Bruker Corp (BRKR) 2014 Q4 法說會逐字稿

Good afternoon, everyone. Welcome to Bruker's fourth-quarter and full-year 2014 earnings conference call.

(Operator Instructions)

Today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Joshua Young. Mr. Young, please go ahead.

Thank you very much, Jamie. Good afternoon.

I'd like to welcome everyone to Bruker's fourth-quarter and full-year 2014 earnings conference call. My name is Joshua Young and I am 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 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'd like to reference Bruker's Safe Harbor Statement, which I show on slide 2. During the course of this conference call we will be making 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, February 19, 2015. 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 first-quarter 2015 financial results in early May 2015. We will begin today's call with Frank providing a business summary of our performance. Charlie will then cover our financials for the fourth quarter and the full year 2014 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. Our fourth quarter financial performance was roughly in line with our expectations despite facing significant headwinds from currency. We reported $508 million in revenue in Q4 2014, which represented a $44 million year-over-year decline compared to Q4 2013. Approximately $34 million of this decline was related to foreign exchange rates and $8 million of the decline was related to products that were divested in our CAM division.

Adjusting for these two factors, our revenues were nearly flat on a year-over-year basis, as we reported a year-over-year organic revenue decline of 0.5% in Q4 2014. We reported non-GAAP EPS of $0.30, a decline of 3% compared to Q4 2013. Our non-GAAP operating profit was negatively impacted by $6 million due to year-over-year changes in foreign exchange rates.

On slide 5, I show our financial results for the full 12 months of 2014. We reported $1.81 billion in revenue in FY2014, a decrease of 2% compared to FY13. After adjusting for foreign exchange and the net effect of acquisitions and divestitures, revenues were approximately flat compared to FY13. In addition to currency headwinds, our performance in 2014 was impacted by weaker demand for our Nuclear Magnetic Resonance or NMR and our X-Ray products.

From a group perspective, our BioSpin group reported flat revenues in FY14, as a very good year from our pre-clinical imaging division was offset by the second half revenue declines in our NMR business. Revenues for our CALID group declined by 5% in FY14 with nearly all of this reduction coming from our CAM division. CAM's revenues declined by $22 million year-over-year and the division reported a $27 million non-GAAP operating loss in FY14. With the previously announced CAM divestitures and restructuring now expected to be completed by March 31, 2015, Bruker's future operating results will benefit from not having our profitability dragged down by CAM's operating losses.

At the beginning of 2015, we renamed our Bruker Materials or BMAT group to Bruker Nano group. This change was made to emphasize that the group's capabilities and markets go far beyond providing analytical information about industrial materials. We now have extensive capabilities in nano analysis and microscopy for areas such as nano materials, neuroscience and life cell imaging research. As a result, the name change more comprehensively characterizes the Nano group's product portfolio and capabilities.

Our Nano group revenues declined 1% in FY14 as industrial and semi conductor markets remained soft, but did not materially worsen during the course of the year. Geographically, we generated low single-digit organic revenue growth in the Americas, approximately flat revenues in Europe and a mid-single-digit revenue decline in Asia. While our revenues in China declined slightly in FY14, our revenue decline in Asia was primarily related to weakness in Japan and other Asian countries. Our non-GAAP EPS of $0.75 represented a year-over-year decline by $0.02. Changes in foreign exchange rates reduced our EPS by $0.08, or nearly 10% for FY14.

Please turn to slides 6 and 7 now, where I will provide additional details about the FY14 performance of our three groups and of our BEST segment. First, let me begin with our BioSpin group, which generated revenue of $623 million in 2014. Weak demand for our NMR products was the primary reason that BioSpin's 2014 revenues were flat with 2013. NMR revenues declined in all three major geographic regions as demand for high-field products continues to remain muted.

Fundamentally, we believe that the NMR market remains healthy, but it is absorbing some of the investments made in high-field systems over the past few years. We are seeing some incremental order opportunities as a result of Agilent's exit from the market, but I would remind you that it can take up to a year before we see the benefit of new orders affect our P&L. That being said, we are optimistic that NMR new order bookings will continue to improve over the next few quarters.

On a positive note for BioSpin, our pre-clinical imaging or PCI division had a good year, generating double-digit revenue growth in FY14. The division is seeing increasing customer demand for higher strength pre-clinical MRI systems. We also saw a nice year-over-year improvement in the profitability of the PCI division due to better operating leverage and the execution of productivity improvement initiatives. Geographically, revenues for the BioSpin group grew nicely in the Americas and that growth was offset by declines in European revenue.

During 2015 we are moving forward with our rightsizing and manufacturing footprint consolidation programs in BioSpin. We made our proposals to the worker's councils in Europe earlier this quarter and have proposed to reduce our headcount in BioSpin by approximately 9% or slightly less than 200 positions.

We are also seeking to further rationalize our manufacturing footprint. We expect that some of the savings from these programs would increase BioSpin profitability, while some would be reinvested into new capabilities and in adjacent markets for future profitable growth.

For example, I shared with you last quarter that we are building a new division within the BioSpin group to pursue new opportunities for NMR technology in applied and clinical markets. We will provide additional information about these programs once we complete our negotiations with the various worker's councils. I would expect that we will see more savings in 2016 than in 2015 due to the longer timelines and higher materiality associated with our footprint consolidation efforts.

Next, I would like to turn to our CALID group, which generated $554 million in revenue during FY14, which includes $80 million of CAM related revenue. Please keep in mind that the CALID group revenue will decline about $50 million in 2015 due to our CAM divestitures and restructuring.

Our teltonics division generated low single-digit organic revenue growth, which was headlined by another year of 20% plus growth in the MALDI Biotyper. The performance of the MALDI Biotyper in the United States was very good and we are working with the US FDA to further expand the libraries available for the MALDI Biotyper. Within CALID, our optics division capped its second straight year of solid performance and is now the most profitable business in the Bruker portfolio.

