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

Executives

Isaac Ro – Goldman Sachs, Analyst

Stacey Desrochers – Burker Corporation, IR Director

Analysts

No Analysts

Bruker Corporation (BRKR) Goldman Sachs Healthcare Conference June 5, 2012 5:00 PM ET

Isaac Ro

Okay, let’s get started here. Thanks for joining us here after lunch. I'm Isaac Ro, analyst here at Goldman. And I'm happy to have Stacey Desrochers from Bruker here to talk about the company.

And for those of you who are not familiar, the company has actually had a very busy start to the summer here. You had a big showing at the ASMS Conference. You had your first-ever investor meeting last week in New York. So there’s a lot of new stuff going on, and the stock’s had a pretty good run here with lots of improvements to the franchise over the last couple of years.

So, certainly, happy to take any questions throughout the course of the next 30 or 40 minutes. If you have them, please just raise your hand.

And with that as backdrop, let me just start by saying, thanks for coming, and feel free to give us a couple minutes update for the takeaways on the analyst meeting, if you like, and the key areas of focus for the balance of the year.

Stacey Desrochers

So, Bruker Corporation is a life science tools company. As Isaac said, we had our first Analyst Day ever last Friday in New York. It was well-attended, webcast and out there for folks if you want to listen to it. But we highlighted technologies and the new businesses that we acquired in 2010.

So we had Collin D’Silva present the CAM Group which, if you're not aware, is within the Bruker Daltonics Group. It is mass specs, so, triple quads, GC themed products, and ICP-MS as well. That business is a great business for us. It has a market potential of $2 billion in addressable markets, and we have successfully revamped the entire portfolio that we bought two years ago now, and are making inroads into those new markets with that business. It will continue to be a drag on margins, so we have set forth a goal of 18% adjusted operating margins for 2014 excluding the CAM Group.

We also had Mark Munch talk about the Veeco assets that we acquired in 2010, that’s the atomic force microscopy and stylus and optical metrology group. That has -- which we now call Bruker Nano Surfaces. That business has been fantastic for us. Last year was greater than $160 million in revenue, with 20-plus percent up margin. So that’s been a fantastic acquisition.

We also had Tom Rosa from our BEST Group. So that’s the other segment, so, most of our businesses are in our BSI or scientific instruments segment. Tom talked about the BEST Group. As you might or might not be aware, we had an S1 registration that had been out there since September 2010 that we pulled in March. And so we hadn’t been able to talk through about that business for about 18 months now. So he kind of re-explained that business to folks and the various products that we’re working on.

So, the highlights for that business are that we have gotten long-term contracts with MRI suppliers to be their supplier for superconducting wire, which is a big win for that group, and have done a great job with the low-temperature superconducting wire. And one of the things that we’re doing this year is moving from our existing factory to a new factory for the wired business.

On the device side for that business, it creates beam lines and synchrotrons and RF cavities, and is working on crystal growth magnets, which is a way that you can grow silicon and solar wafers in a gravity-free environment that allowed less variability in the wafers, so you get better pull-through. That’s a future product that has good growth potential, as well as the fault current limiter, which is a high-tech surge protector for the energy grid.

So, those are all future products for that BEST business. So, he spent sometime talking about that. We expect BEST to lose about $0.04 this year, but grow at a 15% organic or 20% FX-adjusted rate, to be about $130 million in revenue this.

And then we had Werner Maas talk about the BioSpin business, since with Agilent buying Varian two years ago, that continues to be an area of interest for folks. So, he highlighted the technology that we have and the portfolio of products as compared with our competitors and some of the growth opportunities for applied markets with our juice screeners and other applied markets.

Question-and-Answer Session

Isaac Ro

Great. Very comprehensive review, and I think it does highlight the range of technologies that Bruker has. It’s certainly one of the hallmarks of the company. And so, with that in mind, want to drill down to the last part, where you touched on the BioSpin business or NMR technology, which I think is probably the single, by far, the single biggest component of the franchise. And that’s one area where you guys have had good leadership position. At the high end you had great competitive wins and so forth. And so, as we look at the secular growth of that industry or that part of the market that you’ll serve over the next few years, how do you think it’s going to play out when we put in context some of the funding challenges that are out there in the world?

