Bruker Corp (BRKR) 2014 Q3 法說會逐字稿

Good afternoon, everyone and welcome to Bruker's third-quarter 2014 earnings conference call.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions).

Please also note today's event is being recorded. At this time I'd like to turn the conference all 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 third-quarter 2014 earnings conference call.

My name is Joshua Young. I'm the 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 which we issued earlier today, we'll be referencing a slide presentation as part of today's conference call. The PDF for 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'd like to reference Bruker's Safe Harbor statement which is shown on slide number 2 of the presentation. During today's call we will make forward-looking statements regarding 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, November 6, 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 fourth-quarter 2014 financial results in February 2015.

We will begin today's call with Frank providing a business summary of our third-quarter performance. Charlie will then cover our financials for the third 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'll begin my presentation on slide 4.

We had previously communicated the reduced outlook for the second half of 2014 and a very weak third quarter. As a result of a number of factors outlined in our second-quarter earnings call, Q3 2014 revenues came in below our reduced outlook. In the third quarter of 2014, we reported $420 million in revenues, a 4% decline from Q3 2013.

On the bottom line we reported $0.14 in non-GAAP EPS during the quarter, a 30% decline from the previous year's third quarter. All three of our BSI operating groups reported revenue declines with different drivers in each of the groups. There were four key developments that led to our performance.

First, within our BioSpin group our NMR revenue declined in the quarter year-over-year as a result of our weaker first-half 2014 quarters. Second, our BMAT business continues to suffer from a cyclical downturn in the semiconductor and data storage markets which led to meaningful year-over-year revenue declines for our AXS Nano Services divisions. We are also seeing weakness in other selected industrial markets such as minerals and mining, and metals.

Third, our decision to divest and restructure significant portions of the CAM division led to a $10 million year-over-year decline in revenue in Q3 2014. And finally our revenue performance in Asia was particularly weak for all three groups. Revenues in nearly every region of Asia declined in the quarter and we experienced a decline in revenues from China for the first time in several quarters.

The year-over-year revenue decline in our BSI groups was partially offset by strong revenue growth from our BEST division. As a result of strong demand from MRI vendors and big science customers. I will provide further details on these points in a few minutes when I talk in more detail about our performance in each of the groups.

On slide 5, I show Bruker's performance through the first nine months of 2014. Revenues grew by 1% led by 2% growth from BioSpin. All of the growth in BioSpin was generated by our preclinical imaging division which grew in the high single digits and offset a year-to-date revenue decline in our MRS division.

Our CALID and BMAT groups both declined by 1% in the first nine months of 2014. BMAT's performance was the result of weakness in demand from semiconductor and data storage customer. On a year-to-date basis our CALID group was impacted by a $15 million year-over-year revenue decline in our CAM division.

Geographically, low- single-digit growth in Europe and mid- single-digit growth in the Americas was offset by a mid- single-digit decline in Asia with most of that year-to-date decline coming in the third quarter.

Our year-to-date non-GAAP EPS were $0.46 which was flat with the previous year. Changes in foreign exchange rate reduced our EPS by $0.04 on a year-to-date basis. Finally, our free cash flow improved by $46 million through the first nine months year-over-year which reflects good improvements in our working capital.

Please turn to slides 6 and 7 now where I will provide additional details about the Q3 2014 performance of our three BSI segment groups and our BEST segment. And I will also comment on their outlook for the remainder of this year.

So far in 2014, our Bruker BioSpin group is facing weaker demand in NMR and nuclear magnetic resonance and we did not yet see the pickup in NMR bookings that we had expected in the third quarter of 2014. I would like to emphasize that the lower NMR orders are not due to competitive losses but rather the result of a slowing NMR market demand in 2014 after two robust years of growth in 2012 and 2013.

For the first nine months of 2014, the bookings in our magnetic resonance spectroscopy or MRS division which includes our large NMR business, are down in the high-single digits and our MRS division revenue for the full year 2014 is now likely to decrease in the low-single digits year-over-year. A positive development for the BioSpin group is the performance of our preclinical imaging division or PCI division which had very healthy bookings growth and is expected to achieve double-digit revenue growth for the full year 2014. However, keep in mind that our PCI division revenue constitutes less than 20% of the BioSpin group revenue, so the PCI division is not big enough to compensate for weaker demand in the NMR spectroscopy market.

Coming back to our NMR business, so far in 2014, we are seeing lower demand from academic and research customers than we had seen in the previous two years. Geographically, NMR demand is still growing in Europe and North America but we have seen a significant drop in NMR bookings in Asia-Pacific so far in 2014. This decline is led by Japan where in 2013, NMR bookings benefited from a special supplementary budget which is not available in 2014.

Our NMR bookings in China have also declined in the double digits on a year-to-date basis. Some of the NMR slowdown in China has to do with prior-year orders for some large NMR structural biology centers in Shanghai and Beijing, whereas this year it is more steady-state NMR business.

By now I'm sure that you all have read Agilent's announcement length announcement that they will or have exited the NMR business. This will not yet have any revenue impact on Bruker in Q4 of 2014 and probably not much in early 2015 yet either. We expect that Bruker may see some incremental NMR revenue in mid-2015 and beyond as a result of Agilent's departure, but the magnitude of that effect is yet to be determined.

Given this changing demand background, our BioSpin group is taking action to address their organization and cost structure. The BioSpin group President Thomas Bachmann has already begun to implement organizational changes in the business and has carved out two new BioSpin divisions with new leadership.

First of all, a new BioSpin division called Applied, Industrial and Clinical or AIC is now headed by Dr. Iris Mangelschots who had been a senior manager at a Danaher business. We expect medium-term growth in NMR applied markets particularly in pharmaceutical, food and beverage quality control as well as in clinical metabolomics research and eventually in IVD or in vitro diagnostics by NMR.

