Good day, everyone, and welcome to the Bruker Corporation first quarter 2018 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Miroslava Minkova. Please go ahead.
Good afternoon. I would like to welcome everyone to Bruker's first quarter 2018 earnings conference call. My name is Miroslava Minkova, and I'm the Head of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO, and Gerald Herman, Bruker's Interim Chief Financial Officer. In addition to the earnings release we issued earlier today, during today's conference call, we'll be referencing a slide presentation. The PDF of this presentation can be downloaded by clicking on the earnings release hyperlink on Bruker's investor relations website. During today's call, we will be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com. Before we begin, I would like to reference Bruker's Safe Harbor and Regulation G statement, which I show on slide two.
During the course of this conference call, we'll be making forward-looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K, as well as in subsequent SEC filings. Also, note that the following information is related to current business conditions and to our outlook as of today, May 3rd, 2018. Consistent with our prior practice, we do not intend to update our forward-looking statements based on new information, future events, or other reasons prior to the release of our second quarter 2018 financial results in August 2018.
Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We will begin today's call with Frank providing a business summary. Gerald will then cover the financials for the first quarter of 2018 in more detail. Now, I'd like to turn the call over to Bruker CEO, Frank Laukien.
Thank you, Miroslava. Good afternoon, everyone, and thank you for joining us on today's call. Bruker is off to a good start with revenue, operating profit, and earnings all on track or modestly exceeding our expectations. In the first quarter, Bruker's revenue increased 12.2% year-over-year. On an organic basis, revenue increased 4.0% with another quarter of organic growth improvement in our Bruker Scientific Instruments business. Among the highlights for the quarter, growth in our CALID Group business strengthened significantly, helped by a recent refresh of the portfolio, healthy markets, and strong execution. Our Nano Group had another solid quarter, propelled by strong results in industrial research markets. Our BioSpin Group had a slower start to the year due to NMR revenue timing. Our end markets mostly remain healthy, and we are encouraged by another meaningful increase in the U.S. NIH budget.
Looking more closely at our first quarter 2018 results on slide four, we reported revenues of $431.7 million, an increase of 12.12% year-over-year. Foreign exchange increased revenues by 7.7% year-over-year, while acquisitions contributed 0.5%. On an organic basis, our Q1 revenue was up 4.0% with 3.8% organic growth in our BSI segment and 5.1% organic growth at BEST, net of intercompany eliminations. In Q1 2018, our non-GAAP gross margin decreased slightly by -10 basis points year-over-year, and our non-GAAP operating margin decreased by -50 basis points year-over-year. Gerald will provide more details later on the call, but these decreases were primarily the result of strong foreign exchange headwinds in the first quarter, which masked meaningful year-over-year operational improvements. Despite this drag from FX, our non-GAAP operating income increased 8% year-over-year.
In Q1 of 2018, Bruker reported GAAP diluted EPS of $0.17 per share, compared to $0.13 in Q1 of 2017. On a non-GAAP basis, Q1 2018 earnings per share of $0.24 increased 26%, compared to $0.19 in Q1 of 2017. Please turn to slides five and six now, where I provide further highlights on the Q1 2018 performance of our three scientific instruments groups and of our BEST segment, all on a constant currency basis. The BioSpin Group revenue or BioSpin group revenue of $ 132 million, was modestly below Q1 2017 levels, excluding the impact of currency translation. Within BioSpin, NMR had a slow start to the year with some delayed system shipments and acceptances. NMR systems for applied and clinical research markets had a strong quarter, with growth in clinical phenomics research as well as in food and beverage analysis.
Aftermarket service revenues also continued to grow year-over-year. Just earlier this week, BioSpin announced a number of new research products for high field NMR on globular or structured proteins, on intrinsically disordered proteins or IDPs, on membrane proteins, and on disease aggregates, which will make gigahertz- class NMR even more useful for molecular and cell biology research. We also introduced a small footprint AVANCE NEO NanoBay console, so that our unique and novel multi-receiver NMR architecture is now also available for routine 300 MHz and 400 MHz NMR customers. This should further accelerate our NEO ramp to volume. Also within BioSpin, our pre-clinical imaging, or PCI, division's revenues, were up strongly with continued recovery in our pre-clinical MRI and micro-CT product lines and good progress in pre-clinical PET.
Turning to the CALID Group, they had an exceptional quarter with high single-digit constant currency revenue growth to $ 131 million. Within CALID, our Daltonics mass spec business posted outstanding growth with strong performance in the microbiology business and healthy results also in life science research mass spectrometry. We believe that our refreshed portfolio and focused execution within our two primary target markets of microbiology and diagnostics and life science research are yielding positive results for CALID. In microbiology and diagnostics, adoption of our BioTyper care consumables kits continues to increase at a rapid pace. Optics products had strong growth with continued good execution. The rollout of recently launched products like the ALPHA II and aided by healthy demand from global industrial, applied, and academic markets. Finally, CALID's detection revenue can be lumpy and was lower year-over-year. Please turn to slide six now.
Bruker NANO reported mid-single- digit constant currency revenue growth with revenues of $ 124 million. NANO's Q1 results reflected a strong uptake in industrial research markets. In industrial research, our tools support many core industrial research areas, but also some exciting growth areas. For example, we have tools for research into two-dimensional materials like graphene, into new battery and fuel cell technologies, into novel organic solar cells, or into advanced functional materials, to name a few examples. Our AXS revenues again grew nicely in Q1 2018, fueled by strong industrial demand. Our Nano Surfaces and Nano Analysis revenues also increased year-over-year. Semiconductor metrology revenues were flat in Q1 due to some shipment and acceptance delays. As a reminder, our semi- business is characterized by some sizable orders, and revenues can be lumpy from quarter to quarter.
In total, NANO had a solid start to the year with continued strong demand from industrial markets. Last but not least, BEST revenue grew in the quarter, driven by the timing of superconductor deliveries and projects. Despite a good start, we continue to expect BEST revenues to decline on an organic basis for the year, and with a significant year-over-year decline projected specifically in the second quarter, as BEST revenue was at an unusually high level in the second quarter of 2017. On slide seven, I would next like to highlight for you an exciting new workflow that is now available in Europe with CE-IVD mark on our MALDI BioTyper system for clinical microbiology. At the recent ECCMID conference in Madrid, Bruker introduced the so-called Bologna Workflow for rapid and cost-effective diagnosis of bloodstream infections or sepsis.
Bologna starts once a blood culture lights up with a positive result for the presence of disease-causing microorganisms. In Europe, we now have an improved and faster, rapid Sepsityper Workflow and assay, which allows for microbial identification in about 15 - 20 minutes on the BioTyper. As a reminder, our BioTyper has broad microorganism ID coverage, 2,700 species in Europe, and this coverage is available for bloodstream infections from positive blood culture as well. We now also combine our gold standard microbial ID and the MALDI BioTyper with kits and assays that can test for two dangerous and common antibiotic resistances. First, the MBT STAR-Carba CE-IVD for possible carbapenem resistance, and two, the MBT STAR-Cepha CE-IVD, a new kit for cephalosporin resistance. The combined Bologna Workflow of identification and selected resistance testing on the MALDI BioTyper takes in total between 60 and 90 minutes.
can provide important, potentially life-saving information to physicians and patients at an assay kit price of $30 or less per sample to our customers. We are very excited about this introduction and the impact the shortened time to result can have for these very sick patients, as well as for the significant hospital cost savings with more affordable bloodstream infection Fast Sepsityper detection methods. Microbiology and diagnostics, as a reminder, is one of our six Project Accelerate initiatives, and we believe this new Bologna bloodstream infection workflow, together with the expansion of our product offering for fast two-hour time to resolve invasive fungal disease detection directly from blood and without culture, position us well for further progress in this high growth, high margin area. Turning to slide eight, I am very pleased to announce the appointment of Dr. Falko Busse to be our BioSpin Group President.
Falko joined BioSpin in 2015 as Executive Vice President of R&D and has served in a variety of functions, most recently as BioSpin Deputy Group President. He also has been responsible for BioSpin's operations, marketing, and strategy since early 2017. Under Falko's leadership, BioSpin will focus on key growth and margin expansion initiatives, including our expected gigahertz class rollout in future years, as well as BioSpin Pharma, applied markets, and aftermarket growth initiatives, as well as a major lean initiative called Project 2020 for BioSpin's Germany and Switzerland operations. Falko joined Bruker from Philips Healthcare, where he held successive leadership positions. In a moment, you will hear from Gerald Herman, our Interim Chief Financial Officer, who took over after Tony Mattacchione's departure in mid-March. We are very pleased to have Gerald as our Interim CFO, and he is off to an excellent start.
On slide nine, I summarized Bruker's key priorities for 2018, and they are fundamentally unchanged. We remain committed to creating values for our customers and shareholders via our Project Accelerate portfolio transformation, as well as our ongoing operational excellence and margin expansion initiatives. In summary, Bruker delivered a good first quarter, highlighted by the strong year-over-year organic growth improvement in our BSI segment, continued healthy underlying margin expansion excluding currency headwinds, and robust year-over-year EPS growth. We remain committed to our short and long-term financial commitments, and we look forward to updating you on our progress on subsequent calls. On that note, let me turn the call over to our Interim CFO, Gerald Herman.
Thank you, Frank. I am pleased to join you today and review Bruker's financial highlights starting on slide 11. As you saw in our press release, Bruker's reported revenue increased 12.2% to $431.7 million in Q1, which reflects organic growth of 4.0%. We reported GAAP EPS of $0.17 per share compared to $0.13 in Q1 2017. On a non-GAAP basis, Q1 EPS increased 26% year-over-year to $0.24 per share. Q1 non-GAAP operating income was up 8%. On a non-GAAP basis, our Q1 operating margin declined 50 basis points to 12.3%. This included 140 basis points of negative impact from foreign currency translation versus the prior year quarter, which more than offset the positive underlying operational trends we saw in the quarter. As a reminder, Bruker has a large cost base denominated in EUR and CHF.
With the USD's year-over-year weakening relative to these currencies, this had a large positive impact on our revenues, but also an outsized currency-driven increase in our costs. For the quarter, changes in foreign currency had a 7.7% positive impact on revenue and 140 basis points negative impact on our operating margins but were roughly neutral to non-GAAP EPS. We generated free cash flow of approximately $35 million in Q1 2018, an increase of $14.2 million or 67% compared with the first quarter of 2017. We ended the quarter with a net cash position of $63.3 million, down slightly from net cash of $79.7 million at March 31st, 2017. The decrease in net cash resulted from the continued use of cash to fund our dividend, buybacks, acquisitions, as well as repayment of borrowings under our revolver in Q1 2018.
