Bruker Corporation

Thank you, and good morning. I would like to welcome everyone to Bruker Corporation's third quarter 2023 earnings conference call. My name is Justin Ward, and I'm Bruker's Senior Director of Investor Relations and Corporate Development. Joining me on today's call are Frank Laukeen, our President and CEO, Mark Munch, President of the Bruker Nano Group and Corporate Executive Vice President, and Gerald Herman, our Executive Vice President and CFO. In addition to the earnings release we issued earlier today, during today's conference call, we will be referencing a slide presentation that can be downloaded from the events 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 Booker's safe harbor statement, which is shown on slide two of the presentation. During this conference call, we will be making forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to geopolitical risks and wars, as well as to supply chain, logistics, and inflation. The company's actual results may differ materially from such statements. Factors that might cause such differences include, but are not limited to, both discussed in today's earnings release and in our Form 10-K for the period ending December 31, 2022, as updated by other SEC filings, which are available on our website and on the SEC's website. Also, please note that the following information is based on current business conditions and to our outlook as of today, November 2, 2023. We do not intend to update our forward-looking statements based on new information, future events, or for other reasons, except as may be required by law, prior to the release of our fourth quarter 2023 financial results expected in early February 2024. You should not rely on these forward-looking statements as necessarily representing our views or 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 and the first nine months of 2023 in more detail and share our updated fiscal year 2023 financial outlook. Now, I'd like to turn the call over to Bruker's CEO, Frank Laukeen.

