Bruker Corp (BRKR) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to the Bruker fourth quarter 2016 year, and FY16 earnings conference call.

(Operator Instructions)

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

Good afternoon. I would like to welcome everyone to Bruker's fourth quarter and full year 2016 earnings conference call. My name is Miroslava Minkova, Head of the Investor Relations for Bruker. Joining me on today's call are our 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'll 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'll be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are reported in our earnings release, in our webcast presentation, and on our website at ir.bruker.com.

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'll make forward-looking statements regarding future events, or financial performance of the Company that involves 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-10K, 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, February 13, 2017. Consistent with our prior practice, we do not intend to update our projections based on new information, future events, or other reasons prior to the release of our first quarter 2017 financial results in May 2017.

We'll begin today's call with Frank, providing a business summary. Tony will then cover our financials for the fourth quarter and full year 2016 in more detail.

Finally, before we begin, we have had power outages at our Billerica facility today due to weather conditions. In the event, that we do drop out during the call, we ask for your patience as we dial back in on a different phone line. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

Thanks, Miroslava, and let's keep our fingers crossed that the power stays on. Good afternoon, everyone, and thank you for joining us on the call today. I will begin today's earnings presentation on slide 4.

Q4 of 2016 marks another quarter of solid operational improvements for Bruker, despite a revenue decline. We increased our non-GAAP gross profit margin by [220] bps year-over-year. We increased our non-GAAP operating margin by 210 bps year-over-year, and we grew our non-GAAP EPS to $0.46.

Looking more closely at the fourth quarter, we reported revenues of $470 million, a reported decline of 1.6%, and an organic decline of minus 2.2% year-over-year. Partially offset by plus1.9% growth from the Bruker OST and Jordan Valley acquisitions. Finally, foreign exchange lowered our Q4 2016 revenue by minus1.3% year-over-year.

The organic revenue decline was expected, as the result of weak European academic bookings earlier in the year 2016. We also experienced soft demand in global industrial markets in 2016. Our Q4 2016 non-GAAP gross profit margin expanded to 220 bps year-over-year to -- expanded by 220 bps year-over-year to 48.8%, and our non-GAAP operating margin was 19.6%, up 210 basis points from Q4 2015, the result of ongoing operational improvement initiatives and cost control.

We reported GAAP EPS of $0.43 in Q4 2016, compared to $0.36 in Q4 of 2015. Our non-GAAP EPS of $0.46 in Q4 of 2016, compared to $0.38 in Q4 of 2015.

Moving on to slide 5, I show Bruker's performance for FY16. In FY16, we reported revenues -- our reported revenues were down minus 0.8% year-over-year, and down minus 2.3% on an organic basis. Weak European academic and global industrial demand were the primary drivers behind the decline, and as we previously reported, we also had some MALDI biotyper challenges in the first half of 2016. This was partially offset by strong China growth.

The Jordan Valley and Bruker OST acquisitions contributed plus 2% to reported revenues, while foreign exchange subtracted minus 0.5% year-over-year. We are very pleased with our solid operational improvements throughout the year in the face of revenue headwinds. For FY16, our non-GAAP gross profit margin is up 190 bps to 48.1%, and our non-GAAP operating margin is up 150 bps, exceeding our guidance, and finishing at 14.8% for FY16. This is about 460 bps of cumulative non-GAAP operating margin improvement over the past two years.

In FY16, we generated non-GAAP EBITDA of $290 million, or 18% of revenue. This is up 12.4% from non-GAAP EBITDA of $258 million in FY15. We finished FY16 with GAAP EPS of $0.95, compared to $0.60 in 2015. Our non-GAAP FY16 earnings per share of $1.19, compared to $0.89 in FY15.

Our FY16 non-GAAP EPS of $1.19 contains two items, totaling approximately $0.18 per share that are unlikely to repeat in future years. Excluding these two items, our 2016 non-GAAP normalized EPS would have been about $1.01, which is in the upper half of our original FY16 guidance in February 2016, and which is also our internal baseline for future EPS growth.

Finally, I'm pleased to report that our non-GAAP return on invested capital or ROIC, now has exceeded 20% in each of the past two years, FY16 and FY15. This underlines our primarily organic growth-focused management philosophy, and our disciplined approach to M&A.

I would like to briefly pause here, and comment on the end market conditions in the fourth quarter of 2016, and as we start FY17. During the first three quarters of 2016, a steep, and at the time unexpected decline in European academic demand, together with global industrial market weakness negatively impacted Bruker's revenue growth. Those trends still have an impact on our Q4 2016 revenue performance, as many Bruker products have lead times from booking to revenue of four to six months, or even longer.

To give you more perspective, in FY16 our European revenues represented 36% of Bruker's overall revenue, and revenues declined at a double-digit in constant currency in Europe. Outside of Europe, Bruker actually grew its revenues at a mid single-digit rate in FY16. During the fourth quarter of 2016, we saw signs of improvement in our European orders, which were up year-over-year for the first time in 2016, after declining year-over-year in each of the prior three quarters.

While we are not ready to call this a rebound yet, we are more optimistic, and we expect to have a lot less headwind in Europe in 2017. The weak bookings earlier in 2016 will still have an impact on our first quarter of 2017. We will need more quarterly data points before we can confirm a trend reversal in our European orders.

With that, please turn to slide 6 and 7, now where I'll provide details about the performance of our three [BSI] groups, and of our BEST segment for FY16. The Bruker BIOSPIN group delivered low to mid single-digit revenue growth, with revenues of $[563] million in 2016. BIOSPIN reported strong margin gains, and has been the major contributor to Bruker's gross and operating margin expansion in 2016. Better NMR pricing, mix, our 1 gigahertz NMR installation, our 2015 restructuring actions and factory closing, all contributed to higher BIOSPIN margins.

We also saw good demand for the NMR Foodscreeners in applied markets, and for NMR clinical research systems in phenomics, as well as strong growth in BIOSPIN's aftermarket service offering called LabScape. Our BIOSPIN preclinical imaging revenues declined in the low single-digits year-over-year.

