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

Brandon Couillard - Jefferies LLC Chris Lin - Cowen & Co. LLC Tycho W. Peterson - JPMorgan Securities LLC Stephen Willoughby - Cleveland Research Co. LLC Aurko Joshi - William Blair & Co. LLC Jack Meehan - Barclays Capital, Inc. Bryan A. Kipp - Citigroup Global Markets, Inc.

Puneet Souda - Leerink Partners LLC Michael Ryskin - Bank of America Merrill Lynch.

Good afternoon, and welcome to the Bruker Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. We do ask that you limit your questions to one and one follow-up. Please note that this event is being recorded.

I would now like to turn the conference over to Miroslava Minkova, Head of Investor Relations. Please go ahead, ma'am..

Good afternoon. I would like to welcome everyone to Bruker's second quarter 2017 earnings conference call. My name is Miroslava Minkova, and I'm the 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 conference 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 I show on slide 2.

During the course of this conference call, we'll be making forward-looking statements regarding future events or the financial performance of the Company that involve risks and uncertainties. The Company's actual results may differ materially from these 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 conference call and in our Form 10-K, as well as other subsequent SEC filings. Also, note that the following information is related to the current business conditions and to our outlook as of today, August 3, 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 third quarter 2017 financial results in early November 2017. We will begin today's call with Frank providing a business summary.

Tony will then cover our financials for the second quarter of 2017 in more detail. Now, I would like to turn the call over to Bruker's CEO, Frank Laukien..

Thank you, Miroslava. Good afternoon, everyone, and thank you for joining us on the call today. I will begin today's earnings presentation on slide 4. Bruker continued to perform well in the second quarter of 2017.

During the second quarter, our revenues increased 11.6% year over year, which included organic growth of 7.6%, albeit in comparison to a relatively weak second quarter a year ago.

We are pleased with our Q2 2017 year-over-year order growth, which now marks three consecutive quarters of positive bookings momentum in Europe, and we now also see clear signs of improvements in industrial markets. Our CALID Group returned to revenue growth with strong margin expansion.

Finally, we saw clear operational benefits from our 2016 restructuring programs at both Daltonics and AXS, with both businesses posting good revenue growth at higher margins. In the second quarter of 2017, our gross margins decreased 100 bps year over year, our operating margin increased 170 bps year over year, and our non-GAAP EPS grew 15%.

Looking more closely at the second quarter 2017 results, we reported revenues of $415 million, an increase of 11.6% year over year. Acquisitions contributed 5.8% to revenue growth, while foreign currency translation lowered revenue by minus 1.8%.

On an organic basis, our second quarter 2017 revenue increased 7.6% year over year, reflecting mid-single digit organic growth in our Scientific Instruments segment or BSI, and very strong organic growth in our BEST segment.

Within BSI, we saw continued good organic growth at BioSpin and a notable year-over-year organic revenue improvement in our CALID Group. Our BEST segment revenues grew 89% year over year, something that we are very pleased with. BEST had over 40% organic revenue growth, as well as significant inorganic growth from our OST acquisition last November.

To give you perspective, in Q2 2017, BEST contributed about 13% of Bruker's overall revenues compared to about 8% of revenues in the second quarter of 2016. As a reminder, BEST has significantly lowered gross margins than our core BSI business, something that is inherent in the advanced superconducting materials business model.

However, we have multi-year productivity and innovation efforts underway to further increase the BEST operating margins. This significant degrader of percentage of BEST revenue was the main contributor to our Q2 2017 non-GAAP gross profit margin decline of 100 basis points year over year to 46.6%.

Our Q2 2017 gross margin was also somewhat affected by year-over-year differences in product mix at BioSpin. Most importantly, our non-GAAP operating margin of 12.5% was up 170 basis points from Q2 of 2016 despite the lower gross margin. We reported GAAP EPS of $0.15 in the second quarter of 2017, up from $0.09 in the second quarter of 2016.

Our second quarter 2017 non-GAAP EPS was $0.23, an increase of $0.03 from the second quarter of 2016, despite an unusually low non-GAAP effective tax rate in the second quarter a year ago.

Looking at the first half 2017 performance on slide 5, our revenues increased by $53 million to about $800 million, a 7.1% increase compared to the first half of 2016. We are pleased that Bruker returned to organic revenue growth in the first half of 2017 with approximately 3.4% organic growth year over year.

First half 2017 gross margin was essentially flat versus the prior year, with BEST contributing now about 12% of our first half 2017 revenues. We continue to improve our operating margin, which was up about 90 bps in the first half of 2017 year over year.

On a GAAP basis, Bruker reported EPS of $0.28 in the first half of 2017 compared to $0.23 in the first half of 2016. Our first half 2017 non-GAAP EPS was $0.41 and was unchanged from the same period in 2016, when we had an unusually low effective tax rate.

