Bruker Corporation (NASDAQ:BRKR) Q3 2023 Earnings Call Transcript

Bruker Corporation (NASDAQ:BRKR) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Greetings, ladies and gentlemen. Thank you for attending today’s conference call. I would now like to turn the call over to Justin Ward, Head of Investor Relations. Please go ahead.

Justin Ward: Thank you and good morning. I would like to welcome everyone to Bruker Corporation’s third quarter 2023 earnings conference 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; Mark Munch, President of the Bruker Nano Group and Corporate Executive Vice President; and Gerald Herman, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today’s conference 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 conference call, we will be making forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to geopolitical risks and wars as well as to supply chain logistics and inflation. 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 for the period ending December 31, 2022, as updated by other SEC filings, which are available on our website and on the SEC’s website.

Also, please note that the following information is based on current business conditions and to our outlook as of today, November 2, 2023. We do not intend to update our forward-looking statements based on new information, future events or for other reasons, except as maybe required by law, prior to the release of our fourth quarter 2023 financial results expected in early February 2024. You should not rely on these forward-looking statements as necessarily 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 third quarter and the first 9 months of 2023 in more detail and share our updated fiscal year 2023 financial outlook.

Now, I’d like to turn the call over to Bruker’s CEO, Frank Laukien.

Frank Laukien: Thank you, Justin and good morning everyone. Thank you for joining us on today’s third quarter 2023 earnings call. In the third quarter, Bruker has continued to deliver excellent revenue growth with three consecutive quarters of double-digit organic revenue growth year-to-date. For the fourth quarter of ‘23, we anticipate high single-digit organic revenue growth, which puts us on track for 3 years of double-digit organic revenue growth in 2021 to 2023. In the first 9 months of 2023, we have demonstrated great resilience in difficult market conditions with what we believe is industry leading organic revenue growth of 13.9% and non-GAAP EPS growth of 17.5% year-to-date. Given our strong year-to-date financial results, solid backlog and positive outlook for the fourth quarter, we are raising our organic revenue growth guidance for fiscal year 2023 again, this time by 150 bps at the midpoint.

We are pleased to report solid financial results in the third quarter of 2023. We attribute this resiliency to our innovation strategy, which yields products and solutions with unique capabilities as well as to our differentiated portfolio, which is now resulting from our ongoing Project Accelerate 2.0 transformation. These core elements of our strategy are to a significant extent shielding us from the present demand weakness, for example, in COVID testing, CROs, biopharma, bioprocessing, etcetera. We remain positive about demand for Bruker Scientific Instruments and Life Science Solutions, which gives us confidence in the fourth quarter and also for continued solid growth in 2024. In fiscal year 2023, we have accelerated our investments in our transformative Project Accelerate 2.0 initiatives as well as in operational excellence and productivity.

We are making further investments in recently acquired growth drivers in single cell biology. And my colleague, Mark will talk about that as well as in previously acquired proteomics consumables, proteomics drug discovery services, neuroscience research tools, applied solutions and scientific software. Right. Let’s get to it. Turning to Slide 4 now. In the third quarter of 2023, Bruker delivered another good quarter with excellent organic growth of 10.9% and non-GAAP EPS growth of 12.1% and year-over-year. Bruker’s third quarter ‘23 reported revenues increased 16.3% year-over-year to $742.8 million, which included an FX tailwind of 3.3%. On an organic basis, revenues increased 10.9%, which included 10.9% organic growth in our Bruker Scientific Instruments, BSI segment and 10.2% at BEST, net of intercompany eliminations, while growth from acquisitions added 2.1%.

This implies constant exchange rate growth of 13.0% year-over-year. Our third quarter ‘23 non-GAAP operating margin was 20.0%, which is a good level for our third quarter, albeit a decrease of 240 bps year-over-year compared to a very strong operating profit margin in the third quarter of 2022. In the third quarter of ‘23, Bruker reported GAAP diluted EPS of $0.60 compared to $0.59 in the third quarter of ‘22. On a non-GAAP basis third quarter ‘23 diluted EPS was $0.74, up 12.1% from $0.66 in Q3 ‘22. This had a $0.05 tax tailwind pretty much exactly offsetting a minus $0.05 currency headwind in the quarter. Gerald will discuss the drivers of margins and EPS later in more detail. Moving to the first 9 months on Slide 5, you can see Bruker’s strong performance and excellent execution in the first 9 months of 2023 with industry leading organic revenue growth of 13.9% and non-GAAP EPS growth of 17.5%.

More specifically, our first 9 months of 2023 revenues increased by 15.8% to $2.11 billion. On an organic basis, first 9 months revenues grew 13.9% year-over-year, consisting of 14.0% organic revenue growth in Scientific Instruments and 12.8% organic growth at BEST, net of intercompany eliminations. First 9 months 2023 order bookings for BSI grew in the upper mid single-digits year-over-year organically, driven by Bruker BioSpin and CALID. Also, our BSI book-to-bill ratio year-to-date remained above 1.0 and our backlog at the end of the third quarter remains strong and elevated in fact. Our first 9 months 2023 non-GAAP gross and operating margin and GAAP and non-GAAP EPS performance are all summarized on Slide 5. And you can see the strong non-GAAP EPS growth of 17.5% despite a $0.14 headwind from currency.

