Bruker Corp (BRKR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bruker Corporation's quarterly earnings conference call. My name is Tony, and I will 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 toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Bill Knight, Chief Financial Officer. Please proceed.

Okay. Thank you, Tony. Good morning and welcome to the Bruker Corporation third-quarter 2008 financial results conference call. With me on today's call are Frank Laukien, President and CEO and Brian Monahan, our corporate controller. On today's call Frank will provide an overview of the business and some financial highlights, and 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 or prior periods to the date of the acquisition, as they typically would be in pro forma financials in an acquisition of an unrelated party. Upon 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 reflect 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 but 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 related to the integration of businesses we have acquired or may acquire in the future, changing technology, 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 of 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 statements 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 charges incurred in connection with the acquisition of the Bruker BioSpin Group, interest expense associated with acquisition related debt, non-cash stock-based compensation charges and foreign exchange gains and losses.

Non-GAAP financial measures are not meant to be a better presentation or a substitute for results of operation prepared in accordance with US GAAP. We believe that discussing these measures helps investors 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 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 this morning. Starting with the financials, I believe most of you may have read our earnings press release issued earlier today, and you are now probably familiar with the key numbers in the earnings release. As you will have seen, our third-quarter revenue was below Street expectations while our third-quarter GAAP EPS of $0.11 per diluted share, which includes non-cash stock-based compensation of $0.01 per diluted share, met Street expectations.

As we have predicted, we continue to see very significant revenue fluctuations from quarter to quarter. Revenue in the first quarter of 2008 was somewhat weak. Revenue in the second quarter of 2008 was extremely strong. And revenue in our third-quarter of 2008 was again on the weak side. We do not believe that this is necessarily a trend, but likely more a result of the lumpiness of our revenue, particularly, but not only in our Bruker BioSpin magnetic resonance business.

Year to date, including our third quarter, we are reasonably satisfied with our overall revenue growth rate of 15% to $792 million, which exceeds our stated full year revenue growth goal of 8%. Our currency adjusted revenue growth rate for the first three quarters of 2008 was 6%.

We are clearly not satisfied with our margin developments in the first three quarters of 2008, and it is below the goal we set for 2008, even with the extraordinarily high euro to US dollar exchange rates that prevailed during the first three quarters of 2008. Therefore, as discussed in our earnings release, after the second quarter our management teams conducted a thoughtful bottoms up analysis of our operations. And as a result began implementing numerous cost-cutting steps to re-accelerate our gross margin improvement programs, to reduce our operating and our interest expenses and to further reduce our exposure to currency fluctuations.

We have also implemented certain restructuring steps to improve our effective tax rate, not only in the third quarter of 2008, but also in a more permanent fashion. Finally, we are also taking advantage of synergies from the Bruker BioSpin Group acquisition through the elimination of certain redundant functions and by combining legal entities.

Again, as stated in our earnings release this morning, we expect that our cost-cutting initiatives will already have noticeable positive effects in the fourth quarter of 2008 and the first quarter of 2009, and that by the middle of 2009 we anticipate annualized reductions in our overall costs of greater than $12 million. And reaching annualized cost savings of about $15 million in 2010.

These specific cost savings are the direct results of our new cost-cutting initiatives and are in addition to an expected general leveraging of our remaining expenses with our anticipated longer-term revenue growth. While it is very difficult to predict how the global financial turmoil will affect our industry and our company going forward, so far our bookings and backlog up to and including the third quarter of 2008, were still quite healthy. With a bit of weakness in the US and Japan and robust orders in Europe, Asia Pacific and Latin America. As most years we expect strong revenues in our fourth quarter of 2008.

Going forward, our international diversification, our broad technology base and product portfolio, as well as our greater than 50% share of revenue derived from universities, medical schools, nonprofit research institutions and government labs, tend to mitigate the effects of recessions and have made Bruker traditionally fairly resilient in tough economic times.

We continue to drive the profitability of Bruker Corporations towards our internal medium-term goals of 50% gross profit margin and 15% or greater than 15% operating margins, and many of these actions are designed to leverage our R&D investment and SG&A expenses, while still enabling us to deliver above-market's top line growth.

Moreover, our recent very significant product rollouts, some of which are still in progress, as well as new major product introductions planned within the next 12 months, some of which have been under development for several years, should give our gross margins as well as our growth rates a further boost in 2009 and 2010.

