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Edited Transcript of BRKR earnings conference call or presentation 1-Aug-19 8:30pm GMT

Q2 2019 Bruker Corp Earnings Call

BILLERICA Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Bruker Corp earnings conference call or presentation Thursday, August 1, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank H. Laukien

Bruker Corporation - Chairman, CEO & President

* Gerald N. Herman

Bruker Corporation - CFO, VP & Corporate Controller

* Miroslava Atanassova Minkova

Bruker Corporation - Director of IR & Corporate Development

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Conference Call Participants

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* Chris Lin

Cowen and Company, LLC, Research Division - Research Associate

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Jack Meehan

Barclays Bank PLC, Research Division - VP & Senior Research Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

* Stephen Scott Unger

Needham & Company, LLC, Research Division - Senior Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the Bruker Corporation Q2 2019 Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Ms. Miroslava Minkova, Director of Investor Relations and Corporate Development. Please go ahead.

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Miroslava Atanassova Minkova, Bruker Corporation - Director of IR & Corporate Development [2]

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Good afternoon. I would like to welcome everyone to Bruker's Second Quarter 2019 Earnings Conference Call. My name is Miroslava Minkova, Director of Investor Relations and Corporate Development.

Joining me on today's call are Frank Laukien, our President and CEO; and Gerald Herman, our Chief Financial Officer.

In addition to the earnings release we issued earlier today, during today's conference call, we'll be referencing a slide presentation. The PDF of this presentation can be downloaded from the Quarterly Results section 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, which is posted on our website at ir.bruker.com.

Before we begin, I would like to reference Bruker's safe harbor statement, which is shown on Slide 2. During the course of this conference call, we will make forward-looking statements regarding future events or the financial performance and operational performance of the company that involve risk 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 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, August 1, 2019.

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 2019 financial results. Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today.

We will begin today's call with Frank providing a business summary. Gerald will then cover the financials for the second quarter 2019 in more detail.

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

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [3]

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Thanks, Miroslava, and welcome back. Good afternoon, everyone, and thank you for joining us on today's call.

Bruker delivered a solid quarter with good revenue growth and strong margin and EPS improvements. During the second quarter, our year-over-year organic revenue growth was 4.8%. Including the contributions from recent acquisitions, our second quarter 2019 revenue grew 13.5% year-over-year on a constant currency basis.

During the second quarter, we continued to introduce important new products and solutions in support of our Project Accelerate high-growth, high-margin initiatives. This included the launch of the timsTOF fleX at the recent ASMS meeting and the introduction of our latest MALDI Biotyper sirius system also introduced in June at the ASM Microbe Conference.

In the second quarter, we reached field on a 1.2 gigahertz NMR magnet in our factory, an important milestone and we recognized revenue on a 1.0 gigahertz NMR system.

In Q2 and in early July, we also closed 2 additional acquisitions in support of our Project Accelerate; RAVE, a leading provider of NANO machining and photomask repair equipment for semiconductor applications; and PMOD Technologies, a provider of research use only software for preclinical and molecular imaging applications, primarily for PET/MR and PET/CT imaging.

Overall, we are encouraged by our progress with Project Accelerate and remain committed to accelerating our revenue growth to above-market growth rates and to delivering on our further operating margin expansion and EPS growth objectives, which were communicated at our June 20 Investor Day in New York.

Turning now to specifics on Slide 4. In the second quarter of 2019, Bruker's revenue increased 10.5% year-over-year to $490.2 million. On an organic basis, revenue increased 4.8% year-over-year, including 3.4% organic growth at our scientific instruments segment and 18.2% organic growth at BEST, net of intercompany eliminations.

During the second quarter, acquisitions added 8.7% to revenue growth, while foreign currency translation was a headwind of 3%. On a constant currency basis, our revenue increased 3.5% (sic) [13.5%] year-over-year.

Second quarter 2019 non-GAAP gross margin increased 190 bps year-over-year, while our non-GAAP operating margin improved 170 bps year-over-year. In the second quarter of 2019, Bruker reported GAAP diluted EPS of $0.23 per share compared to $0.20 in Q2 of 2018. On a non-GAAP basis, second quarter 2019 EPS of $0.33 increased 32% compared to $0.25 in the second quarter of 2018. Please keep in mind that the second quarter of 2018 was a somewhat easier year-over-year comparison.

Turning to Slide 5 now, I show Bruker's performance for the first half of 2019.

Our revenues increased by $76 million to $951.6 million, an 8.7% increase compared to the first half of 2018. Organic revenue growth in the first half was 5.1% year-over-year, comprised of 4.4% organic growth in the scientific instruments business and an 11.6% organic increase at BEST. Acquisitions added 7.4% to our top line in the first half of 2019 while foreign exchange was a 3.8% headwind.

On a constant currency basis, we delivered year-over-year revenue growth of 12.5% in the first half of 2019.

End market conditions for Bruker's academic and government research, biopharma and microbiology markets remained favorable in the first half of the year while industrial and applied growth appears to be slowing as we expected. Semiconductor metrology demands remains weak for now, also as expected.