Our trailing 12 months return on invested capital, a non-GAAP measure was 23.2%, a metric that highlights our differentiated Bruker management process and focus on disciplined entrepreneurialism and organic growth supplemented by selected attractive acquisitions. Please turn to Slide 6 and 7, where we highlight the year-to-date third quarter ‘23 performance of our three scientific instruments groups and of our BEST segment, all on a constant currency and year-over-year basis. Year-to-date, the BioSpin Group revenue was $541 million and grew in the high single-digit percentage This included revenue from just 1 gigahertz class NMR so far this year and namely in Q3 ‘23. And for comparison, we also had one in Q3 of ‘22. In the fourth quarter of ‘23, we expect to book revenue on 1 or 2 gigahertz-class NMRs, by the way.

In the 9 months – in the first 9 months of 2023, Bruker saw growth across biopharma, academic and government markets, industrial research and applied markets as well as in the new integrated data solutions software division with its SciY scientific and lab software platform, something that’s relatively new to Bruker. Right. First 9 months of 2023, our CALID Group had revenue of $703 million and growth in the high-teens percentage with strong growth in life science mass spectrometry driven by the timsTOF platform and aftermarket business as well as strong growth in our applied mass spec business and the optics infrared near infrared Raman business. Our optics business – in our optics business, we know two recent tender wins, very nice for eventually over 250 so-called DE-tector explosive trace detectors for the Frankfurt and Zurich airports, both of which were explained in recent press releases.

At ASMS this year, we launched the timsTOF Ultra and at the HUPO Congress in Korea in September, we announced further advances in timsTOF methods, consumables and software for this next-generation unbiased high fidelity four-dimensional, 4D proteomics and 4D multiomics that’s quite unique on the timsTOF platform and very advantageous. Microbiology and infectious disease revenue was up slightly as solid demand for the MALDI Biotyper consumables was offset by a final drop of our modest COVID-19 molecular diagnostics revenue to now near zero. Please turn to Slide 7 now. Year-to-date, Bruker Nano revenue was $673 million and grew in the low-20s percentage with strong revenue growth across end markets, including ACA/GOV, industrial semiconductor metrology.

Revenues at advanced x-ray and Nano surface tools all delivered strong revenue growth in the first 9 months. Life science fluorescence microscopy was up on product innovation and now includes a strong contribution also from our fourth quarter ‘22 acquisition of the Inscopix neuroscience research tools. Finally, year-to-date ‘23, BEST revenues grew in the mid-teens percentage net of intercompany eliminations, driven by share gains and superconductor demand by our MRI OEM customers as well as from revenue growth in Advanced Technologies for big science, fusion research and key extreme UV, EUV semiconductor technologies for semiconductor lithography tools by other large OEM customers, again, often driven by strong growth in AI demand. Right.

Moving to Slides 8 and 9. I’ll take a pause, and we highlight the new Bruker Cellular Analysis business. And I’m delighted to take – hand this part over to Dr. Mark Munch, our Bruker Nano Group Presidents who drove the PhenomeX acquisition now renamed to Bruker Cellular Analysis and Mark now resetting the strategy and rightsizing the business. Over to you, Mark.

Mark Munch: Thank you, Frank. We’re excited about our acquisition of PhenomeX, this new business. As Frank mentioned, we now call Bruker Cellular Analysis, perfectly fits our Project Accelerate 2.0 initiative. PhenomeX was a Q1 2023 merger of Berkley Lights and IsoPlexis which brought together 2 unique and valuable platforms: the Beacon OptoFluidics platform and the ISOSpark platform. Together, these technologies address rapidly growing market segments in antibody discovery, cell line development, cell therapy and gene therapy, amongst others. This helps also our Project Accelerate 2.0 initiative and expanding our footprint in translational research, clinical research and biopharma. It is also complementary to our Bruker Cellular Analysis and [indiscernible] Tools.

For example, our Canopy Sellscape tool, which is an important tool for spatial biology as well as examining phenotypes and cell suspensions. And so this brings a lot of opportunity for commercial synergies. Moving to Slide 9, just to give some financial details on the acquisition PhenomeX was acquired for $122 million, which included a $14 million bridge loans, which therefore was an attractive valuation of roughly 2x revenue. We closed this transaction on October 2, 2023, and immediately started our work on rightsizing the business and optimizing cost structures, which is mostly going to happen here in Q4 2023. Initial run-rate is expected for the business to be greater than $60 million per year, given the strong attractive potential of the market segments that I spoke of and that we address with this.

Many of these segments are somewhat new to Bruker, and so we’re excited about that. And as mentioned, we see cross-selling opportunities with our existing spatial biology and cellar analysis tools. In terms of Bruker non-GAAP EPS impact, we anticipate $0.12 dilutive to Q4 2023, a one quarter significant impact as we work through the rapid rightsizing and cost structure optimization. And being slightly dilutive for 2024 and accretive by 2026, and we expect long-term double-digit ROIC. We encourage you to visit the links shown here to help get familiar with these businesses. We are very excited about the potential here in these very valuable technology platforms. Thank you, Frank. Back to you. .

Frank Laukien: Thank you very much, Mark. Yes, these links are actually has a really cool website. I would highly recommend that if you have a few minutes, I think it’s very informative. So thank you, Mark. We’re excited about this attractive acquisition of a leading single cell biology business, with key technologies for all the reasons that Mark explained well done. So in summary, Bruker is on track for its third year in a row of double-digit organic revenue growth and solid EPS growth even as we have accelerated our investments in the Project Accelerate 2.0 transformation as well as in operational excellence in capacity and productivity. Our dual strategy is working exceedingly well right now. So Bruker’s strong growth is the result of a fundamental commitment to innovating and high-value solutions for customers as well as the result of our ongoing portfolio transformation.

