Bruker Corp (BRKR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 Bruker BioSciences earnings conference call. My name is Jackie, and I will be your operator for today's conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's conference, Mr. Bill Knight, CFO. You may proceed, sir.

Thank you, Jackie. Good morning, everyone, and welcome to our Bruker BioSciences fourth-quarter 2006 financial results conference call. With me on today's call are Frank Laukien, President and CEO of Bruker BioSciences, and Brian Monahan, our Corporate Controller. During the call today Frank will provide an overview of the fourth-quarter and full-year 2006, and then we will outline our financial goals for 2007. After that, I will follow-up with more detailed discussions of our financial results, and then we will open it up for questions.

Before getting started, I would like to read our Safe Harbor statement. This discussion will include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected including, but not limited to, risks and uncertainties relating to technological approaches, product development, acquisition integration, manufacturing, market acceptance, cost and pricing of our products, exposure to currency fluctuations, dependence on collaborative partners, suppliers, competition, intellectual property, litigation, changes in governmental regulations, capital spending and government funding policies and other risks factors discussed from time to time in our filings with the Securities and Exchange Commission. We expressly disclaim any obligation to release publicly any revisions to any forward-looking statements. These statements may not be rebroadcast, recorded, transcribed or otherwise used without the written consent of Bruker BioSciences.

During this call we may refer to certain financial measures that are not in accordance with generally accepted accounting principles or GAAP. Non-GAAP financial measures are not meant to be a better presentation or a substitute for results of operations prepared in accordance with US GAAP. We believe that discussing these measures helps investors to gain a better understanding of our core operating results and future prospects consistent with how management measures and forecasts the Company's performance, especially when comparing such results to previous periods or forecasts. A reconciliation of non-GAAP financial measures used on this call to the most directly comparable GAAP measure is available in our earnings press release which has been filed with the SEC and is available on our website at BrukerBioSciences.com.

Before turning the call over to Frank, I would like to give a final reminder as to how we accounted for our acquisition of Bruker Optics, which was completed in the middle of 2006. Because of the common ownership between the Companies, the acquisition was required to be accounted for in a manner similar to a pooling of interests. As a result, all historical financial statements, including those in our earnings press release issued earlier today, include the results of Bruker Optics for all periods presented, including all periods prior to the acquisition. For those interested in our historical pooled results, on December 15, 2006 we filed a Form 8-K with the SEC, which presented pooled historical financial statements for the three years ended December 31, 2005. This unique pooling treatment for an acquisition also required us to expense all acquisition-related charges such as legal, investment banking and accounting fees instead of recording them as goodwill on the balance sheet, which is the more typical way to handle acquisition-related expenses. During the call today we will highlight these charges because we believe calling out these charges and the effect they had on our GAAP earnings helps investors to gain a better understanding of our core operating results consistent with how management measures the Company's performance.

With that, I will turn the call over to President and CEO, Frank Laukien.

Thank you, Bill, and good morning, everyone. We appreciate you joining us today. Let me start off by saying what an incredible year 2006 has been for us. Our customer-focused products and solutions generated strong revenue growth from our core businesses. We completed several acquisitions which significantly expanded our addressable market and grew our top lines and our bottom lines. We improved our gross profit margins through selling complete solutions and ongoing cost reduction programs. Excluding the Bruker Optics acquisition-related charges, we leveraged our overall operating expenses, and we significantly reduced our effective tax rates, all of which contributed to our much improved bottom-line performance year-over-year.

Before I talk about our financial goals for 2007, let me go over the highlights from the fourth-quarter and full-year 2006. Traditionally our fourth quarter is the strongest quarter of the year, and the fourth quarter of 2006 was no exception. Our fourth-quarter 2006 revenue increased by 27% to $135.6 million compared to pooled revenue of $106.8 million in the fourth quarter of 2005. Our core businesses, including Bruker Optics generated 22% top-line growth, and additional smaller acquisitions contributed the remaining 5% year-over-year growth. Excluding favorable currency effects, revenue in the fourth quarter increased by 22%.

