Bruker Corporation

Hey, and welcome to the Berger Corporation first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question from the queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Miroslava Minkova, Senior Director of Investor Relations and Corporate Development. Please go ahead.

Thank you, Sarah. Good morning, everyone. I would like to welcome everyone to Brooker's first quarter 2021 earnings conference call. My name is Miroslava Minkova, Senior Director of Investor Relations and Corporate Development. Joining me on today's call are Frank Laukeen, 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'll be referencing a slide presentation. The PDF of this presentation can be downloaded from the latest results section on Booker's Investor Relations website. During today's call, we'll be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release, and they're posted on our website at ir.broecker.com. Before we begin, I would like to reference Broecker's safe harbor statement, which we show on slide two. During the course of this conference call, we'll make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to the ongoing COVID-19 pandemic 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, May 5th, 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 second quarter 2021 financial results expected in early August 2021. except for any forward-looking statements regarding medium-term outlook that we may share at our upcoming Investor Day in June. Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We'll begin today's call with Frank providing a business summary. Gerald will then cover the financials for the first quarter in more detail. Now, I'd like to turn the call over to Brooker CEO Frank Laukeen.

Thank you, Miroslava. Good morning, everyone, and thank you for joining us on today's call. Rooker had an excellent first quarter with a strong start to 2021. We saw a significant recovery in many of our businesses previously impacted by the pandemic. Our project accelerate initiatives continue to deliver strong growth and value. and our financial performance stepped up accordingly, reflecting strength and competitive business and end market dynamics. We also continue to make progress in the expansion of Project Accelerate, which we now call Project Accelerate 2.0. So Q1, first quarter 2021 revenues grew 30.8% to approximately $555 million. Foreign currency translation was a tailwind of 6.2%, while acquisitions added 0.8% to revenue growth in the quarter. On an organic basis, brokers' revenues increased 23.8% year-over-year from a pandemic-impacted Q1 2020 when our revenues were down approximately 8% organically. The reported and organic revenue increases in Q1 of 2022 reflected strong demand for our high-performance life science tools, scientific instruments, and diagnostic solutions, with continued uptake of our project accelerate growth initiatives and a strong recovery in end markets globally. Our first quarter 21 non-GAAP gross margins stepped up 460 bps year-over-year, while our non-GAAP operating margin reached 18.4% from 7.6% in the first quarter of 2020. The improvements reflect our revenue and volume increase, positive operating leverage, and higher project accelerate revenue in the mix. In the first quarter of 2021, Broecker reported GAAP diluted earnings per share of 37 cents. On a non-GAAP basis, first quarter 21 diluted EPS were 44 cents, more than tripling compared to 14 cents in the first quarter of 2020. First quarter 2021 order bookings for Broecker's scientific instruments groups grew mid-teens organically year over year. This reflected continued strong order growth for our innovative proteomics and biopharma solutions and a strong recovery in our academic, applied, and industrial research businesses. Demand for microelectronics and semiconductor metrology systems also remained robust. During the first quarter, we made further progress in three areas of significant long-term growth potential, unbiased proteomics, spatial and single-cell biology, and microbiology and molecular diagnostics. At the U.S. UPO Conference in March, researchers presented exciting new results in deep, unbiased plasma 4D proteomics using our unique TIMSTOP passive solutions. We believe that plasma proteomics is the next frontier for proteomics researchers, particularly for liquid biopsy multi-omics biomarker development using cancer proteogenomics methods. In late February of 2021, a seminal publication by the groups of professors Matthias Munn and Fabian Zeiss, published in Nature Communications, described collision cross-sections, or CCS, on the TIMSTOF platform as an essential intrinsic property of peptide ions. The Mann and Zeiss publication suggested that accurate large-scale Collision cross-section values, which are unique to TIMSTOF, can increase confidence in peptide and protein group identification. In spatial and single-cell biology, in March, we announced the formation of Acuity Spatial Genomics, a new company that is with a majority investment by Bruker. Acuity Spatial Genomics has core IP with an exclusive license to certain innovations made at Harvard University in Professor Ting Wu's lab. I will discuss Acuity Spatial Genomics in more detail later on the call. Finally, in our microbiology and diagnostics business, we began the U.S. rollout of the FDA-cleared MBT-septotyper IVD kit for the rapid identification of bacteria and fungi directly from positive blood cultures. We are very pleased with how our Project Accelerate 2.0 initiatives are unfolding. We will do a deeper dive into these areas at a planned Virtual Investor Day on June 17th. Last, but by no means least, we continue to drive operational excellence and productivity programs. These should