Bruker Corp (BRKR) 2003 Q1 法說會逐字稿

Bruker Deltonics First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Christina and I will be your coordinator for today's call. If at any time during the call you require assistance, please press star zero, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded.

I would now like to turn the program to your host for today's call, Mr. John Hulburt, Chief Financial Officer, Bruker Deltonics. Please proceed, sir.

Thank you. Thank you, and good morning, everyone. John Hulburt, CFO, Bruker Deltonics. I'm here with Frank Laukien, President and CEO. As usual, before we begin the discussion of our first 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 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 Deltonics.

Now I'd like to give you some highlights and additional explanations from our earnings release, issued yesterday afternoon. Our first quarter, 2003, product revenues were $34.1m, as compared to $25.7m for the comparable period in 2002. This translates to a product revenue growth of 32.7% for the quarter, or 18.8% for the quarter on a constant currency basis. Gross margins for the first quarter, 2003, were 50.6%, as compared to 51.9% for the entire year 2002. We incurred approximately 1.5% higher cost of goods sold as a result of foreign currency. While we have a reasonable natural bottom line hedge between the Euro and the U.S. dollar, it is not perfect, and when both currencies undergo major relative changes, as we have seen, is an effect on our cost of goods sold. Approximately 55% of our overall revenue is denominated in Euro currency, while more than 70% of our costs are dominated in Euros. Therefore, with the significant 22% strengthening of the Euro to the U.S. dollar, from Q1, '03, versus Q1 of '02, it had a gross margin impact of approximately 1.5%.

Similarly, our R&D expenses were approximately $6.3m, or 18.5% of revenue. Excluding the foreign currency, it would have been around 17.6%. SG&A was relatively currency-neutral, as most of our G&A expenses are normally in U.S. dollars.

Included in our first quarter, 2003, operating loss is approximately $1.9m of first quarter costs related to the expected merger of Bruker Deltonics and Bruker AXS, which was announced on April 7th, just a short time ago, for which we filed the preliminary joint proxy/prospectus, on a form S4, with the SEC last week.

Excluding these first quarter, 2003, merger-related costs, our EBITDA, excluding the costs for Q1, '03, was $3.9m, as compared to an EBITDA, Q1, 2002, of $3m. This translates to an increase of 28%.

Our U.S. GAAP net loss for the quarter was $1.1m, or two cents per diluted share, compared with a net income of $.9m, or two cents per diluted share, for Q1, 2002. Net income, excluding the merger-related costs in 2003, was $.8m, or $0.2 cents per diluted share. There is a reconciliation of this in our press release, issued yesterday, which will be available on our website under the Investor Relations.

Our break out of revenue between life science systems, substance detection systems, and aftermarket, as a percentage of product revenue was 76%, 6%, and 18%, respectively, for the quarter March 31st, 2003. This compares to 76%, 8%, and 16%, respectively, in Q1, 2002.

I'd like to now turn the discussion over to Frank to talk about certain highlights and new developments during the quarter, and our current expectations for the year 2003.

Thank you, John, and good morning, everyone. As indicated in our press release, we are really quite pleased that in the first quarter of 2003, we were able to continue our strong growth track record, recording 33% product revenue growth year over year, or 19% on a constant currency basis. We are equally encouraged that our first quarter EBITDA, excluding the merger costs, has also grown 28% year over year, even though the strong Euro did affect our gross margins and expenses somewhat in Q1, as John explained earlier. We are committed to achieve our full-year 2003 EPS goal of between 11 cents to 14 cents per diluted share, excluding the merger charges, and we intend to implement additional expense reduction steps towards that goal as necessary.

We see strong customer interest in our new products, which were introduced at Safecon [ph] 2003, particularly our new hybrid QQ-FTMS, our new high-capacity ion trap for proteomics, and also our two new [electro-spray TOF], or [Q-TOF] systems. We also expect additional product introductions later--

Thank you for standing by. Your conference will begin shortly. Again, thank you for standing by.

Hello?

Operator? Operator, are we back on the conference call? Mr. John Hulburt and Mr. Frank Laukien has joined the conference.

