Bruker Corp Q2 FY2020 Earnings Call

Good afternoon, and welcome to Bruker's Second Quarter 2020 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Miroslava Minkova, Director of Investor Relations and Corporate Development. Ma'am, please go ahead.

Good afternoon. I would like to welcome everyone to Bruker's second quarter 2020 earnings conference call. My name is Miroslava Minkova, Director of Investor Relations and Corporate Development. Joining me on today's call are Frank Laukien, our President and CEO and Gerald Herman, our Chief Financial Officer. In addition to the earnings release we issued earlier today, during today's conference call, we'll be referencing a slide presentation. The PDF of this presentation can be downloaded from the latest results section on Bruker's investor relations website. During today's call, we'll be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are available in our earnings release and are posted on our website at ir.bruker.com. Before we begin, I would like to reference Bruker’s safe harbor statement, which is shown on Slide 2. During the course of this conference call, we’ll make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including new risks and uncertainties related to COVID-19 and the COVID-19 pandemic. The company's actual results may differ materially from projections or scenario estimates described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K and subsequent Form 10-Q filings, all of which are available on our website and on the SEC's website. Also note that the following information is related to current business conditions and to our outlook as of today, August 3, 2020. Consistent with our prior practice, we do not intend to update our forward-looking statement based on new information, future events or other reasons prior to the release of our third quarter 2020 financial results expected in early November 2020. Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We'll begin today's call with Frank providing a business summary. Gerald will then cover the financials for the second quarter 2020 in more detail. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

