Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Bruker Corporation (NASDAQ:BRKR)

Q2 2011 Earnings Call

August 3, 2011; 09:00 am ET

Executives

Frank Laukien - President & Chief Executive Officer

Bill Knight - Chief Operating Officer & Interim Chief Financial Officer

Tom Rosa - Chief Financial Officer of BEST Division.

Analysts

Ross Muken - Deutsche Bank

Isaac Ro - Goldman Sachs

Peter Lawson - Mizuho Securities

John Wood - Jefferies

Tycho Peterson - JPMorgan

Dan Arias - UBS

Stacey Desrochers

Hello. You have joined the Bruker Corporation’s second quarter and first half 2011 earnings conference call. Sorry for the delay. We had some technical difficulties with the phone company.

I am Stacey Desrochers, Treasurer and Director of Investor Relations. With me on today’s call are Frank Laukien, Bruker’s President and Chief Executive Officer; Bill Knight, Bruker’s Chief Operating Officer and interim Chief Financial Officer; and Tom Rosa, the Chief Financial Officer of our Bruker Energy & Supercon Technologies division or BEST.

Before we begin let me briefly cover our Safe Harbor statements. Various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those described in the company’s filings with the Securities and Exchange Commission.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and therefore you should not rely upon these forward-looking statements as representing our views as of any date subsequent to today.

In addition to the financial measures prepared in accordance with Generally Accepted Accounting Principles or GAAP, we will discuss certain non-GAAP financial measures, including adjusted EPS, adjusted operating income, adjusted operating margins and adjusted net income, which are non-GAAP measures that excludes certain items.

We exclude these items because they are outside of our normal operations and/or in certain cases are difficult to forecast accurately for future periods. We believe that the use of non-GAAP measures helps investors gain a better understanding of our core operating results and future prospects, consistent with how we measures and forecast the company’s performance, especially when comparing the results to previous periods or forecasts. A reconciliation of our GAAP to adjusted numbers is available on our press release issued earlier today and is located in the Investor Relations section of our bruker.com website.

Today Frank will provide an update on the business and certain financial highlights. Tom will describe the financial results of our BEST segment and then Bill will discuss the financial results of our Bruker Scientific Instruments segment.

I will now turn the call over to our President and CEO, Frank Laukien.

Frank Laukien

Thank you Stacy and good morning everyone. We appreciate you joining us today. Again, we apologize for the telephony issues. I think at this point we are still without a conference call operator. Hopefully that will resolve itself prior to the Q&A part.

Let me then continue. In the first half of 2011, Bruker delivered solid revenue and excellent bookings growth with revenues increasing by 31% over the first half of 2010 and bookings growth of more than 50% year-over-year, of which more than 20% was organic bookings growth.

We ended the second quarter with another record in backlog, which positions us well for the second half of 2011 and beyond. Our rapid revenue and bookings growth is driven by healthy demand, particularly in our industrial, hi-tech, clinical, security and applied markets and even more so by excellent new product market share and competitive momentum in essentially all of our divisions.

We expect double digit organic revenue growth in the third quarter and with current foreign exchange rates and our excellent bookings and record backlogs, we now expect to reach revenue in the range of $1.60 billion to $1.62 billion, which is $30 million to $50 million higher than the original high end of our 2011 revenue goal of $1.57 billion.

Our solid competitive positioning and new product momentum is further underlined by a 230 bips or basis points improvement in adjusted gross profit margins in the first half of 2011, compared to H1 of 2010. This again bodes well for our margins and profitability, once we see expense leverage from our major jump in bookings and backlog.

However, while we see better than expected revenue and margins from our new Bruker Nano Surfaces division, which we acquired from Veeco in October of 2010, it is taking us longer than expected to turn around the Bruker Chemical and Applied markets or CAM Division. That said, we are making a lot of progress with CAM and as of the end of the second quarter of 2011, CAM has now completed the final two factory moves for GC-MS systems within California and for ICP-MS systems from Australia to our new CAM factory and division headquarters in Fremont, California.

CAM also has been very active in new product introductions with the new ICP-MS product or roll out being introduced already at Pittcon earlier this year and the new GC-MS product lines called SCION, just announced two weeks ago.

Overall, our expenses have grown faster than anticipated in the first half of 2011, partially due to current 2FX currency and partially due to commission expenses being due in part when orders are received, while our bookings have grown considerably faster than revenue in the first half of 2011.

Early in the second quarter we declared a hiring moratorium with very few exceptions and we are attacking discretionary spending and expenses, while at the same time, trying not to restrict our rapid expansion this year.

