Bruker Corp (BRKR) 2016 Q2 法說會逐字稿

Good day, and welcome to Bruker's second quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Stacey Desrochers, Treasurer and Interim Director of Investor Relations for Bruker. Please go ahead.

Good afternoon. I'd like to welcome everyone to Bruker's second quarter 2016 earnings conference call. I am Stacey Desrochers, Treasurer and Interim Director of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO; Tony Mattacchione, Bruker's Senior 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-non-GAAP financial statements is included in our earnings release and in our webcast presentation.

Before we begin, I'd like to reference Bruker's Safe Harbor statement, which is shown on slide 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 to our outlook as of today, August 2, 2016. Consistent with 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 2016 financial results in [November].

We will begin today's call with Frank providing a business summary. Tony will then cover our financials for the second quarter of 2016 in more detail. Now I'd like to turn the call over to Bruker's CEO Frank Laukien.

Thank you, Stacy. Good afternoon, everyone, and thank you for joining us on the call today. I will begin today's earnings presentation on slide 4.

While Bruker continues to execute on its operational improvement initiative, the demand recovery that we needed to see in the European academic market and in global industrial markets in order to meet our previous 3% full-year 2016 organic revenue growth guidance did not occur. Moreover, we were disappointed by lower MALDI Biotyper sales in China and the US in the first half of 2016.

We are pleased with the revenue growth and strong performance of our Bruker BioSpin group, our optics business, and the semiconductor metrology business, which now includes the Jordan Valley business that we acquired in Q4 of last year. Overall, we now expect full-year 2016 reported revenues to be approximately flat with 2015, and down minus 2% on an organic basis.

Accordingly, we are accelerating various operational initiatives, and are taking selected right-sizing and additional cost actions to meet our 2016 operating margin expansion, and EPS growth commitments, and to position ourselves to continue our margin expansion in 2017 and beyond.

We will continue to focus investments in profitable growth in our four strategic areas of: One, life science molecular research; two, applied and pharma markets; three, nano-analysis, microscopy, and material science; and four, clinical research, microbiology, and diagnostics.

We are pleased that we are seeing the benefits of the operating leverage we gained over the last three years from our transformation initiative. We managed to expand our non-GAAP gross profit margin and our operating margin by more than 100 bips each in the first half of 2016, compared to 2015. We also increased non-GAAP EPS by plus 28% in the first half of 2016, compared to the first half of 2015, even with flat reported revenues.

Looking now at the second quarter, we reported revenues of $372 million in the second quarter of 2016, a reported decline of minus 6%, and an organic decline of minus 9% year over year, which was partially offset by plus 3% growth due to recent acquisitions. The revenue decline in the second quarter was driven primarily by academic funding delays in Europe, weakening industrial markets worldwide, and lower MALDI Biotyper sales in China and in the US.

Our new semiconductor metrology business had a very good quarter, in part due to the acquisition of Jordan Valley semiconductor in Q4 of 2015, and in part due to the accelerating adoption of x-ray metrology tools by major customers.

In Q2, our non-GAAP gross profit margin expanded 250 bips year over year to 47.6%, driven primarily by gross profit improvement in the BioSpin group, and in our semi conductor business, with gross profit weakness primarily in the Bruker AXS and Bruker Daltonics businesses.

Our Q2 2016 non-GAAP operating margin was 10.8%, flat with Q2 of 2015, despite the revenue decline due to the gross profit improvement and continued operating expense discipline. We reported non-GAAP EPS of $0.20 in Q2 of 2016, which represented year-over-year growth of 5%. Lower share count contributed to this EPS increase, despite lower operating profit.

On slide 5, I move on to our performance in the first half of 2016. As you will see, our revenues were essentially flat with those in the first half of 2015, with an organic decline of minus 2.2%, compensated by plus 2.3% portfolio growth, due to our semiconductor business acquisition.

Further improvement and growth in operating margin of 100 each was due to good performance by the BioSpin group, our optics and semiconductor metrology businesses, and a margin recovery in the Bruker nano-surfaces business, due to previous cost-reduction action.

The first half of 2016 operating margin expansion, along with a favorable tax rate and lower share count, contributed to a 28% increase in our non-GAAP EPS to $0.41, from $0.32 in the first six months of 2015.

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 for the first half of 2016.

Let me begin with the BioSpin group, which had a strong first half, and delivered mid-single-digit revenue growth and continued margin improvement. NMR continued to drive most of the improvement, due to higher volume and pricing, favorable product mix, and the 2015 BioSpin restructuring and factory consolidation.

In the first half of 2016, BioSpin also saw good demand for NMR applied market products. For instance, the NMR food screener and our NMR clinical metabolomics research systems, as well as for our new service and aftermarket offering called LabScape.

Our CALID group reported a revenue decline in the low single digits, primarily due to Daltonics, driven by delays in European academic funding, as well as lower MALDI biotyper sales in China and the US. We initiated various cost actions at Daltonics in the second half of 2016 and for 2017. In the first half of 2016, Daltonics introduced some exciting new products, which we expect to begin to move the needle next year, as these profitable growth drivers pick up momentum.

Our optics business, part of the CALID group continued to grow and expand its margins further, solidifying its recovery from 2015.

Moving on to slide 7, the Nano group experienced weakening industrial demand and a delay in European academic funding in the first half of 2016. This resulted in a low-single-digit revenue decline for the Nano group in the first half of 2016. Our AXS business was most affected, with lower revenue for the first half of 2016, also caused by European funding delays and weakening industrial demand. Right-sizing and other cost actions are underway at AXS.