support further operational gains and reinvestment in our business in 2021 and beyond. With that, please do turn to slides five and six now, where I provide further highlights on the first quarter 21 performance of our three scientific instruments groups and of our best segments, all on a constant currency and year-over-year basis. First quarter 2021, BioSpin group revenue grew in the mid-20s percentage to $159.4 million, as customer demand and instrument deliveries improved. BioSpin system revenue was up strongly and included customer acceptance of a 1.2 gigahertz system and of a 1.0 gigahertz system, both in Europe. During the quarter, in addition to strengthening academic markets, demand for BioSpin's industrial and applied solutions began to recover as well. BioSpin's aftermarket and software revenues also grew. First quarter 2021 CALID group revenues increased in the high 20s percentage to $192.4 million. The growth at CALID reflected strong demand for life science mass spectrometry and for FT-IR, Near-IR, Raman molecular spectroscopy products. During the quarter, we continued to see robust order and revenue growth, for our TIMSTOF unbiased 4D proteomics platform, while demand for other mass spec products also improved. Microbiology and molecular diagnostics revenue was higher on contributions from SARS-CoV-2 diagnostic products. During the first quarter of 2021, revenue from COVID testing was approximately 7 million. Virtually all incremental growth year over year but down sequentially from the fourth quarter of 2020. Revenues for our molecular spectroscopy products were sharply higher year over year amid excellent new product ramp and strengthened industrial, applied, and academic markets. Please turn to slide six now. Bruker Nano revenues increased in the mid-20s percentage to $154.4 million. In the quarter, Nano saw a rebound in its industrial research product lines and a recovering academic business. Demand for Nano's microelectronics and semiconductor metrology products remained strong. First quarter 2021, Nano revenue also included a modest contribution from our September 2020 Canopy Biosciences single-cell targeted proteomics acquisition. In the first quarter of 2021, nanos advanced x-ray and nanosurface revenues grew strongly year over year, and nanoanalysis revenues stabilized. First quarter 2021, microelectronics and semiconductor metrology revenue grew significantly compared to first quarter 2020 on healthy demand. And finally, nanos fluorescence microscopy revenue was slightly higher year over year, but with very good order growth. Moving on to best, best revenue in the first quarter of 2021 grew in the mid-single digits, net of intercompany eliminations on contributions from best big science projects. During the first quarter, underlying demand for best superconductor products for healthcare and MRI began to recover after a slowdown in 2020, primarily attributed to the pandemic last year. Moving to slide seven, I would like to share some highlights on the recent U.S. and America's rollout of an enhanced 4E80 benchtop FT-NMR with applications in applied, industrial, pharmaceutical, and academic teaching markets. The benchtop 4E80 is a next-generation, higher-performance system featuring a permanent magnet so therefore no need for cryogen refills. The system is routinely equipped for gradient spectroscopy and has industry-leading automation options. We believe this system is poised to democratize NMR through a broad range of labs and applications, as it does not have the cost, space, or cryogen requirements of high-field superconducting NMR systems. Turning to slide 8, in March 2021, Acuity Spatial Genomics was formed with a majority investment by Bruker. ACQUITY aims to open a new frontier in spatial 3D genomics and multiomics analysis for basic research and discovery. ACQUITY leverages innovations developed in the lab of Professor Ting Wu, which is a professor of genetics at Harvard Medical School, and specifically the oligophysique methods and technology, which makes it possible to see the three-dimensional genome in situ, and at single-cell and subcellular resolutions. Capabilities enabled by ACQUITY include, for example, a deeper understanding of the three-dimensional chromatin structure and insights into transcription regulatory programs that drive cell type, cell state, pathogenesis, and function. Such fundamental cell biology discoveries could help address problems in complex questions in oncology, neuroscience, and cell development. Acuity is an important addition to our emerging spatial and single-cell biology portfolio. We look forward to sharing more information on this area at our upcoming Investor Day. So let me conclude by reiterating that our first quarter 2021 got us off to a strong start. We saw a recovery in most of our core businesses, and our high-growth Project Accelerate initiatives continued to deliver. As discussed on our February call, we are planning further investments this year to support the growth of our business and Project Accelerate 2.0, including in R&D and CapEx. At the same time, we also continue to drive our operational excellence programs, which are already partially reflected in the strong recovery of our core businesses. We are raising our fiscal year 2021 outlook for revenue growth, non-GAAP operating margin expansion, and non-GAAP EPS, as you can see from our press release. I'm confident that Bruker is emerging from the pandemic in a very strong position, and I look forward to further updating you on our many exciting opportunities at our Virtual Investor Day in June. Let me now turn the call over to our CFO, Gerald Herman, who will review our first quarter 2021 financial performance and guidance in detail. Gerald.

