Good Morning my name is Marcie and I will be your conference operator today. At this time I would like to welcome everyone to the Bruker Fourth Quarter and Full Year 2012 Earnings Conference Call. (Operator Instructions).
Thank you. Mr. Young, you may begin your conference.
Thank you Marcie. Good morning, I would like to welcome everyone to Bruker's fourth quarter and full year 2012 earnings conference call. My name is Joshua Young and I am Vice President of Investor Relations for Bruker. Joining me on today’s call are Frank Laukien, President and CEO; and Charlie Wagner, Bruker’s Executive Vice President and Chief Financial Officer.
In addition to the earning's release we issued earlier today, we will be referencing a slide presentation as part of today's conference call. The PDF of this presentation can be downloaded by clicking on Bruker's Investor Relations website, or by accessing the file by clicking on the Downloads hyperlink through our audio webcast player. Once you download this PDF, you will be able to follow along with management commentary.
During today's call we will be highlighting non-GAAP financial information. A reconciliation of our GAAP to our non-GAAP financial statements is included in our earnings release and in our webcast presentation.
Before we begin, I would like to reference Bruker's Safe Harbor Statement, which you can see on slide number two. During the course of this conference call, we will make 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 other subsequent SEC filings. Also note that that the following information is related to current business conditions and our outlook as of today, February 19, 2013. Consistent with our prior practice, we do not intend to update our projections based on new information, future events or other reasons, part of our release of our first quarter 2013 financial results.
We will begin today's call with Frank providing an operational summary of our 2012 performance. Charlie will then cover our financials for the fourth quarter and full year 2012, before providing our guidance for 2013.
Now, I’d like to turn the call over to Frank.
Thanks Joshua. Good morning everyone and thank you for joining us on the call today. We are pleased to report solid financial results in the fourth quarter and another excellent year of top line growth for Bruker. With our performance in 2012, we have generated three straight years with organic revenue growth between 9% and 12%. As I look back on our performance in 2012, there are three key takeaways that I would like to share with you to summaries our performance.
First, Bruker’s innovation engine is working. We remain very close to our customers and we had a solid year of new product introductions. Bruker continues to win business with differentiated products and by entering adjacent markets. This has enabled us to grow organically, significantly faster than many of our peers in the past few years, despite concerns about the end of stimulus spending, the European economic malaise, the uncertainty of NIH funding and a slowdown from industrial customers.
Second, our business in most of European academic and non-profit markets has held up reasonably well despite the fact that we saw some weakness in these segments. While uncertainty remains in U.S., the funding for scientific research continues to grow in many European countries in most of Asia, Latin America and the India, Middle East Africa regions.
This has helped spur demand for many of our academic non-profit clinical research, as well as biopharma and advance materials research customers around the world. Our successful foray into clinical microbiology and our expansion in the applied markets also continues to support our revenue growth.
Third, we have begun the process of making significant changes at Bruker with a stronger leadership team and investments in operational excellence, management processes and related systems. This is evidenced by the appointment of Charlie as CFO and of the new group president, as well as by the arrival or promotion of other important members of senior management.
We’ve recognize that we need to improve our operating leverage and generate higher and more consistent profitability in cash flow. In Q4 of 2012, we took some decisive steps towards this objective. While further optimization of the company is expected to be carried out over several years, the key message is that we are highly focused on building a solid foundation of leadership, processes and systems that will help us drive sustainable, profitable growth and increased shareholder value.
With the key takeaways covered, let me move into more detail about our full year 2012 results. I will begin my detailed comments on slide 4. For the full year 2012, we reported revenues of $1.79 billion, which represented 8.5% growth over 2011. Excluding a 4.6% unfavorable effect from changes in foreign exchange rates and a 1.2% net positive impact from acquisitions and divestitures, Bruker generated 11.9% organic revenue growth in 2012.
This is exceptional topline performance when you consider the fact that we were facing weakness in several European economies, softness in the U.S. academic markets, and a slowdown in several industrial and applied markets.
We generated double digit organic revenue growth in all four quarters of 2012. The key drivers of this performance were a strong up tick of new product, strong demand from academic customers outside of the United States and continued momentum in Asia-Pacific, which represented nearly one-third of our revenues at the end of 2012.
Another key highlight of the year were the organizational changes that we made. We organized the 10 operating divisions of our BSI segments into three groups. We have also elevated or appointed new heads for each of these groups. We believe that this structure will allow for greater managerial oversight and will make it possible for us to begin to implement common global processes in all groups and divisions. Each of the three BSI groups generated more than $500 million of revenue in 2012.
The final business highlight, which I will touch upon, is that we have initiated new outsourcing programs and other productivity improvement efforts in certain parts of the organization. We have divested certain loss making or lower profitability businesses and we have begun the process of outsourcing some of our non-core manufacturing activities. We expect that these actions will begin to create savings over the next two years by reducing our working capital ratio and by improving our margins.
From a financial perspective, our healthy top line growth enabled us to expand our non-GAAP operating margin by 30 basis points in the full year 2012. One of the drivers of this expansion was the BEST Rosatom license deal that we recorded in Q3 of 2012. Our profitability clearly improved in the second half of 2012, after a disappointing start to the year.
I would like to now turn to slide 5 and make a few comments on the three groups and the BEST segment. I will not cover all of the points of the slide but I want to elaborate on a few of the key drivers. Let’s begin with the BMAT Group.