Second, our service in aftermarket business has a lot of opportunity for growth in the BioSpin group and it recently has been put into its own service and lifecycle support or SLS division which is now headed by Ulrich Mueller, which joined us from the Swiss company TCM. Our BioSpin group President Thomas Bachman is also developing plans to right size the cost structure of the BioSpin magnetic resonance spectroscopy division in early 2015. The costs and benefits of the rightsizing program are not yet finalized, but we expect actions to phase in during the first half of 2015 and be fully effective as of Q3 of 2015.

Turning now to our CALID group, our life science and clinical division grew in the mid-single digits in Q3 as good growth in our TOF products combined with double-digit revenue growth from our MALDI biotyper per drove the performance. Our optics division continued to deliver growth and good margin expansion and is now generating some of the highest margins in the Bruker portfolio.

As many of you know may have seen from the press the press release we issued earlier this week we have made excellent progress in our CAM restructuring over the past three months. We completed the sale of our ICP-MS business to Analytik Jena AG in September and we sold our gas chromatography products to Techcomp in late October. Additionally, Techcomp also has a deferred option to buy our GC service business over the next 12 months. In the meantime, Bruker will continue to run the GC service business which is profitable.

These two divestitures will generate approximately $28 million in proceeds most of which has already been received. With these divestitures completed we can now turn our full attention to the product transfers and restructuring activities that still need to be completed within CAM.

First we are relocating the manufacturing of our GC triple quadrupole and LC triple quadrupole mass spectrometers from Fremont, California to our factory in Bremen, Germany. And second, our related product research and development is being transferred from California to our major mass spectrometry side in Bremen and in Billerica, Massachusetts.

Finally, we need to finish rightsizing the CAM employee and cost structure once statutory notice periods have lapsed. Although we feel good about the announced divestitures, we still need to execute the programs in order to get CAM's financial profile to an acceptable level which we expect to do prior to the end of Q2 in 2015.

Please turn to slide 7 where I will discuss the performance of our Bruker Materials Group's or BMAT and of our BEST segment. BMAT's Q3 2014 revenues declined year-over-year in the high single digits due to continued sluggish industrial demand and pronounced weakness in demand for metrology tools in the semiconductor and data storage industry. Nearly all of this revenue decline came from customers in Asia. This weakness has existed throughout 2014 and we don't see any evidence of a cyclical upturn yet as is reflected in softer bookings performance for the group.

BMAT's AXS and elemental divisions have experienced year-to-date order and revenue declines. AXS bookings and revenue growth has been negatively impacted by the continued weakness in semiconductor fab line orders but has also suffered competition primarily due to Japanese competitors that benefit from the much weaker yen.

Both the AXS and elemental divisions have also experienced sluggish demand in minerals and mining as well as in metals foundries, processing and metals fabricator markets. As a result, our AXS division is implementing additional cost-saving initiatives and most importantly is implementing modifications to its product strategy and operations in order to drive higher levels of profitability in the future.

On a year-to-date basis, our BNS division's revenue is flat as a result of the decline in revenues from semiconductor and data storage customers. The BNS division saw encouraging growth in other core businesses and positive contributions from our new florescence microscopy business unit which is the result of the Prairie and Utara acquisitions we completed over the past 13 months.

Fortunately we are now finally seeing strong overall bookings momentum in this BNS division in the second half of 2014. All together for the full year 2014 BNS division revenues are expected to grow revenue year-over-year in the mid-single digits.

Our BEST segment continues to be a bright spot for Bruker in 2014. BEST reported revenue growth of 23% and reported a non-GAAP operating margin of 10% in Q3. This revenue growth was driven by solid superconducting wire demand from large MRI vendors. As we had expected, we could not export our Rosatom pilot line in the third quarter and we do not expect to complete the installation before the end of 2014.

Over the past 18 months, we have transformed BEST from a loss generating business into a segment that now has mid- to high- single digit profit margins. While considerable work remains within BEST, we are encouraged by our progress.

Now I'd like to make a few closing remarks before turning the call over to Charlie. I want to stress that we remain committed to transforming Bruker and driving better operational performance in the future. While we are being affecting by some short-term dynamics in our markets we remain focused on improving our profit margins.

The opportunity to drive higher margins and cash flow remains very much intact. The recent actions we have taken reinforce our commitment to running the business for sustainable, profitable growth.

We are continuing to execute our previously announced strategy initiatives and restructuring programs. This includes initiatives such as outsourcing certain manufacturing activities, our procurement initiative which will drive cost savings in the future.

We are also continuing to fund innovation and expand into faster growing adjacent markets. Bruker will remain a company that is known for developing high-performing and high-quality analytical instruments.

We have made great progress already with our CAM restructuring plan and we will ensure that we deliver all of the key milestones associated with a plan through the middle of next year. Our swift action to sell two of the CAM's product lines demonstrates how restructuring CAM has been a top priority for our management team.

Finally, we are initiating a cost reduction program within Bruker BioSpin to better align our costs with the expected level of revenues in our NMR business. We believe that lowering the cost of the BioSpin group will benefit us when the NMR market recovers.

While it is too early to share the specifics of our rightsizing plan, I would expect that these programs in aggregate will generate material cost savings when they are completed. The key message that I would like to leave you with is that we are taking action based on the lower levels of revenue that we now expect. And we are making the necessary decisions to build a stronger foundation for Bruker's future.

With that I will now turn the call over to our CFO, Charlie.

Thanks, Frank. I'll now provide some additional details on our Q3 2014 financial performance.

On slide 10 I show a snapshot of our Q3 2014 non-GAAP results. Total revenues were $420 million, a decrease of 4.4% from the third quarter of 2013 reflecting the impacts that Frank described earlier.

Our non-GAAP operating margin of 8.6% was 220 basis points below last year including a 40 basis point headwind from foreign exchange rates. But it was the decline in revenue that was the biggest driver of lower profitability.