Thank you, Justin, and good morning, everyone. Thank you for joining us on today's third quarter 2023 earnings call. In the third quarter, Bruker has continued to deliver excellent revenue growth with three consecutive quarters of double-digit organic revenue growth year to date. For the fourth quarter of 23, we anticipate high single-digit organic revenue growth, which puts us on track for three years of double-digit organic revenue growth in 2021 to 2023. In the first nine months of 2023, we have demonstrated great resilience in difficult market conditions with what we believe is industry-leading organic revenue growth of 13.9%, and non-GAAP EPS growth of 17.5% year-to-date. Given our strong year-to-date financial results, solid backlog, and positive outlook for the fourth quarter, we are raising our organic revenue growth guidance for fiscal year 2023 again, this time by 150 bps at the midpoint. We are pleased to report solid financial results in the third quarter of 2023. We attribute this resiliency to our innovation strategy, which yields products and solutions with unique capabilities, as well as to our differentiated portfolio, which is now resulting from our ongoing Project Accelerate 2.0 transformation. These core elements of our strategy are to a significant extent shielding us from the present demand weakness, for example, in COVID testing, CROs, biopharma, bioprocessing, et cetera. We remain positive about demand for Bruker Scientific Instruments and Life Science Solutions, which gives us confidence in the fourth quarter and also for continued solid growth in 2024. In fiscal year 2023, we have accelerated our investments in our transformative project Accelerate 2.0 initiatives, as well as in operational excellence and productivity. We're making further investments in recently acquired growth drivers in single cell biology, and my colleague Mark will talk about that, as well as in previously acquired proteomics consumables, proteomics drug discovery services, neuroscience research tools applied solutions and scientific software right let's get to it turning to slide four now in the third quarter of 2023 brooker delivered another good quarter with excellent organic growth of 10.9 percent and non-gap eps growth of 12.1 percent year over year brookers Third quarter 23 reported revenues increased 16.3% year over year to $742.8 million, which included an FX tailwind of 3.3%. On an organic basis, revenues increased 10.9%, which included 10.9% organic growth in our broker scientific instruments, BSI segment, and 10.2% at best net of intercompany eliminations, while growth from acquisitions added 2.1%. This implies constant exchange rate growth of 13.0% year-over-year. Our third quarter 23 non-GAAP operating margin was 20.0%, which is a good level for our third quarter, albeit a decrease of 240 bps year-over-year compared to a very strong operating profit margin in the third quarter of 2022. In the third quarter of 23, Brooker reported gap diluted EPS of 60 cents compared to 59 cents in the third quarter of 22. On a non-gap basis, third quarter 23 diluted EPS was 74 cents, up 12.1% from 66 cents in Q3 22. This had a five cent tax tailwind pretty much exactly offsetting a minus 5 cent currency headwind in the quarter. Gerald will discuss the drivers of margins in EPS later in more detail. Moving to the first nine months on slide five, you can see broker strong performance and excellent execution in the first nine months of 2023, with industry-leading organic revenue growth of 13.9% and non-GAAP EPS growth of 17.5%. More specifically, our first nine months of 2023 revenues increased by 15.8% to $2.11 billion. On an organic basis, first nine months revenues grew 13.9% year-over-year, consisting of 14.0% organic revenue growth in scientific instruments and 12.8% organic growth at best, net of intercompany elimination. First nine months 2023 order bookings for BSI grew in the upper mid-single digits year-over-year organically, driven by Broecker-Biosman and Kellett. Also, our BSI book-to-bill ratio year-to-date remained above 1.0, and our backlog at the end of the third quarter remained strong and elevated, in fact. Our first nine months, 2023 non-GAAP growth and operating margin and GAAP and non-GAAP EPS performance are all summarized on slide five. And you can see the strong non-GAAP EPS growth of 17.5% despite a 14 cents headwind from currency. Our trailing 12 months return on invested capital at non-GAAP measure was 23.2%. a metric that highlights our differentiated broker management process and focus on disciplined entrepreneurialism and organic growth supplemented by selected attractive acquisitions. Please turn to slide six and seven where we highlight the year-to-date third quarter 23 performance of our three scientific instruments groups and of our best segment, all on a constant currency and year-over-year basis. Year-to-date, the bioswing group revenue was $541 million and grew in the high single-digit percentage. This included revenue from just one gigahertz class NMR so far this year, namely in Q3 23, and for comparison, we also had one in Q3 of 22. In the fourth quarter of 23, we expect to book revenue on one or two gigahertz class NMRs, by the way. In the first nine months of 2023, Bruker saw growth across biopharma, academic and government markets, industrial research and applied markets, as well as in the new integrated data solutions software division with its SciWi scientific and lab software platform, something that's relatively new to Bruker. All right, first nine months of 2023, our Cali group had revenue of $703 million and growth in the high teens percentage, with strong growth in life science mass spectrometry, driven by the TIMSTOCK platform and aftermarket business, as well as strong growth in our applied mass spec business and the optics, infrared, near-infrared Raman business. Our optics business, in our optics business, we know two recent tender wins, Very nice, for eventually over 250 so-called DE-tector explosive trace detectors for the Frankfurt and Zurich airports, both of which were explained in recent press releases. At ASMS this year, we launched the Timstop Ultra, and at the EUPO Congress in Korea in September, we announced further advances, in TIMSTOF methods, consumables, and software for this next-generation, unbiased, high-fidelity, four-dimensional of 4D proteomics and 4D multiomics. That's quite unique on the TIMSTOF platform and very advantageous. Microbiology and infectious disease revenue was up slightly as solid demand for the multi-biotype or consumables was offset by a final drop of our modest COVID-19 molecular diagnostics revenue to now near zero. Please turn to slide seven now. Year-to-date, broker nano revenue was 673 million and grew in the low 20s percentage, with strong revenue growth across end markets, including ACAGOV, industrial semiconductor metrology. The global investments in AI, artificial intelligence, are strong tailwinds for our semiconductor and advanced packaging metrology tools. Revenues at advanced x-ray and nanosurface tools all delivered strong revenue growth in the first nine months. Life science fluorescence microscopy was up on product innovation and now includes a strong contribution also from our fourth quarter 22 acquisition of the InScopix neuroscience research tools. Finally, year-to-date 23 best revenues grew in the mid-teens percentage. Net of intercompany eliminations driven by share gains and superconductor demand by our MRI OEM customers, as well as from revenue growth in advanced technologies for big science, fusion research, and key extreme UV, EUV semiconductor technologies for semiconductor lithography tools by other large OEM customers, again, often driven by strong growth in AI demand. Right, moving to slides eight and nine, I'll take a pause and we highlight the new Bruker Cellular Analysis business. And I'm delighted to hand this part over to Dr. Mark Munch, our Bruker Nano Group President, who drove the Phenomex acquisition, now renamed to Bruker Cellular Analysis. And Mark is now resetting the strategy and right-sizing the business. Over to you, Mark.

