Azenta, Inc. (AZTA) Earnings Call Transcript & Summary

Good afternoon. I'd like to welcome everyone to this afternoon's session. It's my pleasure to introduce Lindon Robertson, the Executive Vice President and Chief Financial Officer of Brooks Automation. Lindon has a presentation that will probably last about 20 minutes or so. There will be some time for Q&A at the end of the presentation. If you have any questions, please e-mail them directly to me, [email protected], and I'll try to work them into my prepared comments. With that -- I'll turn things over to Lindon. But before I do, to me, Brooks is one of those interesting unique assets in our covered space. I've been covering Brooks or have known Brooks since the late '90s when they were just a robotics company into the semi cap equipment space. They've clearly not only just broadened out their portfolio in the semiconductor market, but they've embarked on a journey to broaden out their market representation within life sciences, both through M&A and organic growth. And despite the fact that I think life sciences was greater than $100 million in quarterly revenue in the September quarter, this pesky semi business continues to grow pretty aggressively as well such that it's still a little bit more than half of the business. But Lindon's going to walk through a presentation that I think helps to identify the core IP of the company and really the core markets that they address. And then we'll move into Q&A from that. And so with that, Lindon, first, let me thank you for joining us this afternoon and turn things over to you.

That's excellent, John. Thanks. It's always a good conference. We appreciate your support. So I'll get right into it, and we appreciate everybody's time and interest. Of course, we'll make a pause here to highlight the safe harbor and Regulation G. We'll make some forward-looking statements that we're not obligated to update in the go forward, and we always encourage you to take a look at the GAAP disclosures. And we try to be fulsome in all of our disclosures, both non-GAAP and GAAP. We will highlight today an overview of the business. We'll talk about both platforms that John just highlighted, the Life Sciences and the Semiconductor. And I'll give you some new highlights, more recent highlights, on our model, our long-term model, for profitable growth. And we do have targets out there for 2022, and we made some adjustments. It's probably good to start off with a reminder that we have our fiscal year-end September 30. So this past month, we highlighted our results of our fiscal year '20, and we're now sitting in the first quarter of our 2021 fiscal year. So as John highlighted, we have this Life Sciences and the Semiconductor business segments and businesses that we invest in. In Life Sciences, we're active in everything around samples-based services and infrastructure to handle large volumes of biological, chemical compound samples. And we service all of the largest pharmaceuticals. We'll tell you more about that. And a couple of years ago, we highlighted that we picked up our GENEWIZ business, the GENEWIZ acquisition, to add in analytics of those samples. And that's really been an engine for growth, and we're starting to see some synergistic opportunities there that are materializing. So it's an exciting space. Semiconductor, just as John highlighted, it's no less exciting. It has continued to provide double-digit growth this past year for us and exceed the market growth on a pretty consistent basis in the recent years. And I would just highlight that where we've had advanced that portfolio, it's really tuned towards secular growth drivers. And so I'll be happy to point those out to you. We're global in nature. We pay a dividend. We just touched -- almost touched that $900 million for the fiscal year. But as you look at our quarterly results, you'll see that we're running close to $1 billion run rate currently, so it gives you an idea of 15% growth. I'm about to show you that it's growth on both sides that support that. First, we'll stop and look at the long-term growth. You'll see that this is pretty consistent. And I'm just showing you for the last 5 years, but 20% CAGR has provided pretty consistent growth, handsome organic growth combined with M&A, as highlighted by John. But certainly, one of the drivers is margin expansion of everything we do. And the leverage with that, combined with the growth of the top line, has given us a handsome expansion of earnings per share. When you think about that transformation, it's nice to look at this just as well. As John highlighted, if you went back 5 years ago, it was largely a semiconductor business interested in the diversification into the life sciences. It started off with that aspect of taking our core automation competencies. At that time, we had high competency in a product set around cryogenic pumps, which we divested in 2019. But we took that in the early stages of life sciences and invested in life sciences cryogenic sample management infrastructure. In other words, highly automated freezers that could handle millions of samples. We acquired some companies. We've built organically new innovations around cryogenic automation which, previously, the companies we acquired were minus 20 and minus 80 degrees. That opened up the space for sample management. And by 2018, then we added in the GENEWIZ business just at the beginning of our 2019 fiscal year. So in that 2018 circle, we're still -- we expanded on a basis of sample management. By the time we got to 2020, we've encompassed the