Bruker Corp

NASDAQ:BRKR

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, and welcome to the Bruker Corporation Q1 2020 earnings conference call. [Operator instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Miroslava Minkova, director of investor relations and corporate development. Ma'am, please go ahead.

[Miroslava Minkova, Director, IR and Corporate Development]

Good afternoon. I would like to welcome everyone to Bruker's first-quarter 2020 earnings conference call. My name is Miroslava Minkova, director of investor relations and corporate development. Joining me on today's call are Frank Laukien, our president and CEO; and Gerald Herman, our chief financial officer.

In addition to the earnings release we issued earlier today, during today's conference call, we'll be referencing a slide presentation. The PDF of this presentation can be downloaded from the latest results section on Bruker's investor relations website. During today's call, we'll be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com.

Before we begin, I would like to reference Bruker's safe harbor statement, which we show on Slide 2. During the course of this conference call, we'll be making forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including new risks and uncertainties related to the COVID-19 pandemic. The company's actual results may differ materially from projections or scenario estimates described in 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, which are available on our website and on the SEC's website.

Also note that the following information is related to current business conditions and to our outlook as of today, May 6, 2020. Consistent with our prior practice, we do not intend to update our forward-looking statements based on new information, future events or for other reasons prior to the release of our second quarter 2020 financial results expected in early August 2020. Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We will begin today's call with Frank providing a business summary and reviewing how Bruker is responding to the challenges presented by the COVID-19 pandemic.

Gerald will then cover the financials for the first quarter of 2020 in more detail. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

[Frank Laukien, President & CEO]

Thank you, Miroslava. Good afternoon, everyone, and thank you for joining us on today's call. I hope you and your families are well. These are extraordinary times, and as such, it's not business as usual.

We are presently focusing on four key priorities. As you can see on our Slide No. 3, namely the, first and foremost, the health and safety of our employees, customers and partners; maintaining business continuity and service levels for our customers. Three, executing prudent temporary cost reductions; and four, delivering -- enabling research and diagnostics products to help fight the COVID-19 pandemic and to support other essential priorities of our society.

Let me share a few highlights on each of these areas. First, preserving the health and safety of our valued employees, their families, our customers and collaboration partners. While Bruker's businesses are essential, we have proceeded to implement strict social distancing, enhanced cleaning protocols and other preventive measures throughout our major facilities. While many of our office colleagues are working remotely, we are placing enhanced focus on our service organization and factory employees for whom work from home is not feasible.

Let me share with you one example from our Bremen, Germany campus, where a pilot COVID-19 at work testing program for our factory workforce has been implemented in April. In Bremen, we are currently offering a pilot project with weekly company paid voluntary COVID-19 PCR tests to employees in our factory.

Where customer sites are accessible and open, our field service organizations operate under strict social distancing protocols to ensure the safety of customer sites, when our employees need to be on site. We are very grateful to all our employees for persevering and for everything they are doing.

Number two of our focus areas is maintaining business continuity and service level for our customers, ensuring our ability to supply our enabling technologies and solutions and maintain high service levels for our customers is another top priority for our team.

In late March and during parts of April, several of our manufacturing sites underwent temporary controlled shutdowns or were operating at reduced capacity to implement new safety protocols, comply with local rules, and manage cost and inventory levels. These sites are now ramping back up.

Our supply chain has generally held up well, and we do not anticipate being supply or capacity limited in the second half of 2020, provided that the current gradual reopening trends continue without some second COVID-19 wave. Third, executing prudent, meaningful temporary cost reductions. Gerald will cover this point in more detail. But suffice it to say, we proceeded with a previously planned restructuring in the Bruker NANO Group and we have taken meaningful temporary cost compensation and short time work measures in Europe and globally.

At the same time, we are seeking to minimize the disruption for our employees and preserve our ability to ramp up again with our highly trained and loyal workforce. So while pursuing cost savings throughout the business, we are maintaining our important investments in key areas of Project Accelerate and in operational excellence.

Finally and fourth, Bruker is providing critical technologies and solutions to help combat the COVID-19 crisis. Most notably, our microbiology and infectious disease diagnostics portfolio, to which we have added a SARS-CoV-2 PCR test and our NMR and mass spec systems, which are used in critical disease, therapeutic and vaccine research.

On Slide 4, let me give you highlights on Bruker's new SARS-CoV-2 test or coronavirus test, as I'll simply call it. Bruker-Hain's automated sample prep tools and nucleic acid extraction kits are used in Europe, along with a recently introduced coronavirus PCR assay. We are starting from a small basis of about 1 million in the first five weeks since launch, but we are now gradually ramping up and have planned capacity increases by June, July.

On Slide 5, I highlight the performance of Bruker's microbiology and infectious disease diagnostics portfolio, which continues to do very well as many of our products are needed to help address health issues related to the pandemic. As you may know, the MALDI Biotyper is not used for viral detection itself. But it is very important during the COVID-19 pandemic, for instance, for ruling out or for identifying bacterial, respiratory or other nonviral infections, which complement direct viral detection by other methods. For example, in Q1, we had an extra 25 MALDI Biotyper orders from China, including orders from Chinese CDC labs.

One of the interesting pictures on Slide 5 actually shows one of our service engineers, a Chinese service engineer who flew into Wuhan in the middle of February to install one of our MALDI Biotypers in one of their new hospitals. We are incredibly grateful to something that borders on being heroic, but with the right attitude for our customers and their patients. Beyond China, we've seen strong systems growth for the MALDI Biotyper in Europe, especially in the U.K. but throughout Europe.

And our microbiology business, MALDI Biotyper platform systems, consumable services have actually grown in the double digits in Q1 2020 year over year. On Slide 6, we show our timsTOF Pro being used in COVID-19 proteomics research. At Peking University in Beijing, in China, Dr. Catherine Wong, a rising star in proteomics in China has been using the new dia-PASEF methods on her timsTOF Pro systems to identify and quantify changes in proteins and protein pathways as a result of COVID-19 infection.