Before we move on to our group review, let me take a moment to discuss end market and demand trends over the six months' period.

Our first half of 2017 bookings for Scientific Instruments were up in the mid-single digits on an organic basis, with continued positive order growth in Europe, strong performance in China, and an improvement in North America in the second quarter of 2017 after a slow start in the beginning of the year in the U.S.

Our academic markets have stabilized. For the first time in several years, we saw improved booking trends in most industrial markets, including continued strong demand in semiconductor metrology.

We believe that these improving market and order trends, as well as the investments in our six strategic growth areas and our portfolio transformation, will position us to accelerate our annual organic revenue growth rate in 2018, compared to our improving but still modest year-over-year organic growth rate in the full year of 2017.

With that, please turn to slide 6 and 7 now where I will provide details about the performance of our three BSI groups and of our BEST segment for the first half of 2017 on a constant currency basis.

The Bruker BioSpin Group delivered low-single digit revenue growth with continued steady demand for NMR systems and improvement in our PCI or preclinical imaging business, albeit with lower margins.

This was due to Q2 mix with more low-field NMR and PCI revenue in the second quarter of 2017 and more high-field NMR revenue in the second quarter a year ago.

BioSpin's aftermarket and service business continued to post strong year-over-year revenue growth, and we are encouraged by signs of recovery in Preclinical Imaging markets, which resulted in improvements in our PCI revenue and bookings year-over-year.

Important to note, at BioSpin, we now no longer expect to have any 1 gigahertz systems revenue in 2017, as the expected timing of installations has shifted to mid-2018. The Bruker CALID Group reported slow (sic) [low]-single digit revenue growth, with operating margins that were significantly above the levels of the first half of 2016.

Daltonics mass spec revenue was up mid-single digits, with good revenue and bookings growth in the second quarter. Daltonics margins were substantially higher year-over-year, in part due to our 2016 factory consolidation and restructuring. Within the CALID Group, optics products had solid mid-single digit revenue growth with higher operating margins.

Our CALID detection revenue was down year-over-year due to significant Middle East contract revenue in the first quarter of 2016. CALID has benefited modestly from revenues from the InVivo acquisition, our consumables business, which we completed in January 2017. Please turn to slide 7 now.

Bruker NANO reported mid-single digit revenue growth, with contribution from our January 2017 Hysitron acquisition of nanoindenting products, as well as substantially stronger year-over-year results in our AXS business, partially offset by lower year-over-year revenues in semiconductor metrology.

Bruker AXS, which had a challenging year 2016, recovered in the first half of 2017 with significantly higher margins, given both better revenue volume and the 2016 restructuring and factory consolidation. We are pleased with the turnaround at AXS.

Our Nano Surfaces business benefited from the Hysitron acquisition, which has been off to a strong start at Bruker. As expected, semiconductor metrology revenues were below the prior year, due to the low backlog of systems entering this year. This put a drag on NANO operating margins in the first half of 2017.

However, the semiconductor metrology or Semi order book is now strong, and we expect revenue growth to recover significantly in the back half of this year.

Overall, while Nano performance in the first half was impacted by several timing issues in the second quarter, we are encouraged by the activity pickup in both general industrial and semi-industrial markets, and believe this sets the stage for better performance at Nano in the second half of 2017.

Finally, I've already discussed the exceptional growth in BEST earlier. Next, I will like to take a moment to highlight some important new products we launched or acquired over the course of the second quarter.

On slide 8, we show Bruker's IR Biotyper system for microbial strain typing, a new instrument we launched at the American Society of Microbiology Microbe Meeting in June. The IR Biotyper is a novel benchtop FT-IR system designed for hospital hygiene and infection control labs.

It provides bacterial strain typing information at a lower cost and with faster time to result than current alternatives, which should enable hospitals to provide rapid and effective infection outbreak localization and control. The IR Biotyper is highly complementary to our MALDI Biotyper, the leading system for fast bacterial identification.

Although not shown on this slide, on Monday we issued a press release about the recent U.S. FDA clearance of an expanded third claim for our MALDI Biotyper. The expanded approval covers 144 additional microbial species for a total library coverage of 424 species.

The expanded claim also includes new disposable Biotargets and new workflow automation tools, as well as our high-end new smart system within a proprietary 200 Hz lifetime laser. So, good news from the FDA.

In other late-breaking news, we announced yesterday the acquisition of a field-portable platform for fast and universal immunoassay detection of bacteria, viruses and toxins.

While this new platform initially is focused on Homeland Security biothreat applications, over time, new immunoassays are expected to further strengthen our microbiology portfolio.

In summary, our new products, additional regulatory approvals and M&A investments in microbiology and diagnostics are a key element of our ongoing portfolio transformation. On slide 9, we discuss our May 2017 acquisition of Luxendo with its novel light-sheet microscopy technology.

