Bruker Corporation

Good day and welcome to the Brooker Second Quarter 2022 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 a touch-tone phone. To withdraw your question, please press star Please note, this event is being recorded. I would now like to turn the conference over to Justin Ward, Senior Director of Investor Relations and Corporate Development. Please go ahead.

Thank you. Good afternoon. I would like to welcome everyone to Bruker Corporation's second quarter 2022 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 Laukeen, our President and CEO, and Gerald Herman, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today's conference call, we will be referencing a slide presentation that can be downloaded from the Events and Presentations section of Brooker'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 two of the presentation. During this conference call, we will make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to geopolitical and energy risks, the COVID-19 pandemic, and supply chain logistics and inflation challenges. The company's actual results may differ materially from such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K for the period ending December 31, 2021, and as updated by our 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, August 3, 2022. We do not intend to update our forward-looking statements based on new information, future events, or for other reasons except as may be required by law prior to the release of our third quarter 2022 financial results expected in early November 2022. You should not rely on these forward forward-looking statements as necessarily representing our views or outlook as of any other 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 second quarter and first half of 2022 in more detail and share updated fiscal year 2022 financial outlook. Now, I'd like to turn the call over to Brewker CEO, Frank Laukeen.

Thank you, Justin. Good afternoon, everyone, and thank you for joining us on today's second quarter 2022 earnings call. Turning to our slide four, in the second quarter of 2022, Brooker delivered robust bookings growth with organic bookings growth again outpacing organic revenue growth. In the second quarter, we launched several compelling product innovations across our portfolio, and our strong organic revenue growth of 8.8% was 160 bps above consensus. This solid performance came despite operational headwinds from significant supply chain and logistics delays, lockdowns in China, and the conflict in Europe. We again saw excellent demand for our differentiated high-value scientific instruments and life science solutions, as evidenced by the strong momentum in organic bookings and revenue growth. For the second quarter of 2022, our broker scientific instruments, or BSI segment, organic bookings were up double-digit percentages year over year, and our BSI book-to-bill ratio remained greater than 1%. Finally, our BSI backlog remains very high. Brooker's second quarter 22 reported revenues increased 3.1% year-over-year to $588.4 million, despite a strong FX headwind of minus 7.3%. On an organic basis, revenues increased 8.8%, which included 8.1% organic growth in BSI and 15.1% at best net of intercompany eliminations. while growth from acquisitions added 1.6%. This implies constant exchange rate growth of 10.4% year-over-year. Our second quarter 22 non-GAAP gross margin increased 180 bps year-over-year to 51.8%, while non-GAAP operating margin was 16.6%, a decrease of 70 bps year-over-year. Our gross margin expansion, despite inflation headwinds, is clearly benefiting from our Project Accelerate 2.0 margin mix, as well as from volume leverage and currency tailwinds. In the second quarter, gross profit margin expansion was more than offset by our planned Project Accelerate 2.0 operating expense OPEX investments in commercial and R&D capabilities. In the second quarter of 22, Bruker reported GAAP diluted earnings per share of 33 cents compared to 38 cents reported in the second quarter of 21. On a non-GAAP basis, second quarter of 22 diluted EPS was 45 cents up a penny from 44 cents in the second quarter of 2021. Gerald will discuss the drivers for margins and EPS later on. In summary, the second quarter of 22 again saw strong demand for our differentiated products as we ramped our OPEX investments in Project Accelerate 2.0 to capitalize on the major opportunities in proteomics and spatial biology, as well as in biopharma, applied markets, infectious disease diagnostics, cancer research, and semiconductor tools. Moving on to slide five, you can see Brooker's performance for the first half of 2022. Our revenues increased by 5.1% to $1.183 billion. On an organic basis, revenues grew 9.6% year over year, consisting of 8.8% organic growth in scientific instruments and 17.9% organic growth at best. net of intercompany eliminations. First half 2022 order bookings for brokers three scientific instruments groups grew double digits year-over-year organically, and our BSI book-to-bill ratio for the first half remained above 1.1. Geographically, our first half 2022 order bookings were up double digits year-over-year organically in all major regions. Our first half 2022 non-GAAP growth and operating margin and GAAP and non-GAAP EPS performance are all summarized on this slide five. And we are particularly pleased with our 160 bps growth margin expansion year over year, which speaks to the value of our products and solutions. Our trailing 12 months return on invested capital, a non-GAAP measure was 25.9%. which puts us among the leaders in our industry. We believe this is the result of our strong broker management process and our focus on disciplined entrepreneurialism and organic growth supplemented by selected bolt-on acquisitions. Please turn to slide six and seven, where we