Right. I'm Doug from Wolfe Research. It's my pleasure to be joined here by Gerald Herman, Chief Financial Officer of Bruker Corporation. Joe Kostka, Investor Relations, is here as well. Thanks to the two of you for being here again. We really appreciate you taking the time.
Happy to be here.
Gerald, you've been—I might be messing this up, but is it seven years you've been CFO?
Seven years, yes.
Time flies while you're having fun.
Eight in March.
The company's undergone a lot of changes since then, from a portfolio perspective, from an IR perspective. Operationally, a lot has tightened up relative to what we've seen historically with Bruker. I mean, Bruker's known for fantastic science, fantastic innovation, operational prowess in the nicest way I can say it possible. Was not always a strength. I think it's improved a tremendous amount under your leadership, on your tenure. With that said, I want to spend the next half hour really unpacking Q3. That report feels like it was a year ago at this point. I think it was just a couple of weeks. I want to talk about Q3 and maybe more importantly, what that means for Q4 and momentum heading into 2026. I want to talk about 2026 itself.
It would be good to go through the building blocks from a top-line growth standpoint. Really, where I want to try to spend a little more time than we probably normally would is on the margin expansion story. I do think there is an argument to be made that the end markets are getting better. I want to talk to you about the momentum you have heading into next year at the top line. I really want to focus in on the things that you can control and see where there is risk and where we can confidently—how we can confidently think about the building blocks to you getting to the margin expansion targets for next year. That is the roadmap. Let's start on the state of the company, Q3, Q4.
Q3 revenue came in better than expected, even accounting for, I think it was $6 million of—it was a bit of unexpected China stimulus. Even if you take that out, it was a really good quarter. Can you talk through how much of that was timing or one-off in nature versus a sign that things are actually tracking a little bit ahead of plan?
Yeah, I guess what I'd say is that we had anticipated a relatively weak third quarter following a quite weak second quarter. I think what we saw is that some strength in a couple of areas that we weren't really anticipating. One was in our Life Science mass spectrometry business, particularly for the third quarter. We also saw better revenue performance across a couple of other areas, including our AXS business in particular. This is one of those businesses that performed a little bit better in the third quarter than we had expected to see. This is sort of a bellwether division for us, one that's typically, that together with our Optics division, typically sort of indicators of macro conditions. We were quite encouraged to see a little bit better performance in the AXS division itself.
We saw strength in the defense area that we had anticipated we'd see a little bit of strength, but certainly, I'd say this is double-digit revenue performance in the third quarter that wasn't really on the radar. This is reflective of the European markets really kind of moving towards more defense and security-related instruments. We have a relatively small but still growing fast security systems, mostly Explosive Trace Detection systems, but also a number of other security-related systems for airport security and cargo transport as well. Those areas for the third quarter came in a little bit better than we had expected and still down overall on a year-over-year basis, but relative to expectations and even internally was better than we saw. We also wanted to somewhat de-risk our fourth quarter.
We did not see a lot of pull-in from the fourth quarter, just mostly due to order timings. It was good that we were able to perform a little bit better in the third.
Yeah, you just touched on something because it does—that I think is important. I mean, you did effectively bring down fourth quarter relative to prior expectations. It does not sound like—it sounds like there is an element of prudence, acknowledgment of the government shutdown, things like that versus a lot of revenue got pulled forward.
That's right. I think the other piece for the fourth quarter is that we saw a push-out. We saw a couple of orders in our semi business, almost $40 million pushing out into H1 of 2026. I think fundamentally we felt like we just needed to bring our overall guide down a bit for the fourth quarter. You have government shutdown elements. You had that push-out. We had sort of a weaker—a couple of other businesses that we thought were going to be stronger in the fourth quarter were just not there.
Okay. Super helpful. Moving down the P&L, operating margin of 12.3% exceeded street estimates. I think most of us were around 9%. How much of that is a function of, again, one-timers versus that we should actually maybe look at this as a sign of progress towards the $100-$120 million of cost actions?