Luxendo's product feature proprietary single plane illumination microscopy or SPIM, which reduces acquisition times and reduces phototoxicity, making these products particularly suitable for live cell imaging and its biological applications.

Again, our multiple acquisitions and significant investments in further product development and commercialization of high performance fluorescence microscopy solutions in recent years are another important element of our portfolio transformation for accelerating growth and ongoing margin expansion.

Finally, for my part, on slide 10, Bruker's key priorities for 2017 remain unchanged, and we believe we are on track with them for this year. Overall, I am pleased with our growth acceleration in the first half of 2017, and I believe we are well-positioned to deliver on our financial commitments for the full year 2017.

Let me turn the call over to our CFO, Tony Mattacchione..

Thank you, Frank. I will now provide some additional details on our financial performance in Q2 2017 in the first half of 2017, starting on slide 12. In Q2 2017, Bruker returned to organic revenue growth with solid year-over-year EPS growth and continued operating margin expansion.

As Frank mentioned, we grew our reported revenues 11.6% to $415 million, and our non-GAAP EPS 15% to $0.23. With this performance, we are raising our non-GAAP EPS guidance for the full year by $0.03 per share. Free cash flow with the use of $27 million in Q2 2017, reflecting largely a shift in bonus payments from Q1 last year to Q2 this year.

Net cash was $9.5 million at June 30, 2017, which was down versus last year and we used cash to fund our share buybacks – as we used cash to fund our share buybacks, dividends and acquisitions. Our working capital-to-revenue ratio deteriorated 8% year-over-year to $0.39 per dollar of revenue in the second quarter.

This was due primarily to the inclusion of acquisitions and BEST inventory purchases. On slide 13, our revenue bridge for Q2 2017 shows a reported revenue increase of 11.6% versus last year, including a 7.6% organic revenue growth, 5.8% growth from acquisitions, and that was mostly from OST, Hysitron and InVivo, and a negative 1.8% from FX.

From an organic growth perspective, revenue gains were led by the CALID Group and BEST, with the CALID revenues up in the mid-teens, including higher rapifleX revenue and a strong contribution from consumables and aftermarket service sales.

Our BEST revenue increased 43% organically, which was attributable to higher MRI OEM customer demand, and our acquired B-OST revenue was also high in Q2 for this reason.

Gross margins for these BEST businesses are inherently much lower than in our BSI segment, lowering overall Bruker gross margins in Q2 by approximately 200 basis points, partially offset by gross margin improvements in BSI for an overall 100 basis point year-over-year margin decline in the quarter.

While the B-Nano Group's Q2 2017 revenue declined year-over-year on an organic basis, this was driven largely by expected lower revenues of semiconductor metrology products. We have seen strong recent order growth in Semi and in the Nano Group, which bodes well for the second half of 2017 revenue and margins.

BioSpin Q2 2017 revenues grew mid-single digits on an organic basis, reflecting higher revenues of lower field NMR systems with comparatively lower gross profit margins. By contrast, Q2 2016 included a higher number of high-field NMR systems. PCI also contributed to growth as revenues were up also in Q2 2017.

From an end market perspective, we continue to see encouraging trends in both our CALID and Nano Groups, with improvements in academic and industrial markets. Semi end markets, while lumpy, are healthy as we meet customer needs for both capacity expansion, the Internet of Things, and new technology foundry applications.

Demand for the MALDI Biotyper is again growing in applied markets, particularly for food, feed and beverage. They were also healthy. Geographically and currency adjusted, our European revenue was up high-single digits in Q2 of 2017, which was helped by the positive impact of acquisitions.

North America revenue was up low-single digits, driven by growth in BEST, including its OST acquisition. Earlier uncertainty around NIH appears to have eased, which is contributing to our U.S. academic order improvements in Q2 of 2017. Asia Pacific organic revenues were up nearly 20%, largely attributable to another very strong quarter in China.

Overall, we are pleased with the continued stabilization in our organic revenue and the improvements in end-market demand we are seeing. Turning to slide 14, our Q2 2017 non-GAAP gross profit margin was 46.6%, a decline of 100 basis points year over year.

Strong revenue growth in our lower-margin BEST business and the addition of OST accounted for a headwind of approximately 200 basis points, as we mentioned, on our corporate gross margin. This was partially offset by gross margin expansion at Daltonics and AXS. BioSpin margins were below the prior year due to the product mix, as we earlier discussed.

Q2 2017 SG&A expense of $101 million was roughly flat versus the prior year as additional expenses from the acquisitions were mostly offset by G&A cost control. Q2 2017 R&D expense at roughly $41 million increased 11% year over year due to select investments in targeted growth areas and the addition of acquisition.