Finally, I am very pleased with our third-quarter acquisition of SIS GmbH, now renamed Bruker Nano GmbH. This Bruker Nano business develops and manufactures and distributes atomic force or scanning probe microscopy systems for numerous applications in materials research. Our AFM or SPM are well-established methods for ultrahigh spatial resolution surface imaging and the characterization of surfaces down to atomic dimensions.

The global SPM market has an estimated total market size in excess of $250 million, and this acquisition increases our accessible markets even further and dovetails nicely into our Bruker AXS materials, research and industrial QA business.

Now here is our CFO, Bill Knight, again with a more in-depth look at our financial results for the third quarter and for the first nine months of 2008.

Okay. Thank you, Frank. As a quick recap, during the third quarter of 2008 revenues were $242.1 million compared to $241.8 million in the third quarter of 2007, with foreign exchange rate changes contributing 7% of our top line growth. Year-to-date revenue grew by 15% to $792 million with foreign exchange rate changes contributing 9% to the top line growth.

On the bottom line GAAP earnings per diluted share were $0.11 in the third quarter 2008 compared to $0.16 in the third quarter of 2007. For the first nine months of 2008 GAAP earnings per diluted share was $0.23 per diluted share compared to $0.36 per diluted share during the first nine months of 2007. Included in GAAP earnings per share for the nine months ended September 30, 2008 were Bruker BioSpin acquisition related expenses of $0.04 per diluted share. Interest expense on acquisition related debt of $0.03 per diluted share, and non-cash stock-based compensation expenses of $0.02 per diluted share, with a cumulative effect of $0.08 per diluted share.

For comparison, included in the net income for the nine months ended September 30, 2007, were acquisition related charges of $0.5 million or zero pennies per diluted share. Non-cash stock-based compensation expenses of $0.01 per diluted share and there was no acquisition related interest expense. So the overall cumulative effect was $0.01 per diluted share.

Gross profit margins were 45.5% in the third quarter of 2008 versus 46% in the third quarter of 2007. Our gross margins for the first three quarters of 2008 remain constant at 44.4% year-over-year. As part of our cost-cutting efforts and profitability initiatives we are taking significant steps to improve our gross margins and our internal goal is to achieve the 50% gross profit margin rate. These steps include both reducing costs and existing product lines through redesign and improved manufacturing processes, as well as multiple new product introductions scheduled for 2009 as we capitalize on our significant R&D investments from the past several quarters.

Our operating profit in the third quarter of 2008 was $15.1 million or 6.3% of revenue, down from $29.8 million or 12.3% of revenue in the third quarter of 2007. Operating profit year to date for the first three quarters of 2008 excluding acquisition related charges was $65.7 million or 8.3% of revenue, down from $71.8 million or 10.4% in the first nine months of 2007.

Frank already discussed the cost-cutting measures we are taking, which include targeting operating expense reductions to obtain better margin leverage from our topline growth and our internal goal remains to achieve operating margins of 15% to 17% over time. The implementation of these near-term cost-cutting and restructuring initiatives are expected to result in one-time restructuring and tax charges of approximately $6 million. During the third quarter of 2008 we had $3.2 million of net foreign currency gains, which continues to help offset some of the extraordinary first-quarter 2008 net foreign currency loss of $12 million, resulting in a net foreign currency loss of $5.9 million for the first nine months of 2008. The net foreign exchange gains in the third quarter of 2008 were primarily driven by the continued strengthening of the US dollar.

As for effective tax rates, during the third quarter of 2008 we incurred several one-time tax benefits, which totaled $10.9 million resulting in an effective tax rate of negative 12.3 for the third quarter. These benefits were the result of legal entity reorganizations in Germany established to lower our long-term effective tax rate going forward, and a withholding tax reimbursement for which we previously had been required to have a full valuation allowance again.

Year to date for the first nine months of 2008 our effective tax rate was 24.2% versus 22.4% in the comparable nine-month period of 2007.

Cash flow from operations through the third quarter of 2008 was $17.8 million compared to $32.9 million through the third quarter of 2007. In the third quarter of 2008 we were able to repay an additional $21 million of acquisition related debt.

Accounts receivable day's sales outstanding improved again in the third quarter and our inventory turns increased slightly. However, we still have a lot of opportunity for improvements in inventory turns, balance sheet management and cash flow generations. Given the recent turmoil in the credit markets I would like to provide you with a quick summary of our liquidity position as of the end of the third quarter of 2008.