I will not reiterate it, but I'll point you to the very nice quote Catherine gave us on Slide 6. Where she has highlighted the throughput and robustness, for large scale, large cohort studies which is exactly what you need during COVID-19 for COVID-19 research. We thank her for working closely with us. Moving on to Slide 7.

Shows Bruker partnering with the Australian National Phenome Center, the ANPC, and other global phenomic sites using both NMR and mass spec on frontline research efforts on COVID-19 patient body fluids. The Australian National Phenome Center recently launched a major research project to better understand and predict variation in the severity of COVID-19.

It also plans to engage in clinical trials of antiviral agents and other therapeutic or clinical protocols when available and when available also of vaccine candidates. The Australian National Phenome Center uses numerous Bruker NMR and mass spec systems to conduct this important metabolomics research.

These are just some examples of how Bruker is engaging to help combat COVID-19. Again, I invite you to perhaps take a closer look also at the quote by Professor Jeremy Nicholson, the ProVice Chancellor for Health Sciences at Murdoch University and the leader of the Australian National Phenome Centers. So our tools, our research tools play a very important role. There are many other examples where they play an important role in pharmaceutical, biopharma development, pharma development, in structural biology on the SARS-CoV virus itself.

It's RNA genes, it's proteins, in drug screening against these targets, etc. So let me continue then with our business update and financial overview. Let me turn to our first-quarter performance, starting on Slide 9. Amid a challenging operating environment due to COVID-19, Bruker's Q1 2020 revenues declined 8.1% to $424 million.

Our 2019 acquisitions added 0.9% to our revenue growth, while foreign currency translation was a headwind of 1.1%. On an organic basis, Bruker's revenues declined 7.9% year over year. The reported inorganic revenue declines were due to COVID-19 related disruptions to our customers as well to certain of our operations, as I mentioned earlier, they included an approximately 30% revenue drop in China. As COVID-19 spread across the globe, toward the end of the quarter, we saw weaker results in our major European and North American geographies outside China as well.

Our Q1 2020 non-GAAP gross margin decreased 220 bps year over year, while our nonoperating margin, non-GAAP operating margin declined 590 bps year over year. The drop in margins reflects primarily the revenue shortfall, certain operational challenges and unfavorable mix that resulted from COVID-19 disruptions. In Q1 of 2020, Bruker reported GAAP diluted EPS of $0.07 compared to $0.20 in the first quarter of 2019. On a non-GAAP basis, Q1 2020 EPS of $0.14 decreased 50% compared to $0.28 in Q1 2019.

Our Q1 2020 order bookings for Bruker's three scientific instrument groups were healthier than the revenue decline would suggest with orders roughly flat compared to the first quarter of 2019. However, we anticipate that bookings could weaken in the second quarter of 2020 as COVID-19 disruptions spread globally while China appears to be improving gradually.

Please turn to Slides 10 and 11 now where I provide further highlights on the first-quarter 2020 performance of our three scientific instruments groups and of our best segment, all on a constant currency and year-over-year basis. first-quarter 2020 BioSpin Group revenue declined in the mid-single digits to $120.9 million as certain deliveries and installations were delayed due to customer closures, and COVID-19 disruptions.

BioSpin's first quarter results included a significant revenue drop in China. NMR systems revenue declined year over year due to the mentioned delivery and installation delays. Preclinical imaging revenue was actually higher year over year, helped by the timing of deliveries early in the quarter. And finally, BioSpin's aftermarket and software revenues were modestly above the prior year Q1 of 2019.

Our first-quarter 2020 CALID Group revenues declined in the low single digits to $140.5 million. The decline at CALID was due to a revenue drop in molecular spectroscopy, which more than offset continued growth in microbiology and diagnostics and in Life Science Mass Spectrometry. CALID's microbiology and infectious disease products posted solid growth, as I pointed out earlier, and these products are needed to help address important health issues, including some associated with COVID-19. CALID's Life Science Mass Spectrometry business also performed well with continued good uptake of our timsTOF proteomics solutions.

Revenues in our FTIR, Near IR and Raman molecular spectroscopy products declined, in part due to COVID-19 related temporary disruptions at our Bruker Optics factory, in particular, late in the first quarter of 2020. Please turn to Slide 11 now. Bruker NANO revenues declined in the mid-teens to $120.1 million in the first quarter of 2020 on COVID-19 related disruptions globally and weakened industrial market demand. NANO's x-ray and NANO surface tools revenue declined, while our NANO analysis tools held up well.

NANO's semiconductor metrology revenue remained weak in the first quarter of 2020 as expected, but also included pushouts of deliveries to a major customer in Wuhan, China. However, in general, in semi, we see signs of recovering demand in semiconductor metrology markets, which could partially help offset weakened industrial demand elsewhere. Finally, BEST revenue in the first quarter of 2020 declined in the mid-single digits as superconductor demand softened toward the end of the quarter. As a reminder, BEST revenue can fluctuate from quarter-to-quarter.

On Slide 12, we are pleased to announce that the installation of the world's first 1.2 gigahertz NMR system was successfully completed at the CERM of the University of Florence in Italy in April 2020. So this was a second quarter item, but it is certainly worth mentioning today. Yes, we have received customer acceptance on that system, first customer system of this type accepted. This new class of stable homogeneous magnets does enable novel research in functional structural biology of proteins and their functional complexes.

Remarkably two pretty heroic Bruker engineers were able to execute this installation in Italy in February through April of 2020, while complying with social distancing and lockdown guidelines. As a reminder, we anticipate only partial revenue recognition on the NMR console and probe of this system in Q2, while revenue for the more expensive part of the system, the 1.2 gigahertz magnet is subject to a multiyear lease contract. I again would invite you to take a look at the customer quote, not only are they generally doing functional structural biology, but they're also doing work on the COVID-19 virus and its proteins and protein interactions. Turning to Slide 13.

