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

Good afternoon, everyone. Thank you for being here. I'm Stephanie Yan from Cowen's life science and diagnostics tools team. It is my pleasure today to welcome Azenta Life Sciences to Cowen's 42nd Annual Healthcare Conference. With us today are President and CEO, Steve Schwartz; and EVP and CFO, Lindon Robertson. With that, I'll pass it to Steve.

Thank you, Stephanie, and hello, everyone. We're delighted to be here at the Cowen Healthcare Conference. So we really appreciate the invitation and the chance to have -- to speak with you today. Linda and I will share the presentation. But before we begin, I just want to call your attention to the safe harbor statement at www.azenta.com as indeed, we will be making forward-looking statements. Just a quick summary for you. Today, we have a chance to talk to you about an overview of the company, newly launched Azenta Life Sciences. We'll talk in particular about the fiscal year ended September 30. Lindon will make some reference to Q1 performance in the December quarter. We'll talk to you about market drivers and why we're enthusiastic about our opportunities in the near and distant future, talk to you very specifically about the differentiated solutions we think serve this market particularly well. And then Lindon will give you a look at the outlook and talk to you very specifically about why we believe the growth prospects remain very compelling for Azenta Life Sciences. Just a snapshot for you. We closed the fiscal year in September at $0.5 billion in revenue with a particularly strong growth rate and most importantly, we closed the transaction, the sale of our semiconductor automation business to THL on the 1st of February last month, and we have a net cash position now of more than $2.5 billion of cash to put to work to continue to grow the business and continue to take advantage of the tremendous opportunities that are presented by the market and the ones that we've created by ourselves with the portfolio that we have in place. It's important just to give you a little bit of history for the company, if you're not so familiar with Azenta. We were an automation company with cryogenic capability that we have employed in the semiconductor equipment space. So we have tremendously strong engineering capability that we took a look at this cryogenic capability in automation to look at other verticals back in the 2010, 2011 time frame. And we found in the life sciences space, the opportunity for the automated storage and management of biological samples in a cold environment. So this was a nascent opportunity and something that we capitalized on with our strong engineering prowess and a healthy enough balance sheet to go out and do some acquisitions and over a 5-year period, we acquired some companies that were tools companies that were embedded in the space with a good customer connection and a nice installed base. We continue to evolve those technologies and capabilities, built our own suite of products, and over a 5-year period, we had a $100 million business in the life sciences space, in the cold chain, the management [ of samples ] in the cold chain. As we got familiar with the market, as we got to know the uses that our customers have for these particular samples, we continue to expand our capability. And we became not only an engineering company but a science company. We acquired a market leader in genomic services capability, really an outstanding capability in GENEWIZ to build scientific capability on top of our engineering prowess, and we added additional services, the management of samples off-site for a customer and repository solutions. We started to do outsourcing of samples where we could literally supplement the customers' selection with samples that they needed from a rare disease type in particular, and we could source the samples for them. We also had an informatics capability. So we went from a mechanical cold chain of capability to a real value chain managing these incredibly valuable assets for customers where we can not only manage them, track them, source them, but also provide them very specific genomic analysis and information on these highly valuable samples. We launched at the end of September and officially in November as Azenta Life Sciences, a $500 million life sciences company, but using the strong capability that we had as an engineering team, building scientific capability and the close connections with customers gave us a really clear road map on the precious management of these samples in the value chain. We have a strong track record of growth in the company, and it's something that's embedded in all that we do. We have a tremendous market opportunity, and we tend to continue to grow at a particularly strong rate, both compared to the market and from a historical perspective. Over the past couple of years, we've grown more than 20% on an organic basis. What we're most proud of is we have tremendous leverage built into the model. So from an earnings standpoint and EBITDA standpoint, we have tremendous leverage built into the model, and then we'll address that in his remarks, as we look at the future prospects for Azenta as we continue to drive strong revenue growth. So I want to say a little bit more about this portfolio for the sample value chain. I talked about the capabilities we have to source samples for customers and then we ultimately format the sample. So in our consumables and instruments business, we put these samples into various containers