Looking below the line, net interest and other expense was $3.3 million or $700,000 more than in Q2 of 2016. And this was caused by the higher debt balances. For the second quarter of 2017, our non-GAAP effective tax rate was 24.2% compared to 12% in the second quarter of 2016. Last year's lower effective rate was the result of the U.S.

valuation allowance reversals that were required and we booked in 2016. Weighted average diluted shares outstanding in the second quarter were 160.4 million, down approximately 2 million shares or 1% year over year, reflecting our 2016 and 2017 share buybacks.

In May 2017, Bruker's board of directors authorized a new two-year share repurchase program in the amount of $225 million. We repurchased approximately 1.6 million shares in Q2, amounting to $43.9 million.

Finally, non-GAAP EPS of $0.23 in Q2 2017 rose 15% from $0.20 in Q2 2016 as revenue growth and higher operating margins more than offset the challenging year-over-year tax comparison. On slide 15, I show the year-over-year revenue bridge for the first half of 2017.

Revenue was up $53 million, or 7.1%, reflecting the first half of 2017 organic growth of 3.4%, acquisitions of 5.5% and FX headwinds of negative 1.8%. The organic growth improvement reflected increases at BioSpin, CALID and our BEST segment. Frank covered the drivers of our revenue performance for the first half earlier.

On slide 16, our first half 2017 non-GAAP gross profit increased $24.4 million while the gross profit margin of 47.1% held roughly steady. Higher Daltonics and AXS sales volumes in last year's restructuring activities were offset by the BEST growth and BioSpin mix effects.

Our first half 2017 operating expenses increased approximately $11 million or about 4% year over year, caused by the same year-over-year drivers in Q2. All-in, our non-GAAP operating margin in the first half of 2017 improved by 90 basis points to 12.6% compared to 11.7% in the first half of 2016.

Our first half non-GAAP tax rate of 27.2% was substantially higher than the 15% tax rate in last year's first half, and this again was due primarily to last year's U.S. valuation allowance reversals.

Finally, non-GAAP EPS of $0.41 was flat relative to the first half of 2016 as a higher effective tax rate in the first half of 2017 offset improvements in revenue and operating profit. Turning to slide 17, we used $6 million of cash in the first half of 2017 versus a $13 million use of cash in the first half last year.

Higher net income and lower tax payments offset somewhat by an uptick in CapEx drove this slightly improved performance.

Our cash conversion cycle for the second quarter of 2017 reflected a decrease of 13 days compared to the end of Q2 2016, driven by reductions in DSO, day sales outstanding, and days inventory outstanding, and this is partially offset by lower days payable outstanding.

Now, turning to slide 17, I will now cover our guidance for the full year of 2017, which includes updates for our year-to-date performance and for recent changes in foreign currency translation rates. We now expect our organic revenue growth to be in the range between 1.5% and 2% in 2017.

For our 2016 and 2017 acquisitions, we continue to project a contribution between 3.5% and 4%. We now expect a negative revenue impact from FX ranging from a negative 50 basis points to no impact for the full year.

These updates result in a projected reported revenue growth for the full year of 2017 of 4.5% and 6%, up from our prior estimate of 2% to 3.5% reported revenue growth. For non-GAAP operating margin, we continue to project improvement between 40 basis points and 70 basis points, from a base of 14.8% in 2016.

This continues to include an approximate 40 basis points headwind from our acquisitions completed in the second half of 2016 and the first half of 2017. Our full year 2017 non-GAAP tax rate continues to be projected at 25%. Our fully diluted share count is now expected to be around 160 million shares due to the new share repurchase program.

Rolling it all up, we now expect our 2017 non-GAAP EPS to be in a range between $1.08 to $1.12, an increase from our prior guidance of $1.05 to $1.09. The increase of $0.03 is the result of our better year-to-date performance, slightly lower share count and the FX changes.

Much like in past years, we expect the majority of our revenue and profitability to occur in our fourth quarter. As you update your models for the remainder of 2017, I'd like to highlight a few factors.

First, in Q3 of 2017, we expect a similar portfolio effect as we had in Q2 of 2017, and our Q3 2017 gross margins could be roughly similar to Q2 of 2017.

In Q4 of 2017, the shift of our 1 gigahertz NMR magnet into 2018, together with the absence of the large Q4 2016 detection revenues, may lead to an essentially flat organic growth for the fourth quarter year-over-year. That's it for the full year guidance and the quarterly color.

In summary, during the second quarter of 2017, Bruker continued to make good progress, resuming organic revenue growth and delivering on our profitability expansion commitments. We were pleased to see our core revenue stabilize, and we remain confident in our ability to deliver our full year financial objectives.

We look forward to updating you again in our Q3 2017 conference call in early November. With that, I'd like to turn the call back over to Miroslava to start the Q&A session..

Thank you, Tony. Denise, we're ready to open up the Q&A..

Thank you..

As we try to accommodate more of our analysts, please limit your questions to one and a follow-up..