highlight the first half 2022 performance of our three scientific instruments groups and of our best segment, all on a constant currency and year-over-year basis. In the first half of 2022, BioSpin Group revenue was $318 million and grew in the high single-digits percentage. Please note there was one gigahertz class NMR system recognized in revenue in the first half of 2022 compared to two in the first half of 2021. We continue to expect four gigahertz class NMRs in revenue in 2022 with one in the second quarter, and we expect one in the third quarter and two in the fourth quarter. BioSpin saw robust growth in applied markets revenues as well as from services and support. BioSpin achieved organic bookings growth in excess of 20% in the first six months of 2022. BioSpin innovations of note include our new single-story 1.0 GHz magnet to make GHz NMR accessible for more functional structural biology and drug discovery laboratories. We also launched advanced capabilities on our Benchtop 4E80 FT-NMR system to enable broader applications in pharmaceutical and applied markets analysis. Switching to CALIT for the first half of 2022, the CALIT group revenue or CALIT group revenue of 394 million increased in the high single digit percentage with strong growth in life science mass spectrometry and microbiology aftermarket, but also with supply chain delays slowing revenue execution. Our TIMSTOF proteomics platform saw robust demand for applications in 4D proteomics, epiproteomics, and metabolomics. In the second quarter, we launched the TIMSTOF HT, or high-throughput system, as a higher-throughput instrument that includes a novel fourth-generation TIMS XR cell and 14-bit digitizer for greater dynamic range, enhanced peptide coverage, and more accurate quantitation in unbiased, 4D plasma and tissue proteomics. More on that on a later slide. Microbiology revenue delivered strong growth driven by demand for multi-biotyper consumables. This was coupled with a gradual recovery in our tuberculosis molecular diagnostics products. We are excited about the launch of selected liquid array next generation syndromic panels at ECMIT 2022 in April, with more to come later this year. Please turn to slide 7 now. First half 2022 broker nano revenue was $361 million and grew in the mid-teens percentage. Nano's industrial and semiconductor metrology markets all remain strong. Revenues for our advanced X-ray and nano surfaces tools delivered strong growth in the first half. Nano's microelectronics and semiconductor metrology tools performed well, again with strong bookings and backlog. Nano LifeScience fluorescence microscopy revenue was up sharply on product innovation and strong research demand. And our Canopy subsidiary launched the next generation CellScape chips cytometry instrument for high throughput in C2 spatial biology with subcellular resolution and best-in-class quantitation. Finally, first half 2022 best revenues grew in the high teens percentage net of intercompany eliminations driven by share gains and strong superconductor demand by our MRI OEM customers. Best demand appears healthy but we continue to navigate through supply chain and logistics challenges. Moving to slides eight and nine, we continue to make good progress with our Project Accelerate 2.0 initiatives, which, as a reminder, in 2022 represented about 54% of total revenues. On slide eight, we highlight three recent orders that all came in in the second quarter for our compact single-story 1 gigahertz, 1.0 gigahertz, 4 Kelvin magnet. You see it's that little guy in the middle that's really quite a technological marvel and clearly enables more structural biology researchers and even pharmaceutical companies, individual PIs, individual universities to access gigahertz NMR, which is obviously very, very powerful for pathology research and fundamental biology research, as well as even metabolomics. This now fits into a single-story lab. This compact system, it has much smaller footprint, easier to deliver and install, and quite importantly, it also reduces helium consumption by almost two-thirds. The orders came from Japan and two of them from Spain. We're very, very pleased with that. All three of these orders were received in the second quarter and subsequent to our product launch at a conference in early April. Moving on to slide nine, a very important platform for Proteomics but also for Metabolomics is, of course, our TIMSTOF platform. It now has a number of family members, and the latest one that we launched was the TIMSTOF-HT that we launched at the ASMS conference in Minneapolis in June of 2022 as sort of the ultimate high-throughput workhorse and particularly also suitable for plasma proteomics. I won't go through this slide in detail, but in terms of performance, higher and higher numbers of peptides and proteins that can be identified and quantified with excellent one percentage false discovery rates, which is really essential, I think, certainly for discovery applications and without suffering from the inevitable antigen cross-reactivity. As a bit of an update, as of the end of June, as of the end of the second quarter of 2022, our total TIMSTOF installed base of of paid units is greater than 500 units. And our revenue run rate now is greater than 125 million per annum. So excellent continued growth and excellent progress. So in summary, Bruker again experienced strong demand for our differentiated instruments and solutions across our portfolio. Our project Accelerate 2.0, high growth, high margin initiatives perform well. and we continue to ramp investments in R&D and in our commercial infrastructure in compelling opportunity areas. With that, let me now turn the call over to our CFO, Gerald Herrmann, who will review Bruker's Q2 financial performance and our fiscal 2022 outlook in more detail. Gerald.

