Bruker Corp (BRKR) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Bruker Biosciences third quarter earnings results conference call.

[Operator Instructions].

Now I'd like to hand the call over to your conference host, Bill Knight, Chief Financial Officer, over to you sir.

Thanks, Ron and thanks for joining us today. With me on the call is Frank Laukien, President and CEO of Bruker Biosciences and Brian Monihan, Corporate Controller of Bruker Biosciences. During this call Frank will discuss the results and progress of Bruker Biosciences while I take you through the Bruker Biosciences financial result for the third quarter and year to date and their outlook for the fourth quarter. I would like to start off 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 properties, litigation, and other risk factors discussed from time to time in our filings with the Securities and Exchange Commission. We especially disclaim any obligation to release publicly any revisions to any forward-looking statements. These statement may not be rebroadcast, recorded, transcribed or otherwise used without the written consent of Bruker Biosciences. During this call, we refer to certain financial numbers--measures that is are not in accordance with generally accepted accounting principles or GAAP, a reconciliation of non-GAAP financial measures used on this call for the most directly comparable GAAP measure is available in our release. With that, I'd like to turn the call over to Frank to discuss highlights from the quarter and progress of Bruker Biosciences.

Thank you, Bill. First I'd like to welcome Bill and formally introduce William Knight, our new Chief Financial Officer to you. I'm sure Bill is looking forward to speaking and meeting with many of our major investors in the months ahead. As you may you have seen from our recent press release, Bill has significant experience in our industry as well as in the medical device and biotechnology industries. We believe Bill will quickly become a major contributor to our company, both in our financial and operational management. Now I would like to begin by highlighting some key results for the third quarter and year-to-date 2004.

For the quarter, we reported a 5% increase in revenue to 66.5 million compared to revenue of 63.1 million in the third quarter of 2003. Excluding the effects of foreign exchange, revenue decreased 1%. Year-to-date, revenue increased 6% to 198.8 million compared to revenue of 187.0 million for the comparable period last year. Again, on a currency adjusted basis, revenues declined by approximately 1%. I would like to address why revenue is in the third quarter were slightly below what we had originally forecasted.

During the quarter, we experienced delays by customers who placed orders with us where the company had the systems ready, but our customers were not yet ready for us to install their systems. Had these delays not occurred, revenues would have been approximately 2 million higher than we reported. In addition, the lengthening and time it took for us to produce ship and install our new products that we started experiencing in the second quarter still somewhat impacted our third quarter results as well. Most of these new product introductions were announced at Pittcon and ASMS earlier this year and are now shipping and generating revenue. But some only began to do so in the middle of the third quarter. As you may know, we typically recognize revenue when we receive customer acceptance for our products and not upon shipment.

Our new order bookings continue to show us that our end user markets are healthy and our products are competitive. During the first nine months of 2004, our Bruker AXS business has experienced strong growth in revenue and even stronger growth in order bookings of more than 20% compared to the first nine months of 2003. During the same period of time, our Bruker Daltonics business has experienced more modest mid-single digit growth for revenue and order bookings. Recently -- very recently at the Human Proteomics Organization or HUPO conference in Beijing, we introduced several new Bruker Daltonics products, the major ones being our next generation high-end ultraflex two TOF/TOF system that sets the new performance standards for high-end ultra TOF research capabilities in expression and clinical Proteomics as well as the very important and very convenient consumable our pre-spotted anchor chip for MALDI-TOF, MALDI FTMS etc. that makes MALDI analysis for expression Proteomics far more convenient and much better in terms of lack of cross contamination, cross memory effects, etc., for the pharmaceutical and biotech industries. We think both of these will begin to contribute to our revenue rather quickly.

Now I would like to talk about our bottom line performance during the quarter and year to date. During the quarter, we incurred an adjusted net loss of 1 million or one penny per diluted share compared to an adjusted net income of half a million or one penny per diluted share for the comparable period of 2003. Year to date, the adjusted net loss was 3.7 million, or four pennies per diluted share compared to an adjusted net income of 1.6 million or two pennies per diluted share in 2003.

Our shortfall on the top line during the quarter and year-to-date fell to the bottom line as well. During the third quarter, gross margins recovered from the second quarter, resulting in operating income of a quarter million dollars, in addition during the third quarter we generated cash from operations of half a million dollars compared to a use of cash for operations of 7.2 million in the second quarter of 2004. So we see clear sequential improvement and we expect that to continue. So with that said, we're committed to driving towards meaningful industry standard profitably about over the next three years and recently announced a major productively initiative near the end of the third quarter that is expected to save the company approximately 6 million annually, once fully effective.

In addition, we expect to announce additional restructuring and cost-cutting measures before the end of this year. Looking forward we believe we have the drivers in place for a return to double digit top line growth in 2005 and more immediately for further sequential improvement in revenue and operating income. This provides the summary of our results for the quarter as well as our plans to address challenges and opportunities. I will now turn the discussion back over to Bill, our CFO to discuss the financial details for the third quarter and our outlook for the fourth quarter.

Thanks, Frank. I would like to provide a little more information on the quarterly and year-to-date results by taking you through the P&L for the next few minutes, including certain information on our business segments. Bruker Biosciences' third quarter 2004 revenues increased 5% to 66.5 million compared to revenue of 63.1 million in the third quarter of 2003. Excluding favorable currency effects, net sales decreased 1% year-over-year. In the third quarter of 2004, revenues for Bruker Daltonics businesses decreased 6% to 34.9 million, a decrease of 11% when you exclude currency effects. Revenue for Bruker AXS business increased 20% to 32.3 million in the third quarter of 2004, for an increase of 13%, excluding foreign currency effects. Year to date, 2004, Bruker Biosciences revenue was derived 39% from life science mass spectrometry systems, 32% from x-ray systems, 5% from NBC detection systems, and 24% from after market sales.

The GAAP net loss for the third quarter of 2004 was 2.7 million or $0.03 per diluted share, compared to a net loss of 14.7 million or $0.17 per diluted share in the third quarter of 2003. The adjusted net loss for the third quarter of 2004 was 1 million, or one penny per diluted share compared to an adjusted net income of half a million or one cent per diluted share in the third quarter of 2003. The adjusted net loss in the third quarter of 2004 excludes 118,000 for amortization of acquisition-related intangible assets and approximately 1.6 million from the write-down of impaired investments in two small Proteomics companies. The write off of investments during the quarter represented the remaining investments on our books.

During the third quarter of 2004, gross margins improved sequentially from the second quarter to approximately 47%. Selling general and administrative expense is a percentage of product revenue decreased to 30.3% for the third quarter of 2004 as compared to 30.5% in the third quarter of 2003. The decrease was primarily attributable to decreases in our sales and marketing expenses partially offset by increases in general and administrative expenses. The increase in G&A expenses during the were mainly due to additional expenditures associated with implementation work to comply with Sarbanes-Oxley including accounting, consulting, and legal fees.

Research and development expenses increased 17% of product revenues during the third quarter of 2004 compared to 15.5% in the comparable period of 2003. From a tax perspective, we incurred approximately 1.0 million in income tax expense on a loss before income taxes of approximately 1.6 million since we could not take a tax benefit for our domestic losses or the write off of the investment. From a cash perspective, we ended the quarter with 76.6 million in cash. During the third quarter, we generated cash from operations of $500,000 compared to a use of cash by operations of 7.2 million during the second quarter of 2004.

Now, on our expectations for the fourth quarter of 2004. We ended the third quarter with a high backlog and expect our recently introduced new products to generate strong order booking. As a reminder due to the fact that both of our businesses mostly sell capital equipment that is subject to customer acceptance, we may from time to time experience significant fluctuations between our anticipated and actual results. Keeping that in mind, we anticipate revenue of 72 million to 78 million and adjusted earnings per share of break even to $0.03 for the fourth quarter. We believe that the factors that challenged us over the last two quarters are temporary and the launch of multiple new products during the year will continue to drive bookings growth in the fourth quarter and beyond. We also continue to focus our efforts on the bottom line growth of the business and will continue to act accordingly in order to meet our objectives. With that, I'd like to open it up for questions.

[Operator Instructions].

Our first question comes from Alan Goldstein, a private investor.

Hello, can you hear me?

Yes, I can hear you.

I would like to know when, you know the result that you anticipate are going to start to drive interest from the investment community I mean bottom line here is that consistently these results seem to be disappointing. This quarter was below -- below estimates. I mean it's a not a lot of published estimates out there. But nevertheless, it -- it still seems to have been a disappointing quarter. Also going forward, your revenue estimates seem to be below what the few analysts that are following the company are looking for. The bottom line here is that there's no sponsorship out there, nobody really seems interested in owning the stock, and the stock seems to be languishing here in multiyear lows. When are you going to put numbers on the bottom line that are going to create some institutional sponsorship and get some institutional investors actually interested in buying and owning this company?

Well, this is Frank Laukien. I certainly -- as you have heard from our forecasts, we expect to have a small but clear operating income and earnings per share in the fourth quarter. We are working very hard, not only on cost cutting and restructuring, which we have announced and which we will drive further as far as it takes, but also, of course, on driving revenue on further improving our gross margins, that bringing down our expenses. There's not a -- I think there's not a magic bullet or a single action that will drive this, but many actions that go hand-in-hand in driving and growing our business as well as taking the necessary cost control and cost-cutting steps and productivity step that we have initiated and that will show a benefit in the fourth quarter, some of it also comes in the first quarter of next year plus additional steps that we are taking. But its not just about cost cutting, it's also about driving our business. We have grown very, very rapidly over the last five years into significant players in both of our respective markets. We need to entrench ourselves and clearly focus on driving the bottom line. We don't disagree with you on that. But there's not a magic bullet or a quick fix, it does take some time.

Can I follow up, please?

Certainly.

You've made two presentations recently to Wall Street. One at the best earnings conference, one at the UBS conference and there was generally a bullish tone. You mentioned that you had some products that were being evaluated by the Department of Homeland Security. Can you give us any updates on that as it relates to your portable detector, portable chemical and radiation detector units?

Yes, we have a portable chemical agent detector that's being evaluated by the Department of Homeland Security. That's a major contract opportunity. And we also have our long distance chemical agents detector using optical means, which is sort of a late 2005 or early 2006 contract opportunity with the Department of Defense. I would like to say that these potential grand slam really large contracts right now are NBC detector business is driving, its growing very nicely at the base business with a variety of smaller orders. But we continue to have these two domestic plus at least two international major contract opportunities.

When these proceed, obviously, at the -- on the time schedule of our customers, which would be the government and we really have no influence on that. These take -- these are major opportunities, but they're -- in this type of defense and security business things happen at a -- on a time scale that we do not control. We have, therefore outline that, we hope or expect that the Homeland Security decision could be made in 2005 and the decision by the Department of Defense is more like in early 2006 decision. The other two international opportunities are proceeding but we cannot -- we do not know in what quarter an order like this may fall or, of course, whether we get this order at all. But we are certainly one of the few very qualified company that have this unique type of instrumentation. But I think maybe the main message I would like to leave you with is that our base business that consists of many smaller orders in the NBC and Homeland Security and Defense business is growing nicely and that continues to be one of the nicely growing areas of the company.

One more --

If I may then add just to complete the line of reasoning here -- our forecasting does not take into account these large contract opportunities or does depend on that. We cannot rely that those will come through if they come through, they're gravy so to speak, for us. But they're not part of the base business plan.

One additional question. You seem to be talking about a growing top line with a 10% to 15% organic growth rate. I don't see where that's reflected in your forecast. Also the current stock price -- what comments can you make about the current stock price in relation to whether or not it represents any kind of a reflection of the real growth opportunities that this company seems to have or that management seems to have going forward. I mean $3 and change is a one time sale price and that seems to be totally out of whack with other companies and other industry multiples.

Let me take the first part of your question first, the double digit growth that we have experienced, in fact a compounded annual growth rate over the last three or four years of over 20% for the company, not taking into account the mergers or performers, if Bruker AXS and Bruker Daltonics had been merged all along, that's one of the highest growth rates in the industry. This year we will have less growth but we have a -- it will be in the single digits for the full year as you can see can easily see from our Q4 guidance.

But the drivers in terms of new order bookings and in terms continued very high backlog that we have right now give us reason to believe and a basis to expect that we can return to double-digit top line growth in 2005. Having said that, obviously, this remains a high priority, but the highest priority will be reaching sustainable and then meaningful profitability. I would rather not comment on our stock price. It -- you know, it's -- suffice it to say that we are not satisfied with our stock price, but I -- you know, I think it's inappropriate for me to comment on our stock price relative to others here.

What is the real earnings power of this company in '05? What kind of number can you put on the bottom line?

We will give quarterly guidance and we'll obviously look to give quarterly guidance again at the end of the fourth -- when we do our fourth quarter conference call for Q1 of next year. And we hope that there will be a track record that you can see from which analysts and others on the street, investors or self find analysts can then extrapolate and hopefully see the trend that we believe -- for which we believe to have the drivers in place.

The next question will come from Ken Hirschberg, a private investor.

Thanks for taking my call. I want to ask a question somewhat along the lines of the prior caller about Homeland Defense and Department of Defense. Currently this area makes about 5% on your business, I was wondering where you see that going to in the future, is that going to be a more substantial part of your business or investing much money in there to really grow that business?

Ken thank you for the question. Yes, indeed. We believe that this will grow faster than the rest of the business. And we cannot forecast it accurately, but we over the next few years this could very well grow from 5% of our business presently towards, you know, 10% and higher. Obviously it will not dominate the business and the revenue, but we believe this will be one of the faster growing parts of our business in the next three years from the trends that we have seen recently.

Is that a higher margin business or a lower-margin business?

It is generally comparable. It is generally comparable. After market for supplies and for consumables tends to be a higher margin business systems, a little bit higher in margin than systems that's true for our life science and materials analysis business as well. There tends to be a significant after market component when you sell any of these systems that are then deployed for Homeland Security and Defense typically for a very long time. And so it tends to have decent margins. And on average probably a little better margin if you look at it over the lifetime of an instrument because of the higher after market component.

And another question -- this is probably a question you never received before, but when I listened to your presentation and your conference calls and your quarterly calls, one almost needs a degree in mnemonics to understand what you're saying, what your TOF TOFs. It really seems to be almost geared to the -- so that people familiar with your jargon. Is there any way of making it a little more presentable for the average investor? And I don't want to say dumb down, but in some way actually dumb down your presentation?

We'll take that as a suggestion rather than a question. I appreciate the suggestion. You -- you made my of the institutional investors and the self-analysts, of course, are very familiar by now with this jargon because they follow us, they may also follow others in the industry. But I think your point is well taken, Ken, and we'll endeavor to make progress in putting it into more - using less jargon and making it more understandable for people who are less familiar with our story.

I look at so much about your company that I like and I think it has wonderful prospects. But it's one of the few companies that I have invested in where I can't really say I understand exactly what you're doing. Thank you very much.

Thank you for your suggestion.

And Jim Harden from Sterling Capital has the next question.

It's David Cohen. Bill, welcome aboard. I wonder if you could comment about working capital. Is working capital still growing even though revenue basically flat -- I don't know how much of that is currency and part of your restructuring plans, what are you guys thinking about on the working capital side?

We certainly are looking at what capital we have tied up in working capital and that will be a focus over the next few quarters to give hard attention to receivables and particularly inventory is to where the best place to put those dollars and what we can do to bring those amounts back and to probably more of an industry standard level. So it's clearly has our attention and focus and we'll be working on it, as I say, over the next few quarters.

Thank you.

The question signal is star one. The next is from Larry Neibor from Robert Baird.

Hi, actually this is Tom Russo for Larry Neibor. The first question -- I notice the gross margins obviously expanded for Q3, with the Q4 revenue guidance being even higher than Q3, can you comment on what the gross margin might look like in Q4?

We generally expected an improvement in gross margins, as you recall, the restructuring steps we took last year after the merger with closing our manufacturing facility in Switzerland and manufacturing also in the Netherlands. We were expecting a gross margin improvement in the second half of this year and this seems to be occurring now. We're taking a blended average of recent gross margins over the last few quarters to predict the fourth quarter, quite honestly. Because we do have fluctuations in gross margin a little. We generally have an improving trend but on top of that, we also have some gross margin fluctuations that depend on product mix in any given quarter. So we're taking sort of a blended average. But I think generally there's an improving trend in gross margins that we have predicted.

Thanks, follow-up question -- maybe I missed it -- were there numbers that actually put to bookings growth in the two different segments?

Quarter-to-quarter, it obviously fluctuates. We don't give exact numbers, we sort of give greater than numbers. Our total bookings growth year-to-date for the combined company is in the neighborhood of -- is in the mid teens. And that obviously, again, is a long - double digit -- low teens to mid teens is our long-term growth expectation. And that's what Bill and myself are basing our optimism for assuming double-digit growth in to 2005, backlog and bookings. Those are the trends that we can discern from the market. We do believe that struggling with revenue in the second quarter and a little bit so much fully catching up on the third quarter are transition effects for us.

Lastly, I think I did miss this. The breakdown within Daltonics Masspec versus NBC, was the breakdown given for the quarter?

We do it per quarter, it just fluctuates too much. It really isn't that meaningful. So we've given that year-to-date in the press release. It is in the press release, I believe.

Thank you.

Thank you.

And your next question will come from Michele Salucha from Seleqnan (ph).

Hi, I have two quick questions. First, is on Masspec Frank, can you give some color on what you're doing competitively and what sort of year-over-year quote rates you've seen for the last three months as well as for the last nine months. And then can you give a little bit more color on the second cost saving initiative that you will be implementing in Q4? Thank you.

Michele on the life sciences mass spectrometry side, as I said, we are -- our growth rate this year has been sort of in the mid single digits. So somewhat slower than what we had seen before. But some of that, obviously, has to do with some transition effects, some revenue. We are, you know, as always, there are some product lines that are growing rapidly, there are some are not growing rapidly that changes from year-to-year. But right now if, you know, obviously ASX turns out to be the faster growing company this year, all be it from a weak basis last year. The second question on the cost-cutting and the productivity initiative, we had a press release on that on September 10. That had outlined about $6 million annualized in cost cuts. Michele we are planning to go beyond that and we hope to make an announcement before the -- before the end of the year. At this point, I cannot go into the details of that yet.

Maybe another way of asking the question is what do you think is a reasonable break-even point for the business on an annualized run rate?

We hope to move beyond break even in Q4 and obviously also that's our goal for next year, even though we haven't given detailed guidance for 2005 and our ambition is to go beyond break even and over the next -- our goal is to be profitable next year and our goal is to reach meaningful industry standard profitability over the next three years. We'll be driving that pretty aggressively.

Thank you.

Thank you.

And that was our last question. I'll hand the call back to management for a closing statement.

We appreciate you all joining us for our quarterly earnings call. We look forward to -- I'm sure Bill looks forward to meeting and speaking to many of you and we're -- we'll talk to you again once we can review the fourth quarter early next year. Thank you very much, bye-bye.