Optics benefited from strong growth in the Americas and Europe and is seeing healthy demand for its products in the food and agriculture industries. It also has been successful in operational programs that have driven higher profit margins in the business.

The biggest milestone for CALID in 2014 was the execution of the CAM divestitures and restructuring plan. In the second half of 2014, we divested two CAM product lines and we have now exited most of the division's employees.

In July 2014 we laid out a plan to generate $15 million to $20 million in annual savings once the plan was completed by June 30, 2015. We now expect that we will complete these activities one quarter early, by the end of March 2015. This will enable us to generate three quarters worth of CAM restructuring savings during 2015.

While we have some work remaining in the first quarter, I'm pleased with the speed of our execution. The remainder of the CAM activities was merged into our Daltonics division as of January 1, 2015.

I'll finish the discussion about our CALID group with a few brief comments on our detection division. Although detection is a small division, it had an outsized impact on CALID in 2014. Detection experienced substantial delays on export licenses, which had a significant impact on the division's ability to convert backlog into revenue. As a result, the division's revenue and profitability declined considerably year-over-year in 2014. On the other hand, the detection division had very strong order bookings in 2014 and enters 2015 with strong backlog and the potential to convert several large deals into revenue over the next 12 months.

Please now turn to slide 7, where I will discuss the performance of our Bruker Nano group and our BEST segment. Bruker Nano reported revenue of $498 million, representing a 1% decline from FY13.

I would characterize 2014 as a mixed year for the group. While our Nano Surfaces and Nano Analytics divisions experienced growth, our AXS and Elemental divisions were impacted throughout most of the year by persistent softness in demand from industrial customers, particularly in Asia. Our Nano Surfaces division, which includes our atomic force microscopy product posted flat organic revenues after a challenging year 2013.

The division's core academic research markets remained healthy while demand from semiconductor and data storage customers remained weak. During 2014, the division integrated two acquisitions, Prairie and Vutara, which added important capabilities in fluorescence microscopy, as well as $11 million of 2014 revenue. These new products will help Nano with its strategic goal of increasing its exposure to life science research and cell biology markets over time.

While we did not see the rebound in the Nano Surfaces division that we had hoped for in 2014, the good news is that the division posted much stronger new order bookings in the back half of the year, which is an encouraging sign as we head into 2015. Our AXS and Elemental businesses both reported revenue declines during the year. The AXS division had a particularly challenging year as a meaningful exposure to Japan, Russia and the semiconductor markets all contributed to a weak 2014.

Finally, our BEST segment reported revenues of $153 million or 4% growth compared to FY13. BEST was able to deliver good growth, despite having about $10 million of revenue related to the Rosatom pilot line, delayed into 2015. BEST also faced a difficult year-over-year comparison due to the Rosatom licensees recognized in 2013. The market for low temperature, superconducting wire remains healthy, as BEST exited the year with strong new order bookings and backlog. We also expect its market for big science projects will remain attractive.

I'd like to close by talking about Bruker's key priorities for 2015, which I show on slide 8. First, we want to continue to transform our leadership, our management processes and our systems. While we made tremendous progress during 2014, we have more work to do in 2015. From a management standpoint, we continue to make targeted changes to our divisional leadership teams and a high priority will be to find a new leader for the BioSpin group, once Thomas Bachmann will leave in mid of 2015 to become the CEO of Eppendorf.

In terms of systems, we successfully implemented a new financial consolidation platform and new CRM systems in 2014. As we move into 2015, our systems focus will move towards ERP and HR systems, so that we can gain better visibility into our Business.

Next, we will focus on successfully executing our rightsizing programs and footprint consolidation plan in BioSpin. We will work to complete negotiations with our worker's counsels and reduce our headcounts and factory costs in BioSpin as quickly as possible. We will accelerate the further outsourcing of high-level assemblies in a number of our divisions in 2015 and 2016 with expected further improvements in cost and working capital over time.

Finally, we believe that after the CAM restructuring we can reaccelerate organic growth in the Bruker portfolio. We continue our significant investments in R&D and expect important new product introductions in 2015. We are also successfully entering adjacent markets and expect a reacceleration of our bookings growth in 2015 and of our organic revenue growth rates in 2016 and 2017.

I'll close my remarks by stating that we have a number of transformational initiatives underway at Bruker that are all aimed at helping us to drive better operating performance. While some factors outside of our control, such as currency and market demand, have prevented these improvements from translating into EPS growth, I believe that we are taking the right actions to create long-term value at the Company and I expect solid operating margin improvements in 2015.

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

Thanks, Frank.

I'll now provide some additional details on our Q4 and full-year 2014 financial performance. On slide 10, I show a snapshot of our Q4 2014 non-GAAP results. Total revenues were $508 million, a decrease of 8% from the fourth quarter of 2013, reflecting the significant currency impacts that Frank described earlier.

Our fourth-quarter free cash flow of $62 million represented the strongest quarter of the year, but was far lower than the fourth quarter of 2013, as working capital and cash flow improvements occurred more evenly during 2014. Our working capital ratios improved nicely year-over-year and while some of this improvement came from changes in foreign exchange rates, a substantial portion of the improvement came from better inventory management. Finally, our net cash position was up 70% compared to the previous year as we continued to strengthen our balance sheet.

On slide 11, I show our Q4 2014 non-GAAP operating results in more detail. Our Q4 2014 non-GAAP gross margin of 43.9% is a decrease of 110 basis points on a year-over-year basis. While foreign exchange rates decreased our gross profit by $16 million, FX did not have a material effect on the gross margin percentage in the quarter.

Low margin revenue in CAM, BioSpin and BEST, as well as lower volumes in Daltonics were the primary drivers of the lower gross margin percentage in Q4 2014. Our Q4 2014 operating expenses were down approximately $8 million on a year-over-year basis, with all of the decrease due to changes in currency. However, despite the favorable impact on operating expenses, foreign exchange rates still lowered our operating income overall by $6 million in the quarter compared to the fourth quarter of 2013.

