Bruker Corp (BRKR) 2012 Q4 法說會逐字稿

Good morning. My name is Marcy and I will be your conference operator today. At this time, I would like to welcome everyone to the Bruker fourth-quarter and full-year 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you, Mr. Young, you may begin your conference.

Thank you, Marcy. Good morning. I would like to welcome everyone to Bruker's fourth-quarter and full-year 2012 earnings conference call. My name is Joshua Young and I am Vice President of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, President and CEO and Charlie Wagner, Bruker's Executive Vice President and Chief Financial Officer.

In addition to the earnings release we issued earlier today, we will be referencing a slide presentation as part of today's conference call. The PDF of this presentation can be downloaded by clicking on Bruker's investor relations website or by accessing the file by clicking on the downloads hyperlink through our audio webcast player. Once you download this PDF, you will be able to follow along with management commentary.

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

Before we begin, I would like to reference Bruker's Safe Harbor statement, which you can see on slide number 2. During the course of this conference call, we will make forward-looking statements regarding future events or the financial performance of the Company that involve risk and uncertainties. The Company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K, as well as other subsequent SEC filings.

Also note that the following information is related to current business conditions in our outlook as of today, February 19, 2013. 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 2013 financial results.

We will begin today's call with Frank providing an operational summary of our 2012 performance. Charlie will then cover our financials for the fourth quarter and full year 2012 before providing our guidance for 2013. Now I would like to turn the call over to Frank.

Thanks, Joshua. Good morning to everyone and thank you for joining us on the call today. We are pleased to report solid financial results in the fourth quarter and another excellent year of top-line growth for Bruker. With our performance in 2012, we have generated three straight years with organic revenue growth between 9% and 12%. As I look back on our performance in 2012, there are three key takeaways that I would like to share with you to summarize our performance.

First, Bruker's innovation engine is working. We remain very close to our customers and we had a solid year of new product introductions. Bruker continues to win business with differentiated products and by entering adjacent markets. This has enabled us to grow organically, significantly faster than many of our peers in the past few years despite concerns about the end of stimulus spending, the European economic malaise, the uncertainty of NIH funding and a slowdown from industrial customers.

Second, our business in most of European academic and nonprofit markets has held up reasonably well despite the fact that we saw some weakness in these segments. While uncertainty remains in the US, the funding for scientific research continues to grow in many European countries and in most of Asia, Latin America and the India, Middle East, Africa regions. This has helped spur demand for many of our academic, nonprofit, clinical research, as well as biopharma and advanced materials research customers around the world. Our successful foray into clinical microbiology and our expansion in the applied markets also continues to support our revenue growth.

Third, we have begun the process of making significant changes at Bruker with a stronger leadership team and investments in operational excellence, management processes and related systems. This is evidenced by the appointment of Charlie as CFO and of the new group presidents, as well as by the arrival or promotion of other important members of senior management.

We recognize that we need to improve our operating leverage and generate higher and more consistent profitability and cash flow. In Q4 of 2012, we took some decisive steps towards this objective. While further optimization of the Company is expected to be carried out over several years, the key message is that we are highly focused on building a solid foundation of leadership, processes and systems that will help us drive sustainable, profitable growth and increase shareholder value.

With the key takeaways covered, let me move into more detail about our full-year 2012 results. I will begin my detailed comments on slide 4. For the full year 2012, we reported revenues of $1.79 billion, which represented 8.5% growth over 2011. Excluding a 4.6% unfavorable effect from changes in foreign exchange rates and a 1.2% net positive impact from acquisitions and divestitures, Bruker generated 11.9% organic revenue growth in 2012. This is exceptional top-line performance when you consider the fact that we were facing weakness in several European economies, softness in the US academic markets and a slowdown in several industrial and applied markets.

We generated double-digit organic revenue growth in all four quarters of 2012. The key drivers of this performance were a strong uptake of new products, strong demand from academic customers outside of the United States and continued momentum in Asia-Pacific, which represented nearly one-third of our revenues at the end of 2012.

Another key highlight of the year were the organizational changes that we made. We organized the 10 operating divisions of our BSI segment into three groups. We have also elevated or appointed new heads for each of these groups. We believe that this structure will allow for greater managerial oversight and will make it possible for us to begin to implement common global processes in all groups and divisions. Each of the three BSI groups generated more than $500 million of revenue in 2012.

The final business highlight, which I will touch upon, is that we have initiated new outsourcing programs and other productivity improvement efforts in certain parts of the organization. We have divested certain lossmaking or lower profitability businesses and we have begun the process of outsourcing some of our non-core manufacturing activities. We expect that these actions will begin to create savings over the next two years by reducing our working capital ratio and by improving our margins.

From a financial perspective, our healthy top-line growth enabled us to expand our non-GAAP operating margin by 30 basis points in the full year 2012. One of the drivers of this expansion was the BEST ROSATOM license deal that we recorded in Q3 of 2012. Our profitability clearly improved in the second half of 2012 after a disappointing start to the year.

I would like to now turn to slide 5 and make a few comments on the three groups and the BEST segment. I will not cover all of the points of the slide, but I want to elaborate on a few of the key drivers. Let's begin with the BMAT group. The two key drivers for our BMAT group in 2012 were the success of new product introductions and the strength of the group's business in Asia-Pacific. A little over a year ago, we launched the Dimension FastScan Atomic Force Microscope, or AFM, which dramatically increases the speed and throughput of AFM. This product launch came out of our Bruker Nano Surfaces division. The acceptance of the Dimension FastScan has been rapid and helped to drive sales growth in 2012. BMAT's business in China, particularly with industrial customers, was strong during the year and also had a good start in January 2013.