Our Nano-surface business revenue declined, but with strong margin improvement in the first half of 2016, due to previous cost actions in this business. We were pleased with increasing demand for our unique fluorescence microscopy products for cell and neurobiology research.

Finally, our best segment revenues were down in the mid-single digits, with a decline in margins as a result of the phase-out of the Daisy and [ETR] multi-year projects, and pricing pressure for superconducting wire. At Best, our superconducting wire business saw good revenue growth, due to their product's high performance and quality, which has led to healthy long-term contracts and backlog. We made further technical and quality progress with Best's high-temperature superconductor or HTS technology, and expect to commence commercial deliveries in Q4 of 2016.

Moving on to slide 8, during the second quarter we participated in several important customer and industry conferences, including Analytica, ASMS, and the Metabolomic Society conference. At Analytica, we introduced a number of new instruments for the applied pharmaceutical food and environmental market, and for nano-analysis, microscopy, and advanced materials research across the majority of our divisions.

I will focus on the Senterra II Raman microscope here, which is designed to deliver excellent sensitivity compared with -- combined with high-spectral and imaging performance. Due to its high degree of automation, compact size, and efficient work flow, it is an ideal tool for solving real-world tasks in the quality control labs for forensics, pharma, materials and life sciences.

In the middle of the page, you will see that at ASMS we unveiled an entirely new mass spectrometry technology platform, deemed the most important mass-spec introduction at the ASMS conference. It is the innovative timsTOF, which combines very high IM mobility resolution using our proprietary trapped IM mobility spectrometry technology called TIMS, with our ultra-high performance electrospray QTOF mass specs, for the optimal separation and analysis of unresolved compounds. We're very excited about this product, and believe it will be a major growth driver for years to come.

Additionally, at ASMS we launched the all-new Rapiflex MALDI-TOFTOF, which is well-suited for detailed protein characterization in life science research, and importantly, biopharmaceutical laboratories. The Rapiflex MALDI-TOFTOF is an exciting new product, taking MALDI technology and also adapting it for mass-spec imaging, to be used by an entirely new group of pathology researchers.

Finally, we also used our revolutionary -- excuse me, we also based our revolutionary MALDI PharmaPulse label-free ultra-high throughput screening platform for direct discovery on the Rapiflex mass-spec system, and expect good orders by pharma companies in the second half of 2016. We are very excited about these new instruments, and expect them to add to our profitable revenue growth in 2017.

All right, moving on to slide 9, Bruker's key priorities for 2016 remain unchanged from last quarter, except that we are accelerating operational initiatives, and taking various cost-reduction actions. We are making good progress on each of the key priorities.

During the first half of 2016, we expanded our non-GAAP growth and operating margins over 100 basis points each. In January, we moved to a single version of SAP, and are working on automating and harmonizing our business processes.

As I described earlier, we introduced a number of products in our four strategic growth areas, which are focused on customer needs. Additionally, we continue to investigate bolt-on acquisitions which fit our focused strategy, increase our portfolio, contribute to margin expansion, and have a good return on invested capital.

A good example was the Bruker Nano acquisition of a mineral liberation analysis software business in Australia in the second quarter 2016, as we seek to also expand software, consumables, and after-market business opportunities in all of our businesses.

To conclude, overall at the midway point in 2016, we are pleased that our transformation has enabled us to make progress on our margin and EPS goals, despite acknowledged demand challenges in 2016. We now expect our reported revenues for the full year 2016 to be approximately flat compared to 2017.

As a result, we are taking the actions to support our ongoing margin and EPS expansion priorities in 2016 and 2017 that I already mentioned. While we are taking these cost actions, we will continue to invest in our promising strategic initiatives and new high-margin products, which are expected to re-accelerate revenue growth, and drive further growth and operating margin expansion in 2017 and beyond. Significant work remains ahead of us in order to achieve our full-year operating goals.

With those comments, I will leave it at that. Let me turn the call over to our CFO Tony Mattacchione.

Thank you, Frank, and good afternoon. I will now provide some additional details on our financial performance for Q2 and the first half of 2016, starting on slide 11.

Starting with overall financial performance for Q2, as you saw in the press release, we grew non-GAAP EPS 5% to $0.20. GAAP EPS was $0.09, which was down $0.04 from Q2 last year.

On the top line, our reported revenue was 6% lower year over year. Q2 reported revenue includes a 9% organic revenue decline, 3% growth from the Jordan Valley acquisition, and no impact from foreign currency translation.

Are non-GAAP operating margin of 10.8% was the same as 2015, despite the negative leverage we are dealing with on the lower volume. The BioSpin group in our semiconductor metrology business, however, provided a strong tailwind to gross margins in the second quarter of 2016.

Free cash flow was a $8.9 million in the second quarter of 2016, which was an $18 million improvement from the same quarter last year. Net cash declined 40% year over year to $77.4 million at the end of the second quarter of 2016, as we continue to buy back our stock in accordance with our November 15 share buy-back authorization. We also declared and paid another dividend of $0.04 per share in the second quarter of 2016.

Now let me share more details on our second quarter 2016 performance. On slide 12, I show our year-over-year revenue bridge for the second quarter of 2016. Our revenue declined 6.1% in the quarter. The 3.1% portfolio improvement from the Jordan Valley acquisition was more than offset by the 9.2% organic revenue decline. Changes in foreign currency translation had no impact during the quarter. As Frank mentioned, European academic funding delays in the weakening industrial markets were the primary drivers for the decline.

