Miroslava Minkova - Bruker Corp. Frank H. Laukien - Bruker Corp. Gerald N. Herman - Bruker Corp..

Brandon Couillard - Jefferies LLC Chris Lin - Cowen & Co. LLC Jack Meehan - Barclays Capital, Inc. Daniel Arias - Citigroup Global Markets, Inc. Tycho W. Peterson - JPMorgan Securities LLC Luke Sergott - Evercore Group LLC Puneet Souda - Leerink Partners LLC Patrick Donnelly - Goldman Sachs & Co.

LLC Derik de Bruin - Bank of America Merrill Lynch Steve Barr Willoughby - Cleveland Research Co. LLC Sung Ji Nam - BTIG LLC.

Good afternoon, everyone, and welcome to the Bruker Q2 2018 Earnings Release Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. And at this time, I'd like to turn the conference call over to Ms.

Miroslava Minkova, Director of Investor Relations and Corporate Development. Ma'am, please go ahead..

Good afternoon. I would like to welcome everyone to Bruker's Second Quarter 2018 Earnings Conference Call. My name is Miroslava Minkova and I'm the Director of Investor Relations and Corporate Development for Bruker. Joining me on today's call are Frank Laukien, our President and CEO; and Gerald Herman, our Chief Financial Officer.

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

Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.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 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 in subsequent SEC filings. Also, note that the following information is related to current business conditions and to our outlook as of today, August 2, 2018.

Consistent with our prior practice, we do not intend to update our forward-looking statements based on new information, future events or other reasons prior to the release of our third quarter 2018 financial results in November of 2018.

Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We'll begin today's call with Frank providing a business summary. Gerald will then cover the financials for the second quarter of 2018 in more detail.

Now, I'd 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 today's call. Bruker had another good quarter with excellent 7% organic revenue growth in our Bruker Scientific Instruments, or BSI segment, offsetting the expected significant revenue decline in our BEST segment.

We again improved our non-GAAP operating margin by more than 100 basis points, or bps, on a constant currency basis, and we increased our diluted non-GAAP EPS 9% versus the second quarter of 2017.

During the second quarter, we rolled out important new products for our phenomics and proteomics and microbiology initiatives of our portfolio transformation called Project Accelerate, and I will speak to some of them later in the call.

We also completed several bolt-on acquisitions in Q2 and in July, which support our ongoing growth and profitability expansion in our core business, and also help us drive Project Accelerate. Turning to specifics, in the second quarter of 2018, Bruker's revenue increased 6.9% year-over-year. On an organic basis, revenue increased 2.9% year-over-year.

This included 7.1% organic growth at our Scientific Instruments business with all three BSI groups posting mid single-digit or high single-digit organic revenue growth. Our BEST segment revenues, net of intercompany eliminations, declined 25.6% on an organic basis.

The decline was anticipated given the 2018 timing of BEST deliveries, and the unusually high Q2 2017 BEST revenue, a quarter, if I may remind you, in which BEST revenue had increased about 50% year-over-year on an organic basis, and net of intercompany eliminations, so strong comparison.

Looking more closely at our Q2 2018 results on slide 4, we reported revenues of $443.7 million, an increase of 6.9% year-over-year. Foreign exchange increased revenues by 3.3% year-over-year, while acquisitions contributed 0.7%.

Our Q2 non-GAAP gross margin increased by 70 bps year-over-year, while our non-GAAP operating margin increased by 40 bps year-over-year. As Gerald will discuss later on in the call, in Q2 2018 we again faced significant foreign exchange headwinds on our operating margin, which offset much of the robust operational improvements that we have achieved.

Our non-GAAP operating income in dollars increased 10% year-over-year. In Q2 2018, Bruker reported GAAP diluted EPS of $0.20 per share compared to $0.15 per share in Q2 of 2017, and on a non-GAAP basis, Q2 2018 EPS of $0.25 increased 9% compared to $0.23 in Q2 of 2017.

Turning to slide 5, I show Bruker's performance through the first six months of 2018. Our revenue increased by $76 million to $875 million, a 9.5% increase compared to the first half of 2017.

Organic revenue growth in the first six months was 3.4%, comprised of a 5.5% organic growth in the Scientific Instruments business, and a 12.6% organic BEST revenue decline. Acquisitions added less than a percent to our overall top line in the first half of the year, while foreign exchange added 5.5%.

End market conditions and order bookings for Bruker's academic, applied, pharma, microbiology and industrial research markets remained favorable in the first half. First half 2018 order bookings for Scientific Instruments were up mid single-digit on an organic basis.

This included good growth in Europe and the Americas and strong growth in Asia-Pacific driven by China. During the first six months of the year, we also saw the expected improvement in our BSI or Scientific Instruments organic revenue growth rate that we had been anticipating.

We believe the stable and favorable trends in the majority of our markets combines with our significant new product roll-outs, and Project Accelerate portfolio transformation should allow us to deliver good results in the Scientific Instruments business in the remainder of the year in the second half.

We also currently do not expect any further year-over-year BEST revenue decline in the second half of the year anymore.

Our first half 2018 non-GAAP gross margin increased by 40 basis points, or bps, compared to the first half of 2017, while non-GAAP operating margins were above flat, as stiff foreign exchange headwinds more than offset the robust operational improvements we delivered.

On a GAAP basis, Bruker reported EPS of $0.37 in the first half of 2018 compared to $0.28 in the first half of 2017. Our first half 2018 non-GAAP EPS of $0.49 increased about 20% from the same period in 2017.

Please turn to slides 6 and 7 now where I provide further highlights on the first half 2018 year-over-year performance of our three Scientific Instruments group and of our BEST segment in all cases on a constant currency year-over-year basis. The first half of 2018 in the BioSpin Group, revenues increased in the low single-digits to $272 million.

Within BioSpin NMR had modest growth. NMR systems revenue improved in the second quarter after its slow first quarter start. In the first half of the year, NMR Solutions for applied and clinical phenomic applications continued to report strong growth. Aftermarket and service revenue for NMR continued to increase also year-over-year.

