Bruker Corp (BRKR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Bruker BioSciences second quarter earnings conference call. My name is Rob and I'll be your operator today. Throughout this conference, all lines will be on listen-only mode. (OPERATOR INSTRUCTIONS).

Now I'd like to introduce the host for this morning's call, Mr. Bill Knight, CFO.

Thank you. Good morning, and welcome to our Bruker BioSciences second quarter 2007 financial results conference call. With me on today's call are Frank Laukien, the President and CEO of Bruker BioSciences, and Brian Monahan, our corporate controller. During the call today, Frank will provide an overview of our results for the second quarter and first half of 2007. I will follow up, with a more detailed discussion of our financial results. Then we will open up the line for your questions.

Before getting started, I'd 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 risk factors discussed from time to time, in our filings with the Securities and Exchange Commission.

We expressly disclaim, any obligation to release publicly any revisions, to any forward-looking statements. These statements may not be rebroadcast, recorded, transcribed or otherwise used without the written consent of Bruker BioSciences. During this call, we may refer to certain financial measures that are not in accordance with generally accepted accounting principles, or GAAP. Such as the changes incurred in 2006, associated with our acquisition of Bruker optics. Non-GAAP financial measures, are not meant to be a better presentation or a substitute for the results of operations prepared in accordance with U.S. GAAP.

We believe that discussing these measures helps investors to begin 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.

I'll now turn the call over to our President and CEO, Frank Laukien.

Thank you, Bill, and good morning, everyone. We appreciate you joining us this morning. In the first half of 2007, we have continued the rapid growth and steady improvement trends in profitability, of the prior two years. And we have met or exceeded our stated financial goals.

I am particularly pleased with our second quarter 2007, currency adjusted revenue growth rates of 17%, which included an accelerating organic growth rate, of 12% year-over-year. For the first half of 2007, our currency adjusted revenues grew by 14%, with organic revenue increasing by 9% year-over-year. Our excellent top line performance has enabled us to deliver improved operating and net income. Our net income in the second quarter of 2007 was $5.0 million or $0.05 per diluted share, compared to net income of $2.5 million or $0.02 per diluted share, in the second quarter of 2006. Our net income in the first half of 2007, was $8.8 million or $0.08 per diluted share, compared to net income of $5.8 million, or $0.06 per diluted share, in the first half of 2006.

I am also quite pleased with a positive financial contribution from some of the acquisitions that we have completed, since November 2005, which taken together, are now clearly having a positive impact on our overall revenue growth, and bottom line. Our new order bookings in the second quarter of 2007, and our backlog at the end of the second quarter, have been very good, and we continue to see healthy demand across the various markets we serve. We saw particularly strong growth in materials research, in our chemical detection product lines, as well as in our expanding industrial and applied analysis market.

During the first half of 2007, our three operating companies introduced numerous innovative products and solutions, about which we recently had separate new product press releases. These new products are expanding global distribution capabilities, as well as our very healthy backlog position as well, for the second half of 2007. Now here is Bill Knight our CFO with a more in-depth look at our financial results.

Thanks, Frank. To recap briefly, our second quarter 2007 revenue growth rate of 21% included approximately 5% from acquisitions, 4% from foreign currency exchange rate changes, and 12% the majority of the increase, from organic growth.

For the first half of the year, our revenues grew by 19%, including approximately 5% from acquisitions, 5% from foreign exchange rate changes, and 9%, from organic growth. Our gross profit margins in the second quarter of 2007 were 43.6% down from 46% in the second quarter of 2006. Included in our gross profit margins in the second quarter of 2007, was a special one-time marketing driven charge of $1.5 million associated with upgrading certain FTMS systems to our new high-performance ten times more sensitive Apollo Tool Dual Funnel ESI source. We are pleased that we made this investment as our FTMS bookings have rebounded nicely in the first half of 2007, which will benefit us going forward. Had this FTMS. upgrade charge not been incurred in the second quarter 2007, then our gross profit margins would have been higher by 1.2%.

For the first half of 2007, our gross profit margins were 45.5%, compared to 46.1% in the first half of 2006. And excluding the FTMS charge incurred in the second quarter, our gross profit margins would have been 0.7% higher than reported, which would have resulted in a slight gross margin improvement, on a year-over-year basis.