Thank you. Sorry about that. I'm not sure what happened with the call, but we just got disconnected. We hope that we're back on the conference call, and I'll just back up one paragraph. I don't exactly when we got disconnected. As I said, we see strong customer interest in our new products, which were introduced at Safecon 2003. I was highlighting particularly the new hybrid, high field QQ-FTMS for proteomics, our new high-capacity ion trap for metabolomics and proteomics, as well as our new high-performance bench top and floor standing electro spray TOF and electro spray QQ TOF system.

We do expect additional product introductions later this year, both at the AS/MS conference in June, as well as at the International Mass Spectrometry Conference in early September, in Europe.

As all of you know, on April 7th of this year, we announced a definitive merger agreement with Bruker AXS. This has been generally well-received, and everyone we have spoken to on our road show and in the trade press, among customers, appear to agree with the strategic rationale behind the merger. We believe that investors are taking a fresh look at the potential of the combined company, and appear to like the opportunities for increasing shareholder value.

In the meantime, we have done our Hart Scott Rodino filings and we have field a preliminary S4 joint proxy and prospectus with the SEC on May 1st, and we encourage all investors of both companies to read our S4 carefully. It is presently our expectation that this merger will close in July of this year.

We would now be happy to answer any of your questions, please.

Operator?

Yes, sir.

We're open for questions and answers.

Yes, sir. Ladies and gentlemen, if you wish to ask a question, please press star one on your touch tone telephone. If your question has been answered, or you wish to withdraw your question, please press star two. Questions will be taken in the order received. Please press star one to begin.

Your first question comes from Kenneth Goldman from Lehman Bros.

Good morning. Congratulations on a good quarter. Frank, where exactly was the strength in mass spec, if I may ask? Obviously, you know, you had strong life science growth, which-- [inaudible] was strong. Mass spec growth-- in which category do you think you got most of your growth?

Good morning, Ken. MALDI-TOF and MALDI-TOF [inaudible] continues to be quite strong. It's really across the board. I can't really single out anything. Ion traps were strong, both directly and via Agilent. FTMS looked very healthy, with a lot of interest in the new hybrid FTMS systems. A lot of customer activity. That's not turned into revenue yet, but we did [roll] later this year. And well, the electrospec-- I really can't single out one in particular. Life science, mass spectrometry, across the board, has been pretty strong, and there is nobody lagging and nobody exceptional, compared to the others, Ken.

Well, it looks like you had a better growth rate than some others in the industry. Is that fair to say?

It appears that way, from what I can read about this quarter, yes.

OK, and just one other question -- in absolute dollars how much do you think F/X added to your top line?

Added to the top line was roughly about $3.5m, $4m.

OK, I'll get back into queue for some of the housekeeping questions. Thank you.

Your next question comes from Larry Neibor from Robert W. Baird.

Thank you. Good morning.

Good morning, Larry.

To kind of follow on to Ken's question, could you give us some idea of your results by customer group and by geography? I've heard a lot about how U.S. pharmaceutical market is tough sledding, has been in the March quarter. Could you give us your view on that?

We have some additional noise on the line here. Operator, if you can deal with that? Larry, to answer your question, it's a little bit too early for us to really discern meaningful patterns. Usually one quarter doesn't give us enough data points to really do that in a very meaningful way, so I prefer to do that after we have two or three quarters under our belt. We've had some good orders, also, in the U.S. from pharmaceutical and biotech companies. Is that a trend? I would hesitate to call it a trend. But Asia has continued to be reasonably strong, although we're a little bit concerned about China and Hong Kong; that may simply slow down for a few months, because of the inability to travel and do service and so on. But I don't really have any very meaningful insights. It's sort of a continuation of what we've seen last year, and it is quite honestly a little bit too early to see whether there is any shift in trends. But the U.S. biotech and pharmaceutical aren't all bad; we certainly got some light orders in the first quarter and for April, so no new trends that I can discern at this point.

OK, and one additional question -- how are you going to offset your German-based cost structure, given the current currency environment?