Also, within the BioSpin Group, our preclinical imaging or PCI business had a strong first half, with revenues meaningfully higher year-over-year.

Over the past few quarters, the PCI business has delivered improved results in magnetic resonance imaging and in nuclear molecular imaging or PET SPECT amid good end-market activity and also with good execution. The CALID Group had an excellent first half, with single-digit revenue growth to $259 million.

Within CALID, the Daltonics mass-spec business had meaningfully higher revenues with strong performance in both our microbiology and our life science mass-spec portfolios. We are clearly seeing benefits of our portfolio refresh and focused strategy in life science mass spectrometry markets.

Although still early, we are pleased with the initial reception of our recently introduced scimaX magnetic resonance mass spectrometer; I'll talk about it later, for biopharma and phenomics research. We are also on our way with the ongoing roll-out of the timsTOF Pro with PASEF for the proteomics markets, something I will also discuss later.

And in microbiology and diagnostics, something we discussed on the Q1 call, both Biotyper instruments and consumables had a strong first half, with new products that were discussed on the Q1 call, I apologize.

Optics products had solid growth, with continued execution in products like our ALPHA FTIR, BRAVO handheld Raman spectrometers, and TANGO FT-NIR instruments, which are used in industrial research, applied research and academic markets. CALID's Detection revenue was significantly lower year-over-year as this business can be lumpy.

Please turn to slide 7 now. Bruker Nano reported high single-digit revenue growth with revenues of $258 million. The Nano Group's first half of 2018 results were driven by strong industrial research and academic research demand, as well as by robust year-over-year semiconductor metrology revenue growth.

Nano results also included a small contribution from the April 2018 Anasys acquisition and the August 2017 XGLab acquisitions. Within Nano, AXS revenue grew at a solid pace in the first half, fueled by strong industrial materials research demand. Also within Nano, our Nano Surfaces and Nano Analysis revenues also increased year-over-year.

Finally, and within Nano, the semiconductor metrology revenues were up strongly in the first half. However, we now see some increased uncertainty in semiconductor metrology CapEx spending for the remainder of the year, particularly in the memory space to which we are less exposed.

In total, Nano had a solid first half of the year, with continued strong industrial markets demand. Lastly, BEST revenue declined at a double-digit rate in the first half of the year due to the timing of superconductor deliveries and Big Science projects and unusually high prior-year performance particularly in the second quarter of 2017.

For the second half of 2018, we do not anticipate any further year-over-year revenue declines in the BEST segment, and we continue to expect a full year 2018 low single-digit organic revenue decline at BEST as previously communicated.

Going to the new product highlights on slide 8, I would like to highlight for you some of the exciting new products and solutions from the recent ASMS meeting in early June, that's the American Society of Mass Spectrometry where we unveiled the scimaX, our new magnetic resonance mass-spec system with both electrospray and MALDI sources under full computer control, with applications in both biopharma, drug discovery and in phenomics or metabolomics research.

scimaX features our novel Maxwell magnet technology with conduction cooled magnets that do no longer require the typical liquid helium or nitrogen refills anymore. This has important user benefits as it allows the user to place scimaX in virtually any mass-spec lab, while also reducing the cryo (14:18) maintenance and site prep costs.

Importantly, from a scientific standpoint, scimaX performs with extreme mass resolution, up to 20 million, which reduces the need or perhaps eliminates the need in certain applications for any liquid chromatography. The scimaX thus enables important new workflows, like high-throughput phenomics studies at 200 samples per day.

Other important applications are spatial metabolomics research for pharma drug development using MALDI mass-spec imaging. A very important solution which we have continued to ramp up this year is the timsTOF Pro trapped ion mobility QTOF system for high-throughput proteomics.

As you may be aware, trapped ion mobility spectrometry, or TIMS, is a unique and differentiated Bruker technology with significant benefits for proteomics.

And the timsTOF Pro is optimized for the PASEF method that was developed at the Max Planck Institute for high-throughput, ultra-high sensitivity proteomics with a step-function improvement in sensitivity. In early June there was a seminal paper that's shown in our slides on the PASEF timsTOF technology.

There's a lot of excitement building about these capabilities. These results together with our very positive customer reception together leave us encouraged that timsTOF Pro, while it may not move the needle this year, can be a significant future driver in the $500 million per annum proteomics research markets. It's an important part of our strategy.

On slide 9 we offer some perspective on the acquisitions that we have completed in the first half of 2018 and in July. Our M&A program is designed to support profitable growth in both our Project Accelerate and Bruker core businesses.

As you can see on the slide, year-to-date we have completed five bolt-on transactions, two related primarily to our core businesses and three related primarily to Project Accelerate portfolio transformations. Total cash investment for these transactions was slightly above $50 million year-to-date, including July.

As Gerald will explain later, acquisitions in total are now expected to contribute about 1% to year-over-year revenue growth for the full year 2018. On slide 10, Bruker's key priorities for 2018 are unchanged.

We are pleased with our progress thus far in 2018, and we remain committed to creating value for our customers and shareholders with our Project Accelerate portfolio transformation, as well with our ongoing operational excellence and margin expansion initiatives.

So in summary, Bruker delivered a good second quarter highlighted by the strong year-over-year organic growth in our BSI segment and continued healthy underlying margin expansion, excluding headwinds. We remain committed to our short and long-term financial commitments, and we look forward to updating you on the progress on subsequent calls.

On that note, let me now turn the call over to our Chief Financial Officer, Gerald Herman..

Thank you, Frank. I'm pleased to join you today and review Bruker's financial highlights starting on slide 12. As you saw in our press release, Bruker's reported revenue increased 6.9% to $443.7 million in the second quarter of 2018, which reflects organic growth of approximately 2.9%.

We reported GAAP EPS of $0.20 per share, compared to $0.15 in the second quarter of 2017. On a non-GAAP basis, Q2 EPS increased 9% year-over-year to $0.25 per share. Q2 2018 non-GAAP operating margin of 13.3% improved 40 basis points from the 12.9% reported in Q2 2017.