Geographically, during the second quarter Europe and Japan showed double-digit revenue declines, due to delays we are seeing in the academic funding environment, and further industrial market weakness. North American revenue grew in the double digits, in part due to the strong semiconductor metrology revenue we experienced in the quarter.

On slide 13, I show our second quarter 2016 profit and loss statement on a non-GAAP basis. Our Q2 2016 non-GAAP gross margin came in at 47.6%, which was a 250-basis-point increase over last year. The Jordan Valley acquisition added 65 basis points to the increase, and foreign currency again had no impact. Adjusting for these effects, the increase was primarily the result of the NMR revenue growth, price increases, operational improvements, and favorable product mix. These effects were offset by the lower Nano and CALID volume.

Our Q2 2016 operating expenses increased about $1 million year over year. Adjusted for Jordan Valley expenses of $3 million, Q2 2016 operating expenses were down $2 million year over year. In the second quarter of 2016, and as a result of our Jordan Valley acquisition exceeding expectations, we increased our earn-out accrual, which resulted in a negative $0.05 effect on GAAP EPS.

The net result is our non-GAAP operating profit margin in Q2 2016 was flat at 10.8% compared to last year. Now looking at our results below the line, net interest expense of $2.9 million was essentially flat with 2015. Translation of foreign-currency-denominated transactions added $3 million to other income compared to Q2 2015, and this was largely due to a reduction in our foreign currency exposure.

Our Q2 2016 non-GAAP tax rate of 12% was 170 basis points higher than last year's Q2 tax rate. Bruker's tax rate was unusually low for both Q2 periods because of the conclusion of various tax audits, the reversal of valuation allowances, and the effects of tax bleeding. Weighted average diluted shares in the quarter were 162 million, down 7 million, primarily as the result of the share repurchase buy-backs we completed since the beginning of the program in November 2015. Finally, non-GAAP EPS of $0.20 in Q2 of 2016 was an increase of $0.01, or 5%, from Q2 2015.

On slide 14, I show the year-over-year revenue bridge for the first half of 2016. Our revenue was essentially flat with last year. The 2.3% portfolio improvement from the Jordan Valley acquisition was offset by a 2.2% organic revenue decline. Changes in foreign currency also had no impact in the first half of the year on our revenues.

In the first half of 2016, our BioSpin group grew in the mid-single digits due to both the volume and pricing effects already discussed, as well as the Q1 acceptance of the 1 gigahertz NMR system we disclosed. Including Jordan Valley, B-Nano revenue declined in the low single digits, as did CALID's revenue.

Geographically during the 2016 first half, Europe and Japan showed double-digit revenue decline due to the same factors affecting the second-quarter comparison. North American markets grew in double digits, with all Bruker's businesses growing, except for those affected by the weaker industrial markets. Importantly, China showed approximately a 10% growth in the first half, with most of our businesses showing healthy revenue increases.

On slide 15, I show our full first-half 2016 profit and loss statement on a non-GAAP basis. Our first-half 2016 non-GAAP gross profit increased $6.8 million, and the gross profit margin of 47.2% increased 110 basis points year over year. This was largely due to higher BioSpin volume, price, favorable product mix, and operational improvements. These were somewhat offset by the lower CALID and B-Nano volume.

Our first-half 2016 operating expenses decreased approximately $2 million year over year. Adjusting for foreign currency translation as well as the Jordan Valley expenses of $5 million, first-half 2016 operating expenses were down organically $4 million year over year.

The decrease in operating expenses largely reflects lower R&D expenses, and continued overall expense discipline. The net result is that our non-GAAP operating margin in the first half of 2016 improved by 120 basis points compared to last year.

Our first-half 2016 non-GAAP tax rate of 15% was 320 basis points lower than the tax rate in last year's first half. This had a positive $0.02 impact on our EPS in the first half of 2016 versus last year. This was in part caused by the closing of certain tax audits, valuation allowance reversals, and favorable changes in the expected mix of earnings among our tax jurisdictions.

Finally, non-GAAP EPS of $0.41 represented an increase of $0.09, or 28%, from the last year first-half period. Bruker's lower average share count, which declined 4% year over year due to our share buy-back program, contributed $0.02 to the increase.

Turning to slide 16, we used $13 million in cash in the first half of the year this year. This compares with free cash flow generation of $12 million in the first-half period last year. The year-over-year comparison is affected by an increase in working capital. This is primarily driven by higher inventory levels needed for second-half shipments, as well as higher bonus payments for 2015, and higher tax payments associated with our 2015 cash repatriation.

Our Q2 2016 cash conversion cycle increased by 10 days compared to last year. This comprised the following. Our DIO increased 17 days to 218 days, and our days sales outstanding were flat. This decline was partially offset by the increase in our days payable outstanding, which totaled 41 days, compared to 34 days in Q2 2015.

During the second quarter of 2016, we repurchased 1.2 million shares, spending $34.5 million. Since the inception of the program until the end of the second quarter, we repurchased 7.4 million shares at an aggregate cost of $182.6 million.

As of the end of Q2 2016, we had approximately $42.4 million of the remaining authorization to buy back shares, as part of the initial $225 million share back program. We also paid another quarterly dividend of $0.04 a share in the second quarter of 2016.