While our gross profit margin improvements have not come as quickly as I would like, overall, progress is being made. Bruker Optics continues to deliver 50% plus gross margins. We continue to believe that our ongoing programs which include new product developments, redesigning to cost activities, component sourcing, and improved manufacturing efficiencies, will allow us make steady progress on an annual basis towards our medium term goal, of greater than 50% overall gross profit margins.

Our overall operating expenses for the second quarter of 2007 were 37.8% of revenue, down 530 basis points, from 43.1% in the second quarter of 2006.

Included in the results for the second quarter of 2006 was $3.6 million of Bruker Optics acquisition related charges, which represented 3.7% of revenue in the period. For the first half of 2007, our overall operating expenses were 39.1% of revenue, down 300 basis points, from 42.1% in the first half of 2006. Included in the results for the first half of 2006, were $4.9 million of Bruker Optics acquisition related charges, which represented 2.5% of revenue during the period.

We continue to get volume leverage in our R&D expenses, while we have made deliberate additional investments in sales and marketing activities worldwide, which now contribute to our top line growth, in which we also expect to begin to leverage all going forward, as a percentage of revenue. Included in interest and other income expense in the first half of 2007, were gains of approximately $0.3 million or 300,000 on derivative financial instruments, compared to much higher gains of approximately $2.3 million in the first half of 2006. These contracts, the contracts these gains were associated with, have now mostly been settled, and the final contract will settle in August, of 2007.

Also included in interest and other income in the first half of 2006, was interest income of approximately $1.5 million, generated on certain cash and short-term investments, which were used to finance a portion of the Bruker Optics acquisition, which was completed on July 1st, 2006.

In the second quarter of 2007, we incurred $2.3 million of income tax expense, on pretax income of $7.3 million. Resulting in a much improved effective tax rate of 31.6%, compared to an effective tax rate of 50.4% in the second quarter of 2006.

For the first half of 2007, we incurred $5.6 million of income tax expense on pretax income of $14.6 million, resulting in an effective tax rate of 38.3% compared to an effective tax rate of 49.9% in the first half of 2006. Our below statutory tax rate for the second quarter, and first half of 2007, is a result of our U.S. operations being profitable. Whereas in the past, they generated losses, that could not be tax benefited.

Beginning in the first quarter 2008, we will benefit from the recent change in the German tax rates, which reduced the German corporate income tax rate, by approximately 10%. Currently, we under the process of evaluating the impact which this change will have on our overall tax rate in 2008, and beyond. As a substantial portion of our pretax income is currently generated by our German subsidiaries.

In the third quarter of 2007, we anticipate a modest one-time benefit, that we will need to revalue our deferred tax assets and liabilities, as a result of this tax law change in Germany. On the bottom line, our net income in the second quarter of 2007, was $5.0 million, or $0.05 per diluted share, compared to net income of $2.5 million or $0.02 per diluted share in the second quarter of 2006. Our net income in the first half of 2007 was $8.8 million or $0.08 per diluted share, compared to net income of $5.8 million, or $0.06 per diluted share, in the first half of 2006.

I would like to make one final comment on our balance sheet, regarding inventory, before we open up the calls for questions. With our high new order bookings, and further growth, backlog growth in the first half of 2007, we have ramped up the production levels that our factories, with associated inventory growth, under our current production processes. At the same time, our finished goods, and in-transit inventories, have also increased, in anticipation of a strong second half of 2007. +q-and-a Overall, our inventory turns have remained constant, but going forward, we expect improvements in our manufacturing processes, and augmented field service capabilities, to increase our inventory turns. With that we would like to open it up for Q&A.

Thank you, sir. (OPERATOR iNSTRUCTIONS). All questions are taken in the order they are received.

And sir, I have your first question today coming to you from Derik De Bruin, from UBS.

Good morning. This is [Hazuer Frond], for Derik De Bruin Good morning, besides the one-time charge on the M.S. upgrade, impact on gross margins, can you guys also help us to understand, what other components might contribute to gross margin decline in second quarter, such as F.X. and et cetera?

