Stephen Unger - Lazard Capital Markets
Hi, thanks everybody. We're ready to get started with the next presentation in the life science tools and diagnostics track here at the Lazard 9 annual health care conference. Very excited to have our next presenter, it's a relationship that I've had for a long time, business [guru]. It's actually the first life science tools company I have picked up in my career. That was back in 2002, so over 10 years I've covered the company and Bruker has demonstrated significant growth over that period and it's been quite remarkable to follow the company grow to the size that it has so quickly.
So with us today is CEO Frank Laukien and Stacey Desrochers who is the Director of Investor Relations, there is no breakout as you know for us so, in some time we'll do some questions in the room. And with that I'm going to hand it over to Frank.
Thank you, so much Lazard and Steve, it's a pleasure to be here. Good morning everyone and thank you very much for joining us in this festive environment. Let me briefly draw your attention to our safe harbor statements. And then I'll actually pause on this slide a little bit and kind of set the stage for the rest of my presentation.
We've been an interesting company in the last couple of years. We have clearly defied the predictions that we wouldn't be able to grow in an environment without the stimulus, or with less CapEx in academic spending or because of the European crisis last year, we grew organically at 9% this year year-to-date we're growing organically at 12%.
So our ability to bring out compelling new products and to take our technologies into new or adjacent markets has really been outstanding that's clearly one thing that – where that we're very very pleased with. We however have been more erratic on the margins side, we as you all know are or many of you know we had a problematic second quarter, we had a very good third quarter, so a little bit of lumpiness here that we don't like and you the investors do not like.
Moreover in – after two years of very rapid and solid margin improvement in 2009 and 2010, when our adjusted operating margins went up in each year about 2% or 200 basis points. We've unfortunately been moving somewhat sideways in the last couple of years. So 2011 and 2012 year-to-date at least, if I exclude the significant investment that we're making in our CAM division which as many of you know, we acquired from the old Varian Inc., a couple of years ago and which is a major investment for us. We've been more or less moving sideways on margins and that is not satisfactory to us.
So with all of that said and without any intention of getting out of the passing lane in terms of growth, we have embarked this year, on what I would call a transformational approach to our business. And in particular to an even stronger foundation building in terms of Talent including outside talent in terms of processes and in terms of systems. And some of it is an ongoing story that you will see going on for the next two or three years.
Some of that we have implemented already, we have implemented a new group structure as of September 1st for our large Bruker Scientific Instruments segment to new group presidents, one has been joining us a couple of years ago, he had previously merson Electric and Veeco experience and has been very successful in running our BNS division, he's now Group President of our BMAT division, very experienced executive. And we have another very experienced group president joining us in January for our Daltonics optics group that, all three groups in about the $5 million to $6 million range we have a new CFO, Charlie Wagner who cannot be here today but many of you will meet him or have met him as of July 1st very experienced CFO, with the ability in many processes and systems and of course the CFO organization to take us to the next level.
And earlier in the year I appointed Stephan Westermann as our new EVP of Order Execution, Production & Logistics, so there's lots drivers of further foundation building in the next two or three years while we of course intend to continue our creativity in bringing out new products and going after new markets.
Finally, the best segment which of course is relatively small, we did look at IPOing that business and we pulled back from that simply because of all the comparables in the wind, clean-tech, solar battery business, you know the story, that's been a terrible market so their comparables really weren't there and in fact we're going to scale back some of our strategic initiatives and investments – invest a little going forward to make that business also going – have it go towards moderate profitability whereas previously the last three years we were simply driving growth without losing money, now the new mantra is emerging profitability perhaps to a slightly slower growth.
So that's the big picture. Many of you are familiar with us, here are a few bullets on our company, I'm not really going to read them I assume most of you are somewhat familiar with them. And of course all these slides are available on our investor relations website. So an extremely simplified version, this isn't quite the history of the company but that's the highly simplified history of the company, a 53 year-old company, always had a focus on products and technology leadership and I think an outstanding job in really in having what you would call customer intimacy, excellent customer relationships and I think one might – you might think, you might take that for granted, but as I look around the industry I think they're actually significant differences in how close management teams are to their customers, or very close to them and that's been a big driver of our innovation of course, we don't come up with all of these new product ideas internally.
We've added significant additional parts of the company, additional divisions additional technology, some of them more developed organically, mass spectrometry, infrared and Raman, others were acquired in 97, the X-ray business in 2010, the automic force microscopy business. The next decade or so you'll se this negatively set fragmented positively said somewhat entrepreneurial, divisional modular approach, we want to continue that but maybe not to the extreme that we've added before.
