Thank you. John, you finished the quarter with a net cash position of about $30 million, I think, but you showed a net interest expense for the quarter of 16,000.

Yes.

Larry Mibore (ph): How do I get there?

Basically, in our German subsidiary we actually have a line of credit for working capital purposes in Germany of around -- about 5 million, and the interest expense -- we are working on trying to reduce the short-term line of credit over in Germany because the interest short-term debt in Germany is a lot higher than the current interest income we are making on our short-term investments.

Larry Mibore (ph): One $5 million line of credit offset your cash return on almost 50 million in cash?

Exactly. Right now I think the treasury rate is only about 1.75, and interest rates over in Germany short-term debt are around 7 to 8%. Plus, the other thing include indeed that 16 is change, actual gains and losses from foreign currency.

Larry Mibore (ph): And how large was your loss this quarter?

Roughly about 100,000.

Larry Mibore (ph): Okay. Thanks.

This is Frank. That's something that I think is a bit of a Q3 effect. We noticed that ourselves. That's already been taken care of in Q4 already, but I don't think that's a trend.

Larry Mibore (ph): Okay. Thank you.

The next question is from David Cohen (ph) from Fairlong Capital.

David Cohen (ph): One follow up question. I don't thing you commented on the share repurchase and where you stand with it?

We initiated the program at the end of August and the month of September we repurchased just shy under 200,000 shares at an average price of about 498. So just under a million during September. Then we continued to purchase a little bit into October, and we feel the buy-back program is actually doing quite well.

David Cohen (ph): Thank you very much.

The next question is from Thomas Flatten (ph) of RBC Capital Markets

Thomas Flatten (ph): Frank or John, one of the previous questions triggered this. At what point do you think you will get some sustain able leverage out of the R&D line? I know it has been coming down since 2000. When with can we expect that to come in line with the industry norms. You guys are consistently at the high end of that number?

Yeah. In 2000 we are still at about 26, 27%, 2001 at 21%. This year we are 18%. I think the last quarter was close to 17-1/2%. We are seeing the leveraging coming off. We're not going to turn this on a dime. We will bring it down gradually. We expect it to leverage off by a couple percent per year, and at some point probably end up in the 10% range, I think, strategically. That's our further expectation and we are also seeing, even though you didn't ask that question, but we have begun to see, with about a year's time delay compared to R&D, the leveraging off of -- not so much the G&A, but most of the marketing and selling expenses which has kicked in this year in a meaningful way.

Thomas Flatten (ph): Great. Thanks.

the next question is from Scott Wilken (ph) of SG Cowen.

Scott Wilken (ph): I think you just -- look looking for granularity if you could provide it on the Q-TOF business. I think you talked about last quarter around 20 orders for that. Could you maybe comment on how many orders for Q-TOF you have for right now or have year to date. Could you maybe talk about the market environment for that product, you know, Waters results were somewhat disappointing on that front. If you could comment on market demand for Q-TOF.

Okay. We don't want to go into exact Q-TOF orders at this point. As I've said, our combined Electrospray or which consists of bioTOF II which does not have a Q in it, but sort of a high end competitor to the LCT or former Mariner, the Q-TOF version of that, the bioTOF Q, we expect the orders for that will be roughly double what they were last year.

However, having said, that I need to admit we think there is a rather small percentage or market share in that particular market. It is a good growth opportunity for us. We are happy we doubled but we are still in the single digit market share and not high single digits yet. Having said that, that means we are not competing in the majority of those cases yet and probably don't have the best view of the overall activity of the Q-TOF market. So since we get somewhat of a, you know, myopic view, maybe 10% of the cases and winning half of those or so, I'm not sure I can give you a real good feeling how that market is doing overall.

Scott Wilken (ph): Thanks. Maybe one more on the balance sheet. You talked about your plan to improve inventory turns. Do you want to put a stake in the sand in terms of what you thing is the right level for us to look for next year, maybe Q4 and next year on the inventory turns.

I think we will try to do that when we set some DHO and DSO goals with when we provide guidance and go through the internal budgeting process with our board. We are somewhat vague in that we clearly want to improve this. I think there will be some improvements as we start delivering that MOD contract for which we had rather old ABC inventories. That distorts the overall picture anyhow. We have begun to see a slight improvement, but we don't have enough -- we haven't worked on this for enough quarters to give a meaningful statement about, well, this is where we want to be at the end of '03 or ‘04. We intend to do it. It is not growing further. It is actually coming down gradually. We need to get a better feeling.

As you know, but also for the other participants, we have some unusual factors. First of all, a lot of our demo instruments and instruments we have shipped already but, according to our very conservative revenue recognition policy, we have not accepted as revenue. Those are carried as inventory. So as you compare us with other companies, we first have to provide -- or you have to look at a net inventory, taking these things out that other companies do not have in their inventory.

Second of all, we have the other factors, once you are at a comparable level, you have deep manufacturing processes, especially in Germany, where you don't do a lot of outsourcing but do production in house. Last but not least, we have the inventory management for the military and defense business is so dramatically different from the life science business because you really need to support sometimes 15 or 20-year-old processors and still provide service and spare parts for.

I apologize for remaining somewhat qualitative at this point. We intend to be more quantitative with a stake in the ground when we provide '03 guidance.

Scott Wilken (ph): Thank you.

There are no further questions at this time.

All right, ladies and gentlemen. Thank you very much for your participation. Obviously, John Hulburt and myself are available for additional questions at your convenience. Thank you. Bye-bye.