During the first half of 2019, organic order bookings for our scientific instruments segment increased in the mid- to high single digits. We saw good growth in bookings in Europe and Japan, stable order rates in North America and the rest of the world and bookings softness and paperwork delays in China.

Our first half 2019 non-GAAP gross margin increased 160 basis points compared to the first half of '18 while non-GAAP operating margins expanded by 150 basis points as we benefited from operational improvements, favorable mix, accretive acquisitions as well as a tailwind from changes in foreign currency rates.

On a GAAP basis, Bruker reported EPS of $0.43 in the first half of 2019 compared to $0.37 in the first half of 2018.

Our first half 2019 non-GAAP EPS was $0.61 and increased 24.5% year-over-year, a solid improvement.

Please turn to Slides 6 and 7 now, where I provide further highlights on the first half 2019 performance of our 3 scientific instruments groups and our BEST segment, all in constant currency and in comparison to the first half of 2018.

First half 2019 BioSpin Group revenue increased mid-single digits in constant currency to $279 million. This reflected growth in both systems revenue and aftermarket and included revenue recognition for a 1.0 gigahertz NMR system in the second quarter. BioSpin preclinical imaging systems revenues were lower year-over-year, with a difficult comparison in the first half of 2018. BioSpin's aftermarket revenue continued to increase at a solid pace.

Moving on to our CALID Group. They reported strong performance in the first half of 2019, with revenues up in the mid-teens in constant currency to $289 million. With -- within CALID, we saw strong organic growth in both our microbiology and in our life science mass spectrometry franchises, driven by continued strong results for the MALDI Biotyper platform and early growth in proteomics.

CALID's consumables revenue was up substantially with contributions from our Bruker-Hain molecular diagnostics acquisitions. Revenue in our molecular spectroscopy FTIR near IR business were approximately flat year-over-year.

The restructuring of our CBRNE detection business was substantially completed during the first half of 2019, with that business now integrated within our molecular spectroscopy division.

Please turn to Slide 7 now. The revenues of our Bruker NANO group were up in double digits, in constant currency, to $292 million in the first half of 2019. NANO's revenues were higher year-over-year due to the contributions from recent acquisitions, including Anasys, JPK, Alicona and RAVE. While academic markets for NANO continued to perform well, we saw signs of weakening in NANO's industrial research markets and in China.

NANO's advanced x-ray business grew on continued demand from academic and government customers. Our NANO analysis tools had strong results with good growth in EDS and microXRF tools, NANO surface tools revenue increased due to the acquisitions, and semiconductor metrology remained weak. But revenues were higher due to the RAVE acquisition.

Turning to our BEST segment. BEST revenue in the first half 2019 was up double digits as the pickup in superconductor demand from MRI and strength in big science projects continued. Also keep in mind that Q2 of 2018 was quite weak for our BEST segment.

Moving on, on Slide 8. I'll highlight recent innovation on our timsTOF platform in SpatialOMx, which is a part of Project Accelerate. Label-free SpatialOMx is similar to a molecular GPS, whereby researchers locate specific cellular populations based on their molecular expression profile, examples are glycans or lipids, using MALDI mass spectrometry. Specific cells can then be selected for Bruker's unique electrospray 40 proteomics or 40 lipidomics workflows on the same instruments.

The new timsTOF fleX system has the potential to further accelerate our proteomics and phenomics growth.

Turning to Slide 9. I'll highlight our early July PMOD Technologies acquisition. PMOD is a highly respected provider of preclinical and molecular imaging research software, and PMOD software is widely used in PET, which stands for Positron Emission Tomography study -- for PET studies in neurology, cardiology and oncology and has applications in the areas of molecular quantification and pharmacokinetic modeling.

Although not financially material for now, PMOD will allow Bruker's preclinical imaging business to offer end-to-end solutions in PET/MR and PET/CT.

On Slide 10, I show Bruker's medium-term objectives, which we laid out at our recent Investor Day in New York. For the years 2020 to 2022, Bruker will target an above market revenue CAGR at a double-digit 11% to 15% EPS CAGR.

We expect to achieve this by further development of our 6 high-growth, high-margin Project Accelerate initiatives, and with our focus on operational excellence. Our detailed objectives are laid out on the slide.

We are encouraged by the progress we've been making with important areas of Project Accelerate, including our programs in proteomics, structural biology, biopharma and microbiology.

And I can confirm that in the first half of 2019, Project Accelerate revenue growth continues to exceed the corporate average growth rate.

In summary, I'm pleased with our progress during the second quarter and first half of 2019. We believe that our innovative product cycles, operational excellence focus and favorable secular trends position us well for the remainder of 2019 and beyond despite greater macro uncertainty.

Let me now turn the call over to our CFO, Gerald Herman, who will review our second quarter and first half 2019 financial performance in greater detail. Gerald?

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Gerald N. Herman, Bruker Corporation - CFO, VP & Corporate Controller [4]

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Thank you, Frank. I'm pleased to join you today and review Bruker's second quarter 2019 financial highlights, which is starting on Slide 12.

Bruker's reported revenues increased 10.5% to $490.2 million in the second quarter of 2019, which reflects organic growth of 4.8%.