The two key drivers for our BMAT group in 2012 were the success of new product introductions and the strength of the group’s business in Asia-Pacific. A little over a year ago, we launched the Dimension FastScan Atomic Force Microscope or AFM which dramatically increases the speed and throughput of AFM. This product launch came out of our Bruker Nano Surfaces Division. The acceptance of the Dimension FastScan has been rapid and helped to drive sales growth in 2012. BMAT’s business in China, particularly with industrial customers was strong during the year and also had a good start in January 2013.
Turning to the Bruker BioSpin Group, the demand for NMR was sluggish and the market did not grow in 2012. Despite the stagnation of the market we were able to grow through market share gains in Ultrahigh-Field NMR and preclinical MRI. Additionally, new funding programs in Europe helped the BioSpin group to play several high-end instruments in the region.
In our preclinical imaging division, the highlights of 2012 included the acquisition of SkyScan’s microCT imaging business and Carestream preclinical in vivo molecular imaging portfolio. Bruker now has the broadest preclinical imaging product line in the industry. We are actively working to integrate these two companies and we are excited about our ability to drive growth in this business from our broader offering.
I would like to now turn to slide 6 to discuss Bruker CALID, which is home to the Daltonics CAM optics and Detection divisions. The Bruker CALID group had a mixed year with several bright spots but also with some disappointing results. The division did well in the life sciences market and demand from pharma and bio-pharma customers was solid.
Our Mass Spec clinical microbiology product, the MALDI Biotyper continues to perform well and the group saw good performance from its non U.S. academic customers. However, the poor bottom line performance of our CAM division, which still lost in excess of $25 million in 2012, has offset some of these good results.
Charlie will talk in more detail about some of the restructuring actions we are taking in CAM to get the performance of this business heading in the right direction. Finally, BEST we had a good year of top line growth and profitability with the improvement driven by the ROSATOM license deal we closed in Q3. The incentives and the strategic emphasis for BEST had shifted from fast topline growth to steady profitability improvement. We are implementing decisions to streamline our BEST research project, lower our expenses and increase our BEST margins.
I would like to close on slide 7 by talking about some of my key priorities for 2013. First, improving our operating leverage and kicking off initiatives that help us to lower our cost and working capital ratio is far and away my highest priority in 2013. While we have launched several initiatives to help us towards this endeavor, we intend to accelerate these efforts and decisions in 2013.
Another key priority is to turn up the financial performance of our CAM division. We've made considerable investments to upgrade the products and the portfolio. And in 2013, we expect to see a meaningful reduction in the CAM operating loss. At the same time, we need to lower our manufacturing and discretionary spending to put this business on a path towards profitability in the coming years.
Finally, we need to successfully implement performance management systems that provide management with better visibility into the business. This does not just apply to our financial systems but we will move Bruker towards global processes and global systems that provide us better information to optimize the performance of our businesses.
So I would conclude my comments by stating that one of Bruker's core strengths is innovation and launching new products and we will continue to focus on cultivating these strengths. We had a very year of growth in 2012 but our profit and cash flow performance was not satisfactory for the full year.
That being said, we ended the year on a positive note and generated both good top line growth and margin expansion in Q4 of 2012 and we continue to have a very healthy backlog. As we enter 2013, we will have a strong focus on ensuring that our growth is profitable and that we are generating attractive cash flow.
With that, I will turn the call over to our CFO, Charlie Wagner.
Thanks, Frank. I’ll now provide some addition details on the Q4 and full year 2012 results before providing our financial outlook for 2013.
On slide 9, I show a snapshot of our Q4 2012 non-GAAP performance. Total revenues increased 8.9% from the fourth quarter of 2011, totaling $517 million. Excluding a 2.1% unfavorable impact from changes in foreign exchange rates and a 0.8% net impact from acquisitions and divestitures, year-over-year organic revenue growth was 10.2% in the fourth quarter of 2012. This solid performance was primarily driven by our Bruker MAT and CALID groups.
We were pleased that we generated operating leverage from the entire sales volume in Q4 2012 with non-GAAP operating income growing by 20% and non-GAAP operating margin expanding year-over-year by 130 basis points in the fourth quarter.
On the bottom of the slide, you can see that during the course of the year, we continued to make some progress on our working capital, lowering our working capital-to-revenue ratio from $0.48 to $0.46. However, considerable opportunity remains to bring this ratio lower in 2013 and beyond.
Turing to slide 10, changes in foreign exchange rates continue to be a headwind on the top line for Q4 and reduced our year-over-year revenue growth by 2.1% in the quarter. This was primarily driven by a weaker Euro, Swiss Franc and Japanese Yen versus the U.S. dollar. You can also see on the slide the revenue impact from the two smaller acquisitions that we completed earlier this year - SkyScan and Carestream which added $4million of revenue in the quarter after adjusting for the effects from the divested thermal analysis instruments business in Japan.
On slide 11, we show our Q4 2012 non-GAAP operating results in more detail. Our Q4 2012 non-GAAP gross margin of 47.7% increased a 120 basis points on a year-over-year basis, driven primarily by higher revenues and mix.
Our SG&A as a percentage of revenue declined by 40 basis points, due to tighter control on discretionary spending, but this SG&A leverage was offset by R&D increasing as a percent of revenue due to the timing of certain R&D projects. As a result, our non-GAAP operating margin expansion was driven entirely by our improvement in gross margins during the fourth quarter.
Despite this margin expansion, we reported non-GAAP earnings per share of $0.28 in Q4 2012, which was a 7% year-over-year decline. Interest expense and foreign exchange losses were higher in Q4 2012 than in Q4 2011, and Q4 2011 also benefitted from an unusually low tax rate.
On slide 12, you can see the difference in our year-over-year non-GAAP tax rate at the bottom of the slide. Our Q4 2012 non-GAAP tax rate was 30.9%, compared to 16% in Q4 2011. During the fourth quarter 2011 we released $6 million tax reserve, which led to the low tax rate. On the rest of the slide we show a reconciliation of our GAAP to non-GAAP results.
During the fourth quarter of 2012, we incurred $34 million of costs that we excluded from our non-GAAP results. The largest component of these costs was related to roughly $24 million of impairment and restructuring charges related to our CAM Invest divisions. Included in that amount was $16.4 million impairment charge for intangible assets and a $1.4 million write down of goodwill both of which were established in 2010 during purchase accounting for CAM.
The impairment charge reflects the view that after two and half years of operating losses, the projected cash flows from the CAM division are not in line with projections made at the time of the purchase. In addition, we recently made the decision to close a CAM R&D and manufacturing facility in Europe and move those activities to our CAM locations in Freemont California.
As a result of this decision, we recorded fixed asset impairment charges and other restructuring charges of approximately $3 million in the fourth quarter of 2012. Additional charges related to this decision will continue to be incurred during 2013.
We remain committed to improving the financial performance of CAM and believe this factory consolidation is an important step towards improved operational efficiency.
Finally in Q4 2012 we also made the decision to seize R&D activities and exit a manufacturing location in our BEST division. We remain committed to BEST superconducting materials and big selling business but we’ve decided to scale back investments in technical development programs that were not expected yield meaningful commercial results for several years.
We expect to retain some of the Technology, IP and knowhow so that these programs could be restarted in the future if it deemed attractive to do so. As a result of these decisions, in BEST we recorded $2 million of fixed asset impairment charges and other employee related restructuring charges.
Looking on the slide 13, I’ll briefly touch a point on our full year 2012 non-GAAP results. Total revenues increased 8.5% compared to 2011 totaling $1.79 billion. Excluding a 4.6% unfavorable impact from changes in foreign exchange rates and a 1.2% net contribution from acquisitions and divestitures, revenues grew 11.9% organically in 2012. This is exceptional performance, which is clearly ahead of the overall market growth.
Our non-GAAP operating margin of 12.2% expanded 30 basis points, compared to a non-GAAP operating margin of 11.9% in 2011. However, if we adjust for the Rosatom license impact, which contributed roughly $15.5 million to 2012 operating income, our non-GAAP operating margins could have declined by roughly 50 basis points year-over-year. Our 2012 non-GAAP EPS of $0.83 was nearly unchanged from 2011.
Moving to slide 14, I’ll show you our GAAP to non-GAAP reconciliation for the full year 2012. We excluded approximately $63 million of costs from our non-GAAP results in 2012. In addition to $24 million of Q4 charges related to CAM and BEST that I just mentioned, the reconciliation also includes meaningful costs related to our investigation and review of our past business practices in China. These costs are reflected in the other category that you see on the schedule.
Since 2011, the company has been reviewing business practices at its subsidies in China. In our 2011 Form 10-K we reported that we identified certain issues at our Bruker Optics subsidiary and took actions to terminate certain employees and implement enhanced financial controls and oversight.
Further investigation during 2012 has reviled additional issues in other Bruker subsidiaries in China. As a result in early 2013, we took further personnel actions including termination of certain individuals. The review of our China operations is still ongoing and no final conclusions can be drawn at this time as to its final outcome. At this time we cannot reasonably assess the timing or outcome of these matters or their effect if any on the Company’s business.
Turning to slide 15, our balance sheet continued to strengthen during 2012. Despite two acquisitions during the year, our net debt was reduced by 53%, due entirely to higher cash balances as the cash and cash equivalents increased by 26% during 2012. The only other thing I’d point out on the slide is that our pension liability increase by 55% during 2012 and this increase is almost entirely due to a lowering of the discount rate.
On slide 16, I show our cash flow statement for 2012. We increased our free cash flow by $34 million year-over-year with all of our free cash flow generation coming in the fourth quarter of 2012. We made modest improvements in our working capital ratio, due to improved DSOs and lower in-transit inventories. While we made progress in 2012, we have a significant opportunity to improve our cash flow over the next two to three years by improving our profitability and lowering our working capital.
Now turning to our financial guidance for 2013 on slide 18. We went through the year with a mix of caution and optimism. While industrial markets appear to be stabilizing and improving, we still see continued weakness in market such as the semiconductor and data storage industries, and continued uncertainty in U.S. academic markets. Additionally we anticipate that a meaningful proportion of our growth and profitability will be skewed towards the back half of the year, so we’re taking somewhat cautious start to what is sure to be a very busy year.
For the full year 2013, we expect to generate reported revenue growth of approximately 4% to 5%. Our currency assumptions are that exchange rates are roughly in line with today’s rates. On the bottom line we expect to generate approximately 6% to 10% growth in non-GAAP earnings per share in 2013, when compared to the year of 2012. In addition in 2013 we expect to incur $20 million to $25 million of restructuring charges related to the facility exits in CAM and BEST, and the ramp up of our outsourcing initiatives in other divisions.
We expect that these programs will lead to more than a 150 employees leaving the Company or being transferred to a contract manufacturer or other strategic partner over the next 15 months. We will continue to evaluate additional optimization programs that could impact 2014 and future years as well.
