Bruker Corp (BRKR) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the Bruker First Quarter 2017 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 First Quarter 2017 Earnings Conference Call. My name is Miroslava Minkova, 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'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 included in our earnings release and are posted 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 be making forward-looking statements regarding future events or financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from these 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, May 3, 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 second quarter 2017 financial results in August 2017. We will begin today's call with Frank providing a business summary. Tony will then cover our financials for the first quarter of 2017 in more detail.

Now I would like to turn the call over to Bruker's CEO, Frank Laukien.

Thanks, Miroslava. Good afternoon, everyone, and thank you for joining us on the call today. I will begin today's earnings presentation on Slide 4. Bruker is off to a solid start in 2017 as our first quarter revenues and operating income exceeded our expectations. Bruker's reported revenues increased 2.5% year-over-year while on an organic basis our revenues were still down slightly year-over-year, as we had predicted. We again improved our gross and operating margins year-over-year. Keep in mind that Q1 '16 was a challenging comparison, which included revenues from a high-margin 1-gigahertz NMR system, a major Bruker detection contract, and an unusually low tax rate.

In Q1 of '17, our European revenues remained soft as expected; but European bookings continued to recover, as we again saw an increase in orders year-over-year, the second quarter in a row of positive order growth in Europe. We also saw continued strength in China, further stabilization in our microbiology orders and some positive trends in certain areas of our industrial, applied and semiconductor metrology markets. We are encouraged with the continued stabilization we see in our business, and we remain confident in our ability to achieve our 2017 organic revenue growth and earnings objectives.

Looking more closely at the quarter. We reported revenues of $385 million in Q1 of '17, an increase of 2.5% year-over-year. Our late 2016 and January 2017 acquisitions contributed about 5.3% to revenue growth, while foreign currency translation lowered revenues by 2%.

On an organic basis, our Q1 '17 revenue was down 0.8% year-over-year and reflected the weak European orders in the first 9 months of 2016 as well as last year's revenue recognition of our first shielded 1-gigahertz NMR and high Bruker detection contract revenue in the Middle East in Q1 of 2016.

Our Q1 2017 non-GAAP gross profit margin expanded by 90 bps year-over-year to 47.6%; and our non-GAAP operating margin was 12.8%, up 20 basis points from Q1 '16. This was a positive result as we integrate our recent acquisition and given the challenging comparison to Q1 2016.

We reported GAAP EPS of $0.13 in Q1 '17 compared to $0.14 in Q1 '16. Our non-GAAP EPS of $0.19 in Q1 '17 was down $0.02 versus Q1 '16 and reflected a higher non-GAAP effective tax rate of 30.6% versus 17.7% in the first quarter of 2016.

Before we move on to our group reviews, let me take a moment to update you on end market conditions. While overall demand conditions in our academic end markets remain a concern, our European orders again showed positive growth year-over-year. In the U.S., we had a slow start to the year, though it is unclear whether that is related to the current budget uncertainty in the U.S. NIH budget, which has been resolved as of Monday morning, but we haven't seen any details yet.

On the industrial side, we saw select strength in our semiconductor metrology markets and some pockets of improvement in certain industrial and applied end market segments, for example, food and beverage testing by Bruker Optics, Near IR products, NMR industrial research demand, et cetera. Other industrial market segments showed no clear positive market direction in the Bruker orders yet in Q1 of 2017.

Overall, we still see mixed conditions in our academic, governmental and industrial end markets, with better order growth in Europe relative to 2016 and in selected areas like microbiology, applied testing and semicon metrology. So please do turn to Slides 5 and 6 now, where I provide details about the performance of our 3 BSI groups and of our BEST segment. All growth rates that I will discuss exclude the impact of foreign currency translation.

Starting with the Bruker BioSpin Group. It delivered low single-digit revenue growth, as solid NMR results more than offset PCI revenue weakness. PCI is preclinical imaging. NMR's growth was in -- the NMR growth was impressive in the context of a challenging prior year comp, given the completion of our first shielded 1 gigahertz in Q1 of 2016. Favorable average selling prices and improving productivity also continued to support Bruker's growth and operating margin expansion.

BioSpin's aftermarket and service business, called LabScape, once again posted strong year-over-year growth. Preclinical imaging remained weak, with sales and margin lower year-over-year.

Moving on to the Bruker CALID Group. It reported a year-over-year revenue decline in the mid- to high single digits in Q1 '17. Daltonics mass spec revenues continued to be negatively impacted by the weak European academic bookings in the first 9 months of 2016. Despite lower revenues, Daltonics margins improved significantly year-over-year, as we executed on our factory consolidation and benefited from favorable product mix and cost control initiatives. Within the CALID Group, our Optics products had another solid quarter of revenue growth and margin expansion.

Our CALID detection revenue was down significantly year-over-year due to order timing and challenging comparison from the high Middle East contract revenue in Q1 of '16. The CALID Group benefited modestly from revenues from the InVivo acquisition, which we completed in January 2017.

Turning to Slide 6 now. The Bruker NANO reported high single-digit revenue growth, with contributions from our late January 2017 Hysitron nanoindenting products acquisition, strong growth in our semiconductor metrology tools and improved results in our AXS business. Our Nano Surfaces business was off to a good start with the Hysitron integration and with these products contributing growth into Q1 of '17. Our AXS products, which had a challenging year 2016, returned to positive year-over-year growth in the first quarter of '17. Our 2016 AXS factory consolidation and ongoing cost actions are beginning to improve the AXS margins. Last but not the least, we had another strong quarter in our semiconductor metrology business, with revenue and order growth driven primarily by auto, atomic force microscopy, or AFM, demand in 10-nanometer semiconductor manufacturing. We are pleased by the progress in our NANO Group.

Finally, our BEST segment revenues were substantially higher year-over-year, driven by our Bruker-OST acquisition in November 2016. Our core BEST business was also up modestly year-over-year after adjusting for FX. BEST had an improved first quarter of 2017, as demand for superconducting materials and the strong order book of 2016 continued to drive the segment's results. Our newly acquired Bruker-OST unit in New Jersey had revenues and margins slightly ahead of expectations, given good demand for Bruker-OST's proprietary rod reset process, or RRP, high magnetic field wire technology.