Our technology and biological applications leadership in many areas, combined with world-class execution via our Bruker management process position us well for continued outperformance. As in other years, we expect to give fiscal year ‘24 guidance when we report Q4 ‘23 financial results, so will be in early February. However, please note that we expect to deliver solid organic growth also in 2024, and we remain on track for our medium-term 2026 targets, which we issued at our June ‘23 Investor Day. So with that, let me turn the call over to our Chief Financial Officer, Gerald Herman, who will review our financial performance and our updated fiscal ‘23 outlook – outlook in much more detail, Gerald.

Gerald Herman: Thank you, Frank, and thank you, everyone, for joining us today. I’m pleased to provide some more detail on Bruker’s third quarter and the first 9 months of 2023’s financial performance starting on Slide 11 and – in the third quarter of 2023, Bruker’s reported revenue increased 16.3% to $742 million, which reflects an organic revenue increase of 10.9% year-over-year. We reported GAAP EPS of $0.60 per share compared to $0.59 in the third quarter of 2022. On a non-GAAP basis, Q3 2023 EPS was $0.74 per share, an increase of 12.1% from the $0.66 we posted in the third quarter of ‘22. Gross margin performance was down 50 basis points year-over-year in the third quarter of ‘23, negatively impacted by 100 basis points foreign exchange headwind and partially offset by organic and acquisition gross margin improvement by 50 basis points.

Our third quarter 2023 non-GAAP operating income increased 3.6% and while our non-GAAP operating margin decreased 240 basis points year-over-year to 20.0%, impacted by foreign exchange and acquisition headwinds as well as a challenging comparison from the strong Q3 of ‘22. We finished the third quarter with cash, cash equivalents and short-term investments of approximately $364 million. During the third quarter, we used cash to fund selected project Accelerate 2.0 investments, acquisitions of approximately $120 million and share repurchases of about $80 million in the third quarter. On October 2, we closed the acquisition of PhenomeX, which I’ll discuss later. We generated $44.1 million of operating cash flow in the third quarter of 2023.

Our capital expenditure investments were $26.9 million, resulting in free cash flow of $17.2 million in the third quarter of ‘23. This compares with operating cash flow of $69.5 million and free cash flow of $11.8 million in the third quarter of ‘22. Slide 12 shows the revenue bridge for the third quarter of ‘23, as Frank has reviewed earlier. Compared to the third quarter of ‘22, BioSpin’s third quarter ‘23 organic revenue was up high single digits. Both Q3 2022 and ‘23 had 1 gigahertz class NMR in revenue. We expect revenue from 1 or 2 gigahertz class NMRs in the fourth quarter ‘23 similar to the fourth quarter of ‘22. Nano organic revenue grew in the mid-teens percentage range, driven by strength in Nano’s industrial research, AI-driven semiconductor and advanced packaging metrology as well as academic markets.

CALID organic revenue grew high single-digit percentage with strong performance by our microbiology business. We delivered solid growth in the third quarter of ‘23 in BSI systems and aftermarket revenue with low teen’s percentage organic growth in systems and high single-digit organic growth in aftermarket. Geographically and on an organic basis in the third quarter of ‘23, our Americas revenue grew in the low single-digit percentage, Asia-Pacific revenue grew in the teens percentage range, while European revenue had low-teens percentage growth all year-over-year. For our EMEA region, third quarter ‘23 revenue was up mid-20% year-over-year. Slide 13 shows our third quarter ‘23 P&L performance on a non-GAAP basis. Non-GAAP gross margin of 52.7% decreased 50 basis points from the 53.2% in the third quarter of ‘22, impacted by 100 basis points of foreign exchange headwinds, partially offset by organic and acquisition-related gross margin improvements of 50 basis points.

The third quarter of 2023 non-GAAP operating margin of 20.0% was 240 basis points lower than the 22.4% margin we posted in the third quarter of ‘22, as we were impacted by foreign exchange and acquisition headwinds to margins and faced a difficult comparison from our strong third quarter ‘22 operating margin. For the third quarter of ‘23, our non-GAAP effective tax rate was 23.8% compared to 30.4% in the third quarter of ‘22, driven mostly by favorable jurisdictional mix. Weighted average diluted shares outstanding in the third quarter of ‘23 were $147.3 million, a reduction of 1.3 million shares or 0.9% from the third quarter of ‘22, resulting from our share repurchases over the trailing 12 months. Finally, third quarter 2023 non-GAAP EPS of $0.74 was up 12.1% compared to the third quarter of ‘22 and with a $0.05 tailwind from a favorable tax rate, offsetting a $0.05 foreign exchange headwind.

Slide 14 shows the year-over-year revenue bridge for the first 9 months of 2023. Revenue was up $288 million or 15.8%, reflecting organic revenue growth of 13.9%. The – Acquisitions added 2% to our top line, while foreign exchange was a 0.1% headwind, resulting in constant currency revenue growth of 15.9% year-over-year. Frank already covered the drivers for the first 9 months. Non-GAAP P&L results for the first 9 months of ‘23 are summarized on Slide 15, with the drivers largely similar to the third quarter of ‘23, and as explained on the slide. Turning now to Slide 16. In the first 9 months of 2023, we generated $144.6 million of operating cash flow, up about $42 million over the first 9 months of ‘22 on higher profitability and favorable other items.