We exited Q1 2018 with higher working capital balances, reflecting our revenue growth late in the quarter product shipment activity, and the impact of the weaker U.S. dollar year-over-year. These effects also resulted in the slight deterioration in our working capital to revenue ratio. Slide 12 shows the revenue bridge for Q1 2018. In addition to organic revenue growth of 4.0%, we had a small positive contribution from acquisitions of 0.5%. Foreign currency translation was a 7.7% tailwind. From an organic growth perspective, the 4.0% Q1 2018 organic growth rate included strong gains at CALID, which had high single-digit growth driven by the mass spec, microbiology, and optics businesses. NANO and BEST each increased in the mid-single digits. BioSpin had a slow start to the year with a modest year-over-year organic revenue decline.
Regarding BEST, we continue to present BEST's revenue growth excluding intercompany shipments, which we view as a better indicator of BEST's underlying growth. On that measure, BEST revenue increased 5.1% in constant currency in Q1 2018, as BEST benefited from the timing of scheduled deliveries of superconductors to MRI OEM customers and project revenue recognition. We continue to expect a full-year organic revenue decline at BEST, with a significant double-digit year-over-year organic revenue decline expected in the second quarter. From an end market perspective, we saw stable academic market conditions and strong momentum in our product portfolio for industrial research, which again propelled growth for the Nano Group. We continued to see growth in biopharma, with a highlight being our Mass Spec Biopharma Solutions portfolio. Our microbiology business was off to a strong start.
Semi- metrology deliveries remain lumpy, but we continue to expect good results in our semi- business for the full year. Geographically, and on an organic basis, our European revenue increased high single digits year-over-year in Q1. North American organic revenue grew in the mid-single digits in the quarter. Asia Pacific revenues were down low single digits in Q1, including some shipment and acceptance delays at BioSpin APAC customers. Overall, we are pleased with another quarter of positive organic growth momentum and the favorable end-market conditions that we've been experiencing. Slide 13 shows our Q1 2018 non-GAAP results. Our Q1 2018 non-GAAP gross profit margin was 47.5%, a decrease of 10 basis points year-over-year. Higher volume and operational improvements within our CALID and Nano groups were more than offset by the negative impact of foreign exchange movements due to the weakening of the U.S. dollar.
Q1 2018 selling, general, and administrative expense of $108.9 million was up 13% from Q1 2017, with foreign currency translation a major driver of this increase. Higher SGA expense also included increased commissions on higher orders and revenue and merit increases. Our previously announced G&A initiatives, including our new finance shared service center in Central Europe, remain on track. Q1 R&D expenses at roughly $43.2 million increased 15% year-over-year, driven primarily by changes in foreign currency rates, the addition of acquisitions, and some accelerated project spending. Looking below the line, net interest and other expense of $2.3 million was $3.7 million favorable versus the prior year, including a favorable year-over-year impact from foreign exchange transactions and a paydown of our revolver debt in the quarter.
For the first quarter of 2018, our non-GAAP effective tax rate was 23.7%, lower than the 30.6% effective tax rate in Q1 2017, which included certain unfavorable discrete tax items. Weighted average diluted shares outstanding in the first quarter were 157 million, down from 3.5 million shares or about 2% year-over-year. This reflected our 2017 share buybacks, partially offset by stock option exercise dilution. Finally, Q1 2018 non-GAAP EPS of $0.24 increased 26% from $0.19 in Q1 2017, driven by the higher revenue and favorable year-over-year tax rate and share count. Turning to slide 14, we generated approximately $35 million in free cash flow in Q1 2018, which was $14 million higher than in Q1 2017.
This reflected higher net income, an increase in customer advances, and slightly lower year-over-year CapEx, partially offset by the increase in working capital described earlier and the timing of employee bonus payments. Our cash conversion cycle at the end of Q1 2018 lengthened slightly versus the same quarter in 2017 due to an increase in DSO, largely driven by higher revenues in Q1 2018 and quarter-end shipping activity. Turning to guidance for 2018 on slide 16. Our 2018 outlook for revenue growth, operating margin expansion, and non-GAAP EPS are unchanged from our February earnings call. For 2018, we expect Bruker's revenue to grow approximately 7% on a reported basis, including approximately 3% organic growth and an approximate 4% contribution from foreign currency translation. As mentioned earlier, embedded in these projections is an organic decline in our BEST business, net of intercompany eliminations.
We continue to expect full-year 2018 non-GAAP operating margins to expand between 50 and 80 basis points compared to the 15.6% level achieved in 2017, while we absorb a foreign exchange headwind of 70 basis points year-over-year due to the weak U.S. dollar. Our full-year 2018 non-GAAP tax rate is projected to remain at 25%. Other guidance assumptions are listed on the slide, including our foreign exchange rate assumptions, which are unchanged from our February earnings call. On the bottom line, we continue to project non-GAAP EPS in the range between $1.34 and $1.38, representing growth between 11% and 14% compared to 2017. In summary, Bruker had a good start to the year and we remain on track to deliver on our full-year financial commitments. We look forward to updating you again on our Q2 conference call in August 2018.
And with that, I would like to turn the call over to Miroslava to start the Q&A session. Thank you.
Thank you, Gerald. William, we would like to open the call up for Q&A. In the interest of accommodating more of our analysts, please limit your questions to one and a follow-up.