Ladies and gentlemen, we will now begin the question-and-answer session. And your first question will be from Brandon Couillard of Jefferies. Please go ahead..

Thanks. Good afternoon. Frank, at our conference, you framed the subset of the portfolio across five different areas that account for about a quarter of the business.

Could you give us a sense of what that basket of these higher growth businesses grew organically in the second quarter?.

Hi, Brandon. We actually don't track that on a quarterly basis. We will update that on an annual basis. So, overall, it seems satisfactory, but we don't have exact data on that on a quarterly basis..

Okay. I'll try to stick to my two. I guess one for Tony.

Could you break out the impact of FX for the year on the gross margin, operating margin and EPS lines at the updated rates?.

Yeah. I can come back to you with the exact numbers. But there's a very insignificant effect to date on the FX line. And for the full year, the rates that we put out in the updated guidance, FX has a modest negative impact to our operating margins and a modest negative impact to EPS..

The next question will be from Doug Schenkel of Cowen & Company. Please go ahead..

Hi. Good afternoon. This is Chris Lin, on for Doug today. Thanks for taking the question. I just want to go back to the commentary for the expectation for flat organic revenue growth in Q4. You had some pretty positive commentary on North America activity, Europe orders, industrial, CALID and Nano.

So, I guess, why wouldn't the business outside of the detection and the gigahertz order, why wouldn't that business grow?.

Yeah. This is Frank. So, Chris, yeah, it would grow. But if you take about that 300 bps or $15 million headwind into account, that cannot fully overcome that.

So, this year, and it's as much a result of 2016, we have a considerable variation in the year-over-year comparison, and Q4 will be a tough year-over-year comparison, Q2 was a little bit easier, and so on. But for the year, obviously, we're inching up our organic – we've tightened our organic growth guidance for the year.

And we're gaining more confidence that we can continue to grow faster than that in 2018. So, a lot of the bookings, another part of the question, the answer is really that some of the bookings that we're getting now are going to benefit us in 2018. So, that's a good setup.

And so, there's a quarter-to-quarter growth rate fluctuations that you'll see this year mostly because of comparison..

Okay. I just want to ask one more question on margin. It looks like basically what's implied in operating margin guidance is pretty limited operating margin expansion in second half. I just want to be clear.

Is this largely because of M&A?.

Limited operating margin expansion?.

In the second half..

In the second half..

No, M&A's got a not a significant effect on our operating margins..

The M&A impact remains at 40 basis points for the full year. You have the year-to-date operating margin expansion. We're not going to give you precise guidance for the second half, but you could see what's implied..

Okay. Thank you..

And also, the second half, there starts to be a – there's a little bit of a headwind from currency on operating margins but, yeah, we've built that all into the updated guidance..

And the next question will come from Tycho Peterson of JPMorgan. Please go ahead..

Hey. Thanks. First one, maybe for Tony, on free cash flow. I know you broke out kind of the various headwinds in the slides in terms of working capital needs, customer advances, and incentive comp.

Could you maybe just help us think about the relative contributes of those and how we should be thinking about free cash flow in the back half of the year?.

Yeah. I'm not coming off of the full year expectation of free cash flow and converting – we've gotten that income converting roughly one times into free cash flow. We see this – I mean, you can see year-over-year, cash was negative last year and it is again this year.

And a lot of our business occurs, as you know, in the fourth quarter and so does a lot of the cash. So, a lot of what you saw in Q2 was timing with bonus payments. It's just an anomaly in terms of when we pay the bonuses, so no real insight there.

So, we're not – nothing special in the cash flow and we're estimating in the $120-ish million to $150-ish million full year free cash flow generation..

Okay. And then for the follow-up for Frank, I want to go back to the guidance dynamics because I've had a few questions just about the setup for the back half of the year given the deceleration you're modelling in. I understand the NMR dynamics and the comp issues, academic's getting better, Semi's getting better, industrial's getting better.

Are you factoring any headwinds in the back half of the year or is that related to end markets? And then on the NMR dynamics, there's pushout here. Was this driven by customers or was this on your end? (36:27)..

Yeah, Tycho. So, no, we're not really seeing – what we're seeing right now is improving end markets. I think you've kind of went through the list and Europe, of course, is most significant from us. So, that all bodes well, particularly for 2018.

Though the gigahertz shift into revenue shift into 2018, both has technical, factory, and customer site reasons. So, with that, it made more sense to move that to the middle of 2018..

Okay. Thank you..

The next question will be from Steve Willoughby of Cleveland Research. Please go ahead..

Good afternoon. Thanks for taking my question. Frank, just a question on your BioSpin business. I was wondering if you could talk a little bit more about what you're seeing there. You commented that it was up in the low-single digits, but you said you saw steady NMR and improving Preclinical Imaging.

And then just along with that, the comment about some mix shift towards lower field NMR. Just wondering if there's any more color there. And then I have one quick follow-up..