Now turning to guidance, we are updating Bruker's guidance for the full year of 2016, as Frank had mentioned. We now expect approximately flat reported revenue, which includes a 2% organic revenue reduction, and acquisition growth of 2%.

Given the negative leverage associated with the lower revenue projections, we are now guiding to an operating margin expansion range of 75 basis points to 100 basis points. Our non-GAAP EPS remains -- our non-GAAP EPS guidance, excuse me -- remains unchanged, in the range of $0.97 to $1.02, because we now expect to release more tax valuation allowances as our expectation for improvement in US profitability will continue.

Accordingly, we are lowering our non-GAAP tax rate guidance to a new range of 20% to 23% for the full-year 2016. We continue to assume a fully diluted share count of approximately 163 million shares.

With regard to foreign exchange rates, we do not expect it to change significantly, or impact our full-year 2016 reported revenues, with only a nominal positive effect on our non-GAAP EPS in the full year for 2016.

Our currency assumptions have changed modestly, as the Japanese yen strengthened versus the dollar, while the euro and Swiss franc weakened versus the dollar in the second quarter of 2016. Our currency assumptions include a yen-to-US-dollar rate of 1.03, a US-dollar-to-euro rate of 1.11, and a Swiss-franc-to-US-dollar rate of 0.98.

We now expect CapEx to be in a range between $35 million and $40 million for the full-year of 2016, which is lower than our previous estimate.

I would remind investors once again that much like 2015, we expect the majority of our profitability and cash flow to be generated in the second half of the year, and particularly in Q4. We also expect Q3 revenue and EPS to be essentially at the Q3 2015 level.

I will close by stating that with our revised revenue outlook for the second half, we are taking the necessary actions to compensate for the negative leverage that we would otherwise experience. The savings associated with these actions will be used both to increase our profitability, as well as to fund our strategic growth initiatives.

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

Operator, could you please open the call for questions?

We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Derik de Bruin of Bank of America Merrill Lynch. Please go ahead.

Mr. de Bruin, your line is open. Please go ahead with your question.

Okay, I believe we'll move along to the next question, then. The next question comes from Tim Evans of Wells Fargo Securities. Please go ahead.

Thank you.

Frank, could you give us a little bit more color on the European situation? How broad are the funding delays that you're seeing? What's causing it? Maybe a little bit more specifics on the countries or the initiatives there that might be relevant? Thanks.

Sure, Tim.

As best as we can, I don't think we have complete clarity on it, either. There is some structural delays in Central and Eastern Europe, where Russia remains weak, of course, and Eastern European, European Union countries tend to have a bit of a funding gap this year between the framework program 7 and framework program 8. That is a contributor, but not the largest contributor. There clearly seems to have been both academic and really also, quite honestly, industrial reluctance to commit funding, perhaps with the Brexit uncertainty, and then the initial surprise after the vote. That was on the continent as much is in the UK itself, actually.

Last, but not least, to somewhat unexplained, we do see what looks like a delay in funding, particularly in Germany but perhaps also in France, where we don't really see any budgets changing. Therefore we think that more tenders and more funding likely will be released in the second half. The initial trends that we detected in the first quarter continued, and we had several data points just within the Company, where several of our divisions saw the same pattern, although not all of them. That's the best color I can give you from what we do know. In part, it's probably lower funding this year, and part is probably a shift to the second half of the year.

Okay, and a quick one for Tony.

Tony, what's your outlook for cash flow in the back half of the year, here? Do you feel like you can get the working capital issue back under control?

Yes, I would first say that I don't think working capital is out of control. We have initiatives focused on improving working capital, and those are on track. The increase in inventory is really to fund shipments in BioSpin and semi-metrology in the second half, so we understand what's driving the increase. The DSO is in good shape, and we're making good progress on collecting overdue receivables. With regard to the cash flow, I still continue to expect the free cash flow for the year to approximate the GAAP net income, which will obviously be lower with the lower volume, but that relationship still holds.

Thank you.

The next question comes from Derik de Bruin of Bank of America Merrill Lynch. Please go ahead.

Good afternoon. Sorry about that. You had really good gross margin expansion during the quarter, certainly well ahead of what we thought they were going to do. Is that 200 basis points improvement year over year something we can look forward to for the quarters going forward?

No, I think it's going to be lower. Look more at the first half of the year, where it was obviously down in Q1 and up in Q2. [End year I was] it would average out some quarters. For the full year, we've given obviously the range of guidance on the operating margin, 75 to 100 bps; and the majority though not all of that is expected to come from gross profit.

Great. As a follow-up, is there any idea you can give us of how much NMR is specifically contributing to that, in terms of both pricing and to operational improvement in the gross margin?

Derik, this is Tony.

While we won't give specifics on that, I can give you some color on the margins in general. NMR pricing had a meaningful role in Q2. It did in Q1, and we expect it to for the remainder of the year, and in fact into 2017. That impact will likely affect most of the year. With respect to your question, mix had a big impact in the quarter, and last quarter we had an easy comp, if you will. If you remember, there's some legacy NMR business in last quarter -- in Q2 2015, right.

Quite frankly, we're not counting on that mix to continue. We're not counting on currency to really have a big impact on the second half. We're pleased with the price and the cost reduction and the effect of M&A on our margin. Some of that will carry forward, but with the uncertainty and the difficult business environment, we think that the margins will come out at our guidance.

Great, thanks for the additional color. It was very helpful.

