Bruker Corporation

Good morning and welcome to the Brooker Corporation's fourth 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 on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would like to turn the conference over to Justin Ward, Senior Director of Investor Relations,

and corporate development. Please go ahead. Thank you, Anthony, and good morning, everyone. I would like to welcome everyone to Bruker Corporation's fourth quarter and full year 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 presentation 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.brooker.com. Before we begin, I would like to reference Spruiker'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 the 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 as updated by our other SEC filings, which are available on our website and on the SEC's website. Also, note that the following information is based on current business conditions and to our outlook as of today, February 9th, 2023. 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 first quarter 2023 financial results, expected in early May 2023. You should not rely on these forward-looking statements as representing our views or outlook as of any date after today. We will begin today's call with Frank providing an overview of our business progress. Gerald will then cover the financials for the fourth quarter and full year 2022 in more detail. And he will share our fiscal year 2023 financial outlook. Now, I'd like to turn the call over to Bruker CEO, Frank Laukeen.

Thank you, Justin. Good morning, everyone, and thank you for joining us on today's earnings call. In fiscal year 2022, Bruker achieved solid operating and financial improvements with 10% organic revenue growth, 150 basis points gross margin expansion and 11% non-GAAP EPS growth, all with a non-GAAP return on invested capital above 20% and while investing significantly in proteomics and spatial biology. We have made several key acquisitions and investments in the last 13 months in order to expand the breadth of our proteomics capabilities into proteomics consumables, automation software, and expert proteomics drug discovery services, and also in order to enter attractive new markets in cancer research tools and neuroscience research tools and solutions. Our teams also have been effectively navigating supply chain and geopolitical challenges, which are gradually improving but not fully resolved yet, and probably will not be fully resolved until the end of 2023 and in some areas of electronics even into early 2024. Most importantly, we are advancing our project Accelerate 2.0 high growth, high margin initiatives with, as you know, a particular focus on the large opportunities in proteomics and the related field of spatial biology, while also investing in operational excellence, productivity, and our capacity growth for the next 10 years. Bruker again has introduced key life science tools innovations in 2022 and demand for our high-value solutions and differentiated instruments is strong. In fiscal year 2022, our scientific instrument segment generated double-digit year-over-year organic bookings growth and built additional backlog for good visibility into the year. In 2023, we intend to drive strong revenue growth and another solid EPS increase while further expanding our focus strategic investments in the recently acquired additional proteomics capabilities and in our other key project accelerate 2.0 initiatives. Our medium term goal is to continue to transform Bruker into a high revenue growth and consistent double digit EPS growth company with significant further growth and operating margin expansion potential. Turning now to slide four, broker solid 8.9% year-over-year organic revenue growth in the fourth quarter capped off another strong year for the company. Continued demand for our differentiated high-value solutions drove robust performance in bookings and revenues, and our fourth quarter 22 scientific instrument segment book-to-bill ratio was again greater than one. For the full year 2022, our BSI segment organic bookings and backlog both increased in the double-digit percentage year-over-year. For the fourth quarter of 2022, the BSI segment order bookings continued to grow nicely driven by broad-based customer demand with demand in Europe being particularly strong. Brooker's Q4 22 reported revenue increased 3.6% year-over-year to $708 million. This was in comparison to a strong prior year Q4 of 21 and with a 7% Q4 22 headwind from FX. So on an organic basis, our Q4 2022 revenues increased 8.9% year-over-year. Our Q4 2022 non-GAAP gross margin increased 140 basis points year-over-year to 52.6%, while our non-GAAP margin was 21.0%, the same as in the fourth quarter of 2021. Despite inflation headwinds, our gross margin expansion is clearly benefiting from Project Accelerate 2.0 margin mix, are operational excellence, productivity gains, as well as volume leverage, pricing, and currency tailwinds. In the fourth quarter of 22, Bruker reported gap-diluted earnings per share of 66 cents, up 32%, compared to 50 cents reported in the fourth quarter of 21. On a non-gap basis, fourth quarter 22 diluted EPS was 74 cents, up 25% from 59 cents in the fourth quarter of 21. In summary, the fourth quarter of 22 was a quarter of good execution and continued broad demand for our