Bruker Corp (BRKR) 2014 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Bruker's first-quarter 2014 earnings conference call. (Operator Instructions) Please note, today's event is being recorded.

At this time I'd like to turn the conference call over to Mr. Joshua Young. Sir, please go ahead.

Thank you very much, Jamie. Good afternoon. I'd like to welcome everyone to Bruker's first-quarter 2014 earnings conference call. My name is Joshua Young, and I am Vice President of Investor Relations for Bruker.

Joining me on today's call are Frank Laukien, our President and CEO; and Charlie Wagner, Bruker's Executive Vice President and Chief Financial Officer. In addition to the earnings release we issued earlier today, we will also be referencing a slide presentation as part of today's conference call. The PDF of this presentation can be downloaded by clicking on the earnings release hyperlink on Bruker's Investor Relations website.

During today's call we will be highlighting non-GAAP financial information. A reconciliation of our GAAP to our non-GAAP financial statements is included in our earnings release and in our webcast presentation.

Before we begin, I would like to reference Bruker's Safe Harbor statement, which I show on slide 2. During the course of this conference call, we will make forward-looking statements regarding the future events or the financial performance of the Company that involve risks and uncertainties. The Company's actual results may differ materially from the projections described in such statements.

Factors that might cause such differences include but are not limited to those discussed in today's earnings release and in our Form 10-K, as well as other subsequent SEC filings. Also note that the following information is related to current business conditions and our outlook as of today, May 7, 2014. Consistent with our prior practice, we do not intend to update our projections based on new information, future events, or other reasons prior to the release of our second-quarter 2014 financial results.

We will begin today's call with Frank providing a business summary of our first-quarter performance. Charlie will then cover our financials for the first quarter in more detail. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

Thanks, Joshua. Good afternoon and thank you for joining us on the call today.

I will begin my presentation on slide 4. Q1 was a reasonable start to the year for Bruker, as we generated 7% organic revenue growth; drove 160 basis points of non-GAAP operating margin expansion; and reported year-over-year improvement in our free cash flow. That being said, please remember that Bruker had a relatively weak first quarter in 2013.

We reported $424 million in revenue during the first quarter 2014, an 8% reported increase from the previous year. From a market perspective we saw healthy demand from customers in the research, applied, and chemical markets during the first quarter.

Our Q1 2014 revenues from industrial customers grew from a lower base after declining significantly in 2013. While there is no strong industrial recovery, it is a positive sign that revenue from other industrial customers resumed modest growth in Q1 2014. Our microelectronics revenue, which includes semiconductor, data storage, displays, and solar, declined in revenue in Q1 2014 year over year. But we did see a gradual pickup in orders.

Geographically, Europe generated steady revenue and bookings growth in the first quarter. While we saw good revenue performance from Japan in Q1, new orders in Japan were weak in Q1 2014.

We saw improving order trends in North America but weakness in Latin America during Q1 2014. Revenues in North America declined in Q1, which is a reflection of the weaker environment we saw in bookings in North America during 2013.

From a group perspective, CALID posted low double-digit revenue growth in Q1 2014 after a relatively weak Q1 2013. Our BioSpin and BMAT groups both generated mid-single-digit revenue growth in the quarter year over year. Finally, we reported $0.11 in non-GAAP EPS in the first quarter of 2014, an increase of 38% from Q1 2013.

In summary, we are pleased with our start to the year. The current demand environment is slightly better than what we experienced in of 2013, and we believe we are on track to deliver our full-year 2014 guidance.

Now please turn to slide 5 and 6, where I will provide some additional details about the performance of our three BSI segment groups and our BEST segment.

I will start with the Bruker BioSpin group. BioSpin delivered another good quarter, posting good revenue growth in Asia and continued steady performance in Europe. This is our second consecutive quarter of solid revenue growth from BioSpin.

Some of this growth has come from a concerted effort on our part to work down excessive backlog. During Q1 2014, both our BioSpin magnetic resonance spectroscopy division and our preclinical imaging division performed well.

Now turning to our CALID group, whose revenue growth in the first quarter was generated by the optics and life science and clinical mass spectrometry divisions, as both had an easier year-over-year comparison. Optics had strong performance in North America and is benefiting from recent product launches such as TANGO and LUMOS.

Our life science and clinical, or LSC division, saw robust demand in Europe and continued momentum in their clinical microbiology business with our MALDI Biotyper platform. Our high-performance QTOF mass specs performed well, and academic and government demand was healthy in Europe and North America.

Our LSC team did an effective job of integrating CAM's commercial management organization during the first quarter of 2014. With this integration, LSC and CAM now share one commercial operations management team.

Our CAM division posted a weak Q1 of 2014. In January 2014 we expanded our review of CAM's market focus and cost structures to identify the best way to drive the core CAM business towards profitability. We expect to share details of this CAM review with you on our Q2 earnings call this summer.

Our detection division had an unexpected dip in revenues in Q1 of 2014 due to the timing of German export licenses, which were delayed for almost all countries due to the crisis in the Ukraine.

On slide 6, our Bruker materials group, or BMAT, revenues grew in the mid-single digits in Q1 of 2014. The research and academic markets, which are BMAT's largest customer segments, remained healthy and generated good performance. And I already commented on microelectronics and other industrial demand earlier.