Finally, please keep in mind that Q1 2012 was a very strong quarter for Bruker with revenue growth of nearly 14%. We’re not entering 2013 with as much momentum as we entered 2012, so we’re expecting modest revenue growth in the first quarter of 2013 and non-GAAP EPS could even slightly decline from Q1 2012 levels.
In contrast, Q2 2012 was a very weak quarter for Bruker and we’re looking to do better in the second quarter of 2013. This commentary further highlights that Bruker’s business remains lumpy when viewed in three month intervals and we believe that a 12-month view is the most appropriate way to evaluate the performance of our business.
With that I’ll turn the call over to Joshua to begin the Q&A session.
Marcie, please assemble the Q&A roaster.
(Operator Instructions). Your first question comes from Tycho Peterson from JP Morgan.
Tycho Peterson - JPMorgan
You guys have started to show some nice SG&A leverage. So just wondering if you can talk a little bit more about, what the drivers there have been and then the sustainability of some of those trends in particular on the SG&A line.
Sure Tycho, we obviously after Q2 put tighter controls in place in the second half of the year. So some of the improvement you see in the quarter is related to that. But as we head into 2013 I would say in all of our businesses we are pushing for a greater level of discipline around SG&A spend. We’ve had some pretty significant increases in some businesses over the last couple of years and in 2013 we’re looking for those businesses to earn a better return on those investments.
That said, we are also continuing to make investments, particularly in G&A around strengthening the finance function and starting to invest in some IT capabilities. So that will offset some of the savings that we’re generating in the businesses as well.
Tycho Peterson - JPMorgan
And if we think about your guidance you’re assuming the environment’s unchanged. Obviously sequestration could change a lot. Can you just talk about maybe the sensitivities in own assumptions, around sequestration if that goes through?
Well, Tycho this is Frank. As you know, our U.S. revenue overall is less than 20% of our revenue and we generally figured that directly or indirectly related NIH funding is maybe 3% to 4% of our revenue. So if that gets all sorted out, we’ll happy to see an uptick in that into that 3% to 4%, perhaps in the second half of the year. But right now we are not modeling that, we're modeling the present uncertainty which leads to very restrained academic spending in the United States.
Tycho Peterson - JPMorgan
And last one on backlog conversion times. This has obviously been a focus for people over the past year. Can you just talk a little bit about some of the initiatives to improve backlog conversion and then maybe how we should be thinking about cash flow expectations for ‘13?
We're making some progress on backlog conversion and there's more progress to be made in 2013. In fact quite a bit of our business planning for 2013 in a number of the divisions is really also focusing on that. A nice example in 2012 where we've really accelerated backlog conversion, maybe the Deltonics LifeScience division, where we really now have a higher speed to the entire flow to cash process. I think there are other divisions like AXS which is now part of the BMAT group where progress has been slow and we're looking forward to accelerating that quite a bit in 2013. So steady progress, more further to go.
Tycho, on cash flow; I think we're not going to give guidance today on cash flow. We will probably update that later in the year. What I can tell you is that obviously we're expecting some improvements from profitability and better management of inventory for sure. I guess a headwind though that's going to offset that somewhat is we've got somewhere in the neighborhood of $20 million worth of tax payments to make in the first quarter related to tax audit settlements that are already fully accrued and I would say that alone is a pretty substantial item, that is not something you expect to occur year over year. So once we get through the first quarter, we'll have a better sense on that.
Your next question comes from John Wood with Jeffries.
Jon Wood - Jeffries
Frank or Charlie, you guys normally give the backlog I think once a year in the 10-K. Are you in a position to do that on the call today?
Our backlog is in the neighborhood of $1 billion. This remains rather high. I cannot comment on the 10-K right now.
The backlog's still healthy John. We are actively looking to drive down, with better conversion in some of our businesses and at this point, I think it's healthy entering ‘13 is the best we would say.
Jon Wood - Jefferies
Okay and just directionally, how are the order trends in the fourth quarter? I think you have talked about orders being down modestly in the third quarter. Can you give us a sense, at least qualitatively of the order trend in the fourth?
Orders were soft in the fourth quarter. There is some comparability issues. In the fourth quarter of 2011 we had a very, very large multi-year orders from some BEST customers and those orders tend to be placed once every three years or so. So, the kind of the comparison is skewed a little bit. If you strip that out, the order of growth rate in Q4 was still kind of flat to slightly negative but again Q4 ‘11 was very strong.
Jon Wood - Jefferies
At least on the CapEx side Charlie, can you share a budget for ‘13 on the CapEx side?
We are not going to guide to that specially John. I expect it to be lower than 2012 but we are still in an investment period. If you look at Bruker over a five year view, certainly the last couple of years have been higher CapEx but the three years preceding that were actually quite low. So, we are in the mist of some building projects and likely to start to take on some IT projects that contribute to CapEx, So to ballpark it ‘13 it’s probably in the 55 to 60 range.
Jon Wood - Jefferies
And then last one, have you guys thought about new intermediate term goals, at least when, you have got your arms around enough to kind of to initiate revise, now it's called three to five years goals. Any thoughts on that will be great.
So again I understand the desire to have that information at this point where we don’t have any plans to provide mid-term goals. As Frank has pointed out we have got several new or newly promoted members of management who are getting their hands around their business and the full potential of those businesses. We would like to go through a full planning cycle this year with that management team so that we can commit to a plan that we feel good about. So, it’s unlikely that we will be providing mid-term guidance during this year.