Non-GAAP EPS of $0.14 declined by $0.06 compared to Q3 2013. We continue to make good progress managing our working capital with net working capital and our working capital to revenue ratio both improving approximately 10% compared to Q3 2013. A little less than half the overall improvement is a result -- a little more than half is a result of our various operational initiatives while the remaining benefit comes from changes in foreign exchange rates.

Turning to slide 11, I show the revenue bridge for the third quarter of 2014. Our reported revenue decline of 4.4% reflected an organic revenue decline of 4.8%. We had a 0.8% positive effect from acquisitions and changes in foreign exchange rates decreased our revenues by 0.4% in the quarter primarily as a result of a stronger dollar versus the Japanese yen. From a profitability perspective currency had a negligible effect on our EPS during the quarter.

On slide 12 I show our Q3 2014 non-GAAP operating results in more detail. Our Q3 2014 non-GAAP gross margin of 44.2% is a decrease of 90 basis points on a year-over-year basis. Foreign exchange rates decreased gross margins by 20 basis points and the remainder of the gross margin decline is primarily related to lower revenue volume.

Our Q3 2014 operating expenses were flat on a year-over-year basis despite the fact that we continue to invest in new capabilities. Over the course of the year we've continued to strengthen our management team and we've built new capabilities in functions such as finance procurement, regulatory affairs and sales and marketing, all while trying to maintain tight control of our overall spending.

We've also been making investments to upgrade the IT infrastructure of the Company. In October we went live on our new corporate financial consolidation system. We worked hard on this implementation over the last year and I'm pleased that the go live went off without issue. While we have additional work to do to achieve full benefits from the new financial system we've taken an important first step toward improving Bruker's global, financial reporting and analysis capabilities.

Furthermore over the last few months we've upgraded some of our ERP systems in parts of Asia. Specifically we implemented SAP in Singapore, Taiwan and Korea sales subsidiaries replacing legacy systems with much less functionality. We're still developing elements of a more comprehensive multi-year ERP strategy, but in the meantime we're rolling out SAP in locations with the greatest need. I'm pleased that we're able to make these long-term investments while still keeping our operating expenses in check.

Turning back to the P&L, our non-GAAP EPS declined by 30% compared to Q3 2013 and reflected a tax rate of approximately 27% in Q3 2014 compared to a rate of 20% in Q3 2013. Our tax rate in the third quarter of last year was unusually low due to the jurisdictional mix of profit and certain discrete items in the quarter including tax benefits associated with the Prairie acquisition and a reversal of tax reserves.

On slide 13 I show a reconciliation of our non-GAAP -- our GAAP to our non-GAAP financial results for the third quarter. In Q3 2014, we excluded $31 million of costs from our non-GAAP results, up considerably compared to the previous year. The biggest components of the reconciliation are $16 million of restructuring costs recognized during the quarter primarily related to CAM and $6.9 million of asset impairments also related to CAM.

I would also note that we excluded $6.3 million of net gains in our net interest income other line. This net gain results from the $8.7 million gain on the sale of our ICP-MS business which is partially offset by a $2.4 million accrual for the estimated cost of settling our ongoing discussions with the SEC about Bruker's past business practices in China. While our discussions are not yet complete, the $2.4 million accrual represents our best current estimate of the probable loss associated with this matter. The Company will continue to evaluate the accrual pending final resolution of the investigation and the related discussions with the SEC.

On slide 14 I show our revenue bridge for the first nine months of 2014. Reported revenues grew 1.1% and we reported an organic revenue decline of 0.4% year-over-year. Changes in foreign exchange rates added about 0.7% to our revenue growth and the net impact from acquisitions and divestitures added 0.8% to our revenue growth. While the stronger euro versus the dollar drove most of the year-to-date benefit we expect to see this trend reversed in Q4 due to the recent weakening of the euro versus the dollar.

On slide 15 I show our operating performance through the first nine months of 2014. Non-GAAP gross margins declined year over year by 50 basis points to 44.9% and this decline was essentially entirely driven by changes in foreign exchange rates which lowered our gross margin by 70 basis points through the first nine months of the year.

Currency also had a significant impact on our operating income and lowered our operating margin by approximately 90 basis points on a year-to-date basis. Our year-to-date 2014 non-GAAP EPS was flat compared to the first nine months of 2013.

On slide 16 I show our non-GAAP reconciliation through the first nine months of 2014. We've excluded $60 million of costs from our non-GAAP results which is up $23 million from the first nine months of last year and reflects the higher amount of restructuring activity we have ongoing in the business. Additionally our other costs are up primarily due to asset impairments we incurred as part of our CAM restructuring.

On slide 17 I show our cash flow performance through the first nine months of 2014. We recorded free cash flow of $18 million in the first nine months of 2014, an increase of roughly $46 million compared to the first nine months of 2013. Despite lower income we were able to drive higher free cash flow through improved working capital and lower CapEx spending.

Our cash conversion cycle improved by 29 days compared to the previous year which is comprised of the following. Days of inventory outstanding were 230 days compared to 234 days in Q3 2013; days sales outstanding were 60 days compared to 62 days last year; and finally days payable totaled 48 days compared to 26 days in the previous year.

Now I'll turn to our financial guidance for 2014 which I show on slide 19. We're reducing our guidance for the remainder of the year due to the incremental weakness we've seen in our NMR and AXS businesses. We also expect currency to reduce our revenue by as much as 4 percentage points year-over-year in the fourth quarter. As a result we now expect revenues to be in the range of $1.81 billion and $1.84 billion for the full year.

We expect to report non-GAAP EPS in a range between $0.72 and $0.78. The wider range of guidance reflects the potential for significant variability in our fourth-quarter results.

Historically the fourth quarter's had significant impact on Bruker's full-year results as is often the case we have several large transactions in BioSpin and detection for example that could fall in Q4 and change the complexion of the quarter. Furthermore we have the potential for variability in our Q4 tax rate depending on the timing of certain items.