Overall, we are comfortable with our liquidity position and ability to meet our financial needs for the foreseeable future. We have $87 million in cash and $214 million in debt for net debt of $127 million. Our US Cash is currently invested primarily in money market funds consisting of treasury securities. Our offshore cash is currently invested primarily in bank deposits. We have a $230 million committed credit facility in place through February 2013, a group of 11 major international banks, none of which is individually representative more than 15% of the commitments. The five primary banks in the facility are JPMorgan, Citibank, Citizens Bank, Deutsche Bank and Dresdner Bank.

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

(Operator Instructions) Isaac Ro, Leerink Swann.

Thanks for taking the question. First off, your operating margins have been a bit underwhelming all year long. Could you give us a little more detail as to why you think you are so far behind as you look back on the last nine months? And I know you mentioned last quarter that the integration of BioSpin was part of the explanation but I think it has sort of been going on 10 months year to date and we really haven't seen much improvement in operating margins. And I would like to know a little bit more about why that is going to change.

I think certainly we had our expenses. We've noticed after the first two quarters when we identified that trend, as well, that our margins and operating margins are coming in lower. That is why we primarily tackled our expenses with the cost-cutting program that we are laying out. It also affects other items. It does also affect, should affect positive affect gross margin, and of course we are also looking at interest expenses.

But we clearly acknowledge that our operating margins are not where we had hoped they would be, and are taking the appropriate action. That has been, some of that has been implemented already. Some of that is being implemented and has been internally announced, and some of these things take a little bit longer. So that is why we think it will phase in somewhat in Q4, more so in Q1 of 2009 and probably the full effect of approximately those 12 million plus in annualized savings should be unavailable or noticeable in Q2 of next year.

We certainly did feel some currency pressures. So we welcome the reversal in some of the euro dollar exchange rate effects although it does not have an immediate effect; even that takes a quarter or two to kick back in. There is some selling price pressure out there that is certainly also correct. So a number of these affects have come together but I think it is primarily a matter of expense control and of expense and cost-cutting.

You mentioned the pricing pressure there. Is that kind of what drove the lower gross margins year-over-year, and is there -- obviously one of your competitors last night talked about having a good quarter specifically in NMR. Is that where you see the pressure, or is it elsewhere across your products?

I think it is really -- it is not one particular product line that I would highlight here. I think we would be concerned about the demand perhaps slowing down or slowing down. I think it is not isolated to one particular product line. It is not that NMR or anything like that comes to mind in particular. I think certainly exchange rates have also had an affect on our gross margin percentages certainly.

In terms of I know you mentioned a little over half your business into the sort of more durable customer markets. But for the other half and more specifically within the large drug companies, what visibility do you have on their budgets for next year? And it's certainly a fast-moving marketplace, but I'm wondering if you feel like your visibility there is marginally better or worse than it was at this time last year.

Isaac, I think it is about the same. For us large pharma companies are an important customer segment, but they are not a very large or overwhelming customer segment, so the type of data that we get on their next year's budget is not statistically as meaningful as you might get from some companies that sell -- that have a much higher percentage exposure to big pharma, for instance the traditional DLC companies.

We have seen for -- we have seen reasonable and steady demand from big pharma, as well; at least in our data we have not noticed any significant deterioration there either. In fact, even the industries like the infrastructure industries, cement, metals and so on; for some of those products our demand in the first nine months of the year have been healthy and up and in some cases still growing. Sometimes those are competitive factors that for a particular product line that are more important than the general trends. But even in those areas where we would probably see a recession first we haven't really -- we are not in the boom years of 06, 07, 08 -- 06, 07, but certainly there has not been a significant slowdown and we still see pretty healthy demand. However, with the caveat that Japan and the US for most of our businesses have been weak probably throughout the year so far.

Lastly, just given the uncertainty and a lot of your competitors are talking about low single digits growth next year on a currency adjusted basis. Do you guys think you are positioned to get to this teens operating margin in an environment where revenues grow 2%, 3% or 4%?

We are very committed to driving our operating margins, not only -- it is not our only plan to get leverage from very fast growth, so we will quite possibly be dealing with slower growth for some time period. That nobody can really estimate and we are very much committed to do whatever it takes to bring up our operating margins. Obviously we are moving -- we haven't had -- we haven't reached our goal in the first three quarters of this year. That is why we are taking corrective measures and it's on the expense side that is also very important for us, are the gross margin sides.

