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

All right. We'll go ahead and get started. Good afternoon, everyone, and welcome to the Jefferies 2022 Global Healthcare Conference. It is great to see everyone back in person today. I'm Brandon Couillard. I cover the life science tools and diagnostics market and very happy to have the former Brooks team, now Azenta with us back at the conference this year. Here to give us an update on the story, Steve Schwartz, President and CEO; and Lindon Robertson, CFO, Lindon?

Thanks, Brandon, and thank you for everybody's attention. The Jefferies conference has just really been good to us over the years. It's one of the more robust with investors and has been a terrific conference for us. So thank you for inviting and including us. I'll go fast. Obviously, we'll observe the safe harbor statements here. We'll be making some forward-looking statements and not obligated to update those any given time, but we'll do our best to give you a vision going forward as we go through today. That vision outline really is about an overview of a company, as Brandon highlighted, brand-new as a stand-alone company, but you'll see it's a decade in the making. Azenta Life Sciences was launched in the fall as we separated the company or announced the separation of the company. The separation actually came to finalization on February 1 of this year. It's a strong market with differentiated solutions being addressed here. So we think it's a very exciting story and one with a lot of growth ahead. It's a $0.5 billion business, $0.5 billion business that we reported last year growing in the last couple of years 24% on a CAGR basis, and so high growth, and it has demonstrated profitability. So it's a bit unique because as it separated out as a stand-alone life science business, you don't see a new life science business of this size already profitable and global in stature. So we have 2,900-plus employees now. And with that said, we service our customers in the market all over the world. And because we did make the sale of the semiconductor business, it put about $3 billion currently on our balance sheet. But after we pay the taxes on the deal, we expect about $2.5 billion of cash to put to work. So a very unique place to be given our enterprise value and then you add that cash for us to add multiple growth steps ahead of us. And when you think about the growth potential of the company, maybe you want to look at the history of the company in terms of what we've done. About a decade ago, we started in this space off of the strengths we had in our portfolio. Back in the days where we had the semiconductor equipment automation company, we had particular strength in very precise robotic automation and very good R&D and manufacturing capability in cryogenics, around cryogenic pump that created a vacuum space. So the company started applying that into a different industry of life sciences and capitalized on what at the time was an emerging need just in needs of the market, just begging for better solutions around large automated ultracold storage generally thought to be minus 20 degrees or minus 80 degrees Celsius. But our company, as we stepped into that and improved on those formats, also invested organically to develop automated minus 190-degree Celsius ultracold storage, which, as you know, today is critical to the cell and gene therapy markets. And so we're excited about the progress we're making today off of things that started a decade ago. Now at the end of the first 5 years, we also stepped into the services business in storing millions of samples on behalf of our biggest customers and also many small customers, an outsourced stretch that heavily started in this first 5 years and prior to that off of the archive of samples, millions of samples that need to be stored for multiple years. We shared at our recent Investor Day, we have some samples that have been in storage 17 years with our business. And with that said, the average sample has been close to 5 years. And so it's a long-term storage in an archive sense, but it's more and more so becoming a banking or ecosystem of samples in this environment of cell and biologic research-based life sciences industry that everything comes back to the sample. And so there's an ecosystem of samples going in and out of an R&D center to perhaps a CRO, but we are a landing spot and a facilitator of that ecosystem in terms of moving in the cold chain and providing services as well as infrastructure. That made us a natural then in the next coming 5 years to look at other services that were relevant to the sample-based research environment and a natural was genomic analysis. So in 2018, we picked up a beautiful company by the name of GENEWIZ, stepped into a business that was already a high-growth profile, had been 20 years in the making by its co-founders. And they came into the fold of Brooks at the time, Azenta now. And they really have become a foundational aspect of not just a growth engine but a facilitator of additional future potentials to tie this business together as we now store at the customer site, in our infrastructure or the customer does within the infrastructure we provide. We service millions of samples on our location. And then we also do analysis by millions of samples each year through the genomic services. And that opens the door to many other adjacencies as you can imagine. When you think about the track record of growth, as I highlighted, above 20% over the last couple of years. It brought gross margin expansion with leverage and efficiencies that we put in place. And certainly, we price for value. And all of those came in to bring us over 800 basis points over that 2-year period. And as you would expect, as we separated the company, we're basing these on restated actuals just for the Life Sciences business. But on that restated basis, it took us through a breakeven point of earnings per share in 2020. In 2021, we reported at September 30 year-end $0.48 of profit. In 2022, we're anticipating good growth off of that as well. Now what do we do for the customer? This is the challenge for a customer, whether you're going from a sample sourcing on a drug development initiative or if you're going from a patient to trying to get to a physician, there are multiple challenges in both sourcing as well as storage and handling of samples. If we go out to sourcing, you have all the right samples, we can help alleviate that through procurement services. We can also help in the collection and kitting if needed. But the sample formatting then is the next step in terms of what type of consumables, what format do you want to see these samples, what format do you want to store and by the way, how many of each sample do you want to store. And then in the automation, the storage, the logistics, this has probably become more household knowledge given the COVID environment, everybody became familiar with the fact that many vaccines need to be stored at minus 20 or minus 40 degrees, minus 80 degrees. But biologics have been in that motion for more than a decade or for 20 years. And this is an overwhelming volume of samples. So through automation and logistics, we're helping the customer to secure their cold chain of condition. Obviously, the genomic analysis is critical to yield the data from the samples, and that's why people hold the samples. They yield information, research and iterative data, and we help with the informatics as well. So all of these offerings are things or problem statements from the customer are offerings that we can help address through differentiated solutions. The market in total, we estimate to be about $6 billion this past year but on a double-digit growth toward $10 billion. Now our growth rates have been exceeding this because we're living at the edge of advancement, of automation against a market that is fairly manual and manual freezer environments, against analysis that supports cell and gene therapy trends against a market that is largely broad-based drug development and discovery, and outsourcing in general is more and more widely accepted across the industry. So we're in a very good place in terms of the growth. If you think about the attributes of that market, you can see that the R&D, I think you observe this probably through many of your meetings these days, particularly as companies are looking at conservation of cost that outsourcing becomes more and more a flexible solution for them. But we would tell you that even before this cost or inflationary period became a problem statement, there were many customers looking to offload their capital burden on to our premises. In other words, us do the storage on their behalf, and we're seeing that more than 50% of biopharma R&D are not just willing but looking to subscribe to outsourcing models. High demand on the quality sample collections. Not only is there large amounts being outsourced, but there's also demand to secure more samples. And we've picked up capabilities and expanding capabilities and our ability to procure samples to help identify those needs. Obviously, cell and gene therapy market is looking for high growth in the future. It's had breakthroughs. It is really, we still believe this is the future of what's going to change the lives for us in the coming decade personally, at a personal level, I should say, as well as an industry-shaping event. Let's keep moving on to the differentiation of our business. We've got a team that moves fast, unique solutions. If you pick out any one solution, you will find somebody who participates in that type of solution. Is there ultracold? Yes, there's ultracold. Usually in a manual environment, somebody opens a freezer door, takes a box out, we don't participate in that. What we participate is the automation and the high throughput, the high workflow environment. So we apply automation inside the ultracold freezer. And on the lab bench, we do many instruments that help the workflow and the integrity of the samples themselves. Speed and convenience is inherent in every offering and every service that we provide, whether it's our turnaround to the customer, the reliability of the placement of a sample when they need it or it's in the handling inside their own R&D shop. The access to the samples is unrivaled. In fact, if you store your samples with us, whether it be in Griesheim, Germany or in Indianapolis, Indiana, customers tell us time and time again, they can get the samples from us faster than what they could do even on their own campus when they're a large pharma. It takes a long time for them to apply their lab techs to collect samples, but we do this as a core capability to us, and we expedite those shipments to them as needed. And then the breadth of our product and capabilities, including the analytics, just makes us a very unique set of offerings, set of portfolios and a comprehensive set of solutions. And in fact, as you see around the portfolio, it's fairly well balanced. If you started at the right side, you would see that infrastructure that I talked about in the beginning years, complemented by consumables and instruments that became a natural growth and profit multiplier for us in those days, and it's continued to do so. And then the services on the left side, which comprise about 60% of our revenue, includes that sample and repository solutions heavily oriented toward a recurring revenue stream, by the way, as the samples are in our freezer and we bill out on a monthly basis, but also in the highly transactional space of genetic analysis. And uniquely, on the analysis side, it put us in the exact right position to do gene synthesis. So customers generally are sending us a sample on the analysis side for us to analyze and send back the gene structure. But on the reverse where they need synthetic samples to do their research, they will give us the gene structure in the data form and we'll send back the substance that they need for their research projects. It is a remarkable portfolio from a CFO perspective because every one of these pieces have demonstrated track records of growth. Every one of them have an indication of good growth going forward. So I'm in a unique situation, frankly, the first time in my career where I've not been working on a piece of the business that I need to repair or divest or yield. In this particular case, all areas of my businesses is quite strong. We're really pleased to talk about a deal that we signed this week. Just a couple of days ago, we signed a deal with Barkey based in Germany. And in this equation, this is a controlled rate thawing device. They have several products, but their flagship is around the plasmatherm, helping to, in a very controlled rate, be able to thaw the most sensitive samples. Now obviously, there are companies that have done this in blood and plasma. This one has been applied with FDA approval in the cell and gene therapy. It's a standout, EUR 17 million in the last 12 months revenue. We disclosed that we paid about EUR 80 million for the business. When I say this, it was signed this week, expected to close early July. I'll highlight that the business has been a grower of higher than 20% in the recent years, and we expect that this will fit right into our model, including the 2024 model. It will not be a drag. It will be nothing but a help to our model. Obviously, a small piece in addition today, but the nice thing is, it's a big adder to the cell and gene therapy equation with the relevance it has. And with that said, that indicates that it's a high-growth space. In terms of combining this with a portfolio that we already have that addresses cell and gene therapy in substance, the first area, when you think about the patient samples and therapies that need to be stored in ultracold temperatures when it comes to cell and gene therapy, it's a critical aspect of cell and gene therapy. You cannot take cells and store them in anything that lacks high integrity, high security, traceability and confidence. And if you think about a manufacturer that is trying to distribute down the road, particularly in allogeneic, we think we're really, really well positioned to capitalize on the growth of allogeneic market down the road. So we see nothing but growth in the solutions that we already have. In the genetic analysis, we've shared that we have proprietary capabilities in the AAV ITR and the Sanger capabilities. But the AAV challenge has set us apart in the market for services in sequencing and giving customers the clearest and highest integrity reading on the first time. And in doing so, we have helped the customers avoid what we've seen from customers. Hey, I used to have to do this 15 or 20 times to get the clarity of reading because it's a random result in these hairpin gene structures, but you've given us a protocol that helps to get a clear reading first time through. So a tremendous capability we already have. Add to this the controlled rate thawing, and we think we're building a true growth engine inside the company. We've shared that prior to adding Barkey, about 10% of our revenue, a little less is related to cell and gene therapy but high, high value in this space and a growth engine that will continue to outgrow the rest of our portfolio, I'm confident. With this, I'll highlight that there are several bragging rights that we have in terms of the number of top pharma that we serve, the 18,000-plus citations in scientific journals and some of the customer names that are just really household and also the most advanced and most admired in the research environment and clinical as well in health care. So we just couldn't be more proud to be part of an industry that is helping to change lives and improve them. The growth outlook indeed is strong. When we reflect on how we put our portfolio together, how we build our investments, we always look at these 4 tenets. And you would find this if you look back at our presentations for the last decade to be very consistent. One, we're always going to be relevant to what we're already doing. But in place of what we will invest in next, we're always focused on an investment that extends our leadership. We want each of our product areas, our service areas to be among leadership in the market. We'll invest for both organic and strategic M&A to build out the business. And obviously with $2.5 billion on the balance sheet, we have a strong track record in the past behind us, but we have a lot more to do ahead of us. Margin expansion is key to us. And on the final one, with the disciplined approach, particularly with the return on invested capital equation, it's no surprise that both revenue growth and margin expansion is important to us to achieve an ROIC criteria. And I'll talk about that in a moment. CapEx obviously is a piece of our capital deployment. Generally, 6% to 8% of revenue has supported our business in the past on an operational CapEx. We are on schedule to and beginning to move in China into a new building, and we expect to have that finished in the very near term, and we'll update at the earnings announcement coming up, but it's all on schedule for now. And R&D, we'll continue to invest as we have in the past, roughly 5% of revenue overall. And the investments on the M&A, I would just highlight, we've got all of our cash and resources pointed to growth of the company, and we're excited about what that does for our customers but also for our shareholders. In fact, we always provide a 3-year model for our investors and shareholders to see where we're headed. As you can see, we've highlighted it by segment so we give the underpinnings of each of these. Just quickly, you're looking at a teens growth in the products and close to about a 20% growth in the services business. Products had a little more COVID-based revenue in the 2021 time period. And so that's a little bit more muted. But services has just continuous high growth capability, as does products if you're willing to accept teen level growth as high growth, and I think most people are. And both of them bring leverage capabilities. So we're looking at EBITDA expansion with 18% growth handsomely by 2024 to about 26% and a return on invested capital achieving based on what we own to get to 12%. This whole model is based on what we own at the time of launching the model. In P&L terms, you're looking at $800 million to $880 million. That's a 16% to 20% growth rate on the goalpost there over a 3-year period. And you could just see at the bottom line that earnings per share then is set to more than triple on the target model of 2024 and the EBITDA is approximately triple. So good cash capability coming out of the business in the future. We always provide a quarterly guidance. We always have, I should say. And I'm not here to update or to reiterate that guidance, but I'm just sharing with you the guidance we provided back on the, about the 9th of May. But more importantly, I think you can see the quarterly progression over very rocky times recently with COVID in and out, and we've always given clarity to our investors our estimated impacts of COVID, but continuous expansion has been pretty consistent across the quarters. I referenced the M&A and the investment model that we've had. It is strategic for us to make sure that what we buy next fits our base and is relevant to our customer set, sometimes expanding that aperture, as I explained earlier, and the broadening of our services. But in the financial side of it, we're always focused on ROIC. Of course, we do net present value equations and scenarios that may be better or worse than our base case. But what we're looking for is a case that says, this ROIC is going to exceed our weighted average cost of capital within 5 years. And to date, everything that we've done, including the model that we just did for Barkey, the business case indicated 5 years or better ROIC better than our weighted average cost of capital. We did allow the latitude to go to 7 years, if necessary, but our general intent is within 5 years. With that said, this is the summary, and I think I have just enough time to hit it. $0.5 billion business, high growth, we're looking at high teens and better cash generation already. Earnings per share model that says it could triple by 2024, and we have good line of sight. And we have a pretty good track record, by the way, of keeping 3-year models out in front of our investors and delivering on those and a balance sheet that just really is unique with $2.5 billion for investment. So we're happy to add that to our platform and to grow across an already leadership company platform. So with that, I thank you again for the attention that you've given us. And Brandon, thank you for the invitation to the conference.

Thanks so much. It was great to hear the update. And everyone, have a great afternoon. Thank you.

Thank you.