While we expect to see a favorable EPS benefit from the weaker euro in the fourth quarter, nearly all of this benefit will be offset by the yen and several other currencies that have weakened versus the dollar. Finally we expect to incur restructuring charges of approximately $10 million in the fourth quarter bringing the full-year total to nearly $40 million. That figure would increase once we finalized our rightsizing plans for BioSpin.

So I close by stating that we remain committed to continuing the transformation initiatives that we have launched at executing new programs to lower our costs in response to lower market demand. We're confident that the Bruker portfolio will return to growth and that we'll be successful in driving higher levels of profitability and cash flow at the Company.

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

Jimmy, please assemble the Q&A roster.

(Operator Instructions)

Tim Evans, Wells Fargo Securities.

So Frank, I guess the thing that was most surprising to me was the comment about the slowdown in the NMR market as a whole. I guess I'm curious what you see as the long-term structural growth rate in this market at this point.

Tim, I think the experience with the NMR markets over long time periods over a decade and more is that it's sometimes has some of its own timing. We sometimes see two or three years of growth, sometimes we then have a year of settling or even a slight reduction as we are experiencing so far at least year-to-date. And long-term growth rates while the previous couple of years we had high single-digit growth rates the long-term growth rate for the NMR market at least for the next few years I would expect to be in the low- to mid-single digits.

Okay. All right. Thank you very much.

Isaac Ro, Goldman Sachs.

I did want to ask a follow-up on the NMR question. Maybe if you could spend a few moments on what's going on in Asia specifically China. And we've seen obviously a lot of pressure in China across the sector this quarter but seems like the pullback here was more than you guys would have otherwise expected.

At the same time you have your biggest competitor obviously pulling out so maybe revisit number one your expectations in the short term for the NMR business in China. And then secondly, given that you had your biggest competitor pull out just remind us why you feel like the structural growth trend here should be rebound? It's certainly unusual to see an industry that consolidated have its second player just bow out completely.

Yes. Isaac, so yes indeed.

We had even three months ago predicted slightly stronger orders in NMR and they just have not or are not yet materialized. And some of them have materialized but not to the extent that we had expected even three months ago. And clearly Asia, Japan and -- Japan is expected and China and the rest of Asia-Pacific, not necessarily expected, have been slower.

We have -- we don't necessarily have complete explanations for that. And some of it may just be you deal with bigger orders, big-ticket items, sometimes there's just some variability that doesn't necessarily have an underlying reason. As I have observed in the past over many years, the NMR market sometimes has its own little S curve, two or three years of good growth, a year or two where it settles and goes sideways or maybe goes down a little bit.

And we think that's what we're seeing right now but it is not strictly related to China overall or the macroeconomic trends. And that is something that we have observed in the past as well. So some NMR idiosyncrasies if you like.

The Agilent effect of course didn't affect Q3. The announcement was made in middle of October. Clearly it won't affect our Q4 revenue.

We do expect and have already experienced anecdotally at least some orders that have come to us now rather quickly or that were perhaps not coming to us to begin with and are now coming to us after all. But so far this is anecdotal and not quantitative so basically we've said, look, as we really just have to deal with this new set of circumstances since the middle of October. And then probably by the end of Q4, we'll have a much better feeling for what is the effect on Bruker of Agilent exiting the NMR business. And I think when we report Q4 early next year and then give guidance for 2015, we will have a more satisfying answer and could put some quantitative brackets around what we might expect.

Right now, because we did not even have exact figures of what Agilent's NMR systems and upgrade revenue was, if you recall they're keeping their service business and obviously we'll not pick up all of that anyway, it -- we hesitate to make estimates because we still have a pretty broad range even internally. So anecdotally we're getting more business but it's very recent and when I say business it's really just initial orders that we otherwise would not have received. But they won't be out until sometime middle of next year until they going to revenue and the magnitude. It's difficult to estimate for us right now.

That's helpful. One quick follow-up for Charlie.

I think one of the bright spots this year has been the continued improvement in free cash performance and the Company obviously tends to have very backend loaded free cash flow. So would you be able to give us a range or some sense of expectations for how full-year free cash will look?

Yes. It's been obviously performance so far this year has been pretty good. If you recall last year's fourth quarter was enormous. I think we generated something like $120 million of free cash flow in the fourth quarter last year.

And so there is some variability in that number. Obviously a lot will depend on what makes it into revenue versus what ends up not making it into revenue and remaining on the balance sheet from an inventory standpoint. So I'm not going to give an estimate at this point, but certainly we're expecting for the full year to have very, very healthy growth in free cash flow.

Got it. Thank you.

Doug Schenkel, Cowen.

So revenue's clearly not played out as expected this year. Over the first nine months of the year revenue increased I think it's about $14 million year-over-year. OpEx has increased $4 million.

So as we think about expense control here on one hand it's commendable, but the other hand might suggest that there could be some link between the level of operating spend and the revenue performance. So the questions here are first is there any concern that you may be underspending and that maybe you've cut too much too quickly?

And second keeping in mind that many of the revenue challenges you've described as really being timing related. And my last question about operating spend, assuming revenue growth picks up as you capture some of these delayed revenues presumably next year, are you going to have to turbo boost operating investment to keep that going?

Doug, that's quite a range of questions. Let me try to answer them and maybe Charlie will chime in.

I don't think we've cut too much too quickly. I really don't detect anything where oh, my God, we've cut back or cut to the bone in a sense that that has an impact on our bookings generation or our revenue execution for that matter. So I think that's not the case.

I think we're doing it judiciously and I think we're coming in about right with the cost cuts that we have taken so far. Obviously we're planning further cost adjustments.

In terms of timing there were a couple of these timing issues that we had pointed out for Q3. They have gotten pushed out further so we're now not assuming that we will get these export permits for some of these detection contracts which we've had under our belt and in backlog for a while. We assume they're going into next year. It won't require us any additional significant additional capacity to execute that when they come in, they've largely been built already and we're waiting.

And the same is true completely for that Rosatom pilot line that we were not able to export in Q3 and we may be able to export it in Q4 but it will not make it into revenue until next year if it makes it into revenue at all. A little bit of uncertainty on that one. Those are the specific timing guides.

I think the bigger picture semiconductor data storage and NMR and AXS weakness, to a great extent related to the semiconductor space, those are more external demand factors that we had not -- where we had been -- that had been worse than what we expected when we started the year. And even a little less than what we expected three months ago.

So I hope -- I don't think that we -- I think we'll be fine without any turbo capacity boosts. We clearly have some ability to adjust capacity. We have some flexible work arrangements in some of our factories where we can either go 15% less or 15% more.

We have the ability to go to short work or we have the ability to go to overtime. I think that's all very manageable in the ranges that we're looking at. I don't think there's anything there.

In fact in some areas particularly in BioSpin, Thomas Bachman has determined that there is an opportunity to bring down the cost structure more permanently and he's trying to execute that plan. We'll execute that plan in the first half of next year and again when we get together and report Q4 we'll be able to give you some outlines what's the restructuring costs, what the expected benefit? The timing is approximately going to happen between now and the end of the second quarter of next year, so by the third quarter of next year we think we'll have those rightsizing benefits available to us.

All right. So to be clear as we think about the outlook for operating leverage heading into a year where hopefully the revenue trajectory picks up a little bit. Even though research and development is down looks like it's going to be down $10 million to $15 million year-over-year this year, SG&A is going to be up but not much more than $10 million. You still feel like with this level of investment you can generate growth in operating leverage, not years down the road but in the near-term, meaning next year?

We're still spending about 10% a revenue on R&D. And if anything in some areas we've expanded marketing and sales capabilities where we were perhaps historically underinvested in those areas a little bit. So I think absolutely we can drive growth with that.

But we're seeing some in some of our bigger businesses unfortunately, we have seen some slowdown in demand in addition to some of the discrete timing issues and of course currency having an effect. And so we're also pushing into quite a number of adjacent faster growing markets. Some of that is taking off like preclinical imaging.

Some of that is in the very early innings like fluorescence microscopy and isn't moving the needle that much. Multi-Biofiber is very moving the needle. Some other moves into explosive trace detection are still in very early stage but I think we're spending the right amount of investment.

Okay. Thanks, Frank.

Dan Arias, Citigroup.

Frank, as you think about the way that the business shapes up over time how important is it at this point to find a way to increase your recurring revenue streams? And to the extent that that's something you're looking to do what avenues do you think you might go down there?

I think that is important. And I think in some businesses we've made decent progress there. But in just about every business and especially even some the large ones, Bruker BioSpin -- but also other businesses I think by really focusing that on a discrete business unit within the larger division. I think we have opportunity also as I look at some of our peers that are in comparable instrumentation business to drive recurring service upgrade, software, training, services, and some consumables business.

The push into diagnostics particularly in microbiology but eventually also in other fields will have a higher percentage recurring revenue. We see that in the MALDI Biotyper business already. So while we won't become a razor blade model even like some other half instrumentation half consumables companies we think we can grow this part of the business quite a bit. And I think we're -- we are taking the organizational steps for instance in Bruker BioSpin for putting this under very experienced dedicated management, something that in the past we haven't really done as throughout our business.

Okay. Thanks. And maybe just two quick follow-ups with Charlie.

Charlie, on the BioSpin business, does the scope of outsourcing and what you're looking to do their change NMR with the restructuring? I guess secondary to that, given everything that we're seeing externally internally how far do you think we are away from getting some longer-term financial targets?

BioSpin has been busy over the last 18 months with a range of programs aimed at improving their supply chain practices. They were one of the first Bruker businesses last year to start outsourcing in a meaningful way. They're pretty far along with procurement programs and they keep layering on new programs. So that will continue.

The rightsizing that is going to occur as a result of this new demand outlook is certainly going to add to that. I think that it doesn't affect the scope of the supply-chain programs that they have ongoing in general all our businesses are trying to look carefully at their manufacturing footprint and their supply chain practices to move our cost structure to be less fixed and more variable over time. So I think you'll continue to hear supply chain program announcements coming out of BioSpin and I don't think the rightsizing has any particular impact on that.

In terms of your question about long-term targets. Clearly we are seeing a lot of variability in our results right now and we're also having some visibility challenges and that's resulted in some guidance reductions and adjustments recently. We need, we clearly need more time to get a better handle on the business and get a better feel on the business. So at this point I'm not making any comments about when we'll have midterm targets.

Okay. Thank you.

Derik de Bruin, Bank of America.

A couple of questions. I guess on the NMR orders, are you seeing is it weakness in High Field that you're mostly seeing or is it Low Field?

The reason why I'm going there is I know the High Field orders often have a longer delivery time so I'm thinking about orders as they go into 2015 and what happens. Just give us a little bit more color on where it is or is it across the board?

No. It was clearly in the High Field area. Particularly in High Field they didn't get the same orders from China and Japan. And Europe steady and US is not bad. But it's been particularly at the High Field.

And these are instruments you would not have thought -- where these ones you would have delivered revenues on in 2014 or are these things you would have delivered on in 2015?

Some -- mostly 2015 but some 700 or 800 for structural biology. We can also deliver -- had we gotten them into Q1 of this year we would have been able to still deliver this year. Some of them at least. Most of them have longer delivery times as you correctly pointed out.

Okay. So Charlie if you look at where the currency rates are right now can you give us what you would think the initial impact would be on the 2015 top line number as we think about adjusting our models?