Thank you, Miroslava. Good afternoon, everyone and thank you for joining us on today's call. I hope you and your families are well. These are challenging times as we all manage through a global pandemic that has upended economies and daily lives. At Bruker, as you can see on our Slide 3, we remain focused on our key priorities; number one, the health and safety of our employees, customers and partners; number two, maintaining service levels for our customers; number three, carefully managing our cost structure, while continuing to invest in important long-term Project Accelerate and operational excellence initiatives; and number four, delivering enabling research and diagnostic products that support essential priorities of our society and help fight the pandemic. I am very proud of how our leadership team and our 7,000 employees worldwide have delivered. Our organization has continued to support our customers globally with exemplary dedication, while adhering to appropriate health and safety protocols. Over the last few months, we have supported various initiatives aiming to understand the characteristics of the SARS-CoV-2 virus and of the COVID-19 disease. For example, we are supporting the COVID-19 NMR initiative, which is a consortium of 140 scientists in 30 research groups across 15 countries who are working to determine the RNA and protein structures of the SARS-CoV-2 virus in order to investigate the druggability of such structures with pharmaceutical inhibitors. Between late March and the end of June, we continuously ramped our Bruker Hain deliveries of nucleic acid extraction kits and of COVID-19 PCR test kits to customers in Europe and Africa. In Q2 2020, we reached $7 million in COVID-19 related testing revenues. These revenues came from the sale of liquid handling robots, from about 0.5 million nucleic acid extraction kits and about 0.25 million COVID-19 PCR assays in the second quarter of 2020. We intend to ramp this further in the second half of 2020 and into 2021 and we are presently evaluating additional COVID-19 related tests across our asset portfolio. Just last week, we announced our second generation CE-IVD marked FluoroType SARS-CoV-2 plus PCR test for the detection of COVID-19. The new test targets two independent genes on the SARS-CoV-2 genome, while at the same time differentiating the SARS-CoV-2 virus from four common human coronaviruses. The test is available on our novel Bruker Hain FluoroCycler XT real-time PCR system, as well as on other commonly available thermocyclers. From an operational standpoint by now, all of our major manufacturing sites have returned to the new normal operations with expanding capacity and productivity levels. And we are currently not facing any Bruker factory disruptions anymore as we did in April and into May at certain sites affected by full or partial site closures. Several of our European factories continue to use the short time work approach to reduce their capacities and cost structures during reduced demand. Generally, our teams have done an excellent job in managing our costs and OpEx in the second quarter, which is why our second quarter non-GAAP operating margin has improved sequentially by 390 basis points compared to the first quarter 2020 despite similar revenues. Financially, our second quarter 2020 revenues declined less than the minus 15% to minus 25% year-over-year revenue decline scenarios that we outlined during our last earnings call. We also mitigated the negative impacts of the pandemic on our profitability and cash flow through successful cost control and cost reduction measures, while continuing to invest in our key dual strategic priorities of Project Accelerate and operational excellence. Exiting the second quarter 2020, Bruker maintains a healthy balance sheet and we believe Bruker is well positioned for sequentially improving business conditions in the second half of 2020. I now go to Slide 5 where we show the financial highlights for the second quarter of 2020. Bruker's Q2 2020 revenues declined 13.4% year-over-year to $425 million. Acquisitions added 0.4% to revenue growth while foreign currency translation was a headwind of 1.1%. On an organic basis, Bruker's second quarter 2020 revenues declined 12.7% year-over-year and the reported and organic revenue declines primarily reflect COVID-19 related disruptions to our customers and certain of our operations, along with softer instrument demand by academic, industrial and applied customers due to the pandemic. Our second quarter 2020 non-GAAP gross margin decreased 440 basis points year-over-year to 45.1%, while our non-GAAP operating margin declined 350 basis points year-over-year to 11.5%. The margin decline reflects primarily lower revenues and reduced productivity due to disruption from the pandemic, partially offset by cost control and reduction measures as Gerald will discuss. In Q2 of 2020, Bruker reported GAAP diluted EPS of $0.16 per share compared to $0.23 in the second quarter of 2019. On a non-GAAP basis, second quarter 2020 EPS was $0.21 compared to $0.33 in the second quarter of 2019. On Slide 6, we show Bruker's performance for the first half of 2020. Our revenues decreased by $103 million year-over-year or by 10.8% to $849 million. On an organic basis, revenues declined 10.3% year-over-year in the first half comprised of a 10.5% organic decline in the scientific instruments business and an 8.5% organic decline at BEST, net of intercompany eliminations. Acquisitions added 0.6% of our top line while foreign exchange was a 1.1% headwind. First half 2020 order booking for Bruker’s three scientific instrument groups declined in the mid- to high-single digits organically. In our Q1 2020 earnings call, we shared our expectation that order bookings would soften during the second quarter due to customer closures and disruptions from the pandemic and this was indeed the case. However, our BSI book-to-bill ratio of approximately 1.1 for the first half of 2020 implies the order rate held better than the first half 2020 revenue decline would suggest. Towards the end of the second quarter, academic laboratories began to reopen gradually and this continues as a process that continues albeit with reduced capacities compared to pre-pandemic levels. The operations of our industrial and applied customers also continue to normalize, although with a more uncertain spending outlook. Biopharma markets and order rates remained robust, while the semiconductor metrology markets have continued to rebound. Our life science mass spectrometry and infectious disease diagnostics businesses are growing. Although the environment remains challenging, we continue to anticipate gradual sequential improvements in business conditions as we move into the back half of the year compared to the first half of 2020. Our first half 2020 non-GAAP gross margin decreased 330 basis points compared to the first half of 2019 while non-GAAP operating margins declined 470 basis points year-over-year. We were able to partially offset the impact of the lower revenue and reduced productivity on our operating margin by controlling and reducing expenses. On a GAAP basis, Bruker EPS of $0.22 in the first half of 2020 compared to $0.43 in the first half of 2019, our first half 2020 non-GAAP EPS of $0.35 compared to $0.61 in the first half of 2019. All right, please turn to Slide 7 and 8, where I provide further highlights on the first half 2020 performance of our three scientific instruments groups and of our BEST segment, all on a constant currency basis and in comparison to the first half of 2019. First half 2020 BioSpin group declined low double digits to $246 million. The revenue decline at BioSpin was due to COVID-related customer lab closures and installation delays, as well as the temporary closure of one of BioSpin's manufacturing sites. We have since reopened that site while BioSpin’s academic customers have been gradually returning to their labs and international tenders in