Yeah, not a lot related to cost actions in the third quarter. We're going to see roughly $30 million plus of cost actions in the fourth quarter of 2025, but we didn't see a lot in the third quarter. I'd say where we had an improvement in the third quarter operating margin performance was mostly mix. And we had an improvement overall in our LSMS business from a profitability perspective than we had expected to see. I also think that just the whole environment, the whole environment internally within Bruker, whether we were now at that point starting to talk about significant cost-saving programs across the globe, not just on the street. We were talking about it internally pretty significantly.
I think that also helped to put a little more pressure on cost actions that started to sort of manifest themselves into the third quarter, even though we hadn't actually pulled any actions out.
The book to bill, I guess I'm going back up to the top line.
Yeah.
but the book to bill was above one in the third quarter. Again, what's the right way to think about that?
Yeah, I think it's a better—it was a better demand picture because our overall revenue performance, as you mentioned in the third quarter, while it was down, it was down about 4.5% organically. It was not really that much of a factor. We had very good order demand in the third quarter, and it was mostly coming from outside the U.S. academic and government research markets and strong biopharma order performance, both in the U.S. as well as outside the U.S. I think the bigger story for the book to bill was stronger academic government research and stronger biopharma demand in the order performance.
Heading into year-end, I mean, I wouldn't say it's a great NIH environment, but it's a lot better than what we were talking about six months ago. That's less bad. You have MFN agreements that, again, I don't know if they're good or great, but they're not as bad as feared. Now that you have some certainty, now that your customers have some certainty, are the types of conversations you're having across academic, government, and biopharma changing?
I think the sentiment has shifted. I think, as I've talked about with a number of investors here today at this conference, which, by the way, has been terrific for us.
Thank you.
I would say the sentiment shifted around the industrial side of the market for the U.S. once the tariffs mostly settled. I think the same is true in biopharma here now. I mean, it seemed like there were brakes being applied earlier in the year in the biopharma space, at least relative to our solutions. That has been mostly lifted. Now we saw quite strong, and here I am talking about double digits, order growth in the third quarter. We have not seen that in many, many quarters. I do not attribute it necessarily to a catch-up, but just a change in sentiment. Most biopharma companies, and I am talking about this globally, I mean, we have spoken to many of them in the U.S. and especially in Europe, just a different thinking about when to spend. They seem to have lifted their foot off the brake for the moment, at least.
We will see where we are most optimistic is that we hope to continue to see that in the fourth quarter from an order perspective. As you know, Doug, we cannot talk really intelligently about fourth quarter order performance until we get into December. Most of our order activity is occurring in the third month of a quarter. It is really difficult for us to predict this. Just based on conversations and certainly pipeline activity, it is encouraging for us, especially on the biopharma side.
I was going to, along those lines, I mean, recognizing it can be a back-end-loaded quarter. Additionally, given a lot of what Bruker sells is longer lead time, what we're describing, I would think, would be more of an order dynamic if there's upside than revenue dynamic. Is that right?
Yeah, I think that's right. Of course, the order dynamic reflects what's going to happen for us from a revenue perspective in 2026, in FY 2026, because we have long lead times generally for many of our larger instruments, and they take months to produce and ultimately get distributed into our customer base.
Perfect segue to 2026 revenue growth. As we think about some basic building blocks, I think you've talked about having—just correct me if I'm messing up anything.
Go ahead.
Probably having seven months of backlog heading into next year.
Yeah
We talked about the $40 million in semiconductor-related revenue that was expected Q3, Q4, largely Q4 that I think moves to the first half of next year.
That's right.
I think that's a point of growth if I'm doing math right.
You are.
Pharma as a percentage of sales, it's only 15%, but that sounds like it could actually be a tailwind
Uh hm.
at some point. Academic and government, that's your biggest thing, 40-45% of sales, around 10% of that in the U.S. You talked about strength really outside the U.S. in Q3 and maybe some stability in the U.S.
Yeah. It's hard to exactly understand what's going to happen for the U.S. This has been a very turbulent year for academic government research in the U.S. The fact that the government is actually now open.