Thank you, Frank. We're excited about our acquisition of PhenomX. This new business, as Frank mentioned, we now call Bruker Cellular Analysis, perfectly fits our Project Accelerate 2.0 initiative. PhenomX was a Q1 2023 merger of Berkeley Light and IsoPlexus, which brought together two unique and valuable platforms, the Beacon OptoFluidics platform and the IsoSpark platform. Together, these technologies address rapidly growing market segments in antibody discovery, cell line development, cell therapy, and gene therapy, amongst others. This helps also our Project Celery 2.0 initiative in expanding our footprint in translation research, clinical research, and biopharma. This is also complementary to our Bruker cellular analysis and subcellular analysis tools. For example, our Canopy CellScape tool, which is an important tool for spatial biology as well as examining phenotypes and cell suspensions. And so this brings a lot of opportunity for commercial synergies. Moving to slide nine, just to give some financial details on the acquisition, Phenomex was acquired for $122 million, which included a $14 million bridge loan, which therefore was an attractive valuation of roughly two times revenue. We closed this transaction on October 2nd, 2023, and immediately started our work on right-sizing the business and optimizing cost structures, which is mostly going to happen here in Q4 2023. Initial run rate is expected for the business to be greater than $60 million per year, given the strong attractive potential of the market segments that I spoke of and that we addressed with this. Many of these segments are somewhat new to Bruker, and so we're excited about that. And as mentioned, we see cross-selling opportunities with our existing spatial biology and cellular analysis tools. In terms of Bruker non-GAP EPS impact, we anticipate 12 cents dilutive to Q4 2023, a one-quarter significant impact as we work through the rapid right-sizing and cost structure optimization, and being slightly dilutive for 2024 and accretive by 2026. And we expect long-term double-digit ROIC. We encourage you to visit the links shown here to help get familiar with these businesses. We are very excited about the potential here in these very valuable technology platforms. Thank you, Frank. Back to you.

Thank you very much, Mark. Yes, these links are actually, there's a really cool website. I would highly recommend that. If you have a few minutes, I think it's very informative. So thank you, Mark. We're excited about this attractive acquisition of a leading single cell biology business with key technologies for all the reasons that Mark explained. Well done. So in summary, Brooker is on track for its third year in a row of double digit organic revenue growth and solid EPS growth. even as we have accelerated our investments in the project, accelerate 2.0 transformation, as well as in operational excellence in capacity and productivity. Our dual strategy is working exceedingly well right now. So Bruker's strong growth is the result of a fundamental commitment to innovating and high value solutions for customers, as well as the result of our ongoing portfolio transformation. Our technology, and biological applications leadership in many areas, combined with world-class execution via our broker management process, position us well for continued outperformance. As in other years, we expect to give fiscal year 24 guidance when we report Q4 23 financial results, presumably in early February. However, please note that we expect to deliver solid organic growth also in 2024. And we remain on track for our medium-term 2026 targets, which we issued at our June 23 investor day. So with that, let me turn the call over to our chief financial officer, Gerald Herman, who will review our financial performance and our updated fiscal 23 outlook in much more detail. Gerald.