Our non-GAAP tax rate of 20% was down considerably year-over-year as a result of jurisdictional mix and the release of valuation allowances in the fourth quarter. Non-GAAP EPS of $0.30 represented a $0.01 decline from the previous year. On slide 12, I show a reconciliation of our GAAP to our non-GAAP financial results for the fourth quarter. In Q4 2014 we excluded $19 million of operating costs from our non-GAAP results, down slightly from the previous year. Fourth-quarter restructuring costs are primarily related to CAM and other costs are primarily non-cash asset impairments.

On slide 13, I show our revenue bridge for the full year 2014. Reported revenues declined 1.7%, including an organic revenue decline of 0.4% year-over-year. Changes in foreign exchange rates reduced revenues by 1.4% and the net impact from acquisitions and divestitures had a negligible effect on the full-year growth rate. Lower CAM revenues in 2014 reduced Bruker's growth rate by roughly 1% for the full year. Significant currency changes in Q4 drove the negative currency effect that we reported for the full year.

On slide 14, I show our operating performance for fiscal year ended December 31, 2014. Our non-GAAP gross margins were down 60 basis points, but were flat after adjusting for the negative effects of foreign currency. Our higher year-over-year SG&A spending reflects the investments in new management and functional capabilities including sales management, marketing, finance and IT.

Our full-year tax rate of 25.1% is at the low end of the range of guidance we provided in November. The year-over-year decrease in tax rate is the combined result of planning activities and fourth-quarter reserve releases.

On slide 15, I show our non-GAAP reconciliation for the full year 2014. We've excluded $79 million of operating costs from our non-GAAP results, which is up $22 million from the full year 2013. The $11 million of higher restructuring costs is primarily related to our CAM restructuring, and other costs were also $12 million higher on a year-over-year basis as a result of non-cash asset impairments related to both CAM and BEST businesses.

On slide 16, I show our cash flow performance for the full year 2014. We recorded free cash flow of $81 million for 2014, a decrease of $14 million compared to 2013. The decrease is the result of lower net income and customer advances, which was partially offset by lower CapEx spending during the year.

We made good progress during the year on lowering our inventories, but some of this improvement was offset by higher receivables at year end. The unusually low CapEx spending was primarily the result of project timing and we expect CapEx spending of approximately $45 million in 2015.

Our cash conversion cycle improved by 21 days compared to the previous year, which is comprised of the following. Our days of inventory outstanding were 195 days compared to 218 days in 2013. Overall, our inventory declined year-over-year by 20% with approximately half of that decline related to our outsourcing and restructuring programs. Our days sales outstanding were 61 days compared to 59 days last year. Finally, our days payable totalled 25 days compared to 26 days in the previous year.

Before turning to guidance, I'd like to spend a few minutes talking about the effects of foreign exchange rates on our operating results. With approximately 80% of our revenues generated outside the United States, changes in currency have a substantial effect on our financial performance. On slide 18, I show the effect the changes in foreign exchange rates had on our revenue, our non-GAAP operating profit and our earnings per share in 2014 and the effect we expect for 2015, based on recent rates.

While we did not see a large reduction in revenues during 2014 due to currency, we did see significant effect on our operating margin and EPS as a $25 million revenue impact led to an $0.08 reduction in EPS. The profit impact was primarily the result of the weakness of the yen versus the dollar during 2014. Since we have very little in yen denominated costs, the negative currency impact on yen revenues flows directly through operating margin and EPS.

As we turn to 2015, we're expecting currency to have a much larger negative effect on revenues, primarily due to the weaker euro versus the dollar. However, a much smaller percentage of this revenue reduction will flow through to adversely affect our operating margin and EPS. This is due to the fact that we have a significant amount of euro-denominated costs, which act as a natural hedge to the euro's impact on revenues.

However, I want to point out that in recent months the dollar strengthened against nearly every global currency, not just against the yen or euro. As a result, and with such a high percentage of our revenues outside the United States, we still expect changes in foreign exchange rates to lower our EPS by $0.09 year-over-year, which represents a double-digit EPS headwind in 2015.

Turning to slide 19, I show Bruker's summary financial outlook for 2015. We expect changes in foreign exchange rates to reduce our reported revenue by 7% to 8% for the full year. The biggest revenue impact from currency will be felt in the first three quarters of the year. We expect the combined effects of currency and the revenue lost as a result of the CAM divestitures will reduce revenues by $185 million year-over-year.

Excluding the impact of foreign exchange rates and the net effect of acquisitions and divestitures, we expect organic growth of approximately 1%. As a result of our CAM and other initiatives, we expect non-GAAP operating margin to increase by over 100 basis points in 2015, allowing us to keep EPS approximately flat even on a lower revenue base. Finally, we're expecting a non-GAAP tax rate of approximately 26% to 28% for the full year and our outlook assumes a yen to dollar rate of 1.17 and a dollar to euro rate of 1.16.

So I'll close by stating that despite the challenges we have faced over the past two years, we believe that we are moving Bruker forward and see that the benefits of the many initiatives we have launched are beginning to accumulate. We remain as committed as ever to deliver on our objectives to transform Bruker's operations, drive innovation and deliver greater value for Bruker's shareholders.

With that, I'd 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)

Tim Evans from Wells Fargo.

Frank, could you elaborate a little bit on the outlook for the NMR market now that you have another quarter behind you? And I'm thinking here, organically, if you remove the outlook for possibly picking up some of the Agilent business here, what you think is the underlying growth rate for that market?

Okay, Tim.

After pretty good high single-digit growth for several years, it's obviously weakened considerably in 2014. So a long-term growth rate for NMR over five or more years I would estimate to be in the low to mid single digits, perhaps 3% to 4%.

The shorter-term prediction for 2015 is somewhat more difficult. We had some decent orders in Q4. Of course those will go into next year and as you know, we had order weakness for most of the first three quarters of 2014.

