Bruker Corp (BRKR) 2015 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Bruker's second-quarter 2015 earnings conference call.

(Operator Instructions)

Please also note that this event is being recorded. At this time, I'd like to turn the conference call over to Mr. Joshua Young. Sir, please go ahead.

Thank you very much, Jamie, and good afternoon. I'd like to welcome everyone to Bruker's second-quarter 2015 earnings conference call. My name is Joshua Young, and I'm the Vice President of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO, and Tony Mattacchione, Bruker's Senior Vice President and Interim Chief Financial Officer.

In addition to the earnings release issued earlier today, we will be referencing a slide presentation as part of today's call. The PDF of this presentation can be downloaded by clicking on the Earnings Release hyperlink on Bruker's Investor Relations website.

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

Before we begin, I would like to reference Bruker's Safe Harbor statement, which I show on slide 2. During the course of this conference call, we will 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 including 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 August 5, 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 third-quarter 2015 financial results in early November.

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

Thanks, Joshua. Good afternoon, everyone, and thank you for joining us on the call today. I will begin my presentation on slide 4.

The trends we experienced in the second quarter were very similar to what we saw in Q1 of 2015. Our CALID and NANO Groups reported organic revenue growth, while our BioSpin and BEST businesses declined. Although BioSpin's Q2, 2015 revenue continued to be affected by weaker orders back in 2014, our overall organic revenue performance of approximately plus 1%, in Q2, 2015 was sequentially improved from the minus 3% organic year-over-year revenue decline that we reported in Q1 of 2015.

In Q2 of 2015, we reported revenues of $396 million, which was a decline of minus $61 million or minus 13% from Q2 2014. Foreign currency translation reduced our reported revenue by minus $53 million or minus 12%. And our 2014 CAM divestitures reduced our revenues by minus $12 million compared to Q2, 2014.

After adjusting for these items, we reported year-over-year organic revenue growth of approximately 1% in Q2 of 2015. From a geographic perspective, this organic growth was driven by Europe and China.

North America also performed well, excluding the effects of our 2014 CAM restructuring. This growth was offset by weakness in Japan, and the rest of the Asia-Pacific region, excluding China.

We reported non-GAAP EPS of $0.19 in Q2 of 2015, which was a $0.02 decline from Q2 of 2014. Our lower profitability in the quarter was primarily the result of lower gross margin in our BioSpin Group, as a result of lower margin revenue mix in Q2 of 2015. And a challenging year-over-year comparison, due to a large 21 Tesla FT-ICR magnet that was recorded in Q2 of 2014. We will talk in more detail about this later in the call.

Our non-GAAP EPS faced a headwind from foreign currency translation of approximately $0.01. Which offset some of the benefits from the CAM restructuring.

We also reported a lower tax rate in Q2 of 2015, as a result of a $6.5 million discrete tax benefit relating to our ongoing footprint consolidation and operations improvement activities. This tax benefit was partially offset by higher foreign currency transaction losses in Q2 of 2015. The net effect from these two below the operating income line items was a positive, plus $0.02 contribution to non-GAAP EPS in Q2 of 2015.

On slide 5, I show Bruker's performance through the first six months of 2015. Our first-half 2015 year-over-year reported revenue decline of minus 15% was primarily driven by the effects of currency translation, and the 2014 CAM divestitures.

We reported a year-over-year organic revenue decline of minus 1% in the first half of 2015. Which reflects low single-digit organic revenue growth in our CALID and NANO Groups, offset by a double-digit organic revenue decline in our BioSpin Group.

Europe and the Americas were our strongest performing regions. While APAC outside of China and EMEA in the Middle East/Africa reported a double-digit organic revenue decline in the first half of 2015.

Our H-1, 2015 non-GAAP operating margin expanded by plus 90 basis points to 10.5%, compared to 9.6% in the first half of 2014. Our first-half 2015 non-GAAP EPS were $0.32. Flat with the first half of 2014, but would have been up 16% or plus $0.05 excluding FX translation headwinds. GAAP net income and GAAP EPS both improved by plus 13% compared to the first half of 2014.

So in summary, we made continued progress in core margin expansion in the first six months of the year. And we believe that we are on track to meet the greater than 100 basis points non-GAAP operating margin improvement in our full-year 2015 guidance, which remains unchanged.

Please turn to slides 6 and 7 now, where I will provide additional details about the year-over-year performance of our three groups and of our best segment in the second quarter of 2015. Let me begin with the BioSpin Group, which reported a mid, single-digit organic revenue decline in Q2 of 2015.

This revenue decline is a sequential improvement from the double-digit year-over-year organic revenue decline that BioSpin reported in the first quarter of 2015. But the Group is still being affected by weak NMR orders from last year.

Our BioSpin year-over-year gross profit margin comparison was affected by a less profitable revenue mix in Q2, 2015, and a difficult year-over-year comparison. Specifically, in Q2 of 2014, BioSpin benefited from a profitable 21 Tesla FT-ICR research magnet, which had been mostly expensed during its multi-year development but then carried a very high gross profit margin when it was finally recognized as revenue in Q2 of 2014.

Our BioSpin pre-clinical imaging division, which represents about 20% of the Group's revenues, continue to see customer side readiness delays. And also weaker market conditions in the second quarter of 2015. While we are likely to see our core MRI business improve during the second half of this year, we do not expect a complete recovery of the PCI division this year.

I am encouraged by the year-over-year double-digit organic growth in new order bookings that our Magnetic Resonance Spectroscopy division has generated in the first half of 2015. This improvement is coming from three factors.