For the full year 2011 we expect to achieve our BSI segment adjusted EPS target of $0.98 to $0.93 per share, which would result in an increase in adjusted EPS of 18% to 22% for the full year. However we expect to achieve our fiscal year 2011 EPS growth in a different manner, than anticipated when we announced our 2011 goals in February. With higher revenue growth, better than expected growth margin expansion, but higher operating expenses.

Moving on to additional financial highlights of Bruker Corporation, revenue in the second quarter of 2011 was $401.2 million an increase of 33% year-over-year or a currency adjusted increase of 21% when compared to the second quarter of 2010. This corresponds to an organic growth rate of 7.5%, in which we disregarded estimated CAM revenue in the first six to seven weeks of Q2 2011, so that this represents a true estimate of our organic growth rate.

For the first half of 2011, revenue was $758.2 million, an increase of 31% over the first half of 2010 or a currency adjusted increase of 24%. Adjusted operating income in the second quarter of 2011 was $52.2 million compared to $42.4 million in the second quarter of 2010, an increase of 23%. For the first half of 2011, adjusted operating income was $89.8 million compared to $71.9 million in the first half of 2010, an increase of 25%.

In the second quarter of 2011 our adjusted EPS was $0.20 per diluted share compared to second quarter 2010 adjusted EPS of $0.16 per diluted share. Adjusted EPS for the first half of 2011 was $0.34 per diluted share compared to $0.27 per diluted share in the first half of 2010, an increase of 26%.

We continue to be very innovative and during 2011 we have already launched more than 25 new high performance analytical products, which address an expanding array of life science from a biotech, clinical, food and food safety, pertochem environmental, homeland security, materials and nanoscience, as well as academic research and educational markets.

In particular we believe that the novo SCION triple quads introduced in July, just two weeks ago, represents game changing technology and will leave and greatly accelerate the inevitable change over of the GC-MS market to GC triple quadruple mass spectrometry technology, to deal with today’s ever more challenging analytical problems and matrices in environmental, forensics, doping and food safety applications.

Concerning reductions in US government spending task and signed into law yesterday, we estimate that sales to the US government will represent 2% of less of Bruker’s 2011 revenue and primarily US NIH or NSS funded academic business will represent 5% or less of Bruker’s 2011 revenue.

So overall a good first half of the year with a large number of new product introductions, exceptional bookings trend and solid increases in revenue, adjusted gross profit margins, adjusted operating income and adjusted EPS.

I will now turn the call over to Tom Rosa, the Chief Financial Officer of our BEST division.

Tom Rosa

Thank you, Frank. Revenue for the BEST segment during the second quarter of 2011 increased by 55% to $28.1 million compared to $18.1 million in the second quarter of 2010. Excluding the effects of foreign currency translation, second quarter 2011 revenue increased by 38%. Revenue for the BEST segment during the first half of 2011 increased by 34% to $52.1 million compared to $38.8 million in the first half of 2010 or by 27% excluding the effects of foreign currency translation.

Adjusted operating income for BEST in the second quarter of 2011 was $0.6 million compared to an adjusted operating loss of $1.5 million in the second quarter of 2010. For the first half of 2011, the adjusted operating income for BEST was $0.1 million, compared to an adjusted operating loss of $1.8 million in the first half of 2010.

The adjusted loss per share for the second quarter of 2011 for the BEST segment was zero compared to a loss per share of $0.01 in the second quarter of 2010. The adjusted loss per share for the first half of 2011 for the BEST segment was $0.01 compared to an adjusted loss per share of $0.02 in the first half of 2010.

So far in 2011 we have continued to make progress on the commercialization efforts of our new products. BEST announced an order for three super conducting crystal growth magnets from a European customer. BEST also announced that it passed factory acceptance test and shipped its first super conducting crystal growth magnet system, which was ordered in 2010 by our Korean customer.

Super conducting crystal growth magnet systems are used in the semi conductor industry, especially for larger diameter ingots, in order to improve the quality of monocrystalline silicon. BEST is also working on demonstrating the positive effect of super conducting crystal growth magnet on photovoltaic conversion efficiency and manufacturing yield of single crystal silicon, thus potentially increasing the overall cost effectiveness of solar power.

BEST external backlog as of June 30, 2011 increased by approximately $19.4 million or by 13% from the end of 2010. Backlog for BEST has almost doubled over the last 12 months to $171.6 million as of June 30, 2011 compared to $94.9 million of external backlog as of the end of the second quarter of 2010, an increase driven not only by LPS orders, but also by orders for RF cavities, couplers and other super conducting devices from customers across the globe. Overall BEST has been making good progress executing on its business plan during the first half of 2011.

I will now turn the call over to the interim CFO of Bruker Corporation, Bill Knight.

Bill Knight

Thanks Tom. Since Frank has already commented on the overall BRKR financial highlights and Tom provided a summary of our BEST segment, I will now focus primarily on Bruker’s Scientific Instruments or BSI Segment.

Before I talk about the results for BSI, I wanted to briefly comment on the 8K that we filed with the Securities and Exchange Commission yesterday. As the 8K stated, this is an ongoing investigation and we are not able to comment any further on details or the status of our efforts beyond what was included in the 8K, but will at the appropriate time.

Back to the BSI. During the second quarter of 2011, on the top line for the BSI segment, revenues increased 33% to $377.9 million compared to $284.9 million in the second quarter of 2010. Excluding the effects of foreign currency translation, revenues increased by 21% in the second quarter of 2011.

For the first half of 2011, BSI revenues increased by 31% to $713.7 million compared to $545.2 million in the first half of 2010. Excluding the effects of foreign currency translations, revenues increased by 23% in the first half of 2011 and excluding the effects of foreign currency translation and acquisitions, our BSI organic growth rate was 5% in the first half of the year.

Now moving further down the income statement, adjusted gross profit margin for BSI in the second quarter was 49.5% and 49.4% for the first half of 2011 compared to 47.0% in the second quarter and first half of 2010, a 250 basis points and 240 basis points respectively increase year-over-year in adjusted gross profit margins.

Adjusted BSI operating margin in the second quarter of 2011 was 13.7% compared to 15.7% in the second quarter of 2010. For the first half of 2011, adjusted operating margin for BSI was 12.8% compared to 13.7% in the first half of 2010.

GAAP net income for the BSI segment in the second quarter of 2011 was $22.4 million or $0.13 per diluted share compared to net income of $25.1 million or $0.15 per diluted share in the second quarter of 2010.

GAAP net income for the BSI segment during the first half of 2011 was $36.5 million or $0.22 per diluted share, compared to net income of $42.3 million or $0.25 per diluted share in the first half of 2009.

Adjusted net income for the BSI segment in the second quarter of 2011 was $34.0 million or $0.20 per diluted share compared to adjusted net income of $28.8 million or $0.17 per diluted share in the second quarter of 2010.

Adjusted net income for the BSI segment during the first half of 2011 was $59.2 million or $0.36 per diluted share compared to adjusted net income of $48.0 million or $0.29 per diluted share in the first half of 2010.

Before I turn the call back over to the operator for Q&A, I wanted to briefly discuss certain cash flow and balance sheet metrics that relate to the overall Bruker Corporation. Cash flow from operations in the first half of 2011 with a use of cash of $25.6 million, compared to asserts cash of $53.1 million in the first half of 2010. Our capital expenditures or CapEx were $31.2 million in the first half of 2011 compared to $10.7 million in the first half of 2010.

Capital expenditures were unusually high in the first half of 2011 due to significant investments in BEST R&D and production capacity, along with the moves of three former variant factories and associated SAP ERP implementation to our two new CAM division factories in the Netherlands and Fremont, California.

Free cash flow defined as cash flow from operations less capital expenditures with a use of cash of $56.8 million in the first half of 2011, compared to asserts of cash of $42.4 million in the first half of 2010. Inventory levels increased its results and in the use of cash of $82 million in the first half of 2011 and this inventory build up is directly linked to a strong bookings performance during the first half of 2011. We ended the second quarter of 2011 with cash, cash equivalents and restricted cash of $173.1 million and net debt of $114.7 million.

So with that, I will turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Ross Muken with Deutsche Bank. Please proceed sir.

Ross Muken - Deutsche Bank

Good morning. So I’m trying to put the bookings commentary and backlog growth in context with sort of the revenue pull through we are seeing and so if you can just maybe walk us through how your thinking about maybe as a backlog duration or your kind of trending the backlog relative to revenue recognition.

I’m just trying to sort out, you know the sort of back half confidence in that conversion versus the sort of the BSI organic growth that we’ve seen and try to understand the components of backlog and how much of it is coming from BSI also versus BEST.

Frank Laukien

Good morning Ross, good question. So our backlog reach, while we don’t disclose exact backlog, but our backlog right now reaches well above – well beyond two quarters, so we have very good visibility.

Of course some of that backlog is – we will have to get new orders in the next two quarters that will also already turn into revenue quickly, whereas other parts of that backlog you know have extended beyond one years delivery time and revenue recognition.

But it is by far the highest backlog that we ever had and in fact with the growth and with the ramp up, we would have liked to maybe turn even more of that backlog into revenue and organic revenue growth already in the first half, but we had not fully planned for the 50% or greater than 50% bookings growth in the first half.

