Bruker Corporation (NASDAQ:BRKR)
Bruker Corporation at UBS Global Life Sciences Conference
September 20, 2012 08:30 AM ET
Charles Wagner – Executive Vice President & Chief Financial Officer
Good morning everyone. So, I am Charlie Wagner, Chief Financial Officer of Bruker. I have been Chief Financial Officer for all of 75 days at this point, and so, still in learning mode with the company, but have some messages today, see a few familiar faces in the audience.
Prior to Bruker, I have CFO of Progress Software, which is based in the Boston area, and prior to that, I was in life science as the CFO of Millipore Corporation where I had been for about eight years. So, good to be here today, good to be with Bruker and good to be back in the life science industry. We will just pause for a second and flash up the Safe Harbor statement, and then, we can dive right in.
So, for those, I am sure there is a mix of folks in the room who are familiar with Bruker and those perhaps who are less familiar. Bruker is a leading provider of analytical and scientific instrumentation and solutions for the life science and applied markets. In 2011, the company generated revenues of $1.65 billion. Our 6,000 or so employees are organized in two large, two groups, really two reporting segments. The first and the largest which really is the bulk of the company, the Scientific Instruments segment, otherwise known as BSI, generated 94% of our revenues in 2011. The other piece is focused on Energy and Superconductivity markets known as BEST, 6% on the company’s revenue in 2011.
With the size that we have achieved and the global employee base that we have, Bruker is a large substantial company, even if though today is not quite a household name. The company is like most companies on a journey. And Bruker’s journey started over 50 years ago. The company was founded in the ‘60s in Germany, really around core technologies in NMR and other technologies. The company grew through the ‘70s, expanded globally, expanded the technology portfolio in the ‘80s and the ‘90s, but the Bruker Corporation that exists today, really only came together in the last decade or so. Throughout most of its history, Bruker was three or four separate companies, all with the common starting point, but grown separately and independently through the years, through a series of acquisitions, those companies were rolled back under Bruker Corporation parent company in the 2005/2006/2008 timeframe. So, the company in its current incarnation really has only been together in the last four to five years or so.
Given that history, the company is very decentralized, and as we look at where we go from here, starting last year into this year and onward, it’s very much about a period of selective integration, streamlining and optimizing the portfolio of Bruker today. So, what differentiates us? A lot of it is around innovation and growth. Bruker has a tremendous portfolio of high-performance instrumentations that have broad application across life science, material science and other applied markets. The company is proven in its innovation capabilities and has an outstanding IP portfolio.
Bruker is recognized as a premier brand in scientific instruments and analytical instruments, and particularly known for its technology advantage in key technologies. But also, it’s not just a technology arms race. Bruker is very much focused on being close to the customer, customer intimacy at the application level, understanding how the instruments are being used, what the customer is trying to achieve, and I think that is certainly a key ingredient to our growth story in recent years.
We back up that, that focus on innovation with a pretty significant investment in R&D. Over the last three to five years, the company’s investment in R&D has averaged around 11% of sales, meaningfully ahead of other peers in the life science industry. And what that has translated into is a pretty significant run rate in terms of new product introductions with over 100 products introduced in the last four years alone, and that’s across all of our business. We will talk a little bit in a minute about the impact that has, but it’s a proven growth engine for the company, the investment, the closeness to customers, and our ability to translate that investment into new product introduction certainly has driven a good chunk of our growth.
We have augmented the organic growth with some targeted acquisitions, mostly small, several acquisitions in the sub-$5 million range, which are really just technology fillers to fill in gaps in the portfolio, but a couple of more sizable bolt-ons and larger acquisitions as well. 2010 was a particularly significant year for acquisitions with the CAM acquisition, relatively small amount at under $40 million, but a sizable business and a key part of our strategy to expand our offering in life science, and we will talk more about that business in a little while.
And then the largest acquisition the company has done in some time, the Veeco acquisition, which got us into applied markets, particularly for data storage and semiconductor, and the Veeco business, inside of Bruker, it’s called BNS, BNS has been a tremendous acquisition, has grown, helped drive profitability and also brought some new management talent into the company that is quite important. So, combination of organic growth and I would say very selective M&A has contributed to, overall pretty significant growth for the company.
In 2008, revenues were in the neighborhood of $1.1 billion. Last year, $1.65 billion. So, compound growth rate of 14% over the last three years. Pretty meaningfully outpacing most companies in the life science space.
So, that growth has also afforded us the opportunity to balance out our portfolio a little bit. Bruker, given its origins has always been pretty heavily – it’s been a very global company, with presence all around the world for many, many decades, but also given its history, it’s been pretty heavily concentrated towards Europe, with Europe representing over 50% of revenues in 2008, with some of the acquisitions we have done, particularly Veeco and CAM, moving deeper into the life science space. We have been able to shift our business mix such that Europe now represents in the neighborhood of 40% of revenues, and most of the increase, inner shift in the mix has been towards Asia. Asia representing 10% more in 2011 than it did in 2008.
