Bruker Corp (BRKR) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to Bruker Corporation fourth question earnings conference call. My name is Shikanah and I will be your coordinator for today. (Operator Instructions).

I would no like to turn the call over to your host for today, Ms. Stacey Desrochers, Treasurer and Director of Investor Relations. Please proceed.

Good morning and welcome to Bruker Corporation fourth quarter and fiscal year 2008 financial results conference call. I'm Stacey Desrochers, Treasurer and Director of Investor Relations. With me on today's call are Frank Laukien, President and Chief Executive Officer, Bill Knight, Chief Financial Officers, and Brian Monahan, Corporate Controller.

As a reminder, on February 26, 2008, Bruker Biosciences Corporation closed its acquisition of 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, al 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 expense incurred on acquisition-related debt are not reflected in the financial results of periods prior to the date of the acquisition as they would typically be in a pro forma financial 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 statement of Bruker Biosciences Corporation with those of 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 Bruker BioSpin Group.

Before I begin, I would like to read our Safe Harbor Statement. This discussion will include forward-looking statements. The 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 adverse changes and conditions in the global economy and volatility in the capital markets, 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 statements other than as required by law.

During this call we referred to certain financial measures that are not in accordance with US GAAP. Such as non-GAAP operating income, non-GAAP net income and non-GAAP EPS. Non-GAAP operating income is net income and EPS excludes certain items such as restructuring charges, acquisition related charges, non-cash stock base compensation and other special charges. A reconciliation of non-GAAP measures to US GAAP has been provided this morning in our earnings press release. Non-GAAP financial measures are not meant to be a better presentation or substitute for results of operations prepared in accordance with US GAAP.

We believe that discussing these measures help 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 results to previous periods or forecasts.

Today Frank will provide an overview of the business and financial highlights. Bill will follow up with a more detailed discussion of our financial results for the fourth quarter and fiscal year 2008 and our goals for 2009 and then we will open up the line for question.

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

Thank you Stacey and good morning, everyone. We appreciate you joining us today. Starting with a financials, I believe most of you have read our earnings press release issued earlier this morning. And you now probably familiar with the key numbers in the earnings release.

In the fourth quarter of 2008, our revenue was $315 million. A currency adjusted decline of 3% compared to the fourth quarter of 2007, but up 30% sequentially from the third quarter of 2008. Moreover in the fourth quarter of 2008, our non-GAAP EPS was $0.18 per diluted share which beats street expectations significantly. For the full year 2008, our revenue was over $1.1 billion compared with $1.03 billion for the year 2007.

Considering the difficult economic conditions we were pleased with our overall revenue growth of 7% in 2008 and our year-over-year 2008 currency adjusted revenue growth of 3%. For the full year 2008, GAAP revenue in our Bruker BioSpin reporting segment was essentially flat while our Bruker Biosciences reporting segment saw double digit GAAP revenue growth with 2008 revenue in our Bruker AXS division, drawing in the low teens, and revenue in our Bruker Daltonics, and Bruker Optics division growing in the mid- to high teens percentage-wise.

As discussed previously, we were not satisfied with our operating margin trends in 2008. And with the onset of the global economic downturn, we took a close look at our operations. As a result, in the third quarter of 2008, we began and we continue to drive an ongoing cost cutting initiative which we expect to generate very significant annual savings. Some of the steps include voluntary temporary top management salary decreases for 2009, selected staff reductions, salary freezes and cuts in discretionary spending.

Our focus in 2009 is on cost cutting and gross margin improvement, but we intend to take advantage of new opportunities in the current market. Using our industry leading product to continue to gain market share. In that vein, we will continue to invest more than the industry average in research and development and keep pushing into new market segments some of which were mentioned in our earnings press release this morning where we see additional growth and margin opportunities for Bruker.

While it is very difficult to predict how the global recession will affect our industry and specifically Bruker going forward, our bookings and backlog in the fourth quarter of 2008 were quite healthy. We saw strong growth in 2008 in South America, China and India, and we continue to expand our presence in these areas. Moreover, we have a strong technology IP and product portfolio, broad international diversification, and at over 60%, 60%, an unusually high percentage of revenue derived from universities and medical schools and other nonprofit customers and governmental customers who all tend to be less sensitive to current economic conditions.