Thank you, Frank. I'm pleased to join you today and review Bruker's first quarter 2021 financial highlights, starting on slide 10. Brooker's revenue increased 30.8% to approximately $555 million in the first quarter of 2021, which includes an organic revenue increase of 23.8%. We reported GAAP EPS of $0.37 per share compared to $0.07 in the first quarter of 2020. On a non-GAAP basis, Q1 2021 EPS was $0.44 per share, an increase of 214% from 14 cents in the first quarter 2020. Our first quarter 2021 non-GAAP operating income and non-GAAP operating margin stepped up significantly year over year, given the increased revenue and volume. Coupled with our disciplined management of expenses, this resulted in a significant drop through to the bottom line. as our first quarter 2021 non-GAAP operating margin reached 18.4% compared to 7.6% in the first quarter of 2020. At the end of the first quarter of 2021, our balance sheet cash and liquidity position remained healthy and improved sequentially from the fourth quarter of 2020. We ended the first quarter with $746.8 million in cash, cash equivalents, and short-term investments, and a modest net debt position. During the quarter, we again used cash to fund strategic capital investments, our stock buyback program, and our dividend. In the first quarter of 2021, we repurchased approximately 531,000 shares of Brooker stock for a total of $32.8 million. We have completed our share buyback authorization, which was valid until mid-May of 2021. Free cash flow in the first quarter of 2021 was a healthy $73.3 million. And our working capital to revenue ratio improved relative to December 31st, 2020, driven by efficiency gains. Slide 11 shows the revenue bridge for the first quarter of 2021. As noted earlier, organic revenue in the quarter increased 23.8%. We had a positive revenue contribution from acquisitions of 0.8% and a foreign currency tailwind of 6.2%. From an organic revenue perspective, bio-spin revenue increased in the mid-20% range. Callid revenue increased in the high 20% range, and nano grew in the low 20% range. Best revenue is up in the mid-single digits, net of intercompany eliminations. Frank has already reviewed the primary drivers earlier in this call. Systems revenue for each of our three BSI groups increased in the high 20% range organically, and aftermarket revenue also grew approximately 20% organically compared to the first quarter of 2020. Geographically and on an organic basis in the first quarter of 2021, European revenue increased close to 40%, including the two gigahertz class NMRs, while Asia Pacific revenue grew in the mid 20% range and North American revenue grew in the mid single digits. Rest of the world revenue was slightly higher year over year. Slide 12 shows our first quarter 2021 P&L performance on an on-gap basis. The first quarter 2021 non-GAAP gross margin of 51.3% increased 460 basis points from the 46.7% in the first quarter of 2020, driven by volume leverage on increased revenue and higher project accelerated mix. Over the past few years, we've added new capabilities to our high-performance instrument portfolio, which are now delivering solid margin improvements. in addition to the higher volume we experienced in the first quarter of 2021. Q1 2021 non-GAAP operating expenses increased 9.8% compared to the first quarter of 2020. Our operating expenses in the first quarter reflect solid cost management as we navigated through a significant foreign exchange headwind in the quarter. We anticipate that our planned Project Accelerate 2.0 investments which did not impact the P&L in a significant way in the first quarter, will ramp up over the remainder of the year. As a result, our first quarter 2021 non-GAAP operating margin stepped up over 10 percentage points year over year to 18.4%, a record level for us in the first quarter. This reflects significantly higher revenue, improved gross margin, and favorable operating leverage compared to the first quarter of 2020. We also observed an approximate 70 basis point foreign exchange headwind on our operating margin in the quarter. For the first quarter of 2021, our non-GAAP effective tax rate was 31.1%, compared to 23.9% in the first quarter of 2020, primarily up due to discrete items and jurisdictional mix. Weighted average diluted shares outstanding in the first quarter of 2021 were 153.2 million, a reduction of approximately 2.2 million shares or 1.4% from the first quarter of 2020, resulting from our share repurchase activity over the past 12 months. And finally, first quarter 2021 non-GAAP EPS of 44 cents stepped up significantly from the 14 cents in the first quarter of 2020, driven primarily by higher revenue and margins. Turning to slide 13, our free cash flow in the first quarter 2021 was $73.3 million, reflecting sharply higher net income year over year. First quarter 2021 cash flow also benefited from the timing of income tax payments and other items, as well as slightly lower year over year capital expenditures. Our cash conversion cycle at the end of the first quarter of 2021 was 243 days, a decrease of 33 days compared to the first quarter of 2020. The reduction was due to our strengthening cash collection process and improvements in days inventory and days payable outstanding. We continue to carry significant inventory in order to manage supply chain risks, with new risks emerging related to semiconductor chips, and other supply shortages as the major economies recover from the pandemic. Turning now to slide 15, we're raising our guidance for 2021 to reflect our strong start to the year and favorable trends we see in our business. While we cannot rule out further risks, including those related to the pandemic or to the supply chain, Demand for our products and solutions has strengthened across our portfolio, and major end markets appear to be recovering. For fiscal 2021, we now expect organic revenue growth of 11% to 13%, representing an increase of four percentage points from our February guidance. Foreign currency is now expected to contribute approximately 3% to revenue growth, a slight reduction from the approximate 4% tailwind projected earlier. This now calibrates reported revenue growth for 2021 to a range of 14% to 16% compared to 2020. Baked into this projection is the assumption that our three BSI groups will continue to be the primary drivers of this growth. We now expect our 2021 non-GAAP operating margin to expand 210 to 250 basis points compared to the 16% reported in 2020. This is an increase of approximately 60 basis points compared to our prior outlook. For the full year 2021, we now estimate a foreign currency headwind of approximately 50 basis points on operating margin, more favorable than the 80 basis point foreign exchange headwind we projected in our February call. On the bottom line, we expect 2021 non-GAAP EPS in a range between $1.82 and $1.87. a 10 cent increase compared to our February guidance range and representing non-GAAP EPS growth of 35 to 39% compared to 2020. This also represents mid to high teens growth from the $1.57 pre-pandemic non-GAAP EPS level in full year 2019. Our 2021 projected non-GAAP operating margin expansion and non-GAAP EPS continue to assume an increased R&D investment of approximately 10% of revenue as we fund investments in Project Accelerate 2.0 growth initiatives. We're increasing our non-GAAP tax rate projection for 2021 to approximately 30%. This is due to a change in the jurisdictional revenue mix we now anticipate for the full year. Other assumptions for 2021 are listed on the slide, along with our updated foreign exchange rate assumptions as of April 30th. While we do not provide quarterly guidance, I'd like to add some additional color to our expectations for the second quarter. Given the relatively weak comparisons from the second quarter of 2020, we currently anticipate our second quarter 2021 financial performance improvements to again be quite strong. with 15% or greater organic revenue growth year over year. Unlike the first quarter of 2021, we do not expect any gigahertz class systems revenue in the second quarter due to timing reasons. This, combined with our planned ramp up in Project Accelerate 2.0 investments, may result in lighter than first quarter sequential operating margin and EPS performance in the second quarter of 2021. To wrap up, we began 2021 with an excellent competitive position in strengthening end market demand for our products in many key markets. In the first quarter, we saw strength particularly in proteomics, biopharma, applied, semiconductor, and industrial research markets. Our innovative product portfolio combined with recovering end markets positioned us well to deliver strong year-over-year improvements in revenue, margin, EPS, and cash flow in the first quarter. We also took a meaningful step up in our outlook for the full year. The strategic investments and sound operating actions we took in 2020 are expected to further strengthen our financial performance in 2021 and beyond. We look forward to updating you on our upcoming Virtual Investor Day and on future earnings calls. 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 over to the operator to begin the Q&A portion. As a reminder, in order to allow everyone time for questions, we ask that you limit yourself to one question and one follow-up. Operator, we are ready to begin the Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Doug Shankle with Cohen. Please go ahead.