applied and clinical markets are resuming. In April of 2020, BioSpin received customer acceptance for the world's first 1.2 gigahertz NMR system, which was successfully installed at the CERM of the University of Florence in Italy. This was a remarkable achievement capping a decade of R&D into groundbreaking 1.2 gigahertz materials and magnet technology. As we indicated on our Q1 conference call, during Q2 of 2020, we recognized revenue on just the NMR console and probes for this particular Italian 1.2 gigahertz system, while the Florence magnet is subject to a multiyear lease contract. During the first half of the year 2020, BioSpin's NMR and PCI systems revenue declined significantly year-over-year due to delivery and installation delays caused primarily by customer disruptions. BioSpin’s aftermarket revenue held steady year-over-year with software revenues higher, although off of a low base. Moving on to the CALID Group. The first half of 2020 CALID Group revenues declined low-single digits to $270.3 million. The modest decline at CALID reflects a significant revenue decline in molecular spectroscopy compared to the first half of 2019, which was partially offset by continued growth in our Daltonics life science mass spectrometry, microbiology and infectious disease diagnostics business. CALID's microbiology and infectious disease consumables, which include our MALDI Biotyper consumables and Bruker Hain nucleic acid extraction and COVID-19 PCR assays grew significantly year-over-year. In life science mass spectrometry, our timsTOF proteomics business saw continued growth despite the challenging business conditions for instruments and customer site installation delays. Revenues for FTIR, NIR, Raman molecular spectroscopy products declined substantially year-over-year due to COVID-19 related disruptions to customer operations, lower demand and a temporary factory slowdown. Please turn to Slide 9 now. Bruker Nano revenues were down mid-teens year-over-year to $246 million in the first half of 2020. The decline in Nano revenues was due to worldwide academic customer closures due to the pandemic, weaker industrial market demand and temporary factory closures at some of Nano's businesses, which also were reopened by the end of May. Nano's X-ray, Nano Surface and Nano Analysis tools all declined compared to the first half of 2019 due to academic customer closures and significantly slower industrial research demand. Semiconductor metrology revenue for the Nano Group held steady year-over-year with order rates improving as semi metrology equipment markets appear to be in a rebound. Finally, BEST revenue in this first half of 2020 declined high-single-digit net of intercompany eliminations due to weakening superconductor demand by MRI companies and governments with research lab disruptions from COVID-19. So, despite the challenges created by COVID-19, Bruker continues its track record of meaningful innovation, which we believe will position the company well for recovery as global market conditions improve. Turning to Slide 9. During the recent ASMS Reboot virtual conference in early June, I believe we were the clear innovation leader as we introduced instrument and workflow innovations for our flagship timsTOF mass spectrometry platform for high throughput, high sensitivity SpatialOMx, discovery proteomics and targeted proteomics. Our timsTOF platform actually maintained a healthy double-digit year-over-year order growth rate even during the difficult first half of 2020. If you take a quick look at Slide 9, you will see at ASMS, we had a very major innovation with MALDI-2 Source, that is really a next generation MALDI source that provides one to two orders of magnitude increase in sensitivity for many small molecules and lipids and it greatly increases the applications range of MALDI mass spectrometry and MALDI mass spectrometry imaging, both of them very important to our business. In parallel in 4D-proteomics and also 4D-metabolomics for that matter on our timsTOF platform, we introduced the targeted so-called prm-PASEF method, a high throughput, short-gradient dia-PASEF method. We did a lot of work on glycosylation analysis, which is very important for viral antigens; whether you're developing SARS-CoV-2 vaccines or serology assays, you need antigens with proper glycosylation patterns and that's another area where the timsTOF platform excels. Moreover, taking this fourth dimension that we keep mentioning in 4D-proteomics, we've shown and some of our collaborators have shown the use of very large-scale accurate collision cross sections using the ion mobility spectrometry capabilities of our TIMS system that are completely unique and that moreover in addition to measuring tens and hundreds of thousands of collision cross sections routinely and at scale also allow excellent machine learning and predictions. So it's really changing the way proteomics is done. Fundamentally, it's allowing about an order of magnitude more information content and capacity, which is tremendously important for the future of high throughput and in-depth proteomics. We also introduced together with a partner company, the Run & Done IP2/GPU 4D-proteomics analysis software, something that has previously not been done and again addresses the bottleneck in high throughput proteomics. If you go to Slide 10, as we’ve said already earlier, we are pleased to announce the customer acceptance of a second 1.2 gigahertz NMR system at the Eidgenössische Technische Hochschule or ETH in Zürich, Switzerland, which was in July and that revenue therefore is anticipated for Q3; it was not in Q2. We continue to ramp our gigahertz-class production and testing capacity at our Swiss BioSpin factory. We've already shipped an additional system to the Max-Planck Institute in Germany. And so, our gigahertz and gigahertz-plus business is really running very nicely and we were very, very pleased with how this has gone so far this year. Moreover, as I mentioned earlier and you'll be seeing more news of that in the future weeks, NMR is really quite important in COVID-19 research. I had mentioned earlier the International COVID19-NMR Consortium with the website being given here on Slide 10, which is very important for functional structural biology and for studying how pharmaceutical inhibitor binding can bind to the SARS-CoV-2 RNA or protein. Moreover, we're making very good progress in our collaboration with Murdoch University in the Australian National Phenome Centre in Perth, Western Australia, in studying what will soon be called, in my opinion, the post-COVID-19 syndrome that comes after the active infection whether it's asymptomatic or with severe symptoms and we are using some very unique NMR and mass spec combined plasma metabolomic methods to study the long-term effects, which are really quite considerable even for patients who barely had any symptoms or had very mild symptoms. So if you like that will be in some ways the third wave of post-COVID-19 syndrome effects that we're only beginning to see now. This is the other six-sevenths of the iceberg that has not emerged yet. And I believe NMR and mass spec with metabolomics will play a very important role as a screening tool for this next focus of our COVID pandemic health concerns. Anyway, let me conclude by reiterating that Bruker remains fundamentally healthy and we continue to invest in our key Project Accelerate and operational priorities that we believe will position the company well for the future. While we anticipate that the pandemic will continue to negatively impact our third quarter financial results year-over-year, we expect sequential improvement in our financial performance from the second quarter to the third quarter of 2020 provided of course that the present second wave increase in infections can be contained. With that, let me now turn the call over to our CFO, Gerald Herman, who will review our Q2 and first half 2020 financial performance in more detail. Gerald?