Despite the challenging environment, Bruker continues to invest in operational excellence, like our multiyear Project 2020. As a reminder, Project 2020 at Bruker BioSpin will consolidate two major historically grown BioSpin sites in Germany into a single, modern, lean and customer-oriented site. The goals are higher productivity and capacity for growth in addition to an improved customer interface. The project is expected to be completed in 2021 and is part of our elevated planned capital spending budget in 2020.

So let me conclude by reiterating that Bruker is a fundamentally healthy, essential company with a strong balance sheet and a very solid liquidity position. Our life science tools and diagnostic markets are quite resilient. Our first-quarter 2020 results reflect the initial impact of COVID-19 and the second quarter of 2020 is likely to be more challenging given customer and demand disruptions around the world. However, we believe that long-term funding trends in Life Science, biopharma and basic medical research as well as in infectious disease diagnostics are going to be strong.

As a result, of the COVID-19 pandemic. We believe Bruker is well positioned for a gradually improving business environment in the second half of 2020 and hopefully, a recovery in 2021. So with that, let me turn the call over to our CFO, Gerald Herman, who will review our first-quarter 2020 financial performance in detail. Gerald?

[Gerald Herman, CFO]

Thanks very much, Frank. Pleased to join you today and review Bruker's first-quarter 2020 financial highlights, starting on Slide 15. Bruker's reported revenue decreased 8.1% to $424 million in the first quarter of 2020, which reflects an organic revenue decline of 7.9%. We reported GAAP EPS of $0.07 per share compared to $0.20 in the first quarter of 2019.

On a non-GAAP basis, Q1 2020 EPS was $0.14 per share, a decrease of 50% from $0.28 in Q1 2019. Our Q1 2020 non-GAAP operating income decreased 48%, while non-GAAP operating margin of 7.6% declined 590 basis points year over year. This reflects primarily lower revenues, unfavorable mix and related operating inefficiencies due to COVID-19 disruptions to Bruker's customers and some of our own operations, initially in China and in North America and Europe later in the quarter. We also experienced weakening industrial markets during the quarter.

At the end of Q1 2020, our balance sheet and overall liquidity position remains strong. We ended the quarter with $851.7 million in cash, cash equivalents and short-term investments after substantially strengthening our cash position following our December 2019 debt financing. Net debt was slightly higher in Q1 2020 than a year ago after our debt refinancing and the drawdown of an additional $200 million on our revolver. We are well within our debt covenant requirements with plenty of borrowing capacity headroom.

During the quarter, we used cash to fund strategic capital investments and our dividend. At the end of Q1 2020, our working capital to revenue ratio was essentially unchanged from a year ago. Slide 16 shows the revenue bridge for Q1 2020. As noted earlier, organic revenue in the quarter declined 7.9%.

We had a positive revenue contribution from acquisitions of 0.9%, which was partially offset by a foreign currency headwind of 1.1%. From an organic BSI revenue perspective, BioSpin revenues declined mid-single digits, CALID revenues declined low single digits and NANO revenues were down in the mid-teens. As Frank mentioned, Life Science Mass Spectrometry and Microbiology & Diagnostic revenues grew in the first quarter. But most of our other businesses declined due to the challenging COVID-19 operating conditions.

BEST revenues also declined mid-single digits net of intercompany eliminations. For our three BSI groups, systems revenue declined in the low teens, while aftermarket revenue grew low single digits. Geographically and on an organic basis in Q1 2020, Europe and North America revenues declined mid-single digits year over year. Asia Pacific organic revenue declined in the low double digits with approximately a 30% drop in China due to its lockdown for much of the quarter.

Rest of the world revenues outside Latin America were up modestly compared to the prior year Q1. Slide 17 shows that our Q1 2020 non-GAAP gross profit margin of 46.7% decreased 220 basis points from 48.9% in Q1 2019, driven principally by lower revenues, factory inefficiencies and unfavorable mix from COVID-19 disruptions as well as due to weak industrial markets. Q1 2020 non-GAAP operating expenses increased 1.7% compared to Q1 2019, including expenses from our recent acquisitions as cost savings kicked in near the end of the quarter. As I'll discuss shortly, in Q2, we took further cost reduction actions across the globe.

In Q1 2020, our non-GAAP operating margin declined 590 basis points compared to Q1 2019, driven primarily by our revenue decline and unfavorable mix. For the first quarter of 2020, our non-GAAP effective tax rate was 23.9% compared to 24.5% in Q1 2019. Weighted average diluted shares outstanding in the first quarter of 2020 were $155.4 million, a reduction of approximately 2.5 million shares from Q1 2019 following our 2019 share repurchases. Finally, Q1 2020 non-GAAP EPS of $0.14 decreased 50% year over year, driven by lower revenue and margins.

Next, I'd like to comment briefly on cost reduction actions we've taken to support the profitability and cash flow of the company. During Q1, we implemented certain previously planned restructuring actions primarily within the BSI NANO segment and initiated additional temporary cost measures related to COVID-19.

Temporary measures, which will mostly be effective in Q2 included short time work for many of our European operations, temporary tiered salary reductions for our global leadership team and workforce, 1-2 week closures of select manufacturing locations, a hiring freeze and curtailment of nonstrategic discretionary spending. Due to the timing of the BSI NANO restructuring actions and these additional temporary measures, we did not see a major impact in Q1, but we expect to see cost reductions in the range of $10 million to $15 million in the second quarter of 2020.

Turning to Slide 18. Our free cash flow in Q1 2020 was essentially flat compared to Q1 2019. Q1 2020 free cash flow does, however, include an increase of approximately $20 million in capital expenditures related to production facilities for productivity gains and expansion as described earlier. Our cash conversion cycle at the end of Q1 2020 was 276 days, representing an increase of 41 days compared to Q1 2019.

The step-up was primarily driven by an increase in DIO of approximately 40 days as we carried higher inventory balances due to revenue declines and to prevent supply chain disruptions. Turning to Slide 20. You may recall that on March 27, we suspended our guidance for 2020 due to the uncertain business conditions created by COVID-19. Since then, business disruptions related to the pandemic have eased in some parts of the world but remain significant in others.