We reported GAAP EPS of $0.23 compared to $0.20 in the second quarter of 2018. On a non-GAAP basis, Q2 2019 EPS was $0.33, an increase of 32% from $0.25 in Q2 2018.

Our Q2 2019 non-GAAP operating income increased 25% year-over-year while non-GAAP operating margin of 15% improved 170 basis points year-over-year. This improvement reflects favorable product mix, operational improvements, along with accretive acquisitions and an approximately 40 basis point tailwind from foreign currency translation. We expect this foreign currency impact on operating margin to moderate for the remainder of 2019.

Free cash flow in Q2 2019 was an outflow of $7.4 million compared to an inflow of $27.1 million in the second quarter of 2018, reflecting higher working capital and capital expenditures.

As of June 30, 2019, we were in a net debt position of $205 million as we deployed cash over the course of the second quarter on acquisitions, capital expenditures, share repurchases and dividends. We ended Q2 2019 with higher working capital balances, reflecting our revenue growth, recent acquisitions, inventory buildup and increased receivables due to shipments late in the quarter.

Slide 13 shows the revenue bridge for Q2 2019. As noted earlier, organic revenue growth in the quarter was 4.8%, with 3.4% growth at BSI and an 18.2% organic increase in the BEST segment. We had revenue growth from acquisitions of 8.7% primarily from our Hain, Alicona, RAVE and JPK acquisitions, which was partially offset by a foreign currency headwind of 3%.

From a BSI organic revenue growth perspective year-over-year, we saw high single-digit growth in Q2 2019 at BioSpin, which included revenue from a 1.0 gigahertz NMR system. Our CALID Group posted solid mid-single-digit organic growth in the second quarter, driven by microbiology and life science mass spectrometry.

NANO revenue was down mid-single digits in Q2 2019 on an organic basis, with the challenging prior year comparison in semiconductor metrology and softer performance in NANO surface tools while x-ray and NANO analysis tools had solid organic growth.

From a geographic perspective, Q2 organic revenue was up modestly in Europe. We had strong growth in North America and Japan. China grew in the mid-single digits, and the rest of the world, other than Latin America, had good results.

Slide 14 shows our Q2 2019 non-GAAP results. Q2 2019 non-GAAP gross profit margin of 49.5% increased 190 basis points from 47.6% in Q2 2018. This was driven primarily by favorable mix, operational improvements within our CALID and BioSpin groups and the accretive impact of acquisitions.

Q2 2019 operating expenses grew roughly in line with our revenue growth, including expenses related to recent acquisitions, Hain, Alicona, JPK, RAVE as well as our software acquisitions. This resulted in Q2 2019 non-GAAP operating margin improvement of 170 basis points versus Q2 2018, driven by our revenue growth, favorable product mix and the positive contribution of acquisitions and foreign exchange.

As mentioned earlier, foreign exchange translation had a favorable impact of approximately 40 basis points on our Q2 non-GAAP operating margin.

For the second quarter of 2019, our non-GAAP effective tax rate was 23.3% compared to 27% in Q2 2018. The year-over-year decline was primarily impacted by a favorable discrete item.

Weighted average diluted shares outstanding in the second quarter were 157.6 million, up 0.6 million shares from Q2 2018.

In May 2019, Bruker's Board of Directors authorized a new 2-year share repurchase program, authorizing the company to repurchase up to 300 million of our company's stock. During Q2 2019, we repurchased 2.3 million shares, for a total of $100 million. We currently have $200 million remaining under the share buyback program, which authorizes repurchases through mid-May 2021.

Finally, Q2 2019 non-GAAP EPS of $0.33 increased 32% year-over-year, driven by higher revenue, margin improvement and lower tax rate year-over-year.

Slide 15 shows year-over-year revenue bridge for the first half of 2019. Revenue was up $76 million or 8.7%, reflecting first half 2019 organic growth of 5.1%, acquisitions of 7.4% and foreign exchange headwinds of 3.8%.

The organic growth improvement reflected 4.4% organic growth at BSI, with a strong increase at CALID, solid mid-single digit growth at BioSpin and flat organic revenue performance at NANO.

Our BEST segment grew 11.6% on an organic basis. And Frank has discovered the drivers of our revenue performance earlier.

Geographically and on an organic basis, in the second half of 2019, Bruker's European revenue was down low single digits. North American revenue grew high single digits. Asia-Pacific revenue grew double digits on an organic basis, with strong growth in Japan and China and a modest decline in other markets.

On Slide 16, our first half 2019 non-GAAP gross profit margin of 49.2% increased a 160 basis points. Favorable mix, operational improvements at CALID, accretion from the acquisitions and favorable foreign currency translation drove the improvement relative to the first half of 2018.

First half 2019 operating expenses increased approximately in line with our revenue growth rate, including expenses from the previously described acquisitions. All in, our non-GAAP operating margin in the first half of 2019 was 14.3%, a 150 basis point improvement over the prior period, benefiting from favorable mix, CALID operational improvements and a tailwind from acquisitions and foreign currency rates.

For the first half of 2019, foreign currency translation had a 60 basis points favorable impact on Bruker's non-GAAP operating margin.

Our first half 2019 non-GAAP tax rate of 23.9% was below the 25.4% tax rate in the first half of last year driven by discrete items which are expected to reverse in the second half. Finally, non-GAAP EPS of $0.61 grew 24.5% relative to the first half of 2018, reflecting a revenue growth, higher margins and a lower tax rate year-over-year.

Turning to Slide 17. Free cash flow in the first half of 2019 was a cash outflow of $3.8 million compared to an inflow of $62.4 million in the first half of 2018. The weaker free cash generation in the first half of 2019 was primarily driven by inventory buildup for product transitions into our Penang, Malaysia factory and for our gigahertz-class NMR production as well as by increases in capital expenditures and by shipments late in the quarter impacting receivables and collections.

Our cash conversion cycle at the end of Q2 2019 of 237 days lengthened compared to 220 days at the end of Q2 2018, due to an increase in DIO and DSO as well as a reduction in DPO.

Turning now to guidance for the full year 2019 on Slide 19. Our 2019 outlook for revenue growth, non-GAAP operating margin expansion and non-GAAP EPS is unchanged. For 2019 revenue, taking into account our solid performance in the first half of the year and a more uncertain macroeconomic environment, we continue to guide to 7% to 8% overall revenue growth, including 4.5% to 5.5% organic growth and an approximate 5% revenue contribution from acquisitions.

This equates to constant currency revenue growth of 9.5% to 10.5%. We continue to expect a foreign currency headwind of approximately 2.5% to 2019 revenue growth. We expect non-GAAP operating margin to improve between 90 and 120 basis points from the 16.8% level achieved in 2018, including an approximate 30 basis points tailwind from foreign currency translation.

Our outlook also assumes a full year 2019 non-GAAP effective tax rate of about 25% and fully diluted share count of approximately 157 million shares. This rolls up to a full year 2019 non-GAAP EPS in the range between $1.57 and $1.61, which represents an increase of 12% to 15% compared to 2018 and includes accretion from our acquisitions. Other guidance assumptions are listed on the slide.

While we do not provide quarterly guidance, I'd like to point out some modeling dynamics that we expect to affect our Q3 results. We face a challenging prior year comparison in Q3 2019, particularly from an operating margin and EPS perspective. Given expected revenue timing and mix dynamics between Q3 and Q4, we currently anticipate our Q3 2019 non-GAAP operating margin to be lower year-over-year. And our Q3 2019 non-GAAP EPS to be approximately flat compared to Q3 2018.

As a reminder, between Q2 and Q3 2018, our non-GAAP operating margin increased more than 400 basis points sequentially. In 2019, our operating margin is expected to improve sequentially from Q2 to Q3, but not as steeply as in 2018.

And one final note on modeling. As it's not unusual for Bruker, we anticipate our profitability and cash flow to be more weighted toward the fourth quarter. So to wrap up, Bruker delivered solid financial performance in Q2 2019, with revenues up 10.5% and non-GAAP EPS growth of 32% compared to Q2 2018. We made very good progress in the first half of 2019 and remained fully committed to our financial objectives for the full year.

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

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Miroslava Atanassova Minkova, Bruker Corporation - Director of IR & Corporate Development [5]

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Thank you, Gerald. Just for anyone who's not looking at the slides, I have a clarification, our Q2 constant currency growth rate was 13.5% and not 3.5% as said earlier. So with that, we would like to begin the Q&A session. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Brandon Couillard from Jefferies.

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Unidentified Analyst, [2]

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This is [Matt] on for Brandon. First one on NMR. Can you walk through any of the gating factors, if any, to scaling up on the ultrahigh field production? And then in terms of timing for the first 1.1 gigahertz, is that still a 2020 event.

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [3]

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Yes, we're gradually ramping up production capabilities on -- for gigahertz for 1.0, 1.1, 1.2 gigahertz. And we are -- 1.1 gigahertz has been at the factory. I feel that the factory -- we expect to ship it late in the year or later in the year. And we will see. It's more likely to be a 2020 revenue event, but -- and obviously we're not going to 2020 guidance at this point. But we're ramping up as per our long term plans on gigahertz revenue. And we continue to reach important milestones as you've heard. We brought a 1.2 gigahertz to field in the factory in the second quarter. And hopefully, we'll be able to show NMR data from those magnets later in the year.

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Unidentified Analyst, [4]

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And then just given the current EU macro backdrop, any specific pockets of weakness on the insurance side to call out? And then what do you guys baking in for the second half in terms of Europe?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [5]

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Yes, for us Europe looks a lot better than for Siemens or some of the Wall Street Journal reports that I've seen in the last couple of days. That's because we're not -- we're serving science in Europe and science is well-funded in Europe. It's -- and we're good partners for that. So while you have heard earlier perhaps that our revenue in Europe in the first half of the year was organically was approximately flat or relatively low growth, we actually have seen a nice order pickup. So our BSI scientific instruments bookings in the second quarter year-over-year picked up in the high single-digit organically and a similar story is true for the first half of the year. So for us, European science funding is really quite good, and of course, our particular solutions are well received there. We're quite a bit more bullish about Europe than what you'd see when you pick up the Journal.

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Operator [6]

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Our next question comes from Tycho Peterson from JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Frank, you mentioned weakening NANO demand in China, paperwork delays, obviously that's been thematic throughout this earnings season. Can you just talk a little bit about your expectations for NANO and also for China? And given the tariff decision announced today, does that have any risks?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [8]

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Yes. So if you take it all in for the full year, NANO is going to grow a little bit more slowly organically, at least. They had some acquisitions, very good acquisitions, but organically, it's going to grow more slowly than we had anticipated at the beginning of the year. On the other hand, BioSpin has stepped up. CALID has continued to do very well and also notably BEST has stepped up compared to our expectations at the beginning of the year, which, all in, as you've seen, we are comfortable with our annual guidance.

So NANO also has some emerging life science drivers. We think its semiconductor business could conceivably recover in 2020, possibly before an industrial recovery. So there's different drivers under the hood at NANO that -- and most importantly, most of the Bruker NANO spending is also academic government, which you know, even in the downturn tends to be very resilient and still shows some at least modest growth.

But NANO is -- there's more economic uncertainty for sure and a lot of that comes from China or some of the economies that export into China quite a bit. And there, the industrial spending, industrial spending patterns seem to be not surprisingly to us and compare to also what we've seen for many other companies are becoming weak -- appear to becoming weaker, and we see some of that as well. There's more uncertainty in China. Even when we get orders, sometimes until we have letters of credit and end user certificate and other paperwork, everything seems to be moving a little bit more slowly. And that's not unexpected from our perspective either, and it probably confirms what you've heard elsewhere at least from some that have reported recently.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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And then a follow up for Gerald, just on free cash flow. It was a pretty significant step-down. Obviously, you had the inventory build-up dynamic that you highlighted. Can you just talk a little bit about where are we in the inventory build cycle? And how should we think about free cash flow potentially recovering if at all?

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Gerald N. Herman, Bruker Corporation - CFO, VP & Corporate Controller [10]

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I'd say as you already know I think our free cash flow fluctuates quite considerably quarter-to-quarter. We do have a -- we have built up here relative to our Penang facility as well as our gigahertz NMR activity.

We also had a little bit of late shipments in the quarter, which drove collections and receivables to a different place. We also have a bit of a pick up as I think we commented on in the past, for the year in CapEx, so those are all factors. So I do expect this fluctuation to continue from a quarter-to-quarter perspective. But I would also say we do have more activity from a revenue perspective and certainly from a profitability perspective in the latter half of the year. So we're not expecting any major change from our previous view on free cash flow going forward.

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [11]

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What that means, if I may expand, since we had negative free cash flow in the first half of the year, while we don't guide on this quarterly, we expect to have -- to come back to your specific question, Tycho, I think we're probably at the peak of the inventory buildup or at least very close to it, So we would expect positive free cash flow in the second half of the year.

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Operator [12]

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Our next question comes from Puneet Souda, Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [13]

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On the quarter, I just -- help me understand on Project Accelerate, if you could. You obviously had a good set of growth here for the last couple of quarters, and now you're about the -- growth is above the corporate average obviously. So could you give us a view of the parts of businesses where you're getting more traction? And what should continue to work here in the second half, despite the comments you made about China and a couple of other geographies? Just help us understand what should continue to accelerate in the Project Accelerate overall in second half?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [14]

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I mean not very much changed, Puneet, from what we discussed in New York. So ultrahigh field structural biology, we're optimistic about that. That's progressing, and we expect that to hopefully continue to ramp up in next year. Microbiology is doing really quite well, so that's -- that continues to be in a good trajectory. Proteomics or omics in general, we're seeing early, early growth there. It's not enormous for us yet, but it's becoming -- as we had predicted in the beginning of the year, it's beginning to kick in to where it is beginning to positively move the needle. And our pharma business, our pharma business has continued to grow in terms of revenue very significantly. That's also worked well for us last year as you recall. So on the negative side, semiconductor isn't recovering. It's not recovering in the second half of this year as some might have hoped earlier in the year. We actually didn't bet on that anyway. And so now it's predicted. So I'd say those -- all the drivers are more or less along the lines of what we discussed in New York at the Investor Day. So a lot of good secular trends that we've positioned now, a lot of good product innovation, so with that, even with a potentially or likely weakening China and weakening industrial, I think we will continue to do quite well.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [15]

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Okay. And then on NMR front, could you tell us where the 1 gigahertz, was it North America, Europe another geography? And then just one of those is in the revenues, but where our checks are suggesting, there's another gigahertz in the field at the Customer Lab already installed and operating. So just trying to understand what's keeping that out of the guidance still in the second half here? And then what's maybe the caution there? And then when should we expect a 1.2 gigahertz within the factory to be shipped out to the customer? I assume that's a 2020 event.

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [16]

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Right. Working backwards then. 1.2 gigahertz shipments from factories. We have not set a target date for that. I would tend to agree with you, that's more likely to be -- I mean, it's certainly not a 2019 revenue event, that's impossible. And when exactly we ship that, perhaps this winter, but that could also go into 2020. And then typically, it takes more months to install those. So there's more uncertainty around that.

Then the 1.0 gigahertz on which we had revenue recognition was in Israel. And we are, as you know, we've shipped another 1.0 gigahertz. We're not guiding one way or another of whether that's going to be in our revenue in the second half of the year. And we're not reluctant about that, it is just something that we can't really call the quarter when these things happen. And maybe, the one thing, if I may add to that, don't think of those generally as something that's on top of everything else, sort of as a bonus in a quarter.

We look at our acquired growth. We look at our BEST growth. We look, of course, whether there's a GigaHertz in the mix or not in any given quarter and then those are all the pieces along that we've used for planning our quarters to try to deliver and beat the quarters, if we can. And of course, with a full focus on the annual guidance to which we are committed.

So in short, we're not guiding on this one way or the other. It is possible that a second one could be in revenue, but I'm -- we're not non-committal about it, simply because it's not that easy to predict. It's also -- it doesn't matter that much. It's not something that would come on top of everything. So whatever we expect in the probabilities we assign to those are kind of baked into our overall guidance. And gigahertz and gigahertz plus, hopefully, this year and next year and in the future, will just be a steady, an occasional part of our organic story. And when we have one of those, it's not on top, it simply gets some worked in with our overall revenue planning for any given quarter.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [17]

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If I could just squeeze in last one on timsTOF. You had this product for some time in the market and continues to see the pickup here. If we look at the existing proteomics and mass specs success in the field, that was launched back in I think, 2005, took more than 5 years to get to a couple hundred installs in the market. So how should we really think about the timsTOF trajectory now that you have some experience over the last couple of quarters?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [18]

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Yes, timsTOF and proteomics launched, timsTOF Pro, timsTOF fleX, mostly the Pro, it's growing very nicely for us. Of course, first half revenue and orders year-over-year are up very significantly but from a tiny, tiny base a year ago or the first year-over-year for the first half of last year. So it's really, it's getting -- continuing to get very good customer traction and good feedback generally from the customers. Many of them are key opinion leaders that now have that in their lab. So that ramp, it's starting from a small base, but it's going really very well. And not a commercial, but on the scientific side, beyond the ASMS and what we announced earlier, there's the International HUPO is coming up in Australia in the middle of September and there's also another important mass spec in health science workshop coming up -- or in conference coming up in late August in San Francisco. So it's just -- we steadily keep improving software workflows, and it's very well received. It's just the serious second platform in the market now and a lot of people are looking at it, and that's very good growth, albeit from a small base.

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Operator [19]

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Our next question comes from Doug Schenkel from Cowen.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [20]

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This is Chris on for Doug today. I just want to follow up on the China bookings weakness and paperwork delays question. Did [beat] dynamics impact Q2 revenue at all and then you reaffirmed the guidance for the full year, so should we expect the incremental China weakness to have immaterial impact on full year results?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [21]

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I wouldn't call it immaterial. It's not that small. But we're offsetting it with other good drivers. So I think China is 15% of our revenue. When things get a little weaker there in terms of growth and in terms of the things moving a little bit more slowly, which we have clearly observed, which affect a little bit more the industrial part and maybe applied part. So it has an effect that we are offsetting it with other areas of strength, is I think how I would characterize it. And I think that's a fair statement.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [22]

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Can you help us quantify the weakness at all in China and maybe just detail exactly what other areas are offsetting this weakness?

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Gerald N. Herman, Bruker Corporation - CFO, VP & Corporate Controller [23]

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I wouldn't say we're going to go into too much more detail but I can just add, in general, we did have sort of a mixed story I would say with respect to China. We had some solid revenue performance in the first half from China, but we did have order softness, some booking softness.

So it's a different dynamic, I guess, I would say from what we had seen in the past. We attribute some of that softness to the items that Frank's already outlined around some paperwork delays and order patterns and generally reduced visibility in China specifically. So we're not prepared to comment specifically on the direct impact on our guidance for sure.

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Chris Lin, Cowen and Company, LLC, Research Division - Research Associate [24]

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Okay. And then Frank, I think in the Q&A session, you mentioned that BioSpin growth has stepped up. Could you just elaborate a bit more on that comment? I'm curious how your NMR business performed in the quarter, if you excluded the GigaHertz order. I guess said differently, are you seeing pickup on the non-GigaHertz systems?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [25]

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Well, I mean, I think of the GigaHertz as clearly part of our organic growth. So BioSpin this year, I would expect and -- BioSpin this year -- let me put it this way. In the previous year, it was sort of -- growing in the low single digits and below the corporate average. And this year, we expect -- we actually communicated that earlier in the year and it's playing out that way, that BioSpin will be more of a mid-single-digit grower. And that's really how it's playing itself out. There are other areas in BioSpin that are doing well also. They get less visibility, but some of the applied markets, we expect to have a good second half in Preclinical Imaging. Our aftermarket business is doing well and -- sorry, and we had very nice growth also in -- or we had continued good revenue growth in the pharma part of the NMR market. So there's many drivers there in NMR. It's not just the rest of NMR and GigaHertz. GigaHertz is nice, it's beginning to kick in, but there's other pieces. So NMR for us this year being a mid-single-digit grower as we had predicted, which is a step up to the previous year, is gratifying and it also has decent margins.

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Operator [26]

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Our next question comes from Steve Unger from Needham & Company.

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Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [27]

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The acquisition contribution was a bit higher than what we were looking for. Is there a way you can give us some color on the performance of these acquisitions relative to your original business case? And then I'd like to specifically drill down on Hain. It looks like it's profitable, I guess, is what I'm thinking? And what's your outlook for Hain on the second half of the year?

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Gerald N. Herman, Bruker Corporation - CFO, VP & Corporate Controller [28]

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Okay. With respect to the acquisitions, we're actually quite pleased about how they're performing for 2019 for the first half. We got very solid revenue contribution. In addition, we've got good solid contribution at the operating margin line. And if you recall in '18, not all these acquisitions were necessarily accretive. So we're very -- we're quite pleased with that. I'm not going to go into details on each individual acquisition, but I'm...

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [29]

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I can maybe add on Hain that Hain so far, we're satisfied on the revenue store side and not yet on the margin side. So Hain so far, it's a good addition on the revenue side, and I think we'll get the margins to closer to where they should be in the second half of this year, and hopefully where they should be then in next year. But for starters, for the first half or since we acquired the business, we did that with our eyes wide open. We know that initially its margins would not be up to par, and they haven't been. So there's work -- there's a lot work going on to improve the margins at the Hain business. So far it's a revenue, but not a margin contributor. We think that's going to change and normalize in the second half and hopefully become a margin -- a real margin contributor then also going forward, 2020 and beyond.

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Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [30]

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Great. And then if you could just ask one more. It looks like BEST is off to a good year. Could you give us color on what's driving that? And then -- I mean you talked about big science projects for several quarters, but could you give us a feel for what the kind of things BEST is doing in that area?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [31]

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Yes. BEST, we had started the year thinking it will be -- maybe have organic growth of flat to low single digits, now we're more expecting low single digits to mid-single digits, perhaps even weighted towards mid-single digits.

In Q2, we had unusually high growth, that's mostly because Q2 of last year was quite weak, unusually weak, and then -- even more so than the Big Science business, which is stable and good. It's really the MRI business. So our OEM medtech customers, the big 3, and some other smaller ones who use our superconducting materials, all have pretty good -- we're getting pretty good demand from them, so that's clearly been growing very nicely. And there also is a very science project business that's been steady and good.

But the more -- but I think the more remarkable story is how solid the growth in MRI appears to be right now and we're a beneficiary of that.

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Operator [32]

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Our next question comes from Daniel Brennan from UBS.

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Unidentified Analyst, [33]

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This is [John Sarty] on for Dan. Frank, congrats on the quarter. Can you provide any more details on your comments regarding the weakness in industrial and was the outcome worse than you expected and was the impact felt evenly throughout the quarter or did it worsen? And what is assumed in your second half guidance?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [34]

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Right. I mean that's -- so the industrial -- it's a little bit -- we expected B NANO for the full year to be approximately in the mid-single-digit organic growth, and that looks more like they're going to be in the low single organic growth. So B NANO for the full year in terms of organic growth. It's taking a bit of a step down compared to what we expected at the beginning of the year. BEST is stepping up. CALID's doing great. BioSpin, as expected. I would say, which is overall, all in, we maintain our guidance and feel good about that.

I would say that right now -- I would say in industrial there is reduced visibility. That there are some areas and some geographies where industrial research is fine, and heavy industry is weaker and some others, it's reversed. The NANO Group, as I said earlier, their academic and government funding, which is greater than even their industrial funding, but their academic government funding for materials research is a great cushion against these macro forces that are going on around us. And that part has been relatively stable. As you would expect, I mean, university budgets, they don't get cut like industrial budgets.

So it's all in. If I sound a little uncertain, it is because we're a little less certain on the many little micro drivers that we're seeing for our industrial and our B NANO business. There's a little bit more uncertainty in that, and some of it, we had anticipated. And for other pieces, we're making up with other areas picking up or being stronger than expected. So that's the -- that's the picture as we see it in the middle of the year.

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Unidentified Analyst, [35]

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If I could sneak in a follow-up. In Europe, your comments sounded variable regarding demand trends across academic. With the Brexit possible, some of your peers have discussed customer slowing spending given the uncertainty. Have you seen any of that ahead of the Brexit and if not, are you expecting to see anything in the second half?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [36]

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This is more of a macro command from simply seeing on what's going on in Germany, for instance. So I don't think it affects academic and government and microbiology and proteomics and structural biology budget at all. It does, however, weave into this industrial demand uncertainty, and that's just yet another one where some European companies and our industrial demand, they might be a little bit more cautious.

So there are some indications of that. Many other parts of our business simply aren't affected by that. So with the likelihood of a hard Brexit as it now appears, there -- and there's a little bit more caution. That's what I -- what we see in Europe -- European industrial demand. But again, life science, microbiology, structural biology, omics doing really well, and all in, which surprised us a little bit on the upside, I would say that our order bookings for the BSI segment in Europe has been up quite fairly strongly in the high-single digits in the first half of the year. I would also call that a bit of a surprise. I wouldn't have predicted that 6 months ago. I predicted good order patterns and good competitive of our new technologies, but that's really quite positive.

So that's a plus. You'll hear more bullishness from us about Europe, but also, we're just not a sum of macros in Europe or anywhere else. Really these micro trends and secular trends are more important than the macro. We're not immune to the macro, but the other things are playing a bigger role right now in Europe, which is pretty remarkable and gratifying.

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Operator [37]

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Our next question comes from Jack Meehan from Barclays.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [38]

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I wanted to go back to CALID's performance in the quarter. I think the organic growth was a little lighter than we were looking for. And I was wondering if maybe the detection, restructuring, was there any impact there? And then similar -- well, staying in the segment, I was wondering if you can just give us an update on the MALDI Biotyper in microbiology and just what the consumable uptake was like in the quarter?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [39]

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Sure, Jack. So yes, detection was a little bit weak, probably had a small effect. Also as we had said, the FTIR, near IR business revenue in the first half of the year was also lower growth than previously. They have a little bit more exposure to China and applied markets.

On the other hand, microbiology, the MALDI Biotyper and the consumables that go with it had very good growth and our Life Science Mass Spec franchise, which is driven by mass spec imaging by proteomics, by other omics, also had very good growth and continued good order booking trends as well.

So yes, with that, all in, CALID, I think probably is likely -- you're right, in this particular quarter, the organic growth rate was mid-single digits. But I think for the year, I would expect that CALID would be the strongest growth organically.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [40]

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Great. And one follow up for Gerald. Just the timing in the GigaHertz came in a little bit earlier than what it was expected. I was actually curious, if you could just walk us through from a margin perspective, how did that impact gross margins in the quarter? And I'm just thinking as it pertains to the step-up through the rest of the year, just getting that pacing right.

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [41]

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If I may make a comment on that. The first couple of GigaHertz systems, one that's now being accepted and one that's in the pipeline and may get accepted later this year or into next year, we'll see. They're not going to have unusually -- such unusual gross margins because they were sold a very long time ago. And afterwards, we had then taken on corrective pricing actions and so on. So we're actually pretty optimistic on margins for the GigaHertz product line, but you're not going to see it so much in the first couple of those systems. So hopefully, a step-up in margins coming from that direction maybe in 2020. Obviously not giving guidance for that year right now, but not that unusual compared to average margins in BioSpin, for instance, which has good gross margins anyway.

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Operator [42]

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(Operator Instructions) Our next question comes from Derik De Bruin from Bank of America.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [43]

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A lot of my questions have been asked, so I'll pick around on the edges on some of the stuff. So specifically, how big to the revenue contribution was the 1 GigaHertz in the quarter?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [44]

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We don't give exact numbers, but this was less than 10 million.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [45]

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Great. That's what I would have thought. And looking at the 6% M&A contribution in Q1, 8 and change in Q2, 5% for the full year, can you remind us what the M&A contributions were from JPK, Hain, Alicona and RAVE? Which one of those goes in? Wondering why given the strength in the first half that your -- why it's there, why it trails off and what's coming in on the timing?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [46]

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Some of them annualized in Q3 and Q4 and go into organic -- and so we have it all...

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Gerald N. Herman, Bruker Corporation - CFO, VP & Corporate Controller [47]

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Exactly. I would say that it's really the answer that a lot of those -- with respect to the full year, our guidance reflects a 5% contribution, not a higher number than that, is because of some of those acquisitions roll off on an annual basis into organic going forward. But as I said earlier, we're quite pleased with the acquisition accretion that we've seen both at the revenue line and in generally in the operating margin line as well. We expect to see that to continue for the rest of the year.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [48]

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And just one final one. I mean any -- I mean going back to the China question, any local competition, any tender issues? Some of your peers complained about seeing some bias against companies that are not Chinese. Just any sort of like other general thoughts on that market?

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Frank H. Laukien, Bruker Corporation - Chairman, CEO & President [49]

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It hasn't escaped us that, that probably it's politically, we are not seeking that, but it's not a bad thing that our NMRs come from Switzerland or Germany and some of our mass specs come from Germany, so that's -- there are some occasional customer color or comments, "oh good, I'm glad that timsTOF is made in Bremen," so there is a little bit of that so I wasn't surprised at seeing that comment in other Q&A or other scripts. I don't know, I think it's just a lot of uncertainty in China right now and that uncertainty apparently has gone up again today with the tweet. So it's slowing down a little bit. I'm not sure we have much more color, but no, I mean, I would -- we expected China to be a bit problematic this year, and it is, actually kind of as expected. Some of the companies are acknowledging that, others aren't, but I mean, China is not as booming as it was a year ago, probably not for anybody.

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Operator [50]

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

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Miroslava Atanassova Minkova, Bruker Corporation - Director of IR & Corporate Development [51]

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Thank you for joining us today. We look forward to updating you again on our Q3 2019 conference call. In the meantime, we invite you to meet us at the various investor events over the course of the quarter or to visit us at our headquarters in Billerica, Massachusetts. Thank you, and have a good evening.

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Operator [52]

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