Thank you, Frank. Hello, everyone. I'm pleased to walk you through Bruker's second quarter 2020 financial highlights, starting on Slide 12. Bruker's reported revenue decreased 13.4% year-over-year to $425 million in the second quarter of 2020, which reflects an organic revenue decline of 12.7%, favorable to the revenue decline scenarios we outlined in our Q1 earnings call. We reported GAAP EPS of $0.16 per share compared to $0.23 in the second quarter of 2019. On a non-GAAP basis, Q2 2020 EPS was $0.21 per share, a decrease of 36% from $0.33 in Q2 2019. Our Q2 2020 non-GAAP operating income decreased 34%, while non-GAAP operating margin of 11.5% declined 350 basis points year-over-year. The decline was principally driven by lower revenue and gross margin performance impacted by COVID-19 disruptions, partially offset by disciplined expense control and certain cost reduction measures we initiated in late Q1. Our entire organization from our factories to our leadership played an important role in supporting these cost control and reduction initiatives. At the end of Q2 2020, our balance sheet and liquidity position remained strong. We ended the quarter with $796.8 million in cash, cash equivalents and short-term investments after substantially strengthening our cash position with our December 2019 debt financing and the partial draw down of our revolver in Q1 2020. Net debt was modestly higher in Q2 2020 than a year ago. During the second quarter, we used cash to fund strategic capital investments, our dividends and our share repurchase activity. In Q2 2020, we repurchased 1.2 million shares of Bruker stock for a total of $50 million. As of June 30th, we have $107.7 million remaining on our share repurchase authorization, which is valid until mid-May 2021. At the end of Q2 2020, our working capital to revenue ratio was slightly higher than a year ago, as we carried higher inventory levels to address supply chain risks related to the pandemic. Slide 13 shows the revenue bridge for Q2 2020. As noted earlier, organic revenue in the quarter declined 12.7%. We had a positive revenue contribution from acquisitions of 0.4%, which is more than offset by a foreign currency headwind of 1.1%. From an organic BSI revenue perspective, Q2 2020 BioSpin revenues declined in the high-teens year-over-year. CALID revenues declined low-single digit and Nano revenues were down mid-teens. Bruker's biopharma revenues, MALDI Biotyper consumables, Bruker Hain molecular diagnostic consumables and timsTOF proteomics revenues all grew in the second quarter, while our academic and industrial research revenues were pressured by customer closures, lower demand and installation delays related to the pandemic. Second quarter semiconductor metrology revenues grew year-over-year. For our three BSI groups, second quarter systems revenue declined in the high-teens, while aftermarket revenue grew low-single digits year-over-year. Despite the revenue declines we've experienced since the start of the pandemic, we exited Q2 with our BSI backlog approximately 9% above the Q2 2019 ending backlog. BEST revenues were down 12.5% net of intercompany eliminations. Geographically and on an organic basis in Q2 2020, European revenues declined mid-single digits. North American revenues were down high-teens. Asia Pacific revenues declined low-double digits, including steep declines in Japan and the rest of the APAC markets. Our China Q2 2020 revenue declined low single-digits year over year as China began to recover from its lockdown. Slide 14 shows our P&L results for the second quarter of 2020 on a non-GAAP basis. Q2 2020 non-GAAP gross profit margin of 45.1% decreased 440 basis points from 49.5% in Q2 2019, driven principally by lower volume, reduced productivity and factory inefficiencies from COVID-19, disruptions to our operations and those of our customers. This was partially mitigated by our cost reduction measures. Q2 2020 non-GAAP operating expenses declined 16% compared to Q2 2019. In March, as COVID-19 spread further into Europe and North America, we took cost reduction actions to support the profitability and cash flow of the company. These included previously planned restructuring actions, primarily within the BSI Nano segment, as well as additional temporary cost measures due to the pandemic throughout Bruker. We expect continued cost savings over the balance of 2020, but we will relax certain temporary cost measures as our revenue and profitability declines were not nearly as severe as potentially feared a few months ago. In Q2 2020, our non-GAAP operating margin declined 350 basis points compared to Q2 2019, as cost actions partially mitigated the impact of the revenue, volume and productivity declines. For the second quarter of 2020, our non-GAAP effective tax rate of 22.6% was 70 basis points below the prior year quarter due to a more favorable jurisdictional mix. Weighted average diluted shares outstanding in the second quarter of 2020 were 154.7 million, a reduction of approximately 2.9 million shares from Q2 2019 following our share repurchase activity. Finally, Q2 2020 non-GAAP EPS of $0.21 decreased 36% year-over-year, driven by lower revenue and margins. Slide 15 shows the year-over-year revenue bridge for the first half of 2020. Revenue was down $103 million or 10.8%, reflecting the first half 2020 organic decline of 10.3%. This included a 10.5% organic decline across the three BSI groups collectively, while the BEST segment declined 8.5% net of intercompany eliminations. Geographically and on an organic basis in the first half of 2020, Bruker's European revenue was down mid-single-digits. North American and Asia Pacific revenues declined low-double digits, including a high-teens decline in China, which had a particularly weak Q1. On Slide 16, our first half 2020 non-GAAP gross profit margin of 45.9% decreased 330 basis points. Lower volume, reduced productivity and unfavorable mix caused the decline relative to the first half of 2019. First half 2020 operating expenses were down 7% year-over-year on our cost reduction measures. All-in, our non-GAAP operating margin in the first half of 2020 of 9.6% was 470 basis points below the prior year period on lower revenue and margin performance, partially offset by cost reduction measures. Finally, non-GAAP EPS of $0.35 per share declined 43% relative to the first half of 2019, reflecting our revenue decline and weaker margins. Turning now to Slide 17. Our free cash outflow in the first half of 2020 of approximately $4 million was similar to that of the first half of 2019. This reflects the lower forecast taxable income, favorable timing of cash tax payments and customer advances in the first half of 2020, which helped partially offset reduced cash generation from net income, working capital inefficiencies and our continued CapEx investments in higher productivity and higher capacity facilities. Our cash conversion cycle at the end of Q2 2020 of 281 days worsened from 237 days a year ago, with the step up driven primarily by an increase in DIO as we carried higher inventory balances due to supplier and customers' lab disruptions from the pandemic and some modest increase in DSO. Turning now to Slide 19. In March, we suspended our guidance for 2020 due to the uncertain business conditions created by COVID-19. Business uncertainties related to the pandemic remain substantial in many parts of the world. And our visibility as it relates to customer operations and spending patterns in certain markets is still relatively low. Our 2020 guidance therefore remains suspended. Although we're not providing guidance, I would like to give you some directional color on how we see the business unfolding in Q3 and over the back half of the year. As Frank stated earlier, we expect that Q3 will still continue to be challenging from a demand and customer access perspective, although to a lesser extent than in Q2, as our academic and government customers continue to reopen. Similar to Q2 2020, we believe it's better to think about a range of scenarios for the third quarter of 2020 with the potential for a 6% to 10% year-over-year revenue decline. On a sequential basis, we expect Q3 2020 financial performance to improve relative to Q2 2020. Please note that of course actual results may be outside these scenario ranges, but this gives you our good faith estimates at this time based on the information currently available to us. Our working assumption is that business conditions and the disruptive impacts of the pandemic will continue to gradually improve in the second half of 2020, although an economic recovery is not anticipated until 2021 or later. Directionally, based on the limited level of visibility we have today, we currently anticipate revenues to decline in Q4 2020 year-over-year but continue to improve sequentially versus Q3 2020. These scenarios also assume that any potential future waves of infections will not lead to new significant lockdowns. In conclusion, we continue to manage through a challenging business environment with unprecedented uncertainties and reduced visibility created by the pandemic. We remain very confident that Bruker will emerge from the pandemic a stronger company with an attractive product portfolio and a promising long-term outlook. We look forward to updating you again on our quarterly progress during our Q3 conference call anticipated in early November. And with that I'd like to turn the call over to Miroslava to start the Q&A session. Thank you very much.