BMAT's three largest divisions all generated growth in Q1 2014. We were pleased with the performance of our new fluorescence microscopy business, which we acquired in September 2013. This business put up strong performance in Q1 and is off to a great start in the Bruker portfolio, leveraging their new products and our larger commercial channel. The market for multiphoton and fast confocal fluorescence microscopy products are healthy in cell biology and neuroscience research worldwide.

We saw the benefits of the restructuring actions that BMAT took in the second half of 2013, as the BMAT group's operating expenses declined significantly in the first quarter of 2014. This helped BMAT to deliver increased operating profitability compared to Q1 2013.

Finally, our Bruker Energy and Supercon Technologies, or BEST segment, continue to do a good job of balancing growth and improvements in profitability -- although it did have some unusual revenue timing benefits in Q1 of 2014. BEST reported revenue growth of 12% and a non-GAAP operating margin of 8% in the first quarter of 2014, and it more than doubled its operating income from a year ago.

Most of this improvement has come from better control of operating expenses, which have declined as a result of actions we took in 2013. BEST also had a good quarter of bookings growth, as it secured some large contracts for its superconducting wire business from major MRI vendors.

Now I'd like to make a few closing remarks before turning the call over to Charlie. While Q1 was a reasonable start to the year for Bruker, we recognize that we still have a lot of work ahead of us to deliver our operational objectives for the full year 2013.

Similar to 2013, we may see quarterly variability in our business. In particular, we will face a more challenging comparison in Q2 due to our relatively strong second quarter of 2013, and we expect that revenues will likely be flat in Q2 on a year-over-year basis.

That being said, our lower operating expenses and growth in the first quarter should put us in a position to deliver on our full-year 2014 guidance, which remains unchanged. I look forward to reporting on our progress.

And now I would like to turn the call over to our CFO, Charlie Wagner.

Thanks, Frank. I will now provide some additional details on our Q1 2014 financial performance.

On slide 8 I show a snapshot of our Q1 2014 non-GAAP results. Total revenues were $424 million, an increase of nearly 8% from the first quarter 2013.

Higher revenues combined with lower operating expenses drove operating leverage in the P&L, as non-GAAP operating margins expanded by 160 basis points and non-GAAP EPS grew approximately 38% over Q1 2013. We also generated free cash flow and increased our net cash position during the first quarter of 2014.

Turning to slide 9, I show the revenue bridge for the first quarter of 2014. Reported revenue growth of 7.7% included organic revenue growth of 6.6% and a 1.1% net positive effect from acquisitions and divestitures. The acquisition impact reflects the BMAT acquisition of Prairie Technologies, a provider of fluorescence microscopy products. Changes in foreign exchange rates had a negligible effect on revenue during the quarter, as the stronger euro offset a weaker yen compared to the prior year.

On slide 10 I show our Q1 2014 non-GAAP operating results in more detail. Our Q1 2014 non-GAAP gross margin of 44.2% is a decrease of 140 basis points on a year-over-year basis.

Nearly all of the decrease is due to changes in foreign exchange rates and primarily the result of the weaker yen. We also saw some pressure on our gross margin this quarter due to weak CAM performance and lower pricing for some of our BMAT products in industrial markets.

Our Q1 2014 operating expenses were slightly lower on a year-over-year basis, as modestly higher SG&A was offset by lower R&D spending. Overall, operating expenses as a percent of revenue declined by 300 basis points in Q1 2014 compared to Q1 2013.

Our non-GAAP EPS of $0.11 was $0.03 higher than Q1 2013 and reflected a tax rate of approximately 26% in Q1 2014, which is below our expectation for a full-year 2014 tax rate of 29% to 30%. And the difference primarily due to the timing of the tax items and mix of jurisdictional profits.

On slide 11 I show a reconciliation of our GAAP to non-GAAP financial results for the first quarter. In Q1 2014 we excluded $11.5 million of operating costs from our non-GAAP results, and that number is flat compared to Q1 2013. We incurred $2.4 million of restructuring charges in the first quarter of 2014 and still expect our restructuring charges to increase during the course of the year and total $15 million to $20 million for the full year.

We have expanded the outsourcing and restructuring activities that started in 2013 as we strive for continuous improvement in our margins. In 2014 we have already completed the divestiture of the CALID Group's Leipzig, Germany, machine shop in Q1 2014. And we're in the process of consolidating other life science division manufacturing within Germany.

In BioSpin we have expanded our outsourcing of non-core manufacturing, including incremental programs to outsource electronics components in France and Germany. In addition, opportunities for further rightsizing of costs are being assessed in a number of divisions, including CAM. For programs announced or to be announced in 2014, most of the run rate benefit will begin in 2015.

On slide 12 I show our balance sheet as of March 31, 2014. Our balance sheet continued to strengthen during the quarter. Inventory increased from December 31, 2013, but was flat with Q1 of 2013, including the unfavorable effect of a stronger euro.

Our days of inventory outstanding improved by 30 days, totaling 233 at the end of Q1 2014 compared to 263 days in Q1 of 2013. Accounts receivable totaled $295 million at the end of Q1. And our days sales outstanding was 65 days, unchanged from Q1 2013. Our accounts payable increased by about $40 million. And days payable outstanding increased by 3 days compared to Q1 2013, as our cash flow benefited from the timing of payments.