Hi, good morning. This is Chris on for Doug. Thanks for taking my questions. Gerald, I think updated full-year organic revenue growth guidance implies that the average two-year stack growth rate in Q2, Q3, and Q4 collectively is just 2%. I know you increased full-year guidance beyond the Q1 revenue beat, but the stack growth rate is well below the 8% you just delivered in Q1. Even if we adjust for the two-figure systems, So with that in mind, I am curious how conservative you think updated guidance is, and if there are any other factors we should consider as we update our models.

We can't follow your numbers. They don't agree with our numbers.

I guess said differently, if you just look at a staff growth rate in Q1 of 21, you just put up, I think, that stack growth rate of 8% is just lower than what guidance implies for the rest of the year. So I'm curious, you know, if there are any factors we should consider as we update our models, or, you know, how conservative do you think updated guidance is for the balance of the year?

We think the guidance is reasonable, and they still won't follow the numbers that you're citing to us because they don't coincide with our numbers. But we think our guidance for the second quarter and for the remainder of the year is reasonable.

Okay. We could follow up after. My second question, Frank, could you just help us contextualize the market opportunity for the FT NMR system? Does that replace some of the lower magnetic field strength NMR systems you have, or is that more complementary?

Good question. Yeah, no, I think it's a new, you know, still rather small market segment. There are some other companies, smaller companies out there that have been in that market. We're sort of a little bit of a late follower here, but I think we now have a very good second-generation, high-performance, very stable, highly automated product. with a lot of benefits. So it's its own little market niche. I don't think it'll cannibalize the superconducting NMR market of 400 megahertz or above. That's just a different performance envelope. But I think for the first time, and that's really what we were aiming for, It makes a benchtop FT-NMR, you know, something that you could put into any lab. Just you could put a little GC or LC mass spec into single or triple quad or a little FTIR benchtop system into any analytical or chemistry or teaching lab. And NMR always was, you know, pretty much mostly relegated to central research facilities with a few exceptions to that. And I think we're really breaking that paradigm today. So I think it just adds, NMR is incredibly useful, but it wasn't as easily and broadly accessible to all sorts of chemistry labs as it now is becoming. So I think it's a very, it's a small niche, but I think it, you know, has a lot of growth potential for the future. Okay, great.

Thanks for taking the questions.

Our next question comes from Puneet Sita with SVV Learning. Please go ahead.

Hi, good morning. This is Scott McAuley on for NEAT. Thanks for taking the question. So I want to talk about single-cell proteomics. You guys kind of mentioned in a call actually held with us about a single-cell proteomics instrument that's slated to launch in 2022. It's based on a breakthrough paper from the Mann Group. I don't want to frontrun the investor day, but maybe just more high-level, how you're thinking about the system and how it fits into the portfolio of Canopy and some of the other initiatives you guys have ongoing in the single-cell arena.

