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

Hello, good afternoon, and welcome again to another Cowen conference presentation I'm Lindon Robertson, the CFO of Azenta. And with me today, I have Vandana Sriram, our Senior VP of Finance. We're really pleased to have your attention and be here at the conference. To tell you a little bit about Azenta Life Sciences, we're into our second fiscal year of existence after separating in an unusual transformation for a company coming out of a semiconductor manufacturing automation company. In that context, we're unusual. Let me tell you a little bit about that. Before I do, of course, I should call attention to the safe harbor statement. We will make some forward-looking comments. We won't be obligated to update those. You can look at the risk factors that we've highlighted in our filings recently. In the discussion, we'll use non-GAAP measures, of course, but we'll always encourage you to reference GAAP measures to take those into consideration in the full context of all of our discussions. So what makes us unusual as a Life Science company in our second fiscal year? We're already in excess of a $600 million run rate business. Last year, we recorded over $0.5 billion of revenue. It's relatively new to the Life Science as a stand-alone company, we're sizable, and we're profitable. With that said, a sizable company for consideration and solving problems really across all of the household names as well as the smaller names that you may or may not know in Life Sciences in the area of cold chain and genomic analysis. With that said, you can see that our growth rates last year, 8% reported, but 17% when you took into consideration the foreign exchange and removing the COVID dynamics in both periods so a double-digit grower this past year, and that's been a consistent historical trend. Now this year, we have shown 28% reported growth in our organic dip down in the first quarter into high single digits. We can certainly address those things. But we have taken on another acquisition in October, and that was the acquisition of B Medical Company, which extended our solutions in the cold chain environment. You could see we're a global footprint as well with 3,500 employees were around the world now serving most each of the continents where science is, in some cases, very advanced in some cases, not so much. With that said, a very strong balance sheet makes us additionally unusual. $1.4 billion of cash on our balance sheet or equivalents at the end of this last quarter, we do have a share repurchase program in place, and we've committed to return approximately $1 billion of cash through that repurchase program by the end of the calendar year. With that aside, we still have $900 million identifiable on the balance sheet that can be used for growth and for investments. We are active in both the investment and the organic investments of the company, but also in M&A, as you can tell from what we've built just recently. Over the history of the company, while it's a relatively new stand-alone company, it's a little bit more than a decade in building. In the first 5 years, while we were still a semiconductor automation company, providing robotics and vacuum pumps into the semiconductor manufacturing space, the company initiated around those 2 strengths, the automation of the ultra-cold environment or cryogenic environment in Life Sciences. You can see over the first 5 years, it took us to a $100 million business. About that time, we stepped into the services business, storing biological samples, not just in the infrastructure where we were selling to customers at their site but then outsourcing the storage onto our premises on their behalf. Today, we now store in the range of 50 million plus samples and on behalf of customers on our premises in addition to large volumes of capacity that we've installed for customers to store at their site. Of course, storage isn't the operative we're really managing the samples is the intent there. If you look across the following, call it, 6 years, then we get to the $555 million reported revenue last year, a significant jump there is adding the genomic services analysis through the acquisition of Gene was back in the 2019 fiscal year. With that said, the growth of the company has been accelerated, not just through M&A, but through organic growth on a pretty consistent basis over the decade. Several transactions there, which Vandana will highlight later in the presentation. With that said, the expansion of the company is quite unusual in size. But really, what are we talking about in solving for the customer? The portfolio is an enabler for our customers in sample solutions in management. When we talk about that, think about all of science comes down to research around biological samples these days. In some cases, chemical compounds as well, we help to store and manage those. But in many cases, it's biologics now. and billions of samples stored around the world that have been collected and stored tested and stored again and often allocate it into multiple samples so that you can continue to test as technology develops. In the challenge of the research project, you may start at the left and said, "Well, I need to source those samples," and if you don't already have those samples collected or don't have a process to click, we can help to source those samples as well. In the sample formatting, we can provide the consumable formats, and we can provide some of the kitting and