On slide 13 I show our Q1 2014 free cash flow performance. We recorded free cash flow of $9 million in the first quarter of 2014, an increase of roughly $42 million from Q1 2013. Higher net income, improved working capital, and lower CapEx spending combined to drive the improvement.

On a trailing 12-month basis, our CapEx spending has roughly matched our level of depreciation. And we expect this trend to continue in the near future.

Now I will turn to our financial guidance for 2014, which I show on slide 15. We're not making any changes to our full-year 2014 guidance. We expect that revenue growth from all three BSI groups and from BEST will be roughly the same as the Company's overall revenue growth rate.

We are making a small update to our currency assumptions, as the US dollar to euro rate currently stands at 1.38/1.39, and the yen to dollar rate is at 1.02/1.03, which are slightly changed from the last time we gave guidance in February.

On the bottom line, we expect to generate 10% to 14% year-over-year growth in non-GAAP earnings per share during 2014. This guidance continues to assume a full-year 2014 non-GAAP tax rate of 29% to 30%.

While we do not provide specific quarterly guidance, we do expect to see quarterly variability in the year-over-year comparability of our operating results over the next few quarters. Specifically, we expect our reported revenue growth in Q2 2014 will be roughly flat with the prior year due to the strong comparable quarter that we had in Q2 2013. Keep in mind that Bruker reported 8% year-over-year revenue growth in Q2 2013 after a relatively weak start to the year in Q1 2013.

So I will close by saying that Bruker is off to a good start to the year. Revenue growth is in line with our expectations, and we're managing our investments and expenses to ensure they remain on track to achieve our guidance for the full year.

With that, I would like to turn the call over to Joshua to start the Q&A session.

Thank you. Jamie, please assemble the Q&A roster.

(Operator Instructions) Brandon Couillard, Jefferies.

Frank, with respect to the CAM division, can you quantify the revenue size of this business now and the magnitude of the operating profit drag? And under what circumstances would you consider, I suppose, exiting the business entirely?

I think that there's -- I don't see a set of circumstances where we would exit the business, but I see circumstances where we -- we are in the process, as you know, and we're in the middle of that process of analyzing what will be -- what market segments and what product lines are most core to us, and where we can perhaps sharpen our focus.

So we do expect to give an update on CAM when we report our Q2 earnings in roughly 3 months from now. And we have already taken further actions in Q1, combining the commercial management structure for the customer-facing functions -- sales, field application, service, and so on. And that is still ongoing a little bit, because we started in the middle of Q1; but it is making good progress.

And other than that -- you know we had a loss in CAM last year. We are anticipating a lower loss this year, but still a significant loss, which is why we're looking at these things. I would rather not get into CAM quarter by quarter, because we don't usually break that out. But we have an issue there, and we are addressing it very seriously.

Thanks. That's helpful. And then one for Charlie: could you quantify the impact of currency on the EPS line in the first quarter? And how should we think about that dynamic -- still expect it to probably be a headwind in Q2 before normalizing in the second half? Is that fair?

Yes, in the first quarter currency would have been about $0.02 to $0.03. And that is the biggest quarterly impact, primarily because of the yen. First of all, Q1 is a big revenue quarter for Japan. And the year-over-year delta in the yen is the greatest in Q1, assuming today's rates remain where they are. The yen started to move in March/April of last year. And so the comps on the yen get easier in Q2, Q3, Q4.

The euro delta is significant, though, year over year. And that comp doesn't get easier until Q4. So anyway, for the quarter it's about $0.02 to $0.03. If rates say where they are, that impact should lessen in Q2 and Q3 and should be a lot less in Q4.

Super. Thank you.

Doug Schenkel, Cowen and Company.

This is actually Chris on for Doug today. So I want to ask about gross margin. The one metric which looked like it could have been better and missed over an otherwise solid quarter was gross margin.

You attributed the year-over-year weakness largely to FX, especially the yen. Is FX masking gross margin improvement? And is it possible to quantify how much of a headwind some of the programs you are taking on to improve manufacturing and the supply chain represent?

Yes, that is a good question. This is Charlie. We would say that currency had about 140, 150 basis point impact on gross margin in the quarter. So it is true that absent that, it would have been a better part of the story.

That said, we are disappointed. We are looking for year-over-year improvement in gross margins on an absolute basis this year. We clearly took a lot of actions last year to begin to address that.

The restructuring actions last year -- where they impacted operating spending, that is flowing through -- you know, we get the full benefit of that pretty much right away. Where the restructuring actions affect cost of goods, some of that flows through; it ramps over the course of the year.

And particularly, when you look at things like procurement savings, they ramp over the course of the year, as well. So there are a lot of factors that affect gross margin. And I would say we are a little bit disappointed with where it came out in the quarter.

But one quarter doesn't make the year. And we're counting on an absolute improvement during the year and counting on seeing the benefit from the actions that we took last year, and ultimately, in the future, additional actions that we will take. So I agree; it is kind of the one point we wanted to -- we should come in a little bit better, but it's still early.

Okay, and just one more. Some of your peers have talked about delays in capital budget releases, specifically in China related to governmental sales. Was this an impact on your business at all?

This is Frank. I think China was reasonable. China is not fantastically strong for us right now, but it is reasonable. It is growing.