Moving on to the Bruker CALID group, it reported a year-over-year revenue decline in the low to mid single-digits in 2016 to $475 million. CALID was negatively affected by European academic markets, as well as weak first half 2016 MALDI Biotyper revenue in China and in the US.

In 2016, optics and detection products have positive revenue growth, while our Daltonics mass [spec] products saw a decline. Daltonics orders did improve in Q4 of 2016, with Europe a main driver. As discussed in our Q3 2016 earnings call, we have initiated a factory consolidation and restructuring plan at Daltonics in 2016, which should have its full P&L impact in the second half of 2017.

Daltonics is ramping up several exciting products, including our MALDI PharmaPulse solution, our new timsTOF and rapifleX TOF/TOF instruments. We expect these products to begin to have a positive impact on Daltonics in FY17. Finally, our Bruker optics business had solid revenue performance, and contributes to Bruker's overall margin gains in 2016.

Please turn to slide 7 now. The Bruker NANO group had a year-over-year low single-digit revenue decline in 2016 to $[455] million, as contributions from the Jordan Valley acquisition partially offset weakness in AXS especially in Europe, and in our industrial research and analysis product lines worldwide.

We continue to execute on our right-sizing and factory consolidation efforts at AXS, as also discussed on our Q3 2016 call. Together with cost controls elsewhere, we expect those actions to help improve the Bruker NANO group's profitability by mid 2017.

Our Nano surfaces business saw improved profitability year-over-year in 2016, due to prior restructuring and cost actions. Our fluorescence microscopy products continue to see good demand in neuroscience and cell research. Our semiconductor metrology business nearly doubled in 2016, following our late 2015 Jordan Valley acquisition, and early major customer adoption of x-ray semiconductor metrology tools for technology validation.

Finally, our BEST segment revenues were down in the low single-digits in 2016, including a small revenue contribution from the November 2016 acquisition of Bruker OST in Carteret, New Jersey. BEST had a difficult prior year comparison, given the phase-out of the higher margin DESY and ITER multi-year projects in 2015. BEST was also not immune to previously reported pricing, pressures, and industry consolidation in the superconducting materials industry.

As we explained previously, in November 2016, we seized the strategic opportunity to acquire what is today Bruker OST, and have established BEST as a market leader in superconducting materials. In 2016, despite the above mentioned trends, BEST saw increased orders for superconducting wire, due to its superior quality, technology, and lower total cost of ownership for its MRI OEM customers and high energy physics customers.

BEST ended the year with strong backlog and long-term contracts. And BEST is now working hard on integrating the Bruker OST acquisition, and to begin its turnaround, productivity gains and margin expansion.

Next I will take a moment to highlight our investments in high value innovation with two new products. On slide 8, I show our new Ultima NeuraLight 3D optogenetics and multiphoton fluorescence microscopy system. This novel and unique system will help neuroscience researchers by providing simultaneous all optical optogenetics simulation and imaging on the same platform.

Multiphoton microscopy is an important tool in brain research, and we believe we now have the fastest and deepest penetrating 3D multiphoton system for neuroscience research. We just introduced the Ultima NeuraLight 3D at the Annual Meeting of the Society of Neuroscience in San Diego in November 2016.

On slide 9, our label-free rapifleX MALDI PharmaPulse solution is gaining acceptance among pharmaceutical customers. Just last week at the SLAS conference in Washington, DC we introduced our MALDI PharmaPulse 2.0 solution with further improved automation, assay development tools for 100 times to 1,000 times faster mass spec based screening.

Some of our key pharma early adopters showed outstanding data at SLAS, demonstrating the utility of this game-changing ultra-high throughput screening solution for drug discovery. We believe we have the first mass spec based system to offer the necessary speed, specificity, and robustness for label-free pharma primary screening of millions of compounds in drug discovery.

Moving on to slide 10. As you know, during 2015 and January 2017, we completed a number of strategically focused bolt-on acquisitions. The assets we acquired enable us to offer more integrated, analytical and diagnostic solutions, and also have made us a market leader in superconducting materials. These acquisitions will be important for the acceleration of our consumables, assay, and software aftermarket growth strategy. And they also added important preclinical PET/SPECT, micro-EPR and nano-indenting product lines to Bruker.

In 2017, we expect Bruker OST and our other bolt-on acquisitions to reduce our operating margin expansion by approximately 40 bps. By 2018, we expect them in total to contribute positively to our further margin expansion.

As an example of how we supplement internal growth with M&A on slide 10, I highlight key capabilities that we acquired to ramp up our assay, consumables, and software products for our MALDI Biotyper and MALDI Tissuetyper platforms. Over time, we expect this assay, consumables, and software business to be a Bruker revenue component with greater than 20% operating margins, and to contribute to our further margin expansion while also achieving high return on invested capital.

Bruker's key priorities for 2017 are summarized on slide 11. We are driving for constant currency growth in the mid single-digits, and we intend to continue our multi-year margin expansion.

In summary, we are making tremendous progress at Bruker, even in the face of significant end market headwinds in 2016. We believe we are on track to resume organic growth in 2017, and to achieve non-GAAP operating margins in the high teens over time. With that, let me turn the call over to our Chief Financial Officer, Tony Mattacchione.

Thank you, Frank. I will now provide some additional details on our financial performance in Q4 and full year 2016, starting on slide 13. Starting with overall financial performance for Q4, as you saw in the press release, we grew non-GAAP EPS 21% to $0.46, compared with $0.38 in Q4 2015. GAAP EPS was $0.43, up $0.07 from $0.36 in Q4 last year.

On the top line, our reported revenue was 1.6% lower year-over-year. Q4 reported revenue included a 2.2% organic revenue decline, 1.9% growth from the Bruker OST and Jordan Valley acquisitions, and a 1.3% negative impact from foreign currency translation.

Our non-GAAP operating margin of 19.6% was 210 basis points higher than in Q4 2015. This reflects continued price and mix benefits and operational improvements, most notably in our BIOSPIN group, but also improvements in our CALID group, and Nano surfaces business. Importantly, these improvements have occurred despite the challenging end market conditions we experienced in 2016.