logistics in helping to format those samples for long-term storage and for your analysis needs. The center point here, the storage, the automation, the logistics is being able to handle samples with integrity, not losing them, not subjecting them to warmer temperatures, but keeping them in the ultra-cold environment and with automation setting the standards and protocols in place for the safekeeping of those samples. The genomic analysis added another dimension to the business in services of adding significant insight needs to customers and an outsourced base again. In other words, we're not competing with technology platforms. We're actually a customer of all technology platforms, and we've leveraged those. We have more than 400 advanced degree scientists in our team, helping our customers to get the correct protocols and preparation steps for the optimal reading of their samples for the sequencing. Then we also provide gene synthesis in producing samples back for the customers. Data informatics, as you might imagine, in each of these steps, data tracking of an individual sample is key, but also the attributes of the samples is key and so it's an end-to-end solution that customers come to us. That makes us unique in many areas. If you pick one of these areas, you'll find other competitors sometimes participating one but when someone is looking for an end-to-end sample management environment they turn to Azenta. We're positioned to capitalize on some market trends that are quite attractive. In other words, we're not seeing friction in the trends, but we're actually seeing growth opportunities in the trends that we participate in. Notably, the outsourced environment has become more accepted and adopted by our customer base. We're seeing significant growth in the outsourced samples over the next coming years. You can personalize this really by just thinking about some customers storing not just hundreds or thousands but millions of samples. At their R&D center, they will take in the equipment to manage on-site, but they need to archive and then they also have an ecosystem where samples are going in and out of third parties for testing but need a place to be stored, logged, and tracked and maintained for integrity purposes and for future research. The second item on this page is the cell and gene therapy space. With this trend, the cryo market is really ultrasensitive, in other words, the cold temperature in cell and gene therapy is a key element in maintaining a therapy, and in doing so, we help to enable those trials with much care and integrity as well as in the analysis world for helping to provide certain protocols to help advance and provide breakthroughs in their research. In the cold chain solutions specifically, we note that over 30% of the FDA drugs approved in the current environment require a temperature control environment. We have seen this increase, and particularly combining not just cell and gene therapy, but all medical and healthcare advancements around drugs and healthcare science tend to derive itself in a temperature-controlled environment. Then finally, a global footprint. There is an increasing demand to solve problems globally. It became I think, abundantly clear in the coping environment, you don't solve problems in one country, one region and as we know crosses borders and so there is a strong, strong demand to take the footprint and apply that global approach to solving problems internationally. I highlight cell and gene therapy a couple of times already, and I just want to highlight some of the offerings that we have. The sample management in the cold temperature environment is just critical. The automation is helping to provide protocols and standards for that integrity purpose and on-site and off-site solutions allows customers to continue their confident level research, both on-site and off-site, and throughout the process and to consider using the full strength of what they can bring for their breakthroughs and for manufacturing development and potentially distribution of those therapies. In the analysis world, there are difficult challenges in seeing clearly certain sequencing and achieving certain outcomes without the synthesis of genes and we provide those. We have a particular proprietary technologies around the AAV-ITR to help provide very clear reads of sequences that otherwise, customers are left in a random environment of doing many reads in order to happen to get the read of these overlapping genes structures and so it brings clarity of reading and increased time lines or I should say, decreased time lines, more efficient timelines to get to the end result, again, accelerating their research. Finally, on this page, we highlight the controlled rate of thawing. We had acquired a company this past calendar year and in that context, it's a controlled rate thawing. You can imagine across many research projects, the vast predominant solution is actually to drop a sample into a water bath, but it's not a controlled rate thawing process. In fact, if that waters of various temperatures, you'll get various outcomes of the thawing of those samples. Controlled rate thawing helps to remove some of those variables and to increase and enhance the integrity of the research project. Moving on, I'd just give you a few of our customer names at the bottom of this page, household names, but we have thousands of customers that we service. I think some of the highlights across the page just gives you a testament just how substantial