Number one, we're seeing some new NMR orders from former [Adula] customers. Number two, we are effectively driving reduced discounting in the NMR markets.

And number three, we're also seeing some underlying market growth as the NMR market gradually recovers. While these new NMR orders will not have much of an effect anymore on our FY15 performance, they should help us to drive growth and margins in 2016.

Next, I will turn to our CALID Group. Which generated low single-digit year-over-year organic revenue growth in the quarter, and improved profitability. CALID is seeing higher profit margins in the group, primarily as a result of the 2014 CAM divestitures and the CAM restructuring, which we finished earlier this year.

Our Daltonics division continues to see momentum for our MALDI Biotyper platform. We are also encouraged by the Daltonics performance in Q2 of 2015, because we also saw growth for our MALDI-TOF research products.

In June of 2015, Daltonics had a very successful showing at the ASMS conference. Where we introduced a number of important products, including our MALDI Tissuetyper solution and our new MALDI PharmaPulse solution which I will speak about briefly later in the call. We are seeing healthy interest from customers in these new products.

Please turn to slide 7, where I will discuss the performance of our Bruker NANO Group and our BEST segment. The Bruker NANO Group reported low single-digit organic revenue growth in Q2 of 2015. Which was primarily driven by a good quarter for our Nano Analytics division with good micro XRF growth, as well as by our AXS division.

The Nano Surfaces division continued to experience weaker demands for its research and auto AFM products. Whereas its new fluorescence microscopy, microscopes for cell biology research are well received in the market.

Our BEST segment or business, generated an organic revenue decline of minus 8% in the second quarter of 2015. This decline was driven by the phase out of the large multi-year [ETER] project last year, and some revenue shift into the second half of 2015. BEST had a great quarter for new order bookings, with significant orders from certain large super conducting wire customers.

Finally, BEST recently made good technical progress in scaling up production for our high-current, high-temperature super conductors. Which are useful for ultra high field NMR, and also for a high energy physics magnets, for instance, those that would be used for the CERN Large Hadron Collider. Although this HTS business does not yet generate product revenue, it still holds significant potential for the future.

Now I'd like to highlight a couple of market and product trends that are important for growth for our growth going forward. I will begin on slide 8, where I show our new MALDI Tissuetyper solution that was launched at ASMS in June 2015.

The MALDI Tissuetyper and the underlying breakthrough rapifleX 10 kilohertz laser MALDI-TOF system are designed for mass spec imaging in general, and for anatomical pathology research in particular. The MALDI Tissuetyper offers dramatic further improvements in spatial resolution, image quality, and contrast in mass spec imaging. And offers for the first time, the robustness and ease of use of MALDI-TOF mass spectrometry, plus another order of magnitude throughput improvement to the anatomical pathology research market.

The MALDI Tissuetyper has the potential to contribute very valuable multi-molecular tissue imaging information in a label-free approach. And could change the way that anatomical pathology research and diagnostics are done in the future.

If you go to the next slide, I will highlight the launch of our MALDI PharmaPulse solution which I show on slide number 9. MALDI PharmaPulse is a new high throughput screening or HTS solution designed to help pharmaceutical companies achieve higher throughput, lower costs, and higher specificity in drug discovery.

It combines the speed, sensitivity, and ease-of-use of Bruker's robust MALDI-TOF systems, with leading robotics and automation technology. For dramatic performance, throughput, and cost advantages over traditional labeling HTS approaches, or other slower more costly mass spec based HTS solutions.

On slide 10, I show our priorities for 2015, which remain unchanged. And on which we're making good progress. I will make two quick comments on the first two bullet points on the slide.

We have hired a new BioSpin Group President who will join Bruker on November 1, and we will provide you with more background on him after the summer. And second, with all of the approvals now obtained, we can move ahead with the bulk of our restructuring plans in the BioSpin Group.

We expect this restructuring to cost approximately $15 million to $20 million. These costs of $15 million to $20 million will primarily be incurred in FY15 and Q1 of 2016. We expect to generate approximately $10 million in annualized savings beginning in the second quarter of 2016, once all the restructuring actions are completed by the end of Q1 of 2016.

I will close my remarks by stating that I believe that Bruker is on track this year after the first six months of 2015. While we clearly have work to do in the second half of the year, the core margin improvements are trending in the right direction. And I expect that Bruker will be able to meet its key goal of 100 basis points or more of operating margin expansion for the full-year 2015.

With that, I will now turn the call over to Tony Mattacchione, our excellent Interim CFO. Tony?

Thanks, Frank, and good afternoon, everybody. I will now provide some additional details on our Q2, 2015 and first-half 2015 financial performance.

On slide 12, I show a snapshot of our Q2, 2015 non-GAAP results. Total revenues were $396 million, a decrease of 13% from the second quarter of 2014.

Our non-GAAP operating income was $42.9 million, a 19% decline from Q2, 2014. And our non-GAAP operating margin decreased 70 basis points year over year to 10.8% from 11.5% in Q2, 2014. But grew sequentially by 70 basis points from Q1, 2015.

Our year-over-year decline in profitability was due to a less profitable revenue mix, and the profit contributions from the 21 Tesla magnet in Q2, 2014 referred to by Frank earlier. Our non-GAAP earnings per share declined 10% to $0.19 per share in the quarter.

We used $9.2 million of free cash flow in Q2, largely to fund customer receivables caused by more shipments this June versus the same time last year. We continue to strengthen our balance sheet during the last 12 months, as both our net cash and working capital ratios improved on a year-over-year basis.

