Bruker Corp (BRKR) 2016 Q3 法說會逐字稿

Good evening and welcome to the Bruker third-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over Miroslava Minkova. Please go ahead.

Good afternoon. I would like to welcome everyone to Bruker's third-quarter 2016 earnings conference call. My name is Miroslava Minkova and I'm the new Head 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 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 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 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, November 2, 2016. Consistent with our prior practice, we do not intend to update our projections based on new information, future events or other reasons prior to the release of our fourth-quarter 2016 financial results in February 2017.

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

Thank you, Miroslava. We are happy to welcome you to Bruker publicly one more time as our new Head of Investor Relations. Good afternoon, everyone, and thank you for joining us on the call today.

I will begin today's earnings presentation on slide 4. I am pleased to say that Bruker continued to execute very well on its operational improvement initiatives during Q3 of 2016. We increased our non-GAAP gross profit margin by 280 BPS year over year and our non-GAAP operating margin by 160 BPS year over year and we grew our non-GAAP EPS significantly even after adjusting for non-cash tax benefits in the quarter.

Importantly, we produced these margin and operational EPS improvements despite a 0.6% year-over-year decline in revenue, which was driven by the demand headwinds we have faced this year, particularly in European academic markets and in global industrial markets. From an operational standpoint, we are pleased that we're seeing the benefits of the operating leverage momentum that we gained over the last three years from our transformation initiatives.

Our Q3 2016 results also demonstrate our sustained focus on operational improvements and tight cost control in the face of major revenue headwinds so far this year. Since our last earnings call, we have announced two additional factory consolidations, right sizing and select cost actions in the CALID and NANO groups in order to position Bruker for a continued margin expansion in 2017 and beyond.

We expect additional annualized cost reductions of $10 million to $13 million in the second half of 2017 from these additional initiatives and we are also working hard to resume revenue growth in 2017. Tony will provide more color on the additional restructuring initiatives later in the call.

We are also continuing to invest in profitable growth in our four strategic areas. In the last hour, you saw our announcement that we have purchased assets and have hired an experienced team in Glasgow, Scotland, which will give our microbiology franchise access to nucleic acids testing, or NAT assays, and syndromic panel development capabilities for our MALDI Biotyper platform. Although no revenues are expected in the near term, we're excited about this investment and believe it is a good example of how we're looking to add profitable growth to some of our successful franchises.

End-market conditions remain mixed for us, with weak demand year to date in our European academic and global industrial market segments. Overall for Bruker, market conditions in Q3 were similar to those we described in our second-quarter 2016 conference call. We did not see any further weakening in demand in Europe or industrial markets. Any pickup in demand and orders that we might see in the fourth quarter, for example from China, perhaps from European end-of-year spending, or from increasing NIH budgets, would help our revenue growth in 2017.

Looking more closely at the quarter, we reported revenues of approximately $394 million in the third quarter of 2016, a decline of 0.6% and organic decline of minus 2.4% year over year, which was partially offset by 1.6% growth from our Jordan Valley acquisition. Despite the revenue weakness, our non-GAAP gross profit margin expanded 280 BPS year over year to 48.9%, driven primarily by gross margin improvement in our BIOSPIN group.

Our Q3 16 non-GAAP operating margin was 14.9%, expanding 160 basis points from Q3 2015 and reflecting our price and restructuring actions as well as continued operating expense discipline. We reported GAAP EPS of $0.29, a significant increase over $0.07 in Q3 2015. We reported non-GAAP EPS of $0.32 in Q3 of 2016, which represented year-over-year growth of 68%. Adjusting for some non-cash tax benefits that resulted in a 6.3% effective tax rate, our non-GAAP EPS still improved substantially year over year.

On slide 5, I show Bruker's performance through the first nine months of 2016. As you will see, our reported revenues are essentially flat with those in the first nine months of 2015, with an organic revenue decline of minus 2.3%. This was offset by 2% growth due to the Jordan Valley Semiconductor metrology acquisition.

Further improvements in non-GAAP gross and operating margin of 170 basis points and 130 basis points year over year, respectively, were driven by strong performance in our BIOSPIN group and our optics Nano Surfaces and semiconductor metrology businesses within our CALID and NANO groups. This more than offset weakness due to lower volume elsewhere in our CALID and NANO groups. Together with a favorable tax rate lower share count, this contributed 343% increase in our non-GAAP EPS to $0.73 from $0.51 in the first nine 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 three quarters of 2016. Let me begin with our BIOSPIN group, which delivered mid-single-digit revenue growth with strong margin improvement. NMR continued to drive most of the improvements due to better pricing, favorable product mix and the 2015 BIOSPIN restructuring and factory consolidation.

Our BIOSPIN preclinical imaging business is recovering gradually after a weak year 2015. In the first three quarters of 2016, BIOSPIN also continued to see good demand for NMR applied market products, the NMR FoodScreener and our NMR clinical metabolomics research systems, while our new service and aftermarket offering called LabScape continues to gain customer acceptance.

