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

All right. Well, thanks, everyone, for joining us today. It's Alberto Bertani from Morgan Stanley banking team. And it's my pleasure to host Lindon Robertson, CFO of Azenta; and Matt McManus, Chief Operating Officer. Thank you very much. For important disclosures, please see Morgan Stanley Research Disclosure website at morganstanleyresearchdisclosures.com (sic) [ morganstanley.com/researchdisclosures ]. If you have any questions, please reach out to your Morgan Stanley sales representative. So in terms of kicking off the discussion, can you give us sort of 10 minutes overview of the strategy of Azenta history as a life science company? That would be helpful.

Yes, that would be great. So we're in our first year as a life science company, but in about our 40th year as being a company. And so we've gone through a transition -- transformation out of 2021 as we separated a company that was born in the semiconductor space and we launched as a new life sciences company by the name of Azenta in the December quarter. As we did that, we finalized the sale of the Semiconductor business, which was our origin in -- at the end of February. And so here we are in the fourth fiscal quarter of our first year as a life science company. And what's really unique about this is as a brand-new life science company, we already exceeded $0.5 billion of revenue. We're profitable. We're growing. And it's got a portfolio that we couldn't be more proud of. And as a CFO, I'll just reflect on the portfolio from a couple of different perspectives. One, the mission of the company is very sample-based services. When we talk about samples, we're talking about biological samples, sometimes chemical compounds, sometimes drive slides, et cetera, but primarily biological samples that are handled in the process of research. And sometimes it leans into clinical. We do have CLIA certification in certain operations. But it's the research end of clinical. But what we're referring to is all substantive research in life sciences comes down to examining a sample, recording the history of that sample, taking attributes from that, and in the most advanced areas, developing cell and gene therapy solutions out of that research that can be used to promote the health in the most remarkable ways of the patients. So as we think about this, I would underscore in that mission we are from the beginning of sourcing of samples to helping customers to format those samples with consumables, also to sometimes move those samples, most notably store those samples, whether it be at their location in our automated ultra-cold storage solutions, which tend to be large automated stores at minus 20 degrees Celsius or many of them minus 80 degrees Celsius for biologics. And those you would find at most common R&D centers of a pharma company or at a university perhaps or hospitals that are storing significant number of samples under automation that is connected with their lab information management system. And so it's automatically inventoried. The attributes of the samples would be in their LIM system. We also store millions -- tens of millions of samples on our premises on behalf of customers. So think of it as outsourced storage. And again, we do it at the individual sample level, carrying those formats from the customers or their third-party service organizations. We'll have samples coming in every day that we add to our storage capacity. Predominant location is Indianapolis, but we have some on the West Coast, East Coast. We have capacity in Europe and Asia as well. And we're able to provide a true global solution to the largest of global pharma and to provide the services to the smallest of customers as well. It doesn't stop there. It continues to go to analytics. And we have been in genomic analysis since 2018 when we acquired the GENEWIZ company. And there, we're analyzing millions of samples each year under genomic analysis, including both Sanger platform, next-generation sequencing platform. And we're creating synthesis samples to send back to customers as they need it for their research. When you tie all of this together, there's a common thread underneath that information and data informatics. So we have informatics offerings for customers as well. So you can see it's a really complete and comprehensive portfolio. And we're a very acquisitive company. We had built the company from organic, from our capabilities in cryogenics and automation, but we've also acquired many companies over the last decade in this transformation out of the semi days into a pure life sciences company. So as you think about that now today, we have 2 acquisitions, just a recent announcement. One that was automated controlled rate thawing of samples, which is -- just as an example, the value proposition is touted in FDA approvals. And so this was the Barkey company out of Germany. And well, well cited in those documents for approval, also very well known across customers in research, more than a hundred cell and gene therapy customers in their books already. And then the larger acquisition that we just announced, but haven't completed -- we would expect to be completed in October -- is a company referred to B Medical. Based in Luxembourg, but servicing much of the world in the most remote territories in the vaccine cold chain end point. And so this was a nice -- or is going to be a nice extension as we anticipate closing the deal of our cold chain capabilities into that last mile of places like Africa, South America regions and parts of Asia that you generally find that the infrastructure is challenged in supporting traditional -- more modern cold chain infrastructure. So it's a remarkable business. It helps us establish leadership into the regions that represent 40% of the world's population significantly underserved by life sciences today. In places that global health organizations are looking to help solve as they address global health conditions. Now if you think about the $0.5 billion of revenue, in excess of that currently, I mentioned it's been profitable, we are on a path to build it larger. So as we completed the sale of the Semiconductor business, it did net us approximately $2.5 billion of cash to invest. After the 2 acquisitions I just mentioned, we have another $2 billion that we still can use for investment on our balance sheet. So a very unique company profile. New in the sense that for less than 1 year we've been Azenta Life Sciences, a stand-alone company. But with a decade of building behind us, we're already $0.5 billion profitable and $2 billion of cash on the balance sheet. So I'll leave it at that for now. And maybe we can add color too through your questions.

Absolutely. So maybe why don't we do a little bit -- a deeper dive on the genomics portfolio just to understand a little bit better what's the value proposition from Azenta and why do customers decide to do business with you instead of in-house activities, for example?

Sure. So I'm happy to talk about that and we can add color to it as well. So the genomics business really spans a number of offerings for our customers that increasingly, I think, are a holistic offering for what the customers need in their research. So we -- it's centered around sequencing. So we offer Sanger sequencing services, next-generation sequencing services, but also gene synthesis, as Lindon said, to create synthetic genes that they use in their research. Increasingly, we've got 400 advanced -- greater than 400 advanced degree scientists at the bench who are interacting with the customers. And so we have a good idea of what the next set of questions that our customers want to ask are. And so we're adding capabilities there to move beyond just genomics into multiomics, so into proteomics and high throughput proteomics, single cell capability, spatial biology, right? These are sort of the next frontiers for the kind of questions that customers ask and often in conjunction with sequencing, which has been the predominant research modality for a lot of our customers over the last set of years. So we're continuing to expand there. What we offer in the genomics services themselves -- the more than 400 scientists at the bench give an idea of the scale. They're all focused on really just serving the customers' needs around sequencing, and increasingly, these other services. But most of our customers in-house don't have 400 scientists that can focus on that one approach. And so the things that we're able to do with the same equipment that they could buy in many cases are very different. We have proprietary methods and chemistries, everything from the sample extraction to the way that we use them in a sense on the sequencer to get more out of the equipment, and then the analysis that we do on the back end, highly differentiated. We can work with parts of the genome that are very challenging, like the really tough sledding for our customers. And in many cases, can do things that they couldn't do even if they had the core in-house. And so in many cases, we're complementary to what they actually do in-house. Many of our customers do, in fact, have sequencing capabilities or cores and still use us because of the highly differentiated services. And for other customers, they outsource everything to us.

What do you think you're doing differently compared to your core competitors within the segment?

Well, so that's a -- that's different in the different segments. Certainly, in the genomics space, I think the ability to work at that kind of scale is -- we don't have as many competitors that are at the scale that we're at, right? Certainly, from the Sanger sequencing standpoint, we're one of the largest players. We do have competition in this space. And of course, it's always we have to earn the right to serve every customer with every interaction. And I think that, that's a big part of how we differentiate from the competition. So we're very responsive to the customer. The kinds of questions that they come to us with are sometimes very challenging, not just the kinds of sequences that we address, but the analysis of it afterwards, the partnership that we have with the customer to help them understand the information that comes off of the sequencers. And even at the front end, sometimes how to collect the samples, how to format them before they come -- before they even get into our hands. It's a highly consultative service that I think our customers really value. So we play sort of high end of the market.

Okay. Understood. And in terms of sort of organic growth of the segment overall going forward, how do you think about that?

Yes. So we're at this stage of where we have had a longer-term view out there that said we could grow high double-digit or teens -- high teens business. And then this last quarter, we reported lower growth. And in the current quarter, we've guided lower. Now we've seen others in our space come out with similar results recently. But here's our view. We're not advocating the long-term model currently. We're waiting to see for things to pick back up. But our conviction is that the longer-term equation for research is very robust. The life sciences space can do more today than it could a year ago. It's going to be able to do more next year than it can this year. The commercial compelling nature of the business says that this has a long road ahead of high research. And we have positioned the business interestingly to really tailor to the more advanced spaces. Cell and gene therapy currently about 10% of our revenue, thereabouts, growing quite fast, both in the production equipment -- when I say production, I mean the automated storage equipment that we place at customers -- as well as in the genomic analysis, with some key elements of that business helping our customers analyze. But we also have the Barkey acquisition added to that. We also have global relationships now that we've won in the last 2 years on top of what we had in the past, that just continue to build the base of footprint with each primary customer. And as we have more customers to add, that's incremental growth on one dimension, but we're growing with those customers as well. So we would still believe that, that longer-term growth provides a double-digit capability. We were pausing currently on advocating the model framework that we previously had, just a responsibility to the current periods that we're addressing.

Right. And staying within the Services segment, can you elaborate a little bit what's the strategy around Sample Repository Solutions business and also the growth prospect of that vertical?

And so happy to -- the sample repository for us is absolutely core to the business. When we look at the need in the space -- there are estimates of between 2 billion and 3 billion samples that are out in the rest of the world. We hold about 50 million to 60 million of those samples. And the value proposition we bring there to our customers is the way that we run our biorepository and biobank. So we operate under all the appropriate federal regulations, quality systems. We're able to work with our customers through just about any level of quality or clinical regulation that they require. And in addition to all of the quality overlay, at the very core of it is, we understand where the sample is, how it's been handled at all times. So as opposed to storing a freezer full of samples for a customer, which is a business model that some of our competitors have, we actually know where each sample is, what box it's in, where in the box it is, what shelf that box is on, where in the biorepository that freezer is. And we're able to do that across their whole sample collection. We can work with them to understand not only the samples that they have with us, but the samples that they have on their side through our informatics solution that Lindon referenced earlier. And so we have really a different approach to biobanking, where we partner with the customer to understand and to extract the most value from their sample collections as opposed to just keeping things cold. We're really about sample management at a very different level. And so for us, when we look at what the customer needs are, we think that we have a better solution for the majority of the -- certainly, in the clinical development space, but really throughout the research space.

Okay. Very helpful. In terms of -- so moving to the products part of the business. When you look at the consumables and the instruments versus automated stores business, again, how should we think about growth rate of those segments within the current environment in the future year?

Yes. Our history has shown that on the C&I business -- let's take out the COVID environment where it ramped up really fast, and now it's on the trailing off aspects of that. But over the longer-term history, we've generally have viewed this as a high single-digit grower. And we've had periods where it's grown much faster, particularly in periods where customers are investing in automation and workflow. Because the consumables we produce are tailored towards that, and we sell the instruments to help with automation of the workflow. But high single digits has generally been our expectation of the C&I business. Now on the ultra-cold storage, we've had strong periods of 20% growth, plus or minus. And this last quarter on our large -- on our total systems base, on a -- organic rate was 25% growth. And the services related to that, the repair and services, spares, et cetera, grew 27% year-over-year. So I don't advertise the quarter as a proof point. I just advertise the -- I would just highlight that we've had times where we've grown consistent double digits for a long time -- long periods of time. And we're seeing good momentum in that direction. I'll highlight that in the June quarter, it was a record quarter of bookings for us and it bodes well for the -- feeding the equation, because these tend to be 9- to 12-month building projects for a large ultra-cold store. You think of it as a significant sized conference room when you think about the type of system we're talking about. It's walled in. You wouldn't want to be in it because it's minus 80 degrees Celsius. But it's got thousands of shelves on each side with a robot running down the middle. And as I said, highlighted, is it's connected to the LIM system and the customer knows exactly where their sample is, and they never have to touch it till they need it.

Right. So I think we are seeing a lot of interest from the investor community in the cell and gene therapy area. So it would be helpful to understand which different part of Azenta are impacted by these sort of end markets.

Sure. So I think the -- we have offerings that support cell and gene therapy in multiple ways. Certainly, on the analysis side, what we can provide for the research community as they push the basic research that ultimately translates to clinical research and to therapy. That's one set of offerings on the biorepository side. Again, just holding the samples and being able to retrieve them and assay them is a service that is generally applicable to the space. I think the most present or easily understood way that we serve that is with our automated cryogenic stores and with the acquisition of Barkey as well. So in the cell and gene therapy space, if you take cells from a patient, modify them, where they become therapeutic, and then give them back to the patient. After they've been modified, they need to be stored in cryogenic temperatures, so minus 190. And the tracking and understanding of where those samples are and who has access to them and being able to secure them is a critical piece of making sure that the right patient gets the right cells. And so the automation solution and the informatics that we have as part of our automated cryo offering is critical for that sort of patient, adjacent storage of the therapy. Further, when you then take that, punch in the patient's identification, take the therapy out, that set of cells has to be thawed very carefully. If you thawed it just too quickly, you'll rupture the cells and the therapy is basically no longer useful. And so the acquisition of Barkey, their controlled rate thawing -- the plasmatherm is the instrument that they have that, as Lindon said, 100 customers are using that in the cell and gene therapy space. And [ RESPECT ] through -- the clinical trials, for instance, [ RESPECT ] and Kymriah, which the Novartis therapy -- has been built in a way that it's purpose-built really to be able to thaw those cells in the appropriate way to then take it to the patient. So we're really pushing closer and closer to the patient in terms of being able to serve that market.

Yes. And given the fact that we will see more and more therapies becoming commercial in the coming years, do you feel like do you have enough capacity and capabilities today to serve the commercial stage or...

We do. And we look at that as a transition of the market in the cell and gene therapy space from autologous to allogeneic, which is a much higher volume. We're, I think, well positioned in the way that our systems are constructed to handle that kind of volume and in our ability to expand capacity to be able to serve it. So we think that's going to be a growth vector for us that we're -- that we'll be able to serve appropriately, and we're excited about that going in the future.

Perfect. So I guess a question more around sort of the current macroeconomic environment and increasing energy prices, inflation. Can you make a little bit of -- your comments on how do you see this impacting the financial performance of the business?

So the macro environment certainly presents some challenges. Again, I think they're short lived. But the inflation, we've been talking about this since early 2021 because we started seeing labor inflation significantly, the battle for talent. And I would highlight that in our business, particularly in genomics, but across our business, we have a deep skill. So in genomics, we have more than 400 advanced degree scientists that is -- as Matt highlighted, it's consultative capabilities with our customers and making -- ensuring that the analysis is done efficiently, proficiently and optimizes the clarity of the reads and analysis. But in our products business, we have people with deep capabilities in cryogenics and robotic automation. So the battle for talent over the past 1.5 years, 2 years has just been really keen for us, and we just don't give up on this because we maintain the skills. So inflation on the labor side has presented a bit of a challenge. You see it a little bit in our gross margins. We had some other perturbations. As COVID hit, customers slowed down in 2020 and we slowed down on the hiring actually. In 2021, not only did the competitive nature of the labor market come up, but the demands on us accelerated and we saw some really high utilizations. We've gotten ahead of that with more investments now. So that factors into our margins as well. Now currency is another aspect of this macro environment that we're seeing. And we do have nice exposure into the Europe markets as well as into Asia and China. It's great for us. But with the currency, it's been a headwind in the recent 3 to 6 months. So we lived through Brexit with a significant piece of exposure in the U.K. But these are great markets. We wouldn't give up the global presence at all, but they do put pressures on the P&L structure. But it's also why we're a global partner to many customers.

Of course. Yes. So maybe last point around sort of M&A, right? I mean I think after the acquisition of B Medical and Barkey, as you said before, you still have sort of the $2 billion cash available. How investors should think about what's the next steps in terms of M&A strategy?

Yes, I'll offer this. It's been a clear element of our makeup for a decade. We've done more than a dozen transactions over the last 10 years. And we formed this $0.5 billion company substantively around M&A, complemented with the deep context that we could receive that and add value to it and do organic developments with cryogenics and automation. And so now we've got a really strong profile of capabilities, of platform with multiple dimensions that can easily receive and add value back to the projects that we buy. So there's no question in our makeup and in our definition. Acquisitions are part of us. So the $2 billion is there as fuel for growth without any question. We also get a lot of questions on our overall deployment of capital. And so certainly, every year since we've been here, we always have a significant discipline to review the cash that we have on hand, our needs, the opportunities to use it and what we might determine to give back to shareholders in the form of either dividend or buyback. Buybacks are certainly a hot topic right now, and it's due consideration inside the company and with the Board. But I'm not telegraphing that we would go that direction because primary definition of the company is to build out organically as well as with M&A. But it's certainly a significant consideration with the valuations where they are today.

And do you see sort of more opportunities in terms of building via M&A, both in the U.S. and internationally?

Yes, it's really not slowed down. The landscape is ripe and rich with opportunities. The developments, it's quite interesting. As I referenced earlier, what you can do in life sciences today exceeds what you could do a year ago, and we expect it to be more so next year. And so all of the time, there are entrepreneurial start-ups as well as longer-term companies. B Medical has been around for decades. Barkey had been around for decades. And the fuel that they have added to it in the recent years is just tremendous reflection of what life sciences needs are. But -- so there are long-term companies as well as start-ups that bring significant value in this industry that we undoubtedly see as opportunities for us to pick up and add not just in what we might need to enhance our cold chain or the current business structure, but also adjacencies that may be relevant to us. So we're very encouraged by the landscape.

Okay. Well, we ran out of time. It was a real pleasure. Thank you very much.

An excellent conference. Thank you.

Yes, thank you.

Appreciate it.

Thanks a lot.