And visibility, particularly as it relates to our customers' operations in certain markets remains low. Therefore, our 2020 guidance remains suspended. It's our intention to resume annual financial guidance once visibility improves. Although we're not providing any guidance, I would like to give you some directional color on how we see business unfolding in Q2 and over the course of the year.

As Frank stated, we expect Q2 to be more challenging than Q1 due to continued closures among many of our academic customers in the U.S. and Europe and uncertainties related to our industrial customers. We, therefore, believe it's better to think about a range of possible scenarios for the second quarter of 2020 with the potential for 15% to 25% year-over-year revenue declines. Revenue declines of this magnitude, combined with our cost reduction actions, are expected to keep Bruker breakeven or possibly profitable in the second quarter of 2020.

Please note that actual results could be outside of these scenario ranges, but this gives you our good faith estimates at this time based on the information currently available to us. We currently anticipate business conditions to improve in the second half of 2020, although a recovery is not anticipated until 2021.

In conclusion, we're continuing to navigate a challenging environment with unprecedented uncertainties created by COVID-19. But with our strong liquidity position, and agility in responding to changing market conditions, we're confident that Bruker will emerge from this pandemic, a stronger and healthier company with an attractive product portfolio and a promising long-term outlook.

We look forward to updating you again on our quarterly progress with our Q2 2020 conference call anticipated in early August. And with that, I'd like to turn the call over to Miroslava to start the Q&A session. Thank you very much.

[Miroslava Minkova, Director, IR and Corporate Development]

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

[Operator]

[Operator instructions] Our first question today comes from Tycho Peterson from JPMorgan. Please go ahead with your question.

[Tycho Peterson, JPMorgan]

Thanks Frank. I'll start with the COVID test you highlighted in the fourth slide there. I'm just curious of the thought process. It's a competitive market.

We see your competitors scaling up to 10 million tests a week, if not more. Why do you think this is the right move to push into what's already a crowded market for PCR-based COVID testing.

[Frank Laukien, President & CEO]

Well, we are in PCR-based testing anyway with our Bruker-Hain acquisition, of which we took the full 100% a few months ago, we initially had owned 80%. So we have pretty good customer access, maybe not to the very large labs that tend to use large automated systems. But as you know, the diagnostics markets have many, many different customer types. And we don't have global strength there, but we have strength in certain European countries and some other geographies.

So we have good market access. We have complementary technologies. When we acquired that business, that was about a $40 million business that does molecular diagnostics. And this is a good opportunity from a smaller base than a Roche or an Abbott, for sure, for us to expand in that space.

And so far, that's going very well. And there's plenty of demand, and our tests are finding good traction. Now like many others, we are in the process of ramping up our capacity there.

[Tycho Peterson, JPMorgan]

And then a follow-up on China. Can you comment on the order book and expectations for China for the remainder of the year? And are you seeing a reprioritization of government funding at this point?

[Frank Laukien, President & CEO]

Well, I'm not sure. I cannot answer all of those questions. But anecdotally, the order bookings patterns in probably starting perhaps in late March. But certainly, in April, for instance, BioSpin and NANO both have reported that orders in China and order patterns are recovering.

So the gradual ramp-up in China is not only something we read about in the newspapers, but we're seeing it initially in terms of order patterns also in China, at least anecdotally. Obviously, that's not a full quarter yet. We're not going to comment on Q3 or Q4 or longer-term patterns this year. Because we have suspended our guidance.

There's so much uncertainty. So I would be speculating. But China seems to be coming back according to some at least anecdotal Bruker data in the last six weeks or so.

[Operator]

Our next question comes from Doug Schenkel from Cowen. Please go ahead with your question.

[Chris Lin, Cowen and Company]

Hey This is Chris on for Doug today. Thanks for taking my questions. Could you perhaps compare and contrast the differences between the China and ex China businesses that result in the outlook for 15% to 25% decline in Q2 versus the 30% decline you experienced in China in Q1. I guess the ex China business a bit more durable given perhaps a little bit less semi and industrial exposure. Or is there anything else you would point to, such as the 1.2 gigahertz system?

[Frank Laukien, President & CEO]

Yes, the 1.2 gigahertz system because we'll only have partial revenue recognition. It's nice, but it's not going to be that needle-moving in Q2, it's an accomplishment and milestone, nonetheless. We in Q2 without going into any details. But of course, we do not expect that to be as China dominated as the decline in Q1 was.

We saw a decline in Europe and in the Americas in Q1 as well, but it was in the single or mid-single digits with the big -- even slightly more than 30% revenue decline in China. So that was very Q1 specific. We expect that to be more even in the second quarter without necessarily being able to give you right now relative proportions, but it's going to be much more evened out. Yes, overall, we do not expect greater than 30% revenue decline, at least that's not one of the scenarios that we think has any significant or meaningful probability.

So in that sense, there are some other parts of the business that are -- China is picking up a little bit again. As I said, our pharma business, at least on the order side, is seeing good growth. Our Life Science, Life Science Mass Spectrometry and particularly our Microbiology & Diagnostic business are reasonably healthy, so its best. So we're expecting a meaningful decline in the second quarter, but not, as far as we can tell from what we know today, not reaching these 30%, 35%, 40% levels that some people may have feared.

So we think globally with a much more even picture perhaps, there'll be some exceptions, probably Japan and probably India will be super -- will be very, very weak in Q2, but the major geographies should be more evenly performing more evenly than the extremely uneven performance in Q1 when China dominated at all. And that's probably as much as color as we have and as we can give you right now.

[Chris Lin, Cowen and Company]

Okay. And maybe for a quick follow-up. Do you expect to be breakeven or profitable at the low end of the revenue decline range?

[Gerald Herman, CFO]

We do, and that's our expectation. I would just say that generally speaking, relative to that range that I provided, 15% to 25%, it does assume that China will gradually reopen, and that's our expectation, and that's certainly the signals we're seeing on the ground at the moment. And also at the low end, it implies that the one of the decline, it implies that in U.S. and Europe would also see some stabilization in some reopening activity.