Some of our customers have already begun to benefit from contracyclical supplementary budgets and various national stimulus packages. For example, in January 2009, we announced a contract for over $12 million to provide 51 state of the art electrospray Time-of-Flight Mass Spectrometer, [crust plus-related] chromatography equipment to the Japanese National Police agency Prefecture forensic laboratories.

In 2008, we made some of the most significant new product introductions in the history of our Company and we expect many of these exciting new products to continue their ramp up in 2009. Moreover, we plan to announce additional major new products at Pittcon and other conferences later this year and we believe that the new products coming out of our R&D pipeline will further drive our growth and growth margins in 2009 and beyond.

Now here is our Chief Financial Officer, Bill Knight with a more in-depth look at our financial results for the fourth quarter and the fiscal year 2008.

Thanks, Frank. As a quick recap, during the fourth quarter of 2008, revenues were $315.2 million compared to $344.8 million in the fourth quarter of 2007. Sequentially revenues in the fourth quarter of 2008 increased by 30% compared to revenue of $242.1 million in the third quarter of 2008. For the year 2008, revenue increased by 7% to $1.1 billion compared to revenue of $1.03 billion for the year 2007.

Excluding the effects of foreign currency translation for the quarter revenue decreased by 3%, but increased 3% year-over-year. As Frank mentioned earlier, we believe in challenging economic times we will benefit from our broad international footprint and customer diversification. As for our 2008 revenues, approximately one-half came from Europe, approximately one-quarter came from the Americas, and approximately one-quarter came from Asia/Pacific, Australia, India, the Middle East and Africa combined. As for end markets, our revenues in 2008 are approximately 67% came from academia, medical schools and other nonprofits, 12% from health care, biotech pharma or diagnostics companies, 11% from government, 11% from industrial research, 7% from industrial quality and assurance and quality control, and 3% from applied markets.

In 2008, we derived approximately 77% of our revenue from systems sales and 23% from aftermarket and other revenue. Gross profit margins were 48.6% in the fourth quarter of 2008 compared to 49.3% in the fourth quarter of 2007. Our gross margins for the full year 2008 were 45.6%, compared to 46.1% for 2007.

In 2008, amongst other factors, our growth margins were under pressure due to the high Euro to US dollar exchange rate earlier in 2008. Frank already mentioned our upcoming product introductions ,productivity improvement and cost cutting initiatives which will help our gross margin and move us to our medium term gross margin goal of 50%.

Non-GAAP operating profit for the fourth quarter of 2008 was $52.6 million, compared to $74.0 million in the fourth quarter of 2007. For 2008, non-GAAP operating profit was $121.2 million, or 10.9% of revenue, compared with $147.3 million or 14.3% of revenue in 2007. Our non-GAAP net income in the fourth quarter of 2008 was $30.4 million or $0.18 per diluted share, corresponding to a non-GAAP net income margin of 9.6% of revenue compared to the fourth quarter 2007 with non-GAAP net income of $47.7 million or $0.29 per diluted share or 13.8% of revenue.

For the full year 2008, non-GAAP net income was $77.9 million or $0.47 per diluted share, corresponding to a non-GAAP net income margin of 7% of revenue compared to a fiscal year 2007 with non-GAAP net income of $107.9 million or $0.66 per diluted share or 10.5% of revenue.

During the fourth quarter of 2008, we had $5.3 million of net foreign exchange currency losses. The net foreign exchange losses in the fourth quarter of 2008 were primarily driven by the continued strengthening of the US dollar against the Euro, Japanese Yen and British pound. In 2009, we are implementing a transactional hedging program to minimize the effect of currency fluctuations on the P&L. In the fourth quarter of 2008, our effective tax rate was 37.3%. For the full year 2008 our effective tax rate was 30.1% compared to 30.9% in 2007.

Cash flow from operations in 2008 was $105.5 million compared to $120.9 million in 2007. Free cash flow was $58.1 million in 2008 compared to $93.9 million in 2007. Capital expenditures for the year 2008 were $47.4 million, which was approximately $20 million higher than last year due to the expansion of two manufacturing locations in France and Germany. In 2009, we expect to return to our normal capital expenditures spending of approximately $30 million.

During 2008, we repaid $187 million of the $351 million of debt incurred in connection with the Bruker BioSpin Group acquisition in February of 2008. As of December 31, 2008, Bruker Corporation had cash of $167.7 million and net debt of $56.1 million. Accounts receivable day sales outstanding improved again in the fourth quarter, while our inventory turns remain constant. We will continue to push for improvement in inventory turns, balance sheet management and cash flow generation in 2009.

