Bruker Corporation

Good morning, everyone, and welcome to the Bruker Third Quarter 2022 Earnings Conference Call. All participants will be in a 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 and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Justin Ward, Senior Director of Investor Relations and Corporate Development. Sir, please go ahead.

Thank you. Good morning. I would like to welcome everyone to Brooker Corporation's third quarter 2022 earnings call. My name is Justin Ward, and I am Brooker's Senior Director of Investor Relations and Corporate Development. Joining me on today's call are Frank Laukeen, our President and CEO, and Gerald Herbin, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today's call, we will be referencing a slide presentation that can be downloaded from the Events and Presentations section of Bruker's Investor Relations website. During today's call, we will be highlighting non-GAAP financial information. Reconciliation 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 call, we will make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to elevated geopolitical and energy 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, 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 our outlook as of today, November 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 fourth quarter and fiscal year 2022 financial results expected in February 2023. You should not rely on these forward-looking statements as necessarily representing our views or outlooks as of any date after today. We will begin today's call with Frank providing an overview of our business progress. Gerald will then cover the financials for the third quarter of 2022 in more detail and share our updated fiscal year 2022 financial outlook. Now, I'd like to turn the call over to Bruker CEO, Frank Lauke.

Thank you, Justin. Good morning, everyone, and thank you for joining us on today's third quarter 2022 earnings call. Turning to slide four, in the third quarter of 2022, Brooker delivered robust organic revenue growth of 12.7%, well above the mid-single-digit outlook provided on our Q2 2022 earnings call. Our teams executed well despite operational headwinds from lingering supply chain and logistic delays. lockdowns in China, and the conflict in Europe. We again saw good demand for our differentiated high-value scientific instruments and life science solutions, and our third quarter 2022 scientific instruments segment book-to-bill ratio was again greater than one. With a strong Q3, we have now made up for our somewhat weaker second quarter, where, if you recall, we experienced some revenue delays due to supply chain and logistics. For the third quarter of 2022, brokers reported revenues increased 4.9% year-over-year to $638.9 million, despite a very strong currency headwind of minus 9%. On an organic basis, revenues increased 12.7%, which included 12% organic growth in scientific instruments and 20.3% organic growth at best net of intercompany eliminations, while growth from acquisitions added 1.2%. This implies a constant exchange rate growth of 13.9% for the quarter year over year. Our third quarter 22 non-GAAP gross margin increased 150 bps year-over-year to 53.2%, while non-GAAP operating margin was 22.4%, an increase of 180 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 our core operational excellence drive, volume leverage, pricing, and currency tailwinds. Importantly, we were able to deliver strong operating margin expansion in the third quarter despite our previously announced additional Project Accelerate 2.0 OPEX investments in commercial and R&D capabilities, particularly in proteomics and spatial biology. In the third quarter of 22, Bruker reported gap diluted earnings per share of 59 cents, up from 57 cents reported in the third quarter of 21. On a non-gap basis, third quarter 22, diluted EPS was 66 cents, up from 63 cents in the third quarter of 21. And Gerald will discuss the drivers for margins and EPS later. So in summary, the third quarter of 22 again saw solid demand for our differentiated products. and robust margin expansion, even as we executed certain planned OPEX investments in Project Accelerate 2.0 to capitalize on the major opportunities we see in proteomics and spatial biology, as well as in biopharma-applied infectious disease diagnostics, cancer research, and semiconductor tools. Let me now look at the year-to-date third quarter performance and moving to slide C. Slide 5, I apologize, you can see Brooker's performance for the first nine months of 22. Our revenues increased by 5.1% to $1.822 billion. On an organic basis, revenues grew 10.7% year over year, consisting of 9.9% organic growth in scientific instruments and 18.7% organic growth at best net of intercompany eliminations. First nine months 2022 order bookings for brokers three scientific instruments groups were double digits year-over-year organically. Geographically, our year-to-date third quarter 2022 BSI order bookings were led by mid-teens growth in Europe and APAC with Americas growing in the single digits. Our first nine months 2022 non-GAAP gross and operating margin and GAAP and non-GAAP EPS performance are all summarized on slide five, and we are very pleased with our 80 BIPs operating margin expansion year over