Turning to the Bruker BioSpin group, the demand for NMR was sluggish and the market did not grow in 2012. Despite the stagnation of the market, we were able to grow through marketshare gains in ultrahigh field NMR and pre-clinical MRI. Additionally, new funding programs in Europe helped the BioSpin group to place several high-end instruments in the region.

In our Preclinical Imaging division, the highlights of 2012 included the acquisition of SkyScan's micro-CT imaging business and Carestream's preclinical in vivo molecular imaging portfolio. Bruker now has the broadest preclinical imaging productline in the industry. We are actively working to integrate these two companies and we are excited about our ability to drive growth in this business from our broader offering.

I would like to now turn to slide number 6 to discuss Bruker CALID, which is home to the Daltonics, CAM, Optics and Detection divisions. The Bruker CALID group had a mixed year with several bright spots, but also with some disappointing results. The division did well in the life sciences market and demand from pharma and biopharma customers was solid. Our mass spec clinical microbiology product, the MALDI Biotyper, continues to perform well. And the group saw good performance from its non-US academic customers.

However, the poor bottom-line performance of our CAM division, which still lost in excess of $25 million in 2012, has offset some of these good results. Charlie will talk in more detail about some of the restructuring actions we are taking in CAM to get the performance of this business heading in the right direction.

Finally, BEST had a good year of top-line growth and profitability with the improvement driven by the ROSATOM license deal we closed in Q3. The incentives and the strategic emphasis for BEST have shifted from fast, top-line growth to steady profitability improvements. We are implementing decisions to streamline our BEST research projects, lower our expenses and increase our BEST margins.

I would like to close on slide number 7 by talking about some of my key priorities for 2013. First, improving our operating leverage and kicking off initiatives that help us to lower our costs and working capital ratio is far and away my highest priority in 2013. While we have launched several initiatives to help us towards this endeavor, we intend to accelerate these efforts and decisions in 2013.

Another key priority is to turn out the financial performance of our CAM division. We have made considerable investments to upgrade the products in the portfolio and in 2013, we expect to see a meaningful reduction in the CAM operating loss. At the same time, we need to lower our manufacturing and discretionary spending to put this business on a path toward profitability in the coming years.

Finally, we need to successfully implement performance management systems that provide management with better visibility into the business. This does not just apply to our financial systems, but we will move Bruker toward global processes and global systems that provide us better information to optimize the performance of our businesses.

So I would conclude my comments by stating that one of Bruker's core strengths is innovation and launching new products and we will continue to focus on cultivating these strengths. We had a very good year of growth in 2012, but our profit and cash flow performance was not satisfactory for the full year. That being said, we ended the year on a positive note and generated both good top-line growth and margin expansion in Q4 of 2012. And we continue to have a very healthy backlog. As we enter 2013, we will have a strong focus on ensuring that our growth is profitable and that we are generating attractive cash flow. With that, I will turn the call over to our CFO, Charlie Wagner.

Thanks, Frank. I will now provide some additional details on the Q4 and full-year 2012 results before providing our financial outlook for 2013. On slide 9, I show a snapshot of our Q4 2012 non-GAAP performance. Total revenues increased 8.9% from the fourth quarter of 2011 totaling $517 million. Excluding a 2.1% unfavorable impact from changes in foreign exchange rates and a 0.8% net impact from acquisitions and divestitures, year-over-year organic revenue growth was 10.2% in the fourth quarter of 2012. This solid performance was primarily driven by our Bruker MAT and CALID groups.

We were pleased that we generated operating leverage from this higher sales volume in Q4 of 2012 with non-GAAP operating income growing by 20% and non-GAAP operating margin expanding year-over-year by 130 basis points in the fourth quarter. On the bottom of the slide, you can see that, during the course of the year, we continued to make some progress on our working capital, lowering our working capital to revenue ratio from $0.48 to $0.46. However, considerable opportunity remains to bring this ratio lower in 2013 and beyond.

Turning to slide 10, changes in foreign exchange rates continued to be a headwind on the top line for Q4 and reduced our year-over-year revenue growth by 2.1% in the quarter. This was primarily driven by a weaker euro, Swiss franc and Japanese yen versus the US dollar. You can also see on this slide the revenue impact from the two smaller acquisitions that we completed earlier this year, SkyScan and Carestream, which added $4 million of revenue in the quarter after adjusting for the effects from the divested thermal analysis instruments business in Japan.

On slide 11, we show our Q4 2012 non-GAAP operating results in more detail. Our Q4 2012 non-GAAP gross margin of 47.7% increased 120 basis points on a year-over-year basis driven primarily by higher revenues and mix. Our SG&A as a percentage of revenue declined by 40 basis points due to tighter control on discretionary spending. But this SG&A leverage was offset by R&D increasing as a percent or revenue due to the timing of certain R&D projects. As a result, our non-GAAP operating margin expansion was driven entirely by our improvement in gross margins during the fourth quarter.

Despite this margin expansion, we reported non-GAAP earnings per share of $0.28 in Q4 2012, which was a 7% year-over-year decline. Interest expense and foreign exchange losses were higher in Q4 2012 than in Q4 2011 and Q4 2011 also benefited from an unusually low tax rate.

On slide 12, you can see the difference in our year-over-year non-GAAP tax rate at the bottom of the slide. Our Q4 2012 non-GAAP tax rate was 30.9% compared to 16% in Q4 2011. During the fourth quarter of 2011, we released a $6 million tax reserve, which led to the low tax rate.

On the rest of the slide, we show a reconciliation of our GAAP to non-GAAP results. During the fourth quarter of 2012, we incurred $34 million of costs that we excluded from our non-GAAP results. The largest component of these costs was related to roughly $24 million of impairment and restructuring charges related to our CAM and BEST divisions. Included in that amount was $16.4 million impairment charge for intangible assets and a $1.4 million writedown of goodwill, both of which were established in 2010 during purchase accounting for CAM. The impairment charge reflects the view that after 2.5 years of operating losses, the projected cash flows from the CAM division are not in line with projections made at the time of the purchase.

In addition, we recently made the decision to close a CAM R&D and manufacturing facility in Europe and moved those activities to our CAM location in Fremont, California. As a result of this decision, we recorded fixed asset impairment charges and other restructuring charges of approximately $3 million in the fourth quarter of 2012. Additional charges related to this decision will continue to be incurred during 2013. We remain committed to improving the financial performance of CAM and believe this factory consolidation is an important step towards improved operational efficiency.

Finally, in Q4 of 2012, we also made the decision to cease certain R&D activities and exit a manufacturing location in our BEST division. We remain committed to BEST's superconducting materials and big science business, but we have decided to scale back investments in technical development programs that were not expected to yield meaningful commercial results for several years. We expect to retain some of the technology, IP and know-how so that these programs could be restarted in the future if it's deemed attractive to do so. As a result of these decisions in BEST, we recorded $2 million of fixed asset impairment charges and other employee-related restructuring charges.

Moving on to slide 13, I will briefly touch upon our full-year 2012 non-GAAP results. Total revenues increased 8.5% compared to 2011 totaling $1.79 billion. Excluding a 4.6% unfavorable impact from changes in foreign exchange rates and a 1.2% net contribution from acquisitions and divestitures, revenues grew 11.9% organically in 2012. This is exceptional performance, which is clearly ahead of the overall market growth. Our non-GAAP operating margin of 12.2% expanded 30 basis points compared to a non-GAAP operating margin of 11.9% in 2011. However, if we adjust for the ROSATOM license impact, which contributed roughly $15.5 million to 2012 operating income, our non-GAAP operating margins would have declined by roughly 50 basis points year-over-year. Our 2012 non-GAAP EPS of $0.83 was nearly unchanged from 2011.

Moving to slide 14, I show you our GAAP to non-GAAP reconciliation for the full year 2012. We excluded approximately $63 million of costs from our non-GAAP results in 2012. In addition to the $24 million of Q4 charges related to CAM and BEST that I just mentioned, the reconciliation also includes meaningful costs related to our investigation and review of our past business practices in China. These costs are reflected in the Other category that you see on the schedule.

Since 2011, the Company has been reviewing business practices at its subsidiaries in China. In our 2011 Form 10-K, we reported that we identified certain issues at our Bruker Optics subsidiary and took actions to terminate certain employees and implement enhanced financial controls and oversight.

Further investigation during 2012 has revealed additional issues in other Bruker subsidiaries in China. As a result, in early 2013, we took further personnel actions, including termination of certain individuals. The review of our China operation is still ongoing and no final conclusions can be drawn at this time as to its final outcome. At this time, we cannot reasonably assess the timing or outcome of these matters or their effect, if any, on the Company's business.

Turning to slide 15, our balance sheet continued to strengthen during 2012. Despite two acquisitions during the year, our net debt was reduced by 53% due entirely to higher cash balances as our cash and cash equivalents increased by 26% during 2012. The only other thing I would point out on this slide is that our pension liability increased by 55% during 2012 and this increase is almost entirely due to a lowering of the discount rate.

On slide 16, I show our cash flow statement for 2012. We increased our free cash flow by $34 million year-over-year with all of our free cash flow generation coming in the fourth quarter of 2012. We made modest improvements in our working capital ratio due to improved DSOs and lower in-transit inventories. While we made progress in 2012, we have a significant opportunity to improve our cash flow over the next two to three years by improving our profitability and lowering our working capital.

Now turning to our financial guidance for 2013 on slide 18. We entered the year with a mix of caution and optimism. While industrial markets appear to be stabilizing and improving, we still see continued weakness in markets such as the semiconductor and data storage industries and continued uncertainty in US academic markets.

Additionally, we anticipate that a meaningful portion of our growth and profitability will be skewed towards the back half of the year, so we are taking a somewhat cautious start to what is sure to be a very busy year.

For the full year 2013, we expect to generate reported revenue growth of approximately 4% to 5%. Our currency assumptions are that exchange rates are roughly in line with today's rates. On the bottom line, we expect to generate approximately 6% to 10% growth in non-GAAP earnings per share in 2013 when compared to the year 2012.

In addition, in 2013, we expect to incur $20 million to $25 million of restructuring charges related to the facility exits in CAM and BEST and the rampup of our outsourcing initiatives in other divisions. We expect that these programs will lead to more than 150 employees leaving the Company or being transferred to a contract manufacturer or other strategic partner over the next 15 months. We will continue to evaluate additional optimization programs that could impact 2014 and future years as well.

Finally, please keep in mind that Q1 2012 was a very strong quarter for Bruker with revenue growth of nearly 14%. We are not entering 2013 with as much momentum as we entered 2012, so we are expecting modest revenue growth in the first quarter of 2013 and non-GAAP EPS could even slightly decline from Q1 2012 levels. In contrast, Q2 2012 was a very weak quarter for Bruker and we are looking to do better in the second quarter of 2013.

This commentary further highlights that Bruker's business remains lumpy when viewed in three-month intervals and we believe that a 12-month view is the most appropriate way to evaluate the performance of our business. With that, I will turn the call over to Joshua to begin the Q&A session.

Marcy, please assemble the Q&A roster.

(Operator Instructions). Tycho Peterson, JPMorgan.

You guys have started to show some nice SG&A leverage. Just wondering if you can talk a little bit more about what the drivers there have been and then the sustainability of some of those trends, in particular on the SG&A line.

Sure. We obviously, after Q2, put tighter controls in place in the second half of the year, so some of the improvement you see in the quarter is related to that. But as we head into 2013, I would say, in all of our businesses, we are pushing for a greater level of discipline around SG&A spend. We have had some pretty significant increases in some businesses over the last couple years and in 2013, we are looking for those businesses to earn a better return on those investments.

That said, we also continue to make investments, particularly in G&A, around strengthening the finance function and starting to invest in some IT capabilities, so that will offset some of the savings that we are generating in the businesses as well.

And if we think about your guidance, you are resuming the environment is unchanged. Obviously, sequestration could change a lot. Can you just talk about maybe the sensitivities in your own assumptions around sequestration if that goes through?

This is Frank. As you know, our US revenue overall is less than 20% of our revenue and we generally figure that directly or indirectly related to NIH funding is maybe 3% to 4% of our revenue. So if that gets all sorted out, we would be happy to see an uptick in that 3% to 4% perhaps in the second half of the year, but right now we are not modeling that. We are modeling the present uncertainty, which leads to very restrained academic spending in the United States.

Then last one on backlog conversion times, I mean this has obviously been a focus for people over the past year. Can you just talk a little bit about some of the initiatives to improve backlog conversion and then maybe how we should be thinking about cash flow expectations for '13?

We are making some progress on backlog conversion and there is more progress to be made in 2013. In fact, quite a bit of our business planning for 2013 in a number of the divisions is really also focusing on that. A nice example in 2012 where we have really accelerated backlog conversion may be the Daltonics life science division where we really now have a higher speed through the entire [quote] to cash process. I think there are other divisions like AXS, which is now part of the BMAT group where progress has been slow and we are looking forward to accelerating that quite a bit in 2013. So steady progress; more further to go.

On cash flow, I think we are not going to give guidance today on cash flow. We will probably update that later in the year. What I can tell you is that obviously we are expecting some improvements from profitability and better management of inventory for sure. I guess a headwind though that is going to offset that somewhat is we have got somewhere in the neighborhood of $20 million worth of tax payments to make in the first quarter related to tax audit settlements that are already fully accrued and that is -- I would say that alone is a pretty substantial item that is not something you expect to occur year-over-year. So once we get through -- once we get through the first quarter, we will have a better sense on that.

Okay, thank you very much.

Jon Wood, Jefferies.

Hey, thanks a lot. Good morning. Hey, so Frank or Charlie, you guys normally give the backlog I think once a year in the 10-K. Are you in a position to do that on the call today?

Our backlog is in the neighborhood of $1 billion. This remains rather high. I cannot comment on the 10-K right now.

Yes, the backlog is still healthy, Jon. We are actively looking to draw down with better conversion in some of our businesses and at this point, I think it is healthy entering '13 is the best we would say.

Okay, and just directionally, how were the order trends in the fourth quarter? I think you talked about orders being down modestly in the third quarter. Can you give us a sense, at least qualitatively, of the order trend in the fourth?

Yes, I mean orders were soft in the fourth quarter. There is some comparability issues in the fourth quarter of last year. We had very, very large -- yes, fourth quarter of 2011, excuse me. We had very, very large multiyear orders from some BEST customers and those orders tend to be placed once every three years or so. So kind of the comparison is skewed a little bit. If you strip that out, the order growth rate in Q4 was still kind of flat to slightly negative, but again Q4 '11 was very strong.

Okay, great. At least on the CapEx side, Charlie, can you share a budget for '13 on the CapEx side?

We are not going to guide to that specifically, Jon. I expect it to be lower than 2012, but we are still in an investment period. If you look at Bruker over a five-year view, certainly the last couple of years have been higher CapEx, but the three years preceding that were actually quite low. So we are in the midst of some building projects and likely to start to take on some IT projects that contribute to CapEx. I guess to ballpark it in '13, it is probably in the 55 to 60 range.

Okay, great. And then last one, have you guys thought about new intermediate term goals, at least when you have got your arms around enough to kind of -- to initiate revised, call it, three to five-year goals? Any thoughts on that would be great.

Yes, so, again, understand the desire to have that information at this point. We don't have any plans to provide midterm goals. As Frank has pointed out, we have got several new members of -- new or newly promoted members of management who are getting their hands around their business and the full potential of those businesses. We would like to go through a full planning cycle this year with that management team so that we can commit to a plan that we feel good about. So it is unlikely that we will be providing midterm guidance during this year.

All right. Thanks a lot.

Ross Muken, ISI Group.