For the full-year 2006, revenue increased by 17% to $435.8 million compared to revenue of $372.3 million in 2005 with negligible effects from foreign currency translation. Our core businesses generated above industry average top-line growth of 13% for the year, and acquisitions contributed the remaining 4% in growth.

Net income in the fourth quarter of 2006 was $9.7 million or $0.09 per diluted share compared to pooled net income of $4.9 million or $0.05 per diluted share in the fourth quarter of 2005. Neither of these quarters included charges associated with the acquisition of Bruker Optics. Net income for the full-year 2006 was $18.5 million or $0.18 per diluted share compared to pooled net income of $9.7 million or $0.10 per diluted share in 2005. Included in net income for the year 2006 were after-tax charges of $5.0 million or $0.05 per diluted share for Bruker Optics acquisition-related expenses and approximately $2 million or $0.02 per diluted share of after-tax gains on derivative financial instruments. For comparison included in our GAAP net income for the year 2005 were after-tax losses on derivative financial instruments of approximately $1 million or $0.01 per diluted share.

So, from an overall business perspective, we are generally seeing strong demand across the various markets we serve, but we experienced particularly strong growth in the materials research market, as well as in our expanding industrial and applied analysis business during 2006. We believe that our expanding product portfolio and solutions position us well in these additional high-growth markets, and we also continue to do well in our traditional areas of strengths such as academic and life science research, proteomics, clinical research systems, etc.

The integration of Bruker Optics, as well as of the other important acquisitions which we have completed over the past 15 months, have been moving along very well and have been exceeding our expectations.

So, in summary, we believe the drivers are in place and opportunities exist to continue this positive momentum into 2007 and beyond.

Moving onto our financial goals in 2007, we want to remind everyone that the nature of our business can cause quarterly fluctuations and that we are excluding in our goals any acquisitions or other unusual charges if any in 2007. With this in mind, our financial goals for the full-year 2007 are revenue growth greater than 10% and net income growth greater than 40% above our 2006 GAAP results.

Now here is our CFO Bill Knight again with a more detailed overview of our financial results.

Thanks, Frank. I will provide some additional color on our financial results for the fourth-quarter and full-year 2006.

As Frank mentioned earlier, on a pooled basis for both periods, our 2006 revenue increased by 17% to $435.8 million compared to revenue of $372.3 million in 2005. Had the acquisition of Bruker Optics not been accounted for essentially as a pooling, revenue for 2006 would have increased by 46% compared to pre-pooling Bruker BioSciences revenue of $297.6 million for 2005 as reported in SEC filings prior to the acquisition of Bruker Optics. On the bottom-line, pooled net income for the full-year 2006 was $18.5 million or $0.18 per diluted share compared to pooled net income of $9.7 million or $0.10 per diluted share in 2005. Pre-pooling net income for 2005 was $3.6 million or $0.04 per diluted share as reported in SEC filings prior to the acquisition of Bruker Optics. Gross profit margins for the full-year 2006 improved from 44.2% to 45.6% or about 1.4%. We continue to focus on cost reduction programs, which include redesign the cost activities, components sourcing and improving manufacturing efficiencies. These initiatives will be ongoing over the next two to three years as we work towards our goal of greater than 50% gross profit margin.

Excluding Bruker Optics acquisition-related charges of $5.7 million, our overall operating expenses for the year 2006 were 37.5% of revenue, down 1.3% from 2005 even as we made significant additional investments in sales and marketing worldwide. The combination of our higher gross profit margin and leveraged operating expenses resulted in improved operating margins of 7.1% or 8.4%, excluding the Bruker Optics acquisition-related charges compared to an operating margin of 6.1% in 2005.

Included in operating expenses in 2006 were approximately $1 million of stock-based compensation charges. For 2006 we incurred $15.9 million of income tax expense on a pretax income of $34.4 million, resulting in an effective tax rate of 46.3% compared to an effective tax rate of 54.8% in 2005. Excluding Bruker Optics acquisition-related charges, our non-GAAP effective tax-free was 41.6% in 2006.

For the full-year 2006, adjusted EBITDA grew by 41% to $59.2 million compared to adjusted EBITDA of $41.8 million for the full-year 2005. And during the year 2006, cash flow generated from operations was $42.7 million.

Before we open the call up for questions, I would like to welcome our new investors to Bruker BioSciences. As you may know, in early February we completed a follow-on offering in which the Company sold approximately 2.5 million shares, and certain existing shareholders sold approximately 9.4 million shares. We are excited about the further enhanced liquidity in our Bruker stock, and this transaction has generated -- that this transaction has generated for all our stockholders.

With that, we would like to open it up for questions and answers.

(OPERATOR INSTRUCTIONS). Derik De Bruin, UBS.

So I guess looking at the -- you certainly had a lot of gross margin improvement in the fourth quarter. Is that level, do you think that is sustainable?

Well, the fourth quarter is always stronger than the other quarters. So we are obviously looking at year-over-year improvement for the full year, but the fourth quarter is always somewhat exceptional in every year.

And I take it the US business must have been profitable in the fourth quarter to allow for the dramatic drop in tax rate? Also, how sustainable is that?

We have got, as you know, a couple of corporate operations or operational activities here in the states. One is certainly profitable. The other is at a breakeven to modest profitability. We expect to see continued improvement again in 2007 and beyond in those operations. So we fully expect to be able to -- our statutory tax rate is 40%. We fully expect to get below that level in the next few years.

Okay. And I guess when you looked at the end markets, could you just talk about I guess what you're seeing in terms of the competitive market. Is there just generally broad demand across all the three segments?

We see pretty healthy demand right now in all three of our divisions, for all three of our divisions. And looking away from the divisions, all three of our divisions are obviously active in the traditional research instrumentation that goes into pharma and academia and medical school. That demand is I would say growing by high single digits, and we are growing faster than that. And some of the applied and industrial analysis markets have been growing even faster, particularly for Bruker AXS and for Bruker Optics, but we think it is also accelerating in some of these applied markets for Bruker Daltonics.

And I guess how much -- what was the total number, the total dollar amount of revenues acquired during 2006?

We had about $14 million, $14.3 million of acquisition-related revenue other than the Bruker Optics (multiple speakers)

Which is a pooling but not an acquisition.

Right. Great. I'll get back in the queue. Thanks.

(OPERATOR INSTRUCTIONS). Steve Unger, Bear Stearns.

Bill, could you give us the revenue split by each of the individual business units? Is that possible?

We really look at ourselves now, Steve, as a single segment, and we are in the business of providing solutions for our customers and really don't get into the technology split.

So going forward are we no longer going to disclose Bruker Daltonics, AXS and Optics? Is that --

This is Frank. We can give you some qualitative ideas. Obviously in 2000 -- in terms of organic growth, the fastest growth last year was at Bruker Optics. Bruker AXS was also growing very fast. At Bruker Daltonics it was more in the single digits, although with a bit of a life science growing in the high single digits. But our OEM business and our NBC business being flat or declining, which led overall Daltonics to essentially more or less flat with some growth in the fourth quarter but more or less flat. But underneath that flat overall number is actually high single digit life science mass spectrometry growth.

Okay. That is very helpful. And then in terms of the plan for improving the operating margins, is it primarily focused on the gross margin? And the optics margin is already in excess of 50%. So I'm assuming that the manufacturing efficiencies can be gained from Daltonics and AXS. Can you give us some color as to how, or a little bit more detail as to how you're going to go about improving the manufacturing gross margin?

Steve, it is not only the manufacturing, but we do -- are seeing better pricing on the solutions approach, and you get margins by what you sell it for and what you make it for. So we are attacking both sides of that. But, on the production side, we're certainly looking at with the existing products what can we do with improving quality, improving installation; what can we do with logistics and better sourcing for those existing components, and what can we do on the factory floor with logistics for taking the same square footage and running more product through it to leverage those overhead costs. The longer term activities are really on product redesign where you build manufacturability in, you lower part count, you dramatically improve quality, ease of installation, reliability.

So we have many opportunities. We have been successful early on in some of those, but this will be an ongoing effort. Certainly a fairly intense focus over the next couple of years, and we hope to hit that 50% plus level within those next couple of years.

This is Frank. I will follow-up a little bit. We don't do pure redesign to cost. We always do redesign to cost and performance, and many of the products that you will see coming out at the PITTCON next week or at ASMS or other conferences later this year will -- the headlines clearly will be improved performance, improved capabilities for our customers. But under the hood, so to speak, be assured that in all or essentially all of those products, we have also been doing redesign to costs.

So it is working on the gross margins. You're right, the greater improvement potential is at AXS and Daltonics, and so that is where a lot of the focus is there. Although I think Bruker Optics' gross margin can go up a little bit further as well. But you're right, they are already in pretty good shape.

But there is the other side of the equation, which is expense leveraging. So I think you will see continued leveraging of our total expenses, a little bit faster on the R&D and G&A side, and some modest expense leveraging on the marketing and selling side because there we continue to make additional investments both in our international distribution going direct more and more, which we have already done mostly in '06, but some of that has been continuing into '07, as well as getting slightly different marketing and applications and business development capabilities for some of these newer applied markets and industrial markets, which is really a theme for all three divisions -- Daltonics, AXS and Optics. We're looking at the combination of expense leveraging and gross margin improvement and improved tax rates to drive our bottom-line faster than our topline. That is our goal.

Excellent. So it does not involve facilities rationalization or restructuring in any major fashion?

Not as presently planned. We think we have done some significant restructuring a couple of years ago in '04 and then early '05. We have done a little bit more of that in '06, not exactly headline material, but there was more of that. And in '07, quite honestly I don't see a lot of that. It is really these other drivers that we discussed.

Excellent. And then, Bill, I noticed on the breakdown that you have for the EBITDA calculation, that D&A was over $5 million in the quarter. Could you explain why there was such a significant increase in depreciation and amortization in the fourth quarter?

This is Brian. Yes, we do include our acquisition-related intangibles in the fourth -- in that line in the P&L and in the cash flow. And, as we talked about, we did do four or five acquisitions over the last 15 months. Several of those, three of them the largest one, Bruker Optics, incurred in the third quarter. So that really impacted the D&A substantially in Q4 year-over-year.

And is that expected to flow through in 2007, or is that more of a onetime impact?

No, there will be continued ongoing amortization of intangibles for the next -- most of those intangibles will be amortized over a four to five-year period, so that will be more of an ongoing higher balance than historically we have had.

Okay. And then in terms of on the balance sheet last question, the due from affiliated companies, is that all Bruker BioSpin I should assume, and then could you maybe talk about what relationship you have with Bruker BioSpin and what the impact on revenues for 2006 was?

You're correct. It is Bruker BioSpin. We buy certain components from them for certain of our units. There is also activity between Bruker BioSciences and Bruker BioSpin as far as distribution activities where in a couple of parts of the world they will represent us and a couple parts of the world that we will represent them. So I would not say that there is significant dollar activity amongst the groups, but they are handled all at arm's length transactions, and because of the related party nature, I do review most of those transactions, and then at a certain level, our audit committee would review those as well to ensure that they are arm's length.

I think in general a few years ago related party transactions, what we were purchasing from related parties or what we were selling through related parties was less than 10% of our revenue. I believe it is now generally less than 5% of our revenue.

That is correct.

Excellent. Okay. Congratulations on a fine year, guys. Thanks.

(OPERATOR INSTRUCTIONS). At this time, gentlemen, you have no further questions. So I will turn it back over to you for closing remarks.

Okay. Thank you very much to all of you for joining us this morning, and we're looking forward to speaking to you after the first quarter. Thank you. Bye-bye.

Thank you, ladies and gentlemen, for your participation in today's presentation. This does conclude today's presentation. You may now disconnect, and have a wonderful day.