Your next question comes from the line of Ross Muken from ISI Group.
Vijay Jayant - ISI Group
This is Vijay in for Ross and thank you for taking my question. Maybe a quick housekeeping question. Can you guys share what the organic growth for the segment was BSI versus BEST and what is implied in the 4% to 5% guidance for ‘13; sort of what is the puts and takes?
2012, the best organic growth rate was higher than the BSI growth rate, but the BSI organic growth rate, I don’t have an exact number right now, we’re still quite high. In 2013 it is going to be much more similar in terms of growth rates.
And we can do that housekeeping offline.
Vijay Jayant - ISI Group
And Charlie, now that you've sort of been in the CFO role for a while, can you share with us sort of what has surprised you on the positive or the negative side and what has been the feedback from the employee base?
Sure, I don't have much new to report on that front. I have known the company for some time. So I know the strengths here and I know the things that we need to work on. I think in terms of opportunities for improvement, Frank and I have commented on that at length in the past. We really need to work on tightening up our management practices and systems related to that, so that we have better insight and better control over the businesses. And we also need to get better at operational practices, specifically in our factories and in our supply chain to drive down our consumption of inventory.
So those are consistent themes that we've certainly been pounding over the last six months and prior to that. I think the response that I have seen has been quite positive. Part of this is making sure that we are getting the message to folks and making sure that they have the incentives and the tools to do what we want them to do. So at this point I feel like we are taking some important early steps and that the employee base is quite receptive.
Yes I think the employee and staff response to the changes and the CFO and financial organization, the group reorganization, the promoted or newly hired group presidents I think is really excellent. I think everybody sees this is as very positive.
Your next question comes from Isaac Ro with Goldman Sachs.
Isaac Ro - Goldman Sachs
Frank, just wondering if in general you could talk a little bit about emerging markets, how did it do in the fourth quarter and what are you guys seeing in China in particular as we move into 2013?
Isaac, I know we had a good start in January, that may be in part due to the timing of the Chinese New Year, where a lot of orders were placed in January. Except for our Bruker optics division, which was a bit slower in China in 2012, I think overall China was solid, not exceptional. So, emerging markets, we have seen continued strength, more than we had expected in 2012 in Latin America with particularly Brazil being quite a bit stronger in the second half of the year than we would have expected.
Russia was solid in 2012, though not as strong as in 2011 but remaining at a quite a high level. Our business in India was solid, actually quite good. I think our NMR division had a record year in India in 2012 and we’ve seen some ongoing evolving strength in the Middle East and in Africa, particularly Saudi Arabia but also a number of even countries like Egypt investing a little bit, but Saudi Arabia really being the driver in some of the Gulf States there. That perhaps gives an overview.
Isaac Ro - Goldman Sachs
And then maybe just a follow up on the NMR comments you made. Could you give us a sense of where you think you are in that position in terms of the pricing environment, is it healthy? And maybe from a product cycle standpoint, do you see anything in the works for the next 12 to 18 months that could be material in expanding the market or advancing these technologies specifically?
Not to frustrate you but on the latter of course we always have new product and R&D plans and those we tend to discuss ahead of time. We’ve had strong product introductions in the last few years. We’ve done quite well and in NMR, particular strength and ultrahigh field NMR and DNP-NMR which is sort of a new flavor but for that new flavor, because it’s a true new scientific capability, there were a lot of special funding projects in the last couple of years; for instance first in France and then in Germany and I think there is an opportunity to gradually expand the NMR into new applications into applied markets, food composition, food authenticity, same for wine and beverages, fruit juices and I think we’re leading the way in that.
Isaac Ro - Goldman Sachs
Great, let me just squeeze in one more for Charlie. Charlie you went in a lot of detail on the working capital, a potential, but I was wondering if you could maybe break it down for us systematically over the next couple of years, what you think the two or three biggest opportunities are to improve the free cash flow of the business?
The opportunity one, two and three is around inventory, really. We have got to really improve our strategic procurement practices as it’s a key driver, shortening the length of our supply chain and our in-transit cycle is another, and then finally outsourcing. We are pretty vertically integrated in most of our businesses, have done outsourcing already, but really need to step that up quite a bit in some of our European locations. And so as we push on outsourcing that should take some inventory off the balance sheet as well. So I think it’s really about inventory.
(Operator Instructions). Our next question will be taken from Amanda Murphy with William Blair.
Amanda Murphy - William Blair
A question on 2013 expectation. So you talked to the sort of back half skew if you will for EBIT margin expansions; but I’m curious, you have mentioned a number of different sort of cost improvement initiatives you have in place, and I know it’s still early but can you just help us get a perspective on which ones might benefit you in ‘13 and what specific initiative could maybe drive you to the higher end of your guidance range versus the lower end?
Sure, yes. There is obviously, I only mentioned a selected list of things that we’re working on. It turns out that list is definitely skewed towards the back half. If you look at the manufacturing facility exits in CAM and BEST, both are our European facilities, and so we are working with works councils through, kind of the appropriate process and those exits really don’t occur until about Q3 timeframe. So little benefit in the current year.
Similarly with the larger outsourcing programs that I have mentioned, again those are well underway in terms of planning but don’t occur until the Q3, Q4 timeframe. So those activities will be a lot of work this year and not a lot benefit this year but obviously they have benefit that accrues into the future.
Aside from that there is a whole portfolio of other things that we’re working on to improve margin expansion. What could drive us to the higher end? Obviously, growth at the higher end of our range is going to help and as we look at programs in sales and marketing and in our manufacturing environment to lean out a little bit, those are the things that don’t have quite as long a lead time associated with them and things that we’re kicking off really this year.
Amanda, this is Frank. I would maybe add to that that some of the outsourcing initiatives probably will have an impact on working capital first and on margins with about a half year to a year delay and so as some of the working capital comes of our books you may see that earlier but of course that’s built into our 2013 guidance.
Amanda Murphy - William Blair
Got it and I think, you started your systems infrastructure review in January, maybe too early but and I think you’ve also mentioned some expected spend on the IT side. Do you have update there in terms of what you’re looking at from a systems perspective near-term and long-term?
Yes, not much new to report. I’ll segment it; we’ve got a financial systems project which is well underway. That’s relatively modest investment in the $3 million to $5 million range. I think the study that you’re referencing is obviously you want to take a look our ERP infrastructure and layout a roadmap for that for the future. That study has not commenced at this point but it is something we will undertake this year.
Amanda Murphy - William Blair
Okay and then last one in terms of R&D. I know you talk to the opportunity in the long-term to get leverage there, but it seems like from a quarter-to-quarter standpoint there may be some lumpiness just around project timings. So I’m curious if you have any perspective on how to think about that over the next quarter or over the next few quarters here?
Yes Amanda, there will be some lumpiness. I think that’s really quite inherent. It’s very difficult to predict that. We cannot predict in which quarter some of this lumpiness may fall quite honestly. So from time to time there will be some lumpiness built, particularly part of the BioSpin group, but there are also some larger systems orders occasionally in BEST or in the BMAT group. We'll highlight those from time to time, if a quarter is particularly affected but we cannot predict which quarter this may fall in, given our conservative revenue recognition upon full written acceptance.
Your next question comes from Derek De Bruin with Bank of America.
Derek De Bruin - Bank of America
So one of the questions has been answered but I'm just wondering, could you give a little bit more color on the CAM business and sort of what organic revenue growth were in that business. I'm just curious to see how it's been tracking since the last year?
So Derek I'll take that one, it's Frank. We had decent but not great CAM growth. We had hoped for more growth, but there's definitely been a retrenching in 2012 in the applied markets and we think even some of the applied markets have shrunk in 2012, perhaps with a recovery late in the year, too early to tell; and accordingly our CAM growth rate was lower than we expected internally. Nevertheless, it was above the corporate average still and our CAM business, which was sort of at a $60 millionish revenue run rate when we took it over has now recovered and exceeded its historical highs at about a run rate of $100 million.
Derek De Bruin - Bank of America
Okay, great that's very helpful. You mentioned some toughness in the semiconductor and data storage industries. Can you just elaborate on that and just sort of how you see that pacing out through the year.
That's been pretty pronounced. We did have some good orders actually in the first half of the year, but those had to do more than technology transitions. So rather big companies like Intel or IBM or Samsung, continuing to invest for the next node with smaller feature sizes or going to 450 millimeter fabs. So we had some good orders for that and we continue to have some of that in our backlog.
But the more cyclical part of the industry I think is it may have reached its low in the second half of this business cycle, in the second half with more recent orders in data storage and semiconductor being very low and now I'm not talking about our own data but if I look at some companies, some of the larger companies in that space, their more recent announcement have been a little bit more positive.
So maybe we are through the bottom of the cycle there but we have a non-cyclical part of the business which is doing well and a somewhat cyclical part of the business, which for us is less than 2% to 3% of our revenue but a division like BNS we will see it to a greater extent of course than Bruker overall.
Derek De Bruin - Bank of America
And Charlie, the non-GAAP gross margin was about 60 basis points year-over-year and some of that clearly was due to the Rosatom license, that’s there. I guess just qualitatively for 2013, do you expect the gross margin on an absolute basis to be up year-over-year?
Derek the Rosatom impact is pretty meaningful in 2012 and then it has a follow on impact in 2013 as well. Obviously, it was about $16 million of revenue in ‘12 at essentially a 100% gross margin. So that’s a big uptick from ‘11 to ‘12 and then from ‘12 to ‘13 it goes from 16 down to 6. So you get a $10 million of margin siphoned off. So, at this point I would say, absent that, we are absolutely looking for gross margin expansion with that included. Again we are not guiding to that, so we’ll kind of take that up later in the year.
Your next question comes from Tim Evans with Wells Fargo.
Tim Evans - Wells Fargo
A couple of product-related questions here. Can you comment on your expectation at this point for the MALDI Biotyper FDA approval and then the other question I had was related to kind of your outlook for the NMR business. Do you anticipate increased competition there going forward?
This is Frank. I’ll take that. We are working on FDA clinical trials in the United States. The MALDI Biotyper last year had continued to have double digit organic growth above the corporate average, with quite a bit of uptick also in non-clinical applications in regulatory agencies, including in the United States that of course do not need FDA approval. So FDA approval, we are hoping for it in the second half of the year and we are working very diligently with the FDA on that. Of course there cannot be no guarantees on timing or whether or not we can achieve that, but we are hopeful. On the NMR side of the business; I’m sorry, what was your specific question there Tim?
Tim Evans - Wells Fargo
I’m just wondering kind of what your outlook there is if you could comment but just qualitatively for 2013 and then also are you expecting an increasingly competitive environment?