On slide 13, I show the revenue bridge for Q2, 2015. Factoring in a 2.6% net-negative effect from the 2014 CAM divestitures and an 11.5% negative effect from changes in foreign currency translation, organic revenue grew 70 basis points in the second quarter of 2015. Our organic growth in 2015 reflected low single-digit organic growth, the low single-digit organic growth dynamics Frank mentioned earlier.

On slide 14, our Q2, 2015 non-GAAP gross margin of 45.1% decreased 120 basis points on a year-over-year basis. Foreign currency translation decreased our gross profit by $22 million in the quarter, and had a small positive effect on our gross margin percentage in the quarter. While our gross margin faced a difficult year-over-year comparison caused by the effects of the 21 Tesla transaction, our Q2, 2015 gross margin remained above our full-year 2014 level.

Our Q2, 2015 operating expenses were down approximately $24 million year over year. Approximately $18 million of this decrease was related to foreign currency translation, with the remaining decline related to our CAM restructuring.

Non-GAAP operating margin declined 70 basis points compared to Q2, 2014. Excluding the 21 Tesla transaction, our operating profitability and margin would have been higher.

Our Q2, 2015 non-GAAP tax rate of 10.3% was significantly lower than the previous year, due to our ongoing facility consolidation. We consolidated some production in the United States into our Swiss production facility, and this resulted in a discrete tax benefit in Q2, 2015. Finally, non-GAAP EPS of $0.19 represented a $0.02 decline from Q2, 2014.

On slide 15, I show a reconciliation of our GAAP to non-GAAP financial results for the second quarter. In Q2, 2015, we excluded $11.3 million of operating costs from our non-GAAP results, a decrease of $6 million from last year. This decrease was driven by lower restructuring costs and a reversal of a previous allowance for acquisition-related costs.

I would also note that our non-GAAP interest and other income and expense net-line increased by $3.7 million year over year. This is related to FX transaction losses incurred from unhedged foreign currency balances caused by the high shipment volume in June.

On slide 16, I show the revenue bridge for the first half of 2015. We reported an organic revenue decline of 1% after the first six months of 2015. Changes in foreign currency translation lowered our revenues by 11.3% or nearly $100 million, with the weaker euro driving most of the year-over-year difference.

On slide 17, I show our non-GAAP P&L for the first six months of 2015. At the midpoint of the year, we are on track to meet the guidance we set earlier in the year. Our non-GAAP gross margins have improved 80 basis points compared to the first half of 2014.

Improved gross margins in both NANO and CALID offset lower margins in BioSpin. Due to the lower volumes in that business and negative product mix. The savings from our CAM restructuring added 60 basis points to the gross margin improvement.

Excluding CAM and FX, our operating spending was flat in the first half of 2015. Our non-GAAP operating margin increased 90 basis points in the first six months of 2015, which is in line with our guidance to increase our non-GAAP operating margins by at least 100 basis points for the full year.

On the bottom line, we reported $0.32 in non-GAAP EPS, which was the same as the first half of 2014. Changes in foreign currency translation rates reduced our EPS by $0.05. So excluding FX, our EPS would have grown by 16% in the first half of 2015.

On slide 18, we show the GAAP to non-GAAP reconciliation for the first half of 2015. We excluded operating costs of $31.9 million compared to $28.8 million in the first half of 2014.

Lower restructuring costs were offset by higher other costs in the first six months of 2015. The biggest drivers of the higher other costs are a $10 million charge related to outsourcing of our pension plan in Switzerland, higher IT costs related to our ERP financial consolidation and management reporting, and human resource transformation initiatives. We also incurred a $2 million asset write down related to our BioSpin restructuring, as a result of our plans to close down one of the Group's plants.

I want to provide you a further update from what we provided you last quarter on the progress we're making on our financial systems. Our Management Reporting System project is nearly complete.

This is the second quarter we have closed our books using the system, and we will soon be able to close our books on a monthly basis. We are already getting better insights into our business as a results of this system.

Similarly, our ERP consolidation project is also on track, and we expect that most of the business will operate on a merged SAP platform in 2016. Concurrently, we are defining harmonized business processes that will be incorporated into the new ERP template. We'll begin to roll out this new template in our commercial operations later in 2016 and in future years.

On slide 19, I show our cash flow statement for the first six months of 2016. We generated free cash flow of $12.1 million in the first half of 2015 compared with $14.7 million in the first half of 2014.

Higher GAAP net income due to fewer restructuring charges in a lower tax expense was offset by working capital being a smaller source of cash in the first six months of 2015. This was caused primarily by the timing of vendor payments and higher accounts receivable balances.

Our cash conversion cycle improved 23 days compared to Q2, 2014. This is comprised of the following, our days of inventory increased 28 days to 201 days. Our days-sales outstanding increased 3 days to 54 days, and these improvements were partially offset by a reduction in our days-payable, which totaled 34 days compared to 42 days in Q2, 2014.

On May 20, we announced that Bruker's Board of Directors had authorized the Company to repurchase up to 1% of its shares outstanding annually. During the second quarter, we used $17.2 million of cash to repurchase 850,000 shares.

Turning to slide to 21, I now show Bruker's financial outlook for 2015. While we are changing some of our assumptions behind the guidance, we are keeping our overall outlook unchanged.

In 2015, we expect to generate organic revenue growth of approximately 1%. And to approve our non-GAAP operating margin by more than 100 basis points compared to last year. This is expected to result in our 2015 non-GAAP EPS being flat with 2014.