And we will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And we will now pause momentarily to assemble our roster. And our first questioner today will be Brandon Couillard with Jefferies. Please go ahead with your question.
Hey, good afternoon. Frank, on the semiconductor business, any chance you could give us a sense of how orders trended in the quarter? I know you said revenues were relatively flat on timing of shipments, but how were orders? And there has been, I think, some debate as to where we are in the semi cycle. What is your view there? And then could you just remind us on how big that business is as a percent of revenue?
Yeah, Brandon. So orders in Q1 also were a little bit weak in semiconductor metrology, but we expect to have a much better Q2 in both aspects. So we still expect the year to be up for semi. We have so few systems that a couple of systems being pushed back from one to the next quarter, which is exactly what happened, makes a big difference. I would not read too much into our data. Of course, the general market debate is out there. Many parts of semi are still doing really quite well, particularly in the memory areas. I think we will be all right this year, probably not growing as fast as last year, but we are still looking to do well in semi for the year.
Actually, it is a two-part question for you on bio-
Keep in mind that semi is about 5% of sales, so it is a nice business. It is not really driving all of Bruker. So, yeah.
Okay, good to know. Secondly, a two-part question for you on Bruker BioSpin. First, on Project 2020, is this a new initiative that has just recently come together? It has just been going on along in the background, and you just had not talked about it much. With respect to the footprint rationalization, are there any expected savings you can quantify at this point? Secondly, has your outlook changed at all as to how many 1 GHz NMR shipments you think you might be able to get out the door this year?
Project 2020 has been something that has been evolving and being planned for quite some time. We were now ready to pull the trigger on the project, primarily in Germany, but also with some further investments in Switzerland and a little bit in France. First of all, I should point out that the $ 35 million or so that we had mentioned at a recent NMR conference in CapEx, that is in our normal CapEx run rates. That is obviously going to be spread over three years. There is not a particular bolus of CapEx coming our way, but it is in our normal CapEx spending. It is a lean project that is expected to combine our two remaining larger German NMR sites, or Bruker BioSpin sites, into one. It is also going to combine a number of facilities, including leased facilities, third-party leased facilities that we have around our Swiss campus.
Overall, when this is done by middle or late 2020, it will have various phases. We expect to save about 20% in footprint and have one major site less. There will be some cost savings and efficiency gains with that, but I think that kind of goes into our normal productivity and annual planned margin expansion. In terms of identifiable one-time cost savings, it is not as dramatic as previous factories' restructurings. This does not affect a large number of jobs, but we do expect that to contribute to our productivity, reduced footprint. It is kind of a multi-year process. I think it is a very good project. It will give us the modern facilities we need for our customers, for our further growth, for our applications for the next two to three decades, really.
It is a nice new lean layout with much better flow in R&D and operations and so on. That gives you some perspective. To the last point of your question. Yes, we still presently expect that we will have 1 GHz in revenue this year. Of course, that always could get pushed into next year, in which case we are committed to make that up elsewhere. We then expect to begin gigahertz and gigahertz-plus shipments, if we reach our technical milestones, into where they begin to move the needle, hopefully in 2019, 2020 and beyond. It is not a 2018 story. That is one of the Project Accelerate investments that we are making that will not move the needle this year.
Very good. Thank you.
Our next questioner today will be Dan Leonard with Deutsche Bank. Please go ahead.
Thank you. So another project-related question, Project Accelerate. Frank, you had talked about accelerating the top line for a little while now, but I do not think you had named the project previously. I guess question one, correct me if I am wrong, is the naming of this project new? Secondly, can you elaborate on the significance around formalizing a project around your growth initiatives? Are there targets associated with this? Does it create any organizational momentum around your initiatives? Anything you can share?
Yeah. So it is a new name to the external world. We have been calling it Project Accelerate internally, all along, and eventually we got tired of always talking to The Street about our six high-growth, high-margin initiatives, because that is a mouthful. So we are simply beginning to use the internal name for the portfolio transformation also externally. So in that sense, it is not a new project. It is something that we have begun to talk to The Street about, I think as of middle of last year, roughly. Yes, we believe that, over a number of years, Project Accelerate, as it becomes a more significant part of our revenue and as some of the still fledgling initiatives like gigahertz NMR or proteomics by mass spec also hit their stride and become bigger and begin to move the needle, that this will fundamentally improve our organic growth rates.
We also think that many or all of the Project Accelerate six initiatives that you heard about previously within Project Accelerate, many of them or all of them have qualitatively, fundamentally higher margin profiles when they reach maturity and obviously, reach volume and begin to move the needle. So it is, along with operational excellence, the most fundamental and significant part of our strategy going forward. Of course, we will never give up on cost and small restructurings and lean projects. They go with operational excellence. So it is nothing entirely new. It just gets more and more momentum. However, having said that, some of these items still do not move the needle or they are still relatively modest in size, 20 million , 30 million , 40 million. Some are well above 100 million, like microbiology or aftermarket or biopharma applied is well above that.
Semiconductor, along with nanomaterials, is well above that, while others, as I mentioned, gigahertz NMR or proteomics by mass, will still be very small this year.
Okay. Appreciate that. For my follow-up question, hoping you could comment on the NIH budget increase. How quickly do you expect that money to flow, and what are the efforts underway at Bruker to make sure you capture your share?
Yeah, there's a lot of debate about that because there's now so much money that needs to be spent quickly. You'd almost have to program officers. From what we hear anecdotally, they're calling back existing grant recipients and say they're raising and increasing existing grants because to some extent they can't spend the money fast enough with new grant cycles. So that's a little bit of feedback from the academic community with which I interacted quite a bit at the ENC Conference. For us, the cycle till something goes through a grant cycle or someone on an existing application does get funded, our customers are more optimistic. But, until we get orders, especially for bigger-ticket items, big mass specs or imaging or NMRs, and then deliver them, it probably is more likely to go perhaps a little bit late in the year, but mostly become a 2019 story.
Overall, three years of good increases in a row and deans and people that spend money at universities, all much more optimistic. I think it's obviously a good environment for academic spending in the United States in general. It's not only NIH, also DOE and some others have seen very nice increases. So it's good for the field. With some delay, I think it's also going to be quite good for Bruker.
Okay. Thanks for that color.
Our next questioner today will be Tycho Peterson with JP Morgan. Please go ahead.
Okay, thanks. First, Frank, just on BioSpin, the NMR, you commented on delayed shipments and acceptance. Is this just a customer readiness issue or is there something else there that is worth highlighting?
It is a mix of customer readiness and some of our internal operations in having everything ready, magnets and probes at the same time. So it is a little bit of a mix. Part of it is due to our own operations, and part of it is due to customer sites. I would not read a lot into that, especially at BioSpin. A quarter just does not make a trend, and one always should look at four quarters in a row. But certainly two or three quarters in a row, I do not think there is anything going on. So I think we will do well and catch up for some of that in the remaining quarters. Other parts of BioSpin, the preclinical imaging, the aftermarket, and delightfully, also the food analysis and clinical phenomics research systems have done really very well in Q1.
I think we'll be okay with BioSpin, but it had a bit of a slow start. Yep.
Okay. Can you help us think about the, I guess, relative importance in the new MALDI BioTyper workflow, and how you think about, I guess, competitively versus some of the other ID/AST platforms that are out there?
Compared to the other. What platforms? What was the description that you used, Tycho?
Other platforms that will do identification and antibody susceptibility testing.
Yeah.
But more importantly, how does the launch change the market opportunity for you guys?
Yeah, no, I think certainly in Europe right now, we have CE-IVD, and some of that we can leverage outside of Europe. But we don't have FDA yet. That maybe comes at the end of next year or so. There's more work to be done, but the European market is, of course, very important. It's also a price-sensitive market, so it's always a very good test bed for us. We think this is quite important. First of all, it used to be the old dogma was that people don't really make decisions unless they have ID/AST or resistance data, and these days it has just changed. It's remarkable. With Fast ID within an hour or so after a positive blood culture, people clearly in hospital settings and ICUs are making treatment decisions, as they should. Some antibiotics are clearly not applicable to certain bugs and vice versa.
The Fast ID already helps. Then, having a very cost-effective way of looking for some of the major resistances. By the way, using functional tests, not genomic tests, which is subtle but pretty important because there could be other genes or other mechanisms that lead to resistance by having a functional test on the MALDI BioTyper. Again, very importantly, getting very fast time to resolve, altogether in 90 minutes or so. It just can save a day or two or three. I'd say typically a day or two. The other part that nobody wants to talk about is cost-effectiveness. These tests will really only find widespread acceptance if they're cost-effective. I think this is cost-effective to where we think it could go into large-scale deployment rather than specialized small-scale deployment for a few publications. So we think this is a really big deal.
Obviously, the perspective is three to five years for that to be rolled out. The really nice thing is that we have about 1,400 BioTypers in Europe and 2,900 BioTypers worldwide, so we don't need to start with systems placements. People that have these systems can start with those workflows in Europe. If they wish to, they could start tomorrow. This is a big deal. This is another S-curve on the S-curve for the BioTyper with ID. This is a strategic introduction.
Okay. One last one. Can you just comment on Japan? Is there any signs of improvement there overall?
Japan was a little bit weaker in Q1 on orders. It was a lot better in revenue because we had had a tick up in bookings previously. So revenues were up. But orders in Japan actually went back to looking a little bit weaker, maybe with the exception of industrial research. So, mixed picture, I would say. Again, I should heed my own advice and not read too much into one quarter. Let's watch this for two or three quarters.
Okay.
Late last year, I got more optimistic that Japan might have a discernible trend. I would say that it is not clear that there is any trend.
Okay. Thank you.
The next questioner today will be Jack Meehan with Barclays. Please go ahead.
Hi. Thank you. Good afternoon. I wanted to dig in a little bit on the results at Daltonics within CALID. I think you had an easy comp there, but results look good. Maybe just talk about what you are seeing and how you think the business grows through the rest of the year?
For microbiology, instruments have been good. But they are not growing that fast anymore. It is a large installed base, and it is still growing, so no problems there. But the really wonderful part is that from a lower basis, but aftermarket and consumables in particular are growing at a very fast pace. And that, of course, they carry good margins. To the point where probably within a year or two, half of our microbiology franchise will be aftermarket revenue. That is probably the first time we have a business like that at Bruker. We are not quite there yet, but we are not that far from that anymore. So that is doing very well. And that is before these product introductions that were at this segment that I just discussed with Tycho that are really quite significant over time. And delightfully, the life science mass spectrometry business was really quite healthy.