Thank you, Frank, and thank you, everyone, for joining us today. I'm pleased to provide some more detail on Brooker's third quarter outlook in the first nine months of 2023's financial performance, starting on slide 11. In the third quarter of 2023, brokers reported revenue increased 16.3% to $742 million, which reflects an organic revenue increase of 10.9% year-over-year. We reported GAAP EPS of 60 cents per share, compared to 59 cents in the third quarter of 2022. On a non-GAAP basis, Q3 2020 EPS was 74 cents per share. an increase of 12.1% from the 66 cents we posted in the third quarter of 22. Gross margin performance was down 50 basis points year-over-year in the third quarter of 23, negatively impacted by 100 basis points foreign exchange headwind, partially offset by organic and acquisition gross margin improvement by 50 basis points. Our third quarter 2023 non-debt operating income increased 3.6%, while our nine-gap operating margin decreased 240 basis points year-over-year to 20.0 percent, impacted by foreign exchange and acquisition headwinds, as well as a challenging comparison from a strong Q3 of 22. We finished the third quarter with cash, cash equivalents, and short-term investments of approximately $364 million. During the third quarter, we used cash to fund selected Project Accelerate 2.0 investments acquisitions of approximately $120 million, and share repurchases of about $80 million in the third quarter. On October 2nd, we closed the acquisition of Phenomics, which I'll discuss later. We generated $44.1 million of operating cash flow in the third quarter of 2023. Our capital expenditure investments were $26.9 million, resulting in free cash flow of $17.2 million in the third quarter of 2023. This compares with operating cash flow of 69.5 million and free cash flow of 11.8 million in the third quarter of 22. Slide 12 shows the revenue bridge for the third quarter of 23 as Frank has reviewed earlier. Compared to the third quarter of 22, BioSpin's third quarter 23 organic revenue was up high single digits. Both Q3 2022 and 23, had one gigahertz class NMR in revenue. We expect revenue from one or two gigahertz class NMRs in the fourth quarter, 23 similar to the fourth quarter of 22. Nano organic revenue grew in the mid-teens percentage range, driven by strength in nano's industrial research, AI-driven semiconductor and advanced packaging metrology, as well as academic markets. calid organic revenue grew high single-digit percentage with strong performance by our microbiology business. We delivered solid growth in the third quarter of 23 in BSI systems and aftermarket revenue with low teens percentage organic growth in systems and high single-digit organic growth in aftermarket. Geographically and on an organic basis in the third quarter of 23, our America's revenue grew in the low single-digit percentage Asia Pacific revenue grew in the teens percentage range, while European revenue had low teens percentage growth all year over year. For our IMEA region, third quarter 23 revenue was up mid 20% year over year. Slide 13 shows our third quarter 23 P&L performance on a non-GAAP basis. Non-GAAP gross margin of 52.7% decreased 50 basis points from the 53.2% in the third quarter of 22, impacted by 100 basis points of foreign exchange headwinds, partially offset by organic and acquisition-related gross margin improvements of 50 basis points. The third quarter of 2023 non-GAAP operating margin of 20.0% was 240 basis points lower than the 22.4% margin we posted in the third quarter of 22, as we were impacted by foreign exchange and acquisition headwinds to margins and faced a difficult comparison from our strong third quarter 22 operating margin. For the third quarter of 23, our non-GAAP effective tax rate was 23.8% compared to 30.4% in the third quarter of 22, driven mostly by favorable jurisdictional mix. Weighted average diluted shares outstanding in the third quarter of 23, were 147.3 million, a reduction of 1.3 million shares or 0.9% from the third quarter of 22, resulting from our share repurchases over the trailing 12 months. Finally, third quarter 2023 non-GAAP EPS of $0.74 was up 12.1% compared to the third quarter of 22, with a $0.05 tailwind from a favorable tax rate offsetting a $0.05 foreign exchange headwind. Slide 14 shows the year-over-year revenue bridge for the first nine months of 2023. Revenue was up $288 million, or 15.8%, reflecting organic revenue growth of 13.9%. Acquisitions added 2% to our top line, while foreign exchange was a 0.1% headwind, resulting in constant currency revenue growth of 15.9% year-over-year. Frank already covered the drivers for the first nine months. Non-GAAP P&L results for the first nine months of 23 are summarized on slide 15, with the drivers largely similar to the third quarter of 23 and as explained on the slide. Turning now to slide 16, in the first nine months of 2023, we generated $144.6 million of operating cash flow. up about $42 million over the first nine months of 22 on higher profitability and favorable other items. We generated $69 million of free cash flow over the first nine months of 23, up about $61 million over the first nine months of 22 on higher operating cash flow and lower capital expenditures. Turning now to slide 18, Given our strong year-to-date results, solid backlog, and positive outlook for the fourth quarter, we're again increasing our revenue guidance for the year. Our updated outlook for fiscal year 2023 includes raising our revenue guidance to a range of $2.88 to $2.91 billion. This implies organic revenue growth of 11.5% to 12.5% year over year, an increase of 150 basis points from the midpoint of our prior guidance. And by now up 300 basis points from the initial fiscal year 23 guidance we gave in early February. We now expect foreign currency to be about neutral to revenue for the year and acquisitions contributions of about two and a half percent to our revenue growth. This leads to reported and constant currency revenue growth guidance in a range of 14 to 15%. For operating margins in 2023, we now expect organic operating margin improvement of about 100 basis points, which is up from our prior expectation of 50 basis points. For non-GAAP operating margins all in, we now expect 150 basis point decline from the prior year due to a 250 basis points combined headwind from foreign exchange and acquisitions, now also including the cellular analysis business we acquired as of October 2nd, 2023. As previously discussed, we're rapidly rightsizing the cellular analysis business with most cost actions expected in the fourth quarter of 23, such that the cellular analysis business is expected to be only slightly diluted during 2024 and accretive to non-GAAP EPS by 2026. As you just heard from Mark, We believe that over time cellular analysis could be another high ROIC business for Bruker. Cellular analysis accelerates our entry into important biologics and cell and gene therapy tool markets, leveraging its differentiated research solutions with high revenue growth and margin potential. On the bottom line, excluding the new cellular analysis business, we're actually increasing our estimated non-GAAP EPS guidance to a range of 260 to 265, which implies 11 to 13% year-over-year growth, or up 5 cents from our prior guidance range of 255 to 260 for fiscal year 2023. In the fourth quarter of 2023, we expect cellular analysis to be about 12 cents dilutive to non-GAAP EPS as we work through rightsizing the business. Accordingly, we overall expect non-GAAP EPS to be in a range of 248 to 253, down 7 cents compared to our prior guidance, including VAT acquisition. Our guidance assumptions, other guidance assumptions are listed on the slide. Our full year 2023 ranges have been updated for foreign currency rates as of September 30th of 2023. Finally, at our investor day in June of 2023, I shared financial targets for the medium-term fiscal year 2026 outlook for Brooker. Our year-to-date 2023 financial performance and positive outlook for Q4 gives me confidence to reconfirm today our commitment to those targets, including solid growth for 2024. So to wrap up, Brooker delivered excellent organic revenue growth and strong EPS growth in the quarter and for the first nine months of 2023. And we remain confident in our fiscal year 23 outlook and beyond. With that, I'd like to turn the call over to Justin to start the Q&A session. Thank you very much.

Thank you, Gerald. I'd now like to turn the call over to the operators 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're ready for the Q&A.

Thank you.

Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from the line of Puneet Farah with Learning Partners. Your line is now open.

We cannot hear anything at the moment. Sorry, Puneet, can you start over? We couldn't hear the beginning.

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

Yes, I'm happy to do so, Puneet. We're not giving 24 guidance. We've signaled solid organic revenue growth for next year. We'll give guidance when we always give guidance. Anyway, so it is correct. In Q3, there was some weakness in bookings in China and in Japan. The rest of the world, which of course included America and Europe and so on, was fairly strong. And so our book-to-bill in Q3 was below one, as we expected. Year-to-date, it is about one. Remember, in China, we had this unusual effect, more than perhaps other peers, that we had very strong Q1 bookings. We believe some of that was truly incremental, as some big-ticket items got funded that normally might struggle to get funding. But some of it was also pulled forward. And so we have a bit of an uneven order pattern in China, but there is also weakness in China right now. And in Q3, we saw that in China and Japan. So book to bill year to date is about one. And we also have a very good forecast for bookings in Q4. So we think we'll maintain the book to bill of around one for the year. Backlog always comes down a little bit in Q3 before our typically strong Q4. You've heard the outlook of high single-digit organic revenue growth and good bookings for Q4. So we will still be at a very significantly elevated backlog. Keep in mind, I know you like the term backlog conversion, but those are customer orders. That's real demand. So anyway, we'll still have a very, very healthy and extended backlog that will take us, in fact, a few years to work down going into 24. I hope that addressed most of your or all of your questions.

Yeah, yeah, absolutely. Frank, appreciate it. And if I could follow up, I mean, congrats on the phenomics and the cell analysis business. Definitely attractive longer term. But could you just to talk a little bit about how you see that, you know, high end capital equipment positioned within broker, you have significant experience with selling high-end equipment to both research and now with the cell analysis, you'll be positioning well into pharma. So maybe could you talk a little bit on a high level about that? And if I may just sneak in one on Tim's top, any changes in customer order behaviors or dynamics given the demos of a potential competitive high-res instrument ongoing in the market right now? Thank you.

Yeah, so we love selling instruments. We have very innovative instruments. We keep them refreshed also in our core, which our core is really doing well as well. Not only the Project Accelerate initiatives. The beacon is another high-end instrument, the one that we just acquired with cellular analysis. But it really depends if you're addressing key markets in in better, faster antibody developments, or maybe antibody developments that without a tool like this, you just can't develop very well by the traditional ways of doing it. And of course, for important markets, I know there's a bit of a weakness right now in biologics and cell and gene therapy, but we're very happy to accelerate our push into those markets. This is what we're really, really good at, and it's, of course, right now, these sometimes maligned academic government markets. If you're in the right spot, if you're in the post-genomic trends, which is proteomics, post-translational modifications, spatial biology, antibodies, stable cell line development, it's great. And I think we've positioned ourselves in the right areas. I should also add, and I know that tends to be one of your questions, that the high-end semiconductor and advanced packaging metrology tools in the Nano Group are also doing remarkably well. There is a bit of a cyclical downturn in SEMI, but with our technology buys and the strong push for really high-performance, newer packaging and chip technologies from artificial intelligence, and these geopolitical trends of the U.S. rebuilding and Europe rebuilding their semiconductor industries, it's really, we're not fully shielded from the economic trends that others are seeing or the macro trends, but we're just more diversified and we have positioned ourselves for spatial biology, proteomics, AI, and a few others to some trends that continue to be very strong. All right, we should probably let some others get in with questions as well, but... That's sort of good innovation, good portfolio, exciting new products.

Go on to the next one. Thank you. Appreciate it, Frank. Yeah.

The next question comes from the line of Derek DuBrun with Bank of America. Your line is now open.

Hi, good morning. Thanks for taking my question. Hey, Frank, we're trying to... understand some of the dynamics going on in the market, particularly in the biopharma space. I know you have a, you know, you don't have as much exposure to some of your peers right now, but there has been some concessions in terms of instrument buying and stuff like that. Could you just provide some incremental color on what you're seeing in biopharma, and I have a follow-up after that.

Yeah, we see some of that as well. Biopharma Investments are slowing down. Budgets are not getting spent as aggressively, especially among emerging biopharma that will keep it on their cash runway and so on. Also, we did see China CRO business for NMR, for instance, being pretty weak. So we're not immune to some of the trends you see elsewhere. We don't really do... bioproduction very much or anything like that. We have very little COVID testing business. But we see we can confirm some of those weaknesses. They're just, you know, a year ago or two years ago, my God, if you weren't in biopharma, you were nothing, right? We're strong in biopharma. We've been growing very nicely, but we have so many other drivers as well. So we confirm the trends. We just have many other growth. We're not firing on all cylinders. But we're firing on a lot of cylinders, and we have some very unique portfolio positioning and really some very innovative high-performance product lines that compete extremely well.

Great. And I'm going to stay on the market commentary. I mean, you alluded to some metrology and semis, but what about some of the more industrial-focused customers? We know chemical spending seems to be chemicals and some of those other markets that are out there. Can you sort of talk about broader macro-industrial spend and capex spend in those places? Thanks.

Yeah, so metrology, memory, and there's some downturn there, and we're seeing that in some metrology orders. But again, some very high-end orders also for advanced packaging and things that you need for very high-performance computing and et cetera for our AI platforms. Um, general industrial, we don't really spend, you know, we, we see some weakness there, but we also see we're really a lot in industrial research and there's some really non cyclical fast growing areas in green tech in battery research and. In, um, in other, you know, hydrogen economy there, there's, um. There's enough green tech of a green tech economy that is a very strong growth drivers and other industrial research, industrial materials have been good for us. And then I really think we have share gains, you know, that may be base hits, but they add up to we've refreshed and we're not neglecting our core and just, you know, milking the cow. We're investing there. This is part of our, of our management process. And so, yeah, it's been actually something, a company or a division like Rooker AXS, right? This really has done quite well. Yes, Q3 China order is a bit weaker. So we, you know, but again, with a much healthier setup within industrial, towards industrial research and green tech research, right?

Thanks, Frank. Yeah, it's been impressive what you've done with the portfolio over the last 20 years that I've been covering the stock, so congrats.

We go back sometimes, Eric. The next question comes from the line of Josh. The next question comes from the line of Josh Walden with Cleveland Research. Your line is now open.

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

Yeah. Hi, Josh. We're talking about you. We thought you had our CFO's office bug because your predictions were pretty accurate for the quarter. Congratulations. Anyway, so backlog remains. I mean, Q3 backlog is always a little lower than Q4. So as we look at year-end backlogs, we're, you know, two and a half to three. two and a half months, maybe three months or so, higher backlog than we traditionally had before all the rollercoaster began in 2019 and all of that. So that'll be a multi-year story, right? We're not trying to, and we can't from a capacity point of view, pump that all out in one year. So it'll add to our organic growth, but it'll be a multi-year story. And right, so I think that that was your question, right? I would assume that backlog can be normalized maybe in something like three years or so.

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

Yeah, no, we were assuming a slowing because of our little micro trend, right, that we had these very strong orders in Q1. So China was relatively weak in orders in Q3, as was Japan. The rest of the world did quite well. But if I look year-to-date, that's why over-interpreting a quarter is always tricky. Year-to-date, we have very strong order growth in China. I mean, significantly into the double digits. And our forecast for Q4, we will see. For us, I think there was a little bit of a broker special, namely this Q1 partial pull forward, which has led to slower. That, along with China macro weakness, has made Q3 bookings in China weaker for us, as we acknowledged. I might add a point. Very significant. Yeah, go ahead.

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

Got it. Thanks, guys.

Thank you.

Thank you, Josh.

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

Good morning, and congrats on the quarter. I appreciate the color on pharma demand, but maybe if you could provide just a little bit more color just on the overall funding environment for high-end instrumentations, maybe specific with academic and government customers.

Okay, John, thank you. It's been good, right? I mean, academic government never grows as fast at boom times, but it also is pretty resilient. It just grows steadily generally, you know, by low single digits, sometimes by mid-single digits. As I always say, it really depends where you are. I mean, academic government, including academic medical centers, we are very much more exposed to academic medical centers, cancer research, proteomics research at medical schools, et cetera, than we were years ago. And that's a really good thing because between, you know, philanthropy and NIH funding and and just procedures growth and all of these things and focus on cancer or neuroscience research. The scientific areas in the post-genomic, the post-genomic trends, I think, are much stronger than the genomic trends these days. And I think they will remain that way. And we're very well positioned there. Metabolomics, lipidomics, proteomics, PTMs, glycomics, I just don't want to turn this into a techno session here. But for post-genomic trends, we're beautifully positioned. Our greater exposure into spatial and cell biology are good drivers. So where we are within this modestly growing academic government funding is much more important. And so we're in the really, I think, for the next decade or hopefully more, we're really, I think, are at the sweet spot of the demand curve and funding, therefore, as well. So the allocation of funding and prioritization with our products is great.