So we are not aware of that specific effect in China. We had reasonable growth in China, but not spectacular.

Jon Groberg, Macquarie.

So, Frank, just following up on some of the end market commentary there: you mentioned that, I think, some of the microelectronics and industrial earlier on in your comments -- that you started to see some improvement in the orders. Can you maybe just expand on that a little bit more? It has been a mixed bag, particularly around areas like semiconductor still, with some folks seeing some strength in maybe earlier-stage R&D node-related investments, whereas some of the CapEx stuff is still weak. So can you maybe just give us a sense of what you are seeing there? I know your comps were somewhat easier, as well.

Well, the revenue comps were still strong in Q1 of last year, but the bookings last year in that area, microelectronics/semiconductor, started to be weak. Now the bookings are picking up a little bit, and we got some orders. Often, these are now for larger systems that if they make it into 2014, it would be late in the year. They could also go, sometimes for customer reasons, into 2015.

But we did see an uptick in orders. And still, year-over-year, we saw some microelectronics being down in revenue because of the delay of roughly 6 months that we typically have in this Company between orders and revenue.

So solar remains down; LED remains down; but semiconductor is recovering a little bit. And data storage is hard to read, quite honestly, but we have gotten some encouraging orders. And these are still more technology adoption orders; these are not volume buys. So that gives you a bit of color to my earlier comments.

Okay. And then if I could just follow up, again, a little bit more on the margins. I guess two parts to the question. One, on the gross margin again, Charlie, if you exclude FX, and you think about your view for the year getting some expansion: in the quarter, where are we in terms of mix in the business, and how that impacted it? Where are you in terms of some of the older pricing? Is that starting to roll off yet, and you should start to see an improvement in pricing that was delivered?

And just generally speaking, how much more control do you feel on a quarterly basis you have on some of the discretionary costs? Because it looks like while gross margin was still a little weak with FX, your R&D -- it seems like you are able to maybe manage that a little bit. So I am curious. One, impact of mix; and then, two, as you see the variability there, how comfortable you are feeling with it, in terms of your ability to flex costs intra-quarter -- and if that has changed at all in the last 18 months?

Sure. Yes, there was nothing remarkable about mix. I would say nothing material. There are always a lot of little factors that affect gross margin, whether it is adjustments to inventory or other accounting adjustments. And we had some of that flow through in the quarter. I purposefully don't call that out, because it happens from time to time and from quarter to quarter.

What I can say is that the programs that were put in place last year are going reasonably well. We do -- we've got a lot going on on the procurement and supply chain side. So it's fair to say that some of these programs do slip a little bit. They run a little bit later than we would like. But I don't think that is worth calling out that much, either.

We're trying to build on last year's programs with new programs this year. To the extent that some of these programs are aimed at reducing our material costs, and purchasing, and the like -- there's a delayed effect, a delayed benefit there, because your procurement reductions first affect inventory and then ultimately flow through your cost of goods sold.

Your point around control over OpEx is accurate. I think we have now shown for at least four, maybe five, quarters in a row that we have a better handle on OpEx -- that folks are managing to their budgets more carefully, and on the margin making adjustments to spending when they need to to offset issues in other parts of the business.

That is not a winning long-term strategy. Of course, we want to control over OpEx, but we are well aware of the fact that we're going to drive profitability improvement through a combination of control on spending and improvement in gross margins.

So as I said earlier, it is one quarter. This Company is hard to judge in 90-day increments. And there's nothing about Q1 that has us changing our guidance for the year.

And this is Frank, continuing. Before I discuss the pricing part, the restructurings of last year -- the OpEx effect, where we have, not just for short-term management of results but really more fundamentally reset the OpEx structures of some of our divisions -- I think you are really seeing that now pretty nicely in Q1. And that's not just going to be a Q1 effect, I believe.

Whereas it is true, as Charlie just pointed out, that some of the gross margin effects of procurement and outsourcing -- they tend to come in with a little bit more of a delay, because when you first outsource, you don't immediately have a cost savings. That takes a little bit to settle in to the new supply chain and contract manufacturing structures.

On pricing, I think in some of the areas where we continue to foster price discipline -- I think we're beginning to see some of the effects on that, for instance, in our preclinical imaging division. But you do also see some price pressures, and some of that is still in our backlog.

Maybe it will ease a little bit now, which we -- you know, particularly when the industrial or other industrial demand fell pretty steeply, in the double digits, last year, that some of that is still in our backlog. And again, it is too early to say whether that will ease a little bit. It typically does ease a little bit when there is a recovery. And we are seeing a modest recovery in other industrial, and apparently now in microelectronics or parts of the microelectronic market, as well. I hope that addressed your question.

Yes for me. Thanks a million.

Tycho Peterson, JPMorgan.

Just looking at the quarter here, you beat the original target for flat year over year by north of $30 million. You were guiding $12 million below consensus for the second quarter. And I know you don't give quarterly guidance, but can you just talk to whether there was an element of either pull-forward or spillover from the fourth quarter that impacted this quarter in terms of larger orders?

Yes, there was clearly a little bit of pull-forward into Q4, which -- so Q4 had some pull-forward. And perhaps, also, more modestly a little bit of pull-forward into Q1. Which -- our comments about Q2 were we will have a much stronger comparison year over year.