Thanks, Gerald. I would now like to turn the call over to the operator to begin the Q&A portion. As a reminder, in order to allow everyone time for questions, we ask that you limit yourself to one question and a follow-up. Operator, we are ready to begin the Q&A.

Ladies and gentlemen, we’ll begin the question-and-answer session. Our first question today comes from Patrick Donnelly from Citigroup. Please go ahead with your question.

Frank, maybe just on the academic government market there. Obviously, one, a lot of your peers have called out it being slow to come back online as well. Can you just talk through the trends that you're seeing there throughout the quarter and maybe even into July, any geographies particularly weak or strong? And then with that one, is that kind of the primary reason you guys are thinking Q4 will probably still decline, or is that market just very slow to come back?

Well, obviously, China began to open first but the opening in China is not that fast. It's not that they had a V-shaped recovery or reopening. Europe is ahead of the United States. Also, the infection rates are now generally lower in Europe. As you have seen, the U.S. academic and government customers are all cautiously gradually reopening. Of course, I'm aware that not all students are coming back but that doesn't really affect us; grad students, postdocs and professors that drive the research part of the academic enterprise are reopening gradually, just obviously under these new normal conditions that are different from working previously. So access to labs is improving. The same is true in Japan. There are some geographies like India or parts of Australia that are quite difficult and there are sometimes additional lockdowns and restrictions, but things are generally improving. We think it's a gradual process; that's why we think probably by the end of Q3, most academic customers will be back in the research business, although not with quite the same productivity and capacity that we’ve seen prior to the pandemic. And I would also point out that there is applied and industrial market demand that, even independent of the pandemic disruptions, is facing an economic downturn. How quickly that recovers is uncertain; we expect ongoing recovery in the second half of the year but we do not model this as returning to pre-pandemic levels this year.

And then, Gerald, maybe just on the cost actions you guys took in the quarter. Certainly some pretty effective, they kept margins more resilient than we had expected. How should we be thinking about the durability of those cost savings? How aggressive you guys will be in the back half again kind of expecting negative growth both quarters? Any helpful commentary you could have on the margin cadence there for the remainder of the year would certainly be helpful.

So we're quite pleased actually with the overall actions that we took and the results that we achieved. The cost reduction actions were quite effective for the second quarter. We made very significant progress with respect to that area in the second quarter and we expect to be able to carry a number of those elements into the third and the fourth quarter. However, I would not expect the level of cost savings to necessarily translate one-for-one, especially as we move into the third and the fourth quarter. As I noted earlier, we are expecting to see sequential improvement both in our revenue performance and we would expect that to translate into better financial performance all the way down the line. So I think that's probably the best I can say relative to Q3. And we don't have particularly good visibility as it goes to Q4 but our expectation would be the same relatively speaking there.

Our next question comes from Tycho Peterson from JP Morgan. Please go ahead with your question.

I guess another question about the back half of the year as we think about the industrial trends. Could you talk a little bit about to what degree you're baking in some improvement there on the industrial side and where you're seeing it?

