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Bruker Corporation (NASDAQ:BRKR)

Bruker Corporation at Credit Suisse Annual Healthcare Conference Call

November 11, 2011 10:00 am ET

Executives

Bill Knight - CFO & Interim COO

Analysts

Unidentified Analyst

Good morning everyone. Thanks for joining us. Our next session here in this room is from Bruker. I am very pleased to have Bill Knight, the CFO and currently the Interim COO as well join us to give us an overview and then from here we will have our breakout down in the Cedona room.

Bill Knight

Thank you. Good morning everyone. Also here from Bruker is Stacey Desrochers who is our Corporate Treasurer and Investment Relations Officer. The standard Safe Harbor statement. Bruker is in its 52nd year, is a company which was founded in 1960. It was a private company for 40 some years, founded by Günther Laukien. The Laukien family still has a significant ownership interest in the company of 48.5%. Frank Laukien and his brother Jörg still have significant management roles. Frank is our CEO.

The company historically had a very strong science-focused leading-edge, sometimes bleeding-edge, but over the years has been able to establish some dominant positions because of that focus on science and technology and solutions. In the past probably seven eight years having gone public, there is much more of an operational focus as well on products and product solutions on market, market growth, market shares, operational improvements, balance sheet management.

So the company I think today is really poised for continued outstanding topline growth. We've got a much broader market mix of products from life science, material science, food, feed, environmentals, defense than what we have had in the past. It is a very much a global company. The company was founded in Germany. So we do have our most significant production and product development operations are in Germany with production facilities in France and Switzerland as well.

Recent acquisition in the US have created more of a balance. We now have several production facilities in the US and you can see the green dots, our production facilities the yellow dots, our sales marketing offices, we typically are direct in our markets with direct sales forces. In emerging markets, emerging countries we would typically start out with a distributor, but once we get a good foothold in that market area, we tend to go direct, we think to support our product lines and the technical knowledge that is required a direct market is or direct distribution is really the way to go.

Bruker Corporation has two principle segments. Bruker Scientific Instruments or BSI and then Bruker Energy and Supercon Technologies. There is four major product groups, Bruker BioSpin which is the original company, the NMR Group. Bruker Materials which is much more of a material science company, not really a life science group. Bruker Daltonics is the Mass Spec Group primarily focused in life science, but the new Veeco or the CAM acquisition, the assets we got from Varian are in that group. That will broaden their focus into the chemical and applied markets, in our Military and Homeland Security Group is within Daltonics as well and Bruker Optics is our Molecular Vibrational Spectroscopy Group and it has a very diverse, probably the most diverse division within the company as far as product and market mix from healthcare to defense to life science, industrial, forensic.

We updated these goals in our earnings call in October. We commented that for the first time as of June 30, we have a systems backlog in excess of $1 billion that continued into Q3 or there was a very modest growth in that. So we have significant backlog. Orders have been very strong this year, probably exceptionally strong in the industrial and material science group. We are looking at our 2011 revenue to be in the range of $1.62 billion to $1.64 billion. The BSI adjusted EPS is going to be in the $0.87 to $0.90 range. That’s an 11% earnings growth for that group.

Our medium goals through 2014 are to continue to grow the topline in excess of 10%. That will obviously help margin expansion and this is coming from new products. It’s coming from market share gains, but it is primarily going to be organic growth. We are not counting on any M&A type activity to achieve that, although I am certain as with Bruker’s historical trend, there will some type of M&A activity.

The average adjusted operating margins, we expect to increase by a 100 basis points every year from 2012 through 2014. Our goal, our target is to be greater than 18% in 2014 and we expect our bottomline growth during those years to expand at a rate faster than the topline.

Once a year, we take a look at how our markets are grouped, so these are 2010 numbers. When we have our Q4 earnings call and release, we will start to talk about what the 2011 numbers are. Bruker is still primarily a capital equipment company. Our system sales or 79% and service consumable software is 21%. We do not have a significant consumables business at the moment, not that we’re against that, but our technologies that we currently have in house don’t have a significant consumables stream.

Now some of the recent acquisitions we’ve done, the GC business from Varian, we bought an HPLC company, a small HPLC company that I’ll talk about in a moment is going to provide some consumable stream and so in the coming years we hope to expand that a little bit. Our revenue by customer base, academic, medical is about 55%. Government is about 9%. What’s really growing is our industrial and applied business at 24%. Two or three years ago, that was around 17%. When we do publish the 2011 numbers, I expect to see some significant growth in that area.

We’re focused on our acquisitions in that area. The group that we acquired from Veeco, now our Bruker Nano Surface is in that group, a rapidly growing division within Bruker and I think also this industrial and applied market has really contributed to our solid backlog and bookings growth this year.

Geography has been pretty consistent over the years. Europe is still dominant. I think that’s because the company was founded there. That’s kind of Bruker’s backyard and so we have been very successful there. The Americas are about 24%. I think over time with the groups that we have acquired, more product and production in the US that we will get a larger piece of our overall revenue coming out of the Americas. Asia Pacific continue to be areas of rapid growth. India, China are still exceptionally strong and then the rest of the world.

I won’t spend a lot of time on this slide. I think what it does show that year-over-year 2009, 2010 good improvements in topline, good improvements in margin expansion. We started this concerted effort on improving margins about three years ago. We made excellent progress, we expect these trends to continue.

In 2011, three quarters year-to-date, we have had about an 8% topline growth and adjusted EPS has grown about 17%. If you look at our BSI group, again FX and acquisition-adjusted organic growth has been about 7%, some margin improvement about 50 basis points, a scenario where we expect to continue. That margin does include our CAM group where we’ve made significant investments. Excluding CAM adjusted gross margins would be over 50% and good growth on the bottomline. Our best segment is also done very well. We won’t talk a whole lot about that today. It does have an S-1 on file and with possibilities of an offering, we will be limited as to what we can say with that.

The Varian product lines that we acquired in May of 2010, ICP-MS, Lab-GC and the GC triple-quad business I think are very important to Bruker. Those were technologies that we did not have particularly the triple-quad single and triple-quad business. Those are huge market places; are industrial in nature, QA, QC work areas that will open up significant market expansion potential for Bruker.

We paid $32 million for about $70 million of business. It is probably taking us a year longer to get that where we want it go. We expect in 2012 that this will be $100 million plus in revenue and at breakeven or slight profit.

This year we are investing heavily. We have moved three factories. We had a factory in the Netherlands that we had to move; that was a Varian facility that we had to move; it’s about 40 miles away from where it once was. We also had a factory in Walnut Creek that we moved to Fremont, again to get out Varian facility. And then, we had the ICP-MS factory in Australia that is now in Fremont as well.

So we’ve gone from three factories to two, that was quite an effort to get those factories moved and product development moved. It was a costly endeavor, but I think that will certainly bear fruit. We will be able to leverage two factories much more effectively than three and I think down the road we’ve got plenty of room for expansion as these product lines grow.

We also acquired the AFM and the stylus and optical metrology business Veeco in October of 2010. That was right around to $240 million, $230 million business our purchase price. That business has done exceptionally well. They are dominant market holder and they are markets that they operate in. Their revenue was targeted to be $130 million this year in excess of 15% operating income, it’s certainly has been and will be accretive for 2011.

And has we finished, we gave 630 view that they will significantly exceed their 2011 target. Then certainly you can say as of September 30th as well that they have succeeded and will continue to succeed in the fourth quarter; a very rapid top-line growth, exceptional operating margin. So that has been a great add-on for Bruker.

The Bruker Nano Surfaces Group, the Veeco assets that I just spoke about is just acquired a company called [C-Trib], it was a $13 million acquisition of product line that is about $10 million in revenue greater than $2 million in EBITDA, very profitable group. The customer segments had about 50% overlap with the Bruker Nano Surface Group. We will be able to provide distribution for this product line; we will be able to provide resources to continue to invest in their product line.

So this has been a very nice full-time for the Nano Surface Group and Bruker historically has done many more small acquisitions, it product line bolt-ons and the large divisional type and I think you will continue to see areas where the Nano Surface Group will do that.

The BEST Group, the Bruker Energy and Supercon Technologies Group was originally a spin-off from our BioSpin Group. They make the super-conducting wire for all Bruker’s NMR/MRI magnets or FTMS magnets. They have some other technologies now that can focus on electrical grids and anything with high-end physics research.

We did announced that they recently, very recently received two large contracts for super-conducting wire that totaled $71 million with potential to go higher than that and these orders will shift through 2014. So not only has the BSI Group had very strong bookings backlog, the BEST group does as well.

One of the new market areas that Bruker is really moving into is the food, feed, food safety markets. I have got a couple of slides describing some recent successes. We have put an FT Near IR systems into the South African sugar industry. This looks at sugars and sugar-based products in a nondestructive format and its use for product quality control. We also in our next generation our TANGO System for rapid Near IR identification and quantification of food, feed and chemical.

In pharma constituents, very new instrument is released this year. It’s another area where we are focused into this food feed marketplace, food safety is a concern throughout the world, a very robust small footprint. These can be used in rugged labs potentially even in mobile applications, very cost efficient, fully GMP and CFR compliant and we have high expectations for this product line as well.

In the Chemical & Applied Market, the CAM division, these are the varying assets. We’ve recently not only have we moved factories, but we re-designed some of the products. We’re making a significant R&D investments into these groups and I think for those of you that have followed Bruker over the years know that we do invest heavily into our product lines, our R&D spend is typically higher than our peer groups.

