Bruker Corp Q2 FY2021 Earnings Call

Good day, everyone, and welcome to the Bruker Second Quarter 2021 Earnings Conference Call. Please also note today’s event is being recorded. At this time, I would like to turn the conference call over to Miroslava Minkova, Senior Director of Investor Relations and Corporate Development. Ma’am, please go ahead.

Thank you, Jamie. Good afternoon. I would like to welcome everyone to Bruker’s second quarter 2021 earnings conference call. My name is Miroslava Minkova, Senior Director of Investor Relations and Corporate Development at Bruker Corporation. Joining me on today’s call are Frank Laukien, our President and CEO and Gerald Herman, our Executive Vice President and Chief Financial Officer. In addition to the earnings release we issued earlier today, during today’s conference call, we will 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 will be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are included 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 we show on Slide 2. During the course of this conference call, we will make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to the ongoing COVID-19 pandemic, the spread of the Delta variant as well as ongoing worldwide semiconductor chip and other supply shortages. The company’s actual results may differ materially from 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 as updated by our other SEC filings, 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 2, 2021. We do not intend to update our forward-looking statements based on new information, future events or for other reasons prior to the release of our third quarter 2021 financial results expected in early November 2021. Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We will begin today’s call with Frank providing a summary. Gerald will then cover the financials for the second quarter in more detail. Now, I would like to turn the call over to Bruker’s CEO, Frank Laukien.