GENEWIZ business. Meanwhile, while the portion of the business of semiconductor is getting smaller of the pie, it's a larger revenue number. So let me now go take you into those segments. We're going to focus first on the Life Sciences, and then we'll step right through the Semiconductor business, and you'll see the capabilities on both sides. First, as I highlighted, we sell several products here in the sample management: large freezer capability; and then a smaller footprint around highly sensitive cryogenic automation that allows the most sensitive gene therapy, cell therapy-based applications to survive and to be categorized, inventoried, exact placements and protected until you need to draw the sample out of the freezer. That's very different from the manual environment that for years has predominated the space in a lab, a bit of a paradox to the advancements of the science. And so now when you think about a scalable therapy solutions space, you're looking for this kind of automation. More important, you're looking for the integrity that the automation provides. In the services space of Life Sciences, we provide the analytics. That GENEWIZ acquisition 2 years ago set the stage for significant gene sequencing and synthesis. So sequencing samples are coming into us from customers, and we're sending the data analytics back to them on what that gene structure is. But on the synthesis, they're sending the data request into us, the data of a gene, and we're sending the sample back to them after we manufacture the sample. And so it's a fulsome service on the analytics side, combined with off-site storage. So a customer that may have infrastructure in every one of their R&D sites with the large freezers that we sell are as likely to be storing off-site for a couple of different purposes: partly for archiving samples they want to keep long-term; and partly for the workflow environment with third parties, such as CROs that will do testing, samples will come into us and then come back out. And then most recently, we've highlighted we won contracts around vaccine management as well in this COVID environment. It's not a new event for us to do vaccines, but it has accelerated a bit in the current COVID environment with the new vaccine challenges for distribution. Brooks was one of the first to be turned to. So our value, really, think about that, it's the scientific technology, understanding capability of handling the samples and supporting how sensitive that technology is. The quality and integrity that enables that, it's also the expert analysis behind that, that is key. So reliability, clarity of the reading of the gene sequence is important in the first pass. And we have consultative capabilities with our customers that they would not have inside their business. And of course, it's the efficiency of automation and the continued cold-chain management in that workflow. That's what's produced this growth you see on the right side and the opportunity for us to pull together a complete and comprehensive portfolio of solutions around both the capability to manage samples but also to analyze and provide full services including the informatics, the information around those samples. So I just threw a lot at you in terms of what we offer. This slice -- each slice of the pie chart actually gives you the insights of that. So I highlighted in the blue, the product offerings. And you could see that in total, it's a little more than 1/3 of our business. And on the green side, it would be all of the services that we've highlighted. And sequencing, as I highlighted, the genomic analysis is over here in the next-generation sequencing on the most advanced platforms. And we do every platform, including Illumina, BGI, [ Pectin ]. So all of these are -- every platform, we utilize. In Sanger Sequencing, a little older technology, a very key service that is provided to broad pharma, biotech and especially academics as well in the institutional research. And then the synthesis space is very key, as I've already highlighted, in producing gene samples for significant broad research projects. This is the off-site storage piece, 24%. And what most investors want to take note of is that this is a high recurring revenue. So these are significant amount of samples in our freezers that we're storing on behalf of customers, and we build them on a monthly basis. And so that's a high annuity-like business. And then we have highlighted in our recent results the consumables and instruments have seen a jump in acceleration of demand, particularly in the COVID environment. And often, consumables, not the instruments portion so much but the consumables portion of this pie, is also considered more like a recurring revenue because once someone starts a project, they continue to use that same platform, that consumable format. And it's a little bit like a subscription. Not an obligation like a subscription, but it repeats. So this market is significant, $10 billion and growing. And it highlights just from basic research to drug development. But look down this path, and you'll see some words that are very high in the growth elements of the life science space, particularly cell and gene therapy, the infectious disease. These applications are significant growth areas in applications of life sciences. And when you think of how significant those are, you can look at the significance of the names that we serve. Pharma and biotech certainly is our largest sector, but we have much larger proof points -- well, I shouldn't say larger but similar proof points in the