Next, I will take a moment to highlight some important new products we launched over the course of the quarter ending April of 2017. On Slide 17 (sic) [Slide 7], at the March Experimental NMR Conference, or ENC, Bruker BioSpin introduced our new AVANCE NEO platform, a next-generation NMR electronics console which will help take NMR research to the next level. This is Bruker's most significant NMR console introduction in a decade, and we are cautiously optimistic that we'll -- it will contribution to an upgrade cycle over the next few years and further improve our competitiveness and margins.

There are significant new capabilities on the AVANCE NEO, which include frequency range that supports 1.2 gigahertz and beyond, and full multichannel, multireceive architecture, enabling each channel of the NEO to operate as a fully functional NMR spectrometer with multireceive capabilities, plus other performance advantages. The NEO is available for sale to our customers now, and we already have many units in customer labs and are recognizing revenue as we speak.

On Slide 8. We have continued to expand our microbiology offering with high-value test innovation at the recent European Congress of Clinical Microbiology and Infectious Disease, or ECCMID for short, which took place just over a week ago in April. At this year's ECCMID, we had several important assay introductions for the European market that further enhanced Bruker's differentiated position in microbiology and should generate higher consumables margins over time.

Our MBT, or MALDI Biotyper Star-Carba in vitro diagnostics kit is the first CE-IVD marked assay for mass spec-based antibiotic resistance testing in the market. This Carba IVD assay runs on the MALDI Biotyper platform and tests against resistance to carbapenem antibiotics. Importantly, the MBT Star-Carba assay is a functional test which generates results independent of the precise gene involved -- genes or gene involved in the beta-lactamase resistance. This means the test will still be relevant as bacterial resistance and the underlying genetic mechanisms continue to evolve rapidly. Over time, we have plans to expand our MBT Star resistance kit portfolio to address additional resistance mechanisms and other types of antibiotics beyond the very important carbapenem class.

At ECCMID, we also introduced the first 2 products from our Glasgow real-time PCR assay purchased in November of 2016: our Fungiplex Aspergillus identification and Carbaplex resistance gene assays. Briefly, Fungiplex Aspergillus is a multiplex PCR assay that tests for the most common pathogens associated with invasive aspergillosis, a fungal infection that can have potentially fatal outcomes in immunocompromised patients. The Carbaplex assay is a multiplex PCR assay that provides information on the most common genes involved in carbapenem resistance. These tests run on a standard real-time PCR reader and only take 2 to 3 hours to provide results from sample extraction and do not require any culture. We expect these tests to yield improved outcomes for critically ill ICU and organ transplant patients, and they will also help reduce the usage of costly antifungal and antibiotic drugs.

Moving on to Slide 9. Bruker's key priorities for 2017 are unchanged. We are driving for constant currency growth in the mid-single digits, including contributions from our recent strategic acquisitions. We intend to resume organic revenue growth this year, and we continue to execute on our multiyear operational and commercial excellence plans, which we expect will drive further operating margin expansion. Most importantly, we are continuing our portfolio on mix transformation towards our strategic growth initiatives with fundamentally higher margins, which will be an increasingly important contributor to our ongoing margin expansion.

In summary, I'm pleased with our execution in Q1 of '17 and believe we are on track to deliver on our financial commitments for the full year 2017.

Now let me turn the call over to our CFO, Tony Mattacchione.

Thank you, Frank, and good evening. I will now provide some additional details on our financial performance in Q1 2017, starting on Slide 11. Financially, Bruker had a solid start to the year, and we are on track to meet our full year commitment. Q1 revenue was 2.5% year -- was up 2.5% year-over-year. On a non-GAAP basis, our operating margin of 12.8% expanded slightly versus the prior year, despite a very challenging comparison to Q1 2016, which included the high-margin 1-gigahertz NMR system.

GAAP EPS of $0.13 was down $0.01 compared to $0.14 in Q1 2016. On a non-GAAP basis, our EPS came in at $0.19 per share compared to $0.21 per share in Q1 2016. Free cash flow was positive at $21.1 million versus a negative use of cash flow of $22 million in the first quarter of 2016. Net cash was $79.7 million at March 31, 2017, which was a year-over-year decline caused by cash deployed for recent acquisitions, the 2016 share buybacks and our $0.04 quarterly dividend. Our working capital ratio was up modestly year-over-year to $0.37 per dollar of revenue in the first quarter, largely due to an increase in the BEST inventory for Q2 shipments.

Turning to Slide 12. I show the year-over-year revenue bridge for Q1 2017. On a reported basis, our revenue increased 2.5% versus Q1 2016. Our recent acquisitions, including B-OST, Hysitron and InVivo, all contributed about $20 million in total, or approximately 5.3%, to revenue growth. Changes in foreign currency translation rates negatively affected revenues by about $7 million or about 2%.

On an organic basis, our revenue was down 0.8% year-over-year against the challenging prior year comparison that included the 1-gigahertz NMR magnet and revenue from a large detection contract. Our modest year-over-year organic revenue decline reflected the soft European academic orders we experienced earlier in 2016. As Frank noted, our BioSpin, B Nano and BEST groups all had positive growth on a constant-currency basis, while CALID revenues were down in constant currency.

Geographically and currency adjusted, European revenue increased low single digits, driven in part by the B-OST acquisition. Within our Bruker Scientific Instruments segment, European revenue was down mid-single digits on a currency adjusted basis, reflecting soft order entry last year. Importantly, Q1 represents the second consecutive quarter that European orders were up year-over-year on an organic basis.

North America revenue was up low single digits. However, from an order perspective, we are off to a slow start to the year in the U.S. We are encouraged by the recently announced $2 billion NIH funding increase this -- last week -- this week but have not factored it into our planning for the whole -- for the entire year. Asia Pacific was up low double digits, including another quarter of greater than 20% growth in our China businesses. Within China, we experienced an impressive growth from both academic and industrial customers. Japan was down in the low single digits. Overall, we are pleased with the continued stabilization in our organic revenue, despite the still mixed end market demand conditions, as Frank described.

