Bruker Corp (BRKR) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Bruker Corporation quarterly earnings conference call. My name is Robin and I will be your coordinator for today.

At this time all participants are in a listen-only mode and we will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press 'star' followed by 'zero' and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Miss Stacey Desrochers. Please proceed.

Good morning and welcome to Bruker Corporation first quarter 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 officer, and Brian Monahan, chief accounting officer.

Before I begin, 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 relating to adverse changes and conditions in the global economy and volatility in the capital markets, 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 fluctuations 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.

Today Frank will provide an overview of the business and some financial highlights. Bill will follow up with a more detailed discussion of our financial results for the first quarter of 2009 and then we will open up the line for questions.

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 the financial highlights, I believe most of you will have read our earnings press release issued earlier this morning and you are now probably familiar with the key numbers in this earnings release.

In the first quarter of 2009 our revenue was $230.5 million representing a currency adjusted revenue increase of 4.5% compared to the first quarter of 2008.

In the first quarter of 2009 our net income was $8.4 million which included $1.4 million of non-cash, stock-based compensation charges net of taxes.

Our first quarter 2009 GAAP EPS was $0.05 per share per diluted share.

Overall we are pleased with our first quarter 2009 results given the unprecedented economic environment. While we saw softness in certain customer segments, we continued to book healthy orders from academic medical schools, governments and other nonprofit customers who historically accounted for about two-thirds of Bruker's revenue.

We are pleased with our double digit order growth in our Life Science Mass Spectrometry business driven by the compelling capabilities of our high performance mass spectrometers.

We have also seen a significant uptick in the requests for proposal and assistance with grant writing for high end and shared instrumentation grants in Europe, Japan and North America as a result of various international government stimulus packages.

We hope that the global stimulus funding for academic, medical and government research will result in additional revenue and margins for Bruker in the second half of 2009 and into 2010.

In the first quarter of 2009 we continued to be below our gross margin and operating margin goals. However, we have started to see some of the effects of our previously announced cost-cutting initiatives in the first quarter and we expect to realize further savings this year.

While we continue to rationalize our cost structure, we are also investing in new growth and margin opportunities and have already introduced a record number of important new products in the first four months of 2009.

Our new systems and solutions focus on more productivity and higher specificity for Confidence molecular and materials analysis. At the same time we also endeavor to enable entirely new scientific horizons for our research customers.

At PITTCON 2009 we introduced a record number of cutting edge and innovative products, some of which even provide completely unique new research capabilities including for example our proprietary Edmass solution for in tact protein sequencing as well as for protein and N- and C-terminal characterization.

Even more recently at the major annual NMR conference called ENC we also introduced the world's highest field, actively shielded magnets, 850 MHz standard bore compact magnet system and a 900 MHz wide bore solid state NMR system for biosolids including for example membrane protein studies.

Earlier this week we announced the introduction of the fastest and most flexible MALDI-TOF/TOF Mass Spectrometer for proteomics.

Towards the end of the second quarter, at ASMS in June 2009 we plan additional novel product announcements which will further broaden our Life Science Mass Spectrometry solutions offerings.

Along with our new product offerings, we also continue to look for strategic partnerships where we can develop new technologies to benefit our customers.

One of our new partnerships is with Bio-Rad to develop and market new products based on Bio-Rad's technologies in combination with our MALDI-TOF/TOF Mass Spectrometers for applications in high throughput protein profiling and identification.

On the acquisition front, on April 1 we acquired the research instruments portion of Varian Medical Systems' ACCEL Instruments GmbH, a world leader in a variety of advanced superconducting and other systems for physics and energy research.

This acquisition opens an important new chapter in the history of our Bruker Advanced Supercon business. It positions us for additional revenue and margin growth in several exciting markets including renewable energy research, the smarter and more stable energy efficient electricity grids of the future as well as OEM subunits for novel medical devices.

We plan to expand this new business in growth markets such as high temperature supercons, fault current limiters for energy grid stabilization, crystal growth magnets for semiconductors and superconducting devices for large scale scientific and energy research facilities.

We also expect to continue to supply OEM products and services to Varian Medical Systems in support of Varian's proton therapy business.

Now here's our chief financial officer, Bill Knight, with a more in-depth look at our financial results for the first quarter of 2009.

Thanks Frank. As a quick recap, during the first quarter of 2009 our revenues were $230.5 million, a decrease of 3.3% compared to $238.3 million in the first quarter of 2008. Excluding the effects of foreign currency translation, for the quarter revenue increased by 4.5% year-over-year.

In the challenging economic environment, we benefit from our broad international footprint, customer diversification and gains in market share with our newer products.