differentiated portfolio. Moving on to slide five, we show broker's performance for the full year 2022. Our revenues increased by 113 million year over year or by 4.7%. to $2.53 billion. On an organic basis, fiscal year 2022 revenues grew 10.2% year-over-year. For the full year 22, book-to-bill for Brooker's three scientific instruments group were all above 1.1. Geographically, our 22 BSI order bookings were led by double-digit organic growth in Asia Pacific, South Asia, and Australia and New Zealand, the APAC region as we abbreviate it, and with mid-teens percentage organic growth in Europe and Middle East Africa, or EMEA, and mid-single digit percentage organic order bookings growth in the Americas. In fiscal year 2022, we experienced particularly strong organic growth in our proteomics, biopharma, semiconductor metrology, and industrial research markets. In fiscal year 2022, we delivered double-digit organic revenue growth, 150 bps year-over-year gross margin expansion, 60 bps year-over-year operating margin expansion, and double-digit percentage non-GAAP EPS growth. Our non-GAAP return on invested capital of 24.3% was again well above our long-term target of ROIC greater than 20%. And this continues to confirm our differentiated strategy and entrepreneurial management process and culture are working. Finally, we're also pleased with our 7% year-over-year non-GAAP EBITDA growth, bringing 2022 non-GAAP EBITDA to $547.5 million and the related non-GAAP EBITDA margin up 40 bits to 21.6. So please turn to slide six and seven, where we highlight the full year 2022 performance of our three scientific instruments groups and of our best segment, all on a constant currency and year-over-year basis. In 2022, BioSpin Group revenue grew in the high single digits percentage year-over-year to $697.7 million, with strong growth in its services and support revenues, as well as strong growth in preclinical imaging and a notable contribution from our biopharma process analytical technology software acquisition, Optimo. Rooker Biospin recognized revenue on four gigahertz-class NMR instruments in 22, consistent with four systems recognized in 21. You may have seen our press release last week in which we detailed the customer acceptance of the first two 1.0 GHz NMR systems already in the fourth quarter of 2022, one at RIKEN in Japan and one in Barcelona, Spain. These acceptances were ahead of schedule as this new compact single-story 1.0 GHz product launch is technically going really very well. It resulted in some 1.2 GHz installations however moving to this year, 2023, And in 2023, we again expect to install four gigahertz-class NMRs. And by the way, none are expected in the first quarter of 2023. I know some of you are following that quarter by quarter. Moving on, for the full year 2022, CalID group revenues increased in the high single-digit percentage to $822 million, with continued growth in our life science mass spectrometry business and notable strengths in proteomics applications and our TIMSTOF portfolio with now more than 600 units installed in customer labs. We continue to experience some supply chain delays, however, slowing revenue execution in CALIT and hence the backlog went up. Our TIMSTOF platform saw very robust demand in applications for 40 proteomics, PTMs or epiproteomics, as well as single-cell proteomics and mass spec imaging all on the various models of the TIMSTOPS platform. Our microbiology and molecular diagnostics revenue was up slightly year over year as aftermarket strength offset modest instrument demand, which faced difficult comps and comparables from 2021. Moving on to slide seven now, full year 22 broker nano revenues grew in the high teens, Our growth star, high-teens percentage to 787 million. Nano's revenue growth in semiconductor industrial markets was particularly strong. Our nanosurfaces division drove the nanogroup strength, while X-ray and nanoanalysis divisions also grew further versus 2021. Nano's microelectronics and semiconductor metrology tools performed well in 22, with strong bookings and a strong backlog that provide us with good visibility into 2023. Brooker Nano life science fluorescence microscopy showed strong year-over-year growth as a result of product innovation and life science research demand, and that's also where we have made some additional acquisitions I'll discuss in a moment. So last but not least at all, fiscal year 22 best revenue grew in the mid-teens percentage, net of intercompany eliminations driven by contributions from big science, clean energy, research, and robust demand for our MRI superconductors by our MedTech OEM customers. Best superconductor demand appears healthy, but we continue to experience supply chain challenges there as well due to some material shortages. Moving to slides eight and nine now, we continue to make good progress with our project Accelerate 2.0 initiatives, which in 22 now represent 56% of our total revenue. On slide eight, we highlight two recent acquisitions, Inscopix and Diagnosis. Inscopix is a part of our fluorescence microscopy business, although it's a very specialized way of doing life animal fluorescence microscopy. And Inscopix has really generated and pioneered the field of fundamental neuroscience brain circuitry research So this is not molecular and this is not just behavior. This is this