The next question comes from Brandon Couillard of Jefferies. Please go ahead.

Thanks, good afternoon. A follow-up to Frank.

As far as the three main issues you cited with the reset to the outlook -- just to be clear, to what extent have you baked in [stability] from those three areas for a continuation of what you've seen in the first half? To the extent that the academic market funding issues -- to what extent were those orders standing orders? Have they been canceled? Is there any color around, with the status of these orders that just didn't really materialize?

Sure. We think funding -- we had no order cancellations, certainly nothing significant. We rarely if ever do. The academic funding delays were pronounced in the European Union. We hope that, that will improve in the second half. There's some indications in our pipeline, so it's not purely hope, but I wouldn't want to predict that yet.

We don't necessarily see a strengthening of the industrial market, except that the semiconductor market -- which isn't particularly strong, but for us we're getting a lot of technology buys. Semiconductor has been a good success for us in the first half of the year, and we expect it to be strong in the second half of the year, as well -- actually, even stronger. It did have a slow start in Q1.

The MALDI Biotyper weakness in China and in the US -- I'm not sure about China yet, not enough visibility. But in the US, we expect that to pick up quite a bit in the second half of the year in orders. These systems don't have very long delivery times, so if orders pick up, you can usually deliver them within two or three months.

In the industrial markets, just about everything is down, perhaps with the exception of polymer and petroleum companies. They're benefiting from a lower oil price. But metals, minerals, mining, automotive industry -- we picked up another little mini-trend in Germany, as people know about these emissions scandals. It seems that a number of large German manufacturers may have cut back their CapEx to maybe preserve cash -- again, not heavily publicized, but we did see some of that. We have no opinion on whether that's a corporate strategy, or whether that's going to continue; but that's certainly something our sales people have picked up on.

A little bit more color; not necessarily a whole lot more clarity. I guess the really short answer is, European academic funding we expect to improve in the second half. MALDI Biotyper funding at least in the US we expect to be stronger; not sure about China. China is strong otherwise, by the way. Just the Biotyper was weaker. Industrial -- general industrial other than semiconductor, we expect to remain weak for the foreseeable future.

One more for Tony.

Could you elaborate on accelerated cost action in the CALID business, perhaps size that for us in terms of dollars? Should we expect any savings impact in the second half, or is this really a 2017 event?

I can give you some color on it. We're not going to size it at this point, but clearly with our model that is predicated on leveraging our cost structure without revenue growth, actions are needed. We're taking the right actions in that regard. They include -- there's both cost actions and acceleration of the strategic initiatives we've already planned. They include similar types of things that we have done before -- you've seen us do before in the area of factory consolidation, more outsourcing, product line streamlining, and generally expense avoidance. I would say we're taking the right actions to achieve our profitability, given the volume is down when we need -- when our model is based on volume leverage.

The cost actions this time will not be -- in 2014 it was the [CAN] divestitures and restructuring. In 2015 it was very identifiable major restructuring and one factory closing at BioSpin. These cost actions are very broad, and really affect all divisions and all businesses, even those that are doing well, out of solidarity to achieve the overall Bruker goals. They are also being very cautious with expenses, for instance. Of course there will be a slightly larger impact on the two divisions that particularly are having a tougher time this year, which is Bruker Daltonics and Bruker AXS -- ironically, two of the highest performers last year.

The next question comes from Isaac Ro of Goldman Sachs. Please go ahead.

Good afternoon, guys. Thank you for taking the question.

I wanted to try and get a little more color on the revenue miss. I was hoping you could quantify the extent to which the miss came from that event you mentioned in China versus the issues in Europe? Was the China issue a minor thing, or was it significant enough? $40 million as a total on a notional basis is a pretty big number. I was trying to square up how significant the China issue was versus Europe? Thank you.

China overall was strong. It was really just the China MALDI Biotyper business, for which there were fewer budgets, at least in the first half of the year, than we had anticipated when we were doing our business planning. Clearly, the majority of it -- in terms of importance and in terms of ranking them in terms of importance, it was European academic funding delays; the most important industrial markets weakening, not only remaining weak; and the China MALDI Biotyper -- which was a standout, because everything else grew in China to the order of 10% or so, right, 10% or 11%, yes? The Biotyper was just one part of the business that we had budgeted and planned for growth in China, and that hadn't occurred. There just weren't enough budgets in the beginning of the year.

Probably that will remain somewhat unclear until perhaps next year. In the US, as I said, the MALDI Biotyper business we expected to be quite a bit stronger in the second half, but we had a weak start in the first half of the year.

Okay, thank you. A follow-up on the first item you mentioned, the European academic: I think there was a question asked earlier. I want to clarify, your updated guidance does not assume an improvement in those markets in the back half of the year?

We expect that the bookings will be better in the budgets, but we think that we'll mostly go in 2017 revenue for us. We're not banking on that, and we're not building that in necessarily. We're not building that in, believing that if it comes through it will help us in 2017 more than in 2016.

Right, got it. Thank you for the clarification.

The next question comes from Ross Muken of Evercore ISI.

This is B.J. in for Ross. Thank you for taking my question.

Frank, maybe just one on the high-level guidance for the back half. If you look at what's happened in that one half, Q1 was up mid singles; down high singles in Q2. The guidance is now minus-200 bps for the year, right, which implies back half is declining. Is that -- are we looking at from a quarterly cadence perspective, continuing trends in 3Q and then more things start improving 4Q? Is that how the back half cadence looks like?

