|
Bruker Corporation (BRKR-NASDAQ) |
|
|
January 13, 2012 Issue |
||
|
The Most Powerful Name In Corporate News and Information |
||
CURRENT ISSUE | COVER ARCHIVES | INDEX | CONTACT | FINANCIALS | SERVICES | HOME PAGE |
||
|
Bruker Corporation is Focused on Being the Premiere High-Performance Scientific Instruments Company in the World using Organic Growth with a High Return on Investment Capital Targets |
||
|
Bruker Corporation (NASDAQ:
BRKR) is a leading provider of high-performance scientific instruments and
solutions for molecular and materials research, as well as for industrial
and applied analysis. |
|
|
|
Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published – January 13, 2012
Dr. Laukien: The focus of our company is really on products, on organic growth, on investing in our technology and products with a higher than industry average R&D spending. Rather than acquisitions, we focus on organic growth. We do some selective bolt-on acquisitions, but we have very high return on invested capital targets. Our long-term focus is to be the premier high-performance scientific instruments company in the world.
Dr. Laukien: Our main instruments are research instruments for chemical and biological molecular analysis, such as magnetic resonance or mass spectrometers or x-ray instruments. These are used by academia, by government researchers and also by pharmaceutical and diagnostic companies. Some of our newer applications are in the applied markets, e.g. they are used from food safety to doping and toxicology, all the way the way to homeland security applications. Some of our newer products that customers or perhaps investors are not that familiar with yet, are in the explosives trace detection market that we are only entering in 2012 with a new range of products. We had previously been in homeland security instrumentation with chemical detectors, but we are now making a big push with next-generation technology into explosives detection. Another different example would be the application of our MALDI mass spectrometers to microbiology with our product called the MALDI Biotyper. This has really been a game-changing technology. It is the new paradigm for the rapid, cost-effective identification of bacteria, fungi and yeasts, which are of tremendous importance in clinical microbiology as well as in industrial microbiology.
Dr. Laukien: We have a very good product life cycle, or PLC, process that we have implemented recently and we try to make hopefully good decisions about which products to pursue with what priority and what investment. Of course, it depends on technological feasibility and technical capabilities, but very much also on the potential market size. In this competitive environment, we have a stringent process looking at what margins would be achievable, how much do we have to invest and what would be our return on invested capital. So, there is quite a bit of market research and financial analysis going on even in the early stages of product research and development, more so than in the past when this was primarily driven by technical and the scientific instincts. We have a good review process and we also kill some projects that might be nice, but where the market is too small or where the return on invested capital just will not be there, in order to allocate our resources to those that have the biggest potential in terms of accessible markets, margins and return on investment capital. Those are our key metrics.
Dr. Laukien: That means for our customers that they can and generally do expect some of the most innovative products from us. Not only the incremental improvements that we bring out as well, but some breakthrough enabling technologies that perhaps customers had even not asked for yet before because they really just did not exist. We have a number of significant examples over the history of the company, including some very recent ones, where we have done completely novel things that we would not have gotten out of market research. We really just discovered new scientific opportunities and made them happen. “Innovation with integrity” also means that when we come out with products, we have a really high standard in terms of quality and usability. We would like to have our customers be at the leading edge, not at the bleeding edge, which sometimes has happened in the scientific instruments industry. We bring things out after very thorough beta testing. Often, we do quiet introductions where we have a product in the market for a while, until we really announce it. That goes into the integrity part. We try to deliver a quality product that is thoroughly tested as opposed to just a new racecar that may break after a short period of time. It is that combination that customers would like to have. They want to be at the leading edge. In addition, they want it from a company that also has a track record and every intention of delivering something to them that is high performance and has unique capabilities but also will be a reliable product that has been validated.
Dr. Laukien: In some areas. For diagnostic products, we are talking to the FDA about FDA clearance. For airports, the Transportation Security Agency will have to approve the explosives detectors before they can be used at U.S. airports. Therefore, in some areas of our business, yes, but probably for 95% of our business there is no specific labeling or governmental regulations like an FDA or TSA approval.
Dr. Laukien: It is a busy marketplace out there. Competitors include for instance Agilent Technologies Inc. or Thermo Fisher Scientific Inc. We also compete with other companies like Waters Corporation or PerkinElmer Inc., AB SCIEX, now part of Danaher Corporation and many more private and international companies. Not all of them are in the US, as some of them are European or Japan based. For each of the products it is always competitive and there are always two or more competitors. Sometimes they are the ‘usual suspects’, such as Thermo or Agilent, because we compete with them in many of our product lines, but sometimes it is a certain specialized company that we compete with in a specific market or technology area.
Dr. Laukien: It depends a lot on our product lines. For instance, you are right in a couple of product lines, such as the nuclear magnetic resonance, or NMR, spectrometers or some of our infrared and Raman systems, we are so well known because we have been in the business for decades. In addition, we go to all the trade shows and to scientific conferences, and customers generally would contact us if they intend to purchase one of these systems. There are also other areas where we are quite frankly the ‘new kid on the block’. In life science mass spectrometry we have only been at this for the last fifteen to twenty years. We are becoming established, but not necessarily the default go-to company yet. In other areas, for instance in the applied markets for separations and triple quad technology, where we just recently did an acquisition of our new CAM division, there we have to do a lot of marketing and product road shows for customers because Bruker is known, but not yet for these types of products. It really depends on the lifecycle of the division. If we have been in it for a long time not so much advertising is needed, but if we are very new to a new application or market, then we have to do quite a bit of marketing and some image building so people can remember that we are one of the contenders.
Dr. Laukien: It is a decentralized approach where you give a lot of authority and responsibility to division presidents. We really have fostered an entrepreneurial spirit in them. They do not have to worry about all the products of Bruker, but they have to do the best with their products and their product lines, their R&D roadmap, and so on. Therefore, by giving a lot of responsibilities to the senior division management and making them responsible, with agreed upon targets, it has led to a culture that a lot of our managers really like, which is differentiated from some other larger, more centralized organizations. It also has kept up that growth momentum where over any multi-year period, we are really growing organically quite a bit faster than our markets or our larger peers. If there is one secret, there is of course centralized controls and we agree on targets, but really we have a decentralized entrepreneurial culture.
Dr. Laukien: Ironically, I will say not so much, even though we did two acquisitions in 2010 that were fairly sizeable. However, this was a very unusual year for us. Actually, that has never happened before, as we are not looking constantly for acquisitions. Last year we had two larger acquisitions; one was due to Agilent’s divestiture of certain Varian Inc. product lines due to the Federal Trade Commission and European Commission divestiture requirements. In the process, we picked up some very interesting assets that we combined into our CAM, or new Chemical & Applied Markets division, now based in Fremont, California. Also late in 2010, we acquired from Veeco their scientific instruments business headquartered in Santa Barbara, California. They are the world leader in AFM, or Atomic Force Microscopy, and also have some high-end optical metrology tools. So, last year we did two larger acquisitions, but this year and probably next year we may only do some very small bolt-on acquisitions. We are really not a very acquisitive company, so when we do acquisitions, we like to do them relative early stage and small. Then we take the little seed or the little tree and hopefully grow that into a big tree over time, as we prefer to grow businesses and product lines rather than acquire them.
Dr. Laukien: For us, ironically, we have had absolutely record bookings, and dramatic growth in bookings and backlog this year of the order of 50% in the first half of the year, and still fairly fast growth and great than one book to bill, even in the 3rd Quarter. So while we have grown rapidly this year, our GAAP revenue grew faster than 30%, and if you take out currency, we are growing revenue at approximately 25% this year. So, it is a very good growth rate for a company our size and the best in our industry, for any larger company at least. We should be growing even faster because our orders have been growing even faster and we have not been able to get the same rate of back-log conversion. It is sort of a good problem to have going forward that our backlog and our bookings have outpaced our revenue growth, but it has had some of its own challenges and a little bit of margin compression, or at least going sideways on margins the first half of the year. For instance, we pay our sales commissions and have a lot of the marketing expenses associated with this bookings and backlog growth before we recognize it as revenue 6-8 months later. Therefore, this year our operating margins have been going sideways, whereas in previous years we have been able to expand them by about 200 bps each year in 2010 and 2009. We hope to get back to the operating margin expansion of about 100 bps per year next year and the following years as we begin the backlog conversion and grow into that higher revenue model.
Dr. Laukien: We certainly do a lot. We go to about fifteen healthcare financial conferences during the year. We do non-deal road shows or investor meetings when I am traveling in Europe, on the West coast, or in Chicago. We often organize an investor breakfast for local investors or do a half-day road show. Since we are located in Boston and a lot of investors at some point during the year end up in the Boston area, we host a lot of investor groups on our campus here a half-hour outside of Boston. Those investors come here and spend a couple of hours with us touring with product managers, seeing our demonstration laboratories and talking to management. They always find that particularly useful. Therefore, we have an intensive investor relations program - focused on a lot of one-on-one meetings with investors.
Dr. Laukien: We have a very large inventory balance of raw materials and work-in-process, not finished product inventory. Our inventory for some of the products that we have sometimes is of the order of five or six months of our revenue. We are actually trying to reduce our working capital usage, doing a little bit more outsourcing while still retaining the key intellectual property and know-how in the company. A lot of our products that are ordered from us on average, it is probably going to be 6-8 months before a customer really has been delivered, installed and we have revenue recognition. It is not off-the-shelf products typically.
Dr. Laukien: Investors that like companies that focus on organic growth and not primarily on acquisitions, and companies that have faster growth than the rest of the industry should be interested in Bruker. We are not doing expensive acquisitions, and we have very high return on invested capital targets of the order of 30%, which we have been at historically. With a couple of acquisitions recently our RoIC is hovering around 20%, but our goal is to get back towards 30% ROIC, which is much higher than for some acquisitive companies. Therefore, investors who like that organic growth and high RoIC model rather than the acquisition-driven model will probably really like our company.
Your second question, what investors have misunderstood with Bruker, is our so-called ‘academic exposure’. This is because we are strong in academic and research markets, but we have shown this year that the end of stimulus for us was not at all like ‘hitting a wall’, as some had predicted. That end of stimulus money meant maybe $25 million less in revenue, yet at the same time everywhere else is growing $320-$340 million in 2011. So, that was a significant concern for investors six to nine months ago and we have been able to demonstrate that the $25 million reduction is dwarfed by the $340 million growth elsewhere. Therefore, even though we benefited from stimulus two or three years ago, our growth prospects are excellent. In fact, we still have the best momentum in bookings and book to bill ratio and backlog that we ever had.
Dr. Laukien:
Most investors right now are very much focused on the macro question, what
is going on in Europe, what will be going on in six months, what is going on
with the NIH Super Committee, etc.. While these things are somewhat
important, they are not nearly as important as the competitive and product
momentum. Therefore, if anything I would encourage investors to really take
a deeper dive into our admittedly numerous successful products. We have
great product and competitive momentum across essentially all of our
division and product lines. That has led to this very unusually strong
growth and momentum, but at times it gets overshadowed by the macro economic
questions. At the end of the day, and next year, this is going to be more
important for our growth and our margin expansion than just looking at the
macroeconomic picture. |
||
|
Rather than acquisitions, we focus on organic growth. We do some selective bolt-on acquisitions, but we have very high return on invested capital targets. Our long-term focus is to be the premier high-performance scientific instruments company in the world. - Dr. Frank H. Laukien Ph.D. |
||
|
|
||
|
|
||