Azenta has become over the years through what we have grown, but also through what we've acquired. The Nobel Laureates labs that use Azenta, the citations in scientific journals are now are in the thousands. We have 1 in 3 U.S. molecular biologists estimated to use in Azenta now. We have the best-selling pharma products and the clinical samples managed by our sample repository solutions. In other words, we've got the top 5 of those top-selling pharma solutions that have relied on either our archive and/or our storage management facilities to help them store samples behind their research. We can brag the 13 of the 15 top pharma use our storage facilities or tools, while our top pharma and biotech all 20 of the top 20 are served by Azenta in one capacity or another. We're not at all looking like a startup, are we? We're in the second year of a stand-alone company, but after a decade, we've some relationships across the industry that are really hallmark relationships. I highlighted the acquisition of B Medical. It's a significant addition to our business in October. B Medical extended our cold chain reach with the capability to store vaccines in an ultra-cold environment for an extended period of time into regions that are less developed. It's not unusual to see this equipment installed with solar capability to provide the electric power where an electric grid is not existing. One of the highlights of this capability is a communication back on the condition of that particular container. Is it open? Or is it closed? What's the temperature on the inside and the outside of that container? How many times has it opened in the last 30 days? It gives a very clear indication of the utilization and therefore, the implementation of the vaccine. Now the WHO often accesses the information as well to see just how prevalent their distribution of certain vaccines is actually getting used and applied in certain territories. We're very proud of this. 80% of the revenue is actually on the continent of Africa, South America and Asia, and most of them are not in the regions in Asia, where we typically see most of our revenues, such as China and Japan. We do business there with B Medical, but in other parts of Asia, Southeast Asia, in particular. The platform is quite diverse. We do see wilt B Medical added to the product side, almost equal split between products and services. As you can see, the services on the right side, the bulk of that is in the analysis that being the next-generation sequencing, the Sanger sequencing, and then the gene synthesis through the genomics business. Then the sample repository solutions, the bottom right, makes up 16% of last year's revenue. With that said, that's a recurring revenue stream in large part. That is samples in the freezers in that slice and so that provides stability and profit stability factor as well to the company. That's been growing. All of these areas have shown demonstrated growth in the past and have expectations for growth in the future. As does those pieces on the product side, this is pro forma would B Medical in, which would make up a comparable 17% for B Medical in terms of the percentage of our total revenue last year had we owned it last year. In the automation side, which was the hallmark of our origin of being in the Life Science business, you can see that rounds out with 13% around ultra-cold systems with the automation and complementing consumable and instruments factor. If you sell a large store, let's say, it's 1 million samples. It might be $1 million, $1.5 million for a store like that, but you might put $300,000, $400,000 of plastic in it once it's filled. We take that revenue opportunity and provide innovation to our customers in those solutions. With that, I'm going to pause, turn it over to Vandana Sriram, our Senior VP of Finance, and take you through the rest of the presentation.

Great. Thank you so much, Lindon. I think I'm with Azenta for a little over a year now, and it's been truly remarkable seeing the transformation of the company from a semiconductor automation company to a pure-play Life Sciences company. There's a new name, there's a new brand, and there's a whole new energy that comes with being a pure-play life sciences company. So just to hit on the pillars of our strategy. Our first is that we extend our leadership in our core markets. We stay close to our core, and we tend to want to exceed in the markets that we play in. You'll see us stay very close to our core competency of sample management and cold chain capabilities. We invest both on the organic as well as the inorganic side. I'll take you through this in a little more detail, but we tend to buy companies that are a good fit for us and then grow them organically in an exponential manner. We are very focused on driving margin expansion and operating leverage. That is fundamental to our ROIC focus. An ROIC is the key metric by which we manage our capital deployment, and I'll talk about that in some detail as well. This strategy has been pretty consistent over the last decade or so, and it's really served us well. When you look at our growth rate over the last 8 or 9 years since we started to expand in the Life Sciences space, you will see that we grew our revenue by 35%. Now that's a combination of organic and inorganic growth. Within the inorganic growth, some of our acquisitions were truly transformational. For example, the BioStorage acquisition in 2016 made us leaders in sample storage that Lindon just talked