So we have a little bit of catching up to do, which is not a bad problem, but we are going obviously through a growth spurt now if you like, trying to catch up with the higher than we had planned bookings growth, which as I said earlier for the first half and for the second quarter really we’re greater than 50% and if you take out acquisitions and FX, it was organic growth in the first half or in the second quarter in bookings of greater than 20%.

Ross Muken - Deutsche Bank

Great.

Frank Laukien

Backlog growth, there was a second part to your question, I apologize. Backlog growth has been very strong at BSI and at BEST.

Ross Muken - Deutsche Bank

Great, thanks Frank. Maybe just also and this is more just on sort of the numerical calculations, so I think you said on the call that organic growth all in was 7.5%. Now the implied M&A impact from the math is about 14%, which would be about $40 million or so of M&A revenue.

So I’m just trying to understand sort of that calculation, because it seems like there is not much contribution from variant or the contribution from variant is sort of accounted for different than we had been thinking and so maybe just walk us through kind of what’s in the M&A number and sort of how that plays into the calculate organic growth rate.

Frank Laukien

I don’t know that I can – we’re not usually going into that level of detail, but we certainly did subtract when we calculated the organic growth rate. We didn’t subtract the estimated CAM revenue in the first six or seven weeks of this 2011-second quarter to arrive at a growth rate. So our growth rate was not materially affected, organic growth rate by the fact that we acquired CAM on May 19, 2010. We tried to correct and adjust for that.

Ross Muken - Deutsche Bank

Yes, I guess the point is in Q1 you did somewhere based on what you reported around $60 million of acquired revenue and so obviously this quarter its been about $20 million sequentially and you only did $3 million in Q2 last year. So I’m just trying to understand in the context; the assumption that you only didn’t count the first six weeks and so the quarter was more backend weighted in terms of where revenues came.

Frank Laukien

That is correct, yes.

Ross Muken - Deutsche Bank

Okay. That makes sense.

Frank Laukien

That’s a useful clarification of both.

Ross Muken - Deutsche Bank

Okay, I just wanted to make sure and then lastly on sort of the…

Frank Laukien

Then deferred revenue in the last month, yes.

Ross Muken - Deutsche Bank

On the gross margin commentary, I mean if you think about sort of the steps you’ve taken and kind of the mix of business that we are seeing in terms of relative growth. I mean what sort of the – more of the drivers and some of the coast actions taken, is it leveraging the revenue or it sort of mix improving.

Bill Knight

Its, Bill Knight. It’s several things. Certainly the new products that we continue to introduce as we have stated before do have lower cost designs. We have more volume running through our factories now, which we are able to leverage that fixed factory overhead and gain some benefit and we clearly, the off-shoring sourcing exercise that we started last summer is clearly starting to show some benefit on obtaining high quality, but lower cost components and in some cases minor sub-assemblies that go into our products.

Frank Laukien

And the fourth element on that is really also ASP, Average Selling Price, obviously with the very new product line, with excellent you know and then often unique selling points. When you add additional features or capabilities on your products, we often can get an incremental average selling price for that.

Ross Muken - Deutsche Bank

Great, thank you guys.

Frank Laukien

Thank you.

Operator

Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.

Isaac Ro - Goldman Sachs

Good morning guys. Thanks for taking the questions. Frank, just want to ask a few broader thoughts on academic funding. Clearly I’ve seems this earning season that has raised some concerns and if you can give us some commentary on your confidence in the back, what is it that you have for the back half of this year and then whatever visibility you might have in the next year for some of your longer conversion products. I would be interested to know what you are seeing in terms of cancellation rates and how those has been trending.

Frank Laukien

Okay Isaac, we essentially have no cancellation rates. It is very rare; not impossible, but very rate to have any cancellations in our business. The backlog extends – in principle if it all came in the second half of this year, which it won’t, but it extends beyond two quarters very comfortably. So we have as much or more visibility with the strong booking trends, including strong organic booking trends.

As we have said, academic funding growth and academic order growth is slower than applied industrial homeland security clinical market that they growth faster. Some of our product lines there are growing 30%, 40% in booking, which brings our overall average to 20% organic bookings growth, more than 20% organic bookings growth.

But academic funding has really been decent, not fantastic but not bad really, even including in the Untied Sates. We expect that to be weaker in the second half of the year in the United States, but again for us that’s less than 20% of our revenue in total and we’ve on the call earlier tried to quantify US government funded revenue or US government direct revenue and NIH, NSS funded revenue, which are less than 2% and less that 5% for us respectively, so not a very high exposure.

