Bruker Corporation (NASDAQ:BRKR)
Citi 2012 Global Health Care Conference Call
February 29, 2012 9:30 AM ET
Frank Laukien – President and CEO
Thank you very much Rameez, I’m so pleasure to be at the Citi’s Global Healthcare Conference. Good morning everyone, thank you very much for joining us today.
Let me give you briefly draw your attention to our Safe Harbor Statement and jump right in. We – many of you are familiar with us, some of you are not that familiar with us. We have a pretty clear business philosophy and financial philosophy. We’re looking for fast profitability growth primarily really focused on organic growth. We’re not a very acquisitive company. We have – we keep a very solid low leverage balance sheet and we’re very much focused on high return invested capital. We’re presently in the low 20s and return on invested capital and try to take that back up to the high 20s.
Very much a company that has an excellent brand for high performance innovative instruments in the life science tools and increasingly also in the diagnostic space at least in selected areas. Very much an innovative company, we spent quite a bit on R&D. We have – I think we have the best new product development engine of any of the larger diversified companies in our space and we have a lot of fast profitable growth to show for it and I’ll take you back to that in a moment.
10 years ago, when the company went public or 12 years ago rather, we were still somewhat distribution limited today, we’re absolutely can go toe-to-toe with any of our slightly larger competitors. So we’re absolutely diversified, internationally diversified in a lot of applications and markets and that’s why throughout the last few years and this year, I think we’re going to be – we’re so resilient in terms of our ability to maintain this rather rapid growth with margin improvements.
And this is a little bit of picture that I was alluding to earlier. We are originally a European company, but we have growth in the United States and a number of acquisitions particularly the two acquisitions in 2010 that I’ll talk about a little bit in my later slides. We are very much a transatlantic company in terms of manufacturing an R&D footprint and of course we also sell quite a bit in Asia. We outsource a lot of Asia although we don’t really own factories there.
Our key markets are listed in the lower right. I’m not going to go through them all. I think you’re either familiar with them or you can read them. Again I think the take-home message here is simply, we are quite diversified. We’re not the only depending on NIH or on European Academic Funding, which by the way is stronger than most people here expect. And have really attained via our targeted product development but also via the acquisitions and bolt-ons over the last few years, really very excellent diversifications and I think the numbers simply prove that. And I’ll get back to that point.
One thing that I’d like to stress, while we’re not in the genomic space which admittedly is an interesting space, although for us we’ll keep that as a spectator sport, we really are benefiting from a lot of tailwinds from what I would call strong secular trends that in a variety of ways are driving our business. The trend really in genomics is to post genomics into epigenetics and to systems biology and protean (ph) mix and that very much caters to our strengths.
The fundamental move to most R&D investment in pharma and biotech and going into biologics again caters to our strengths. Those are the type of animal (ph) and primarily mass spectrometers that are being used for looking at biologics, for looking at quality control for submitting FDA submissions and so on. So those are some very, very big trends. Those are 20 years trends that are – that are again very much – that we’re benefiting from very much.
Outside of the life sciences, the – we got a lot of the early orders for the first tool that go into the new 450 millimeter fab lines of the semiconductor industry. The shrinking nanotech and semiconductor feature size is absolutely work in our favor. The field is moving towards us. Our atomic force microns to PN X-ray analysis systems do not struggle with smaller feature sizes where there is a lot of other traditional technologies but other companies are simply running out of steam and the physics doesn’t work anymore.
In other areas, in molecular diagnostics, in clinical microbiology, we’ve engineered a paradigm change of doing that with mass spectrometry with our so-called MALDI Biotyper which is to really become a huge success, very good margin product for us and has again last year, grown something like 50% or 60% after doubling for a few years in a row before that.
And there are other examples, the last being our less than 10% at best segment for which we have been S1 on sales (ph) is the growing by leaps and bounds I’ll come back to that in a moment as well. Providing unique superconductivity enabled tools from healthcare to large energies – to fundamental energy research to energy and smart grid applications that are only beginning to emerge, so a bright picture with very strong demand drivers and rather diversified demand drivers.
I won’t go through that but we, kind of, published that every year, so this might actually be more interesting to those who’ve seen this a year ago and the year before that. You might recall that we were at some point had about 50% or more in our sales in Europe. Europe hasn’t shrunk at all but of course we’ve grown faster in the Americas and particularly in Asia Pacific. We’ve also grown quite a bit in the industrial and applied in biotech markets, so again a much more diversified company than even two or three years ago.
So this is somewhat complicated story, it’s not a one-trick phony where we have four major groups within our scientific instruments segment. And they’re listed here along with their total addressable markets. And one important point on this slide and the rest, you’re probably familiar with our product lines in different divisions and so on, one important point is that we’ve greatly increased our served addressable market to these SAM (ph) as people often call it.
With the acquisitions of the former Varian Inc. business which is now our Chemical and Applied Markets division, and with the applied – acquisition in late 2010 from Veeco, of what today is our Bruker Nano Surfaces Division, I’ll come back to both of those. But, not only have they given us new technologies, new products, they really increased the size from probably about 5 billion to 8 billion of markets that we can compete in and I think that’s been an important element of giving us the run rate to continue our rapid profitable growth with high ROIC.
I won’t go into all of the products, but of course, these slides are in fact going to be available from our Investor Relations and we’d be happy to go into. Much more detail in any particular area that you may be interested in.
As I said earlier, sort of still by way of introduction, we’re spending a lot of R&D and we have a lot of to show for it. We are spending – we prefer to spend 10% on R&D, then 5% or 6% on R&D and then have to make expensive acquisitions in order to fuel our growth. We just think, well it fits our model, it fits our culture and I think we’re very, very good at it, I think in terms of dollar for dollar that we spend on R&D, we get the most new product – productivity out of it.
And again, however, newer products tend to have higher, they help, they support average selling price, they tend to be re-engineered for higher growth margins and so on. and I think you’ve seen that in the – if you’d followed us for some years in the gradual, sort of a last four years I think we’ve improved our gross margins gradually by 3% that’s actually pretty good that’s lot of blocking and tackling but it has to do a lot with the growth and new product strategies that we’re pursuing.
This is what we achieved in 2011. If I’ll take a quick step back in 2009, during the recession, we actually grew as well. We only grew by 2% but nonetheless as everybody was shrinking in 2009 that wasn’t bad. In 2010, we had excellent growth, in 2009 and 2010 we also grew our adjusted operating margins in one year by 190 bps, in the following year by 200 bps. And the 2011 really has been a dramatic growth year, sort of a step function.
Certainly I wouldn’t call its transformative because the business model is the same. We just got into additional markets with additional technologies with external – with acquired growth from the acquisitions in 2010, but not only 27% overall GAAP growth, but also even the traditional business is grew at 9%. It is interesting in hindsight to remember that 2011 was supposed to be the year when Bruker was supposed the hit the wall or fall into some whole because of the end of stimulus money and other dire predictions by, yeah okay, some members of the Street community in 2010, so yeah, we lost $25 million in stimulus money of revenue but we gained about $340 million elsewhere and also organic growth has been excellent.
So I think the proof in the putting is there. We grew our adjusted EPS more slowly last year, 12% that has primarily to do with our rather significant investment in the new CAM division and I’ll explain that in a moment. We think we have a very large opportunity there, but it requires some additional investment in R&D, to take assembling the assets that we had bought from the former Varian Inc. into an effective new division and rejuvenating the product line.
I’ll go on and talk about our goals for 2012 and I’ll come back to – let me just briefly comment on that because I can’t say too much about that later on because there is an S1 pending. That division, in the prior two years, had a CAGR of over 40% and last year it grew 25% still very, very satisfactory. And in all of that, it even managed to eke out at least breakeven, a small operating income, we basically gave those guys the margin order grow as rapidly as possible because I think we have the broadest and most advanced technology based for superconductivity material but also superconductivity enabled tools or devices. And I think there is a huge, if you like, land-grab ability for a company that has all of these capabilities and we’ve really taken advantage of that.
So we intend to grow that business very, very rapidly and gradually develop its margins previously that had the margin orders were simply grow as fast as possible, grow your backlogs and stay near breakeven and in fact they have now reached breakeven and their backlog has gone up actually by more than a factor of ten over the last three years. So, their products are really in demand.
So here are our financial goals for the first quarter. I’ll let you read them and then I’ll focus more on the full-year and the medium term. So we again expect to without acquisitions we expect – with acquisitions having a small impact, we did some small acquisitions so acquisitions maybe about 1% or less of that growth.
But we are expecting to grow in currency adjusted terms by 7% to 10%, which would bring up to the – to about $1.8 billion in revenue. We expect to grow our BFI, our largest segment, over 90% of our business are our adjusted operating income by 15% to 18%.
We expect to improve our adjusted operating margin by 120 to 140 basis points on adjusted operating margins in 2011, we kind of were in sideways after two years of rapid increases in 09’ and 010’ in ’11 because primarily of the large investment of the CAM division we ended up at the end of the year excluding CAM at a 15.5% adjusted operating margin, which wasn’t an improvement, so we were trying to improve that in 2012 and we are aiming at north of a percent of north of a 100 bids as you can see here.
Our adjusted EPS numbers, I want to take you through them that is considerably EPS growth. Please note that we are restating our adjusted numbers differently in 2012 than we have in the past, that was mostly due to investor input and we are now in both year’s pro-forma for 11 and 2012 and going forward including non-cash stock compensation.
We are looking – we are working on working capital, working capital improvements we had a penny improvement in 2011, we are looking for 2 pennies of improvement in 2012. And then, again very much focused on ROIC, we think with our scientific instrument segment we can reach ROIC return on invested capital of 23% to 25%. And the cash flow that go through that profitability and with those working capital improvements.
Our medium term goals for 2014, which we announced last year, they still remain unchanged. We are looking to be a greater than $2 billion company by 2014, I think we are well on our way. We may reach it early. And we are looking at an 18% adjusted operating margin, excluding the CAM division which is the newer division that will probably two or three years behind the rest of the business. But now including the stock option, the stock base, stock option primarily expense, which actually technically then relates to a goal of 18.3% above the way we said the adjusted operating margin goal a year ago, but now we are including those and slowly maintaining the 18% goal.
So rapid, profitable, primarily organic growth with fast margin and EPS improvement and very high ROIC goals i.e. we won’t giveaway all of our shareholder value in very expensive acquisitions we’re focusing. Primarily on organic growth but we do not shy away from some smaller acquisition if we think it’s a good portfolio match.
Here are some of the traditional – sorry some of the historical figures and I again I won’t go into all of them but I think feel free to look at these slides at your leisure, you see the trends that I’ve spoken to and I’ll just leave them for you to look your leisure if you want to dig deeper.
We also maintain a very good low balance sheet. Our leverage ratio, total debt to EBITDA is 1.2, we just put in January a long term debt financing in place with 7, 10, 12 year maturities, but overall we are relatively debt averse although some structural debt on our balance sheet I think can enhance shareholder value. Positive, very low intangible asset ratio, our balance sheet isn’t all goodwill and intangibles. And our net tangible value, tangible book value is clearly positive.
So, I’ll take the last two minutes to take you through three of the divisions where we have a lot of, that are relatively new or we have that particular growth potential. I did mention already earlier the chemical and applied markets are tam division that’s out in Freemont California. This is dramatically increased first of all, I’ll address them a markets by more than $2 billion.
With some very exciting and potentially high margin markets that have opened up to us, these were buying three product lines from the former Varian and they’re nearly merging us into one new division, we have to move three factories last year in 2011, we’re centralizing that business more or less in one factory in Freemont, California.
And we’re dramatically investing dramatically more in R&D, we think that field it’s really ready for some real innovation. And in fact, we’ve already introduced quite a few product in 2011 particularly what we bought out in the ICPMS, the aurora which is successful in the markets and I think the game changing product that we call the SCION, the GC-MS and GC triple quad MS that really deep performance, it’s the performance leader, it’s the price performance leader, it’s the market print leader and it’s the ease of use leader. We really think it’s the game changing product and it’s studying inside of attraction and on our continents.
There will be a lot more products, the prominent next two years and we’re very excited about this camp division and the opportunity that it is bringing to group.
Now, it is an investment, it’s an unusual acquisition that we invest, we acquired it for very, very level for $32.5 million. We expect to put in a total investment capital if you like excluding working capital for the moment of about $70 million that means we’ve invested, last year we had about $20 million of investment or losses from this business. This year, in 2012, we expect to cut to less than half and we expect that business to reach breakeven.
And by 2016, a couple of years later than the rest of the business, we expect that it will be in the 18% operating margin range that we want to optimize it’s profitability when it’s sizable business. And we fully expected to be in the mid $200 million range with that point in time.
So, again you’ll see very much of investment philosophy maybe I’ve missed a little bit more, the private equity type of philosophy but we want to be able to do that within Bruker as well, we think it’s for lot of shareholder value, a business that we acquired for vary level, it’s all planned for our guys, it will probably contribute $500 million to $750 million of value, of enterprise value to Bruker by the time, by the time this has advanced into 2015, 2016. For that probably like to go businesses – like to these opportunities and grow businesses rather than doing expensive acquisitions.
Acquisitions were admittedly, we did spend a little bit of money that’s over $230 million acquisition from the form of Veeco done in October of 2010. Bruker Nano Surfaces has been a very different story, it’s a high performance business it has required continued investment, but it’s already within good shape and it had even further very dramatic growth under 3% we acquired it.
It’s a primary product line, it’s a chemic force microscopy or AFM as well as automated systems for data storage and semiconductor, that’s where lot of the folks orders are coming in now that they’re only week and really supply the technology for future 450 millimeter FAB, that’s not the scaling up yet, these are the early pilot project.
But of course when you – those who tend to supply the systems for these early pilot projects, if they do a good job and the intend of a very large, very good chance of them supplying the systems in large quantities in the next SEMICON cycle and ask them.
The long term trend, the 20 year trend of 450 millimeter fabs takes off. There’s other 3D obstacles and stylish microscopy system in that product line with all sorts of applies and industrial usage, a healthy business and not quite as large as the atomic force might cost to be business.
So, we acquired that for $230 million, which, if I calculated with the benefited of hindsight admittedly, if I look at our 2011 result for that division, we acquired that at about 6.5 or 7 times EBITDA. So, we didn’t over pay, but it was a good business.
This business already had adjusted operating income greater than 20% and it had really excellent growth of 40% last year. We don’t expect to be able to continue to go at 40%. But we expect this to be a fast growing business, going forward. Again driven primarily by new applications, new market. But also a, strong product R&D investments, which, the chart on the right speaks to that, that product line, this is about division that you will see in the chart on the right, it’s getting more and more of its revenue from the higher margin product line that have been introduced in recent years and which also carry higher gross margins.
And last, but not least, before we go to the break our session. Again, this is the division, the best, the energy of super content division, it has been growing from $40 million to the last quarter that a revenue, a quarterly of $30 million, it’s a good phase of $120 million.
While the run rate at this point in time. We expect for the fast growth and we expect to also go from breakeven out to some low single digit margins, which is really when you’re creating entirely new, you’re almost creating a new industry. I think it’s really quite remarkable, we had very little cash flow and now already at about breakeven.
So, that business had some very large opportunity, so far quite honest with serving the lowest two quadrants mainly MRI systems, we supply lot of the Super Conducting material for GE, Philips, Siemens other companies, MRI systems. So, for healthcare, the Bruker scientific instrument is using the Super Conducting material for its high field NMR, FTMS and other systems that you’re Super Conducting magnets, you supply lot of Super Conductor for Ether the nuclear fusion project as well as other high physic projects.
So, that’s a good solid business that’s a lot of our bad law that sort of margins are coming from. But, I think it could be additional emerging opportunity in the very large markets for Super Conducting tools and devices, the Super Conductivity and able devices, we are the primarily in the smart grid and in mostly renewable energies.
And they are the – I think the long term opportunities are in wind and long distance power transmission that’s more five years and out. But in the next five years, I think crystal growth magnets for the Semiconductor industry in affordable take, we’ve just proven that really gives the further improvement in the solar conversion efficiency and really therefore can reduce the price of solar and photovoltaic energy further, and important element of that continued adoption and evitable adoption of solo energy.
And we’ve also had some very exciting paid for projects on smart grid applications without superconducting default current limiters which will enable more diversified heterogeneous great of the future where you have all sort of suppliers generating solar energy on their rooftops, local windmills plus of course but the coal and gas and then nuclear power plant.
So, very important technologies, great opportunity, something we’ve been investing in for seven years and that have already now reached the breakeven and importantly it’s continuing, it has really developed into deep global leader in its space.
So, with that I’d like to wrap up and so you’ve seen the recurring scenes here if you like, we are a premier brand for high performance life science, and our analytical instruments, and our superconductivity tools, very much with focus on innovation organic growth, R&D investment.
We are expanding our market share, we’re growing faster than our markets were expanding our market share essentially in every product light we’re active in. I think we have the best competitors product developments, product focus in our industry among the, at least among the larger diversified companies and we stand there for number of years, this is not a just, okay, we had a good year 2011, we really had a very follow track record for many years.
We have an, operational excellence initiatives that’s something we are not world class yet, I think that’s something where we are starting to be good. But I think we want to be very good at that. And that will also help of course cash flow and margin improvement that’s an important strategic initiative for the company.
And I think we’ve given you our projections, financial projections. So, I will not, I will not repeat them. But, I think we have excellent diversification and geographic and secular trend that are supporting our growth ambitions. And with that, I’d like to thank you very much.
Question and answers one floor up to the Park Avenue Suite Central Location. Thanks again.
[No Q&A session for this event]
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