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

Good morning, everybody. My name is Luke Sergott. I cover Life Science Tools and Diagnostics at Barclays. It's my pleasure here to have Lindon from Azenta Life Sciences. And with that, I'll just let you kick off. We're going to do a presentation. There's going to be a couple of Q&A.

Great. Luke, thank you very much. It's a real pleasure to be here at the Barclays Health Care Conference. And amazingly feels like normal this morning with so many people in the labor conference, so thanks for including us. With a lot of excitement, we present the Azenta company. Of course, first of all, I'll highlight the safe harbor statement. We'll make some projection comments. And of course, as always, I'm not obligated to update those, but we do frequent communication so I don't think you'll find us hard to read here. The agenda today, we're going to give you an overview of the business. We launched the company as stand-alone Life Science company just December 1. And in the last couple of quarters, you've seen us report just on a Life Sciences company for the first time. Our legacy was around semiconductor. And we struck a deal last summer to sell the business. So we've been reporting as a Life Science company, and happy to say that we closed the deal on February 1. And so we truly are a Life Science company with a strong balance sheet, and happy to talk to you about that. As well, we'll talk about the market drivers, the differentiated solutions that we bring, and a very compelling outlook for growth, not just in the near term, but over a very long term, high-growth industry. The profile of the business, uniquely as a Life Sciences company that has just launched, is over $0.5 billion of revenue last year in 2021 with a fiscal year-end September 30. And with a 2-year growth rate of 24%, and it was even higher than that in the 2021 fiscal year. And EBITDA margins, we're a profitable business, so you can see 17%. We're still in a very high point of the leverage curve. We expect that to accelerate. We'll talk about that as we look at the 2024 business model that we've shared with investors at our Investor Day back in November. We're global in footprint. You'll see us in every geography around the world, and it's a nice complementing footprint. 2,900 employees, facilitates a premier customer list. We'll be happy to brag about that a little bit in this presentation as well. And of course, as I just highlighted with the divestiture, we have $2.5 billion of cash in excess of that on our balance sheet ready to go to work for additional growth and opportunities for some hands on the M&A space. The business, as you can see on the left, is about 40%, 60%: 40% Product, 60% Services. And but what's really striking is the cohesiveness of the entire portfolio and the relevance that we have across our customer set. So I'll be sharing that as well. If you look back at the origin of the business, it was grounded in what our competencies were. And we always stay close to where we are relevant today. But we continuously expand our adjacencies and our relevance and the impact we can have to customers in terms of value. In the first 5 years of the business, we really focused on, first and foremost, the ultra-cold automated storage of samples. And so ultra-cold freezers are able to get minus 20 degrees, minus 80-degree ultra-cold freezers, that's in Celsius temperatures. And of course, you could get doers that store at liquid nitrogen phase, minus 190. But what is challenging is to get reliable automation. And so as a semiconductor business, 40 years in automation and precision in working in cryogenic temperature environments, we applied that capability and acquired a couple of companies that had footprints. And we redesigned the automated storage environment for Life Sciences. And we swept the market in 2013 with the revamped automated storage solution. And from there, the business just never stopped. In about 4 years later, we found it very appropriate to acquire a business that was already storing samples on behalf of customers. So now you saw us go from providing infrastructure at the customer site to becoming an outsourced provider to take samples. And we now source tens of millions of samples on behalf of customers at our location on our capital as a service to those customers. And when we talk about storing samples, we're not talking about renting space for freezers. We're talking about storing the individual sample tube down to an identifier with data and information stored with those samples and helping our customers to manage their asset database. So it took us about 5 years to get to the first $100 million. But over the second 5 years, you saw us get to the $500 million level. And what you saw curve was going from that sample repository solutions, outsourced business of handling tens of millions, that became very clear that the information around the asset was the key. The analytics of what's in that genomic structure of the sample became key. And not just fundamental to what the customer needed for research, but fundamental in discovering what was possible around science. And so nearly every project that you have today in research has fundamental aspects of genomic analysis. And we provide that service as an outsourced provider to our customers, using every platform in the industry to bring analytics and also with strong, strong capabilities that provide the writing of genes. In other words, the production of gene -- synthesized gene samples or research back to the customer. So we've taken it to a $0.5 billion business over the last 10 years. And today, we're called as Azenta Life Sciences. And very proud of the track record with customers but also with the growth. And if you -- again, if you look over the last 2 years, 24% growth, included an organic growth of excess of 20% and some acquisition-based revenue. The gross margin tracks of 8 points of expansion over the last 2 years really reflects a couple of fundamentals. One, a fundamental inherent drive in the business to perform -- to increase our performance, improve our performance to address cost structures, but also highlights our movement to the value for the customer. And the value for the customer shows up in the prevalence of growth, the leverage of the structure that we have, but also in the offerings that most resonate with our customers. And so all of those have moved our margins up to the 50% level for 2021 fiscal year. And we continue to project a bit of margin expansion in our 2024 model that we'll talk about. Earnings per share, interestingly, as a segment, when semi included, we were profitable. But once you take the G&A structure and you put it all in the Life Science business as we sold the element of the semiconductor business, we restated our past as SEC would require us to. And you would see us just being breakeven in FY '20 now under this new concentrated structure over a smaller base of revenue of $0.5 billion. But the leverage curve is very clear in this. And you can see that we've already taken earnings per share in '21 that we -- as we close the year, we reported $0.48. And again, very exciting times in this leverage curve in this base of growth and where we are at the margin structure, you're going to see accelerated leverage in the model. Let's talk about what we enable for the customer for a moment. And that's the operative word on this page, is what are we enabling? From the beginning to the end, the customer has a challenge in the research around the research assets, in the preservation of the gene structures, the samples, the biological samples that they use for research and so they are focused on making sure they have the -- not just the embodiment of the patient, but embodiment of a research database. And so