Yeah. Steve, in the first half, we had – first half of last year, we had 1 gigahertz in Q1 of 2016, and we had a lot of high field systems in the second quarter of 2016 where we had a lot of low field, 400, 500 megahertz systems and more PCI revenue in the second quarter of 2017, which tend to have lower gross margins.

So, that's the mix shift if I compared Q2 2016 to Q2 of 2017. That's obviously – I don't think that's a permanent issue, that's really something that can fluctuate from quarter-to-quarter.

Did you have a follow-up?.

Frank – yes, sorry about that. The follow-up is on the BEST segment. If you could just provide a little bit more color on – kind of explain what happened this quarter with the significant organic growth.

And then, just so we're clear, are you expecting a similar level of organic growth in the BEST segment in the third quarter as well?.

We think the BEST segment will stay strong, and I think that Q2 was somewhat – was unusually good for BEST. Some of our – some of BEST's MRI OEM customers called off more wire in the last couple of weeks even off of the quarter. That was good.

And our Research Instruments subsidiary, that's probably not on your radar screen, also got acceptances and revenue recognition in the second quarter, some of which we thought might come in in Q3, but they got everything completed, so that was good.

But generally – very generally – BEST in the past had been about 7% to 8% of our revenue, and in the future, for the full year, it might be around 11% of our revenue. So, that's great. That's a well performing business. Its operating margins from a low basis are improving. We think we can improve them a whole lot more over the next few years.

But BEST is now – the BEST segment fundamentally will now be more closer to an 11% part of our revenue rather than 7% or 8% as it had been in the past. It's strategic to our business, it's accretive, and it has improving operating margins, so we're very pleased with their performance..

Thanks very much..

The next question....

You're welcome..

I'm sorry. The next question will be from Amanda Murphy of William Blair. Please go ahead..

Hi, all. It's Aurko, in for Amanda. Just one question on the Europe side. I was wondering if you could....

You're hard to hear..

I was wondering, breakout on the Europe side.

Which countries are kind of driving the strong bookings growth?.

It varies a little bit every quarter. In Q2, Germany was not as strong, but France, Italy, Spain and the UK were strong. In Q1, it was more Germany-driven. So I think that's just quarterly noise.

But generally, Europe now for three quarters in a row clearly had better bookings and sort of – not saying Europe is booming, but Europe is sort of has that unusual drop of orders that we had in the first nine months of last year. I think Europe is simply normalizing..

Got it.

And then also from a geographical perspective, if you were to exclude China, how much were other areas in APAC growing?.

Yeah. Japan was relatively weak. I don't have the exact numbers, but Japan revenue was up, and orders were flat or down. And the rest of APAC, I don't have those numbers at my fingertips, but that was less remarkable. So China, strong; Japan, weak; and the rest of APAC fluctuates from quarter to quarter..

Yeah. Frank said it right. I mean, the increase in APAC is really driven by China. Japan, some quarters it's up, some quarters – it usually hasn't been, but it happens to be this quarter, we had a large industrial acceptance. But most of the increases is China..

Great. Thanks..

The next question will come from Jack Meehan of Barclays. Please go ahead..

Hi. Thanks. Good afternoon. I wondered if you could maybe talk a little bit about CALID. It looked like it bounced back in the quarter, a little bit of an easier comp I think as well.

Can you walk through the drivers of the performance there, and whether you think any of the new products are starting to contribute?.

Yeah. Yeah, I think they do. This is Frank. So the Biotyper had some hiccups in the first half of last year, those have normalized. I mean, it's not a double-digit growth product anymore, but our microbiology business of the Biotyper is back in growth mode. The consumables and aftermarket business for the microbiology is growing very nicely.

Now, some of that was acquired with our InVivo acquisition and our skilled software (42:51) and so on, but we're very pleased with that. The rapifleX, which is used for pharmaceutical application with the MALDI PharmaPulse for imaging, that's doing really quite nicely. Aftermarket is growing nicely.

And a really big part of – was, of course, the factory consolidation and restructuring in the Daltonics Group that – for the Daltonics Group which had its margins under pressure last year made some nice progress in the first half of this year and in Q2. rapifleX and MALDI was way up for the CALID Group.

Bruker Optics performed – almost always (43:34) performs nicely, so it's kind of the steady performer, steady growth, steady margin expansion. Very, very pleased with that business. It's one of our best-performing businesses.

And detection can be lumpy from quarter-to-quarter, but I think the more remarkable thing on detection is really only the top comparison in Q4 that's coming up, which I had mentioned earlier. So CALID, I think most importantly the mass spec business and the optics business are doing – optics is doing very well, continuous improvements.

CALID is substantially better than last year when it had some weakness..

