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Bruker Corporation (NASDAQ:BRKR)

Bank of America Merrill Lynch 2012 Health Care Conference

May 15, 2012 02:20 PM EST

Executives

Derik De Bruin – Bank of America Merrill Lynch

Bill Knight – CFO

Derik De Bruin

Derik De Bruin, the Life Sciences Tools and Diagnostics Analyst here at Bank of America Merrill Lynch. Our next company presenting in this track is Bruker Corporation. Presenting for the company today will be Bill Knight, Chief Financial Officer and also Stacey Desrochers, Head of IR is with us today. There will be a short presentation and we’ll follow it up with some Q&A afterwards.

So with that I’ll it over to Bruker Corp. Thank you.

Bill Knight

Thanks Derik and good morning everyone. I think you are all familiar with Safe Harbor statements, so I won’t spend a lot of time there. I think Bruker, what we would like to remind everybody is that, it’s a 52 year old company, significant financial operational improvement, a very strong product development engine. We have global distribution. We really focus I think on growing the business organically, strong market segment position and a very-very strong brand name and the company is certainly poised and positioned for future strong growth.

Geographically, the company was founded in Germany, significant product development and manufacturing states still in Europe, Germany, France, Switzerland. We have several production sites now in the U.S. We have sales and marketing distribution service offices throughout the world. We do distribute primarily direct, some areas we do use distributors. We’ve got from – we’ve been known historically as a strong life science company but Bruker certainly has made inroads into the applied markets and into the industrial, the chemical marketplace and food safety detection, homeland security. And so our market basket is really much more balanced than it has been in the past.

These are 2011 numbers. You can see the product by revenue. We’re still primarily a capital equipment company. We do have a small 20% segment that’s related to after-market sales, service, some consumables. The revenue by customer type, the industrial, in the slide, you see is 30%, in 2008 that was 16%.

And that – it’s not that the life science piece is shrunk, that is still growing, significant growth, but we’ve made quite a few investments in products and technologies in the industrial area and we would like to see over time that there’s probably closer to a 50-50 mix between life science and applied and industrial.

Europe is still the significant marketplace for us. I think part of that is because of our historical background. That is our backyard. But Asia-Pacific is the fastest growing region. China is the fastest growing marketplace. China represents close to 10% of our business and we still have significant opportunities in the Americas.

Bruker Scientific is – plays in market that total around 47 billion, of that, we serve specifically an addressable markets of about 8 billion. So, Bruker has significant opportunities through its four major product groups within BSI to further growth, further product development, some M&A activities. But we have a lot of markets face yet that we can grow the company.

2011 financial achievement, improvements year-over-year, 2011 was not quite the growth that we wanted to achieve, but we had significant infrastructure improvements that we put in place, distribution improvement. And I think when you look at our Q1 numbers, you can see that we had significant growth in overall Bruker Corporation, but in both the BSI segment and the best segment, and significant margin and profit improvements. And we certainly anticipate with our backlog and the product portfolio that we have that this is a trend that we can expect to continue.

Our financial goals for the full year 2012, we are looking at revenue growth of 7% to 10%, which will get us to little over 1.7 billion to a 1.8 billion in revenue, significantly increase operating income, operating margin improvements of 120 to 140 basis points, which will come from improved gross profit margin and continuing to leverage our operating expenses.

Improved BSI EPS, another area that we spend significant amount of time working on operational excellence is our working capital ratio that is a ratio of working capital to $1 revenue. We were in $0.45 for Q1. We have a long-term goal of getting that down to about $0.30, four years ago, that was closed to $0.60. So, we’ve already pulled probably 150 to 170 million of cash off our balance sheet through improved inventory metrics. We expect to have potential for a similar amount when we’re going to get into the $0.30 to $0.32 range. Our BEST group which is the superconducting division had good organic revenue growth of 15% they did lose some – they expected to lose some money in 2012, but we will anticipate in ‘13 and ‘14 that that will start to smooth out a bit.

We expect by 2014 to have revenue in excess of 2 billion and operating income in the BSI segment greater than 18% excluding the CAM division. The CAM is the group of products that we bought from Varian and we anticipate that they will get to their 18% target by 2016. These are four graphs showing revenue and EPS growth in the BSI Group not going to go over each one specifically but I think you can see a good trend. The return on invested capital is impacted somewhat with the CAM investment that we made and the debt refinancing that we had done in January.

Bruker has so far this year introduced 13 new products. I’m not going to go through each one, but this is the Material Science Group has introduced this is a new acquisition that will play into the Material Science Group and both BioSpin we continue to look at significant numbers of M&A opportunities that come across our desk. We do primarily grow the company through organic growth, but we do look for opportunities that have interesting technology or might play into market segments that are next to where we play or give us a fee for penetration into existing market segment.

These are typically companies that have good products, good technology, but might not have the market presence or where with all to distribute their product. So we can put a Bruker brand name on them and achieve much better success than the company would have standalone.

So past three years, we’ve introduced over 94 new products. Bruker, I think it’s real strength is its product development programs. We continue to invest in R&D more than our peers. That will certainly continue. I think that is what really drives our topline growth of 10% to 12%. Historically Bruker has been able to grow faster than the marketplace by 5% to 6%, and it’s because of this product development engine that we have.

So far as I said earlier, we’ve introduced 13 new products in the first quarter of 2012. I am not going to spend a lot of time on each one, but certainly mass spectrometry, you will hear much more about mass spec next week as ASMS. The vibration of the FT-IR Group has got two new products, same with our material science and the X-ray Group, four new products so far this first quarter. And as the year rolls out, you will continue to see a number of new products we introduced; we maintained a very healthy product development pipeline.

And the NMR is well – our new product. Our BEST group, we did have an S1 out on that. We didn’t say a whole lot the past year or so. We have pulled that S1 and until market conditions improve, so I would not expect that we would entertain any type of offerings through the rest of this year or 2013. But the goals for BEST are organic revenue growth of 15% and year adjusted operating income and it will have an EPS loss of about $0.04. So reason that we remain excited as a longer term growth strategy and profit driver for Bruker is the best place in marketplace is up about 20 billion.

They do make one of the strategic products or components for our magnet; they make the superconducting wires, a low temperature wire. They have high temperature wire product now. The wire business is a good business, but I think the real potential for this group is the device business and that is where we really are making investments, that is where we really see the future for this company, the device business, the fault current limiter et cetera will carry the margins that are typical for the rest of Bruker and will really drive the profit engine. But again I will say that this is a much longer term play but an important play for Bruker.

I think as far as the investment opportunities, very much a premier brand. It is well-known in the marketplace, a 52-year history of strong innovation. I think Bruker has gotten much better in the past several years on markets strategies and really developing the markets and getting a very strong market position. We have a very strong operational excellence initiative ongoing.

I think historically Bruker has done very well on the top line. We haven’t delivered as much as we would have liked on the bottom line. That is changing. There is focus on science, will always remain, but there is a significant focus effort as far as improving margins, as far as improving working capital performance. And, as I said earlier, our best – our R&D product development is going to continue. That is the real heart and soul of the company.

We continue to look at new markets. Sometimes these markets are right next to where we exist today. They may be new technologies that take us into whole new areas. We have very strong tailwinds from some of the mega trends that we had shown earlier. Bruker continues to – its new products are not only more cost effective, but they offer a significant new solutions for our customers and that typically means that better pricing and with the lower cost structure a much better margins as well.

And with the two – with the best and it’s continuing R&D development on devices and the CAM division, which is really regained a foothold in the marketplace on the product line, the three major product lines that it has, and it’s continuing to profit improvements in 2012. We are very much are looking forward to the contributions from these two units down the road.

So we continue to see a 10% plus growth rates on the top line. I think we’ve very clear goals, plans and actions in place to improve margins, to improve working capital, very, very solid balance sheet, a lot of cash not over leveraged and a very high focus on returns for our investors.

And with that, I think we’re open for questions.

Derik De Bruin

Great. Absolutely. So I’ll ask you know, the – you think would have funding question, is like you know the – your business as you know there is heavily European academic focus that the company’s revenues have been quite resilient in the face of all the turmoil. I guess, you know what is it that makes Bruker so special and I guess more resilient to the – then we would expecting the headlines, part of that due to the – I guess also you happen to be – your biggest end market in Europe is Germany so that matter?

Bill Knight

I think if you’re speaking Europe, specifically Europe is our backyard, that’s where the company was founded. That’s we’ve significant presence there with production sites, with product development site, significant infrastructure in place and for us with our product portfolio is the European markets has been good.

We do not play heavily in some of the countries that you hear about Greece, Spain, Portugal, even Italy, but they do contribute. But the main area for us is Germany, France, over the last couple of years continuing into the first quarter Eastern Europe, Russia have been very strong and I think we see a sense that countries want to continue to invest in science, continue to invest in innovation. I think there is a little bit of a fear out there that if we don’t do it China might do it.