So simplifying a lot of the systems and operations and deriving of course great higher margins and better cash flow from that, while retaining the entrepreneurial spirit in our divisions is what we intend to do in the next 10 years. Don't expect a lot of acquisitions from us, perhaps some smaller bolt-ons that we tend to do every year. We just did one on October 1st, I'll talk about that in a moment. But I think mostly we're – we have the incredible opportunity of having so many growth opportunities internally or using our internal technologies in adjacent market, that I think the fast organic growth, high ROIC approach is what we will continue to pursue.
So what differentiates Bruker. I think again with our reading every bullet here, I think you're familiar with the theme, very good technologically, very good at product innovating getting into new markets, some times creating new markets excellent brand excellent customer recognition those are our strengths and will continue to be. One of the things we do well is to generate new products. We invest quite a bit in R&D, north of 11% over time that may leverage a little bit but we're not certainly not going to go down all of a sudden to 6% R&D spending but it from 11.5% or 12% we do go down to 10% I think we can still be very creative and get more leverage for our bottom line, same is really true for SG&A.
We did a number of smaller acquisitions, and really only two large acquisitions at least in the last few years, the two larger acquisitions both happens to occur in 2010. Our Chemical and Applied markets division or CAM, was acquired from the divestitures needed by – in that case, Agilent when they acquired the Varian Inc. this is mandated by antitrust commissions in Europe and the United States, that business we continue to invest in, that business continues to have significant start-up losses for us.
We think that market opportunity of $2.5 billion or north of that is compelling and we're generating a lot of exciting new products, I'll give you an example later on with the EVOQ LC triple-quad but it continues to be on operating margins probably about a 150 bps negative effect this year and of course we'll try to reduce that pretty aggressively going forward, while getting additional growth momentum from that business. I don't see why over the years we cannot capture a 10% of higher market share with 15 to 18% operating margins in these very attractive of life markets.
The other larger acquisition in October 2010, was the – we bought the scientific instruments, the atomic force microscopy or AFM and optical metrology business, from Veeco and that's really been a fantastic success story far exceeding expectations in terms of growth, in terms of operating margins that is one of the divisions for us that's north of 20% adjusted operating margins. Good internal benchmarking for us, clearly that's where we want to take many of our – other divisions going forward.
So our CAGR has been very good despite even over that time period from 2008 to 2009 there wasn't much probe to be had and our organic growth rate in the last two years, 12.5% and 9% this year, we're above – well above 10% year-to-date.
And looking at our full year forecast than guidance that would still have other than organic growth rate of about 8% to 10% of course we do acknowledge that generally there are macro headwinds and things are slowing down I the second half of the year, compared to the growth rates in the first half of the year.
Our footprint has been changing, we traditionally or long-time ago, almost exclusively catered to governments and University and perhaps research medical school accounts – this is our geographic footprint, I'll come to the market footprint in a moment. We used to realized strongly on Europe, Europe is still the strongest market for us. And not because of Europe has been shrinking for us on the contrary, but of course, we've been surprisingly growing particularly fast in India Middle East, Africa, Asia Pacific, those have been the growth drivers. I think that's true for just about any company.
In terms of market footprint, you'll see that the red piece here, in this case red is a good color, the industrial and applied markets have been growing for us. And I anticipate that maybe in another year or so we'll have a very nice mix of industrial and applied markets making almost half of our revenue. And the academic markets really except for the United States, which for us less than 20% of our revenue anyway, an important market of course, but while there's with the fiscal cliff there are presently concerns we're just not that dependent on US government and academic spending and we see many pockets of academic spending that are quite strong in Europe and Asia I think for reasons of competitive of nations you see continued very strong commitment to academic and research spending in the major Asian economies as well as in Central Europe.
So the academic markets for us perhaps surprising to many of you are really continuing to be quite strong, many of our other markets are listed here interestingly, emerging because of clinical mass spectrometry the in vitro diagnostics market with the significant success of our MALDI Biotyper, the clinical mass spec platform that's changing the paradigm in clinical microbiology, we've entered the applied markets with the CAM acquisition much more forcefully, presently slowing down a little bit but overall, I think significantly a very healthy market, in the long-term. And we also making a further push in to homeland security and defense with our new explosives detection strategy that I will comment on a in a little bit.
So these are the very big addressable markets, in principle, our industry is set to be at about $47 billion, no we do not, we're not a genomics company, we're not a cellular analysis company, we're not a consumables company, there's many things we do not do and we do not have the ambition to become, if you like, a jack of all trades, or an incredibly broad company, but in the four areas in which we are serving about an $8 billion, serve addressable market, I think we either are we – in some areas are number 1 or number 2, or we'll be very much head for the strategy of really really focusing in those areas and developing strategies an implementing them to become a profitable, highly profitable number 1 or number 2.
So a fairly focused strategy not a broad-based strategy but on the other hand we're not just depending on one particular market, many-many years ago we essentially depended on magnetic resonance, the non-clinical version, today that's not the case at all any more in our addressable markets and our breadth of our technologies and products has gone up considerably, I think, there's a very good balance without becoming too diversified and a good focused strategy in my opinion.
So BEST, our 6% or 7% of our revenue, near breakeven these days, is focusing on other markets, some very large, emerging markets and even though we're dialing back a little bit, some of the investments that we're making in BEST to take them towards profitability from essentially breakeven now very pleased, because they grew from about $40 million to about $130 million run rate in the last 3 or four years, their backlog went from less than $20 million to over $200 million so if there is one green energy and renewable energy in related applications company that's actually quietly done well, despite all the headlines of failures and bankrupcies, it's our BEST division.
But on the other hand now is the time to also begin thinking about margin improvement and getting emerging profitability. So our goal for that division would be to go from breakeven to perhaps 10% operating margin in the next three years or so. While retaining a pretty good CAGR, but we don't have to necessarily invest or perhaps you might argue over invest to drive a 30% to 40% CAGR, we're set aside with less if they have emerging profitability. So no longer planning any IPO for that business, I think that business with emerging profitability will remain a smaller but core business for Bruker.
So, our adjusted operating margins increased nicely in '09 and 2010. In 2011 if you take out about a 150 bps CAM investment, we went down in absolute numbers for sure, but if you take out that particular investment after the acquisition then essentially we've been going sideways in our adjusted operating margin in the last couple of years, also year-to-date so far and our free cash flow has not been satisfactory.
So those are areas we, our new CFO, albeit really the entire organization will be very, very much focused on. And that's also because we are undergoing a further foundation building and really a bit of an organizational talent systems processes transformation to put Bruker on a solid foundation for the next decade of further profitable growth.
In some ways, we probably grew too fast if there's such a thing and I think now it's the time to continue the product and growth momentum while doing more of the foundation building and that's what we have started at the beginning of this year and you'll see more of that.
After a weak Q2 admittedly we had a rather good Q3. I would urge you not to pay too much attention to any one particular quarter, so the year-to-date probably is a more meaningful numbers. And the story there is really under the present circumstances, I would argue, excellent growth, particularly organic growth, since it's organic and not expensively acquired. We continue to maintain very good ROIC, but in addition you'll also see that our operating margin and EPS performance has been going sideways and that's not satisfactory to us.
We did update our guidance on November 1st, we raised our guidance on November 5th during our Q3 earnings call and we're now projecting revenue of $1.73 billion to $1.76 billion for the full year. That would correspond to 8% to 10% organic growth for the full year and adjusted EPS of $0.75 to $0.79. And I would draw your attention to our reconciling tables and definitions in our November 5th, earnings release GAAP versus non-GAAP and so on.
So what are the opportunities to improve our profitability and add to our cash flow? We're doing an internal strategic review, I don't expect that we will be selling any divisions or anything like that, but we're doing a fair amount of pruning. We're looking at spending, we're looking at expense rates, we're particularly focused on the CAM investments/operating losses, the best new product developments and of course our working capital. I think our DSOs are excellent, our inventory turns are not satisfactory. We may never be fully at the industry average and that's not necessarily something we aspire to, because we - in some of our divisions we really are quite deep with our technology.
We take also high field NMR. Yes, we sell the systems, we make the magnets, we make the consoles; we even make the super conducting wire, but in that case, it is key to our success. We can build magnets that nobody else can build and therefore had excellent success in some of those fields.
Nevertheless having said that we can, you will, please expect to see a fair more reliance – a fair amount of more reliance on contracts manufactures further outsourcing as well as some pruning of our activities. I don't think that will appreciably reduce our growth rate, because obviously the exciting growth opportunities we will retain and we have many of those, but there are some of them that simply are drain in our resources and on our margins and we've recently divested a small thermal analysis business.