If you look at Q4 for example, there should be pretty much neutral no impact year over year from currency. I think if you project forward into 2015 I haven't done the full analysis yet but I think on the bottom line, at this point, I wouldn't expect much of an impact in 2015 from where we are today. Obviously on a revenue side, it would be a pretty significant headwind. And so looking at Q4 might be a reasonable proxy for 2015.

Great. And could you talk about the mass spec competitive landscape? Sounds like you're having seeing some issues there as well. Could you talk about pricing, people with new products a little bit about the dynamics in that market and then I'll get off.

Okay. Derek, I think we're doing well with TOF products. We've obviously really refreshed that product line throughout the year -- and have seen decent growth year to date in that one.

Definitely remains a competitive space and a sought-after space and essentially all major competitors with one product or the other going after that. But I think we're doing well there.

The MALDI Biotyper continues to see very good growth throughout the year. And we think that will actually continue for quite a while.

We had acknowledged in the past that the other applications of MALDI-TOF are flat or down so far year-to-date and also to some extent last year as MALDI-TOF is getting into new applied markets like clinical microbiology and plays a role in MALDI imaging. Its role in proteomics it's clearly the secondary tool and it is still needed but is not the primary tool for proteomics anymore.

So even though in the last few years we became a pretty clear number one in MALDI-TOF for the research applications, it's growth had been sluggish whereas the ramp up has been in TOF technology and in the MALDI Biotyper clinical microbiology.

Great. Thank you.

Tycho Peterson, JPMorgan.

Just a question on going back to some of the leverage discussion on the pacing of some of the initiatives. In particular for SG&A as Doug mentioned earlier that was a dollar amount year-over-year. Charlie you highlighted some of the ERP initiatives you highlighted to your hires.

I guess as we think about next year will SG&A be down in an absolute dollar amount? Obviously getting rid of CAM and the ICP-MS business helps, so how should we think about the absolute level of SG&A spending going forward, baking and obviously the BioSpin cost reduction program too?

Tycho, again I'm not going to model out the 2015 P&L just yet. You're absolutely correct that rightsizing and BioSpin and CAM going away are both going to have pretty significant effect on OpEx next year. Obviously we have investments in other growing businesses.

As Frank commented earlier, there's not going to be any need for us to have some sort of surge in spending to make up for any of the cuts or controls that we've had in place in the past. So I'm going to hold off on guiding to that until we've looked --

Maybe put another way. Have you incurred the bulk of the ERP costs this year and the senior management hires?

So good questions. From a senior management hire, yes. I would say that obviously there's always puts and takes but I think that's done.

ERP importantly the spending on the financial systems is going to tail into next year a little bit, but it's not a significant number and therefore should represent a year-over-year decrease. On the ERP importantly, we have -- that's in the line item call the IT transformation cost and it's part of our non-GAAP reconciliation. So that number -- the investments there in ERP are actually not hitting the non-GAAP OpEx number. And you can see that in the reconciliation.

Okay. And then how about R&D leverage? We think about NMR going to a monopoly are there other opportunities to potentially get a little bit more leverage on R&D?

I think we've been pushing for R&D leverage in bringing down R&D in almost all of our businesses. Without really sacrificing our investments into either new and improved product or solutions on based on those technologies for adjacent or other markets. And that has to do with PLC processes and efficiency and I think we're really making a lot of progress there.

So if R&D spending has come down from 11%, 12% maybe 13% historically towards the 10% range I'm very satisfied with that. But I don't think we're shortchanging our ability to drive to be competitive and to rekindle growth.

In terms of leverage, I think there'll be some ongoing leverage in R&D as well. So I think there might be sort of a slight leveraging in the next two years or three years. I think that's to be expected.

I don't expect it to be a big drop or something like that again with reserving to give you a better feel for that in February when we announce Q4 and give you 2015 guidance. But some incremental R&D leveraging is to be expected.

And last one. You mentioned Techcomp has the opportunity on the GC service business.

Can you maybe just quantify that for us and what are the implications? You said it was profitable. If they do acquire that.

It is approximately -- Revenues are in the range of $10 million to $15 million. Yes.

And if we divest it to them, one could model that we might divest it by the middle of the year but that's hard to say. Of course actually they are driving the timing. It could be early or as late as in the fall. And of course they have an option so strictly speaking, if they were not to exercise that option then we would continue to run with that service business.

Okay. Thank you.

(Operator Instructions)

Dan Leonard, Leerink.

How quickly could any benefit from the Agilent and NMR exit impact your P&L given the lead times in business vary quite a bit by product?

It could begin to phase in a little bit in Q2 of next year. And then really more so in Q3 and Q4.

For once -- and Derek was hinting at that earlier with his question -- it's not that there would be any ultra high field orders that we would be getting from Agilent's because they had exited that part of the business a year earlier if you recall. So the types of products the types of bookings that we might begin to pick up from them in the fourth quarter and into next year, they might on average have something like a six-month lead time to revenue.

Got it. And Frank how are you thinking about the pricing opportunity in NMR?

Well, I think even before this announcement there has been a big push by us and in most cases not always but in most cases we think even by Agilent to have more rational pricing or discounts. So in NMR it's not so much the price list or prices going up but historically there had been in some cases just very aggressive discounting and I think that may update quite a bit.

Got it. Thank you.

Steve Willoughby, Cleveland Research.

Two things. One I guess first on the guidance Charlie, you made a comment about there's a wider range for the fourth quarter and then you made a comment regarding some larger BioSpin projects that could fall in the fourth quarter. I was just wondering those larger BioSpin projects are those assumed within your guidance or would you need those to come in in order to get to the high-end of your guidance?

Obviously the guidance is roughly plus or minus $15 million. And at the high end of that would -- the implication would be that a couple of orders would ship or would revenue in the fourth quarter if they slip out obviously would push us towards the lower end.

Okay. And then secondly regarding restructuring, I know you guys did restructuring programs in 2013. How much restructuring has there been in 2014 outside of the CAM restructuring?

I'm trying to think about a go forward impact you had some restructuring benefit from the restructuring you did in 2013. The restructuring that you're going to do with CAM this new restructuring with the BioSpin sounds like a little bit in BMAT as well. Are there other restructuring going on in 2014 that could possibly impact 2015?

Yes. If -- last year, I think the restructuring number in the reconciliation was about $26 million, $27 million for the year. The biggest pieces of that last year would have been associated with BioSpin supply chain initiatives. So outsourcing and machine shop divestitures, that sort of thing and then a very significant third and fourth quarter rightsizing in the BMAT business. So most of last year's restructuring charges were BioSpin and BMAT.

This year's number is mostly CAM with a little bit of the tail end of some of those BioSpin and BMAT initiatives from last year. And then based on the comments that we've made tonight you'd expect that the next significant restructuring charge would be around BioSpin rightsizing could be as early as Q4 but more likely it's Q1 of 2015. And so aside from -- there's always a little bit -- even in some of the other businesses in elemental and other places we've had smaller restructuring initiatives. They just don't rise to the level of materiality of the programs that I've outlined there.

Okay. When you think about the benefit from those restructurings -- I know you've talked about you quantified the CAM restructuring. I believe you quantified the 2013 restructuring. Is there any other ways to quantify the benefit, the run rate benefit you should expect to receive?

We commented on last year the restructuring activity resulted in about 300 employees leaving either through rightsizing or joining some of our partners. And we talked about benefits of $15 million to $20 million this year.

If you look at our year-to-date operating margins, they're down 30 basis points or so but that's with a 90 basis point headwind from currency so net of that up about 60 basis points. So I think you're seeing some benefit there.

This year's restructuring charges mostly are CAM and we've commented on the run rate or the annualized benefit from that phasing in in the first half of next year. And then obviously if we're going to announce a new restructuring or rightsizing effort around BioSpin, we'll absolutely quantify the expected benefits from that.

Okay. Thanks very much.

Scott Leavitt, Evercore ISI.

This is actually Vijay in for Ross. Frank, I guess a lot of questions in NMR. I just wanted to maybe shift towards BMAT.

Again pretty weak results out there, but can you tell us what's happening in those markets. And ASM has been weak and sort of if we had to look at some of those macro data points and try to correlate what happens to growth in that segment, how should we be thinking about on a go forward basis?

Yes. So starting with the second part of your question actually the BNS division ASM and their other product lines have really done quite reasonably. And they've seen some decent growth and they've seen some building order momentum especially in Q3 and we think into Q4.

But they clearly have a lot less semiconductor and data storage call it microelectronics revenue so far this year overall. It's going to change a little bit in Q4 but I think they've seen some reasonably healthy trends in everything other than microelectronics at BNS.

So ASM is healthy. BioASM is growing. Their fast scan products are working. Their fluorescence microscopy ramp up is happening.

But also some of the tribology and other white light interferometry and other industrial products are picking up except for data storage. And data storage and semiconductor is not insignificant for them in terms of revenue but it also has when it comes through it has some of the best margins in that business. So that's why so far this year they've been two very different trends unfortunately more or less offsetting each other. With, I think, good bookings momentum building to where BNS I think will do better next year.

AXS and elemental the first part of your question they are seeing also AXS only the semiconductor. They've done a lot of R&D in the last couple years. Have some fantastic x-ray semiconductor tools now that we think will eventually that investment will pay off. But we're bringing them now to market at a time when not a lot of people are buying but fundamentally we actually don't regret having made that decision. We think there will be a time when we will benefit from these rather unique tools that are coming in at a point where the semiconductor technology trends and roadmaps will really need them.

Thanks.

The other industrial markets, there's some strength in cement and so on is strong but metals prices are down worldwide and that's affecting any metals analysis business. But is also affecting minerals and mining so there's a second industrial trend that these two businesses also elemental and AXS see it is weakness in metals pricing and that has a number of repercussions in various analysis markets.

That was very helpful, Frank. Maybe one quick one for Charlie if I may. I know that you guys mentioned about the ERP investments and the restructuring and I'm not asking for what the benefit is.

But I guess if you had to look at how some of these actions could help you predict the business -- we've had these periods where you experienced volatility. Charlie, do you feel like any of the actions that you've been taking like this might help you better predict the business on a go forward basis?

Well, we certainly are feel like we've made improvements in our management process and are continuing to make improvements on the commercial side of the business. That said, we clearly are having a harder time with visibility right now.

So I do believe that cumulatively over time these process improvements are going to yield benefits in terms of visibility. But at the moment that doesn't show.

I'll give you a historical perspective. We did predict three months ago that we would have a weak Q3. There were some trends that we couldn't didn't capture but two years, three years ago it would have been difficult for us to predict that at that time.

Got it. Thanks.

Amanda Murphy, William Blair.

Just a couple more on NMR. Sorry.

With Agilent I guess a question on the benefit from the fact that the exited the High Field market previously. Is that something that maybe was impacting you to the positive and now is rolling off?

And second on Agilent I know it's early days but have you had a chance to maybe reach out to any of your customers and see what the view is there? Obviously they're keeping services but maybe there's a potential opportunity for you to capture some of their current install base as well?

So Amanda, two parts. I think they coincidentally perhaps dropped out when the High Field demand the following year or so wasn't that strong. So we have not benefited as much from them dropping out of the High Field a year ago in capturing the orders because that segment of the market was a little bit weaker.

There's still are some High Field orders and that's been good but as you know, High Field is less than 10% and maybe with associated orders associated systems that go through less than 15%. Now we're talking about the entire market. That's a bigger deal.

And we have been talking to a lot of their customers and they've been talking to us of course and we have a lot of customers that actually have both Bruker and Agilent varying equipment and a lot of them have been contacting us because they're obviously concerned. And so anecdotally I can tell you that a number we've picked up some business already from some of those customers. And some of them are longer-term looking how can they get funding to upgrade to some newer capabilities?