Again the number of higher gross margin products have recently been introduced and are still in the rollout, but until you really see them in revenue and therefore in the P&L, will be mostly next year. And there is other very important products that have new performance features but also have gone through extensive redesign to cost far better gross margins that are coming out in the foreseeable future. And so gross margins and operating expense control or cost-cutting will be the mandates because we are committed to driving our operating margins also in a slow growth environment.

Okay. Thanks a bunch.

(Operator Instructions) Derik De Bruin, UBS.

Frank, could you just go over, talk about just what you are seeing particularly in the x-ray and optics markets, in terms of demand, especially -- particularly in the x-ray market right now?

Really there has not been an enormous discrepancy between the various product lines. I think x-ray, our x-ray business had been growing very rapidly sort of 20% and north of that in '07 and '06; we are not experiencing those growth rates anymore. But it is probably now in line with the rest of the company, and we believe that most of the product lines, some of the product lines there have still seen very fast growth but again that is probably more driven by us being relatively new to some of these markets like the metals OES which is part of our x-ray business or the EDS business, those have seen quite high growth rates. Most of our x-ray business is now growing I would say in line with the rest of the company.

I guess when you kind of look out over the next year do you still expect to -- is there a possibility that organic revenue growth could be negative in 2009?

I wish I knew. That's the honest answer. I don't think we have this type of visibility. Obviously the fourth quarter is always quite important for us, of course in terms of revenue profitability and we expect clearly a sequentially up fourth quarter. Now the fourth quarter in terms of bookings, which determine our next year's revenue and give us the visibility that you are asking us for, the fourth quarter is also very important. It tends to be the highest bookings quarter of the year as well. And until we have the fourth-quarter under our belt, so to speak, I think it really would be somewhat speculative what type of growth rates we could expect for the market. And what type of growth rates we will be aiming and setting as our goals for next year. We will tend to do that in come February once we really have seen and analyze the fourth-quarter bookings data in particular.

Fair enough. I guess when you kind of look at where the currencies are at the moment, do you expect to see an additional currency gain like you saw for the last two quarters?

Since the end of the third quarter and towards the end of the third quarter even obviously the dollar has strengthened very considerably and the euro dollar exchange rate has come down to a level that is in my personal interpretation maybe a little bit closer to purchasing power parity, but I know there is other macroeconomic factors that drive that.

We welcome that (technical difficulty) development. In terms of topline growth I think we've always focused on currency adjusted rates, and we will -- if that is what your question is driving at obviously -- I don't know where the currencies are going, but probably for the -- there would be more of a slight currency headwind whereas traditionally there has been a currency tailwind for the reported GAAP revenues but I think we have generally focused on the organic currency adjusted growth rates anyway.

I was actually just wondering about the below the line items in terms of -- you had the $12 million loss in the first quarter, and then you had -- (inaudible) gains in there. I was wondering if that's going to continue as well.

That was sort of a specific currency -- certainly rapidly changing exchange rates always have the potential that we have in any given quarter currency, currency gains or currency losses. We are trying to reduce the effect of those quite a bit. And so we have had that effect in the second and third quarter, but to a much lesser extent than in the first quarter as you may have noticed. We will not -- that will not get eliminated altogether. It may be 1, or 2 or $3 million in any given quarter and which way that cuts is hard to predict. But we should not have -- we hope this takes the steps that we will not have such enormous things and such enormous P&L effect of currency swings. So we are doing our best to minimize that it will not go to zero as would be my answer.

So what are your -- when you start looking out, what was the -- what is the CapEx -- what was the CapEx spend expectations for 2008? And I guess how do you see that changing in 2009? And also depreciation and amortization, as well?

We had currently this year to date it has been about $40 million as far as CapEx, but that did include a $16 million building addition in Europe. So that is about a $25 million run rate for the first three quarters. I would expect something similar, maybe a little more conservative for next year, as well.

That's good. And D&A, depreciation and amortization?

The depreciation and amortization for the first three quarters was about $21.9 million, which was a little bit ahead of year ago $21.1 million. And write-down of demo equipment for the first three quarters was about $18.5 million compared to $16.2 million for the first three quarters of 2007. Again, I would expect similar numbers, similar 2008 numbers for 2009.

Okay, and I guess -- within the Daltonics business, nuclear, chemical and biological business, is there -- is that seen some fluctuations as -- (inaudible) government spending on that, those items recently?

There have been no very large contracts that we have reported, but that we would have reported separately. But certainly that business has become a more significant part of the Daltonics business in recent years, and we expect that trend to continue. If in recent years, maybe a bit before 2006 and so on this business tended to be 15 -- then more towards 10% and less of our Daltonics revenue. And it does fluctuate quite a bit from quarter to quarter but sort of an annual average may be more around 20% of revenue at this point in time.