crucial in between that we need to understand brain function, in vivo brain function much better. They had about 20 million and 22 revenues. Their growth margins are well above 60%. And while this year they only have a single digit EBIT margin because they're investing a lot and we support that, we expect to have not only a double-digit revenue CAGR, but also to become accretive to operating margin over time and become one of our more profitable businesses over a few years. But right now, they're very much in growth and fast investment mode. Somewhat similar, but also slightly different story on diagnosis, where we did go into this specialty drug discovery and development research services, or CRO services, Not a general strategy for us, as you may know, but very much beneficial in the specialty proteomics services field, where, by the way, diagnosis also has some very key consumables kits and software. So they're a mix of CRO, drug discovery, and proteomics specialty tools businesses. They had about $15 million in 2022 revenue. We're also expecting them to have a long-term double-digit CAGR in the double digits. And this year, in 2023, because of significant investments that we support, including their rollout of their U.S. facility, we do not expect them to be profitable. But over time, we think they will also then become accretive to our operating margin over time. This will take a few years. but a very key additional acquisition in proteomics. Moving on to slide nine, just very briefly, something that you probably don't have much visibility on, and we had a press release on this in December, but many of our technologies within BEST are not only used for high-energy physics experiments or big science or MRI by our MRI OEM customers, but increasingly also by cleantech as cleantech technologies under development. And here are examples of contracts that we have received for over $50 million for superconducting materials from an Asian pilot plant on fusion, magnetic confinement fusion pilot plant, as well as from ITER indirectly for something that is part of the diverter. I don't expect you to be experts in how magnetic fusion and ITER work. But those are the parts of the heater machine that have the highest heat and radiation load. We have some very specialized materials there and got those long-term contracts. By the way, these are all multi-year contracts. This will not all be 23 or 24 revenue. Superconductors also may play an increasing role in offshore 20 megawatt and larger wind turbines. The investment in Europe, in Asia, and particularly in the U.S. that are planned for offshore wind are enormous. And larger, more efficient wind turbines probably will get away from rare earth materials because it gets too heavy. It also is only sourced in one country, China in this case. And so there may be a bright future for superconductors in offshore wind turbines. More of an outlook for some future growth areas on which you probably haven't had much visibility. So let me wrap up on slide 10. Illustrates how our revenue mix continues to improve. Project Accelerate 2.0 now presents 56% of our revenues. Year by year, the changes are incremental, but if you look at this at the last pre-COVID year, 2019, it's up from 46 to now 56%. This, along with operational excellence, obviously advances our growth and our operating margins and opens up very large new tents for us, particularly the large opportunities for this decade and the next in proteomics and spatial biology. We're still an instruments company and proud to be that one, an instruments company, because that's where we innovate and create new markets. But our recurring revenue has advanced from the mid-20s percentage to 30%, as you see in the lower left. And our geographic balance has really changed dramatically with fast growth, particularly in the Americas. to where Americas and EMEA are at parity at about 33%, and very, very similar to our broader APEC South Asia revenue, which is about 34% of Rupert's total global revenue. Also quite a different picture than from a few years ago. Well, let me wrap things up. Summary. During 2022, Bruker again made excellent progress. We closed several key technology and capabilities acquisitions, particularly in fluorescence microscopy and neuroscience and proteomics in the last 13 months. And we are expanding the breadth and depth of our capabilities, as well as entering new attractive markets, as I've referred to earlier. Very proud of the agility and responsiveness of our teams in addressing the supply chain challenges. Moving forward, our high backlog for 2023 gives us good visibility into another promising year ahead. And in 2023, we intend to combine rapid revenue growth, further gross margin expansion, and solid EPS growth with additional strategic R&D and commercial investments, particularly in proteomics and spatial biology. And for 2023, we expect to reach our previously announced medium-term target of R&D investments of 10%, of revenues, which is a 70-bit step up or increase from 9.3 in 2022. So we are really investing very significantly while improving our financial performance year over year. It's a good strategy. It's a good process. And with that, let me turn the call over to our CFO, Gerald Herman, who will review Brooker's financial performance and outlook in more detail. Gerald.