Hm.
And there's a number of—we did see a little bit of a boost in the third quarter in terms of actual order and revenue performance connected to the U.S. government. If NIH and NSF funding could get back on track from a U.S. perspective, I think we could really see a boost here even as we march through the fourth quarter and into the first quarter. It's not clear exactly what the continuing resolution through to January will do here. We need to have a little bit of caution on the U.S. side. At least we have had evidence in the third quarter about some funding.
It is not just about grant approvals, but actually getting funding to be able to get these instruments out into the markets where they are needed is really what is critical. I think on the academic and government research side outside the U.S., we have seen quite a bit of strength, particularly in Japan. I mean, this is a market that was at some point a very large buyer of Bruker-related instruments and solutions, specifically around material science and in their academic research markets more broadly. If you add Japan, Korea had some strength in the Akagav area in Q3. Our European markets, it seemed to us that the European markets were quite a bit stronger in the third quarter than we had seen almost all year. That is an important stabilizing factor for us, particularly. We see that continue again in December orders.
It seems as if we're hopeful that we will continue to see that moving in that direction, then we could have essentially good visibility into both H1 and a good part of H2 of 2026 from an order perspective translating into revenue. That easily could give us the step up that we need to get to on the 26 line on organic revenue growth somewhere in the flat to low single digits growth in 2026. That's really the year, kind of important takeaway here is there could be some other steps in between there, but fundamentally we're pretty comfortable that with that we will show some improved organic revenue growth.
Does that type of growth factor in, fully factor in what you've described in terms of your price opportunity?
I mean, what I would say here is, and some investors that are in the room here have listened to me talk about this today, we've got a number of pricing actions. Some of those actions are directed specifically at essentially neutralizing the tariff impact. So we're not really trying to necessarily bring up the revenue line. We're really just trying to neutralize the impact of tariffs. And I've been pretty public about the fact that we feel pretty strongly that Bruker should not absorb those tariffs, that those tariffs should really be moved back into the marketplace. And we absorbed those tariffs in Q2 and to a certain extent even in Q3. And we want to try to remove that as we march forward into 2026.
Pricing actions to neutralize tariffs are one element, but the second is we're continuing to look very closely at pricing opportunities, especially for our most innovative products where I think we have the most price elasticity, where we are leading, we have leading-edge technology instruments that we're introducing into the market. We're automatically putting in price adjustments to reflect that. That is ultimately going to improve the overall revenue position and the gross margin performance of the business in 2026. On the gross margin side, it's not just pricing. We have a number of sort of lean actions that we take from an operational excellence position to keep pushing costs down even in inflationary conditions.
Model in question.
Sure.
Is it one more NMR in the fourth quarter?
Yes.
One, I think, in the first quarter of next year.
That's our expectation, yes.
It would be three total this year in 20.
Two total.
Two total?
Yeah, two total.
25.
It doesn't take much for that to actually be an opportunity for.
Yeah, exactly. I mean, we have to continue to build on the order book again in the ultra-high field. This is another area that if U.S. academic government research funding were to turn in the right direction, there are a number of opportunities that are actually presented to government authorities to get approval. If those could get approved and then ultimately funded, we could increase that volume going forward into 2026. Yeah, I mean, our expectation is that will continue to be sort of a supplement to our overall NMR business going forward.
Pricing. I appreciate everything you just described, but going back to that, I just want to make sure I'm clear in how we should think about this. I mean, I think at one point you talked about you potentially being able to get two to four points of price.
Uh hmm.
Should we say that, but that is inclusive, at least some of that will be pure price the way we think about it, but at least some of that is margin, I'm sorry, tariff.
Tariff recovery, right.
Okay. Year- over- year, because you've already been taking the hit on tariffs,.
Yeah.
it does still, even if it's tariff recovery, it does contribute
It does contribute.
Meaningfully to margin excellence.
Yes. I would say just generally, the company as a whole has been looking at pricing actions in, let's say, depending on the products, anywhere between 3%-6%. It could be lower than that depending on the market dynamics. Fundamentally, that's a pretty significant step up. Some of that will be absorbed in the tariff elements, but there will be other pieces. We're not talking about just for the U.S. markets. We're talking about more globally making price adjustments to drive better operating margin performance over time.
Okay. Super helpful. You nicely corrected me because I said two to four, and you said it could be as much as three to six.
Yeah, yeah.
Okay, that's great. All right, let's talk about margin expansion. High level, but I think really important question. Keeping in mind, I think it was Frank who said even in a no-growth environment, the company should be able to expand margins 300 basis points
Yeah
in that environment. How confident are you based on what you control that you could achieve that next year, especially if you can grow a little bit better than that?
Yeah, look, I think we have put the building blocks in place, particularly around the cost-saving measures that we've put in place across the globe. We have, at the high end of the cost-saving targets that we set out a few months back, we're expecting to be at $120 million of cost savings. And just to frame that, relative to our OPEX, $120 million of cost savings is almost 10% of the total OPEX for the company on an annualized basis. That is a meaningful adjustment to our cost base. The expectation is that we will have that $120 million run rate going through 2026. With even flat growth, I'm very confident that we can hit that 300 basis points of operating margin improvement. If we layer on some other elements that we expect to hopefully be able to realize, pricing is one element.
Operational excellence is another. We have also been talking with a number of investors today about the fact that some of our M&A drag that we had a year ago or so will be at a break-even point from an operating income perspective in 2026. Very proud of that. I think fundamentally that will also help to contribute ultimately, especially if in our Bruker Spatial Biology business, we actually start to see growth in that business. This has been a difficult market condition with academic and government research here in the U.S., as well as softened demand in biopharma. We could start to see improvement in the NanoString business in particular, but that broad division specifically, we could start to see some improvement in operating income performance in that area as well. There is a bunch of blocks to build on relative to operating margin expansion in 2026.
Much of a drag was M&A, like those deals on margin.
Yeah, it was about $0.08 to EPS in 2025, and that will disappear in 2026. We're quite clear about that because we've taken the cost actions that are required. If that business improves from a market dynamics and demand perspective, we could see some upside there.
How much of, and maybe it's just 300. No, actually it wouldn't be. I was just trying to make sure I wasn't going to ask a really stupid question. It still may be stupid, but how much of the margin expansion comes from OPEX versus COGS or gross margin?
Yeah, about 60% of it comes from OPEX and the rest of it is in the COGS area. So about 40% is going to be in the COGS area.
Okay. I'm not sure you're going to want to break it down this specifically, but I would love to try to get at how much of it's price. The semiconductors helps you, right? That's a super high gross margin product. What are the components of the gross margin improvement?
Yeah, I think the gross margin, a lot of it's going to be mix. A good portion of it is going to be price. We are expecting to see some improved volume as well. As you know, with Bruker, once we start to see significant revenue volume, we drop a lot down into the operating margin line. That's just the scale of our factory capabilities. Those I would say would be the most significant elements. Yeah, I'd say those would be it for now.
The $40 million in semiconductor-related revenue that's going to come through early next year, I don't know how big semiconductors is as a business or.
Yeah, it's about $300 million. It's a sizable business for us. These push-outs between quarters happen fairly regularly. This happens to be a little bit larger because we have two particular orders that moved, but fundamentally this isn't that unusual. It's just a larger number.
Is that area growing right now?
The demand environment for semi seems quite solid. I think that's not the issue. What we're seeing at the moment is fairly lumpy order activity. We saw in Q1 of 2025, and we expect to see stronger order performance in Q4 of 2025, but we had weak Q2 and Q3 on the order side for semi. A little lumpier, and we attribute that mostly to decisions that are being made by our customer base and the timing of when they want their, these are larger scale instruments typically that are going into their operations. They get to decide when they want those. It feels like they're timing those instrument deliveries based on their schedule, and that's creating this sort of lumpiness in the orders, which is ultimately going to translate into lumpiness in the revenue side.
I think over time you'll see continuing growth in semi, but some lumpiness in the quarters.
I think my last semiconductor-related question. I think you have said other than NMR as a category, that's your highest, it's the second highest gross margin category.
That's right.
How much higher? The corporate average is around 50%, right? So how much higher is it?
Substantially higher.
Okay.
You're going to have some underperformers and some overperformers, and it's an overperformer in that category.
All right. So from a confidence standpoint, it sounds like you're pretty confident on the 40 million incremental coming through next year on semis.
Yes, I am.
The price, you're pretty far along in putting those in place.
We are, and we've made multiple pricing adjustments, which are in the order book and will ultimately get executed in 2026. So I'm pretty confident about those as well.
The rest is really like those are the parts that you could control or have high visibility on. The rest is largely does the revenue pick up and start to.
Yeah, what's the demand environment look like and how does it unfold in 2026?
On the OPEX side, I think your OPEX is tracking to about 1.3 billion this year.
That's right.
Is this as simple as that should be closer to 1.2 next year?
Yeah, pretty much. I mean, I think what we were expecting for 2026 is that you'll see a drop from that $120 million worth of savings that gets factored into either OPEX or these other categories. As you move into the forward years, you'll see a slight increase relative mostly to merit increases and other items that are normal in the OPEX categories. I mean, we feel like with the synergies we've taken with our integrations on the acquisitions and the cost control measures we've put in place, that we've got a very good handle on OPEX going forward. I would say, I mean, I fielded one of these questions earlier today. I would say we're not expecting to really scale up that OPEX back to the levels that it was post-acquisition activity.
We feel like we've got kind of the integration model already established, and we are where we feel we need to be.
Do you have a hand? Do you know what the new flow through would be on incremental revenue as you get towards the end of next year and we're kind of in the new operating model for Bruker?
I mean, I think what I know you know this, Doug, but we're targeting to continue to march our way forward towards closer to this target of 20% operating margin.
That's still intact.
That's still intact. Actually the goal for 2026 is to march in large chunks. One of those large chunks will be that 300 basis points of operating margin improvement for 2026. Then we'll do another large chunk in 2027 and so on until we march our way up to that 20% target.
Yeah, I was going to ask about, you know, the LRP isn't really the LRP anymore, but I mean, it still sounds like the OPEX targets are definitely on track. And then is there still a belief that normalized growth is above the peer group? I mean, it may be not the right time to ask, but.
Yeah, I think it's early for us, but I mean, if we're in a partial recovery in 2026 and we continue that trajectory into 2027, I mean, I don't see any reason, like Frank said on the earnings call in November, that we should and have aspire to be at this 200-300 basis points above the market growth. If the market demand starts to take off dramatically in 2027, I would still, I think we could get into those mid to high single-digit growth rates that we've had before. I mean, one of the other things that I did want to mention is we have a history, whether it's in the 2008 and 2009 period, or whether it's post-COVID, I mean, kind of coming out of these relatively weak market conditions. We've had a really good bounce, a return to organic revenue growth historically.
I do not see any reason, especially when you look at the quality of the portfolio that we have built and developed over the last couple of years, I think it is really well positioned to take off if we get the market demand there.
If I think about walking before running in a way, we've talked about what could demonstrate the beginning of a recovery at the top line, but everything you described suggests to me we should be very confident in your ability as you've talked about growing earnings double digits next year.
Yeah, I think certainly all the elements are there, right? Most of the elements we're controlling from a double-digit EPS growth perspective. We've been talking about this kind of targeting the mid-teens category, and I think that that's pretty achievable for us. Just to be clear, that's post-MCP, post-Mandatory Convertible Preferred impact. The dilution related to that is already factored into our EPS targets here.
Yeah
That's off of the full year.
I think it's impressive for us to be able to say that, but that is in fact the reality. With the operating margin expansion and the other elements that we have, lower interest cost and even offsetting the preferred dividend structure, we think we're confident we're going to be able to get to that double-digit EPS growth in 2026.
All right. This has been fantastic. I really appreciate you taking the time.
Of course. My pleasure. Great to be here. Thank you very much.