Our CALID group reported a revenue decline in the mid-single digits year to date, primarily due to Daltonics weakness, driven by weak European academic spending and the lower MALDI Biotyper orders in China and the Americas, which we had reported in the first half of 2016. As announced on our second-quarter 2016 conference call, we have initiated additional cost actions in our Daltonics business and are in the process of consolidating the factory, which should help improve profitability by mid-2017.

Daltonics is also in the early stages of ramping up several exciting new products, including our MALDI PharmaPulse, our new timsTOF research system and rapifleX TOF/TOF instruments. We expect these products to have a positive impact in FY17. Our CALID optics business had another quarter of solid execution, with revenue growth and margin expansion.

Please turn to slide 7 now. The NANO group continued to face challenging industrial market conditions, as well as delayed in European academic funding. Year to date, the NANO group revenue is down in the low-single digits on a reported basis, with continued weakness in AXS and our industrial analysis product lines. In response to the weak demand, we have initiated additional right sizing and a factory consolidation in our AXS business.

Our Nano Surfaces business revenue remained subdued year to date, but the business realized profitability improvements due to prior restructuring and cost actions. Its fluorescent microscopy products continues to see strong demand for cell and neuroscience research. Our semi conductor metrology business has more than doubled in the first nine months of the year following our Jordan Valley acquisition about a year ago.

Last, our BEST segment revenues were about flat year over year in the first nine months of the year, though margins are lower given the phase out of the previous DESY and ITR multi-year projects, along with previously reported pricing pressures and industry consolidation in the superconducting wire business. BEST actually solid increased demand and good revenue growth for superconducting wire as their product's high-performance and good quality has led to long-term contracts and backlog.

On slide 8, I highlight how we invest in new technology to help supplement our organic growth opportunities in our strategic focus areas. This afternoon we issued a press release announcing the purchase of assets and we have hired an experienced PCR assay development team in order to add a second strategic focus area of syndromic panels to our clinical microbiology franchise over time. While the transaction is not expect to add material revenues for Bruker in the near term, it brings an exciting additional technology and consumables potential to our MALDI Biotyper platform in a rapidly growing area of microbiology testing.

Specifically, we're acquiring infrastructure and IP in nucleic acid testing, as well as a portfolio of multiplex real-time PCR assays plus syndromic panel development capabilities. Over time, we see significant advantages to combining multiplex PCR assays with a readout on our MALDI Biotyper platform, which now has installed base of greater than 2,000 units worldwide.

Moving on to slide 9, Bruker's key priorities for 2016 remain unchanged from the beginning of the year. Some of our end markets have been more challenging this year than we had envisioned at the start of the year. As a result, we have proactively stepped up our operational initiatives and accelerated factory consolidations and restructuring efforts in parts of the business where revenues have been subdued. As mentioned earlier, year to date we have delivered strong non-GAAP gross and operating margin expansion.

For the remainder of 2016, we are slightly reducing our revenue guidance for the full year and we are raising our operating margin expansion and our non-GAAP EPS guidance. We believe we are making good progress on each of the key priorities and should be in an even stronger position to deliver profitable growth once the markets rebound and as our additional initiatives become effective in 2017.

With that, me turn the call over to our CFO, Tony Mattacchione.

Thank you, Frank. Pardon the hoarseness of my voice as I get over a fall cold. I'll do my best. I will now provide some additional details on our financial performance in Q3 and year-to-date 2016, starting on slide 11.

Starting with overall financial performance for Q3, as you saw in the press release we grew non-GAAP EPS 68% to $0.32 per share compared with $0.19 per share in Q3 2015. Included in the year-over-year comparison were significant benefits associated with tax valuation allowance releases amounting to approximately $0.07 per share. Adjusting for these tax benefits, our Q3 non-GAAP EPS would've been approximately $0.25 per share, or an increase of 32% year over year.

GAAP EPS was $0.29, up from $0.07 in Q3 last year. On the top line, our reported revenue was 60 basis points lower year over year. Q2 reported revenue included a 2.4% organic revenue decline, a 1.6% growth from the Jordan Valley acquisition and 20 basis points impact from foreign currency translation.

Our non-GAAP operating margin of 14.9% was 160 basis points higher than in Q3 2015, despite the difficult end-market conditions in several of our businesses. This was the result of continued price benefits and operational improvements, both notable in our BIOSPIN group, but also profitability improvement at our optics and Nano Surfaces businesses.

Free cash flow was $27.1 million in the third quarter of 2016, an $18 million decline from the same quarter last year, reflecting a difficult prior-year comp, but also some inventory buildup and expenditures associated with the restructuring actions we took this summer, which Frank already covered. Net cash declined year over year but remained positive at $76.6 million at the end of the third quarter of 2016.

In the third quarter we continued to buy back our stock in accordance with our November 2015 authorization. We also paid another quarterly dividend of $0.04 per share in the third quarter of 2016. Now let me share more details on our Q3 2016 performance.

On slide 12, I show the year-over-year revenue bridge for Q3 2016. Our reported revenue declined 60 basis points in the quarter. The 1.6% portfolio improvement from the Jordan Valley acquisition was more than offset by a 2.4% organic revenue decline. Changes in foreign currency translation had a minimal affect of about 20 basis points during the quarter. As Frank mentioned, year-to-date soft European academic spending and weak global industrial market conditions were the primary drivers of the organic decline.

Geographically and currency adjusted, European revenue declined in the high teens during the third quarter. North America was up in the high-single digits. Japan was up in the low-single digits, while China revenue increased at a low-teens rates.

For Germany -- excuse me, for Europe, Germany representing about 10% of our sales experienced the largest decline as a result of the year-to-date academic and government funding weakness. Eastern Europe was also sharply off versus the prior-year and is the region in Europe most affected by the funding weakness. The gains in North America came from both b-bio and BEST. The China growth also came from b-bio and we are beginning to see healthier multi-biotyper business in Q3 than we had in the first half of 2016.

On slide 13 I show our full Q3 2016 profit and loss statement on a non-GAAP basis. Our Q3 2016 non-GAAP gross profit margin was 48.9%, which was a 280 basis point increase year over year. The gross profit margin increase was primarily the result of operational improvements for our Bruker's portfolio but most little bit in BIOSPIN. Our optics and Daltonics business also contributed. These were partially offset by lower NANO and CALID sales volumes.

Our Q3 2016 operating expenses increased approximately $4 million year over year. Adjusting for Jordan Valley expenses of approximately $3 million, Q3 2016 operating expenses were up only $1 million, demonstrating our excellent cost control. As Frank mentioned, we took additional restructuring actions this year given the soft demand. We are consolidating two additional manufacturing facilities, one at CALID and one at NANO, and right sizing operations, primarily in Europe.

In total, these restructuring actions will cost about $11 million to $13 million and are expected to lead to cost savings between $10 million and $13 million on an annualized basis. We expect the vast majority of savings from these programs to be realized in the second half of 2017.

The net result is that our non-GAAP operating margin in Q3 2016 was 14.9%, which was 160 basis points higher compared to Q3 2015. Looking out our results below the line, net interest and other expense of about $3 million was similar to the second quarter of 2016 and slightly lower versus the third quarter of 2015.

Translation of foreign currency denominated transactions added a positive impact year over year as foreign exchange did not have a material impact on our other expense line this quarter. Our Q2 2016 non-GAAP tax rate of 6.3% was unusually favorable as we benefited from tax planning and the release of tax valuation allowances this year.

There were some dynamics affecting the Q3 tax rate that warrant further explanation. The largest driver of the low rate was a substantially complete release of the remaining valuation allowances recorded in the past, which resulted from multi-year losses incurred principally in our US businesses. As a result of our transformation, which included the 2014 CAM portfolio pruning, production outsourcing and restructuring actions, our US businesses first became profitable late last year.

Now in 2016, with our US business forecast be profitable for the foreseeable future, the accounting rules requires reverse our previously recorded tax valuation allowances. This resulted in the extraordinarily low effective non-GAAP tax rate in Q3. Looking at the full-year tax rate, we now expect an effective non-GAAP tax rate range between 16% and 17% and this reflects the full-year effect of the valuation allowance reversals.

While we expect to provide formal tax rate guidance when we release Q4 earnings in February of 2017, our normalized effective non-GAAP tax rate will be higher in 2017 and somewhere around 25% range. It is important to note that these valuation allowances reversals will not repeat going forward and will therefore create a headwind to Bruker's year-over-year EPS growth in 2017.

Weighted average diluted shares in the third quarter were 161.5 million, which was 7.2 million shares down -- sorry, which were 7.2 million shares down year over year, primarily as a result of the share buybacks since the November 2015 authorization. Finally, non-GAAP EPS of $0.32 in Q3 2016 was an increase of $0.13, or 68%, from $0.19 in Q3 2015.

On slide 14 I show the year-over-year revenue bridge for the first nine months of 2016. Our reported revenue was essentially flat, down 40 basis points from the same period in 2015. The 2% portfolio improvement from the Jordan Valley acquisition was offset by a 2.3% organic revenue decline. Changes in foreign currency did not materially impact our revenue during the first three quarters of the year.

In the first nine months of 2016, our BIOSPIN group grew in the mid-single digits due both to volume and pricing effects already discussed. Including Jordan Valley, b-nano reported a revenue decline in the low-single digits while CALID's revenues declined in the mid-single digits. Geographically and adjusting for foreign currency translation, European revenue was down in the low teens during the first nine months of 2016 year over year. Japan was down in the high-single digits. North America was up in the high-single digits, while China increased at a low-teens rate.

On slide 15 I show our year-to-date 2016 profit and loss statement on a non-GAAP basis. Our year-to-date 2016 non-GAAP gross profit increased $16.7 million, or 3%, and the gross profit margin of 47.8% increased 170 basis points year over year. This was largely due to the positive BIOSPIN price mix and operational improvements. These gross margins improvements were somewhat offset by the lower CALID and NANO sales volume.

Our year-to-date 2016 operating expenses increased approximately $2 million year over year. Adjusting for foreign currency translation, as well as our new Jordan Valley expenses of $7 million, year-to-date 2016 operating expenses were down organically $2 million year over year with continued overall expense discipline.

