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Executives

Frank Laukien - Chairman, President and Chief Executive Officer

Joshua Young - Vice President of Investor Relations

Charles Wagner - EVP and Chief Financial Officer

Analysts

Tycho Peterson - JPMorgan

Bruker Corporation (BRKR) 31st JPMorgan Global Healthcare Conference January 7, 2013 2:30 PM ET

Tycho Peterson - JPMorgan

Good morning. We are going to go ahead and get started. I am Tycho Peterson from the life science tools, diagnostics, and medtech team at JPMorgan. It’s my pleasure to introduce our next company this morning, Bruker. Before I turn it over to Frank, let me just note the breakout is in the Sussex Room for those that are interested. So, with that let me turn it over to Frank to tell you a little bit more about Bruker.

Frank Laukien

Thank you very much, Tycho, and good morning ladies and gentlemen. It’s my great pleasure to also introduce our relatively new CFO, EVP and CFO, Charlie Wagner, who joined us on July 1st, and in fact we will be splitting the presentation. I will start out and he will continue the second half. I would also briefly like to introduce our new VP of Investor Relations, Josh Young, who just joined us very recently. And I am happy to see a couple of our West Coast based Board members in the audience. Welcome, glad you could join us.

So with that I would like to draw your attention to our Safe Harbor statement and would suggest that you consult our SEC filings for further information. We are not going to give a Q4 update or 2013 guidance today. We intend to do that at the end of February when we report our Q4, and at that point we also, as has been our habit, intend to our give our financial outlook and goals for the year 2013.

Having said that, let me start out with the overview of Bruker. I will give you a bit of an update on business and market trends, and then Charlie indeed will tackle the financials and wrap up with the summary.

The key messages for those of you who are not familiar with or for those of you who are familiar with us and want to see what are we emphasizing in 2013 and beyond, we are and have been for some time a premium brand that has consistently delivered higher than industry average organic growth. We, in the past years, have typically grown a few percent, around 5% faster organically than many of our larger peers and our focus always has been on organic growth and on ROIC.

We have made -- I have made a number of changes that I think we will be -- you will be hearing a lot about. I think they may be transformational to focus not only on organic growth and on innovation, which we think we are very good at, but to really focus on the key objectives of margin improvement, EPS growth, cash flow, and free cash flow. And a number of these have to do with our management processes. We have added quite a bit of new talent, not only in the CFO position but also in our new group structure that I will talk about in a moment as well as in internal – in efforts supporting our operational excellence initiative.

And we are in the process of evaluating and implementing initiatives that will provide -- that can further accelerate our growth, but also -- especially the growth in adjusted EPS and cash flow which is our focus. So, Bruker is a multi-faceted story. We have many growth drivers. Accordingly, as we divest certain smaller businesses, as we perhaps consolidate some factories, as we do some outsourcing, don’t look for the one breakthrough event that changes everything, I think you are more likely to see over 2013 and beyond a number of incremental steps that altogether, I think, will accelerate the growth of our EPS and of our cash flow, and some of those have been taken already.

You may be familiar that we divested our TA business, our non-strategic thermal analysis business in Japan. In our optics divisions last year already we began the process of consolidating that into one manufacturing factory, and there are a number of other steps that are in the pipeline and we will keep updating you on our quarterly earnings calls as we have already in Q2 and Q3 about ongoing restructuring, outsourcing, and other activities. But that’s our strategy and that’s our plan.

So, not much new on this slide. This is who we are, perhaps for those who are less familiar with us. A new word has gotten in there, and it’s been evolving for some time, but the new word in the headline is diagnostics. With our clinical mass spectrometry efforts and the wonderful success in clinical microbiology with our MALDI Biotyper, I will come back to that, the clinical and in-vitro diagnostic component of Bruker clearly is becoming more and more important, and it now is beginning to start to move the needle with good growth and also with above average margins. And as we will go further into clinical toxicology with the launch of our -- European launch at least of our clinical Toxtyper as we expand MALDI imaging for pathology and other clinical research applications, I think you will continue to see that in addition to the applied and life science research in industrial markets that we serve.

We have changed the complexion of the company over the last few years and what you see on the left -- on the right is actually the 2011 picture. In fact you will see further evolution and trends in 2012 and 2013. So not surprisingly, the industrial and applied markets have become a lot stronger for us. We are less dependent on academic spending, although academic medical school, non-profit research still is a very large part of our customer base. And I think actually while in the United States, academic spending is a bit challenged due to fiscal cliff, I think the U.S. is the exception here in the world. Other than the Mediterranean and the United States, I think academic spending is really going to be a very positive for Bruker with perhaps relatively weaker applied and industrial markets in 2013.

So, I don’t regard the academic segment here as an exposure but as an opportunity in a market where we are very strong. We have also, again perhaps not surprisingly, changed the complexion of the company with the geographical markets that we serve in Asia Pacific as well as India, Middle East, and Africa, of course have been growing. And when you see the 2011 and 2013 numbers, these trends of course will continue. So we started to have a much -- a really quite healthy geographic distribution of our end markets.

We do serve very large markets. The total life science tools, analytical instrumentation, and molecular diagnostics markets are approaching $50 billion. That’s perhaps not the relevant figure for us, but with the number of internal business development moves and some acquisitions in recent years, like the CAM acquisition from Varian a couple of years ago or the Veeco acquisition which is now Bruker Nano Surfaces. We have quite deliberately expanded the served addressable markets which for us today are around $8 billion. So you see as $1.7 billionish company. We have plenty of headroom to grow within our markets, and of course there are attractive adjacent markets that I think you are mostly familiar with.

So Bruker has been and will continue to invest more than the industry average in research and development. We may let that leverage off a little bit, but we are not going to change the strategy of the company. We have been driving good growth above industry average growth, particularly organic growth. In the year 2009 when the industry was shrinking about 6%, our organic growth was flat. But in terms of relative performance that’s not bad. You see in 2010 and 2011, we had very good organic growth, and this year without updating any guidance or anything like that, but we had been targeted to grow in the range of 8% to 10% organically for the full year.

So those are the things we wish to continue to drive even though the main strategy is focusing on EPS and cash flow. Our operating margins had made very nice progress in 2009 and 2010 when we had been growing our BSI segment excluding BEST, our scientific instruments business operating margins by about 200 bps in each one of these years. But in the last two years, 2011 and year-to-date 2012, year-to-date being the end of Q3, we have been essentially moving sideways on margins. And that has to do with a couple of large investments in our BEST division, which I will talk about that in a moment. We will be scaling that back a little bit as well as in our newly acquired CAM division which had the Varian heritage where we perhaps were investing a little bit too much simultaneously, and we will scale some of that back in order to accelerate margin expansion and EPS.

So, the Bruker roadmap for the next few years. You will see, and Charlie will explain that in more detail, quite significant new leadership and organizational elements. I will leave it to Charlie to explain them in more detail. We have adopted a simplified organizational structure that I will explain, our new group structure on the next slide. And we are taking more and more, and now really a fully globalized functional approach to our businesses.

I think we are striving for certainly and I hope you will see incremental profit improvements from better expense control, perhaps some of that already began to show in Q3 and as we go to the 2013 budgeting, that’s of course one of the things that we are focusing on. We are evaluating structure and processes. We are putting -- we are making certain structural changes from outsourcing to factory consolidation to looking at our sales organizations and R&D organizations to see whether we can improve efficiency and the return on invested capital there, and we are quite committed to quite a bit more outsourcing that you will see come into the Bruker Group in 2013-2014. It may not always immediately have a P&L effect, hopefully longer term it does, but it more immediately probably has a working capital effect. And so, we are setting ourselves up for continued above industry average organic growth and good ROIs things that we have been good at, but also for sustainable profit and sustained profitability and cash flow growth. All of this in a more performance driven culture that affects from compensation to the new management processes that we have adopted that really is in some ways transformational for Bruker. Hopefully not so or the ideas to make it not so transformational that we lose the positive attributes that the company has had, and I think we will find the right balance to drive that forward for maintaining the positive attributes and the great entrepreneurial spirit and growth spirit in the company with more of a focus on financial performance.

So, the Bruker Corporation, then you simplified structure that we adopted on September 1st is that our 10 BSI divisions are now grouped into three groups. Each of these three groups on the left, with about $500 million to $600 million in revenue. Our original and oldest Bruker’s BioSpin or magnetic resonance group -- there’s perhaps not as much change there except that it now includes a preclinical imaging division that I will talk about in more detail in a moment. The BMAT group is now led by Mark Munch who has joined us from Veeco with an Emerson Electric and other hi-tech background, a very seasoned manager who has now at the four divisions that some of you may know, as Bruker Nano Surfaces, the X-ray division, Bruker Elemental, and Bruker Nano Analysis are now grouped in the BMAT group. And the Bruker CALID group really combines our chromatography, mass spec, and molecular spectroscopy, Infrared Raman. Four divisions, and they have now been put together into one group led by a new executive.

Finally, our BEST segment, which is really a standalone division. That’s one where we are taking a little bit of a directional change, if you recall, the next three years perhaps with a goal of an IPO, we were driving that division essentially near breakeven and in landgrab mode to grow as quickly as possible. They grew from about 40 to about 130 million run rate. Their backlog went from 20 to over 200 million, so they executed, we are very pleased with that, but they were taking a directional change, not a U-turn and saying, look we will accept slower growth with emerging profitability, so over 2 or 3 years, we would like to grow that at least to above 10% operating margin or at least in that direction, accepting slightly slower growth, and that is one of the areas where for instance we recently looked at -- some of its growth initiatives, we looked at one program which some of you who may have followed that is our fault current limiter or superconducting fault current limiter program and we decided not to pursue that going forward in 2013 because the commercialization opportunities were just too far out and so we are going to cut back on our R&D and business development in one area. Another example of Bruker pruning, if you like, without really damaging any near-term or even intermediate term revenue or margin opportunities. So a quick update on business and market trends before I then turn it over to Charlie.

We are in a mixed environment. This is not January 2009 where everything was pointing south or negative. There are negative developments. All the headwinds are there. You are familiar with them, we are seeing them. U.S. academic budget uncertainty, although the U.S. as I said before in terms of academic spending is a bit the odd man out right now, maybe we will fix that over time. The euro softness continues, China growing but perhaps more slowly. Some pricing pressures emerging, for instance, in some of the applied and industrial markets not so much in research markets perhaps. But there is also -- it’s a mixed picture at least, which is better than all negative, there’s positive developments.

We have some good core and niche markets with accelerating and attractive growth. We have some very exciting new products that we have launched in 2011 and 2012 that are beginning to get traction. We have more in the pipeline for 2013 of course. Some of the selective bolt-on acquisitions, we did last year this time, particularly in pre-clinical imaging, are adding to Bruker very nicely. And we are entering some new markets. Let me give you some examples.

This is our core business, our NMR business. This is our oldest, 52-year-old business. We had a very large number of ultra-high field, which we define as 900 MHz and above NMR orders in the last three or four months where we have really done very well. And I thought the interesting part of that if you go through the list, most of these accounts are actually in Europe. Maybe some of you may have thought that European academic spending was weaker, but quite honestly in some of these investments in new scientific capabilities, it tends to be more robust in Europe and in Asia than in the U.S. right now.

NMR remains a lumpy business so from quarter-to-quarter there will be some revenue unevenness. You know things -- is a lab ready, can we get liquid helium in time. It has its own challenges. It has some inherent lumpiness, but it’s obviously overall fundamentally a good business for us and in our core business we are doing well.

We have expanded as you know initially in Europe but now really globally, into clinical mass spectrometry and diagnostics, particularly into clinical microbiology. Our MALDI Biotypers, sometime abbreviated MBT product line, is really doing very well with continued fast growth, good margins, market leading position. We now have over 700 paid MALDI Biotypers in the world either paid as a lease or as an acquisition. And we surprised ourselves when at the end of 2012 we did a back of an envelope estimate of how many IDs, identifications, would be done by our customers. We estimated it’s now of the order of 20 million per year. So, I think that clearly shows this has gone mainstream and has really replaced, in many cases, the traditional biochemical technologies.

Focus on Europe. We are still driving that in the U.S. We are hoping for FDA approval in the second half of 2013. We got market approval and pursuing that in many other Asia Pacific geographies. We got it in Japan, we got it in Canada, Australia. There is a list here of more countries where we got market approval. And also in the research markets, the pharma, microbiology, there has actually been a lot of growth.

There was a rather lengthy press release on that last bullet that’s sort of a long clinical press release, but I think there is actually an interesting business point behind it. It just came out a few days ago. I think the MALDI Biotyper platform can be further expanded beyond just identification which is its main franchise, into hospital acquired infection management and epidemiology with some of these beta-lactamase things that we are in-licensing and developing as new products. I think it is a platform that has a long way to go and can be further expanded.

We are expanding in new markets -- new markets for us. The LC triple-quad market is a rather large market. There are other competitors in there for sure, but I think we have done from the CAM assets a very nice development of a performance-leading product that we have just launched in September called the EVOQ, our first entry into the largest, single mass spec market namely the LC triple-quad market. And so we are optimistic that we will get a share of that market overtime. It’s early days but it’s a large established market, and I think we have some really good products for that market.

And I noticed I skipped one slide and then I will turn things over to Charlie. And this was really on our pre-clinical imaging division which I had mentioned briefly earlier. With a couple of acquisitions a micro-CT, microcomputed tomography x-ray company in March. And then getting into optical-molecular imaging and functional PET, SPECT molecular imaging for pre-clinical applications. This is not for patients, this is for pre-clinical applications. We now have the broadest product line and we further expanded our preclinical MRI leadership with internal developments and some external business development. And last but not least, together with Philips we are pioneering the new field of cardio imaging using magnetic particle imaging. Again, we are the pre-clinical component, Philips pursues the clinical end. So with that we have emerged in this, about $400 million per year pre-clinical imaging market, as a market and technology leader. So that’s really a new aspect for Bruker that has emerged slowly but I think here is a good slide to put it altogether.

And with that I will turn it over to Charlie to give us the financials update.

Charles Wagner

Thank you, Frank, and good morning everybody. It’s good to be here at the JPMorgan conference. Good be back in the life science tools space after being removed a little bit for a couple of years. I will touch a little bit on the financials and then I think go a little bit deeper on some of the things we are doing to drive improvement in the business that Frank touched on.

The year-to-date story through Q3 is very similar to the story that Frank outlined earlier. I think we are quite proud of the top-line growth we have been able to drive in the business. Through Q3 we reported 8% growth in revenues on a reported basis in the range of 12% to 13% if you strip out the impact of acquisitions and currency which was a big headwind for us this year. Exceptional growth and I think it really reflects some of the comments Frank made about the Bruker brand, our commitment and innovation, and some of the strength not only in our core markets but some emerging niches for us.

All this has been a very positive development in the year. At the same time we remain unsatisfied with margins. Operating margins are roughly flat with the prior year. Earnings are roughly flat with the prior year. And that is despite the fact that we have made some efforts internally over the last couple of years to drive improvement. Those improvements just have not stuck. If you look at 2012, gross margin expansion was very limited and some of those gains were then consumed with spending in sales and marketing and R&D. All good investments around driving growth, but we do acknowledge and are committed to doing better in terms of driving the bottom line.

Additionally, we haven’t been translating those profits in the cash flow largely because of growth in inventory. And that’s the platform that Frank described. Before I move on from that, let me touch on one point. If you look at the way the year developed for us, Q1 was an outstanding quarter for Bruker, Q2 was a disappointment, Q3 was a strong quarter. Over the year, things have balanced out, but the year and our business tends to be fairly lumpy. I pointed out because Q1 of 2012 in particular is a tough comp heading into 2013. We are not going to be making guidance estimates today but I do want to remind folks that Q1 of 2012, we had 15% revenue growth and 20% growth in operating profits.

So that is going to create some year-over-year difficulties in the Q1 comparison and I think not unlike a lot of folks who are developing macro estimates for the year, we are looking at the second half of our year as being a stronger driver of growth and profitability for the company.

As we look at then where to do better and where to drive improvements, it’s really all the way down the P&L and the balance sheet. You can see on the book ends here, we are happy with our top-line growth. We are happy with our return on invested capital. But we see opportunities to drive cost of goods sold down. We see opportunities to drive SG&A down. And we see opportunities to better manage our investment in R&D and then translate those profits into cash flow.

On the cost of good side, we are evaluating a number of initiatives from procurement through outsourcing, factory consolidation, and better supply chain management throughout. On the sales and marketing side we are starting to look now country by country at the investments and whether those investments are yielding the right return, whether we have made the right channel decisions, whether we have made the right sales force compensation decisions. And so really myself along with some of the new management team that Frank has talked about, we are really starting to dive deeply into the operations and the financials of the company, looking at driving sustained improvement over multiple years.

The change in leadership is an important first step. There were plenty of good improvement efforts ongoing at the company before I arrived and before other members of the new management team arrived. But with new management you get new perspective and you get new energy around some of these change initiatives. And I think that’s important. The board and Frank have started with this process over a year ago in the winter of 2012, putting in place dedicated leadership around supply chain and order execution. A new and important move for the company. I joined over the summer, and then the group structure was put in place in September wit Mark Munch moving into his role in the August, September timeframe, and really glad that (inaudible) an industry Veteran has joined us in January to lead the CALID group. And I can already see in a matter of week or so the impact he is having on the quality of the business discussion inside of Bruker.

So it’s an important first step. I call it out because we are still a little bit in foundation building mode. If you think about where we are at this point. 2012 for myself and for my peers, whether they are new leaders in the organization or leaders who are in new roles, still going through a lot of organizational assessment. Looking at the resources we have and the skills gaps, making sure we have the right people in the right place, putting a new management process in place for the company and making sure we get the right budget set with the right incentives for 2013. As we move into 2013, it will give us the chance to dig deeper into supply chain, sales and marketing, on my side financial systems, HR systems. All long ongoing improvement initiatives for the company that we will really be digging into in 2013.

So, little bit of foundation building left to do but we will be making improvements along the way. So to wrap it up, why do you care. I think Bruker represents a unique opportunity, tremendous fundamentals in the brand and in the innovation and the growth of the company with realistic upside potential. That potential has been there for some time. We have got a new management team with a renewed energy focused on driving improvement on the bottom line and in cash flow, which I think translates into real value for the company over time. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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