they often look for the sourcing of samples for the research that they need to achieve, if they don't have the samples readily available. They need to take those samples and put it in the right format, not just for analysis, but also for preservation of the samples. The storage automation and logistics ensure safety, integrity, recordkeeping and tracking of those samples. The genomics and analytics obviously gets to the heart of what that sample can tell them and what happens as they progress in their research. And perhaps that's with treatments or perhaps that's with testing or variations in those gene samples that they would have. And we help to provide the analytics and additional genomic or gene synthesis production so that they can advance and expand their production. Data and informatics, I've highlighted already a couple of times. I would just emphasize that it's the information around each individual sample that is key. If you want to store samples in a freezer and rent the space and go in and manage your own samples, you can do that with other businesses, but not with ours. Ours is more focused on the value of helping you not just with the storage of where the sample is, of course, that's first and foremost, to protect the integrity and to ensure that you have those samples for years to come. But it's also to help with the information of those samples. So the end-to-end enablement of research is really the differentiating factor of the comprehensive portfolio. When -- I've had customers highlight that we are the sample storage business in the industry. They don't think of us as individual consumables companies. They don't think of us necessarily as a storage company. They think of us as the sample-based provider in the industry. If you look at the drivers of this industry, it's pretty dramatic. If you, again, back up and think about all the research you're excited about in this Life Science Conference, how often it comes back to the base of sample interrogation, of investigation, of accumulation of data, the samples are at the fundamental of everything. We're not anchored into a unique science or a unique IP. The interesting thing about this, it's very compelling. All science, all areas of research go back to the variety of samples being tested. So in that space, the $6 billion opportunity that we estimate, grows to about $10 billion over the next 4 years at a double-digit clip rate. Now interestingly, that double-digit clip rate encompasses all samples, whether you're doing it in a manual environment or you're doing it in academic environment. But here's the key for us. We have a differentiated growth rate against this because of the value and the sensitivity of where the most critical samples are being used. And you can think of this in cell and gene therapy at the most, I'll say, the most advanced areas of therapy development. But you can also think about this as the most critical storage value stated. In other words, as I said, we don't participate so much in manual freezers. We participate in automated freezers, so the automation, the information with the data. So the breakout of this is, while there's manual freezers in this equation, we're zeroed in on the automation and the workflow in that automation and the integrity of the information. In the genomics, of course, genomics applies to everything. But with the growth factors of cell and gene therapy, we're seeing this as more of a growth engine as well. In the SRS or sample repository solutions of storage of assets, this is looking at the adoption rate of outsourcing. So while biobanks are prevalent and many customers do store millions of samples, the advent of outsourcing is an accelerating factor for our business. So double-digit in the market. And the question, well, how is it that Azenta is able to sustain 20% growth rate? It's because of the advantage, value statement of where we participate in this market. The market has evolved. And the question, of course, is always, what does the future look like? But if you look at the evolution of the business, obviously, you still have the fundamental of drug discovery that was centered around chemicals. But the expansion of biologics from the time that genome sequence was first accomplished has just been an explosive space. You take that biologics where the samples continue to expand at approximately double-digit level, and you add to that the layer of what's possible now around cell and gene therapy or regenerative medicine, you'll see that what's possible in the future is just multiplying. And so the growth and the demands are not just there on the volumes that are increasing on samples being stored, but the value and the integrity requirements around those samples. More and more so as you get into cell and gene therapy, it's about the preservation of those exact samples, and the integrity of those samples and what the tracking of those samples mean to the science. So not only is it exciting around the volume, but also around the value of those samples as well. And we believe we're strategically positioned to capture this value unlike anybody else. If you look at the value where we participate, the growth in the R&D is very clear. But the growth in outsourcing of R&D services is even more clear, more prevalent. We think that greater than 50% of the R&D outsourced today continues to grow, and we map directly to that space. The demand for the quality sample collections, we see that an expectation that those stored in biobanks will be more than double in 5 years. The cell and gene therapy market that I've already highlighted is an accelerating factor, not just in terms of what's available today, but what's in development today continues to multiply. And there's no question that all of us will be impacted over the next decade of what's possible for our lives and for society. The demand for the global footprint is really clear as well. We're servicing global pharma and biotech. We're not a regional player. We certainly stay close to the customer at the regional level. And we do have some great customer relationships. And we've highlighted Cleveland Clinic as one of those centered on their campus with a dedicated bio-repository there that we manage for them. But we've also highlighted that we've taken on global footprint of -- as an enterprise partnership to some of the largest pharma companies in the world. And 2 of which, we've secured over the last 9 months. And the business continues to expand. The footprint of our global presence is clearly an asset that we have that we can leverage, not just with new offerings, but with our customers. So the differentiation of the solutions certainly plays in. And just to give you a quick characterization. If you look at those 2,900 people that we have around the world, it's a unique team with really highly valued solutions. It's cohesive in its nature. And in that cohesiveness comes speed and convenience and reliability. The customer is delighted by us on a daily basis. They may not be thinking about the samples in their storage on a daily basis because they stay there very long time. But on an analysis or on a handling or how they can reliably send us more samples and have them registered and show up in the database or how they sit in samples and retrieve them and get the data back, I should say, to get the data back overnight on a simple sequence or within a month on a more complex sequence, they're delighted. The reliability, the clarity of the reads is fundamental to their business endeavors. The access to the samples is unrivaled. We've had customer wins where customers have said they no longer wanted to leave their samples in the hands of third-parties that were accommodating storage because they couldn't retrieve the samples within a month or 2. But they know in our hands, if required, they can get the samples tomorrow, the individual samples because we know exactly where they are and we can retrieve them. Typically, it's 72-hour or 1 week or 2-week request, but they know that they can get it on the day that they need it in their lab. And we've had customers tell us, in fact, that they can get it faster from our remote site than they could even inside their own R&D shop because their people will take time to find and locate those samples to retrieve and accumulate, but we have dedicated teams to do so. And the broader product and capability set is, as I said, it's an umbrella of offerings that enables from beginning to end what a customer needs to do in regards to samples and analytics of those samples. And so now to crystallize the offerings that we actually match up with that enabling factor, look at the portfolio we have and how balanced it is. Again, in a big picture, think of it as 60-40, 60% of Services, 40% Products. If we go around the wheel here, and you'll notice that we do sequencing on every platform. We do Next Gen sequencing and we do Sanger-based sequencing. We provide the gene synthesis and bring samples back to the customers. In fact, we had requests in the very early days of 2020 COVID, we had a request from the U.S., from China and from the U.K. CDC organizations immediately for samples of COVID-based gene synthesis product. We're testing both for detecting and then on the heels of that, for vaccine research. So the balance of the portfolio is quite strong on the analytics and the production of gene samples. Same for Repository Solutions. 17% of our revenue last year includes the handling and the precious caretaking of samples. We do this in each -- in Europe, in the U.S. and in Asia. The largest operation facility is in Indianapolis, the second largest, FedEx hub in the country. Centrally, we store tens of millions of samples on behalf of customers, and they can see it in the data that we provide. Consumables & Instruments has become a large portion of our revenue in the products business. And last year, we shared that in 2021, we had about $53 million in our total revenue equation related to COVID. Roughly more than 90% of the -- 80% to 90% of that is in the Consumables & Instruments space. And so a large portion in consumables last year -- when I say large, a good piece of the growth was driven on COVID. But -- and that starts to tamp down our model a little bit in the '22, we'll get to that in just a moment. But in the bottom portion there, on the far right, you see the ultra-cold automated stores, 14% of our revenue. There's a gem of a growth driver there. And total automation, the adoption of automation is key across the industry. But inside of that, the success of our automated minus 190 environment, which is pictured there, has become critical to cell and gene therapy. And we've heard that more than half of our revenue now on that product set is driven by cell and gene therapy solutions. We highlight 3 of these pieces with the purple star contributing to recurring revenue. It's just fundamental to our benefit -- a fundamental benefit to our business model. We continuously have samples in our storage month after month that we bill out recurring revenue in a pure essence. Consumables are often behave like a subscription, where a customer starts a project, does not change the consumable format, continuously orders the next box, and then the next box, not necessarily on a monthly subscription, absolutely not. But as their projects progress, they continuously repeat order the same consumables. And in the ultra-cold stores, we're building a nice post-warranty service business behind that. And the replicating business model, in fact, on the B3 cryo or the minus 190 environment. If I move forward, the global customers, as I said, I was going to brag about this a bit. Look, we serve the top 20, all of the top 20 pharma, as you would measure them by the amount of R&D that they spend. And we do this both on products and on the services side of the business. If you look across this entire spectrum of value and the customer names at the bottom, it's only a very, very small sample of the few thousand customers that we serve. The key here, as you can -- as you could think about the enabling of research and you look across where we have substantial participation from customers, you could see that they're in there from the beginning, from collection, to use, to storage, to retaining their information. It's a remarkable space, helping the not regional but global, or I should say, not only regional but also global customers in their total solutions. The growth rates that we've achieved are significant. And I give you a view of this over the last 5 or 6 years. And you can see that there's a substantial amount of organic growth as well as transformative M&A that has built out the portfolio. So we -- when we acquire, we're always aiming for continuous growth. But we also are looking for those opportunities to transform and continue to extend our value proposition. As I highlighted earlier, the biostorage put us into the service market and the GENEWIZ business acquisition put us into the analytics market. And we've got continuous growth out of all of these in a cumulative nature. The outlook continues to be very strong. The strategy continues to be consistent on leadership in each of the markets we participate. Growing through the M&A, the strategic driving margin expansion, and using the capital in a very responsible way. The operational CapEx is modest in this business overall. The R&D is consistently feeding the business. And the investments in the business yet to have is sitting with $2.5 billion on the balance sheet to provide M&A. The focus that we will bring to this is unquestionably expected to be complementing and synergistic, but also transformative as we move forward. The model sets us up for an 18% growth over 2024 time period, with continuous leverage. And this will be sourced on both sides of the business, from products and services, with handsome growth on both sides. There's more details to be had here on our website. I invite you to take a look at that. And the model is clearly -- we give as much transparency and clarity as we can in the P&L structure. Our analyst coverage will help also enhance the understanding. You could see the transformative nature in the business, going from $300 million to $500 million already, with an expectation to exceed $800 million. And earnings per share and EBITDA leverage is significant. Tripling of earnings per share is in our projections by 2024. I give a quick glimpse of the guidance here. The guidance range, sometimes, it gets the question, why $10 million range? We have volatility, both in the COVID-related demand, but also the China situation. It's just one example of disruptions that can come during COVID. We've experienced this consistently over the last 2 years. Oddly, we think of it as a disruption, but it's been a consistent question in our environment. We've had tremendous resilience through this, and we don't expect it to be different this quarter. M&A continues to percolate. We have a key focus to do this under the right wins of ROIC and always focus on exceeding our weighted average cost of capital within 5 years, and if not 5, in the Life Sciences space, within 7. And again, to wrap up, $0.5 billion business, highly profitable already, but sharpen the leverage curve. We have a strong balance sheet, $2.5 billion for accelerated investments in the future. We're excited to grow this business into the future, not just on the strength of the products, but on the strength of an industry that is transformative for our lives. And we couldn't be more proud to be a part of that industry space. So Luke, with that, I'm finished.

Yes, I think so. I think so. I'm just looking -- I got one from the audience here really. They want to walk through kind of the bridge on the EBITDA guide for the year. So where you jumped off of, I think, 14.2% in 1Q and then going up to 22% by 4Q. Kind of bridge us the walk there.

Yes. So we had provided a milestone in our 3-year track to get to 22% EBITDA by the fourth quarter of this year. And that's on the trajectory to get to 26 percentage adjusted EBITDA by 2024. And we provided that milestone for clarity as we separated the business to help people understand what we said. So last year, we were at 17%. We described that in the first part of this year, we'd be carrying extra expenses. We separate the company between semiconductor and Life Sciences. This last quarter, we reported 14%. But 200 basis points will come off as of February 1. You'll see this in the future reporting. We anticipate 200 basis points drop off, simply because some of the people helping to manage total corporate [indiscernible] the semiconductor business. So think of it as 16%. Going from 16% to 22%, we're aided by the fact that we have high growth. And so a significant portion of the 6 points remaining is growth of revenue over a flatter spending in the operating expense line. And about 100 basis points or so is in the gross margin line. So about 1 point from gross margin and about 5 points of leverage. By the time we get to the fourth quarter, we expect to be operating somewhere in the range of 22% adjusted EBITDA compared to the equivalent of about 16%.

All right. Great. Great. Thank you.

Luke, thanks again. Thank you, everybody. Appreciate it.

Thanks.