year, despite high inflation and the planned investments in our project accelerate initiatives. Our trailing 12 months return on invested capital, a non-GAAP measure, was 24.6%. which puts us amongst 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 year-to-date third quarter 2022 performance of our three scientific instruments groups and of our best segment, all on a constant currency-based currency and year-over-year basis. For the first nine months of 2022, the BioSpin group revenue was 493 million and grew in the mid single digits percentage-wise. Please note, there were two gigahertz class NMR systems recognized in revenue in the first nine months of 2022 compared to three in the first nine months of 2021. We now expect three to four gigahertz class NMRs in revenue for the full year 2022, which means one or two are expected in the fourth quarter. BioSpin saw robust growth in services and support revenues, as well as strong growth in the preclinical imaging business. Moving to CALIT for the first nine months of 2022, The Kellett Group revenue of $601 million increased low double-digit percentage with strong growth in life science mass spectrometry and microbiology aftermarket, but still with supply chain delays slowing revenue execution. Our TIMSTOF platform in particular saw robust demand for applications in 4D proteomics, epiproteomics, and metabolomics. with double-digit growth year over year in revenues and bookings. Please turn to slide seven now. For Brooker Nano, for the first nine months of 22, revenue was $559.8 million and grew in the high teens percentage on a constant currency basis. Revenues for our NanoSurfaces tools delivered very strong growth in the first nine months while our advanced x-ray business also grew. Bruker Nano's microelectronics and semiconductor metrology tools performed well with strong bookings and backlog. Life Science fluorescence microscopy revenue showed year-to-date growth, a result of product innovation and Life Science research academic demand. Finally, First nine months 2022, best revenue grew in the high teens percentage net of intercompany eliminations driven by excellent execution under adverse conditions and strong superconductor demand by MRI OEM customers. Best demand appears healthy, but we continue to navigate through difficult supply chain issues. Moving to slides eight and nine, we highlight some important applications and innovations of our instruments. On slide 8, we highlight recent TIMSTOF purchases by BioMS, a Swedish national infrastructure consortium for biological mass spectrometry. They did acquire six TIMSTOF systems for three institutes in order to advance high-throughput proteomics workflows for clinical research and in future emerging laboratory-developed tests. The TIMSTOFS HTs were used for plasma cell and tissue proteomics, and we're delighted that they also all obtained TIMSTOFS SCPs for single-cell proteomics, but really also generally used for very low samples amount, such as, of course, sorted and single cells, but also for immunopeptidomics, FFPE slides, specific tissue sections, et cetera. A very nice case example of success of going to broader clinical proteomics research. Switching to slide nine, often we talk about magnets here. I really want to talk about the science and the novel functional structural biology research that's being enabled by other probe technology, in particular NMR probes. There is a new eight millimeter cryoprobe for 15N, a very, normally a very insensitive nucleus, but with a special 15N Trozy experiment developed by Professor Hari Arthanari and other coworkers. We've reached dramatic sensitivity and very significantly increased resolution for complex larger proteins and for these pathobiologically very important intrinsically disordered proteins. And there is a very nice statement here that I let you read that allows really a great expansion of the applicability of liquids NMR to more and more protein systems, including intrinsically disordered proteins. On the solid-state NMR side, there has been dramatic further progress with 160 kilohertz magic angle spinning, or MAS probe. Imagine that's something that rotates 160,000 times per second, and this is mechanical rotation, not radio frequency. Anyway, with this new probe, which is completely unique as far as we're concerned, it's used for biological applications by Professor Guido Pintacuta at Lyon in France, and it significantly enhances the ability of high-field NMR to push structural, cellular, and disease biology research in solid-state NMR, for instance, for membrane proteins, amyloid, neurodegenerative diseases, and many other fundamental biology and disease biology questions. So after this non-financial excursion into what we're doing, in summary, Bruker delivered a strong third quarter with good organic growth and margin expansion. While the macro environment remains difficult to forecast for 2023, we also believe that the strong demand for our differentiated products and solutions combined with our strong backlog will make Bruker quite resilient in the coming year. We expect to give fiscal year 2023 guidance when we report our results for the fourth quarter of 22 in February. With that, let me turn the call over to our CFO, Gerald Herman, for further details. Gerald.