Well, it's hard to disentangle, Tycho. We think other industries like the automobile industry, where we're not heavily exposed, are getting their own disruptions. To the extent that those disruptions were due to lockdowns or supply side disruptions, we expect that to improve. What remains unclear is how the economic downturn will play out once the disruptions are over. We expect industrial demand even after lockdown-related disruptions are removed will be lower because we're effectively in an economic recession. With that we're taking a cautious view of industrial and applied markets. We expect them to continue to be down, even as the disruptions per se are hopefully addressed, barring a second wave of lockdowns. So we don't have precise numbers, but we expect industrial and applied demand to be down.

And then you highlighted NMR for COVID. Just curious about how you think about COVID-related research on the overall proteomics portfolio and you alluded to some incremental investments. Can you maybe just talk to how you're thinking about that going forward?

So proteomics for us is almost entirely the timsTOF mass spectrometry platform. We announced a number of new capabilities at the ASMS conference. There is also the HUPO meeting coming up in October where we'll have more innovations and workflows for that platform. We continue to invest in the capabilities of that 4D-proteomics platform for more workflows and additional capabilities. You'll see more of that as we proceed through the year and into next year. That remains a high priority for continued investments and also investments in collaborations with industrial and academic partners. On the ultra-high field NMR side and for functional structural biology, which is primarily where NMR is involved and which distinguishes NMR from cryo-EM or X-ray crystallography—i.e., NMR can probe functional and binding and dynamic information—that's going technically very well and we also decided to make incremental investments in our factory and testing capacity in Switzerland. So both of these are part of the ongoing Project Accelerate investments that we have not slowed down or deprioritized at all.

And then just one clarification before I hop off on your comments on Europe; we did see the Horizon funding get cut. Is your view that that's not necessarily going to be disrupted in the back half of the year, or how material could that be?

Well, it was disappointing but it's more of a multiyear effect. So I don't expect that to have a dramatic immediate impact. Europe has been one of our better performers so far this year and we expect that to continue. Fortunately not all R&D funding for academia in Europe comes from the Horizon budget; a very large amount comes from national budgets such as Germany, the UK and France. They have sizable investments planned in priorities that align with what we offer for spatialomics, proteomics, metabolomics and other priority areas. So the Horizon slowdown is a disappointment but it's more of a multiyear effect and we think it will be mitigated by national R&D budgets.

Our next question comes from Chris Lin for Doug Schenkel from Cowen. Please go ahead with your question.

This is Chris on for Doug today. Firstly, just provide a bit more detail on order trends and demand from the U.S.-based academic government customers, given that this is last fiscal quarter for that NIH budget. Have you seen any indications that this customer base could accelerate spending before the end of each fiscal year?

For us, the budget flush or year-end spending isn't as significant a factor as it might be for some consumables companies; we don't see huge swings. U.S. academic orders have been coming back more slowly than European academic orders. The reopening of U.S. academic sites has been slower due to higher infection rates and other reasons. While we expect federal funding for life science R&D—NIH, NSF, DOE and others—to remain strong and perhaps increase in future years, there are concerns at some private universities about reduced tuition and housing income or hospital revenues. So U.S. academic spending is a bit of a mixed picture despite likely solid federal investment priorities. Under the surface, trends for spatialomics, proteomics, post-translational modifications, glycomics and metabolomics are very good. These areas are becoming more scientifically important and accessible using our timsTOF technology and other technologies beyond next-generation sequencing and transcriptomics. So it's somewhat mixed for the U.S.

And then just for my follow-up question, another question on COVID tailwinds. I think you talked about evaluating additional assays addressing COVID-19. Are these molecular-based or serology-based and what would be your go-to-market strategy? And just on the financial side, I think you mentioned that COVID-19 tailwind approximated $7 million in Q2. What do you expect in Q3 and Q4? Thank you.

If you recall, our COVID-related molecular work was quite de minimis in Q1, so the $7 million is not a huge number but it is a meaningful improvement. We realized that it doesn't offset some of the other headwinds, but it's a start. We are developing further molecular tests, including second-generation PCR tests. We're looking at expanding geographic coverage for sales, ramping capacity, and evaluating additional refinements and capabilities in molecular tests. We're also in pilot phases for two additional types of tests related to Bruker Hain. One is indeed a serology test targeted at Europe and Africa; we're evaluating performance, workflow, economics and market acceptance in a pilot. We also have a pilot project for active disease antigen testing from nasal swabs as a faster point-of-care screen compared to PCR. So there are several initiatives. Lastly, on the BioSpin side, we are seriously exploring NMR and mass spec combined tests that might be needed in the future as a risk screen for post-COVID-19 syndrome; metabolic signatures detectable via NMR and mass spec might play a significant role. That is longer term but could become very important.

Our next question comes from Dan Leonard from Wells Fargo. Please go ahead with your question.

I guess first off, can you elaborate on booking trends in the quarter? Is it right that the bookings decline was down pretty comparable to the revenue decline? And Frank, could you comment on your ability to build an order book for '21 and beyond while labs are operating at reduced capacity?

Yes, bookings were down similarly to revenue overall. For BSI, however, we did build a little backlog in Q1 and Q2, with a book-to-bill ratio close to 1.1, partly because not all labs are open and because in April some of our facilities had temporary slowdowns. We are building some backlog that we may not be able to consume entirely in the second half of the year, so we're focused on sequential improvements and positioning ourselves for a healthier 2021. We're very focused on investment, bookings and go-to-market strategies to set up for that recovery next year.