Gross profit margins were 44.6% in the first quarter of 2009 compared to 47.8% in the first quarter of 2008. The year over year decline in gross profit margin was due in part to a decline of revenues in our Bruker Detection business which is historically a very lumpy business with above average gross profit margins.

Our PITTCON and ASMS product introductions along with the productivity improvements and cost cutting initiatives should gradually help improve our gross margins going forward.

Overall, operating expenses were down $4 million in the first quarter of 2009 as compared to the first quarter for 2008, excluding acquisition related charges.

Sales and marketing expenses were down $1.8 million and research and development costs were down $2.1 million year-over-year.

Some of the cost reductions came from the reduction in force in the implementation of more rigorous review of projects in the R&D pipeline. While we have begun reducing our costs in these areas, we have also increased our strategic investments in additional growth markets.

Our GAAP operating profit for the first quarter of 2009 was $14.3 million or 6.2% of revenue compared to $15.8 million or 6.6% of revenue in the first quarter of 2008. Included in the first quarter of 2008 were $5.8 million of acquisition related expenses.

During the first quarter of 2009 we had $1.1 million of net foreign currency gain as compared to $12.2 million of losses in the first quarter of 2008.

During 2008 and continuing in 2009 we made some significant changes to reduce our foreign currency exposures, which has helped reduce our foreign currency volatility. Some of the changes were timely settlement of inter-company balances, reduction of non-functional currency holdings and use of foreign denominated cash to pay down a large portion of the debt incurred in the Bruker BioSpin group acquisition.

The net foreign exchange gains in the first quarter of 2009 were primarily driven by the continued strengthening of the US dollar against the euro, Japanese yen and Swiss franc.

Our net income in the first quarter of 2009 was $8.4 million or $0.05 per diluted share corresponding to a net income margin of 3.6% of revenue, compared to the first quarter of 2008 with a net loss of $0.8 million or $0.00 per diluted share corresponding to a net loss margin of 0.3% of revenue.

Operating cash flow in the first quarter of 2009 was $13.2 million compared to $22.3 million in the first quarter of 2008. In the first quarter of 2009 free cash flow, which is defined as cash flow from operations less capital expenditures, was $9.2 million compared to $8.9 million in the first quarter of 2008.

During the first quarter of 2009 we repaid $20.2 million of debt and ended the quarter with cash of $149.9 million and net debt of $53.7 million.

Over the past two years we have made a concerted effort to reduce our working capital to revenue ratio. We define working capital as accounts receivable and inventory less accounts payable. And have succeeded in reducing it from $0.60 per dollar of revenue in 2006 to $0.56 in 2007 to $0.50 in 2008 and $0.47 in the first quarter of 2009.

The $0.13 per revenue dollar in savings from 2006 to the current quarter equates to approximately $140 million of lower working capital to support our revenue stream.

Accounts receivable days outstanding or DSO in the first quarter of 2009 was 47 days compared to 56 days in the first quarter of 2008. Inventory turns improved significantly to 1.4 times in the first quarter of 2009 as compared to 1.1 times in the first quarter of 2008. We continue to strive for improvements in inventory turns, overall balance sheet management and cash flow generation.

So with that, I will turn the call back over to the operator for your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Isaac Ro from Leerink Swann. Please proceed.

Hi, good morning everybody. Thanks for taking the question.

Hi Isaac.

Hi. Just related to the basic RFP activity you mentioned from the stimulus, can you give us a sense of what you think actual close rates might be on some of those quotes? I understand that a lot of these programs are just now getting applied for so it's just unclear. But just wondering if you guys had a sense of maybe people are asking for a lot more money than they actually receive.

Isaac, this is Frank. Very difficult to answer what the percentage or the batting average will be, really very difficult to predict. Obviously there's a lot of applications, not all of which will be funded, but overall more grants will be funded but we really don't have a good answer of what percentages may close or get funded.

Some of the -- we already see some orders and already some revenue from some of the supplementary budgets in Japan so that's already occurring in Q1 including orders and in Q2 as well there will be some revenue from that. But the bulk of it will come later in the year and in 2010 as you know, with probably the governmental intramural spending at major DOE or NIH labs coming before the funding that goes out from NIH or others via grants to medical schools and universities. They probably won't be able to really spend their money till Q4 or into next year.

But overall, this has the effect that things get spread out a little bit. We also have the sense that some of the stimulus spending will occur in Europe a little bit earlier than in the United States but it's a fluid situation.

Sure. I understand that. Okay and maybe moving over to the drug industry, I think one of your peers was talking this morning about actually seeing decent orders flow out of some of the companies that are involved in mergers coming out of the first quarter. So could you comment a little bit on what your reps are seeing with some of the big pharma names in this environment?