We generated $69 million of free cash flow over the first 9 months of ‘23, up about $61 million over the first 9 months of ‘22 on higher operating cash flow and lower capital expenditures. Turning now to Slide 18. Given our strong year-to-date results, solid backlog and positive outlook for the fourth quarter, we’re again increasing our revenue guidance for the year. Our updated outlook for fiscal year 2023 includes raising our revenue guidance to a range of $2.88 billion to $2.91 billion. This implies organic revenue growth of 11.5% to 12.5% year-over-year, an increase of 150 basis points from the midpoint of our prior guidance. And by now, up 300 basis points from the initial fiscal year ‘23 guidance we gave in early February. We now expect foreign currency to be about neutral to revenue for the year and acquisitions contributions of about 2.5% to our revenue growth.

This leads to reported and constant currency revenue growth guidance in a range of 14% to 15%. Our operating margins in 2023, we now expect organic operating margin improvement of about 100 basis points, which is up from our prior expectation of 50 basis points. For non-GAAP operating margins, all in, we now expect a 150 basis point decline from the prior year due to a 250 basis points combined headwind from foreign exchange and acquisitions, now also including the cellular analysis business we acquired as of October 2, 2023. As previously discussed, we’re rapidly rightsizing the cellular analysis business with most cost actions expected in the fourth quarter of 2023, such that the cellular analysis business is expected to be only slightly dilutive during 2024 and accretive to non-GAAP EPS by 2026.

As you just heard from Mark, we believe that over time, Cellular Analysis could be another high ROIC business for Bruker. Cellular Analysis accelerates our entry into important biologics in cell and gene therapy tool markets, leveraging its differentiated research solutions with high revenue growth and margin potential. On the bottom line, excluding the new Cellular Analysis business, we’re actually increasing our estimated non-GAAP EPS guidance to a range of $2.60 to $2.65, which implies 11% to 13% year-over-year growth or up $0.05 from our prior guidance range of $2.55 to $2.60 for fiscal year 2023. In the fourth quarter of 2023, we expect Cellular Analysis to be about $0.12 dilutive to non-GAAP EPS as we work through rightsizing the business.

Accordingly, we overall expect non-GAAP EPS to be in the range of $2.48 to $2.53, down $0.07 compared to our prior guidance, including that acquisition. Our guidance assumptions – other guidance assumptions are listed on the slide. Our full year 2023 ranges have been updated for foreign currency rates as of September 30, 2023. Finally, at our Investor Day in June of 2023, I shared financial targets for the medium-term fiscal year 2026 outlook for Bruker. Our year-to-date 2023 financial performance and positive outlook for Q4 gives me confidence to reconfirm today our commitment to those targets, including solid growth for 2024. So to wrap up, Bruker delivered excellent organic revenue growth and strong EPS growth in the quarter and for the first 9 months of 2023.

And we remain confident in our fiscal year ‘23 outlook and beyond. With that, I’d like to turn the call over to Justin to start the Q&A session. Thank you very much.

Justin Ward: Thank you, Gerald. I’d now like to turn the call over to the operator to begin the Q&A portion of the call. [Operator Instructions] Operator, we are ready for the Q&A. Thank you.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Puneet Souda with Leerink Partners. Your line is now open.

Puneet Souda: Sure. Yes. So I was just saying congrats on a very strong quarter here versus the backdrop of industry and peers. So that’s really great to see. Just wanted to clarify a question that we’re getting here on the BSI book-to-bill year-to-date that you provided. But based on the mid-single-digit growth in bookings versus the sort of double-digit – high single-digit growth you had in the prior two quarters for bookings. Just wanted to check if the book-to-bill was lower in first – I mean, in the third quarter here? And just given, Frank, what you’re seeing in the end markets and in China, obviously, nervousness out there in the market. Could you maybe just help us frame is it still fair to think about 6% to 8% growth, the longer-term growth algorithm for 2024 as well?

Frank Laukien: Yes. Happy to do so, Puneet, we’re not giving ‘24 guidance, we’ve signaled solid organic revenue growth for next year. We will give guidance when we obviously give guidance. Anyway. So it is correct. In Q3, there was some weakness in bookings in China and in Japan. The rest of the world, which, of course, included Americas and Europe and so on, was fairly strong. And so our book-to-bill in Q3 was below 1 as we expected. year-to-date, it is about 1. Remember, in China, we have this unusual effect more than perhaps other peers that we had very strong Q1 bookings. We believe some of that was truly incremental as some big ticket items got funded that normally might struggle to get funding. But some of it was also pulled forward.

And so we have a bit of an uneven order pattern in China, but there is also weakness in China right now. And in Q3, we saw that in China and Japan. So book-to-bill year-to-date is about 1 in – and we also have a very good forecast for bookings in Q4. So we think we will maintain the book-to-bill of around 1 for the year. And our backlog always comes down a little bit in Q3 before our typically strong Q4. You’ve heard the outlook of high single-digit organic revenue growth and good bookings for Q4, so we will still be at a very significantly elevated backlog. Keep in mind, I know you like the term backlog conversion, but those are customer orders, that’s real demand, so anyway, we will still have a very, very healthy and extended backlog that will take us, in fact, a few years to work down going into ‘24.

I hope that addressed most of your or all of your questions.

Puneet Souda: Yes, absolutely, Frank. I appreciate it. And if I could follow-up, I mean, congrats on the PhenomeX and the Cell Analysis business. definitely attractive longer-term. But could you just talk a little bit about how you see that high-end capital equipment positioned within Bruker? You have significant experience with selling high-end equipment to both research and now with the Cell Analysis you’ll be positioning well into pharma. So maybe could you talk a little bit high level about that? And if I may just sneak in one on timsTOF, any changes in customer order behaviors or dynamics given the demos of a potential competitive high-res instrument ongoing in the market right now? Thank you.