On a year-over-year basis, in Q2 2018 we absorbed about 90 basis points of negative foreign currency translation on operating margins. This was partially offset by positive underlying margin improvement.

For the first half of the year, Bruker absorbed more than 110 basis points of negative foreign currency translation on the company's operating margin percentage. As a reminder, Bruker has a large cost base denominated in euro and Swiss franc. Weaker U.S.

dollar rates versus these currencies year-over-year had a positive impact on revenue of about 3.3% in the second quarter and 5.5% in the first half of the year, and a negative impact on operating margins in both periods, but were roughly neutral to non-GAAP EPS in both periods.

At current rates, we anticipate that the large foreign exchange headwind to operating margins is now largely behind us and will not recur in the remainder of the year. We generated free cash flow of $27.1 million in Q2 2018. This compares to a negative cash flow of $26.8 million in the second quarter of 2017.

As of June 30, 2018, we continue to maintain a net cash position, despite year-to-date use of cash for dividends and acquisitions and the repayment of borrowings under our revolver in the first quarter of 2018.

We ended Q2 2018 with slightly higher working capital balances, reflecting our revenue growth, shipping activity late in the quarter and the impact of the weaker U.S. dollar year-over-year. The higher revenue growth also resulted in a modest improvement in our working capital to revenue ratio compared to Q2 2017.

Slide 13 shows the revenue bridge for Q2 2018. In addition to organic revenue growth of 2.9%, we had a positive contribution from acquisitions of 0.7%. Foreign currency translation was a 3.3% tailwind.

From an organic growth perspective, the 2.9% Q2 2018 organic growth rate included mid single-digit organic revenue growth at CALID and BioSpin, and high single-digit organic growth at Nano. BEST segment revenue declined approximately 26% on an organic basis compared to the second quarter of 2017.

As Frank explained earlier, this decline was due to the timing of deliveries and the difficult comparison versus an unusually strong Q2 2017. Geographically, and on an organic basis, our overall Bruker European revenue increased mid single-digits year-over-year in Q2 2018 and was up low double-digits in the BSI segment.

North American organic revenue for Bruker was approximately flat, but up mid single-digits for the BSI segment. Asia-Pacific revenues were up low double-digits for Bruker overall and the BSI segment. Overall, we are pleased with the organic revenue growth momentum across our core BSI segment. Slide 14 shows our Q2 2018 non-GAAP results.

The company recently adopted a new accounting standard on pensions ASU 2017-07, which resulted in a reclassification of pension expense from cost of revenue in various operating expense categories into net interest and other expense in the P&L.

In accordance with this accounting standard and to be consistent with the 2018 presentation, the company has reclassified these expenses in our 2017 GAAP and non-GAAP financials, resulting in slightly higher than previously reported GAAP and non-GAAP operating income in the second quarter and fiscal year 2017.

This reclassification does not have any impact on the company's GAAP and non-GAAP EPS in the second quarter of 2018 or in fiscal year 2017. Our Q2 2018 non-GAAP gross profit margin was 47.6%, an increase of 70 basis points year-over-year.

Higher volume and strong operational improvements at CALID and BioSpin, and favorable business mix more than offset the negative impact of foreign exchange movements due to the weaker year-over-year U.S. dollar.

Q2 2018 selling, general and administrative expenses of $109 million was up 8% from Q2 2017, with select investments and foreign currency translation the major drivers of this increase. Higher SG&A expense also included increased commissions on higher orders and revenue, as well as merit increases.

Q2 2018 R&D expense at roughly $44 million increased 8% year-over-year, driven primarily by changes in foreign currency rates, the addition of acquisitions, and the timing of project spending.

Looking below the line, net interest and other expense of $5.5 million was about on par with the prior year, including slightly lower net interest expense due to the pay-down of our revolver borrowings in the first quarter of 2018.

For the second quarter of 2018, our non-GAAP effective tax rate was 27.0%, 280 basis points higher than the effective tax rate in Q2 2017 due to discrete tax items which are expected to reverse later this year.

Weighted average diluted shares outstanding in the second quarter were 157 million shares, down approximately 3.4 million shares or about 2% year-over-year. This reflects our share buybacks, partially offset by stock option exercises.

Finally, Q2 2018 non-GAAP EPS of $0.25 per share increased 9% from $0.23 in Q2 2017 driven by higher revenue, margin improvement and a lower share count, partially offset by the higher year-over-year tax rate in the quarter. Slide 15 shows the year-over-year revenue bridge for the first half of 2018.

Revenue was up $76 million or 9.5%, reflecting first half 2018 organic growth of 3.4%, acquisitions of 0.6%, and foreign exchange tailwinds of 5.5%. The organic growth improvement reflected 5.5% organic growth at BSI with solid increases at CALID and Nano, and low single-digit growth at BioSpin, and a roughly 13% organic BEST revenue decline.

Frank covered the drivers of our revenue performance in his earlier remarks. On slide 16 our first half 2018 non-GAAP gross profit margin of 47.6% increased 40 basis points. Higher volume, favorable business mix and operational improvements at CALID and BioSpin were partially offset by unfavorable foreign exchange translation.

Our first half 2018 operating expenses increased approximately 11% year-over-year, driven significantly by foreign exchange translation effects, but also select investments in sales and marketing and R&D.

All-in, our non-GAAP operating margin in the first half of 2018 was 12.8%, which is unchanged from the prior year as a result of slightly more than 110 basis points of negative foreign exchange translation, which offset the positive operational improvements.

Our first half 2018 non-GAAP tax rate of 25.4% was below the 27.2% tax rate in the first half of last year due to favorable income mix. Finally, non-GAAP EPS of $0.49 grew approximately 20% relative to the first half of 2017 reflecting improvements in revenue, share count and the effective tax rate.

Turning to slide 17, we generated approximately $68.1 million in free cash flow in the first half of 2018, compared to negative cash flow of $5.7 million in the first half of 2017. This reflected higher net income, an increase in customer advances, a year-over-year working capital improvement, and slightly lower capital expenditures.