health care clinical as well as academic and government, purely -- truly a global business. You'll see us all around the world in nearly every geography. Each country has some activity from us on the life sciences side. And certainly, some of the most advanced household names of long-term pharma and most up-to-date, advanced biotech names that are advancing, what's going to change our lives significantly over the coming years. So the most leading -- leadership businesses making use of our capabilities for high integrity business. Let's shift over to the Semiconductor business. And I know being in a technology conference, many of you will be more familiar perhaps with what we offer here. But let me take a minute to brag about it a little bit in terms of our IP capabilities. So the robot really is the core legacy of the business, and it continues to be the differentiator in our semiconductor business. But we have positioned our portfolio around really 3 things pictured here. One, the core robot, the vacuum robot, we have extended the functionality of this robot with our latest family over the last 3 years that have really accelerated design wins in both the first-tier and second-tier OEMs. And often that is with a placement of the component of the robot, most notably at the first tier. And at the second-tier OEMs, often, it's wrapped around with a vacuum chamber system. And so we captured more and more of this revenue share of the market by positioning ourselves with advanced engineering capability to enable the second tier to make full use of the top-notch vacuum automation in a vacuum chamber. And of course, we still produce the atmospheric systems as well that are at the back end of that system you see pictured there. And then over the last 5 years, we've developed quite a business in contamination control. We picked up a very small asset in an M&A move in 2014 that was about $32 million, purchased $28 million of revenue, but we've approached and perhaps exceeded about $150 million of revenue this past year in contamination control. It's not a small business anymore. It's a significant piece of our pie, and we're active in the FOUP cleaner or that wafer carrier box that carries wafers throughout the fab. We clean these by the thousands with this piece of equipment inside the fab. So it's not a tool of a process tool, but it's in the process line and the wafer carrier drops right into this automatically, never has to be touched and it's part of the throughput challenge in the line, and we've proven to be a reliable and -- not just a reliable supplier in this cleaning step but an enabler of improved yields, which is the key reason someone to invest in contamination control. We also picked up reticle stockers. So in the reticle stocker space, you would align this certainly with the latest EUV trends that will make use of EUV mask and reticles. But certainly, the reticle libraries of the fabs have been pretty robust in the past. And certainly, the growth trajectory of those will only increase with the advancement of the EUV space. So certainly handling, productivity, all of these are important aspects, but really, it's the yield enhancement and a partner in the engineering space that has accelerated our ability to win more and more design-in wins and look at the continuous growth. And certainly, you would see that while in the industry, 2019 was a downturn here, it wasn't so much for us. So you can detect there's a bit of a cycle there, but we're very proud of the fact that the cycles inside Brooks Semiconductor have been a little more muted the way we have positioned our secular growth toward the trends of the industry: higher vacuum automation, higher sensitivities to contamination. And so this just outlines that a little more. Of course, we get growth with volume demand, but it's the chip complexity that positions us for the multiple growth versus the WFD market. So vacuum automation, every time the number of process steps increase, which has been continuous over recent years, you'll see that we continue to have incremental placements for each fab line of our vacuum automation robots and systems. In the contamination sensitivity, you see us expanding the carrier cleaners. And again, we're not selling the carrier itself but the cleaner of that. And in that aspect, it's an increasing propensity where each -- every time a node line shrinks, the vulnerability of contaminants increases. And so there's an increased investment there to eliminate contaminants. And of course, at the back end of the line, as wafer-level packaging has come on in the last 5 years, the handling of more complex wafers, in other words, they're not rigid but they're flexible wafers, has caused many to come to us for the solution at the back end of the line, so another diversifying play inside a fairly, I'll say, constrained environment of automation. Now it's taken us to the back end of the line and made us relevant in another incremental space and another buying point in the cycle, helping to contribute not just to the customer-enabling processes but in multiple places in the buying process and in each technology, so helping to contribute to the muting of those cycles for us. Again, if you were to look at the customer names and the split of our revenue, roughly 40% this last year went to device end manufacturers. But the other 60% went to Tier 1, Tier 2. And you would see many names in advanced packaging, some overlapping, obviously, vacuum automation and, certainly, the large names in the fab space. So a good testament to the capabilities and the long-term relationships that we've had throughout. It would be -- it's really important that I touched the margins and the momentum of the model. I'll do this quickly. Our strategy has always focused on the expansion of both the leadership and the margins of the business. We put a little more bias towards this diversification in terms of marching forward to expanding the life science space. But as I've highlighted to you, we've been active in M&A in the semiconductor space as well a little bit more opportunistically but all with a very disciplined ROIC focus and a careful capital deployment. If you were to take a look at the model updates that we've had, what we showed at the end of 2020 was upside in the margin structure but on track also through a 2022 revenue target of over $0.5 billion in life sciences. But I want to highlight to you here that in the margin structure where this had previously said 45 to 48, we upped it about 3 points, and we highlighted we're spending a little more on operating expense, but we give 1 to 2 points higher operating margins than what our previous model targets had highlighted on Life Sciences. So this previously said 15% to 18%. We're indicating to you we're confident that this will be in the 16% to 20% range by the time we get to 2022. In Semiconductor, off the 2020 results, we left the model range the same. It's $100 million range because, as we all know, it is a cyclical space. And we don't pretend that we would be completely isolated from that -- or insulated. And so while we're confident that there'll be growth, the CAGR at a midpoint is 11%, but it's a wide range from 16% -- I believe 6% to 16%, if I recall. But it's a wide range here on a CAGR basis. But the gross margins, we think, would be in the range of 42% to 44%. It's really closer to the higher end with the higher revenue numbers and more leverage. But we're focused on this value proposition, getting us over the 20% operating margin structure here. And in total, that gives us a margin structure that will perhaps get to over 20% in the right combination of these 2 businesses. So we're knocking at that door, the midpoint to add up to 19% and a double-digit revenue growth supported on both sides of the business here. ROIC objectives, we think we'll be well above 13%. And keep in mind, our weighted average cost of capital in recent days, it's estimated to be around 9%. So we're adding incremental value every day. This target model -- sometimes people say, well just show me the numbers. Here's the P&L structure, and this will be posted on the website, so I won't belabor it. But keep in mind, $1.1 billion to $1.2 billion is what we see in 2022. We see earnings per share that we just turned in of $1.26 being in the range of $2.00 to $2.40. So it gives you some good clarity of just what that momentum might be. We highlight deployment of capital as a discipline. Certainly, a relatively low CapEx business overall, which is ironic given we're in a CapEx business that we serve. But in producing our tools and equipment, it's lower CapEx. A larger portion of our CapEx goes into the services business where we equip the lab and equipment and also freezers to store the samples. But with that aside, we invest in the R&D and drive organic growth in combination with that CapEx. But still, a majority of our cash deployed has been in M&A. And we've deployed about over $1 billion over the last 5 years, and I can't overlook that we still pay that dividend on a quarterly basis. So again, I won't belabor the details here, but I'll highlight where did we spend that $1 billion of capital. And $945 million of it went into acquisitions. And I shouldn't say of that last 5 years, but over the last 10 years, we spent $945 million, about 20 transactions we've executed. Some of these include some divestments. So you'll see us fine-tune the portfolio, and we think we've got a good return on our divestment as well as a great return on our investments and we continue to plow forward. Our most recent acquisition was a software company for $15 million. And before that, we were talking about GENEWIZ for $450 million. So we play both at the smaller end and the higher end for returns. And this simply gives you a picture of our quarterly run rate. You could see through the COVID environment, amazingly stable across the top line of revenue, and the earnings has accelerated with the leverage models that we've highlighted. And recently, we turned in $0.47. And we're pointing to that again at the top end but with just -- the midpoint being just flat or slightly down on the revenue. You see Semi just possibly flatter up but the midpoint being slightly down. It will be significant growth on a year-over-year basis. Life Sciences, in the same range again as Q4, will be a significant growth on a year-over-year basis. So we're plowing forward with high capabilities. And John, you'll be glad to hear this is my last chart. And so again, 2 businesses, 2 strong markets feeding those businesses, and we're stepping up to each of them. The financial model is really tuned to benefit each step of growth and with an ROIC focus. And we're capturing opportunity by positioning our portfolio around those growth opportunities and, at the same time, being fed with really strong markets. So we're playing not just in growth market but at the higher end of those markets, we believe the premium spaces. And it's producing these results on the right side. So John, with that, I'm going to stop, see if you have some questions and where I can help round out the conversation.

