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

This is Paul Knight at KeyBanc. I'm the analyst in life science technology. With us today, we have Lindon Robertson, the Chief Financial Officer of Azenta; and Sara Silverman, who's Head of Investor Relations. I still want to call it Brooks, but I won't after this meeting, Lindon. What we'll do is, I know you're going to do a little bit of an overview here. And on our chat, you are able to ask questions. In addition, you can e-mail myself at [email protected]. So with that, Lindon, I'll let you begin.

Well, that's great. Thanks for having us again. And we love your conferences, and it's been a really good day for us. And as you said, we are Azenta these days, and we finalized the separation from our semiconductor legacy on February 1. So we're a complete stand-alone life sciences company. First, we pay a little attention here to the safe harbor statement. We won't make adjustments to our comments today. We're not obligated to, but we will be using some of those forward-looking statements as we always do, which are helpful to you, I think, for perspective. We're going to give you a really fast overview. We're using the deck that's on the portal for the conference, but we will skip through a couple of pages to leave room for questions. The overview, some drivers, but really, we want to get to the differentiation in the outlook for the model. To give you a perspective, this last year in 2021, which ended September 30, our revenue was already in excess of $0.5 billion. The 2-year growth rate to put at pre-COVID to what '21 was, it's 24% CAGR and already profitable. We're in a sharp point of the leverage curve still, as you will see, that we just broke through a breakeven point on an EPS basis in the last couple of years under this restated view of the business just being Life Sciences. We're global in footprint, and it's about 60-40 split, roughly, 60% Services, 40% Products. Most -- probably something that does immediately stand out to you, well, that's a large amount of services. I'd emphasize, the services are not the follow-on services of the products. We keep those inside the Products business. These services are value-added services and analysis and off-site storage as an outsourced offering to our customers. Of course, we got $2.5 billion of cash now on our balance sheet with the divestiture of the semiconductor company completed. And we are a stand-alone Life Science business, growth sizable, profitable and a very strong balance sheet. And that's the key profile that I think you're looking at today. We have a history that really spans the last decade as the Life Science business. As we ramped it a decade ago with our first step, and it was because we had competencies around automation and cryogenics out of the semiconductor business that this first started. And it was started with a couple of small acquisitions and a lot of organic investment to redesign ultra-cold automated stores. And so, yes, it's minus 20, minus 80 degrees Celsius freezers, but not manual in environment. Its automation is where we're focused. And during that 5-year period -- first 5-year period, to get us to $100 million was a significant organic investment to drive automation to the minus 190 degrees Celsius space for the cryogenic storage. Now at that $100 million mark is a key year in that we did something transformative in terms of stepping into services. There was 2 transformative points I should say. One, we stepped into the services of storing samples, and we got Paul Knight to pick up coverage on the company. And both of them were remarkable for us in that it's what really captured the market in noticing that we were a force in the life sciences space as a sample management company. The pickup of the storage services brought recurring revenue, but it also put us in touch with hundreds of customers in handling their assets, their resources out of research and for many years. And so recurring revenue, profitable and stable. Now about 3 years later in 2018, we picked up another rich asset and that being the analytics business of the genomics business. So GENEWIZ, we acquired at the end of -- beginning really of 2019 fiscal year, the end of the calendar year '18. And that momentum carried us from the $100 million mark up to the $500 million mark along with organic growth all along the way. And so now here we are at a $0.5 billion business, Azenta Life Sciences, stand-alone business with growth momentum in our sales. The growth, obviously, 24%. But with that, we've also enhanced our gross margin profile with the value of the product, cost reductions, some efficiencies we drove into the business. And then as I mentioned a moment ago, under the restated view of the smaller base of just the Life Sciences revenue, you would see that we've broken through that breakeven point a little over a year ago. In 2021, we were already up to $0.48 a share and a lot of momentum at our back. Now first, let's look at what the business does for the customer -- from the customer's perspective. Customers looking at a sample or patient or research project, and they're trying to get to the drug development or the physician's analysis that they need. So they're looking, first, let's make sure we have the right samples. We have a database of samples in-house as a customer, but we need more or perhaps we need to pull from our archive storage. We need to be able to find them. We need to make sure they're good quality. And by the way, I may not have all the right samples. We, as a company, can help them find those samples, very fast access to their own samples, but also sourcing samples that they may not have ownership of. Sample formatting helps them in the collection process to put it in a format that's usable, maintains integrity, it's trackable for workflow and it's engineered toward automation. And that gets you to the storage spot, whether it's on-site, at the customer site, we provide the infrastructure for that. But we also provide the outsourced storage and make it highly accessible. Interestingly, some customers tell us we can get samples out of your Indianapolis site faster than we can get it from our next building because you guys are on top of it in the moment you get the notice we need it and instead of us having to go out and find those samples. But so storage and access and the information with that is key. Now if you're handling tens of millions of samples in storage, you also find yourself in a place to help customers with the analysis of samples. And so genomics and analytics as well as the synthesis of additional samples is important in the gene structure. And certainly in the cell and gene therapy space, these services are vital. Everything is now not just coming back to a sample, but coming to this gene structure of those samples. And obviously, as I highlight, data and informatics is almost throughout every step of this. You'll see it in the automation, the software, the identification and the value of the asset and in the analysis of the assets. So data and informatics is a very rich element. This is the value chain that a customer strives for to establish and that we help to solve as a company. Now the drivers are pretty clear. We're on a fast pace growth business. It's 11% is our estimate of the total space, but this is addressable on an entire market, including the manual storage business of just the expansion of sample. And so when you think about our adoption rates that are inside of this, of automation in a heavily manual market and the outsourcing of storage in an on-site storage market, then you can understand why our business would be tailored to faster than market growth. And in the genomic space, we would see this as a very consistent high growth business even in the market, but a little bit faster in ours as it also is an outsource of what a customer could do if they choose to do it, but with our critical mass and ability to delight our customers with reliable reads the first time through and at a reliable cost point, then we can satisfy the demand much faster than what the average market is doing, and we outperform. I won't go through the total history that we've done in the past off of this chart on our Investor Day, but you know that chemical compounds are key in the database to store for FDA and for future research. But biologics, since the time of the human genome, has become prevalent in analysis and in storage for future research. And now cell and gene therapy has exploded what information is needed from the samples, but also can be built up as an asset around those samples. And this is propelling that market forward. I'll spend less on this, but I think a key point on the left side. We see that more than 50% of pharma R&D has the propensity to outsource services that they can outsource, and that's helping our expectations that we think that the outsourced samples in the next 5 years will more than double. As we think about where we differentiate ourselves, know that with that 2,900 people footprint we have around the world, we have a unique team. More than 400 of those resources are advanced degree individuals, either PhDs or advanced degrees in life sciences -- in the sciences, helping our customers get to the research enablement steps that they need. That's generally around the analytics. In addition, we have the speed and convenience and unrivaled access to samples that were enabling the customers to faster research at a very cost-effective basis and enriching their asset database of the samples that they hold. And of course, no company has put together quite the streamlined but comprehensive portfolio that is relevant to the handling of the sample environment. Everything samples is how some customers have described us, that Azenta is everything samples. Now as you think about this, this is that -- if you thought about that value chain that I highlighted earlier, now this is from a company perspective, our portfolio and balance of revenue. So these percentages represent what portion of our revenue in each element. You can see a very balanced portfolio. The roughly 60% of Services is made up of 3 different layers in our sequencing and synthesis business. Next-gen sequencing has been a fast outgrower for the business, but gene synthesis has kept pace with that. Even Sanger in the last 2 -- in recent years has been a higher growth business. We see this as being high single digits on a sustainable basis and sometimes growing double digits. It's making up 11% of our total company revenue. The sample repository solutions at the top of the curve is where we outsource tens of millions of samples on behalf of customers on our premises, on our capital, and we handle it with information at the fingertips of our customers so that they have access to the -- almost immediately. And then, of course, the Products business, aimed toward automation. The consumables aimed toward automation and workflow. And there's high efficiencies, not just in the consumables, but in the instruments, the service and support the benchtop working with those samples and, of course, the innovation around ultra-cold automation. And again, what would differentiate us here is that you don't see us carrying a freezer where you open the door and pull out a box, this is where automation is applying itself and helping customers to access and hold with high integrity and track those samples and gain immediate access to those samples with high workflow. Now the blue stars help point to what we estimate to be about 35% recurring revenue made up of significant elements of the sample repository, the consumable portion of the C&I and the warranty service -- or I should say postwarranty service in the store systems. I won't go across all of the attributes where our customers value us here. But what you can see is we have just a sampling of our customers, thousands of customers, but just the sampling, the biggest names, some of the most advanced science names in the industry, and we couldn't be more proud to be viewed as a close partner to each of these. 40% growth over the last 6 years, and it's a mix of organic and M&A that is transformative. I already highlighted the transformative nature of the storage and the GENEWIZ acquisitions, but I think what's key, too, is to know that we don't buy a business that does not look for continuous growth. And so while we're obviously anxious to put that balance sheet to work for the next level of M&A, I would highlight to you that our dailies are around building out our organic business and progressing forward on the high growth that's in front of us. That takes us to our outlook. It starts with understanding that we have continuous strategy going forward to extend the leadership in each core market that we play in. We're going to invest on both, as I highlighted. We're always looking for margin expansion to be a natural expectation, and we'll continue to press forward on that on the businesses we own, but also what we look at to acquire. And of course, we will apply ROIC as we strive to do a very balanced and disciplined capital deployment focus. In that capital deployment, we do invest continuously on the CapEx. We estimate this to be 6% to 8% on our history and we think is a good indicator of the future. This excludes a building project we have in China, which will displace some lease buildings, but 6% to 8% is a good measure of what we've been doing recently on CapEx. Think of this as freezers, the sequencers and some lab space, and those would predominantly drive this. R&D, relatively low for a life science company. Keep in mind, we're not anchoring our research toward the next cancer solution or the next liver disease solution. You're not betting on a company with an IP zeroed in at that level. But we are advancing automation. We are advancing the protocols, the reagents for sequencing in enhancing and improving the capabilities that our customers can take advantage of. And of course, again, the investments we look forward to deploying additional on the M&A front. On the company -- in the company's makeup, we've always kept a 3-year model. When I say that always the last decade, we've kept a 3-year model out in front of our investors. So you can see where we're headed. The model has a much longer explanation that you can reference in our materials from the Investor Day and our meetings here in the conference. But know that it points to our high teens growth, 18% at the midpoint, supported with mid-teens growth or low to mid-teens in the products with bigger headwind from COVID from last year, COVID demands, we think continue this year to be supporting in the testing market to some degree, but we said it would be slower growth. By 2024, we don't think there's any COVID revenue, and this is assumed revenue of $280 million to $310 million. On the Services side, much less impact from the COVID, puts and takes over the last couple of years, but a little bit less. And this is growing higher rate. This is the space where we do sample repository solutions, that is the storage on behalf of customers, and the analytics of samples for gene sequencing and of course, synthesis production. Sharp part of the EBITDA curve supported with flat to up 2 points of gross margin over this 3-year period. Emphasis here is this gets us to a point in 2024 with revenues that have grown 18%. You'll see in a moment, exceed $800 million, 26% EBITDA margin. And this is based on what we own today, not something that we will acquire, and what we would acquire would add additional value. So in the P&L structure, I provide this to you, you could see continuous progression of the P&L structure over the last couple of years. And in 2024, as I said, higher than $800 million of revenue. The EPS more than triples in this projection, and EBITDA nearly triples in that same space with a quite strong ability to generate additional cash for investment in the business. We're not here to comment or update on the guidance. But just with the guidance we put out at the end of our -- at the beginning of the quarter, and you could see stable to upward trend on revenue on a sequential basis, consistent across the time period at the midpoint and stable EPS and EBITDA range. We gave a lot of color on this. I'll leave that for you to look back at the earnings. But I want to show you the continuous expansion of that business. Touching on the M&A, you can see that there's a significant focus on ROIC. The experience we've had over the last decade was $1 billion invested. We're looking for ROIC to exceed our WACC in 5 years. And I highlighted perhaps 7 to give us a little wiggle room depending on the multiples we end up paying, but with a strong focus on continuous growth and profit leverage with high confidence and that trajectory to get there and to exceed that then in the years to come. And of course, we only look at businesses that are close strategic fits to us. You're going to find us being very close to what we already do, but we always expand ourselves on the adjacencies. So this is summary. And there's a couple of comments I'll add. We're a $0.5 billion company. High teens growth, as I said, looking to triple our EPS, increased margin leverage is going to bring a sharp increase in EBITDA. Strong balance sheet is obviously there. Global platform, couldn't be more proud of the customers that we satisfy every day and delight them. There's a couple of other areas that I'll just comment on. One, Paul, we have an industry code that is stuck in the semiconductor space right now. And just to round out my comments on this, we had -- it's public knowledge that the MSCI organization put out on their website that they will update at the end of March, March 31, and it will be officially moved to a life science industry code. Most of our active investors all know that, but we expect some volatility as we move through this time period and passive funds start to move around a bit as technology holders may drop us and as life science holders may pick us up. And with that, I think, Paul, I'll turn it back over to you to see where you'd like to take the conversation.

Yes, Lindon, I'll just ask a few questions that come up or I need help on. Starting with the 39% of the business, that's consumables and ultra-cold stores. There's a, what I would call, recurring revenue in there. Is there not such as tubing? The consumables needed to run even those businesses and the services attached. So if I look at the 39%, is half of that Service and Consumables? Or what would your guess be on that?

Yes, that's exactly right. The recurring revenue does occur in the product side really in 2 spots, but the most notable is exactly what you're pointing to. And that would be in the consumables portion of what we referred to in that revenue portfolio, and I'll just go back to it so people have it in their picture, but it -- in their mind. It is the -- a little more than half -- well, the majority of the revenue here is consumables, but more than half of it. And that would be take on a recurring nature. And what we described this is looks like a subscription business. Customer starts ordering a platform of sample tubes and they'll continue to order that until they finish that study or that project. They just don't have a habit of changing. And we find that to be a nice part of that business, a nice attribute of that business.

And then the other question I have, Lindon, is you have the largest storage network. You have the most advanced technology for that biologic storage. You have a track record of 5 to 7 large customers outsourced to you. So with that kind of profile, why would they go elsewhere? Is it somewhere more local? Why wouldn't -- why don't you win sample repository work sometimes?

Yes. So it's a really interesting question. And if it's okay with you, I'll take this chart down, I'll stop sharing and let me just pull that down. So we've got, as I highlighted, some of the most notable largest customers around the world. In fact, all of the top 20 pharma, as you would measure them by the R&D spend, have both infrastructure as well as some storage outsourced services with us. And we highlighted, as you just mentioned, that we've taken on really premier enterprise relationships with some of those to be their core partner globally. The biggest competitor with an outsourced equation like that is actually the in-house storage. And so when we win an enterprise, what you generally see is it's a project to bring libraries of samples from the customer in. Now there are other chapters of shifts that we've seen. I'll highlight to you that 3, maybe 4 years ago, we started pulling in samples from a CRO environment, which I would refer to it as an accommodative storage. In general, third-party CROs can provide the storage environment for large pharma, and large pharma parks a lot of samples there. But it's generally at a box-level storage. And if they want to request samples to come back to them, they'll receive a box. And sometimes, that box will include the right samples or not. So we have seen a shift of those at different periods decided by individual pharma companies. They decide to enrich their asset database by bringing it to us rather than to leave it in what I refer to as accommodative storage. But there's not a -- there certainly are regional players. Some people -- Cleveland Clinic is an institution that really emphasized the value of keeping it close to them at the campus, and we facilitate that on occasion. But the biggest competitor is really in-house storage.

Got it. And I think 1 issue that investors bring up is GENEWIZ. And obviously, the mix is that they're much more than Sanger and next-gen sequencing. But storage is kind of needed for sequencing. Can you determine how much of GENEWIZ -- once you -- if you're doing storage, are 25% of those customers using GENEWIZ as well? Do you have an idea about that?

Yes. I'll highlight -- getting a little feedback there. But what I'll highlight, first, in this -- again, I'll be a little bit anecdotal, but when I reflect back on those top 20 pharma, most all of those top 20 pharma are using about 8 or 9 of our offerings across the business. And so there is an overlap of offerings. Now some of them will be varying in size. But when I get down to the center point of what you're asking, if you're using our storage, are you and why wouldn't you be using our sequencing services, I think it's the heart of your question. And what we detect is that there is more and more recognition of this occurring. And this is part of the reason why we acquired sequencing business is we're handling tens of millions. We know that those samples were pulled out for additional analysis for testing and we can add that value. So that's starting to occur. I wouldn't put a percentage on it. But there's probably more overlap to somebody who's sending us a sample into sequencing for analysis and samples into storage at the same time from the same source, then it is leading yet from storage right into sequencing. But the ecosystem there is now being commonly referenced.

Got it. Okay. And we have just a few minutes to go. I think that -- would you mention that the industry category code, is that on or around the 31st, Lindon?

We're told at the close of the 31st business, it will flip. And it's a weird one to me why they're reluctant, but that's the bureaucracy of getting a change.

Okay. Got it. And then capacity expansions, any change there? I know that you're expanding, obviously, in China, Indiana. Any news there?

I would emphasize, we don't have constraints in place. But our capacity expansion, we've accelerated capabilities and capacities at different stages. When we acquired GENEWIZ, we accelerated investment in Germany, for example, and enhanced what we could offer in Europe. Today's activities are we've added another storage location in Indianapolis that will be tuned toward manufactured product, vaccines and other manufactured product, and will expand our storage space for archiving storage. But it emphasized it's fast to put up a warehouse and it's a variable CapEx putting in more freezers. So we're not constrained on capacity. We've never been constrained in the storage capacity. In sequencing, we're always watching this to make sure we keep each lab ahead of the demand curve. And where our significant investment is -- right now is displacing those lease buildings in China. And the space building -- the building we're putting up in the first phase is about double the space of the 3 lease buildings. It will provide expansion of space and, frankly, some elbow room of squeeze, but it will provide growth for a couple of years to come still.

And then the last question would be regarding -- I think the common perception is that you're a new acquirer in the life science market but -- when, in fact, you've been acquiring for 10 years. What do you think your strength is when you go into analysis of a potential acquisition?

So frankly, we're -- I think people know us. I think our reputation is there that we won't waste people's time. When we see the value, we go for it, and we apply fair diligence, and we pay fair value. They also know that if we don't see the ROIC, that we won't waste their time and we'll let them know that we're stepping away. We've done both. We also see that our adjacencies continue to expand and our ability to keep cofounders and leaders and engage the team as we integrate them has been a positive experience on every acquisition we've had. And I think that reputation has helped us also with those that we're talking with.

Great. With that said, Sara and Lindon, thank you very much for your time today.

Paul, it's a tremendous conference. Thanks. You're always a big help to us. We appreciate it. Thank you very much.

Bye-bye.