Free cash flow was $79.7 million in the fourth quarter of 2016, a $59 million decrease from Q4 last year. As a reminder, we had very strong cash flow generation in Q4 2015, including significant customer advances with the ultra-high field magnet orders we received that quarter, and strong cash collections. In Q4 2016, we had more normalized AR collection, given this year's business volume and fewer ultra-high field magnet orders.

The timing of tax payments this year also reduced the year-over-year comparison. In Q4 2016, our free cash flow conversion rate was [115]%. Net cash declined year-over-year, but remained positive at $88.6 million at the end of the fourth quarter of 2016.

In the fourth quarter of 2016, we continued to buy back stock, and completed our November 2015 share repurchase authorization of $225 million. We also paid another quarterly dividend of $0.04 a share in the fourth quarter of 2016. The reduction in net cash reflects these two items, as well as our recent acquisition activity which Frank just covered.

On slide 14, I show the year-over-year revenue bridge for Q4 2016. Our reported revenue declined 1.6% in the quarter. The 1.9% portfolio-related growth from the Bruker OST and Jordan Valley acquisitions roughly offset a 2.2% organic revenue decline.

Changes in foreign currency translation lowered revenue about 130 basis points during the quarter. As Frank mentioned, soft European academic spending in the first three quarters of 2016, together with weak global industrial market conditions were the primary drivers of the organic decline.

Geographically and currency adjusted, European revenue declined in the low double-digits year-over-year in the fourth quarter. North America declined in the low single-digits. Asia was up low teens, including a greater than 20% growth in China, and low double-digit growth in the region generally. That's except for Japan, which was down in the mid single-digits.

For Europe, Germany representing approximately 10% of Bruker's total sales, reversed the significant decline from earlier in the year, and was up at a double-digit rate year-over-year. Broader Europe remained in negative territory, albeit to a lesser degree than in Q3 2016.

Most of our businesses reflected gains in China, benefiting from the new five year plan. China's focus on research serves us very well. We also had a strong fourth quarter in other Asian geographies, and in our semi and detection businesses.

On slide 15, I show our full Q4 2016 profit and loss statement on a non-GAAP basis. Our Q4 2016 non-GAAP gross profit margin was 48.8%, which was a 220 basis point increase year-over-year. The increase was primarily the result of operational improvements throughout Bruker's portfolio, but most notably in the BIOSPIN group, and also within our Nano surfaces, and Daltonics product lines.

These effects were partially offset by the academic and industrial market-driven volume declines. Our Q4 2016 operating expenses decreased approximately $2 million year-over-year, as movements in foreign exchange rates offset the additional expenses from acquisitions. Overall, we again demonstrated prudent expense control in the fourth quarter. SG&A expenses were down, while R&D was slightly up on selected investments, and the addition of acquisitions.

Our previously discussed restructuring activities and factory consolidations within our CALID and NANO groups remain on track. As a reminder in total, these restructuring actions are costing us 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 continue to expect the full impact of the savings in the second half of 2017.

Our non-GAAP operating profit margin in Q4 2016 was 19.6%, which was 210 basis points higher compared to last year. Looking below the line, net interest and other expenses were $2 million positive, and driven in part by gains on foreign currency denominated transactions, which we recorded in Q4 2016.

Our Q4 2016 non-GAAP tax rate of 21.7% increased sequentially from the unusually low approximate 6% effective tax rate in Q3 2016. In that quarter, our tax rate benefited from the remaining reversal of US tax valuation allowances. Our Q4 2016 tax rate was 260 basis points higher than in Q4 of 2015, as valuation allowance reversals were also recorded in the FY15's fourth quarter.

Weighted average diluted shares in the fourth quarter were 160.7 million, down 8 million shares or about 5% year-over-year, as a result of share buybacks since our November 2015 authorization. Finally, non-GAAP EPS of $0.46 was -- in Q4 2016 was an increase of $0.08, or 21% from $0.38 in Q4 2015.

On slide 16, I show year-over-year revenue bridge for the full year of 2016. Our reported revenue declined 0.8% from 2015. The 2% increase from the additions of Jordan Valley and Bruker OST offset a 2.3% organic revenue decline. This was slightly better than the approximate 3% organic revenue decline we had projected in November.

Changes in foreign currency had a small 0.5% negative impact on our 2016 reported revenue. Geographically, and adjusting for foreign currency translation, European revenue was down in the low double-digits during 2016, compared to 2015. Asia was up in the mid single-digits, including a mid teens contribution from China, that was partially offset by a high single-digit decline in Japan. North America was up in the mid single-digits.

On slide 17, I show our full year 2016 profit and loss statement on a non-GAAP basis. Our 2016 non-GAAP gross profit increased $23 million or 3%, and the gross profit margin of 48.1% increased 190 basis points, compared to 2015. This is largely due to the positive BIOSPIN price mix and operational improvements -- I'm sorry -- due to positive BIOSPIN price, mix and operational improvements.

These gross profit margin improvements were somewhat offset by the CALID -- the lower CALID and NANO volumes. Our 2016 operating expenses were essentially flat year-over-year. Our cost controls, together with favorable foreign exchange movements roughly offset additional expenses from the recent acquisitions.

SG&A declined slightly for the full year 2016 compared to 2015, while R&D increased modestly on select investments and acquisitions. The net result is that our non-GAAP operating profit margin for 2016 improved by 150 basis points compared to 2015, higher than our 100 basis point operating profit margin expansion guidance at the time of our last update. We are very pleased with our continued operational progress.

Our 2016 non-GAAP tax rate was 15.7%, and our 2015 tax rate was 22%. While both years benefited from the reversal of tax valuation allowances, the effect was much more significant in 2016. Adjusting both years for the valuation allowance effect, our non-GAAP tax rate would have been 26.3% in 2016, and 34.4% in 2015. The reduction reflects our progress with tax planning initiatives.

In 2017, we expect our full year non-GAAP tax rate to be approximately 25%. Finally, FY16 non-GAAP EPS of $1.19 represents an increase of $0.30 or 34%, from $0.89 in 2015.

Operating profit expansion represented $0.07 of the increase, the lower share count due to our share buyback program contributed $0.05, the effect of the year-over-year tax valuation allowance reversals contributed $0.08, favorable currency effects contributed $0.06, and the Jordan Valley acquisition added $0.04.

As Frank mentioned earlier, our $1.19 full year 2016 non-GAAP EPS included two items that we believe are unlikely to repeat in future years. Let me provide a little more detail around that.

First, as discussed in our Q3 2016 earnings call, in FY16 we were able to reverse more US tax valuation allowances, which resulted in a non-cash tax benefit of approximately $0.15 for the full year. Second, foreign currency transaction gains contributed about $0.03 to EPS in FY16. Excluding these two items, our 2016 non-GAAP EPS would have been closer to $1.01 -- $1.01 which is our internal baseline for future EPS growth.

Turning to slide 18, we generated $93.7 million of free cash flow in 2016, compared to $195 million in 2015. The year-over-year comparison was affected by an increase in working capital, primarily driven by higher inventory levels needed to support our factory consolidation efforts, and long-term contracts at BIOSPIN and BEST, higher bonus payments for 2015, higher restructuring payments, higher tax payments associated with our 2015 cash repatriation, and higher tax prepayments. By comparison, the change in working capital was a source of cash for us in 2015.

Our cash conversion cycle at the end of 2016 reflected a decrease of 6 days compared to 2015. This was comprised of the following. Our days of inventory remains at 188 days, our days sales outstanding decreased 5 days to 54 days, and our days payable outstanding which totaled 34 days were up 1 day, compared to 33 days in 2015. As mentioned in inventory build associated with this year's restructuring actions and long-term contracts kept our days of inventory outstanding consistent year-over-year, offsetting inventory reduction initiatives.

During the fourth quarter of 2016, we repurchased an additional 734,000 shares at an average cost of $22.48 per share, totaling $[16.5] million. Since the inception of the program through December 31, 2016, we repurchased 9.3 million Bruker shares at an aggregate cost of $225 million, completing our November 2015 share repurchase authorization. We also paid another quarterly dividend of $0.04 a share in 2016 -- in Q4 2016.

Now turning to slide 20, I show Bruker's guidance for the full year of 2017. We currently expect our FY17 reported revenue growth to be in a range between 1.5% and 2.5%. We project organic -- excuse me -- organic revenue growth of approximately 1% to 2% in 2017. Acquisitions are expected to contribute approximately 350 to 400 basis points to top line growth.

Assumed in our guidance, [our] average foreign exchange rates over the month of January, which would result in a foreign exchange headwind to Bruker's revenue growth of approximately 300 to 350 basis points. We expect our FY17 non-GAAP operating margins to expand 40 basis points to 70 basis points, from a base of 14.8% in 2016.

Let me briefly comment on our operating margin expansion goals for 2017. Our 40 to 70 basis point operating margin expansion target includes a cumulative dilutive impact from our 2016, and early 2017 acquisitions of approximately 40 basis points. Excluding the FY17 impact of these acquisitions, our underlying operating margins are expected to increase 80 to 110 basis points in 2017. As mentioned, our FY17 non-GAAP tax rate is projected to be around 25%.

We assume a fully diluted share count of approximately 161 million shares in FY17. Rolling it all up, our 2017 non-GAAP EPS is projected to be in the range of $1.05 and $1.09 a share.

For 2017, our foreign currency assumptions include a JPY115.1 per $1, $1.06 per EUR1, CHF1.01 per $1, which were the average rates in effect in January of 2017. We expect capital expenditures of approximately $45 million for FY17.

I remind investors that like in past -- in years past, we expect the majority of our profitability and cash flow to be generated in the 2017 second half. Given a challenging prior year comparison, we expect to have a slow start in Q1 of 2017. As a reminder, our Q1 2016 included a 1 gigahertz NMR system, and a favorable tax rate.

In addition, in the first quarter of 2017, we expect to still have an overhang from the weak European orders in the first nine months of 2016. While we do not provide quarterly guidance, we currently anticipate both operating profit margin and EPS in the first quarter of 2017 to be lower year-over-year, compared to the first quarter of 2016.

I will close by stating that we are very pleased to report strong improvement in operating margins in Bruker's bottom line in Q4, and the full year of 2016. We have made significant progress with our profitability expansion initiatives, and we are committed to delivering further improvements in this area, as we resume revenue growth in 2017 and beyond. With that, I'd like to turn the call back over to Miroslava start the Q&A session.

Thank you, Tony. Andrea, please open the call to questions? Please limit your questions to one and a follow up, in order to accommodate as many analysts as possible.

(Operator Instructions)

Brandon Couillard, Jefferies.

Thanks, good afternoon. Frank, in terms of the 2017 outlook, can you give us a sense of what you see as the positive and negative tailwinds and headwinds going into next year, be it by region, or specific end market?

Yes, Brandon. We do anticipate less headwind from Europe, not quite ready to call it a trend reversal yet, but we are encouraged. We expect continued growth from China.

And we have not made a call yet on what the industrial trend will be. We've seen that others have reported encouraging trends in industrial, and our data on that is still ambiguous. So we'd like to observe that for another quarter or two. We do generally believe that there will be a come back in academic spending, and that over time -- maybe not all in 2017, or all in the first half of 2017, we'll have a stabilization in academic demand.

Just to clarify -- to make sure we're clear in terms of what you have embedded in guidance for the year, have you assume that the European government academic market is -- returns to positive growth on balance for the full year? And a second question for Tony, you have a sense of what you're expecting for free cash flow conversion for 2017?

So I'll take the first half. We have not, we have at this point said that, in Europe we expect last headwind. If you recall, in the fourth quarter and all of last year, European revenue down, European revenue was down in the low teens for us. And we expect that -- we have not said yet that we will grow in Europe, but we don't think we will have a headwind anymore, much less headwind.

[Not of the same magnitude.]