So, while we are certainly proud of our European heritage in the position we have in Europe, a little bit of diversification in the geographic portfolio and greater exposure to Asia, certainly has been a good thing, and we believe it’s a good thing going forward.
Similarly, we have diversified our exposure to end markets somewhat as well. As I mentioned, key markets for Bruker are life science and clinical research, materials research, pharm and biotech, food, chemicals and the petrochem industry, all significant users of scientific and analytical instrumentation. If you look back to 2008, the company today is still predominantly focused on customers in the academic, government research medical field, but we have increased our exposure, particularly again through the Veeco acquisition, increased our exposure to applied markets that are focused on material science, petrochem, semiconductor and data storage and that’s helped shift our revenue mix as well. We continue to believe going forward that life science is an attractive space for us, and even with potentially short-term considerations about sequestration in the U.S. budget and other headwinds, we do believe that long term, it’s the right space for the company, but the additional exposure to applied markets is certainly something that we value as well.
So, even with the growth we have experienced over the last several years, double-digit growth, we do feel that the markets that we address are large enough and provide enough headroom for us to continue our growth. If you define that the served markets that we are in today, we would say that represents roughly an $8 billion market opportunity. If you expand to a broader definition, it’s north of $40 billion to $50 billion in terms of our potential market, as we start to look at expanding from our core.
At the moment, we are certainly committed to staying focused in our existing segments. The
BioSpin business is focused on NMR, MRI and preclinical imaging applications in life science and other fields. We believe that represents $1 billion opportunity. The Bruker Materials Group, otherwise known as BMAT, which is where the Veeco acquisition has really helped us expand, XRD, XRF, SOM, AFM, all technologies geared towards material science and other applications, and again, where we are seeing particular growth in recent years as manufacturing has rebounded globally, there has been some positive trends at times in the semiconductor industry and more recently in the data storage industry. So, that opportunity for us, we feel is probably a $2 billion served market, and one that we are excited to continue to grow sharing.
On the life science side, Daltonics & Optics combined represent about a $5 billion opportunity, particularly focused on fields with GCLC, mass-spec, and related technologies, FT-IR and Raman, all four variety of applications with life science being the most significant. Bruker has had a presence there for some time, though we believe there is continued room for growth. So, overall, I think the push towards growth in the last few years, I think has been positive. We have certainly seen it on the top line for the company, but by no means do we feel that we have run out of steam. There is additional opportunity there in our served markets without going too far afield to push for growth.
The BEST business, which I mentioned focused on energy and superconducting technologies. We think of that business, it’s a good business today. It’s a healthy business, in excess of $100 million in revenues. But really what that is, is an option on the future. As semiconductor and smart grid and other technologies continue to take prominence in the overall economy, we believe that exposure of that through the BEST business is an attractive potential for the future, and one that obviously today represents just a really small piece of our business.
So, while I think growth has been an overwhelmingly positive story for the company for the last few years, our results of turning that into profitability have been more mixed. In 2011, the company’s adjusted operating margins were just below 12%, and that was a decline after two years of steady increases in 2009 and 2010. And this is an area where the management team is very focused, an area that we have talked about quite a bit in the last couple of years, and I think inside and outside, the company is clearly recognized as the opportunity for Bruker to drive value, addressing the profitability here.
At 12% operating margins, we are behind the peer group in analytical instrumentation and applied and life science markets, and we know that we can do better there. So, that’s going to be a key focus going forward, and I am going to touch on that in a minute.
Bit of an (inaudible), but the Q2 results were very similar, I would say the results over the last few years. Outstanding top line growth, but inability to convert that into meaningful increases and profitability. We got out of the gates in Q1 with a very strong start, 15% top line growth FX adjusted, profitability higher than last year, certainly putting a good foot forward there in Q2. FX-adjusted growth of 12%, but a decline in profitability over the prior year. And the way it came in during the quarter was a bit of a late surprise resulted in an announcement at the end of Q2. So, after improvements in 2009 and 2010 to a step back in 2011 and 2012 is certainly disappointing and the management team right now is taking a look at how we start to get on the right foot and drag that back in the right direction.
As a result of the Q2 results, we have adjusted our outlook for the full year. At this point, we are expecting 7% to 10% top line growth FX-adjusted, which is somewhat consistent with our initial guidance at the beginning of the year, though obviously reflects a meaningful slowdown in the second half compared to the first half growth rates that were put out. We have also reduced our earnings estimate down to $0.65 to $0.75, reflecting the profitability of run rate that we are on through the half year.
So, where do we go from here? Bruker, with everything I have described, that will tell you has opportunities, meaningful opportunities to improve profitability, and I would put them in two buckets. One is that as a company, while the growth has been outstanding, we need to go back and evaluate investment levels in certain areas. On a very tactical basis, that could be as simple as looking at headcount hiring and run rate in the first half of the year, and figuring out how to rein that in, in the second half of the year. A secondary consideration in the level of R&D investment. As I pointed out, that investment has generated significant product introductions and significant growth over the last several years, but at 11%, we are well above industry averages, and our feeling that we might be able to make some selective decisions there that reduce our short-term investment without impairing our ability to grow.