No clear picture, don't think anything statistically relevant. We do -- I can confirm that we also have received some orders from companies that are involved in large mergers on the -- being acquired or are acquiring so it's not that they're spending nothing at all. They're obviously very selective but they continue to spend some, probably at a reduced level but apparently not at a zero level.

Great, okay, and then just lastly, this is for Bill, on foreign exchange, obviously impact on the topline for everyone in this space, but could you give us a sense of how that might have hit your margins during the quarter one way or the other?

We feel that with the stronger dollar and the production plants in Europe that again for us the translation is to benefit. For the cost portion it can be a hit so it's probably, maybe a percent negative but on a particular quarter it's not a very meaningful statistic for us.

I would add that our quarterly fluctuations even in gross margin or cash flow or things like that, probably our -- there's more quarterly fluctuation for instance on the fourth quarter to the first quarter and so on. And also just somewhat random fluctuations simply on the timing of orders and revenue.

We're naturally somewhat hedged at the bottom line. Topline we'll obviously see it more strongly.

Okay, so just quickly as a followup, that 1%, Bill, that you mentioned, is that at the gross margin line?

No, that's more at the operating income line.

Okay and was there a gross margin impact in the quarter from FX that was meaningful or was it mostly just for volume year-over-year?

I think it's -- what we are really seeing as meaningful is the Bruker Detection was probably more of an influence this particular quarter than it has been in the past. That business was down year over year significantly. That's a business that is primarily Department of Defense and Department of Homeland Security type contracts throughout the world. It can be very lumpy. Typically that carries a very, very high margin. It's the highest margin business that we have and it was down significantly quarter over quarter.

Got it. Thanks very much.

And your next question comes from Derik De Bruin from UBS. Please proceed.

Hi, good morning.

Good morning Derik.

Hi, hey was there any M&A impact to the top line in Q1?

No. The acquisition of the ACCEL research instruments business closed on April 1.

Okay, great. And I guess sticking with ACCEL, and I just -- could you just -- how big is the -- I mean is the Supercon business a -- currently a contributor to the revenue line in any material sense? Could you just give us some idea of how we can look at the division and just I guess how you see the division growing over in the next few years?

The acquired business may add on the order of $15 million or let's say $5 million quarterly, so $15 million perhaps for the remainder of this year. Obviously an estimate, so you will see that in Q2 but not in Q1 yet.

Did I answer your question with that?

Let me just try again -- is -- I mean it's part of your advanced Supercon business I guess. Is there -- how -- on the core business that you have without ACCEL, is there any revenues generated from that?

Oh certainly. Our traditional conductor, low temperature and high temperature super conductor business does generate revenue. It is a cash burn business presently and we're continuing to invest in it. It generally tends to be in the $35 million to $40 million annual revenue run rate.

Okay, great. That's exactly what I was trying to get at.

And Derik, I would clarify that was before the acquisition that we did on April 1.

Right, of course. That's helpful. I just really haven't been able to parse out how much of that -- what the size of that business was.

And it is still relatively modest but not insignificant and clearly we have pretty -- we have major strategic plans to make that a significant contributor to BRKR overall and we are working on that, but it's early days as we just now really become a much more balanced Superconducting --- conductor, wire and now also device company and so you'll see a lot of further strategic development in that part of the business.

We're pretty excited about that. We think that has really great medium and long term prospects. I think that goes into some good new markets but it's early days for that business.

No, it certainly is a novel opportunity relative to anything your peers are selling in this space or have in this space. When you look at the -- your quote activity that you're seeing, is it more heavily weighted to say NMR or is it more spread out across your other product lines?

I would say it affects more typically the products with higher average selling prices, so it maybe yes, it is NMR or research, preclinical, MRI to EPRs, any of the magnetic resonance products.

Right.

And they're typically the higher end products that can be funded in a shared instrumentation or even a high end instrumentation grant here in the United States. But we are also quoting higher end mass spectrometers, maXis type systems, MALDI-TOF/TOF, FTMS, higher end X-ray and optic (inaudible) systems. So it's typically not for the $50,000 instrument but for the several hundred thousand to several hundred million type system.

Great, which is what I would have expected. Sticking with NMR, could you talk a little bit about what the pricing dynamics are in that market? It's essentially duopoly and I'm just wondering how the profitability and the pricing goes in that division relative to say mass spec for example where you face a lot more -- different competitive environments.

Well I would say, especially in these times, I think there is pricing pressure in most markets. I think there certainly are three NMR competitors and but I think it's also nothing new. It's always been -- it has fewer competitors but it is very much a competitive field, even though mass spectrometry has more competitors but then again, typically mass spec is a bunch of islands and on each island, if you like, there are sort of scientifically two or three or four competitors.

So I don't know that there's a big difference in competitive pressures. They're both different competitive dynamics but they're both quite competitive.

Okay. Any comment on your '09 outlook? Are you still expecting a single digit revenue decline?

I believe it's not that we have much better visibility now then just a couple of months ago when we announced our -- what our release said is our annual goal but we're still aiming and driving towards single digit decline and or perhaps even flat revenue when currency adjusted.

But there -- the visibility, yes we're a little bit deeper into the year but there's still -- it still is a somewhat -- there are various trends that we're observing. Some things got weaker in Q1 that we had anticipated, other things actually were a little bit stronger.

On balance, we're -- have about the same outlook as we did a couple of months ago.

Okay, and I guess the -- you also commented about seeing non-GAAP operating margin expansion and is that still a deliverable this year?

That remains to be seen. We'll probably have more comments on that after the second quarter. And you know, while we're in endeavoring to reduce the volatility or fluctuation from quarter-to-quarter somewhat this year compared to last year, we'll still have volatility and fluctuation from quarter to quarter. Hopefully not as pronounced as last year and I would probably prefer to come back to that question after a couple of quarters.

Fair enough, fair enough. I guess with respect to the top line, would you say though that just on he timing of when your recognizing revenues for orders for example for some of the big orders you took last year, would you say that you're visibility this year is greater than in prior years on a the revenue growth?

Some of the big orders like a long time ago, the North Carolina Research Center was a very big NMR order or the [Saudi] order that you may recall for cost, none of those have made it into revenues so far so, but I would say our visibility is, for the big ticket items, is as it always has been.

We have there typically more than a quarter or sometimes more than two quarters of backlogs and it depends on the system type. It tends to be longer backlog for the bigger ticket items because they typically have longer delivery times.

And so I think our visibility is, for orders that we have already from backlog that we have already, it's about the same as it always is, so that's predictable but usually these are longer term items.

Okay, great. Thank you very much, Frank, Bill.

You're welcome.

(OPERATOR INSTRUCTIONS) And your last question comes from Kenneth Hershberg from Hershberg Capital. Please proceed.

Good morning, thank you for taking my call.

Good morning.

I just have a question concerning the litigation that's going on between you and ISIS regarding your pathogen detection business. Several questions, first of all, is that affecting sales of those -- that equipment? And also now that that business was acquired by Abbott Laboratories from ISIS, might that help resolve the issues? And actually could you give us a little detail about what the issues are? Thank you.

As you may expect, we prefer not to comment on pending litigation but I can certainly comment that we're not expecting or have in our business plans any revenue this year that would be related to ISIS or IBIS or Abbott Molecular, the new parent company of IBIS.

Beyond that, I would really prefer not to comment on pending litigation.

Thank you.

You're welcome.

And your last question comes from Bob Carlson from Janney Montgomery Scott. Please proceed.

I'm just wondering if you could expand on the Supercon area. Are we working with any local utilities? I know I keep reading about American Super Conductor and they're doing this and that and expanding here and there. Is our product something that we're going to compete with them on or is it -- if you can just bring me up to speed on that.

Well, we have a variety of products and actually relatively little overlap. There's some overlap with American Super Conductor but we both, with American Super Conductor, we both make second generation high temperature super conductors. Beyond that we have a broad portfolio of traditional low temperature super conductors which today are the bulk of our revenue.

They tend to go into our own NMRs or mass spectrometry magnets. They also go into MRI systems of the big MRI, the big three MRI suppliers, as you might expect.

We also have first generation super -- high temperature super conductors, which are used in a number of high temperature super conductor generators and motor type applications.

And we are preparing to work with some utilities, although let's say traditional, cable projects are not our primary focus in that. In addition, very different from American Super Conductor, or maybe they're changing as well, we are really focusing much more on super conducting devices where the super conductors are an important element and really a key enabling technology but we think there is better margin opportunities in providing super conducting devices.

And these might be magnets or other types of applications such as the -- we have a very unique inductive super conducting fault current limiter technology that we think is perhaps the best available super conducting fault current limiter technology out there. That's a potentially very large market but it's still in the technology development phase.

Until that really goes into a major application, it may be two to five years out but it may ramp up and become a rather sizeable market and we think we have perhaps the most interesting of the competing technologies in that space.

Thank you.

And at this time there are no further questions. I'd like to turn the call back over to your host, Mr. Frank Laukien. Please proceed.

Okay, thank you very much to all of you for joining us today. This concludes our earnings call. Goodbye and thank you very much again.

Ladies and gentlemen, we thank you for your participation in today's call. You may now disconnect. Good day.