Academic funding in Europe has been quiet good for us; academic funding in Asia has been quiet good for us. There are may other pockets of strength around the world that on balance while not everything is, I mean not everything is lining up perfectly, have give us the very strong bookings growth, including organic bookings growth.

No let-up in the second quarter, sequentially or anything like that. So we are actually very optimistic and given the geographic and the markets diversification that we have achieved and the great visibility that we have, we are not only optimistic about the second half of the year, but really have pretty good visibility into the first half of next year in terms of revenue.

Isaac Ro - Goldman Sachs

Great, that’s really very helpful, thanks.

Frank Laukien

All of next year’s half year of revenue in our backlog for sure, but the trends have overall been very strong, even though there are some pockets of weakness.

Isaac Ro - Goldman Sachs

Okay, thanks. That was right there, thanks for that. Bill just a follow-up on the numbers. I think you guys have previously committed to about 75 bips of operating margin expansion in BSI. I’m just wondering if you are still committed to that and then secondly on the tax rate, I think it was in the high 20s. You guys have previously said for the year that it will be low 30s. So I was just wondering if the current run rate is sustainable.

Frank Laukien

I think Isaac for this year you will certainly see increases in absolute dollars on adjusted operating income. As far as the percent of revenue, it’s probably going to be flat with prior year and again, we expect an improved top like Bruker profit margin, but we have hired some extra head count and operating expenses have gone up, which is an area that we are looking at very hard right now. And as far as the tax rate, I think we would continue to go with what we had stated earlier.

Isaac Ro - Goldman Sachs

Got you. Thanks a bunch.

Operator

Your next question comes from the line of Peter Lawson with Mizuho Securities. Please proceed.

Peter Lawson - Mizuho Securities

Frank, just on the increased revenue guidance, are you implying better than that kind of high single digit organic growth that you previously talked about?

Frank Laukien

Yes Peter, in Q3 we expect from our forecast that we would exceed a 10% organic growth rate for Bruker overall and so we see an accelerating organic growth rate based on our strong organic growth in bookings.

Peter Lawson - Mizuho Securities

And that 10% is for BSI or total group.

Frank Laukien

That is for total Bruker.

Peter Lawson - Mizuho Securities

All right, thank you. And then just…

Frank Laukien

I don’t have a breakout for that between BEST and BSI right know, but we expect double digit organic growth in the third quarter, which if you recall in the second quarter 7.5%, it was lower in the first quarter and that simply makes sense given the strong organic, not only the strong bookings growth, but also the strong organic bookings growth of greater than 20%, both in Q2 as well as in the first half of this year.

Peter Lawson - Mizuho Securities

Great. On the pockets of weakness you talked about in academic, where were those pockets.

Frank Laukien

Well its more anticipated really. So far its not really been many pockets of weakness. Japan after taking a dip in March and April has come back quiet strongly and we actually expect fairly strong Japanese spending and orders going forward, including some 3/11 or tsunami, earthquake reconstruction funds, including for some universities.

We expect slower academic spending in the United States, primarily in the second half of this year, so slower orders there. I think those are the – the European countries that are notoriously week are relatively small and they are more than made up for by strength in the major markets in Europe, strength in Eastern Europe, Russia, Turkey elsewhere. So Europe overall is really quite strong and stronger than we had expected.

US so far has been quiet strong, but we fully anticipate and have built that into our forecast, that academic spending it the US will be weaker going forward. But it’s been good so far.

Peter Lawson - Mizuho Securities

Great. Thank you so much.

Operator

Your next question comes from the like of Jon Wood with Jefferies. Please proceed.

John Wood - Jefferie

Hey, good morning.

Frank Laukien

Hey Jeff.

John Wood - Jefferie

So Bill, obviously with the revenue growth, you are chewing up quite a bit of working capital here. If I look at your prior forecasts, I think – and correct me if I’m wrong, you said $0.46 of networking capital $1 revenue in 2011. Can you update us on where you stand relative to that forecast?

Frank Laukien

We had both creped in DSOs and inventories this quarter. So we are getting back to probably more aggressively managing those DSOs to get back down to what I would call our normal run rate levels and there is significant opportunity there.

Inventories, some of the build-up is due to this anticipated second half shipments, but we continue to have to work to improve the turns. I don’t have any I’ll say revised guidance that I would give you now. I haven’t changed any internal targets for our divisions, but we’ve got work to do in the second half.

John Wood - Jefferie

Okay great, and then on the margin side, is it possible to try to pass out the impact of FX and potentially you talked about commissions related to bookings and any color you can give on both the FX side as well as the commission related impact would be very helpful.