We expect changes in foreign currency translation rates to reduce our reported revenue by 9% to 10% for the full year. Which is a slight reduction from the 10% to 11% assumption we had last quarter. We continue to expect that foreign exchange rates will generate a headwind to our non-GAAP EPS of roughly $0.09 for the full year in 2015.

Our currency assumptions include a yen-to-US dollar rate of 1.22, and a US dollar-to-euro rate of 1.11. Which would spot rates at the end of Q2.

We expect the CAM related revenues to decrease by about $50 million in 2015 compared to 2014. And we have slightly lowered our guidance for CapEx spending, and expect that CapEx could be up to $40 million in FY15.

From a tax perspective, we expect a non-GAAP tax rate of 25% to 27% in the second half of 2015. I would also note, that at this mid-year point, we expect Q3 to be weaker, and Q4 to be stronger than we previously forecast.

We expect that Q3 operating profit in EPS will be both flat to down year over year. And for Q4, 2015, we expect that as much as 40 to 50 basis points of our full-year non-GAAP operating income will be generated in the fourth quarter.

So I will close by stating that there were a number of positives for Bruker in the second quarter. We generated good organic revenue growth in both the CALID and NANO Groups, while BioSpin showed a nice sequential improvement in revenues from Q1, 2015. We've expanded our non-GAAP operating margins by 90 basis points halfway through the year, and we're well-positioned to deliver our full-year guidance for the full year.

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

Jamie, please assemble the Q&A roster.

(Operator instructions)

Brandon Couillard, Jefferies.

Thanks, good afternoon. Tony, just on the gross margin buckets, could you quantify the impact of the tesla magnet's shipment the effect of it on gross margins in the second-quarter? And just walk through the main buckets for me in terms of the gross margin change year over year, particularly around mix would be helpful.

Yes, hi, Brandon. As you know, we don't disclose profitability of individual transactions. But we called out the 21 tesla because it generated both growth in operating margins that were well above our corporate average.

So we're not going to quantify the much higher effect on our profitability would have been in Q2. But suffice it say, that both our gross and operating margins would have been significantly higher if we excluded the effects of this deal. From a -- (technical difficulties)

Branded, did that answer your question?

Yes, we can follow up off-line. But the -- I guess the second question for Frank or Tony. Could you elaborate exactly on NMR orders trended in the second quarter? And to Tony's new and final comment there in terms of the heavier weighting towards the fourth quarter. Exactly what is that attributable to, and how much visibility do you have into that dynamic?

Yes, this is Frank. So, Brandon, first-quarter NMR orders were stronger than second quarter. But we had some very strong orders that came in in early July that had shifted out of June. But nonetheless, the orders for the first half of the year in NMR or in the MRS division were really very satisfactory. What comes in now mostly will go into next year, except for some smaller systems.

Then in terms of the second half dynamic between the third and fourth quarter, could you elaborate on what that might be attributable to and which business units?

I think it's also primarily -- not only the Bruker BioSpin group. It just turns out that even on site readiness a number of sites just had shifted into Q3 or Q4.

And so as we reassessed our backlog and our likely revenue picture, we did notice that there is also to some extent in the other divisions in the other groups that there is a little bit more of a shift from Q3 to Q4. So it will be a little bit more Q4 loaded than what we had anticipated, and we just wanted to raise that as an issue.

All right, thank you.

Tim Evans, Wells Fargo.

Hi, thank you. Wanted to go back to the NMR order commentary. Frank, would you willing to put a little color around it thinking about H1 in aggregate, you said orders were good. Are we talking growth of high single digits, is it better than that, maybe a little worse than that?

A little bit better than that.

Okay. Great. Also wanted to make sure that I --

It was in the low double digits. Order growth in MRS and NMR in the first half of the year, year-over-year was in the low double digits. Keep in mind that last year's orders were quite weak.

Got you. That's very helpful. And how much of that is the less discounting or pricing, however you want to characterize that?

Some transfer of orders from [Adulent] that we were still able to differentiate in last year's fourth-quarter and first quarter. And increasingly so, that becomes more difficult because now there's no more previous Adulent orders that had got canceled and get placed with us. So, no, that category and the differentiation will be more difficult to see going forward.

Some of it has to do with the reduced discounting. I'm very pleased with the way our discounting program is going in NMR. I think we're reaching our objectives there, and I see good discipline in the team and reasonable acceptance in the field.

And then, of course, there's some underlying strength to the market. It's not roaring back, but it is clearly getting stronger compared to last year. So those three items together maybe without you really trying to quantitate them exactly, all have contributed to that encouraging new order bookings growth in the first half of the year.

Great. Thank you.

Steve Willoughby, Cleveland Research.

Good evening, and thanks for taking my questions. I guess first, Frank, could you maybe comment a bit on revenue versus orders in areas outside of BioSpin or NMR?

Okay.

I'm just trying to see if backlog was continuing to grow, in the other segments of the business as well.

Yes, I don't think there were such significant discrepancies because the lead times are not as great. So of course, they may need two quarters, and for some products less than one quarter, for some other small or benchtop products to turn orders into revenue. But the trends are more parallel than they are in BioSpin, whereas in BioSpin we had order growth because of last year's weak orders, we had revenue decline.

AXS was quite good; I think that's worth noticing. Because that was a little bit of a concern last year. And then there's some sort of these discrete changes. Last year, we had some very strong detection orders, couldn't get export licenses. This year, we've delivered them. The orders this year aren't quite as strong, but we got some other good orders on explosives trace detection for European airports.