I would encourage everybody to look at the first half-year. The first half-year, I think, will be, as best as we can tell, pretty much on track with what we have predicted for the full year.

Yes, Tycho, we were obviously a little bit cautious in the color we gave around our Q1 expectations. The Company has a little bit of a history of following a strong quarter with a slow start to the next quarter.

And we wanted to guard against that. And so the Q1 color might have been a little bit of cautious. But the organization responded and got off to a healthy start; as Frank pointed out earlier, it was an easy comp. So I guess the key point is: there's nothing about the Q1 outperformance that has changed our view on the full-year outlook.

And then on the outlook, what are you baking in for an academic recovery in the back half of the year? We've certainly heard from some of your peers that expectations are picking up for a second half of the year recovery.

Well, academic -- really, we haven't really looked or are anticipating any big differences between back half and front half. Academic has been reasonably healthy, with some geographic differences, admittedly -- Europe getting stronger; North America getting stronger; Japan getting weaker, simply because they had the special supplementary budget last year, which, for instance, still led to pretty good Japan revenue for us in Q1 of 2014, which was the end of their previous fiscal year.

So there is some gives and takes in geography. But overall, academic research spending has been -- it is not growing wildly, but it is healthy, and we do well in those markets. It's a little bit -- the trends first-half versus second-half may be a little bit more, again, on the industrial and microelectronics side. And some of that recovery in orders will also already go into 2015, for some of the larger projects, at least. Does that address your question, or should I elaborate more?

Yes. And then just one clarification on CAM. You had talked before about narrowing the focus in products. Have you actually started to do that? I know you are going to give an update in the second quarter, but I was just wondering if there's an impact this quarter from, maybe, some operational initiatives for CAM.

It has been somewhat selective in some geographies where we didn't feel -- and these are very selected -- some selected geographies where we didn't feel that we could get profitable growth, we scaled back a little bit.

And we are busy this quarter. Still a little bit busy with fully getting the production going in the new outsourced/Fremont concentrated factory setting. While we have exited the Dutch factory at the end of last year, you know, not the first quarter you're in a new set of circumstances -- not everything is running smoothly yet, but it is improving pretty rapidly.

And we are also focused on the big opportunities on the commercial side, and hence the commercial management consolidation that we started in early February. That is still ongoing a little bit, but we are getting there.

So a number of things are moving there. And other than that, we are really analyzing and trying to be very thoughtful. There's obviously quite a few market segments and some technologies and products that absolutely will be core to Bruker. And we are trying to make sure that we are doing a good job in nurturing those and in investing in them while overall addressing our cost structure there.

(Operator Instructions) Isaac Ro, Goldman Sachs.

Charlie, question for you on the ERP system. I know that has been one of the major initiatives under the hood that is maybe a little less visible for us in terms of how that's going. So maybe if you could offer an update as to progress and key goals over the next, I don't know, six months or so, be helpful.

Sure thing, Isaac. Yes, and I would like to draw a distinction between our financial system and ERP. The big project we have ongoing right now is a financial system, financial consolidation and reporting system, that will help bring together our disparate landscape of financial systems and move us to a more enterprise-level system that is going to allow us to report more efficiently and more quickly. And there is great business value in that.

It doesn't get at the complexity and diversity of the underlying ERP landscape of the Company. That is one where we do have a project ongoing right now to assess what our options are there, and to most likely lay out what is likely to be a multi-year plan to incrementally improve our ERP landscape over time.

So with the financial consolidation system, we are going to expect to go live at the end of Q3. We're going to be running -- we're doing some parallel tests of the new system in the next two months and would expect to be fully live on the new system at the end of Q3.

Got it. Thanks for that color. And then just a follow-up on the NMR business. You obviously have a, I would call it, more favorable competitive landscape to work with now. So maybe if you could talk a little bit about quota activity and backlog, specifically, in the core of that marketplace as you enter the middle part of the year, that would also be interesting. Thank you.

Yes, this is Frank, Isaac. It is obviously a quarter -- it's difficult to read much into it. We had good bookings in the Bruker BioSpin group. We had very strong bookings at the beginning of the first quarter of last year. So we're actually down in bookings a little bit, but that is really just fluctuations. And that is even sequential fluctuations for which there is no rhyme or reason. That's just fluctuations when you deal with big-ticket items.

So I think it remains quite competitive, especially in the 400-, 600-, 800-megahertz range. And we also have an additional -- we have that backlog of more niche, ultra-high-field systems which we are delivering. And, of course, there's some new interests coming up from time to time. But that's not really any remarkable trends there, I would say.

Beyond NMR and related to that, actually, the MRI demand has been -- pre-clinical MRI, of course -- has been quite healthy for us. And even overall demand for other modalities other than MRI in our pre-clinical imaging business -- demand and orders and bookings have been quite strong in Q1.

We were pleased with that, and that bodes well for our preclinical imaging business. That had some strength last year, but it was a little bit erratic. And there were some pockets of weakness in certain product lines in 2013. I think we're making very good progress there.

Got it. Thanks very much.

Derik De Bruin, Bank of America Merrill Lynch.

Charlie, if I am correct, if my memory serves me correct, you had a $5.7 million licensing payment from the Rosatom in Q2 last year?

That's right.

Okay. Just wanted to make sure that we are apples-to-apples everything with the numbers when we do the math. So the free cash flow has improved nicely. Have you given the free cash flow target for the full year?

No, we have not, Derik.

But do you expect to be free cash flow positive each quarter?

I haven't given that guidance, and I don't have anything else to offer on that today.

Okay. Great. And actually -- my other question was already asked, so I will get back in queue. Thanks.

Steve Willoughby, Cleveland Research.

Following up on one of Tycho's questions, three months ago when we were talking about the first quarter, you were thinking the revenue growth might be around flattish. Obviously, it came in much better than expected.

So I was wondering if you could maybe talk about what parts of the business or what geographies of the business came in better than what you were thinking maybe three months ago?

All right, Steve. So certainly Bruker BioSpin did well and brought in a little bit more revenue than we had expected. BEST grew a little bit faster than what we had expected, even at the end of February.

As I said, Bruker Detection was a notable dropout, because in May they couldn't ship many of their products because they need export licenses -- and even export licenses for South Korea, which is not close to Ukraine. But we just couldn't get export licenses, so we couldn't do anything. So they had to hold back revenue.

Other than that, I think -- yes, Bruker Optics was -- thank you, Charlie -- Bruker Optics did better than expected; not dramatically, but better than expected, and it's a good margin business for us.

So other than that, we were pleased that in some ways, that the growth rate of the businesses, which, as you know, with the more life-science-oriented CALID and BioSpin, pretty good last year; and BMAT being negative, high single digits for the full year, if I recall -- we are getting more in line with each other. In a given quarter they are never exactly the same.

But it points towards what we had been assuming, i.e., modest low- to mid-single-digit growth in most of the -- maybe not in all divisions, but at least in all the groups. So that is the take-home message from Q1, if that gives you a little bit more color.

It does, thank you. And then just as a follow-up, if you could maybe provide a little bit of color on how the Biotyper launch is going so far in the United States?

Well, the FDA-cleared Biotyper launch, it is shipping and demand is healthy. We, of course, have sold quite a few MALDI Biotypers into research-use-only, or into state laboratories, or CDC, or others that did not need FDA clearance.

So the MALDI Biotyper business overall -- and this is not just a US comment; it's even a European comment. Maybe that surprised us a little bit else, but we have ambitious goals for it. But it exceeded those ambitious goals.

And growth in Asia is picking up as well. So it's been a good first quarter for revenue and bookings for the MALDI Biotyper business. Again, one of our faster-growing product lines.

I would like to put a -- there will be some more product news, because we're heading into the two most important conferences of the year, which will be the ECCMID, the European conference which starts this weekend in Barcelona. And then a week later in Boston, we have the American Society of Microbiology meeting in Boston, back to back.

So there will be more product -- technical and product -- further significant improvements to our MALDI Biotyper platform. Initially, when they come out, it is the research-use-only improvements. And then over time, of course, we try to also make those improvements available under IVD-CE. And we're also in clinical trials for further US FDA claim extensions.

So I hope that gives you enough information presently, and then look at some product press releases on Monday morning coming out of Barcelona for the ECCMID with some cool additional stuff and further workflow improvements. The MALDI Biotyper platform is doing great for us.

Ross Muken, ISI Group.

Frank, you called out the TANGO in the presentation. I know it's a new product that seemingly is doing quite well. How do you feel like, in general, the R&D organization is reacting to some of the structural changes going on and some of the disciplines putting in, from a cost efficiency/operations standpoint that maybe before were not as big a focus?

Do feel like the new product momentum is still remarkably strong despite the changes? And do you think it actually might help you get some incremental momentum on projects where the ROIC is obviously quite attractive, and you had a high success rate historically?

Yes, you took a lot of my answer, but that is good. I really think -- you know, we did invest. We cut out a couple of R&D projects that were too speculative and long-term. We did that last year, so that is kind of old news.

But everywhere else, we're really focusing and then just using the PLC process, and by focusing on higher ROIC and larger market opportunities to focus and to be more a efficient. So I am not -- and our teams, more importantly, are not saying, hey, here is this great opportunity; or that adjacent market that we should get into.

We're doing these things. We're doing what we want to do. And our new product flow in the first quarter, with PITTCON and then Analytica -- I guess technically that was the first week of April -- has been quite strong. And the next couple of weeks you will see stuff happening in microbiology. Of course, other mass spec consciences are coming up.

We will have very strong new product flow. We've had it already in the first four months, and there is more to come. So I feel really good about our improving R&D efficiency without really any appreciable reduction, and perhaps -- let's say, I don't see any reduction in our ability to innovate. And if anything, it's going to be a little bit more ROIC and larger market opportunity focus. So I feel actually really good about what we're doing in R&D. And we are being more efficient in terms of OpEx.

You can obviously see it in the organization, Frank. One last thing, just touching upon some of the restructuring and other items you highlighted earlier in the call: do you feel like now that you're starting to narrow the focus, and you are likely slimming down CAM further, and really now breaking this into several key units that will be the value drivers of Bruker -- do you feel like from an organizational perspective it is helping the execution on some of the key projects you want to get at?

One of the challenges of Bruker is always you have so many great products, so many great units; but it was a little bit disbursed. Do you feel like in shrinking the focus a bit, that that has helped accomplish things, maybe, on a medium-term basis?