And then as a follow up. Frank, could you elaborate a bit more on your comment around ramping your ultra-high field manufacturing capacity. Should we think about an acceleration in your annual placement rate of the 1.2 gigahertz magnets as a result?

Yes. Historically we tend to deliver roughly four systems a year, not all necessarily 1.2 gigahertz—sometimes 1.1 or 1.0, which we classify as gigahertz-class. We're working to increase capacity so that hopefully by 2021 and certainly by 2022, we can deliver more than three to four systems a year and increase our placement rate of gigahertz-class systems.

Our next question comes from Derik DeBruin from Bank of America. Please go ahead with your question.

Just a couple of clarifications: the down six to down 10 scenarios for the third quarter, that's total revenues reported?

It will be similar; the scenarios we provided were for reported revenue.

Just to clarify, we're not officially guiding; we're providing some scenarios. Those scenarios were for reported revenues and would imply improved financial results at the operating margin level and at the EPS level if realized.

And so basically flattish FX in the third quarter and then fourth quarter, any idea given how rates are all over the place?

The volatility in foreign exchange has been significant in the second quarter and we're watching it closely. Our expectation is that the foreign exchange impact down to the bottom line will be relatively modest and that the revenue line will show a similar headwind to what we experienced in Q2, where foreign exchange was a 1.1% headwind. Q2 was a bit unusual in volatility, and we hope for more stability as we move through Q3 and Q4, but it's not yet clear.

Right. Because that's where I was actually going on sort of the bottom-line impact and clarifying that as those currencies move.

Yes. As I said, Q2 was a little unusual on volatility and hopefully we'll see more stability in subsequent quarters.

Right. And I think you answered just a little bit, but I want to make sure I understand. Some SG&A and cost measures you put in place—you're going to add some expenses back but not all of them, right?

Yes, that's correct. The approach depends on business conditions. As conditions improve, some of our operations will move back more quickly to a more normal cost structure while others may remain at a lower cost structure depending on what transpires. Some temporary measures will be relaxed as appropriate.

For example, travel and entertainment will continue to be down. Many conferences are virtual. Some temporary salary and compensation reductions that we've asked management teams to take temporarily will be allowed to expire as business improves. We greatly appreciate the leadership and solidarity of our employees who accepted temporary reductions, but we will relax some of these temporary compensation measures in Q3 or Q4 as appropriate.

And if I can squeeze one more in, you talked about the metrology markets picking up a bit. Could you elaborate a little bit more? And obviously, there's a lot of emphasis on people reshoring and bringing semiconductor manufacturing back to the U.S. What are you sort of seeing in terms of trends in the metrology market in general?

The IT infrastructure demand due to increased remote work and cloud usage has been strong and was overdue for recovery even before the pandemic. Semiconductor metrology has been recovering and was previously a drag on us in 2019; that headwind is going away and is turning into a small tailwind. Semiconductor metrology revenue was about 6% of our revenue in 2019 and rather than declining, it is a mild tailwind and may become a stronger tailwind along with diagnostics and biopharma proteomics. The metrology piece has very nice incremental margins for us and could help us into next year.

Our next question comes from Puneet Souda from SVB Leerink. Please go ahead with your question.

First question just to clarify on COVID testing: I'm wondering if you can provide, as a number of peers have provided, the capacity that you have for COVID testing in your case, the Hain PCR assay and extraction kit. Can you provide what the capacity currently is and what capacity growth you can potentially expect into the second half? Also can you elaborate if those kits are mostly OUS, it seems that’s the case but are those getting shipped to the U.S. as well?

No, it's OUS only. Our capacity was modest but growing: about 0.5 million nucleic acid extraction kits and 0.25 million PCR assays in Q2. We're continuing to increase that for the second half and into next year. We're not prepared to provide detailed capacity numbers, but we've been able to sell pretty much everything we could produce; we were capacity-limited. We plan further ramping and are broadening geographic markets outside the United States, though currently our COVID-related molecular efforts have been focused OUS. It's modest compared to some larger companies but strategically important. This also ties into our broader MALDI Biotyper and infectious disease diagnostics franchise, which has been healthy and continues to grow, and these consumables have helped make Bruker Hain profitable.

And then I have a couple of questions around timsTOF, and if I could wrap it into one. You're obviously seeing good uptake for the instrument. Can you elaborate a bit—was that what you saw in the quarter, was that coming from pharma or academic? And would the academic situation in the U.S. right now impact continued growth for timsTOF into the fourth quarter? And then appreciate the comments on MALDI. Could you elaborate the mix of customers that are interested in the new MALDI optionality versus traditional ESI, and help size the opportunity for MALDI on timsTOF?