And so we see that I think is one of the reasons Russia is investing, one of the reasons you see continued investment in the U.S., South America. So I think again Bruker’s product development engine, the breadth of the product line that we have plays while in the marketplace and we certainly continue to see that in the future as well.

Derik De Bruin

That BEST business force some drag on earnings this year, I guess when you kind of look at the progression of business, realize it’s going to take some time, is the best way to thinking about the business is maybe plus or minus around – plus or minus $0.01 or $0.02 in terms of next couple of years.

Bill Knight

I think through 2013, ‘14 it’s not going to be a strong drag or strong contributor to the bottom-line, having said that, the next couple of years we’ll continue to invest in the products, the future of that business. When you look at energy, energy management, grid construction, grid management and some of the changes that people are starting to talk about, Bruker’s going to have components for that when that happens. And I think that is going to be, when you look five to eight years out that’s going to be a very, very strong opportunity for Bruker.

Derik De Bruin

Sticking on the theme of diversification of the business and having much more an applied market footprint and industrial market footprint, what does the Veeco Metrology acquisition brings to the business and how are you synergizing on that?

Bill Knight

Okay. It – we would do Veeco type acquisitions all day, every day. I mean it’s been a phenomenal performer, has very high operating metrics, very strong revenue growth, their business processes are probably the strongest within Bruker and exceptional management plan.

We’ve been able not only to take their operating contributions and roll it into our consolidated numbers, but we’ve been able to leverage off their product development strategies, some of their production strategies, their outsourcing offshoring strategies and start to bring those into other Bruker divisions. This is a division that has mid 50s plus gross profit margins and mid 20s plus operating income contributions and clearly they are strong processes contribute to that. And I think we’re able to bring those into other divisions and help to be their performance improvements as well.

Derik De Bruin

And I guess when you look at potentially for reducing your cost structure. I mean, you do have a lot of manufacturing structure in Europe, is there a desire to move more to lower cost areas?

Bill Knight

We are looking at some components, some subassemblies, I don’t think you’ll see it in the near term put a plant in Singapore, certainly not in China. There is some things we want to keep proprietary. We have a very stable highly qualified labor force in Europe and in the U.S. Our products are not necessarily labor intensive, I think they are very much intellectually driven and we can still use Europe as a very cost effective base of operations.

Having said that, some of the sourcing in the component, some of the things that we’ve done in-house as far as making our own cables or electronics, some of the machining we are now starting to push that outside of Bruker. And really taking a look at what’s core – what’s area important to Bruker? What its context? And what’s important to Bruker will keep in-house? And what is not will start to run through an offshore in effort?

Derik De Bruin

When you – actually let me see if there is any questions in the audience before I keep blabbering. Gentlemen?

Question-and-Answer Session

Unidentified Analyst

Thank you. Just two quick questions. One, you mentioned several times the focus around working capital and the imports there, improving your metrics there. You mentioned inventory controls is a key driver there, are there other strategies you’re employing to trying to improve working capital is one? And then second, you mentioned that China was 10% of your business today and where do you see that going over the next few years?

Bill Knight

Okay. As far as working capital, I think inventories are primary focus, our DSOs, our receivables are probably in better positions than our peer group. So we’ve got customers that are very happy to pay, so we still make credit calls to keep that, but our real focus is on inventory management. We’ve got over 0.5 billion of inventory. If you’ve looked at similar size companies the Waters for instance, I’ll give them credit and really an excellent company when you look at some of their operating metrics.

So we think we could probably with the right processes in place, to the right product designs in place operating with the couple of 100 million less in inventory. But you don’t do that overnight. There is some significant cultural changes, some significant vendor relations that have to be set up. So but it is the product goal at the end of rainbow is so large that we’ve got to achieve that and that money we would rather put in other areas of the business to continue to grow.

As far as China, I don’t see anything – we don’t see anything that really says that’s going to slow up. I mean they – whether they grow at 8% a year, 12% a year, it is still a significant business. And I think they have just announced that they are going to continue to invest, I think from 1.8 of their GDP to 2.2 of their GDP in R&D. They have over 5,000 universities. I think they are trying to make more of a consumer economy, but that is going to continue I think for quite a while to be an excellent place for Bruker.

We have a significant footprint on the ground. We’ve been selling there direct to see early ‘70, I think we have 300 people still there currently, that’s probably going to expand. Our major centers in Beijing, Shanghai, Hong Kong, and regional offices as well. So that is a very important place for us.

Unidentified Analyst

When you look at your product portfolio, you just recently entered to the triple-quadruple mass spectrometers space to do acquisition of Varian products. It’s been a market segment you’ve not really played in before particularly relative to some of the GCs spaces where Danaher, Waters plays like that. Is there – is that an area the market you’d be potentially moving into?

Bill Knight

Certainly. We – the thing that excited us about the Varian acquisition was the marketplace, those product playing is 2 billion, 2.5 billion which is significant. Bruker did not had as you said that the triple-quad single or triple-quad technology no other GC. So that really opens up significant market opportunities, that’s more than industrial base QA/QC marketplace. And I think Bruker has demonstrated overtime that we can grow a significant market presence. We can improve the profitability of products in operations.

Those products aren’t as profitable as we want them to be at the moment, but we’ve really reestablished a foothold in the marketplace. And those products have probably gone up 100 million in revenue. Currently, on an annual basis, that’s less than 5% of market share. We think by 2016 that will be a division that 0.25 million – 0.25 billion in revenue and 18% plus of income. So it’s taken a year or two longer than we originally thought. We’ve had moved three factories. We’ve consolidated from three down to two. We’ve significantly increased the skill sets of some of the people in that Group, but the end targets are – we still feel that this is a great opportunity great acquisition for Bruker.

Unidentified Analyst

One of the things that comes out of the conversations of investors about Bruker is the fact that the Laukien family has a very large shareholder, actually Dirk has a very large presence in the shareholder base because where is the family presence now and I guess is that targeting under some 50% in the near future?

Bill Knight

Yeah, they’re currently at 48.5%. So they have been as high as 80% since I’ve been involved with the company. Frank Laukien, who is our CEO and Chairman owns about 24%, his older brother Joerg has about a 10% interest and so those two together about 34%. And those are the only two remaining family members that are active in the business, Dirk Laukien, who sits on our Board. But I would anticipate that that 48.5% would come down overtime and I think the Joerg and Frank will certainly maintain their position. Frank bought some shares again this week, but I would not be surprised at some in the future that, radically soon, but some point in the future that they would mid-30s something like that.

Unidentified Analyst

The applied market you’ve been moving in and two things such like MALDI-TOF and a new line testing applications for the NMR. What are those technologies that be not at the NMR technology, but a lot of those technologies are LC/MS based technology, I mean you look at beyond kind of MALDI-TOF, but a lot of the stuff is going in the food safety testing. You don’t have a dedicated LC platform in size. It’s like – how do you – when you’re addressing these markets at one where systems approach, how you go into that given you don’t really have a front-end?

Bill Knight

We do have a small LC company that we purchased that – we’ll be able to grow to a certain size, but we also find our customer base. We still are able to get dialectic thermal products, waters products, Agilent products. I think our customer base appreciates the fact that we can offer a variety of solutions LC Solutions for them and it’s also another distribution channel for the three that I’ve just mentioned. So I think we’re – it would have been great if there is one more LC company that Bruker could acquire, but we’re doing quite well without.

Unidentified Analyst

And I guess what’s this – you’ve been at the company for a long time and it seem – you’ve seen it go through quite a bit transition over that. I guess, when you look at how the company has transformed, I guess what’s been your biggest upsides surprise, your biggest downsides surprise, you may have looked at it, when you look into this. This is a question of what is Street still missing about Bruker.

Bill Knight

Well, I think, the Street certainly appreciates our top-line growth. I think the Street is still not totally sure why the products or the market places that we play in are as resilient as they are, and why do people talk about Europe collapsing funding or whatever, but yet Bruker still delivers a solid top-line growth.

I also think the Street is really waiting to see the predictable bottom-line improvement, predictable and consistent bottom-line improvement. And I’ll admit that Bruker that hasn’t always been its best form in the past, we’ve focused a lot on top-line product developments not as much as we should have on some of the margin improvements. The working capital improvements. So I think that has really changed the last couple of years. I’ve been with Bruker almost eight years now.

There is much more of an operational focus now, much more of a market focus when I came to the company and I also competed against Bruker for 15 years before I joined them. Bruker had great science, great technology and that’s where the focus was. And that’s what really created the products that they have, but I think Bruker has gotten a lot of savvy on its market, marketing skills, its market presence and the operational improvements.

So I think they’re at size now where we really can see the benefits of driving margin improvement programs, of working capital improvement programs and really generating the cash flows that we want to continue to grow the company and give us that flexibility. So I think the eight years I have been there, I’ve really seen the company mature quite a bit and no barriers.

Derik De Bruin

Great. And with that, thank you for attending.

Bill Knight

Okay. Thank you.

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