Well, I think we're not far off from our goal, but we're a little bit off, so we will need to look at additional cost-cutting measures that we intend to implement in order to reach-- to continue to strive for our original guidance for the full year, which we maintain, of the 11 to 14 cents per diluted share, excluding the merger costs, obviously. And I believe that those will be incremental changes and a cost-cutting program.

We-- once the merger is completed, presumably this summer, there will be some additional restructuring and cost-cutting that are associated with the merger, but even before that, Bruker Deltonics as a stand-alone entity will take a very hard look at our expenses, to-- in order to achieve the stand alone Bruker Deltonics goal for the year.

Great. Thank you.

Thanks, Larry.

Your next question comes from Paul Knight from Thomas Wiesel Partners.

Frank, can you hear me?

Yes, we can. Good morning.

When-- any more color on when you expect the merger to be completed? Is it June or is July? What's your-- any more color on that?

We expect early-- we expect July at this point. We haven't heard anything definitive yet on the Hart Scott Rodino end and whether the S4, you know, how long the review period may be, so we've submitted those, but we don't really have any meaningful feedback yet, so we guesstimate somewhat, but it will be July.

OK, thank you.

Yeah, usually, we should hear this week or early next week if the SEC will review. If the SEC reviews, then it usually takes maybe another four to five weeks for their review process, and then depending on what type of comments come back, then it's kind of a back and forth of our comments, answering their comments, and then eventually doing the shareholder meeting. That's our best estimate, but really, the SEC is driving that process. We believe the Hart Scott Rodino filing will proceed pretty quickly. The filing has occurred. We believe that will be resolved pretty quickly.

Thank you.

Your next question comes from David Cohen from Farrallon (ph).

Good morning. I'm wondering if you could just give us some numbers on CAPEX and also cash flow, and if you could talk a little about cash flow, it seems like net debt was up a little bit over the quarter?

Yeah, hey, Dave, depreciation and amortization was about $2.5m for the quarter, cash flow from operations was use of cash of about $3.6m, mainly related to pre-paids and a little bit of inventory. Inventory did not go up as much as it has been in the prior quarters. One of the reasons for debt going up a little bit is mainly timing of the tax payables and other working capital. As you know, I'm not sure if you're in Germany, most taxes are paid during the month of March, so from a working capital standpoint, we had a large tax payment that went out in March.

And what was CAPEX?

CAPEX was $1.1m.

And could you just talk -- going forward for the rest of the year, what your expectations are on cash flow, overall?

Yeah, we expect, from a CAPEX standpoint, it's going to be significantly less than what we've done over the last couple of years, because of the new buildings that have been completed. But I would expect a run rate this quarter for CAPEX of about $1m; year-to-date, about maybe $4m, $4.5m. We're actually starting to see positive movement on our inventory turns, from an operations standpoint. Inventory turns, without the demo and inventory in transit, was actually about 218, which was significantly less than where we were a year ago, so we're actually starting to move in the right direction.

It's about 10% less, David, than the first quarter of '02, our net inventory DOH. It's obviously-- we're not fully satisfied with it yet, but it's moving in the right direction. I think the right steps have been implemented, and we're beginning to see the effects of that.

Great. And cash flow, your expectations for the year?

We'll be turning positive cash flow by the end of the year.

I also wondered just if you could give us an update on the MOD issue, in the UK? I think you took a reserve for that, and there's been an update on that.

Yes, the reserve for that has not changed in the first quarter. And we have not recognized any revenue relative to that contract in the first quarter, but we are actually very optimistic that this will be resolved in the second quarter, and that we will begin to revenue from this contract in the second quarter. We are very close to resolving this.

Great. And then lastly, if you could talk about the detection business, with all the unrest around, just your views on what your expectations are on that?

The detection business has healthy order bookings. We don't have one of these large contracts that we have occasionally, which is why our detection business, obviously, for the entire year will be lower than last year, particularly noticeable in Q2 and Q3, as we had previously indicated in our guidance. But the sort of the base business that we always have in the detection business is growing very nicely, was growing very nicely. Has good order inflow in Q1, and it also continues to look good into Q2, so I think we'll have a steady growth of the base business, but not necessarily any large contracts on top of that base business that we normally have in our substance detection segment, or business.