We're picking up the occasional system that otherwise would have gone or perhaps already did go and was canceled with Agilent. But if anything, that's partially making up for the weakness that we've seen in the NMR market.

So it's I think difficult to predict what 2015 will be. We're not expecting a significant strengthening of the NMR bookings in 2015 compared to 2014. And that's over very long time periods, over a couple of decades, we have sometimes seen a 2, 3, 4 year run-up followed by one or two years settling and that may be one of the NMR patterns that we're seeing right now.

A quick follow-up: what's your thinking on the way pricing has evolved in this market as growth has slowed down and all the other dynamics that are going on at the same time?

We're certainly trying for better price discipline, I would say. Before that over -- for a variety of reasons, even under Varian, Inc. and then as Agilent declared this market to be strategic for a few years, the pricing discipline and some of the discounts in the NMR market were really very -- perhaps egregious.

So we're trying to be much more price disciplined and we're making a significant effort to do that. You also cannot overdo that. Obviously there's budgets that are out there, but we're trying to be much more disciplined, and I think the customers, by and large, understanding that that's necessary to make sure we remain financially healthy within NMR.

Thank you.

Brandon Couillard from Jefferies.

Frank, could you give us a sense of your outlook by division in terms of the organic revenue growth for next year, the leaders and laggards?

By division, we wouldn't do it by group. Each group has a number of different factors, so there isn't really a remarkable discrepancy between the groups. They are fairly closely grouped, no pun intended here.

We may see a little bit softer performance in the BEST segment. That's because some projects have rolled off, like the big ether project for them. But there isn't any thing very remarkable. It's not that one grossed 10%, something else is flat and something else shrinks.

It's not very remarkable. They're relatively similar, with perhaps a very slight growth recovery organically compared to last year. But we're really expecting more of a bookings recovery and more of a revenue uptick in 2016. And I'm talking, I'm sorry, in all cases about organic revenue because obviously currency is a major headwind, particularly in the first three quarters. No remarkable differences would've been the short answer.

Fair enough. Charlie, on the margin outlook for next year, can you quantify the effect of currency that it will play the margin side? And then if you can, quantify the magnitude of incremental cost savings benefit that you expect this year. Should we think about the CAM savings being three-quarters of that $15 million to $20 million target?

On CAM, I'd say that's exactly right. We've been pleased with the pace of execution there and our estimate around the full-year run rate of savings hasn't changed, so you can assume that we have got three-quarters of that benefit in 2015.

On currency, I gave you the dollar figure on the impact. You can kind of back into that. You've got $135 million at the revenue line and $22 million at the operating profit line.

Thanks.

And Brandon, that's also showing again on slide 18 if you want to refer back to that one.

Dan Leonard from Leerink.

Could you elaborate on the weakness in Japan? I'm wondering how much of that is market weakness versus perhaps share loss?

Dan, I'll take that. This is Frank.

So certainly revenue in Japan was down in 2014. A lot of that is currency. But bookings in Japan were down more strongly and a lot of that had to do that in 2013 we benefited in many divisions, but particularly for the big ticket systems from the special supplementary budget, which turned into revenue in early 2014, but was bookings in 2013.

In the area that we've looked at there, I don't think we lost any shares. I think that affected the other NMR vendor in Japan about equally.

In the X-Ray business it is possible that there is some share loss in Japan, as our Japanese competitor there is clearly seeing a benefit from the much lower yen over the last two years and we have, obviously, had to raise our pricing. In addition, there's clear industrial weakness in Japan and the microelectronics data storage and semiconductor segment has not picked up, really worldwide, but that always affects southeast Asia and also Japan quite a bit.

Got it. And then for my follow-up, Frank, if your MALDI business continues to grow 20% plus but Daltonics is only growing low single-digits, does that mean the balance of Daltonics is declining? And why would that be?

It was declining a little bit and the MALDI, the other applications of MALDI mass spectrometry have generally come down a little bit in recent years, as MALDI is considered a secondary and complementary technology for proteomics. But electrospray high-resolution accurate mass systems such as Orbitrap or QTOF technologies are the primary proteomics technologies.

Our improved ESI-QTOF came out late in the year. They're very well received, but they really haven't done that much for revenue yet last year. So your observation is correct, but we think we're, with the new product introductions, are at an inflection point with the other parts of our product line there.

In the LC-triple quad effort, how is that trending versus planned?

The LC-triple quad business for us is relatively small. With moving the entire factory from Fremont to Bremen and closing our part of the Fremont factory and moving the R&D from Fremont, in part to Billerica, Massachusetts where we built the Biotyper and the software R&D to Bremen as well, that has slowed things down a little bit in the triple quad business.

But I think by the end of Q1, and that's really then the end of our CAM restructuring, I think we'll have -- I believe a much more -- much higher quality, more stable product line for both types of triple quads from our new factory. But I have to acknowledge that we lost several months there where we were not growing in our triple quad product lines as we were transferring that from one to another factory.

Steve Willoughby from Cleveland Research.

Frank, first a question for you.

Do you have any thoughts on how you are expecting 2015 to play out from both a geographic standpoint, as well as a pacing throughout the year? Are there any quarters that you're expecting to be stronger or weaker than others throughout the year?

Maybe I'll take the first part and leave the second part to Charlie.

Geographically, we expect the United States to be really the highlight. I think, like everyone else, we're expecting the best growth in the United States. We're expecting Europe, by and large, to be flat to low growth with much of Europe really not in bad shape, but at some point our business in Russia was not insignificant and a little bit larger than perhaps for other companies in the life science tools base. And it's not going away, but it's really dropping dramatically for all the well-known reasons.

In Asia, Asia is really multiple geographies and obviously, China did a little better than the rest of Asia for us last year and we actually, along with the fact that we picked up our China organization, are a little more upbeat on that.