Great. Thanks for all the feedback there. Just one follow-up on the guide. So there is 3.5% to 4% acquired growth embedded for the full year. You took 5.5% in the first half. Was there anything timing related? I know the deals have been phasing in, you've certainly been very active.

Just for what's embedded in the second half, could you help us there?.

Yeah. Couple of things. Yeah. There was a little bit of timing I think, both the InVivo consumables business as well as OST. The way we're looking at them this year with their orders are probably a little front-loaded in the first half, not completely, but a little bit more, whereas normally we have a more back-loaded business.

And then, keep in mind that OST is no longer organic growth in the middle of the fourth quarter.

So basically, it's a big part of our organic growth, but that kind of drops out for the last, essentially, month and a half or the last half of the fourth quarter, that's why the inorganic growth rates are higher in the first half than they are projected to be in the second half..

Perfect. Thanks..

You're welcome..

The next question will be from Dan Arias of Citigroup. Please go ahead..

Hi. This is actually Bryan Kipp on behalf of Dan. A question for you on the Semi business. I'm just surprised by the top-line softness in 2Q given the prior order quarter commentary. There's been a lot of trends you guys have alluded to in the past. The one thing that seems to come in focus recently is a lot of factory investments.

Is part of the delay just factories that are scaling up and you're just waiting to place the instruments? Kind of what's going on there?.

No, Semi is really just timing. Semi was pretty good in Q1. We had fantastic Semi revenue in Q4 of last year, and then the order book was depleted a little bit getting into this year. So, it just turned out there wasn't much to deliver in Q2.

Orders were strong in the first half, and the Semi will have a good second half of the year, and overall Semi will grow this year is our expectation. So, we concur Semi markets for memory, for foundry are all pretty healthy. We have unique tools. It's going to be a good year for Semi, but for timing reasons, Q2 wasn't – it was purely timing..

Okay. Helpful. And then can you kind of strip out some of the growth dynamics going on in China? I know the Biotyper had some hiccups last year, so that could be partly contributory into the first half momentum.

But is there anything else structurally going on? Individual markets proving that you haven't had it previously?.

Well, I think, generally, I would say that the wonderful, torrid, double digit growth in China, we don't expect that to continue forever. But as Europe picks up a little bit or picks up quite a bit, industrial markets pick up, as the U.S. remarkably in the second half including academic markets in the U.S.

has picked up, I would think that China will not continue at a double digit growth rate. So, I think it's – I don't know whether that's the dynamics of their five-year plans or how that works exactly, but I think any time you have something growing at double digits, it's likely to cool off a little bit.

So, Japan just remains weak, and we had a bit of a boost in revenue in Japan, but it's weaker on orders. But more importantly, more than offsetting all of that is stronger U.S. and stronger Europe by geography..

Next question, please?.

The next question will be from Puneet Souda of Leerink Partners. Please go ahead..

Hi. Thanks. So, Frank, if I could just briefly ask on the biopharma segment? Earlier in the year, you had highlighted – I know you don't have a ton of exposure there, but earlier you had highlighted that's an area of focus and at the ENC as well.

So, I'm just trying to understand how you feel about that and the rest half of the year, and just trying to understand if you can build more biopharma targeted assets before the biomolecules growth picks up..

Yeah. I mean, our pharma – correct, our biopharma product offerings, there is more and more solutions that we're bringing to market, not only with NMR and mass spec, although those are the bigger drivers, but also all the way to Preclinical Imaging. I mean, some very good Preclinical Imaging orders from pharma that came in.

The rapifleX, the MALDI PharmaPulse is doing quite well with orders and revenue. MALDI imaging for drug development using the FTMS mass spec technology is doing well, some reaction monitoring by NMR.

I mean, we don't serve it as broadly as some other companies in this space, but the little islands that we've picked or the specific application islands that we've picked and that are strengthening and multiplying in pharma will give as a good year in pharma.

But I think even independent of the exact pharma or biopharma growth rate, we will, just over time, have a lot more exposure to pharma as it's very strategic for us, and our investments in new pharma applications is an ongoing multi-year effort.

This year will be good for pharma, but I think it's part of a long-term trend, and quite honestly, not really dependent on pharma growth rates because it's – we're not serving those markets broadly, but are with specific applications that are doing well..

Okay. Got it. And just quickly on that point again, I just wanted to understand how would you characterize the growth in the LCMS segment for you? I mean, just asking this because two of the larger competitors have posted somewhat divergent results and just trying to understand the market shift doesn't happen there overnight.

So, just hoping to get a view from you on the LCMS segment. And thanks for taking my questions..

Yeah. Puneet, LCMS for us is smaller than MALDI Biotyper and other MALDI applications, some of which I've mentioned. So, we're probably not a good proxy for market trends in LCMS. I think LCMS was unremarkable and unsatisfactory, but I don't have a broken out number for that.

