Miroslava Minkova - Bruker Corp. Frank H. Laukien - Bruker Corp. Anthony L. Mattacchione - Bruker Corp..

Brandon Couillard - Jefferies LLC Amanda Louise Murphy - William Blair & Co. LLC Jack Meehan - Barclays Capital, Inc. Doug Schenkel - Cowen and Company, LLC Patrick B. Donnelly - JPMorgan Securities LLC Bryan Brokmeier - Cantor Fitzgerald Securities Jonathan Groberg - UBS Securities LLC Joel Harrison Kaufman - Goldman Sachs & Co.

William March - Janney Montgomery Scott LLC Sung Ji Nam - Avondale Partners LLC Matthew John Nicolai - Evercore ISI Daniel Arias - Citigroup Global Markets, Inc. Steve Barr Willoughby - Cleveland Research Co. LLC Dan Leonard - Deutsche Bank Securities, Inc. Puneet Souda - Leerink Partners LLC Michael Ryskin - Bank of America Merrill Lynch Tim C.

Evans - Wells Fargo Securities LLC.

Good afternoon and welcome to the Bruker fourth quarter and fiscal year 2016 earnings conference call. All participants will be in listen-only mode. Please also note that this event is being recorded. I would now like to turn the conference over to Ms. Miroslava Minkova. Please go ahead..

Good afternoon. I would like to welcome everyone to Bruker's fourth quarter and full year 2016 earnings conference call. My name is Miroslava Minkova, Head of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO; and Tony Mattacchione, Bruker's Senior Vice President and Chief Financial Officer.

In addition to the earnings release we issued earlier today, we'll be referencing a slide presentation as part of today's conference call. The PDF of this presentation can be downloaded by clicking on the earnings release hyperlink on Bruker's Investor Relations website. During today's call, we'll be highlighting non-GAAP financial information.

A reconciliation of our non-GAAP to GAAP financial measures are included in our earnings release, in our webcast presentation and in our website at ir.bruker.com. Before we begin, I would like to reference Bruker's Safe Harbor statement, which I show on slide 2.

During the course of this conference call, we'll make forward-looking statements regarding future events or financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections 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, as well as other subsequent SEC filings. Also note that the following information is related to current business conditions and to our outlook as of today, February 13, 2017.

Consistent with our prior practice, we do not intend to update our projections based on new information, future events or other reasons prior to the release of our first quarter 2017 financial results in May 2017. We'll begin today's call with Frank providing a business summary.

Tony will then cover our financials for the fourth quarter and full year 2016 in more detail. Finally, before we begin, we have had power outages at our Billerica facility today due to weather conditions. In the event that we do drop out during the call, we ask for your patience as we dial back in on a different phone line.

Now, I'd like to turn the call over to Bruker's CEO, Frank Laukien..

Thanks, Miroslava, and let's keep our fingers crossed that the power stays on. Good afternoon, everyone, and thank you for joining us on the call today. I will begin today's earnings presentation on slide 4. Q4 of 2016 marks another quarter of solid operational improvements for Bruker despite a revenue decline.

We increased our non-GAAP gross profit margin by 220 bps year over year. We increased our non-GAAP operating margin by 210 bps year over year, and we grew our non-GAAP EPS to $0.46.

Looking more closely at the fourth quarter, we reported revenues of $470 million, a reported decline of 1.6%, and an organic decline of minus 2.2% year over year, partially offset by plus 1.9% growth from the Bruker-OST and Jordan Valley acquisitions. Finally, foreign exchange lowered our Q4 2016 revenue by minus 1.3% year over year.

The organic revenue decline was expected as a result of weak European academic bookings earlier in the year 2016. We also experienced soft demand in global industrial markets in 2016.

Our Q4 2016 non-GAAP gross profit margin expanded by 220 bps year over year to 48.8% and our non-GAAP operating margin was 19.6%, up 210 basis points from Q4 2015, the result of ongoing operational improvement initiatives and cost control. We reported GAAP EPS of $0.43 in Q4 2016 compared to $0.36 in Q4 of 2015.

Our non-GAAP EPS of $0.46 in Q4 of 2016 compared to $0.38 in Q4 of 2015. Moving on to slide 5, I show Bruker's performance for fiscal year 2016. In FY 2016, our reported revenues were down minus 0.8% year over year and down minus 2.3% on an organic basis.

Weak European academic and global industrial demand were the primary drivers behind the decline, and as we previously reported, we also had some MALDI Biotyper challenges in the first half of 2016. This was partially offset by strong China growth.

The Jordan Valley and Bruker-OST acquisitions contributed plus 2% to reported revenues, while foreign exchange subtracted minus 0.5% year over year. We are very pleased with our solid operational improvements throughout the year in the face of revenue headwinds.

For fiscal year 2016, our non-GAAP gross profit margin is up 190 bps to 48.1% and our non-GAAP operating margin is up 150 bps exceeding our guidance and finishing at 14.8% for fiscal year 2016. This is about 460 bps of cumulative non-GAAP operating margin improvement over the past two years.

In FY 2016, we generated non-GAAP EBITDA of $290 million or 18% of revenue. This is up 12.4% from non-GAAP EBITDA of $258 million in FY 2015. We finished fiscal year 2016 with GAAP EPS of $0.95 compared to $0.60 in 2015. Our non-GAAP fiscal year 2016 earnings per share of $1.19 compared to $0.89 in FY 2015.

Our FY 2016 non-GAAP EPS of $1.19 contains two items totaling approximately $0.18 per share that are unlikely to repeat in future years.

Excluding these two items, our 2016 non-GAAP normalized EPS would have been about $1.01 which is in the upper half of our original fiscal year 2016 guidance in February 2016 and which is also our internal baseline for future EPS growth.

Finally, I am pleased to report that our non-GAAP return on invested capital or ROIC now has exceeded 20% in each of the past two years FY 2016 and FY 2015. This underlines our primarily organic growth focused management philosophy and our disciplined approach to M&A.

I would like to briefly pause here and comment on the end market conditions in the fourth quarter of 2016 and as we start FY 2017. During the first three quarters of 2016, a steep and at the time unexpected decline in European academic demand, together with global industrial market weakness, negatively impacted Bruker's revenue growth.

Those trends still have an impact on our Q4 2016 revenue performance, as many Bruker products have lead times from booking to revenue of four months to six months or even longer.

To give you more perspective, in fiscal year 2016, our European revenues represented 36% of Bruker's overall revenue and revenues declined at a double-digit in constant currency in Europe. Outside of Europe, Bruker actually grew its revenues at a mid single-digit rate in fiscal year 2016.

During the fourth quarter of 2016, we saw signs of improvement in our European orders, which were up year over year for the first time in 2016, after declining year over year in each of the prior three quarters. While we are not ready to call this a rebound yet, we are more optimistic and we expect to have a lot less headwind in Europe in 2017.

The weak bookings earlier in 2016 will still have an impact on our first quarter of 2017. We will need more quarterly data points before we can confirm a trend reversal in our European orders.

With that, please turn to slide 6 and 7 now where I'll provide details about the performance of our three BSI groups and of our BEST [Bruker Energy and Supercon Technologies] segment for fiscal year 2016. The Bruker BIOSPIN Group delivered low to mid single-digit revenue growth, with revenues of $563 million in 2016.

BIOSPIN reported strong margin gains and has been the major contributor to Bruker's growth and operating margin expansion in 2016. Better NMR pricing, mix, our 1 gigahertz NMR installation and our 2015 restructuring actions and factory closing all contributed to higher BIOSPIN margins.

We also saw good demand for the NMR FoodScreeners and applied markets and for NMR clinical research systems in phenomics, as well as strong growth in BIOSPIN's aftermarket service offering called LabScape. Our BIOSPIN preclinical imaging revenues declined in the low single-digits year over year.

Moving on to the Bruker CALID Group, it reported a year-over-year revenue decline in the low to mid single-digits in 2016 to $475 million. CALID was negatively affected by European academic markets, as well as weak first half 2016 MALDI Biotyper revenue in China and in the U.S.

In 2016, Optics and Detection products had positive revenue growth while our Daltonics mass spec products saw a decline. Daltonics orders did improve in Q4 of 2016 with Europe a main driver.

As discussed on our Q3 2016 earnings call, we have initiated a factory consolidation and restructuring plan at Daltonics in 2016, which should have its full P&L impact in the second half of 2017. Daltonics is ramping up several exciting new products including our MALDI PharmaPulse solution our new timsTOF and rapifleX TOF/TOF instruments.

We expect these products to begin to have a positive impact on Daltonics in fiscal year 2017. Finally, our Bruker Optics business had solid revenue performance and contributed to Bruker's overall margin gains in 2016. Please turn to slide 7 now.

The Bruker NANO Group had a year-over-year low single-digit revenue decline in 2016 to $455 million, as contributions from the Jordan Valley acquisition partially offset weakness in AXS, especially in Europe, and our industrial research and analysis product lines worldwide.

We continue to execute on our rightsizing and factory consolidation efforts at AXS, as also discussed on our Q3 2016 call. Together with cost controls elsewhere, we expect those actions to help improve the Bruker NANO Group's profitability by mid-2017.

Our Nano Surfaces business saw improved profitability year over year in 2016 due to prior restructuring and cost actions. Our florescent microscopy products continue to see good demand in neuroscience and cell research.

Our semiconductor metrology business nearly doubled in 2016, following our late 2015 Jordan Valley acquisition and early major customer adoption of X-ray semiconductor metrology tools for technology validation.

Finally, our BEST segment revenues were down in the low single-digits in 2016, including a small revenue contribution from the November 2016 acquisition of Bruker-OST in Carteret, New Jersey. BEST had a difficult prior year comparison given the phase-out of the higher margin DESY and ITER multi-year projects in 2015.

BEST was also not immune to previously reported pricing pressures and industry consolidation in the superconducting materials industry. As we explained previously, in November 2016, we seized the strategic opportunity to acquire what is today Bruker-OST and have established BEST as a market leader in superconducting materials.

In 2016, despite the above mentioned trends, BEST saw increased orders for superconducting wire due to its superior quality, technology and lower total cost of ownership for its MRI OEM customers and high energy physics customers. BEST ended the year with strong backlog and long-term contracts.

And BEST is now working hard on integrating the Bruker-OST acquisition and to begin its turnaround, productivity gains and margin expansion. Next, I will take a moment to highlight our investments in high value innovation with two new products. On slide 8, I show our new Ultima NeuraLight 3D optogenetics and multiphoton fluorescence microscopy system.

This novel and unique system will help neuroscience researchers by providing simultaneous, all-optical optogenetics stimulation and imaging on the same platform. Multiphoton microscopy is an important tool in brain research and we believe we now have the fastest and deepest penetrating 3D multiphoton system for neuroscience research.

We just introduced the Ultima NeuraLight 3D at the Annual Meeting of the Society of Neuroscience in San Diego in November of 2016. On slide 9, our label-free rapifleX MALDI PharmaPulse solution is gaining acceptance among pharmaceutical customers.

Just last week, at the SLAS conference in Washington, D.C., we introduced our MALDI PharmaPulse 2.0 solution with further improved automation assay development tools for 100 times to 1,000 times faster mass spec-based screening.

Some of our key pharma early adopters showed outstanding data at SLAS, demonstrating the utility of this game changing ultra-high throughput screening solution for drug discovery.

We believe we have the first mass spec-based system to offer the necessary speed, specificity and robustness for label-free pharma primary screening of millions of compounds in drug discovery. Moving on to slide 10, as you know, during 2016 and January 2017, we completed a number of strategically focused bolt-on acquisitions.

The assets we acquired enable us to offer more integrated analytical and diagnostic solutions and also have made us a market leader in superconducting materials.

These acquisitions will be important for the acceleration of our consumables, assay, and software aftermarket growth strategy, and they also added important preclinical PET/SPECT micro-EPR and nanoindenting product lines to Bruker.

In 2017, we expect Bruker-OST and our other bolt-on acquisitions to reduce our operating margin expansion by approximately 40 bps. By 2018, we expect them in total to contribute positively to our further margin expansion.

As an example of how we supplement internal growth with M&A, on slide 10 I highlight key capabilities that we acquired to ramp up our assay, consumables, and software products for our MALDI Biotyper and MALDI Tissuetyper platforms.

Over time, we expect this assay, consumables, and software business to be a Bruker revenue component with greater than 20% operating margins and to contribute to our further margin expansion while also achieving high return on invested capital. Bruker's key priorities for 2017 are summarized on slide 11.

We are driving for constant currency growth in the mid-single digits, and we intend to continue our multiyear margin expansion. In summary, we are making tremendous progress at Bruker, even in the face of significant end market headwinds in 2016.

We believe we are on track to resume organic growth in 2017 and to achieve non-GAAP operating margins in the high teens over time. With that, let me turn the call over to our Chief Financial Officer, Tony Mattacchione..

Thank you, Frank. I will now provide some additional details on our financial performance in Q4 and full year 2016, starting on slide 13. Starting with overall financial performance for Q4, as you saw in the press release, we grew non-GAAP EPS 21% to $0.46 compared with $0.38 in Q4 2015. GAAP EPS was $0.43, up $0.07 from $0.36 in Q4 last year.

On the top line, our reported revenue was 1.6% lower year over year. Q4 reported revenue included a 2.2% organic revenue decline, 1.9% growth from the Bruker-OST and Jordan Valley acquisitions, and a 1.3% negative impact from foreign currency translation. Our non-GAAP operating margin of 19.6% was 210 basis points higher than in Q4 2015.

This reflects continued price and mix benefits and operational improvements, most notably in our BIOSPIN Group, but also improvements in our CALID Group and NANO Surfaces business. Importantly, these improvements have occurred despite the challenging end market conditions we experienced in 2016.

Free cash flow was $79.7 million in the fourth quarter of 2016, a $59 million decrease from Q4 last year. As a reminder, we had very strong cash flow generation in Q4 2015, including significant customer advances with the ultra-high field magnet orders we received that quarter and strong cash collections.

In Q4 2016, we had more normalized AR collection given this year's business volume and fewer ultra-high field magnet orders. Timing of tax payments this year also reduced the year-over-year comparison. In Q4 2016, our free cash flow conversion rate was 115%.

Net cash declined year over year, but remained positive at $88.6 million at the end of the fourth quarter of 2016. In the fourth quarter of 2016, we continued to buy back stock and completed our November 2015 share repurchase authorization of $225 million. We also paid another quarterly dividend of $0.04 a share in the fourth quarter of 2016.

The reduction in net cash reflects these two items as well as our recent acquisition activity, which Frank just covered. On slide 14, I show the year-over-year revenue bridge for Q4 2016. Our reported revenue declined 1.6% in the quarter.

The 1.9% portfolio-related growth from the Bruker-OST and Jordan Valley acquisitions roughly offset a 2.2% organic revenue decline. Changes in foreign currency translation lowered revenue about 130 basis points during the quarter.

As Frank mentioned, soft European academic spending in the first three quarters of 2016 together with weak global industrial market conditions were the primary drivers of the organic decline. Geographically and currency adjusted, European revenue declined in the low double digits year over year in the fourth quarter.

North America declined in the low single digits. Asia was up low teens, including a greater than 20% growth in China and low double-digit growth in the region generally. That's except for Japan, which was down in the mid-single digits.

For Europe, Germany, representing approximately 10% of Bruker's total sales, reversed the significant declines from earlier in the year and was up at a double-digit rate year over year. Broader Europe remained in negative territory, albeit to a lesser degree than in Q3 2016.

Most of our businesses reflected gains in China, benefiting from the new five-year plan. China's focus on research serves us very well. We also had a strong fourth quarter in other Asian geographies in our semi and detection businesses. On slide 15, I show our full Q4 2016 profit and loss statement on a non-GAAP basis.

Our Q4 2016 non-GAAP gross profit margin was 48.8%, which was a 220 basis point increase year over year. The increase was primarily the result of operational improvements throughout Bruker's portfolio, but most notably in the BIOSPIN Group, and also within our Nano Surfaces and Daltonics product lines.

These effects were partially offset by academic and industrial market-driven volume declines. Our Q4 2016 operating expenses decreased approximately $2 million year over year, as movements in foreign exchange rates offset the additional expenses from acquisitions. Overall, we again demonstrated prudent expense control in the fourth quarter.

SG&A expenses were down, while R&D was slightly up on selective investments and the addition of acquisitions. Our previously discussed restructuring activities and factory consolidations within our CALID and NANO groups remain on track.

As a reminder, in total these restructuring actions are costing us about $11 million to $13 million and are expected to lead to cost savings between $10 million and $13 million on an annualized basis. We continue to expect the full impact of the savings in the second half of 2017.

Our non-GAAP operating profit margin in Q4 2016 was 19.6%, which was 210 basis points higher compared to last year. Looking below the line, net interest and other expenses were $2 million positive and driven in part by gains on foreign currency denominated transactions which we recorded in Q4 2016.

Our Q4 2016 non-GAAP tax rate of 21.7% increased sequentially from the unusually low approximate 6% effective tax rate in Q3 2016. In that quarter, our tax rate benefited from the remaining reversal of U.S. tax valuation allowances.

Our Q4 2016 tax rate was 260 basis points higher than in Q4 of 2015, as valuation allowance reversals were also recorded in the fiscal year 2015 fourth quarter. Weighted average diluted shares in the fourth quarter were 160.7 million, down 8 million shares or about 5% year over year as a result of share buybacks since our November 2015 authorization.

Finally, non-GAAP EPS of $0.46 in Q4 2016 was an increase of $0.08 or 21% from $0.38 in Q4 2015. On slide 16, I show year-over-year revenue bridge for the full year of 2016. Our reported revenue declined 0.8% from 2015. The 2% increase from the additions of Jordon Valley and Bruker-OST offset a 2.3% organic revenue decline.

This was slightly better than the approximate 3% organic revenue decline we had projected in November. Changes in foreign currency had a small 0.5% negative impact on our 2016 reported revenue. Geographically, and adjusting for foreign currency translation, European revenue was down in the low double-digits during 2016 compared to 2015.

Asia was up in the mid single-digits, including a mid-teens contribution from China that was partially offset by a high single-digit decline in Japan. North America was up in the mid single-digits. On slide 17, I show our full year 2016 profit and loss statement on a non-GAAP basis.

Our 2016 non-GAAP gross profit increased $23 million or 3% and the gross profit margin of 48.1% increased 190 basis points compared to 2015. This is largely due to the positive BIOSPIN price, mix and operational improvements. These gross profit margin improvements were somewhat offset by the lower CALID and NANO volumes.

Our 2016 operating expenses were essentially flat year over year. Our cost controls, together with favorable foreign exchange movements, roughly offset additional expenses from the recent acquisitions. SG&A declined slightly for the full year 2016 compared to 2015 while R&D increased modestly on select investments in acquisitions.

The net result is that our non-GAAP operating profit margin for 2016 improved by 150 basis points compared to 2015. Higher than our 100-basis-point operating profit margin expansion guidance at the time of our last update. We are very pleased with our continued operational progress. Our 2016 non-GAAP tax rate was 15.7% and our 2015 tax rate was 22%.

While both years benefited from the reversal of tax valuation allowances, the effect was much more significant in 2016. Adjusting both years for the valuation allowance effect, our non-GAAP tax rate would have been 26.3% in 2016 and 34.4% in 2015. The reduction reflects our progress with tax planning initiatives.

In 2017, we expect our full year non-GAAP tax rate to be approximately 25%. Finally, fiscal 2016 non-GAAP EPS of $1.19 represents an increase of $0.30 or 34% from $0.89 in 2015.

Our operating profit expansion represented $0.07 of the increase, the lower share count due to our share buyback program contributed $0.05, the effect of the year-over-year tax valuation allowance reversals contributed $0.08, favorable currency effects contributed $0.06, and the Jordan Valley acquisition added $0.04.

As Frank mentioned earlier, our $1.19 full year 2016 non-GAAP EPS included two items that we believe are unlikely to repeat in future years. Let me provide a little more detail around that. First, as discussed in our Q3 2016 earnings call, in fiscal year 2016, we were able to reverse more U.S.

tax valuation allowances, which resulted in a non-cash tax benefit of approximately $0.15 for the full year. Second, foreign currency transaction gains contributed about $0.03 to EPS in fiscal year 2016. Excluding these two items, our 2016 non-GAAP EPS would have been closer to $1.01, which is our internal baseline for future EPS growth.

Turning to slide 18, we generated $93.7 million of free cash flow in 2016 compared to $195 million in 2015.

The year-over-year comparison was affected by an increase in working capital, primarily driven by higher inventory levels needed to support our factory consolidation efforts and long-term contract at BIOSPIN and BEST, higher bonus payments for 2015, higher restructuring payments, higher tax payments associated with our 2015 cash repatriation and higher tax prepayments.

By comparison, the change in working capital was a source of cash for us in 2015. Our cash conversion cycle at the end of 2016 reflected a decrease of 6 days compared to 2015. This was comprised of the following.

Our days of inventory remained at 188 days, our days sales outstanding decreased 5 days to 54 days, and our days payable outstanding which totaled 34 days were up 1 day compared to 33 days in 2015.

As mentioned in the inventory build associated with this year's restructuring actions and long-term contracts kept our days of inventory outstanding consistent year over year, offsetting inventory reduction initiatives.

During the fourth quarter of 2016, we repurchased an additional 734,000 shares at an average cost of $22.48 per share totaling $16.5 million. Since the inception of the program through December 31, 2016, we repurchased 9.3 million Bruker's shares at an aggregate cost of $225 million completing our November 2015 share repurchase authorization.

We also paid another quarterly dividend of $0.04 a share in Q4 2016. Now, turning to slide 20, I show Bruker's guidance for the full year of 2017. We currently expect our fiscal year 2017 reported revenue growth to be in a range between 1.5% and 2.5%. We project organic revenue growth of approximately 1% to 2% in 2017.

Acquisitions are expected to contribute approximately 350 basis points to 400 basis points to top line growth. Assumed in our guidance, our average foreign exchange rates over the month of January, which would result in a foreign exchange headwind to Bruker's revenue growth of approximately 300 basis points to 350 basis points.

We expect our fiscal year 2017 non-GAAP operating margins to expand 40 basis points to 70 basis points from a base of 14.8% in 2016. Let me briefly comment on our operating margin expansion goals for 2017.

Our 40 basis points to 70 basis points operating margin expansion target includes a cumulative dilutive impact from our 2016 and early 2017 acquisitions of approximately 40 basis points. Excluding the fiscal year 2017 impact of these acquisitions, our underlying operating margins are expected to increase 80 basis points to 110 basis points in 2017.

As mentioned, our fiscal year 2017 non-GAAP tax rate is projected to be around 25%. We assume a fully diluted share count of approximately 161 million shares in fiscal year 2017. Rolling it all up, our 2017 non-GAAP EPS is projected to be in the range of $1.05 and $1.09 a share. For 2017, our foreign currency assumptions include a ¥115.1 per one U.S.

dollar, $1.06 per one euro and CHF 1.01 per one U.S. dollar, which were the average rates in effect in January of 2017. We expect capital expenditures of approximately $45 million for fiscal year 2017. I remind investors that like in years past, we expect the majority of our profitability and cash flow to be generated in the 2017 second half.

Given a challenging prior year comparison, we expect to have a slow start in Q1 of 2017. As a reminder, our Q1 2016 included a 1 gigahertz NMR system and a favorable tax rate. In addition, in the first quarter of 2017, we expect to still have an overhang from the weak European orders in the first nine months of 2016.

While we do not provide quarterly guidance, we currently anticipate both operating profit margin and EPS in the first quarter of 2017 to be lower year over year compared to the first quarter of 2016.

I will close by stating that we are very pleased to report strong improvements in operating margins and Bruker's bottom line in Q4 and the full year of 2016. We have made significant progress with our profitability expansion initiatives.

And we are committed to delivering further improvements in this area, as we resume revenue growth in 2017 and beyond. With that, I'd like to turn the call back over to Miroslava to start the Q&A session..

Thank you, Tony. Andrea, please open the call to questions. Please limit your questions to one and a follow-up in order to accommodate as many analysts as possible..

Our first question comes from Brandon Couillard of Jefferies. Please go ahead..

Thanks. Good afternoon.

Frank, in terms of the 2017 outlook, can you give us a sense of what you see as the positive and negative tailwinds and headwinds going into next year, be it by region or specific end market?.

Yes, Brandon. We do anticipate less headwind from Europe, not quite ready to call it a trend reversal yet, but we're encouraged. We expect continued growth from China. And we have not made a call yet on what the industrial trend will be.