Our cash conversion cycle at the end of Q2 2018 was on par with Q2 2017 with an increase in DSO offset by a roughly corresponding increase in DPO.

Turning to guidance for 2018 on slide 19, we are adjusting our guidance for revenue growth to reflect year-to-date progress on organic growth, as well as a move in foreign currency rates from earlier this year. For 2018, we now expect Bruker's revenue to increase approximately 6.5%.

This includes approximately 3.5% organic revenue growth versus our prior expectations for about 3% organic revenue growth, and a foreign currency revenue tailwind of approximately 2% compared to our prior expectations for a roughly 4% tailwind. Finally, we now expect our recent acquisitions to add approximately 1% to full year 2018 revenue growth.

For the BEST business, in 2018, we continue to expect a low single-digit revenue decline net of intercompany eliminations.

We continue to expect our full year 2018 non-GAAP operating margins to expand between 50 basis points and 80 basis points compared to a 15.9% level achieved in 2017, that is, after the previously mentioned pension expense reclassification.

Our estimate continues to include an approximate 70-basis point year-over-year foreign exchange headwind largely realized in the first half of the year. Our full year 2018 non-GAAP tax rate is projected to remain at approximately 25%.

Other guidance assumptions are listed on the slide, including our foreign exchange rate assumptions which have now been updated to reflect the recent strengthening of the U.S. dollar against the euro and other major currencies.

On the bottom line, we continue to project non-GAAP EPS in a range between $1.34 and $1.38, representing growth of between 11% and 14% compared to 2017.

While we do not provide quarterly guidance, due to the expected revenue mix and expense timing over the balance of the year, we currently anticipate our 50-basis point to 80-basis point improvement in reported non-GAAP operating margin to occur largely in the fourth quarter of the year.

For the third quarter of 2018, we currently expect both operating margins and EPS to be approximately comparable to Q3, 2017. In summary, Bruker had a solid first half of the year. We continue to drive our key operational and Project Accelerate initiatives and we remain on track to deliver on our financial commitments for the full year.

We look forward to updating you again on our Q3 conference call in November 2018. And with that, I'd like to turn the call over to Miroslava to start the Q&A session. Thank you very much..

Thank you, Gerald. Just a small correction on one of the comments; on slide 17, the year-to-date free cash flow was $62.4 million, and that was an increase of $68.1 million year-over-year. So the year-to-date cash flow is actually $62.4 million. With that, we're happy to take your questions.

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

Our first question today comes from Brandon Couillard from Jefferies. Please go ahead with your question..

Thanks. Good afternoon. Frank, if we look at the BSI segment in the second quarter, the 7% organic growth, kind of best you've been able to put up in five years or so, you sort of unpack the pockets of the business that kind of surprised most for you to the upside.

Could you speak to what that portfolio of the five segments, the five priority strategic segments grew in the second quarter? And then perhaps give us some color on aftermarket and service, would be great..

Gladly, Brandon. I think we're very pleased with our mass-spec portfolio and the microbiology business right now. They really both performed well. They also seem to be on healthy trajectories looking going forward.

As we had highlighted in the call, I think that portfolio refresh and the new products and additional solutions and consumables seem to be getting traction. Still early days in some areas like proteomics and phenomics where it won't contribute much.

But we're doing quite well, for instance, in biopharma and applied growth and also with the academic markets with our mass-spec portfolio. Semiconductor did well. So one of our Project Accelerate initiatives is advanced nanotechnology and applications in various areas, but including semiconductor metrology, so that did well.

That was not unexpected, but that was satisfactory. We've made good progress in pharma and applied markets from infrared to NMR tools. And pre-clinical imaging had recovered perhaps better than we might have expected. We expected a recovery, but it ended up being a little bit stronger.

Aftermarkets, to your last part of your question, aftermarkets continued to hum along, and that continues to be a good growth driver for us. So I hope that covers it.

Maybe I should point out that things like GigaHertz NMR, which won't be till next year, phenomics biomass spectrometry, proteomics, the Bologna workflows, a lot of this year's headlines will hopefully begin to contribute next year to our financials, but that's typically what happens.

This year's progress is a result of last year's product introductions. But it's going well..

Thanks. That's helpful.

Just to clarify, so are you saying that the 1 GigaHertz NMR shipment that you expected in the back half is now going to slip into next year (34:19)?.

Correct. As we agreed with the customer, the shipment may occur this year, but it's very clear that there's no way that it will go into revenue upon acceptance this year, because these installations take many weeks. So yeah, that's moving into next year..

Okay. Thanks.

And then to follow up, Gerald, on your last comment right at the end there with respect to the weighting between – or the operating margins, EPS to be relatively flattish in the third quarter, could you speak to revenues? Will they also be somewhat back-end loaded, and then what are kind of the contributing factors we should think about as far as the flattish OPM in the third quarter?.

Yeah. So a couple of items here. I guess, I'd say operating margins in the third quarter are driven primarily by the timing of revenues.

Some of the mix of that revenue as well as the expense timing that we expect in the back half of the year, so while we're very comfortable with the full year operating margin expansion guidance, we now expect more of that to occur in the fourth quarter, given all these factors.

As far as revenue goes, I guess I'd say, we're very pleased with what we saw in the BSI segment business, a very solid first half. You probably already know that our BEST business revenue can be lumpy from time-to-time. And we are expecting a slight modest slowdown in the BSI revenue growth for the remainder of the year.

Because of that, there's a fair amount of that revenue that will fall into the fourth quarter, and of course, it has some risks with it, particularly around some of the larger systems. But overall, we're still expecting very solid gradual organic growth improvement, and we expect to see that in the second half..

Very good. Thank you..

You're welcome..

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

Hey. Good afternoon. This is actually Chris on for Doug today. Thanks for taking my question. I just want to follow up on your previous point. You said BSI revenue growth is expected to decelerate in the second half.

Could you just provide a bit more commentary as to what is driving that? Is it largely the ultra-high field NMR shipment, or is there something else in there?.

So this is Frank. Hi Chris. I mean, last year 2017, our organic growth rate for BSI was about 2.6% or 2.7%. For this year we had the implication in our initial guidance would be that it would be about 3.5%, certainly north of 3%, that's kept inching up further. So as you saw, we saw raising our organic revenue guidance for the year by 50 bps.

So we're building up a nice momentum on an annual basis in our organic growth rate for the BSI business. So we had healthy orders in the second quarter for the BSI business. There is the risk that some revenue like the 1 GigaHertz, for instance, shifts into early next year, and we're comfortable with that.

Our growth rate is improving, and it's better than we expected at the beginning of the year. And so this all has a good, solid and sustainable feel to it..

Great. And then maybe just a follow-up question, a higher level question. You guys have done a lot of heavy lifting on improving operating margins with numerous restructuring activities and various outsourcing activities.

So with that in mind, could you just remind us what are the key drivers to operating margin expansion going forward?.

Well, a lot of it has to do with the mix and the new products, the new solutions, the business areas that we capture under Project Accelerate, the six initiatives that all have higher operating – and qualitatively higher, significantly higher operating margins and most of them other than aftermarket also have higher gross margins.

So that's the biggest driver. Of course, we continue with operational excellence. We continue to lean out our business as we work on productivity. We work on further multi-year factory and site consolidations. We will take out cost in some of the acquisition targets where we think we can have great cost synergies.

You may recall examples like the European shared services center that Gerald has set up in Central Europe at lower cost. So there are many, many, many, too many for headlines, but there are many, many areas where we're taking out cost in addition to bringing out higher margin products..

Okay. Perfect. Thanks for taking my questions..

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

Hi. Good afternoon. Frank, I was hoping you could elaborate on the China commentary. It sounded more positive than, I think, earlier this year.

And I was curious, just as you dig in related to some of the comments around the CapEx in metrology, was there any pull-forward related to the tariffs, or just what are you seeing in the market would be helpful..

No, we don't see any pull-forward. I mean, we're not aware of any pull-forward. If anything, there were even a little bit of delays in semiconductor. It did well, but it could have done even better with some things got pushed out into Q3 or Q4. Yeah, China, we are more positive.

We had some management transitions, and maybe there was a bit of a market weakness in Q1, not entirely sure what the mix was. And then, our Q2 orders ended up being quite strong. Our orders in China in the first half are up by more than our revenue, so that bodes well.

And we don't have any Chinese factories and not a huge part of our supply chain is in China. So the trade wars that are hanging out there so far, knock on wood, don't seem to be affecting us significantly from what we can see and what we do know.

So yeah, China second quarter orders and becoming more robust is a bit of a positive surprise to us, as well as obviously there had been concerns out there that everybody reads about..

Great. That's helpful. And then I also wanted to dig in on CALID. It looked like another good quarter.

How much initial traction are you seeing with the Bologna workflow? And has your view changed at all around what that could mean in terms of the recurring revenue opportunity there?.

The Bologna workflow really won't move the needle this year. First of all, we only have it under CE-IVD so we can go after European markets. And we have begun the testing to eventually have some modified version of that also under U.S. FDA clearance, but that's more likely a year away or so.

And whenever you have a new work stream, initially it's really the flat part of the hockey stick. You've got to establish that and collaborator and customer and key reference sites, and then you get more and more adoption, and then the idea is obviously to get a nice snowball effect eventually.

But the Bologna workflow has essentially no financial impact this year, and will begin to then gradually grow, although I think, over time, it can become a very nice S-curve.

And strategically, it's very important to us, especially to your second part of your question, as eventually we believe that aftermarket and consumables will be half or more of our microbiology revenue. In the early years, it was more systems heavy. And the systems business is also growing, but the consumables business is growing much, much sooner.

So Bologna workflow, strategically very important, but clearly a multi-year story..

Thanks for all the updates..

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

Afternoon, guys. Thanks.

Frank, on the metrology strength that you called out for your semi business, was that a function of timing in the sense that orders and recognitions were a headwind for you last quarter, and now you're just sort of benefiting from some of those delays this quarter? It sounds like you're a bit more cautious there going forward, so just trying to understand the dynamic a little bit..

Yeah. Well, there was a little bit of pushout from Q1 into Q2, but some of the pushout there also has gone into Q3 or Q4. Nonetheless, we still had year-over-year very good growth in metrology compared to the first half of 2017.

And then if you look at the semicon metrology world and the bigger players, some of them have guided – everybody's guiding down, it's guiding a little bit more cautiously. I think the memory boom times may be over, and some more diversified players around us, I won't mention any names, they've guided to continued more moderate growth.

And some that are heavily exposed to memory may see a bit of a downturn or a correction. I don't know, I can't speak for them, what the exact terminology is. We are primarily exposed to or have opportunities more so in logic than in memory.

So a memory boom didn't affect us as much, and also maybe the backside of the boom perhaps will also not affect us as much as others. Plus we're a small player with really new technology, and we're mostly in the technology adoption curve. So these semi cycles, while we're not immune to them, are not what's primarily driving the business.

Keep in mind that semi for us in total is 5% of our business. So it's not exactly dominating our trends, but it starts to – it is a good margin – can be a good margin business and we're making good progress. And yes, we are, like the entire industry, somewhat more cautious about the second half of the year..

Okay. Thank you for that color. And then maybe in the mass-spec portfolio, it does sound like the timsTOF platform is being pretty well received overall.

Can you just sort of add some color on where within the customer base that system is seeing traction or is looking most promising? Obviously, the high-res space within mass-spec is pretty competitive right now..

Yeah. No, I think it's going to be a nice complementary additional tool for the proteomics market, and the proteomics market of course is a primarily non-profit, academic, large non-profit research from a Scripps in the U.S. to a Max Planck Institute in Germany. Those are the type of customers.

There is also a pharma segment for proteomics research, and we're beginning to get some traction there as well. That is somewhat smaller but not insignificant either. It is still early days. It's not clinical proteomics yet.

Although with our high throughput and high sensitivity and very robust proteomics tools, we might be opening the door towards at least clinical research and large scale validation, so that could become an additional driver over time.

But right now, I would simply say that we are providing a very interesting and unique additional technology that not everybody has already. And the most proteomics labs are pragmatic and mixed vendor labs, so they'll have a variety of different tools, and we're optimistic that ours will be an important tool in the proteomics arsenal going forward..

Okay. Thanks very much..

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

Hey. Thanks. Frank, I'll start with a higher level question. Just wondering if you can kind of provide a broader update on Project Accelerate, you highlighted it as related to the bolt-ons.

But can you maybe just talk on some of the other six initiatives that you've flagged in the past?.

Yeah. So overall, internally we look at this, our metrics and our forecasts every quarter. And so we're very much on track with Project Accelerate, already even though many things are in Project Accelerate, and I'll explain in a moment, Tycho, really are going to begin to kick in more this year.

But even this year our Project Accelerate initiatives in the aggregate are forecasted to grow faster than our corporate average, and the margins are higher than our corporate average margins. So we think our strategy is very much on track.

Our dual strategy of course is operational excellence for the core and Project Accelerate, within Project Accelerate, and that's perhaps your real question. The microbiology part is really going very well. Semiconductor and advanced metrology and advanced nanotechnology tools are going very well, aftermarket growth very well.

Those are all moving the needle, and for sure are beginning to help our growth rate and continued margin expansion. There are others that are kicking in this year, like applied and pharma and to some extent cell biology neuroscience are beginning to move the needle.

Still early days, but they're becoming noticeable, and particularly applied and pharma is really doing quite well. And then there are others that really won't make any difference this year. In microbiology, the Bologna workflow for bloodstream infection identification, that really will build up slowly.

Similarly, our efforts in proteomics and mass-spec based phenomics are mostly an investment this year, and hopefully will begin to contribute next year and beyond. And finally, as you've heard and know, our GigaHertz backlog and new GigaHertz and GigaHertz Plus order growth very much will be a 2019 and beyond story.

But even though, we are quite aware that this takes some patience, and it's a multi-year story, it's already working. It's not all just future promise. It's already having in 2018 better margins and better growth rates, and beginning to pull us up and in the right direction with more things hopefully, more good things to come in future years.

So I think we're spot-on with that strategy..

Okay. And then I want to go back to one of the earlier questions on BSI, kind of moderating in the back half of the year, because I've had some questions on that during the call. I mean, the order book looks good, the comps are kind of the same going forward, as you just staged, NIH environment is better, MALDI Biotyper are doing well.

I just didn't quite understand the explanation as to why things are going to slow a bit in the back half of the year, given some of the leading indicators here are still pretty strong..

Well, first of all, the first half of the year surprised us a little bit. It's stronger at BSI than what we had expected, with 5.5% organic growth in the first half of the year, and we needed that because of the BEST reduction.

We managed that actually reasonably well, knowing that BEST would have a very difficult Q2, and the rest of the year for BEST is not all that bad. So I think we've managed it well.

But mathematically, that implies that with an improving year-over-year growth rate, organic growth rate in BSI, mathematically, we understand that that implies slightly lower growth in the second half.

Technically, or operationally, I should say, that also may – that, that reflects some conservatism given that we know that sometimes things get pushed out by a quarter. We're relying on a very strong Q4.

We're pretty sure it will be a strong Q4, but even there, there's always a possibility that some systems at some customer sites aren't ready, we're not quite ready and some things get pushed out. So with that, all-in, we think this is a reasonable improvement in our guidance on the organic growth rate without getting ahead of ourselves..

Okay. Thank you..

Our next question comes from Ross Muken from Evercore ISI. Please go ahead with your question..

Hey, guys. It's Luke on for Ross today. I was just hoping you could dig in a little bit more on the biopharma side. I know it's a smaller piece of your business, but just kind of dig in and see where you're seeing the majority of the interest from that market and kind of if there's been any changes to those trends going forward..

No. It's been pretty consistent. We didn't see any trend changes. We're not really reflective of any trends, because we serve certain niches or islands of demand with rather unique tools. So our NMR tools with various applications in pharma, biopharma have done well and are growing nicely.

Similarly, our mass-spec tools, which is for mass-spec imaging for drug development, for the MALDI PharmaPulse ultra-high throughput label-free screening solution, we're getting nice additional business there. That's really beginning to be adopted.

And then our biopharma biomolecular tools, mass-spec tools, that helped to look at antibodies and glycosylation and drug conjugates, antibody drug conjugants and so on. Some rather specific but unique and very, very much needed tools to study biologics in detail, and in more detail than you can see with other technology.

Those are actually all doing well.

I don't know that that's a reflection of the market, or simply a reflection that we have some really unique solutions, and that we have now a much more focused biopharma tiger teams and key account management that we've introduced some new commercial approaches to that market that gives us more focus and expertise with more tools and solutions that are welcome.

I think it's more – we're getting our act together in biopharma rather than a market reflection..

Got you. Sounds good. And then, I guess on the Daltonics strength you had, it looked like it was a really good quarter, and it was pretty much in line with what we've been hearing from other peers on their capital equipment side.

Can you just talk about the dynamics on the mass-spec side of that, what you're seeing competitive landscapes, where you guys think you're gaining share, anything like that?.

Yeah. So life science mass-spec is doing well. Also the mass-spec part that serves microbiology is doing well, but that's not really comparable to anybody else. So yeah, on the life science high-end mass-spectrometry where we play primarily, we might be gaining a little bit of share in the aggregate, both in academic and pharma.

Proteomics is still early days. Phenomics by mass-spec is still early days. What we introduced at the Metabolomics 2018 meeting in Seattle and at ASMS probably will begin to give us orders by later in the year and hopefully for revenue next year. So it's too early to say. Initial customer reception is quite positive.

So we continue to be somewhat optimistic that we'll make good progress and can grow with the market and perhaps a little faster..

Great. Thanks..

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

Yeah, hi, Frank. I had two questions, one on scimaX first. Just trying to understand, I mean, that is a product feature. You have new cooling features there that are superior compared to what FTs used to be. You obviously have the leadership in magnets.

So how should we think about acceleration in this market? The profile of the products looks smaller compared to the traditional FTs we have seen in past.

Could you maybe provide us some metrics of annual installs, what it used to be, and where do you see this market evolving now with proteomics? And sort of what's your expectation here, despite being a somewhat niche market still?.

Yeah. No, it has been a niche market. Everything you're saying is correct. I mean, to give you a ballpark figure that tends to be, maybe excluding aftermarket, less than two dozen systems a year, less than $20 million. We think that has an opportunity to go a little bit more mainstream, certainly in the high-end market.

These systems cost well over $1 million. But there's a market for these high-end systems, and there are budgets for that and they're worth it. They give you unbelievable performance. That's not the first mass-spec any lab will buy, unless they do some very specialized MALDI imaging for drug development, then it might be.

But in most cases, these are a very, fairly high-powered mass-spec labs that also sometimes need that ultimate performance, and I think a lot more of them can begin to consider that now, now that it's not a specialty system that reminds you of more of an NMR system with cryogens, and needs a special lab that can go into a standard mass-spec lab.

So that has been well received, and we think as this can go more mainstream it can maybe grow out of its rather small niche and become a little bit larger over time.

With biopharma, and particularly also the phenomics or metabolomics workflows, where it has some rather unique capabilities for high-throughput phenomics of 200 samples a day, something you just can't realistically do with traditional LC-QTOF or LC-ORBI (57:31) type technologies..

Okay. Thanks. And another follow up in the mass-spec segment, I wanted to get a view from you in timsTOF, actually taking share in the ion mobility segment of the market. I mean, there's an established competitor here that was an early entrant to the market.

Now, with the product, sort of, firmly out there and gaining some traction in the market, do you think you can take more ion mobility share from the QTOF segment, or do you think this is going to be a more expansionary effort again, somewhat of a smaller market? But I just want to get your views here..

Yeah, it's a very good differentiated question. We're aiming this TIMS technology, which has many advantages over traditional IMS technology as a front into mass spectrometry. We're aiming it very much so right now at the proteomics market.

So we're not pursuing necessarily all niches and all markets, although there is interest also by general fundamental academic research customers, and some other niche applications. But we're focusing at a lot right now on proteomics and ultra-high sensitive and high-throughput proteomics.

Yes, it is an exciting new technology, and we're not, maybe enough said, but we're not broadly deploying it at this point, but more focusing it on one particular problem where it can do a really, really good job..

Great. Thanks..

Our next question comes from Patrick Donnelly from Goldman Sachs. Please go ahead with your question..

Great. Thanks.

Maybe one for Gerald, just looking at the margin opportunity, can you talk through the opportunity going forward? Are there more cost saving or operational excellence initiatives to come, or is it more based on Project Accelerate, with growing some of these higher margin products at a faster rate?.

No, I think there are many other opportunities, both in terms of operating margin, and Frank already mentioned, we're not only looking at operating performance within the business, we're also looking at infrastructure groups that support the business. So I think there are number of opportunities.

And even within the business from an operating margin performance, we are looking at a number of operational excellence initiatives, and we track those on a regular basis, and we're expecting those to deliver some significant continuing operating margin expansion as we move forward..

Pat, not all of these are necessarily headline material, although we'll try to highlight some of them for you during our earnings calls or when we go to conferences. But right now we're opening our Malaysia factory in Penang, Malaysia which is obviously a lower cost destination for some of our BNANO products primarily.

So there is an ongoing, steady, not necessarily headline-worthy, continuous improvement in lean initiatives and taking cost out. We don't give up on that. But compared to a few years ago, certainly a big part of the story now also is these high growth, high margin initiatives. But I think it's a good balance.

It's not that we abandoned one and now went to growth only with high margins. It's a very balanced approach that I think together can deliver very nicely..

Sure. Makes sense. And then, Frank, maybe just on Europe, nice performance there, low double-digits in BSI.

Any particular regions or markets that are doing better than others there, and how are you feeling on the outlook in Europe?.

Well, everybody is a little bit nervous about Brexit once again. But we hope this can all be managed. Again, other industries will have bigger issues than we typically with something like that. You saw some nice funding trends in the UK on NMR, our ultra-high field NMR, you may have picked up on that. So we're pleased with that.

We of course continue to have a lot of backlog in Europe. And I don't know that there was anything all that noteworthy. I mean, Western Europe, Germany, France all did well, I believe. I think we may have seen a little bit slower Scandinavia and UK is what I recall. But again, that might just be fluctuations and Bruker specific.

So I don't think there's anything really noteworthy other than traditional, the major Western European countries have generally done well, and no major crises that I'm aware of in any particular region of Europe or a country..

Thanks..

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

Hi. Good afternoon, and thank you for squeezing me in. Couple of housekeeping questions for Gerald. Gerald, the specific FX impact as revenues that you're looking for in Q3, just so we can look at the – model correctly for the back half..

It flips in the back half of the year for revenue, Derik. It becomes a negative on the top line..

Right. I'm just trying to get a sense for the magnitude in Q3..

The magnitude of the impact in Q3?.

Yes..

I believe it's in the low single-digits, negative..

Yeah. Negative low single-digits..

Okay. That's what I would have thought. Thanks..

Next quarter. Yeah..

Great.

And the number for net interest expense for the full year and where you're sort of looking at that?.

So that's a line that varies quite a bit from quarter to quarter because there is a number of items that are not always easy to project. But I think we were at about $5.5 million in the second quarter. I think that's a reasonable number to bake in on a quarterly basis for the remainder of the year..

Great. And I'm just curious, Frank, I mean, I just want to go back and do something. I mean, some of your other competitors have made specific callouts on potential impact from tariffs and stuff. But I'm just curious, is your manufacturing footprint such – I mean, I know you do a lot of your mass-spec work in Bremen and such.

I mean, is your manufacturing footprint so that you're more isolated from that or is it your sales are not as big? I'm just curious as to what's so different between what your peers are saying and Bruker?.

Well, some peers have factories and major suppliers, major supply chain in China. Of course, everybody has some entanglement of the supply chain with China.

For us it's probably less than for a number of companies that have invested in Chinese factories or Chinese factory outsourcing partners, as our outsourcing partners tend to be in Central Europe and in Southeast Asia rather than in China and we don't have a Bruker factory in China.

Also, more of our products tend to go from Europe to China where there is less of a mood for a trade war. And our products from our California or Arizona factories, at this point in time we're not aware that they have been implicated by either side.

So for us, it's – for once, we might be a good part of that – relatively at the benign end of that story from what we can see so far, knock on wood. But others may be affected by that more than us. So we're not going to play the China excuse card.

Everybody else is doing quite well anyway, so I think that's not – no, for us, China is mostly demand, and demand has recovered from what we can see in the second quarter, and not so much of a supply chain or tariff threat from what we know..

Great. Thank you very much..

Pleasure..

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

Hi. Good evening, and thanks for taking my questions. Two things for you sort of related. I guess, first, if you could just comment on what you're seeing or what you're hearing from your U.S. academic customers as it relates to NIH funds maybe starting to flow, maybe also remind us your revenue exposure to U.S. academic customers.

And then I guess, secondly, Frank, the 1 GigaHertz NMR system, if my memory serves me correct, it was initially you thought might go in and be placed back in the fall or late 2017, then it got kind of pushed to mid-2018, late 2018, now it sounds like 2019.

So just wondering on, I guess, your confidence in your ability to create these systems, as well as customers accepting them. Thanks so much..

Yeah. All right. NIH funding, yeah, it's not so clear yet that all this good NIH funding news has translated into orders and revenue for us yet. Although the customers tend to be upbeat. I mean, you go to ASMS or metabolomics conferences and U.S. customers tend to be more upbeat about NIH funding, also about DOE funding.

Quite a bit of that is going into, you have the basic energy science programs, it's going into some life science programs, and other funding. So overall, we're upbeat. But yeah, the U.S. has actually not been as strong in terms of demand in the first half of the year as we had anticipated. But the mood remains upbeat.

Little bit puzzling, and I think we're not the only ones reporting that, not exactly sure. So we remain optimistic, but don't have a lot to show for it yet. Europe was strong and China came back nicely more than we had expected. That's a more of an order rev comment – for Europe it's an order and revenue comment. Sorry if I confused the two.

On the GigaHertz, that is correct, these are leading edge systems, and so they're quite challenging, and any time you have a delay or a customer siting delay, it very easily is a quarter or two. It's not just a few weeks.

And we are – on the 1.0 GigaHertz, we are optimistic that we can deliver and get revenue on one or two of these systems next year, although there has been pushouts, and we acknowledge those. We're making them up elsewhere as we had predicted also.

On the 1.1 GigaHertz and above, we still have to meet some technical milestones where we're guardedly optimistic that we can meet those, but these are leading/bleeding edge of technology; very, very demanding.

And so there we cannot say yet whether or not they begin to in the second half of next year, or whether it will be early 2020 before we can deliver those and get revenue on those.

There we still have to meet some milestones in integrating this new high temperature super conductivity technology into these hybrid magnets, which is a novel way to build super con magnets that has never been done before in NMR. So there we still have to do some milestones.

The GigaHertz, we're pretty optimistic we can get revenue next year with the exact timing obviously than more a subject of our 2019 guidance..

Okay. Thanks, Frank..

And our next question comes from Sung Ji Nam from BTIG. Please go ahead with your question..

Hi. Thanks for taking the questions. I just have one question. Frank, maybe on your microbiology business, obviously an important part of your Project Accelerate, I recognize there is a lot of direct competition there, but obviously there's a lot of competition, emerging technologies, rapid DNA sequencing, et cetera.

So as you look at the business and the growth potential there going forward, and also with the recent product launches such as IR, Microtyper and the Bologna workflow, et cetera, and new pathogens added, fungal pathogens added to your menu, how do you see your addressable market changing there, and kind of your competitive position overall, not just within the current environment, but with a lot of different technologies out there potentially competing against the same applications? Thank you..

Yeah. Very good questions. It's a confounding area, and there's a lot of dynamics going on. So first of all, with the MALDI Biotyper, we have of course one competitor, a formidable company in that space. Although we believe we're the market leader with MALDI, fast MALDI ID.

We are also offering capabilities on top of our MALDI Biotyper primarily in Europe right now, but over time also elsewhere that go beyond what others have tried to do with these systems, mainly into the fast blood culture identification markets. And there we really think, their market is a little bit bifurcated.

So there are some mostly molecular technologies, PCR, one flavor or another, sometimes also phenomic technologies that are really quite expensive, and I think some of them just don't have much traction yet, although they may be promising, and some of them may carve out certain niches, whereas we go much more after the cost effective, millions of years of identifications from blood culture type of mass markets that require a more cost effective, lower price point.

So we think we are in the sweet spot for our markets, and even our Bologna workflow is very different from these molecular or technologies that you're seeing out there. I can't comment on each one of them. It's obviously a confounding field, and a lot's going on. Our Invasive Fungal Disease niche, you're right about that. That is a molecular technique.

That is directly from specimen or from blood samples without any culture, very important, because a lot of it is Candida and Aspergillus, they just don't grow very much or very well, or only very slowly in culture.

So there we're going after a certain niche where we think we actually, by doing it directly from blood where we have something unique, but that's still very early days for that.

And yeah, I mean, a lot of the things that we're rolling out are just for a slightly different take on the market, much more mainstream, but at a lower price point and with slightly different characteristics than some of the other press releases and new products that you may have in mind, and that we're keeping an eye on..

Great. Thank you so much..

And ladies and gentlemen at this time I'm showing no additional questions. That will conclude today's question-and-answer session. I'd like to turn the conference call back over to Miroslava for any closing remarks..

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

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines..