Bruker Corp (BRKR) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Bruker BioSciences' third quarter earnings conference call. At this time all participants are in a listen-only mode. My name is Mike and I will be a conference coordinator today. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Director of Audit and SEC Compliance, Mr. John Hulburt. Please proceed, sir.

Thank you for joining us today. I am John Hulburt, Director of Audit and SEC Compliance for Bruker BioSciences. Also with me on this call today is Frank Laukien, President and CEO; Martin Haase, Senior Vice President; and Laura Francis, CFO and Treasurer of Bruker BioSciences. As you know, the merger of a Bruker Daltonics and Bruker AXS occurred on July 1, 2003. So this was our first quarter as Bruker BioSciences.

During this call, Frank will discuss the third-quarter results of Bruker BioSciences and our progress at Bruker BioSciences and Bruker Daltonics. Martin will then discuss the trends at Bruker AXS and then Laura will wrap it up and take you through the Bruker BioSciences' financial details and our fourth quarter forecast. I would like to begin the call by reading the 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 obligations 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 BioSciences. During this call we will refer to certain financial measures that are not in accordance with generally accepted accounting principles, or otherwise known as GAAP. A reconciliation of the non-GAAP financial measures used on this call to most directly comparable to GAAP measures is available in our press release. Now with that I would like to turn the call over to Frank Laukien to discuss highlights from the quarter and progress at Bruker BioSciences and Bruker Daltonics.

Thanks John and good morning everyone. Thanks for joining us this morning. I would like to discuss some of the highlights from the third-quarter. During Q3 we slightly exceeded our range of revenue guidance with revenues of 63.1 million. We are particularly pleased with the ongoing growth in our life science mass spectrometry revenue from the Bruker Daltonics business. During the third-quarter mass spectrometry revenue increased 30 percent while year-to-date mass spec revenue increased 27 percent, both numbers including favorable currency effects.

We believe we have been able to drive continued growth despite the challenging market environment due to various factors, including for instance the strong performance of our MALDI-TOF/TOF systems as well as strong demand for our new Esquire HCT high-capacity ion trap. We have experienced dramatic increase in interest for our unique hybrid Q-q FTMS (ph) systems and we are also quite pleased with the strong initial customer reception of our new type of system, the benchtop ESI-TOF system that we introduced at PACON (ph) as well as our ClinProt solution for a biomarker discovery and clinical proteomics.

So in general, our existing and new products seemed to be well-received and we are growing our revenue. We intend to continue to drive growth through innovation. Our continued innovation in mass spectrometry is underscored by our recent product launches during the third-quarter. We announced the new AutoFlex TOF/TOF system in September which provides the power of MALDI-TOF/TOF in a compact and affordable system for proteomics.

And in addition and also in September our strategic partner, Sequenom, introduced its benchtop MassARRAY Compact system for direct DNA and SNP analysis which is also based on our MALDI-TOF technology. We are also working to drive additional revenue growth as a result of the merger and as planned we have begun joint marketing and cross-selling of our life science mass spectrometry and x-ray products in order to generate incremental revenues. In addition to driving revenue growth, we are very committed to significantly improving our profitability in 2004 and 2005.

Although our adjusted third-quarter EPS of one penny per share per diluted share was in the middle of our Q3 guidance and the net consensus estimate, our goal is clearly to regain stronger operating earnings momentum in 2004 and beyond and we are working to do just that. As publicly stated and as you know already, we have moved to eliminate redundant public company costs and we estimate the cost savings of that to be around 1.5 million per year.

We are starting to see the impact of these savings in Q4 and of course in next year. We are beginning to streamline processes in accounting, HR, information technology and other overhead functions, and we estimate -- as we have stated previously, we estimate cost savings of another 1 to 2 million per year from these efforts, expect this to be seen in 2004. But as you have seen from our recent October 20th press release, we didn't stop there.

We announced an additional restructuring initiative to consolidate some of our global production sites with a goal of driving profitability. Following our July first merger, we analyzed additional opportunities to drive our operating performance, and this restructuring plan went beyond the original merger plan and reflects our management's commitment to cost-cutting and bottom line improvement. As part of the restructuring, the Bruker AXS business will consolidate its life science, x-ray system production in Madison, Wisconsin and it will outsource or transfer its other production center -- to its other production centers the manufacturing of certain Bruker-Nonius technologies.

If you recall, Bruker-Nonius, a subsidiary of Bruker AXS located in Delft, in the Netherlands will strengthen its focus on applications and product development for life science x-ray crystallography and structural proteomics as well as on marketing and customer support but will no longer be a production site. In parallel, the Bruker Daltonics business will phase out manufacturing in Switzerland.

This is manufacturing of substance detection products at are Faellanden, just outside of Zurich, Switzerland site, by the end of the second quarter of 2004. Due to this overall manufacturing consolidation, Bruker BioSciences expects to improve its operating performance by 2.5 to 3 million per year pretax beginning -- or the full effect of that will be available to us, if you like, in the third-quarter of 2004, although we begin to see some of the benefits earlier than that.

Moreover, we have this United Kingdom, Ministry of Defense contract at this Swiss subsidiary which has been depressing our Bruker Daltonics gross margins by about 2 percent, in Q3 for instance, and this contract will be running out of the end of the second quarter of 2004 which should also help us in driving our gross margins at Bruker Daltonics back to above 50 percent where they were historically.

I would like to reiterate that we take our commitment to driving growth, top line and bottom line, in our business very seriously. We have demonstrated our ability to drive top line growth over the last few years. The merger gives us a unique opportunity to further drive revenue growth while improving our bottom line. We are working hard to deliver the results you expect from us and we will continue to search for other opportunities to drive growth and cost-cutting in our operating businesses and as a result of the merger. And with that I would like to turn things over to Martin Haase to discuss the Bruker AXS business.

Thank you, Frank, and good morning. The third-quarter was quite a challenge on the x-ray side of our business. Revenue declined slightly for the quarter due to the softness in our life science x-ray system sales. Revenue growth in our elemental composition and thermal analyzer business, as well as in the aftermarket helped to improve our financial position, however. While business conditions remain challenging we are optimistic for further improvement.

We are seeing an increase in life science demand again (indiscernible) governmental funded, government funded, as well as pharmaceutical customers. And while Europe continues to be weaker than expected, we are looking for strong growth in Asia. We are also working on launching new product and developing strategic collaborations to fuel our top line growth. To strengthen our life science business we announced a partnership with Discovery Partners International to provide seamless integration of systems for protein crystallization and x-ray crystallography for structured proteomics.

Bruker AXS is now the worldwide distributor for Discovery Partners' crystal (indiscernible) line of crystallography products. In addition, our recently launched microstyle (ph) is gaining momentum. The microstyle is a new x-ray (indiscernible) (indiscernible) Bruker AXS instruments for structured proteomics. This new (indiscernible) delivers a small but (indiscernible) x-ray spot for the benefiting instruction biology application.

Despite all our efforts on the life science side, we also continue to innovate on the (indiscernible) research side. This quarter we introduced a new NanoStar for nanostructure analysis, providing much higher sensitivity in a more compact and cost efficient instrument. In addition, Bruker AXS introduced the new D8 superspeed solutions featuring our new fully integrated high powered rotating (indiscernible) generator technologies acquired from MAC Science in 2002.

This will allow us to increase our performance in the high-end materials research market. In addition to the x-ray source side, we also recently introduced the new generation of VANTAGE detector technology which in conjunction with the high power x-ray source technology, will further increase speeds and sensitivity for applications in our high-end materials research market and will definitely help to drive additional growth in this market segment.

We're not only focusing on improving our top line, we are also focusing on measures to improve the bottom line. And as Frank already mentioned, we are focusing on efforts to streamline operations within the Bruker AXS business. For example, despite the softness in the life science sales and resulting overcapacity in the business, we have been able to improve our gross margin from 39 to 41 percent year-to-date, which represented 2 percent improvement in gross margin.

We will continue to drive gross margin improvement in the future for productivity improvements, further redesigned to cost initiatives and introduction of higher margin product. As already mentioned, our recent restructuring will also have a substantial positive impact on gross margins. By consolidating life science production in one location we reduce overcapacity in our life science x-ray business. I will now turn the discussion over to Laura Francis, our CFO, to discuss the financial details of the third-quarter and our expectations for the fourth quarter.

Good morning. The highlights of our financial performance in the third-quarter are continued relatively good revenue growth driven by our life science mass spectrometry systems and slower growth of our adjusted EBITDA. We also have incurred a number of special charges due to the closing of the merger on July 1 that I will discuss in more detail. Bruker BioSciences' third-quarter 2003 revenues grew 12 percent to 63.1 million, slightly higher than our guidance compared to 56.6 million for the comparable quarter in 2002.

Excluding favorable currency effects, third-quarter 2003 net sales increased 2 percent year-over-year. Sales of mass spec equipment increased 30 percent this quarter including FX effects and represents 39 percent of total sales. In addition, we experienced robust growth in aftermarket sales increasing 36 percent this quarter and accounting for 26 percent of revenues. The growth from these product lines was offset by a decline in x-ray systems and substance detection sales.

Now let me speak about special charges. In the third-quarter of 2003 Bruker BioSciences incurred 6.4 million of merger-related charges. They are classified as follows on our GAAP income statement: 5.4 million of charges are in other special charges; 900,000 are in cost of product revenues, mainly for the write-off of inventory due to restructuring and amortization of acquisition related assets; and 100,000 are in SG&A expenses for the remainder of the amortization of acquisition related assets.

Now for the constitution of the 6.4 million of merger-related charges. The merger-related charges include cash charges from merger transaction costs of $100,000, as well as cash restructuring charges of 1.6 million incurred in conjunction with the consolidation of two of our manufacturing sites. The third-quarter 2003 merger charges also included non-cash charges for the amortization of acquisition related assets of 300,000, the write-off of acquired research and development of 2.5 million, goodwill and other intangibles write-off of 1.2 million and an impairment of acquired assets charge of 700,000.

You should note that with typical purchase accounting, most of these charges would have been included in goodwill and would not have impacted the income statement. However, given that both Bruker Daltonics and Bruker AXS were affiliates, GAAP accounting required us to account for related party ownership of the pooling of interests and, therefore, these charges were expensed instead of included on the balance sheet. During the third-quarter of 2003, Bruker BioSciences also recorded a non-cash charge to establish evaluation allowance of 8.7 million, which essentially eliminates our net deferred tax assets in the U.S.

Before special charges, the Bruker BioSciences' gross margin decreased approximately one half a percent to 45.4 percent for the quarter compared to 45.9 percent in the third-quarter of 2002. The reduction was driven by the decline in the Bruker Daltonics' margin to 48 percent from 52 percent due to the previously mentioned UK MoD contract, the strong euro and higher sales to strategic partners. Partially offsetting the Bruker Daltonics' decline in gross margin was the increase previously mentioned by Martin at Bruker AXS.

In the third-quarter of 2003 the Bruker BioSciences' GAAP net loss was 14.7 million or a loss of 17 cents per share compared to net income of 1.2 million or a penny per share in the third-quarter of 2002. Excluding the merger-related charges, adjusted net income was a half of $1 million or a penny per share within our Q3 guidance. We also look at our adjusted EBITDA to assess our performance. Despite the negative impact on gross margins of the UK MoD contract and foreign currency, our adjusted EBITDA grew to 14.8 million year-to-date or 8 percent of revenues.

This represents a 7 percent increase from prior year adjusted EBITDA of 13.9 million. This is a metric we will be watching closely in 2004 and beyond as our merger synergies should begin to drive additional profitability. I will now discuss our expectations for the fourth quarter. We expect to see more increases in revenues based on our backlog and we also expect to see a reduction in our operating expenses as merger synergies begin to kick in for redundant public company costs.

However, we also need to consider the impact of the UK MoD contract, foreign currency effects and the weak life sciences x-ray business. Based on all these factors Bruker BioSciences currently estimates that fourth quarter 2003 net sales will be in the range of 62 to 65 million with EPS excluding special charges of 0 to 2 cents per share. I should note here that we are not expecting additional special charges in Q4. We intend to give an outlook for 2004 early next year.

Let me just wrap this up by saying this has been a remarkable quarter for Bruker BioSciences. We successfully completed our merger, we've made substantial progress in integrating our business, and we proactively restructured to drive bottom line growth without significantly impacting top line opportunities. We are transforming into a company that not only consistently delivers on the top line, but also drives bottom line improvement. And we look forward to what we can do with our new structure in the quarters ahead. With that, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Paul Knight with Thomas Weisel Partners.

This is Tim Lung (ph) here. I have a question for Martin. What happened in the x-ray crystallography market? Do you see researchers doing less protein structured elucidation (ph) or that you seeing any more (indiscernible) x-ray? And finally, what happened to the competitors in (indiscernible) Japan. Do you see your technologies gaining market share from the image plate technology, the traditional technology? Thank you.

Lots of questions. Let me first say that we have seen earlier this year and that has an effect on our revenues, a softness in the biological crystallography market. The funding was weaker and as I mentioned during the call, that we see an upswing toward the end of the year already. So that momentum on the life science, x-ray life science business towards the end of this year. The same is true for Asia, not so much for Europe. And some is coming from academic side as well as from pharmaceutical industries.

The x-ray crystallography market and the Japanese company you mentioned also, are the two dominating companies in that market. There is competition. We fight on the technology portion. We have introduced a lot of new technologies on the detection side as well as on the x-ray source side in addition to this strategic alliance with the Discovery Partners which really gives us a much better stand now to offer complete solutions from protein to protein structure. Did that answer all your questions?

Yes, and do you see researchers (indiscernible) analyze the protein structures nowadays than previously? Is it fully (indiscernible) application issue? Are they using more mass specs than (indiscernible) than x-ray crystallography instruments?

X-ray crystallography is and in the future will be essential to do three-dimensional structure determination. We see a trend to more automated crystal structure determination, also with the funding you see with all the structured proteomics initiatives. We believe that x-ray crystallography in addition to MMR will be the main tool to determine three-dimensional structures of protein.

And finally, is revenue from Crystal Farm going to be included in your x-ray revenue in the future?

It will be included in the x-ray revenues in the future starting 2004.

Thank you.

Larry Neibor with Robert W. Baird -- his line has just dropped. Our next question then, comes from Sarah Michelmore with SG Cowen.

Thanks for taking my question. Just a question on Q4 guidance and the range that you quoted puts growth in kind of a (indiscernible) to maybe mid single digit range and I'm wondering what you guys are assuming for foreign exchange benefit and what that implies for an organic growth rate? And then perhaps you can break that into what your expectations are for Daltonics versus AXS.

In terms of -- from a foreign currency perspective we are expecting consistent currency in Q4 compared to Q3. In terms of the mix of revenues, we are assuming approximately 55 to 60 percent of revenues coming from the Daltonics business and the remainder coming from the AXS business.

Does that assume then, are you planning on both of the businesses being down on an organic basis in Q4?

We would expect that the Bruker Daltonics business will be up on an organic basis and that the AXS business will be slightly down, similar to what we've seen this quarter.

All right. Thank you.

Larry Neibor with Robert W. Baird.

Thank you, good morning. Have you begun shipping the new mass spec systems, the hybrid Q-q FPMS and the ESI-TOF?

Yes, Larry, we have begun shipping those.

And what type of backlog do you have in the mass spec side on Bruker Daltonics?

Our life science mass spectrometry backlog, actually our total backlog has been fairly high at the end of the second quarter and also at the end of the third-quarter. So we have in the range of five to six months of backlog. I don't have a break out by productline, so that really is a range for all of Bruker Daltonics.

Okay. Martin mentioned that there is new funding coming into the biological crystallography market in the academic area. Could you give us more information about that, please, such as where this funding is coming from?

You may have seen that there was a lot of structural proteomics funding two years ago. Very recently we saw that, especially in Canada -- in the UK there is $80 to $100 million funding for structured proteomics initiative in the first (indiscernible) which will continue to go into the U.S. proteomics (indiscernible) as well. And the same is true for Japan which was historically or still is strongly driven by technology but there is indications that x-ray crystallography will become a more prominent part of structured proteomics in Japan, as well.

Okay. One final question. Given that you have so much of your manufacturing in euro based currencies, what impact did the change in currencies have on your gross margins?

The impact of currency on gross margins was approximately a half of a percent. That was approximately the impact that foreign currency had on gross margin this quarter.

That is an overall number. Bruker AXS is more, it has less of an impact. Bruker Daltonics sees more of an impact.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Paul Knight with Thomas Weisel Partners.

I might have missed this. In your fourth quarter guidance what was your currency expectation? How much is from currency benefit?

We are expecting that currencies will stay the same on average during the fourth quarter as they have been during the third quarter. We are not projecting any changes in currencies in exchange rates compared to the third-quarter.

Also low single digit growth rate, you are guiding to what percentage of currency impact (indiscernible) into that guidance, because last quarter I remember you mentioned 7 percent but then currency delivered even more benefits to the top line. What is your expectations for the fourth quarter?

I don't think we have the number here at our fingertips, but you can certainly work it out from the relative change in exchange ratios from the fourth quarter 2004 to fourth-quarter 2003.

Okay, and final question is the gross margin into 2004. This year you have 2 percent negative impact from DOE contract and also UK Ministry of Defense contract, (indiscernible) impact from currency, so that is three percent. In 2004 should we expect the gross margin to recover to 50 percent range?

We expect the gross margin to recover at Bruker Daltonics to the 250 percent or perhaps even somewhat higher. But that is going to occur with a full impact of that will be available and the third-quarter. In the first and second quarter we will still see some of the weaker gross margin because we still continue to finalize that contract and we will expect to ship the last systems in the second quarter of 2004.

Thank you.

We are taking other steps to improve gross margin so you will see some gradual improvement, but the full improvement should be there in the third-quarter of 2004.

Thank you.

(OPERATOR INSTRUCTIONS). There are no further question at this time.

If there are no further questions we would like to thank all of the participants for joining us this morning and we will talk to you in three months, actually four months. Thank you very much. Have a good day.

This concludes your Bruker BioSciences' third-quarter earnings conference call. Thank you for your participation today. You may now disconnect.