Japan, we really haven't seen any inflection points and the currency situation is still what it is and I don't think there's any -- there's certainly no major supplementary budgets in Japan, so our expectations there are perhaps the lowest. For the rest of Asia, which was relatively weak last year, we expect that to come back a little bit. But overall, US strongest, Asia weakest and Europe in between.

Charlie, the quarterly flow, did you want to comment on that?

From a quarterly standpoint, keep in mind that Q1 of 2014 was a pretty strong quarter so it will be bumping up against that comp in Q1 of 2015. Also, the currency impact, proportionally, the rate differential is the most significant in Q1. So Q1, maybe not in absolute dollars, but proportionally, will have a pretty big currency impact. So with that, I would say pretty modest expectations for Q1 with some momentum building over the course of the year.

And then Charlie, a second question for you.

You've had pretty good free cash flow for at least two years now and you're building some net cash on the balance sheet. Do you have any updated thoughts on either timing or uses of cash?

Yes. The cash flow was pretty good in 2014. We could've done better. Over the course of 2014 we consumed a little more cash on restructuring than what we expected at the beginning of the year. I think that's a good use of cash for us.

And then in the fourth quarter inventory was solid, but receivables got away from us a little bit and so we can do better there. Heading into 2015, I think I mentioned we'll see an uptick in CapEx. We're going to continue to be on the lookout for both on M&A. The last two deals that we've done, Prairie and Vutara, have been a really nice fit and off to a very nice start, so that's going to continue to be part of the portfolio.

Beyond that, we've not made any commitments or any decisions around additional uses of cash. I think, honestly, we want to take a little time to make sure that we're delivering some consistency both in profits and cash flow before we make any additional decisions.

Okay. Thanks very much.

Amanda Murphy from William Blair.

I had a follow-up to Tim's initial question on the NMR market. You made some comments about the high-field side of things, maybe going through a replacement cycle. I'm curious, is that driven by the price discounting that happened earlier or did it accelerate what would be a more protracted replacement cycle? And then how do we think about what the product cycle looks like on NMR generally? Do people replace after 10 years, 15 years? What's the cycle there?

Amanda, this is Frank.

So the high-field weakness, really, I don't think was related to pricing. There were a fair number of high-field deals in 2013, 2012, 2011, even 2010, if I recall, from China to Europe to Japan, also, with special supplementary budgets. That's still a little bit of a multi-year stimulus spread over different geographies and different years hangover that we're having there right now.

It's not that there people had 80% of the funding or 90% of the funding for a high-field system, but then we just couldn't quite get them and couldn't make the pricing work. There just wasn't that much funding. So those two are not related.

Some of the slower NMR bookings may be related to the fact that we're just getting away from the somewhat extreme discounting that was prevalent in the industry. And we are doing it gradually, but nevertheless that will slow things down a little bit as some customers will need to look for additional funding for what they are intending to procure.

The product cycle in NMR can be, of the order is longer than for other products. There's different pieces for the magnets. It's 10 or maybe even more years for some of the electronics and probes and computer peripherals. It does get replaced in between, so it's a longer product cycle on the order of 10 years and other parts, and there's quite a bit of upgrade business in the NMR market, where you don't replace the entire system, but you basically keep the superconducting magnet, which tends to last a very long time. So between 5 or 10 years plus for the magnet.

Does that answer your question?

Yes.

And then you mentioned some of the opportunities in adjacent markets in NMR. Have you spent time quantifying what that looks like in terms of market opportunity expansion for you, taking the base NMR market and then thinking about incremental adjustable market there?

It's early days and we have some theories on that, but I don't think any numbers that we would really want to throw out into the public yet. But we've seen good growth in with our food and wine and juice and honey screener and those are very dedicated products for NMR.

It's very robust and reliable and very cost-effective because the measurements are fast. It's a good way of doing, in a way, quantitative metabolomics on a smaller number of samples or metabolites, the most important ones. And we spend a lot of years developing and refining those libraries with a number of our customers, so that's not usually moving the needle yet.

But it's a few $10 million per year that we're growing gradually and where that might go ultimately, we're very much in the strategic analysis of where might that go, and the related clinical research field might be similar. And whether that can go further, that's obviously something we would like to accomplish, but we're still very much in the analysis phase for that.

Ross Muken from Evercore ISI.

This is James Clark in for Ross. A question on the NMR structuring. You alluded to some headcount reduction. I'm just wondering if you can put some dollar terms around that and talk about where you're looking to reinvest in the business.

Well, I'll again leave the dollar terms to Charlie and the reinvestment tends to be in the service business. I think the service and lifecycle support has been under-invested in in the past. We think we can over time, perhaps over not that many years, maybe over three or five years already, get a significantly higher percentage of revenue for that group from service and after markets, something that we hadn't developed as strategically before.

Also, we have continued investment very nicely in the fast-growing pre-clinical imaging division, and last but not least, our new division, the applied industrial and clinical NMR or magnetic resonance division, NMR EPR. From a small base it's trying to create more, not ultra high performance NMRs, but high-value analytical solutions that are very robust and based on NMR and that of course take longer to adopt because you've got to really develop, of course, the databases, the software.

And then they need to be validated by our customers, which can be both industrial customers or regulators and then the adoption cycle takes a little bit longer. But if it gets adopted over time you can see some additional nice and I think also less price sensitive growth in that area.

So that's where the investments are. Less environment to the right-sizing is more in the traditional NMR and EPR field where the budgets just aren't quite as strong and we think we can run with a leaner team and a smaller footprint.

We are investing on the CapEx side and we have to invest quite a bit to reduce the number of factories that we do have. Obviously, some of it there's a little bit more outsourcing, but some of these activities have to go into our existing factories, which therefore need some expansion and remodeling. So I think it's a good use of our cash and net cash that we're investing our business, some of it is restructuring, some of it is CapEx to make Bruker more profitable and more efficient. There was a --

The question for Charlie was around the dollars, but that was sufficient. A follow-up, as you go through the restructuring and you get back to sort of a mid-single-digit market growth that you alluded to, maybe you could talk about what you would expect from incremental margins when you get back to that more normalized market growth rate post the restructuring.