Well, I would answer it this way, Ross. I think the group structure with a three-group presence -- I am really pleased with that. I'm still -- and Charlie, where applicable -- we're still involved, and we're still helping them guide that, and in some areas very involved, perhaps.

But I think the group presidents and their management teams in the divisions are doing really a good job in focusing. And I think that was a really good move for Bruker. I think that's healthy in terms of how I can manage the Company, but also in how they then manage the divisions and the projects.

So I think that is really -- we are seeing the benefit. And we will continue to see the benefit of that larger structural move, if you like.

That was exactly what I was asking, Frank. Thanks very much.

Tim Evans, Wells Fargo Securities.

Charlie, I wanted to ask you a question on the outsourcing initiatives. Is there any way you can help us understand how substantial the opportunity there is? Maybe what percentage of your COGS do you feel like could be outsourced over time? And the bigger picture here is: what are the initiatives that you really want us to focus on as far as moving the needle the most?

That is a reasonable question. The reality is we have been working hard on outsourcing programs over the last year. And even -- there were some programs that were ongoing before that.

But we are still in the relative early stages, I would say, of our outsourcing efforts. And we are doing what you'd expect we'd do. We are starting with things that are the most obvious to us as being non-core and working those things off. And then over time, you work towards things that are more core while, obviously, hanging on to those things that are ultimately very core.

I will tell you, though, given the diversity of the Company and just given the state of our information systems, I don't have a road map exactly to tell you how much of our COGS or how much of our production value ultimately makes sense to outsource -- partly because we don't have all the information; partly because that is a judgment call around what is strategic and what is not. And I don't think we have enough accumulated history or experience yet at this point to make a call on that.

But what I will say is we are in the relatively early innings. And as we build upon each of these programs, we will be looking to do more and more going forward. So I think there is additional opportunity there that we will look to capture over the next several years.

Okay.

And this is Frank, just adding a little bit. Keep in mind, there are some outsourcing projects where we -- for instance, January 1 we divested a machine shop of the CALID Group in Leipzig, Germany. So that is outsourced a minute later or the next day.

There's other outsourcing programs, like in the Bruker BioSpin Group, a lot of the cabling and electronics, where you make the fundamental decision; but then until you outsource the majority of these literally 15 to 18 months program -- you take that many units and subunits and outsource them.

That has started. That is on track. But it will be ongoing all of this year and even into next year. Then you have the next wave on top of that -- again, I will stay qualitative here -- where we are now taking selected medium to larger volume -- or medium volume, as you know; maybe the ones that aren't the most configurable but have more standard configurations, and where we look at dozens or 100-plus systems a year. And we're doing systems outsourcing while retaining some of the key IP components and the final test and software, of course, that we only insert at the very end stage.

But on the other hand, we may now go in mass spectrometry and some other areas, in various pilot projects -- we are now in certain products going from procuring, managing, putting in into inventory, paying for hundreds and hundreds of parts to maybe going into a handful or into a dozen or two dozen of parts for certain systems. So those projects that -- many of them have been kicked off. Some of the divisions are doing pilot projects this year. You will see steady progress.

I know you're always asking: what really moves the needle? Well, that whole process, multi-year process, does move the needle. But there isn't a one action that will be totally dramatic.

Okay, that is very helpful. And I just wanted to get a quick update on when you think you might be ready to talk to the Street quantitatively about long-term expectations?

We haven't set a date for that yet.

Okay, thanks.

Amanda Murphy, William Blair.

Just a question on some of the commentary you made around pricing in BMAT. Just curious if you could provide some more detail there.

And then, also, I know that is something that you have been looking at more strategically across the organization. So curious if you can provide an update just on your thoughts around pricing, more from a corporate perspective.

Amanda, this is Frank. I will take that one.

BMAT pricing -- there is two elements to it. Obviously, as other industrial, and especially in the other industrial markets, and this may be natural product; this may be metals; this may be recycling -- of course, that is all in the metals industry. This may be metals and mining or cement. Those have some cyclicality. And when the cycle is down, as it was last year, there is more price pressure from our competitors.

We don't need to match that, but we can't ignore it altogether. So it exerts some pricing pressure on us. That tends to ease as there is a gradual recovery.

The other component can be FX. In some businesses, including some in the BMAT, we have stronger competitors in Japan. They, obviously, within a 15-month period, have an unprecedented -- the changing FX work relative to the dollar. Maybe it is 30% relative to the euro or Swiss franc. In some cases it is 35% to 40% shift.

You can, with redesign to costs with our procurement initiatives, you can react to that. But you can't react to that in 15 months. So we do see some pricing. We pricing disciplines and improving work on pricing elsewhere in the Corporation. But we also -- some of these things cannot react as quickly as some of the currency changes that we have experienced in last 15 months.

But it is a high priority, and we are driving it. I think all divisions are driving it within what is competitively possible.

And I know you have had some pricing dynamics in NMR a few quarters ago. Is that essentially out of the gross margin now?

I think no, not entirely. You still -- some of these ultra-high-field orders, they take sometimes much more than a year to be delivered. And I would point out that the 400 megahertz to 800 megahertz mainstream in NMR remains pretty -- you know, it is not super price-sensitive, but it remains quite competitive.

And there's also one Japanese supplier in the mix here, not only the other US company. So I think -- it is moving in the right direction for us, but it's not that we have pricing power there in the NMR market.