Thank you, Frank, and thank you, everyone, for joining us today. I'm pleased to provide more detail on Booker's fourth quarter and full year 2022 financials, starting in slide 12. In the fourth quarter of 2022, Booker's reported revenue increased 3.6% to approximately $708 million, which reflects an organic revenue increase of 8.9% year-over-year. We reported GAAP EPS as $0.56 per share, compared to $0.50 in the fourth quarter of 2021. On a non-GAAP basis, the fourth quarter 22 EPS was 74 cents per share, an increase of 25% compared to the 59 cents in the fourth quarter 2021. Our fourth quarter 2022 non-GAAP operating income grew 3.5% year-over-year, with the fourth quarter 22 non-GAAP operating margin about flat year-over-year at 21%. That's a strong growth margin expansion was offset by higher R&D and commercial investments for Project Accelerate 2.0 initiatives, as well as by inflation-related costs. We finished the fourth quarter with cash, cash equivalents, and short-term investments of approximately $646 million. During the quarter, we used cash to fund selected Project Accelerate 2.0 investments in our key strategic opportunities, capital expenditures, and, of course, our dividend programs. In the fourth quarter, we purchased approximately 435,000 shares of Booker stock for total consideration of about $26 million. For the full year of 2022, our repurchases totaled 4.2 million shares, or approximately $265 million. We generated $159 million of operating cash flow in the fourth quarter, which after capital expenditure investments, resulted in $135 million in free cash flow for the fourth quarter of 22. This represents a $25 million increase from the fourth quarter of 21, primarily the higher net income in the quarter. Slide 13 shows the revenue bridge for the fourth quarter of 22. As noted earlier, organic revenue in the quarter increased 8.9%. We had a positive revenue contribution from acquisitions of 1.7%, and a foreign currency headwind of 7%. From an organic revenue growth perspective and compared to the fourth quarter of 2021, BioSpin's fourth quarter revenue for the fourth quarter of 22 revenue increased in the high single-digit percentage with a notable strength in our PCI and BioSpin software businesses. Nano organic revenue grew in the low 20% on strength in semiconductor metrology, and our surface materials and nanoanalysis tools divisions. CALID performance was constrained by supply chain delays in the fourth quarter of 22, but bookings were again robust. Order bookings in CALID in the fourth quarter were significantly higher than revenues for a book to bill meaningfully above one. Fourth quarter 22 BSI systems revenue and aftermarket were both up high single digit percentages organically compared to the fourth quarter 2021. Geographically and on an organic basis in the fourth quarter 2022, our European revenues down mid single digit percentage year over year. Americas grew in the high single digit percentage range and the APAC region grew in the 20% range year over year. The rest of world fourth quarter 22 revenue was higher year over year in the high teens percentage. Slide 14 shows our fourth quarter 22 P&L performance on a non-debt basis. Fourth quarter 22 non-debt gross margin of 52.6% increased 140 basis points from 51.2% in the fourth quarter of 21 due to increased capacity utilization, favorable revenue mix, and volume leverage. Fourth quarter 22 non-GAAP operating expenses were up 8.2% compared to the fourth quarter of 2021 and reflect the continuing acceleration of R&D and commercial investments in Project Accelerate 2.0, including in proteomics and spatial biology, in addition to increased costs related to inflation. For the fourth quarter of 2022, our non-GAAP effective tax rate was 20.6%. compared to 34.4% in the fourth quarter of 21, primarily due to a favorable U.S. tax clarification issued in the fourth quarter of 22. Weighted average W-2 shares outstanding in the fourth quarter of 22 were 147.9 million, a reduction of approximately 4.6 million shares, or 3%, from the fourth quarter of 21, resulting from our share repurchase activity over the past year. Finally, fourth quarter 22 non-GAAP ETS of 74 cents was up 25% compared to 59 cents in the fourth quarter of 21. Slide 15 shows the year-over-year revenue bridge for the full year of 22. Revenue was up $113 million, or 4.7%, including organic growth of 10.2%, following a very strong 2021 organic growth comp of over 19%. Acquisitions added 1.4 percent to our top line, while foreign exchange was a 7 percent headwind for the full year of 22. P&L results for the full year of 22 are summarized on slide 16. For the full year, gross margin expanded 150 basis points to 52.6 percent, reflecting higher revenue, volume leverage, and more favorable mix from Project Accelerate 2.0. while operating margins grew 60 basis points to 20.0% for many of the same reasons. The full non-GAAP tax rate was 27.7% compared to a 28% rate in 21. Turning now to slide 17, in the full year of 2022, we generated $143 million of free cash flow, approximately $47 million lower than in 2021. Full year 22, free cash flow benefited from higher net income, more than offset by higher working capital related to our increased volume, buffer inventories, and the timing of receivables. Our capital expenditures in the year reflect our continuing investments in growth capacity and productivity as part of our operational excellence drive. Our cash conversion cycle at the end of the fourth quarter of 22 was 229 days, an increase of 21 days compared to the fourth quarter of 21. This increase was due to higher working capital needs to cushion supply chain risks. Turning now to slide 19, given our continued strong bookings growth and backlog in 2022, we expect solid growth in 2023. Our outlook for 2023 includes We are now guiding to organic revenue growth of 8 to 10% year over year. We have to make a foreign currency tailwind of about 1.5%, with acquisitions also contributing about 1.5% to growth. This is expected to lead to reported revenue of $2.81 to $2.86 billion, representing growth in a range of 11 to 13% compared to 2022. For 2023 we expect to reach our medium term R&D target of approximately 10% of revenues. That's a 70 basis point step up from the 9.3% level we delivered in 2022. Nonetheless, we expect our innovative portfolio to continue to deliver solid gross margin expansion and operating profit growth in 2023, and we're targeting 7 to 9% year-over-year non-GAAP operating profit growth in 2023. Organic operating margins are expected to expand approximately 50 basis points in 2023, but a combined transitory headwind in 2023 of about 120 basis points from foreign exchange and dilution from our recent acquisitions is expected to decrease our non-GAAP operating margins by approximately 70 basis points to about 19.3% for 2023. We expect operating margins to rebound from this anticipated 2023 dip in 2024. And our median term goal continues to be to expand our non-GAAP operating margins well beyond by 20% level, which we achieved for the first time in 2022. As Frank mentioned, our recent acquisitions are highly synergistic and strategic. We expect them to deliver double-digit revenue growth, rapid margin improvements, and strong shareholder returns over time. On the bottom line, we're guiding to non-GAAP EPS for 2023 in a range of 252 to 257, or non-GAAP EPS growth of 8 to 10% compared to 2022. This would also represent a 13% non-GAAP EPS CAGR from our $1.57 pre-pandemic level in fiscal year 2019. We're projecting a non-GAAP tax rate of approximately 28% for the full year of 23. Other guidance assumptions are listed on the slide. And our full year 2023 ranges have been updated for foreign currency rates as of January 31st, 2023. So to wrap up, Bruker delivered strong bookings, backlog, and revenue growth in the fourth quarter, capping off another year of very good financial improvement. We're carrying bookings momentum, innovative products, and a record backlog into 2023, giving us good confidence in our ability to deliver another solid financial performance in 2023. With that, I'd like to turn the call over to Justin to start the Q&A session. Thank you very much. Thank you.

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?

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Our first question will come from Punit Sudha with SBB Securities.

You may now go ahead.

Hi Frank, Gerald. Thanks for taking my questions. So first one is on just book to bill. That came in obviously greater than one. Could you maybe elaborate on bookings? Are they going to one segment versus the other among the instrumentation? And on Khalid, you said you were supply chain constrained. We've obviously been hearing from other peer groups on instrumentations. Supply chains have been getting addressed, you know, throughout the year. So could you talk a little bit about that and what visibility you have on supply chains there and what instruments are maybe, you know, sort of impacted there? And then I'll follow up.

All right, I'll start with that. So book to bill greater than one in the BSI segments. Strength in Tim's talk for sure. BioSpin had very strong bookings. But it was really nothing that dropped out or something like that. Some of the applied and industrial areas remained pretty resilient. We kept an eye on that. And then geographically, a bit of a surprise is that Europe had such strong bookings in Q4. I think those are maybe the more remarkable things that some of them may surprise you and some are as expected. To the second point, supply chain, yes, it is getting better, but that, you know, just certainly not getting worse. But there still are some things that sometimes there's just a part or, you know, a few parts that delay deliveries. We got, for instance, in the Cali group, both the Brooker Optics Molecular Spectroscopy, but also our Timstop line got delayed in some deliveries. Sometimes it's even just even the the chromatography equipment and so on that can be delayed. So I don't want to bore you with the details, but it's not, you know, that it's all smooth sailing. This will still take some time to sort itself out. It is getting better, but that, you know, it's not gone. And so it still is a drag on revenue, which is, you know, we didn't really intend to build our backlog further in Q4, but, you know, that we delivered good revenue growth. But we also had, you know, delightfully better than expected, perhaps, or better than feared. If you if we were all a little concerned what's going on with the economy. So we're pretty pleased that our bookings were so strong, and yes, that our backlog went up yet again. So that's the bigger picture there.

Got it. Okay, helpful. And then just, Gerald, on off-margin dip in here in 2023, could you talk a little bit about the R&D investments that you're talking about? How should we think about off-margin throughout the year. And then just if I could squeeze one on China. Frank, we've been hearing about this one point. I appreciate it, but this is an important one. I would love to get your view on the $1.7 trillion Renminbi and $200 billion instrumentation stimulus there. I know it's a loan But I'd love to get you, because you are obviously strong in instrumentation, so I would love to get your thoughts there, if that could be meaningful for quicker. I'll start with that.

I mean, we're obviously delighted by that prospect. As you know from announcements until this gets into specific grants and budgets and then into purchase orders take some time. But, you know, that along with the, you know, Inflation Reduction Act in the U.S. or the CHIPS Act in the U.S. and potential also... additional stimulus that may happen in Europe, in clean tech and other energies. It all caters to our strength, and we're in principle very delighted and excited, but I just don't want to caution it. It takes some time before. This probably won't show up in our revenue until 2024, 2025, but it's great to have these medium and long-term tailwinds as well. On the other side, I go over to Justin or to you?

I'm happy to respond. So relative to the 23 guidance, relative to the margin performance, I think as you probably heard from my prepared remarks, there's two major factors there. First of all, we posted, I think, very solid full year 22 operating margin performance at 20%. That's a record for the company. Secondly, we do expect some combined performance foreign exchange and acquisition-related dilution on the operating margin for 23. There's another factor which you've already referenced, which is the accelerated R&D spend. We do think with some stabilization on the supply chain and some of the work we're doing there that we will be able to bring our R&D levels back up to a 10% level in 23. All of that pulls the operating margin down slightly for 23. We expect to be able to rebound that back in 24.

Importantly, we expect to expand our growth margins, our non-GAAP growth margins in 23. And even if you look at the guidance slide, we're thinking that organically our operating margin is still going to grow about 50 bps. But, yes, we are acknowledging some transition margin headwinds from FX. and the, you know, deliberate and very good acquisitions, but in the first year, they're either not profitable or they have low margins. We're very glad we did these acquisitions. I think they'll be terrific for the company, but that gives us a temporary drag in 2023, which we're accepting, and we think that only gives us more growth and operating margin expansion potential in the future years as we're positioning the company and continue to transform the company.

Got it. Appreciate it. Thank you.

Our next question will come from Patrick Donnelly with Citi.

You may now go ahead.

Taking the questions. Frank, I think this is the highest growth number I've seen you guys put out to start a year. You guys are typically known for layering in a pretty healthy amount of conservatism. I guess with this elevated growth numbers, there's still that typical broker conservatism in there. And on the back of that, I guess what gives you the confidence to put out this type of number to start the year, bumping it even from what you were talking about at JPM? I mean, clearly the record backlog, I assume it's part of it. Does that just give you the visibility you didn't have in prior years to get to this number? Did headwinds like that China semi-concern that you talked about last quarter alleviate a little bit? It would be great to just get your perspective on kind of where we stand to start the year here.

Yeah, thanks for the question. Good question. I can give you some incremental. Because to your very last point, we already took out about a few orders from China semiconductor out of our backlog because of the probability of either significant delays or it not being feasible to export certain pieces of equipment. So that's all built into our forecast, and we took care of that in Q4, if you like. So no additional risk there that we can see at the time. You know, I think it's the usual balance of risks and opportunities. Yes, it is backlog. We acknowledge that. Of course, that backlog will not come to normalized levels all in one year. That will be a two- to three-year process. It's continued orders momentum. It's also in some of the areas where we were concerned and we're wondering ourselves whether they would get quite a bit weaker and, you know, why some of them are not growing as fast We haven't seen any pronounced signs of weakness or any signs of real weakness. So it's just coming, the order momentum, and then, you know, order momentum in BioSpin, Timstop, a number of areas is very strong. We have, so it's just, yeah, it is an unusual number early in the year for us, but I think it's the usual good balance that we hopefully will not regret, right? That's a number that we, we hope we can deliver.

Okay. That's helpful. And then, you know, I think this quarter particularly, there's been an increased focus on kind of the one Q and annual progression. Most of your life science peers have kind of guided one Q to be a little bit light of expectations in the latest quarter. As you think about kind of the growth progression throughout the year, can you guys just give us some perspective on kind of the cadence throughout the year? How should we think about one Q and, both on the organic growth side and then, Gerald, maybe on the margin side, just in terms of the build as we work our way through the year, particularly, again, 1Q, just given some headwinds via China and stocking and others you've seen.

Sorry, we also expect Q1 to be a little lighter. So, Gerald, do you want to expand there on some quarterly color? But we do acknowledge that we also expect Q1 to be – on the lighter side, but we still expect decent growth.

Yeah, we do. And I would say from an organic growth perspective, we still expect H1 to be fairly solid. Q1 may be a little lighter. But remember, we are targeting some ultra-high field systems as we move through the year. Not in Q1, however. But it is clear that there'll be you know, strength in the first half for sure. And in addition, you likely know, we had some supply chain constraints. We hope to be able to release some of that as we move through the first half, including the first quarter.

And maybe I'll add to that for your modeling. Q1 of last year was very strong. So we're likely to be flat or down on margin compared to Q1 of last year. Q2 of last year was particularly supply chain constraint, so Q2 will be a weaker comparison for us. We don't expect to, we expect to have a more even revenue and margin flow this year than last year. So last year Q1, strong comparison, Q2, weaker comparison, and we expect that to even out in a more, be more even in 2023. So for your modeling, relatively speaking our q1 will not be that strong because q1 of 22 was so strong okay i hope that's on the organic growth side maybe one cube below that eight to ten maybe like mid single and then we build our way through the year is that kind of a fair ballpark we're not giving color numerical color so we draw them not common because we don't give quarterly color this time um there's nothing that we if if there was something very unusual we tried to call it out But I just want to make sure that I'm not giving additional numerical color that we didn't intend to. Understood. Thank you, guys. Yep.

Thank you. Our next question will go from Jack Meehan with Nephron Research.

You may now go ahead.

Thank you. Good morning. I wanted to talk about nano. So 17% organic growth for the year, over 20% in the fourth quarter, just really, you know, like an outstanding year. Can you dissect for us how much of this is coming from things like semiconductor versus the investments in spatial? How big is that business today?

Oh, yeah. I mean, the spatial and fluorescence microscopy is still much, much smaller than the semiconductor and advanced electronics. spatial biology and, you know, including the adjacent areas that we group there, which include fluorescence microscopy, but also the new spatial neuroscience businesses that we've acquired, particularly in Scopix, are going to be needle-moving in 2023, but they're still quite a bit smaller than the semiconductor business. And the semiconductor business has a very strong backlog. We're not too exposed to the memory area where indeed there is an oversupply in some areas that are a bit commoditized. But we expect semiconductor orders to be weaker and revenue will not grow steeply in 2023 in that area. But, you know, it looks like a soft landing and more than made up or at least made up by other areas of strength in our portfolio. In-22 Semiconductor was a strong contributor margin-wise and growth-wise for sure.

Great. And then I wanted to move over to BioSpin. Just ask about the single-story gigahertz NMR system. Can you give us an update on how many orders you have for that at this point and just expectations for ability to scale the manufacturing?

Yeah, so far we just have three orders, two of which we've delivered in Q4. We announced them all. They coincidentally all came in in the second quarter of last year. So two of them we delivered ahead of schedule. That was just really amazing that a new product could really you know, mature so quickly and indeed be delivered and getting smooth customer installation. So we're kind of thrilled with how that's going. And yes, there's another one that we expect to have in 23, revenue. There is quite a bit of activity. There's quite a few opportunities and things in the pipeline where people are trying to raise funding, but no orders to report yet, no additional orders to report yet.

Super. Thank you. Mm-hmm.

Our next question will come from Josh Waldman with Cleveland Research. You may now go ahead.

Good morning. Thanks for taking my questions. A couple for you. I guess first on the margin guide, Frank, I wonder if you could provide more context on where the R&D and commercial investments are being targeted and what the timeline is for when we should start to see these show up in revenue growth. It sounds like these are a bit more kind of one-time-ish investments that show up in 23 and roll off in 24. Is that right? And then I guess... Go ahead, yeah. Gerald, I guess a follow-up on that, and you alluded to it a bit, I think, in the prepared remarks, but curious if you're still targeting the 21.5% out margins and $3 of earnings for 24, or is this going to change that target?

So a number of points, good, very good question. So no, the R&D 10% investment, that's a medium-term target. That's not a one-time shot in 23. We had been ramping in that, particularly in proteomics. Now in proteomics, as you've seen, we've added early last year, we've added sample consumables and automation. We added chromatography capabilities. All these, in addition to, of course, continuing to develop our Tim's Talk portfolio, Now we've added CRO capabilities and software and further consumables capabilities. These will all require multi-year continued strong R&D investments, and we do not want to be penny wise and pound foolish and underinvest in this very large proteomics opportunity. So the 10% R&D, I don't want to predict for how many years, but that's a multiple year level at which we want to be, I think it would be actually a mistake, a strategic mistake if we underinvest it here. The second part of that R&D investment goes heavily into spatial biology, which for us is a mix of fluorescence microscopy and neuroscience, and then the more traditional spatial single-cell proteomics, single-cell biology, particularly the canopy proteomics, and then the 3D structural, the 3D genomic spatial biology of acuity, which is a whole new area that won't have any revenue or any products this year yet, but that, you know, will begin to come out in 24. So there is a very, very significant, very important R&D investments. And the 10% R&D, we're not going to drive it to 11% or 12%. I think that's just, you know, it's not financially. We're also doing disciplined growth investments. But the 10% is here to stay for not forever, but for quite a few years to come. The transitory effects, Josh, are more on the FX and the M&A, the newly acquired, especially the larger ones in Scopix, single-digit margins in 23, and then improving from there in diagnosis in 23 and 24, having investments that will lead to a P&L loss for these new significant acquisitions. But we're doing that with our eyes wide open. They will grow. They will become important. they will need further investments. So that's why that 120 bps transitory effect from FX, about half FX, and half from these recent acquisitions, that is indeed transient or transitory for 2023 and may still be a bit there, but much abated probably in 2024, whereas the R&D investment of around 10% is very, very much important for our growth in proteomics and and spatial biology. We're not giving, to your last question, Josh, we're not giving 24 guidance on operating margin. We know we're taking a dip in operating margin this year. We hope to recover substantially from that and grow from there, but we're not giving 24 guidance. And by the way, we had a range that we've given for 24, not just the number. We are easily, we're already within our 24. revenue in 23. So that's happening much faster and we're within we're on the last few yards on the few yard lines here of reaching our EPS goal for 24 already in 23. So we're very likely to reach that in 24. And then we tend to give new multi-year medium term goals which we're planning to do in our June 15th investor and analyst day on June 15th of this year, where we'll probably again give three-year financial goals for the median term.

Got it.

Got it.

Appreciate all the color. And then a follow-up, Frank, just wondered if you could give us an update on your view of the quoting and ordering activity among university accounts in recent months. Just curious your expectations for this in market in 23. Very healthy.

Okay. Thanks.

Our next question will come from Rachel with JP Morgan. You may now go ahead.

Great. Thanks, guys, for taking the questions. So maybe we could just spend a minute on Europe here. The region was down mid-60s just in the quarter, but you noted that bookings were exceptionally strong. So can you just talk about what you're really seeing in that region? You previously called out some of the energy headwinds and conversations with customers there. So are you seeing any pockets of weakness? And then maybe can you just point us towards what level of growth are you expecting in Europe for the year?

Right. Good questions. Yeah. So, I mean, I think that the mood in Europe has changed a little bit. That's maybe you can see that in the currencies, right? Euro strengthening and related currencies. The fear of a broader war in Europe rather than it being, hopefully, And tragically, we understand that, but contained to eastern Ukraine, I think that fear of a broader war is probably reduced. Also, Europe had a mild winter and is not running out of gas anytime soon. In fact, the gas supply is very high, so the chances of energy blackouts and so on, they're much reduced, and at least for this winter. Europe still needs to develop their energy strategies for future winters, but this year, Europe probably dodged a bullet, and everybody's more optimistic. Accordingly, energy prices that had absolutely peaked three, four months ago or something like that have come way down again, not to the pre-war levels, of course. They're still quite a bit higher, but not nearly as high as the peak levels. Everybody's kind of adjusting to that with energy-saving measures and us making more investments, for instance, in solar power all of this year, so hopefully ready for the summer season when that's particularly beneficial and other energy-saving measures. So the mood in Europe, in the European Union and also, I think, UK and Switzerland and so on, and their willingness to continue to invest in R&D or pharmaceutical discovery or into their version of having a semiconductor supply chain in Europe and not only relying on Asia or the U.S. as the U.S. is rebuilding are all good drivers. And so, yeah, I think the outlook for Europe is much more optimistic. And so we're not totally surprised that bookings came up in Q4, although they did that to a greater extent than even we had anticipated. So I don't think Europe will be a drag anymore, maybe even the opposite, because it has to catch up a little bit.

Yeah, and it seems like it was very broad from an organic perspective on the booking side, Rachel. So it seems as if it wasn't just focused in one particular area.

So it bodes well, I think, for the whole... And Europe is now discussing political additional stimulus in the clean tech sector and elsewhere somewhat in response to our Inflation Reduction Act here in the U.S., So that's the update there.

Perfect. Great to hear. And then maybe just last one for me on pricing. So you took some incremental price, especially in the back half of 2022. Can you just let us know where did pricing fully land for last year? And then what are you modeling for pricing increases and contribution there for 2023 as well? Thank you.

Yeah. Hey, Rachel, this is Justin. Thanks for the question. So for the full year of 2022, price realization was You know, in that low single digits, as we mentioned, and again, it wasn't fully offsetting the inflation for the year. So we had, call it about 100 basis point drag to operating margin from that net price realization inflation. For next year, we do think it's going to improve that net price realization as it's working its way through the backlog. We're expecting a little bit higher price realization next year, still in that low single digits. And we think it's going to be a better net against the inflation, but still a little bit of a drag on inflation, maybe about 50 basis points. So as you look at our implied guidance for, and the commentary that Gerald had for 2023 on op margin, that organic op margin expansion we're expecting in 2023 does still include a bit of drag from price versus inflation.

Thank you, Rachel.

Our next question will come from Derek DeBruin with Bank of America. You may now go ahead.

Hi. Good morning. And nice quarter, Frank, and company. Thanks. Thank you, Derek. A couple of cleanup questions and then one bigger one. So share count assumption for fiscal 23, I mean, you do do some incremental buybacks. I just want that. And how should we think about FX in the first quarter? Does it sort of set the pacing for the rest of the year? And then I would follow up.

On the share buybacks, Derek, we don't typically comment on any future buybacks. The numbers are baked into what we have there already. And relative to foreign exchange, we actually re-rated our guidance based on the January 31st rates. You've seen, I think, I assume, that the U.S. dollar is weakened against some of the major currencies, and we factored that into our analysis, which is fantastic. Currently predicting, as you saw for the full year, 1.5% foreign exchange tailwind on the revenue line from that.

Yeah, I just wanted to get the first quarter assumption on it, FX.

Yeah, those are really the expected levels.

Normally, we take year-end FX rates for our planning, but since they had changed so significantly still in January, we did the unusual step of baking in January 31st rates because there had been quite a bit of change even in the first 30 days.

Got it.

So can we talk a little bit about growth expectations by geographic region Americas EMEA, APAC in 23, and then also on APAC, just a little bit more color on the China stimulus, timing, you know, is there any preference for local companies versus, you know, outside of China, you know, political headwinds going on, just a little bit more color on how we should sort of think about that situation. Thanks.

Yeah, so you've heard on the geographic side that Europe's making a comeback, right? And we're optimistic about Europe and bookings and this year. China is always difficult to read, right? When at some point you have zero COVID lockdowns, then you have the whole country infecting, getting a wave of infections. So far, that all seems to not have such big disruptions. Although I think China revenue growth was a little weaker in Q4. Is that correct?

A little bit, but we were up teens for the year. Q4 was up single digits.

Single digits, so a little bit slower than the year. But, you know, that's probably a transition effect. We're excited about the stimulus and the size of it and how much of it might go into scientific instruments. It's fantastic. I wouldn't say that at this point we have more than headline visibility into all of that. So it's a little bit like when the first stimulus package or the chips that get passed Until you then see, until the rubber hits the road and we get orders or have visibility into grants and so on, that always takes a few quarters. And so often these announcements then, until they turn into our revenue and growth, it's probably a 24 effect. But we're delighted to have more strong drivers in 24. China always has a preference for local products where they are competitive. In some areas, multi-biotyper, preclinical MRI, and lower-end X-ray systems that are local products, right? And we continue to hold our ground. People sometimes want the higher performance, but sometimes they buy local. That's nothing new. For most of our product lines, there isn't a Chinese substitute. And then the geopolitical risk with China, around Taiwan or other things or balloons. That's just very, very, very difficult to see where that's going. So we have not built in any geopolitical major crisis as that's just not predictable for us. But it is a concern, of course, for the next decade.

Great. Thank you very much.

Operator, We're past 930 here, so we're going to finish up the call here.

Okay, so this concludes the question and answer session. I'd like to turn it back over to Justin Ward for any closing remarks.

Great. Well, thank you, everyone, for joining us today. During the first quarter, Bruker will participate in several investor conferences, including the Citi Healthcare Conference and the Cowan Healthcare Conference. And as Frank mentioned, we expect to host a broker investor day at the headquarters in Billerica Massachusetts on June June 15 of this year, so we look forward to welcoming all of you to that. Also brokers leadership team looks forward to meeting with you at one of those events or speaking with you directly during the quarter, please feel free to reach out to me to arrange a follow up have a great morning.

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