Thank you very much.

You're welcome, David.

Your next question comes from Tim Lang from Thomas Wiesel Partners.

Hi. Good morning. Was there any particular large orders in the quarter that could have contributed to the revenue increase? For example, besides the FTMS you sold to the Mayo Clinic, were there many FTMS orders?

Well, first of all, any of the orders that we received for FTMS in Q1 would typically not be revenue until the third or fourth quarter, and probably even into next year. FTMS are very long lead time items, particularly the high field system, and as you know, we have our revenue recognition upon acceptance, not upon shipment.

So, to answer the second part of your question, FTMS orders have been healthy in the first quarter, but this will typically translate into revenue later in the year.

Thank you.

You're welcome.

Your next question comes from Scott Wilkin from SG Cowen.

Hey, just a couple here, more or less housekeeping questions. Hey, gross margin, Frank, you know, even with the currency adjustment, is still down about 100 basis points year over year, and it seems to have been showing that kind of trend the last several quarters. Could you comment on the erosion there and maybe the outlook for margins, going forward?

Scott, yes, good morning. I don't really see any fundamental towards gross margin erosion. We-- see here is it fluctuates from quarter to quarter, with product mix, but I think this is really pretty clearly a currency, Euro-dollar exchange rate effect, so I don't see any trends towards gross margin erosion. In fact, our average selling prices, for most of our instruments, have increased last year, and I do not see any trends in the other direction this year. In fact, they may increase further.

So there's no sort of mix trend here? You know, because even after currency, there is a 100 basis point erosion?

Are you comparing from--

Year over year.

--of '02 to Q1 of '03?

Yep.

Yeah, Q1 of '02 was a stronger margin for that quarter, and that's kind of the mix between direct sales, or direct to, you know, the OEM providers, so basically in Q1 of '02, it was more of a direct sales mix as compared to the OEMs. But if you look year-to-date for 2002, the gross margins are in the 52% range.

OK, that's helpful. And just on the charges, or the merger-related expenses, could you maybe give us a little bit more of a breakdown on the $2m and what's left in terms of charges to take, once the deal closes, and should we expect to see Bruker AXS also incur some charge-- or some expenses, in front of the closing of the deal?

I would rather not comment on Bruker AXS, since they have their earnings release this afternoon and their earnings call tomorrow morning. But for Bruker Deltonics, we will have some-- the first quarter, obviously, included a lot of legal fees and fairness opinion and things like that. In the second quarter, we will continue to have some legal expenses, and in the third quarter, presumably, if the deal closes in July, we'll have some additional fees, some legal fees, as well as some additional investment banking fees that could be in the next quarters, that could be of the same order of magnitude of what we, at Bruker Deltonics, have incurred in the first quarter. And as I said, I think-- I would prefer for Bruker AXS to answer that question on their own behalf. I'd rather not get into that.

OK, that's very helpful. Thank you.

OK.

Your next question comes from Tom Schroeder from [Gile Equities] (ph).

Good morning, guys, a couple of quick questions. First of all, in our merger announcement, we gave an estimate of about $250m to $260m for the combined company '03 revenues. Are we still OK with that?

Again, that would imply that we comment on Bruker AXS beyond what's in the S4. I would not want to comment on Bruker AXS, given that they have an earnings release and an earnings call tomorrow morning, so I will take the liberty of answering the question for Bruker Deltonics as a stand alone entity, even though we don't anticipate that it will be a stand-alone entity beyond July. But in terms of top line revenue projections or top line outlook that we gave earlier in the year, as we gave guidance, or our expectations for 2003, we're very well on track for top line revenue and growth for Bruker Deltonics.

OK, and did you guys give a bottom line estimate?

Yes, our goal, excluding merger charges, for Bruker Deltonics as a stand alone entity, it is our goal and expectation to have 11 to 14 cents EPS, per diluted share, for the full year, and we are continuing to strive towards that goal.

OK, thanks.

You're welcome.

Your next question comes from Kenneth Goldman from Lehman Bros.

Thanks. Once again, just one or two bookkeeping questions. What will be your tax rate, going forward, number one?

Currently we're in the range of, for conservative purposes, about 38% to 40%. The effective tax rate for Q1 '03 is- looks a little awkward, because basically the merger-related cost there is-- they're not 100% fully tax deductible. So, excluding the merger-related costs, we should be in the range of 38% to 40% for an effective tax rate.

OK, and just one other question -- again, just going back to the cost of goods for the quarter -- in view of the fact that the F/X will probably be similar for the quarter that we're in, we should expect-- and you bring out new products, we should expect a similar gross margin, or a similar cost of goods, for the present quarter, I suspect. That's one question. Then secondly, was the spurt in aftermarket sales primarily due to F/X as well, or is there another reason?

First comment on gross margins is currently, the U.S. dollar is still pretty weak against the Euro, so yeah, we would expect kind of a consistent Q2 at this time, unless something happens in the end of May, June timeframe with the currency.

As for-- there was an F/X on the substance detection-- I mean, on the aftermarket, but it's just the continuing of us, our focus on focusing not on just the mass spec product but also the accessories with our [Protonease] suite and [Robust] and other consumables. That is really-- that's been a focus for the last year and a half, and is really starting to show nice trends currently.

But also I would say these things also fluctuate a little bit from quarter to quarter, and that type of data that makes up aftermarket revenue, for instance, becomes typically a little bit more meaningful after averaging it for two or three quarters. In any given quarter, there are some fluctuations.

OK, thanks very much.

You're very welcome.

Your next question comes from David Wood of Stephens, Inc.

Hi, good morning. I was just wondering if you could sort of characterize-- you said that there was strong demand, or inquiries, into the new FTMS debut at Pittcon. Could you kind of characterize a little bit what the customer type is, or the potential customer type is? Are they people looking to upgrade or supplant existing technologies? Are they academics, or biotech? And I realize that it's early since the debut of the instrument, so it may be hard to characterize, but if you had any thoughts, that'd be great.

It's, delightfully, it's rather broad-based. You know, we sold-- not in terms of revenue, but in terms of new order bookings, we sold a system to one of these-- Q-FTMS systems to a large U.S. biotech company, we sold one to a European University. We sold an upgrade to an existing system to a government entity. Mayo, of course, we had announced that, at the medical school. We have interest for this from Asia, from Europe, from the U.S. It seems to be rather broad-based. I think it's really proteomics-driven, and I'm very pleased. I think it's a broad trend. I think we have a lot of industrial, pharmaceutical, and biotech interest in it, at this point in time, as well as, of course, medical schools. A lot of medical research funding in molecular biology. It's going into proteomics, but also available for FTMS. It's a broad mix.

Thank you.

You're welcome, David.

Again, ladies and gentlemen, if you wish to ask a question, please key star one on your touch tone telephone. Your next question comes from David Cohen of Farrallon.

Frank, I wondered if you could just talk a bit about -- people always talk about Bruker's depth of service coverage and sales coverage. I think it's primarily a U.S. question, in some ways. I wondered if the AXS merger solves some of that, or if you think there are other steps on it, too, to get the depth of coverage?

We are-- we are continuing to increase, as a stand alone entity at this point. Bruker Deltonics is continuing to increase and grow its marketing, sales, and service capability worldwide. We are- as we continue to grow, we need to grow that, and we grow that also particularly the United States, as well as in Asia. But also further investments in Europe. So, with an emphasis in the United States, but really growing this worldwide, David.

The second part of your question, as we have outlined in our S4, we believe there is some additional opportunities in terms of corporate marketing, in terms of lead sharing, in terms of joint sales into certain accounts once the merger closes, as we have detailed in our S4.

Thanks a lot.

You're welcome.

Sir, you have no questions at this time.

Good. We'd like to thank all of you for attending our earnings call. Have a good day.

Thank you.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.