The timsTOF growth was primarily in proteomics, with some metabolomics and imaging, and the growth we saw in the first half was primarily from Europe and from pharma customers—not so much from the U.S. or China yet. We expect continued growth in the proteomics platform. 4D-proteomics technology and high-throughput capabilities are driving an inflection point in proteomics' importance in disease research, and we remain optimistic. Regarding MALDI, if you can do an assay without chromatography—say in a few seconds or under a minute—you can address many applications with MALDI. It's robust, fast and can do imaging, which ESI with chromatography cannot easily do. Increasing sensitivity and broadening the molecular classes amenable to MALDI makes the technology much more applicable to applied and diagnostic markets and mass spec imaging. MALDI-2 is a generational innovation that increases the addressable market for MALDI, complements our growth in proteomics, and may drive a renaissance in MALDI applications. So, timsTOF is the core for proteomics and LC-ESI workflows, while MALDI (including MALDI-2) expands applications, especially in imaging and rapid screening.

Our next question comes from Brandon Couillard from Jefferies. Please go ahead with your question.

Gerald, as far as the third quarter scenarios go, can you quantify the 1.2 gigahertz NMR placement that you had in July and any color as far as your expectations for each of the BSI segments in the third quarter, particularly which ones you think get directionally better?

We're not providing guidance by business group. More generally, overall performance is expected to improve sequentially. Some of our businesses in industrial or applied markets are going to have more challenges than others. Areas like BioSpin and CALID performed stronger due to the portfolio composition, while other industrial and applied markets face headwinds, with the exception of semiconductor metrology which is a small bright spot.

Broadly for the third quarter and the second half, CALID, including life science mass spectrometry and diagnostics, will be the strongest. BioSpin is likely to get stronger in the second half. Nano and BEST will be relatively weaker because they have more industrial and applied exposure. Nano has some bright spots like fluorescence microscopy, and the semi metrology piece in Nano is improving as well.

And then one more, Frank, generally in terms of your forward outlook, assuming the COVID pandemic is somewhat contained here, how do you feel about the '21 outlook? Is there pent-up demand? And to what extent could stimulus plans be meaningful opportunities for you, either late this year or more so next year?

The stimulus plans so far are not especially targeted to our industry. For COVID testing and vaccine development, governments will spend significantly. Beyond that, many stimulus measures are general economic supports like temporary tax reductions and are not specifically targeted to R&D. We hope some proposals—particularly those that increase NIH and NSF budgets—may be helpful, but visibility is limited. There is a general sense that more investment in life science research is needed, but concrete targeted programs have not yet been widely enacted outside the U.S. We're still in the phase of fighting the pandemic and it's a bit early to see clear strategic responses in many countries.

Our next question comes from Vijay Kumar from Evercore ISI. Please go ahead with your question.

Just two quick ones and I'll roll them up into a question. One on the academic end markets: has your expectations changed since early July when you were saying most academic labs would perhaps be open by August? I'm just curious has anything changed for you? And on the order side, the book-to-bill of 1.1—when do orders get converted to revenues? Is that book-to-bill implying some of those orders getting booked after revenues in the back half, or is that more of a '21 phenomenon?

A little of both. We expect sequential improvement: Q3 better than Q2, Q4 better than Q3, and some of that improvement will carry into 2021. At the end of July my view hasn't materially changed since early July. There are second wave hotspots like in parts of the U.S. and Victoria, Australia, but so far we haven't seen broad, nationwide re-lockdowns. I took a conservative view expecting academic and government labs to reopen gradually rather than all at once at full capacity. Regarding conversion of orders to revenue, some backlog will be consumed in the second half, but some will extend into 2021 depending on installation timing, travel restrictions and customer readiness. So it's both a back-half and into-2021 phenomenon.

And our next question comes from Dan Brennan from UBS. Please go ahead with your question.

So not to beat the academic question, Frank, what did that market do in Q2—do you have a number? And what are you assuming for the back half? Also, could you speak to among your customers how the split works between federal funding and university funding, and how to think about the trajectory of both of those?

Academic and government was down in the high-teens in Q2. It's one of the weakest areas. There are clear geographic differences: Europe performed better than the U.S., Japan was very weak, and India and other regions were also weak. China is recovering but not roaring back. Outside the U.S., academic funding is generally solid and we expect disruptions to be temporary, mostly tied to the pandemic in Q2 and Q3 and a bit into Q4. In the U.S., funding is more mixed: federal grants are likely to remain strong, but some universities face reduced tuition, housing and hospital revenue and may cut budgets or slow hiring. About 80% of our academic and government business is outside the U.S., so while the U.S. picture is mixed, the global academic market outside the U.S. should largely normalize once pandemic-related disruptions subside.

Terrific, thank you for that. And maybe one follow-up for Gerald: you commented on margins earlier, could you give any color on COGS, OpEx growth in the back half or incremental margins—any inputs that might help us model second-half margins?

Generally, we expect sequential improvement both at the revenue line and in the gross margin line. Many of the volume and disruption-related inefficiencies we had in Q2 are not expected to be as severe in Q3 and Q4, and while some temporary cost reductions will be relaxed, we expect a net improvement in financial performance sequentially. Likely stronger improvement in Q4 than Q3, but visibility remains limited.

And ladies and gentlemen, with that we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

Thank you for joining us today and apologies to those whose questions we didn't get to answer. During the third quarter, Bruker will participate in the 2020 Wells Fargo Virtual Healthcare Conference. We hope you stay healthy and well and we invite you to reach out to us for a virtual meeting during the quarter. Thank you and have a good evening.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.