Thank you, Frank, and thanks, everyone, for joining us today. I'm pleased to provide some more detail on Bruker's second quarter 2022 financial performance starting on slide 11. In the second quarter of 2022, brokers reported revenue increased 3.1% to approximately $588 million, which reflects an organic revenue increase of 8.8% year over year. We reported gap EPS of 33 cents per share compared to 38 cents in the second quarter of 2021. On an on-gap basis, Q2 2022 EPS was 45 cents per share, an increase of 2.3% from the $0.44 in the second quarter of 2021. Our Q2 2022 non-GAAP operating income decreased 1.1%, and our non-GAAP operating margin decreased 70 basis points year-over-year to 16.6%, with expanding gross margins more than offset by our planned Project Accelerate 2.0 investments. We finished the second quarter with cash, cash equivalents, and short-term investments of approximately $723 million. During the quarter, we used cash to ramp selected Project Accelerate 2.0 investments, fund capital expenditures, complete several key and organic investments in strategically relevant technologies, and fund share repurchases. You may recall that in May 2021, our board approved a two-year share repurchase authorization up to $500 million through May of 2023. In the second quarter of 2022, we repurchased nearly 1 million shares for approximately $60 million. In year-to-date, we repurchased 2.6 million shares for approximately $166 million. As a reminder, in the full year of 2021, our repurchases totaled 2.1 million shares for approximately $153 million. We used $44.4 million of operating cash in the second quarter of 2022, largely to build inventories for our planned revenue ramp in the second half of the year, as well as to protect against supply chain risks. Operating cash flow was also impacted by the timing of tax payments and customer advances. Our capital expenditure investments were $17.9 million, resulting in a decrease of $62.3 million in free cash flow in the second quarter of 2022. This compares with the free cash flow decrease in the second quarter of 2021 of $0.7 million. Slide 12 shows the revenue bridge for the second quarter of 2022 as discussed earlier. Compared to the second quarter of 2021, BioSpin's second quarter organic revenue for 2022 grew in the low double digits percentage and benefited from revenue recognition of one 1.2 gigahertz system in the second quarter of 2022, where there wasn't one in the second quarter of 2021. Nano organic revenue grew in the high single digit percentage, driven by strength in nano's industrial research and semiconductor businesses. Caled organic revenue grew mid single digit percentage, as this group was constrained by supply chain issues. Q2 2022 BSI systems and aftermarket revenue both increased in the high single-digit percentage range organically compared to the second quarter of 2021. Geographically and on an organic basis, in the second quarter of 2022, our North American revenue grew in the high single-digit percentage. Asia Pacific grew in the low 20% range, while European revenue had low single-digit percentage growth. all year over year. Our rest of world, which is small as we categorize it, Q2 2022 revenue declined in the high teens percentage range. Slide 13 shows our Q2 2022 P&L performance on a non-GAAP basis. Non-GAAP gross margin of 51.8% increased 108 basis points from 50% in Q2 2021. benefiting from our Project Accelerate 2.0 mix, volume leverage, and currency tailwind, partially offset by supply chain and logistics inflation. 2022 non-GAAP operating margin of 16.6%, with 70 basis points lower than the 17.3% margin delivered in the second quarter of 2021, as our gross margin expansion was more than offset by increased sales and marketing investments, to invest in higher growth, higher margin, Project Accelerate 2.0 initiatives. As expected and noted in our first quarter call, in the second quarter of 2022, our sales and marketing OpEx ramp outpaced our revenue ramp, particularly due to supply chain delays. For the second quarter of 2022, our non-GAAP effective tax rate was 28.2%. compared to 26.7% in the second quarter of 2021, primarily due to unfavorable discrete tax items. Weighted average diluted shares outstanding in the second quarter of 2022 were 149.8 million, a reduction of 3.1 million shares, or 2%, from the second quarter of 2021, resulting from our share repurchases over the past 12 months. And finally, Q2 2022 non-GAAP EPS of 45 cents was up 2.3% compared to the second quarter of 2021. Slide 14 shows the year-over-year revenue bridge for the first half of 2022. Revenue was up $58 million, or 5.1%, reflecting organic growth of 9.6%. Acquisitions added 1.3% to our top line, while foreign exchange was a 5.8% headwind. And Frank has already covered the drivers for the first half of 2022. Non-GAAP P&L results for the first half of 2022 are summarized on slide 15, with the drivers largely similar to the second quarter of 2022 and as explained on the slide. Turning now to slide 16, in the first half of 2022, we used $3.5 million of free cash flow compared to positive free cash flow of $72.6 million in the first half of 2021. First half 2022 free cash flow use was used principally to build inventory to facilitate the second half revenue ramp and to address supply chain risks. It was also impacted by the timing of tax and other payments. Our cash conversion cycle at the end of Q2 2022 was 257 days. an increase of 18 days compared to the second quarter of 2021. And we continue to carry elevated inventory to manage supply chain risks, as well as to meet growing backlog from our excellent bookings. Turning now to slide 18, given the strength in revenue and bookings growth in the first half of 2022 and our record backlog, we're maintaining our guidance for high single-digit organic revenue growth for the full year 2022. while reducing our outlook for reported revenue growth due to a stronger foreign exchange headwind. Our updated outlook for the full year of 2022 now includes the following. First, no change to our prior guidance of organic revenue growth of 7% to 9% year over year. We now estimate a foreign currency headwind of approximately 6%, stronger than our 3.5% prior foreign exchange headwind guidance on the basis of a stronger US dollar against most major currencies. We expect acquisitions to contribute about 1.5% to growth unchanged from our May 3rd guidance. This is now expected to lead to reported revenue growth in a range of 2.5% to 4.5%. We expect supply chain and logistics delays to continue throughout the second half of 2022. We are maintaining our guidance of 30 to 60 basis points of operating margin expansion in 2022 from the 19.4% level in 2021. On the bottom line, we reiterate our non-GAAP EPS estimated range of 229 to 233 for fiscal year 2022, which would represent non-GAAP EPS growth of 9 to 11% compared to 2021. We're projecting a non-GAAP tax rate of approximately 29.5% for full-year 2022. Other guidance assumptions are listed on the slide. Our full-year 2022 ranges have been updated for foreign currency rates as of June 30th, 2022. To give you some color on the third quarter of 2022, we expect supply chain and logistics delays to impact our third quarter with mid-single digits year-over-year organic revenue growth. On non-GAAP EPS, we do not expect to repeat the unusual tax favorability of the third quarter 2021 and anticipate third quarter 2022 non-GAAP EPS to be down year-over-year, but up sequentially from the second quarter 2022 by 10 to 20 percent. As you've just heard, This does not change our full year 2022 outlook for organic revenue growth or non-GAAP EPS, as we expect to catch up in the fourth quarter of 2022. So finally, to wrap up, Bruker delivered another solid quarter of solid organic revenue growth and continued strong bookings and backlog. We also posted very encouraging gross margin expansion in the quarter as our teams delivered remarkable execution under challenging conditions. With that, I'd like to turn the call over to Justin to start the Q&A session. Thank you very much.