Frank Laukien: Yes. So we love selling instruments. We have very innovative instruments. We keep them refreshed also in our core, which our core is really doing well as well, not only the Project Accelerate initiatives. The Beacon is another high-end instrument, the 1 that we just acquired with Cellular Analysis but it really depends if you’re addressing key markets in better, faster and antibody development or maybe antibody developments that without a tool like this, we just can’t develop very well by the traditional ways of doing it. And of course, for important markets, I know there is a bit of a weakness right now in biologics and cell and gene therapy, but we’re very happy to accelerate our push into those markets.

So this is what we’re really, really good at. And it’s, of course, right now, the sometimes maligned academic government markets. If you’re in the right spot, if you’re in the post-genomic trends, which is proteomics post-translational modification, spatial biology, antibody, sell on – stable cell line development, that’s great. And I think we’ve positioned ourselves in the right areas. I should also add, and I know you – that tends to be one of your questions, that the high-end semiconductor and advanced packaging metrology tools in the Nano group are also doing remarkably well. There is a bit of a cyclical downturn in semi, but with our technology buys and the strong push for really high-performance, newer packaging and chip technologies from artificial intelligence and these geopolitical trends of the U.S. rebuilding and Europe rebuilding their semiconductor industries, it’s really we’re not fully shielded from the economic trends that others are seeing or the macro trends but we’re just more diversified, and we have positioned ourselves for spatial biology, protel, mix AI and a few others to some trends that are – continue to be very strong.

Alright. We should probably let some others get in with questions as well, but that’s sort of good innovation, good portfolio, exciting new products.

Puneet Souda: Appreciate it, Frank.

Operator: The next question comes from the line of Derik De Bruin with Bank of America. Your line is now open.

Derik De Bruin: Hi, good morning. Thanks for taking my questions. Hey, Frank, we’re trying to understand some of the dynamics going on in the market, particularly in the biopharma space. I know you have a you don’t have as much exposure to some of your peers right now. And – but there has been some concesitation in terms of instrument buying like that. Could you just provide some incremental color on what you’re seeing in pharma? And I have a follow-up after that.

Frank Laukien: Yes. The – we see some of that as well. Biopharma investments are slowing down, budgets are not getting spends aggressively, especially among emerging biopharma that we will keep it on their cash runway and so on. Also, we did see China CRO business being – for NMR, for instance, being pretty weak. So we’re not immune to some of the trends you see elsewhere, we don’t really do bioproduction very much or anything like that. We have very little COVID testing business. So – but we see – we can confirm some of those weaknesses they are just a year ago or 2 years ago, my god, if you weren’t in biopharma, you were nothing, right? We’re strong in biopharma. We’ve been growing very nicely, but we have so many other drivers as well.

So we confirm the trends. We just have many other growth. We’re not firing on all cylinders, but we’re firing on some – a lot of cylinders, and we have some very unique portfolio positioning and really some very innovative high-performance product lines that compete extremely well.

Derik De Bruin: Great. And I’m going to stay on the market commentary. I mean, you alluded to some metrology in semis, but what about some of the more industrial-focused customers? Chemical spending seems to – be, chemicals and some of those other markets that are out there. Can you just sort of talk about broader macro industrial spend and CapEx spend in those places? Thanks.

Frank Laukien: Yes. So metrology, memory and then some downturn there, and we’re seeing that in some metrology orders, but again, some very high-end orders also for advanced packaging and things that you need very high-performance computing and etcetera, for our AI. General industrial, we don’t really spend, we see some weakness there, but we also see we’re really a lot in industrial research, and there is some really non-cyclical fast-growing areas in green tech, in battery research in other hydrogen economy. There is enough green tech of a green tech economy that is a very strong growth drivers and other industrial research, industrial materials have been good for us. And then I really think we have share gains that maybe base since, but they add up to, we’ve refreshed and how we’re not neglecting our core and just milking the cow.

We’re investing there. This is part of our management process. And so yes, it’s been actually some – a company or a division like Bruker AXS, right. This really has done quite well. Yes, Q3 China orders a bit weaker, so we – but again, with a much healthier setup within industrial – towards industrial research and green tech research, right?

Derik De Bruin: Thanks, Frank. Yes, it’s been impressive what you’ve done with the portfolio over the last 20 years that I’ve been covering the stock. So congrats.

Frank Laukien: We go back some time there.

Operator: The next question comes from the line of Josh Waldman with Cleveland Research. Your line is now open.

Josh Waldman: Good morning, guys. Thanks for taking my questions. Just two for you. First, Frank or Gerald, can you provide an update on the backlog opportunity? I think you said backlog remains elevated. Is it still at about 2 months’ worth of kind of higher than normal backlog? And then how much do you think the backlog work down can impact annual organic growth as we roll into ‘24 and kind of over the medium term?

Gerald Herman: Yes. Hi, Josh, we’re talking about you, we thought you had our CFO’s office because your predictions were pretty accurate for the quarter than congratulations. Anyway, so backlog remains – I mean, Q3 backlog is always a little lower than Q4. So as we look at year-end backlog, 2.5% – 2.5 months, maybe 3 months or so higher backlog than we traditionally had before all the roller coaster began in 2019 and all of that. So that will be a multiyear story, right? We’re not trying to – and we can’t from a capacity point of view, pump that all out in 1 year. So it will add to our organic growth, but it will be a multiyear story. And right. So I think that was your question, right? I would assume that backlog can be normalized maybe at something like 3 years or some.

Josh Waldman: Follow-up is I wondered if you could provide more context on the weaker trends in China? I mean did China decline in the quarter? And I guess, any context on what you’re seeing by end market there? And how much your outlook in China has changed? I mean were you assuming a slowing? Or is the slowing here in recent months, a surprise?

Frank Laukien: Yes. No, we were assuming a slowing because of our little micro trend, right, that we have these very strong orders in Q1. So China was relatively weak in orders in Q3, as well as Japan, Rest of the world did quite well. But if I look year-to-date, that’s why overinterpreting a quarter is always tricky. Year-to-date, we have very strong order growth in China. I mean, significantly into the double digits. And in our forecast for Q4, we will see, but it’s for us, I think there was a little bit of a Bruker special, namely this Q1 partial pull forward, which has led to slower – that, along with China macro weakness has made Q3 bookings in China weaker for us. As we acknowledged year-to-date, they are up very significantly.

Gerald Herman: I might just add that revenue trend is quite different given the lead times and backlogs. So, revenues are still growing nicely there. The order bolus in the early part of the year really just added on to the backlog. So, it’s still going to take a while for us to convert that backlog in China to revenues. So, the weakness Frank is referring to is more so the Q3 orders. But again, that’s because of the pull forward earlier in the year, orders are up year-to-date, well in the double-digits there, so.

Josh Waldman: Got it. Thanks guys.

Operator: The next question comes from the line of John Sourbeer with UBS. Your line is now open.

John Sourbeer: Good morning and congrats on the quarter. I appreciate the color on pharma demand. But maybe if you could provide just a little bit more color just on the overall funding environment for high-end instrumentation is maybe specific with academic and government customers?

Frank Laukien: Okay. John, thank you. It’s been good, right. I mean academic government never grows as fast at boom times, but it also is pretty resilient at – and it just grows steadily generally by low-single digits, sometimes mid-single digits. As I always say, it really depends where you are. I mean academic government, including academic medical centers, we are very much more exposed to academic medical centers, cancer research, proteomics research and medical schools, etcetera, than we were years ago. And that’s a really good thing because between Philanthropy and NIH funding and at just procedures growth and all of these things and focus on cancer or neuroscience research. The scientific areas in the post-genomic – the post-genomic trends, I think are much stronger than the genomic trends these days.

And I think they will remain that way, and we are very well positioned there. Metabolomics, lipidomics proteomics, PTMs, glycomics, I am just turning this into a techno session here. But for post-genomic trends, we are beautifully positioned our greater exposure into spatial and cell biology are good drivers. So, where we are within this modestly growing academic government funding is much more important. And so we are really – we are in there really, I think for the next decade or hopefully more, were really, I think are in the sweet spot of the demand curve and funding therefore as well. So, the allocation of prioritization with our product is great.

John Sourbeer: Got it. I guess I was trying to get that more. I mean do you anticipate any change in this demand? I know you are not guiding for next year, but when you look out over the next 12 months, do you see any changes when you look out there on trends?

Frank Laukien: I think the secular trends are the chador [ph] or maybe a couple of decades, still early days in those – in that, but I think it really has changed dramatically now. Towards the post-genomic age, which is exactly where you could call as post-genomic company except we also do semiconductor and food analysis, but right. So, I mean there might be some noise, maybe slower NIH budgets, but we are not exposed directly to NIH all that much. But then you have the CHIPS Act, you have the Science Act, you have a European CHIPS Act. China has been investing very heavily. A lot of our orders in China this year, also early were for high-end life science, NMR, microscopy, timsTOF mass spectrometry tools. So, there is a big proteomics project in China that sometimes the headline – the headline use if they execute all of that as often is the case, we will dwarf anything in the West, so to speak.

Then it just means there will be a very significant investment and focus on this post-genomic investment, which is exactly where we have positioned ourselves.

John Sourbeer: Appreciate that. If I could sneak in just one more on PhenomeX, or the Bruker cellular business, would you be willing to provide what you think could be the long-term growth rate for this business or any way to quantify any of the dissynergies or cross-selling opportunities there? Any additional color you could provide on that?

Frank Laukien: We are right now focusing on getting the cost structure right. So, we are – as you have seen also our run rate of $60 million or greater is initially focusing on making it just a little bit dilutive. And then – in the long-term, I would rather do that maybe when we give color and guidance next year. We think it can swing back to being a very, very good growth business and one that eventually in terms of growth rates and CAGR, given these attractive markets will be, over the long run, higher than what you see than even our Bruker average. In ‘24, that may not be the case because of some biopharma weakness, right. But long-term, we think it’s accretive to our organic growth rate.

John Sourbeer: Appreciate it. Thanks for taking the question.

Frank Laukien: Thank you, John.

Operator: Thank you. The next question comes from the line of Patrick Donnelly with Citi. Your line is now open.

Patrick Donnelly: Hi guys. Thanks for taking the questions. Gerald, maybe one for you to start, understand you are not giving ‘24 guidance. But just on the margins, as you think about high level, the moving pieces as we work our way into next year. Obviously, this year, you have had the FX headwind, the M&A headwinds, the core organic op margin expansion, I think you guys flagged as 100 bps. So, as you look into next year, what should we be thinking about as those moving pieces? Obviously, the dilution from the deal you flagged, you guys are stripping out costs pretty aggressively, which is good to see. But maybe just talk high level how you think about that margin algorithm next year?

Gerald Herman: Hi Patrick. I guess I would say, perhaps just stay tuned. We are going to go through that in more detail in February. And obviously, you have seen some of the moving parts. We have got a lot of pieces here, but we are pretty optimistic in the long-term. So, I think I will leave it at that for just today. We want you to come back for the February ‘24 call, for sure, Patrick.

Patrick Donnelly: I will be there. I appreciate it. And then Frank, maybe just on China, obviously a few questions there. But when you think about the backlog, is that backlog above kind of the, call it, nine months for the company? I mean are we at a year backlog in China? And if it is, given that visibility, how sticky is that order backlog? How often are these order [ph] cancellations? I think there is just a concern with what’s happening over there that maybe the backlog isn’t quite as firm as other areas? I would be curious, as you look historically, what you have seen there? And again, if you can frame up the backlog for us in China specifically, it would be helpful.

Frank Laukien: Yes. No. I mean we – except for – we very rarely, if ever, see any order cancellations. And it is extremely rare. And then of course, we usually have a down payment or something like that, that we retain. When there were regulatory changes in semiconductor and with the U.S. would allow to be delivered to China, I think we had to have – but we have corrected for all of that a year ago or thereabouts, so that’s all long in our system. Other than that, the China backlog is good call, good question. The China order backlog is a little bit higher than our average backlog, I don’t want to quantify specifically. We don’t go into that granularly, but it is above our corporate average. And that has to do also with the fact that there is some – that China bought a lot of big-ticket systems throughout – also in Q2, a lot in Q1.

Some of that has – some of that will even go into next year. So yes, the China backlog is a little bit stronger. And other than a geopolitical crisis, we think there is risk for the entire industry, right. Geopolitically, we know what will happen over the next 10 years. But in terms of Bruker risk and Bruker order cancellations, we just don’t see that. We have valuable instruments. We make our – try to really do great things for our customers. And so we are a reliable company.

Patrick Donnelly: Yes. Appreciate it.

Frank Laukien: Thank you.

Operator: Thank you. The next question comes from the line of Rachel Vatnsdal with JPMorgan. Your line is now open.

Rachel Vatnsdal: Hey. Thanks for taking my questions and congrats on the strong quarter guys. I wanted to follow-up on some of these China comments here around the weaker orders. Could you give us what the book-to-bill was in China this quarter? And then just given some of your peers have flagged that, that market has also really continued to weaken throughout through 3Q and into October. Can you give us any more color on when you started to see the weakness in orders? And then specifically, were there any types of end markets, customer types or even product types where you are seeing that more pronounced weakness?

Frank Laukien: So, we don’t give book-to-bill by country or by region. We acknowledge that in Q3, bookings were down year-over-year in China and in Japan and elsewhere, certainly in the major geographies. Right, we don’t look at daily or weekly order patterns like maybe more of a consumables business model, right. We always, in all geographies, get more than half of our orders in the third months of each quarter. So, the type of trends within the quarter that some people have described and that you probably are asking about, we just don’t even see that in our data. So, right, I did – we did notice that CRO business and for biopharma CRO business in China throughout the year already had been weak, and I am sure Q3 was not an exception. That’s about it. That’s not going to answer all of your questions about – but you get a lot of color from other vendors that see more this monthly pattern or even weekly patterns, which we don’t.

Rachel Vatnsdal: Fair enough. Thanks. And then I just wanted to ask around budget plus dynamics within that high-single digit organic growth that you guys are assuming for 4Q. What’s your assumption on budget flush? Have you started to see any of those orders or customer conversations around that December dynamic, and yes, really any color there. Thank you.

Frank Laukien: We have been in this industry for a long time and budget flush is still one of these enigmatic terms to us. It doesn’t – and again, it is one of the things that I think applies much more to consumables and companies and for us, we are never really looking for that. And so we are just not a good data point to give you color on that. So, we have – just like in other years, we have no expectations for any budget flush, because it just doesn’t – it doesn’t work that way at Bruker. That’s a Bruker specific answer I realize. So, that I don’t need to frustrate you, Rachel, but budget flush for us isn’t one of the things that we look for and will there be one this year or not, can’t comment. We just don’t have the invites into that, I should say.

Operator: Thank you. The next question comes from the line of Jack Meehan with Nephron Research. Your line is now open.

Jack Meehan: Thank you. Good morning. I wanted to ask a question on PhenomeX. First, could you talk about just what you are doing in terms of the integration through year-end, where that – maybe just a little bit more detail on what you are focused on? And then I wanted to clarify on the dilution commentary. So, you said it was slightly dilutive in 2024. I just wanted to clarify, is that incremental to the $0.12 in 4Q, or is that relative to the trend line from prior to the deal getting announced?

Frank Laukien: I will turn things over to Mark in a moment, but the slightly dilutive, I am not sure I fully understood the question. But obviously, that implies being much less dilutive per quarter than the $0.12 one-time bolus that we have as a headwind in Q4 ‘23. Again, when we give guidance in early February for next year, but much less per quarter than the $0.12 is what we mean by slightly dilutive. Now for your modeling, sorry, Mark, then I will turn things over to you. For your modeling, I assume that it’s a little bit more dilutive in the first half and a little less dilutive in the second half, but on average, it’s going to be much less dilutive. Guys, we just don’t want to give guidance today for ‘24. We are not going to do it, so that’s why we stick to adjectives. I know you would like numbers. Mark, without numbers, may I turn things over to you and you can at least qualitatively describe some of the strategy resetting and rightsizing with…

Mark Munch: Yes. Sure. Yes. The types of things we are doing, I will characterize that. And first of all, we are kind of accelerating. They were already doing some integration, but we are really accelerating on a faster pace because in terms of our M&A expertise, we are pretty good at that. And so – and then one of the things we are doing is getting over to Bruker management process to kind of crystallize and sharpen the strategy that they have, and that’s kind of helpful. In terms of highlighting then where to focus, where not the focus is then in terms of costs, certainly, headcount, personnel costs, also overhead, we have streamlined a lot of the overhead structure. There is some consolidation also going on in terms of sites as well as they were carrying a fair amount of depreciation expense kind of unnecessarily in the business serving.

So, there is just a number of items across many fronts where we are kind of operationally optimizing and cost optimizing the business and then doing it pretty rapidly.

Frank Laukien: Mark is fantastic at that, and of course, also drove the acquisition, so very strategic, but also very good at integration. Of course, the number of jobs affected will be, I mean well over 100, unfortunately. And we are taking tens of millions of costs out on an annualized basis during that integration process. Stay tuned for a bit more detail on that when we give guidance in early February. Jack, did that hit the points, or was there something else we…

Mark Munch: And maybe one more follow-up here for the Q&A, Jack. Thanks.

Jack Meehan: Okay. The rollout of timsTOF Ultra might have impacted life science mass spec sales in the quarter. You didn’t call it out within CALID. Just was wondering if the initial rollout could have actually had a short-term dampening effect as customers kind of reevaluated what they are buying?

Frank Laukien: Yes, that’s true. So, the Astral is more competitive than the previous Orbitrap. So, a lot of people are taking a look and that previously would have just ordered. They are now taking while there is an Ultra from Bruker and there is an Astral, and they both came out at the same time. So, people are taking a look. We are doing more detailed demos as people really try to drill down into that. Still have a lot of pipeline and orders that are coming through, but people are taking a closer look. And the high-end proteomics mass spec market with the Astral introduction and the Ultra introduction has become more competitive.

Jack Meehan: Thank you.

Justin Ward: So, I think operator, actually, maybe we will take questions, I think from one more caller.

Operator: Absolutely. The final question comes from the line of Dan Arias with Stifel. Your line is now open.

Dan Arias: Hey. Good morning guys. Thanks for squeezing me in here. Frank, maybe just a follow-up on the instrument portfolio, you guys have a fairly wide range of price points there. I am curious whether as you have watched demand evolve, you have noticed any break points or thresholds within certain customer groups or end markets, just when it comes to being above or below a certain level, seeming to draw less friction or more friction on orders, the trend emerge there at all?

Frank Laukien: Can you give me an example? Dan, I want to make sure I understand the question.

Dan Arias: Well, I am just thinking about the different product lines that you have and the price points that are attached to them and whether or not you are seeing some – whether price sensitivity the order book has evolved has gotten lower, or whether you are seeing certain customers just draw out their timelines, depending on where the ASP happens to fall, basically price sensitivity in the instrument market for you guys.

Frank Laukien: Yes. Sometimes, we see – we have the effect of currencies for people in some of the currencies that have been weakening, like the yen, so China a little bit, right. And Israel most recently have budgeted for our instruments. And then just before they are about to buy their currency drops some percent. But that’s not a brand-new trend. So, we always wrestle with that, and we try to figure it out with the customers, but it’s not really a recent trend. It’s just one of the things we deal with from time-to-time. I haven’t seen any portfolio inflection points or so. I have not seen any, I mean our – we actually had pretty good price realization. We didn’t talk about that much. So, price realization was behind inflation previously.

We are now sort of where price realization at least keeps up with inflation and maybe even turn slightly positive. So, our pricing power has remained very solid, and our competitiveness has remained solid. So again, they will need to update the question anyway. But the answer – the short answer would be no. We haven’t really seen any portfolio inflection points or something or excessive price or significant price sensitivity. I mean price is always important. But ultimately, what’s the best performance or what gives you the research or the results that you need. There are some industries semiconductor, they will buy the best that works for them basis $1 billion fab. It depends on it, and that’s what you guys – the high end of proteomics is, most of the funding is going.

People want the best as opposed to lower – not a lot of lower-end proteomic sales right now, for example.

Dan Arias: Okay. That’s helpful, just figured out that. If I could – Frank, if I could just sneak – can I just sneak one more in on Berkeley Lights, if I may. Those guys had some plans for some additions in the portfolio, just in terms of lower-cost instruments and some application-specific stuff. Does your plan call for carrying forward that roadmap of theirs?

Frank Laukien: Maybe early to say. But Mark, would you like to comment or defer until next year?

Mark Munch: No, we can comment on it. So, that’s correct, for example, the Beacon platform, they had launched some lower-priced position products in terms of the Beacon Quest and Beacon Select in 2023 and those will continue onward. And then kind of – and what that’s about, by the way, is helping expand to new segments, new markets. So, all of that – those kind of trends will continue.

Dan Arias: Okay. Thank you, guys.

Operator: Thank you. I would now like to pass the conference back over to the management team.

Justin Ward: Thank you everyone for joining us today. I do want to note Bruker’s CFO, Gerald Herman, will be presenting at the Jefferies Conference in London on November 14. And Bruker’s leadership team looks forward to meeting with you at an event or speaking with you directly during the fourth quarter. Please feel free to reach out to me to arrange any follow-ups, and have a great day.

Operator: That concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.