So a little bit anecdotal, I don't want to get lost in the anecdotes here. There's nothing, no major trends here to hang your hat on, so to speak. The more noticeable trend would then be bio.

Actually I will add to that, that at BEST, we had very strong orders and an 8% organic revenue decline. Some of that was because of the big ETER contract just coming to an end last year. And some of that simply had to do with some business also shifting into the second half of the year.

That's helpful. And then I just, secondly, if you could just provide any more color on what you're seeing going on in China these days?

Yes, I think we're seeing what everybody else is seeing. China is all right. China, Europe, and North America are all right for us. Latin America is a little bit all over the place, India, Middle East, Africa is weaker.

And clearly, Japan and the rest of APAC outside of China are generally weak. So China, sorry that was a longer answer. But China is all right, with mid to high single-digit growth depending on what business I look at.

And quite admittedly, it's also with uneven within Bruker. Because even two quarters don't make a year for us, so there's just some fluctuations on top of the trends.

But short answer would've been China is all right. Mid to single-digit growth or slightly better. But not as much of a growth engine as it has been in the past.

Derik de Bruin, Bank of America Merrill Lynch.

Hello, good afternoon.

Hello, Derik.

Hey, could you talk a little bit about the parsing of the organic revenue growth in Q3 and Q4. You said a little bit weaker business in Q3, a little bit stronger in Q4. Just a little bit of color on how you see organic trends.

Yes, Derik, so as we look out over the course of the rest of the year. Actually when we look at Q3, we actually see reasonably good organic growth. I think the commentary we provided was more in the context of operating portability, where the large ramp that we expect to see in Q4, is expected to generate quite a bit of operating leverage and as a result, much higher profitability in Q4 versus Q3.

Great. Thanks for the clarification on that. And how should we think about the tax rate for the full year? Are there any more discrete items?

Derek, no. So, we are guiding to 25% to 27% for the second half. And so just adding that to the first half, what we achieved 18.3%, would give the full-year rate of about 23%.

And when you look at the divestitures, you've done about -- it looks like about $24 million or so for the first half of the year. Is the bulk of the divestitures now, is it mostly a Q3, or is there some Q4? How should we think about the divestiture for the remainder of that $24 million or $26 million?

Well we had two divestitures last year at CAM. One is I recall, I don't have it front -- all at my fingertips, but one was late in Q3 and one was in Q4, if I recall. So it will still have an inorganic effect in Q3, and a little less in Q4.

Great. And then just one final question. It looks like AXS was doing a bit better. What was driving that? Just given that I would assume that metals and mining are still pretty choppy.

Yes, we are focused a lot on improving our execution in the AXS business. So just being smarter about understanding when our customers are ready to accept our deliveries, and just some revenue processes been a focus and has provided some incremental benefits.

Dane Leone, BTIG.

Hello, thanks for taking the questions. Is there a way you could give a little bit more clarity regarding the outlook for the gross margin line for the remainder of the year? As it plays into your guidance, obviously, a lot of moving parts in the first and the second quarter here. Even directionally, flat, up, down, I think would be pretty helpful as we try to narrow in on what you guys are thinking.

Yes, Dane, this is Joshua. So as you know, that gross margin is going to fluctuate quite a bit quarter to quarter, particularly because of the larger deals. I think the way that you should think about it, is we are definitely planning for a much stronger gross margin in the fourth quarter.

And if you look at where we are halfway through the year, operating margins are up 90 basis points, gross margins are up 80 basis points. So, while we may not keep that ratio as we move through the second half, we might see a little bit more of an impact from operating expenses due to BioSpin. Gross margins are still going to be a big part of the operating margin story for the full year.

Okay. So for the third quarter specifically, if we look back historically, it varies Q on Q between the second and third quarter. So we don't really have a great trend. Would you tell us to be looking flattish, or in a direction up or down?

It depends a little bit on exactly what, including some big-ticket items that may or may not fall into Q3. So for Q3, we're very conservative on gross margin. For Q4, I think it will be strong.

Okay. And then, in terms of the FX line. Are we expecting that same type of level that we saw on a translational losses in the back half of the year in terms of what we saw for the second quarter?

Well, more so in Q3 than in Q4. By Q4, it starts to become less so, because the big changes in the exchange rates last year occurred roughly between Q3 and Q4.

Okay. And --

Q3 is still a big effect, Q4, less so.

And in terms of the impact on the operating expense line from FX. Was there any demonstrable difference in 2Q versus what we saw in 1Q?

No.

I think that's -- no, that was pretty consistent, and yes. Pretty consistent.

(Operator Instructions)

Doug Schenkel, Cowen and Company

Hey, good afternoon. I guess let me just start with a couple more clarifying margin questions. Last quarter, you indicated that you expected gross margin to be the key driver to operating margin expansion. It sounds like that's still the case.

I just want to be clear. Has anything changed in terms of what you've embedded into your full-year guidance for gross margin? Or are you still on track to what we've been talking about all year?

Well we're basically on track. So far, we are at 90 bips operating margin expansion. And we're aiming at 100 bips or higher.

And so I think that's on track. The majority of that will come from gross profit margin improvements. Although as Joshua had indicated, that was probably a little bit stronger in the first half, whereas in the second half, we may also expect a little bit more expense leverage.

Okay. The reason I'm asking the question, it's probably obvious. But the reason I'm asking the question is to just make sure that you are on track with all the initiatives that you have been putting into place and plan on putting into place that affect the gross margin line. So I just want to be crystal clear here, nothing has changed there?

No, I think we really are on track. But on top of that trend, you just see some noise and fluctuations from quarter to quarter. And we had pretty good mix in Q1, we had weaker mix in Q2.

We really think there is no trend here. We think, first of all, taking a couple of quarters together gives you a better indication. And I'm really very convinced that we are on track, but on top of that you'll see some fluctuations.

Okay.

To add one thing to that, Doug. The quality in the backlog that we're seeing close in the first half of this year is clearly much better than what we've seen in the past.

And we've got better control and visibility into quotations, particularly in BioSpin than what we've had, and that's going to show up. But it's going to take a good 9 to 12 months for the time those BioSpin deals are closed to show up in revenue.

Okay. And that's actually probably a good segue to my second margin question. So as you guys have talked about a few times, operating margin expanded 90 basis points year over year in the first half. Obviously, mathematically to get to your full-year guidance, margin would need to expand over 100 basis points in the second half.

And you actually pushed out I think a lot of the expansion into the fourth quarter. So, we're talking about some pretty material improvement late in the year. Could you just provide a little bit more detail on what gives you the confidence that you can hit this target?

Is it what you just mentioned, Joshua, benefits from BioSpin backlog improving and restructuring activities that have been ongoing? Is it improving order visibility in other areas, pricing, or something else? Could you maybe just give us a better understanding of how we can be confident in you guys hitting this target?

First of all, I will say, we're very much aiming for that. There is risk. We have a strong Q4 coming up, so that is not without risk.

Second of all, this is our plan and we're sticking to our guidance. We think we have a very good shot at making that.

And we had good bookings. NANO and CALID have performed well. BEST had a slow start, but will do better in the second half of the year. The weak order bookings from B bio and NMR in particular for last year, they're starting to -- that's showed in the first couple of quarters. It will still show a little bit in the third quarter.

But we are beginning, towards the end of the year and into next year, begin to benefit from the much stronger bookings in NMR in the first half of the year. As a bit of a downer, the pre-clinical imaging demand and orders indeed have been weaker and the demand environment there looks weaker after a very strong last year. So overall, it's not without risk, but overall, we also believe that we have a very good shot at meeting our goals.

Okay. Thank you.

Tycho Peterson, JPMorgan.

Thanks. I guess on NMR, can you give us a sense, Frank, of the realized price increases that you are actually getting in the field? Is 10% the right bogey, or are you able to push through a little bit more?

Yes, for orders that we're receiving in the last three or four months, maybe not right from the beginning of the year. While there is some spread, obviously, depending on -- from deal to deal, overall that's about the right number.

And are you baking anything in for IDP NMR this year? I know you've talked in the past about a $60 million to $80 million opportunity. Because you're only that (inaudible), 16 --

Nothing this year yet. That's all. We're beginning to have good discussions and fundraising discussions. But the order cycles, until that ramps up and until there's more funding, particularly also in the US, will take a while.

So in terms of revenue, we're not baking anything into this year. We may get some orders that are partially IDP related. They're not likely to be a lot of pure IDP systems, because they're always these very expensive systems are used for multiple applications.

But we see a lot of interest. We think that it will mostly turn into orders next year, maybe a little bit of revenue next year. And really, it will be mostly a revenue story in 2017, because those are long sales cycles and then long delivery cycles.

But it's definitely a lot of good activity. And I think simply, the science there is compelling and the scientific and medical research opportunities are really quite compelling in some of the most pressing and most expensive disease area.

And then for CALID, you didn't talk about a lot MALDI Biotyper in your comments. But you've got the expanded claim, you've got the TE Marks Tissuetyper. And can you maybe just talk about how we think about it in the back half of the year given some of the announcements in the first half of the year?

Yes, so second quarter, not unlike the first quarter. Double-digit growth, and I believe that's an ongoing trend. I don't have specific color on that for the second half of the year.

But first quarter and second quarter are both double-digit growth in Biotyper. We expect that momentum to continue, given the strength, the new claims, the China expansion here. But also just additional consumables and after market offerings. So it looks pretty healthy.

Okay. And then a quick one. The GC service business, you are still hanging onto that, right? I thought at this point that you might be -- there might be a discussion Tech Comp about whether they would pick that up?

Good memory. Yes, we were having some discussions, but it looks like we're going to hang onto it, yes.

It's rather insignificant. I don't even remember the number right now. But it's clearly south of not $5 million a year for us, and that will decline over time. But it looks like we're going to hang onto it.

And then just with everything going on in the CFO transition, are you still considering both on M&A? Or how do we think about your appetite?

Yes, appetite I wouldn't say -- I wouldn't call it big appetite. Because most of the BEST expansion and growth acceleration opportunities with good margins, and good ROIC, are internal or internally going into adjacent markets. But every year it's possible that we do one or two smaller bolt-on acquisitions.

Nothing larger on the horizon, nor are we seeking any -- nor do we have much appetite for that. By the way, that has nothing to do the CFO search, that's probably the same that what Charlie would've told you six months ago.

Isaac Ro, Goldman Sachs.

Good afternoon, guys, thank you. Wanted to ask a question about free cash flow. I don't recall you guys giving a full-year guidance on free cash flow, but was curious how we should consider that versus last year performance just given the 2Q items you mentioned? And if you could put a little more color as to why free cash was negative this quarter, that would be helpful.

Yes, hello, Isaac. It's Tony. You're right, don't give guidance for free cash flow, but I think we guided to it would be higher than this year. And that continues to be our guidance and our objective.

As you know, Q4 is a very significant quarter for us. And if you look back, we generate most of our cash flow in the fourth quarter. And that will continue this year.

The Q2 negative cash flow, I wouldn't read anything into that. If you look at Q2 last year, it was our lowest cash flow generation quarter. It was positive, it was $5 million. But it's negative $9 million this quarter. Nothing to read into that, it's just timing of when the business came in and some vendor payments as well.

Okay, that's helpful. Thank you. And just a follow up on the --

Isaac, just for the first half, the cash flow was really identical to last year, within $2 million. So it's no big trends there. But some fluctuations.

Got it. Thanks, Frank, I appreciate that. Just one follow-up beyond the comments you made in BioSpin regarding restructuring. I was just hoping you could give us a little bit more color on the types of changes we should expect to see either in terms of operations or physical plan. Any color on the nature and duration would be helpful.

Well I think we've talked about a little bit before. So in total, the right sizing and footprint alignment in the Bruker BioSpin group affects roughly about 8% of the staff. We had begun that in the first half of the year, and implemented that everywhere outside of Germany and outside of France.

We then got the French approvals a little bit earlier, I think in May, and the approvals in Germany very late in the quarter in June, end of June even. And now we can implement what we had intended to do in the second half of the year. Some of it will go a little bit into Q1 of next year, but I think we'll be done by the end of Q1 of next year.

Included in that and really not separable is, that we're looking to close one of our German factories in the [Callsgrow] area. And where we have more than one in that same area, and transfer the products. Which are primarily magnets of ultra high field magnets, and resistant permanent magnets, and so on, to other sites within the group in Germany, in France and in Switzerland.

So it will take out one factory by the end this year, or by Q1 of next year. And obviously, the factory overhead costs that go with that, and it will also lead in the process to a little bit more outsourcing. So maybe that's the detail that you were looking for, and it gives you a little bit of a flavor of what we're doing.

Yes, that was great. Thank you very much. And if I could just sneak in one more. Could you offer an update on the process around the CFO transition, appreciating the ongoing interim. But just curious about where your head is at right now in the process. Thank you.

Yes, not only because he's sitting here, we have a very capable Interim CFO with Tony. And we kicked off those search about six weeks ago, with a very reputable major international search firm. We're getting into the first round of discussions with initial candidates, and other candidates are still reviewing our specifications and so on.

So it's still pretty early days, and what I had suggested six weeks ago is that it would probably be a six month process. But of course, it could accelerate a little bit, it could take a little longer. So it's really perhaps better to say it's a four to eight month process, is my best estimate, and we're getting into the first round of discussions now.

Dan Leonard, Leerink.

Thank you. I was hoping you could elaborate a bit more on the share repurchase program. 1% is a bit of a nominal amount. And I'm curious, is this is a trial balloon and we could see something bigger down the road, or is this a number that you are -- we should expect going forward?

No, this is different from other companies, I would say, Dan. I think we're just not a major share repurchase, but we really our Board decided to offset the dilutive -- the otherwise dilutive effect of any equity options restricted share type of compensation.

And basically, that's why we have that annual 1% authorization. So I would not read anything that's going to go up or something like that into that. I might, I cannot rule that out either. But it really was intended to deal with the otherwise dilutive effects of our option and other equity programs.

Okay. And my follow-up question is for Tony. The tax rate in the quarter, I realize benefited from a one-time item. But it sounded like the driver of that should be somewhat sustainable if you're moving production to Switzerland from the US. Can you speak to the sustainability of the tax improvement?

Yes, Dan, that's not sustainable. What basically happened was, we sold a small business to one of our production sites outside the US, and we were able to absorb the tax that was due on that with NOLs that we have. And we're in an NOL loss position.

So basically, the $6.5 million is just a reversal of a valuation allowance that we had against our NOLs. So that's clearly a one-time event.

We'll benefit from the business going forward, tax at a lower tax rate in Switzerland. But there is nothing that would affect our full-year rate other than the one-time event in Q2.

Sure, but we should expect a somewhat lower tax rate going forward, right?

Yes, it's like I mentioned before, we're expecting 25% to 27% Q3, Q4. And you can do the math with what we actually incurred in Q1 and Q2, and that should be the rate you would use.

So we're always looking for tax planning opportunities, and in particular, this one came around totally naturally as part of our site consolidation anyway. It does have a discrete effect, it does have even a little bit of a longer-term rate effect. But it's not very material, and in any case, the Q2 tax rate, it was very really unusually low because of that discrete one-time effect.

But we're clearly looking at more tax planning. So over time, we hope to have other creative ideas that especially as they are part of what we're doing anyway to improve the operations.

Ross Muken, Evercore ISI.

Good afternoon, guys. Just in terms of picking on Isaac's question on Charlie's departure. I'm just curious, between that and the transition at BioSpin, how the organization as a whole has responded to the changes? And obviously, you've brought in a lot of talent the last few years; it seems like you're retaining most of it. So I'm just curious if there was any follow through post Charlie leaving?

No, I would have to say that was also a discrete item in Q2. I really think that's not indicative of anything, other than that Charlie had a very good opportunity elsewhere. And so, it's really not an organizational or pervasive item here, it's really a discrete item in Q2.

And just in terms of how the broader organization has backfilled and responded. Obviously, Tony is filling in the CFO duties. But in general, in terms of some of the bigger picture restructuring and other activities you were working on. I'm just curious how that's been staffed in the interim, in terms of whatever response -- other responsibilities fell under him.

Well, there was staff that we were staffed before by the people who are executing that, and that was actually neither Charlie nor myself. Of course, we're the architects of that. And we're driving -- well we're helping make the strategic plans.

But the execution never took a -- didn't take a seconds break, these things are just ongoing, and some people in the organization and the management team using our better management processes are executing that as we had planned before.

That's good. And maybe lastly, you provided some comments in some of the businesses. But I'm curious if you look at -- maybe you don't have the clarity -- if you look at or you spoke to folks in the organization who touch more of the economically sensitive businesses, whether it's AXS or NANO, et cetera that are either semi or industrial base, how do you think, those trended over the course of the quarter, and into now Q3?

There are two things that are going on. The Bruker NANO group that has a little bit more of an than industrial exposure, metals, mining, minerals on the one hand. Things follow that, automotive, et cetera, and as well as micro electronics, semiconductor data storage. Those markets are not strong, they are weak. So they have a weak macro backdrop. Not surprisingly, more of their growth has been in some of the research, governmental, and academic research areas.

They've of course also added product lines that are more likely to be sold into academic or government or other medical school type research settings, such as the fluorescent microscopy, cell biology, and research lines. So they're coping. But overall, it is true that even though they've returned to revenue growth, to organic revenue growth in the Bruker NANO group, it is still overall subdued because of the industrial weakness.

Thank you, Frank.

Dan Arias, Citigroup.

Good afternoon, guys, thanks. Frank, just a follow up on the Biotyper in the second half of the year. When are you thinking you could have antibiotic sensitivity capabilities there? I think you mentioned at ASM is that could be end of year, so just curious if that's still the thought?

So antibiotic susceptibility, that's the Holy Grail. That would be some years away if that is feasible. Specific antibiotic resistance, mechanism testing, I think could become a product by the end of the year and begin to contribute next year.

Again, presumably starting in Europe, and then over time, probably also in other countries. So it's really a 2016 story, and it is the more selective resistance assays as opposed to some broad sensitivity or susceptibility testing. Just to keep things in perspective, because they have different market size implications.

Okay. Thanks. And then, Tony, you mentioned that you are learning some things from having your reporting system in place. Wondering if you can elaborate on any specific takeaways there? I feel like that would be a helpful insight. Thanks.

One of the bigger things is we isolate performance versus currency impacts on our business. So discussions in terms of insights and what's driving the business is more around the operating elements, and not as much around currency fluctuations and that type of thing.

Anthony Sassali, William Blair.

Hey, guys. Thanks for taking my call, and obviously I'm calling in for Amanda Murphy. Just real quickly, as you've been more broadly focused clearly on innovation, I guess what are the expectations for R&D as a percentage of revenue?

And actually, even along the lines of capital expenditures? I guess like can we -- should we be expecting that to be an increasing as a percentage of revenue? I guess what are your overall thoughts?

No, I think we just want to manage it. It's not going to decrease rapidly, because I think we're comfortable at that around 10% level. It's now much more dynamically allocated.

Some areas have that more growth, profitable growth potential and margin potential. There might be pockets of the Company that are at 12% to 15% R&D spending. There are other pockets of the Company that may be at 6%, 7%, and that's a good thing.

In the past, it was more evenly distributed, and now it's more according to what's strategic and where do we expect the best margins. So I think, for the next two to three years, I think that's what we expect to get the most out of that, improve our productivity of our R&D, and deploy it very strategically.

That's really helpful. And so I'm trying to also gain a better understanding of the magnitude of the BioSpin order growth. And I know maybe we've already touched on this.

But what is specifically driving demand? Is it more of the Adulent customers, or this underlying demand? And also on the same topic, what does the NMR demand weakness, when from 2014 does that actually flush out?

Well, it started getting better in Q4 of last year. The first two quarters, a bit uneven, but have been good. And then a good strong start into Q3. It's as I said earlier, a couple times, it's really about the three elements. Some pickup from Adulent, some pricing discipline, and some underlying recovery.

Now, some of that will show in Q4 of this year. Although the margin improvement from the pricing will be mostly a 2016 story, because that started really -- it began -- it was starting to be implemented along with systems to control it in Q1. But that really probably really became effective at the end of Q1. So that's a little bit more granularity, but basically those are the three drivers.

Eric Criscuolo, Mizuho.

Good afternoon, just filling in for Peter Wilson tonight. On the weak Japanese market, could you quantify maybe how much of an impact that was, and any thoughts of when that may improve?

Yes, the trend, Eric, in Japan was pretty much almost exactly what we saw and communicated in the first quarter. So we saw Japan down double digits, and we don't see any signs that Japan is going to materially improve during the course of this year.

Okay, great. Thank you. And then I guess just in the end markets in general, or however you want to slice it. Can you maybe call out anything in particular that was significantly better than you had expected? Or something that was worse than you guys had thought that maybe would move the needle, or is something that we could look forward to going forward?

Well, I think the two things that were a little bit of a surprise was that the pre-clinical imaging market for the first half of the year was weaker than we had expected. And maybe not a fully surprise, but we were pleased that the MRS or NMR owners continue to be healthy.

Thank you.

And, ladies and gentlemen, at this time and showing no additional questions, I would like to turn the conference call back over to Joshua Young for any closing marks.

Thank you very much, everybody, for joining us this evening. If you're interested in meeting with Bruker management, we'll be presenting at the Wells Fargo Health Care conference during the third quarter. And we also invite you to visit us at our headquarters here in Billerica, Massachusetts. Thank you for your attention, and have a good night.

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