(Technical difficulty) incremental margins more for a 2016 point of view. I don't know that I have a reliable figure that I can give you at this point in time.

Okay. That was helpful.

Doug Schenkel from Cowen and Company.

Thanks for taking my question. This is Chris on for Doug today. In the context of 2015 operating margin, can you talk about what the contribution for the greater than 100 BPs expansion target is from gross margin? If I could be a bit more specific on operating margin guidance, can you specify exactly how much is due to restructuring actions such as CAM outsourcing and rationalizing BioSpin spend? And then will you need incremental restructuring actions to meet the required margin expansion target next year?

Okay. Yes.

So we talked about expected margin expansion in 2015 of greater than 100 basis points. The question was asked earlier about currency. If I recall, currency is about a 30 basis point headwind. We're going to overcome that and still improve operating margins by more than 100 basis points. Most of the improvement comes from the cumulative effect of programs that we've been putting in place over the last couple of years.

Clearly, CAM has a big effect and I sized that earlier on this call. But then, as you know, we've had restructuring in the Nano group, and in CALID, as well, over the course of 2013 and 2014, outsourcing programs and other things. They are now starting to accumulate and I think we're starting to see some of the benefit of that in a more meaningful way heading into 2015. At this point, we've got a little bit of BioSpin restructuring assumed in the guidance that we've given, but we don't need to overachieve on that to hit the guidance.

Which is another way of saying that what we're doing in 2015 will mostly then benefit 2016. So yes, to answer the last part of your question, yes, Chris, we do need the rightsizing and footprint consolidation within Bruker BioSpin, plus other incremental actions, plus the significant outsourcing initiative that's underway this year in order to further improve our performance in 2016. It is clearly a cumulative effect of these transformational steps that we've been at for the last couple of years at least, and will continue this year, and will continue somewhat also into 2016.

(Operator Instructions)

Dan Arias from Citigroup.

Frank, on the personnel changes that you're making, I'm wondering if you would be willing to rank the businesses in terms of which are most settled versus which are still fairly influx. BioSpin obviously sounds like it's on the unsettled side, but I think it would be helpful if you could comment across the organization, as we try to gauge where the leadership needs are at this point.

On the Bruker BioSpin side, actually Thomas has made very good progress in settling his divisional leadership. He has a very good and already somewhat experienced operational leader. We just hired a head of R&D that will join us mid-year. We're delighted to have that person joining us soon, a very capable individual with a good track record.

I think we're still building off the financial organization and HR a little bit in BioSpin there. We had a couple of setbacks.

But that's at the level where you usually don't see the names anymore. And yes, of course I want to find another top-notch person like Thomas Bachmann to continue to run that group then after midyear. Clearly one of my priorities, but I think Thomas, even after two years, will leave a very positive imprint. And quite honestly, we're looking for continuity to execute a lot of the things and plans that he has put in place and that are now on track from the organizational to processes to -- that's the rightsizing and the footprint.

In Bruker Nano, very good group. There are, in the divisions at the level that you just don't see any more, you probably wouldn't be familiar with the names. We've over the last couple of years, have obviously improved some of our financial business partners in those divisions. We've strengthened operations in quite a few of those divisions and mostly those individuals are on board and are leading the outsourcing and lean and other initiatives.

In some areas we will be making some leadership changes or maybe there's a retirement. Still quite a bit of activity, I'd say, in all groups at that level of the top division management. But the groups, other than Thomas needing to be replaced, it looks stable and we have a very good team together there. But yes, there will still be quite a bit of work to be done with functional executives, some commercial leaders in our divisions, which are underneath the group levels and a lot of that is going on this year.

Okay. That's helpful.

And then on the outlook for the year, what does guidance assume with respect to end-market improvement for the Nano group: specifically, what you're factoring in for AXS and demand on the industrial side?

We're mostly trying to shift the markets for the group a little bit by even more. They're actually selling quite a bit into academic research, of course all the life science and life science AFM. We introduced a fantastic product in December and of course the new instruments for fluorescence microscopy, for cell biology and neuroscience research go into more stable academic and government research, with quite a bit here in the United States where those markets aren't bad.

We have not predicted a microelectronics, data storage or semiconductor rebound, so we're happy to be positively surprised if that happens. However, also if it happens, it's almost likely to go, and it will help our bookings, but it most likely will go into 2016, because often these $2 million to $5 million systems then have three or four quarter delivery times, but we haven't built a lot into it. Also in minerals and mining and metals pricing, in metals processing we expect, due to the low raw materials prices, these markets to be constrained.

So we're really changing the portfolio of that group, if you like, towards higher growth areas and we probably will await a meaningful contribution to revenue growth from some of the microelectronic, semiconductor, data storage and or other industrial markets more for 2016. But there may be some bookings pick-up this year with more revenue pick-up next year.

Derik de Bruin from Bank of America Merrill Lynch.

A couple of quick questions. One, how much did NMR bookings grow in the fourth quarter?

I think that's more granularity than we're prepared to give. But it was a little bit of an uptick. It was a decent uptick compared to several quarters of order weakness. I don't know that that's a trend though.

To be clear, Derik, uptick excluding for currency.

That's right. I meant organic. Right.

Could you talk a little bit about the ERP roll-out that you're planning and some of those changes. That's often been a challenge for companies, even with a little bit more established infrastructure, so what are you going to do to mitigate some of the hiccups that we've seen with some of the other companies that undertake that?

We're starting small. So we started, we haven't made a big deal out of it, but we started in 2015 with some implementations in countries that were really on very old legacy systems, so we went live on SAP in Singapore, Taiwan and Korea in 2014. We will likely go live in Thailand and Malaysia in 2015. These are kind of easy ones to pick off. We rolled out a standard template and replaced the legacy system that's there.