Yes. But just to follow up on that, we won't grow in Europe on a year-over-year basis, but what we've seen in Q4 is encouraging in terms of our order patterns.

And I should have added, thank you, is that we still have an overhang from weak European orders that will affect us, certainly in Q1 of 2017.

And Brandon, as regards to free cash flow, we, Q4 was a good cash flow quarter for us, at [115]% GAAP net income conversion. If you look back for a few years back, we, that's generally the amount of free cash flow conversion, plus or minus 20 basis points. And that's what we're looking at for 2017, around a 100 -- 80 to 100 basis points free cash flow conversion on our GAAP net income.

Great. Thank you.

Amanda Murphy, William Blair.

Hi, thanks. I just had a quick follow up in terms of 2017 expectations around the ultra-field side, are you expecting anything from a revenue recognition there in 2017? And then, maybe you could just give us a sense of how the backlog even qualitatively is shaping up there, order flow? Thanks.

The ultra-high field which we define as 1.0 gigahertz and higher, we have one system in the 2017 forecast. Our backlog is obviously higher than that, but these systems take a while to build and test. And, of course, there's also always the issue of site, customer [citing] and readiness. We have a very substantial backlog, north of $100 million off backlog for 1.2 and 1.1 gigahertz systems for the years 2018 to 2021. But we do not expect those to come into revenue in 2017 yet.

And is the expectation you'll be able to manufacture those in 2018 then, the 1.2?

No, it will take several years. We hope that we'll make a lot of progress in 2017, and probably can update you at the end of 2017, whether we expect them to go into 2018 revenue. At this point, we cannot say yet, as there's still real R&D issues.

Okay. Thanks very much.

Jack Meehan, Barclays.

Hi, thanks. Good afternoon, guys. I wanted to get your perspective on the forecast for CALID in 2017, and just thoughts on MALDI on the hospital side going into the year?

Yes, so CALID, I'll take that when Jack. So detection had unusually high business in 2016, where we expect them to be lower because they had some unusually high deliveries in 2016. Group optics, we expect to see solid growth, as in just about every year.

And we also expect to assume -- we expect that the Bruker Daltonics mass spec business will resume growth -- organic growth, and growth in general in 2017. For the group, that means a mixed -- a growth year, but also still in a low single-digit growth year, because of the detection going down in revenue, even though the two larger divisions will be growing.

As to the question on MALDI, and I believe MALDI Biotyper in particular, we expect that business to be back in growth mode after some hiccups that we had in the first half of 2016. So we expect that to normalize, but now that it's including aftermarket and service, a $100 million business. We don't expect to do -- or ever -- to go back in 2017 to double-digit growth, but we expect it to grow in the single-digits.

Great. That's helpful. And then just one follow up, the share count guidance, the 161 million? I'm assuming that doesn't include any repurchase, and just thoughts on reauthorization of a new buyback program? Thanks.

That's correct, it does not include any new share buyback authorization, and we will be with our Board, analyzing our capital allocation for 2017 and beyond. And at this point, we do not have an authorization for additional share buybacks, but that's always something that we analyze from time to time.

Thanks, Frank.

Doug Schenkel, Cowen.

Hi, good afternoon. NMR pricing was a major driver of margin expansion over the last several quarters, it also helped at the revenue line. Can you help us think about how much opportunity is left, in terms of the pricing driver at the NMR line on margins, and at the top line? And more broadly, would you be able -- would you be willing to provide some sort of a bridge or a ladder, in terms of what the components are, of margin expansion, at least in the context of your guidance for 2017?

So I'll take the first part, and then I'll pass the second to you. The NMR pricing, the one-time larger NMR price increase that we did, announced in early 2015, has been coming in mostly in 2016, a little bit already in Q4 2015, as you'll recall Doug. And it still has an effect also on the first half of 2017, certainly.

On going, small 2% to 3% price increases which we tend to do in many of our businesses, not only in NMR, it's simply an ongoing part of business, and they are part of margin expansion, like in probably most companies. But there's really nothing unusual about them, and there's no unusual NMR price increases that we have executed since early 2015, or intend to do in the future. So it's really just business as usual, probably what every company does, small price increases to make up for raises and inflation and so on.

And Doug, to follow up on bridge. We're not going to put out a detailed bridge, but the drivers will be reflective of what we put in place in 2016. Of course, the restructuring of the AXS in the Daltonics production facilities, the MALDI Biotyper move, and the AXS move will contribute significantly to the margin increase, that as you might recall is about a $10 million to $13 million increase fully annualized in the second half of the year.

As Frank just mentioned, price will have an impact, there is an overhang with the 2015 price increase, as well as an annual price increase at BIOSPIN and other businesses. New products will contribute nicely to margins next year as well. And importantly, with the improving volume, we'll better absorb fixed costs in our factories, so that will have an impact as well.

Okay. And one very quick related follow up. Recognizing you acquired several assets over the past few months, can you help us think about how these deals impact operating expense specifically in 2017? Just trying to get at, a benefit or drag on the margin line, in the context of your full year guidance?

Yes, we put -- as we, in our prepared comments, the acquisitions have a 40 basis points drag on our operating profit margin in 2017, and we expect those contribute to the expansion after that.

Okay. Thank you very much.

Tycho Peterson, JPMorgan.

Hi, thanks. It's actually Patrick Donnelly in for Tycho. Maybe Frank, just on the guidance, and you're looking for 1% to 2% organic growth. It's still a little bit below market growth, coming off of a decline this year. Can you just talk through what's preventing you from growing at a market rate, and what gets you back to mid single-digits, maybe in 2018? Obviously, you assume the European hangover is affecting 1Q a bit. I mean, without that do you feel like you're kind of back to that mid single-digit growth next year? If you could just talk through that, that would be great?

Yes, Patrick, a good question. So obviously, for us, from an organic decline in last year, the 1% to 2% organic which is below market in 2017, is very good progress. As we said, we still feel that we have some backlog hangover from the weak bookings, in particular in the first three quarters of last year. So that will have an effect on Q1 2017 for sure, as Tony explained, and possibly little bit later into the year.

The other effect is really more -- so yes, Europe is normalizing is clearly required for us to get to market growth rates. We believe that our industrial business cannot reasonably get weaker than it has been in the last two or three, or four years. It's been a while. We certainly recall periods in our industrial business was growing very nicely, at times faster than our life science business, although so far for 2017, we haven't modeled that in. Right? We do expect some recovery there eventually, just don't -- not ready to call the timing.

And then mostly, we're just really quite bullish about the opportunities from the new products and solutions, and new market segments that we're entering from phenomics by NMR, to Proteo mix, to a further expansion in molecular biology, with much more assays, and antibiotic susceptibility testing, resistance testing, multiplex PCR assays, to advances in semiconductor metrology. And this wasn't my complete list, because I don't want to make the answer to long.

But generally speaking, it's the product and solutions momentum that we think can accelerate us to market growth and possibly beyond, with a little -- with clearly, cooperation needed in Europe, where we're more optimistic. And a little industrial help wouldn't hurt, but isn't really crucial for our longer term growth prospects. I hope that gives you enough color perhaps.

Yes, that's helpful. And then, maybe just looking at M&A, obviously, you been a lot more active over the last couple months. Maybe just an update as to how the pipeline looks, and then just general thoughts on capital deployment? I see you touched on -- your share repurchase is now completed, and how you're thinking about capital deployment going forward, split between those two, and then the ongoing dividend as well?

Yes, M&A, we would expect now for the remainder of 2017, to be much more of a normal year, with a slower M&A pace. It was really somewhat coincidence, that so many of the deals, that some of them have been in the pipeline for many quarters, and maybe even a year, that they all seem to close in Q4, or even shortly after the end of Q4 in the new fiscal year.

The pipeline is such, that there will be very likely less -- quite a bit less M&A, and there could be anywhere from zero to two or three transactions per year. Hard to speculate, but it's going to be a more normalized M&A year, now going forward.

In terms of capital deployment, I mean, investing in our profitable growth is always the highest priority, internal investments which we think are sufficiently funded. We don't need a lot of CapEx as Tony has explained. High quality, high ROIC, strategically focused M&A would be the highest priority, but they're not that many targets, plus we have some digesting and integration to do now. And we -- we'll from time to time, look at share buybacks, and I think our dividend will probably stay as it is.

Bryan Brokmeier, Cantor Fitzgerald.

Hi, good evening. Just following up a little bit on the last question on M&A. You have the strongest cash than you had in a number of years, at the end of the year, and I think that's probably driven some of the acquisitions that you've done recently. But have you also seen valuations come down? And then, what's your appetite for a larger, more meaningful transaction?

Valuations are very mixed. I don't know that I'm aware of a trend in valuations, and whether there -- I -- we do most of our valuations not, we don't necessarily, or we don't typically acquire publicly traded companies, or necessarily an auction processes. So our valuations, the ones we pursue, tend to be a little bit earlier stage, the longer term they tend to be at -- at reasonable valuations, fair valuations that allow us a good ROIC over time.

I wouldn't say that we have appetite for a larger acquisition, but I wouldn't want to rule it out either. But it is not one of our key goals for 2017.

I think we have, so many opportunities that we can grow into organically, or with the help of the recent acquisitions that really in many ways, enable us to pursue more complete solutions, particularly life science, pharma and diagnostic spaces, that I don't want to rule it out. But it's not that we have appetite for a larger acquisition -- I wouldn't characterize it that way.

And have you made progress in your search for a new BIOSPIN president, and what time line do anticipate?

Probably a 2018 decision. We've implemented a very capable interim team, of people that were on the team already, and we've established them in the middle of January, and we'll give them the year 2017 to prove themselves. And then, probably make a decision at the end of the year, in early 2018. I think I'm really quite optimistic, that we won't miss a beat, and that the strong momentum at Bruker BIOSPIN will continue also in this year, and we have some excellent internal bench strength.

Okay. Thank you.

Jonathan Groberg, UBS.

Great, thanks. Sorry, just two quick ones -- I don't know that I exactly got the answer. I know people already asked them already. But one, Tony, what is your free cash flow guidance for 2017? And then, in 2016, the 200 bps of margin expansion, how much of that would you attribute to the NMR pricing that you took? And I have one follow up?

Yes, like previous times when you've asked a specific question in that regard, we're not going to give the specific amount on the price increase, and the [2000] bps. But it was a significant driver of the expansion, as well as restructuring activities, operational improvements, mix, and the like. So the answer hasn't changed there.

Free cash flow, again, we don't provide guidance for free cash flow. So what I said, and what I think is what you should expect is around 80% to 100% of GAAP net income for free cash flow for 2017.

Okay. Got it, that makes sense. I think I heard 80 to 100 bps improvement or something like that. Okay, that makes sense. And then, Frank, can you -- now that you are a kind of -- your year ended, I'm assuming you go back, and talk to some of our customers in Europe on the research side. What you hearing from them, why do you think things seemed to get a little bit better in the fourth quarter? And maybe what happened earlier in the year, and how that's informing what you're thinking about 2017?

Yes, still no clear answers. I think there's some structural issues in central and Eastern Europe that we don't expect to change. But I think that Germany spent so late, and some other powerful economies, from France to the UK, to Scandinavia, that Italy and Spain for good parts of the year 2016, didn't have governments or functioning governments.

We just believe the excitement of Brexit is subsiding a little bit, the negative excitement, if you like, and we think there will be a normalization over time. We think there has to be one, and our Q4 indicates that. And certainly, the tone at our internal recent sales meetings that I've been attending in Europe, was clearly more positive than a year ago. So we are reading the tea leaves, like everyone else, and we have some -- we have a good data point in Q4 with year-over-year increase in European orders. So we're encouraged, but we won't call it a trend yet.

Thanks.

Isaac Ro, Goldman Sachs.

Thanks, guys. It's actually Joel in for Isaac. Maybe just another quick one on the balance sheet and capital allocation. Just thinking about your priorities to shift the business a little bit more towards the recurring revenue, whether it's consumables or software, how should we think about the optimal balance sheet leverage of Bruker in, let's say, 2018 or 2019?

Well, we like relatively low leverage, unless we do a very significant deal. And while we spent a number of deals, and I think the cumulative spend on that has been around $70 million, I believe, in the last several months, we're comfortable with our leverage as is. It could go a little bit higher, and going to a higher -- a level higher in the 2 to 3 range, we probably would only want to do that, if there is a very worthwhile acquisition that we would want to consider.

So we're comfortable with our present leverage. We're obviously, not going to a completely unlevered balance sheet, given the still relatively attractive cost of borrowing. I think right now, having this more permanent debt feature on our balance sheet is good for our shareholders.

Thanks, and maybe just one on Japan. Just help us understand whether there are any competitive dynamics at play here, that may be amplifying some of the underlying market weakness we saw in 2016?

Well, we have strong competitors in Japan with Shimadzu, [JEOL], [Rigaku], a little bit of [Ariba] as well. Certainly, NMR Japan is the most competitive of all markets, without any question, because that is the home market for our main NMR competitor, although they're certainly very active worldwide.

So it is possible that there's some competitive dynamics in it. But I also don't know that our market trends are so different from that what others are seeing.

Great. Thanks.

Paul Knight, Janney.

Hi, this is actually Bill Marsh on for Paul. How are you guys doing?

Good, thanks. How are you?

Maybe just if we could, after a string of acquisitions at a high level, how do you think about the continued growth in recurring revenues over the next few years? Is it going to be driven by going after specific product lines or customers, can you continue to grow your percentage of revenues for -- in recurring revenues?

Really two pieces. We've been very consistently growing our aftermarket service, and IQ, OQ, PQ services, and the regulatory services, qualification services. That's been a good growth driver, and we now really have put the appropriate management in place, just about, well, really everywhere in the last three or four years. So that's already humming along from a lower base, than some other companies that have done this for decades, but this is well underway, and is really broad-based.

The other part, which has to do with software and some assays and consumables, that is not only, but that is primarily focused on our diagnostic and microbiology and clinical research solutions. There are also components of that elsewhere, from some industrial AFM tips, to supplies for the MALDI PharmaPulse for pharma industries, but there, consumables business growth which is very rapid right now, albeit from a low basis, and software business, will be primarily in clinical research and diagnostics.

Got it. And then, just back to the Jordan Valley acquisition, the semiconductor market has been pretty strong over the past 6 to 12 months. Is that an area where you would look to maybe continue to expand off, of a smaller percentage of your business in the future? Thanks.

Yes. We believe that the, especially as nodes sizes get smaller and smaller, right now there's capacity [buys] for the 10 nanometer node in which we play some role. But as we go, as we pass hopefully, and that looks good, the technology validations for the 7 and eventually 5 nanometer node. And if some of our tools also play an important role in the 3D features that more and more memory and chips have, we believe there's good technology trends, more so even then marketing trends, towards our semiconductor metrology tools.

So once you get beyond the validation year, 2016, 2017, this is something that may very well get a good pick up in 2018 and beyond, as we go more into the capacity buys for these newer technologies. So over time, right now, semi is 5% or less of our revenue even in a good year. But over time, that could go into the high single-digits, if, with very good margins is our technology strategy works out there, and we're actually quite optimistic.

Thanks.

Sung Ji Nam, Avondale.

Thanks for the questions. Frank, given your overall strength in the BIOSPIN business, and you talked about also having the backlog of the 1 gigahertz system, et cetera, is that segment, the growth that you've seen recently, is that -- do you think that's sustainable into 2017 and beyond? And did you also expect the organic growth [up] from the preclinical imaging business?

Okay. So Sung Ji, a few questions. The ultra-high field backlog has not gone up very much in the last year, we, that's sort of older backlog. And I would think, this past year, that probably more of the structural biology investment probably went to other vendors, CryoEM, and [CryoTEM]. We believe that that will pick up again, as there will be more investments by governments in particular, in intrinsically disordered protein, which we believe will be one of the next investment priorities in molecular sciences.

But we do believe that the applied food authenticity, and clinical research markets and phenomics, that those can be good growth drivers, as long as the focus on pharma for our NMR business, which is why fundamental -- and you heard me say this before, we upgraded our long-term CAGR, for the NMR business from low single-digits a few years ago to mid single-digits, and we're sticking to our story there. We think that it is promising.

And Sung Ji, the last part of your question was on preclinical imaging, that has not had a couple years of slower growth, and slower funding. We're still looking -- we're right now primarily pursuing a product strategy with exciting nuclear molecular imaging, and optical molecular imaging, and the combination of PET and MRI to restart growth there. But it's a little too early to call the long-term growth rates in that market.

Okay. And just quickly for Tony, what's the assumption for currency impact on margins and earnings next year for 2017?

We used the average rate, because of the changes in the rates recently, we use the average rates in January for the guidance. And that had a negative impact on the top line, but given our cost structure, we have a natural hedge in the business. So the impact on operating profit margins is not significant, if the rates stay where they are today.

Thank you.

Ross Muken, Evercore.

Hi, this is actually Matt Nicolai in for Ross, and thanks for taking the question. So in European academic market in the quarter, are there any other markets where you saw sequential improvement? I know you called out Germany, but was that the only real bright spot, in terms of a sequential improvement?

We called out Germany on the revenue side in Q4, on the order side, the European improvement in Q4 was a little broader.

Got it. Thanks. And then, just one more. Have you seen any pick up in orders related to NIH in the quarter, or are you still not really seeing any pickup there?

No. We haven't seen anything remarkable, and our data isn't usually the statistically most meaningful. I'm sure, a consumables company will have statistically better data on that. So we haven't seen anything remarkable. We did not see any significant NIH spend coming our way, in terms of orders in Q4 yet, at least nothing unusual. So that's something that we're observing.

Got it. Thanks.

Daniel Arias, Citi.

Good afternoon. Thanks for the question. Just one for me. Frank, within BIOSPIN, are you looking for NMR growth to come more from the research side, or from the applied market this year?

From this year, likely more from the pharma and from the applied side.

From pharma and applied? So [equal] (multiple speakers) contribution, if you just consider pharma research?

I wouldn't -- I'm not prepared to say equal contribution. I didn't quantify that actually exactly, but I think those are both businesses that are smaller than the academic research side, that probably will have the faster growth rates qualitatively, without going into the exact numbers.

Okay. Thanks.

Steve Willoughby, Cleveland Research.

Hi, good evening. Most of my questions have been answered. Just one quick one for Tony. Tony, what are you guys expecting in terms of interest expense for the year, given the deals you've done so far, over the last 60 days or so?

Some of the deals were funded with foreign cash, but we have borrowed up a bit on the revolver, but a little higher than our rate this year. So I think we ended the year, in the mid teens on interest expense, and that'll be about the rate for next year.

Okay. Thanks so much.

Dan Leonard, Deutsche Bank.

Thank you. Just another one for Tony. Tony, I'm wondering if you've done any work to assess potential changes in US tax policy on Bruker? Would that be a positive or a negative?

Yes So obviously, a very fluid situation that we're not making any conclusions with, but there's three elements we're looking at, the corporate rate element of it, the territorial aspect, and the repatriation aspect. And then, of course, the border adjustment, and you got to really look at those three pieces separately.

From a corporate rate perspective, that obviously would have a good impact on our tax provision, however, a lot of our taxable income is non-US, so that puts some guard rails around that. Obviously, we've got quite a bit of cash outside of the US, so a repatriation at a low rate will help us quite a bit. We've got about $[460] million of cash, we think about $300 million of that could be repatriated under -- if the new plan goes into place. And then, the elimination of the permanent reinvestment of those earnings going forward, obviously, is good for a company that generates a lot of cash overseas.

The border adjustment is more of a wild card for us. We are a net importer, so depending on how that plays out, that will have an adverse effect on our tax rate. But it's too early to estimate that in -- with a lot of precision. And things could go, that could happen or not. And we would obviously react to that, with pricing and supply chain type of decisions. But it's too early now to really conclude on what we would do, if the legislation as proposed passes.

Okay. Thanks, Tony.

Puneet Souda, Leerink Partners.

Yes, hi, Frank. Thanks for taking my question. Just a quick one on the NMR services contract. I just wanted to know, if you could educate us a bit on how the contracts -- if the contracts are maintaining the higher level of pricing, how do you see that in 2017? Are those sticking, or I mean, compared to the service contracts that you had before, and the number of service contracts you had before, how is the trend looking, with the updated pricing, if there is one?

Yes, no, that's very sticky, and we're really expanding our service contract business, and BIOSPIN, but also elsewhere, very nicely. That's just been a somewhat under-pursued opportunity in the past, at least not equally pursued in all geographies. And we're now making good progress in geographies where we previously didn't have a lot of service contracts, from China to ironically Germany, and central Europe.

And so, I think that's making good progress, and it's mostly in pricing a little bit, but it's mostly really the larger number of service contracts that we're -- and the greater flexibility, the greater range of product offerings that we have for people who need -- from 24/7 including weekends, to people who need just some basic repair parts, that they might not have otherwise in their academic budget. So we really have a good product offering, a good product range now, and a good commercial effort to pursue it.

Great. Thanks for taking my question.

You're welcome.

Derik de Bruin, BAML.

Hi, thanks. It's [Mike Groskan] on for Derik actually. I just have one quick question that hasn't been asked yet. In terms of the M&A contribution for 2017, you talked in detail about the revenue assumptions, and then you also commented on a 40 basis points hit to Op margin expansion.

Given the size of the deals that you've done -- and you also said that in 2018, it will return to expanding, and contributing to margin expansion overall. Given the size of the deals, and the shift from a negative 40 basis point headwind to contribution, that seems like a pretty dramatic jump just in one year. Can you talk about how you're confident you can make such a big turnaround in OST, and in the other bolt-on acquisitions?

I can give you a couple of examples, Mike. So for instance, the assay business that we bought in Scotland, in Glasgow, only has expense right now, R&D and other expenses, and has no revenue. We expect to launch first products as early as this summer. And obviously, as they start to have some consumables and assay revenue, albeit on a small basis, finally that will begin to offset some of their pure expenses right now. So that's -- percentage-wise going to be a big improvement.

As we get going with some of our software and consumables businesses that we have acquired, we expect good growth from them. And finally, the sizable Bruker OST business, the part of the BEST segment, again, because they had been -- their operating margins had been essentially near zero or essentially flat, so making in improvement from that with best practices, with better productivity, with some of the things that we had previously implemented elsewhere, it's somewhat low-hanging fruit to make good progress with them. So we believe that that's realistic to get them to make -- to become contributors to our further margin expansion, as early as 2018. We're moving pretty quickly on all of this.

Okay. All right. Thanks.

Tim Evans, Wells Fargo Securities.

Hey, just one quick one, Frank. Do you feel like your visibility, and the accuracy of your forecasting is better this year than it has been in the past? Has there been an improvement in that, or do you still feel like it's in similar territory?

I'd like to think it's better Tim. Of course, last year, I think we at least -- I cannot speak for others, although I suspect the European slow down, and how suddenly it happened, came as a surprise for most companies, it certainly came as a surprise to us. We did not have a year ago or 13, 14 months ago, see that significant European slow down coming.

So I don't know, what I don't know. I feel pretty -- I feel better about our forecasting. And on the other hand, there's somewhat of a hope element that none of these major surprises come up, that you just don't see yet so.

Okay. Thank you.

Our nearer term for revenue forecasting is certainly getting better, our pipeline and opportunity view from the CRM systems that we've been implementing is getting better and better. It's the major disruptions that are hard to see, the steady business, I think our forecasting is getting much, much better. I think maybe that's a more differentiated answer.

Thanks.

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

Thank you for joining us this evening. During the remainder of the first quarter, Bruker will participate in the Cowen and Barclays healthcare conferences. We invite you to meet us at these conferences, or visit us at our headquarters 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.