The net result is that our non-GAAP operating margin for the year-to-date 2016 period improved 130 basis compared to last year. We are very pleased with this resulted, particularly as we navigate a difficult demand environment in several of our businesses.

Our year-to-date 2016 non-GAAP tax rate of 11.4% was substantially lower than the tax rate the same period last year, also benefiting from valuation allowance releases I just described. The closing of certain tax audits and tax reserve reversals also had a favorable effect, but were offset by an expected mix of full-year earnings favoring higher income tax jurisdictions.

Finally, non-GAAP EPS of $0.73 represented an increase of $0.22, or 43%, from $0.51 in the first nine months of 2016. The lower average share count due to our share buyback program contributed $0.03 to this increase.

Turning to slide 16, we generated $14 million of cash in the first nine months of 2016. This compares with free cash flow generation of $56.8 million the same period a year ago. The year over year comparison is affected by an increase in working capital, primarily driven by higher inventory levels needed to support our factory consolidation efforts and for fourth-quarter shipments, as well as higher bonus payments for 2015, higher restructuring payments and higher tax payments associate with our 2015 cash repatriation.

Our Q3 2016 cash conversion cycle increased four days compared to Q3 2015. This was comprised by the following: our days of inventory increased 10 days to 216 days, our days sales outstanding decreased 6 days to 50 days and our days payable, which totaled 39 days, were up 1 day compared to 38 days in Q3 2015. As earlier mentioned, an inventory build associated with this year's restructuring actions was the primary driver of the higher inventory levels. DSO improved both as a result of the lower revenue and improvements in cash collections.

During the third quarter of 2016, we repurchased an additional 1.2 million shares at an average cost of $22.23 per share, totaling $25.9 million. Since the inception of the program until September 30, 2016, we repurchased 8.6 million shares at an aggregate cost of $208.5 million. At the end of Q3 2016, we had approximately $60.5 million of remaining authorization to buy back shares as part of the share buyback program. We expect to utilize the remainder of this authorization in Q4. We also paid another quarterly dividend of $0.04 a share in Q3 2016.

Now turning to slide 18, with respect to our guidance we are updating Bruker's guidance for the full year 2016. We now expect our reported revenue to be down approximately 1%, which includes a 3% organic revenue reduction and acquisition growth of 2%. The revenue decline reflects year-to-date softness in our European academic and global industrial end markets, as well as some acceptance timing delays in our BIOSPIN group.

We are increasing our non-GAAP operating profit margin expansion guidance to an improvement of 100 basis points or more compared to 2015 for the full year. Including better-than-projected operational improvements and the further reduction in our effective tax rate, we are increasing our full-year 2016 non-GAAP EPS guidance to a range of $1.07 to $1.11.

This assumes a full year non-GAAP tax rate between 16% and 17%. Stepping back and looked our revised non-GAAP EPS guidance, this means a $0.03 to $0.04 increase in operating profitability after adjusting for the valuation allowance releases.

Back to the details of our guidance for 2016, for the full year we now expect a fully diluted share count of 162 million to 163 million shares. Regarding foreign exchange rates, we do not expect them to significantly impact our full-year 2016 reported revenues, with only a nominal positive effect on our non-GAAP EPS in FY16.

We continue to expect CapEx to range between $35 million and $40 million for the full year of 2016. I would remind investors once again that like much like 2015, we expect the majority of our profitability and cash flow to be generated in the fourth quarter of 2016.

I will close by stating the additional restructuring actions we began this summer position us well to achieve our margin expansion and EPS growth objectives for 2016, despite the revenue challenges we have experienced. The savings associated with these actions will be used both to increase our profitability and to fund our strategic growth initiatives in 2017 and beyond.

Despite the difficult business environment we have, and we will continue to, take necessary actions that we believe position Bruker for sustained margin expansion into 2017, with even better operating leverage when improvements in the industrial, academic and governmental end markets occur.

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

Thank you, Tony. Angie, please open up the call for questions.

(Operator Instructions)

Brandon Couillard, Jefferies.

Thanks, good afternoon. Frank, from a high-level perspective, I know you spoke to the European government, academic and industrial markets not getting worse sequentially. Are there any markets globally as you should look from a high level that got directionally better? As we think about the growth equation for next year, is a return to growth in your view necessarily dependant upon an end-market recovery?

Yes, that's a key question, Brandon. In Europe, we still think that most of the funding issues in government and academic funding our funding delays, especially in the big economies, Germany and the UK that also in France Italy. In Eastern Europe, there is some lower funding that's probably more structural or perhaps longer term, but that's of course much smaller part Europe. In Western Europe, most of the European Union, we tend to believe that the delays, that these primarily delays and so there's a little bit of optimism but no clear evidence yet. There's some optimism certainly with a stronger activity pipeline that Q4 may see some improving orders.

None of that will help us in 2016, but that would be a nice contributor to 2017 backlog and growth. We are still -- we're somewhat optimistic that Europe will improve. It certainly hasn't gotten worse in Q3. Perhaps it's gotten a little bit better in Q3 sequentially, but no clear evidence yet. Some optimism about year-end funding in Q4. There is nothing published out there, other than maybe in Poland and Russia and some rather small markets that would indicate that these budgets weren't growing. They were clearly not released, in our opinion, as quickly as in previous years.

From a -- as you've seen, the growth in Europe, revenue growth in Europe for us, or decline in Europe has been severe. We have some optimism but no clear evidence yet that this will get better and probably will get better in next year. We will talk about that in February 2017 when we give guidance. I think China has been strong for everyone, and also for us. The [self] -- the Bruker-specific issues in the first half of 2016 for with the MALDI Biotyper seem to have been resolved and we expect to back on track probably already for the fourth quarter and for 2017 with the MALDI Biotyper business, which was weak in the first half of this year. That's not a macro. Those were Bruker and related issues.

In the US, the NIH budget did go up 6%. Apparently nobody has seen it yet, but I assume that eventually comes through and will affect extramural funding, which helps instrument companies in particular. Clearly a 2017 effect for us if it comes through, or when it comes through. Industrial, no clear signs of any improvement. Not getting worse but no clear signs of improvement. Independent of the semi CapEx cycle of a macro, we are optimistic about the x-ray metrology tools, which we think will have fundamental reason to be adopted.

Yes, finally, we also some bullish about the ramp-up of some exciting new products in 2017 that will begin to move the needle a little bit more whereas this year the new products, they are exciting but they don't move the needle yet. I'd say we're guardedly optimistic, awaiting further evidence in Q4. I think we have not drivers to return to growth next year. Obviously, will give guidance on that in February when we report Q4.

Thanks, that's helpful. Then one quick one for Tony. Could you break out the impact of the Jordan Valley deal on the gross profit dollar or gross margin line? Secondly, to what extent, if at all, will the acquisition announced this afternoon be dilutive for some interim period as you scale up that business?

We haven't been quantifying the effect of Jordan Valley on the individual lines of the P&L, but it had a very small impact from a basis points perspective. With respect to the deals that -- I think the second half your question was the deals that might close this Q4 and the impact -- .

It has no effect or deminimus effect this year. It would have a slight dilutive effect next year but I think it's again, not significant.

That's right.

Super. Thank you.

Isaac Ro, Goldman Sachs.

Good afternoon. Thanks a bunch. Just hoping we could spend a little bit more time on macro trends, given your exposure in Europe. You guys obviously have the best read there. Just curious how you're thinking about the visibility you have to the end of this year at least. I know it may be early to talk about 2017, but can you talk about the process you went to, to ensure you have good visibility on order and just revenue outlook for 4Q in Europe?

Well, we have excellent visibility on revenue because most of that revenue is in backlog or tends to be in our recurring aftermarket revenue for Q4. We do not have fantastic visibility for European trends into 2017. I'm not sure that anybody does. Again, as I explained earlier, Isaac, we think some elements, perhaps the majority but it remains to be seen, of the slow spending in Europe, in particular academic and government spending, is due to delays, at least in the major economies of Western Europe. I think the proof in the pudding we're waiting for that ourselves and that will clearly, then in Q4 influence on how we think to what degree of growth we're looking for, for next year. The activity and market activity and number of bids out there clearly seems to be increasing, but that's not bookings yet, that's not backlog yet, and certainly not revenue, so for us it's too early to tell how Europe will evolve next year.

Okay, I appreciate that. I know it's not easy on that front. Thank you. Follow up would be on the gross margin side. Obviously a lot better there than we had expected and versus recent history. I want to see if we could dissect. You mentioned pricing and operational efficiency but curious if you can maybe deconstruct the pricing aspect of it versus maybe mix or the operational side. Any way to prioritize what mattered the most in terms of the gross margin improvement and the extent to which that is a sustainable dynamic? That would be great. Thank you.

We think it's sustainable. We don't tend to dissect it. Tony, if you want to jump in?

Yes, what I would say directionally, Isaac, is pricing had a major impact. We're not going to quantify it, but a major impact. Mix didn't impact the quarter as much as it did the year-to-date period. Remember, we had that large magnet in Q1. The mix is more a year-to-date story than it is in the quarter. The rest of it is the restructuring that BIOSPIN took last year and it's really delivering strongly now.

In addition, it's just operational excellence steps in every single business, in every division, in every group. None of them are headline materials, perhaps, but they do add up.

Understood. Thank you very much.

Ross Muken, Evercore ISI.

Good afternoon, Frank. How have you made sure that with all the restructuring activities you are doing in terms of inflecting the operating line that you haven't sort of disrupted the sales organization, made sure that on a customer basis you're not missing anything or that internally there's no distraction that would keep folks from executing on the shipments versus focusing on continuing to cull some of the operating expenses and manufacturing expenses?

Good question. There is perhaps always some tension between these various objectives. The restructuring -- the two factory consolidations and the right sizings are very specific and very topical in two of our businesses, Daltonics and AXS, and they even affect very specific product lines. I'm not going to go all details, but this, while it does add up to the cost savings annualized of $10 million to $13 million by middle of next year that Tony had described, while this is not insignificant, I think this is less likely to be broadly disruptive or something that will be defocus people from achieving their other growth and operational excellence goals.

I'm actually not -- they do not reach the scale of what we've been through in the last three years. I think this should not be any -- we're not expecting any disruptions. We've already made progress and are quite -- have really started much of this and executed much of this already, although it will be fully finalized really only in the first half of next year. I think the risk of that is relatively low. It's never zero.

That's helpful, Frank. Maybe just on product vitality. Bruker's always had a calling card for being really innovative and great number of new products. We were together recently. We saw a number on the molecular imaging side. Help me understand, is there any differential on the growth rate with products introduced, I don't know, last two years, three years, one year, versus maybe some of the older products? I'm just trying to get a sense for, obviously the cap equipment line in general -- or cap equipment in general has been volatile, but is there any bias towards something that's more differentiated, newer than you've introduced versus maybe some of the older stuff?

Okay. Good question, a multifaceted question. I'm trying to think how to answer it. I mean we continue to do the usual mix of incremental product improvements, next-generation products, some of the things that you've seen recently at the Molecular Imaging Conference in New York. Some of them were incremental or next-generation products with substantial improvements. Some of them, like MRI PET were new, certainly for new in the preclinical markets. Some of the things that we've mentioned like the MALDI PharmaPulse for high throughput or even ultra throughput Pharma Screening. That is a completely new solution that's getting traction very, very quickly by major pharma companies, major and smaller pharma companies, I should say.

If you recall from ASMS, the timsTOF is really potentially a fairly revolutionary technology, an instrument and platform with a lot of runway for the next 10 years, obviously starting small. I think there's some -- well, and I would maybe add, if I may, what you've seen with today's acquisition although it's not immediate products, those of course are also things where we by adding more software, more overall complete solutions, certainly more assays and consumables, we're of course also using that element over time to change the gross margin and therefore the margin profile of the Company in a profound way. Some of that is organic and some of that is also inorganic from time to time.

I think some -- the short answer is I think some pretty differentiated products have come out and are in the pipeline, as well as the steady improvements at which we also excel and which often in our product cycle have helped us with good growth as well with a little bit of cooperation from the end markets. Perhaps even without much additional cooperation, I feel that we are having a good set up to resume revenue growth in 2017.

That's helpful. Thanks, Frank.

Next question, please?

Tim Evans, Wells Fargo Securities

Thank you. Frank, I to come back to a topic that was briefly touched on earlier. You've said in the past that you feel like you can get back to mid-single-digit top-line growth eventually. How much of that do you feel like it's in your control via new product launches pricing, shifting your mix, things like that versus waiting on the end markets?

Good question. First of all, while we are predicting broadly that we will go get back to growth in 2017, we believe it will take us a couple of years to get to industry standard growth in the life science [tool] space. We hope that we can make good progress in 2017 but I would assume that industry -- that we'll reach industry growth levels or perhaps exceed by more in 2018.

Having said, that obviously whenever industry growth is whether industry growth is 5% or 3% depends on the macro. I'm not prepared to predict, or others can predict better, what the macro growth rate will be next year. I think there is diminished visibility for everybody in the industry into that right now. I don't know what the macro will be so the short answer is, compared to industry, I think will it be a growing still not as fast as the industry next year but resuming growth and I hope that will be at or above industry growth next year.

One of the additional items that is helping our growth is aftermarket and service, in which we've made a big push and continue to make a big push and that's also something that where we quite honestly have some low hanging fruit coming from the behind a little bit and that we'll see -- and is already even this year seeing growth ahead of the growth that we are reporting and probably in many areas, even ahead of the industry growth.

Great. Just a follow-up on that, the industry growth has been pretty heavily influenced by a robust pharma market and that's an area where you are relatively smaller. What do you feel like you could do to push into that market more? Do you want to push it in that market more? Could we potentially see more action there in the near term?

Yes, very much so. You're right. First of all, we're underrepresented in pharma and biopharma. It's less than 10% of our revenue presently. It's probably our single highest priority to add valuable products for that market segment, to enhance our sales and marketing structure to address that market segment more comprehensively. Even some of our inorganic activities are related to that market segment, so it's for us the single highest priority among our market focus areas to grow our exposure to that long term and sustainably.

Okay, thanks.

Jack Meehan, Barclays.

Hi, thanks. This is actually Mitchell Peterson filling in for Jack this afternoon. Starting with the Biotyper, I know you mentioned you saw a recovery in China. I was just wondering how the system did in the US in the quarter? Also, I know you mentioned you had some sales cycle issues with MALDI at hospitals. Are these fully recovered now? Thanks.

Yes, China, there were some particular issues with distribution channels and so on the first half. Those have been resolved, but until that really gets back to normal will be 2017, but even that's improving now for us in the second half, back on track hopefully by 2017. Europe is actually doing okay with them all the MALDI Biotyper. The one we don't mention is doing okay and do not have any particular funding issues, I'm not sure why, but we're pleased with that. In the US we had a rather weak start with the Biotyper in the first half that has improved quite substantially sequentially in the third quarter, but we're also not quite where we want to be yet. That's the answer, improvements but more room for improvement also in the Americas; Latin America being incredibly weak almost not funded, which didn't help the Americas picture.

Okay, thanks. On NMR, could you update us with the status of your IDP initiatives and any progress towards funding in 2017?

Yes, the larger IDP initiatives that we're observing -- I don't think they have an enormous traction that would lead to commercial effects but individual grant applications, I think IDP and the fact that you can get dynamics and function from the dynamic protein and protein complex world is more and more simply used in grants, because it's fundamental in the science. While it's not a identifiable large initiative with large funding right now, like precision medicines or something like that, it is playing a role in funding applications, particularly for high field NMR. Some progress with that, but I'm expecting that to accelerate.

Great, thank you.

Sung Ji Nam, Avondale Partners.

Hi, thanks for taking the question. I just have one question on the acquisition that you made of the real-time PCR assays. Was curious as to, for those of us more scientifically challenged, what -- are you actually integrating workflows or integrating kind of the technology into the MALDI Biotyper?

Well, Sung Ji, we are doing both. We are taking some assays that have been real-time PCR, assays for microbiology, specifically, that have been developed and with the associated team or the key team members to develop them further. We are starting an additional element of also adapting and enhancing these panels for higher multiplexing and for being read out on the MALDI Biotyper. Think of this as two phases of this acquisition. We hope to launch some these real-time PCR assays as early as next year, and then over time, probably in the following year or years, also have higher multiplex syndromic panels using PCR technology with the MALDI Biotyper as a reader, but that's more of an 2018/2019 story then. There's kind of two phases to this.

Just as a follow up, this implies there's going to be improvement in the current revenue for the MALDI Biotyper going forward?

This is independent of that question to a great extent as this will be targeting not so much new sales but the large installed base of MALDI Biotyper. This will be primarily -- this will be an assay and therefore primarily a consumables and a little bit of a software business. It may also enhance some new sales but that's sort of a -- it's much more of a consumable story.

Okay, thank you.

Derik de Bruin, BAML.

Hi, thanks. This is Mike Ryskin, actually, on line for Derik. I just have a couple of quick questions, one to piggyback on an earlier one. You had discussed the sort of the gives and takes and the timelines and your expectations with European funding environment pretty well, especially Eastern Europe. I was wondering if you could to do the same for North America. I know you mentioned that if there was any pickup in NIH in the fourth quarter, that be an incremental upside for FY17, given the timing of orders and everything. I was wondering what you had seen in 3Q and in October in terms of bookings, bids, discussions with institutions, and especially if you could put that in context of prior years, given you have a unique timing cycle, just to get an idea of how the funds are flowing through?

Yes, we don't track NIH and that funding on a month-by-month basis a consumables company would. I don't think that I -- quite honestly, I cannot offer you all that much insight. What I can say is that we haven't really seen significant order pickup yet, or generally order pickup from this increased NIH funding that was written, put into law or signed already in December of last year. It has not shown up yet. We assume it's in the system and working through the grant review and eventually granting cycle, but we're still awaiting solid evidence of that with more funding and bids and for bigger ticket instrumentation. We, so far this year, we have seen activity but we haven't seen this turn into an NIH-driven pickup in bookings and backlog yet.

Okay, thanks. That's really helpful. A quick follow-on, just broadly you've spoken that Q2 to Q3 you didn't see any dramatic changes in terms of end markets or geographies. Yet just trying to reconcile it. It was an incremental decrease but you did lower your organic revenue guide assumptions for 2016 by 1%, so I'm wondering what was the -- what went into the decision-making process there? Was it something that you saw the quarter? Was it your expectations for bookings in 4Q? If you could just narrow that down by geography, end market, anything.

Yes, we had looked for a -- we've seen some sequential pickup in Q3 business, but we had expected perhaps a slightly stronger sequential pickup in Q3, and as that did not materialize to the extent we had expected, we slightly tweaked and slightly reduced our growth, reported growth guidance for the year from flat to minus 1%. We also had some push outs in Q4 of sites not ready for major installations so therefore we cannot deliver and get acceptance until Q1. Those two tweaks together made us slightly reduce our revenue guidance for the full year.

Great, thanks. That's really helpful.

Tycho Peterson, JPMorgan.

Hi, guys. This is Steve Reiman for Tycho. Thanks for taking my questions. First, sounded like the Japan market improved sequentially. Can you just talk about what drove that and what your outlook is in that particular market?

Yes. Steve, Japan was helped quite a bit by currency so if you take currency out it was up, I think, in the low-single digits. We're not really seeing a lot on the academic funding side. We are seeing some business on the industrial side and that's driving the growth, but there's nothing really fundamentally different, I guess, in Japan that would cause us to think differently about it going forward.

Got it. (Technical difficulty) Give me your expectation for kind of a 25% normalized rate going forward. Given that remains much higher than peers, do you still have tax planning programs in place to bring that down and when can we see those actions begin to flow through into a lower tax rate? Thanks.

We do. It's a good question. Some of those tax planning initiatives are already under way but we -- as I think I've talked about before, we've got significant presence in Switzerland and we're excited about some reforms that are coming into place in Switzerland that will afford us tax savings. Given our significant presence there, we are continually looking at outsourcing more of our production to more favorable tax jurisdictions and getting revenue taxed in those jurisdictions. Those programs are ongoing as well and will accelerate as we go forward.

Doug Schenkel, Cowen.

This is Chris on for Doug today. Thanks for taking my questions. Just a quick question just to start. Tony, gross margin expansion has been much stronger than expected this year, so how are you thinking about the gross margin contribution to your operating margin expansion guidance? Do you think there's an opportunity to incrementally invest some of the gross margin upside into perhaps operating expenses?

Yes, I think we've been pretty consistent. It comes differently in different quarters but the biggest part of the operating margin expansion will come from the gross margin. That has been the case, not every quarter, but that's been the case most quarters this year. That will continue in Q4. We are using the benefits of our initiatives and our restructuring actions to invest in commercial activities and R&D activities, so we're not starving the business of investment with our restructuring actions. Of course, the leverage we're getting with no revenue is allowing us to continue those investments.

Bryan Brokmeier, Cantor Fitzgerald.

Good afternoon. Frank, in response to an earlier question you said that you don't expect to grow as fast as the industry next year but you hope to be at or above the industry growth next year. Did you mean you hope to be at industry growth in 2018 or could just clarify that?

I meant 2018. Sorry if I misspoke. (Multiple speakers) Yes, thank you.

I believe you're expecting two Aeon 1 GHz NMR systems to be installed next year. Is it still -- with those is it still going to be difficult to get to a sort of a mid-single-digit rate?

Good question. We will really go into the guidance obviously once we have our fourth quarter under our belt, so in February when we announce Q4. Right now we are leaving somewhat broadly returning to growth next year. You obviously want us to quantify that and we will do that, but we're not prepared to do that today.

Bryan Kipp, Citigroup.

Hi. This is on behalf of Dan Arias. Thanks for taking the questions. Frank, I just want to step back. In 1Q you talked about the incremental pricing associated with NMR and BIOSPIN as probably being -- or being in low-single digits. Just wanted to get a sense -- and potentially accelerating as we look into 2017. Want to get a sense of the incremental pricing that you guys are getting on the order side. Do you still have some leverage there? Are you seeing that, or is that trailing off right now with a little more anemic end markets? Just trying to get a sense.

Well, we're -- the one-time larger price increase that we had to do in NMR world, has as we had said, it's really when that comes in, it started a little bit in Q4 of last year. It's clearly been one of the contributors this year, although there are many others. It's not fully in the system yet, so some of this will still come through even in -- become in the first half of 2017. Then in some aftermarket and some other areas we take incremental price action, not only in NMR but also in other parts of the business. Most of the effect you will have seen by the end of this year, but some of it you'll also begin to see in 2017. We think it's a sustainable affect and then you'll see incremental annual affects.

Steve Willoughby, Cleveland Research Company.

Good evening and thanks for taking my question, guys. I guess it's two things. First, Frank, on the NANO business, I believe you said it was a down low-single digit with the, including the growth from Jordan Valley? I was wondering what you can talk about that business on an organic basis and your outlook for the NANO business? Secondly, just in terms of kind of end of year budget flushes and things like that, when we sit here today in early November, given your backlogs and sales leads, how much of insight, I guess, do you have for the fourth quarter as we sit here in early November? Can things really kind of turn on if there is a big budget flush and help in the fourth quarter?

For us the budget flush the fourth quarter will not have much of an effect but it could really give us stronger bookings and backlog for 2017. For the NANO group, indeed, we have given you the reported growth, including the Jordan Valley acquisition. I think it sets as much granularity as we would like to provide at this point in time. Sorry, I'd like more constructive but that's what I have at my fingertips here right now.

Jon Groberg, UBS.

This is actually Harris on for Jon. I appreciate the question. Can you comment on where you still see leverage to improve working capital efficiencies? I know you mentioned [in the past] supplier negotiations so curious on how you are progressing on that front? And any other initiatives you want to highlight.

Certainly, taking out the two factories and consolidating them into two other factories will help reduce working capital. We continue to improve simply our factory efficiency, our lean setup for the existing final test and manufacturing that we are doing. You will have seen over the years and you'll continue to see our effort to reduce our working capital ratio, working capital to dollar of revenue. By and large, we are making -- maybe not in every quarter and not so much for this third quarter because we really did build up a little bit of revenue in order to have a buffer when we close down the two factories. Don't want to run into delivery or revenue problems because of that, that's why we built up a little built extra inventory at the end of Q3. Most of that will come out of the system, certainly by early 2017. By and large, between outsourcing and our lean and operational excellence programs, factory consolidations and other cost actions, our working capital ratio is gradually coming down. Of course, overall -- over a multi-year trend is also that it improves our cash flow. We think we have continued opportunity to do that for the next three or four years, for sure.

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

Thank you, Angie. Thank you for joining us this evening. Bruker will be participating in several investor healthcare conferences during the fourth quarter, including the (inaudible) conference in Boston and the Citi Healthcare conference in New York. We invite you to schedule meeting at these conferences or visit us at our headquarters in Billerica, Massachusetts. Thank you have a good evening.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.