Yeah, Scott, that's a good one. In fact, of course, we are doing single-cell targeted proteomics. That's not so unique, and there's not many companies that can do it. We're one of them with our Canopy Biosciences investment, and single-cell targeted proteomics primarily for clinical and translational research on both fresh frozen and FFP tissue or unsuspended cells is something that we're doing, and we have very nice panels for that now. That's why we did that canopy acquisition. However, unbiased bottoms up, if you like. Unbiased single-cell proteomics that's quantitative and beyond, you know, just a few signals. That's really novel. And having that with a large number of protein groups and peptides identified was in that seminal paper that you just mentioned by the MUN group. And, yeah, so we're developing that system. We hope to launch that in early 2022. And it really is a new scientific capability. single cell proteomics which goes with spatial proteomics within a tissue you'll obviously want to cut out individual cells if you have a tissue with some um laser cap capture um micro dissection mechanism that's that's not a broker's tool but these tools are out there and uh and then looking at these cells in an unbiased way and uh and and not only you know the few targeted things that you can look at today, and of course also then things that targeted can't give you. You want to look at post-translational modification. Phosphorylation is tremendously important in cancer and in tissue microenvironments. Similarly, cell surface glycosylation is something that's tremendously important, all the things that only unbiased proteomics realistically can give you. So it's going to be a very important new open window that's opening up for spatial and single-cell science in general. I think the biology is tremendously important because single-cell proteomics is far more quantitative than single-cell RNA. It's great because that technology is out there, but because of low copy numbers, it's not biologically, quantitatively very meaningful, and we're big believers in quantitative biology. so stopping there um the instrument will be a very you know very dedicated niche high-end system probably around the million dollar mark um but you know we think there will actually be quite a bit of demand for that i don't say it's going to be a volume product but in certain um specialized markets i think it will be very well received and we're getting inquiries and first orders already so okay great yeah thank you for that that was very helpful um

If I could go back to the NMR business, you guys had very good success placing these systems in recent years and having some strong momentum here. But it seems like U.S. and APAC may be particularly with the gigahertz class. What are the main barriers of adoption for these regions? And do you expect these regions to kind of represent the next leg of growth for the NMR business? Maybe how does the 4E80 announcement today maybe accelerate some of that adoption in those regions?

Yeah. Thank you. So, yeah, two good questions, both NMR-related. Gigahertz NMR, I mean, Asia Pacific and the U.S., or the Americas, but the U.S. in particular, are way behind. And I think there's a lot of momentum in the community and also, hopefully, in the federal funding agencies and some other, you know, privately foundation-funded efforts to improve that. And so, you know, we're somewhat optimistic that... some of the various approaches to raising NIH and NSF funding. How that will be negotiated in the end, nobody knows, but it does seem that all the telltale signs seem to be there for some substantial increases in funding, benefiting many areas, but potentially also that's what would be required from NIH, DOE, NSF, and perhaps others in the U.S. to provide funding for this badly needed infrastructure. which, where indeed Europe has moved first. And by the way, growth in Europe isn't over yet, even just last, not, no, well, in Q4 we had another order in Europe, in Switzerland, and so there's still European activity as well. The 4880, of course, is a very different budget item, right? That's more around the low 100K level. So that comes out of many, many budgets. And I think from colleges to chemistry or pharma research to forensic labs, there are many, many, many labs that previously just would have said, look, I I can only send samples to a centralized facility, and maybe I'll do that or I don't. I just use mass spec or FTIR. But now if I could also get NMR data pretty easily and in my own lab with a little bench top system that I don't need to worry about, I think that just opens up a broader new market. I don't think a geographic. We started in Europe. We're now launching in the U.S. and Canada. We just want to make sure that, you know, that product has excellent, excellent reputation for and overcoming a lot of the shortcomings that the first-generation products that are out there in terms of performance and stability can really fully fulfill the promise. So we're taking it slow, but I think it's going to be a very high-quality, highly automated, very high-stability product that I think hopefully will be a a joy to use and own. All right. Thank you, Frank.

I'll hop back with you.

Our next question comes from Derek de Bruin with Bank of America. Please go ahead.

Hi. Good morning. Hi, Derek. Hey, a couple of questions, Frank, Gerald. I guess the first one, just a margin question. You know, you did 17.6% adjusted operating margin in 2019. Guidance this year basically assumes 18.1, 18.5%. The question is sort of like, how do we think about the margins we go into 2019? 22 there. I mean, you've been tracking somewhere in the 70 to 100 basis points increases. I realize that you're doing some incremental investments and things going on, but is that, is this, can you, you know, how do you expect to grow from sort of like the numbers this year on the margin?

Well, first, Derek, we're pretty pleased with what we delivered for the first quarter coming off of a pretty solid fourth quarter performance on the operating margin side. especially given we saw pretty significant foreign exchange headwind in the operating margin for the first quarter. So I can't comment specifically on 2022. Please join us for the virtual investor day, and we'll talk more about those forward years. But I mean, I can say we've talked a little bit about it in the prepared remarks here today. We are seeing some good end market recovery in many areas that we didn't see even a year ago. We've got a pretty innovative product portfolio, and we're seeing some good uptick there, both in revenue performance as well as in order performance so far. So we're pretty optimistic on the operating margin line, but there's still a few quarters to go before we talk too much about 2022.