that can be tracked and managed and held and stored at cryogenic temperatures. So the preservation of the samples and the ability to locate them at any time, at any place, in a highly automated fashion is how we built the portfolio around the formatting of samples. We have automated cold stores from room temperature applications, minus 20, minus 80, all the way down to liquid nitrogen cryogenic capabilities that sort of the cell and gene therapy market. And we have a strong genomics platform that enables us to interrogate samples, supply data to customers, and a bioinformatics capability that gives them this critical data essential for these highly valued assets. So we have a value chain that we think is the envy of the industry, and it's a particularly valuable capability for customers across the entire spectrum of drug discovery and treatment and therapies. So a little bit about the market drivers. We're in a particularly strong growth area in the life sciences space. So more than 10% growth of market opportunity and in the major categories where we participate in genomics, sample and repository services, ultra-cold storage examples, and in the consumables and instruments space, we continue to outpace the market by almost 2 times the market growth because of where we participate in each of these segments. In the genomics space, the next-generation sequencing capabilities, we have the ability to use the current state-of-the-art technologies, including 10 times genomics, capabilities, [ long-read Pac-Bio ], BGI tools and Illumina tools, we provide this cutting-edge genomics capabilities and in SRS, there's a continued wave of outsourced sample repository services business. We're well-positioned to capture this on a global basis. In the storage area there's a lot of news, a lot of information about the demands for ultra-cold storage of samples, the fastest-growing segment of this particular opportunities and the automated stores were far and away, we're the market leader compared to manual upright freezer storage. In the consumables and instruments space, particularly triggered by the COVID environment people have gone toward automated workflows and the automation and the capabilities we provide here related to tracking and managing samples throughout a workflow, put us at the edge of the fastest-growing segments of the life sciences market as it relates to the sample value chain, hence, the share gains that we have and the positions that we have in these particular areas would allow us to be a 20% grower in an 11% growth space. So we're particularly keen to continue to expand the $500 million revenue company in a $10 billion market opportunity, especially one that's driven by growth where we participate most fully. The driver of our business, the heart of everything that we do is related to the samples that are the foundation of life sciences research. Before the genome was sequenced in 2000, the collection of samples and the treatment of preservation of them was particularly chemical compounds stored in a modestly cool environment, but automated from the standpoint of high-throughput screening and the ability to manage millions of samples [ or in an ] environment today where there are more than 2 billion biological samples stored cold in the world and now the temperatures have gone to minus 80 degrees or standard storage of biological product and as we move towards cell and gene therapy, the cooling temperature is even more severe, below minus 136 degrees C, typically at minus 190 degrees C liquid nitrogen temperatures, and the myriad applications for interrogation of samples has expanded exponentially. So not only the complexity of managing and storing and handling samples becomes more difficult at those temperatures. The sheer volume compounds the problem and the number of things that a customer wants to do with these particular samples puts us in a tremendous position to be able to serve this highly complex market with a portfolio of products and services that allow us to manage this complexity for a customer, provide them with useful data and information that they need to accelerate the speed to market of the therapies that they're bringing. We believe we're strategically positioned to capitalize on these markets. In particular, there continues to be a very strong trend for outsourcing of biopharma R&D, and we are a world-class outsourced provider of services to the industry. So this is a trend that continues to serve us particularly well. We believe over the next 5 years, the number of samples that are outsourced for protection to a biorepository company like ours will double once again over the next 5 years. The cell and gene therapy market and the complexity and the particular capabilities about automation and genomic analysis that come with this opportunity, continue to expand. We had a tremendous growth rate and the technologies that we have at the forefront here continue to put us in a strong market share gaining position. And this is a global environment, a global market and wherever you'll find meaningful life sciences activity anywhere in the world, you'll find us at the life sciences [indiscernible] in support of those customer hubs. In terms of the differentiators that are particular not just in our portfolio, but the physician in the marketplace, we have starts with our unique team and unique solutions that we bring more than 400 PhD equivalent scientists who engage scientists to scientists to bring unique solutions to really critical problems that are in the way