Not growing quite as strongly as MALDI because the bigger part of the growth, certainly in the first half of the year for us, was MALDI, both MALDI Biotyper, i.e., microbiology, and MALDI Imaging and MALDI PharmaPulse. Those were the faster growing parts of the CALID mass spec business – or Daltonics mass spec business.

So, I didn't really give you a quantitative answer. I don't have it at my fingertips, but it was steady or growing slightly, whereas MALDI was growing faster..

All right. Thanks.

The next question will be from Derik de Bruin of Bank of America Merrill Lynch. Please go ahead..

Hi. Thanks. This is Mike Ryskin, on for Derik. I have a couple questions for you. A lot's already been asked, but previously you had talked about in 2018 what the combination from all the deals you've done of returning, sort of, to that reported revenue growth more in line with the tool segment of, say, 4% to 5%.

It seems like you're going to get there this year, given the updated guide.

As some of these deals go organic, and especially talking about stronger end markets, stronger Europe, stronger academic, industrial, the order trends, the benefit of the 1 gigahertz NMR now being in 2018, are you seeing any changes in sort of the long-term momentum? And where you see the organic growth profile returning to over time?.

Just as a clarification, this year, for the full year, our guidance for organic growth is 1.5% to 2%. That's because it just changes quite a bit from quarter-to-quarter, but for the full year I think that's sensible guidance. We do believe that a lot of things are setting up.

You've listed them nicely for us to see faster organic growth for the full year next year. Obviously, I decline to right now give any ranges or any numbers. It's too early for us in the year to do that, but the implication is we're improving our organic growth rate. We were shrinking for a number of years.

We're back to organic growth this year, 1.5% to 2%. We think we can do better than that next year. And only later in the year or really by February of next year, we will give organic growth guidance. But fundamentally, really, we're very comfortable that we're on track to get back to more organic growth rates.

And we think, with our portfolio transformation and other factors, we may well be also in a position to perhaps outgrow the market organically in perhaps a few years. But that's more probably a 2019 story.

But next year, our goal is to be somewhere in that range of organic growth that others in the industry or that you would call the industry average whatever that will be next year..

Okay. That's really helpful. And then just a quick follow-up on the margins. You've called out for a few quarters now the 40 bps of margin headwind from M&A.

Obviously, given the younger nature of some of these companies, the Hysitrons, the OSTs, et cetera, can you talk about the margin progression in those acquisitions specifically, and how long until you see that headwind dissipating?.

We have modeled it as an item this year. I mean, of course, the BEST business, including OST, will not have the margins, certainly not the gross margins, but also not quite the operating margins of the rest of the business.

But nevertheless, even though it's part of our portfolio for good strategic reasons, it will support our further overall margin expansion.

And yeah, as I think about a few of the other businesses, some of the smaller ones we haven't discussed or Hysitron or InVivo and even OST, probably a three-year timeframe is reasonable for us to move up their margins from when we acquired them.

It usually – when you put in productivity enhancement and other good business practices, it tends to take about three years for those to take hold and become fully beneficial. So, that's a good timeframe to think about, on average. And that's applicable for those acquisitions..

And what I would add is the integration programs for each of them are on track and we're delivering well on those, and we're meeting our financial plans on the acquisitions as well, so things are progressing nicely..

They've actually performed quite nicely as we've seen from the significant inorganic growth in the first half. They performed quite nicely in the first half of the year, and so we're pleased with them..

Thanks. I really appreciate all the color. If I could throw in one last quick one. As you said, you've been very busy with the acquisitions in later 2016 and first half 2017. Can you talk about the order pipeline, what you're seeing for the rest of the year? And also the cash on hand as you mentioned was – your net cash position is lower.

Is that going to affect your ability to do deals? Thanks..

No. I mean, so our order growth has been good. We just got our order growth for the year inorganically in the mid-single digits, which again bodes well for organic revenue growth next year. That's total industry average.

And no, we're carefully managing our share buybacks and dividends and cash available, so we are very – we think that it's – that the normal pace of acquisitions that we tend to do when we find good bolt-ons, I don't think we are in any – I don't see any problem with continuing that where it makes sense.

We did have a bit of a bolus of acquisitions closing there late in 2016 and early 2017. I wouldn't expect us to continue at that pace that was somewhat of a timing coincidence..

Great. Thanks a lot, and congrats..

The next question will come from Isaac Ro of Goldman Sachs. Please, go ahead. Isaac Ro of Goldman Sachs, your line is open. It may be muted on your side. Hearing no response, we will conclude the question-and-answer session. I would like to turn the conference back over to Miroslava Minkova for any closing remarks..

Thank you for joining us this evening. During the third quarter, Bruker will participate in the Morgan Stanley Healthcare Conference in New York City. We invite you to meet us at the conference or visit us at our headquarters in Billerica, Massachusetts. Thank you, and have a nice evening..

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines..