I'm Brandon Couillard. I cover the life science tool sector here at the firm. Very happy to have Bruker with us back at the conference again this year. And here to kick it off this morning, Executive Vice President and CFO, Gerald Herman. Gerald?
Hello. Thank you.
Thanks for being here.
Great to be here. Thanks.
Maybe to kick things off, with the third quarter results, I mean, this is the third quarter in a row Bruker has beaten and raised guidance on an organic basis for the year. Your outlook for 2023 is 300 basis points higher than it was when you started the year.
Right.
Every single one of your peers has spent the last two or three quarters slashing numbers. Can you just unpack for us what you saw in the third quarter, and maybe help us, kinda understand how Bruker's been able to deliver such differentiated results?
Sure. Well, we had a terrific quarter, actually, 10.9% organic revenue growth, following a few quarters of double-digit growth as well. We put up solid EPS growth, about 12%, for the quarter. I guess I think the primary difference between Bruker and some of our peers that have reported somewhat different results is... I mean, I think part of it's, of course, our differentiated products. I think we have very unique products that tend to hold and are stickier in more challenging macro environments. But more fundamentally, I think it has to do with the mix. You know, as you probably know, a lot of noise in the system around China, specifically, softness in China, at the order level.
We saw some of that as well, but more of our mix in terms of the portfolio is really driven by academic and government, and that's largely insulated by some of these other trends, I would say. So we did see some softness in biopharma, just as others, but because the mix for us is more like 17% of our total portfolio, the impact is much, much smaller. And at the same time, most of our other elements of the business, particularly from a revenue perspective, have performed extremely well. And I'd say materials science, green tech, industrial-related items have performed quite well for us. We did extremely well in the academic government research area, in proteomics. Our BioSpin business performed well.
So overall, I think it has a lot to do with the mix and less to do with the, the biopharma, impact. We do have impact from China, and we can talk about that further, but, but I think, we did see some softness in China, but a lot of pull forward from H2 into the first quarter of 2023, which gave us a substantial bolus of orders in the first quarter. So I think generally speaking, we're very optimistic about where we stand right now, both in the end markets that we play in, and I, I think, you know, relative to our peers.
I think you said on the call, your book-to-bill year to date, BSI,
Yeah
... is running about one.
Mm-hmm.
Right? You did call out some softness in China.
Yeah.
We're seeing that across the board-
Yeah
... from everyone else. You still expect orders in China to be up double digits, this year, and-
We do
... you know, are you seeing anything, I guess, different in market-wise, within China compared to peers?
Yeah, we—First of all, relative to year to date, we are above one on our book-to-bill. We do expect that to be the case also for China. As I mentioned earlier, we had a significant pull forward of orders related to the China stimulus loan program in the first quarter and some spillover of that into the second quarter. So I think fundamentally, we've got very strong order bookings performance year to date and expect it to be that way through the end of the year. Looking out forward, again, we continue to believe that the academic government funding environment across the board, but including in China, continues to be pretty solid.
So, while we have more difficult comps going forward, I think it's likely that we'll still perform quite well in China. Again, mostly due to the mix, not so much biopharma, but significantly more academic and more material science and industrial.
Which areas of the portfolio, if you look within BSI-
Sure
... we're talking about BioSpin, you know, Nano, are seeing the strongest order trends, or are they equal across the board? If you had to unpack them-
Yeah
... you know, by segment.
I'd say generally speaking, we continue to see good, strong order growth in BioSpin. Again, that's largely fueled by the academic government area. We had good order performance in our Nano business. There's some elements of the, I call them secular tailwinds, that come from our semi-metrology-based business, which is seeing some AI-related trends that are very positive. So, fundamentally, the Nano business has performed extremely well during 2023, and we would expect it to continue to do that. You know, we saw good order growth and business performance by the CALID organization, particularly our optics. Organization's done extremely well during this period. You know, that's a molecular spectroscopy business, and we have solid market positions there.
You said on the call, so you expect for the full year, your book-to-bill to be about 1-
Yeah
... meaning that double-digit revenue growth this year is not coming from backlog burn.
Yeah.
Right?
That's right.
So what operationally keeps you from bringing down that backlog, and where does it sit today compared to historical levels?
Yeah, these are good questions. So we have a significant amount of backlog in the company. We're tracking about, we call it seasonally adjusted, about eight months of backlog, which is very high compared to our normal, which is around 5.5-6 months. It's particularly more significant in other markets. I guess I would say some geographies, it's more significant. So what's causing that? I mean, some of it, of course, has to do with the pandemic supply chain issues. As we worked our way through those, we're still experiencing some supply chain issues, but not nearly as significant. The more significant issue for us right now is, you know, production capacity and our ability to meet the demand that we have.
Secondly, we've had some import/export challenges with respect to our transfer of products in into China. That's largely due to geopolitical risk related to the U.S. and China, but also we see some of that in Europe. So fundamentally, it's taking us just longer to get some of our more high technology-related instruments into China, for example, and other markets as well. So I think it's just been more challenging than we initially expected to be able to pull that down. But this is now more a multi-year backlog takedown. I mean, that's our thinking at the moment. With our existing production capacity, it appears that we will take multiple years in order to pull that backlog all the way down to more normalized levels.
So interestingly, some of us, myself included, would like to see a few book-to-bill quarters where it's a below one, so we start to eat into that backlog. Obviously, it's important for us and for our customers to deliver that more quickly.
I mean, inevitably, at some point, that's gonna-
That's gonna happen.
... naturally happen, right?
That's the goal.
Don't be surprised when-
Yeah
... you say Book-to-bill sub 1-
Right
... in a quarter. But within BSI, which of the three segments has the most excess backlog?
Yeah.
Or is it fairly, you know, spread across the three?
It is reasonably spread, but I would say probably the highest backlog level is with BioSpin. BioSpin carries some fairly sophisticated instruments that take longer to both build and to deliver, especially the ultra-high field systems, for example, where we have multiple year backlog. But generally speaking, I think the rest of the backlog levels are somewhat equal between our other groups.
I think you've described backlog as being eight or nine months' worth-
Yep
... right?
Yeah.
And so if we just sort of play this out in terms of scenarios for 2024, let's say you shave a month of that off-
Mm
... and the base business is flat. So that extra month would be worth maybe $240 million.
Yeah.
So-
Yeah
... like, theoretically, if the core business would be flat next year and you shave a month off the backlog, you can still grow high single digits next year.
That's right.
Is there something I'm flawed with that logic?
No, I think that's the math. I mean, the reality is that we aren't actually seeing significant order declines, and our forecast is not to have those. So I think that, combined with the existing backlog, provides us with a fair amount of confidence on what it looks like for 2024. We've commented on the earnings call that our expectation for 2024, we're only gonna provide some qualitative commentary, but really, we talked about solid growth in 2024, and I expect that to be the case, not only on the backlog, but on the basis of our existing order. But some people have asked, some investors over the last day or so have asked about order experiences in, you know, in certain geographies.
And I mean, fundamentally, we're still seeing good order performance outside of China and Japan. So even if we have some continuing issues in China, for example, which is a sizable market for us, we still have some backlog there to burn through.
If we look at the industrial and applied-
Sure
... markets, that's about 35% of Bruker's mix.
Yeah, it's a sizable part.
About 20% of that you describe as industrial and green tech-
Mm-hmm
... maybe another 10% in semi-metrology.
Yeah.
Can you just kinda unpack what you're seeing in that end market? If there was one area that would be most at risk of slowing in 2024, would it be these markets?
Well, what we have determined with respect to industrial markets, and we loosely maybe we need to recharacterize those markets a little bit. So you've described green tech, which we're quite active in at the moment. We have a number of technologies that address that particular area, including lithium battery activities, for example. We have a number of technologies that allow us to go deep into battery kind of molecular structures and how to extend those battery lives. So that's one area that I think is very positive. The other piece is we tend to be more characterizing... People think about industrial as strictly sort of the Wall Street Journal industrial list, but in fact, much of our work is being done in material science research. So these tend to be more niche or even more durable elements of industrial.
Mm-hmm.
From a sector perspective, you're looking at everything from material science for paints, for chemicals, for concrete, for other elements, and I think those tend to be much more durable under more challenging market conditions. Everyone still continues to do research work in these areas, and for those of you that have done work in your homes or elsewhere, you start to understand, you know, paint is completely different today than it was five years ago or 10 years ago. Those require a lot of research tools in order to look at the molecular structures of some of those chemicals, and so we have a lot of tools that are able to do that.
Within the semi-metrology business, you know, it's obviously not an end market a lot of healthcare people spend a lot of time looking at.
Right.
Help us understand, you know, exactly what your applications serve there?
Sure.
I think you've described that as maybe a $300 million dollar,
Yeah, that's it.
... business today. You touched on some AI.
Yep.
exposure, which is, you know, I think $75 million or so within that.
Yep, yep.
What type of growth rates are you seeing in that piece of the semi market?
Yeah. So I mean, I can only provide some qualitative data here because we're not breaking out that particular segment. But we're one of a couple of companies in this sector that have semi-metrology-related businesses. And interestingly enough, our focus is mostly on technology buys and QA/QC-related elements in that space. And for some of you that follow this, even anecdotally, there's been a major shift of fabrication activities out of places like simply Taiwan because of political and geopolitical risk, and starting to onshore or reshore those back to the U.S. and Europe, and we've now even seen some in Japan. So fundamentally, there's that combined with AI, which is driving major tailwinds in that sector. There's a lot of upside potential, we think, in that space.
Generally speaking, we've seen really good order bookings, performance, and revenue growth in a sector which was supposed to be in the downturn in the last year or year and a half. So fundamentally, for us, it's a very good business. It's high margin performance. We are in sort of a niche-y area where we're looking at really high-end technology elements and also the QA/QC, which puts us neatly in a place to support the infrastructure building that's going on in that semi-metrology space right now in those continents. It's a very unique business for us, but I think generally speaking, we have excellent leadership there and very strong, you know, overall financial performance. And I would expect that to, to continue, especially with these secular tailwinds that push that, that overall performance probably higher as we move forward into 2024 and 2025.
I mean, for some of you, just one other tidbit here. Some of you follow, you know, government funding supporting the semi business. The U.S. put up a big, giant, CHIPS and Science Act, a year or so ago. Funding hasn't even occurred with respect to that particular element, so that's another funding benefit. And of course, in Europe, there's still significant funding activity going on to onshore those fab facilities back into Europe. So we think pretty good tailwinds to support that business going forward.
I want to shift gears over to the PhenomeX acquisition.
Sure.
I think this is the first public company maybe Bruker's ever acquired.
That's true, yes.
Small deal in the scheme of things, but, you know, help us understand how it fits in the portfolio?
Sure.
Why did you need to acquire, you know, a business that was-
Yeah
... that was losing money? And how fast can you rationalize that $100 million or so of OpEx-
Yeah
... that, that cell, you know, had?
Yeah, so interesting, opportunity for us. As some of you may know, we, we moved a year and a half or so ago, more deeply into spatial biology, which we think is a major trend forward. There's a lot of work being done, not only in proteomics, which we have a fairly significant position in, in the marketplace, but more fundamentally, as we started to look at the whole omics area, it looked like spatial biology was really a hot area, and we didn't have as much technology or footprint in that space. So we acquired, about a year and a half or so ago, a company called Canopy Biosciences, and we put out some instruments that are being well received in the marketplace right now.
Combined with that, when you start to look at spatial biology, this gets down to the cellular level. We discovered that we really could use a complementary technology around cellular analysis. And what does this do? This particular company is very focused on what I would call phenotyping of cell activity, looking at antibodies and how they fit within the cell structures, and also cell colonization, cell therapy, gene therapy elements, similar to that. They have a number of instruments coming out of the Berkeley Lights and IsoPlexis merger that are really quite attractive in the space. So, we saw an opportunity to pick up what we think are really excellent assets at a very good price.
But to your question about the business, I mean, I need to say two things. First of all, we think it's a really attractive acquisition. It is gonna take us a year or more to sort of rightsize this business. We've taken pretty aggressive cost actions in the fourth quarter, in this quarter, to rightsize the business. We still are expecting a $0.12 dilution on EPS for the fourth quarter, but that's gonna come down radically as we've done our rightsizing. We expect this now to be roughly a $0.10 dilution in 2024. That's a fairly small piece in the overall scheme of our $2.2+ of EPS over a full year.
So not a terribly material story from a dilution perspective, but I just a couple more things I'll stress on this acquisition. We have taken aggressive cost action, but I think more fundamentally, we still believe that the core elements of the revenue performance in this business, while we've given a bit of a haircut for purposes of the street, we still think that it's a very viable business and it's going to perform well going forward. We are expecting, you know, double-digit organic revenue growth, high growth in this particular sector over time. So ultimately, when we package it all together-...
Right sizing with the organic revenue growth we're expecting, and our ability to supplement some of this technology together with the channel synergies we see with it, we think it's gonna generate a very high ROIC for Bruker over time. So it looks like a really good acquisition for us, as we look at it long term.
And just to clarify, the $0.10 of dilution you mentioned in 2024, that's relative to the pre-deal baseline, and not incremental-
Yeah.
To-
Exactly.
Uh.
That's not on top of the existing $0.12.
Right.
That's the full year performance relative to 2024, as far as we have visibility at this stage, so.
Perfect. Thanks for clarifying that. Just on proteomics, yeah, I'd say it's the one in market that, you know, Frank is most excited about-
Yeah, I would say that's true.
and has been for some time. Update us on the size of that, you know, portfolio.
Yeah
... today, as a percent of your, you know, book.
Sure. It's a sizable market for us. It's about $750 million worth of business at this stage. We have a number of technology tools that are focused on proteomics and the broader omics area. The one that gets most attention is the timsTOF portfolio, but we have a number of other products that focus on proteomics, and we target that specifically. It's a big end market for us, and, you know, we think we have a solid market position now and hope to continue to grow that.
Does the combination of Olink and, and Thermo, you know, SomaLogic in lab, change the competitive dynamic as far as you're concerned, or does it kind of validate, you know, I guess, your enthusiasm?
Yeah
-for proteomics?
I mean, first of all, it's, you know, when large players in the space, you know, surround companies that are performing well, we think that that's a validation of our existing strategy. And these are excellent companies, Olink and Thermo, of course. So, fundamentally, we think this is a really good move for the overall broader proteomics market. I mean, I talk about this a lot with investors, is it's not just about market share that Bruker gains in the proteomics space, it's really about expanding the market and having... I think one of the things we did, certainly with the timsTOF portfolio, is we introduced products into the research field that had never been there before and basically provided more throughput, sensitivity, and dynamic range in a way that didn't exist.
Suddenly, you're able to see more proteins and have visibility into the functionality of those proteins. So we think it's really healthy to have bigger players in the marketplace itself, and more broadly expand the focus of research that just makes the market larger over time. So we actually think this is a very good step for us and for them.
I'll touch on margins briefly.
Sure.
FX is actually a 150 basis point drag-
Yeah
... to margins-
Significant, yeah
this year. Will that be another headwind in 2024?
Yeah, we, first of all-
Just from FX.
Well, we don't have good visibility into what the foreign exchange rates are gonna be for 2024. If I did, I'd be George Soros. But I mean, generally speaking, we're a global company. We have foreign exchange movements up, down. It hits us. Sometimes it's a tailwind, depending on where it is at the revenue line. Generally speaking, we've seen some headwind on the EPS line. I don't really have much visibility into what the rates are looking like between euro and franc against the US dollar at this stage, but-
Well, just in terms of price cost, right?
Yeah.
It finally flipped positive-
Yeah
... for you in the third quarter.
Yep, that's right.
Should it still be a tailwind to gross margins next year? And is pricing of a couple hundred basis points a reasonable assumption for 2024?
Yeah, look, I think irrespective of the foreign exchange movements, certainly part of it may be that, but irrespective of that, I mean, our focus on gross margins is pretty serious. I think we've talked about this in the past, Brian. I mean, fundamentally, we're very focused on gross margin expansion because it's the funding that gets us the fuel for a lot of our R&D spending. And some of you may know, we're spending at the R&D level at a very high rate. It's about 9.5% of total revenue. It's the highest level, I think, in our peer group. And that's mostly because we're driving that technology innovation engine. So we need gross margin in order to fund that.
So our gross margin targets are not so much based on foreign exchange performance, but really more based on overall price realization. Where we have pricing power in the market, we wanna flex it. We're focused very significantly on operational excellence and driving costs down. You may know, we're doing some significant productivity expansion, you know, in a number of our facilities, particularly in Germany and Switzerland, to address the demand, but that also allows us to drive costs down with higher production volume. So the gross margin story is an important one for me, personally. And I spend a lot of time talking about this with our leaders and driving better gross margin performance. Let's see what happens with the foreign exchange element to it, but that can be favorable for us in the long term, depending on how it moves.
Last one, real quick.
Mm.
Your operating margins the last eight or nine years have basically doubled.
Yeah.
Okay.
Very pleased to see-
10%-20%. Yet your free cash flow as a % of revenue is barely moved.
Mm.
What are you doing to improve-
Mm
... free cash flow conversion? Where can that go-
Yeah
... over the next few years?
Yeah, that's a very good question. So fundamentally, we have improved significantly the operating margin story. A lot of the more recent years of free cash flow are impacted by a couple of things. One, we've significantly stepped up our capital expenditure programs. So when I joined the company, about six years ago, we were tracking about $35 million or $40 million of CapEx. Today, we're closer to $130 million or $140 million. So we're really pulling our free cash flow down by virtue of investing heavily in our production facilities, and that's largely targeted around our demand levels, which are really unprecedented for Bruker historically. And then beyond that, you know, we have had some challenges with respect to supply chain.
You know, we are at the high end of our technology base, and some of our supply chain is really very focused. We had some struggle with that, actually, in a couple of quarters in 2022 in particular, but also a bit, even in 2023. So we're carrying higher inventory levels than some of us would like, and it's time for us to readjust those down. So I think from a working capital perspective, we've got two target areas, particularly inventory and receivables, and we're focused a lot of attention on that at the business level now to bring those inventory levels down. That'll pull in more operating cash flow, and ultimately, we'll be able to fund other things.
Great.
That's-
Super. Well, we're out of time, so I'll have to leave it there. Gerald, thanks for being here.
It's a pleasure.
Good to see you.
Thanks. Thanks, everyone. Appreciate it.