Thank you, Frank, and thank you, everyone, for joining us today. I'm pleased to provide more detail on Bruker's third quarter and year-to-date 2022 financial performance, starting on slide 11. In the third quarter of 2022, Brooker's reported revenue increased 4.9% to $639 million, which represents an organic revenue increase of 12.7% year-over-year. We reported GAAP EPS of 59 cents per share compared to 57 cents in the third quarter of 2021. On a non-GAAP basis, third quarter 2022 EPS was 66 cents per share an increase of 4.8 percent from the 63 cents we posted in the third quarter of 2021. Our third quarter 2022 non-GAAP operating income increased 14.2 percent, and our non-GAAP operating margin increased 180 basis points year-over-year to 22.4 percent, with expanding gross margins and operational leverage more than offsetting our increase in Project Accelerate 2.0 operating expense investments. We finished the third quarter with cash and cash equivalents of approximately $626 million. During the quarter, we used cash to ramp selected Project Accelerate 2.0 investments, fund capital expenditures, and fund share repurchases. In the third quarter of 2022, we repurchased 1.2 million shares for approximately $72 million. And year-to-date, we've purchased 3.8 million shares for $238 million. As a reminder, in the full year of 2021, our repurchases totaled 2.1 million shares for approximately $153 million. We generated $69.5 million of operating cash flow in the third quarter of 2022. Our capital expenditure investments were $57.7 million, resulting in free cash flow of $11.8 million for the third quarter of 2022. This is an increase from free cash flow in the third quarter of 2021, $4.2 million. Slide 12 shows the revenue bridge for the third quarter of 2022 as discussed earlier. Compared to the third quarter of 2021, BioSpin's third quarter 2022 organic revenue was down slightly from a difficult comparison in the third quarter of 2021 with over 20% growth. Nano organic revenue grew in the low 20% range driven by strength in nano semiconductor industrial business. Caled organic revenue grew mid-teens percentage driven by strong growth in both the life science mass spectrometry and optics businesses. The third quarter of 2022 scientific instruments systems revenue grew in the teens percentage, while aftermarket revenue grew high single digits organically compared to the third quarter of 2021. Geographically and on a BSI organic basis, in the third quarter of 2022, our America's revenue grew in the mid-teens percentage. Asia-Pacific grew in the low double digits, while European revenue had low double digits percentage growth all year over year. In the third quarter, our rest of the world organic revenue, which is small as we categorize it, grew in the mid-single digits. Slide 13 shows our third quarter 2022 P&L performance on a non-GAAP basis. Non-GAAP gross margin of 53.2% increased 150 basis points from 51.7% in the third quarter of 2021, benefiting from our Project Accelerate 2.0 mix, pricing and currency tailwinds partially offset by inflation. 2022 non-GAAP operating margin of 22.4 percent was 180 basis points higher than the 20.6 percent margin we delivered in the third quarter of 2021. As higher gross margins and operating volume leverage benefits partially offset our increased sales and marketing investments towards high growth, high margin Project Accelerate 2.0 initiatives. In contrast to the second quarter of 2022, Our ramp in revenues outpaced the sales and marketing operating expense ramp, despite ongoing supply chain and logistics challenges. For the third quarter of 2022, our non-GAAP effective tax rate was 30.4%, compared to an unusually low effective tax rate of 19.2% in the third quarter of 2021, primarily due to unfavorable discrete tax items. The average diluted shares outstanding in the third quarter of 2022 were 148.6 million, a reduction of approximately 4.2 million shares, or 2.7% from the third quarter of 2021, resulting from our share repurchases over the past 12 months. Finally, the third quarter 2022 non-GAAP EPS of 66 cents was up 4.8% compared to a strong third quarter of 2021. Slide 14 shows the year-over-year revenue bridge for the first nine months of 2022. Revenue was up $87.9 million, or 5.1%, reflecting organic growth of 10.7%. Acquisitions added 1.3% to our top line, while foreign exchange was a 6.9% headwind. And Frank has already covered the drivers for the year-to-date 2022 performance. Non-GAAP P&L results for the first nine months of 2022 are summarized on slide 15, with the drivers largely similar to the third quarter of 2022, and as explained on the slide. Turning to slide 16, in the first nine months of 2022, we generated $8.3 million of free cash flow, compared to free cash flow of $80.2 million in the first nine months of 2021. Higher working capital, together with increased facility and capacity expansion investment in capital expenditures, reduced our year-to-date 2022 free cash flow year-over-year. Our cash conversion cycle at the end of the third quarter of 2022 was 240 days, an increase of three days compared to the third quarter of 2021. And we continue to carry elevated inventory to manage supply chain risk as well as to meet growing backlog from excellent year-to-date bookings. Turning now to slide 18, given the strength in revenue and bookings growth in the first nine months of 2022 and our significant backlog, we're increasing our full-year 2022 guidance for organic revenue growth and operating margin expansion while holding our EPS guidance for the full year. Reported revenue growth has been decreased due to a stronger foreign exchange headwind. Our updated outlook for fiscal year 2022 now includes the following. We're now guiding to 8 to 10% organic revenue growth year over year, up from our prior guidance of 7 to 9%. We now estimate a foreign currency headwind of 8%, up from our prior guidance of 6% due to a stronger U.S. dollar against most major currencies. We expect acquisitions to contribute about 1.5% to growth unchanged from our prior guidance. And this is now expected to lead to reported full year 2022 revenue growth in a range of 1.5 to 3.5%. We're increasing our non-GAAP operating margin expansion guidance to 60 to 90 basis points of expansion in 2022. up from our prior guidance of 30 to 60 basis points. This implies non-GAAP operating margins of 20.0 to 20.3% versus our 19.4% level in 2021. On the bottom line, for the fiscal year 2022, we are holding at our non-GAAP EPS estimated range at 229 to 233. which represents non-GAAP EPS growth of 9 to 11% compared to 2021. We project a non-GAAP tax rate of approximately 29.5% for fiscal year 2022. Other guidance assumptions are listed on the slide. Our fiscal year 2022 ranges have been updated for foreign currency rates as of September 30th, 2022. To add color to the fourth quarter, We still expect continuing logistics, supply chain, and geopolitical risks to constrain our fourth quarter performance. With that background, we currently anticipate upper mid-single-digit organic revenue growth year-over-year in the fourth quarter. To wrap up, Brooker delivered another quarter of solid organic revenue growth and continued solid bookings performance. We also posted encouraging margin expansion on both the gross and operating lines. Our teams delivered another quarter of excellent execution under challenging conditions. And 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. Operator? Operator?

Ladies and gentlemen, at this time we will begin the question and answer session. To join the question queue once again, you may press star and then one using a touch tone telephone. If you are using a speaker phone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. You can set a star and then one to join the question queue. Our first question today comes from Jack Meehan from Nefron. Please go ahead with your question.

Thank you. Good morning, everyone. I wanted to talk a little bit more about the supply chain and what you're seeing here. Obviously, the third quarter came in better than expected, but it sounds like you're still expressing a little caution about the fourth quarter. Can you just talk about median time to delivery, how that's trending, and when you think this could come back down to more normalized levels?

Yes, Jack, this is Frank. So logistics issues are getting better and logistics inflation is becoming less severe. Supply chain issues, while there is hope on the horizon, it is still a difficult situation. And so that isn't getting worse, but it's not getting better quickly. We were guesstimating that maybe supply chain may normalize in the second half of next year, and logistic situation clearly has improved with, you know, there's always some exceptions. As to our high backlog for scientific instruments, that's about an unusually high, nearly eight months on average. You know, it depends a little bit. We probably would bring that, you know, down. We'd like to bring that down by, you know, a couple of months or more over the next two to three years if demand stays healthy as we see it right now. And I guess it gives us a little bit of optionality that if 2023 was more of a downturn, then, you know, it's difficult to predict. Then obviously that would provide an excellent cushion for us. So that's how we view it at this time.

Great. And then I wanted to dig a little bit more into the nano performance here with organic growth over 20%. Can you talk about, maybe notably on the semiconductor side, what you're seeing in terms of demand there? There's been some mixed signals because you see real new investment from some companies around chips and science and other things, but also maybe some weaker demand signals in the market. So just How do you, just given all these signs, what does it mean for broker in the send market?

Yeah, excellent question. It is mixed signals indeed, as you've seen some memory pricing and there might be a glut in memory chips and so on. There is also some additional export restrictions to China on semiconductor metrology, which at a minimum will lead to delays for getting approvals. and certain types of equipment will not be possible to export anymore. Of course, there's great offsets to that with technology innovations. About half of what we sell in semiconductor metrology goes into new technology buys. As we call them, those continue very, very strongly. Capacity buys are slowing down a little bit, but we still have excellent backlog. And, of course, perhaps with a little bit of a delay, but this Chips and Science Act with the investment in semiconductor technology and fabs in the U.S. And, by the way, also in Europe, although there isn't a single act to support that, we think will provide a strong tailwind to us and the industry in general. We're beginning to see some buying, but I think most of that will begin soon. next year. And until that really materializes as a revenue and P&L tailwind for us will be probably more 24, 25, 26. So overall, given that there is a bit of a downturn or a slowdown for sure, there are many mitigating factors that we think will, from backlog to us having at least half technology buys to the major investments that are coming and have begun in the U.S. and to a lesser extent, but also significantly in Europe. We feel very good about that business, and it's a high-margin, high-growth business for us. So that's the mixed picture, if you like.

Great.

Thanks, Frank.

Our next question comes from Patrick Donnelly from Citi. Please go ahead with your question.

Frank, maybe to follow up on Jack's question there, you talked a little bit about the backlog there going into 23. To your point, if the macro does slow down, it probably benefits you, inflates you guys a little bit given the backlog. How sticky do you typically see that backlog? I tend to think of it pretty high relative to others given the segments you play in. Customers don't have ton of options to go elsewhere. So, you know, maybe talk a little bit about that and then how much more visibility does the current backlog give you into next year compared to your typical starts to the year? And then the only other moving piece, Gerald, just how do we think about FX for next year given current rates?

All right. Thanks, Pat. Yeah, I'll start. So yeah, our backlog is really quite sticky. You know, if, once people order from us and we have purchase orders and very often also down payments with that, it is extremely rare and financially completely immaterial that there would be any backlog cancellations. We do, you know, last year, well, this year really, seems like last year, this year we had a couple of percent revenue headwind from Russia and Ukraine basically dropping off as markets for us. Next year, we may see a 1% to 2% headwind from delays or it being not possible to deliver certain semiconductor metrology equipment to China. So that may be a bit of a headwind for next year, but it's pretty manageable for us and We are estimating one, certainly less than 2%, and mostly we're expecting it to be delays. Having said all of that, with our strong backlog, we really, at about eight months of backlog, that's the highest reach that we've ever had for scientific instruments. And we certainly, not all in one year, but over two to three years, we'd like to bring that down to below six months. So that really smoothens out, I think, our P&L and revenue trajectory quite a bit. And as I said earlier in my prepared statements, I think that, along with the excellent progress on the Project Accelerate initiatives, I think really makes us very resilient for 2023. if this is a year of defense. But, you know, we're really making excellent progress and have good market share gains in many, many areas.

And Patrick, to your question regarding foreign exchange, it's Gerald. I would just add that I I wish I could predict the foreign exchange markets in 2023. I'm not quite in that place at this stage. You know, it's volatility. Clearly, the U.S. dollar continues to strengthen under the current conditions and will stabilize itself for the last quarter. So I'm not quite ready to talk about foreign exchange for 2023 at this stage, but you've

But usually we don't speculate on that. We just take, you know, today's rates or rather, I guess, formally October 1st rates. And that's how we make our September 30th rates. Same thing. Right. And make the prediction. So we don't we don't predict FX. We don't.

Right. Yeah. No, I mean, it seems like it'll be a bit of a headwind, but that's that'll be see what happens.

And then, Frank, I guess... Oh, no, it will still be somewhat of a headwind at the beginning of the year to revenue. We acknowledge that. But we just assume the rates are whatever we have as most recent rates.

Yeah. And then, Frank, during the quarter, we got a decent amount of questions just on the Europe backdrop, given the macro. You guys put up good results there. I think you called out low double-digit growth. Maybe just give us some perspective about customer conversations, what you're hearing in Europe. what that academic market looks like as we work our way into 23, just given the macro fears there.

Yeah, we don't really see any. I mean, the investments in academic research, in life science, in disease research in Europe, we continue to see that very strong. Also, biopharma investments continue strongly. particularly in the U.S., but also in Europe and, of course, also in China and some other geographies. So I think for the type of products that we're making, the concerns about Europe are... It's not zero, but, you know, they're greatly over... They're exaggerated. Europe is, for our type of products and for most of our industry, is probably quite healthy. Plus one thing that kind of... may not be so obvious. If you look at our year-to-date revenue mix for the scientific instruments for the first nine months, it's now about the same at 32% Europe, 32% Americas. That is very different from Bruker a few years ago, as recently as 2020 for the full year then for scientific instruments. It was in the high 30s for Europe and mid-20s for the Americas. So we have grown so significantly in the Americas in academic and biopharma with proteomics, with so many other products that we have, that we are not as historically exposed, if you like, to Europe as Bruker traditionally has been. It's quite a milestone for us that year to date. Our Americas and Europe revenue is about the same at about just under 32% of our revenue. That's a different broker than you remember, I would guess, at least.

Our next question comes from Puneet Suda from SVB Securities. Please go ahead with your question.

Hi, Frank. Thanks for taking the question. First one, I just want to clarify, last quarter you were confident of the 2 gigahertz you know, two of the, you know, gigahertz NMRs in the fourth quarter, but now you're saying it could be one or two. So what is sort of gating that? Is it the acceptance of the instrument and sort of how should we think about the UHF gigahertz magnets in sort of 2023? And obviously the numbers here are, you know, strong, but just want to sort of get a sense of how you're thinking about that in the fourth quarter.

That's correct. Yeah, we initially thought we would have four this year. Now we're hedging a little bit by saying three to four, which implies one to two in the fourth quarter. And, you know, these systems are manufactured and have passed final tests. So that's not the gating item. But, you know, by the time the timing it takes to install them. And some of them, of course, there's some rework that needs to be done. So, you know, that's why we're guiding to one or two systems in the fourth quarter. And that's three to four for the full year. We haven't, you know, we're not giving 2023 guidance, but it's probably going to be similar in that, you know, around four systems per year seems to be our run rate. And over time, that's probably going to go up as we also will have gigahertz systems in addition to the 1.2 gigahertz. As you know, they're slightly different technology, different manufacturing tracks. But yeah, our guidance, of course, for the fourth quarter, that's all baked in. So if we only have one, which is possible, right? if one of them would move into the first quarter of next year, that's not a big deal. I mean, overall, we are pretty confident we can reach our color and implied guidance for the fourth quarter and the raised guidance, at least on the organic revenue growth level for the full year 2022. So I wouldn't let us worry, so to speak. And not to be flippant here, but let us worry about the exact timing. We tend to balance that if one does shift into next year. Right now, it's one or two that we're anticipating in the fourth quarter.

Okay, great. Thanks for that. And then just one for you, Frank, and then maybe just a brief one for Gerald. You know, backlog, obviously, you know, as you pointed out, strong eighth month and book to bill is more than one. So, you know, can you characterize a little bit about, you know, where is end markets and geography of this backlog? Is it just largely a representation of what we have seen with broker revenue and segmentation across broker revenue? Meaning that is it, you know, sort of more lever to biopharma versus industrial versus, again, you have a large presence in Europe. So just trying to characterize the through the backlog, and as you pointed out, this is pretty sticky. So I just want to get a picture there. And then, Gerald, up margin, obviously significantly ahead of us. Can you talk a little bit about the sustainability of that to sort of 2023? Thank you.

So, Puneet, I don't mean to frustrate you because it's an excellent question. We don't see any clear patterns yet. You know, Europe is stronger than most would have expected. industrial and applied is stronger at this point than perhaps many would have expected. Semiconductor metrology is excellent despite some headline news about slowdown in some CapEx investments and in memory chips and so on. So there clearly is more of a mixed headline news and macro picture, but we don't really see it very much yet for us. China has continued solidly. Europe has continued solidly. And yes, also, you know, macroeconomically more sensitive markets such as non-semiconductor industrial or applied markets so far are really quite strong for the year. So it's a bit of a disconnect between you know, what we see on the newspapers or on the internet versus what we see in our own data. So, you know, we're all going into next year a bit more cautiously in our planning than into this year or last year was more of a boom. This year was a very strong year. But so far, it's really quite strong in what we're seeing in our own data, including bookings. So... Not a lot to be learned, and we're looking very carefully because we have all the same questions you just asked, and they are obviously very good questions.

Puneet, it's Gerald. If I may just comment on third quarter margin performance, operating margin performance was pretty solid, as you pointed out. I mean, a lot of that has to do with the Project Accelerate 2.0 mix, as well as our volume drop down through to the operating margin line. I would also point out, if you didn't catch it in my prepared remarks, we had extremely strong operating profit for the quarter, 14.2 percent EBIT. I would say, generally speaking, I'm not going to comment on where that takes us for the 2023 period. We'll talk a little bit more about that in February. But obviously, we're quite encouraged with what we see at this stage. It's clearly moving completely in the direction we were hoping for.

But look at the year-to-date results, not at one quarter. You remember that our second quarter was a bit weaker than we would have liked. We met and exceeded consensus, but we would have liked to achieve more. But then towards the end, logistics and supply chain did not allow that. We had a bit of a boost from that in Q3. So looking at the average of the first three years, of the first three quarters of the year is really more informative than focusing on any one quarter, even if it's a very good quarter like Q3.

Got it. Super helpful. And congrats again on the backdrop. Thank you.

Thank you.

Our next question comes from Dan Arias from Stifel. Please go ahead with your question.

Morning, guys. Thanks for the questions. Frank, I just want to do... Ask a follow-up question on BioSpin. I mean, it sounds like demand for the high-field portfolio is pretty strong right now. What are you seeing on the benchtop side for some of the applied market applications? Just curious if growth there is noticeably different from the high end, and if so, how different?

Yeah, good question. Thank you, Dan. So let me split benchtop and applied a little bit. There's some applied benchtop businesses. But the much larger applied and clinical research businesses, of course, also midfield superconducting systems, typically 400 megahertz for food analysis, our NMR food screener, or our IVDR, our research system, our clinical research system at 600 megahertz. So that demand is good. And Supply chain is challenging, but overall, we've managed so far with some slowdowns, and that's why we have more backlog. Benchtop growth is good this year, but not very good because of some supply chain limitations. Some of the magnet materials and some of the other things that go into that product line have not allowed us to ramp production as much as we would have liked. Keep in mind that's a tiny amount, tiny, tiny part of BioSpin at this point. Of course, it's one that holds promise for the future. So it's growing in the double digits, but not quite as fast as we would have liked to. And that is primarily a supply chain this year. We think that's going to normalize at some point in 2023. The much larger applied in clinical research, superconducting NMR, business and the demand for that. And not to forget, the BioSpin preclinical imaging business, which is primarily MRI and PET-MR, PET-CT, is doing very, very well. And last but not least, the service and consumables business has very nice, very solid, high single-digit growth. It's just chugging along and is a very nice margin business.

Yeah, okay. And then apologies for sort of beating the dead horse on Europe, but I guess I'm just curious about whether your customers are specifically talking about the energy issues and the concerns that people have just as the winter approaches. I mean, especially at sites that do draw a lot of power, physics labs, et cetera. I mean, is that coming up in conversation or is that just sort of? baseline noise and... No, no, no, absolutely.

It's front and center everywhere in Europe, in Germany, but also in Switzerland, I mean, everywhere in Europe. So the inflation is there. The governments, including the German government, just now have decided to basically put a lid, sorry, a cap on that and have the taxpayer, thank you very much, Pay much of that pay much of that and therefore limit for the consumers, as well as for industry, the overall inflation impact. But there is very significant energy and electricity cost inflation in Europe now some industries from fertilizer to beer brewing to. To glass blowing to whatnot there for them it's it's fundamental and structural and some of them are slowing down their investments are moving to other locations in the world. For us, it's not structural. For us, it's an inflation driver, which we acknowledge inflation drivers. They are a headwind this year, for sure, to our margin expansion. However, as you've seen, we've more than overcompensated. We've overcompensated for that with many other positive drivers. I mean, at this point, Germany finds itself in the ironic situation that its gas supplies are full. Of course, they have to last through the winters, but at least it's a good starting position. The French nuclear power plants mostly are back online or coming back online from maintenance before the winter. So it doesn't look quite as dire as it might have looked six or eight weeks ago. Nonetheless, there is risk. I don't think, you know, we're I mean, everybody's dressing warmer and tiling down the temperature and saving energy, and so is Bruker. We're making additional investments in photovoltaic and solar for next summer when we need cooling, quite honestly, more than heating. So, you know, it's messy, and it's a risk. But I mean, if I think what could be the worst risk, right, to Bruker, we have multiple factories that wouldn't be affected simultaneously. If at some point in Q1 one of our factories had to shut down for a week, the others would keep moving. And by the way, the same can happen with wildfires or earthquakes in California or when we had the power outages in Texas some years ago due to a very cold winter. So it is manageable, but yes, there is risk. There is elevated risk and there is inflation. I think that's kind of the picture. I'm not really worried for next year's business plan. Could something move from Q1 to Q2 in a worst case scenario that I would consider as low probability? Yes, there is that type of risk. But with that quantitatively and looking at the different elements, it's actually overall manageable, and I'm really not concerned about Brewker's next year's business plan because of that. All we can ask is that the breweries make it through. Okay. Luckily, there's plenty of them, and there's a few non-European breweries, but yes. Correct.

Our next question comes from Josh Waldman from Cleveland Research.

Go ahead with your question. Hey, thanks for taking my questions.

Two for you. Frank, I guess, starting with a high-level question and a bit of a follow-up, I mean, growth over the last 18 months has obviously been quite strong. Bookings are up double digits year-to-date. It sounds like backlog grew again in the third quarter. I'm curious... Is there anything in the opportunity funnel or in conversations with customers that lead you to believe we might see a normalization in new orders or purchasing as we look out over the next several quarters? I guess just trying to rationalize the macro headwinds with your comments on strong broad-based order trends here recently.

Well, I think, you know, there is a – We're growing. Our backlog is growing. Our book-to-bill for scientific instruments was greater than one. But within that, there is a slowdown in growth, right? The growth was faster in 21, and the order growth was even faster year over year in the beginning of 22. So you see a bit of a... You see... Well, it's a nice way to... it is still very, very healthy, but it is not, I wouldn't characterize it as booming anymore. It is very healthy for us even with non-booming macro conditions because of the strength of our portfolio. Proteomics is doing really, really well. We're doing very, very well with our biopharma tools in essentially all geographies or most geographies and And again, proteomics being a key tool that's also being used in biopharma quite strongly, semiconductor, many, many other examples that I could cite. But it's not booming like 2021, and the growth is not as fast, and the growth in bookings is not as fast anymore as in the first half of the year. So you see a gradual, you don't see a slowdown. I don't want to use that word. Now I've used that word. But you see lesser growth compared to the very high growth in the first half and last year. So we acknowledge that. And we would expect that the economically more sensitive industrial and applied markets will see lower growth in the next, you know, I don't know, 12, 18 months. But they still see growth. And that's really the point here, right? But the growth is not quite as high anymore. which is still a very, very healthy setup along with a backlog. But we don't just live off our backlog. I mean, our order intake is excellent. And, indeed, book-to-bill scientific instruments was greater than one in Q3, and backlog did go up further. So it's still very healthy, but, you know, it's not boom times anymore.

Got it. That's helpful. Then, Gerald, a follow-up on op margins. Could you talk through how you're thinking about the cost price mix progression on the impact to margins as you look ahead to the fourth quarter in 23? Obviously, nice margin performance in Q3. How much of that was cost starting to abate versus price starting to show up in the P&L? And then I guess just a comment on your expectation for price contribution here in 22 and what that looks like in 23 based on how you price the backlog would be helpful.

Yeah, we've Good question. So we've discussed this a little bit in prior calls, but just fundamentally, we do still see a inflation cost pressure headwind net of price realization. And that was the case for the early part of 22 and continues to be the case for the latter part of 22. But fundamentally, we are seeing stronger price realization as we've moved through 22. And that is helping us, I think, certainly on the margin performance. We continue to take pricing actions wherever we can in the markets in which we feel we are well positioned to do so. And I think that's really important for not only the fourth quarter, but also for the future, including 2023. Yeah, I think generally speaking, you know, the performance has been very solid. You see the numbers reflected in the gross margin performance over the last couple of quarters.

Got it.

Appreciate it, guys.

Sure.

Our next question comes from Derek DeBruin from Bank of America. Please go ahead with your question.

Hey, this is Nisarghan for Derek. Thanks for the question. So I wanted to start off asking you about biotyper demand at hospitals and labs are seeing inflationary pressures. How should we think about placements there?

If I understood the question correctly, it's the multi-biotyper clinical microbiology business. This is Frank. So continued very good growth in consumables year-to-date. Last year, we had some 2021 We had some significant orders from Russia in MALDI Biotyper and also earlier last year and the year before, but deliveries were mostly last year from the CDC and their Center for Disease Control in China. some significant orders with that. The instrument revenue for Maldi Biotyper this year is down year over year, but with some exceptional large deals last year, and the consumables business is just growing very nicely. So overall, clinical microbiology is up this year, but not as strongly as last year.

Got it. Thank you. And then following up on some of the supply chain constraints you mentioned earlier from this year, are you seeing any catch-up spend in this quarter or anything you're looking forward to in 4Q?

We're not really aware of that. Nobody has told us that they're catching up or that there's some sort of a budget flush. Those things don't tend to affect us as a more than 50% instruments business with a lot of backlog as much as some primarily consumables or aftermarket companies. So I wouldn't know. We're not aware of it.

Got it. Thank you. Thank you.

Our next question comes from Rachel Batzendahl from J.P. Morgan. Please go ahead with your question.

Hi, thanks for taking the questions here. So following up on some of the earlier comments just about order book visibility, can you just talk about cancellations and how big of a risk that is? So let's say if the macro backdrop continues to deteriorate, how locked in would your order book be? And then maybe can you compare that to prior economic downturns and what your cancellation rates looked like then?

Yeah, it's essentially immaterial then and we expect it to be immaterial now next to nil. It's a pretty simple answer. Sorry if I keep it short, but we just don't, our backlog doesn't usually suffer from cancellations.

Got it. Okay, that's helpful. And then last one for me, just looking at the quarterly cadence, you guys did almost 13% organic growth during the quarter. And then for 4Q, you're expecting that upper mid-single-digit growth. So I understand there's some lumpiness, but can you kind of walk us through some of the puts and takes on the 3Q growth this quarter? How much of that 13% was from pent-up demand from 2Q and the supply chain constraints you saw? And then are you seeing any pull forward from 4Q demand as well? Thank you.

Rachel, as I said earlier, don't look at Q3. Don't look at Q2. Look at year-to-date. Year-to-date organic growth at 10.7 is a meaningful measure. We're guiding to 8% to 10% for the year, obviously, because there always are some continued risks. We've been able to nicely overperform in Q3. We were only barely meeting consensus in Q2. So each quarter is still a supply chain and lockdown and whatnot challenge. So we take that into account, hopefully prudently. And I think the key to really understand broker is to look at the year or the year to date. That's my comments.

And operator, maybe we have time for one more question. One final question.

And our final question today comes from Brandon Colliard from Jefferies. Please go ahead with your question.

Hey, thanks. Good morning. Thanks for squeezing in. Just a couple of housekeeping items for you, Gerald. Could you just speak to the third quarter BSI organic order growth, specifically the rate?

And does that exclude any ultra high-field orders?

No, I understood, Brandon. We had, I think, three ultra-high field orders in Q2 and none in Q3 on that housekeeping item. And then BSI book to bill was greater than one in Q3 as well, if that addressed the two questions.

Okay, and then Joe, what's the impact of currency on gross and operating margin expansion in the third quarter?

You know, I think we've maybe gone through this before, Brandon, but generally speaking, foreign exchanges, it's got volatility. I think we talked about when the U.S. dollar strengthens, we got a headwind on the revenue line. We have generally some favorability because of our foreign operations in both the gross and the operating expense categories. And it's pretty neutral when you get down to the EPS line. So I think that's generally the case. Again, we did see some favorability in the third quarter related to foreign exchange down at the bottom line. But other than that, I think that's the... But if you think about, if I may...

pose it a little bit more broadly. If you look at, we do have some margin tailwinds from FX this year, and we have inflation headwinds, those nearly offset. And by the time you get to EPS, it's relatively small, although we do acknowledge a bit of an EPS, a small EPS headwind from currency, which is why you've seen that, for instance, that we haven't raised our EPS guidance, even though our margin guidance is higher. Margin. Yeah, that's correct.

That's right.

Hope that helps.

And, ladies and gentlemen, with that, we'll end today's question and answer session. I'd like to turn the floor back over to the management team for any closing remarks.

Yep. Thank you for joining us today. Brooker's leadership team looks forward to meeting with you at an event or speaking with you directly during the fourth quarter. Please feel free to reach out to me to arrange any follow-ups Have a great day.

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.