And put it into the - that was non-strategic, that was in Japan, and only about $10 million in revenue and about $3 million in operating margin. So we put into the hands of another strategic buyer who actually is the number two globally in thermal analysis and I think it will be good for the customers and it will be good for us and our investors.
Other structural changes are foundation building as I call it. We will maintain the entrepreneurial divisions now within the new group structures, but we will also look at the more of the one Bruker opportunities of having identical processes, end-to-end systems, identical systems. We will be adding talent, we'll be looking at our compensation practices; we'll be looking at outsourcing supply chain management and our manufacturing footprint.
We - again many little steps add up, probably not very dramatic steps, but many small, a lot of blocking and tackling if you like. We recently decided to close down our one Texas factory and consolidate that for Bruker Optics in one global worldwide factory. So you'll see many of these little steps for them and convince they will add up going forward.
We added leadership and we'll be continuing to add leadership with the, earlier in the year appointment of our Executive Vice President for order execution, very significant hiring of Charlie Wagner as our new CFO. He had previously been at Millipore prior to the acquisition by Merck. So he's certainly been at that level of what it takes to take a $1.5 billion or $2 billion or eventually larger company to the next level, in terms of all the foundations that I mentioned from processes to CFO of our organization. And he is very focused on margin improvement, on profitability via tax rate all the way to cash flow and the new group structure I have mentioned already, so a lot of changes going on while we continue, in turn, with fast growth and new product development.
So I think this may give you an overview of some of the things and also time scales of what to expect. These things do not happen overnight. We have SAP IT systems, we need to make them more homogenous, we need to make them end-to-end, that's takes two to three years. We're not looking, I believe, at $50 million or $100 million investments, because we've made a lot of the investments already, but we will need further investments in the next few years in systems, in processes, in financial, management tools, some of the things that we haven't been lacking for a $1.5 billion plus company and we're building those as we continue to grow.
We are not only internally focused. We're still focused on markets and growth opportunities and customers. And here is just a quick sampling of some of the newer, I'm not listing all of our growth opportunities, because most of you know us quite well, but here's some of the new things that have emerged, some of them fairly recently in 2012.
We're making a significant multi-product push. We brought out our first product into the explosives traits. Detection market, probably $700 million market including aftermarket and services, but even just a systems market is around $300 million worldwide and there is a lot of need for new explosives detection, technology because of liquids explosives, improvised explosives, the analytical field is changing that creates new opportunities for us to deploy some of our advance technologies.
We single handedly created the hyper polarization DNP NMR. I don't know that you can pronounce that nor do you need to, but it's a very exciting way of increasing NMR sensitivity by an order of magnitude for certain selective problems particularly in solid state NMR with very important things like membrane proteins, which are therapeutically important.
Europe has been heavily investing in that technology, even though it was originally developed at MIT and then, we - together with MIT took it and made it a commercial offering, but in Europe we now have more than 10 of these multi-million dollar systems installed or on order with some major initiatives in France and Germany recently to fund these. Unfortunately, that hasn't occurred in the US yet, but perhaps once we get beyond the fiscal cliff the US will catch up.
Importantly, we entered the LC triple-quadrupole mass spectrometry market, something Varian had never done seriously with our new CAM division, with a launch in September of the EVOQ, which I think we will provide an exciting growth trajectory.
We've created a new game changing technology in mass spectrometry also introduced in September, that gives extreme resolution. The highest resolution that you get out of a TOF or orbitrap is maybe several 10 or a couple of 100,000, with FTMS and this technology with X - you now can go up to 10 million. It'll change workflows in mass spectrometry, very significantly. Less of a reliance in chromatography and for certain selected applications like petroleomics and more using these new scientific capability.
A launch in clinical toxicology of our ToxTyper, which could be…
Stephen Unger - Lazard Capital Markets
You have to wrap it up.
Okay, I'll wrap it up. And a major expansion of our Preclinical Imaging Division or PCI division, a new $400 million market where we added the acquisitions a couple of new products this year.
So I'll invite you to take a look at our LC Triple quad and our clinic preclinical imaging slides in our investor relations segment here, in investor relations part of our website. But we have now a broaden very significantly via two acquisitions our preclinical molecular imaging product line with the Carestream acquisition on October 1, with both optical molecular imaging and expect molecular imaging very exciting further development.
So with that I think I'll leave you with potential reasons to invest in Bruker, a very strong foundation and realistic upside potential for more foundation building and new growth initiatives. Thanks very, much.
Stephen Unger - Lazard Capital Markets
Thank you, Frank.
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