I'm not sure I followed every detail, but very roughly, we're flat on reported revenue in the first half, and we expect to be roughly flat for the full year on reported revenue. That gives you a way to triangulate things. Within the second half, we had pointed out that Q3 might be somewhat similar -- somewhat stronger sequentially, at least on the revenue -- but somewhat similar to Q3 of last year, which again makes for us looking at a very strong Q4, which is what we had last year and the year before. That's pretty typical for us.

Sure. Maybe a high-level -- when I look at the magnitude of what happened in the Q, I really have to go back to Q2 of 2009. That was a different scenario. I'm trying to put this in context. It feels like -- and I understand being a CapEx -- the CapEx nature of the business, you have volatility. The magnitude is what maybe caught us a little bit off guard? Can you maybe help us understand why we should be seeing that level of magnitude, maybe when some of your other life science peers aren't seeing the same? Thank you.

We're obviously more susceptible to people's site preparations. For instance, in NMR it doesn't account for all of it, but we clearly had some site delays. When you sell bench-top systems or consumables, you tend to not deal with those issues, at least not to this same extent. Some very large deals who had said, look our lab won't be ready until Q3 and you cannot deliver and install. There was some of that, for sure. We obviously were pleased with our margin improvement and that we've met EPS after all. But we will have fluctuations like this. We've also had fluctuations on the positive side. They of course -- this quarter more things added up to the negative side.

I would just add quickly that we have the most exposure to academic funding in the group, so it's most pronounced for us.

The next question comes from Doug Schenkel of Cowen. Please go ahead.

All right, good afternoon guys.

Maybe building off that last one, recognizing there are differences in your business versus others, it doesn't appear that really any of the peer group that's reported thus far has indicated that they've been impacted as much by European academic funding challenges. You mentioned Brexit, when all others said they weren't seeing anything yet, and that it was way too early to attribute any weakness to Brexit, especially when growth was pretty robust in Europe for most others. Can you help us understand the disconnect here?

Maybe taking a different angle on this, how comfortable are you that this is not also a function of changes in competitive dynamics?

Yes, we're pretty comfortable with that, because we've seen it in such -- in really quite a few internal data points. We've seen very different product lines and in different divisions, and even in different groups seeing very similar dynamics, that this is what we're seeing. I know not everyone has reported that, or has focused on better news elsewhere, but we did see that. Not only in at least four or five of our divisions, where it's been very clear that European academic budgets were really down. As best as we could tell, except for Eastern Europe, we believe -- but we cannot be sure either -- we believe that those are mostly funding delays. For us, that also means revenue delay; probably more of a revenue pick-up again in the first half of 2017, as orders that we get in -- unless we get them in, in the next month or two -- are likely to be turned into revenue in early 2017.

We also among the industrial -- we've analyzed this quite a bit, obviously -- among the industrial customers, we saw the biggest decline in Europe. Listening to the feet on the street or to our colleagues who are out there -- what do you hear, what do you see? They felt that customers in Europe, including in Germany and elsewhere on the Continent as they say, really were more uncertain, and maybe were more slow in having their CapEx approved than even elsewhere. Even within the industrial arena, we detected a little bit more of a weakening in Europe, and we do attribute some of that to uncertainty. I don't know what others are seeing, but that's what we've seen, and those other data points that we can contribute.

That's helpful, Frank. Thank you for that.

I'm struggling to decide whether or not your guidance for the second half looks conservative, or not all that conservative. The updated revenue guidance implies second half organic revenue declines of, I think, around 2%. While this is a lot lower than what the street was previously looking for in the second half, it still would represent an improvement relative to certainly what we saw in the second quarter. I think this is particularly notable, given that the year-over-year comparison actually is tougher in the second act than the first half.

With all of that in mind, what are some of the factors that give you confidence in the second-half outlook? Even though it's been reset, how do you get comfortable that you reset it low enough? Can you share any order or book-to-bill data? Is there something you've seen in terms of better growth or order of momentum thus far in Q3 that would make you feel like this -- that essentially you've cut numbers enough? Thank you.

Yes, it's a good question and it's a fair question.

We did see our orders were better in Q2 than in Q1. Our revenue was the other way around, obviously -- at least the revenue trends. But for ignoring Best, which always has long-term contracts, but as I look at the other 92% of our business, the scientific instruments or life science tools business, it did see order growth year over year in the second half. Having said that, one quarter for us never is necessarily a trend indicator; but nevertheless, it was slightly encouraging, and we'll need to monitor whether that continues.

We also look at our -- many of our groups have now switched to an ability to not only measure orders, but also leads, qualified leads, and most importantly what we call opportunities. Those also have strengthened in a number of our divisions that were struggling in the first half, like the pre-clinical imaging division had remained weak, just as it had been weak last year. But it has a much stronger opportunity pipeline for the second half. There are some data points for that.

Of course, there's also some uncertainty. We think -- we feel that we're neither giving particularly conservative nor particularly aggressive guidance, but hopefully middle-of-the-road type guidance for the second half of the year, and therefore for the full year.

Okay, thanks again.

The next question comes from Tycho Peterson of JPMorgan. Please go ahead.

Thanks.

Sorry to stick with the same theme here, but Frank, can you comment on linearity in the quarter? Did things drop off toward the end of the quarter? To Doug's question earlier, anything you can talk about that you've seen in July that might be worth highlighting?