Now moving on to our financial goals for 2009. The current volatility and uncertainty in the global economy makes forecasting very difficult for the second half of 2009. Assuming that economic conditions do not deteriorate further in 2009, we intend to drive our Company towards the following financial goals for the year 2008 when - - 2009 when compared to 2008. The currency adjusted low single digit percentage decline in revenue or even flat revenue. An improvement in non-GAAP operating margin and EPS and a positive net cash position before the end of 2009.

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

(Operator Instructions). You have the question from Isaac R with Leerink Swann. Please proceed.

Hi Guys. Thank for taking the question. First off, on the pacing of how you are seeing some of the stimulus dispersing itself into the marketplace. You gave an example of one that was overseas. I'm wondering specifically in the US. Are you seeing any early impact from the stimulus package in resulting dollars into the NIH among your customers and this actually translating into demand for your product?

It's too early for that. This is Frank. I think there is a lot of activity in terms of quotations and customer proposals. But it does not relate into any purchase orders yet. We are somewhat optimistic that especially for the bigger ticket items this could have a positive effect for us here in the US.

Sure. Okay. In terms of looking into the past as a comparison, do you have a sense of how quickly that process can take place so if you had a customer that was on the fence in a prior year and got funding in their grant for new equipment purchase, do you have a sense of how long it takes to translate that grant approval into actual orders in resulting revenues.

Perhaps very roughly. Once someone is granted on average, perhaps may tend to make a decision within three months and then maybe that turns into revenue another three to six months later depending what type of equipment they buy. I guess from a date of a grant on average perhaps six months or so, six months or a little more.

Obviously for bigger ticket items it could be year or more. A big NMR system or [SGMS] system for a smaller instrument it could be much, much faster. The whole process could take 60 days. On average five to seven months is not a bad estimate.

And then on the end market, you give a nice little breakdown here on your end market exposure. I think I might be confused on how the government exposure is spread out because you said 57% was academic, government and medical school and nonprofit-type labs. And you also mentioned 11% government --

Let me correct that then. 11% government was correct. And 50% was academia, universities, medical schools, other nonprofits, foundations or similar here and abroad. But the 57% did not include government. The 11% includes federal, state, and local government. So together that's 57 plus 11. Government may have been unusually high in 2008. Usually it's a little less in other years, probably just below 10%.

Right. Okay. I think that adds up right about now. And on the NMR marketplace specifically, can you give us a sense of what you are seeing there given these are higher end, bigger ticket products. How do you feel about your competitive position there? know you had a high field placement in the summer time that was in the news and wondering how that is progressing and whether you see following orders on that type of system at the highest end. And competitively do you feel like you might be in a better market hare position now than you were 90 days ago?

I think the high end market -- the market for big ticket items has not changed materially nor been negatively impacted really in the last six months or so. Most of those are not funded by industry or virtually none of those are funded by industry. Some high-end items come in from pharmaceutical companies. They are very selective in their spending, but they still have the wherewithal to make the selective investments. Most of the high-ticket NMR, SGMS, MRI systems are purchased by universities, medical schools, governmental or quasi-governmental entities. And their funding has not been affected that much by the economy.

We may even see a bit of pick up on those in particular from some of the big stimulus packages in the US, Japan, Germany. So many other countries have stimulus packages as well. In terms of market share, I don't know that that position would - - we have a strong position there and that has not really changed dramatically in the last 90 or 180 days. Those are longer term trends. Does that answer your question, Isaac?

That's helpful. And lastly, Pittcon is around the corner here, should we expect any major new product introductions out of you guys this year? Maybe expansion to your technology range?

Certainly.

That are meaningful?

We expect significant new product introductions at Pittcon.

Okay. That's it for me. Thank you.

(Operator Instructions) You have a question from the line of Derik De Bruin with UBS. Please proceed.

Good morning.

Good morning, Derek.

What's your assumption for the Euro in 2009? I guess when we look at your fiscal '09 assumptions, what do you think of the overall negative FX hit?

Hi Derik, this is Brian. Right now we - - if you use the Euro dollar exchange rate for the first 72 days of this year, that's all we can go on right now. To our revenues, that would have a negative impact, a headwind of 6%.

All right. That's about what I was thinking. Great. guess what are your assumptions for the tax rate '09 and you have a high percentage rate of sales outside the US. Is the profitability distributed similarly?