Of course the bigger value for us is going to come when we can link together the multiple SAP instances that we have. A lot of the factories are in different instances of SAP.

So we have got a project team working in 2015 to essentially devise a strategy and a design that's going to allow us, hopefully, to merge some of these SAP instances in 2016. So think of 2015 as very much a planning and design and development and testing year with some hopeful that we can go live with some sort of a larger merge.

The difference -- what lowers the risk somewhat is that a lot of our significant locations are already on SAP. And we're really looking to merge instances that we have as opposed to replace or roll out new systems altogether. So I do view that as something that helps mitigate the risk a little bit. It also reduces the investment because we're using what we have already.

The other thing is we're going fairly deliberately. We're not rushing to jam this in. We will have some spending associated with that in 2015 and I suppose as we exit 2015 I should be able to give some better clarity around when we think this merge will be able to happen.

In 2014 there was also quite a bit of CRM investment, and that will continue to some extent into 2015, but a lot of the service CRM will roll out, which again I don't consider to be a very high risk and not a headline grabbing number of any sort, but really steady as you go improvement of our systems, including first sales and now also service CRMs, which in some divisions just haven't been available previously or they were Excel-based.

Great. Thank you very much.

Tycho Peterson from JPMorgan.

It's actually Patrick Donnelly in for Tycho.

A quick one on organic growth. Obviously, a slight decline this year, guiding for 1% next year. What's the confidence level going forward to get that back to mid-single-digit growth and what are the key drivers you expect to get that uptick going, 2016 and forward?

We've seen some improvements in some order levels. We also believe that some of the areas, some of the new markets that we have entered from, for instance, explosives trace detection, after many years of investment we're now really getting some nice orders. And we think we're really making progress in biopharmaceuticals and some other areas: pre-clinical imaging, fluorescence microscopy for cell biology. There are number of areas that I think are growing fast, actually. They have just been growing fast from a very small base in some cases and that's picking up a little bit.

We have some continued good growth drivers like our microbiology business. It may not grow at 20% anymore, because it's approaching $100 million, but we still expect it to grow in the double digits. We do, in some of the markets that have been languishing, we expect a little bit of an NMR pickup again. Maybe not rapid high single-digit growth, but we expect NMR in 2016 to no longer be a drag. And we also expect by that time, with orders perhaps this year, that some of the industrial and microelectronics business markets are coming back to where we believe that -- .

Sorry, last but by no means least, some very strong product introductions towards the end of last year, and some very strong product introductions we believe that are coming out this year that also we believe will drive orders in 2015 and revenue growth more towards hopefully mid-single-digits in 2016. So a number of things that are aligning that we think give us a good shot at returning to more normalized growth rates next year.

This is all organic. I'm not commenting on reported, because I don't know what currency will be.

Right. Okay. A quick one; any update whether Techcomp will acquire the GC service business?

I don't have an update on that right now. I've heard something anecdotal recently that they're interested in doing that. I don't have a better update on that, nor would I know timing at this point.

Okay.

It's not a very material part of our revenue, but a good question. Yes, they have that option.

Isaac Ro from Goldman Sachs.

Charlie, I was hoping to talk a minute about free cash flow. You gave some guidance on some of the things you are working on on the working capital front and you also gave some guidance for CapEx. I was hoping you could give us at least a range on free cash flow for this year and maybe one or two of the key drivers behind working capital that you think could provide upside or downside from your goals.

Yes.

Like I said, free cash flow for 2014 at around $80 million was a little lighter than we would've liked. It was $95 million the year before that. So heading into 2015, we're clearly counting on an increase in free cash flow, even with an anticipated $10 million step-up in CapEx. The drivers, obviously a little bit from net income, continued improvement in inventory. All of our outsourcing programs and other operational programs are aimed at driving inventory down.

And then as I mentioned, I think receivables, we could've done a better job in the fourth quarter. That's just a matter of process and focus. We've got some new regional finance structures in place. They're going to allow us to focus on that in 2015. So, I think that the combination of working capital programs and slightly lower restructuring are going to allow us to overcome the step-up in CapEx to deliver increased free cash flow.

That's great, thank you.

Then a follow-up on tax rates. You guys gave a range of, I think, 26% to 28% and I was curious if the low end of that range factors in the renewal of the R&D tax credit. And exclusive of that, just curious, you've talked in the past about long-term opportunities to improve the tax rate, and I was wondering if we look past 2015, if you talk to longer-term goals where you think how much tax rate opportunity is there really if we get past 26%?

Yes.

The US R&D tax credit isn't quite as significant for us, given that so much of our R&D happens outside the US. I would say it's not a material driver of the range of that tax rate. If you look over a few years, the tax rate has come down. Two to three years ago it was consistently around 30% or in the low 30%s, 27% in 2013, a little bit lower in 2014, because we were able to release some reserves, but we've migrated it down a little bit over time.

Some of that is a function of where the business falls, but over the last year and a half or so we've done more work around transfer pricing and some other tax planning, and that has allowed us to impact the tax rate. It's also allowed us to release some of these reserves that historically have been hung up on the balance sheet. So at this point we're doing as much as we can with those sort of tactics.

Obviously, much of our intellectual property, our manufacturing and our profit is generated in Germany, which is a relatively high tax rate, and doing something structural would take a little bit more work. So there's nothing on the horizon for 2015 or 2016, I'd say, that's structural, but we're starting to evaluate that.

That makes sense. Thanks so much.

Paul Knight from Janney Capital.

This is actually Bryan Kipp on behalf of Paul. Can you help tease out a little bit of what you're expecting in organic growth for next year in that 1% in light of pricing increases? I think you highlighted potential for entering adjacent markets, as well as the strength of additional product introductions in 2014, as well as 2015. What are you baking in from those things in the incremental 1% for next year?