And that seems to be playing itself out at least in the United States at the moment and everything we hear would also be true in Europe. So we think that scenario range is a pretty reasonable series of assumptions at this stage.

[Chris Lin, Cowen and Company]

Thanks for taking my questions and I hope everyone is doing well.

[Operator]

Our next question comes from Puneet Souda from SVB Leerink. Please go ahead with your question.

[Puneet Souda, SVB Leerink Partners]

Hi, Frank. Thanks. So the first question is on funding expectation, and there is some funding expectation in U.S. in 2021.

Obviously, magnitude is sort of unclear at the moment. But based on the conversations that we had with European customers as a result of this epidemic. What's your expectation in Europe in academic funding and overall government funding given your stronger position there and being closer to the customers there for 2021.

[Frank Laukien, President & CEO]

Puneet, I mean, in much of the world, I think academic funding is a question of timing in Europe and many other parts of the world. And in part, in the U.S. academic spending is driven by governments. They're certainly not pulling back.

And if anything, there is a lot of noise, a lot of chatter about increasing budgets for life science research, of course, anything that's virology and COVID-19 related but really, I think, life science funding, including in academia as well as in pharmaceutical research, I think, it's going to be quite strong. And in Europe as well as in the U.S., it's not that universe, with a few exceptions in a few southern European countries and maybe in India, universities might really be just about closed. But elsewhere, the students aren't there and the labs, maybe they're not in the labs, but the professors are writing grant proposals and writing papers and whatever else they're doing. So there is quite a bit of activity.

It's not that the academic sector is closed, but a lot of it is working from home. And of course, it's working. The lab work is -- unless you're directly doing COVID research is slowed down. We expect that to reopen.

So actually, life science, academic and government funding for when this chatter and noise turns into specific grant approvals and fundings. Our customers, and we are actually pretty optimistic without being able to predict the precise timing that there is going to be perhaps not only a return to previous funding levels, but maybe even a multiyear bolus of increased life science research and fundamental research funding. Which would benefit us beyond diagnostics also in our NMR and mass spec business and in our microscopy business, in particular.

[Puneet Souda, SVB Leerink Partners]

That's very helpful. And on the NMR side, I appreciate that the lower gigahertz NMR demand might be -- it is going to be impacted here. In the near term. But when you look at the 1.2 orders and the earlier 1.1 and other orders that you expect to ship out.

So on those, can you give us a status of where you stand and what's the expectation here with the sort of the push out that you're seeing here in the second quarter. When do you expect to deliver the rest of them? And then are there any questions on those contracts that have already been signed or where customers have committed to a magnet? What's your sense of those commitments and funding?

[Frank Laukien, President & CEO]

Yes. So starting in reverse order, there is no question about the contractual commitment. These contracts are solid. The funding is there, those costs, that's completely solid as far as I can see.

Maybe jumping to the beginning, the introduction to your question. Funding for NMR and for NMR lower -- and demand for that at lower than the gigahertz class is not necessarily going to be down or down all that much. It's not -- it's a little too early to tell, but it looks like our NMR funding is maybe declining in the mid-single digits, maybe even be flat or so, especially with China picking up again with pharma NMR demand doing really, really well, quite now in terms of bookings. Therefore, the applied and clinical systems, for which we do screening.

That's important in this crisis as we showed you the metabolomics research at the Australian National Phenome Center, but these type of research projects are of interest in many places. I think BioSpin will be doing OK actually in general. Now to the central part of your question, gigahertz and gigahertz plus, at some point, we thought maybe would be delivering three or four of these systems this year. We're not going to be factory limited in that sense.

We're pleased that we actually got the installation faster than we had accepted and in particularly difficult circumstances in Italy, although Florence wasn't the hotspot in Italy, but still all of Italy was locked down, and we're able to get that installation done. So I think it will be gated. So nothing will be canceled as far as I can see. Could there be delays with deliveries to the other European 1.2 or U.K.

1.0 gigahertz cases? And could that -- since we usually need six months for installation and acceptance. I still hope that we can, this year, have two or three delivered, including the system for Italy. Will they all get accepted this year or may the acceptances on one of these systems perhaps slide into next year because we cannot deliver for a few months? That's possible. So I would dampen the expectations a little bit, but the demand and the backlog will be there.

The factory is there to deliver them. And it will depend on when we can deliver and begin installations, and that is presently not -- we don't have complete visibility on that. Although obviously, those customers have been waiting, so they're eager if their administrations will let them do that to accept delivery and allow us to start the installations.

[Puneet Souda, SVB Leerink Partners]

Okay. That's very helpful. Thanks. And then last one, if I could squeeze in on timsTOF. This is -- you saw a good uptick in the quarter. What's your expectation here as we sort of go into the sort of the second half and into 2021, the competitive positioning of this instrument. Maybe if you could provide us if you have a sense on the order book that you have for that instrument? And what could we expect here and despite the impact in second quarter? Thank you.

[Frank Laukien, President & CEO]

Well, the competitive positioning hasn't changed. It is a very attractive second technology on the proteomics market, if you will, and many customers will want to have that timsTOF passive technology in their proteomics lab as well, even though they almost undoubtedly will have a number of systems from another or other proteomics vendors.

So the competitive positioning is good and the continued uptick, the enthusiasm about its throughput, about its robustness in addition to other attributes is perhaps particularly important, especially when people do proteomics or protein network research, where they need to run a lot of samples that are perhaps even doing COVID-19 screening or doing trying to figure out proteins and protein networks. So it's a good system to have for disease research at this time.

And I'm glad we are at the stage where the ramp-up is in good shape, and the initial customers are pretty happy with their system. So I don't have visibility for that into the second half of the year. So I don't want to set out goals because it's hard to figure out how quick the recovery will be in the second half. But in our experience, so far, in the first quarter was that both our revenue and our orders for timsTOF Pro continued to grow year over year.

[Puneet Souda, SVB Leerink Partners]

Okay. Great. Thank you.

[Operator]

Our next question comes from Derik De Bruin from Bank of America. Please go ahead with your question.

[Mike Ryskin, Bank of America Merrill Lynch]

Hey, guys. This is Mike Ryskin on for Derik. I want to follow-up on an earlier point that came up a couple of times in your comments in the prepared remarks regarding order placing and some of the comments you made about a number of deliveries were delayed on the customer disruptions, but you didn't necessarily call out cancellations or anything like that?

I just want to get a better sense of once these near-term quarantines lift and these conditions start to improve over the coming months, people start coming back to work. How quickly do you think you could clear some of this backlog? And I guess what I'm asking is, is there any constraint or there any bottleneck in terms of how quickly you can move it through? Or is it as simple as some of these things are waiting on the loading dock? And within a week or two after people coming back to the labs, you should be able to recognize a lot of this revenue.

Sort of what do you expect as the pacing in which some of these deliveries could come through once we get through the near-term bottleneck?

[Frank Laukien, President & CEO]

We'll be backlogged in some installations and then also in some deliveries. There were some customer sites or some countries where they said, "Look, you can't deliver at all." Like this last couple of weeks of March, I recall, we had a number of deliveries we wanted to make to India, we couldn't even deliver, and therefore, no revenue. We certainly could start installations, but I couldn't even deliver. So there's some backlog on deliveries.

Although there, I think, a little bit more of a backlog will be on field service and installations. Again, we're not paralyzed. We are doing field service and installations in many customer locations. In some countries, it's just all takes a lot more checking and planning and calling ahead of time.

And of course, the usual social distancing and cleaning and rules and others. There are some countries where it's nearly impossible and where we will be backlogged. So it could be that we have a backlog for the -- even if there's a gradual reopening during Q2, where we have a backlog throughout the year, we'll be catching up, but we'll also, of course, have new installations and new service cases to take care of. So our field service force and training and other things that go with that, although I don't think capacity limits will be significant there.

I think we'll be somewhat backlogged and catching up for the reduced site accessibility in early Q2 and in late Q1 for the remainder of the year.

[Mike Ryskin, Bank of America Merrill Lynch]

That's helpful. And then if I could ask a follow-up on the decremental margins in 2Q from the lower volumes. I mean, I think you mentioned quite positive commentary on aiming to stay profitable through the quarter.

Can you walk us through some of the decrementals both on the gross margin line and some of the steps you're taking on SG&A, and sort of how quickly it is to reverse some of that if the volumes returned later in the year?

[Gerald Herman, CFO]

Yes. It's Gerald. So we introduced some restructuring actions. And I mentioned this in my prepared remarks, which are already under way.

So we'll see some benefit for sure there in the second quarter. We also introduced some temporary cost measures, and I won't laundry list them. But most of those are intended to go through Q2 and a little bit into Q3. So our expectation is that we'll see benefit, and I think I carved off, so $10 million to $15 million related to cost savings in the second quarter.

Associated with those temporary measures. And thereafter, I mean, in general, around our cost structure, we're pretty comfortable with where we are. We're continuing to make permanent investments in capital expenditures. You saw, we've increased our CapEx spending in the first quarter here, about $20 million.

We've got some major production facility improvements that we're making for both productivity gains and for expansion. We're not sidetracking those. Those are still a part of the program. And of course, I need to point out relative to our OpEx, we are continuing to invest in the Project Accelerate initiatives, including from an R&D perspective.

So I think our overall cost structure, we're able to flex in a way, and we've done that now. Hopefully, on a temporary basis, if things begin to reopen up in the second quarter, we'll move back to a more, what I would call traditional cost structure as we move ourselves into the third quarter. And I guess the only other comment I would make here is that just generally, I think our experience in mix in the first quarter, I need to point out that there -- if we are talking about a scenario in the second quarter of 15% to 25% range of revenue decline, I mean, there's clearly going to be some impact there on margin. And we saw that in the first quarter, and our expectation is that we would see something similar in the second quarter.

[Mike Ryskin, Bank of America Merrill Lynch]

Well, to the second quarter with an improved decremental margin. Because the revenue drop in Q1 came so quickly and the cost cuts could not occur quite as quickly. The decremental margin in Q1 was high. And we think that will be lower and therefore, better in Q2. Got you.

[Frank Laukien, President & CEO]

Overall, we're trying very hard to keep our -- to not have layoffs and not to have furloughs, but to keep our workforce. And in fact, because of our big European footprint, the general European short time work measures where government support temporary reduced work or even down to 0, are very, very favorable for getting a quick start afterwards.

That happened to us in 2009, and we very quickly were able to ramp up again and go all the way into overtime a few quarters later because we never furloughed and let go of our workforce. And that's very much the intention this time to be able to start when the demand is there and be ready for a recovery.

[Operator]

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

[Carolina Ibanez-Ventoso, Stifel Financial Corp]

Hi. Thank you for the question. This is Carolina Ibanez-Ventoso on for Dan. Frank, you mentioned continued investments in Project Accelerate, but also some shutdowns and reduced activities in some of your sites.

Can you just speak to Project Accelerate launches and ramp, separating activities that are still on track versus those that may be slowed or delayed by COVID?

[Frank Laukien, President & CEO]

Yes. Good question. Our Project Accelerate initiatives, they're all on track. And if anything, one of them that had not been on track last year and not in the first quarter yet either was semiconductor metrology.

But because the world right now working remotely has a voracious appetite for memory and for logic and for IT infrastructure. That on top of additional recovery trends in semiconductor, makes us a bit more optimistic that semiconductor metrology demand, and we're seeing it also in our bookings, is becoming healthier. So one of the weak areas last year and still quite weak in Q1 as we had predicted. That was independent of COVID is probably beyond life science and diagnostics is probably also coming back, at least the indications are looking much more positive in that area.

So yes, we're continuing to invest in our Project Accelerate initiatives, and they remain directionally on track, no disruptions there.

[Carolina Ibanez-Ventoso, Stifel Financial Corp]

Okay. And what are your expectations for imaging demand going forward given where hospital spending priorities seem to be at the moment?

[Frank Laukien, President & CEO]

For what type of hospital demand?

[Carolina Ibanez-Ventoso, Stifel Financial Corp]

For imaging demand.

[Frank Laukien, President & CEO]

Imaging, like magnetic resonance imaging or something along those lines?

[Carolina Ibanez-Ventoso, Stifel Financial Corp]

Yes.

[Frank Laukien, President & CEO]

Yes. Well, we don't -- we're not a med tech company. So we don't really -- we have research microscopy systems. We don't have pathology imaging or radiology imaging systems.

We indirectly support hospital radiology, magnetic resonance imaging, MRI, via the major med tech radiology companies who purchase our superconducting materials, and that demand, by and large, has been dampened a little bit, but only in the low single digits, so that looks pretty solid. But we're not the primary -- we're not an imaging provider for routine radiology applications or pathology applications.

[Carolina Ibanez-Ventoso, Stifel Financial Corp]

Thank you.

[Operator]

Our next question comes from Steve Willoughby from Cleveland Research. Please go ahead with your question.

[Steve Willoughby, Cleveland Research]

Hi. Good evening and thanks for taking my question. Hope everyone is doing well. two questions for you. One for Frank and one for Gerald. I guess, Frank first. If you could just provide us, I guess, a reminder and then also some color as it relates to the funding and revenue from academic customers. How much of your revenue to academic customers would you say comes from federal agencies versus maybe universities themselves?

And then what are you guys hearing as it relates to expectations from these customers in the back half of the year and possibly even to 2020, given there is some increased uncertainty as it relates to what universities look like for the coming of the fall semester? And then I have a follow-up for Gerald.

[Frank Laukien, President & CEO]

Yes. I mean I'd say outside of the United States, per definition, it tends to be the federal government or the governments that fund universities. There isn't a lot of endowment or philanthropy funding for universities outside of the United States. There's a few exceptions.

So I think whatever academic trends you might see in the United States do not extrapolate in general to the rest of the world. So 80% of our academic customers are not in the U.S. roughly, and they tend to be government funded. Their funding is very solid.

In the U.S., I think also, it may be that some universities may struggle in funding their administrations, but they can't take their NIH grant and spend it on their administration. They have to use it for the purpose for which a professor or BI got the grant. And if that happens to be a mass spec or NMR, they'll have to use it for that. So I'm actually -- I acknowledge that some endowments will be down and maybe that very indirectly may affect philanthropic spending or so.

But that's sort of a second derivative, and we'll need to see whether that even plays itself out that way. Our major U.S. life science research customers who tend to get federal grants. If they get a grant, they'll spend it on what the grant was for and not on other university budget holes.

So I'm pretty optimistic that life science academic and government spending for research. With whatever time delays it will have, there will be timing delays. But I think fundamentally, it remains healthy. Or as I said earlier, I think it might even become better in the next five or 10 years because this pandemic in terms of healthcare spending and infectious disease fundamental R&D spending has been a bit of a wake-up call and will probably be prioritized for the next decade. So I am all that bullish, but I think that's my assessment. Thank you.

[Steve Willoughby, Cleveland Research]

Yes. Thank you, Frank. I totally agree with you. Gerald, the commentary you provided as it relates to your revenue expectations and some of the cost cuts you're making.

Just how should we think about cash flow, I guess, over the remainder of the year? Given what you're seeing today. Maybe I presume you probably have a better idea as it is related to 2Q, but just any thoughts you have on cash flow for the full year overall, maybe?

[Gerald Herman, CFO]

Yes. We're really not providing -- well, first of all, we don't have very good visibility into the latter half of the year. So we're not really providing much guidance or information related to profitability and cash flow connected to it. I guess I would say just generally, from what we saw in the first quarter, our cash flow position has been pretty solid.

We're not overly concerned about that at all at this stage. And even following into a further revenue decline in the second quarter, we're pretty confident that from a profitability perspective there as well. So I think our general view is we've got a strong liquidity position, the cash flow has been moving through the systems, the way we would expect to see it. So I think overall, it's probably the only color I can offer.

[Steve Willoughby, Cleveland Research]

Thank you.

[Operator]

Our next question comes from Vijay Kumar from Evercore ISI. Please go ahead with your question.

[Vijay Kumar, Evercore ISI]

Hey, guys. Thanks for taking my question. Frank, maybe one on, I guess, the comments around the recovery being 2021. I guess some of your peers, they've sort of looked at back half and perhaps 4Q as being more normalized.

I'm just curious why -- are you guys seeing anything different? Or is it just conservatism when you think about the recovery being a 2021 event?

[Frank Laukien, President & CEO]

Well, I think we may actually see it the same way. The question is whether you talk sequential or year over year, do we expect a sequential recovery after a significant hole in Q2 this year, that's what I would expect. I believe Q3 sequentially will get better in Q4.

Will that necessarily imply year over year what will be the year-over-year trends, Q3 '19 to Q3 '20 and Q4 '19 to Q4 '19 that I don't have enough -- we don't have enough visibility to provide guidance, for instance, or to comment on that. So whether so sequential recovery, yes, year-over-year recovery, too early to tell.

[Vijay Kumar, Evercore ISI]

Understood. And one last one, if I may. In a post COVID world, as more research money is being thrown into understanding some of these organisms, pandemics, if you will, I feel like structural genomics or, I guess, proteomics will become more important. How is that -- does that sort of change the demand curve from the kind of solutions that Bruker provides, Frank?

[Frank Laukien, President & CEO]

I would think so, but that's not market demand or market data they can point to. That's more my analysis and that of my colleagues. So a structural biology on RNA genes and on proteins and protein networks on glycosylation on top of some of these spike proteins is that important, and drug screening against it. For those NMR and mass spec happen to be terrific tools.

They're not the only ones. Other things are important as well. But one would argue that some of our tools may, in particular, be in demand. I mean, of course, there'll be some sequencing and some meta genomics that one can do on patients.

But perhaps the sequence of the SARS-CoV-2 virus is pretty well known, and there's some minor mutations. And of course, one will want to look at other viruses. But I think this may actually support the need for functional structural biology for proteomics for glycomics, which is really important and really, really difficult. And those are some of the areas where our technologies shine.