The CAM business that we acquired in 2010, has generated operating losses each of the last two years, and is expected to generate operating losses this year as well. That is a business that when we acquired it, we knew it needed to be turned around, we knew that it needed significant investment, and we are making that investment because we believe it’s an important part of our portfolio going forward, but obviously, with the overall corporate trend on profitability, the investment levels in that business needs to be revisited, potentially dialed back. And similarly, the BEST business which I described, basically a breakeven business at this point. There are some profitable segments inside of BEST, but there are also a couple of very significant investment programs, and we will be looking at – as we go through the second half of the year and go through the planning cycle for 2013, looking at the portfolio of choices that we have around investments across our business.
Aside from that though, there are structural considerations that we need to look at as well. As I have described the history of the company, I think you probably get a sense that it’s a very decentralized entrepreneurial organization and while that has served us well in terms of growth, it has not served us as well in terms of profitability. And so, going forward, we are looking at selective streamlining and integration to try to generate better economies of scale from the $1.7 billion portfolio that we have today. Part of that is IT systems, we are currently on multiple ERP and multiple financial systems.
It means that real-time visibility into the business isn’t where it needs to be, and our ability to sort of see and drive improvements laterally across the business is challenged. So, we are currently looking at kicking off a couple of different IT projects that, as you would expect, would take some time, but I think there are important foundation on it going forward.
And then, finally, supply chain and manufacturing footprints. This is an area where the company, again, given decentralized nature, it’s not fully optimized, and so, we think there is significant opportunities as well.
I would say at this point, we are mobilizing. That’s the list of opportunities. We are starting to address some of them selectively, but really I think we are in the mobilization phase. Frank Laukien, the company’s CEO, identified the need to go in this direction over the last year or so, and it started to make changes at the executive level. In the winter, beginning of this year, place an executive in-charge of global order execution production and logistics, so we could start to drive best practices across the company. In the summer, brought me in as the CFO with an outside perspective and experience in helping transform companies in the life science industry.
And then, most recently, in September, an internal reorganization where we have gone from 10 separate divisions to those 10 divisions being organized under three groups with clear leadership of each of the three groups. One of the group leaders is a gentleman named Mark Munch, who joined the company through the Veeco acquisition a couple of years ago, and he is going to help drive better discipline across the businesses in his group. We have got another executive scheduled to join us in January, also from the outside to help on the Daltonics & Optics side of the business.
So, Bruker, I think has been justifiably proud of its organic growth and the way challenge is growing from the inside, but with some of the changes that we need to make in the coming years, I think Frank and the Board have seen that’s appropriate to start to bring in some talent from the outside as well, particularly at the executive level, and these moves over the course of this year I think indicate that there is a serious commitment to go in that direction. And if this new team comes together heading into 2013, we will be working on mid and long-term plans to strive the profitability of the company.
So, while we are not a point yet where we are ready to issue a roadmap on profitability or the actions that would support getting there, I can give you a stance of the type of things you would expect to hear, probably not too surprising. In the near term, as a new CFO, it’s really just about trying better discipline in the finance organization, better insights into the operating results, better quality of forecasting, better accountability, so we that we can get through the second half of this year successfully. As we look at heading into 2013, it’s clear with some of the investment choices we have to make, we need a robust planning process and I view that we have to adjust compensation plans as well to make sure that we don’t have a repeat in 2013 of this year where we are falling short of our targets.
2013, 2014, and beyond will be a series of manufacturing supply chain and IT programs, some of which are contemplated today. Others are, we are really just kicking out feasibility studies at this point, but I would expect that in the next 12 to 18 months, we will be able to lay a roadmap that gives better clarity and better signposts along the way for the changes you are going to expect coming forward.
So, in conclusion, I would say, I think Bruker is a story in progress, and maybe that’s been the case for a couple of years, but I can tell you as a new employee of a company, that’s why I joined. I think there are some very strong foundational elements here. The company’s growth and innovation track record, the company’s brand, the company’s relationship with customers is outstanding. If that foundation were at all not solid, I would say that would be a great concern, but I believe that it is, and I believe the results show that. And there is an opportunity.
I am someone who is attracted to change, someone who is attracted to situations that require transformation and certainly when you look at the profitability of the company, there is a big opportunity there. I think we can see it, and you can see it mathematically that’s one thing. But I can tell you that the level of commitment and the level of mobilization in the company now is greater than it ever has been in the past, and I think we understand for sure our obligation around driving the profitability of the company.
So, when I look at a solid foundation like that with significant upside in value from a profitability standpoint, that’s certainly a situation that attracts me to come in as CFO, and I think that investors certainly want some attention as well.
So, those are my prepared comments for today. Thank you, and we will be having our breakout session downstairs, I think maybe in the Broadway room. Okay. Look forward to seeing you then, thanks.
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