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

All right. Good morning, everybody. Thanks for joining us here at Baird's 2022 Global Healthcare Conference. I'm Tom Peterson. I'm an associate on our life science tools and diagnostics list. We're excited to have Azenta presenting today. And representing the company, we have CFO, Lindon Robertson. Lindon, thanks for joining us.

My pleasure.

In terms of the agenda, Lindon is going to provide a company overview and formal presentation, and we'll use any remaining time to go over some questions.

All set?

Yes.

All right. Thank you. Thank you for the nice attendance here and the attention. We're excited to talk to you today about the newness as well as the legacy of Azenta. And I'll explain that comment here as we talk about the history. First, we'll, of course, declare the safe harbor and the Reg G regulations. We are not obligated to update our forward-looking statements. But with that aside, let's talk about the company. Azenta has been in the making for almost a decade, but we just launched ourselves as a separate stand-alone life sciences company in the December time frame. We for -- since the '90s, had been under the company structure of a semiconductor fab equipment company with robotics. And in 2005, we picked up a cryogenic company. Out of all of that, by the time we got to 2010, the company decided to explore the ultra cold automation and cryogenic capabilities of the company to apply to life sciences. So from there, a decade in the making was the building of a company underneath the semiconductor fab company, but a making of a company in life sciences. I'm going to tell you a little more about that. But today, if you look at us, it's interesting that we're less than a 1 year old, but we're already $0.5 billion of revenue, in excess of that. We have a really steady track record of growth profiling and is a high-teens growth company in general. And I'll give more color to that. We've had higher points. And currently, we're in a little bit of a lull, but still positive organic growth in the single digits in the recent quarter and the current quarter guidance. So I'll be very straightforward with that. But we really see ourselves as this 14%, over on the right side, and the LTM is really representative or even a little stronger on a track record capable growth. Uniquely, new company: $0.5 billion, high growth, already profitable. And $2 billion of remaining cash to invest on the balance sheet because as we came out of the semiconductor structure, we sold the semiconductor business, and we put a net proceeds of about $2.5 billion on our balance sheet. We've already committed about $0.5 billion of that in M&A in the last 90 days. So, one executed and another deal expected to close in October. High growth, both on the organic basis of high teens and additional growth capability as we apply the cash for investments. Let me give you now just an excerpt of the growth just as the life sciences company. So setting aside the semi legacy, we started the investments back a decade ago into life sciences. As I said, we really zeroed in on products that applied out of our competencies of our semiconductor into life sciences. So at that time, biobanks were already starting. But it was a new endeavor, mostly on the sites of pharma and large biotech, not so much in smaller spaces. And in that context, it was highly automated, ultracold freezers which we were specifically in delving into. So we acquired 3 companies, redesigned the platform with our own engineering from our semiconductor background and made it much more efficient. We swept the market in 2014 with a new design. And with that, I'll just highlight that those products specified -20 degrees Celsius for chemical compounds, and -80 degrees Celsius for biological samples. So we're talking about managing individual biological samples in the research equation of life sciences. Companies in the R&D sector, or section of pharma biotech, handles these in the millions. And so we have installed hundreds of millions of capacities for -- hundreds of millions of sample capacity at customer sites, and we store now tens of millions of samples on behalf of customers on our site as an outsourced provider of storage. That occurred in that 2016 time frame. In the 2016 fiscal year, we acquired an outsourced company called, at the time, BioStorage Technologies. And you could see that in the first 5 years it took us to get to $100 million of revenue. In the second 5 years, we've been able to get it to $500 million, both from organic growth and then one more transitional, transformative step. That was to take ourselves into the analytics of samples. So, genomic analysis as a service. There was a leading provider of outsourced services on GENEWIZ. And we acquired them in the 2019 fiscal year. Late 2018 calendar year; we are September 30 fiscal year-end. And as we did that, the business continued to grow in excess of 20% going forward as we expected, and it has compelled us to this $500 million number. In fact, we're about a $560 million going rate company now based on our latest results and guidance. With that said, that's only based on what we own today, and we've just announced an acquisition that will close in October. That's another $110 million run rate company over the last 12 months. Before I go to that acquisition, let's talk about what we are providing. I talked about the freezer capability, the storage off-site. Really, think of this as a definition of the cold chain of custody of a biological sample in research. Importantly, I want to raise you up one notch. We don't invest specifically in a disease, or area of research, or a very specific area that you would be concerned that says, "Maybe that's not going to happen." We are providing an infrastructure requirement to companies which is common across all areas of biological or cell and gene based. Think of it as life sciences research. In doing so, every company that's advancing in research is storing, analyzing, storing again, retaining, and managing a sample database that is really an asset database rich with physical attributes, but rich with data as well. So in the services that we provide, we have filled in that cold chain of custody across the board here. From a customer perspective, when they start with looking for a sample or working with a patient, their end objective is to get to a drug development or to some type of physician conclusion here. And they start with: "Do I have the right samples for my research?" We can help procure those samples with a global capability in 14 different languages, to reach out across the globe, to procure hard to get samples. The sample formatting: millions of samples are handled on a regular basis, and we provide the consumables, the format, and the workflow enhancements to manage these at high volumes. Then you think about the storage that I've already spoken about. There's an automation aspect. If you looked at the more than 2 billion samples held on the globe today, the vast majority of those are in a manual environment. Susceptible to loss, susceptible to the integrity of whether the cold chain is maintained correctly. We help address that with automation and reliability. And notably, as I've not described as of yet, we have organically developed a really standout capability to manage -190 degrees Celsius with automation. And all of these systems are connected to the LIM system, or the lab information management system, of the customer. And so in capturing the -190 degrees, we have positioned ourselves to be a leading provider of an automated protocol that gives you much stronger controls in the cell and gene therapy situation. And so we have many cell and gene therapy customers taking on the automated -190 systems today. In the genomic analysis, this is just a natural adjacency to the cold chain. People don't keep and retain the samples for the sake of samples. They keep it for the sake of the data, the information, the learning, the enhancement of what they can do with that sample later. What you could analyze and get from a sample 5 years ago was less than what you could do today. And our customers know that they'll be able to do more with those samples 5 years from now. So, the retention of the samples is very long term. The analysis is very critical for the information today. On the final step that we show on this page, the data and informatics, as you've already noted, is a common theme throughout. Customers are interested in, one, just to have really good control of their asset database. Secondly, they're looking to retain and add to that information database, the new attributes of the samples that they analyze. So we're able to address each of these with the offerings that we have. We have built ourselves uniquely just around this competency of sample-based services for all areas of research. And again, not anchored into one area of research, but really an infrastructure that is common and required for all areas of life sciences. In the cell and gene therapy space, which has certainly captured a lot of mind share of investors because of the high growth and the promise of the future of these therapies to really change the lives of not just our children, but perhaps even us in the room today, in the areas that we have zeroed in on, we have the most reliable management of samples, as I've already described in the ultra-cold storage. And most notably, that -190 automation, which is the center picture of the left box where it's positioned on a standard door, but we've adopted automation on top to withdraw the sample. So there's no more handling liquid nitrogen. There's no more of the unreliable nature of pulling a rack of samples into a room temperature environment and having to write down on a notepad which samples you took out or put back in. It's tied right into systems and provides the controls and protocols that cell and gene therapy would demand. In addition, in the analytics space, we have developed our own proprietary capabilities around the AAV sequencing area and helping the analytics to get clear reads on genes that are very difficult to analyze and get a clear read. So they're referred to as hairpin gene structures, which are often pasted together. Just like if you write 2 words on top of each other on your page, you can hardly read the 2 words. This helps to pull them apart, the gene structure, so you can get a clear read the first time. Otherwise, customers are looking at doing this multiple times, sometimes 15 or 20 times to randomly get a clear read. We are enabling faster reads, more reliable, clear reads. And time certainly is money in the research environment. And then finally, we have recently acquired Barkey, a controlled rate thawing device, which is already documented in many FDA approvals by name. So it's a very sticky equation, but also one with more than 100 cell and gene therapy customers already in their list being serviced today. So cell and gene therapy is certainly an area of growth. It accounts for approximately 10% of our revenue today with higher growth in our overall portfolio. And as you think about the portfolio, we do give a profile here of the breakdown. It's very balanced. You wouldn't find yourself saying, "Well, I'm purely investing in automation," but you certainly are investing in automation because that's a core competency. But also, I'm not just purely investing in a biorepository, but you are investing in the second largest commercial biorepository company with a global footprint able to serve customers, not just in the U.S. but also in Europe and Asia, making us a key partner to those largest of pharma. But also the analytics. You can see the equal size around the pie chart here. This is the 2021 picture. One segment actually stands out here are the consumables and instruments, but I'll highlight to you in 2021, that was the peak of COVID demand in C&I. And part of the reason we're in a little bit of a lull on the organic growth this year, in this part of the year, because as the COVID demands come off, the C&I actually went back down to being a little less than 50% of the total products on the right side of the chart. So even more balanced in 2022 as a platform going forward for growth. Over to the right, we highlight the 2 recent acquisitions. Barkey, already closed, was about EUR 17 million revenue in the last 12 months prior to acquisition. They became part of the company on the 1st of July. And the B Medical Systems, which I'll give you some more highlights, is looking to close in the October time frame as we start the new fiscal year. On the B Medical front, it's an exciting addition to the platform. It's central to the cold chain. The key elements of it are that it's the last mile. It extends our reach of cold chain to the very last users of the cold chain. And in this case, uniquely, it's in the remote parts of the world that are very difficult to get to and certainly underserved by life sciences. 80% of the revenue, if you look at the pie chart down below, is in Africa, Asia, and South America. And it's in the parts of Asia that we generally are not talking about. Certainly, they have revenue in China and Japan, but most of this is in Southeast Asia. So in this reach, they are helping to put in rugged, configurable, intelligent cold chain capabilities with distributors and agents to help set up if necessary, the electronic support through solar means to support a cold chain in the most remote parts of the world. And we believe that they will become less remote down the road. But certainly, there's a growth and there's a trend for pharma and life sciences in general to start addressing this part of the world more fluidly for solving not just the local needs of that region, but also addressing the global health crisis that is confronted by the world today. In this deal, EUR 109 million or, as you all know, at near parity about USD 109 million revenue in the last 12 months as of June 30. We paid $410 million for this business. So, just close to a little less than 4x revenue. They do have a potential earnout capability over the first year of the company. They're already profitable. We've provided some financial information, the highlight being 20% EBITDA in their 2021 fiscal. However, we'll put in a U.S. structure for compliance and SEC requirements. And so, the beginning point of profitability will be less than that, but we'll be accretive on a non-GAAP basis in the first year, and on a GAAP basis in the second year. We believe this to be a double-digit grower capability that we're adding to the portfolio. With that said, I'll highlight again: expected to close in October, not yet underneath the fold of the company. And this was the first step in applying the $2.5 billion of cash post-separation from the semiconductor company. The sale of that. And we still have $2 billion of proceeds to apply. So let me talk just a bit about the track record that we have. We've done close to a dozen transactions over the last decade. $1 billion of capital deployed, not counting the last $0.5 billion that we just talked about. And in doing so, we always look for the strategic fit to where we're playing today. Whether it's immediately complementing the cold chain, or if it's an adjacency such as the analytics business was analyzing millions of samples. We look for that strategic fit. You won't see us going off far off into left field from where we are today. We use a financial lens of looking for the ROIC to exceed the weighted average cost of capital within 5 years. We provided ourselves some latitude to 7, but we have stuck to the 5 years to date. The high growth and the profit leverage of the company is key for us going forward. We're not looking just to add a layer of revenue. We're looking to add a revenue layer that grows on a continuous basis so that we feed these businesses going forward. In fact, if you looked at the outline of strategy in our presentations over the last decade, you would find this page being very consistent over the last decade. Our #1 strategy statement is: "Let's lead where we participate. Extend our leadership in the core markets. Let's invest for that continuous organic growth. And as we think about strategic M&A, let's make sure that continues to provide a growth engine so that going forward, it provides organic growth capability." The margin expansion enhances and is fundamentally required really to achieve the ROIC focus the company has. And then utilizing the balance and disciplined capital deployment procedures, it's really inherent in the company. You've seen a company that has applied cash in a very responsible way. Past years, we did give some back as a dividend, as a semiconductor company. When we separated the company, we stopped the dividends, even though we were bringing $2.5 billion of cash on the balance sheet, because the environment is so ripe, and we're excited about the potentials to put the capital to work. Inside the company, we also invest the cash. Operating CapEx generally has been 6% to 8% of revenue. Excluding a building project, which replaces some leased buildings, which we did move in and finish the first phase in the July time frame. With that said, we expect history as a good indicator of 6% to 8% of revenue to be capital requirements going forward for CapEx. R&D has been 4% to 6%. We also think that's indicative of the future. And of course, I've already highlighted the investment on the M&A front with $2 billion left to deploy. When you take in the account of both organic and inorganic growth, you'll see a good track record over the last 5 or 6 years, a 40% growth that the company has been able to achieve. And it's certainly our aim to continue this growth trajectory. You can see those transformative acquisitions highlighted here, but what we've done is account for each of the inorganic areas in the lighter part of the bar. And in total, it gives you that 40% fuel. So, we often model our business and provide that to investors, but seldom do we show this picture. But we certainly think today, the definition of the company is both organic growth and ability to continue to add business value through the capital investments and M&A. The quarterly stability has been very strong. The track record has been very strong. In Q3, we did struggle a bit. We came off of our guidance. It's only the first time in the 9 years that I've been here on a quarterly basis that we have come off of our guidance in our results. We did preannounce. With that said, it turns out that many companies have reflected similar results since in the spaces that we provide. It's really a lull somewhat attributable to the headwinds of COVID expanded beyond what we expected, as well as a bit of slowdown in the genomic services in Europe and the U.S. Certainly, currency had a part in that as well. But I'll highlight that on an organic basis, the growth rates went to the high single digits, 7% or 8%, on the genomic services this last quarter. Our guidance for the fourth quarter is similar to the results we just turned in, and we look forward to talking to everyone about our earnings as we get to the end of this fiscal quarter, which, by the way, is the end of our fiscal year. So, we generally do that call in the first or second week of November. Finally, I'll wrap up and I'll highlight that when you take into account the $550 million plus run rate that we have today based on our quarterly results, and you add in the B Medical business, we're already talking about a $650 million business. With that said, we expect continued growth on the aggregate and in the pieces. I will tell you, I couldn't be more proud of the portfolio we have. Each piece of the portfolio has provided significant growth track record in the past, and we expect it to continue to provide growth in the future. And so I don't have a portfolio that I'm any longer working on trying to rationalize. We've done plenty of that over the last decade to get us to where we are today. But today, we're quite proud of this portfolio and excited to be able to add on to it with the $2 billion on the balance sheet of new and potential businesses to bring into the fold. The business we have is a solid platform. It's not a holding company structure. We acquire these companies, and we integrate them and they become part of the total sample-based service solutions that we provide. It's an integration endeavor. It's also a consistent strategic endeavor that we have to bring focus to the company. And so with that, I'd just wrap up here and say we couldn't be more happy that you're tuned in with us as you learn about this unusual new life science company, but that has been in the making for a decade. $650 million capable already in revenue, growing, profitable, and this balance sheet that far exceeds that for $2 billion of value. So with that, Tom, I'll stop and happy to take questions.