And NMR system it's usually not good enough to keep it serviced and running. You almost buy these systems with an implication that you will need software and probe upgrades and probably keep the magnet the longest. But you need console upgrades as we call them during the lifetime of the magnet. So a lot of customers are taking a pretty systematic look at that now but it's early days for them and they certainly haven't been able to raise the funding yet to do something about it.

We think that will happen but we really cannot estimate and put brackets around what the amount will be. We think we'll have a much better read on that when we report Q4. But there's a lot of activity.

Got it. Just a higher level question on some of the comments you made about a resurgence of demand and obviously the market is cyclical to some degree. But in terms of what drives incremental demand or growth presumably the adjacent market piece of it but also a replacement cycle if you will in NMR.

If you think about the entire install base and obviously you have a big chunk of that already. But is there a way to think about aging across the install base in terms of how that might be impacting the growth now and maybe how that might drive growth in the future just thinking about replacement cycles?

Absolutely. That's a way to think about it and we're trying to model all of that right now. Obviously without perfect information on their install base we can make have to make some assumptions there.

And there clearly will be replacement cycles. Often not so much driven by the systems breakdown. The engine just can't do anymore miles but very often driven by the need for improved capabilities and upgrades that are now no longer available as we understand it from Agilent. I think they're going strictly to repair and replacement for broken parts.

So I think there will be some healthy trends for us. Difficult to quantify them right now. We have of course theories internally but we need to really get some real evidence in the next three months and before we report and give you some ranges in early 2015.

Bryan Brokmeier, Maxim Group.

In your prepared remarks you mentioned that you're seeing one of highlights continues to be strong growth from the MALDI Biotyper. Is that growth coming in the US for the most part or are you continue to see growth in Europe and Japan and have you started to see growth in China?

Yes. We've seen continued to see good growth worldwide. Certainly I don't know by -- looking in the year-to-date the first nine months which always means more than any given quarter, I think we had a bit of a bolus in China in Q2 and that was weaker in Q3 but I think you have to average these things out.

So there's been good growth in United States. There's been good growth in Asia and there's continued moderate growth in Europe as well. And of course also the consumables and aftermarket business including service is growing very, very nicely and much faster than the systems business in fact but the strongest growth has been in North America.

All right. And the biotyper, that still requires blood culturing, right? What could be done in order to take the culturing out of the workflow?

I don't know that anybody really wants to take the culture out of the workflow because it's such an important biological viability filter. When you just go to PCR without any culture, you don't know what you're amplifying, whether it's a viable mechanism, whether it's junk DNA or other DNA floating around. A lot of people think that really going away from cultures altogether would be a big mistake and as a result might be very unreliable.

Okay. Thanks a lot.

Paul Knight, Janney Capital Markets. Mr. Knight has disconnected his line. Eric Criscuolo, Mizuho.

Just filling in for Peter tonight. It sounds like you're going to have a couple of headwinds in the fourth quarter be they FX or weaker Asia or NMR. So I was wondering if you could maybe quantify or at least rank how they're going to the biggest to the smallest impacts in the fourth quarter. That you see right now.

Currency year-over-year could take 4 percentage points off. So that alone is a pretty significant driver on the revenue line of course. As we've pointed out it should be neutral to EPS but significant at the revenue line.

CAM will come down by about $10 million.

That's right.

So those are probably the two biggest.

Yes. And then continued softness in BioSpin and BMAT.

Got you. Thanks.

And then on the restructuring additional restructuring that you're likely to do in BioSpin. I was wondering if you could compare not necessarily the dollar amounts that are involved but maybe the efforts that you'll need to maybe get this done what you expect to get done versus what you've done last year and up to this point this year.

Is it easier programs that you're going to tackle or are these things that are harder to implement? I want see how what type of effort you might have to make going forward for this.

The effort is nowhere close to what we're doing in CAM. Of course BioSpin being by and large a beautiful business. Doesn't require the major restructuring that we did in CAM. That's not even close.

What we did in AXS a year ago and elemental, in OpEx rightsizing, it's work. It's quite a bit of work. It takes a couple two to three quarters but I think that may be comparable.

Great. Thank you.

Paul Knight, Janney Capital Markets.

Sorry about that, guys. It's Brian Kipp on behalf of Paul.

Two quick follow-ups on Tycho's service question for the GC business. If Techcomp doesn't exercise that and it goes through, you guys still have to hold the business do you roll it down to discontinued operations at some point? And in addition to that, how long do some of the service agreements last for?

Definitely not going to discontinued operations. We would continue to offer that for a long period of time. And just the ballpark figure typically equipment like this one tends to offer service for about seven years or so after it's been purchased. But in some cases longer.

Okay. Thank you. And then another follow-up one right here.

I think you site during the PowerPoint a focus on new entry into new growth markets. I think there was some conversation earlier about potential consumable offerings. Wanted to get some color there if it's new products that you guys are looking to emerge into or to build up? Is it new geographies you're looking to penetrate just some color there would be helpful.

I think geographically we're in all the markets more or less that we want to be in with some incremental changes but geography is not the driver here. It's really adjacent markets. More diagnostics and clinical research. It's more applied markets both for NMR and mass spec for instance. It's some other field.

Actually we're expanding some of what we expect to do in microelectronics in the future. We think there's some very nice opportunity. We just need the cycle to come back a little bit. There are things all the way to explosive strife detection.

So it's really adjacent markets and adjacent fields that so far we think we can leverage our products into. It's not really a geographical component that's significant.

Okay. Thank you very much.

Ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference back over for any closing remarks.

Thank you, Jimmy. I want to thank everybody for joining us this evening and we encourage you to visit us at our headquarters in Billerica, Massachusetts. Thank you for your attention and have a nice night.

Ladies and gentlemen, that does conclude today's conference call. Thank you for attending. You may now disconnect your telephone lines.