Peter Lawson, Mizuho Securities.

Frank, as you look out across the year, what worries you the most? Where could the business flow, just thinking about where you posted organic growth this quarter and where you are going?

What worries me the most?

Yes.

Okay. Well, I am a little less worried than a year ago, because it is not a great demand environment, but it is an improving environment.

The big worries of last year were these big currency shifts. I think those will be -- I predict -- I could be wrong -- that those will be much smaller than what they presently are.

Everybody is concerned a little bit about Asia and China. Not only China itself, but rest of Asia. A lot of not only Japan, but even more so, Korea, and Taiwan, and Southeast Asia are selling a lot to China. So when China catches a cold, they catch more than a cold, sometimes. I would say that is an area of concern.

An area of lesser concern is Europe. Not that the Mediterranean countries have a lot of money, but the rest of Europe has stabilized nicely. And Europe's commitment to R&D funding is really quite long-term and strong, and not so politically vulnerable.

Demand in Russia will be weaker. First quarter has been fine, but it's almost inevitable that there will be less spending; plus, they are reorganizing their Academy of Science. So even without the political crisis, there would have been some slowdown. There's some currency worries in Latin America and in India.

But we have really good, strong products, and that is why our demand picture has been reasonable. We are doing well overall in the research markets. As we're getting stronger in the applied markets and stronger in the clinical markets, those tend to be pretty healthy markets for us.

So I do sleep at night, and plenty to worry about. Of course, all with competitive effects. Quite honestly, those can always be the biggest effects. But we're also doing well competitively. So nothing singular that sticks out that I could point to. I've given you a little bit of the landscape.

That's great. And on the opposite side, what gets you up in the morning? And where do you see the upside in the business?

Well, we have an innovation and transformation project that is a multi-year project. And that gets me up in the morning.

And, of course, serving our customers and staying very close to them -- not only because we like what they are doing. We genuinely are proud of that, and so are all of my colleagues. But also, because I think being close to your customers helps you anticipate demand and develop great products for them.

And I am optimistic that our long-term story or medium-term story that we can make gradual progress, particularly focused on margin, and product line, and with reasonable growth, is working. But every quarter is a bit of a -- it's uphill, but I think we are -- we have a good team. I think we have the organization, where more and more we have better systems. So I think we are on track.

Bryan Brokmeier, Maxim Group.

Your R&D expense is declining quite a bit quite a few quarters recently. Could you provide some details on what efficiency improvements you've made? Are there outsourcing of certain R&D efforts, or relocation of projects to lower cost areas, maybe improved collaboration across groups that have allowed you to realize the same benefits, the same R&D efforts that you have had historically?

Well, I think it is really mostly the benefit of the management process and the product lifecycle process that we have adopted and are adopting more and more stringently that helps us -- being a little bit more selective; doing some things not all in parallel, but in sequence.

Maybe pruning some projects if they don't have a good ROIC, or if they address really only tiny markets. With this phased gate approach, sometimes we do something for a couple of phases, but we may not go all the way and productize it. In the pharma industry, you call this letting something fail earlier, which saves you money.

So I think the management process is really a better process. I cited a couple of examples in BEST, where we very deliberately stopped some long-term perhaps interesting upside, but too speculative a project that we stopped in 2013.

And our key priorities, and the ones with the high ROIC and the sizable addressable market, we are pursuing; and we are pursuing, perhaps, with a little bit more focus, even. But this is still an industry that does not only have really big fields; it's also a lot of smaller, more fragmented markets. And our R&D structures remained adjusted to that.

So there are some products that may address smaller parts of our market, where we are doing just really well competitively and bringing out nice new products. And I think our track record, just in the first four months of this year, but also for many years before that, I think is really quite good. And I don't see that changing.

Thanks, Frank. And Charlie, you discussed the negative impacts on gross margins from currency. Do you see any positive or negative impact from unexpected performances of your business groups? And how might we expect that that business mix to impact your margins over the course of the year?

I'm not sure I understood the question, sorry.

You talked previously about some of the business units -- I think Frank talked about some of the business units that performed better than expected, or -- just the optics group did a little better. Did those outperformances have any impact on the gross margin in the quarter? And how might that change as we move through the year?

I see, I see. No, as I said earlier, mix wasn't a big part of the gross margin story for the quarter. And there's nothing about the Q1 mix that changes our outlook for the year.

So I think the gross margin improvement is going to come from the programs that we have announced and seeing some of those benefits from outsourcing and procurement activities come through. And as Frank pointed out, being selectively disciplined about pricing where it is competitively viable to do that.

So, again, there is no one thing or one business that I would point to as a margin driver. I think it is about consistently improving our performance across all of our businesses.

And at this time we have reached the end of today's Q&A session. I'd like to turn the conference call back over to Mr. Young for any closing remarks.

Thank you, Jamie. I'd like to thank everybody for joining us this evening. We'd like to invite you to meet with Bruker at one of the five upcoming healthcare and growth conferences we will be attending in the second quarter.

We also encourage you to visit us at our headquarters in Billerica, Massachusetts. Thank you for your attention and have a nice day.

Ladies and gentlemen, we do thank you for attending today's conference call. It has now concluded. You may now disconnect your telephone lines.