Earnings Call Transcript - BRKR Q4 2022

Justin Ward, Senior Director of Investor Relations and Corporate Development

Thank you, Anthony, and good morning, everyone. I would like to welcome everyone to Bruker Corporation's fourth quarter and full year 2022 earnings call. My name is Justin Ward, and I am Bruker's Senior Director of Investor Relations and Corporate Development. Joining me on today's call are Frank Laukien, our President and CEO; and Gerald Herman, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today's call, we will be referencing a slide presentation that can be downloaded from the Events & Presentations section of 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 is shown on Slide 2 of the presentation. During this 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 elevated geopolitical and energy risk, the COVID-19 pandemic, and supply chain logistics and inflation challenges. 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 website. Also note that the following information is based on current business conditions and our outlook as of today, February 9, 2023. We do not intend to update our forward-looking statements based on new information, future events, or for other reasons, except as may be required by law prior to the release of our first quarter 2023 financial results expected in early May 2023. You should not rely on these forward-looking statements as representing our views or outlook as of any date after today. We will begin today's call with Frank providing an overview of our business progress. Gerald will then cover the financials for the fourth quarter and full year 2022 in more detail, and he will share our fiscal year 2023 financial outlook. Now, I'd like to turn the call over to Bruker CEO, Frank Laukien.

Frank Laukien, President and CEO

Thank you, Justin. Good morning, everyone. And thank you for joining us on today's earnings call. In fiscal year 2022, Bruker achieved solid operating and financial improvements with 10% organic revenue growth, 150 basis points gross margin expansion, and 11% non-GAAP EPS growth, all while investing significantly in proteomics and spatial biology. We have made several key acquisitions and investments in the last 13 months to expand the breadth of our proteomics capabilities into proteomics consumables, automation software, and expert proteomics drug discovery services. We also invested to enter attractive new markets in cancer research tools and neuroscience research tools and solutions. Our teams have effectively navigated supply chain and geopolitical challenges, which are gradually improving but not fully resolved yet, and probably won't be fully resolved until the end of 2023. In some areas of electronics, even early 2024. Most importantly, we are advancing our Project Accelerate 2.0 high growth, high margin initiatives with a particular focus on opportunities in proteomics and the related field of spatial biology. We also invested in operational excellence, productivity, and our capacity growth for the next 10 years. Bruker again introduced key lifetime tools innovations in 2022, and demand for our high-value solutions and differentiated instruments is strong. In fiscal year 2022, our scientific instruments segment generated double-digit year-over-year organic bookings growth and built additional backlog for good visibility into the year. In 2023, we intend to drive strong revenue growth and another solid EPS increase while expanding our focus strategic investments in the recently acquired additional proteomics capabilities and in our key Project Accelerate 2.0 initiatives. Our medium-term goal is to continue to transform Bruker into a high revenue growth and consistently double-digit EPS growth company with significant further growth and operating margin expansion potential. Bruker’s solid 8.9% year-over-year organic revenue growth in the fourth quarter capped off another strong year for the company. Continued demand for our differentiated high-value solutions drove robust performance in bookings and revenues. Our fourth quarter ‘22 scientific instruments segment book-to-bill ratio was again greater than one. For the full year 2022, our BSI segment organic bookings and backlog both increased in the double-digit percentage year-over-year. For the fourth quarter of 2022, the BSI segment order bookings continued to grow, driven by broadly based customer demand, with particularly strong demand in Europe. Bruker’s Q4 ‘22 reported revenue increased 3.6% year-over-year to $708 million. This was in comparison to a strong prior year Q4 of ‘21, with a 7% Q4 ‘22 headwind from FX. On an organic basis, our Q4 2022 revenues increased 8.9% year-over-year. Our Q4 2022 non-GAAP gross margin increased 140 basis points year-over-year to 52.6%. Despite inflation headwinds, our gross margin expansion is clearly benefiting from Project Accelerate 2.0 margin mix, operational excellence productivity gains, volume leverage, pricing, and currency tailwinds. The fourth quarter of ‘22 was a quarter of good execution and continued broad demand for our differentiated portfolio. Moving on to slide 5, we show Bruker’s performance for the full year 2022. Our revenues increased by $113 million year-over-year, or by 4.7%, to $2.53 billion. On an organic basis, fiscal year 2022 revenues grew 10.2% year-over-year. For the full year ’22 book-to-bill for Bruker’s three scientific instruments group were all above 1.1. Geographically, our ‘22 BSI order bookings were led by double-digit organic growth in Asia Pacific, South Asia, and Australia, New Zealand, with mid-teens percentage organic growth in Europe and Middle East Africa or EMEA, and mid-single digit percentage organic order bookings growth in the Americas. In fiscal year 2022, we experienced strong organic growth in our proteomics, biopharma, semiconductor metrology, and industrial research markets. Our non-GAAP return on invested capital of 24.3% was well above our long-term target of ROIC greater than 20%. Finally, we're pleased with our 7% year-over-year, non-GAAP EBITDA growth, bringing 2022 non-GAAP EBITDA to $547.5 million, and the related non-GAAP EBITDA margin up 40 bps to 21.6%. So, please turn to slide 6 and 7, where we highlight the full year 2022 performance of our three scientific instruments groups, and of our BEST segments all on a constant currency and year-over-year basis. In 2022, BioSpin Group revenue grew in the high single digits percentage year-over-year to $697.7 million, with strong growth in its services and support revenues as well as strong growth in preclinical imaging and a notable contribution from our biopharma process analytical technology software acquisition. Bruker BioSpin recognized revenue on 4 GHz-class NMR instruments in ‘22 consistent with four systems recognized in ‘21. We expect to install four gigahertz-class NMR systems this year, although none are expected in the first quarter of 2023. For the full year 2022, CALID Group revenues increased in the high single-digit percentage to $822 million, with continued growth in our life science mass spectrometry business and notable strength in proteomics applications and our timsTOF portfolio, now with more than 600 units installed in customer labs. We continue to experience some supply chain delays; however, slowing revenue execution in CALID has increased the backlog. Our Microbiology and Molecular diagnostics revenue was up slightly year-over-year as aftermarket strength faced modest instrument demand, which faced a difficult comp from 2021. Moving on to slide 8 and 9, we continue to make good progress with our Project Accelerate 2.0 initiatives, which in ‘22 now represent 56% of our total revenue. The recent acquisitions of Inscopix and Biognosys are important, particularly in fluorescence microscopy and drug discovery research services. We expect these acquisitions to contribute long-term growth. Additionally, Bruker continues to make progress in clean energy research and superconducting materials for applications in fusion technology and offshore wind turbines. Our innovative approach positions us well for future opportunities, and we are committed to driving growth in these areas. Let me wrap up on slide 10. In summary, during 2022, Bruker made excellent progress. We closed several key technology and capabilities acquisitions, particularly in fluorescence microscopy, neuroscience, and proteomics in the last 13 months. We are expanding the breadth and depth of our capabilities while entering new attractive markets. Moving forward, our high backlog for 2023 gives us good visibility into another promising year ahead. In 2023, we intend to combine rapid revenue growth, further gross margin expansion, and solid EPS growth with additional strategic R&D and commercial investments, particularly in proteomics and spatial biology.

Gerald Herman, Executive Vice President and CFO

Thank you, Frank. I am pleased to provide more detail on Bruker’s fourth quarter and full year 2022 financials. Starting with slide 12, in the fourth quarter of 2022, Bruker’s reported revenue increased 3.6% to approximately $708 million, reflecting an organic revenue increase of 8.9% year-over-year. We reported GAAP EPS of $0.66 per share, compared to $0.50 in the fourth quarter of 2021. On a non-GAAP basis, the fourth quarter '22 EPS was $0.74 per share, an increase of 25% compared to $0.59 in the fourth quarter of 2021. Our fourth quarter 2022 non-GAAP operating income grew 3.5% year-over-year, with the fourth quarter '22 non-GAAP operating margins about flat year-over-year at 21%. The strong gross margin expansion was offset by higher R&D and commercial investments for Project Accelerate 2.0 initiatives as well as by inflation-related costs. We finished the fourth quarter with cash, cash equivalents, and short-term investments of approximately $646 million. In the fourth quarter, we purchased approximately 435,000 shares of Bruker stock for a total consideration of about $26 million. For the full year of 2022, our repurchases totaled 4.2 million shares, or approximately $265 million. We generated $159 million of operating cash flow in the fourth quarter, resulting in $135 million in free cash flow for the fourth quarter of '22. This represents a $25 million increase from the fourth quarter of '21 due primarily to higher net income in the quarter. Turning now to slide 19, given our continued strong bookings growth and backlog in 2022, we expect solid growth in 2023. Our outlook for 2023 includes organic revenue growth of 8% to 10% year-over-year, with a foreign currency tailwind of about 1.5% and acquisitions contributing about 1.5% to growth. This is expected to lead to reported revenue of $2.81 billion to $2.86 billion, representing growth in a range of 11% to 13% compared to 2022. For 2023, we expect our innovative portfolio to continue to deliver solid gross margin expansion and operating profit growth. On the bottom line, we're guiding to non-GAAP EPS for 2023 in a range of $2.52 to $2.57, or non-GAAP EPS growth of 8% to 10% compared to 2022.

Justin Ward, Senior Director of Investor Relations and Corporate Development

Thank you, Gerald. I'd now like to turn the call over to the operator to begin the Q&A portion of the call. As a reminder, to allow everyone time for questions, we ask that you limit yourself to one question and one follow-up.

Operator, Operator

Our first question will come from Puneet Souda with SVB Securities.

Puneet Souda, Analyst

Yes. Hi, Frank. Gerald, thanks for taking my questions. So first one is on just book-to-bill that came in obviously greater than one. Could you maybe elaborate on bookings? Are they skewing to one segment versus the other among the instrumentation? And on CALID, you mentioned your supply chain constraint. We have been hearing from other peer groups on instrumentations supply chains are getting addressed throughout the year. So could you talk a little bit about that and what visibility you have on supply chains there and what instruments are maybe sort of impacted there? And then I have follow-up.

Frank Laukien, President and CEO

Hi. I'll start with that. The book-to-bill greater than one in the BSI segment, strength in timsTOF for sure, BioSpin had very strong bookings. But it was really nothing that dropped out or something like that. Some of the applied and industrial areas remained pretty resilient. Geographically, a bit of a surprise is that Europe had such strong bookings in Q4. We kept an eye on that. To the second point supply chain, yes, it is getting better, but that is certainly not getting worse. But there still are some things that sometimes there's just a part or a few parts that delay deliveries. For instance, in the CALID Group, both the Bruker optics, molecular spectroscopy, but also our timsTOF line got delayed. So I don't want to bore you with the details, but it's not that it's all smooth sailing; this will still take some time to sort itself out. It is getting better, but it's not gone. So it still is a drag on revenue.

Puneet Souda, Analyst

Got it. Okay, helpful. And then just general on the margin dip in here in 2023. Could you talk a little bit about those R&D investments that you're talking about? How should we think about margin cadence throughout the year? And then just if I could squeeze one in on China? Frank, we've been hearing –

Frank Laukien, President and CEO

One by one, sorry. We're obviously delighted by that prospect. As you know from announcements, until this gets into specific grants and budgets and then into purchase orders takes some time. But along with the Inflation Reduction Act in the US, the CHIPS Act in the US, and potential also additional stimulus in Europe, it all caters to our strengths.

Gerald Herman, Executive Vice President and CFO

So relative to the ‘23 guidance related to the margin performance, I think there are two major factors. First of all, we posted solid, full year ‘22 operating margin performance of 20%. Secondly, we do expect some combined foreign exchange and acquisition-related dilution on the operating margin for ‘23.

Frank Laukien, President and CEO

Importantly, we expect to expand our gross margins, our non-GAAP gross margins in ‘23. If you look at the guidance slide, we expect to grow about 60 basis points. But yes, we accept some transition margin headwinds from FX and dilution from our recent acquisitions.

Patrick Donnelly, Analyst

Thanks for the questions. Frank, I think this is the highest growth number I've seen you guys put out to start a year. You guys are typically known for layering in a pretty healthy amount of conservatism. So, with this elevated growth numbers, is there still that typical Bruker conservatism in there? What gives you the confidence to put out this type of number at the start of the year?

Frank Laukien, President and CEO

Yes, I think it's the usual balance of risks and opportunities. Yes, it is backlog. We acknowledge that, of course, that backlog will not come to normalized levels all in one year; there'll be a two-to-three-year process. We have continued orders momentum, and we haven't seen any pronounced signs of weakness or real weakness. It’s coming from the order momentum in BioSpin, timsTOF, and a number of areas are very strong, so yes, it is an unusual number early in the year for us.

Gerald Herman, Executive Vice President and CFO

From an organic growth perspective, we still expect H1 to be very solid. Q1 may be a little lighter, but remember, we are targeting some ultra-high field systems as we move through the year.

Jack Meehan, Analyst

Thank you. I wanted to talk about Nano, so 17% organic growth for the year and over 20% in the fourth quarter is outstanding. Can you dissect how much of this is from things like semiconductor versus the investments in spatial? And how big is that business today?

Frank Laukien, President and CEO

Yes, spatial and fluorescence microscopy is still much smaller than the semiconductor and advanced electronics. The semiconductor business is very strong backlog, but we expect semiconductor orders to be weaker and revenue will not grow steeply in 2023. However, it looks like a soft landing and more than made up by other areas of strength in our portfolio.

Josh Waldman, Analyst

Thanks for taking my questions. I wonder if you could provide more context on where the R&D and Commercial Investments are being targeted and what the timeline is for when we start to see these show up in revenue growth?

Frank Laukien, President and CEO

The R&D 10% investment is a medium-term target. We had been ramping particularly in proteomics. This will require multiyear continued strong R&D investments, and we do not want to be pennywise and pound foolish. The R&D investment also goes into spatial biology and other significant areas that won't have any revenue or products this year yet but will begin to come out in ‘24.

Rachel Vatnsdal, Analyst

Maybe we could just spend a minute on Europe. The region was down mid-single digits in the quarter, but you noted that bookings were exceptionally strong. So can you just talk about what you're really seeing in that region?

Frank Laukien, President and CEO

The mood in Europe hasn't changed much. Europe had a mild winter and is not running out of gas anytime soon. The chances of energy blackouts are much reduced, and energy prices have come down from peak levels. The mood in Europe and the willingness to invest in R&D remains positive, boding well for our future growth in the region.

Justin Ward, Senior Director of Investor Relations and Corporate Development

Thank you everyone for joining us today. We look forward to welcoming all of you to our Investor Day at the headquarters in Bruker, Massachusetts on June 15 of this year. Please feel free to reach out to me if you have a follow-up. Have a great morning.

Operator, Operator

This concludes the question-and-answer session.