Bruker Corp (BRKR) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Bruker BioScience's Third Quarter Earnings Call. My name is Erik and I'll be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) .

I would now like to turn your presentation over to your host for today's call Mr. Bill Knight, Chief Financial Officer. Please

Thank you, Erik. Good morning and welcome to our Bruker BioScience's third quarter 2007 financial results conference call. With me on today's call are Frank Laukien, the President and CEO of Bruker BioScience's and Brian Monahan, our Corporate Controller. During the call today, Frank will side an overview of our results for the third quarter and nine months ended September 30, 2007. I'll follow up with a more detailed discussion of our financial results, and then we will open up the line for your questions. Before getting started, I would like to read our Safe Harbor Statement. This discussion will include forward-looking statements. These statements are based on current expectations, but are subject to risks and uncertainties that could cause actual results to differ materially from those projects, including but not limited to risks and uncertainties related to the integration of businesses we have acquired or may acquire in the future, changing technologies, product development and market acceptance of our products.

The cost in pricing of our products, manufacturing, competition, dependence on collaborate partners and key suppliers, capital spending, and government funding policies, changes in governmental regulations, and intellectual property right, litigation, exposure to foreign currency fluxation and other risks factors discussed from time to time in our filings with the Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statement other than as required by law. During this call we may refer to certain financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP such as one time tax benefit associated with a recent corporate income tax law change in Germany and the charges incurred in 2006 associated with our acquisition of Bruker Optics.

Non-GAAP financial measures are not ment to be a better presentation or a substitute for results of operations prepared in accordance with U.S. 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. 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 today. So how about those Red Sox, but back to our financials. During the third quarter, we continued our solid top line growth and steady improvement in profitability and we are on track to meet or exceed our stated financial goals for 2007. I am particularly pleased with our top line performance in the third quarter with all three operating divisions delivering double-digit growth year-over-year. Our net income in the third quarter of 2007 was 8.7 million or $0.08 per diluted share, compare to net income of 3.0 million or $0.03 per diluted share in the third quarter of 2006. Included in our third quarter 2007 net income was a one-time tax benefit of 2.4 million related to the reevaluation of certain deferred tax assets and liabilities due to corporate income tax law changes in Germany which Bill will discuss in more detail later on. For easier comparison included in our third quarter 2006 net income where 1.0 million of Bruker Optics acquisition related charges net of tax.

Net income for the first nine months of 2007 was 17.5 million or $0.16 per diluted share compared to net income of 8.8 million or $0.09 per diluted share during the comparable nine months period in 2006. Again included in our net income for the first nine months of 2007 was the one-time 2.4 million tax benefit I just described while during the nine months ended September 30, 2006, we expensed 5.0 million of Bruker Optics acquisition related charges net of tax. In addition to the numerous product introductions so far this year about which we have had separate press releases we continue to invest in our marketing, sales, applications, service, and support capabilities, particularly in high growth regions such as Asia Pacific, eastern Europe, and India. As you may have seen from our recent press release just this month, we opened a large new facility in Beijing, China which houses a modern application, demonstration and customer training laboratory, showcasing a wide selection of our life science and materials research as well as our industrial analysis system.

In summary, we continue to make steady financial progress and feel we are well positioned going forward. Now, here's our CFO, Bill Knight, again, with a more in-depth look at our financials.

Thanks Frank. To briefly recap our third quarter 2000 revenue growth rate of 25% included approximately 2% from acquisition, 5% from foreign currency exchange rate changes, and 18% from organic growth. For the nine months ended September 30, 2007, our revenues grew by 21%, including approximately 4% from acquisitions, 5% from foreign exchange rate changes, and 12% from organic growth. Our gross profit margins in the third quarter of 2007 were 47%, up from 44% in the third quarter of 2006. Our gross profit margins for the nine months ended September 30,2007 were 46%, up from 45.4% in the comparable period in 2006. We believe that our ongoing programs are allowing us to make steady progress on an annual basis towards our medium term goal of 50% gross profit margin. Our overall operating expenses for the third quarter of 2007 were 38.3% of revenue. Up 90 basis points from 37.4% in the third quarter of 2006.

For the nine months ended September 30, 2007, our overall operating expenses were 38.8% of revenue, down 170 basis points from 40.5% during the nine months ended September 30, 2006. Included in the results for the nine months ended September 30, 2006, were 5.8 million of pre-taxed Bruker Optics acquisition related expenses which represented 1.9% of revenue during the period. Excluding these acquisition related charges in 2006, operating expenses as a percentage of revenue were comparable year-over-year.

While we continue to get some volume leverage in our G&A and R&D expenses, 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 off as a percentage of revenue in 2008 and beyond. In the third quarter of 2007, we incurred 2.1 million of income tax expense on a pretax income of 10.8 million resulting in an effective tax of 19.1%, compared to an effective tax rate of 54.4% in the third quarter of 2006.

For the nine months ended September 30, 2007, we incurred 7.7 million of income tax expense on pretax income of 25.4 million resulting in an effective tax rate of 30.1% compared to an effective tax rate of 51.5% in the nine months ended September 30, 2006. Included in our third quarter 2007 net income was the one-time tax benefit of 2.4 million or $0.02 per diluted share related to the reevaluation of certain deferred tax assets and liabilities as a result of a tax law change in Germany enacted in the third quarter of 2007. This tax law change will decrease the corporate income tax rate and our sight in Germany by approximately 8% beginning in 2008. Had this one-time benefit not been incurred in the third quarter of 2007, our third quarter 2007 effective tax rate would have been 41% and year-to-date our effective tax rate would have been 40%. Frank, earlier, already explained our net income and earnings per share numbers for the quarter and year-to-date so I won't repeat these.

Looking to the fourth quarter of 2007, we are expecting to deliver solid results, but we would like to remind our investors that our fourth quarter of 2006 was unusual strong and will make for a tough comparison. We would like to make a final comment about our balance sheet in regard to inventories before we open up the call for questions. With our high new order booking and backlog growth during the first three quarters of 2007, we have ramped up production levels at our factories with an associated inventory growth under current production processes. At the same time our finished goods and in transit inventory's have also increased in anticipation of a traditionally strong fourth quarter. In addition to the reasons just mentioned for the inventory buildup since the end of 2006, approximately 6 million of the inventory increase was due to foreign currency translation.

Our operating cash flow in the third quarter of 2007, was a use of cash of 2.2 million and for the first nine months of 2007 operating cash flow was the use of cash of 10.2 million largely due to the change in inventories. Overall, our inventory turns have not yet increase but we have programs in place and expect improvements in our manufacturing processes and augmented field services capabilities to increase our inventory turns and generate stronger positive operating cash flows going forward. With that we would like to open it up for questions-and-answers.

(OPERATOR INSTRUCTIONS) Your first question comes from the like on Derik DeBruin. Please proceed.

Good morning.

Good morning.

So could your just talk a little bit more about the quality of the products I guess in terms of a little bit more details. Anything that particularly stood out? Double-digit growth across all your segments but you give us a little bit more color in terms of where you saw sales and just the type of products being sold.

All right , Derik, this is Frank Laukien. To give you a little bit more color, as we had predicted, the high discrepancy or the unusual discrepancy in growth rates that we have experienced between the three different business in the last few quarters, it's not gone entirely. There's still some differences in growth rate even in the third quarter. Bruker AXS is still the fastest growing part company but certainly Bruker Daltonics which had been not growing essential for a few quarters has certainly accelerated both in bookings as well as in revenue. And so it did turn out that in the third quarter all three businesses had double-digit growth with Bruker AXS still having the highest

What do you attribute to the rebound in the Daltonics business, new products, demand from certain market segments?

Generally the markets are good and I think we have good products. Two additional effects to highlight perhaps but one of them is the acceleration or re-acceleration of our CBRN Homeland Security and Defense business. For that we have been accumulating orders and those are not showing up also in revenue. And the second part is we had some of our life science OEM business up for one large OEM customer had been and continues to decline but the effect is now largely offset by strength in the life science mass spectrometer and solutions that we sell directly or to some other smaller OEM.

Thank you that's very helpful. Bill, when you talk about your medium term growth margin estimate at 50%. How are you defining medium term?

I think as we said, we expect these improvements really to start to enter the production or the revenue process in late 2007, certainly more fully in 2008 for AXS and optics is already there and it's probably by 2009 we are looking for further improvements in our Daltonics business. So over the next 24 months, we hope to make very good progress on these numbers.

Generally, if I may add we hope in gross profit margins we hope to make about 100 basis points up to 200 basis points of progress per year. Not everything lines up in every year. In the 200 basis points is sort of our target. Generally we can improve 100 basis points per year then I think we're making good progress. In any given quarter we will have fluctuations in our gross margins depending on product mix and so on.

Okay and then one final question. You've made really good progress on the tax rate. Are you -- when you start looking into 4Q into next year still something in the low 40s/high 30s range?

For fourth quarter.

4Q and into 2008, I guess where do you see the tax rate going?

I thin we said for the year that we feel we'll be in the 37, 38% range and in 2008 hope to make further improvements on that. We continue to monitor that very closely and just the operating dynamics of the company are really starting to help on that tax rate.

Thank you.

Your next question comes from the line of John Sullivan. Please proceed.

Hi, guys, good morning. A couple of quick questions. Congratulations. Can your just chat a little bit more about sales growth by geography?

John, this is Frank again. I think we have -- it's not a clear picture. It's not a simple answer. It varies by product line. We've had-- without focusing on any given quarter but let's say year-to-date because those numbers tend to be more meaningful, we've had good progress this year in the Daltonics business in Europe in particular and in also Japan has done well for Bruker AXS I believes it is still particularly Asia and eastern Europe and India that's developing nicely, but also the United States and North America. And for the Bruker Optics, actual it was North America. So there's really no clear theme here. But different businesses make progress in different geographies. No clear theme that's discernible or worth mentioning. It depends on each product line and I don't think there's any particular reason. Fluctuations from even on an annual basis where you make progress.

Okay. Secondly, how is business going at the assets you'ved acquired over the last several quarters and are there any particular business drivers that are showing up in the acquired assets?

Yes. Again this is Frank. We are very pleased with the acquisitions that we have made. I will not focus on Bruker Optics because obviously that was a related party transaction but Bruker Optics obviously has worked out exceedingly well for us. The smaller acquisitions into EDS and microanalysis as well as into handheld XRS have shown very, very good growth and decent margins and we're also pleased with our acquisition of an OES optical, Clark Optical (inaudible - background noise) -- we've seen good demand in the metals analysis market. So these smaller bolt on acquisitions if you like have been so far really exceptionally successful for us and have helped drive growth rates and are also, most of them are margin contributors.

Thanks very much. How significant a change to CBRN's backlog occurred in the quarter. Sounds like you were having a good quarter in CBRN. Were you also seeing a good quarter in orders in that area in the third quarter?

Yes. I don't have an exact number. CBRN had good numbers in the quarter I believe that's going to be a sustainable trend. Our CBRN business will be in the foreseeable future in next few quarters for which we have visibility. I expect it to be very solid.

Thanks very much.

(OPERATOR INSTRUCTIONS) . Your next question comes from the line of Stephen Unger. Please

Thanks, hi. Bill, did I hear your mention that the tax rate in the fourth quarter would be in that 37 to 38% range? Is that correct?

What I said, Stephen is we expect for year to be in that range.

Okay. And so you're running higher than that. So the fourth quarter you're expecting the tax rate to be substantially below the 41% then that you recorded in the third quarter.

Whatever gets us to that 37, 38% range. That's what we're looking at.

Goo, okay. Looking at the change to the German tax rate, what impact do you expect that to have? I know that it's difficult were the three business units, but it's about a 10% change for 2008. What kind of impact do you expect that to have? At least 3 or 4%.

I think we'll be better prepared to give you a better answer when we report on our fourth quarter and then we generally fill out our financial goals for next year. It's in that range of what you just mentioned. But we don't really have a good forecast on that yet. But we will have that when we do our fourth quarter call.

Is the majority of the tax's that is you pay in Germany?

A good chunk of it.

Okay. And looking at the mass spectrometry business, Daltonics. Did I hear you correctly that you have yet to really experience a revenue pickup from the CBRN business (inaudible - background noise) most the orders at this pint?

No, in the third quarter we had a nice pickup on CBRN business already, in revenue not just in orders. Orders were also solid, that's what commented in respond to the second question, but we also had a nice contribution to the top-line in the third quarter from the CBRN business, already.

So that's ramping is how I'm looking at it. And then I know you give these disclosures in the Q, but not necessarily on the conference calls. I was just wondering if you could help us understand the overall profitability of the three units. In looking at last quarter, Daltonics generated a small loss. Did that flip to a profitability and could you comment on the other units overall profitability?

Yes, we tend to think of our business more and more as one segment and we tend to have a little bit more detail in the Q. But I believes it is correct that all three businesses at least -- all three businesses made money.

That's great.

(inaudible) differences in how much they contributed to the bottom line.

My last question would be on the inventory build. Do you build inventory? I know that because your business is heavily weighted towards instruments rather than consumables and so forth, does that an indication for us that you have the visibility on these shipments? Or are you building in ahead of the order book?

We do build to a hard copy. As we've said in the past, our bookings and backlog has been very solid the last several quarters. This quarter was no exception. We do have visibility into the next quarter and somewhat beyond. We do have a pretty good feel as to what the fourth quarter will be. But so there's two parts to this inventory build. One is the business has been strong and near-term we still see that. We're also, as you know in the midst of really trying to improve our manufacturing processes, margin, inventory levels, and we're still in the thick of that. And as this business continues to grow, we do expect future improvements in these inventory turns will help moderate some of the absolute dollar growth.

Congratulations on an improving year, a great year. Thank you.

Thank you.

Your next question is a follow-up question from John Sullivan. Please,proceed.

Just quick follow-up. As you look at your distribution channel in 2008, are there changes or particular spending items that you'd call our attention to? Are there any geographies, for example, that you'll be changing to direct distribution in fiscal '08.

John, this is Frank Laukien again. I think we have switched to direct distribution where we wanted to switch to direct and we have some very capable distributors in certain geographies that are performing well. Where we have no present intentions of changing over to direct distribution. What we have done particularly at Bruker AXS, but also in some other area's in the last couple of years we're in the number of geographies we have gone direct, we belive that investment in that process is pretty much complete.

Thanks very much. And then lastly, are there any particular product lines where refreshing them is a priority for 2008 and is a particular focus of research spending in '08?

We continue to spend quite significantly on R&D and on new products on improving existing products, but we don't generally forecast what type of product introductions were planning. We clear are planning a number of product introductions, also, again, in 2008. But we cannot comment at this point in what areas they will be.

Thanks very much.

You're welcome.

It appears we have no more audio questions in queue at this time.

We thank all our shareholders and interested parties for joining the call. And look forward to speaking with you some time after year-end on our fourth quarter and full year results. Thanks again. Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.