Well, we never have linearity in the quarter. We always have about half of our revenue in the third month of the quarter. It followed the usual, typical pattern. There was some talk about orders coming in. While they were slightly improved, but coming in late in the quarter. I wouldn't -- it's a derivative of a derivative, so I wouldn't put too much weight on that.

I'm sorry, Tycho, what was the second part of your question?

Whether things improved in July, or do they continue to deteriorate?

No. July is a summer indication month; but no, we have no further -- I think July we don't have enough data to answer the question one way or the other; but there were no additional alarming signs in July.

Can you quantify the -- call it, delayed European tenders?

It was the biggest effect on the revenue miss, and on the orders miss, among all the factors that came together. We're not breaking it out specifically with a dollar number, but it was the largest effect -- although it was comparable, and not very different from the weakening industrial market, which is, as I said, a global phenomenon, but actually more pronounced in Europe.

Then one last one on MALDI Biotyper. I understand the China dynamic. I don't understand why it was down in the US. Can you maybe clarify why that was the case?

We are not sure either, quite honestly. We don't see an external reason. That may have had to do more with our reorganization. We built a considerably stronger, believe it or not, commercial team for clinical and non-clinical applications of the MALDI Biotyper, with additional staffing and additional training, and it is possible that maybe we lost focus just a little bit at the beginning of the year with bringing so many people on board, and setting up the new organization. We're not aware of an external reason for that.

The next question comes from Bryan Brokmeier of Cantor Fitzgerald.

Good afternoon.

Frank, you report to be seeing some order growth. Can you discuss what you are seeing in terms of NMR orders? Also, given the slowdown in some parts of your business, do you have any ability to move resources around in order to accelerate the deliveries and installations of NMRs that may not be scheduled for completion until 2017?

NMR has been healthy, including the after-market business and the applied markets business within the BioSpin group, which is having good trends this year anyway. By the half-year point and probably for the full year it's growing in the mid single digits. If there is any weakness in the BioSpin group in the first half of the year, it was still the pre-clinical imaging business, which had been weak in 2015 and in the first half of 2016.

To your point, we are actually not production-limited in NMR deliveries. It is primarily where customer facility, customer delivery, customer readiness limited. We could -- if it was just for production, we could accelerate more parts of our backlog. But we're typically limited by when customers can take them, believe it or not. It's not therefore the answer to your question. I couldn't send MS engineers to help with NMR. I could do that, but we actually don't need to do that. Instead, we're obviously working shorter hours and having higher increases, and have people take all their vacations, and the usual discretionary spending and head-count reductions in the divisions that have less business.

Would you comment on the strength you're seeing in the academic market outside of Europe during the quarter? Are you starting to see the academic market pick up, particularly in the US and China?

Two different stories: China has been good all around. China has been stronger on the academic side, a little weaker and not as strong in the industrial side; but nevertheless, China has been good for us, right? Yes. In the US we haven't seen -- US had good revenue growth, and that was in part because some of these semiconductor big systems went to US destinations for major customers. But it's been good business in the US in terms of bookings. It's been good revenue in the US.

In terms of bookings, we have not seen yet the additional orders that we're hoping from, from the increase in the NIH budget. For us as an instruments manufacturer, that makes complete sense: until they get allocated to programs and then go through the grant application and review cycle. Until customers who win -- who get approval of their grant applications have money in hand to go shopping, it's going to be in the second half of the year, quite possibly in Q4. With those typical delays -- not unusual delays -- until we see additional orders and even additional revenue from the increase in NIH spending, which we're optimistic will help because we're issuing more quotations, and helping more people with grant applications; but it's probably also going to be more of a 2017 growth driver in revenue.

The next question comes from Dan Arias of Citigroup.

Good afternoon, guys, thanks.

Frank, can you comment on the competitive dynamic for the Biotyper? It doesn't sound like you think that was part of the problem this quarter, but it seems like a decent time to ask about how you're feeling about menu and database capabilities relative to biotech?

Yes, I think -- good question, a fair question.

I don't think we have detected any competitive aspect to all of this. In fact, with the new product offerings at [ACMED] and ASM, we feel that our competitive position in MALDI identification -- of course, as you know, we are taking that MALDI Biotyper platform beyond identification to additional applications, not all of which are FDA cleared in the US, but they're getting more and more approvals in Europe. Competitive dynamics is good, and probably even strengthening within that field, so it was not a competitive issue, we think.

Okay, then what is the outlook for the Best business for the year? Is there anything related to the European funding situation for big science that makes you think that demand might be at risk in the back half?

Their outlook is always so long-term that they march to a different beat. Their demand for low-temperature superconductors from major health care companies, MRI vendors, has been quite good, but we do acknowledge there had been some pricing pressure in that market segment that also had been publicized elsewhere, and we were not completely immune to that. But our order books there are very healthy. I think we're emerging as the most productive and the most automated and highest-quality supplier.

They are -- over multiple years, they can be somewhat lumpy, because they have, for instance, these [ETER] and [EXFEL] projects that ran for two or three or four years -- I think two or three years. Sometimes, before they have larger follow-on or a number of smaller follow-on projects, there's sometimes a bit of a gap. For Best, it's a weaker year this year. Even though the LTS business is growing, the wire business is growing, but the project and research instrument subsidiary business is weaker this year. That's likely going to continue in the second half of the year.

The next question comes from Sung Ji Nam of Avondale.

Thanks for taking the questions.

Frank, could you maybe talk about what are the potential catalysts to drive Biotyper growth in the second half? Is it easier comps, per se, or is it -- is the recent announcement on the CDC collaboration for the expanded pathogen library -- do you think that could be a catalyst as well? I'm trying to get a sense of what gives you confidence that the Biotyper business will turn around?

Yes, I don't have complete confidence, because I don't have visibility into China, for instance. But we expect from our own pipeline, we expect the Americas to be a lot stronger than the first half of the year. In terms of product drivers, things like the CDC collaboration that you cited, that we announced at ASM, as well as the new products and consumables products, new libraries, new applications for resistance testing. That's research-use only right now.

I think there's more and more capabilities on that same platform that, A, enhance our competitive position; and B, grow the after-market in consumables and software business part of the Biotyper platform. We're seeing an acceleration in that, and that's been a longer-term secular trend. That's not the last quarter or two. There are many healthy growth drivers: China, lack of visibility. US, or Americas generally, I think acceleration in the second half expected. In that business, which actually does not depend much on academic funding, Europe had actually been all right in the first half of the year.

Okay, thanks for that.

Then could you remind us what percent of your business now is coming from biopharm line of sight market, and what the growth rate there was, and then also what the potential is in the medium term for that business to -- as a percentage of your sales? Thanks.

Pharma and Biotyper's still below 10% for us. It is something that we're putting a lot of strategic focus on in new products. For instance, the MALDI PharmaPulse for the ultra-high-throughput screening system, a lot of systems that do in-tech protein characterization for biosimilars, new biopharma applications, several new pharma and biopharma applications on the NMR business, are all really making a very concerted product and marketing effort for that industry. But for us it is smaller than for many of our peers. We don't have a breakout of the growth trends in that particular segment.

The next question comes from Steve Willoughby from Cleveland Research. Please go ahead.

Good evening, and thanks for taking my questions.

I have a couple of housekeeping questions for Tony first. Tony, are you expecting any change in your interest expense for the year? Then secondly on the share count of 163 million, does that assume that you continue buying back stock in the back half? Or would any share re-purchases be accretive to that guidance?

The last one first: the share repurchases are already embedded in our guidance. We would be buyers opportunistically at good prices, but that's embedded in our guidance.

Steve, sorry, can you repeat the first part?

Just what you're expecting on interest expense?

No, same as the first half.

Okay. Then, Frank, we've seen you comment about the semiconductor business maybe starting to improve here. Historically, is this a business that, when it does start to improve and you see semiconductor CapEx come in better, is this a one- or a two-quarter type of phenomenon, or does this typically run more like one or two years?

A couple of caveats on that, Steve. First of all, we doubled or more than doubled our semi business with the acquisition of Jordan Valley semiconductors, so we don't have years of experience with that. We think what we're seeing right now is actually not related to the semi cycle or to the market, which from what everything else that we read here, is still roughly flat. You see some predictions that it will grow, and others that it will not grow.

I think it's very much technology buys rather than capacity buys, as they call them. Very much has to do with the adoption, the increasing adoption of x-ray metrology tools. I think it's, so far it's really -- there's no historical precedent, because we've acquired almost all of these x-ray metrology tools, and it's a new technology trend. Looking through the back window for experience in this particular circumstance will not be helping us predict. We predict that for the remainder of the year, because we have the order book together, this business will continue to do very well.

The next question comes from Steve Beuchaw of Morgan Stanley. Please go ahead.

Mr. Beuchaw, Morgan Stanley, did you have a question? Please go ahead.

Okay, the next question would come from Eric Criscuolo of Mizuho. Please go ahead.

Good afternoon, guys.

Frank or Tony -- were there any significant revenues either delayed or pulled into the quarter versus your expectations?

We pulled a little bit into Q1 which was missing in Q2. We had some delays of sites not ready, going into Q3. Yes, this was to some extent expected. Of course at the end of the quarter there is always some things that drop out. They don't drop out for us, we don't lose it; but it goes into the next quarter. There clearly has been some of that in Q2.

It seems like there was nothing significant versus what you typically see in the business, is that correct?

Yes, that's reasonable. There was some MRS shipments that we expected in Q2 that will ship in Q3. But to Frank's point, they'll ship and accept. The pull-in, in Q1, just to be clear on that, that was the one gigahertz magnet.

Right.

Got it. Okay, thanks.

With the volatility in your top line manifesting again this quarter, does this accelerate or change in any way your thoughts on maybe increasing the percentage of recurring revenues that you have in your business over the longer term?

It just confirms that, that's what we're doing. For instance, all the after-market businesses, including service -- I think they all tended to have pretty good trends, including, for instance, also in the BioSpin business. Clearly as we look to -- it confirms our strategy, and if anything re-accelerates our strategy, in that sense that more recurring business, whether it's software consumables or after-market service or services. Value-added services are clearly an area where we still are in the early innings, and we are putting a lot of effort, and also getting people on board that have built these types of businesses. They are on board. They're getting good traction, and I think have a long runway to do a lot better there. That's clearly an area where we continue to improve. This quarter reminded us that, that's a good thing to do.

This concludes our question-and-answer session. I would like to turn the conference back over to Stacey Desrochers for any closing remarks.

Thank you for joining us this evening. Bruker will be presenting at several investor health care conferences during the third quarter, and we invite you to schedule a meeting with the Management team if you're attending any of them. We invite you to meet us at these conferences, or visit us at our headquarters here in Billerica, Massachusetts. Thank you and have a good evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.