Hi, this is (inaudible) in for Ross and thank you for taking my question. Maybe a quick housekeeping question. Can you guys share what the organic growth for the segment was, BSI versus BEST and what is implied in the 4% to 5% guidance for '13? Sort of what are the puts and takes?

2012, the BEST organic growth rate was higher than the BSI growth rate, but the BSI growth rate, organic growth rate -- I don't have an exact number right now, but it was still quite high. In 2013, it is going to be much more similar in terms of growth rates.

Yes, we can do that housekeeping offline.

Okay. And Charlie, I mean now that you have sort of been in the CFO role for a while, can you share with us sort of what has surprised you on the positive or the negative side and what has been the feedback from the employee base?

Sure. Yes, I mean, I don't have much new to report on that front. I have known the Company for some time, so I know the strengths here and I know the things that we need to work on. I think in terms of opportunities for improvement, Frank and I have commented on that at length in the past. We really need to work on tightening up our management practices and systems related to that so that we have better insight and better control over the businesses and we also need to get better at operational practices, specifically in our factories and in our supply chain to drive down our consumption of inventory.

So those are consistent themes that we have certainly been pounding over the last six months and prior to that. I think the response that I have seen has been quite positive. Part of this is making sure that we are getting the message to folks and making sure that they have the incentives and the tools to do what we want them to do. So at this point, I feel like we have made some important early steps and that the employee base is quite receptive.

Yes, I think the employee and staff response to the changes in the CFO and financial organization, the group reorganizations, the promoted or newly hired group presidents I think is really excellent. I think everybody sees this as a very positive.

We certainly agree with that. Thank you.

Isaac Ro, Goldman Sachs.

Good morning, thanks for taking the question. Frank, just wondering if, in general, you could talk a little bit about emerging markets. How did it do in the fourth quarter and what are you guys seeing in China in particular as we move into 2013?

I know we had a good start in January that may be in part due to the timing of the Chinese New Year where a lot of orders were placed in January. Except for our Bruker Optics division, which was a bit slower in China in 2012, I think overall China was solid, not exceptional. So emerging markets, we have seen continued strength, more than we had expected in 2012 in Latin America, with particularly Brazil being quite a bit stronger in the second half of the year than we would have expected. Russia was solid in 2012, though not as strong as in 2011, but remaining at quite a high level.

Our business in India was solid, actually quite good. I think our NMR division had a record year in India in 2012 and we have seen some ongoing evolving strengths in the Middle East and Africa, particularly Saudi Arabia, but also a number of -- even countries like Egypt investing a little bit, but Saudi Arabia really being the driver in some of the Gulf states there. That perhaps gives you an overview.

Great, thanks. And then maybe just a follow-up on the NMR comments you made. Can you give us a sense of where you think you are in that business in terms of the pricing environment? Is it healthy and then maybe from a product cycle standpoint, do you see anything in the works in the next 12 to 18 months that could be material in expanding the market or advancing the technology specifically?

Not to frustrate you, but on the latter, of course, we always have new product and R&D plans and those we don't tend to discuss ahead of time. We have had strong product introductions. In the last few years, we have done quite well in NMR, particular strength in ultrahigh field NMR and DNP-NMR, which is sort of a new flavor, but for that new flavor because it is a true new scientific capability, there were a lot of special funding projects in the last couple of years, for instance, first in France and then in Germany. And I think there is an opportunity to gradually expand NMR into new applications, into applied markets, food composition, food authenticity, same for wine and beverages, fruit juices and I think we are leading the way in that.

Great. If I just could squeeze in one more for Charlie. Charlie, you went through a lot of detail on the working capital potential, but I was wondering if you could maybe break it down for us thematically over the next couple years what you think the two or three biggest opportunities are to improve the free cash flow profile of the business. Thanks.

Sure, opportunity one, two, and three is around inventory really. We have got to really improve, I think, our strategic procurement practices as the key driver, shortening the length of our supply chain and our in-transit cycle is another and then finally, outsourcing. We are pretty vertically integrated in most of our businesses, have done some outsourcing already, but really need to step that up quite a bit in some of our European locations. And so as we push on outsourcing, that should take some inventory off the balance sheet as well. So I think it is really about inventory.

Perfect. Thanks so much.

(Operator Instructions). Amanda Murphy, William Blair.

Hi, thanks. I had a question on 2013 expectations. So you talked to the sort of back-half SKU, if you will, for EBIT margin expansion. But I am curious, you have mentioned a number of different sort of cost improvement initiatives you have in place and I know it is still early, but can you just help us get a perspective on which ones might benefit you in '13 and sort of what could get you -- what specific initiatives could maybe drive you to the higher end of your guidance range versus the lower end?

Sure. Yes, I mean there is -- obviously, I only mentioned a selected list of things that we are working on. It turns out that that list is definitely skewed towards the back half, if you look at the manufacturing facility exits in CAM and BEST, both are European facilities and so we are working with works councils through kind of the appropriate process and those exits really don't occur until about the Q3 timeframe, so a little benefit in the current year.

Similarly, with the larger outsourcing programs that I have mentioned, again, those are well underway in terms of planning, but don't occur until the Q3/Q4 timeframe. So those activities will be a lot of work this year and not a lot of benefit this year. But obviously they have benefit that accrues into the future. Aside from that, there is a whole portfolio of other things that we are working on to improve margin expansion.

What could drive us to the higher end, obviously growth at the higher end of our range is going to help and as we look at programs in sales and marketing and in our manufacturing environment to lean out a little bit, those are things that don't have quite as long a leadtime associated with them and things that we are kicking off really this year.

Amanda, this is Frank. I would maybe add to that that some of the outsourcing initiatives probably will have an impact on working capital first and on margins with about half a year to a year delay. So as some of the working capital comes off our books, you may see that earlier, but, of course, that is built into our 2013 guidance.

Got it. And then I think you started your systems infrastructure review in January. Maybe too early, but -- and I think you also mentioned some expected spend on the IT side. Do you have any update there in terms of what you are looking at from a systems perspective near term and long term?

Yes, not much new to report. I will segment it. We have got a financial systems project, which is well underway. That is a relatively modest investment, in the $3 million to $5 million range. I think the study that you are referencing is -- obviously we want to take a look at our ERP infrastructure and lay out a roadmap for that for the future. That study has not commenced at this point, but it is something we will undertake this year.

Okay. And then just last one in terms of R&D, I know you have talked to the opportunity in the long term to get leverage there, but it seems like from a quarter-to-quarter standpoint there may be some lumpiness just around project timing. So I am curious if you have any perspective on how to think about that over the next quarter or the next few quarters here.

Amanda, I mean there will be some lumpiness. I think that is really quite inherent. It is very difficult to predict that. We cannot predict in which quarters some of this lumpiness may fall quite honestly. So from time to time, there will be some lumpiness built particularly into the part of the BioSpin group. But there are also some larger systems orders occasionally in BEST or in the BMAT group. We will highlight those from time to time if a quarter is particularly affected, but I think it's difficult -- we cannot predict which quarter this may fall in given our conservative revenue recognition upon full written acceptance.

Okay, thanks very much.

Derik De Bruin, Bank of America.

Hello?

Hi, Derik.

Hi. So a lot of the questions have been answered, but I am just wondering, could you give a little bit more color on the CAM business and sort of what organic revenue [growths] were in that business? I am just curious to see how it has been tracking over the last year.

Yes, so I will take that one. It is Frank. We had decent, but not great CAM growth. We had hoped for more growth, but there has definitely been a retrenching in 2012 in the applied markets and we think even some of the applied markets have shrunk in 2012, perhaps with a recovery late in the year. Too early to tell. And accordingly, our CAM growth rate was lower than we expected internally. Nevertheless, it was above the corporate average still and our CAM business, which was sort of at a $60 million-ish revenue run rate when we took it over, has now recovered and exceeded its historical highs at about a run rate of $100 million.

Okay, great. That's very helpful. You mentioned some toughness in the semiconductor and data storage industries. Can you just elaborate on that and just sort of how you see that sort of pacing out through the year?

Yes, no, that has been pretty pronounced. We did have some good orders actually in the first half of the year, but those had to do more with technology transformations or -- I'm sorry -- technology transitions. So rather big companies like Intel or IBM or Samsung continuing to invest for the next node with smaller feature sizes or going to 450 millimeter fabs. So we had some good orders for that and we continue to have some of that in our backlog. But the more cyclical part of the industry, I think, may have reached its low in the second half of this business cycle in the second half with more recent orders in data storage and semiconductor being very low.

And now I am not talking about our own data, but if I look at some companies, some of the larger companies in that space, their more recent announcements have been a little bit more positive. So maybe we are through the bottom of the cycle there. But we have a non-cyclical part of the business, which is doing well and a somewhat cyclical part of the business, which for us is less than 2% or 3% of our revenue, but a division like B&S will see it to a greater extent, of course, than Bruker overall.

Great. And Charlie, the non-GAAP gross margin was up about 60 basis points year-over-year and some of that clearly was due to the ROSATOM license that is there. I guess just qualitatively for 2013, I mean do you expect the gross margin on an absolute basis to be up year-over-year?

The ROSATOM impact is pretty meaningful in 2012 and then it has a follow-on impact in 2013 as well. Obviously, it was about $16 million of revenue in '12 at essentially 100% gross margin, so that is a big uptick from '11 to '12 and then from '12 to '13, it goes from $16 million down to $6 million. So you get $10 million of margin siphoned off.

So at this point, I would say, absent that, we are absolutely looking for gross margin expansion with that included. Again, we are not guiding to that, so we will kind of take that up later in the year.

Tim Evans, Wells Fargo.

Hi, a couple product-related questions here. Can you comment on your expectation at this point for the MALDI Biotyper FDA approval? And then the other question I had was related to kind of your outlook for the NMR business. Do you anticipate increased competition there going forward?

Okay, this is Frank. I will take that. We are working on FDA clinical trials in the United States. The MALDI Biotyper last year had continued to have double-digit organic growth above the corporate average with quite a bit of uptake also in nonclinical applications in regulatory agencies, including in the United States that, of course, do not need FDA approval. So FDA approval, we are hoping for it in the second half of the year and we are working very diligently with the FDA on that. Of course there can be no guarantees on timing or whether or not we can achieve that, but we are hopeful.

On the NMR side of the business, I am sorry, what was your specific question there, Tim?

I am just wondering kind of what your outlook there is, if you could comment just qualitatively for 2013. And then also are you expecting an increasingly competitive environment?