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

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Our first question comes from Derek DeBruyn of Bank of America Merrill Lynch. Please go ahead.

Hey guys, this is Mike Riskin on for Derek. I've got a quick one on the updated guide and a follow-up. Um, first on the guidance, I want to make sure I got this right. So it seems like the biggest change in the guide or really the main change in the guide is the FX assumption is now, you know, two and a half points higher because organic's unchanged, M&A's unchanged and your margin guides on change. So I'm just wondering, how are you able to maintain the adjusted EPS guide? Is there something in the non-operating lines that we're missing, or is this just some rounding in the numbers somewhere in terms of higher end of the range, lower end of the range? Just given the two and a half points more reported revenue headwind, you would think that EPS would be impacted as well.

Yeah, so it's Gerald here. So first of all, your assumption is correct. We are only modifying the foreign exchange element of the guide. The other elements, both organic revenue growth and non-GAAP EPS, we're holding, reiterating those. So that's the first part of your question, I think. On the second part, yeah, we obviously are facing some cost pressures on a number of fronts, including, you know, you've heard some of the story around supply chain challenges, but fundamentally, We continue to believe that our organic revenue numbers are solid, and we're quite comfortable with that. And on the EPS side, we're continuing to post solid gross margin activity through two quarters now. We've seen excellent OPEX management, I think, over those two quarters, and we're pretty comfortable on where we are at the EPS line, given that.

Okay. All right. And then for the follow-up, I guess on the book to bill comments and on the backlog, you continue to have really positive commentary on book to bill over 1.1, strong demand across most of the business. Could you give us a little bit of clarity on backlog conversion? When do you think some of those orders are going to be able to convert to revenues? Just sort of walk us through how that's going to flow through the business.

Well, as is typical for us, Mike, the second half tends to be stronger in terms of revenue and in terms of margins than the first half. That's our typical seasonality. We expect that, as you just heard, Q3 will not be as strong. We think Q4 will be stronger in helping us catch up. And, you know, I mean, this isn't – backlog conversion – isn't going to be done. I mean, you know, we always carry backlog, but it's not going to be normalized yet this year, as I think supply chain and logistics issues still prevail and are up there, certainly for the remainder of this year. Some of that backlog we expect to, some of that maybe somewhat unusually high backlog, we also expect to carry into next year. Okay, thanks. You're welcome.

The next question comes from Punit Soda of SVB Securities. Please go ahead.

Yeah. Hi, Frank. Thanks for, and Gerald, thanks for taking the question. So first of all, I just wanted to see, I didn't hear on China. I just wanted to see if you can quantify that, what you saw there. And, you know, as you talked about the EPS line, no impact, and just sort of trying to understand, you know, from an off-margin perspective, And you have sizable operations in Germany. Are you expecting any challenges there in terms of the impact from energy and such? Some companies, your peer companies have pointed that out. So I just wanted to check on that geographically as well.

If I may, I'll take the first part of your question regarding China and Frank can talk more intelligently about German situation. So with respect to China, So very, very solid quarter for us in terms of revenue performance. Despite a lot of the China lockdowns, I would say the teams performed extremely well from the logistics perspective under challenging conditions. We saw a little softness in the order performance in China in the second quarter, but I don't read too much into that. We had very strong performance in the first quarter. So what we understand on the ground as the things have opened up or are beginning to open up. There's still some challenges there, but our expectation is that that will improve over time as we execute further into the second half of the year. We are anticipating logistics are going to improve there, and certainly we've got a lot of backlog to be able to execute on for the second half of the year.

And with EPS, I think we were prudent in the way we guided for the year, and that's why we continue to feel comfortable with our margin expansion and EPS guidance. As to Germany, I mean, there are some additional risks now. Europe has some additional energy risks and gas risks. It's all well known. First of all, we at Bruker really don't have any significant processes that use natural gas. So this is not a primary problem for us. Of course, there's other companies in metallurgy or in chemistry, et cetera, that use gas. So it could conceivably, there is therefore a risk for increasing supply chain problems in certain areas, perhaps in the second or perhaps into next year. But it's not a direct primary risk for Brooker. In terms of energy or electricity rationing, we're not a heavy user, but of course we need continuous power. So there is an incremental risk. We are, of course, saving on energy like everybody else in Europe and in Germany in particular. We are taking the prudent steps that we can take. And presently, most of our German factory managers do not anticipate any energy rationing or rolling blackouts or anything like that, even for this winter. But, you know, there is a risk, of course, not so different from what we had due to fires in California some years ago. But there's some additional energy risks in Europe. And we have anticipated the inflation risk. Energy costs are certainly going up. although some of that is buffered by governments, quite honestly, who are protecting consumers and even industry to some extent. But it remains a very dynamic environment between pandemic and supply chain challenges and now additional supply chain, secondary, second-tier supply chain and energy risks in Europe. We acknowledge they exist. We're not primarily affected but we're keeping an eye on it. Of course, we're doing lots of contingency and other planning to manage through that.

Got it. That's super helpful, Frank. And just one on Ascend Evo, the 1.0 gigahertz, three orders that you had, one from Reichen. So when do you think you can deliver those? And should we now assume three to four ultra-high frequency NMRs being ordered instead of the three to four being maybe a larger number for 2023, given the current order book?

Good question, and with some insight, of course. We know, of course, that gives us more capacity, right? The two-story, 1.1, 1.2 gigahertz systems, we have a certain capacity for those. The capacity for the 1.0 gigahertz is almost separate in addition So in many ways, we've more than doubled our capacity in principle. So that doesn't have an effect yet on 2022. And, you know, we're not going to project 2023, 24 right now, but it does help us to have essentially two lines, the two-story magnets and the four Kelvin single-story magnets. And we're just delighted that now early on, there's been some interest and kind of showing, you know, A, going into Asia Pacific or in this case into Japan for biological research. And then, you know, If a country like Spain needs two of those, well, there are very many other countries or larger universities or even high-end biopharma companies that will need this functional structural biology and disease research tool. So we think it's a great start for that product line. But, of course, we don't expect that in revenue this year. That will take a while.

Got it. Okay. All right. Thank you.

The next question comes from Brandon Cuiard of Jefferies. Please go ahead.

Hey, thanks. Good afternoon. Frank, on the Tim's Top platform, I appreciate the update on the install base and revenue ramp. It looks like you've already placed 75 systems in the first half of the year. Just curious if you could speak to the new HT introduction and whether that system will appeal to a broader customer base and then Update us on where you think the install base could ultimately go for the TIMSTOF platform, let's say, over the next two or three years.

Okay. Well, thank you, Brandon. So the TIMSTOF HT in part will – the TIMSTOF Pro, some of those orders in the future will be TIMSTOF HT orders, so that's not purely additive. um but um so it's a further strengthening of the product line um i think it's um it particularly you know high throughput customers and particularly plasma proteomics customers will find the ht even more powerful and and and robust and all of that and even higher dynamic range so uh particularly for plasma proteomics or for you know, liquid biopsy research, for cancer biomarkers, for anybody who pursues a multi-omic strategy. I think it's all going to be quite attractive. So it's yet another building block just, you know, pushing the flywheel again to add additional capabilities to our broader and broader TIMSTOF platform. Your observations about, you know, numbers of units shipped, therefore, in the first half or put into revenue is correct. And we expect that product line to ramp further. I mean, it continues to be obviously a double-digit growth product line for us. And even here, due to some supply chain issues, our order performance is even higher than our revenue performance. So this is all very much on track, and we continue to bring out new workflows, new software. As you know, we invested in companies and investments to also add a lot more consumables and sample prep automation. That'll take a little bit of time until that gets developed and gets rolled out, but it just becomes a broader and broader story for us in unbiased 4D proteomics.

Great, thanks. A follow-up really for Gerald. Can you just clarify, so the FX headwind on the top line, is that actually an incremental tailwind to full-year margins? Just help us understand the impact of currency on the OPM line for the year. Thanks.

Yeah, sure, Brendan. Just generally speaking, the way it works for us, especially when the U.S. dollar strengthens as it has in this particular quarter quite strongly, we end up with a headwind on the revenue line, as you've described, and we end up with a tailwind in both gross margin and operating margin. By the time you net those and get down to the EPS line, it's pretty near neutral. And that's, we have seen some favorability actually in the second quarter, but fundamentally, you know, we get variability quarter by quarter as a result of these movements. And just, I think you likely know this, Brandon, but it's not only, you know, USD against Euro or Franc. We have, we also have a lot of variability against the other currencies. So it's complicated, but that's generally the the big picture.

In addition to that, this year we have a headwind from inflation and logistics costs. While pricing actions have been put into place for broker, they take a while because we have the high backlog and so on. So we have a net headwind of maybe for the full year, maybe we're estimating 20 to 30 bps between an inflation headwind that could be up to up to 100 bps and an FX tailwind on margins that is maybe more for the full year, more in the 60 to 70 bps range. So it's partially offsetting, but it's a net headwind to margins this year. Great. Thanks. You're welcome.

The next question is from Jack Meehan of Nefren Research. Please go ahead.

Thanks. Good afternoon. I wanted to start just on Khalid. You talked about some of the supply chain constraints in the quarter. Is it just possible to quantify what the revenue impact might have been? My back of the envelope was something like $5 to $10 million. Don't know if that's a good ballpark or not.

For broker overall, not for Calais, we don't want to break it up into groups, but we don't want to quantify because then it's almost like a separate set of books. What would everything have been had you had more revenue? But we had revenue delays from Q2 into Q3, and we'll have more from Q3 into Q4. And it's tens of millions, obviously not high tens of millions. So it's meaningful. and we think that will be kind of an effect that we'll have in Q3 and probably again in Q4 until that sorts itself out. I think that's going to be next year. Nonetheless, with all of that in, we still have obviously a good organic growth rate, but that's why our book-to-bill is so high and our backlog is so strong because we have some revenue delays of tens of millions of dollars now. from quarter to quarter. And that's entirely supply chain and logistics. And every once in a while, a customer site isn't quite ready, but that we always have. So it's, you know, it's not demand, which is good. It's not, certainly not competitiveness. We're doing extremely well, but it is supply chain and logistics. I mean, there is a certain amount of disarray and that continues. I wouldn't call it disruption. That's too strong, but the disarray is still there and it's challenging.

Yeah, it makes sense. And then I wanted to talk about MALDI. So coming out of AACC, one of the big themes I was hearing is just automation given staff shortages. I was wondering how you think this is going to play out in the microbiology lab and just, you know, how the instrument placements for MALDI are trending this year. I know you talked about over 600 last year. Is it possible to talk about just, you know, where they're going to land this year?

Um, it's a little early in the year, obviously. Um, we, um, so I, I don't, I don't know what it will be by the end of the year. Last year we had exceptionally strong unit growth this year. That'll be not as strong. Also we had, you know, last year we had some all the biotyper business and into Russia. Uh, so that's not going to be happened this year. Obviously there's no business there. And, um, We launched, for Europe at least, at ECMIT, some further multi-automation solutions that we've developed with our subsidiary in the Czech Republic for multi-automation. And there are more other workflows that are going to be more and more automated. So far, that field is only partially automated. A lot of it is manual. That has been the standard. But we absolutely agree that the trend is towards more at least semi-automation. One doesn't always need a million-dollar sample to answer automation. Most labs don't look for that. But some of the more laborious and repetitive steps, if they can be automated, we have some solutions, although you almost have to get regulatory approval. So some of those have now been launched for Europe with regulatory approval. We'll look forward to the regulatory approval in other markets eventually. And then, of course, more is in the pipeline. So basically, we agree with the trend and we're responding to that. We're not only improving assays and software and the instruments, although the instrument is really best in class, but also the automations availability and capabilities of the automation solutions to support it, just as we do in proteomics. A lot of automation development these days and more to come.

The next question is from Josh Waldman of Cleveland Research. Please go ahead.

Hey, guys. Thanks for taking my questions. Hey, Frank, the deck-noted supply chain constraints within VEST and Optics and comments in OnCalib, what about the rest of the business? Have you seen areas of sequential improvement? I guess when we look at the second half implied guide, It seems a bit conservative given the comps are easing, we have pricing coming in. Is it largely supply chain that's leading you to be more prudent than the guy, do you think?

Absolutely. That's exactly that. Nobody's immune to supply chain. We haven't mentioned it, but it's basically every division is playing whack-a-mole with problems that keep coming up. We have more inventory buffers and things like that, but that only goes so far. I mean, I think our teams are really managing extremely well. But, yes, I mean, in the Brooker Optics and in Vesta, there were some more issues. And it's always just delays, really. But, you know, delays. But it's not only where we mentioned it. I would say it's pervasive and affects all businesses that use electronics or even other materials. And so far, I would not say that it is getting better yet. So we're not saying that. We're not seeing that yet. And so we think it'll certainly last till the end of the year and go into early next year, which is why we are more, you know, why we're also being prudent. We, you know, without supply chain limitations, we could do more backlog conversion this year. But this And, you know, we think we'll have a good second half of the year, but some of that will still also, you know, good thing perhaps to also have good backlog going into 2023. But, you know, some of that is not only by choice, but really by supply chain limitations.

Got it. And Gerald, I wondered if you could talk through how costs in the second quarter materialized versus your expectations and how you're thinking about margin progression through the remainder of the year.

I'm sorry, I didn't hear your earlier part of your question.

Did you just repeat it? Yeah. I wondered if you could comment on how costs in the second quarter materialized versus your expectations in picking COGS mainly, but maybe OPEX as well.

Sure. So I think generally speaking, you may recall, Josh, communicated in the first quarter earnings call that we were expecting to have our OPEX, for example, outpace our revenue in the second quarter. And that's essentially how it played out. We still delivered solid EPS performance and hit EPS consensus in the quarter. But fundamentally, we are investing heavily, I would say, in some of our important Project Accelerate 2.0 initiatives. And you saw that, I think, in the sales and marketing line. certainly in the R&D line in the second quarter. I would also say, you know, in terms of inflation cost pressures, we did see that as well. I think generally speaking, our teams, you know, handled that well, especially with some of the supply chain issues that you just heard Frank describing. So I think overall, I'm very, very pleased with how the cost management occurred in the second quarter. And we're going to have to deliver something similar, I think, in the third And then obviously, as you probably have heard, we expect the third quarter to be a little dampened by supply chain issues, which just means the fourth quarter is going to be larger.

I appreciate it. Sure.

The next question comes from Max Masucci of Cohen. Please go ahead.

Thanks for taking the questions. In light of Perkins business divestitures earlier this week, do you see potential to pursue a similar sort of Perkins-type divestiture strategy, or do you feel like you've already executed on that strategy and covered the bases under Project Accelerate 1.0 and 2.0?

Yeah, even earlier, Max, so no, we're not planning any divestitures. We're very happy with our big businesses, and obviously there's some areas where we're disproportionately investing, which is fine, but we don't really have any legacy business. We have core businesses, and everything we have is core business, and some areas, you know, we in particular try to grow with high-margin opportunities in new fields, in spatial biology, proteomics, etc., So, no, that's not a topic for us. And, yes, we did do some pruning even before Project Accelerate 1.0, more around the 2012 to 2015 timeframe. We did some pruning. It wasn't large-scale divestitures, as in this particular example that you've cited, but we did some pruning. We did some smaller divestitures, and there's some product and business lines that we didn't continue or stopped investing in. But since then, I think what we have looks really quite healthy. And many of our core businesses have done very well last year, continue to do quite well. Of course, Project Accelerate, it's a little bit where the glory is. And of course, that helps pull up our gross margins and accelerate growth. So that formula is all working. But it only is working because we have a very strong core business that's fundamentally technologically also core to a lot of the Project Accelerate projects. you know if we didn't have a base multi-top business we wouldn't be in microbiology and you know there are many other examples that i could cite so so our businesses are good and we're not looking at that i think we have a good mix of core and project accelerate got it one more for me he called out the continued pace of you know proactive investment in the commercial and operational teams you know supporting project accelerate 2.0 like can you give us some additional detail

So, Ron, where you're making headcount ads and just your general approach towards building out your commercial presence for some of the newer proteomics, metabolomics, and spatial offerings that might require a slightly more specialized sales approach.

You named them. So it is proteomics. There's many different flavors of proteomics by now. Metabolomics, lipidomics, those are closely related. Then, of course, spatial biology and C2 spatial biology with the Canopy investment, Acuity, that's not going to have any products until next year, but that's an ongoing investment. And yes, we also have with the Optimal acquisition and additional investments in software and also commercial capabilities, we're investing also quite a bit into biopharma. So those are the Proteomics, multiomics, spatial biology, and biopharma, that's where we have the most investments. Also on the commercial side, marketing, selling, specialized sales teams, application support, all that good stuff. And it's really working well for us. That's why I think it's the products, but it's also, I think, in parallel developing the commercial infrastructure to then leverage those products. I think we have the right mix right now, but certainly continue to invest. I think this makes complete sense for us, and I think we can deliver our EPS and margin commitments. So we're really trying to do both, and we're able to do both.

Great.

Thanks a lot. Thank you, Max.

The next question is from Rachel Vattenstahl of J.P. Morgan. Please go ahead.

Hey, thanks for taking the question. So first up on Europe, that region grew low single digits this quarter. So can you walk us through what you're seeing in that market, specifically on the funding and academic and government in light of some of these recessionary concerns? And then what do you expect Europe to really be able to grow this year?

I'm sorry, what particular area were you focused on? We missed that part. Rachel.

yeah so the low single digits in europe this quarter i was just wondering if you can walk us through what you're seeing from a funding environment for academic and government specifically in europe and then what are you anticipating for europe growth for the year we've cited what we've seen for growth this year europe is the slowest growth growing mode major geography other than rest of world and that's sort of like we continue what we expected um we're not

expecting that to change necessarily in the second half of the year. So Europe is more in the low to mid single digits, presumably also for the year. Academic and government funding in Europe continues to be reasonably healthy. It tends to be more steady in the major economies of Central and Western Europe. and it's not so much affected refugees or energy pricing or defense spending. It doesn't seem to interact so strongly with academic and government funding because those research commitments in Europe, at the European level and also in the individual countries, generally are really quite long-term, and they tend to be maintained.

The only other thing I'd add here, Rachel, is that the order bookings performance for Europe in this category, this segment you're describing, was quite solid, actually, for the first half. So, you know, we're experiencing good bookings growth in that area.

Great. And then a follow-up on some of your earlier comments around the assumptions for the back half of the year. She said that you're expecting mid-single digits organic growth in 3Q, and you say that that includes some of the supply chain pressures that you referenced, but that you're planning on making up for that in 4Q. However, it sounded like you're also anticipating some of those supply chain headwinds to continue into 2023. So can you just clarify those supply chain comments and when you think they will really soften as a headwind? And then for 4Q, are you assuming any outside seasonality from 4Q budget flushes or any other thing that's driving that incremental strength in 4Q?

Thank you. Yeah, good question. Usually budget flush and things like that is something that doesn't affect Bruker very much. Maybe more if you're in the, you know, if you're more of a consumables company, that tends to be more of an effect that they tend to discuss. For us, that's not as relevant. We often get good orders, but then, you know, they often then get delivered three, six, nine months later. So that's less of an effect for us. Yeah, we know we expect the supply chain and logistics delays to continue for the remainder of the year. And nonetheless, you do the math, Q4 looks stronger for us than Q3, even with all of that in. And so I think that's how it adds up to our full year guidance that we've, as you've seen, that we've maintained certainly on organic growth and margins and EPS.

The next question is from Patrick Donnelly of Citi. Please go ahead.

Hey, this is Jason on for Patrick. Just one question for you. On inflation, you noted some pressure there. Just curious what you're seeing more specifically across raw materials, labor, and freight sequentially, and is the second half still the right way to think about passing price due to some of those backlog dynamics? Thanks.

We're beginning to see more pricing improvements that are beginning to help us in the second half more than in the first half, but most of the pricing actions that we've taken at the beginning of the year and then again some of them in the middle of the year, most of that will help us next year. But we're getting a little bit of pricing tailwind in the second half of the year, but it's still fairly modest, certainly low single digits. probably below 200 bps. The other question, inflation on materials and logistics and labor, that's probably too granular for us to comment on. I mean, obviously, you see some of those effects. You see effects everywhere. And yes, I mean, logistics, there's probably some spiking costs there, and some of that will come down. I don't think all of that will be permanent. Other areas remains to be seen.

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

Thank you everyone for joining us today. Booker's leadership team looks forward to meeting with you at an event or speaking with you directly during the third quarter. please feel free to reach out to me to arrange any follow-up. Have a great evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.