Well it's always been competitive but we are doing really very well competitively in NMR. I think we expect weakness in NMR in the United States because of well-known funding problems or at least funding uncertainty. The rest of the world, it's a reasonable market and academic markets there particularly in non-Mediterranean Europe have held up quite nicely. Same is true for much of Asia, where it goes along in all academic funding investments, where the commitment to academic research and funding, that has to do something with the long term competiveness of nations and most countries in Asia Pacific and most countries in Europe are investing; and plus many developing regions, if you want to call them developing, including major economies like Russia or India or Brazil.
So I think in NMR there is of course the competitive angle. I think it is more of the expansion into new markets and applications that may drive that, plus of course the expansion of our pre-clinical imaging product lines beyond pre-clinical MRI into other optical aspect, micro CT and Magnetic Particle Imaging modalities.
Your next question comes from Jon Groberg.
Charlie, you obviously talked about a number of cost initiatives and number of things taken in the fourth quarter. Obviously you are planning some more in 2013. I was just wondering, can you put some specific numbers around kind of what the cost savings ultimately is expected to be from the initiatives that you put in place, that you know about and also on the revenue line, it sounds like you are taking some initiatives to actually rationalize that line a little bit, maybe what the impact is on the topline from some of these initiatives?
Sure, on the topline I wouldn't say they we’re rationalizing that other than we're looking for greater discipline in some of our businesses like CAM, around pricing which could mean that we could walk away from some business that we otherwise might have chased in the past.
Similarly, in invest there are some revenues, again that we won't be pursuing, none of which was high margin. So, I wouldn’t say we’re rationalizing that per say but we are definitely being more disciplined in some of our businesses on the top line.
On the bottom line, the basket of programs that I referred to in CAM, BEST and then outsourcing, this year, the timing gets a little difficult to predict at the end of the year. That’s why I said 15 months in the script but say between now and 15 months out that basket of programs will be more than a 150 employees, maybe even upwards of 200 employees would leave the company during that time frame, many of them would get picked up by our contract manufacturing partners and other strategic partners. So we’re doing it in a responsible way. That could yield run rate benefits north of $10 million, perhaps better in 2014 and we’ve not guided to the working capital benefits but they’re pretty meaningful as well.
So as I’ve stated, think of this as kind of step one or wave one; again there has been plenty of good things happening but we’re going to put a circle around this group of initiatives and call it wave one and as we go through planning this year, we’re going to be thinking about what’s in wave two, what’s in wave three.
And so for ‘13, given currency and given, I don’t how you want to look at some of the revenue initiatives you’ve just mentioned and I don’t know if you have any other divestures planned or anything but what’s your organic growth outlook for ‘13? I don’t know if I missed that.
So, we’ve guided 4 to 5, I think the net impact of acquisitions less the impact of divestitures is something like 50 basis points.
And then lastly, were there any one time items in the Q4 gross margin? I think that whole 60 million was in 3Q for Russia deal, if I’m not mistaken?
The Russia deal was the third quarter. The fourth quarter charges, yes, in the GAAP results it would have been through cost of goods sold because it was in impairment of factory assets, basically they were written down as a result of the exit decisions that we made.
In terms of that non-GAAP to 47.7% there is no any kind of onetime benefit there?
No. There is nothing funky in there.
Your next question comes from Dan Leonard with Leerink Swann.
Dan Leonard - Leerink Swann
A follow up to Derik’s question on CAM. It looks to me that the operating loss in CAM in 2012 was well higher than 2011, even though sales were higher. So my question is, one, is that true? And then two, how much of your expectation that you are going to move closer to breakeven in CAM in 2013? How much of that comes from topline growth in CAM as opposed to some of those margin improvements you talked about, some of the cost reductions in Europe?
Dan I will take that. This is Frank. First of all it is true that our operating loss was higher than in the prior year in 2012. And second of all, we are budgeting some but modest CAM revenue increase in 2013. So that’s another way of saying that the primary drivers for reducing that operating loss are in OpEx savings and as Charlie had mentioned in going from two factories, one in Europe one in the U.S., plus of course, a lot of outsourcing down to one factory through the course of the year. So Charlie, you wanted to elaborate on that.
Yes, I think, so that’s correct. In addition to the benefits from the factory consolidation we're also making some changes in the field as well. But to Frank’s point, we’re still targeting growth for CAM as well. So it’s like, if I got to pin down the improvement I would say it’s half from growth, half from kind of other actions that we’re taking.
Your next question comes from Sung Ji Nam with Cantor Fitzgerald.
Sung Ji Nam - Cantor Fitzgerald
Just two quick questions. Maybe, could you talk about the competitive dynamics for your BSI in general and kind of how that might be impacting pricing in the current environment?
Okay, this is Frank, I will take that. I think the competitive environment; I think there was some pricing pressure, certainly in middle of year. Perhaps it’s continuing, but I think there was a little bit of more of an economic pickup towards the end of the year. But when the markets were particularly weak, which had that feeling in the middle and it went to the third quarter, early fourth quarter, we saw some pricing pressure, I would say in the applied and industrial markets, and I think other than that there is no unusual competitive pricing margins right now. I think generally pricing tends to be rational or perhaps more rational in general as I look over the BSI portfolio.
Sung Ji Nam - Cantor Fitzgerald
Okay great and then one quick question for Charlie. Maybe talk about your tax rate for next year, slightly higher than what I’m calculating this year? And so was wondering, things like R&D tax credit, I know there is onetime benefit this year in 2012 as well but how would this be R&D tax credit benefit even that was recognized last year?