Turning to Slide 17 (sic) [Slide 13], I show our full Q1 2017 profit and loss statement on a non-GAAP basis. Our Q1 2017 non-GAAP gross profit margin was 47.6% or 90 basis point increase year-over-year. This increase was driven by NMR price and efficiency gains as well as the 2016 restructurings and factory consolidations within our Daltonics and AXS businesses. These favorable drivers more than offset some market-related volume declines.

Q1 2017 operating expenses increased approximately $6 million or 5%, caused primarily by the addition of our recent acquisitions and the timing of certain R&D and sales and marketing investments. This was partially offset by a favorable exchange impact on the operating expense line.

Our Q1 2017 non-GAAP operating margin of 12.8% was up 20 basis points year-over-year, a result we're pleased with, as we absorbed the additional expenses from the acquisitions and we faced the challenging comparison from Q1 2016.

During Q1 2017, we began to see results from our previously announced 2 factory consolidations in our CALID and NANO group. Our culture of operating -- operational discipline contributed, as our businesses continue to stabilize. Looking below the line, net interest and other expense was $6 million, on par with Q1 2016.

For the first quarter of 2017, our non-GAAP effective tax rate was 30.6% compared to 17.7% in the first quarter of 2016. The higher effective rate was the result of the absence of the U.S. valuation allowance reversals required last year. While the first quarter rate included some discrete tax items, we continue to expect that our non-GAAP effective tax rate to be approximately 25% for the full year of 2017.

Weighted average diluted shares outstanding in the first quarter were $160.5 million, down approximately 3.8 million shares or 2% year-over-year. This is the result of our 2016 share buyback.

Finally, non-GAAP EPS of $0.19 in Q1 2017 compared to $0.21 in 2016 Q1 was down about 10% year-over-year. The higher tax rate more than offset improvements in operating income and the reduction in the share account.

Turning to Slide 14. We generated $21.1 million of free cash flow in Q1 2017 compared to a use of $22 million in the first quarter of 2016. Less cash needs for working capital, a year-over-year increase in customer advances and the timing of incentive compensation payments all positively affected our free cash flow this year -- this quarter relative to the first quarter of 2016. Our cash conversion cycle at the end of the first quarter of 2017 reflected an increase of 2 days compared to the end of Q1 2016. That was driven by higher inventory levels related to long-term contracts at our BEST and BioSpin groups.

Now for our 2017 guidance on Page (sic) [Slide] 16. I will cover the updates for the full year 2017. We reiterate our full year guidance with only an adjustment to reflect recent foreign exchange translation rates. We continue to expect our organic revenue growth to be in a range between 1% and 2% in 2017. For the 2016, early 2017 acquisitions, we project a contribution between 3.5% and 4%, which is unchanged from when we last spoke to you in mid-February. Given the recent weakening of the U.S. dollar versus the euro and the yen, we are slightly adjusting our foreign exchange assumptions for the remainder of the year. We now expect a negative revenue impact from foreign currency translation of approximately 2.5%, and we expect Bruker's reported revenues to increase between 2% and 3.5% in the full year of 2017.

On the operating margin line, we continue to project improvement between 40 basis points and 70 basis points from a base of 14.8% in 2016, which includes an approximate 40 basis points of negative headwind from our recent acquisitions.

As mentioned already, our fiscal 2017 non-GAAP tax rate is projected to be around 25%, and our fully diluted share count is expected to be around 161 million shares. Rolling it all up, and considering the changes in currency rates on the top line generally have a muted effect on the bottom line given our European manufacturing cost structure, we continue to expect our 2017 non-GAAP EPS to be in the range between $1.05 and $1.09, which is the same as the guidance we issued in mid-February. Other guidance assumptions are also given on Slide 16.

So in summary, during the first quarter of 2017, Bruker continued to make progress on our profitability expansion initiatives, while also integrating our 2016 and 2017 acquisitions. We are off to a solid start, and we are pleased to see our core revenue continue to stabilize despite the still mixed macro and demand conditions. For 2017, we believe we are on track to deliver our full year financial commitments, which implies 2% to 3% average organic revenue growth and mid-single digit constant currency growth over the next 3 quarters. We look forward to updating you again in our Q1 -- sorry, in our Q2 2017 conference call in early August.

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

Thank you, Tony, and we are ready to open up the call to questions. (Operator Instructions)

(Operator Instructions) Our first question comes from Dan Arias of Citi.

Frank, any additional commentary on the European markets, maybe academically, if we just look by country or compare Western Europe to Eastern Europe, what is the look there? If you could just parse out the European commentary a little bit.

Yes, Dan. We looked into that as well. I mean, as we said, European orders, again, second quarter in a row where they were up year-over-year, which is good. Within Europe, not that much color that's really meaningful. I would maybe highlight that Germany was pretty good and that France had a weak start, perhaps related to their elections or not, I'm not sure. But those are maybe the 2 observations that I would offer.

Okay. And then maybe on the industrial business, if we just want to put a finer point on your commentary on improvement there. Are you able to say what percentage of the business, what percentage of sales within that segment or end market you saw some less signs of life in?

No. We don't get -- go to that level of granularity. But high level last quarter, we said semiconductor looked good, and we continue to say that semiconductor metrology looked good. Last quarter, we weren't so sure. Now we see selected areas in our industrial and applied markets that seemed to have an uptick, and we've cited some examples of that. The more global numbers, which you probably know already, is that about 17% of our revenue is industrial including semiconductor, metrology. And so I'd say there's selected positive signs in our industrial market, so we're incrementally more positive than we were a quarter ago. But we're also not yet saying, "Hey, all industrial is improving." That's not the case.

Our next question comes from Ross Muken of Evercore.