Frank Laukien

Just generally in most of our divisions and most of our sales are distributed sales people, we pay approximately half the commission when we accept the order and half the commission when we recognize revenue, so that’s why with bookings growing almost 20% faster than revenues in the first half, you see more qualitative fees, you see more SG&A, faster SG&A growth than we had anticipated, in-part due to currency effects and in-part also due to stronger than expected bookings.

John Wood - Jefferie

Okay, is it possible Frank to parse out the FX impact on the margin side.

Frank Laukien

I think we have said in the past, it certainly still holds true that as you move down the income statement from revenue to gross profits, operating income to net, that the FX impact becomes less, that certainly still holds true. But the gross profit margin improvements, we clearly are bringing in lower cost, subassemblies we’ve got stronger designs as we mentioned earlier and depending upon the products or the market place, improved applications, improved solutions where we are getting better pricing, so…

Bill Knight

So in some ways John it’s not possible to really parse that out and we cant fully parse that out at each gross profit operating margin and net income. By the time we get to next come and EPS, we are somewhat cushioned against euro and dollar exchange rate fluctuations with reasonable ranges, so they were not that sensitive to it.

John Wood - Jefferie

Okay great. And then the last one on the CAM business, Frank you committed, the integration is going a bit slower. You guys have talked about a $3 million to $5 million operating loss for those product lines if you will in 2011. Can you give us an updated on which you expect, vis-à-vis the comments that it’s going slower on the integration side.

Frank Laukien

Yes, it’s going to be higher than that number. We don’t have a new target number, but it’s going to be higher than what we had anticipated. With settling into the new factories we are shipping both GC-MS and ICP-MS now from our new Fremont, California factory. But the factory moves in general were a couple of months later than what we had anticipated and of course by the time you moved the factory and shipped the first few products, until you get to normalized gross margins in the new set up, it takes another quarter or so.

John Wood - Jefferie

Okay. Thanks a lot.

Frank Laukien

You’re welcome John.

Operator

Our next question comes from the line of Tycho Peterson with JPMorgan. Pease proceed.

Tycho Peterson - JPMorgan

Hey, thanks for taking the questions. Maybe just – I appreciate the color on the end markets before – Frank, I think in the passed talked about you know in Japan, the research replacement budget potentially kicking in in the back half of the year. Are you still kind of anticipating an up-tick for the infrastructure replacement?

Frank Laukien

Yes, we do and that would affect our orders in the second and probably turn into revenue sometime next year.

Tycho Peterson - JPMorgan

Okay and then on Europe, any additional color you can give there. I mean, its sounds like Germany and France are still holding up. What about UK and some of the other markets?

Frank Laukien

UK has been flattish or a lot of the other Benelux. We’re filling Austria, Eastern Europe, Scandinavia, Russia, Turkey, all strong or stronger than expected, except for the small countries that have real financial problems and which contribute very little to our revenue and bookings. Its really been Europe stronger than expected and not just Germany or France. It really adds up in most places. UK is somewhat flat, but that was anticipated.

Tycho Peterson - JPMorgan

And then may be on the portfolio, post ASMS and Pitcom before, can you just talk about kind of the level of interest and traction from the refresh through top portfolio and I know you are not shipping Microme yet, but can you talk about you know how you are seeing about CaptiveSpray in the back half of the year or two.

Frank Laukien

We are shipping the CaptiveSpray. We are not shipping the LC yet. They are only in very small quantities, not fully launched yet, so that is correct. The maXis 4G, the very high end instrument that we brought out at Pitcom and the previous maXis performance is better in a bench shop format, where the maXis impact are getting good traction, very good interest.

You probably don’t see that in the revenue line yet, because that’s orders, but order up tick is strong and that you know is one of many elements that are contributing to strong bookings and backlog.

Tycho Peterson - JPMorgan

Are you seeing any change in the selling cycle around that spec? One of your peers talked about delays coming out of ASMS, but I was just wondering you are seeing anything from your customer base.

Frank Laukien

I am not aware of that. ASMS has been somewhat recently and you know generally with a number of new products not only from us but from you know competitors coming out as well, customers may be take another look. So you know that’s plausible, but I’m not aware of the trend. So Q2, it hasn’t been anything unusual that I would point to.

Tycho Peterson - JPMorgan

And then may be one for Bill on the margin expansion initiatives, can you just talk to you know whether this is an acceleration of some of the additional cost control measures that you had in place. Are you looking at adding new ones on and you know again, how much are you prioritizing on manufacturing versus you know other levers in the back half of the year.

Bill Knight

We certainly continue to – this off shoring program that we started last summer, well really we’ve gotten an excellent start to that, but there is still a lot of opportunity remaining. We continue to qualify a lot of, as I said, earlier components, minor subassemblies, so we have a fair amount of opportunity remaining there.