Yes. I appreciate the presentation. I guess harking back to sort of the financial target model by division for fiscal year '22. I'm understanding that's a fiscal year '22 model, I'm just kind of curious. What stood out to me is that the Life Sciences, that's a higher gross margin but lower op margin than your Semi business. And I'm trying to figure out, is that a function of scale in the Life Sciences business that you're trying to drive? And will that gap close over time so that when we look at the sort of OpEx to rev in the 2 businesses at scale, are they similar? Or is there something structurally different about the Life Sciences business that, that carries a higher OpEx to rev ratio even at scale?

Yes. It's a good question. So the answers are a little bit mixed on your question. So definitely, it's a different structure because in the Semiconductor business, we're selling to an OEM market. You -- it might be a challenge to keep the customer list on 2 pages but you can keep them on 3 pages in the Semi market, and you would recognize every name. In the Life Sciences space, you need a phone book to look at every customer in the market. And it's a vast market opportunity. You would need those 3 pages-plus just to list top customers, and so it is a larger OpEx equation. And so the OpEx on a services business and a go-to-market business does require a little more feeding, and we've always portrayed it this way. But what I want to highlight is the leverage is interesting. The leverage of both increases over the years. And with higher revenue growth from Life Sciences and the margins being in the 50% range, it gives you nice leverage over -- even over the operating expense that's required to grow that business. And so we anticipate that while 2022 is only a milestone approaching the 20%, that we have very handsome opportunity above the 20% range, well beyond that. And we have a history of updating our long-term models every 3 years. If you hold me to the cadence, you would expect me to give you a new 2024, 2025 model next year. And so we'll be considering that as we go through 2021. And in the semiconductor space, the margin structure is there, we've continued to enhance it. As you've seen, we've increased from the low 30s to these mid-40s over the last 6, 7 years and I think, over the 5 years, 7 points of margin expansion at the gross margin level, partly from our attention to the portfolio, significant value at the diversification of the customer level. So in other words, not just Tier 1 components but now systems and back-end line and then, of course, the fab. And this has enhanced our margin capability but, certainly, also, cost takeout and efficiency in our own process. So we continue -- I won't downplay our opportunity to enhance these operating margins, but this Life Sciences has every bit of potential and probably will exceed this as we step into our next long-term model.

That's helpful. And then one, I guess, specific question around the Life Sciences business. COVID has been both a tailwind and a headwind to that business this year. And I'm wondering if you could address a question on each. As far as headwind, educational and government is a big part of that Life Sciences business. And clearly, the work-from-home, school-from-home culture has had a headwind effect. How do we handicap that risk going forward from hereon? And then on the tailwinds, last conference call off of the fiscal fourth quarter, you talked about the vaccine opportunity in SRS for calendar year '21 of about $10 million, and that's inclusive of COVID. And I think we're all thankful that we've got multiple potential vaccines for COVID out there. [ How is it ] for Brooks as vaccines get more widely distributed?

Okay. So first on the COVID environment overall, on the headwind portion of the question, as we came through 2020, what we saw in the middle of the year, like most businesses, a lot of places locked down, a lot of geography-based restrictions. However, life sciences and semi both were deemed essential. We stayed in business, and we answered every call. We were able to service the customers that were there. But you're exactly right that in the sector of academic, in particular, researchers were restricted from that. And much of the life science service business was a day-to-day transaction. And the customers just weren't in their offices or in their labs. And so we saw what I would refer to as a dent in the business through the middle of the year. What we described in -- by the first week of November that we have seen that the business in that space seems to have come up to the pre-COVID levels. In fact, the best indicator is our Sanger Sequencing, which is the larger portion is academics and pharma a close second, biotech pharma, but that Sanger space had grown 4% year-over-year, setting a new record for Sanger. But certainly, we would have expected to be even higher had we had the full momentum of the year behind us, and everybody was back at their projects. So we don't think that it's completely back, but it's back to above the pre-COVID levels activity. And so as we go into 2021, we think we have a COVID environment that's producing continued growth, by the way, in synthesis, in next-generation sequencing. Now the base sequencing of Sanger back in the saddle, so to speak, significantly and perhaps continuing to improve, absent another lockdown cycle, which we're all nervous about. But we see that momentum. And in addition, the consumables and instruments product side and the store systems side has seen ability to supplement a constrained market in the consumables space, answer to some of the hunger for automation of instruments. And we're starting to deliver some of the large store systems that had also been held back. So your question, now going into 2021, we see an improved momentum from this point. And on top of that, you add the second part of your question, SRS. We picked up some vaccine business. It's not the first time we've handled vaccines. I want to emphasize this. So we were a go-to name when the challenge came up. And early on, we started collaborating with customers. We won a few contracts. We highlighted in our earnings call about $10 million of opportunity we sized it to be in 2021, around the contracts we've already signed at that time. And one of those we highlighted, it's quite a notable example, is Catalent, a company that manufactures and develops on the behalf of the largest pharmaceutical companies and is helping to manage one of the answers, the vaccine answers. And so they have signed on with us. And we're joining them and facilitating on their site and on our site the handle of samples in cold freezers, ultra-cold freezers, and helping to move those as well not just from their site to ours but then ultimately to their final destination. So I think the core of your question, is that going to continue to grow beyond $10 million? We expect it to. We think that we're helping companies, our customers to get ready in the pre-approval and then be ready at the first opening gate of capabilities. How much it grows beyond that or how many additional engagements we have, we'll update you as we get to the next quarter and this quarter. And so we think it has juice behind it. But I think for now, see it as a $10 million opportunity with promise for a little more. And we're excited to be part of that battle on the front of this -- on the COVID. However, our broader equation, it's my view, John, this is the acceleration of our value proposition we've talked about; in other words, making it more visible to our customer and our investor base. But we've already been handling highly sensitive samples, vaccines, fast and reliable high-integrity capability which what those vaccines management companies were looking for. And so answering that is a nice display of the value proposition that we've already have been stepping into. So it's very exciting times.

Just a follow-up on that. Is the growth beyond $10 million something you're thinking about beyond calendar year '21? Or is that a comment that encapsulates this idea that you could become more involved with COVID vaccine distribution and we could see upside into that $10 million next year?

Well, we don't have the telescopic lens on this on how long this cycle would go in terms of the treatment cycle of COVID itself. But beyond the $10 million, it could be within the year and it could be bigger in the follow-on year. So I'll leave it at that. But what we highlighted was that the few contracts that we already had in hand, we would size to be valued in a total of about $10 million of revenue for the year. And to the degree they expand or scale, then we think that produces additional opportunity for us.

Great. With that, we come to an end of this presentation. So Lindon, I want to thank you very much for spending some time to with us this afternoon. I'd like to pass along my wishes that you, your immediate family and the extended Brooks family continue to be safe and healthy in what's been a challenging and trying year in 2020.

We really appreciate it, John, thanks for the support. And thank you for the invitation to come to the conference. We always appreciate the exposure. Thank you.

Perfect. Thank you.