Yes. Great. That's a fantastic overview, Lindon. Thanks for providing that. I thought maybe we would start following post semiconductor spend. I think the objective there, as you spoke to, was to kind of get some more revenue linearity, a little less cyclicality. But with the remaining portfolio, given concerns about maybe a slower kind of global growth environment, just how do you think about the resiliency of your current offering globally?

Number one: obviously, we don't like... It's interesting. Some companies talk about high single-digit revenue growth as being something to be happy with, that they're proud of. In our case, we've been growing high teens or better for a very long time. And so it was a disappointment to see the high single-digit growth. And when I say that, I should clarify that in this last quarter, we had 3% reported growth as a company year-over-year, but organic 6%. And when you take out the COVID noise, it was 7% or 8% in the genomics space. So, high single digits is how you should think about our recent performance. But with that said, what we see, while there's a little bit of softness right now in the compares, we see a commercially compelling environment for research across life sciences. It's so exciting, what is being developed. And in our positioning of our portfolio, we are tuned towards areas such as cell and gene therapy. We are tuned towards the outsourcing trend to increase outsourcing from pharma and biotech to take that in. If you think about the pieces of our portfolio, not just the analysis is outsourced to us as a service. But the biorepository is fundamentally an outsourced business, where we have signed up 2 global, very large pharma companies in the last 18 months and brought in millions of their samples, and continue to bring in more samples. And of course, the automation endeavors that we have in storing samples on their site is really key for the integrity and the enhancement of their asset database. So, we're seeing the adoption rate of the automation. All of this, combined with the outsourcing, is really fundamental to everybody in research. The only question that you really have to ask is, is Azenta positioned to lead in these spaces? And I think if you do any research, whether it's with us or channel checks, you'll find that we're a leader in the space, quite capable, and with great credibility. Secondly, you'll see that you have to ask yourself, well, do I believe in the commercially compelling nature of research and life sciences? And I just don't think any of us will step away from that. While there may be a lull, there may be some macroeconomics that bring some doubts right now, "What should we do this year?" It's not, "What should we do over the long term?" So we're excited. We think we continue to be a double-digit grower. Preferably, we will be talking about high teens again this time next year. But for now, there's a little bit of a hesitancy in the numbers.

Okay. Great. And then on M&A, you mentioned, I think, about a little over $2 billion in potential capital to deploy here. You played a little bit more recently in the cold chain storage and on the private side, as well. So maybe if you could comment on sort of where valuations are in the private market? Have they rationalized versus public markets? And any sort of targets or areas that we should be thinking about going forward?

Well, we all like to think we were as handsome as we were in earlier days. So, I think the multiples are really an anecdotal point. Everybody who might be in an opportunity to acquire thinks that their business is as valuable as it was 9 months ago. But I think the reality is multiples have softened. It's interesting to find ourselves with having cashed out at a peak of high multiples, and to have this amount of cash on our balance sheet when the multiples are lower. I think the private market has come into some reality of softer multiples. So it's an opportune time for us. And at the same time, I think we have to be patient. Our approach in M&A has been to build relationships over years to establish the touch point. Establish familiarity with many of these companies. The GENEWIZ company, the B Medical company. Even the BioStorage. We had visited these people 2 and 5 years prior to the actual acquisition. There was familiarity already when the opportunity came up; we were a relevant and sought-after potential buyer. It's a natural for us. When I say we'd be patient, I think we obviously demonstrated convictions with the actions we've already taken with B Medical and Barkey. But the opportunity landscape is really nicely positioned for us. And as the opportunities come up, we'll take action with the balance sheet.

Fantastic. Well, I think we're running up right against time here. But Lindon, thank you so much.