Well, it has always been competitive, but we are doing really very well competitively in NMR. I think we expect weakness in NMR in the United States because of well-known funding problems or at least funding uncertainty. The rest of the world, it is a reasonable market. Academic markets there, particularly in non-Mediterranean Europe, have held up quite nicely. The same is true for much of Asia where it is really -- I mean it goes along with all academic funding investments. The commitment to academic research and funding, that has to do something with the long-term competitiveness of nations and most countries in Asia-Pacific and most countries in Europe are investing in that, plus many developing regions, if you want to call them developing, I mean including major economies like Russia or India or Brazil.

So I think in NMR, there is, of course, the competitive angle. I think it is more the expansion into new markets and applications that may drive that, plus, of course, the expansion of our preclinical imaging productlines beyond preclinical MRI into other optical PET, SPEC, micro-CT and magnetic particle imaging modalities.

Great, thank you.

Jon Groberg.

Thanks, good morning. Charlie, you obviously talked about a number of cost initiatives, a number of things taken in the fourth quarter. Obviously you are planning some more in 2013. I was just wondering could you put some specific numbers around kind of what -- kind of what the cost savings ultimately is expected to be from the initiatives that you have put in place or that you know about? And also on the revenue line, I mean it sounds like you are taking some initiatives to actually rationalize that line a little bit and maybe what the impact is on the top line from some of these initiatives?

Sure, yes, on the top line, I wouldn't say that we are rationalizing that other than we are looking for greater discipline in some of our businesses like CAM around pricing, which could mean that we walk away from some business that we otherwise might have chased in the past. Similarly, in BEST, there are some revenues again that we won't be pursuing, none of which was high margin. So I wouldn't say we are rationalizing that per se, but we are definitely being more disciplined in some of our businesses on the top line.

On the bottom line, the basket of programs that I referred to in CAM, BEST and then outsourcing this year, the timing gets a little difficult to predict at the end of the year. That is why I said 15 months in the script, but say between now and 15 months out, that basket of programs will be more than 150 employees, maybe even upwards of 200 employees would leave the Company during that timeframe. Many of them would get picked up by our contract manufacturing partners and other strategic partners, so we are doing it in a responsible way. That could yield run rate benefits north of $10 million, perhaps better in 2014 and we have not guided to the working capital benefits, but they are pretty meaningful as well.

So as I have stated, think of this as kind of step one or wave one. I mean, again, there has been plenty of good things happening, but we are going to put a circle around this group of initiatives and call it wave one and as we go through planning this year, we are going to be thinking about what is in wave two, what is in wave three.

Okay. And so for '13, given currency and given, I don't know how you want to look at some of the revenue initiatives you just mentioned, and I don't know if you have any other divestitures planned or anything, but what is your organic growth outlook for '13? I don't know if I missed that.

Yes, the -- so we guided 4% to 5%. I think the net impact of acquisitions less the impact of divestitures is something like 50 basis points.

Okay. And then lastly, were there any one-time items in the Q4 gross margin? I know I think that whole $16 million was in 3Q for the Russia deal, if I am not mistaken.

The Russia deal was the third quarter, yes. I mean the fourth-quarter charges -- yes, some of that would have been through cost of goods sold because it was -- in the GAAP results, it would have been through cost of goods sold because it was impairment of factory assets basically that were written down as a result of the exit decisions that we made.

But in terms of that non-GAAP, the 47.7%, there is no kind of one-time benefit there?

No, there is nothing funky in there.

Okay, thanks.

Dan Leonard, Leerink Swann.

Thanks. I have a follow-up to Derik's question on CAM. It looks to me that the operating loss in CAM in 2012 was well higher than 2011 even though sales were higher. So my question is, one, is that true? And then two, how much of your expectation that you are going to move closer to breakeven in CAM in 2013, how much of that comes from top-line growth in CAM as opposed to some of those margin improvements you talked about, some of the cost reductions in Europe?

Yes, Dan, I will take that. This is Frank. First of all, it is true that our operating loss was higher than in the prior year in 2012. And second of all, we are budgeting some but modest CAM revenue increase in 2013. So that is another way of saying that the primary drivers for reducing that operating loss are in OpEx savings and in, as Charlie had mentioned, in going from two factories, one in Europe, on in the US, plus, of course, a lot of outsourcing, down to one factory through the course of the year. So Charlie, you wanted to elaborate on that?

Yes, I think -- so that is correct. In addition to the benefits from the factory consolidation, we are also making some changes in the field as well. But to Frank's point, we are still targeting growth for CAM as well. So if I had to kind of pin down the improvement, I would say it is half from growth, half from kind of other actions that we are taking.

Great. That is helpful. Thank you.

Sung Ji Nam, Cantor Fitzgerald.

Hi, just two quick questions. Maybe could you talk about the competitive dynamics for your, I guess, BSI in general and kind of how that might be impacting pricing in the current environment?

Okay, this is Frank. I will take that. I think the competitive environment -- I think there was some pricing pressure certainly middle of the year, perhaps continuing, but I think there was a little bit more of an economic pickup towards the end of the year. But when the markets were particularly weak, which had that feeling in the middle and into the third quarter, early fourth quarter, we saw some pricing pressure, I would say, in the applied and industrial markets. And I think other than that, there is no unusual competitive pricing margins right now. I think generally pricing tends to be rational or perhaps more rational in general as I look over the BSI portfolio.

Okay, great. And then one quick question for Charlie. Maybe talk about your tax rate for next year. It is slightly higher than what I am calculating this year. And so I was wondering if things like R&D tax credit, I know there was a one-time benefit this year in 2012 as well, but how would this be a R&D tax credit benefit? (multiple speakers) that wasn't recognized last year?