Stacey Desrochers

Yeah. I think that funding challenges are challenges for everyone. I think that the way we have combated the funding challenges throughout our history really is to push that technology envelope. That has really allowed us to continue to grow and/or maintain market share in NMR but also across the businesses. So with that business, we continue to invest in new technologies, the DNP which is really an NMR with microwave technology attached to it to enhance the signals and the specificity which you get with your instrument. That is another area of -- where we’ve, you know, it was a concept that was created at MIT and we actually built a marketable product that has had -- is having very good uptake in the market. Those are the types of things that continue to allow us to stave off some of the potential challenges in the funding, government funding area.

Isaac Ro

I think if I remember correctly, the analyst meeting called out for something like 3% to 4% growth in NMR over the next few years. Is that predicated on a little bit of -- I mean, how would you break out the components of pricing versus share and maybe a little bit of mix in terms of achieving that number if the funding environment remains challenging?

Stacey Desrochers

I think that we -- really it’s hard, I guess, to kind of parse out the pieces of it. There’s, you know, competition is always the challenge with pricing, and so on the lower-end instrumentation, there’s a lot of that competition there in the higher end. There’s less competition with that so we can maintain some of the pricing. But I think that as we try to move, that business probably has the most academic government customer base. As we try to move more into the industrial and applied customers, that helps as well with potential funding issues or changes in the market environment.

Isaac Ro

Okay. So, on hold pricing, you feel marginally positive about just given the puts and takes. And then, is it fair to say mix loss will help you grow faster than the overall funding fixture?

Stacey Desrochers

Correct.

Isaac Ro

So, is that a function of just using the technology into the low end with smaller systems into new customer hands? Or how do you grow the market?

Stacey Desrochers

Definitely helps with the low-end instrumentation giving it into different hands, and then just making the instrumentation easier to use and/or more software function specific or solution selling, which we’ve been doing across all of our businesses, again, not just in the BioSpin Group, so, making it so that non-scientists can use the instrumentation and/or you get easier, readable results out of those instruments. Those make it easier to move out of the traditional markets into more industrial markets.

Isaac Ro

Got it. And if we look at the applied markets, the sort of commercial opportunities for the technology, what are some of the things you need to do to engineer those products so that they’re more applicable to those customers, versus the traditional research customers that you serve with NMR?

Stacey Desrochers

So it’s really on the software pieces of it you need to make that very intuitive and user-friendly, and we’ve done a really good job over the past few years of doing that. There’s a lot of red light/green light or a series of results versus “here’s your spectra” and you figure out what that means. So we’ve done a much better job of getting to the answers for people versus having them try to figure out what the answer is.

Isaac Ro

Okay. Let me just take a minute and switch over to the financial side of the story and start with just sort of how you’ve gotten to where you are today which is through a lot of pretty opportunistic M&A. You’ve gotten the new product categories, beyond NMR obviously, and mass spec into some other highly-coveted technologies like HPLC, bought Michrom. You also gotten into some applied markets with the Veeco assets. So, how do you look at M&A criteria going forward, to the extent that there’s a lot of activity out there and rates are low, so there’s a ripe, fertile landscape for M&A. What are you looking for as major criteria for future deals?

Stacey Desrochers

Well, first and foremost, we’re a tools company, so there’s other types of things we’re going to look at. We’re going to look at tools companies that have products, actual, real products, not vaporware, with proven technologies. We tend to historically look at smaller acquisitions, $1 million to $25 million range type of acquisitions that has that good proven technology that are distribution limited. So, things that we can really buy and then add value day one, plugging them into our global distribution network. So that’s the types of acquisitions that we would look for.

We are again not going to look probably at a consumables company for the sake of consumables. It’s going to be tools. We’re really going to kind of stick to our knitting on those things.

The $1 million to $25 million acquisition size is kind of the rule of thumb. That being said, the Veeco acquisition of Bruker Nano Surfaces was $230 million, and if we could find another one of those, we would do it in a heartbeat because it’s been such a great acquisition for us. So we have the capacity from a capitalization standpoint to do something larger; it’s just finding that.

Isaac Ro

[Remind us] on the balance sheet, where you guys think you would be willing to go from a leverage perspective. You could argue the company’s under-levered, give a view on, just given your risk tolerance, what you think would be reasonable if you saw a sizable asset?

Stacey Desrochers

We are currently 1.2 times levered. We would definitely go to two times, which is not anywhere near highly levered at all of foreign acquisition. We might be willing to go slightly above that for the right thing, but have a plan to quickly come down to the two-or-under level, but that’s probably as high as we’d be willing to go from a leverage standpoint.

We have plenty of capacity under our revolving credit facility. We have $250 million of availability, so we could go out and do a sizable acquisition. In January we put out a private placement with five, seven, 10 and 12-year debt. So we now do have some structural long-term financing out there that we’re comfortable with.

Isaac Ro

Okay. And maybe if you look at the P&L side, obviously the gross margins had been somewhat stagnant over the last five, six years, in that you guys have brought in a bunch of new products into the portfolio, some of which have pretty dragged the margins over the long term. So, can you walk through the longer-term assumptions here going forward on gross margin, where you think they can go? And maybe, operationally, some of the key initiatives that you have in place to sort of realize that trajectory?

Stacey Desrochers

Sure. So we think actually gross margins have creased up over time. They were in the mid-40’s and they are approaching 50%. I think that we had had a goal of getting gross margins to 50%, and we think we can do slightly better than that over the long term. Where that number resides, over 50%, not really sure, but definitely over 50% on the gross margin line.

As I said, we have an 18% adjusted margin goal for 2014. Some of the drivers behind that, obviously, are higher gross margin products which, as we’ve developed new products within our R&D pipeline, all of those products need to have 50% or higher gross margin. So, as those replace some of the older products, those fall off, obviously growth in operating margins go up as a result of that.

We are looking at making our products easier to manage and easier to -- I'm sorry, manufacture and easier to service. So, having lower part counts and things like that obviously helps with margins.

And then we’re looking at the entire production processes and seeing where we can make improvements in those. We have, in February, we appointed a new gentleman, Stephan Westermann, to be VP of Production Logistics and Order Execution, so, really taking control of those operations type roles and really trying to drive improvements there. So he’s focused on that whole order execution process timeline and making that more efficient.

And then also we are focused on looking at outsourcing non-key components. There are many things that we make in-house today that there’s no need for us to do. So we will over time outsource those non-key components, whether that’s to Asia or elsewhere has to be determined. And then also looking at consolidating purchasing within division and across the company. That’s an area where we have not taken as much advantage of our purchasing power as we could. So, you’ll start to see those things help with improved operating margins in the future.

Isaac Ro

Got it. Okay. On the, you know, you have a focus you guys tend to spend or invest rather more of the budget into R&D as a percentage of your revenue than your comps, and then that certainly paid off in terms of innovation. So, if you intend to sort of stay focused on the homegrown technologies, how much leverage can there be in the R&D line as you grow the business from here?

Stacey Desrochers

Right. So, R&D the past couple of years has been almost at 11%. We expect that we will probably get to a steady run rate of about 10% of expense on R&D or as a percent of revenue. And that’s probably where we will keep it. We really think that it’s very important to continue to spend on R&D and new product development. That’s really what’s been driving our above-average industry revenue growth for the past few years and we think this is an important driver to having it continue in the future.

Isaac Ro

So, you know, speaking about that R&D investment on the long term, knowing the future deals, hard to predict exactly when and how big, but do you have an internal goal of growth in a given year that you’d seek to drive from new product launches? Is there a percentage contribution of growth that you want to achieve from new products?

Stacey Desrochers

It’s a product-by-product goal depending on the markets and the penetration within those markets. Most products, though, take six to nine months to ramp to volume. So, the things, for instance, that we introduced at ASMS two weeks ago, we won’t see contribute to revenue probably until the end of this year or into the beginning of 2013. And that’s very typical of the new product lifecycle for all of our products.

Isaac Ro

If we sort of -- so that’s sort of an iterative process you --

Stacey Desrochers

Sure.

So if you could kind of smooth it out over the course of any given year, is there, you know, if you have a mid to high single digit organic growth rate, is there a contribution of that that comes from new products year in, year out by -- in terms of your goals?

