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

So my name is Liza Garcia. I'm an analyst at the UBS Life Science Tools Diagnostics Group. And it is my pleasure to welcome Mr. Lindon Robertson, the CFO of Azenta, who will be giving a presentation. Just very quickly before that, I do have to provide disclosures as an analyst at UBS with regards to my role and that of UBS. You can find the disclosures at ubs.com/disclosures. And with that, please begin the presentation.

That's great, Liza. Thank you very much, and thank you for everybody tuning in with us and appreciate the interest and attention. The UBS conference has been really good to us over the years. We appreciate the invitation again. One more disclosure note. Of course, we have the safe harbor statement that we'll abide by, and we'll be making forward-looking statements. And we don't have the obligation to update those until into the future. So please take note that those are forward-looking statements as we talk. The agenda today is I'm going to attempt to give you a good overview of our business, including the market drivers, some of the differentiation of our solutions and how broad they are across the market and then also a glimpse of our outlook for the strategic years ahead. So as an overview, the business has reached over $0.5 billion in revenue this last year in 2021. And as a note to that, our fiscal year-end is September 30. So we're into our third fiscal quarter now of 2022 and accelerated past this level of revenue. The growth rate from the '19 to '21, so going from pre-COVID to the COVID year of '21, the total growth rate was 24%. And so you take out that blimp -- the dip of 2020 and the spike of 2021 and smooth that you see greater than 20% growth capability in this business. And I think you'll see this as a consistent theme as you look through the model. The EBITDA margins stand out is that we're a new life science company as we separated ourselves from a semiconductor business this past year. And in doing so, we're one of those unique animals that's a brand-new life science company stand-alone but already profitable and $0.5 billion in size, with global reach with almost 3,000 employees around the world. And another unique asset is that we have $2.5 billion available to us for investment. In fact, we closed the sale of our semiconductor business on February 1 of this -- just this past February 1. And you'd see in our recent quarterly announcement, in our filing, we have slightly over $3 billion of cash on the balance sheet. After the taxman collects in June, you'll see our available cash down around $2.5 billion for reinvestment into the business. Exciting because the history of the company has demonstrated a strong ability to acquire and build assets for continuous growth. And in fact, if you go back to the 2011 time period, we were about a $500 million -- $400 million to $500 million market cap company in the semiconductor automation space. And the company started looking at the core competencies of cryogenics and automation and looking for diversification. And the life sciences industry floated to the top of the -- on stack priorities. And we went into automated ultracold storage and acquired 3 out of original field of 8 automated storage companies that had already produced freezers that accumulated more than 100 customers in total. And so that's how we launched into the business, around ultracold storage, storage of biological as well as chemical compound samples in the pharmaceutical and research space. Now in that first 5 years, it took us about that long to get to the first $100 million. And in that time frame, we then stepped into the services business. So in 2016 fiscal year, we acquired a services business, which was a natural evolution of the business. Going from ultracold storage infrastructure that we sold to customers, we became the service provider with the acquisition of BioStorage Technologies, and we stored on behalf of customers at our premises. And so that introduced us to hundreds of customers. So at the time, it's approximately 800 customers that we had acquired in that business. So built out our customer relationship portfolio quite nicely and also gave us a complementing solution of total cold chain capabilities. If you get to the $500 million, you don't do that typically without organic growth combined with acquisitions. And in fact, that's what's happened. And I'll show you that more clearly later in the presentation. In 2019, you see a jump in the revenue, and this was the addition of the genomics business. So after acquiring the hundreds of customer relationships and the services business in the storage, we then expanded into genomic analysis with the acquisition of GENEWIZ. And so a broad sample-based services business model has taken us from that nothing starting point of 2010, 2011, up to the $500 million this last year. And we continue to build out a company, and we've named it Azenta Life Sciences. And we launched this last November with our Investor Day. And I'm happy to tell you that as of March -- well, as February 1, we closed the sale of the semiconductor business. And as March 31, we actually adopted the new GICS code or the industry code for life sciences. The track record of just the Life Sciences business has been quite strong. As I already highlighted, 24% growth over the last couple of years, also with margin expansion. Gross margins have expanded more than 800 basis points over the 2-year period. And in the earnings per share, while the reset of the smaller company on a base of G&A took us to a negative earnings per share portrayal in the 2019 period, you can see we passed through that in 2021. We were profitable on a non-GAAP basis, $0.48, and the acceleration of our growth continues to bring earnings with it. In the value chain, from a customer perspective, it's really helpful to understand the challenge of the customer and how we meet that. Starting from what a customer would view is let's look at the sample sourcing or the patient and our end objective getting to drug development, work to a physician insight, there's many steps in the progression of a sample sourcing to a sample processing into the inventory of the asset, that being the information. So you'll start with the sourcing, make sure you have the right number of samples for your research project. You'll, of course, look at the formatting, whether that be in the form of consumable tubes or on plates or on the kitting and preparation. But then finally, or I should say, in the midstream of this, you'll get to the automation and logistics capability of a high-throughput process that you're making good use of those samples. You'll apply the genomics and analysis to get the most out of those samples. And this is usually an iterative process over time with similar patients and/or research projects. The data and informatics combines all of this to give a very rich asset database, if you have them integrated and aggregated across your enterprise as a customer. And this is part of the role that we play being global in capability and also across locations for our customers. And we've recently taken on multiple enterprise relationships with some of the largest pharma companies in the world, helping them to accomplish just this. When you take a step back and think about the market drivers of the business, first, you recognize that we'd have multiple billions, about $6 billion of market opportunity today. And it aggregates from the science of genomics down to the simple step of the plastics of the consumables. But within this, you'll also see this emerging trend of Sample Repository Solutions where more and more outsourcing is taking place as well on just the simple storage. And when we say simple, I don't mean to oversimplify it. It's a very rigorous, secure, high-integrity storage with the inventory management of each of those samples. The growth of this space is expected to be just about double digit. We estimate it to be 11% globally. That's the expansion, driven significantly by this expansion of number of samples with the research activity in the industry, and the outperformance that we provide when you start thinking about 20% growth is really driven by the solutions and the positioning that we have in each of these spaces. And I'll say more about this as I talk about the offering. Before we get there, it's probably good just to see the energy behind the market. So if you think about the beginning of the 21st century here, the Human Genome Project had just established itself as accomplishable and started to close. And in doing so, we are starting to move from a drug discovery that was heavily founded in chemical compound research into biological drug development. And you saw a demand shift from R&D centers of drug companies going from just chemical compounds to accumulation of massive amounts of biological samples. These were samples that were collected, sometimes tested for 1 or 2 insights, but then saved knowing that in the future, much, much more would be able to be accomplished with those samples. And for sure, that has happened. We currently, by the way, are holding samples we shared at our Investor Day as old as 17 years where pharmaceutical companies know that the assets that they're holding will continue to be more valuable with time as they learn more about the samples and as well as more is available in terms of science capabilities. But as you move through the 2010 period, then something interesting happened. The cell and gene therapy space became real, meaning the Human Genome Project was far behind us. The cost curve of genetic analysis started to come down. And suddenly, the possibility started to open up in cell and gene research and cell and gene therapies being developed. And in the last 5 years, you've seen not only research accelerate, but you've seen the beginning of approval of really life-changing therapies take place. And we're seeing that as these take place, the cold chain, while it was critical to chemical compounds, was even more challenging in biologics, where you would keep them in a much colder temperature, minus 80 or minus 190 degrees Celsius. And the integrity required when you start thinking about taking the cell and gene therapies, collecting them, putting them back into the body, becomes the most sensitive high-integrity demands in sample management. So all of these spaces introduce high volumes, high challenges and then obviously, high care for follow-through with the patients in the studies. The positioning to capitalize on the market trends is really key for us. We've prided ourselves in being focused on the markets that would stand out for continuous growth. And we've prided ourselves in establishing and extending our leadership in these spaces. So if you think about the attributes of the market, one, outsourcing is well accepted today and expanding in R&D. So over 50% of biopharma R&D is already outsourced, and the growth in this space has been tremendous in recent years and continues. The quality of the sample collections is key. The assets only hold value as long as the assets maintain their integrity. And the growth in the outsourced samples that we expect to be held in an outsourced environment are expected to double in the next 5 years. The cell and gene therapy is in the explosion process. Now this is an exploding space, not simply because it's popular but because it's been successful in producing really life-changing insights and therapies that are having an effect the way we would foresee our future in the coming years. So ultimately, the global footprint of our company differentiates us to be able to service not just those specific needs but the global needs of an enterprise of customers that are looking for that kind of partnership. So we serve both small and large companies, and we'll give you a glimpse of that shortly of some of those customers. The differentiation isn't just in what we offer, but it's how we offer it. It's unique by the team, the accumulation of scientists. We have more than 200 -- I'm sorry, more than 400 PhD or advanced degree scientists behind our genetic analysis and business offerings. We have the speed and convenience that astounds our customers. Many of our customers have told us that they can actually collect and retrieve the samples from our locations, which are remote, faster than they can even on their own campus because we're there 24 hours a day, and we use the overnight courier services. It can take them longer to accumulate those samples manually on their own sites. So unrivaled access gives them speed to research, and our broad product and capability sets gives them a place to turn to for many of their needs, such as both on the services and product side, they can access Azenta not just for the ultracold storage and consumables that you would use to store your samples but also that off-site storage and be an integrating part of that ecosystem between pharma R&D, such as the CROs, as well as other testing parties. And we can even then begin to do some of the analysis and testing for them with the genomic business that we have built. So the portfolio is nicely spread. If you look at this, you'll see that there's no outstanding major concentration here, and what's really unique from a CFO perspective is that every one of these pieces have demonstrated growth in the recent past or in the long-term past and continues to have expected growth going forward. So I don't have a portfolio that I'm trying to repair. I'm looking for additions through the M&A and organic growth to add on to this. I told you we brag a little bit about the customers, here's just a sampling of some of the customers at the bottom of the page. And as you stare at those household names, I'll just highlight across the top, you'll see a few, I think, sparkling facts that we serve all 20 of the top 20 pharma biotech companies, as you would measure them by the R&D spend. We are indeed servicing 13 of the 15 top pharma companies. They believe in terms of revenue size, and they trust us with their samples. Now this trust is not a casual trust. This is their asset database behind their research. It's critical, critical information and assets for them. And then I'll just highlight, if you want a demonstration of just how pervasively we've been used, look at the factoid on the citations and scientific journals, over 18,000 citations of our Azenta or the companies that we've acquired, being referenced in the science and documentation out in published journals. So it's a pervasive offering and capabilities with some of the most premier customers that you could service, we're quite proud of. I highlight that the growth comes from both organic and inorganic. When you look at the long track record over the last 5, 6 years, a 40% growth, and I've already highlighted the transformational acquisitions of BioStorage and GENEWIZ. But on each of these bars, we've highlighted the acquisition sourced revenue in each year. And so you can see underneath that, a significant organic growth has happened consistently as well over the last 6 years. So we don't buy something for a onetime shot in the arm. We're looking for that secular position of growth to service the markets that are driving and will continue to drive us into the future. So speaking of the future and that focus, we'll just reflect briefly on the strategy that drives us as we do execute going forward. And this has been true for the last decade. First, we focus on extending our leadership in the core markets we serve. Secondly, we're always focused on continuing investing our proceeds back into the organic needs of the business and then using proceeds for strategic M&A. We'll naturally be looking for margin expansion. Doesn't always mean that what we acquire will have the margins we currently have, but we're looking for the expansion capability so that it continues to add and has the runway to be contributing to accretive margins as it grows with Azenta. And then we'll utilize the balance and disciplined capital deployment practices that we've had. And we've highlighted this for the last decade that it's ROIC focus for us. In that capital deployment, it's good to note that in the CapEx space that we have a history of about 6% to 8% of our revenue in the Life Sciences business going to capital expenditures. We are in the mode of putting up a building in China that will replace some leased assets and that's incremental above that. But in general, our operational CapEx is about 6% to 8%. It's good -- it's a good barometer for future expectations, we believe. In the R&D, similarly, historically, it's been 4% to 6% of our revenue. And that's a good range for us to think about it, as we develop new capabilities, new protocols and our analysis and new product technologies. Now the $2.5 billion of cash is on our balance sheet. It just showed up on our balance sheet in our recent 10-Q. And as I've highlighted, we put this to good practice in the last decade with smaller amounts, but we've had transformative acquisitions, and we have the ambition to put the $2.5 billion to good work. In the M&A, horizon does seem to be rich with opportunities, and that's where we'll start focusing all of our cash for the build-out of the company going forward. We do share a business model with our investors, and we've done this for the last decade as well. So every 3 -- well, every couple of years, we refreshed this to give you a 3-year view of our business. And we track ourselves to this. We -- many of the conversations we have across the table with investors, is to highlight where performance is consistent with this target model. And then occasionally, we will update it as we move through the 3-year period, as a discipline to make sure that we tune it for -- as it takes perhaps a different shape. And the last one, we achieved the model a year early. Instead of 2022, we achieved it in 2021. It came with a little higher gross margin than we projected and a little more operating expense investment than we had projected, but it exceeded the bottom line as well as the top line objectives for the 3-year model. This is the current 3-year model we put out in November. It's based on what we own today. It does not count on acquisitions contributing to this. If we do major acquisitions, we will update and tune this. But for now, look at our '21 to '24 growth rate over to the far right of being about 18%. We put a range around that of 16% to 20%. The EBITDA margin range was 25% to 27%. And we're striving that our ROIC hit double digit or about 12% by 2024. In the product space, we're seeing the growth rate being tamped down to the low double digits, and this is contemplating the fact that in the '21 baseline period, we had more COVID-based demand revenue. In the services space, we have 18% to 22%. It is supported by a very fast-growing genomics analysis business that has shown consistent track record well above 20%. So it's at the higher end of that 18% to 22% growth rate. The Sample Repository Solutions business, high teens, we expect in this 3-year period with good visibility to large enterprises in the first year, 1.5 years and with high confidence that the outsourcing trends continue that this should be able to support high double-digit or high teens growth. You could see the leverage in the EBITDA margin, if you look back at our actuals is significantly over the operating expense structure. The operating expense will not need to expand at the rate of revenue. The gross margins, we've been a little more conservative or I should say, responsible in terms of projecting a lower gross margin than what our history has shown. As I highlighted, we had 800 basis points over the previous 2 years. We're only looking at flat to up 2 points in this model. Now when I say that, I don't say that to emphasize that I am being conservative. I think I'm being realistic that we contemplated the wage inflation as we put this model together. And we also want to be responsible that there are limits to where the gross margins may go based on the service that we provide. But we do believe that these are very achievable. And I think the real point is that this is arithmetic. If you believe in the top line revenue and the investments required to make this, you will get to the profile of the model and the P&L in which we provide also good clarity to our investors what those objectives are. So we're looking at taking this $0.5 billion business to something in excess of $800 million by 2024. And you can see at the bottom line that the earnings per share will more than triple when we hit those goals. EBITDA may go to -- from the 80s up to the greater than $200 million, giving you a good indication of the cash capability that we'll be building in this business as we move into that 2024 time period. So with that said, I do pause for a second, just to reflect on the guidance that we gave at our recent quarterly earnings and the momentum that you've seen across these time periods. Now these recent quarters have been a little rocky for some of our industry participants, our peers, but it's been fairly consistent expansion for us. And in Q2, you saw another step of expansion, up about 4% quarter-to-quarter and up 12% year-over-year. If you remove the COVID impacts out of Q2, both the prior year and the current year, we estimate is approximately 20% growth. And in the Q3 guidance, while there's still a little bit of trailing off of COVID demand in consumables and a touch of headwind in the China environment for us, we're still seeing strong growth, the midpoint being about 12% or 13% growth year-over-year. And again, about 20% if you remove the COVID environment in both years. So the underpinning, the bulk of our business still has that 20% growth engine behind it. COVID is smaller dollars these days. We're projecting about $5 million in Q3 revenue versus what in the recent quarters has been -- round numbers averaging about $10 million a quarter. Now setting aside the numbers around the organic now, just to put a little more language around the M&A focus. I highlight that we have used the ROIC lens as our primary financial discipline. Our objective here is as we acquire a business, we want to see capability to get to the ROIC in excess of our weighted average cost of capital within 5 years. When I say that, we've bought ourselves a little latitude back in the fall when we were looking at higher multiples that, okay, it might be 5 to 7. So far, we've not pulled the trigger on an acquisition that required more than 5 years in our business cases. And that's our priority. In the acquisition reviews, I want to emphasize, our very first test for fit, a strategic fit. And that is, we're -- you won't see us going from where we are today, way off into left field. You're going to see us continue to increment what's relevant to us on our current customer base, you're going to see our desire to expand our market relevance, but you're not going to see us jump into something that's unrelated to where we or our customers participate today. And so far, I think you can see the logic of that evolution from cold storage to offsite storage to genomic analysis. And it gives you a good curve to where you might expect us to move. With that said, this is a summary of our business. We're at $0.5 billion as of last September 30, and we're -- and it's high growth, it's high teens, it's profitable growth with expanding margins. We've got a model that I think is well supported by the history we have in terms of a track record, but we also have a strong industry behind it in leadership products and positioning to carry us to that $800 million to $880 million target. The balance sheet is extremely strong, obviously, with the divestiture and with the cash to deploy. We've got a platform that is well exercised and athletic capability in the team to take that platform and expand it with acquisitions. And so we're excited. And as a reminder, the targets that we put out do not exclude -- or do not include the benefit of those acquisitions. So acquisitions would be incremental to that. So we're very excited about what the market holds for us and what the future spells out. So with that, Liza, I'll stop and I'll be glad to consider questions from the floor.

Okay. Anybody in the audience has any questions? If not, we can conclude a couple of minutes early, but we really do appreciate you coming out here. That was a great presentation and getting to know the Azenta story better.

Liza, thank you very much. Appreciate the invitation.