I think the other thing again is, we improve or growth the top line. We also expect to continue to get good factory leverage on our fixed factory cost and as Frank alluded to earlier, our Bruker’s history of continuously developing and introducing new products with new solutions also means better cost structures and better pricing, because of the solutions that we offer. So I think this margin expansion that we’ve seen over the last two or three years, we expect that to continue in some form or fashion in the coming years.

Frank Laukien

Its like we are walking a fine line here. We want to obviously restrain spending growth and expense growth, but at the same time we have to – we are dealing with good problem of having 20% organic bookings growth and 50% bookings growth. We don’t want to strangle that rapid expansion, but we are managing through a very major expansion of the company this year, both from acquisitions, from prudent acquisitions and from organic bookings growth.

So the expense control measures mostly effect SG&A not so much R&D and the local bids manufacturing, again walking the fine line of not wanting to over do that and not being able to deliver, the revenue growth and organic revenue growth that we’d like to deliver in the second half and beyond from our strong bookings and backlog.

Tycho Peterson - JPMorgan

And Frank since you just mentioned acquisitions, I mean in light of kind of what’s going on in the broader markets, were you thinking of a capital deployment strategy or priorities at all, you know both in terms of M&A and other methods of deployment.

Frank Laukien

Well, I mean we did two excellent larger acquisitions last year with CAM and Veeco. The Veeco and our Bruker Nano Surfaces, that is performing – as we had stated previously, that is performing a lot well ahead of its expectations. I think there we had anticipated $130 million of revenue for 2011 or greater than that and $0.6 to $0.8 accretion for adjusted EPS and about greater than 50% adjusted operating margin. That division is far ahead of those estimates and doing much better than we had anticipated.

So investing in the division, investing in CAM, investing in BEST is really the priority this year. We did some smallish acquisitions. We’re not likely to do any large acquisitions, but really focus on what we like to do anywhere, which is organic growth and now of course also organic growth, very soon it being organic growth out of CAM and out of that BNS division and we continue to invest quiet heavily in BEST.

We think there are some significant opportunities there for profitable growth going forward. It’s a major opportunity for us, with a little bit more of a medium to long-term horizon, but there is a lot of CapEx and obviously justified by their enormous backlog expansion over the last two years. I think it’s almost a factor of 10 and so we have a lot of exciting opportunities internally. We are much more focused on those than on the acquisitions.

Tycho Peterson - JPMorgan

And are there methods, buy backs or other things. I mean, any commentary there?

Frank Laukien

That has never been a priority for us or our Board and I don’t anticipate it being going forward. I think we have between repayment of debts and if you accumulate a little bit of cash, I think that’s fine with us as well and you know given compared to dividends or repurchase of shares, I think there are some smallish bolt on acquisition with the higher priority for us and we always look at some of those.

As I have commented earlier, and you are aware of that, earlier in the year may be, up to eight weeks ago I think M&A multiples got a little out of – became a little bit too optimistic and lofty for us to be a participant. That obviously may change a little bit in the second half of the year. But again, we are not focused on announcing an acquisition every other quarter, so we are focused on driving the significant internal opportunities that we have and are creating, so that’s our focus.

Tycho Peterson - JPMorgan

And then last one, just on the CFO transition. You know, I think you talked about a couple of different strategies either having built, you know moving to the permanent CFO role and hiring a COO or hiring a new CFO, any thoughts on which way you are leaning and you know a sense of timeline.

Frank Laukien

No, we are still doing –the decision is probably still two months plus away. We are still looking at a dual track approach. We are looking at both opportunities and one option is that Bill indeed again, and operationally are oriented permanent CFO and that we find a VP of Production and Logistics and we are looking at both options and looking at candidates and I think either way we will be in very good shape, with Bill either being a financially savvy COO or an operationally oriented CFO and then strengthening in the other position. So we are keeping our options opened probably for another two months plus.

Tycho Peterson - JPMorgan

Okay. Thank you.

Operator

Our next question comes from the line of Dan Arias with UBS. Please proceed sir.

Dan Arias – UBS

Yes hi, thanks for the quotations. Frank I think you mentioned that you are seeing some positive things in terms of market share. So I guess where would you say you are having the most success in improving your position within some of the markets you serve.

Frank Laukien

Pretty broad based Dan. I think we are clearly doing well in growing the businesses that we have acquired. So the AFM and optical metrology, the former Veeco if you like. We are making good progress on revenue on products launches obviously with our CAM division.