Stacey Desrochers

There is. I'm not sure that we have specifically talked about at all. And so I guess I'm not willing to kind of talk about that --

Isaac Ro

Sure. Would you consider down the road talking about the sort of R&D productivity, how you measure that in terms of how it translates into organic growth?

Stacey Desrochers

Yes. I think that we definitely will be doing that in the future.

Isaac Ro

Okay. Below the line, tax rate is a little bit higher than the peer average even though your geographic mix is actually not all that dissimilar, maybe slightly higher weighting in Europe. But as we think about things you can do from a tax planning perspective, other items below the line that will help to give you a little bit more of an EPS growth on the growth rate, how would you think about planning there?

Stacey Desrochers

So I think we have a complicated org structure that is historical in nature as a result of the additional of the Bruker entities back into one company. But I think also that adds to some of the tax rate issues and some of the complexity. I think we are over time reducing the number of entities we have, so that will help a little bit some of the things that our competitors have done that you probably won’t see us do in the near future, is moving IT to Ireland or Hong Kong or things like that. That’s just not something that we are yet comfortable with.

That being said, we have a new tax director that started maybe a month or so ago. He’s going to re-look at our whole structure and are there other things that we could potentially do different types of tax structures, whether they’re check-the-box structures or just revamping some of the ways we do our tax planning. So I would expect that in the next six to nine months we might have a plan as to how we get to a place where our tax rate is lower.

Isaac Ro

Right. Okay. Let’s just take a few minutes and take the forward view, and if I add a sort of ballpark the two biggest themes that keep coming up over and over again at the macro level, it’s obviously NIH funding, first, and then secondarily, the regional issues, certainly in Europe and to a lesser extent China. If we could start with the first one, on NIH funding, and just really more broadly for you guys, global austerity, I mean you guys still probably [feature] your products into the end-markets that are served by government funds more or less. I think that’s the first thing that always seems to be an issue that people struggle with when they think about how you guys can grow in the world we’re in. Just give us a sense of what kind of an NIH funding/economic funding picture in the western world that you think you need to see to hit your guidance this year and for the long term?

Stacey Desrochers

So, NIH as a standalone is only about 5% of our revenue. That being said, as I’ve said, 64% of our revenue in 2011 came from academic, government, non-profit organizations. That is down from 72% of our revenue in 2008. So, our industrial and applied was 30% in 2011, up from 16%. So, some of what we’re doing proactively is to move revenue. We want to someday get to kind of a 50/50 split on revenue, industrial, applied, academic, government. So we’re moving to that way so that we will help reduce that reaction to our overweight in the government and academic areas.

That being said, that’s been a good place for us to be in the past and continues to be all right for us. I think one of the things that we constantly say about NIH funding is that it’s a giant pool of money and we are a very small player in that. And so, whether the big budget goes up or down by 3% to 5% doesn’t really affect us that much. There’s still potential opportunity for us to grow within the overall NIH budget.

I assume Europe is the next part of that question. Europe as well, people again focus on that being something that they get concerned about when they look at Bruker. Forty-one percent of our revenue in 2011 came from Europe, down from 52% in 2008. Again, the Asia Pacific region and the Americas regions have grown faster than Europe. It’s not that Europe is shrinking for us. It continues to grow and be a strong area for us.

Europe, we are always more positive than other folks, and I think some of that has to do with the fact that we grew up in Europe, it’s our backyard. We are in more countries than our competitors in Europe, not to say that our competitors aren’t in Europe. They are. It’s just they’re not in as many markets as we are in. They’re all in the big markets but not necessarily in some of the smaller, less-known markets.

Last year we saw good growth in the former eastern bloc countries. Those were big pockets of money that some of our competitors didn’t get. Turkey was good for us last year, continues to be good for us this year. We actually sent out a press release today on the MALDI Biotyper big order for Turkey today. Russia as well, good at the end of last year and continues to be good for us this year.

So we feel that we have good presence in Europe and the ability to find those pockets of monies for growth. And a lot of it has to do with the longstanding relationships and our reach in those areas.

Isaac Ro

And if you could qualify how you think about Europe as a region this year to [shooting to] growth, what kind of a ballpark growth assumption do you have on a regional basis for that market? Are you able to [tease] that out versus the Americas and Asia?

Stacey Desrochers

Unfortunately, we don’t. That’s not how we build our budgets up. We really do them on a divisional basis, so I don’t have visibility to kind of an overall what we think Europe is growing, because our BioSpin Group will say it’s growing x for them versus the Daltonics business. And so we don’t kind of aggregate it that way. So I really don’t have that visibility on a global basis for us.

Isaac Ro

Sure. Well, how about if we look at some of the growth markets in Eastern Europe that you mentioned, what is it about the competitor dynamics where you guys have done better perhaps than the peer group companies? Is it just a function of having more feet on the street, have bigger channel reach, or a better understanding of the local politics and funding dynamics? What allows you guys to do so well in those areas where [presumably] your competition is at least aware?

Stacey Desrochers

I think in some of the places we just have less competitors. So I think if we talk about mass spec, for instance, as the most competitive market in which we compete, there are four other competitors and only two others are in a country, then that obviously gives us better odds. We don’t win every single deal everywhere, but the less competitors there are, the better chances we have of winning those.

And then I think that we really just have a much better group of people and relationships with folks on the ground to understand when new funding is coming and having the right relationships with those people to understand what that means for us as compared to some of our competitors, in some places, not all places.

Isaac Ro

Got it. Okay. If we look over the emerging markets, we didn’t touch on China yet. It’s probably a smaller part of the business than some other companies but still high growth area and one where you guys have built up a good following I think in the academic channel in Beijing and so forth. Just remind us kind of what your goals are at least this year for China and then sort of how you plan to get your share in that region where other -- some of your larger competitors have been there and maybe more aggressively investing.

Stacey Desrochers

Sure. China is a place we’ve been for a pretty long time, it’s about 10% of our revenue and grows very quickly each and every year. We do have a good customer base in the academic side. That being said, we do have good growth and representation on the industrial and applied markets as well.

Isaac Ro

The superconducting business, that’s an area where the S1 has originally been strong, you guys are now going to hang on to that asset theoretically for a further longer period of time. So, maybe just give us a little sense of how you’re going to achieve the double-digit growth there that you’ve outlined and what you need to do over the long term to bring the margin there up to at least closer to the corporate average or at least a level where it’s a really less of a drag on the total earnings of the company.

Stacey Desrochers

Right. So I think that Tom on Friday said that we probably won’t see that business be at margins similar to the 15%, 18% level until it hits about $500 million in revenue. So, really that needs a significant uptake in the sale of the devices. So, we need to get to market products for the crystal growth magnet and the fault current limiter to -- in order to kind of get those margins [to growth].

However, I think that historically BEST has been given the edict of go grow revenue as fast as you can and do kind of a land grab and don’t worry about the costs from a drag perspective. I think now it’s at a good size business that now they’re being told to focus more on the margins. So I think in the next couple of years we’ll see them stop being a drag on EPS and will start maybe even contributing.

Isaac Ro

[inaudible]. If I could ask, a minute left or so, any questions from the audience? I don’t want to monopolize the whole thing.

Okay, if not, let me just ask one more on margins. That’s obviously been the source of upside most recent quarter, you guys have had as far as revenue beats versus the consensus view for the last couple of quarters, but the margin has finally delivered I think at the operating line in a nice way. So if we look at the balance of the year, what needs to happen operationally as well as in the big picture? What kind of an environment operationally do you need to keep delivering pretty solid operating margin improvements?

Stacey Desrochers

I think we just need to focus on the operational improvements. I think that obviously revenue helps drive margin improvement, but there are lots of opportunities with or without huge revenue growth, and I talked about a lot of them, whether that was the purchasing or the quote to cash or fixing or optimizing our production processes. So there’s just a lot of opportunities there. And we don’t need to get them all right this year in order to make margin improvements; we just need to continue the focus on doing those things and getting them done to make -- to continue to make the margin improvements that we saw in the first quarter.

Isaac Ro

Okay. Great. Well, I think we’re a little over time now. So, thank you for coming again this year.

Stacey Desrochers

Thank you.

Isaac Ro

Thank you, guys. And we’ll see you again soon.

Stacey Desrochers

All right. Good.

Isaac Ro

Thank you.

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 Corporation's Management Presents at Goldman Sachs Healthcare Conference - Conference Call Transcript
This Transcript
All Transcripts