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

Good morning. Apologies for the delay, just some technical issues. I'm David Saxon, one of the analysts on the Med Tech research team here at Needham. Thanks for everyone for joining us at the 21st Annual Needham Healthcare Conference. With me today is Azenta's President and CEO, Steve Schwartz; and CFO, Lindon Robertson. In terms of format this morning, the Azenta team will have a short presentation, and then we'll close out with a fireside chat. If anyone in the audience has any questions, you can submit them, there should be a box in the bottom of the screen if you're logged into the Needham conference portal or you can e-mail me at [email protected]. So thanks to Stephen, Lindon, for joining, and I'll turn it over to you.

Great. David, thank you. And we're really delighted to be here at the Annual Needham Virtual Healthcare Conference. We can't wait until it's not virtual, but we're really pleased to be here. Thank you. So Lindon and I will share a presentation today. We're really pleased to have a chance to talk to you about Azenta Life Sciences. As always, we'll be making some forward-looking statements, and we call your attention to our safe harbor statement on our website, www.azenta.com. But today, we'll give an overview of the company. status where we are here now right having finished the half of our fiscal '22. We're really enthusiastic about the prospects for the company. We'll talk to you about the market drivers that continue to fuel a tremendous opportunity for the company, explain a little bit about our differentiated solutions and how they really match an ever-evolving market. And then Lindon will talk very specifically about how we pull this together and the compelling opportunities that we have in the future in light of both the position of the company, position of the balance sheet and what the market opportunity presents to us. We give a snapshot of a company. This is for the fiscal year ended September 30 in 2021, our fiscal '21. We're $0.5 billion revenue company with a tremendous growth momentum that we continue to sustain here in fiscal '22 and we think the prospects are [Audio Gap] for the future. We continue to generate more profitability as a company. We have a global footprint and very different from not just the portfolio that we offer. We have an incredibly strong balance sheet with more than $2.5 billion of cash. We sold a portion of the business, the semiconductor automation business, the deal closed on 1st of February. It was $3 billion sale, the semiconductor automation solutions, and it puts us in a tremendous position for continued growth in the life sciences space. We have a good split between services and products. We'll detail that for you today, in particular, how it provides a tremendous opportunity for us around the sample value chain of capability. Now we are a stand-alone life sciences company, but it's important to give you a little bit of context how we got here. We didn't simply launch as a $0.5 billion company in Life Sciences. We started as Brooks Automation, a company with fundamental capabilities in controlled automation and cryogenic capability. And we looked at opportunities to deploy that same technology capability in other spaces. And in Life Sciences, we found an opportunity in the management -- the cold management of biological samples in automated systems. We did some acquisitions starting about 10 years ago. We built our own tools, and we were able to manage samples on customer sites in our large automated stores, a store upwards of 1 or 2 million or 3 million samples on site. And then we discovered working with those customers that they not only had use for samples -- sample automation on site, but also a need to store archived sample to offsite, sort of long-term maintenance or for occasional retrieval of samples that were in archive. So we built the capability around the sample value chain using our engineering capabilities to manage samples on-site in automated stores and off-site in this value chain for customers to allow them to manage the entire life cycle of their sample collections. So about 6 years ago, we had built a $100 million business. But as we got to know the customers better, as we got to know the use for samples, we also discovered there was a tremendous opportunity for us, not just to preserve the fidelity of the samples in quantities of millions or tens of millions, but also to provide genomic analysis capability to interrogate these samples and provide information on these samples back to the customer. So we acquired capabilities related to genomics, to informatics and the ability to ultimately source some of these rare samples for customers and provide a full value chain of opportunity for customers -- and hence, in 2021, we have a capability now as a $500 million company, providing a tremendous value to customers who do the drug discovery, but managing this critical, but noncore capability for them, how to manage these precious samples that are really are the foundation for all of the discovery that they perform. So we launched at the end of 2021 as Azenta, stand-alone life sciences company, $0.5 billion in revenue, but a trajectory that gives us tremendous enthusiasm and promise for our future. We show here a stand-alone Life Sciences performance basis on the most recent history, as I mentioned, very strong growth that we anticipate will persist because of the investments that we're making because of the market opportunities that exist. We've performed -- we've made tremendous improvements in gross margin and the profitability of the business, and we've demonstrated that it has tremendous leverage. So as we continue to add revenue at a high growth rate, we will continue to drop through a significant amount of profitability and the business model that we've built, we believe, will allow us to continue to fulfill opportunities that Lindon will talk about for the coming years with the Azenta portfolio. I discussed this verbally. Let me show in a schematic here, this sample management value chain that we've created. We can source samples for customers of a rare disease type of a particular phenotype that they need. We can put it into a format that can be stored cryogenically that can be aliquoted, that can be found in any configuration and tracked for many years. We had the ability to store these samples under cryogenic temperatures to be able to locate them and transport them to a customer at any time. And similarly, we have now a world-class capability in genomics to interrogate these samples and with a very strong bioinformatics platform to be able to provide information on these precious samples to customers as an outsourced service. So we may do all of the things related to sourcing the sample, managing the sample holding it, tracking it, and providing data to customers, we provide all of these logistics and scientific capability to them without them even having to touch the sample at times. So we're faced with a tremendous set of market drivers. We're particularly pleased with the market opportunity. We participated in 2021 and about a $6 billion market opportunity that's growing now in low double digits. So it's a tremendous growth potential. And the reason for us to be able to outgrow the market is that we participate permittably (sic) [ permissibly ] in the highest growth sectors in each of these spaces. So in the genomics space, we don't just have basic genomics. We have next-generation sequencing. We've launched some proteomics capability. We participate particularly around capabilities in the cell and gene therapy area, which is the highest growing demand areas for genomics. On the SRS or Sample Repository Solutions business, this is the outsourced management of samples. And by and large, there's a persistence here to manage billions of samples now that customers have. They're starting to put hundreds of millions of samples into outsourced repository services in particularly high growth area. We're market leaders, and we continue to gain outsized share there. Again, high-growth space where we participate as a very strong player. Similarly, there's been a lot of discussion around the need for ultra-cold storage of biological samples, including vaccines. The highest growth segment of this growth area relates to the automated stores. And far and away, we're the market leader in automated ultracold stores down at minus 80 degrees C and now in the BioStore III Cryo system for cell and gene therapy at cryogenic temperatures below minus 150 degrees C. And in the consumables and instruments business, COVID's triggered a wave of automation of workflows and capabilities that we believe accelerated the market by several years. We think this automated capability for the management of these samples and workflows will persist on the downside of COVID, and we think that this opportunity in consumables and instruments that's come about because of the full automation of workflows provides us the next high growth opportunity, and we've demonstrated tremendous growth in each of these segments because of the way we've addressed it with our particular portfolio. The driver of opportunity for us is samples, the number of samples that are collected, the complexity with which they're managed, the myriad applications for interrogation now continue to grow. So when we were in a chemical compound environment below -- before the year 2000 after the sequencing of the genome biological samples entered the fore. So in addition to chemical compounds, we're storing biological samples. As we move to the cell and gene therapy space, the samples are managed, not just at minus 80 degrees C, but at a very complex cryogenic temperature. This involves the shipping, the tracking, the transport in a much more complicated fashion. The amount of samples has increased exponentially. The complexity with which the samples are managed has increased exponentially. The number of different measurements that can occur has also expanded. So we see a tremendous market opportunity in the growth areas that we have compounded by the type of science that's being done. And we also believe that these are in the earliest days of the kinds of capabilities that we bring that customers can no longer conveniently or reliably do for themselves, puts us in a tremendous position and we're at a point now where there are billions of samples that need to be cared for and we think we're exactly in the right space to be able to address that. In terms of capitalizing on the trends in the market, there's a huge growth in the outsourcing of R&D capabilities, and we are high-quality world-class outsource provider of tremendous needs that the customers have. We anticipate over the next 5 years, another doubling of the number of samples that are outsourced for management, puts us in a perfect spot for our SRS business. The cell and gene therapy market, we believe, is still in the earliest days and the scientific capability that we provide -- the engineering capability we provide to handle these samples and to measure these samples is already on the road map at a place where customers need us to be. We think we're far ahead of where the market is, and we are ready to capture market as it continues to grow. And as a global company, anywhere there's a -- any critical mass of life sciences activity, you'll find Azenta serving those customers as well. In terms of our solutions, we believe they continue to be highly differentiated. We have a unique team of scientists and engineers, providing solutions that the industry needs, not just today, but the ones that will be necessary here in the future years. We have a scientific capability of more than 400 PhD-level scientists engaged with customers around the globe on a daily basis. We focus on speed and convenience of answers for customers, solutions for customers, installations for customers to continue to keep up with their fast-growing business and the demands that they have on a daily base (sic) [basis] to get data and make an iteration, and we pride ourselves in our ability to serve customers with unprecedented speed. We have access to samples. We store more than 60 million samples. There are more than 0.5 billion samples in our automated stores around the world. So we have a unique and unrivaled access to samples that continues to grow on a daily basis. And in terms of breadth of the products and capabilities, we serve across this products and services area, serving this value chain across the physical containers that hold the sample all the way to the data that comes from the sample or in those consumable tubes and vials. We have a strong next-generation sequencing platform and Sanger Sequencing. It's a good, balanced portfolio of measurement capabilities that we have for the customers, a very fast-growing gene synthesis business that balances particularly well, let's say, of critical mass. And what we've demonstrated is the capability to serve larger customers and larger contracts as we continue to build mass in the company. On the Sample and Repository Solutions business, where we store samples in the consumables that have been formatted with our instruments and also the storage and management of these samples in ultra-cold automated stores, we have in the products and in the repository services business, a very strong recurring revenue component for the samples that are with us, often are with us for years, if not decades, and the continued replenishment of the consumables that are used to format these samples, we have a very strong position from the standpoint of serving customers across the value chain with a solid recurring revenue foundation that's provided a tremendous opportunity for us to continue to grow profitability in the company. We're particularly pleased by the breadth of the offering that we have and how we engage scientists from the benchtop in discovery all the way through development, and ultimately we serve all of the large pharma and biopharma companies with the products and services that we have. So across this span of research and development and discovery being because of our very strong execution capability, we're able to serve customers and develop a company that's not just an R&D company, but a $0.5 billion company on the way toward an $800 million company that Lindon will talk about here just in the next few years. So we've demonstrated at the research level and the execution level, a strong capability to provide customers the continuity across their discovery value chain. And finally, the track record of growth that we have is supplemented by not just a very strong investment in organic [ growth ], but also by acquisition. So we have a 40% CAGR over the past 6 years. The contribution is about half from M&A and about half of organic development. And this performance here from less than $100 million to a $500 million revenue company came with $1 billion of investment. So we stand here in fiscal '22, having spent $1 billion to grow a world-class very unique Life Sciences company. We stand here with more than $2.5 billion of cash, a very strong M&A pipeline of potential of capabilities to continue to build this opportunity. And we could only be bullish about the future that's in front of us with this as a core capability, a very strong foundation and critical mass on which we'll build a lasting company here in the future. I'll turn it over to Lindon now to talk about how we pulled this together and what the outlook looks like for Azenta here in the coming years.

Thanks, Steve. We're going to go right into the growth model that we've been experiencing and continue. And our experience has been based on a consistent strategy over the past decade, and it continues to be our focus. One, in the markets that we participate in, we aim to lead in those spaces. We believe that, that is the position that commands the most value for us as a market player and obviously, on behalf of our investors. So we make our investments continuously for organic growth and then incremental M&A. And we clearly, every time we make an acquisition, we expect that we're going to continue to see growth and invest behind that to build out the company. Margin expansion is intuitive in our model expectations and substantively because of the final bullet, we do exercise a very disciplined manner in which we make our investments and we expect an ROIC enhancement factor of our organic business and from our investments that we make as we feed them. And so if you pay a certain multiple for an acquisition, you need to have that margin expansion and growth capability to continuously expand for the ROIC to achieve something above our weighted average cost of capital, which is the hurdle we set for ourselves. But continuous margin expansion is inherent, not just in the incremental investments, but also in our base business. And as Steve highlighted, we saw 800 basis points recently in the last couple of years on the gross margin line. Let's continue. On our deployment of capital, specifically, we do highlight for investors that historically, we've seen about 6% to 8% of our revenue spent on operational CapEx. We do have a current building project in China to replace some lease space. And once that's behind us, we expect our CapEx to be in the 6% to 8% on a continuous basis. In the research and development area, historically, again, a good indicator of the future, I think, is a 4% to 6% experience that we have had in the past. And then finally, as highlighted, we've closed the divestiture on February 1, and we indeed have the $2.5 billion round numbers in cash on our balance sheet. And we aim to take that and all cash generated now toward investments for the future in terms of both feeding our business and for strategic M&A. So with that, it's good to look at the model that we laid out, and we did this back in November time frame as we had our Investor Day. And we have a discipline of doing this, keeping a model that's 3-year outlooking -- 3-year horizon outlook for our investors to see where we're headed and ensure that all of our decision-making also is aligned towards these directions. Now importantly, this portion of the model is just based on what we own today. And so we don't update our model with potential acquisitions until we actually take those acquisitions. And if they're material, then we will adjust the model for investor clarity. Now in this case, we projected a 16% to 20% growth rate over the next 3 years. You can see it over to the right, the midpoint of 18% with significant EBITDA leverage. And this is grounded in a products business that's low to mid-teens over the 3-year period. But notably, with the largest portion of our COVID revenues in 2021 being in the products business, and so we highlighted that those growth rates were tamped down a little bit for the COVID headwinds because we do not anticipate inside this model having any COVID-related revenue by 2024. And we also highlighted that in 2022, those growth rates would start a little bit lower and work its way up through those teens. On the services model, we're looking at high teens to 22%. So approximately 20% growth rate over the 3-year period on the services business. Now both of these businesses, we've modeled in about flat to up 2 points of gross margin. And in the EBITDA margin lines, you would see leverage occurring because of the operating expense growing less than the revenue. And so the model has given us a lot -- many proof points in the past and continues to lay out arithmetically for investors. There's more on this in our Investor Day materials, if you would like to look at that. And I think it's very logical, very compelling. And I don't think we put anything down here that would -- is a change of direction or vector. And I think you're going to find this to be a very reasonable projection. So what does it produce? Let's go to the next page. You could see in the P&L structure at the top line, obviously, handsome expansion, as we highlighted, 24% growth from '19 to '21. But as you hit 18% stride going to '24, you're in a business above $800 million. And at the bottom line, you could see a tripling of earnings per share versus the 2021 baseline. And the EBITDA nearly tripling and that's a good surrogate again for the production of cash and ability to continuously invest in our business in addition to the strong balance sheet that we have. So with that, we'll move forward and I highlight this page. I leave it in there only because this is the guidance we provided back on February 8. We've not made any updates, and I'm not here to provide any commentary on the March quarter, but it gives you visibility to the consistency of expansion over the recent quarters. And round numbers at our midpoint, another quarter of expansion is what we've laid out for the March quarter, and we'll be reporting on that traditionally at the end of this month. So ROIC is a significant filter for us, a principle of our financial disciplines. We, in fact, 1/3 of the senior team, LTIP is based on ROIC enhancement. And M&A is a significant element of how we're building out the business. Organic growth is critical, and that's a signature of success. But the M&A continues to increment on it. But obviously, with $2.5 billion, we feel just tremendous responsibility with this balance sheet to continue to build on the track record that we've already established. We look first for a strategic fit to add value to the company. You won't see us going far off the left field. You see us incrementally just as Steve outlined in the progression of our business in history that we continuously expanded on the adjacencies and off of competencies and strengths that we already have. But the financial requirements of ROIC getting to weighted average cost of capital in 5 years, really puts on -- wins for managing the price that we might pay for something today relative to the growth and the margin expansion we get over the coming 5 years. And I say 5 to 7. Our focus is 5, but we did leave latitude giving multiples that we were seeing in the fall that we may see businesses that require 6 or 7. But with tremendous confidence, we might extend ourselves into that time frame. But 5 years has been traditionally our focus. In fact, all of our deals that we've done to date, we've seen an objective to get weighted ROIC above WACC in 5 years. We'll keep going from here and just to summarize, this is our final page. As Steve really nicely outlined, a $0.5 billion company last year, and we're well beyond that now in our run rate. High growth with high teens projected over the next 3 years, profitable. Obviously, with profits nearly tripling at the EPS line and cash capability continuing to increase, the balance sheet is really unique in terms of fueling a business that has a global platform already that can be leveraged with incremental acquisitions being brought in and with plenty of fuel there to add transformative capabilities. So we're very excited about this. And I'll cap it off to say that as of the first of this month, we're actually landed in the industry of Life Sciences in the GICS code or the metric that is no longer associated with the semiconductor industry code, and that was effective on the first of this month finally, and we did manage that to get it done as fast as we could. So with that, David, we're finished and happy to take any comments or questions.

Great. Well, thanks to both of you for going through that. Super helpful. Maybe we'll go through each of the 3 categories, starting with products. So just excluding COVID, how would you characterize the level of demand you're seeing in G&I? And what's really driving that?

So what we've outlined is that we've been seeing a level-off over the last 3 quarters of about $10 million a quarter of COVID. And that we had an expectation at the time of our earnings that we didn't see a real reason for testing to fall off. We said $8 million to $11 million and primarily because that was the range that we had seen. The $8 million indicates that we see it dampening a little bit as we go through this next quarter. But with that, if you were to remove that, the C&I would be a double-digit grower year-over-year. And I'll highlight, since we -- you touched the topic, I'd highlight to our investors that with about $10 million of order or $40 million a year right now, but $10 million a quarter in COVID, there's really 2 degrees of a headwind on our growth rate. One, is if it's just level, the rest of our business is percolating at mid-teens to high teens growth, but having $10 million out of a quarterly revenue of $140 million-ish at flat, it weighs you down a bit. So that's one degree of a headwind. Obviously, if COVID is removed, it's another degree of headwind. And we do anticipate that between now and 2024, but yes we would expect C&I to be a double-digit grower, excluding the COVID headwinds.

Okay. Great. And then maybe just on automated stores. You called that out early in the presentation. So maybe just talk about the value prop there and kind of how you're going out to customers and kind of the conversations you have around your automated stores.

Yes, sure. So David, on the automated stores, the large automated stores, that business is still a little bit more episodic than we'd like, but we -- the pipeline is really solid. So we'll build store capacity for some customers that's in the millions of samples. We'll recognize revenue over the completion of the project. And that's a steady ongoing business, but it's not as dependable from the quarter-on-quarter growth. Having said that, on the BioStore III, the cryo systems, that business continues to expand. So what we find is in a typical adoption of an innovation, customers will take 1 or 2 of these systems and subsequently add 5 more than they'll add another site. And so we see that when customers have adopted the BioStore III Cryo for cell and gene therapy, types of applications that within 18 to 24 months, we'll start to see more volume coming from them. So that's a ramp that's been very pleasing for us, very consistent with what you see going on in cell and gene therapy. When we talk about that having been growing at more than 50%, we see that continuing for a while from a low base, but still, it's a really attractive business, and we think it's a sea change in the means by which people will manage samples of cryogenic temperatures as necessary, not just in the storage process, but even during the manufacturing of the vaccine. So coming as we'd anticipated a little bit later than we thought, but the same -- but it's the drivers that we'd anticipated that are now kicking and we're really pleased with the performance of that business with a really unique solution.

Great. And then, yes, I mean, cell and gene therapy has been mentioned multiple times this morning. So maybe can you just remind us about the run rate there? I think a year or so ago, it was around 24. So maybe update us with that. And then if I heard you correctly, that's grown 50% is -- did I hear that right?

Yes. On the cryogenic stores business, we've been reporting that that's been regularly recently growing at 50% plus on the annualized basis quarter on a 1-year compare. Lindon, maybe you could address the...

Yes, on the cell and gene therapy revenue, we estimate it to be still less than 10% of our revenue. So on a $0.5 billion business, and the growth rate you just highlighted, it's well above a year ago. We haven't put out a new number, David, but -- and I've got to acknowledge it's an estimated base of the dissection of our customers. But we still estimate it's less than 10%, but a larger -- a faster-than-average growth driver. And substantially, what's really resonating, not just on the analytics business, but in the infrastructure space is this B III Cryo and the requirements of deep reliability and integrity of tracking of those samples that they continuously stay in the minus 190. This is why this cryo temperature automation, we think is helping to set the standards and the recent FDA requirements that it is not a med tool, but it's critical in the process is helping to -- it's reflecting, I should say, not helping, but reflecting what our customers are seeing and the critical nature of taking care of those samples at the minus 190.

Got it. And then maybe just a question on GENEWIZ. From a competitive perspective, are there any other companies out there with the breadth of services that Azenta offers and maybe who are your larger competitors in Sanger, NGS and [ Synthesis]?

Yes. So there are a lot of competitors. There's a lot of people doing the kinds of things that we do in the genomics business. When we talk about the business model that we created though, we have 14 laboratories that are close to customer hubs and sites, and that allows us particularly high touch from a scientific standpoint, a fast turn for the reply in the response. So from a differentiated standpoint, it's the connection we have with the customer when they set up their experiment, when they set up their trial, when they set up the workflow that they're going to go through. That's a highly consultative capability. By the time you load the sequencer, then it's the kind of thing that all of us can do, but it's the things that we do for the customer upfront that's really important. On the Sanger side, it's that high touch, high turn overnight service that we provide to customers, we think is provided by a number of different competitors, but we all have a little bit different footprint. And the fact -- David, the fact that we continue to grow that business at a rate that's much higher than we believe the market grows. So we think it's a low single-digit grower from a market standpoint, but we always grow Sanger business higher. It's, for us, share gains. It's more taking capacity away from customers. So we think there's a lot of runway there still for a technology that's going to persist. So a number of small competitors in a bunch of places. I think the quality of the capability, the quality results that we give to the customer continues to have customers join us. We had hundreds of customers every quarter still, in and around the genomics business, and the company has been around for more than 20 years.

Great. And then in just a few minutes we have left, I just want to hit on M&A. The question I get a lot from investors, you mentioned you closed the deal early in February. Now you have $2.5 billion on the balance sheet. You mentioned you have a strong M&A pipeline. So maybe just any update on kind of how you're thinking about adding to the platform? And then I mean you have this pretty unique opportunity to do something transformative. So is that something that you're thinking of? Or are you looking at it more about adding kind of smaller tuck-ins here and there?

Well, you can imagine the tuck-ins are natural, and those are the things that we've always been looking at. So that pipeline has always been live. We do have the capacity to do something more transformative. But we also have a pretty unique portfolio. So it's tough to find something that will add exactly where we are, but we're open to those things. And we've built the company that way with each and every move that we've made. First, into automated stores, then into outsourced biorepository services and its genomics. Each one of those has been transformative in terms of what the business model is, and that's more how we think about it. So a lot of good opportunities. There aren't as many companies available of size and scale that are available, but we think it's compelling why we joined with other companies. And I think that pipeline is healthy and active. Tuck-ins and add-ons you can imagine naturally. And when Lindon talks about an ROIC discipline on things that are a little bit more transformative, we'll be really disciplined about that as we go forward.

Well, we'll be patiently waiting. So...

Yes, we're patiently going after it. Just to be clear. So...

Yes, right. Lindon, I know you said you weren't going to talk anything about the quarter, but maybe I'll try to kind of ask about the near term. I mean, this morning, we saw inflation accelerated to around 8.5%. And so what are you seeing in terms of inflation and any impact on margins?

There's no question that inflation is there, but I will highlight to you that from the fall time frame, we've been talking about this in our model, we contemplated. Because we have such a heavy services mix -- and for investors, by the way, I just want to highlight, our services is not post product. It is analytics service, it's outsourcing service, so it's a bit different. But it's got significant labor content and it's very competitive. So the labor inflation has been with us in 2021 and continues in 2022. We had it contemplated in our model and where we've been getting 8 points of gross margin over the last 2 years, we only put into our model flat to up 2 points, expecting some leverage, but mitigated by some of the inflation. So David, it's no question that it's an impact. As we go through this year, certainly, some of the materials will bubble up on the product side. But labor is the bigger equation and that is contemplated in our model, and we'll update as we move forward on the balance.

Okay. Great. Well, we're about time. So Steve and Lindon, thanks so much for joining us this morning. And I know you have a busy schedule this afternoon. So hope they're productive. And thanks so much.

It's a great conference. Thanks, Steve.

Great. Thanks, David. Thanks very much.