Bruker Corp (BRKR) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bruker BioSciences quarterly earnings conference call. My name is David and I will be your coordinator for today. At this time all participants are in listen only mode. We will be conducting a question-and-answer session towards the end of this conference. If at anytime during the call you require assistance, please key star 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes.

I'd like to now turn the presentation over to your host for today's call, Miss Laura Francis -- Chief Financial Officer. Please go ahead, ma'am.

Thank you and thanks for joining us today. I'm Laura Francis, the Chief Financial Officer for Bruker BioSciences Corp. And also with me on this call today are Frank Laukien, President and CEO of the Company as well as Martin Haase, the Senior Vice President for Bruker BioSciences. As you know the merger for Bruker Daltonics and Bruker AXS occurred in July 1st of 2003 so this ends our first half as Bruker BioSciences.

During this call Frank will discuss the results and progress at Bruker BioSciences while I take you through the Bruker BioSciences financial details and our 2004 outlook. 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 different 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 properties, litigation, and other risk factors discussed from time to time in our filings with the SEC.

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 BioSciences.

During this call we will refer to certain financial measures that are not in accordance with generally accepted accounting principles or GAAP. Reconciliation of non-GAAP financial measures used on this call to the most directly comparable GAAP measure is available on our press release.

Now with that I'd like to turn the call over to Frank Laukien to discuss highlights from the year and progress at Bruker BioSciences.

Thank you, Laura, and good morning, everyone. Thanks again for taking the time to join us. I would like to highlight some key results for the year 2003 and for the fourth quarter in particular.

For the year, our revenues grew 18 percent to 260.7 million. During the fourth-quarter, we exceeded our revenue guidance with revenues of 73.7 million which also represents an 18 percent increase. Importantly, we returned to profitability Q4 (ph) and met our previous guidance for adjusted EPS.

In 2004 we will see the benefit of the numerous cost-cutting steps which we took in 2003, including the merger itself, as well as the restructuring and expense control in each of our two operating businesses. Laura will later explain our guidance for Q1 of 2004 as well as our objective for the full year 2004.

In 2003 we were particularly pleased with the ongoing growth in our Life Science Mass Spectrometry revenue from the Bruker Daltonics business which now has revenue in excess of $145 million. Together with the value added by our strategic partner Agilent [indiscernible] we believe that in 2003 we were the equivalent of a $170 million mass spectrometry company up from $40 million just five years ago in 1998.

For the year, our Life Science Mass Spectrometry revenue increased 29 percent and gained additional momentum in the fourth quarter with an increase of 33 percent, both numbers including favorable currency effect. Even without favorable currency effect we believe we had the fastest growth of any major mass spec (ph) vendor in 2003 and we have continued to gain market share.

The most important development of 2003 was the merger of Bruker Daltonics and Bruker AXS to form Bruker BioSciences. We're now positioned as the leading tool provider to the proteomics marketplace. We believe the combination of our mass spectrometry and x-ray businesses provides our customers with a broader array of solutions for their proteomics needs.

Bruker Daltonics is recognized as one of the most innovative and fast-growing companies in Life Science Mass Spec for expression proteomics and clinical proteomics while Bruker AXS is a leading provider of x-ray structural proteomics.

I'll talk about the accomplishments of both segments of our business here and the momentum we saw in the fourth quarter of 2003.

We believe these factors will position Bruker BioSciences for growth -- for accelerated growth -- in 2004. As Bruker Daltonics one of the highlights for the second half of the year was our progress in biomarker discoveries.

Since launching our [indiscernible] solution at ASMS in June of last year we have seen the strong acceptance of this product line and we believe that we're making significant gains in the clinical proteomics marketplace. We believe that these gains are driven by our superior mass spec performance in terms of resolution and, very importantly, our ability to identify biomarkers on the same platform as well as by the reproduceability, scalability, robust automation and lower cost of our [indiscernible] array samply preparation platform.

This lower cost in automation will become particularly important as we're tackling the key challenge in clinical proteomics which is larger scale validation studies.

Based upon the initial positive market reaction to our [indiscernible] line and our performances packages we believe that [indiscernible] will be a significant growth contributor in 2004. We're also very pleased with our progress in the ion trap market. We have seen strong growth in our unit numbers and the combined market share in 2003 for Bruker Daltonics and our strategic partner, Agilent, together in ion trap mass spectrometry has grown further.

In fact we believe that we may now, together, Bruker Daltonics and Agilent together be asked or very close to take a market leadership position in the LC ion trap mass spectrometry market.

48 trans (ph) for mass spectrometry or TMS continues to deliver results in 2003 as this market segment in total has probably doubled in just one year and continues to be one of the fastest-growing parts of the Life Science Mass Spectrometry market. We believe that the introduction of our new Apex Q system has helped to drive our STMS bookings (ph) growth which has been more than 30 percent for the year 2003 despite increased competition.

We expect continued strong growth in STMS in 2004.

We're also very pleased with our performance in the electrospray (indiscernible) marketplace. Our new Microtop bench top unit has the best performance in its class and plays an important role in biomarket discovery as evidenced by our good initial sales and key collaboration with leading commercial and nonprofit biomarker discovery groups.

The result has been bookings growth of greater than 50 percent for our electrospray top [indiscernible] business in 2003.

Finally we also saw significant improvement in bookings in our substance detection line that we sometimes refer to as the NBC (ph) detection business. We have experienced greater than 50 percent bookings growth here as well albeit after a weak bookings year of 2002.

So, overall, we are encouraged by the picture painted by our life science new order bookings in '03. In total we experienced total new bookings growth of approximately 20 percent for the year which after a weaker first-half of 2003 we will built momentum in the third and fourth quarter with greater than 35 percent bookings growth in Life Science Mass Spectrometry in Q4 compared to the fourth-quarter of 2002.

Again both of these numbers also include favorable currency effects.

Now I will talk a little bit about our other operations business -- Bruker AXS. As you may know, the x-ray business experienced weakness in its life sciences product line during the first three quarters of 2003. However, we continue to innovate and respond to customer demand in anticipation of new growth.

For example, we introduced the Microstar -- a high brilliancy x-ray source -- to boost sensitivity in bio applications. In addition, we partnered with Discovery Partners International to expand our product offerings with Crystal Farm which is a protein crystallization incubator. The bookings results were encouraging in Life Science crystallography in Q4. We experienced more than 30 percent growth in the x-ray Life Science bookings in the fourth-quarter compared to just 10 percent throughout the year 2003.

We also are continuing to innovate to meet the x-ray analysis needs of our advanced materials research customers. Recently we announced the launch of our superspeed solutions for material research applications. These superspeed solutions combined our new high-powered turbo x-ray source with our new Ven (ph) Tech 1 detector to provide the greatest sensitivity and highest throughput available on the market.

We also recently released the Nanostar for nano structure analysis. We believe these new offerings will fuel our Bruker AXS top- and bottomline growth in 2004.

So, overall, we saw an upward trend in the fourth-quarter. We experienced 25 percent bookings growth compared to Q4 of 2002. This compares to overall Bruker BioSciences bookings growth of approximately 15 percent for 2003 compared to 2002.

So we're looking forward to the future and our first full fiscal year as the combined Bruker BioSciences. We're working to drive additional revenue and bottomline growth and at next week's 2004 Pittcon Conference you will see a series of very significant and exciting new solutions and products being introduced by both operating companies.

These new introductions should further strengthen our overall product offerings and strengthen our momentum. In addition to driving revenue growth, we're also very committed to significantly improving our profitability in 2004 and 2005.

In the fourth quarter of 2003, we regained our profitability. Our goal is to claim much stronger operating earnings momentum in 2004 and beyond, based upon the merger and the restructuring of our operation as well as the strength of our product offerings and our expanded distribution capabilities, we believe we are positioned to significantly improve impact profitability as expected in the second half of 2004.

This profitability improvement will occur after our restructuring is completed and once a low margin substance detection contract is fulfilled at the end of the second quarter of 2004.

So we're satisfied that we took the right step in 2003, to deal with our changing market, dynamic competitive environment and the macro economic and currency trend which made 2003 a year of pretty dramatic change. We believe we are well-positioned for the year 2004 and I will now turn the discussion back over to Laura to discuss the financial details for the year and the fourth quarter and our outlook for 2004. Laura.

Thank you. The highlight of our financial performance for the year and the fourth-quarter 2003 were continued, relatively good revenue growth driven by our Life Science Mass Spectrometry system and, unfortunately, some setbacks in our adjusted EPS and our adjusted EBITDA.

Bruker BioSciences 2003 revenues increased 18 percent to 260.7 million compared to revenue of 220.7 million for 2002. Excluding favorable currency effects 2003 net sales increased 4 percent year over year. For the fourth-quarter revenue grew 18 percent to 73.7 million compared to 62.5 million for the fourth-quarter and 2002.

Excluding favorable currency effects fourth-quarter revenue increased 3 percent year-over-year. Revenue of Life-Science Mass Spectometry Systems increased 29 percent this year including currency effects and represented 41 percent total revenue.

In addition we experienced robust growth in our aftermarket revenues this year and they now account for 24 percent of our revenues. X-ray systems revenues on the other hand has only increased 1 percent this year and accounts for 31 percent of our revenue.

The remainder of our sales is comprised of substance detection systems which experienced a downturn in 2003 based on weak bookings in 2002.

During the year the Company incurred significant special charges related to the merger and resulting restructuring. In the fourth quarter, however, we did not incur any additional special charges -- instead we identified $300,000 of charges related to the amortization of acquisition-related assets in the fourth quarter. Going forward such amortization charges will relate only to intangible assets and amount to approximately $100,000 per quarter.

The Bruker BioSciences 2003 growth margin decreased approximately 2 percent to 44.2 percent compared to 46 percent in 2002. Without special charges the 2003 growth margin was 44.6 percent compared to 46.3 percent last year.

The reduction was driven by the decline in the Bruker Daltonics margin to 47.9 million from 51.9 million.

Percent.

47.9 percent from 51.9 percent due to fulfillment of a low margin substance detection contract, overcapacity and our substance detection business, higher sales to strategic partners and the effect of the higher euro. We believe some of these factors will persist through the first half of 2004 but then lead to improvement in growth margins and profits in the second half of the year. Partially offsetting the Bruker Daltonics decline in growth margin was 1 percent increase in growth margin in Bruker AXS to 41 percent from 40 percent.

This increase at Bruker AXS occurred despite overcapacity in the x-ray Life Science business and should improve further in 2004 with the completion of the x-ray Life Science business restructuring announced in Q3 of last year.

Selling and marketing expenses in 2003 increased to 23.3 percent of product revenues compared to 21.8 percent in 2002. The increase is primarily due to higher distribution commission and demonstration inventory amortization at Bruker AXS. The increase was partially offset by additional leverage on selling and marketing expenses at Bruker Daltonics.

General and administrative expenses decreased to 6.7 percent in product revenues compared to 6.9 percent in 2002. In the fourth-quarter of 2003, we began to see reductions in G&A expenses due to merger related synergies. These reductions were partially offset (indiscernible) based on the intangible assets created by the merger. Research and development expenses increased to 14.7 percent to product revenues, compared to 13.9 percent in 2002.

Part of the increase is due to additional R&D costs incurred on a new government R&D contract in Germany at Bruker Daltonics. Costs are incurred in R&D while the reimbursement is classified in other revenues for this contract.

We also continued to invest in R&D to maintain our technological advantage.

Now I'll discuss interest and other income. Interest and other income net primarily consists of 1.3 million of interest income, 1.7 million of interest expense and 1.2 million of gains on foreign currency transactions. From a tax perspective, our tax expense for the year is 9.7 million. This includes the income tax valuation allowance of 8.7 million taken in the third quarter. Excluding this and other special charges we incurred income tax expense of 2 million on 4.3 million of pre-tax income or an effective tax rate of 48 percent. This rate is higher than our standard rate of 40 percent since we cannot benefit losses in the U.S. due to our net operating loss position. So, overall, during 2003 the Bruker BioSciences GAAP net loss was a -17.6 million or a loss of 22 cents per diluted share compared to a net loss of a -6.8 million or a -9 cents per diluted share in 2002.

Excluding the special charges adjusted 2003 net income was 2.2 million or 3 cents per share compared to 5.4 million of adjusted 2002 net income per 7 cents per diluted share.

We also look at our adjusted EBITDA to assess our performance. Given the weak sales performance at Bruker AXS we did experience decline in EBITDA to 19.3 million in 2003 compared to 20.1 million in 2002. Bruker Daltonics, however, continues to grow EBITDA. This is a metric we will be watching very closely in 2004 and 2005 as our merger synergies and other factors should begin to drive increased profitability.

From a cash perspective we ended the year with 76.8 million in cash. We used cash from operations of 5.4 million for the year and the main reason for the use of cash in operations is the payments of merger related expenses. The additional decline in cash from the prior year is primarily due to the 16.3 million in cash payments to Bruker AXS shareholders upon the acquisition of the Company.

From a balance sheet perspective we've made some progress on inventory. On a currency adjusted basis the Company experienced a decline in inventory. When evaluating our performance, we looked at inventory days on hand based on inventory net of systems shipped but not accepted in the revenue. In addition we do not include demonstration inventory.

Inventory days on hand net finished the year at 171 days compared to 178 days last year. The main driver of this decline was inventory improvements at Bruker Daltonics partially offset by a slight increase at Bruker AXS.

I'll now discuss our expectations for 2004. We expect to see accelerated growth in revenues when adjusted for currency. Given recent trends in bookings, we anticipate revenue growth of 13 to 15 percent in 2004 or close to 10 percent without currency adjustments. We also expect to see the reduction in our operating expenses as merger synergies begin to kick in. However we also need to consider the impact of the substance detection contract over capacity in businesses still undergoing restructuring and currency effects.

Based on all of these factors, Bruker BioSciences currently estimates that the first-quarter 2004 net sales will be in the range of 68 to 72 million with adjusted EPS of 0 cents per share to 2 cents per share. While we do not give full year guide our objective for the year 2004 is revenue of 290 to 300 million and we expect our adjusted EPS to more than double to 7 to 9 cents per share.

Let me just wrap this up by saying that despite some challenges this has been a remarkable year for Bruker BioSciences. We've successfully completed our merger, we've made substantial progress in integrating our business functions where it makes sense and we have proactively restructured to drive bottom-line growth without significantly impacting topline opportunities.

We're excited about the trends we're seeing in the marketplace as well as our position in it and we look forward to what we can do with our new structure in 2004. With that I'd like to open it up for questions.

+++ q-and-a.

[Operator Instructions]

Matt Kellogg (ph) from Bree (ph).

Hi guys, nice quarter. Just a couple quick questions for you. I just wanted to make sure I heard you guys right, you guys said OPECS would be down on cash basis from 2003 or as a percentage of sales?

Could you repeat the question please? I am not sure we understood it fully.

Sure. I thought I heard you guys say when you were giving guidance for 04 that OPECs would be down vs '03 and I wondered if that would be on an actual cash basis or whether that is a percentage of sales?

You mean the currency that we are expecting ... the currency impact in 2004?

No. Just what your operating expenses are going to be.

Operating (MULTIPLE SPEAKERS)

So operating expenses? I mean, the guidance that we've provided is we've given our revenue guidance. And we're also giving bottom-line guidance as well and we've given specific information or guidance on the first-quarter with our objective for 2004 and those objectives certainly assume a certain amount of improvement in growth margins more toward the second half of the year because of the factors that I discuss that are depressing growth margins in the first couple of quarters. In addition, it does assume additional leverage in operating expenses in all areas.

Okay that's great. And the second question is can you talk a little from a customer side where you guys are seeing the strength in the business? I mean, is it on the farmer side or university machinery? Where are you guys seeing on a customer base where this change is coming from?

This is Frank again. We certainly geographically see a rebound in the United States. Unquestionably the second half here was much stronger. That's probably the biggest trend and if I look at it by customer type then there has -- selective purchasing by the pharmaceutical and big BioTech also has resumed and to some extent is driving that improvement in the U.S. in the second half and in particular in the fourth quarter.

Okay. That's great. And last question did you guys say what Capex was in '03?

Our capital expenditures in 2003 were 5.5 million.

And any guidance for '04?

We expect to be in that same range.

Great, thanks, good quarter, guys.

Derek Debruen (ph) of UBS.

Sorry about that. Annabelle Simimi (ph) for Derek from UBS. Can you tell us whether you're changing any of the cost-saving assumptions you've made related to the merger going into 2004?

We haven't made any changes to the cost savings. As I had mentioned the issues that we have run into are more related to the fulfillment of a quite large contract during the first couple of quarters of the year. Currency is playing a certain part in what's going on from a bottom-line perspective and also the restructuring as we had always anticipated. Those of effects will not be seen until the restructuring is completed which will be at the end of the second quarter of 2004 but no, we haven't changed our assumptions.

Some of these merger synergies we begin to see in Q4 even and we will see in the first half, particularly, those being only one public company on IT and on similar G&A things. Some of the other effects of the merger and the subsequent or related restructuring takes some time to phase in and will be fully noticeable in the third quarter of this year.

Okay, also for the effects (ph) issue we see that you clearly had very strong topline growth during the quarter which still only translated into a penny on the bottom-line despite -- it exceeded your guidance significantly. Can you tell us to what extent effects impacts your operating senses and how well matched your expenses are with your revenues and how you hedge against effects issues.

Yes I can respond to that. Currency, obviously, is increasing our revenues which we have given specific information on the impact event. However it is also impacting our costs and it is actually impacting our cost more than revenues and the reason for that is because more of our costs are based in euro than they are in dollars compared to the revenues that we received. And so our best estimate in terms of the impact that currency has had from a profitability perspective in total for 2003 is approximately $1.6 million is our best estimate as a bottom-line negative impact that currency had on the business.

[indiscernible] [inaudible] (MULTIPLE SPEAKERS)

[indiscernible]

[indiscernible] [inaudible] that is approximately 2 cents per share last year due to the significant strengthening of the euro.

Okay and do you expect a similar impact in '04? Two cents or... ?

Well in '04 we've put that -- we have basically done our planning for '04 based on where we are in terms of exchange rates right now. We don't dare to make any assumptions of how they will evolve so we basically make our -- do our planning for '04 based on present exchange rate.

Okay great and, finally, can you tell us a little bit about the growth in proteomics market and how you're stacking up (indiscernible) some of the competitors out there?

Proteomics is certainly a broad field and, certainly, the unique -- initially proteomics was mostly considered almost equivalent to some separations combined with mass spectrometry and, certainly, that mass spectrometry continues to play a very important role in expression proteomics in discovering most translational modifications and more recently also in biomarker discovery and clinical proteomics but proteomics is really a broader field than that. One needs to look at interaction proteomics. For instance, we do that in cooperation with our partner Viacor (ph) using SCR and that's very importantly of course in determining the three-dimensional structure of protein or of complexes -- proteins with other proteins or proteins with small inhibitors or etc. and that's of course where the unique combination of x-ray crystallography tools for a three-dimensional structure determination and mass spectrometry for the previously mentioned applications is rather unique.

Spencer Nom from S. G. Cowan.

Couple of questions first question is for the 2004 was just curious if you could give a little detail and flavor on how the 10 percent organic growth was going to achieve in terms of Daltonics vs. AXS, if you could give any guidance on that?

I actually have some numbers, including currency. The -- We do expect for Daltonics to grow at a more -- at a higher rate than AXS, our best estimate for the Daltonics business is growth of 14 to 16 percent on the topline. And for the AXS business our best estimate is 11 to 13 percent. So that is the way that we looked at it at our more respective businesses.

Bottom line increases come from margin and expense improvements in both operating businesses. Not really driven by one vs. the other.

Thank you. On a follow-up on that -- the -- in terms of the AXS business growth so I was curious where you see some of the growth coming in, you know, for given the rather softer environment in '03.

The main growth after our really top Life Science business for the x-ray part will be coming from the Life science x-ray crystallography business where we expect something like 30 percent growth in new order bookings and revenue over '03. Also both the other -- the research business and specifically also the (indiscernible) in process automation business will have double-digit growth rate.

Paul Knight from Thomas Weisel Partners.

Looking at your guidance for '04. It looks like an operating margin of call it around 5 percent.

Approximately yes.

How do you think your operating margin would be without your relatively higher European cost exposure?

It would, as I said, in 2003, that any indication it was about 1.6 million at the bottom-line net income line or about 2 cents per share without the -- due to the euro and so I think roughly the same numbers maybe it's a little bit higher also for 2004 but they have certainly been built into the model and into the objective for the year and into the guidance for the first quarter that Laura has presented (MULTIPLE SPEAKERS) for the order of magnitude. As I said or Laura may have said, Bruker AXS is actually very nicely hedged if you like hedged by the fact that their relationship between U.S. operations and European operations and Bruker Daltonics is reasonably hedged but not perfectly hedged so the increase in the euro has led to that increase in -- or the decrease in the bottom-line of about 1.6 million, primarily driven by the not perfect natural hedge of Bruker Daltonics.

What's your goal, Frank, for an operating margin?

I think our goal is that we have said that the merger remains the same. We are driving in the medium-term our medium-term goal for an EBITDA margin of 14 to 17 percent and we think we -- that that remains our goal that we had set out. Obviously it will take us a little bit longer to get to that because we had some setbacks for instance, with the currency. But that's our medium-term goal that we expect to reach in the next in the '05, '06 timeframe.

Now what kind of environment are you assuming? Do you think we're going -- let's call it an economic recovery environment in '05, '06?

We're not booming. But we are certainly out of the extremely difficult microeconomic environment we saw in the first half of 2003. So a mild sustainable recovery is our assumption for that. We're not looking for a -- boom times to do that. On the other hand, obviously, we also assumed that we're not falling back into some (indiscernible) recession.

Frank, do you think your peak operating margin is going to be lower than the peer group in the upper part of the cycle and if it is lower why would it be lower than the others in a peak cycle?

No. We -- you have asked me sort of for the near-term goals. Our goal is to have comparable operating and EBITDA margins to the peers in our group and but that's not going to all happen within the next two to three years as we are all investing very heavily in R&D to continue our relatively faster growth. So I'm not saying that we forever will be want to be at 14 to 17 percent EBITDA margin but that is sort of the near-term objective.

And my last question, Frank, is on crystallography. Do you think that market has an up cycle coming as we dive more into target validation or do you think crystallography is more of a consistent performer over time?

(indiscernible) growth I guess I would try to.

I will just mention one factor and then I will turn it over to Martin who is obviously more expert on this. But for instance recently it looks like the protein structure initiative Phase II has been funded with a lot of annual funding and so, similarly, there is funding in Europe so we think protein structure, protein structure determination or structural genomics is a healthy and growing field. But it was not growing as rapidly as we were expecting. And we also this year are strengthening our product line, relatively speaking, quite a bit in that area to where we as a company we think we are going to see pretty healthy growth in that this year but I'll maybe pass it on to Martin to make some additional observations.

Paul, this is Martin. What I would like to add is while the x-ray crystallography part and the history was the x-ray crystallography (indiscernible) results the front end and the back end and as we are now adding front end tools and back end tools in terms of softer and crystal incubation and crystallization devices, the market will grow and also fulfill the demand of all customers to get more complete solutions for that structural -- infrastructure proteomics requirement. In terms of adding other technology to the x-ray part the market will grow.

Martin, do you think we will see the crystallography I guess even in [indiscernible] markets grow the way we saw spectrometry emerge back -- I guess, let's say '99? Do you think we will go from industry growth to 20, 30 percent? Do you think that's possible for crystallography?

I wouldn't compare the mass spectrometry with x-ray crystallography. Mass spectrometry is a much faster put through than x-ray crystallography so that growth is expected to definitely be lower than during the high growth areas of mass spectrometry. But I think that it's a 15 percent 10 to 15 percent growth is realistic. And as we are devoting more products we believe we believe we can outperform that growth and go a little bit faster in the long run.

David Coan from Farlon.

Nice to see some rebound and order backlog. Just one clue, ask a question about cash flows going forward -- thought about it, you said Cap X was 5.5 do you expect working capital to be generated cash (indiscernible) cash flow going forward?

Certainly our assumptions for 2004 given the improvements in our profitability, so given the goals that we have for profitability for 2004, would -- what we have assumed is growth in cash flow from operations and that in terms of free cash flow, as I have said, we have a target for CapEx that's similar to the amount that we've incurred this year.

Overall do you expect positive free cash flow next year or --?

On the free cash flow side, we expect positive free cash flow.

Larry Nabor from Robert W. Baird.

Actually it is Andrew Schram for Larry. Could you give us a perspective? You mentioned that the U.S. commercial market was fairly strong in the fourth quarter and that you saw a rebound there. Could you give us perspective both on the commercial side, pharma and biotech and the academic customer base globally specifically in Europe and Asia? And what trends you're seeing develop there in the fourth quarter and perhaps early '04?

I mean the fourth quarter was really pretty good. Everywhere in the world. But particularly good in the U.S. I believe that academia spend, academia and other nonprofits spend more in the fourth quarter. Previously they had dominated a little bit our customers, our new orders but certainly there was a healthy percentage of pharmaceutical and biotech customers in the mix. For the Life Sciences business AXS and Daltonics and I believe that also they saw a reasonable demand from their other industrial customers which of course can be the semiconductor industry, the basic materials industries and up other advanced material customers. So it's been pretty raw state but and we can't really single out any area that was performing other than the United States having the clearest rebound. It's difficult to single out any other particular area that was growing very rapidly or was not growing was growing very poorly for us but that has more to do with our products where Bruker Daltonics was getting worn more traction in the medical research funding and then the clinical research funding with the clinical proteomics and other bio market discoveries instrumentation but that is more of a function of us being relatively new to those markets with our products.

Are you still seeing growth outside of life sciences research academic customers in Europe and Asia?

Yes, we are. Asia was pretty good, Europe was weaker generally 2003. But also with an improvement trend or so it seems in the fourth quarter. But Europe was generally a bit weaker last year and the -- it's not as clear. The recovery in the U.S. seemed most pronounced.

Can you just give us an update on your global consolidation of your production sites where you met process?

Well there's two pieces to that. There's a group in Daltonics -- part is that we are going to eliminate production at our Swiss site by the end of the second quarter. Lots we have fulfill that (indiscernible) detection contract that Laura mentioned previously and and as of January 1st of this year we have already moved all of our production our x-ray production from The Netherlands to our production sites in Wisconsin or in [indiscernible] Germany so by the third quarter we will have eliminated two productions in simultest sites within the overall group of biosciences business. Those were as planned and as announced right after the merger. Those were the two restructurings that we began at that time.

Great and then just a housekeeping question. You provided a breakdown for the full year of mass specks since the (indiscernible) x-ray and aftermarket sales. Could you provide that, possibly, for the fourth quarter?

We prefer to give that for the longer time period because quarter to quarter those percentages can really jump quite a bit and we always caution that they're not that meaningful but if you look at the average full year data and compare that to the prior year data and to the year before that. it really starts to show meaningful trends such as the growth of the aftermarket business for instance.

[Operator Instructions].

John Gibbons from Odin (ph) Partners.

A question for Laura, please. The inventory numbers that you cited in your comments (indiscernible) on hand [inaudible] vs. 178?

Yes.

What do you have for a goal there and could you give us some idea about how large a shipment is not accepted (inaudible).

Maybe the general -- just a general comment is that it's difficult to look at a specific numerical goal. It's really difficult to figure out what the comparable goals are. In our industry there's some general average but of course that includes other toolmakers, that includes makers of small instruments, we generally have faster inventory turnaround time, and we think there's more room for improvement. Our goal is to improve that by at least another five percent next year and we will keep pushing from there but we don't have a specific target numerical target of where we would like that to end up. We know that we can improve it further at this time. And we improved this year by (indiscernible) to give you some perspective, the improvement has been about 11 percent. At Bruker Daltonics and a slight increase at Bruker AXS which resulted in the numbers that you've seen. Within Bruker Biosciences, however, the longer DOH is still at Bruker Daltonics and I think that's where probably more of the improvement needs to come from within Bruker BioSciences.

And what about shipped but not accepted -- is there a way of changing the way that looks?

Well, that has to do with the fact that we probably have the most conservative revenue recognition policy in the industry and we don't recognize revenue when systems are shipped. We really hold back the entire revenue and not just a fraction thereof until the system is accepted and quite honestly that's a healthy part of our business in some ways is that at a reasonable level that just means there's a lot of business activity. We've been shipping a lot as we have very good visibility for near-term revenue. So it's not something that we're trying to manage to bring down. That's just the way we do our accounting which I think is conservative and also gives us -- certainly with that aspect of the business -- gives us good visibility.

(indiscernible) (inaudible) a material number?

It's certainly a material number. Our inventory transit may be at any given time may be something like 30 percent of our cost of goods sold, or more, for the year so it's certainly a material number. But it's a healthy sign of our business and there's no particular aging of that so that's a good part of our business.

[inaudible] to the extent this changes somewhat it affects cash flow.

So, no that's not something that we're trying to manage down. That is more of a function of our overall business volume but the in-house traditional manufacturing inventory which were -- for which we've recently -- is how we state our DOH or DOH net as Laura called them, I think that's very -- that's done in a way that's very typically defined in the industry and that's a number that's more of a comparable benchmark number.

Larry Nabor from Robert W. Baird.

Just a quick follow-up on the substance detection business. The forecast is apparently much rosier for 2004 than the business performed in 2003. Could you just give us a quick update on what opportunities you are seeing there? Are you seeing new funding initiatives? Are you seeing increased discussions or is the function merely or is the growth more of a function of just continued expansion in the marketplace?

Yes I think that it's some ways, Andrew, I think we bounced back to where we should be in a normal year. ? It is just that our 2002 new order bookings for the substance detection were exceptionally weak and, accordingly, '03 was pretty weak in terms of revenue. In '03 was a good year in terms of new orders. I think the best opportunities are on the one hand there is continued steady-state business for a lot of the mobile mass spectrometry and the handheld INS (ph) detector for chemical detection. A new business opportunity that we think could be very sizable for us is the stand up detection of chemical agents, for instance, what we do with the product that's called The Hawk which can detect chemical agents up to three miles distance where we just had a recent very recent press release of a U.S. Army order but that market is not limited to the U.S. Army. That is limited to there are other customers that are in emergency response or associated with Homeland Security or similar defense, in Homeland Security customers in Europe or in Japan, Korea, and so on. So we think that that new product has a lot of potential and we also believe that we'll get increased sales from the B component of the NBC iso-biological (ph) detection. Some of that will be smaller orders for actual deployment but some of that will also be more research and development collaboration and systems.

We see a lot of funding into the research and development and continued decent (indiscernible) decent expenditure levels in chemical detection with a particularly hot area being -- doing that remotely via infrared means, for instance, using this Hawk product I just mentioned.

Understand, and according to your comments and press release that business was substance detection was still down year-over-year. But how did that perform sequentially from the third quarter? Perhaps second half vs. first half of 03?

That business I really look only on an annual basis quarter to quarter. The fluctuations are very significant but in the year it is the total new order increased more than 50 percent compared to the year 2002 and so we expect -- we expected to grow faster than 20 percent in revenue in 2004 compared to 2003.

Derek Debruen from UBS.

I was just wondering in terms of the gross margin this being affected by large (indiscernible) detection order, is it a specific order that you had just announced recently or is it some other order -- (MULTIPLE SPEAKERS)

It's the one that we've had with UK (indiscernible) (MULTIPLE SPEAKERS) for some time (indiscernible) finalizing and are out of our Swiss Production facility and which is the facility we're going to close down after we ship that contract.

There are no further questions at this time.

Okay, if there are no further questions we would like to thank you for joining us this morning and we're looking forward to speaking to you in early May, if not before. Thank you very much.

Thank you, sir, and thank you, ladies and gentlemen, today for your participation. This concludes your conference call -- you may now disconnect. Good day.