Yes. Derek, this is Bill. I think we would be looking at a tax rate in the 30% range.

All right. And I guess, the bulk of the profits are from overseas operations, right?

The profits are certainly driven by the manufacturing facilities in Europe.

Okay. So I would assume that 2009 is going to be a lot like the other years in the fact that your 1Q is going to be substantially lower than your 4Q numbers in this typical seasonality is. Will you expect to be abnormally weak in 1Q this year?

Derik, this is Frank. No, we don't expect Q1 to be abnormally weak. It's not the same exactly every year. Generally Q1 and Q3 tend to be a little bit weaker than Q2 and Q4 always tends to be our strongest. In 2008 those effects were particularly strong. We will endeavor to reduce that effect a little bit if we can. And no, Q1, we do not expect an unusually weak Q1.

Okay. And I guess what do you have for assumptions in terms of free cash flow for 2009?

We - - looking at it as we said, the forecasting is a bit difficult because of what's going on. We certainly would not be looking with profit improvement, but with a potential of revenue decline. Nothing significantly similar than what we were seeing this year. Will be in the range up or down.

That would be, maybe I could qualify that, that would be for the operating cash flow that we expect approximately $20 million less in Ca Ex which will be more historical level. In 2008 we had it to do two factory expansions which led to an additional incremental $20 million or so in CapEx in 2008 which we do not expect to have to repeat in 2009. So CapEx may be about $20 million lower and hence perhaps $20 million pick up or so in free cash flow whereas operating cash flow may not change dramatically. We are obviously trying to push it up, but we don't expect dramatic changes compared to 2008.

That's what my model figures. That's good. And I guess you were talking about profitability. You are talking about a mid-term target of 50% gross margin. And I guess could you just walk us through how you get there and how also when do you kind of see delivering a mid-teens-type of operating margin on a full year basis?

We are looking really at a three year plan and ideally we would love to deliver something like 150 to 200 [bids] pick up per year for operating margin or for non-GAAP operating margin. However, realistically it will be difficult to deliver that in 2009. So we - - our three year plan we were sticking to it, but it may be less of the improvement that we normally would like in 2009 and hopefully more of it in 2010, 2011, assuming that at some point the economy does at least stage moderate improvement again.

I think I can add, Derik, that certainly the last couple of years in product design we not only focused on creating stronger technologies, stronger features, additional new features, but we have focused on pulling cost out of our products, pulling cost out of our processes. We certainly have had successes there. How that translates and we are going to have new product introductions in this year in 2010. So over time we do have products that are entering the marketplace that are able to generate more margins. What that - - how much impact that is going to be in a current market situation versus a more robust situation remains to be seen. There is - - while there is uncertainty where the top line can exactly be, there is certainly certainty a focus on continuing to pull costs out of our products and our operations.

Great. And just one final question. Frank, when the BioSpin deal was done, certainly you made a comment that you weren't expecting to see the family sell shares any time soon. Are you looking potentially to sell shares in 2010 or is the current price prohibitive?

The current price is prohibitive.

Well, I mean, I work at UBS. Give me a break.

(inaudible) obviously.

Obviously, yes.

So, there are no current plans to sell any shares and there are no current plans, period, for any given day to sell shares until there is a present level, I think it will be extremely unlikely.

Okay. That's great. That's what I thought. And finally, can you talk about a little bit do you see doing some [tuck-in MNAs]? Are there still little technologies like the x-ray platform or the platforms you bought recently and just some of the other things you looked at?

Absolutely. That perhaps a normal part of our business. We always keep our eyes open for those. Probably on the smallest scale, smaller technology.

Additional product lines and additional technologies are and could very well be of interest to us and we always keep our eyes open for that. It's difficult to predict any deal slow. You would think that with the current valuations there would be more. But that hasn't really occurred yet because probably people would need to get used to those present valuations for a while before they would be willing to do transactions. But we are always looking at that. I think that's a given at any given time.

Great, thanks a lot Frank. Thanks, Bill.

(Operator Instructions) At this time there are no further audio questions.

Okay, then thank you very much, operator. And thanks to all of you for joining us today. I would like to invite you again to our Pittcon booth tour for investors and (inaudible) analysts on Tuesday, March 10th, starting promptly at 10 a.m. Please contact Stacy Desrochers if you are interested in attending. This concludes our earnings call and good-bye and thanks again, everybody. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.