So that business overall has grown; yes it does fluctuate from quarter to quarter but it has grown and sort of on an annualized basis is a more significant contributor to Bruker Daltonics and to the Bruker Corporation overall. So that has seen -- that has been a sustainable, healthy trend for us.

Could you tell us what percentage of sales have come recently from new products you introduced this year? And I guess just give us some glimpse into -- are we going to see -- we are going to introduce a ton of new products this year. Are we going to see a similar level of new product introductions in 2009?

Different product categories, but very likely yes, and similarly significant. As you may know, a lot of the products that we roll out, things that ASMS or PITTCON it then takes one or two quarters until they really start showing up in the P&L. And until the full impact of one of these product rollouts become apparent often intends to be three or four quarters. And we're seeing that effect and with a very positive uptick that we had expected for some of these products like the high-end new mass spec, the maXis or the pushbutton single crystal refraction system or our new handheld system with a new SDD detector, to name just a few.

But certainly those new product rollouts seem to be going quite well. Those products generally have higher gross margins, but they are so far they wouldn't have had a big Q3 affect yet. You will see that in over time. And yes, we do expect similarly significant new product introductions in the next 12 months, as well.

When you kind of look at your cost-cutting initiatives and what is out there is it going to be mostly SG&A or are you going to pull back dramatically on R&D? Your track -- I guess are we currently -- are you seeing big increases in the R&D? Just give us a little bit of color in terms of what to [look at] from the different buckets.

It is really going to be fairly much across the board. It certainly affects R&D, marketing and selling and G&A. Some of it will also be noticeable and contribute to gross margins actually because we do from some of these steps also expect better productivity. Some of it is also below the operating margin, i.e., in terms of interest and other expenses we expect to be also more efficient there. So it is really not singling out any particular area or geography or product line, but it is really fairly evenly spread; but also it is not that there is any area that is taboo for cost-cutting.

So while we have generally frozen expenses that we continue with, but cut back on others and it is fairly broadly distributed. We've really tried to be -- do it in a smart way that we are not really changing our strategies or our growth strategies but try to take out costs and expenses out of the system. And increase productivity while still driving very hard towards the fast growth, and of course returning to operating margin improvements on an annualized basis.

Barry Goggins, OFI Institutional.

A couple quick questions; just trying to get a sense as to what the normal tax rate would be without all the machinations of the one-time $10 million benefit in the current quarter and kind of looking forward for 2009.

In the quarter if you had backed out the $10.9 million of the three discrete items we talked about our tax rate would have been a little above 40%. And that is because certain areas we had losses in this quarter that we couldn't benefit. So we are still looking as we did in the third quarter of 2008, we are looking at more opportunities where we can restructure our organization to shelter those losses against our profitable entities.

It would have been above 40% in the third-quarter of 2008 backing those out. You also need to recall last year we had a German tax law change, so the effective tax rate in both the third quarter and year to date last year was unusually low as well, so I think we were about 22%. That is not a run rate to project going forward, but I think goal going forward would be -- we think we can achieve about 30% tax rate range in 2009 based on the initiatives that we are looking at.

Okay, so it will be somewhat higher this year? I am trying to get a sense in the fourth quarter, typically is a big amount of sales and it is a big jump relative to the third quarter. Is 30% of kind of annual sales a good number or 25% growth relative to the third quarter before looking at the currency impact?

I think we are not giving quarterly guidance, so I don't think we can -- we cannot give specific percentage numbers, but we clearly expect a healthy sequential increase compared to the third quarter.

One last question on the gross margin. For the year to date it has been about flat. How much has the currency impacted it negatively, and would it have been 46% had not been the currency?

It is actually somewhat -- we are asking ourselves that question, and it is not something that we can calculate precisely. We could calculate it with a static picture but there is also a dynamic effect that we cannot simply derive from our accounting figures. We believe that the gross margin percentage has been under pressure because of the, in the first three quarters still a very weak US dollar. But we wish we could be more quantitative about it. It is not a simple model to calculate or plug in some numbers.

Gentlemen, there are no further questions at this time. I would now like to turn it back over to the Chief Financial Officer, Mr. Bill Knight.

I want to thank everybody for joining our call today, and we look forward to reporting our Q4 and 2008 results after the end of the fiscal year. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.