Could you just talk about -- you, obviously, were quite busy on the acquisition front. You've been sort of integrating a number of them. Can you talk about how the organization is going to respond to that level of activity and how some of the acquired businesses have performed? It looks like the revenue results there were pretty good.

Yes, Ross, actually quite well. I mean -- quite honestly, we spread the work around a little bit. So the biggest acquisition and that integration will be a multiyear process, and it's a bit of fixer-upper, is the Bruker-OST acquisition in Carteret, New Jersey, and that had a good start. Well, I wouldn't say a good start but a better-than-expected start. So they were busy. They have good capacity utilization. There's a lot of work to be done there over the next 2 or 3 years to improve the margins and efficiency and productivity of that business. But it's a welcome opportunity, and that's why we acquired it. So we're very pleased with that. The Bruker NANO Group is -- has a relatively smooth integration of the Hysitron business, which was only acquired at the end of January, so it only contributed about 2 months in the first quarter. But that's going very well, and that, of course, we're not integrating it tightly but mostly into the marketing, sales and service approach. And I think that's going really well, and they're on track. And last but not least, the consumable. I mean, there are some smaller ones that were more technology-wise. But the consumables business, InVivo, in Berlin, that's part of our Daltonics business now. That has done even somewhat better than expected in the first quarter. Nothing that's needle moving, but overall, we're really quite pleased with all the acquisitions. And different teams at Bruker are focusing now on the integration, and it's really going well.

And maybe, can you talk about just the pricing environment, in general? Obviously, pricing was quite a nice tailwind for you last year. How is that sort of price capture trending to start the year, particularly in some of the markets where orders have been a little bit choppy?

Well, I mean, the larger price increase from 2015 that effect is now gradually declining, relatively speaking, in 2017. It's now embedded, but it also was in 2016. We're still probably getting a little bit of a benefit from that in early '17, but that's not a major driver in '17 anymore. We, of course, now do some continuous industry-standard annual, no-headlines type of price increases, like everyone else. And we do that throughout our portfolio, so that has an ongoing incremental effect. And I think -- yes, I hope that answered your question.

Yes, that is perfect.

Our next question comes from Brandon Couillard of Jefferies.

Frank, any chance you could split out the growth from service and aftermarket in the first quarter relative to instruments? And could you talk about some of the initiatives you're working on to improve the attach rates there and lift the gross margin profile of those revenues?

Okay. So aftermarket, I -- without becoming too quantitative, the growth in aftermarket was slightly higher than the overall -- well, actually, let me -- it was slightly higher than our organic growth. It was comparable to our growth overall and was in the mid-single digits. So our -- so yes, it was higher than our organic systems growth. It was comparable to our constant currency growth, which is why I stumbled here for a moment. It was -- it grew in the mid-single digits. A lot of efforts -- it had particularly nice growth in the Bruker BioSpin business, where that had been an opportunity that still has some low-hanging fruit because that was undermanaged somewhat in the past. And so in the BioSpin group, for instance, that grew in the high single digits. And we believe we have several more years of continued improvements throughout the company in generating more aftermarket service and services business. In addition, of course, we're now starting the next trend of generating more assay consumables and software business, in part through some of the acquisitions that we're generating. And that will still be some time before they really start to contribute, but they will be the next level of drivers to really substantially increase aftermarket business, including software and consumables over a multiyear period.

And Brandon, just to add a quick comment to that. The aftermarkets, as Frank refers to, is consumables, aftermarket service. It's all together, including service.

Okay, that's helpful. Then a 2-part question for you, Tony. Any chance you could split out the revenue contribution from the OST acquisition within the BEST unit? And then, secondly, could you give us the organic OpEx growth in the quarter, i.e., stripping out what the acquisitions and perhaps currency contributed to the operating expense line?

Yes. I'm not sure I'll give you the exact numbers. But obviously, we absorbed some dilutive businesses, predominantly OST, in the margin expansion that we delivered both on the gross profit and the operating profit line. OST is the biggest piece of the acquired businesses that we have in the numbers now. So order of magnitude, that's -- most of it is the OST business in the acquisitions.

Let me just clarify one thing. We're just comparing notes here a little bit. It is the largest of our acquired units. It is not the vast majority of our acquired revenue. So Hysitron and InVivo are also somewhat meaningful, but OST is larger than either of those.

Yes, that's it, yes. That's right.

Our next question comes from Steve Willoughby of Cleveland Research.

Frank, I was just wondering if you could comment a little bit about the new NEO NMR system as it relates to how long you expect this to kind of become -- replace your older system, the potential revenue and margin impact from this new system and any initial feedback you received from customers that you might be able to share.

Oh, the initial feedback from customers is very positive to perhaps enthusiastic because it is really -- in NMR, it's a significant innovation. It's really a brand-new architecture and concept. So I think there was probably -- certainly, at this research conference, I'd say there was excitement about the NEO. It's shipping. I would expect that most orders going forward for research system and higher-field systems would be NEOs. Of course, we also still have some other routine systems that are not NEOs. The NEO is designed for reducing the overall costs for us in COGS from manufacturing costs as well as installation and service costs with more built-in intelligence. It's not -- I think it also further improves our competitive position, which is already pretty good. So we're very pleased with it. And it was one of these introductions where we had done extensive internal and customer beta testing till where we absolutely hit the ground running. And it's going to play -- make a difference very much this year already.

Okay. And then just one follow-up question to an earlier question regarding the contribution from M&A and the recent deals you've done. Given that you've done a number of deals in the latter part of 2016 and early 2017, just any feel for what's your desire and pipeline looks like for future M&A at this point following the number of deals you've done recently?

Yes. It was a bit of a confluence of events. We had never planned it that way, but a lot of these deals had been discussed for months and quarters, and then they kind of came together in late '16, and some closed in early '17. I mean, typically, we tend to do some other -- some smaller -- I would expect the pace of and the number of deals to be lower this year than it has been last year, including some of these early '17 closings. I expect there to be some strategically oriented tuck-in M&As, so you'll -- hard to say, but there might be 1 or 2 or 3 smaller deals still his year, but they'll be very, very strategically focused. And from -- if they come to close, they will be very, very good fit.