Thank you, Miroslava and good afternoon everyone. Thank you for joining us on today’s earnings call. Bruker again demonstrated excellent progress in the second quarter following our strong start in the first quarter of 2021. During the second quarter, Bruker’s revenues, margins and earnings grew significantly year-over-year, with robust demand for our high-performance scientific instruments, life science and diagnostic solutions amidst a solid end market recovery. Our teams executed well across our core business and Project Accelerate and Bruker is now very well positioned for excellent progress in 2021. Our second quarter 2021 revenues grew 34.4% to approximately $571 million. On an organic basis, Bruker’s revenues increased 27.2% year-over-year, which includes 27.8% organic growth in the Bruker Scientific Instruments groups and 21.8% organic growth at BEST, net of intercompany eliminations. Our Q2 2021 non-GAAP gross margins expanded 490 basis points year-over-year to 50%, while our non-GAAP operating margin reached 17.3%, up from 11.5% in the second quarter of 2020 which was negatively impacted by the pandemic. In the second quarter of 2021, Bruker reported GAAP diluted earnings per share or EPS of $0.38. On a non-GAAP basis, second quarter 2021 diluted EPS were $0.44 compared to $0.21 in the second quarter of 2020. Gerald will cover the drivers for margins and EPS later on the call. But in summary, the strong revenue and volume growth in the quarter drove substantial year-over-year gross and operating margin expansion despite our increased R&D and marketing and sales investments in Project Accelerate 2.0. On Slide 5, we show Bruker’s performance for the first half of 2021. Our revenues increased by $277 million year-over-year or by 32.6% to $1.126 billion. On an organic basis, revenues grew 25.5% year-over-year, again, comprised of 26.7% organic growth in scientific instruments and a 14.3% organic increase at BEST, net of intercompany eliminations. First half 2021 order bookings for Bruker’s three scientific instruments groups grew more than 20% year-over-year organically and our BSI book-to-bill ratio for the first half of the year remained above 1.0. During the first half of the year, many of our businesses saw revenue and bookings growth even beyond what the pandemic recovery would imply as we experienced strong demand across our core academic and industrial businesses as well as in our Project Accelerate high-growth markets. Geographically, our first half 2021 order bookings were particularly strong in North America, China, and other Asia-Pacific markets outside of Japan. Our first half 2021 non-GAAP growth and operating margin and GAAP and non-GAAP EPS performance are all summarized on Slide 5, all stepped up significantly year-over-year as our business recovered and actually accelerated in the first half of 2021. Please turn to Slides 6 and 7 now, where I provide highlights on where I provide highlights on the first half 2021 performance of our three scientific instruments groups and of our BEST segment, all on a constant currency and year-over-year basis. For the first half of 2021, the BioSpin Group revenue grew approximately 20% to $307.9 million, reflecting a recovery in customer demand and installation activities compared to the first half of 2020. BioSpin Systems revenue was up strongly year-over-year, including revenue recognition on two gigahertz class NMR systems in the first quarter of 2021. As expected, there were no gigahertz class systems in revenue in the second quarter of 2021. In mid-June, the U.S. National Science Foundation announced a $40 million award to establish a network of advanced NMR or NAN among three U.S. academic institutions, University of Connecticut School of Medicine, the University of Georgia Complex Carbohydrate Research Center, and the University of Wisconsin, Madison’s national magnetic resonance facility. We are pleased to announce that as a result of this trend, a new recent order for a 1.1 gigahertz NMR system has been received from the University of Wisconsin in Madison. BioSpin’s aftermarket and software revenues also grew strongly year-over-year. In the first half of 2021, our CALID Group revenues increased more than 30% to $385.7 million with continued strong growth in our mass spectrometry and microbiology businesses and a rebound in our FTIR near infrared and Raman molecular spectroscopy product line. We continue to see very robust demand in revenue growth for our timsTOF unbiased 4D proteomics platform, while revenue for other life science mass spec products also grew year-over-year. Microbiology and molecular diagnostics revenue grew year-over-year, driven by healthy demand for our MALDI Biotyper instruments and consumables coupled with a partial recovery of Bruker tuberculosis diagnostic products. During the second quarter, our revenue from SARS-CoV-2 or COVID PCR testing was approximately $6 million. So, first half 2021 revenues of our infrared, near infrared, and Raman molecular spectroscopy products were sharply higher year-over-year with solid execution, new product adoption and a strong global industrial, applied and academic markets rebound. Please turn to Slide 7 now. First half 2021 Bruker Nano revenues grew in the high 20% range to $329.7 million. Nano’s industrial and academic business had a solid rebound with industrial even outperforming our recovery expectations. Revenues for advanced X-ray, Nano Surfaces and Nano Analysis tools all grew substantially year-over-year. Nano’s microelectronics and semicon metrology tools continued to perform strongly with ongoing healthy demand. Finally, fluorescence microscopy revenue was up strongly year-over-year on strengthened academic demand. First half 2021 Nano revenue also included a contribution from our September 2020 Canopy Biosciences acquisition with Canopy single-cell targeted proteomics tools and services. Moving on to our BEST segment, BEST revenue in the first half 2021 grew in the mid-teens percentage net of intercompany eliminations, driven by contributions from big science projects. BEST revenue from superconductors for healthcare and MRI were below the prior year period. However, we see strengthened MRI demand for superconductors in the second half of 2021. Moving to Slide 8, we continue to make very good progress with our Project Accelerate initiatives and investments. At our recent Virtual Investor Day mid-June, we shared our strategies and goals for our potential breakout opportunities in unbiased 4D proteomics and in spatial biology and single-cell omics as well as in our rapidly growing microbiology and molecular diagnostics business. In early June, we introduced two new timsTOF platform systems: the timsTOF Pro 2 and the timsTOF SCP for single-cell proteomics. We anticipate these instruments will further drive our growth in the fast growing and exciting proteomics market. Today, however, for a change, I would like to highlight additional important timsTOF Pro 2 applications in the areas of 4D, four-dimensional metabolomics and 4D-Lipidomics research. As you will see on Slide 8, we had some important new workflows and products and libraries that we launched in the second half of June after our Investor Day and there was a press release on that. Very importantly, we have a new ultra-high sensitivity source for high flow rates, the VIP-HESI source that you see here on the timsTOF Pro, which generally gives us about an order of magnitude sensitivity gain and further improves or enables new applications in small molecule metabolomics and lipidomics research. We were delighted with our collaboration with Scripps on the METLIN-4D large 4D-metabolomics CCS library now with CCS or collision cross-section data at scale with more than 10,000 reference small molecule data entries in this library, all now including this very new important parameter that we can measure at scale, the CCS or collision cross-section. Because our collision cross-sections on the timsTOF platform are so accurately measured, they can also be precisely predicted and we have new CCS predict software developed together with partners that use artificial intelligence and deep learning to make collision cross-sections predictions available for even more small molecule workflows including those in exposomics and in drug metabolites. And finally, in metabolomics, we really have outstanding tools developed organically at Bruker, our MetaboScape and TASQ 2022 software tools and they are used in a variety of applications, for instance, for the reduction of false positive identification in 4D-Lipidomics, which is a very, very important aspect of how to do lipidomics. So great new developments, not only in proteomics, but also in 4D-Metabolomics and lipidomics. So finally, let me wrap things up here. On Slide 9, at our Investor Day, we also noted our continued investments in operational excellence, including investments in environmental sustainability. Here, we just briefly highlight the progress of our BioSpin Group in reducing its carbon-dioxide emissions, energy and liquid helium consumption. For its major new facilities or renovated expanded facilities in Germany and Switzerland, Bruker BioSpin has invested in solar energy in photovoltaic and other energy-efficient systems. Bruker BioSpin’s new campus in Germany has been built to the latest standard with substantially reduced carbon-dioxide emissions for its operations in Germany and Switzerland. We anticipate significant reductions and they are summarized here with much reduced CO2 emissions and lower overall energy consumption. We are also at BioSpin and at BEST investing significantly in helium re-liquefaction capacity in various locations. I won’t go into the details on numbers here, but if you look at this slide in some detail, if you are interested, these are sizable investments and they make a major difference towards environmental sustainability, something we expect of ourselves and something also our customers expect of Bruker. So in summary and to wrap things up, during the second quarter and first half of 2021, Bruker has delivered strongly improved performance with significant year-over-year revenue growth, margin expansion and EPS growth. Our core businesses have rebounded strongly and our higher growth Project Accelerate areas continue to deliver. We are making further investments in our Project Accelerate 2.0 and operational excellence initiatives, including stepped up investments in the second half of 2021. With that, Bruker is well on track for excellent financial and strategic progress in 2021 and we are raising our fiscal year 2021 outlook for revenue growth, non-GAAP operating margin expansion and non-GAAP EPS further, as Gerald will explain and as you can see in our press release. Now, with that, let me turn the call over to our CFO, Gerald Herman, who will review our financial performance and outlook in more detail. Gerald?

Thank you, Frank and thank you everyone for joining us. I am pleased to join you today and review Bruker’s second quarter and first half 2021 financial highlights, starting on Slide 11. Bruker’s revenue increased 34.4% to approximately $571 million in the second quarter of 2021, which includes an organic revenue increase of 27.2% year-over-year. We reported GAAP EPS of $0.38 per share compared to $0.16 in the second quarter of 2020. On a non-GAAP basis, second quarter 2021 EPS was $0.44 per share compared to $0.21 in the second quarter of 2020. Our second quarter 2021 non-GAAP operating income more than doubled from a weak comparison in the second quarter of 2020, which had been negatively impacted by the pandemic. Our second quarter 2021 non-GAAP operating margin expanded 580 basis points year-over-year to 17.3%, driven by strong revenue and volume. This was after absorbing additional investments in our Project Accelerate 2.0 and operational excellence programs and also included a negative impact from foreign exchange translation of approximately 70 basis points in the quarter. We finished the second quarter with cash, cash equivalents and short-term investments of $706 million. During the quarter, we used cash to fund strategic investments, stock purchases and dividends. In the second quarter of 2021, we repurchased approximately 556,000 shares of Bruker stock for a total of $38.3 million. In May, our Board approved a new two-year share repurchase authorization of up to $500 million valid until May 2023. Year-to-date, share repurchases have totaled 1.1 million shares for approximately $71 million. We generated $21.9 million of operating cash flow in the second quarter, which was more than offset by our higher capital expenditures in the quarter, resulting in a $0.7 million free cash outflow for the second quarter. Our working capital to revenue ratio improved from the full year 2020 due to higher revenue and efficiency gains in the second quarter of 2021. Slide 12 shows the revenue bridge for the second quarter of 2021. As noted earlier, organic revenue in the quarter increased 27.2%. We had a positive revenue contribution from acquisitions of 0.4% and a foreign currency tailwind of 6.8%. From a year-over-year organic revenue perspective, in the second quarter of 2021, BioSpin increased in the mid-teens. Nano grew in the low 30% range and CALID grew in the mid-30% range. BEST revenue increased in the low 20% range net of intercompany eliminations. Second quarter 2021 BSI systems revenue increased in the low 30% range organically, while aftermarket revenue grew in the high-teens organically compared to the second quarter of 2020. Geographically and on an organic basis, in the second quarter of 2021, our European revenue increased in the high-20% range. North American revenue grew over 50% off a weak prior year comparison and Asia-Pacific grew in the high single-digits year-over-year. Softer revenue performance in China and Japan was more than offset by strong revenue growth in other APAC regions. Rest of the world second quarter 2021 revenue was also higher year-over-year. Slide 13 shows our second quarter 2021 P&L performance on a non-GAAP basis. Second quarter 2021 non-GAAP gross margin of 50.0% increased 490 basis points from 45.1% in the second quarter of 2020 driven by higher revenue and volume leverage. Second quarter 2021 non-GAAP operating expenses increased 30.9% compared to the second quarter of 2020, reflecting more normalized expense levels after the temporary cost controls and reductions we had in place during the second quarter of 2020. Second quarter 2021 operating expenses also reflect a step up in our Project Accelerate 2.0 investments and a significant foreign exchange headwind. As previously communicated, over the course of 2021, we are increasing our investments in our Project Accelerate 2.0 initiatives and the pace of these investments is expected to step up further in the second half of 2021. Our Q2 2021 non-GAAP operating margin of 17.3% was 580 basis points above 11.5% in the second quarter of 2020. This resulted from significantly higher revenue, volume, and operating leverage in the second quarter of 2021. For the second quarter of 2021, our non-GAAP effective tax rate was 26.7% compared to 22.6% in the second quarter of 2020, with the increase driven principally by jurisdictional mix and the impact of favorable discrete tax items in the second quarter of 2020. Weighted average diluted shares outstanding in the second quarter of 2021 were 152.9 million, a reduction of approximately 1.8 million shares or 1.2% from the second quarter of 2020, resulting from our share repurchase activity. Finally, second quarter 2021 non-GAAP EPS of $0.44 more than doubled from the $0.21 in the second quarter of 2020, driven primarily by higher revenue, gross and operating margins. Slide 14 shows the year-over-year revenue bridge for the first half of 2021. Revenue was up $277 million or 32.6%, including organic growth of 25.5%. Acquisitions added 0.6% to our top line, while foreign exchange was a 6.5% tailwind. And Frank has already covered the drivers for the first half of 2021 revenue. P&L results for the first half of 2021 are summarized on Slide 15. With the drivers largely similar to the second quarter of 2021 that are explained on the slide. Turning now to Slide 16, in the first half of 2021, we generated $72.6 million of free cash flow compared to a cash outflow of $4 million in the first half of 2020. First half 2021 free cash flow benefited from a higher net income partially offset by other items, principally the timing of customer deposits. Our cash conversion cycle at the end of the second quarter of 2021 was 239 days, a reduction of 42 days compared to the second quarter of 2020, reflecting the normalization of our working capital cycle. We continue to carry elevated inventory to better manage supply chain risks including those related to the semiconductor chips and other supply shortages as well as to meet accelerating demand across most of our businesses. Turning now to Slide 18, given our strong first half financial performance and improving outlook in our core business, we’re again raising our outlook for 2021 revenue growth, non-GAAP operating margin expansion and non-GAAP EPS. For fiscal year 2021, we now expect organic revenue growth of 14% to 16%. We continue to project a foreign currency tailwind to revenue growth of approximately 3%. This is expected to lead to reported revenue growth for 2021 in the range of 17% to 19% compared to 2020. Non-GAAP operating margin for 2021 is expected to expand 270 to 310 basis points compared to 16% reported in 2020. Directionally, our guidance model assumes R&D investments at approximately 10% of revenue in 2021, but adjusted now for a lower foreign exchange headwind to our non-GAAP operating margin of approximately 30 basis points for the full year. On the bottom line, this adds up to non-GAAP EPS for 2021 in a range of $1.88 to $1.93, representing non-GAAP EPS growth of 39% to 43% compared to 2020. This also represents 20% plus growth from our $1.57 pre-pandemic non-GAAP EPS level in the full year of 2019. Other guidance assumptions are unchanged and are listed on the slide. Our updated full year 2021 ranges reflect foreign currency rates as of June 30, 2021. While we do not provide quarterly guidance, given the unusual dynamics of 2020 and 2021, I’d like to add some additional color for our expectations on the third quarter. Revenue, margin and earnings comparisons to 2020 become more normalized in the second half of the year compared to the first half. Given strong demand, we nonetheless anticipate Q3 2021 revenue to grow 10% to 12% on an organic basis compared to the third quarter of 2020. This range includes the likely revenue recognition for one additional ultra-high field NMR system. As I noted earlier, we also anticipate a further ramp-up in our Project Accelerate 2.0 strategic investments during the second half of 2021. To conclude, we delivered excellent financial year-over-year improvements in the second quarter. Robust demand and recovery in our core business, plus continuing strength in our Project Accelerate initiatives drove strong volume and pull-through to our operating margin and EPS in the second quarter. Our first half 2021 revenue performance exceeds the first half 2019 pre-pandemic revenues by approximately 13% organically. And we’re currently well positioned for excellent progress in 2021. And with that, I’d like to turn the call over to Miroslava to start the Q&A session. Thank you very much.

Thank you, Gerald. I would now like to turn the call back over to the operator to begin the Q&A portion. Jamie, please go ahead.

And our first question today comes from Puneet Souda from SVB Leerink. Please go ahead with your question.

Hi, Frank. Thanks for taking the question. So first one is really on the demand we're seeing. Hi Frank, can you hear me now?

Yes, we can hear you, but faintly.

Hopefully, you can hear me now. I’ll try to ask and if not, I’ll rejoin the queue. So just in terms of the overall demand that you’re seeing in the market right now, how much—how would you classify that as more of a pent-up demand? And really, as we go towards the fourth quarter, should we expect a normal sort of a fourth quarter cycle in terms of the budget flush and the total overall instrumentation demand that we normally see in the fourth quarter? Is that somewhat what we have seen prior to COVID?

Yes. So Puneet, I think we’re seeing more than just the recovery. This is a pretty strong economy, pretty strong demand now also with the U.S. being very strong in terms of demand. Previously, Europe and China had picked up earlier, as you know. We are seeing great strength in industrial research and industrial QC business as sort of the core businesses that along with academia. Those had been a little bit more sluggish until recently, but now they are very strong in both bookings and revenue. And of course, our Project Accelerate 2.0 initiatives are all doing quite well, and some are doing exceptionally well. So it’s really a very strong picture right now. In terms of normalized, I mean, I would not—obviously we’re very pleased with our second quarter, but it’s a weaker comparison in the second half, the comparisons get more normalized or get stronger. I think I wouldn’t want to point to any given quarter this year as a normalized quarter. I think I would really average over the four quarters, and that’s what we’re managing to set a new baseline rather than to do something that compares to last year’s rather distorted quarters in 2020. So I think we’re obviously making excellent progress. We’re doing much more than just recover. We’re really in pretty fast growth mode right now. And yes, I hope that gives you the type of color that you are looking for. This is really one more point to one of your questions or elements of your question. This is much more than, in our opinion, much more than just pent-up demand or catch up. This is really quite healthy.

Got it. That’s very helpful. And then on timsTOF obviously, a strong installed base four years into the launch. You’re launching new applications into proteomics and new products as well. As you look at that trajectory, what can you provide in terms of the overall growth rate you’re expecting at this point in time? And second, regarding strategy for LC as you see the installed base growing, do you expect to see more attach rates for maybe Bruker LCs or other Bruker accessories into timsTOF?

Right. So the timsTOF platform, which now has multiple types of systems, right? The flex with the additional imaging capability, the SCP for single-cell proteomics—brand new—and the Pro for proteomics and metabolomics, overall it’s a very healthy picture of strength. In the first half, as well as in the second quarter, both bookings and revenue growth for that platform have been very strong and stronger than the corporate average growth, which is good. So we’re very pleased with that. Regarding LC attach, our standard offering is a Bruker Nano LC. It’s a very good Nano LC known for excellent stability and separation. Our LC attach rate is reasonably high and I would estimate it’s well above 50%, although I don’t have an exact number for our timsTOF series for proteomics at hand. We also work well with other larger LC suppliers and specialists that particularly focus on proteomics. So I don’t anticipate a significant change there. More people are getting our software and they increasingly use our very fast GPU-driven run-and-done proteomics software, even if they also use complementary bioinformatics packages from other vendors with whom we collaborate. So we’re picking up proteomics revenue beyond just mass spec hardware, and that’s going as expected.

Great. And just last one, if I could squeeze in. In terms of the ultra-high frequency gigahertz NMR, could you clarify the expectations again for this year? Given the multiple larger grants, what’s your outlook in terms of expansion of the number of installed base? I think you had guided to three to five installs for the year. Is that changing and how should we look at 2022?

Yes. For this year, we’re most likely going to look at four now is my best estimate with both some factory and some customer site delays. So four this year: we had two in Q1, none in Q2 as expected. In Q3, we anticipate one. And probably one more in Q4 although right now we gave color on Q3. We’re delighted with the additional NSF funding and orders; those projects typically won’t go into revenue until '23 or '24 depending on installation timing. We’ve ramped up our capacity to build and test more in Switzerland. We’re not giving 2022 guidance, but our order books are full and that bodes well. Importantly, beyond instruments and orders, the U.S. needs more funding in this area and the NSF award is a good start. There will likely be more interest over time in Asia Pacific; so far there is only one system on order for Korea. Other drivers like advances in structure prediction, for example from tools like AlphaFold, could actually boost NMR demand because customers often start with a structure—whether from X-ray, cryo-EM, or prediction—and then use NMR to study dynamics, binding, and functional interactions. We think there are many scientific drivers that will make NMR and functional structural biology even more important.

That’s great. Thanks for the details, Frank.

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

Hi. Good afternoon and congratulations on a strong quarter.

Thank you.

Just two quick questions. Frank, could you clarify—did I hear you correctly that there was greater than 20% order growth in the first half. What was it exiting Q2, if you don’t mind?

I may need some help here. We had greater than 20% organic growth in BSI in the first half, and I know that our BSI book-to-bill was about 1.1 in the second quarter. So that is the number that I have at my fingertips—pretty healthy.

Great. Thanks for the clarification on that. And can you talk a little bit about the semiconductor markets and supply chain issues? I think some of the other companies have talked about transportation and shipping costs going up. Can you talk about what you’re seeing in the supply chain and how you’re looking at the semiconductor markets and how that impacts your global supply chain?

Yes. For us, this is two-sided. On one side, like everyone else, we’re working really hard and it’s a struggle to deal with supply chain issues and costs—from transportation issues to components and semiconductor chips. It’s not trivial and it’s far from resolved. That’s why our guidance is reasonable. Some of these issues could slow us down in places. On the other hand, we have a large semiconductor metrology business that’s doing extremely well; investments in semiconductor metrology and packaging are very good for our Bruker Nano business. Our BSI orders in the second quarter saw organic growth around 30% and book-to-bill about 1.1—very strong metrics. If some things get delayed from Q4 into next year, that’s acceptable for us; it may lead to a more even trajectory and more normalized comparisons next year. So we’re managing the year and our backlog and orders are in good shape, though supply-chain risk remains.

Thank you very much.

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

Hey, Frank. I am wondering, looking across the four divisions, could you give a little color about how you’re thinking about which segments may be inflecting? You touched on semiconductor for Nano, but can you walk through Nano, CALID, BioSpin, and BEST for the back half of the year?

Sure, Tycho. CALID is doing really well. In the second half there will be a little headwind because the second half of last year had more PCR testing for COVID, which is down now, but proteomics, MALDI Biotyper, metabolomics and strength in applied molecular spectroscopy give CALID continued momentum. Nano is particularly strong this year with industrial recovery and continued strength in semicon; fluorescence microscopy is also growing and contributing. BioSpin had an okay second quarter but we expect a very strong third quarter; some of its recovery is timing related. BEST has been a surprise this year with stronger-than-expected MRI OEM demand from large MRI customers, and BEST was pretty good in Q2 and should continue strong in the second half. Overall, CALID and Nano are doing best this year, BioSpin will pick up in Q3, and BEST is stronger than we expected.

Okay, helpful. And two for Gerald quickly: can you quantify contribution from the COVID PCR in the quarter, and provide updated thoughts on cash flow in the back half as revenues pick up? Cash flow has been a frequent question.

In terms of COVID PCR revenue, it was approximately $6 million in the second quarter—fairly modest. Regarding cash flow, we generated solid operating cash flow in the second quarter. There was some change in the timing and volume of customer deposits which impacts cash flow. We are hopeful those deposits will continue as orders finalize. We also had a bit of movement in tax payments between quarters which negatively impacted Q2 cash flow. Overall, with current net income levels we are optimistic for the longer term. Frank noted that cash flow varies quarter-to-quarter, and our first half cash flow was about $72.6 million—much higher than last year.

Okay. Thank you.

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

Hi. Thanks for the time. A question on the guidance raise: could you frame the new growth outlook compared to 2019? I understand the deceleration in the second half versus 2020 given comps, but I’m not sure I understand what’s driving the deceleration in the two-year stack compared to 2019 versus what you reported in the first half.

We’re focused on full-year growth and compared to 2019 the full-year growth is quite strong. The first half growth rates are higher for a number of reasons related to comparisons with 2020 which was distorted by the pandemic. The math makes the second half growth rates appear lower compared to last year’s easier comps, but for the year we still expect excellent growth both year-over-year and compared to 2019. We’re setting a new baseline for 2021 and managing to the year rather than any single quarter.

As a follow-up, can you frame the metabolomics and lipidomics applications you highlighted for timsTOF? Are these secondary to proteomics or could they be equivalently important on timsTOF?

Good question. Lipidomics and metabolomics are typically smaller markets than proteomics. Proteomics is the larger opportunity by quite a bit. However, new 4D capabilities unique to the timsTOF platform, combined with much higher sensitivity with the new VIP-HESI source, and libraries like METLIN-4D plus CCS prediction capabilities, are making 4D-metabolomics and 4D-lipidomics increasingly attractive and providing unique workflows. We are seeing pull from those markets in addition to proteomics. Very roughly, proteomics may be two-to-three times the size of the metabolomics/lipidomics opportunity for us—but it’s not negligible.

Okay, I appreciate that perspective. Thank you.

Our next question comes from Jack Meehan from Nephron Research. Please go ahead with your question.

Yes. Thank you and good afternoon. Looking at the back half of the year, your guidance implies roughly 2% to 3% compounded growth versus 2019 on an organic basis, compared to around 6% in the first half. What are some things weighing on that? And Gerald, on Q3, any comment on EPS phasing through the income statement?

We are comfortable managing to the year. The first half growth rates are higher due to 2020 comparisons. We’re establishing a healthy pattern for the full year and prefer to manage to the year rather than to a single quarter. That may make some two-year stacks look lower for certain quarters, but overall the trajectory for the company is strong.

On Q3, we put up a very solid operating margin in Q2 at 17.3%. With higher organic revenue growth, we expect continued improvement, but we are also increasing investments in Project Accelerate 2.0 in the second half. So while revenue-driven margin improvement is expected, it will be offset in part by stepped-up strategic investments. I’m not providing quarter-specific EPS guidance, but directionally we are investing a bit more in strategic areas in Q3 and Q4.

One other thing—any color on the U.S. results this quarter? The step-up sequentially was larger than going back to 2019—what drove the strength in the U.S.?

U.S. biopharma is strong. MALDI Biotyper and Sepsityper were strong and semiconductor activity is strong. Some of our businesses, like MALDI Biotyper, were weak last year and bounced back this year. We didn’t have PCR COVID revenue in the U.S. This is a broad-based strength across academic, industrial, semiconductor, biopharma and applied diagnostics in the U.S.

Thanks Frank.

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

Good afternoon. Two questions: first on guidance pacing—Q3 guide implies mid-teens organic and Q4 implied appears lower; is the pacing simply prudence given visibility differences? Second, on longer-term: you highlighted many initiatives in proteomics at your Analyst Day—are any of the pending efforts beginning to impact revenue or bookings and are they factoring into planning for year-end into 2022?

I’ll be direct: we over-performed consensus significantly in Q1 and Q2, which de-risks the year. We’re setting guidance to the year and providing conservative quarterly color given the many uncertainties. We prefer to over-deliver early and manage the year rather than assume all the upside into later quarters. Regarding proteomics initiatives: customers have recognized the timsTOF platform for several years now. The scientific community and customers are very familiar with our capabilities and adoption is strong—many customers buy repeat instruments. The Analyst Day helped Wall Street attention, but the customer community has long understood the platform’s advantages. The new products, software, and workflows are driving traction and repeat orders, so the initiatives are contributing to bookings and revenue in a meaningful way over time.

Got it. Thanks.

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

Hi, thanks. Frank, you alluded to softness in China and Japan in Q2. Can you elaborate on what you are seeing in China and what you expect for that market for the year?

Japan has been weak this year and continues to be weak. China is more differentiated: for the full year we expect China to be strong, but Q2 revenue was a bit weaker. Order bookings in China in Q2 were very good for BSI—almost all BSI—and we expect that to even out across quarters. One factor was timing and paperwork related to tax exemption certificates for certain academic customers which affected revenue recognition timing.

To add, the delays in China were related to obtaining tax exemption certificates from Chinese authorities which were recalibrated or renewed in Q2, creating timing delays. It’s push-out activity rather than cancellations—order bookings are robust.

Got it. Thank you.

Our next question comes from Josh Waldman from Cleveland Research. Please go ahead with your question.

Hi. A follow-up on China: at the Analyst Day Q&A you alluded to some changes underway in China. Is that related to the tax exemptions you just mentioned, or is there more to it?

Hi Josh. It’s primarily the tax exemption certificates for academic customers that caused some delay. Chinese authorities renewed or recalibrated exemption activities in Q2, creating a delay in revenue recognition timing. Order bookings remain strong across our BSI groups in China.

Got it. So no orders dropping out of the book? Second, on potential benefits from delayed shipments later in the year—what is your ability or appetite to manage growth by intentionally delaying shipments out of 2021 to even out revenue into 2022?

We’re capturing all revenue we can. There is some conservatism in our guidance due to uncertainties like Delta, differences in global responses, and supply disruptions. Countries with low vaccination rates are vulnerable and could impact demand or logistics. We have managed supply chain issues well so far but it requires far more work. We have built a little prudence into guidance but not excessive. If some shipments were delayed a bit into next year, that’s acceptable and may lead to more normalized comparisons, but we are not deliberately managing to move revenue out of 2021—our objective is to execute as well as possible and deliver sustainable growth.

Thanks Frank.

And ladies and gentlemen, with that, we will be ending today’s question-and-answer session. I would like to turn the floor back over to Miroslava Minkova for closing remarks.

Thank you for joining us today. During the third quarter, Bruker will participate in the 2021 Wells Fargo Virtual Healthcare Conference. We look forward to meeting you at an event during the quarter or directly with you during the quarter. Thank you, and have a nice evening.

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