Hello. This is Frank Laukien. Some of it is clearly also product mix. That's why our gross margin does have some variability from quarter to quarter. It was on low side, obviously in Q2. We expect for instance, our gross margin to be better than this in Q3. For instance on the Bruker Daltonic side we expected to shift some CBRN or MBC detection equipment, which now will mostly be revenue in Q3 and Q4, which tends to have better gross margins. There's also a product mix component, while the gross margins in the second quarter was on the low side.

Okay. Do you guys see gross margin jump back to the high 40s in the second half of this year?

I don't know -- this is Bill Knight. I don't know that I want to particularly forecast that. I do want to tell you that we do have these continuous improvement programs in place. Frank just indicated on a quarter by quarter basis, you can have some ups and downs. depending on where you sell. There's certain areas in the world where we sell to distribution, where we get good margins but we don't sell there every quarter. Our product mix has a significant impact. So, you know, overall, I'll just state that we expect that trend, in improving gross profit margins to continue. Our overall goal remains at 50%.

Great.

And you can expect to see annual improvements. I don't think we can forecast it really very well by quarter, but we expect to see steady annual improvements as we have in recent years.

Right. And you guys have very good punctual rate on SG&A and R&D. Just going forward, how sustainable do you guys think these operating expenses can go, for the second half and beyond?

We expect to see continued leverage, of bringing our expenses down, as a percentage of revenue. This is happening a little bit more quickly on the R&D side, because there we were satisfied with our existing investment, and you know, that goes up somewhat, but there's no major additional investment. Whereas as Bill stated earlier, and as we discussed with the street previously, in a number of areas, we are continuing to deliberately invest in our marketing and sales capabilities. For instance, at the Bruker AXS X-ray business, we have gone direct in a number of major markets. For instance India, Korea, Taiwan, Australia, Scandinavia, where we just acquired our distributor. So clearly, there will be some additional marketing and selling expenses.

Similarly on the Bruker Daltonic side, we're investing in marketing and sales capabilities, in the applied and small molecule markets, and in the clinical research solution side. So this year, you will not see much leveraging on the marketing and selling side, despite our, significant growth. But we certainly will see a leveraging, of this investment will not continue indefinitely, but I think this year in '06 was really the ramp up in marketing and selling. So certainly by late '07 and certainly into '08, we'll also begin to see more significant leveraging off, of the marketing and selling expenses is our growth.

Right. Thank you. And I have a last question. Can you guys help to us break down the growth of the U.S. versus ex-US this quarter. Just trying to help us to understand the impact on the tax rate, and going forward.

Well, this is probably the first time in a while, that we have had, profitability in U.S. operations, and we certainly expect, when you look at an annual basis, that that trend will continue. And so when we look at tax rates, we have this prior to the German adjustment, it was 41%. The new German tax rate will certainly bring that down, but we expect to continue to drive our tax rates to be below that statutory rate. And for as much profit as we get in the U.S., we can shelter that for a while.

Okay. Great. Thanks so much.

And thank you. We'll go to Mr. John Sullivan, from Lehring Swan

Hi. Good morning, guys. This is Reg Joseph, in for John Sullivan.

Okay.

Got a quick question for you again, piggybacking off the last one, with respect to tax rate. What are you forecasting for tax rate for 2007, overall?

I don't think we ever issued a formal forecast, but we do believe that we'll be, under that 41%, so you know, 37%, 38%.

Okay.

Probably a good number.

Great. Another question is, do you break out the growth for the different units AXS, Optics, and Daltonics?

We can give you some directional assistance here. The growth in the businesses was the highest growth, certainly well into the double digits, was again at Bruker AXS. The Bruker Daltonics saw single-digit growth, and Bruker Optics was in the double digits, but sort of in the middle among the three divisions.

Great. Thank you very much.

Going forward we expect that those will become, in the second half of the year, we suspect they will be much more similar, and we continue to be comfortable with our sales prediction for the year, and believe that we'll continue to see double digit growth in the second half of the year as well.

Thank you. Sir, we're going to go to Steve Unger, from Bear Stearns.