We are particularly strong right now, also in additional order bookings in homeland security and a lot of the industrial instruments from Bruker X-ray analysis instrumentation to metals analysis instrumentation, whether they are handheld XRF to OES. We are doing very well with our Brooklyn Nano analysis, EDS, EBST and other electro microscope accessories. We are doing well with Life Science Mass Spectrometry, like we are doing well in microbiology.

The nice thing is there isn’t really one that I would single out. The nice thing is really that it’s pretty broad based and I think our fundamental focus on innovation, on R&D processes, on getting good strategic marketing input to guide our R&D is really working very well across the board. Its very broad based Dan.

Dan Arias – UBS

Okay great, thanks for that and then on the revenue line for the quarter, I think there was a delay of $10 million or so from 1Q. Did all of that come through in 2Q?

Frank Laukien

Hard to differentiate exactly. We anticipated and we think that sell-through, that most of that came though in Q2, but some of that also is still going into Q3 and Q4, but then we make up with it for it – excuse me, by accelerating other deliveries and insulations. So I think its essentially a one time effect that’s gone. Although if I drill down specific systems some of them may still be delayed into Q3 and Q4, particularly in Japan if the labs are not ready.

Dan Arias – UBS

Got it. And then I guess lastly, any color on demand in China and may be how you see that in the second half of the year relative to the first.

Frank Laukien

Demand in China for us has continued to be very strong in the first two quarters of this year and we are not aware of any – well, in our data, in our business we are not aware of any slowdown or its going flat at this point.

Dan Arias – UBS

Thanks a ton.

Operator

Our last question comes from the line of Stephen Unger with Lazard Capital Markets. Please proceed.

Stephen Unger - Lazard Capital Markets

Hi. Bill, did you have any trouble with component parts form Japan or getting components parts from Japan in the quarter.

Bill Knight

In Q2?

Stephen Unger - Lazard Capital Markets

In Q2, yes.

Bill Knight

I think that it pretty well stabilized. We had some initial that were a few key components that we fortunately with this new outsourcing team we put together, we were able to relatively quickly find alternative sources, though I would not say that the unfortunate incident in Japan really profoundly, even negligibly impacted Q2.

Stephen Unger - Lazard Capital Markets

Okay and then are you guys having trouble building products to ship in terms of keeping in pace with demand; is that what I’m taking away from your previous comments.

Bill Knight

We’re straining really in all parts of the organization. We’re ramping up production and we’ve done a good job in ramping up production, but you know we need to do more of that and in addition we don’t recognize – on most of our systems we don’t recognize revenue when shipped, but really when delivered and installed and accepted by the customers. So it’s that entire you know logistic chain of delivery, field installations, lab preparation.

I’d almost say that the latter part of that rather than production is the part that has been slowing us down a little bit in the first half of the year, in getting even more revenue accepted and so more so than production.

You know that is about the organization, when you take such a big step in revenue, you know you fell it in every department, but a little bit more so at the back end after things have gone into a truck and been delivered from the factory, getting that larger volume through our field organization, our field service and installation organization that there we have more growing pace.

Stephen Unger - Lazard Capital Markets

Okay, and then how should we think about that in terms of the context of the hiring freeze that you talked about? Are you…

Frank Laukien

We did hire quiet a bit and we wanted to slow it down in the second quarter and second half of this year. So our hiring was front loaded a little bit. That also contributed to the faster than expected expense growth in the first half and you know, we really do need those people, but we also want to make sure that we don’t hire too fast and that’s why we’ve put in that effect to a hiring moratorium, which in selective cases with the management decision we can make exceptions and we do where needed.

So hiring was also a little bit front-loaded and of course a little bit still already in the second half of last year. So we think we did enough and we want this to settle in and get productivity out of that and that’s why we have gone with the essential hiring moratorium for the remainder of the year.

Stephen Unger - Lazard Capital Markets

And that’s to the end of the fourth quarter?

Frank Laukien

At least to the end of the fourth quarter. We will assess our trends and the productivity we get. We’ve done a very substantial jump in employees and hiring, not only from the M&A obviously, with the new divisions, but also in totally ramping up and so we want to have those people fully trained and with great productivity before we look at adding additional resources.

Frank Laukien

But it’s certainly continuously monitored as Frank said earlier, it’s not complete. They are very, very selective hiring and it’s something we take a very hard look at the end of each quarter to see how we are staffed for the next quarter.

Stephen Unger - Lazard Capital Markets

Great, thanks guys.

Operator

There are no other questions at this time.

Frank Laukien

Okay. So again, our apologies for the slow start in getting the telephony going, but I think it all worked out. Thank you all for joining us today and this concludes our Q2 earnings call. Goodbye and thank you very much again.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Bruker's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts