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

Chris Lin - Cowen & Co. LLC Brandon Couillard - Jefferies LLC Mitchell Petersen - Barclays Capital, Inc. Patrick Donnelly - Goldman Sachs & Co. LLC Daniel Gregory Brennan - UBS Securities LLC.

Good afternoon, and welcome to the Bruker Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note this event is being recorded.

I would now like to turn the conference over to Miroslava Minkova, Director of Investor Relations and Corporate Development. Please go ahead..

Good afternoon. I would like to welcome everyone to Bruker's third 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'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 and operational 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 in our Form 10-K, as well as in subsequent SEC filings, which are available on our website and on the SEC's website.

Also, note that the following information is related to current business conditions and to our outlook as of today, November 1, 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 fourth quarter and full year 2018 financial results in February of 2019.

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 third 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 delivered a solid third quarter with revenue, margins, and EPS all exceeding our expectations.

During the third quarter, our organic revenue growth accelerated to 7% with good organic growth in both our Bruker Scientific Instruments, or BSI, and our BEST segments.

We also saw a notable 280 bps step-up in our non-GAAP operating margin versus the prior year as a result of operating leverage, favorable mix, and our ongoing operational improvements. Overall, our teams delivered well and were effective at derisking our commitments for the full year.

During the third quarter, we made further good progress with our Project Accelerate high-growth, high-margin initiatives. We continued the rollout of our timsTOF Pro dual TIMS Mass Spectrometer with additional workflows for proteomics and lipidomics at the HUPO conference in early October.

In August, we announced the planned acquisition of an 80% equity stake in Hain Diagnostics, which we have disclosed in mid-October.

Bruker-Hain Diagnostics, as it is now called, will now add further depth, breadth, and new growth drivers to Bruker's microbiology and infectious disease diagnostics business, and I will provide more color on that later on the call.

We have also seen improved revenue growth and margin performance in recent quarters in many of our established Bruker businesses driven by innovation, our operational excellence initiatives, and the healthy end markets for most of our businesses. Turning to specifics now on slide 4.

In the third quarter of 2018, Bruker's revenue increased 7.1% year-over-year to $466.6 million. On an organic basis, revenue increased 7.0% year-over-year including 6.5% growth at our Scientific Instruments business and an 11% increase at BEST, net of intercompany eliminations.

We experienced strong revenue performance in our Nano and CALID Groups, while BEST improved sequentially from the year-over-year decline experience in the first half of 2018. During the third quarter, acquisitions added 1.5% to revenue growth while foreign currency translation was a drag or headwind of 1.4%.

Our Q3 2018 non-GAAP gross margin increased 140 bps year-over-year while our non-GAAP operating margin increased 280 bps year-over-year, reflecting strong operating leverage, favorable mix, and operational improvements. In Q3 2018, Bruker reported GAAP diluted EPS of $0.28 per share, compared to $0.23 in Q3 2017.

On a non-GAAP basis, our third quarter 2018 EPS of $0.37 increased 28%, compared to $0.29 in the third quarter of 2017. Gerald will provide further detail on the financial results later on the call. If you continue on slide 5, I show Bruker's performance through the first nine months of 2018 or year-to-date.

Our revenues increased 8.6% compared to the first three quarters of 2017. Organic revenue growth in the first nine months of 2018 was 4.7% year-over-year, comprised of 5.8% organic growth in the Scientific Instruments business and a 4.8% organic BEST decline.

Acquisitions added 0.9% to our overall top line year-over-year while foreign exchange added 3.0%. End market conditions and order bookings for Bruker's academic, applied, pharma, microbiology, and industrial research markets remained favorable in the first three quarters of the year.

While semiconductor metrology markets have slowed, booking rates for the majority of Bruker's portfolio remained quite healthy. Year-to-date 2018 order bookings for Bruker Scientific Instruments were up mid- to high-single digits on an organic basis. This included strong growth in North America and China and good results in Europe.

Over the course of the first nine months of the year, we saw the expected acceleration in our organic revenue growth rate, and we believe the strong bookings trends position us well for 2019.

For the first nine months of 2018, our non-GAAP gross margin increased 80 basis points or bps compared to the same period in 2017 while our non-GAAP operating margin rose 90 basis points despite a very strong currency headwind in the first half of 2018.

On a GAAP basis, Bruker reported EPS of $0.65 in the first nine months of 2018, compared to $0.51 in the first three quarters of 2017. Hence, year-to-date for the first nine months of 2018, our non-GAAP EPS of $0.86 increased 23% from $0.70 in the same period in 2017.

Please turn to slide 6 and 7 now, where I provide further highlights on the year-to-date 2018 performance of our three Scientific Instruments groups and our BEST segment, in all cases on a constant currency basis and year-over-year. Starting with BioSpin.

Year-to-date in Q3 of 2018, the BioSpin Group revenue increased in the low-single digits to $411 million with growth in our clinical and applied markets, as well as the aftermarket services business. NMR systems revenue was up slightly from the prior year with our applied and clinical solutions continuing to perform strongly.

If you recall, BioSpin no longer expects any 1 gigahertz revenue in 2018 as this has shifted to 2019. Within BioSpin, our preclinical imaging, or PCI, business had modest growth year-over-year, while aftermarket and service revenue for NMR and PCI continue to increase very nicely year-over-year.

Moving on to the CALID Group, the CALID Group continued to perform strongly with year-to-date revenues up in the high-single digits to $394 million. Within CALID, growth was driven by our mass spectrometry and molecular spectroscopy businesses.

Year-to-date, Daltonics mass spec revenues increased meaningfully versus the prior year with strong performance in both our microbiology and life science mass spec portfolios.

As discussed on prior calls, we are seeing the benefits of our life science mass spec portfolio transformation and we expect further growth in 2019 and beyond, as recently launched products like our timsTOF Pro and the new scimaX MRMS ramp up.

Our microbiology business delivered solid year-to-date results as well with both Biotyper instruments and consumables up strongly versus the prior year. Optics products has had solid year-to-date results driven by product innovation, strong execution and healthy end markets.

CALID's detection revenue, however, year-to-date has been substantially lower versus the prior year as expected. So please turn to slide 7 now. The Bruker Nano reported high-single-digit revenue growth with revenues of $401 million.

Nano's year-to-date results were driven by strong academic research and industrial research demand for ADVANCE X-ray and nano-analysis products. Nano results also included contributions from our recent acquisitions, primarily JPK and Anasys, completed in July and April 2018, respectively.

AXS revenue was up strongly year-over-year fueled by strong demand in both industrial materials research and academic research markets. Our Nano Surfaces and nano-analysis revenues also increased year-over-year with good organic growth supplemented by the acquisitions.

Nano's semiconductor metrology revenues were modestly above the prior year on a year-to-date basis. Semiconductor metrology markets have softened amid a broader slowdown in semi capital equipment spending in the second half of this year. As a reminder, semiconductor metrology markets contribute approximately 5% of Bruker's overall revenue.

Despite the semi slowdown, the overall year-to-date Nano Group results were robust versus the prior year. Lastly, BEST year-to-date revenue declined mid-single digits due to the previously reported double-digit revenue decline in the first half of the year.

BEST results improved significantly in the third quarter with growth of 11.1%, net of intercompany eliminations as noted earlier. Overall, for BEST, our superconductor revenues for MRI and Big Science markets can fluctuate from quarter to quarter.

For the full year, we continue to anticipate a low-single-digit organic revenue decline at BEST, also as previously communicated. Next, on slide 8, I would like to provide some further details on the Hain Diagnostics acquisition which we closed in mid-October.

Hain brings to Bruker an established portfolio of molecular diagnostics tests for mycobacteria testing specifically for tuberculosis or TB screening and resistance testing. In fact, Hain is among the market leaders in tuberculosis testing in international markets in Europe and Africa where the Hain DNA strips are well-known and established.

Hain also adds PCR-based molecular diagnostics solutions and a molecular diagnostics infectious disease assay portfolio. In addition to tuberculosis, Hain's assays cover a variety of pathogens including sexually-transmitted diseases and HIV viral load.

Hain also has been developing the new Fluorocycler XT PCR platform to enable proprietary Liquid Array assay technology for a high level of multiplexing. Development of cost-effective Liquid Array syndromic panels is a work in progress for central laboratories. And we hope to talk more about that in 2019.

So, overall, the Hain portfolio is highly complementary to Bruker's market-leading MALDI Biotyper solution for microbiology.

For the fourth quarter of 2018, as part of Bruker, the Bruker-Hain revenues are expected to be between $6 million and $8 million and the impact of EPS in 2018 is not expected to be material, and we continue to expect that this Hain acquisition or 80% stake to be accretive to our 2019 non-GAAP EPS by a $0.01 to $0.02.

So we welcome our new Hain colleagues to Bruker. Bruker-Hain Diagnostics is now part of the CALID Group. Switching gears on slide 9, I would like to highlight one example of how we drive operational excellence at Bruker, which remains an important priority for us as well in addition to our Project Accelerate high-growth, high-margin initiatives.

In 2019, we expect Bruker's new manufacturing engineering and final test center in Penang, Malaysia to become operational. Select Bruker Nano Group products are slated to transfer to Penang.

This new facility is expected to have lower operating costs for us for final assembly and testing, and it has great access to our existing local third-party subassembly production partners in Penang. Over time, we also expect to establish lower-cost engineering and design resources. The Penang location also offers favorable corporate tax rates.

To give you an idea, by 2021, we anticipate more than $50 million of Nano revenue to come out of the new Penang factory. On slide 10, Bruker's key priorities for 2018 are unchanged. We continue to make good progress with our overall growth acceleration and profit margin expansion strategy.

This includes Project Accelerate, as well as operational excellence to drive improvements in all of our core businesses.

With regards to Project Accelerate, we have taken significant strides this year to position our proteomics, phenomics, ultra-high field gigahertz NMR, and neuroscience initiatives to begin to contribute to our organic growth in 2019 and beyond. In microbiology, we have also added additional growth drivers via Bruker-Hain as discussed earlier.

So in summary, I'm very pleased with how Bruker's teams have delivered in Q3 2018 and year-to-date, and I believe our results are a testament to our effective management processes and to our capable leadership team. Given our year-to-date performance and healthy order growth, we are updating our revenue and EPS guidance for the full year 2018.

And with that, let me turn the call over to our CFO, Gerald Herman.

Please?.

Thank you, Frank. I'm pleased to join you today and review Bruker's third quarter and year-to-date financial highlights starting on slide 12. As you saw on our press release, Bruker's reported revenue increased 7.1% to $466.6 million in the third quarter of 2018, which reflects organic growth of approximately 7%.

We reported GAAP EPS of $0.28 per share, compared to $0.23 in the third quarter of 2017. On a non-GAAP basis, Q3 EPS increased strongly to $0.37 per share, a 28% year-over-year increase.

Q3 2018 non-GAAP operating margin of 17.9% improved 280 basis points from the 15.1% reported in Q3 2017 and non-GAAP operating income grew approximately 27% year-over-year. Higher revenue, excellent operating leverage, favorable mix, and operational improvements drove a strong year-over-year margin increase.

This performance notably exceeded our expectations as all business groups did an excellent job of derisking a back-end-loaded fourth quarter. We generated free cash flow of $16.1 million in Q3 2018, compared to $25.1 million in the third quarter of 2017. This represents the third consecutive quarter of solid cash flow generation this year.

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

We ended Q3 2018 with somewhat higher working capital balances, reflecting our revenue growth, shipping activity late in the quarter, and the integration of earlier acquisitions. Overall, our working capital to revenue ratio held steady year-over-year. Slide 13 shows the revenue bridge for Q3 2018.

As noted earlier, organic revenue growth in the quarter was 7%. We had a positive contribution from acquisitions of 1.5%, which was offset by a foreign currency headwind of 1.4%.

From an organic growth perspective, the 7% Q3 2018 organic revenue growth rate included double-digit organic growth at Nano mid- to high-single-digit organic growth at CALID, and low-single-digit growth at BioSpin.

The BEST segment also contributed with 11.1% organic growth, net of intercompany eliminations, improving on BEST's first half 2018 performance. Overall, we are very pleased with the organic revenue momentum across many of our businesses within the BSI segment. Slide 14 shows our Q3 2018 non-GAAP results.

Our Q3 2018 non-GAAP gross profit margin of 49.2% increased approximately 140 basis points from 47.8% in Q3 2017. Strong operating leverage and favorable mix at both BSI and BEST, as well as ongoing operational improvements all contributed to a solid year-over-year increase.

Q3 2018 selling, general, and administrative expense of $105 million and research and development expense of roughly $42 million, each increased approximately 3% compared with the prior-year third quarter.

This increase is well below the rate of revenue growth and reflects disciplined expense management even after the assumption of expenses associated with acquisitions.

Looking below the line, net interest and other expense of $3.7 million was slightly lower than Q3 2017, principally reflecting lower net interest expense due to the paydown of our revolver borrowings in the first quarter.

For the third quarter of 2018, our non-GAAP effective tax rate was 25.9%, which was unfavorable compared to Q3 2017 and slightly higher than our expected tax rate for the full year. This is due to the timing of certain discrete tax items, which are expected to reverse in the fourth quarter.

Weighted average diluted shares outstanding in the third quarter were 157.4 million, down approximately 1.3 million shares from Q3 2017 or about 1% year-over-year. Finally, Q3 2018 non-GAAP EPS of $0.37 increased 28% from $0.29 in Q3 2017, driven by higher revenue and significant year-over-year margin improvement.

Slide 15 shows the year-over-year revenue bridge for the first nine months of 2018. Revenue increased 8.6%, reflecting year-to-date 2018 organic growth of 4.7%, a contribution from acquisitions of 0.9%, and a foreign currency tailwind of 3%.

Year-to-date organic growth reflected 5.8% growth at BSI, driven primarily by strength in our Nano and CALID Groups and a 4.8% organic revenue decline at BEST, net of intercompany eliminations. Geographically and on an organic basis for the first nine months of 2018, Bruker's European revenue increased low-single digits year-over-year.

North American organic revenue was up high-single digits. Asia Pacific revenue was up mid- to high-single digits. China revenue in our BSI segment has been relatively flat year-to-date in 2018 as expected. However, our China BSI order rates in the last three quarters have been quite robust.

Year-to-date through the third quarter, we've not seen any significant impact from the trade dispute between China and the U.S. on our financial performance. With tariffs now in effect between the two countries, we currently do not anticipate a significant impact to Bruker in the remainder of 2018.

Looking out to 2019, we're working on supply chain and other measures to help minimize the impact on our operations in 2019 and beyond. As a reminder, about 15% of Bruker's total revenue is generated in China, but the majority of our products sold in China are manufactured in Europe.

Certain U.S.-made Bruker products going to China are now subject to Chinese tariffs. We estimate Bruker's overall revenue exposure subject to Chinese tariffs at less than 3% of our total revenue. On slide 16, our first nine months of 2018 non-GAAP gross profit margin of 48.2% increased 80 basis points year-over-year.

Higher volume, favorable mix, and operational improvements throughout BSI contributed to the increase which was partially offset by the unfavorable year-to-date effect from foreign currency translation.

Operating expenses in the first nine months of 2018 increased approximately 8% year-over-year impacted unfavorably by changes in foreign currency rates earlier in this year.

On a non-GAAP basis, we delivered an operating margin of 14.5% year-to-date, an increase of 90 basis points from the prior year-to-date period as volume leverage and operational improvements more than offset a strong unfavorable impact from changes in foreign currency rates realized primarily in the first half of this year.

For the first nine months of 2018, our non-GAAP tax rate of 25.6% was comparable to the same period last year. Finally, year-to-date non-GAAP EPS of $0.86 grew approximately 23% relative to the first nine months of 2017, reflecting strong revenue growth, margin expansion, and lower net interest expense and share count year-over-year.

Turning to slide 17. We generated $78.5 million in free cash flow in the first nine months of 2018, compared to $19.4 million in the same period of 2017.

This reflected higher net income and increase in customer advances and certain favorable other non-cash items year-over-year, partially offset by an increase in our working capital balances relative to the end of Q3 2017.

Our cash conversion cycle at the end of Q3 2018 of 219 days was three days lower than in Q3 2017 with an increase in days sales outstanding more than offset by favorable changes in both days inventory outstanding and days payable outstanding. Turning to guidance for the full year 2018 on slide 19.

We now expect Bruker's revenue in 2018 to increase 6.5% to 7%. This now includes 3.5% to 4% organic revenue growth, a slight increase over our prior expectation of approximately 3.5% organic growth, reflecting our year-to-date performance.

We now project an approximate 1.5% revenue contribution from acquisitions, a 0.5% increase over our prior guidance. This includes the Hain Diagnostics majority interest acquisition which we completed in mid-October. Given the continued strengthening of the U.S.

dollar against a number of currencies, we now estimate a foreign currency tailwind of approximately 1.5%, which is a reduction from the 2% expected at mid-year. For BEST, we continue to project a low-single-digit organic revenue decline in 2018, net of intercompany eliminations.

We continue to expect 2018 non-GAAP operating margin expansion of between 50 basis points and 80 basis points, compared to the 15.9% level achieved in 2017, despite an approximate 70-basis-point year-over-year foreign exchange headwind in 2018, absorbed for the most part in the first half of the year.

Our full year 2018 non-GAAP tax rate projection is unchanged at approximately 25%. Other guidance assumptions are listed on the slide, including our foreign exchange rate assumptions, which assumed foreign currency rates as of the end of Q3 2018.

On the bottom line, we now project non-GAAP EPS of between $1.36 and $1.40, an increase of about $0.02 from our prior guidance range of $1.34 to $1.38. The updated non-GAAP EPS guidance now represents growth between 12% and 16% compared to 2017.

In summary, Bruker had a solid quarter with strong revenue growth and robust year-over-year improvements in our non-GAAP operating margins and EPS.

We're encouraged with our progress during the quarter on multiple fronts, including our Project Accelerate high-growth high-margin initiatives, improvements in our core business, recent acquisitions, and the results of our operational excellence initiatives. Given the year-to-date results, we have slightly increased our outlook for the full year.

We look forward to updating you again on our Q4 and full year 2018 earnings call in early February 2019. 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 clarification on the Nano year-to-date results, the slides were correct. It was a double-digit increase in constant currency and not a high single-digit increase. Sorry about that. With that, I'd like to open the call for Q&A questions.

In the interest of accommodating more of our analysts, please limit your questions to one and a follow-up. Operator, please open the call for questions..

And our first question will come from Doug Schenkel with Cowen. Please go ahead..

Hi. This is Chris on for Doug today. Thanks for taking the question. Just one on full-year guidance. So based on your updated full year organic revenue guidance, it looks like the implied Q4 revenue growth is 1% to 2%. So that's the lowest rate in 2018.

With that in mind, can you just share what are the key assumptions behind the Q4 revenue guidance and why are you expecting a material slowdown?.

Well, first of all, we pay more attention to actual results than to predictions. Second of all, Q4 2017 was very strong, so it's a solid comparison. Q4s are always a little harder to predict because they are such big revenue quarters for us with some uncertainty on what systems will turn into revenue or may move into the next quarter.

And it's our practice that we're providing you with a forecast that we believe is reasonable and achievable based on where we are today. So we're comfortable with the full-year guidance..

Okay. And maybe a similar question just on EPS guidance. You increased EPS guidance by $0.02 but you beat expectations by $0.07 in Q3.

So maybe could you just help us understand why you didn't increase the EPS guidance a bit more?.

I think almost the same answer, Chris, I don't mean to frustrate you, but we think we're on a good track. We feel comfortable with the mid-teens non-GAAP EPS growth that we have this year. If we can deliver a little bit more, great, but I think this seems like it's reasonable and achievable..

Okay. Thank you..

Your next question comes from Brandon Couillard with Jefferies. Please go ahead..

Thanks. Good afternoon.

Frank, could you give us a sense of how that basket of the five strategic Project Accelerate areas grew in the third quarter relative to let's call it the rest of the legacy portfolio? It seems like there must have been some strength in the other parts of the business, and would be curious as to what service and aftermarket growth was in the third quarter as well..

Yes. There was strength in most parts of the portfolio, indeed not only in the Project Accelerate initiatives, but as you've observed also in other parts of the core business that continued to be very core for us have done well as well. We look at it sort of as a year-to-date.

And year-to-date we can again confirm, as we have previously, that our Project Accelerate high-growth high-margin initiatives are already growing faster than the average for Bruker organic growth, and we can also confirm that they have meaningfully higher operating margins.

And mind you, as you realize, Brandon, this is before we obviously hopefully can contribute on the Gigahertz side in a meaningful way with proteomics and phenomics next year. So good progress in microbiology in aftermarket. In semi, actually good progress also – very much good progress in applied and pharma part of the initiatives this year.

And hopefully we can then also add proteomics, phenomics, and Gigahertz NMR, and a little more on the fluorescence microscopy neuroscience side next year. So, some growth drivers will begin to become more meaningful next year. But even this year already, Project Accelerate is growing faster and has higher margins than our average.

Certainly on a year-to-date basis, we look at it on the year-to-date and full year basis, but I think it would also hold true for Q3..

Thanks.

And then, Gerald, I realize it may be a little early, but just looking into 2019, would you expect to be within that 75 bps to 100 bps in terms of operating margin expansion target? You sort of spoke to some China tariff exposure, but could you boil that down in terms of dollars for us? And then in terms of the near-term cost outs, sort of size some of the buckets and areas of the business where you see opportunities to capture some efficiencies.

Thank you..

The overall news is that the exposure is very low for us, right? But anyway, Gerald?.

Well, I would just say, as you likely know, we're not going to offer too much guidance on 2019 so we can't be too responsive with respect to that particular part of your question. But what I would say is we still continue to see significant opportunities from an operational improvement perspective across all the lines of business.

We have performed well for sure in the third quarter and we continue to expect to see that going forward. There are plenty of opportunities. Frank highlighted the production shift of some activities in Penang. We clearly have a number of other opportunities that are available to us, and we're going after all of them, I would say.

So I think our overall margin performance is expected to be encouraging for the next few years, not specifically speaking to a particular year..

And maybe to confirm, though not specific for 2019, yes, our ongoing for the foreseeable future, we really believe we can deliver 75 bps to 100 bps of non-GAAP operating margin improvement per year without any clear end of any runway or anything that we don't see the end of the runway or anything like that.

So that remains our long-term commitment on average. It can change from year to year a little bit. Obviously, this year 2018 we have a strong currency headwind. But even with that, we should be close to the low end of that range.

And, of course, if you look at organic profit margin improvement excluding the headwind conveniently, then we're doing much better this year. And that's our long-term commitment, that hasn't changed. We're just not prepared today to give 2019 specifics..

Very good. Thank you..

And our next question comes from Jack Meehan with Barclays. Please go ahead..

Hey. Thank you. This is actually Mitch Petersen on for Jack this afternoon. I was hoping you could just expand on what you're hearing from customers in China and walk us through some of the puts and takes that are getting you the flat growth year-to-date in the region.

And then just lastly, apologies if I missed this, but did you comment on what China growth was specifically in the third quarter? Thanks..

China, we've been slower in our revenue growth year-to-date in China because of some homemade issues that we fixed at the end of last year and early this year. However, just like in the second quarter and also in the third quarter, our new order bookings certainly for BSI in China, our BSI segment were, I mean, really excellent.

So China seems to continue to do really well for us. And we would – based on our order pattern, we feel good about China..

Okay. And then it seems like cryo-EM has had some pretty nice growth as a technology recently. So I was just curious whether this dynamic was having either a direct impact or maybe an indirect funding impact on the NMR franchise.

And as we think longer term on NMR, what do you think the right long-term growth rate is for that business? And when do you think that you can achieve that growth rate? Thanks..

Yes. So the cryo-EM becoming an additional third tool, major tool in structural biology, that trend has been going on for quite some time and so there is wallet share competition between that. And high-field NMR for structural biology, it does not affect the applied or pharma or small molecule bread and butter business of NMR.

It doesn't affect EPR or preclinical imaging. But our high-field NMR business in recent years has been somewhat weak for two reasons. One of them is that a lot of funding goes into cryo-EM because that's the new tool that universities still wish to acquire.

And second of all is our own technical milestones that we need to overcome to deliver 1.0 Gigahertz magnets and then even higher field magnets for which we have now well over $100 million (39:19) in backlog, so two things coming together though.

To your second part of your question, we've seen very good growth for our NMR tools in pharma and in applied markets, in clinical phenomics, aftermarkets have been growing nicely. So we think the right long-term average rate is in the low- to mid-single digits as a long-term CAGR.

And this year we are probably a little bit below that also because the 1 Gigahertz has moved into next year. But low- to mid-single digits, I think, is a sustainable long-term BioSpin growth rate given the various factors that are not at all – the majority of that business not at all affected by cryo-EM..

Great. Thank you..

And our next question comes from Patrick Donnelly with Goldman Sachs. Please go ahead..

Hey, guys. This is Charlie on for Patrick. Just circling back on the guidance, Gerald, I know for margins for this year, really nice progress there. So just curious, I think as of the last call you're kind of thinking that 4Q would kind of be the biggest contributor of the margin expansion.

It seems like you've kind of already run rate at that level for this year. So, curious if there were any puts and takes between 3Q and 4Q..

Well, I guess what we clearly did I think is an excellent job of derisking the fourth quarter. One of the things that – I mean, fourth quarter is still going to remain a very large quarter for us, but fundamentally we were able to pull some in. And I think that was helpful both from a revenue perspective but also from a margin perspective.

So, favorable product mix helped us, I think, in the third quarter, and I think that's like a good fact for us. As far as the overall guidance goes, we are performing essentially according to our full-year guidance plan. Some of this may have shifted into the third quarter, but essentially we're pretty much on track.

We seem to have performed extremely well in the third quarter relative to our plan. So I would say just generally we're pretty positive about fourth quarter.

It's going to be a strong quarter for us as well but we think we've presented an achievable and reasonable forecast, and that's what's the baked into the EPS guidance numbers that we're having now..

Okay. Great. Thanks. And then, Frank, I know on the last call, I think you were kind of talking about some more optimism on the U.S. academic front but maybe that hadn't quite flowed through yet. So maybe could you give us an update on that market and kind of what your conversations have been like? Thanks..

Yeah. No I think maybe not just academic market but generally the North American market has accelerated year-to-date. I would now call that a trend. North America, which we were a little puzzled by, is strengthening. Growth rates are going up. It seems perhaps sustainably as a trend in most parts of Bruker.

Just as Europe is slowing down a little bit because, of course, high single-digit growth rates in Europe were long-term sustainable, nicely at this point we would call North America as picking up at least from our perspective. And interestingly, and we hadn't seen that. We hadn't necessarily expected that is year-to-date.

There's clearly also a pretty healthy trend in Japan. And so your overall market is healthy, Europe a little bit slower as expected, and the U.S. finally, and North America, U.S. in particular finally picking up in academic as well as in other businesses and Japan being stronger than we had expected.

With China, as I said, for Bruker reasons only, a bit weaken or flattish in revenue this year, but very good in order bookings recently from a Bruker perspective..

Operator, next question, please..

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

Hi. This is Juan (43:45) on behalf of Derik.

Apologize if you did this in the prepared remarks, but could you please break out the M&A contribution and FX rate to revenue in the third quarter?.

We're going to do that in a moment here..

Q3?.

It's on one of our slides, right?.

Yes. Q3 revenue contribution from M&A was 1.5% and the headwind from currency was a negative 1.4%..

That is on slide 13 of the PDF, by the way, if you'd like to see those figures, yeah..

Got it. Appreciate that. And then my follow-up is you've done a good amount of M&A deals recently.

Can you provide some qualitative comments as to how these deals altogether impact the organic revenue growth and margin profile for Bruker in 2019?.

Well, this year we've spent so far about $120 million, I think, as we've invested so far in our acquisitions or majority stakes, for instance, in the Hain Group. So it's a higher level than in most years for us.

Many of them, of course, will not, by definition, not yet contribute to our organic revenue growth in 2019, like the biggest one by Hain we've just closed in October, middle of October, so not till Q4 of next year that that will contribute to organic growth.

And the two midsized, from our perspective, deals that we've done in the middle of the year, roughly JPK and Anasys, we expect them to be helpful with our organic growth rate by middle of next year when they are becoming part of our organic growth calculation. Ultimately, Hain, long term we expect to be helpful to our organic growth rate.

Hain is very much part of the crucial – one of our crucial key pillar of our Project Accelerate initiative, which is, of course, microbiology and infectious disease diagnostic..

Okay. That helps.

And what about margin?.

It helps more in 2020 because the timing of the closing, but I think they'll all be helping our organic growth rate. We think we'll also be very positive in terms of their margin contribution..

Thank you..

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

Hi. This is Eleni (46:30) on for Tycho. Thanks for taking the question. I was hoping you guys could dig in a little bit more on the drivers of organic growth. I know you guys mentioned progress on several fronts in the prepared remarks, but just wondering what you specifically attribute the organic growth to.

And then in terms of sustainability, how you're seeing it going forward..

Well, I mean, some of the strongest growth – most markets are healthy. Most markets are healthy. Our detection business is a little weaker this year although that's not really a particular market. That's just the business. And semi is a little weaker. But everything else really is quite healthy. The macro overall looks good.

The geographies mostly look good. Industrial and applied markets, pharma markets look very good. Academic spending shows very nice growth this year. So really can't complain too much. Overall it's broad-based and the order patterns have been healthy in the mid- to high single-digits organically for our BSI business.

So really quite encouraged that there can be some quarterly fluctuations. But we think that – we feel good about our organic growth guidance for the year, which, of course, has come up a bit from – again in a bit since we gave guidance earlier for the year. And we actually think we're well-positioned for 2019.

So, whatever we have achieved so far is sort of steady momentum building, and that's the mode that we're in. We're optimistic that we'll be able to continue that on organic growth and margin expansion..

Great.

And in terms of the timeline of operational efficiency, I was wondering if you could sort of run us through what you're expecting going forward?.

Well, there is no timeline. We just do that. It was just part of what we've been doing ever since our transformation.

There are no big restructuring issues anymore or single press releases or actions that you can – for which you have clear visibility, but it's really part of our management process, of our strategic process of how we execute, of the lean initiatives and operational excellence.

We just continuously work on innovation, on pricing power, not by modest price increases but mostly by bringing out new products that are exciting and have sustainable advantages and good growth potential with better margins. So this is very, very broad-based. This is pervasive. This is not one or two actions. I mean, there are a couple of actions.

We explained one with Penang. That's going to kick in over the next three years. We moved a lot of our G&A to Central Europe from more expensive Germany, so that's going to have an impact second half of this year already. That's something that Gerald was driving.

And you may be familiar with our BioSpin factory consolidation in Project 2021, where some incremental further annual improvements and productivity and therefore in margins are expected over the next three or four years until that's fully available to us by 2021 actually. But these are just examples.

It really happens absolutely everywhere even in the many other examples that I could cite to you but then it would be an awfully long call. This is just part of our management process at this point. Other people call it their business system. This is part of the Bruker business system, although we don't brand it like that..

Great. Thank you. And I guess one last one.

In light of these dynamics, I was just wondering what you're thinking about capital deployment and your M&A strategy next quarter or even next year?.

Very consistent actually. I mean, first and foremost, priority is to invest in our business.

So when we do a new factory in Penang or when we develop new products or develop new organic – sorry, excuse me, consumables business for microbiology or meaningful multiyear CapEx into Project 2020 at Bruker BioSpin, so those are the internal investments for R&D and other things. They're fully funded.

So beyond that, we look at strategic and financially responsible acquisitions. We've had a number of opportunities this year. We'll probably continue to invest in that. There always seems to be something in the pipeline. It's not predictable, and, of course, we don't discuss these things ahead of time.

But we're looking at both, things that strengthen Project Accelerate, but we're also looking at acquisitions that strengthen our core and improve our margins, those are also of interest to us. And so, of course, we have a dividend that's probably remains untouched.

And then when we – and then depending on how much we spend on that, primarily in M&A, that kind of determines how much we then perhaps use for buybacks for which we have a continuing authorization and long-term interest in continuing that steadily. But it depends a little bit quarter to quarter on how much we spend on acquisitions..

Great. Thank you..

Your next question comes from Daniel Brennan with UBS. Please go ahead..

Hey. Thank you for the questions. Congrats on the quarter. So I guess the first question was I just want to just to clarify. So, Gerald, I know you talked about third quarter was better, maybe some things got pulled forward to de-risk the fourth quarter.

So was there any pull forward that contributed to the strength this quarter such that I know there were a couple of questions on the fourth quarter guidance, but I just wanted to clarify whether or not some things moved earlier than you thought..

Yes. I'd say there were some pull-forwards and we were encouraging those. I mean, as I said earlier, we think our teams did an excellent job of derisking what was a very back-end-loaded fourth quarter by shifting some in. So I think that was helpful. We also, as I said earlier, benefited from some favorable mix.

I think that's helped us in terms of our overall operating margin performance as well. So in terms of the pull forward, it was probably in the $10 million range. It's not very significant in the overall scheme of things, but I think it helped us for sure relative to the fourth quarter..

Okay. And then, Frank, I know there was a question earlier on Project Accelerate versus the base, and you can (53:19) so both are contributing, and Accelerate could help more as you move forward. But I think last quarter maybe the base ex-Accelerate barely grew.

So would you be comfortable giving us a sense of what the non-Accelerate businesses grew versus the Accelerate businesses this quarter?.

Again, we look at it year-to-date and then for the full year. And for that, Project Accelerate, despite a number of these things only beginning to contribute meaningfully next year, already grew meaningfully faster than the corporate average..

Okay. Great. And then in terms of....

So I think in the third quarter, I don't think there's a big discrepancy. When I say – I should clarify a little bit, Daniel – when I say core, that's not everything else. With core, of course, a lot of Project Accelerate is core to us well. So perhaps that's how I may have confused you inadvertently.

So their core business in Project Accelerate and in the tradition of the things that we don't consider qualitatively much higher growth opportunities or higher margin opportunities which we've bundled in Project Accelerate. So I think almost all of our businesses did quite well.

Some of them we count as Project Accelerate and those did well except the ones that haven't started yet and other core businesses also did quite well.

For instance, Bruker AXS or Bruker Optics, molecular spectroscopy, they're not considered – most of their products are not considered under Project Accelerate, they're clearly very core, and they've delivered beautiful results this quarter..

Okay. And then maybe between like CALID and Nano, both of which had really strong quarters, was there anything surprised you frankly this quarter? I know it seems like there's a myriad of products in end markets that you're serving there and they all look they did pretty well.

But I'm just wondering, was there any one thing or two things that kind of actually, versus your internal expectations, actually exceeded it?.

Yeah, I mean, we – not really surprising, but in CALID, the detection business is weak this year. In the Nano business, semiconductor markets, metrology markets are a little weaker this year and we're not completely unaffected although we're not so cyclical in that.

And then if I highlight one, perhaps Bruker AXS being ADVANCE X-ray solutions business did even better than what we expected, although a number of other businesses including Life Science mass spec did even better than we expected. So maybe I'd highlight those two, mass spec and X-ray..

And then in terms of 1.0 Gigahertz, in terms of 1.2 Gigahertz, you made a comment on the backlog there, if you could just give us an update on expectations on timing on 1.0 Gigahertz and kind of where we are with 1.2 Gigahertz development?.

Yeah. Good questions. Again more, I mean, when we give 2019 guidance, but I would say hopefully conservatively that we hope that at least one of the 1.0 Gigahertz systems will make it into 2019 revenue, and we're obviously working on making good technical progress with that.

And we're also making good technical progress with 1.1 Gigahertz and 1.2 Gigahertz although that's not a sprint. That's more of a marathon. So I would say the key technical milestones on those still have to be achieved, but we're actually making good progress towards that. We're not quite there yet.

So, pretty optimistic on 1.0 Gigahertz where we have some backlog for 2019 and 2020 and good progress, although not the crucial milestones yet perhaps for 1.1 Gigahertz and 1.2 Gigahertz. So I'll put it into two slightly different buckets..

And then maybe a final question, just I know I forget if this was in the slide, but just on Europe in particular, it sounds like you had strength in Japan, U.S. and North America improving and Europe slowing kind of as expected you said.

But given that you have overreliance or overexposure in Europe, can you give us little color on kind of what the trends look like in Europe this quarter, I'm looking out?.

Well, in Europe, I think our year-to-date growth rate tends to be more in the mid-single digits, and it was higher before. And in the U.S, North America is picking up. So, yeah, I think those are the – Europe gradually slowing down a little bit from the very high rates that were unsustainable and the U.S.

finally picking up and Japan picking up, which we haven't seen coming but it's a nice bonus..

Great. Okay. Thank you..

You're welcome..

This concludes our 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 fourth quarter, Bruker will participate in the Jefferies London Health Care Conference in the United Kingdom. We invite you to meet us in the conference or visit us at our headquarters in Billerica, Massachusetts. Thank you, and have a good evening..

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