Bruker Corp (BRKR) 2008 Q2 法說會逐字稿

Good Day, ladies and gentlemen, and welcome to the Bruker Corporation quarterly earnings call. My name is Leketia and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (OPERATOR INSTRUCTIONS)

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

Good morning, and thank you, Leketia. Good morning and welcome to the Bruker Corporation second-quarter 2008 financial results conference call. With me on today's call are Frank Laukien, President and CEO, and Brian Monahan, our Corporate Controller.

Earlier this morning, we issued our second-quarter 2008 earnings release. On today's call, Frank will provide an overview of the business and some financial highlights. I will follow up with a more detailed discussion of our financial results, and then we will open up the line for questions.

As a reminder, on February 26, 2008, Bruker BioSciences Corporation closed its acquisition of the Bruker BioSpin Group and renamed itself Bruker Corporation. Under US GAAP, this transaction is accounted for as an acquisition of businesses under common control, and as a result, all one-time transaction costs are expensed in the period in which they are incurred rather than being added to goodwill.

In addition, expenses incurred subsequent to the completion of the acquisition, such as interest expenses incurred on acquisition-related debt, are not reflected in the financial results of periods prior to the date of the acquisition, as they typically would be in pro forma financials in an acquisition of an unrelated party. On the closing of the transaction, all historical financial statements are now required to be restated by combining the historical consolidated financial statements of Bruker BioSciences Corporation with those of the Bruker BioSpin Group.

During the call today, the discussion of financial results for all periods reflects the combined historical consolidated financial statements of Bruker BioSciences Corporation with those of the Bruker BioSpin Group.

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 and 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 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 and pricing of our products; manufacturing; competition; dependence on collaborative partners and key suppliers; capital spending and government funding policies; changes in governmental regulations; intellectual property rights; litigation; exposure to foreign currency fluctuation; and other risk 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 US GAAP, such as the acquisition expenses incurred in connection with the acquisition of the Bruker BioSpin Group, interest expense associated with acquisition-related debt, and foreign exchange gains and losses.

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 future financial goals.

I will 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. We are very pleased with our strong revenue growth in the second quarter of 2008, which increased 31% over the second quarter of 2007, or 19% when you exclude the effect of currency translation.

As we have explained in the past and as we saw in the first two quarters of 2008, our business has and will likely continue to be subject to significant quarterly fluctuations. So, while our top line in Q2 was quite strong, we encourage our investors to look at more than just an individual quarter to gauge the progress in our business.

Revenue growth for the first half of 2008 was very good as well, with revenues increasing 23% over the first half of 2007, or 13% when you exclude the effects of currency translation. In the first half of 2008, excluding expenses related to the acquisition of the Bruker BioSpin Group, our adjusted operating income grew 22%, while our adjusted operating margin as a percentage of revenue was essentially flat, which is not satisfactory to us.

On the bottom line, net income in the second quarter of 2008 was $21.7 million, or $0.13 per diluted share, compared to net income of $17.7 million, or $0.11 per diluted share in the second quarter of 2007. Included in net income for the second quarter of 2008 were after-tax charges of $0.3 million for expenses related to the acquisition of the Bruker BioSpin Group.

For the first half of 2008, net income was $21 million, or $0.13 per diluted share, compared to net income of $32 million, or $0.20 per diluted share, during the first half of 2007. Included in GAAP EPS for the first half of 2008 were Bruker BioSpin acquisition-related expenses of $0.04 per diluted share, foreign exchange losses of $0.04 per diluted share and interest expense on acquisition-related debt of $0.03 per diluted share, with a cumulative effect of negative $0.11 per diluted share.

For comparison, included in the net income for the six months ended June 30, 2007 were foreign exchange gains of $0.4 million and there were no acquisition-related charges or acquisition-related interest expense.

A lot of positive things have happened so far this year. However, we believe the top-line growth rates we experienced in the first half of 2008 should have been enabled us to deliver better growth margins with higher volume through the factories, and this volume also should have allowed us to leverage our overall operating expenses better. Therefore, in the third quarter of 2008, we intend to reaccelerate our gross margin improvement program and to implement various streamlining and expense-cutting steps, including a partial hiring freeze, with a goal of obtaining better margin leveraged from our rapid top-line growth.

Although global market conditions are more difficult than a year ago, demand for our products has generally been solid. As for new orders, while North America and Japan have been challenging markets, we continue to see growth elsewhere; for example in Asia-Pacific, India, Latin America and certain European countries. Moreover, we continue to benefit from a very strong backlog and have not experienced any significant customer cancellations or delays.

Most importantly, we continue to introduce very important and truly innovative new products and solutions, which we believe give us competitive advantages and will further strengthen our leadership position in high-performance scientific instrumentation.

As you may recall, we had an extremely successful set of new product announcements at Pittcon 2008 in the first quarter, and several of these products received Pittcon Editors' and more recently also R&D 100 Awards. Here, I would like to take just a few moments to highlight our more recent major product introductions and their significance to our business.

In the second quarter, at the recent ASMS, American Society for Mass Spectrometry conference, in June, Bruker Daltonics announced the maXis, a revolutionary new ultra-high-resolution time-of-flight mass spectrometry platform. The maXis is unique in offering simultaneous, no-compromise ultra-high resolution of 40,000 to 60,000 over a broad mass of range, plus MS and MS/MS mass accuracy typically between 600 and 800 ppb, and all at speeds of up to 20 full spectra per second.

The maXis is an unprecedented performance combination, which we expect will be a very powerful tool in applications such as small molecule identification, metabolomics, quantitative proteomics, as well as biomarker discovery and validation. We really believe the maXis is a game-changing mass spectrometry platform that is already generating tremendous interest from mass spec users.

Next week at the M&M 2008, the Microscopy and Microanalysis Conference in Albuquerque, New Mexico, Bruker AXS will introduce its new QUANTAX CrystAlign system for electron microscopy-based crystallographic analysis via so-called electron back-scattered diffraction, or EBSD. The CrystAlign EBSD system consists of an ultrafast EBSD detector and powerful, yet easy-to-use, EBSD analysis software that is seamlessly integrated with Bruker's EDS software, ESPRIT.

The combination of EBSD with EDS offers more comprehensive materials characterization capabilities in electron microscopy for a broad range of applications on metals, ceramics and geological samples. For Bruker AXS, the EBSD introduction further supports our momentum as the performance leader and fastest-growing supplier of EDS and EBSD accessories for the electron microscopy market.

Another example. At the Hanover Fair 2008 in April, the Bruker Advanced Supercon business for the first time exhibited its prototype Superconducting Fault Current Limiter, of SFCL, a technology that could address very large markets in the future in energy grid stabilization and more efficient power utilization. Our emerging Superconducting Wires and Devices business is opening up large new market opportunities for Bruker outside of our traditional scientific instruments market.

And finally, last but by no means least, in June, Bruker AXS also announced a technology breakthrough with the introduction of the new TRACERturbo, the world's first handheld x-ray fluorescence instrument that uses a Silicon Drift Detector, or SDD, for dramatically improved speed, sensitivity and energy resolution. Bruker's proprietary XFlash Silicon Drift Detector, previously available only in high-performance laboratory XRF instruments and EDS systems, now offers unprecedented speed and analytical specificity when integrated into this novel, handheld XRF unit.

Overall, there were a lot of positive fundamental developments in the first half of the year, which position us well going forward. Now here is our CFO, Bill Knight, again, with a more in-depth look at our financial results.

Thanks, Frank. As a quick recap, on the top line during the second quarter of 2008, revenues grew by 31% to $311.5 million, or by approximately 19%, excluding the impact of foreign currencies. For the first half of 2008, revenues grew by 23% to $549.9 million, or by approximately 13%, excluding the impact of foreign currencies.

Gross profit margin were down slightly year over year, with a 41.3% in the second quarter of 2008 versus 41.9% in the second quarter of 2007. For the first half of 2008, gross profit margins improved by 40 basis points to 44% versus 43.6% in the first half of 2007.

Improving our gross margin percentage towards 50% continues to be a key initiative for us, and over the past several years we have made significant progress. We still see many additional opportunities for further gross margin improvement through workflow enhancement and further product redesign to improve performance and reduce costs, and we intend to pursue these opportunities aggressively.

Operating profit in the second quarter of 2008, excluding acquisition-related charges, was $28.8 million, or 9.2% of revenue, up from $21.8 million, or 9.1%, in the second quarter of 2007. Operating profit in the first half of 2008, excluding acquisition-related charges, was $50.5 million, or 9.2% of revenue, up from $41.5 million, or 9.3%, in the first half of 2007.

As Frank mentioned earlier, overall, our operating expenses as a percentage of revenue remained constant year over year, and we are currently working with senior management on gross profit margin improvement programs and various streamlining and expense-cutting steps, with the goal of obtaining better margin leverage from our top-line growth. Historically, we haven't spent a lot of time discussing the components of Other income and expense, but as you may recall in the first quarter, we had some unusual items that we wanted to provide an update on.

In the first quarter of 2008, we incurred approximately $12 million pretax of foreign exchange losses, which after tax resulted in a reduction of our earnings per share of $0.06. These foreign exchange losses were primarily driven by the continued weakening of the US dollar, as well as by an unexpected strengthening of the Swiss franc relative to both the US dollar and the euro during the five weeks between the closing of the acquisition of the Bruker BioSpin Group on February 26, 2008 and the end of the first quarter of 2008.

These foreign exchange losses related primarily to the revaluation of intercompany receivables and loans within the Bruker Group into large cash balances held by Swiss Bruker BioSpin subsidiaries and various non-Swiss franc currencies. Prior to the end of the first quarter, we had already started working on plans to reduce the effects of currency fluctuation by enhancing our treasury activities and capabilities, which included the hiring of a treasurer in March 2008 with global oversight and responsibility.

During the second quarter, several actions were taken, which included the rollout of programs to more effectively hedge or settle intercompany balances, and to reduce non-functional currency holdings. In addition, in the second quarter, we aggressively paid down some of the debt incurred to acquire the Bruker BioSpin Group, which reduced our interest expense.

In part as a result of these actions, in the second quarter we incurred approximately $3.6 million pretax of foreign exchange gains, which offset some of the losses realized in the first quarter. Going forward, we believe the actions we have taken will substantially reduce the impact of foreign exchange gains or losses which will have on our results.

As for our effective tax rate, during the second quarter of 2008, we incurred $10.2 million of income tax expense on pretax income of $32 million, resulting in an effective tax rate of 31.9%. For the first half of 2008, we incurred $14.5 million of income tax expense on pretax income of $35.7 million, resulting in an effective tax rate of 40.5%.

This above-statutory tax rate for the first half of 2008 is a direct result to the acquisition-related charges, which we could not tax benefit, and the foreign exchange losses, as they were predominately incurred in locations where we had low tax rates, so the tax benefit was very modest. Excluding these two items, our expected tax rates would have been approximately 32% in the first half of 2008.

Frank already discussed the other bottom-line results earlier, so I will not repeat these again. On the balance sheet, we ended the second quarter with cash and short-term investments totaling $131.8 million, bringing us to a net debt position of $110.4 million. Cash flow from operations for the first half of 2008 was $20 million compared to $16.6 million for the first half of 2007. And we were able to repay $158 million of acquisition-related debt in the second quarter of 2008.

Accounts receivable days sales outstanding improved in the second quarter. Our inventory turns still are not where we believe they can be, although our Bruker Bioscience segment has made some progress on increasing inventory turns. But overall, we still have a lot of opportunity for improvement in inventory turns, balance sheet management and cash flow generation.

While the present global market environment is more challenging than a year ago, we are optimistic that our product innovations and our various medium-term growth and margin initiatives will continue our positive profitability trends of the last three years. Our goal remains to drive our margin towards and beyond industry standards, while maintaining rapid revenue growth.

With that, I will turn the call back over to the operator for any questions you may have.

(OPERATOR INSTRUCTIONS) Derik DeBruin, UBS.

Good morning. Frank, when you look at the, certainly, the 19% organic number, I know it reflects lumpiness in the business. But could you just go through a little bit more about what products that you are doing with a lot of NMR products during the quarter or a lot of mass specs. Just a little bit of color on what the mix was.

Yes, Derik. I can give you a little bit of color. We gave some in our prepared remarks. We had given some geographical color, I believe.

And we had -- in the second quarter -- the NMR and Bruker Optics business were particularly strong in the first quarter, which was a bit below our own expectations. The Magnetic Resonance business, which is mostly NMR, but also MRI, EPR was on the weaker side. So over the first half, really their trends are not that remarkable. From quarter to quarter, there is obviously some lumpiness.

Are you seeing -- what level of organic growth are you seeing in each of these businesses? Are all your business lines over the first half of the year, are they growing mid-single, high-single, double-digit organic growth?

I believe there is no enormous disparity in growth rates between the four businesses at this point in time. They are all growing with somewhat similar rates, but I believe the traditional businesses that were in Bruker Biosciences had slightly higher organic growth rates. But there is not a big disparity in growth rates in the first half year so far.

Okay. I guess certainly the gross margin softness, I guess, is that anything mix-related or is it just -- is it like sourcing initiatives refocusing on -- just a little bit of color on how you are going to improve that?

The gross profit in absolute dollars, it has obviously been a more positive picture, if you look at it as a percentage of revenue. There's -- certainly some of that is with the weak US dollar and the strong euro, it has -- that has some of the effect on the gross margin percentage. And I'm sorry -- what was the second part of your question, Derik?

No, that is fine. I just was wondering specifically what type of issues you're going to be doing to help improve the number.

There is some pricing pressure in certain markets. I think as growth rates in the industry in general have slowed down, we do see a little bit more pricing pressure in various markets.

Okay. And Bill, looking at the -- you had a foreign-currency loss in the first quarter; a foreign-currency gain in the second quarter. Are you expecting any wide swings in the back half of the year or flattish for that line?

I think with what we've put in place, we really hope to minimize gain or loss going forward. Historically, the old Bruker BioSciences was in the 1 million to 1.5 million range, something like that, gain or loss. There could be fluctuations beyond that with the BioSpin Group coming in, but we don't anticipate a whole lot beyond that gain or loss. And obviously, our goal long-term is to make it as neutral as possible.

Okay. I will get back in the queue. Thanks.

Isaac Ro, Leerink Swann.

Thanks for taking the question. First of all, you mentioned in the past, I think, trying to get to operating margins in the 14% area. Could you give a better sense of -- you mentioned (technical difficulty). What your other top three priorities when it comes to operating margin expansion?

I think clearly continued strong revenue growth is always important. And that is not going to change. It's probably the dominant driver here. But equally important are these continued gross profit margin improvement programs. We probably got a little defocused with the BioSpin acquisition, but we are making sure that we have adequate programs in place to continue to improve margins.

And then as we said during the call, we expect to get better operating expense leverage as we grow the top line than we did the first half of the year, and that will certainly be a focus over the next month or so to get those alignments where we think they need to be.

So, we feel as strongly as ever that we can get to our target and we've got the tools and plans to achieve that.

Okay, great. And then just quickly on the numbers. What was operating cash flow and CapEx in the quarter?

Operating cash flow, Isaac, was $20 million. And the CapEx was a little over $20 million for the quarter, which the majority of that CapEx -- that is above our normal run rate in the past -- we are completing a facility expansion in our Optics Group in Italy and Germany. So a big chunk of that facility occurred during the first half of this year.

Okay, great. And then just lastly, I know you guys have made some progress in your high field NMR franchise. How do you feel about your ability to keep driving higher yields in those magnets? How do you feel about that business overall?

We have, Isaac -- we have not had a significant yield problem with our magnets, our high field magnets. So those markets, the ultra-high-field NMR magnets, have been somewhat weakened funding in the last two or three years, although there has been some recovery last year. But in terms of our technology and our products, we have very good, very robust technology, with good yields. If I understood your question correctly.

Yes, that is it. Thanks very much.

(OPERATOR INSTRUCTIONS) At this time, there are no more questions. Actually, we do have a follow-up question from Derik DeBruin.

This is just a question. You were talking about a 14% op margin and a 9% net margin for the full year. Sounds like the op margin is going to be a little bit short of that, just on the gross margin (inaudible).

As -- we certainly, as Bill has stated, we believe we are -- we have the same longer-term target. We don't give guidance for the year; we don't update it, as you know. But we give our annual goals. By now, by midyear, you see how we are trending. In some goals, we are surpassing; other goals, we are so far not reaching this year. And I think that gives you an indication of where we are likely to surpass some goals and not quite reach others, which is why we are taking some of these corrective steps in the third quarter.

Okay, great. Thanks.

At this time, there are no more questions.

Thank you very much for joining us this morning and have a good day. Bye-bye.

Thanks for your participation in today's conference. This concludes the presentation. You may now disconnect.