of the next breakthroughs in technology, and we consider ourselves to be a very strong supporter of the people who are at the cutting edge of this type of research. We pride ourselves on the ability to turn information and data and samples at unprecedented speed for customers to help their therapies to market faster. We do have unrivaled access to samples. We have global collections, repositories everywhere and the ability to access new samples for customers in a very unique broad product and services portfolio capability that allows customers to bring problems to us and solutions from us in a very short period of time. The portfolio consists of a good balance of products and services. We have a state-of-the-art sequencing capabilities in next-generation sequencing by various means and technologies and we're at the forefront in almost any type of discovery here in next-gen sequencing. We have a strong Sanger platform, which is the foundation for tremendous number of applications across research from the first R&D and academic setting all the way through a large pharma capability. We do millions of sample measurements every quarter in the Sanger space. We have a unique capability around gene synthesis, and we still are the only place where you can go -- the only company you can go through to both read and write genes and we have a tremendous footprint around sample repository solutions. On the product side, we have consumables and instruments for the formatting and protection of these samples that serve these particular workflows, and we continue to be a high-growth market leader in the ultra code automated stores and services associated with that infrastructure. So strong growth profile, good balance amongst all the products and a strong attachment for the products and services that we provide as critical but noncore capability for our customers but something that creates tremendous focus for us as we serve them with this value chain. We show here a slide about the roster of global customers we have and if I take you to the right side, you can see we serve the cutting-edge scientists around the globe from Nobel Laureate labs, the number of times [ we cited ] in specific journals but we also serve the top 20 pharma companies in their entirety with a portfolio of capability. So we are critical links in the process from core R&D and discovery all the way through execution for the delivery of the vaccine. So we have a strong capability not just from a strategy standpoint, not just from an R&D standpoint, but from an execution standpoint, where customers and researchers mutually depend on us, and this continuity of capability makes us a very unique provider across this value chain. And I'll show a little bit of recent history for the company, the purple bars, the solid bars represent the revenue from organic growth inside the company. The lighter blue stacked bars here represent contributions from acquisitions that we've made. We've done 14 transactions over the past 10 years, 2 of these in the last 6 years were transformative for the company. And in fiscal '16, we acquired BioStorage Technologies, the largest independent outsourced provider of Biorepository services, which at the time was an opportunity for us to add on to the equipment and the tools that we had and outsourced sample services capability. It was transformative at the time and it enabled us to put capital to put sales force, to put the expanded capability to enhance and increase and speed the investments that BioStorage could make to expand on a global base and that contribution from the company at the time enabled us to enhance the organic growth capabilities of BioStorage. We continue to do smaller acquisitions to add to this value chain portfolio until fiscal '19. So at the end of calendar 2018, we acquired GENEWIZ, one of the best in the world, best-in-class capability, genomic services companies. And we added capability to GENEWIZ from the standpoint of capital. We enabled them to continue their 20-plus percent growth rate by the enhancement of our investment in their facilities, the feed expansion of capability. The addition of additional talent to the company faster than they could have as a stand-alone company and what it did was enabled us to enhance their capability to provide tremendous organic growth capability because of the synergies brought about by the ownership in Azenta. So with this capability, we have a very strong growth profile. We show 40% CAGR over this time period. About 20% of that is organic. And we think we have a road map to continue this type of growth in the future. I will call your attention to the fact that this $500 million company, this growth rate came from about $1 billion of capital invested in this business. We stand here today with $2.5 billion of cash, the same or greater market opportunity in front of us, and a strong appetite for continued growth, the continued value creation and capability for not just our customers, but our shareholders. So we couldn't be more delighted at this moment in our history and a chance to continue to bring tremendous value to the market. We have more potential and capability that we had at any time in our past as the portfolio is stronger and the capability is greater and the recognition, I think, from our customers that we are indeed a strong global player in something that they see provides tremendous value to them. So with that as an introduction, I'll pass to Lindon who will talk a little bit about the future and the next steps for the company.

Great. Thanks, Steve, and thanks for everybody's attention with us here. We'll go right into the next page on strategy. I start here as we think about filling out outlook because the strategy focus that we put on the business has been consistent for the last decade, and this is where we're going to continue to drive our business with these principles in mind. One, we're always focused on where we participate, we want to demonstrate leadership and we want to keep extending that leadership in our core markets. So we worked on this organically. And of course, when we look at an investment, we also look -- are we going to be able to contribute to that leadership. And so we invest on that basis, both organic and strategic M&A with that in mind and as we do so, we expect our margins will expand, and we tune our portfolio toward margin expansion. In the more than 10-plus transactions we've done over the past decade that Steve alluded to for the $1 billion, we've utilized that cash, we believe in a very responsible way, yielding pretty remarkable results in the company with $0.5 billion handsome growth rate portfolio that's running in all cycles. So we do that with this lens on ROIC. ROIC, we see as a true economic growth metric in our targets, our tune toward that. Our investments are [ scoured under that wins ] and I share with you also that the leadership team has started their [ LTIP ] plan compensated on improving ROIC over the time period of [ award structures ]. So with that, let me just touch on capital deployment. Just one more point. We do invest organically in the operational CapEx. You can see historically, which I think is a good indication of the future. 6% to 8% of our Life Sciences revenue is reinvested in the CapEx. I'll highlight that we are currently in a building project in China. It will -- is expected to culminate here in the first half of this -- or calendar, I should say, and be operational and completed by June. And once that's out of the way, that displaces 3 and more lease spaces in China. So it's a real estate strategy. But on an operational CapEx basis, we're typically running 6% to 8% of revenue. In the R&D space, we do invest behind our products and develop our own proprietary technologies. This is true, not just in the product space where we believe we have a stand-alone solution in automated cryo temperature storage for the most sensitive of samples but it's true in our services business and particularly in our genetic analysis business where we develop our own protocols, our own proprietary capabilities to help clarify the [ reach of ] sequences and I think we have some standout offerings there that have certainly yielded the payback on these investments. And then finally, as Steve highlighted, we have $2.5 billion on the balance sheet. It's a [ unique gem ] on a high-growth business already, one that's already been proven track record of being able to deploy capital. So we've got it ready. We don't expect to do anything rash. We expect to -- we have every intention and energy for doing this in a disciplined fashion. But we plan to put it to work and we have highlighted over recent months that as we transition to a stand-alone life science company, we're not paying a dividend currently, we're preserving all cash for these investments in M&A, and we see it as being a rich opportunity for growth. We'll continue to get right into the model. We have a history and a decade of history of putting a 3-year model out in front of our investors. So you can see where we're headed. This is based on what we own today. So there is no inorganic investment or no M&A presumed in achieving these targets. We shared these at our Investor Day just this past November, pointing our investors toward an expectation of 18% growth, round numbers by 2024 on a CAGR basis off of our 2021 results. And I will tell you that it's got all of our internal leadership and teammates focused on driving toward that range and more with more opportunities. So this is a cohesive target model that ties us together, not just from the outside of the company to Steve and me but all the way down into our leadership, which presented the elements of this model. The products business is expected to be in the low double-digit range, a little bit softer than our recent history, primarily because the coated headwinds. In other words, they had significant demands over the last 18 months from COVID, and it will be trailing off in the early part of this 3-year model. But certainly, growth rates are expected to move toward the mid-double-digit teens or I should say mid-teens. In the services space, 18% to 22% growth is our 3-year projection. And this is a pretty solid track record on a very solid track record on the genetic analysis which is expected to be in the higher end of that range. And the sample repository solution has also demonstrated terrific momentum, and we expect to continue in the lower end of that 18% to 22% range. And of course, when you're sitting where we are in the EBITDA relationship already profitable, we will see sharp leverage. We expect the EBITDA margin to go toward 26%. This last quarter, highlight we reported 14%. We've given the rationale and the road map and some milestones towards that. I invite you to tune in with us more closely if you haven't, and you'll see the additional color on them. We go to the numbers chart. You can see in the P&L structure, I'll just highlight a little bit of history that we shared at the Investor Day in more detail. But from '19 to '21, we had a CAGR of 24% topline growth as a life sciences business. We expanded our gross margins 8 full points -- and you can see that EBITDA expansion at the bottom line with the leverage in the business model. And this is on a continuing operations basis as disclosed in our filings. In the 2024 goal column, you can see that this growth of 18% will get us to $800 million to $880 million revenue, sizable business already profitable and expected to be in that EBITDA range of $200 million to $240 million, which would be approximately a 26% EBITDA and more than a tripling of earnings per share as we strive for this. Again, I remind you, this is based on what we own today, not putting the $2.5 billion to work, which we certainly expect to do, and we'll update the model as we add to the business. If we go to the next page, I give you a glimpse on the quarterly progression because as a new life science company standalone, I just want you to see the consistency of numbers across the borders. This last quarter, we turned in 18% growth year-over-year. The Q2 guidance at 137 to 147, which we put out on February 8, reflected a midpoint of about 10% growth year-over-year, muted a bit, again, by strong COVID demands a year earlier. We still have modest demands, but this is primarily muted on the product side. Services side is still percolating consistent with the model. And I should emphasize, products is performing exactly where we expect it to be inside this guidance that was provided at that time. So proceeding just touching again on the capital focus. We do look at all of our investments with ROIC. And our objective is for ROIC to exceed the weighted average cost of capital in 5 years, perhaps 7 years in the life sciences space, but 5 years has been our traditional emphasis and it continues to be. This forces the equation to expect and look and to find high growth capability and value we can add to the business as well as profit leverage to expand margins. And so the many acquisitions that we've done have benefited, I think, from this discipline, and this is what will guide us going forward. So in wrap up, I think we really do have a unique asset and we're so proud and pleased to be able to share it with you here at the Cowen Healthcare Conference, a $0.5 billion company, high teens growth with a strong track record of that growth of cash capability out of the business already running. And then with a very strong balance sheet of $2.5 billion of cash and reserves as well gives us strong capability to invest for the future. We couldn't be happier as Azenta Life Sciences business to be here. And Stephanie, I'll stop at this and take any last question you might have for Stephen.

All right. Thanks, Stephen and Lindon, for a great presentation. I do have -- I'm not seeing any participant questions at the moment. But for anyone listening, feel free to submit your questions in Q&A, but to kick it off. What would you say is your latest view on M&A? I know you touched on that a little bit. Would you be more likely to acquire a business in a new vertical? Or would you rather build upon Azenta's leadership position in other product lines?

Yes. Thanks, Stephanie. So the market opportunities are -- remain strong. So the pipeline is rich, likely in the near term, you'll see us around the -- in the adjacencies around the portfolio that we hold today. We look at it as a $500 million company and a $10 billion of opportunity. And we just think there's so much more to be gained there. We always have an eye toward what the verticals might be. And so we'll keep an eye on those kinds of things. But in the near term, during the next 12 months, you have to expect that we'll be close to the portfolio that [ we build today ].

Awesome. Another question I have is, so you mentioned the cell and gene therapy space. So within that space and more broadly, the regenerative medicine market, what are you seeing as key areas that are still challenged and are still seeing the benefit from further innovation? And how is the Azenta positioned to address these areas of need.

Yes. So thanks. So in our particular area, a couple of things. One, the cryogenic handling of the samples in an automated fashion, we think is critical, both for the fidelity of the samples, but also to ensure that each sample gets the same treatment. Also in a cell and gene therapy environment, ultimately, the samples that we hold have the potential to go back into a human back into the patient. And this care is critical, the ability to be able to read exactly what the virus is. We have a unique capability that we believe may become particularly important for cell and gene therapy from a genomic standpoint, to be able to characterize very specifically this adeno associated virus. So there are a number of places in the cell and gene therapy space where researchers and scientists and therapy developers get bottlenecks. And those are the places where we jump in and see where we can -- how we can help them both on the handling and management of the sample, but also in the interrogation of that particular sample as well.

Awesome. I believe we're up on time, but if I could squeeze in one quick investor question. So can you comment really quickly on the impact of recent commodity inflation on your margins and the ability to pass through price increases to customers?

Yes. Inflation is real for all of us. And certainly, the supply chain of materials is an element of it, but I have shared with investors that our labor equation has been the tighter equation for us as we've all faced more competitive labor markets and particularly in our services space, we depend on the scientists and the labor in our labs and in our manufacturing, and they're the ones that really deliver the goods and the value for this company. So we've maintained focus on that. I shared that the model as well as our guidance has comprehended the investments that we've made recently and a little bit of headwinds that we have on that. Now our ability to pass on to customers, I think there's never been more attention in the general economy and on the customer front included to expect that there is some price and some inflation currently. It will vary by individual sector and segment of this market, subsegment of this market. We price on value though, I would emphasize we price some value. And I think sometimes that inflation certainly comes as part of that value statement. It affects it. But -- but we'll continue with our focus toward margin expansion as we always have and face these headwinds and manage them. And I think we really have been good stewards of both alleviating cost pressures and realizing value for our shareholders.

Okay. Great. So with that, I'll conclude it here. Thanks again, Steve and Lindon, and thanks, everyone, for tuning into the presentation. I hope you all enjoy the rest of the conference.

Thank you, Stephanie.

Thanks, Stephanie.