I think our portfolio update with new timsTOF research systems, with other QTOF systems, with the new magnetic resonance mass spectrometry systems, and importantly also the MALDI systems, the rapifleX doing well in all sorts of life science and academic markets, but also in pharma applications. And we did okay in applied markets as well, so it has been somewhat broad-based that this business may really get its footing as well, and we were encouraged by Q1.
Great. Just would be great to get an update on your thoughts related to capital deployment. Just given the share performance, has your willingness to do more buyback increased, and what are you seeing on the M&A front?
Hi, it's Gerald. I'll just take that question. I guess on the share repurchase question, we have about $73 million still remaining on an existing authorization from the board. That's a two-year authorization, if you might know that. So we still have quite a bit of time to act on that should we choose to do that. From a capital deployment perspective, we like the flexibility to continue, pause, or restart share repurchases depending on the opportunities we see in front of us that support the core business.
Thank you.
Sure.
Our next questioner today will be Sung Ji Nam with BTIG. Please go ahead.
Hi. Thanks for taking the questions. First of all, congrats on the quarter. Frank, maybe on BioSpin, particularly for your NMR business, if I recall correctly, I think there was some headwind on margins due to product mix last year, a higher mix of low field NMR. I think also, if I remember correctly, you expected that to normalize this year. Just based on the order pipeline that you are seeing now, do you continue to expect that to be more normalized this year in terms of product mix?
Yeah. I think 2016 had a particularly favorable product mix. I would say it is a little too early to say in the year because it is only a quarter. I do not think there is anything that remarkable yet, but there are ongoing operational efforts to improve margins at BioSpin, but I would not expect a quick rebound from product mix.
Okay. Thank you for that. On the life science mass spec side, obviously you saw some strong growth there this quarter. Was wondering if you are seeing overall positive end market growth, or do you think that could be attributable to taking some market share as well? Thank you.
In the life science mass spectrometry?
Yes.
Yeah. I think we're doing well with our unique TIMS capability, our trapped ion mobility spectrometry capability. It's still early days, also in proteomics, but a lot of people are taking a look at it. It's a rather unique and intriguing and formidable capability that just hasn't been available on research mass specs, and we're targeting it particularly at proteomics. But also our high-end rapifleX, and other MALDI-TOFs and QTOFs are doing well. So, I think those are healthy markets, and I think it's only a quarter, but we're somewhat optimistic that we'll do well with our refreshed product line in life science mass spectrometry this year.
Great. Thank you.
Our next questioner today will be Amanda Murphy with William Blair. Please go ahead.
Hi, this is Max on for Amanda. Just wanted to follow up on a comment that you made around end markets. You said they mostly remained healthy, and I was just wondering, based on the results for the quarter, where do you feel most optimistic about the opportunity for upside to guidance? Within that specifically, I know we talked a little bit in the prior quarter about maybe some moderation of growth in China. How has that played out through the first quarter here?
Yeah. I don't think it would affect guidance necessarily, but if I look at trends, obviously, in Europe, we expect growth rates to settle in and become more normalized. In 2016, it was a steep drop. In 2017, in a recovery phase, you always have a temporarily higher growth rate. So maybe European growth rates become more normalized, but they're still pretty good, and I think the normalized level can be healthy as well. But Europe isn't going to grow at high single digits forever. That's just not going to happen, right? China, we expect it after double-digit growth for a couple of years now, to moderate a little bit anyway. We think that's happening, and we also had a couple of NMR and BioSpin delays there, so there were a couple of "noise things," as you would call them, in the quarter.
We'll have to observe that. In terms of upside, I think, not necessarily this year for us as revenue, but I wouldn't be surprised if the U.S., including U.S. academic market, but maybe also U.S. markets in general after tax reform continues to pick up. So I'm somewhat hopeful that the U.S. may, if anything, maybe accelerate further and maybe that'll then affect our 2019. But that remains to be seen.
Got it. Yeah, that's helpful. Thank you. Then on a bit of an unrelated note, I know you mentioned Avance in the quarter, and just trying to get a sense of how much, if that contributed, and if so, how much, and then how penetrated Avance is in terms of selling into your existing NMR base moving forward?
Just for clarification, Avance, we've been using that in multiple generations for over 15 years. So obviously you mean the AVANCE NEO, which is sort of the new architecture, the fourth generation of the Avance, if you like. Yeah, no, that's really coming along very nicely, and there's now about 300 units installed with customers. We've been shipping that ever since Q2. We've been shipping that primarily for the more demanding research applications, higher fields, high fields, solids and so on. Now we've taken the second step earlier this week at that ENC/ NMR conference with a compact, fitting below the bench AVANCE NEO NanoBay. Sorry, it's a rather long name, but it works for NMR customers, and that really is for 300 MHz and 400 MHz routine customers. So the ramp up for the AVANCE NEO new platform, which is really a generational change.
It's really a new architecture, not just incremental improvements with this multi-receive architecture being fundamentally enabling new experiments. Actually, quite a bit of new experiments were shown at this conference that, as a matter of fact, you couldn't run on older spectrometers anymore. We're nowhere near penetrated there. Obviously, between us and other vendors, there is years of upgrade business, and we have seen some console upgrade business, uptick in console upgrade business or upgrade orders already also last year. We expect that to continue, and if anything, pick up more momentum as we now cover the full frequency range and applications from routine organic chemistry all the way to ultra-high field systems. That's going really well.
Yeah, got it. Thanks.
Our next questioner today will be Doug Schenkel with Cowen. Please go ahead.
Hi, good afternoon. This is actually Chris on for Doug today. My first question is just on the operating margin. I think operating margin guidance implies expansion is much more material in Q2 through Q4, since Q1 margins declined year-over-year. Could you just remind us what are the key drivers to the margin expansion for the balance of the year? Is it mostly volume driven, or do you have some incremental restructuring initiatives that are expected to benefit margins later this year?
Well, actually it's a number of those. We did have significant BSI volume and revenue growth, put into the outlook for 2018 together with mix. As well, we expect operating leverage together with the Project Accelerate initiative that Frank's already mentioned. We also have a number of continuing operational excellence initiatives, but I'd say those would be the main factors.
Yeah, no major-
Okay, got it.
-restructuring at this point. Project 2020 at Bruker BioSpin is a multi-year lean initiative. It'll take out some cost over time gradually. We had the European Shared Services Centre moving to Central Europe. Those are incremental operational excellence steps that we're taking every year. It's not like in the last three or four years when just about every year we had one or two significant restructurings. The further operating margin expansion comes from operational excellence and from the acceleration of organic growth and, of course, the different margin profile of our Project Accelerate initiatives.
Okay. Then just for my follow-up question, could you provide a bit more detail on APAC performance? Specifically, was the decline isolated to just BioSpin, or was it more broad-based by segment and product class? Maybe could you just provide updated expectations for APAC growth for the year?
Yeah, we don't go to that level of granularity. We're not updating our view in general. For us, the issue is always that a quarter just doesn't mean all that much. One of our divisions might be slow, sluggish in a quarter and then have a great quarter the next one, and you average it over two quarters or three quarters. China, we don't see quite the pace that we've alerted everybody to that last year, that double-digit expansion in China, in our opinion, we think that's slowing down, is our impression. Compounded with that, we had some BioSpin delays in China in Q1. But that's the type of more noise stuff that we will look at that, and I would encourage you to do the same.
I look at that really seriously after two or three quarters, because one quarter, if I slice it by product and then by geography and look at any given quarter, I see more noise than information. So I look at trends after two or three quarters. I don't see any clear trend other than the longer-term trend that China probably also will not grow in the mid-teens or high teens on a sustainable basis. That's not a surprise to us, so we had assumed that.
Okay, great. Thanks for taking my question.
Our next questioner today will be Steve Willoughby with Cleveland Research Company. Please go ahead.
Hi, good evening. Just two quick things for you, Frank. First, could you just comment on how orders for the overall company was in the first quarter compared to, I believe, the high single-digit order growth you had last year? Secondly, you put up 4% organic growth here this quarter. Your guidance, which you left unchanged for the year, is 3%. You had some shipment delays in a couple of areas here in the quarter. Just wondering what gets worse as the year goes on compared to the 4% growth you had here in the first quarter?
Yeah, I am not saying that anything gets worse. We just do not touch our guidance after one quarter. For us, Q4 is so important, and Q4 is still a bit away. So, we are comfortable with our guidance right now. We are pleased with our first quarter. If you recall, BEST was still a growth contributor in Q1. BEST, we highlighted that, had a really exceptionally high revenue in Q2 of 2017. So BEST will have an organic double-digit decline in Q2 specifically. So that is not news to us, but probably how the quarters flow, that may give you some more color as you model the year. With that, I think to your first question, Steve, our BSI organic order growth was again in the mid-single digits. So we think we are on track.
Yes, for BEST for the full year, we still expect an organic decline, even though it grew organically in Q1, but then it will have a pretty steep dip organically in Q2. That is how the year evolves with really the BSI segment, that 89%, 90% of the business, much more steady and a little bit of BEST noise on top of that, which is lumpy and so it is a little confusing. But for the year, we are comfortable with our guidance. That is the best guidance we have at this point in the year. For us, obviously with long lead times and Q4 always being a big quarter, I think it is appropriate at this point. But yeah, we are pleased with organic mid-single-digit order growth in Q1 at BSI.
Thank you very much, Frank.
Our next questioner today will be Patrick Donnelly with Goldman Sachs. Please go ahead.
Great, thanks. Frank, maybe one on Europe. Can you just talk through the trend you saw in that region this quarter? The PMI data, specifically the U.K., was a bit soft and then got even weaker in March and April. I am curious, given the volatility you have seen in that region over the course of the last two years, how you are feeling about that and how you have seen maybe the macro data flow to the government funding perspective in that region in the past?
Yeah. Europe was very good for us in Q1. I think I just repeat probably, and apologize, my longer-term comment that Europe is not going to grow on a sustainable basis in the high single digits. We are kind of taking that into account. We thought Europe had very high order growth rates, and they still translate into nice revenue growth rates this year for us, because it was in part a recovery, the pendulum swinging back after a significant dip in 2016. We think Europe orders and demand will normalize at a healthy level. But it was probably at a non-sustainable high single-digit level that was a sign of a recovery after 2016. We think there is really nothing more to it than that. We are optimistic on Europe. But, with those observations.
That's helpful. Then maybe one on the aftermarket revenue, another strong quarter. I know that's been a focus for you, specifically on the service side. Just wondering where we are in that story, how the attach rate is trending, and how you're feeling about a sustainable growth rate in that part going forward?
Maybe I'll leave that to Gerald. Long-term, we think aftermarket, and particularly consumables, is something that is one of our growth initiatives. It also has very good operating margins, although lower gross margins. Quarter by quarter, Miroslava, can you comment on that? Again, with the caveat, don't read too much into one quarter.
Yeah. On aftermarket, Patrick, it was just on an organic basis, it was actually slightly below the overall corporate average this quarter. The services, software, and consumables are doing quite well and grew a lot faster. But what you see in our disclosures in the quarterly filings is a number that includes some accessories and parts, and that was the part that was a bit of a drag this quarter. So the growth initiatives are growing fast, but there is another component that you will see included in that number.
Thank you.
Our next questioner today will be Derik de Bruin with Bank of America. Please go ahead.
Thanks. It's Michael Ryskin on for Derek. Thanks for squeezing us in. Wanted to follow up on a couple of the earlier questions about the NMR shipments and some of the lumpiness you talked about elsewhere, NANO and CALID. Just wanted to get a sense for, you said it was a mixture of events. There was some customer delays. Any indication on are these orders that are are these shipments that are imminent or a little bit more spread out over the course of the year? Then as far as the 1 GHz goes, again, I think last we talked, it was a mid-2018. Just trying to get a sense for, if you look into the comps of the BSI, it was pretty flat over the bulk of Q2, Q3, Q4 2017. Try to get a sense for pacing, as far as you can tell.
Yeah. No, if in the NMR side, we catch up in part or over the remainder of the year. That tends to be spread out over multiple quarters. That doesn't happen in one quarter, typically. The 1 GHz, if it goes into revenue, it would be in Q4. But again, this one's obviously below $10 million. While it's memorable, it's not that crucial for BioSpin or Bruker overall in any given year. Obviously, with some gigahertz business, if once that gets going, hopefully 2019 or 2020, it'll make a more sustainable difference. But, if we get one in this year, which is still our plan, it would be in Q4 revenue.
Got it. Thanks. A quick follow-up. You'd mentioned that the interest and other income, there was the $3.7 million delta year-over-year. Part of that was the revolver paydown, part of that was the FX transactions. Can you sort of break that down, how much each one contributed to give us a sense for how that should progress over the course of the year? Because that was a pretty meaningful delta in our model.
It's principally on foreign exchange. We're not prepared to give base numbers, but it's principally foreign exchange that had the impact in that case.
Okay. Thanks.
Sure.
As a reminder, it is star then one if you would like to ask a question. Our next questioner today will be Puneet Souda with Leerink Partners. Please go ahead.
Yeah. Hi, Frank. Thanks for taking my question. Just briefly on the NMR types that were in the timing, part of the timing issues. Were those more around anything around the lower magnets, 300 MHz, 400 MHz or 600 MHz? Or is this largely associated with the 1 GHz ? I just wanted to clarify.
It has nothing to do with the 1 GHz. My recollection is that it is more mid to higher fields. Not routine 400 MHzs, but I think more mid to higher fields, but not ultra-high field. It has nothing to do with 1 GHz.
Okay, got it. Thank you. Just overall, just the recent appointments, obviously, Falko and Bruker BioSpin, and Burkhard and BEST, how would you describe the makeup of the team now compared to what you had before? Any other businesses where you think team needs to further evolve in order to grow things even further? Any thoughts there would be helpful. Thank you.
Yeah, I think we have a really strong team. We just have a terrific bench strength and that we had someone like Falko to step in with some further grooming and training within about a year after René Lenggenhager, if you recall, left to become CEO of a Swiss publicly traded company. I am just very impressed by how our team has stepped up, and some individuals have stepped up. I think we just had that team here for a quarterly leadership team meeting, and I think we have a very strong management team at this point in time.
Just one last one quickly. In terms of the NMR orders in U.S., most of the larger 1 GHz, these are going in Europe. I think there is potential for one philanthropic order in U.S. Do you have expectations from NIH at all in U.S. for 1 GHz or right around that field strength, or is it going to be largely still OUS? Thank you.
From what we have visibility, it's OUS, so actually almost all Europe, a little bit in Canada, a little bit in Israel, that's also OUS. In the U.S., indeed, there's a philanthropic order from a medical research, premier research organization. That was encouraging. I presently don't think that there would be some concerted U.S. NIH program. At least it's not fully visible yet. I think it might be more consortia or individual universities, maybe stitching together some NIH, some state, some philanthropic, some endowment funding. There is clearly some interest in the U.S. and in the NMR community to do something, but it is not as organized as it has been in Europe. However, the discrepancy is becoming bigger and bigger, and there's some very compelling science one does with gigahertz by NMR. So I think it's a question of time.
Right now, I don't see an organized XYZ initiative in the U.S. where NIH says, "Yeah, we're investing in that." But I would assume that they're open to individual investigators who try to get a piece of the money from NIH and then combine that with other funding sources. That's often what you've seen in the U.S. So that's the present state. But, yeah, no, it's much healthier OUS at this point, surprisingly.
Okay. Thank you very much. Thanks, Frank. Bye.
This will conclude our question and answer session. I would now like to turn the conference back over to Miroslava Minkova for any closing remarks.
Thank you, William. Thank you for joining us this evening. During the second quarter, Bruker will participate in the Deutsche Bank Healthcare Conference in Boston, the Jefferies Global Healthcare Conference in New York, and the William Blair Annual Growth Stock Conference in Chicago. We invite you to meet us at these conferences or visit us at our headquarters in Billerica, Massachusetts. Thank you and have a good evening.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.