Our next question comes from Steve Beuchaw of Morgan Stanley.

So I caught in your prepared remarks, Tony, that you have not -- you've taken an appropriately conservative view and not embedded any expectation for a contribution from an NIH budget release, or frankly, the presence of a U.S. federal budget in the outlook for the year. It sort of begs the question, well, let's isolate that part of the business. And based on your past experience, I mean, one, what do you think the U.S. business could do over the balance of the year, given that we now have more visibility? And two, how much of that impact do you think can we see in 2017 versus in 2018, given the transition time between orders and shipments?

What I would say is the U.S. business is down on a revenue basis, and we started off soft on orders. And we haven't put our finger completely on it, but we feel a lot of that is due to some of the uncertainty around where this is all going to land. And like you mentioned, we're not counting on anything to contribute going forward in this regard. So yes, so like I just mentioned, we started the year flat -- down on orders, obviously. Now whether that -- whether the $6 billion increase helps us or not, I think it's likely in 2018. With our cycle, even if we got orders today with this new funding, it would likely not affect us this year. And you might recall, last year there was a $6 billion increase as well, which we didn't see a lot of that, not a lot of people saw a lot of that. So really, we're not counting on much lift in the U.S. from that recent event.

Keep in mind, it's not the orders to shipment with maybe just 2 quarters apart. But by the time the good news, at which surprised many of us on Monday morning, we'll take it, but it was a bit of a surprise. Until that turns into NIH institute directors giving more funding in grants -- in competitive grants to universities, that may well be 6 at 12 months, and only then can people even place orders. So it's actually what happens before an order gets placed, before a grant gets funded, an extramural grant that is partially NIH funded. There could be some incremental pickup in Q4, maybe from some direct NIH orders or so, which is pretty small for us, so it's incrementally positive. But mostly, I think it's -- but mostly, that starts to be a pattern rather than the somewhat erratic, unpredictable is there going to be a 6% increase or is there a 19% cut. I think that uncertainty is not good for spending, whereas, if a pattern emerges that this or some small increase can be expected from some bipartisan consensus, in most years in the future that would be very healthy. In short, it's mostly a 2018 story for us, and it's too early to tell. But certainly, very encouraging.

$2 billion.

One other topic I want to hit before I turn it back over, and it's the NMR cryo debate. I don't know if there's anything new here scientifically or in terms of product features. But now that FEI is owned by Thermo, there's a lot of enthusiasm there about what they can do with the consolidated effort in structural biology. It'd be helpful to hear what you're seeing out in the field given that combination and how you're thinking about the trajectory for the business given that evolution.

Yes. I mean, the cryo-TEM capabilities in structural biologies that FEI has developed together with customers are very -- are impressive. And they are clearly becoming a third leg of -- beyond crystallography and beyond NMR of tools that people want to have in structural biology. Clearly, most of them don't have that yet, so they're sort of -- they already have high-field NMR. They already have access to x-ray crystallography, so there's a lot of buying for that right now. That's not a surprise to us that, that cryo-TEM funding wave to some extent providing wallet competition for high-field NMR that's been going on for at least a couple of years. We expect that to continue for a while. Nonetheless, we're pretty optimistic that there are things that cryo-TEM and crystallography cannot do, which is the all-important dynamic information that is so important functionally. And that's something where NMR is quite unique and certainly excels, which is why we think with some delay after the present cryo-TEM wave we actually expect there to be also a, perhaps, more modest pickup in ultra-high field gigahertz NMR for structural biology with dynamics and for intrinsically disorder proteins that aren't accessible to cryo-TEM at all.

Great color.

And Steve -- sorry, I just wanted to jump in. I just wanted to correct the funding that I quoted. Obviously, it's a $2 billion increase, which is a 6% increase. I think I said $6 billion increase, so I just wanted to get that record straight.

Yes, you did. I was afraid that they were going to keep you on the hook to fill in the gap there.

No, that's why I felt the need to correct it.

Our next question comes from Amanda Murphy of William Blair.

This is Aurko in for Amanda. Just a quick one from me. Can you provide any color on the ultra-high field backlog? And then whether there are still expectations for one shipment this year, or rather, installation?

Yes. Nothing has changed there. So we're -- as part of our expectations, we expect to have in revenue 1 of the 1-gigahertz systems this year. If that happens, that would be in Q4, not earlier than that. And of course, due to its complexity and timing, that could also -- that could shift into 2018, which quite honestly isn't a very big deal. I mean there's plenty of other revenue drivers, and so I think it would really have a big impact on guidance. So yes, plan for -- 1 is -- 1 of them is planned for Q4, but there is -- of course, there's always a potential that it moves into next year, given the technical complexity.

Got it. And then a second one for me is, on the advanced console. I guess, what is the size of that installed base or replacement cycle that you're anticipating?

There -- I don't have an exact number right now, but there are thousands of these systems out there. Of course, there's also consoles from our former competitor Varian Inc. and Agilent, and some of them have been upgrading to other vendors' electronics already. But this is probably a further impetus, as even some of their existing and still working consoles sold by other vendors are now technically increasingly obsolete. And so this probably gives additional impetus for them to look for upgrade budgets. So that was all somewhat more qualitative. I don't think we have a -- we're prepared to give a quantitative number specifically for the new upgrades, but it further supports our thesis that NMR for us will be a mid-single-digit CAGR business, and this is one of the contributors to that. And it will be for, really, for the next 2 or 3 years, for sure.

Our next question comes from Jack Meehan of Barclays.

I wanted to ask about the BioSpin growth. I was impressed, low single-digit on tough comp. Was there anything worth flagging on the NMR side just -- despite the weakness in preclinical imaging?