Sure, yes, I mean our estimate around tax rate for 2013 is in the ballpark of where we were in '12. Remember we are not really a taxpayer in the United States, so some of the benefits you are talking to don't necessarily accrue to us in this year. So we have got to work on -- our tax rate is more impacted by the geographic mix of profits and losses and whether those losses are a tax benefit or not. So that's a big part of some strategy work that we are doing this year to look at our tax rate.

Thank you.

[Ben Harris], [EBS].

(technical difficulty)

Ben, are you there?

We cannot hear you, Ben.

I'm sorry, Ben. We are not able to hear you. Are you able to come closer to the phone?

Can you guys hear me?

Yes, we can hear you now.

Sorry about that. The scalebacks that you referenced for some of the BEST projects, is that related to the false current limiter or the growth magnet work that you have talked about as being drivers in the out years?

Both correct, Ben. This is Frank. Yes, indeed, the fault current limiters project ran into protracted technical problems and given the uncertain go-to-market strategy and the long-term nature of that opportunity, we reduced that and stopped that project certainly for the time being. As Charlie pointed out, we could conceivably resume that at some point in the future, but that is certainly not planned for 2013 or '14 for that matter.

So we are also cutting back on some of the magnet opportunities from the BEST business. This has nothing to do with our BioSpin NMR or FTMS or MRI magnets. Our projects did not yield promising gross margins, I would say and therefore, we decided not to try to scale that up. That relates to some of the restructuring charges we took and the plan to exit one European factory in Germany in 2013 at BEST.

Okay, thanks. And then just on some of the operational exercises you guys have underway, with the changes that you have made so far, can you give us a sense of how much or maybe what percentage you think you have left just in terms of headcount changes in order to put the right people in charge of the realigned businesses?

I think we have made a lot of progress in putting in the right leadership. Separately, there is the issue of will some of the outsourcing or working capital -- will that lead to transfer of employees to other partner companies. That is really in the early stages still if you were referring to that.

Got it. Thanks.

Peter Lawson, Mizuho.

I just wondered if you could talk through the SG&A uptick in Q4 and how should we think about that in 2013.

Yes, I mean there were some investments in Q4 related -- driven by me, candidly, that we are working on to strengthen some of our finance organization and some of our systems. That will continue into '13. Offsetting that are productivity gains where we are gaining in the field and other places. I am not going to guide to specific line items for '13, other than to say that we remain very conscious of the fact that we need to extract some operating leverage better than we have in the past.

And then, Frank, were there any changes in the environment for US academic spending in the quarter versus last quarter?

None that I can see. I think the tax deal that averted the fiscal cliff or whatever the wording is in Washington did absolutely nothing to give more confidence to the academic decision-makers. So I think the US academic funding situation, and especially the uncertainty, I think, is really -- is really bad and we are -- at this point, we are simply perhaps conservatively assuming that that is not going to change soon and if it changes by the second or third quarter, then quite honestly, until that results in additional orders and in additional revenue, which orders to revenue for us tends to be sometimes a two-quarter lag, we think if this gets sorted out politically, I don't think it is really going to help us very much until 2014. So we have assumed the somewhat dire state of affairs in US academic spending throughout 2013 that we saw in the last few quarters of 2012. Sorry that is not a very upbeat message, but that is basically how we modeled it.

Now is that the main thing that has kind of pulled you back from that 9% to 12% organic that you have done historically for when you guided in 2013?

No, I think there is a number of factors of why we are -- there is a slowdown, perhaps a shrinkage in the applied markets in the second half or in the middle of second half of 2012. There is weakness in semiconductor and data storage. There is, of course, continued concern over Europe, although the commitment to academic spending and research appears to be generally strong. So there is just many, many areas that make us somewhat cautious on 2013. But, as Charlie said, it is not all caution, it is a mix of caution and optimism, but it certainly is a mixed picture. It is not all economic strength.

And just finally, on the CAM business, do you think that the performance and profitability actually improved in Q4?

I think just even more so for a division, I think one has to look it over the last 12 months to get a good assessment. So there have been some good orders at the end of Q4, so a number of our divisions, including CAM, that may be a little bit more cyclical suggested that maybe towards the end of the year the economies are beginning to turn a little bit. But I think those are early telltale signs and maybe they are not telltale signs at all, maybe they are just statistical fluctuations. We will see. I think it is too early to tell and I think, for CAM, 2012 with some growth and some excellent new products, but none of them really with an effect yet until 2013. In fact, a further product introduction just last week that is rather important for CAM of that new aurora Elite ICP-MS, so we are excited about the product portfolio. We think we are fixing the field issues. We are restructuring the factories, but there is quite a bit of work to be done and I wouldn't take any particular quarter as a telltale sign, but we are very much driving towards making a lot of progress this year towards breakeven. Obviously not with breakeven yet this year.

Great. Thank you so much.

[Kenneth Hirschberg], [Hirschberg Capital].

Congratulations on your improvements. My question has been answered. Thank you.

That is all the time allowed for today's conference call. I would now like to turn the call back over to Joshua Young for closing remarks.

Thank you. Thank everybody for joining us this morning. We hope to see many of you at the Cowen and Barclays healthcare conferences in March. We will also be featuring many of our new products at the Pittcon conference for those investors that will be attending the conference in Philadelphia. Thank you for your attention and have a good day.

This concludes today's conference call. You may now disconnect.