[Vijay Kumar, Evercore ISI]

Great. Thanks, guys.

[Operator]

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

[John Sourbeer, UBS]

Thanks. This is John Sourbeer on for Dan. Maybe digging into more of your industrial segments. Is there any more color that you can provide on what happened in 1Q and 2Q outlook? And then is there any time frame or predicate that you could point us to that could be a comparison to what you're seeing now?

[Frank Laukien, President & CEO]

Well, it's very, very qualitative. So within industrial, we said that semi may actually recover sooner on being a different time line. We had already had indications of that even before the COVID pandemic started. And so what we've seen in the last four months, the semi metrology part may looks like it will recover even as other industrial demand tends to be weakening.

We do not have a lot of exposure to energy, to automotive and to aerospace industries, which is a good thing right now because those industries are obviously hurting. We have some materials research. Some of our tools go into this space, and we have other industrial markets. But those are hard to read.

I would think that those presently are hesitant to invest and will observe demand. So our other industrial markets are weakening, we'll see probably prolonged weaker demand. And when they come back, now the best thing is that we could estimate from 2008, 2009, and if that is any indication, they were probably weak for two or three quarters, not all that long. And then, in fact, because of a lot of stimulus funding, they came back rather quickly and actually was boom times pretty quickly within a few quarters.

But that does not necessarily predict the future. Also, this pandemic affects certain industries like aerospace, maybe more structurally than just temporarily. Although, as I said, we have very little exposure to the aerospace industry or to the energy industries, which are perhaps structurally hit pretty hard.

[John Sourbeer, UBS]

Got it. Thanks for that. And any time frame that you think you could compare this to or predicate in the past?

[Frank Laukien, President & CEO]

Well, I mean it's far from a perfect comparison by 2008, 2009 are, of course, from an economic impact, '08 was less than, but I mean that's the best comparison that we might have and we cut our costs temporarily. We used the short time work rules. That was very, very helpful at the time. We took other costs and temporary cost steps and we were very good then in retaining most of our investments in workforce.

So we were among those that after that time period, I don't recall the exact timing, but at least within a year, maybe a little bit longer, we had some of the best growth years coming out of that by 2010, '11, '12, and nothing is exactly comparable, but we had some of the best organic growth years that we've ever had in the last two decades. Will this repeat itself like that? There might be some analogies. It's useful, thinking about that, but I'm far from predicting that we'll follow exactly that timing and playbook.

[John Sourbeer, UBS]

And if I could ask a follow-up. In areas in the U.S. and in the EU that are beginning to open up. Are you seeing anything there or any changes in how it's impacting your business?

[Frank Laukien, President & CEO]

Well, it's not so much because they're opening up some schools or nail salons or whatever they might be opening up in certain countries in Northern or Central Europe. Southern Europe and France tends to be more locked down, right. In the U.S., it's too early to tell. There's mostly talk about opening up and the geographic patterns don't really affect us here in the United States.

So it's probably not meaningful for us yet. So maybe the only comment there is that in Europe at least, other than Southern Europe and other than France, business has been, including academic business, has been limping along. And we've been able to make deliveries. We've been able to make installations, not everywhere, sometimes with delays.

Sometimes we're asked to hold back, but it's not that this is complete, that big sector is completely closed to us. Purchase orders are occurring. Purchasing departments are working from home. People are doing grant applications. So it's slow going, but it's going.

[John Sourbeer, UBS]

Thanks for taking my question.

[Operator]

And our next question comes from Steve Unger from Needham. Please go ahead with your question.

[Steve Unger, Needham and Company]

Great. Thanks for fitting me in. Frank, I was curious if you could comment on the MALDI Biotyper's performance in the COVID-19 environment. As far as consumables utilization perhaps in the month of April.

[Frank Laukien, President & CEO]

Yes, Steve, good question. I don't have it for the month of April. I know that it was very good, good double-digit growth in the first quarter year over year. So instruments were growing, but consumables were growing at a pretty high pace, I think, north of 20% growth even in Q1.

And we have that on one of our slide, on Slide 5. It's even -- apparently was about 30% growth in consumables. And so that looked healthy. Yes, go ahead.

[Steve Unger, Needham and Company]

So clearly a net beneficiary in this environment.

[Frank Laukien, President & CEO]

Yes. Some med tech devices, all of a sudden aren't used much anymore because it is ruling out other in bacterial or fungal infections. Or you want to rule out or at least discover in time, any co infections, anybody who may have a ventilator assisted, VAP, ventilator-assisted pneumonia, which is bacterial. If you have that in addition to COVID, well the doctors will want to know.

So there is actually, and this wasn't entirely clear to us three months ago. There is actually sort of in the halo of viral testing, there is quite a bit of microbiology, bacterial and fungal testing. And so this has been even stronger than we would have anticipated three or four months ago.

[Steve Unger, Needham and Company]

Great. That's helpful. And then does COVID-19 impact your new product introduction plans for this year?

[Frank Laukien, President & CEO]

Not really. Only in the sense is that some conferences have been canceled and some conferences are going virtual. So for instance, a big microbiology conference, the ECCMID which would have been in the middle of April in Paris did not take place and was canceled altogether. But our product launches, they are just going to happen independent of conferences or maybe be virtual launches at virtual conferences.

The short answer would be no, not really. It doesn't really affect that we're going to drive forward as we had planned. With some incremental work on obviously COVID testing that wasn't in the plans previously. And you'll see more on that as the year progresses.

[Steve Unger, Needham and Company]

Great. That's helpful.

[Operator]

And ladies and gentlemen, at this point, showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

[Miroslava Minkova, Director, IR and Corporate Development]

Thank you for joining us today. During the second quarter, Bruker will participate in the Bank of America, UBS and Jefferies virtual healthcare conferences. We hope you stay healthy and well, and we invite you to reach out to us for a virtual meeting during the quarter. Thank you, and have a good evening.

[Operator]

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