I mean, initially in February, we thought we'd bounce back to 2019 margins. Now we've raised that, as you've seen this morning, to where we think we can exceed 2019 operating margins with a 50-bibs headwind from currency and, if you like, a 100-bibs headwind, which is a choice because we're investing 10% instead of 9% in R&D. And I think we're delivering very good margin expansion there. But we're also investing in growth. So it's that balance. And with our shareholders, we generally discuss that from time to time when we have individual meetings. And they're all very comfortable with our long-term strategy of delivering good operating margin expansion. year over year, obviously disrupted in 2020, but also not absolutely optimizing that in any given year, but really also focusing on the growth opportunities. And that remains our philosophy. And so we expect to generally continue our margin expansion, of course, but again, we're not we're not focusing on the fastest margin expansion possible, but on investing in our future and our profitable growth opportunities while delivering gradual annual margin expansion in, I'm not saying numerically, but in a pattern that you've seen from us for many years, except for 2020. Great.

That's really helpful. And just one quick follow-up. We're getting a lot of questions on the know semiconductor markets metrology markets in two ways you know the ultimate potential on sort of this chip shortage and what it could mean for your business both from a revenue potential and also is there any risk to the chip shortage on impacting your supply chain and you not being able to get materials to manufacture given some of your high-tech items there's some color on both the supply and demand curve on the on the metrology and semiconductor side

Yeah, right. And let me add to that, of course, we have a semi and conductor and metrology and microelectronics tools business. And that business, as we said, is one of our project accelerator, a significant part of one of our project accelerate initiatives. It has very good margins, incremental margins, and it has been on a very good trajectory. And that continues. It had greater than 30% organic growth year over year in Q1. So it's you know, that we're benefiting from all of that. Now, but to your risk question, we do acknowledge there are risks in terms of operating environment, the supply chain risks on chips. You read about it from the automobile industry. And, you know, we're all working that very, very, very hard. So I think You know, I think it's an additional risk. We have taken that into account in our guidance for the year, but we also put it out as an additional, you know, highlighting that risk factor. There's a lockdown in the pandemic, right? You never know quite what happens with a variant, and now there is also the supply chain risk. Pretty confident that in Q2 we've got everything aligned to deliver, and we're also confident with Q3 and Q4 that But having said that, there are additional risks, and it's a lot more work to get all your chips and boards and everything delivered, and it even goes beyond electronics. I think the present industrial boom is affecting logistics and shipping and sometimes wooden pallets and other materials. So we're taking into account that we're working very hard to make it happen. So hopefully it won't become an issue, but it is an additional risk factor.

Thank you very much.

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

Thank you. Good morning. I wanted to dive a little bit more into CALIB. So over 20% growth. I'm getting closer to 30%. But I was wondering if you could talk about the relative performance of proteomics within that. You know, in the past, you've talked about kind of the S-curve of the TENS-TOS-GROW. Do you have any thoughts around how the order book is going and where you think you are on that curve?

Yeah. So it's going well. So now when I talk about proteomics, I have to say that's the unbiased proteomics, i.e., the Tim's Tough business that you asked about. We also have the targeted proteomics with Canopy. Okay. which is much smaller so far for us at least. Unbiased proteomics, Tim Stoff Pro, again, orders and revenue very nice. Annual year-over-year growth, you know, greater than 30%, so above the corporate average, which was high even in Q1. So it's one of our growth drivers, and both orders and revenue look very, very good with a lot of the new capabilities that we had announced and that I even highlighted early in the call. You know, we're in the beginning of the steeper part of the S-curve there, I would think.

Great. One follow up also on Khaled, you know, the COVID tailwinds, it's not huge, but was just curious what you were seeing there. I think 7 million was a little lighter than what you previously talked about. Do you think this is starting to fade as the cases come down?

Yeah. No, definitely. I mean, we had close to 14 million in Q4. So the 7 million, around 7 million of COVID testing, which for us is essentially all PCR, PCR assays and PCR extraction, antigen testing, that market is flooded. And though we have two product offerings out, that's not getting much traction and and so we're focusing refocusing mostly on the pcr testing and associated but at seven million that was lighter and sequentially down and we don't have very high expectations for it for you know we expect that to remain below 10 million or so in q2 and then we'll see but it's definitely you know it's definitely um coming um coming down as far as we can tell and um Some of that is going to antigen testing, although not everybody is fully pleased with it. Antigen testing plays a role, but it's a flooded market with oversupply, as far as we can tell. So we're probably not going to enter that in a very serious way. But we will further refine our PCR portfolio. We had the flu testing, the four-panel, winter four-panel. There wasn't a lot of need for that because there was essentially no flu season in Europe this winter. good for the population. And, you know, we're obviously also looking at, we now have an RUO version that we're testing in Europe of a variant version. So we think that'll be suitable for the market as we proceed. But overall, that is down sequentially. And, you know, that's fine with us. At least we don't have really much of a tailwind there at all, which for next year or even for the second half of the year, it just never was a very large part of our revenue.

That makes sense. Thanks for the comment.

Sure, Jack.

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

Hey, thanks. Frank, I want to dig into the BioSpin instruments a little bit. Just curious, you know, how much of the strength there you think was, you know, pent up versus new customer wins? Can you talk, you know, as to how much of the revenues came out of backlog versus new business wins as well?

Well, for BioSpin in any given quarter, most of it comes out of backlog, but orders in BioSpin were also healthy. So, you know, as I said, for all the number I have is for all the BSI groups together, all three of them together, organic year-over-year order growth was in the mid-teens. And, you know, so BioSpin was healthy. But, of course, in any given quarter, you can pretty much assume that 80% of BioSpin's revenue comes out of the, you know, ending backlog of the previous quarter, even pretty much other than service and aftermarket. So, yeah, BioSpin looks good.

And then on nano, I appreciate the comments on kind of the semiconductor shortage here in the near term. You know, one of the questions we've gotten is just with infrastructure, you know, on the table here and things like broadband build-out and upgrading the electrical grid. Is there an opportunity there, do you think, for the nano business to the extent you could tap into some of the federal dollars?

Yeah, I mean, the opportunity for it, I mean, the risk hasn't really materialized for us, but, you know, we're aware of it, just we're aware of lockdown risks. But the opportunities are substantial. So our semiconductor and microelectronics business in the nano group, almost all in the nano group, has really expanded very, very nicely with excellent growth the second half of last year, also, again, continuing greater than 30% organic growth. much greater than that in the first quarter of this year, and really good bookings. So we think that's not one of the lingering questions. We think that's really going to be positive for as far as we can see, which is sort of throughout this year. But the longer-term trends, I mean, semiconductor is somewhat cyclical, although the cycles aren't what they used to be. They're much longer. And the long-term trends from artificial intelligence to 5G to, I mean, you name it, there's cloud-based computing and many, many, many other drivers working from home, being one of them, make that runway look very, very different. healthy and very long. Plus, there is a lot of new investment in new technologies, seven, five nanometer, greater 3D stacking, more layers, which all cater to our strength. So very optimistic about our semiconductor metrology business.

Okay. And then a follow-up on cellular, you know, Acuity you're doing as a majority investment, you know, can you just talk as to why, you know, that was the right strategy as opposed to, you know, acquire? I know it's early. And then how we think about that, you know, in relation to Canopy, just around your broader, you know, spatial image that you offer?

Yeah, I mean, there was nothing to acquire yet. That's a business to be built, right? It's a real, it's a true startup. And we found some very talented and enthusiastic people that, you that are likely to join Acuity from the group that did that work in an academic setting. So those folks want to, you know, be entrepreneurial and do a startup. And instead of sending them to the usual, you know, VC funding route, they chose Brooker as a majority investor. And, of course, we can also help them as a strategic majority investor with a lot of infrastructure and not just capital. So that combination, including some of our key super-resolution microscopy products that are actually the basis for some of the QED spatial genomics projects, solutions that are then more molecular biology oriented and software and services and so on together, I think, make for a much, much faster start for Acuity than if that truly was a, you know, day one, here's a bunch of money, you know, some seed money, get going. So I think we can you know, it's not a running start, but it also will not have the typical lead times of another startup. So we're excited about that. And we think that, you know, we'll call you more about the investor day. Will it contribute meaningfully this year? No, of course not. But it's also not going to be three or four or five years before that ever sees its first revenue, we're hoping. And so I think it's a fantastic and very creative way of getting into some of the most important new areas in science and spatial genomics in a rather unique way and also in a somewhat unique and clever business model that provides that Mark Munch and colleagues are driving for us here from the Brooker Nano Group. Very exciting.

Okay, that's helpful. And then one quick one for Gerald before I hop off. The increase in operating margin guidance, 210 to 250 basis points, should we assume two-thirds of that is still from the gross margin line? I know that was kind of the rough rule I've done before.

Yeah, I think that's reasonable. We still see very solid gross margin performance in the next few quarters. So I think that's a reasonable assumption for sure. Okay, thank you. You're welcome.

Our next question comes from Dan Brennan with UBS. Please go ahead.

Great. Thanks for taking the questions. Maybe the first one just broadly on the academic and government market, Frank. What are you seeing from probably some of the delays that were happening during 2020 given the pandemic? Have you seen much of a catch-up yet? in terms of instrument orders, and how would you characterize the overall environment given the increased funding that we're seeing globally in that space?

Well, I think we still have a little bit of discrepancies. I mean, China and Europe really did very, very well in academic funding and orders as well. And the U.S. still lagging a little bit behind, although pretty promising signals now. People believe there's going to be A, a rebound, and then just healthy NIH, NSF, et cetera, type spending. And I think the universities will then also become more optimistic in, you know, from faculty hiring to whatever, you know, allocation of their budgets. So I think there's optimism in the U.S., but that optimism still needs to translate into numbers, and that may still take until the second half of the year. The U.S., you know, academic market is recovering, but it's not nearly as strong as China and Europe has been. And then Japan still very anemic, and we'll need to see how that plays itself out and whether that's related, comes after the Olympics or whatever. So we don't have really good clarity there. Plus, a few places like India, of course, having other problems that are far more severe. So it's... It's generally quite good, but Europe and China particularly good, U.S. lagging, and Japan and India unclear or weak. So that gives you a bit of a geographic color to that otherwise pretty strong academic and government funding rebound that we see. Even with those areas of weakness or questions, it's really quite healthy.

And I believe in the last downturn coming out of it, you discussed kind of the delayed reaction maybe to your business, given the timetable at which grants need to be written. And then, you know, grants get rewarded and then money gets spent. So I'm just trying to think sort of within your guidance this year and as we think ahead beyond 2021, is there a potential really for maybe a significant step up in growth beyond just comps, given the spending level from this catch-up on academic and the increased funding, or...

Well, there's potential for sure, but, you know, it remains to be seen. We think that a lot of our, you know, when funding comes back from NIH and NSF and, of course, similar funding institutions worldwide, right, the question is are we, are our instruments in proteomics, in spatial, in structural biology, VNMR, et cetera, are they in the sweet spot? You know, generally rising tides, good, rises, you know, frankly. for all boats, but I think we also positioned ourselves to where a lot of our key instruments are in the sweet spot of funding. But, you know, that also remains to be seen when big funding waves, maybe an NSF or so, come until they get into programs, into grant programs to individual investigators, and they then, you know, purchase an instrument that takes a while. It can take actually six to 12 months But on the other hand, having all the strength that we have already, and then, in my opinion, a pretty good chance that U.S. academic spending will become quite strong possibly in the second half of this year, that could be a nice driver for us for next year.

Great. And then just maybe one on the balance sheet, obviously in great shape. I'm just wondering, you know, MMA strategy. Does that continue going forward? Is anything potentially larger on the horizon? Can you just give us a flavor of what we can expect from that aspect?

Yeah, no, nothing large on the horizon. Obviously, there's a lot of businesses out there right now that are where, you know, it's challenging to figure out what valuations would be, for instance, if they have a big COVID bolus or, you know, some companies are still early in their you know, early revenue or no revenue yet. So difficult. We're very disciplined as an acquirer, also in terms of value. And we have, we're blessed in having such incredible organic growth opportunity that you're not likely to see us Yeah, I'll never rule anything out, but you're not likely to have us focus on M&A, you know, because of some COVID headwind or something like that. Quite on the contrary, we're very much focusing on project accelerate and operational excellence, and we think that can, you know, develop, you know, deliver excellent further performance improvements and growth without the risks from a valuation and operational point of view from doing a lot of, you know, frantic M&A activity. So you won't be seeing – you're very likely not going to see that from broker.

Great. Okay. Thanks, Frank.

And we need to wrap it up.

I think we may have time for one more question.

Thank you. And that question will come from Braden Couillard with Jefferies. Please go ahead.

Great. Thanks for squeezing me in. Just a two-part question for you, Gerald. Free cash flow is off to a great start in a seasonally weak first quarter. Are you penciling in for the balance of the year? And then the tax rate is going up again. Going back to the analyst day two years ago, you talked about runway to maybe bring that down into the low 20s. Is that still a relevant sort of midterm bogey? Thanks.

Yeah, well, let me answer your last question first, if I may. Relative to the tax rate, we did move our non-GAAP tax rate for guidance up for the full year, and that's largely driven by the strength of our European businesses, particularly in Germany. That carries a very high tax rate, so we think it's prudent to move what we currently see in the overall mix from a jurisdictional perspective. So that's what's driving the current thinking around guidance for 2021. I would say we haven't at all given up on further movements in the tax planning strategies that we have here at Booker, and we're still executing through on those. But as I said earlier, the management of how it all plays out from the business so far appears to be more leaning towards those higher tax rate jurisdictions. And then on your first question, relative to cash flow, We actually had a very solid fourth quarter of 2020 and another good strong cash flow performance in the first quarter. Some of this has to do with timing and, of course, including in this particular quarter we had some improvements, I guess I would say, in a couple of areas that are significant. It probably takes a longer conversation than we have today to go through that. But in general, I'm pretty optimistic about our cash flow improvement capabilities and how we've delivered on that over the last couple of quarters.

Thanks.

Okay.

This concludes our question and answer session. I would like to turn the conference back over to Miroslava and Kova for any closing remarks.

Thank you for joining us today. During the second quarter, Brooker will participate in the Bank of America, UBS, and Jefferies virtual healthcare conferences. In addition, we'll be hosting a virtual investor day on Thursday, June 17th with registration information forthcoming. We look forward to meeting you at one of these events during the quarter. Thank you and have a nice day.