We've seen that others have reported encouraging trends in industrial and our data on that is still ambiguous, so we'd like to observe that for another quarter or two.

We do generally believe that there will be a come-back in academic spending and that's over time, maybe not all in 2017 or all in the first half of 2017, we'll have a stabilization in academic demand..

So just to clarify, to make sure we're clear. In terms of what you've embedded in guidance for the year, have you assumed that the European government academic market returns to positive growth on balance for the full year? And then, second question for Tony, give us a sense of what you're expecting for free cash flow conversion for 2017..

So I'll take the first half. We have, at this point, said that in Europe we expect less headwind. If you recall in the fourth quarter and in all of last year, European revenue was down in the low-teens for us, and we expect that – we have not said yet that we will grow in Europe, but we don't think we'll have a headwind anymore, much less headwind..

Kind of the same magnitude..

Yeah. Kind of just to follow up on that, we won't grow in Europe on a year-over-year basis, but what we've seen in Q4 is encouraging in terms of our order patterns..

And I should have added – thank you – is that we still have an overhang from weak European orders that will affect us certainly in Q1 of 2017..

And Brandon, as regards to free cash flow, Q4 was a good free cash flow quarter for us, 115% GAAP net income conversion.

If you look back a few years back, that's generally the amount of free cash flow conversion plus or minus 20 basis points and that's what we're looking at for 2017 around 80 to 100 basis points free cash flow conversion on our GAAP net income..

Great. Thank you..

Our next question comes from Amanda Murphy of William Blair. Please go ahead..

Hi, thanks. I just had a quick follow-up in terms of 2017 expectations around the ultra-field side. Are you expecting anything from a revenue recognition there in 2017, and then, maybe you could just give us a sense of how the backlog even qualitatively is shaping up their order flow? Thanks..

Yeah. Ultra-high field which we defined as one 1.0 gigahertz and higher, we have one system in the 2017 forecast. Our backlog is obviously higher than that. But these systems take a while to build and test and, of course, there's also obviously the issue of site and customer siting readiness.

We have very substantial backlog north of $100 million, off backlog for 1.2 gigahertz and 1.1 gigahertz systems for the years 2018 to 2021. But we do not expect those to come into revenue in 2017 yet..

And as the expectation, you'll be able to manufacture those in 2018 then the 1.2 gigahertz?.

It will take several years. We hope that we will make a lot of progress in 2017 and probably can update you at the end of 2017 whether we expect them to go into 2018 revenue, as at this point, we cannot say yet, as there's still real R&D issues..

Okay. Thanks very much..

Our next question comes from Jack Meehan of Barclays. Please go ahead..

Hi. Thanks. Good afternoon, guys..

Hi, Jack..

I wanted to get your perspective on the forecast for CALID in 2017 and just thoughts on MALDI on the hospital side going into the year..

So CALID, I'll take that one, Jack. So Detection had unusually high business in 2016 when we expected them to be lower because they had some unusually high deliveries in 2016. For Optics, we expect to see solid growth as in just about every year.

And we also expect that the Bruker Daltonics mass spec business will resume growth, organic growth, and growth in general in 2017. For the group, that means a growth year, but also still a low single-digit growth year because of Detection going down in revenue even though the two larger divisions will be growing.

To the question on MALDI and I believe MALDI Biotyper in particular, we expect that business to be back in growth mode after some hiccups that we had in the first half of 2016. So we expect that to normalize.

But now that it's including aftermarket and service $100 million business, we don't expect to go back in 2017 to double-digit growth, but we expect it to grow in the single-digits..

Great, that's helpful. And then just one follow-up, the share count guidance of 161 million, I'm assuming that doesn't include any repurchase and just thoughts on reauthorization of a new buyback program. Thanks..

That's correct. That does not include any new share buyback authorization, and we will be with our board analyzing our capital allocation for 2017 and beyond. And at this point, we do not have an authorization for additional share buybacks, but that's always something that we analyze from time to time..

Thanks, Frank..

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

Hi, good afternoon. NMR pricing was a major driver of margin expansion over the last several quarters, also helped at the revenue line.

Can you help us think about how much opportunity is left in terms of the pricing driver at the NMR line on margins and at the top line? And more broadly, would you be willing to provide some sort of a bridge or a ladder in terms of what the components are of margin expansion at least in the context of your guidance for 2017?.

So I'll take the first part, and then I'll pass the second part to you..

Sure, yes..

The NMR pricing, the one-time large NMR price increase that we announced in early 2015 has been coming in mostly in 2016, a little bit already in Q4 2015, as you recall, Doug and it still has an effect also in the first half of 2017 certainly.

Ongoing small 2% to 3% price increases, which we tend to do in many of our businesses, not only in NMR, are simply an ongoing part of business, and they are part of margin expansion like in probably most companies, but there's really nothing unusual about them and there are no unusual NMR price increases that we have executed since early 2015 or intend to do in the future.

So it's really just business as usual, probably what every company does, small price increases to make up for raises and inflation and so on..

And, Doug, to follow up on the bridge, we're not going to put out a detailed bridge, but the drivers will be reflective of what we put in place in 2016.

Of course, the restructuring of the AXS in the Daltonics production facilities, the MALDI Biotyper move, and the AXS move will contribute significantly to the margin increase that, as you might recall, is about a $10 million to $13 million increase fully annualized in the second half of the year. As Frank just mentioned, price will have an impact.

There's an overhang with the 2015 price increase as well as an annual price increase at BIOSPIN and other businesses. New products will contribute nicely to margins next year as well. And importantly, with the improving volume, we'll better absorb fixed costs in our factory, so that will have an impact as well..

Okay, and one very quick related follow-up. Recognizing you acquired several assets over the past few months, can you help us think about how these deals impact operating expense specifically in 2017? I'm just trying to get at benefit or drag on the margin line in the context of your full-year guidance..

Yeah. We put in our prepared comments, the acquisitions have a 40 basis points drag on our operating profit margin in 2017, and we expect those to contribute to the expansion after that..

Okay, thank you very much..

Our next question comes from Tycho Peterson of JPMorgan. Please go ahead..

Hey, thanks. It's actually Patrick Donnelly in for Tycho. Maybe, Frank, just on the guidance, you're looking for 1% to 2% organic growth, just a little bit below market growth coming off a decline this year.

Can you maybe just talk through what's preventing you from growing at a market rate and what gets you back to mid-single digits maybe in 2018? You obviously assume the European hangover is affecting 1Q a bit. Without that, do you feel like you're back at mid-single-digit growth next year? if you just talk through that, that would be great..

Yes, Patrick, good question. So obviously for us, an organic decline last year, the 1% to 2% organic, which is below market in 2017, is very good progress. As we said, we still feel that we have some backlog hangover from the weak bookings, in particular in the first three quarters of last year.

So that will have an effect on Q1 2017 for sure, as Tony explained, and possibly a little bit later into the year. The other effect is really more – so yes, Europe is normalizing. It's clearly required for us to get to market growth rates.

We believe that our industrial business cannot reasonably get weaker than it has been in the last two or three or four years. It's been a while. We certainly recall periods when our industrial business was growing very nicely, at times faster than our life science business, although so far for 2017 we haven't modeled that in.

We do expect some recovery there eventually. I'm just not ready to call the timing.

And then mostly we're just really quite bullish about the opportunities from the new products and solutions and new market segments that we're entering, from phonemics by NMR to proteomics to a further expansion in molecular biology with much more assays and antibiotics susceptibility testing, resistance testing, multiplex PCR assays to advances in semiconductor metrology.

And this wasn't my complete list because I don't want to make the answer too long.

But generally speaking, it's the product and solutions momentum that we think can accelerate us to market growth and possibly beyond with clearly cooperation needed in Europe where we're more optimistic and a little industrial help wouldn't hurt, but isn't really crucial for our longer-term growth prospects.

I hope that gives you enough color perhaps..

Yes, that's helpful. And then maybe just looking at M&A, you've obviously been a lot more active over the last couple months, maybe just an update as to how the pipeline looks, and then just general thoughts on capital deployment. Obviously, you touched on your share repurchase is now completed.

How are you thinking about capital deployment going forward split between those two and then the ongoing dividend as well?.

M&A, we would expect now for the remainder of 2017 to be much more of a normal year with a slower M&A pace. It was really somewhat coincidence that so many of the deals that some of them had been in the pipeline for many quarters and maybe even a year. They all seemed to close in Q4 or even shortly after the end of Q4 in the new fiscal year.

The pipeline is such that there will be very likely less – quite a bit less M&A, and that could be anywhere from zero to two or three transactions per year. Hard to speculate, but it's going to be a more normalized M&A year now going forward.

In terms of capital deployment, investing in our profitable growth is always the highest priority, internal investments, which we think are sufficiently funded. We don't need a lot of CapEx, as Tony has explained.

High quality, high ROIC, strategically focused M&A would be the highest priority, but there are not that many targets, plus we have some digesting and integration to do now. And we will from time to time look at share buybacks and I think our dividend will probably stay as it is..

Our next question comes from Bryan Brokmeier of Cantor Fitzgerald. Please go ahead..

Hi, good evening. Just following up a little bit on the last question on M&A, you have the stronger cash than you had in a number of years at the end of the year, and I think that's probably driven some of the acquisitions that you've done recently.

But have you also seen valuations come down, and then, what's your sort of appetite for a larger more meaningful transaction?.

Valuations are very mixed. I don't know that I'm aware of a trend in valuations and whether they're – we do most of our valuations, not – we don't necessarily or we don't typically acquire publicly traded companies or necessarily an option processes.

So our valuations, the ones we pursue, tend to be a little bit earlier stage, but longer term, they tend to be at reasonable valuations, fair valuations that allow us a good ROIC over time. I wouldn't say that we have appetite for larger acquisition, but I wouldn't want to rule it out either. But it is not one of our key goals for 2017.

I think we have so many opportunities that we can grow into organically or with the help of the recent acquisitions that really in many ways enable us to pursue more complete solutions, particularly in life science, pharma and diagnostic spaces that I don't want to rule it out, but it's not that we have appetite for a larger acquisition, I wouldn't characterize it that way..

And have you made progress in your search for a new BIOSPIN president and what timeline do you anticipate?.

Yeah. Probably a 2018 decision. We've implemented a very capable interim team of people that were on the team already and we've established them in middle of January and we'll sort of give them the year 2017 to prove themselves, and then, probably make a decision at the end of the year and early 2018.

I think I'm really quite optimistic that we won't miss a beat and that the strong momentum at Bruker BIOSPIN will continue also in this year. We have some excellent internal bench strength..

Okay, thank you..

Our next question comes from Jonathan Groberg of UBS. Please go ahead..

Great, thanks a million. Sorry, just two quick ones I don't know that I exactly got the answer. I know people asked them already, but one Tony, what is your free cash flow guidance for 2017? And then in 2016, the 200 bps of margin expansion, how much of that would you attribute to the NMR pricing that you took? And then I have one follow-up..

Like previous times when you've asked specific questions in this regard, we're not going to give the specific amount on the price increase in the 2,000 bps (sic) [200 bps]. But it was a significant driver of the expansion as well as restructuring activities, operational improvements, mix and the like. So the answer hasn't changed there.

Free cash flow, again, we don't provide guidance for free cash flow. So what I said and what I think is what you should expect is around 80% to 100% of GAAP net income for free cash flow for 2017..

Okay. Got it. That makes sense. I think I heard 80 bps to 100 bps improvement or something so, okay, that makes sense..

No, no, no..

And then, Frank, can you – now that your year kind of ended, I'm assuming you go back talk to some of your customers in Europe on the research side.

What are you hearing from them? Why do you think things seem to get a little bit better in the fourth quarter and maybe what happened earlier in the year and how that's informing what you're thinking about 2017?.

Yeah. Still no clear answers. I think there is some structural issues in Central and Eastern Europe that we don't expect to change. But I think that Germany spent so late and some other powerful economies from France to the UK to Scandinavia, Italy and Spain for good parts of the year 2016 didn't have governments or functioning governments.

We believe the excitement of Brexit is subsiding a little bit, the negative excitement, if you like. And we think there will be a normalization over time. We think there has to be one and our Q4 indicates that and certainly, the tone at our internal recent sales meetings that I've been attending in Europe was clearly more positive than a year ago.

So we're reading the tea leaves like everyone else and we have a good data point in Q4 with year-over-year increase in European orders. So we're encouraged, but we won't call it a trend yet..

Okay, thanks..

Our next question comes from Isaac Ro of Goldman Sachs. Please go ahead..

Thanks, guys. It's actually Joel in for Isaac. Maybe just another quick one on the balance sheet and capital allocation.

Just thinking about your priorities to sort of shift the business a little bit more towards the recurring revenue, whether it's consumables or software, how should we think about the optimal balance sheet leverage of Bruker in, let's say, 2018 or 2019?.

We like relatively low leverage unless we do a very significant deal. And while we've done a number of deals and I think the cumulative spend on that has been around $70 million I believe, in the last several months, we're comfortable with our leverage as is.

It could go a little bit higher and going to a higher level higher in the two times to three times range, we probably would only want to do that if there is a very worthwhile acquisition that we would want to consider. So we're comfortable with our present leverage.

We're obviously not going to a completely unlevered balance sheet given the still relatively attractive cost of borrowing. I think right now having this more permanent debt feature on our balance sheet is good for our shareholders..

Thanks, and maybe just one on Japan.

Just help us understand whether there are any competitive dynamics at play here that may be amplifying some of the underlying market weakness we saw in 2016?.

We have strong competitors in Japan with Shimadzu, JEOL, Rigaku, a little bit Horiba as well. Certainly in NMR, Japan is the most competitive of all markets without any question, because that's the whole market for our main NMR competitor, although they are certainly very active worldwide.

So it is possible that there is some competitive dynamics in it. But I also don't know that our market trends are so different from that what others are seeing..

All right, thanks..

Our next question comes from Paul Knight of Janney. Please go ahead..

Hi, this is actually Bill March on for Paul.

How are you guys doing?.

Good, thanks..

Hi, Bill.

How are you?.

Maybe just if we could ester the string of acquisitions at a high level, how do you think about the continued growth and recurring revenues over the next few years? Is it going to be driven by going after specific product lines or customers, kind of how do you continue to grow your percentage of revenues in recurring revenues?.

Really two pieces, we've been very consistently growing aftermarket service and IQ, OQ, PQ services and regulatory services qualification services. That's been a good growth driver, and we now really have put the appropriate management in place just about really everywhere in the last three years or four years.

So that's already humming along from a lower base than some other companies that have done this for decades, but this is well underway and is really broad-based. The other part, which has to do with software and assays and consumables, that is not only, but that is primarily focused on our diagnostic and microbiology and clinical research solutions.

There are also components of that elsewhere from some industrial AFM tips to supplies for the MALDI PharmaPulse for pharma industries, but there, the consumables business growth, which is very rapid right now, albeit from a low basis, and software business will be primarily in clinical research and diagnostics..

Got it. And then, just back to the Jordan Valley acquisition, the semiconductor market has been pretty strong over the past 6 months to 12 months. Is that an area where you would look to maybe continue to expand off of a smaller percentage of your business in the future? Thanks..

Yes.

We believe that, especially, as node sizes get smaller and smaller, right now, there's capacity-wise, for the 10 nanometer nodes in which we play some role, but as we pass hopefully and that looks good, the technology validations for the 7 nanometer and eventually the 5 nanometer nodes and as some of our tools also play an important role in the 3D features that more and more memory and chips have, we believe there is good technology trends more so even than marketing trends towards our semiconductor metrology tools.

So once we get beyond the validation year, 2016 – 2017, this is something that may very well get a good pickup in 2018 and beyond, as we go more into the capacity buys for these newer technologies.

So over time, right now, semi is 5% or less of our revenue even in a good year, but over time, that could go into the high single-digits with very good margins, if our technology strategy works out there and we're actually quite optimistic..

Great, thanks..

Our next question comes from Sung Ji Nam of Avondale. Please go ahead..

Hi, thanks for the questions.

Frank, given your overall strength in the BIOSPIN business, you talked about also having the backlog of the 1 gigahertz systems, et cetera, is that segment the growth that you've seen recently, is that you think that's sustainable into 2017 and beyond and did you also expect organic growth from the preclinical imaging business?.

Okay. Sung Ji, a few questions. The ultra-high field backlog has not gone up very much. In the last year, with that sort of all the backlog and I would think this past year, probably more of the structural biology investment probably went to other vendors, Cryo-EM and Cryo-TEM.

We believe that that will pick up again, as there will be more investments by governments, in particular, in intrinsically disordered protein, which we believe will be one of the next investment priorities in molecular sciences.

But we do believe that the applied food authenticity and clinical research markets in phenomics that those can be good growth drivers as long as the focus on pharma for our NMR business, which is why fundamentally and you heard me say that before, we upgraded our long-term CAGR for the NMR business from low single-digits a few years ago to mid single-digits, and we're sticking to our story there.

We think that is promising. And Sung Ji, the last part of your question was on preclinical imaging, that has now had a couple of years of slower growth and slower funding.

We're still looking – we're right now primarily pursuing a product strategy with exciting nuclear molecular imaging and optical molecular imaging and the combinations of PET and MRI to restart growth there. But it's a little too early to call the long-term growth rates in that market..

Okay.

And then, just quickly, for Tony, what's the assumption for currency impact on margins and earnings next year – for 2017?.

Yeah. We use the average rate – because of the changes in the rates recently, we use the average rates in January for the guidance and that had a negative impact on the top line, but given our cost structure, we have a natural hedge in the business, so the impact on operating profit margins is not significant, if the rates stay where they are today..

Thank you..

Our next question comes from Ross Muken of Evercore. Please go ahead..

Hi, this is actually Matt Nicolai in for Ross. Thanks for taking the question. So in the European academic market in the quarter, were there any other markets where you saw sequential improvement? I know you called out Germany.

But was that the only real bright spot in terms of sequential improvement?.

We called out Germany on the revenue side in Q4. On the order side, the European improvement in Q4 was a little broader..

Got it, thanks, and then just one more.

Have you seen any pickup in orders related to NIH in the quarter, or are you still not seeing any pickup there?.

No, we haven't seen anything remarkable, and our data isn't usually statistically most meaningful. I'm sure a consumables company will have statistically better data on that. So we haven't seen anything remarkable. We did not see any significant NIH spend coming our way in terms of orders in Q4 yet, at least nothing unusual.

So that's something that we're observing..

Got it, thanks..

Our next question comes from Dan Arias of Citi. Please go ahead..

Good afternoon. Thanks for the question, just one for me.

Frank, within BIOSPIN, are you looking for NMR growth to come more from the research side or from the applied markets this year?.

From this year, likely more from the pharma and from the applied side..

From pharma and applied, so....

Yes..

...equal contribution if you just consider pharma research?.

I'm not prepared to say equal contribution. I didn't quantify that actually exactly, but I think those are both businesses that are smaller than the academic research side that probably will have the faster growth rates qualitatively without going into exact numbers..

Okay, thanks..

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

Hi, good evening. Most of my questions have been answered, just one quick one for Tony.

Tony, what are you guys expecting in terms of interest expense for the year given the deals you've done so far over the last 60 days or so?.

Some of the deals were funded with foreign cash, but we have borrowed up a bit on the revolver, but a little higher than our rate this year, so I think we ended the year in the mid-teens on interest expense, and that will be about the rate for next year..

Okay, thanks so much..

Our next question comes from Dan Leonard of Deutsche Bank. Please go ahead..

Thank you, just another one for Tony. Tony, I'm wondering if you've done any work to assess potential changes in U.S. tax policy on Bruker.

Would that be a positive or a negative?.

So obviously very fluid situation that we're not making any conclusions with. But there are three elements we're looking at, the corporate rate element of it, the territorial aspect and the repatriation aspect, and then of course the border adjustment. And you've got to really look at those three pieces separately.

From a corporate rate perspective, that obviously would have a good impact on our tax provision. However, a lot of our taxable income is non-U.S., so that puts some guardrails around that. Obviously, we've got quite a bit of cash outside of the U.S., so a repatriation at a low rate will help us quite a bit. We've got about $460 million of cash.

We think about $300 million of that could be repatriated if the new plan goes into place. And then the elimination of the permanent reinvestment of those earnings going forward obviously is good for a company that generates a lot of cash overseas. The border adjustment is more of a wildcard for us. We are a net importer.

So depending on how that plays out, that will have an adverse effect on our tax rate, but it's too early to estimate that with a lot of precision, and things could go – that could happen or not.

And we would obviously react to that with pricing and supply chain type of decisions, but it's too early now to really conclude what we would do if the legislation as proposed passes..

Okay. Thanks, Tony..

Our next question comes from Puneet Souda of Leerink Partners. Please go ahead..

Hi, Frank. Thanks for taking my question, just a quick one on the NMR service contracts.

I just wanted to know if you could educate us a bit on how the contracts – if the contracts are maintaining the higher level of pricing, how do you see that in 2017? Are those sticking, or compared to the service contracts that you had before and the number of service contracts that you had before, how is the trend looking with the update in pricing if there is one?.

That's very sticky, and we're really expanding our service contract business in BIOSPIN, but also elsewhere very nicely. That's just been a somewhat under-pursued opportunity in the past, at least not equally pursued in all geographies.

And we're now making good progress in geographies where we previously didn't have a lot of service contracts, from China to ironically Germany and Central Europe.

And so I think that's making good progress, and it's mostly pricing a little bit, but it's mostly really the larger number of service contracts that were – and the greater flexibility, the greater range of product offerings that we have for people who need from 24/7 including weekends to people who need just some basic repair parts that they might not have otherwise in their academic budget.

So we really have a good product offering, a good product range now, and a good commercial effort to pursue it..

Great, thanks. Thanks for taking my question..

You're welcome..

Our next question comes from Derik de Bruin of BAML. Please go ahead..

Hi, thanks. It's Mike Ryskin on for Derik actually. I just have one quick question that hasn't been asked yet. In terms of the M&A contribution for 2017, you talked in detail about the revenue assumptions and then you also commented on 40 basis points hit to op margin expansion.

Given the size of the deals that you've done, and you also said that in 2018 it will return to contributing to margin expansion overall. Given the size of the deals and the shift from negative 40 basis point headwind to contribution, that seems like a pretty dramatic jump just in one year.

Can you talk about how you're confident that you can make such a big turnaround in OST and in the other bolt-on acquisitions?.

I can give you a couple of examples, Mike. So for instance, the assay business that we bought in Scotland in Glasgow only has expense right now, R&D and other expenses, and has no revenue. We expect to launch first products as early as this summer.

And obviously, as they start to have some consumables and assay revenue, albeit on a small basis, finally that will begin to offset some of their pure expenses right now, so that percentage-wise is going to be a big improvement.

As we get going with some of our software and consumables businesses that we have acquired, we expect good growth from them.

And finally, the sizeable Bruker-OST business, part of the BEST segment, again, because they had been – their operating margins had been essentially zero or essentially flat, so making an improvement from that with best practices, with better productivity, with some of the things that we had previously implemented elsewhere, it's somewhat low-hanging fruit to make good progress with them.

So we believe that that's realistic to get them to become contributors to our further margin expansion as early as 2018, we're moving pretty quickly on all of this..

Okay, all right. Thanks..

Our next question comes from Tim Evans of Wells Fargo Securities. Please go ahead..

Hey, just one quick one.

Frank, do you feel like your visibility and the accuracy of your forecasting is better this year than it has been in the past? Has there been an improvement in that, or do you still feel like it's in similar territory?.

I'd like to think it's better, Tim. Of course, last year I think we at least – I cannot speak for others, although I suspect the European slowdown and how suddenly it happened came as a surprise for most companies. It certainly came as a surprise to us. We did not a year ago or 13 – 14 months ago see that significant European slowdown coming.

So I don't know what I don't know. I feel better about our forecasting. On the other hand, there's somewhat of a hope element that none of these major surprises come up that you just don't see yet..

Okay, thank you..

Our near-term revenue forecasting is certainly getting better. Our pipeline and opportunity view from the CRM systems that we've been implementing is getting better and better. It's the major disruptions that are hard to see.

The steady business I think our forecasting is getting much, much better and I think maybe that's the more differentiated answer..

Thanks..

This concludes the question-and-answer session. I would like to turn the conference back over to Ms. Miroslava Minkova for any closing remarks..

Thank you for joining us this evening. During the remainder of the first quarter, Bruker will be participating in the Cowen's and Barclay's Healthcare Conferences. We invite you to meet us at these conferences or visit us at our headquarters in Billerica, Massachusetts. Thank you and have a good evening..

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