Hi. Good morning, just to follow up on that. Does those growth estimates-- or growth numbers include currency or exclude currency?

They are as reported.

As reported, okay. Then I know that you guys had a supplier component issue for the Bruker Optics business in the first quarter, which did weigh on growth. Did that weigh on growth in the second quarter, and has that issue been resolved?

We really had -- you might have been referring to our China order, which was not a supplier issue, but it's how fast we can get units installed, and that was really not an impact-- did not impact this second quarter, nor do we anticipate that will impact the remainder of that order.

In a nutshell, I think it has been resolved. You're right, Steve in that we were somewhat slow in getting those systems accepted at Bruker Optics, in Q1, and that has been resolved.

Has been resolved-- great. Then in terms of the FTMS charge -- was that -- is that a retro fit? Are you upgrading the base, or is that an upgrade to shipments that occurred just in the quarter?

Those are certain systems that have been out there, that we've upgraded, some systems out there in the field, that we've upgraded to newer capabilities, to make them more suitable as reference sites for future orders.

Wonderful. Two other questions, just more broad questions. Could you just highlight the performance of your Daltonics business? I know you have so many different products in that business, selling to so many different customer groups. Could you give us some color as to where you're seeing strength? I know that the growth appears to be improving there.

I can give you some color. Certainly the NBC detection, or as we now sometimes call it, the CBRN, chemical biological radiological nuclear detention business, the CBRN detection business, strong orders for quite a while, but not yet really reflected in revenue, but very a good order intake, and very good backlog in that CBRN business. So that's going to benefit us going forward.

In general geographically, in the life science part of Bruker Daltonics, the first half was very good, particularly strong in Europe, and in Japan, whereas in the U.S. and in the rest of Asia Pacific, it was somewhat slower than the growth in Japan or Europe. Those two regions, I would highlight as performing, particularly well. Protonix, probably growing with the market, and our small molecule business, electrospray (inaudible) instruments growing faster than the markets, although, as you know, there we are growing from a somewhat smaller basis, that because we were traditionally primarily a proteomics company. Maybe that gives you some flavor.

And the FTMS business is doing well?

The FTMS business didn't do so well last year, and its orders are back this year. It sort of rebounded this year. Most of that will also still be seen in revenue going forward.

Wonderful. Last question, in terms of Asia sales, your ability to sell into both China and India, could you comment as to what your success has been? Have you been going direct, and if you haven't, it sounded like you were going to go direct in the second half of '07 or in '08.

Starting with China, in China, we've traditionally been much stronger, and gone direct really, a long time ago, Although when you go direct in China, you also always have additional regional sub-distributors that's pretty typical. But we have a major operation in Beijing, with a smaller office in Shanghai.

And in fact we have just readied, and are going to open it, at a major -- the largest instrument conference in China, the BCIA will occur in October, and we'll sort of have the grand opening of our combined BRKR applications, and demo facility in Beijing, which will be much larger and more impressive, and more capable for customer demos, and training than what we had in the past. So in China, we've done really quite well. Bruker Optics in particular if you call the FFTA order, really our x-ray business has done, really very well in China, and Daltonics really has been direct there for a long time as well. And doing quite well, although probably more focused though on the high end proteomics business, not on to the broad market yet.

Then India?

India's a little bit different. In India, I think we were lagging behind, in those businesses. In Bruker AXS, we've gone direct about a year ago, little less than a year ago, by taking over essentially most of our distribution from a distributor, and from a somewhat lower basis than we would like to see, we've grown rapidly in new orders for the AXS business.

I think we're expanding rapidly in India. I'm also quite pleased with the Daltonics business there. We have a capable distributor in India. That distributor only really got going, in the last, perhaps 18 to 24 months. We've seen very appreciable growth now in India, in the Daltonics side. Via a very capable, and focused distributor.

Okay. That's great color thank you.

Thank you. (OPERATOR INSTRUCTIONS). And sir, it looks as if I have no further questions for you.

Okay. Then we'd like to all thank you very much again, for joining us this morning. We'll talk to you next quarter. Thank you.

Thank you, sir. Thank you again, ladies and gentlemen, this brings your conference call to a close. Please feel free to disconnect your lines, now at any time.