No. It's just generally healthy. And not -- the nice thing is it's not so dependent on these signature 1-gigahertz deals. And I really wouldn't highlight anything in particular. Maybe -- or at least no one system's deal in particular because not one of them made the difference. NMR, not unlike some other parts of our business, have seen continued strength in Chinese academic spending. And since we earlier talked about selected highlights in industrial research, we have analyzed the data; and over the last 12 months, the NMR orders for industrial research by NMR have clearly picked up from the prior 12-month period. So maybe those 2 market and geographic trends rather than single customers all bode well for a healthy NMR business, independent of price increases and independent of Europe or any other -- or a particular 1-gigahertz customers. It's a pretty healthy market right now.

Good. And just also on follow-up on the Daltonics commentary with MALDI. Got the order book commentary. Was the revenue decline more a function of the tough comp? And maybe could you just comment on what the expectation is for 2017 there?

Yes, it was -- you're correct. It was very much a function of the tough comp. Daltonics actually had a pretty really quite good Q1 of '16 as well. That's -- and only later quarters last year did the weakness in European academic orders really hit them. And then an even bigger effect actually was the 1 large detection contract, which we revenued in Q1 '16, in the Middle East. That was sizable. And so it's those 2 factors. So to your last part of your question, really, we're pretty optimistic that Daltonics will develop well this year. And to our delight, they really -- their margin improvement efforts had showed very good traction in Q1 already.

Our next question comes from Doug Schenkel of Cowen.

This is Chris Lin on for Doug today. So I believe if you exclude the 1-gigahertz NMR headwind from the year-over-year comparison, organic growth this quarter would have approximated 1%. Is that about right? And then, just relatedly, your full year guidance is for 1% and 2% organic growth. The growth comparisons become much more favorable over the next several quarters. And if our math on a 1-gigahertz order is correct, then it seems like you're embedding only a slight growth improvement over the balance of this year. So is this largely a function of being a bit conservative since it is still early in the year? Or are there other incremental headwinds that we should be thinking of?

Yes. I mean, I would just go back to our prepared comments there. You're right, if you exclude the 1-gigahertz magnet in Q1, we would've grown organically in Q1. But like I said, based upon our guidance and what we reported in Q1, we're expecting on the average 2% to 3% growth for the remainder of the year. That won't all -- I wouldn't expect that in every quarter, but on average, you'll -- is what will get us to our guidance that we feel confident with. We don't feel like there's a tremendous amount of upside or downside to that. We're reiterating our guidance. And don't forget as well, we called out a large detection order in Q1 of last year as well that affected the comp.

Got it. And then maybe just, can you just provide a bit more detail on the China strength? Which end markets were particularly strong? And then, just how sustainable is that growth right there?

China is kind of on fire for us. I mean, we've had a couple of 20%-plus quarters, and I was there in the beginning of the year, and we're getting higher business levels in both academic and industrial. The 13th 5-year plan is 2 years in, and a lot of the priorities there are -- a lot of its nationalistic type of priorities where some of the funding that the eastern part of the country got, in terms of building capabilities, is now being focused on the western part of the country and the northern part of the country. So there's a lot of focus on basic research in those underdeveloped areas, and we're the beneficiary of that type of stuff. So like I said, both academic and industrial is up. Most of our businesses have seen increases in China, and I think it's the 13th -- the second -- the 13th fifth -- 5-year plan is one of the big factors fueling that.

Our next question comes from Isaac Ro of Goldman Sachs.

Just one on NIH since it's been a big topic. I think maybe there's been a lot of focus on the headline news there, the $2 billion, which obviously is important. But if you look within that, it does seem like there's also some changes going on with regards to how the dollars get allocated. And I'm curious if you could remind us, typically when an NIH grant is received how do those dollars find their way to an order for one of your instruments, especially at the high end? Because if I have it right, there's some new conversation out of NIH, just in the last day or so, where they might limit -- they might cap the grant support for any given recipient. And if that were the case, just wondering the extent to which people sometimes pool their grant dollars or need larger grant awards and R01s. Would that be a factor to watch when it comes to orders in that specific part of your customer base?

Oh, that's been an issue for NMR and cryo-TEM and all the big ticket items for a while and that there is and always has been a limit to the maximum grant size. So these larger systems are almost never purchased on a single grant but almost always stitched together with some state, some university, some endowment, some foundation, some industrial and NIH grants. It's very rare that really big-ticket items, let's say above $2 million or so, are funded on a single grant application. That is really -- unless there's some fine print that I haven't seen yet, that's really been the case for a very long time, for a decade or more. And people have adjusted to that. Deans and faculties and universities have adjusted to that, and they stitch it together.

Okay. Got it. Yes -- no, I think the R01 grant map it's evolving. Again, there's no specifics yet, but I think they are talking about capping it at like 31 points or something like that. The other question I had was on margins. Tony, which is -- if I look at operating leverage continues to improve. And I'm wondering if for some reason you guys are at the lower end or maybe a little light of your organic growth goals, can you guys still hit your margin expansion targets this year? It seems like there's enough operating changes under the hood that you should be able to extend margins even without much help on top line. I just want to clarify the operational gearing in the model this year.

No. No. I think you had that right. I mean, we had good expansion of gross profit margins of 90 basis points. And there was multiple factors. There wasn't any one thing. There were multiple things that fueled that, [biased] in price, the continual operational efficiencies that we're getting in that business, the restructurings that we've done in Daltonics and AXS, the facility consolidations. We do have the offset of the -- funding the dilution with the acquired businesses, so that will -- we'll manage through that. But we've done a pretty good job of delivering on our commitments on profitability. And we feel that we can modulate the spending based upon the business levels that we see to be able to deliver that. So this quarter, there was some timing with some investments in R&D and sales and marketing that will smooth out over the course of the year. So I think comfortably we'll -- we're in the position to deliver what we put out in our guidance, to your point, with the organic growth that we put out as well, which is approaching market base and not there yet this year.

Our next question comes from Tim Evans of Wells Fargo Securities.

One more on China, really quickly. I think APAC in 2016 was 28% of your revenue. How much of that is China? In other words, how big is your China business now?

China is greater than 10%. It's in the low teens. I don't have the exact figure right now. Maybe 11% or 12%?

Okay. Close enough. And Frank, could you elaborate a little bit on the preclinical business? I think that was, if my memory serves me correctly, fairly weak all through 2016. Do you see an inflection point at some point in 2017? And then also like how big is that business now, roughly speaking?

Yes. I mean, just generally, that business is less than $100 million. It has a couple of weak years, and the initial setup this year isn't strong either. I think the big difference is once we really have the Oncovision acquisition integrated and have all the PET specs, CT and PET NMR products that we've been developing and continue to develop on our road map, I think that will make a positive contribution. But that's a little bit more longer term. That may be -- that -- for the first half of -- after 2 weaker years, the first half of that year -- of that business this year is not strong, and it's relatively flat. So it's a little bit of a disappointment. But we've also taken the cost actions in that business already. And so it's -- it has its own cycles that are really not related to anything else,. And some of that is also into the way our own product road map, particularly in nuclear medicine, that in fact is evolving to where, I think, we may see an acceleration in orders in the second half of the year. Actually, that's what we're expecting. But until that business is really back in growth mode, probably will be 2018. Luckily, it's in [other size] to where the -- well, the good performance in aftermarket and NMR and EPR and the applied and industrial magnetic resonance product lines and B Bio still overall make up for that. And the B Bio group is doing quite well, despite that one weaker division.

Has the struggles with that business been more market related? Or is it kind of a competitive issue? What's just your high level take away on kind of why that's struggled along for a couple of years now?

A mix of the 2. A mix of the 2. I think there's some new smaller competitors that are sometimes not taking that much business but have left a little bit of price erosion. And there's been some major change over in the preclinical head spec business with the former market leader, Siemens, a few years exiting that business and some other exits of other players. There's almost a complete turnover of who the competitors are. And that's still sort of sorting itself out.

Our next question comes from Tycho Peterson of JPMorgan.

Maybe, one for Tony. Just kind of circling back on some of the margin questions. Can you maybe give us a sense this quarter the gross margin expansion, how much of that was NMR and pricing versus some of the efficiencies? And as we think about some of the other themes you've hit on in the Q&A between price and aftermarket services, how should we think about gross margin trends for the course of the year?

So in the quarter in terms of the expansion, it was -- like I said, it was a -- it wasn't any one thing. It was a collection of things. BioSpin pricing, the efficiencies there was a big piece of it, but another significant contributor was the restructuring actions. So those were -- those are the major 2 drivers. Going forward, the model, obviously, counts on volume. So the organic increase that's embedded in the second half of the year, we'll get benefits in the margin from that. But we'll continue -- we'll stay focused on the continuous process improvements that we have in place, and we'll be facing some difficult comparisons like some of these other things in the BioSpin side roll off. But we believe that the margins -- most of the margin -- operating profit margin contributions will come from the gross margin improvements.

Maybe I'll add to that, Tycho. The really -- the driver that's getting bigger and bigger beyond taking out costs restructuring efficiencies, as you call them, and resumption of growth at some of our markets have less headwind or strengthened. The bigger and bigger driver will be the changeover in our portfolio. With our growth initiatives and strategic growth initiatives that we've been investing in, they really fundamentally have higher growth characteristics and margin characteristics. And as over time they become a bigger part of our business, over time, maybe not so much yet in 2017, but certainly in the outer years, they will become one of the bigger drivers of our further growth margin and therefore operating margin improvements. So it's portfolio and cost and growth, not just cost and growth.

And I guess thinking about growth drivers for Nano. I know you're still somewhat reluctant to call for an inflection in semi, but AXS has gotten better. Metrology has gotten better. Maybe just what's baked into guidance for a semi improvement in the back half of the year?

Oh, semi we're pretty positive about. All of -- there's other industrial where there's selected strength in other areas that are not getting worse at least so -- but the rest of industrial is still a little bit mixed, with some positive signs. Semi is pretty positive in both orders and revenues and obviously baked into our forecast. But we were pleased with the orders in Q1 and with revenue. So semi, I think, is going to be -- it was a good year last year, and I think it's going to be an incrementally even better year this year. So the semi metrology trends are healthy for us, even though the big volume or capacity buys for 7 nanometers, of course, are a few years away. But already now with 10 nanometers and memory and so on and some technology buys early -- for early evaluation of 7-nanometer and in some cases even 5-nanometer, although that's more research phase, we're doing quite well. And we're setting ourselves up for doing really well once we get into capacity buys in a couple of years.

And Tycho, just keep in mind that the semi growth is more back-half loaded.

Our next question comes from Derik De Bruin of Bank of America Merrill Lynch.

Two quick -- 2 questions. One SaaS, and one's a little bit longer. The short one, unless I missed it, could you -- Tony, could you give me the FX impact for the BSI and the BEST [2] segments? How was that split?

It was mostly BSI, and it was very small. It was -- it didn't move the numbers at all in terms of -- sorry, Derik, are you talking about the (inaudible)...

On the top line, what was the FX headwind? What was the revenues? What was the FX headwind to revenues?

Minus 2%.

Yes. Minus 2%.

But is it split evenly between both segments?

It's mostly BSI.

Okay. All right. Great. And then, just one other longer question. So whenever I see the phrase upgrade cycle, I'm -- it makes me want to ask 3 questions, which is, what's the size of your installed base? How much of that install base is amenable to upgrade? And then, what's an ASP? Just trying to put a revenue number on it.

For the NEO? For the NMR console?

For the NEO, yes. For NMR, NEO.

I don't have an exact number right now, but it is several thousand consoles. It's maybe 2,500 to 3,000 consoles. I don't have an exact number. Actually, the number is probably somewhat larger; but of course, we'd also have to look at those that generally are 7 or more years old. Someone who bought it -- one in the last 2 or 3 years, still have a pretty modern system and, of course, continued support, so they may not be able to upgrade yet. An ASP for these type of console upgrades, where people keep the magnet, very often they buy some additional probes with it. It can be anywhere from 200K to 500K, depending on what's included in the package. Let's say an ASP maybe, let's say, 300K is a number in the ballpark, and I think that's probably as much detail as we can give you at this point. But maybe that helps you. The upgrade cycle in that, this is not -- I don't know, it's not like Illumina bringing out their sequences and everybody upgrades. This is (inaudible) an NMR world that's spread over multiple years. So -- quite honestly, it's spread over 5 years,. But of course, it tends to be maybe a little bit more front loaded in the next 2 or 3 years.

Right. But that's what's giving you confidence in the overall mid-single-digit growth rate CAGR for that NMR business?

Yes. That and ultra-high field picking up. Our ultra-high field backlog that we have, once it's technically feasible to build these type of 1.2-gigahertz magnets and the nice growth in aftermarket and the nice growth in applied industrial and clinical research market. So there's a -- plus pharma growth for NMR. Actually, NMR -- it has a lot of -- it's nice that NMR -- the B Bio story does not only do -- it's not a one-trick pony thing business. But this is another nice contributor.

Our next question comes from Dan Leonard of Deutsche Bank.

I was hoping you could size the kit opportunity for the Biotyper. What the ramp curve could look like, and any timing you could offer around additional menu expansion plans?

Okay. Starting with the last one, probably further expansion. The American Society for Microbiology meeting is coming up, same weekend pretty much before ASMS is in New Orleans. Of course, with FDA clearance, that's always tends to be 2 or 3 years later than IVD-CE, so there's always some differences in what we offer in Europe already and what then end up offering in the U.S. when we get FDA clearance. So right now, it's primarily a European story. Keep in mind that of the roughly 2,500 MALDI Biotypers that are out there, roughly half of them are in Europe because that's where we started originally with the business. So with that microbiology business installed base, it's unusually large in Europe with -- actually, right now still slightly more than half of it in Europe. The ramp up will -- of the -- on these kits will not be needle moving for our financials this year. These are modest numbers. If that ramps up, we -- maybe we get $1 million or $2 million in this type of business, these type of numbers. But over time, obviously, that can build up. And initially, it will take some missionary work to convince the labs that these fairly cost-effective solutions that they get from us without needing a culture have a clinical value and have a good clinical workflow. And I think price performance will play a significant role, particularly in the more cost-sensitive European clinical microbiology market. We think all these drivers will be very positive over multiple years, but it's not going to be needle moving for us this year.

Our next question comes from name from Puneet Souda of Leerink Partners.

So as we head into ASMS here in just a few weeks, I just wanted to see if there's anything in Daltonics which you would highlight in the mass spec business, either on the top end, then going into the pharma or anything else that's worth noting there? And then, just briefly on the NMR -- I mean the ultra-high field, 1 gigahertz plus, 1.2 and 1.1. I mean, from what it appears to us, most of those orders are outside U.S. With the NIH funding in place now, does it give you any more sense compared to before that the pendulum could potentially shift to maybe a one order in U.S. or more? Any color on that would be helpful.

Sure Puneet. Yes, as we discussed -- you were at ENC, and we had a little bit of a discussion starting with the second question. I mean I find the additional $2 billion, and again 6% increase in NIH budget, and the fact that this was apparently bipartisan, and it's about the only thing we may get bipartisan buy-in from -- buy-in on is -- I find that pretty encouraging, but I'm probably paid to be an optimist, so I think that's good. I think that should give some university consortia or some deans of departments or schools of science or medical schools additional confidence. And they were all -- anecdotally, they were all very, very distraught the last few weeks in -- "My God, are we going to see a small increase? Or a 19% decrease?" And that uncertainty, I think, was, well, pretty toxic actually, at least in anecdotal conversation. So again, that's only one more year. But nevertheless, this could -- a trend could emerge though where NIH funding might get bipartisan support for healthy increases. So I'm optimistic that, that could lead over time. I don't know whether it's this year, in future years 2 more U.S. ultra-high field business. I think that's a good medium-term driver. It won't help us this year. To ASMS, I don't mean to frustrate you; but, of course we, for competitive reasons, do not preview or discuss what we may release at conferences. But I'm sure ASMS will be interesting for us and our customers.

Our next question comes from Bryan Brokmeier of Cantor Fitzgerald.

Frank, you commented on the new resistance assay and the Biotyper a little bit. I was just curious, is that going to create any new instrument opportunities? Are the labs largely penetrated at this point? So the impact will be more seen in higher utilization and consumable revenue?

Yes. A little bit. I mean, you don't need an instrument to run this assay. But as they see -- more and more labs see increasing utilization and as some of these newer tests they do take a little bit more instrument times or more laser shots, so over time this may lead more labs to buy more kits but also perhaps upgrade to our newer instruments, for instance, the MBT Smart, which has like 3x higher throughput and more up time. So this will be incrementally positive also for additional instrument demand. It further enhances the competitiveness of our platform, as we obviously have a much larger vision of what one can do on a MALDI system, and I think our customers are acknowledging that. So I think it has a few other benefits from competitiveness to perhaps also driving a little bit of an instrument upgrade cycle or perhaps the desire to buy a second instrument for a number of our customers that have pretty good utilization already.

And on the NEO, how long does it take to convert an order into revenue? And then also is it consistent with some of the other comments you've made around new products that you're introducing that -- are NEO's margins higher than sort of the overall margins you've had in NMR?

So typically an NMR from order to revenue tends to be about 6 months. Of course, it's much longer for a high-field system, and it can be shorter for a relatively straightforward chemistry 400-megahertz system, where it could 3 to 4 months only. And yes, we've designed -- NEO, it's nothing dramatic. It's not that its COGS are dramatically lower. But obviously, COGS have played a role in its design and built an intelligence that makes servicing and installations easier. So we expect a small but incremental margin effect also from the NEO.

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

Thank you for joining us this evening. During the second quarter, Bruker will participate at the Deutsche Bank Annual Healthcare Conference in Boston tomorrow; the Jefferies Healthcare Conference in New York; the William Blair Annual Growth Stock Conference in Chicago; and the Goldman Sachs Annual Healthcare Conference in Rancho Palos Verdes, California.

We invite you to meet us at these conferences or to 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 your lines.