Sure I mean, our estimate around tax rate for 2013 is in the ballpark of where we were in ‘12. Remember that we’re not really a tax payer in the United States, so some of the benefits you’re talking to don’t necessarily accrue to us in this year. So our tax rate is more impacted by the geographic mix of profits and losses and whether those losses are tax benefit or not. So that’s the big part of some strategy work that we’re doing this year to look at our tax rate?
Your next question comes from Ben Harris with EBS.
Ben Harris - EBS
The scale back for your reference for some of the best projects, is that related to the fault current limiter or the growth magnet work that you’ve talked about as being drivers in the out years?
Both correct Ben, This is Frank; yes indeed the fault current limiters project ran into protracted technical problems and given the uncertain go-to-market strategy and the long term nature of the opportunity we reduced that and stopped that project certainly for the time being. As Charlie pointed out we could conceivably resume that at some point in the future but that’s certainly not planned for the 2013 or ‘14 for that matter.
So we’re also cutting back on some of the magnet opportunities from the BEST business. This has nothing to do with our BioSpin, NMR, FTMS, or MRI magnets where our projects did not yield promising gross margins, I would say and therefore we decided not to try to scale that up. That relates to some of the restructuring charges we took and the plan to exit one European factory in Germany in 2013, at BEST.
Ben Harris - EBS
And then just on some of the operational exercises that you guys have underway, with the changes that you made so far, can you give us a sense of how much or maybe what percentage you think you have left just in terms of headcount changes in order to put the right people in charge of the realigned businesses?
I think we've made a lot of progress in putting in the right leadership. Separately, there's the issue of will some of the outsourcing and working capital, will that lead to transfer of employees to other partner companies. That is really in the early stages still, if you are referring to that.
Your next question comes from Peter Lawson with Mizuho.
Peter Lawson - Mizuho
Just wondered if you talk through the SG&A uptick in Q4 and how should we think about that in 2013?
There were some investments in Q4 driven by me candidly, that we're working on to strengthen some of our finance organization and some of our systems that will continue into ‘13, offsetting our productivity gains we're gaining in the field and other places. I'm not going to guide to specific line items for ‘13, other than to say that we remain very conscious of the fact that we need to extract some operating leverage, better than we have in the past.
Peter Lawson - Mizuho
And then Frank, were there any changes in the environment for U.S. academic spending in the quarter versus last quarter?
None that I can see. I think the tax deal that averted the fiscal cliff or whatever the wording is in Washington did absolutely nothing to give more confidence to the academic decision makers. So I think the U.S. academic funding situation and especially the uncertainty I think is really bad and at this point we're simply, perhaps conservatively assuming that that's not going to change soon. And if it changes by second or third quarter, then quite honestly until that results in additional orders and in additional revenue which you know orders-to-revenue for us tends to be sometimes a two quarter lag. If this gets sorted out politically, I don’t think it’s really going to help us very much until 2014. So, we have assumed the somewhat dire state of affairs in U.S. academic spending throughout 2013 that we saw in the last few quarters of 2012. Sorry, that’s not a very upbeat message but that’s basically how we modeled it.
Peter Lawson - Mizuho
Now is that the main thing that’s kind of pulled you back from that 9% to 12% organic that you’ve done historically for when you guided in 2013?
No, I think there is a number of factors of why there is a slowdown, perhaps the shrinkage in the applied markets and in the middle and second half of 2012 there is a weakness in semi-conductor and data storage. There is of course continued concern over Europe although the commitment to academic spending and research appears to be generally strong. So there are many areas that make us somewhat cautious on 2013, but as Charlie said, it's not all caution, it’s a mix of caution and optimism but it certainly is a mixed picture, it’s not all the economic strength.
Peter Lawson - Mizuho
And just finally on the CAM business, do you think that the performance and profitability actually improved in Q4?
Even more so for a division, I think one has to look it over the last 12 months to get a good assessment. So there has been some good orders at the end of Q4. So a number of our division including CAM, that may be a little bit more cyclical suggested that maybe towards the end of the year the economies are beginning to turn a little bit but I think those are early tell-tale signs and may be they are not tell-tale signs at all, maybe they are just statistical fluctuations, we will see.
I think it’s too early to tell and I think for CAM 2012 with some growth and some excellent new products but none of them really with an effect yet until 2013, in fact a further product introduction just last week that’s rather important for CAM of that new Aurora Elite ICP-MS. So, we’re excited about the product portfolio. We think we're fixing the field issues, we’re restructuring the factories but there’s a quite a bit of work to be done and I wouldn’t take any particular quarter as a tell-tale sign but we’re very much driving towards making a lot of progress this year, towards breakeven, obviously not with breakeven yet this year.
The next question comes from Kenneth Hershberg with Hershberg Capital.
Kenneth Hershberg - Hershberg Capital
Congratulations on your improvement. My question has been answered, thank you.
That is all the time allotted us for today's conference call. I would now like to turn the call back over to Joshua Young for closing remarks.
Thank you. I would like to thank everybody for joining us this morning. We hope to see you many of you at the Cowen and Barclay’s Healthcare Conferences in March. We'll also be featuring many of our new products at the Pittcon Conference for those investors that will be attending other conferences in Philadelphia. Thank you for your attention and have a good day.
This concludes today's conference call. You may now disconnect.
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