This will continue with the CAM Group, but this is another product that will be into the food, safety and environment markets. It has some new technical features that the previous contract did not have. And again, this triple-quad markets are several hundred million markets that Bruker did not play in the past and while we have very small market shares now overtime we certainly expect this Bruker CAM division to be one of the more significant divisions.

We also sold to Turkey into the agricultural industry, our Time-Domain NMR machines; it’s a BioSpin product, but it does look at in this case oil and moisture and in seed groups that’s a very important either when you are selling products or you’re looking at the quality of the seed content for various food, feed applications whether it’s human or animal. And again, a very ruggedized instrument with multiple solution opportunities for the customer.

I have mentioned a lot about the food, feed, Ag business, environmental; the Bruker materials science group with the AXS has introduced two new products. AXS has had our industrial group in material science group has been very strong this year. We continue to invest heavily and release new products and I think these are two good examples of a XRD and XRF modules that have come out, new detector application.

And the AXS Group which is a part of this one group that has done exceptionally well these three-four years from taking gross profit margins in the low to mid 40’s to above 50% a very strong operating contributions now. And it has been a good benchmark for some of our other Bruker divisions on how to really be successful.

This AFM product is what was acquired with the Veeco acquisition. It is now in the Bruker Nano Surface, I just want to highlight it. It’s kind of a gold standard in the AFM business; AFM Group has 50% plus market share. It’s a dominant player and we have been able to add some new features; we continue to – Veeco Group has – Bruker Nano Surface Group has done an excellent job on bringing some outsourcing concepts to the rest of the Bruker divisions, bringing design and product development concepts that we can bring in to the rest of the divisions and we hope that we can duplicate what the Nano Surface Group has done throughout the rest of the Bruker divisions.

We've expanded our Singapore office, new center of excellence, expanded laboratories, demo facilities, customer support facilities. We've also are starting to move some of the offshoring capabilities that we've had based in Shanghai and the Singapore. We do much more of our offshore and outsourcing in Singapore and Malaysian areas, which has been very effective in some cost reductions that we've been able to achieve and will be part of the reason that we continue to see margin improvements and we've also expanded our facilities in Shanghai with opening of major new training and customer service centers.

We've talked a little bit earlier. We did acquire a small LLC company. This is something that's very important for both the Cam business and the Life Science business. This group also has a consumable stream that comes with it whenever you have GCs or LCs, you have columns and so this will over time, I think, add a little bit to the mix between consumable and system sales. One thing that we are particularly excited about is our MALDI Biotyper. This is pathogen identification. So it’s a Life Science product.

We've developed a database where we can look at the protein excretions by these pathogens and identify them in a matter of minutes versus hours or days by some of the other traditional, what chemistry methods that can be certainly late threatening situations that we can get an earlier identification on for the patients. It’s certainly can be a cost saving factor to run per sample, is less than traditional methods today and also Patient Care if you get an earlier diagnoses. We current having an access of 300 units out in the field primarily in Europe. We are rapidly working on getting FDA approval for this in the states and have high expectations for this product in the coming near-term and several years out.

This also has the nice consumable stream to it, and it is not only the capital equipment sales but good follow on business as well. The Homeland Security business, we announced earlier this year that we had won a large Navy contract where we are equipping every single U.S. Navy Ship with Chemical Identification equipment. We got about got about 40 systems that will have installed this year. This is a multi-year contract, but this is a division that Bruker is very active in and selling chemical warfare detection, agent detection equipment, biological radiation explosive detection equipment not only to militaries but Homeland Security environment as well. And we’ve feel that this division in particular, it’s a very profitable division, not as large but some of the new radiation products and explosive detection products are really going to accelerate its growth.

BEST, again we will say a whole lot because of the S1 that we have filed but their operating metrics have been ahead of the plan and we are very pleased as what they have done to-date. BEST does have its much longer term play, but it does operates in markets that total about $25 billion. So this is going to take a while to get this division where we are on it, where we want it with the products that are in development. Some of the markets are very low margins, super conducting wires, some of the crystal -- new crystal growth magnets that we have sold have exceptionally strong margins. So there is a real balance between hi-tech and just plain dirty business in this group and so it’s going to be a little bit of a longer play but the market potential is huge.

I think to really sum it up, Bruker has had a great 52 years, almost 52 years. We will continue to be scientific focus, rapid new product development that has kind of been the heart and soul of the company, that is not changing, I think Bruker is doing a much better job now on the product development. We know the markets we want to go after getting much more rapid product development of products that carry much higher margins, products that are solution-specific and because of all that, we’ve had a very good financial performance even some years that have been flat 2009, 2010.

We are not exceptionally strong markets but yet Bruker, as they have done historically, is able to grow faster than the markets and that’s because of the broad and very strong product portfolios that we have and that trend is certainly going to continue.

So I think that is it.

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