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

I think these secular trends are decadal or maybe a couple of decades, still early days in that. But I think it really has changed dramatically now. towards the post-genomic age, which is exactly what you could call us, the post-genomic company, except we also do semiconductor and food analysis. But, right, so, you know, I mean, there might be some noise, you know, maybe slower NIH budgets, but we're not exposed directly to NIH all that much. But then you have the CHIPS Act, you have the Science Act, you have the European CHIPS Act. China has been investing very heavily. A lot of our orders are in China this year, also early work for high-end life science, NMR, microscopy, TIMSTOF, mass spectrometry tools. So there's a big proteomics project in China that sometimes the headline use, if they execute all of that, as often is the case, will dwarf anything in the West, so to speak. then, you know, it just means there'll be very significant investment and focus on this post-genomic investment, which is exactly where we have positioned ourselves.

I appreciate that. If I could sneak in just one more on Phenomax or the Brugger cellular business, would you be willing to provide what you think, you know, could be the long-term growth rate for this business or any way to quantify any of the synergies or cross-selling opportunities there? Any additional call you could provide on that?

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

Appreciate it. Thanks for taking the questions.

Thank you, John.

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

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

All right, Patrick. I guess I'd say perhaps just stay tuned. We're going to go through that in more detail in February. Obviously, you've seen some of the moving parts. We've got a lot of pieces here, but we're pretty optimistic in the long term. So I think I'll leave it at that for just today. We want you to come back for the February 24 call for sure, Patrick.

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

Yeah, no, I mean, except for we very rarely, if ever, see any order cancellations, and it is extremely rare. And then, of course, we usually have a down payment or something like that that we retain. When there were regulatory changes in semiconductor and what the U.S. would allow to be delivered to China, I think we had to have, but we had corrected for all of that a year ago. or thereabouts, so that's all long in our system. Other than that, the China backlog is a good call, good question. The China order backlog is a little bit higher than our average backlog. I don't want to quantify specifically. We don't go into that granularity, but it is above our corporate average, and that has to do also with the fact that China bought a lot of big-ticket systems. Also in Q2, a lot in Q1. Some of that will even go into next year. So China backlogs a little bit stronger. And other than a geopolitical crisis, we think there's risk for the entire industry, right? Geopolitically, who knows what will happen over the next 10 years. But in terms of broker risk and broker order cancellations, we just don't see that. We have valuable instruments. We make our, try to, you know, really do great things for our customers. And so we're a reliable company.

Yep, appreciate it. Thank you.

Thank you. The next question comes from the line of Rachel. Vince Dell with JP Morgan. Your line is now open.

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

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

Fair enough. Thanks. And then I just wanted to ask around budget flush dynamics. Within that high single-digit organic growth that you guys are assuming for 4Q, what's your assumption on budget flush? Have you started to see any of those orders or customer conversations around that December dynamic? Yeah, really any color there. Thank you.

Been in this industry for a long time, and budget flush is still one of these enigmatic terms to us. Again, it is one of the things that I think applies much more to consumables and companies. And for us, we're never really looking for that. And so we're just not a good data point to give you color on that. So we have, just like in other years, we have no expectations for any budget flush. It doesn't work that way at Brooker. That's a Brooker-specific approach. answer, I realize, so I don't mean to frustrate you, Rachel, but budget flush for us isn't one of the things that we look for, and will there be one this year or not? Can't comment, really.

Sounds good. That's it for me.

We just don't have the insights into that, I should say. Yeah.

Thank you. The next question comes from the line of Jack Meehan with me from research. Your line is now open.

Thank you. Good morning. I wanted to ask a question on Phenomax. First, could you talk about just what you're doing, you know, in terms of the integration, you know, through your end where that, you know, maybe just a little bit more detail on what you're focused on? And then I wanted to clarify on the dilution commentary. So you said it was slightly dilutive in 2024. I just wanted to clarify, is that incremental to the 12 cents in 4Q, or is that relative to the trend line from prior to the deal getting announced? Thanks.

I'll turn things over to Mark in a moment. But the slightly dilutive, I'm not sure I fully understood the question, but obviously that implies being much less dilutive per quarter than the 12-cent one-time bolus that we have as a headwind in Q4-23. Again, when we give guidance in early February for next year, we'll, but, you know, much less per quarter than the 12 cents is what we mean by slightly dilutive. Now, for your modeling, sorry, Mark, then I'll turn things over to you. For your modeling, assume that it's a little bit more dilutive in the first half and a little less dilutive in the second half. but on average, it's going to be much less dilutive. Guys, we just don't want to give guidance today for 24. We're not going to do it, so that's why we stick to adjectives. I know you would like numbers. Mark, without numbers, may I turn things over to you, and you can at least qualitatively describe some of the strategy resetting and right-sizing with Mark Munch, if you could get that over, yeah.

Sure, sure, yeah, the types of things we're doing. I'll characterize that. First of all, we're kind of accelerating. They were already doing some integration, but we're really accelerating on a faster pace because, you know, in terms of our M&A expertise, we're pretty good at that. And so and then one of the things we're doing is getting them over to the broker management process to kind of crystallize and sharpen the strategy that they have. And that's kind of helpful in terms of highlighting then where to focus, where not to focus. So then in terms of cost, Certainly headcount, personnel costs, also overhead. We streamline a lot of overhead structure. There's some consolidation also going on in terms of sites as well as they're carrying a fair amount of depreciation expense kind of unnecessarily in the business preserving. So there's just a number of items across many fronts where we're kind of operationally optimizing and cost optimizing the business and doing it pretty rapidly.

Yeah, Mark's fantastic at that and, of course, also drove the acquisition, so very strategic but also very good at integration. Of course, the number of jobs affected will be, I mean, well over 100, unfortunately, and we're taking tens of millions of costs out on an annualized basis during that integration process. Stay tuned for a bit more detail on that when we give guidance in early February. Jack, did that hit the point?

So was there something else we... And maybe one more follow-up here for the Q&A, Jack. Thanks.

Okay. Yeah. I was just curious how the rollout of Tim Stott's Ultra might have impacted life science mass spec sales in the quarter. You didn't call it out within Khalid. Just was wondering if the initial rollout could have actually had a short-term dampening effect as customers kind of re-evaluated what they're buying.

Yeah, that's true. So the Astral is more competitive than the previous Orbitrap. So a lot of people are taking a look and that previously would have just ordered. They're now taking, wow, there's an Ultra from Brooker and there's an Astral. And they both came out at the same time. So people are taking a look. We're doing more detailed demos as people really try to drill down into that. Still have a lot of, you know, pipelines and orders that are coming through, but people are taking a closer look. And the high-end proteomics mass market with the Astral introduction and the Altra introduction has become more competitive.

Thank you. So I think, Operator, actually maybe we'll take questions, I think, from one more caller.

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

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

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

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

Yeah, sometimes we see we have the effect of currencies for people in some of the currencies that have been weakening like the yen or China a little bit, right? And Israel most recently have budgeted for our instruments and then just before they're about to some percent. But that's not a brand new trend, so we always wrestle with it, and we try to figure it out with the customers. But it's not really a recent trend. It's just one of the things we deal with from time to time. I haven't seen any portfolio inflection points or so. I have not seen any. I mean, we actually had pretty good price realization. We didn't talk about that much, so... price realization was behind inflation previously. We're now sort of where price realization at least keeps up with inflation and maybe even turns slightly positive. So our pricing power has remained, you know, very solid and our competitiveness has remained solid. So again, don't mean to evade the question anyway, but the short answer would be no, we haven't really seen any portfolio inflection points or something or an excessive price or significant price sensitivity. I mean, price is always important, but, you know, ultimately, what's the best performance or what gives you the research or the results that you need? There's some industries, some are conducted. They'll buy the best that works for them. You know, if a billion-dollar fab depends on it, and that's what they get, the high-end proteomics is, Most of the funding's going. People want the best as opposed to not a lot of lower-end proteomics sales right now, for example.

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

It may be early to say, but, Mark, would you like to comment or defer until next year?

No, we can comment on it. So, you know, that's correct. From, for example, the Beacon platform, they have launched some lower-priced position products in terms of the Beacon Quest and Beacon Select in 2023, and those will continue onward. kind of, you know, and what that's about, by the way, is helping expand to new segments, new markets. So all that, those kind of product roadmap trends will continue. Okay. Thank you, guys.

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

Thank you, everyone, for joining us today. I do want to note Brooker is CFO Gerald Herman will be presenting at the Jefferies Conference in London on November 14th. And 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 and have a great day.

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

Thank you for your participation. You may now disconnect your lines.