Well, it probably is 20 or 30 different factors, quite honestly. And each then go into so much granularity that we generally, for competitive and other reasons, don't want to go there.

It is an aggregate number. It is the guidance. I wouldn't know how to pick a top two or three, because there's really many, many different factors that come together here.

But I guess --

Let me think about this. The weakness in NMR and X-Ray in last year, and the non-recovery of microelectronics are still some of the big drivers, biggest drivers why organic growth isn't higher already in 2015.

Okay. Is there a way you could give us some idea of what you are baking in on product introductions from 2014 as well as 2015? Is it 1%, 2%? Is it 50 BPs. Any color there would be helpful.

No. We don't have that granularity.

Okay. That's it for me. Thanks again.

Bryan Brokmeier from Maxim Group.

You mentioned the healthy academic market within the Nano business. More broadly across the total company, can you comment on the strength you're seeing in the academic market and how do you anticipate that market unfolding over the course of 2015?

Academic markets have rebounded very nicely in the US. They've become weaker in Japan. They would be stronger in certain countries in Latin America or so, but they are struggling with their currencies and whatever purchasing power they had is now insufficient to buy the systems that they had budgeted for. So there's some markets in India and so on where things have slowed down even though funding is available.

But by and large, when we talk about academic markets, the question is do they not grow, do they grow 2% or do they grow 4%? It's not that you have these 20% drops and then a steep recovery. We had a little bit more of that during the stimulus years, but there's really no significant stimulus on the horizon anywhere.

So long-term academic funding tends to be perhaps low single-digits. Strength in the US, Europe being pretty consistently strong, China, I think coming back, Japan presently being on the weak side. And all other developing or developed countries having a much more consistent approach to that because that's long-term plans that are not influenced typically by short-term events all that much. There's exceptions in Russia or a little bit of a positive exception in recent years and continuing this year is the UK, where after a few years of under-investment last year and this year there is quite a bit of catch-up and probably continued commitment to higher academic spending.

The question then, is what can we -- of the very, very large ocean of academic spending and research spending, how much can we get for our products? And they are of course having really relevant high-performance products, more novel scientific capabilities, which we have in a few areas, or just very good bio analytical or other solutions where people can then not so much focus on the instrumentation, if you like, but focus on some biology or chemistry or proteomics problem and we're just a good tool for that.

That's our job and that's why our long-term growth trends tend to be better than the couple of percent that you have, as long-term academic funding grows over long-term rates in all countries in the aggregate. But those are much more stable markets and much more reliable markets than some of the industrial markets. That was the real point here.

Thanks. That's helpful.

Looking at the Biotyper, you mentioned that you're working with the FDA to try and expand the libraries. Has the growth in the US met your expectations since you entered the market, I think early last year? And do you have any insight into how penetrated the market opportunity is today?

Yes, when I say we are working with them, obviously they are our regulator. We submit things to them, they come back to us, but we're working with them. As you know, we had a claim a year ago with that and more work on additional claims in the pipeline. We've seen excellent growth in 2014. We're really pleased with that. And the penetration of that market is still very early days.

We were encouraged that not only very large research hospitals and children's hospitals and so on that all went for it fairly early and are not fully penetrated in some of the reference labs, but also already midsized and even some smaller hospitals -- it's still selective -- are going for it. That trend is accelerating, then really it could almost go towards levels that we are beginning to see in Europe where that is really becoming somewhat of the standard of care, in which case the penetration is still very early days. There's something like over 5,000 hospitals in the United States and the penetration at this point is still very early days.

Sung Ji Nam from Cantor.

Frank, I was wondering what percent of your BioSpin business currently is services portion and where do you think that could go after you've invested more in that over the next few years?

I think it's not far from 10%. I don't know the exact number in that range. But quite honestly, we think that can go from low teens to high teens.

Okay and just curious as to what's the growth potential for the pre-clinical imaging business in the medium-term?

Good question. We've seen double-digit growth last year. We're again modeling it as one of our fastest growth businesses for 2015, with growth certainly well above the corporate average. I believe it is a model for around 10% this year, 2015. Sorry, I probably don't have all the data at my fingertips, but we expect that to be growing quite a bit above the corporate average again in 2015 and also beyond.

At some point it won't grow in the teens anymore, but maybe at some point in 2016, 2017 it may come down into the high single-digits, but that's a little bit speculative at this point. We also have a good product pipeline to expand that even further. So I think we'll have further good new product introductions in that pre-clinical imaging business, as well.

Thank you.

Eric Criscuolo from Mizuho.

Filling in for Peter Lawson tonight. I was wondering, how long does it usually take for when you decide to restructure a business in Europe, as far as closing a plant or laying off workers? How long does it take from the time of that decision on your end to the time when you can actually do it in that geography?

Well, the legal situation in Germany and France is that you cannot decide and then do it. You can propose a plan and then by law, you need to negotiate that with your worker's counsel or your committee d'enterprise, and I think the truth is that I think everybody buys into the necessity of that.

And I think our worker's councils, they will do their duty and they will look after their employees, but they also I think don't want to have indefinite uncertainty or longer than necessary uncertainty on the entire team. So we're somewhat optimistic that we can hopefully reach a result to those negotiations at the end of Q1 or in early Q2 and then begin implementation. It clearly does take quite a bit longer than if you take some of these decisions in the United States or in Switzerland, for that matter.

Got you. Thanks.

After all the divestitures, how much of the original CAM business will be around when all is said and done?

Just under a third.

Great. Thank you very much.

We've reached the end of the allotted time for today's question-and-answer session. I'd like to turn the conference call back over to Mr. Young for any closing remarks.

Thank you, Jamie.

Thank you for joining us this evening. If you're interested in meeting with Bruker, we'll be presenting at the Cowen and Barclays healthcare conferences this quarter. We also encourage you to visit us at our headquarters in Billerica, Massachusetts.

Thank you for your attention and have a nice evening.

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