about and the GENEWIZ acquisition in 2019 similarly set us up for success in the genomic space. What's important on this page is, as we added those layers of revenue from the acquisitions, we also continue to grow them at a pretty healthy cap, and that's what led to our revenue growth over this period. Within the last, I'd say, 12 years or so, we've done upwards of 15 transactions we've put to work over $1.3 billion of capital. Just since July last year, we've put to work about $0.5 billion of capital and completed 3 acquisitions successfully. All of them complementary to our portfolio in some form of fashion. The framework that we apply again is fairly consistent. Firstly, we look for the right strategic fit. We would look for our acquisition to bring with it capabilities in the sample management and cold chain space. It could bring us geographical expansion or at most, we might go to an adjacency, for example, we invested in informatics that support our biorepositories. From a financial lens perspective, we look for our ROIC to exceed our WAC generally in a 5-year period, but for the right strategic acquisition, we might go all the way up to 7 years as well. What that focus on ROIC does is it ensures we look at targets that will continue to show growth, not just that first layer of revenue. At the same time, keeps us very focused on margin expansion and driving operating leverage. We're very disciplined in our approach to capital deployment. From a CapEx perspective, we generally use between 6% and 9% of revenue in CapEx. This is mainly equipment refresh in our labs as well as additional freezers as we grow our business. Over the last couple of years, we trended a little higher than that. We made some significant investments in China to release some lease costs, but at the same time, expand our capacity and be ready for future growth. From a go-forward perspective, the 6% to 9% is normally a good indicator. Similarly, on R&D, about 4% to 6% of revenue is a good indicator even with the addition of the acquisitions, they follow a fairly consistent trend. From a shareholder value perspective, before we became a pure-play Life Sciences company, we historically were very consistent and regular in distributing a dividend. We stopped that when we became a Life Sciences company, and we focused all of our efforts on growing the business. Late last year, even after having completed a series of acquisitions and having invested in organic growth, we decided that the best use of our capital was to also return some of it to our shareholders. With that, late last year, we announced a $500 million accelerated share repurchase, which is underway right now and proceeding as expected. We do expect to do another $500 million of share buyback within this calendar year. Even with this significant outflow of about $1 billion to our shareholders as well as investments for organic growth, we still expect to have about $900 million of cash on our balance sheet, available either for organic investments, all as the right opportunity arises also for inorganic investment, and we'll continue to prioritize this cash towards M&A opportunities and organic investment. In summary, we are a truly differentiated and unique end-to-end sample management company and what makes us unique is basically 3 things. The first is growth. At our run rate, we expect to be close to the $700 million mark this year. We continue to have a portfolio that we're very pleased with, with capabilities that are really important to our customers and the fact that we bring them all together. That also gives us the opportunity for future margin expansion as we go through this. The second is, as I mentioned, even with all of the actions we've taken, we still have an incredibly strong balance sheet that gives us optionality both on the organic and inorganic side and gives us the optionality to lever up if we were to need to and if the right opportunities were to come along. At the same time, we have a team that has experience and history in doing this. You can see from the trend of the acquisitions that we've brought in and successfully grown. It's a team that knows how to do it. When we bring companies in, it's not a holding structure. We integrate them. We share the synergies that are to be had. We drive the same culture across the company, and we make sure we complement the suite of products that we offer to our customers. Then lastly, we are global. Even before the acquisition of B Medical, we were selling to over 100 countries. With the medical, that's over 175 countries now. That gives us a tremendous reach and the ability to reach customers all across the world. In summary, we're a fast-growing life sciences company with a strong value proposition that seat in our products as well as in a strong balance sheet that enables us for future investment.

Max, we're open for questions if you have any for the last couple of minutes from the audience. Any questions from the audience?

Could you just review how you charge for your services across your products relative to your services?

Okay. I'll repeat the question. The question is, how do we charge for our products and services across each of the portfolio and perhaps the margin? With 3 minutes left, I'll go quickly. In our services business, our sample repository solutions business, where we store samples, the charge comes down to a per sample charge on the month-end. A customer that might store $1 million or $3 million will pay for exactly the number of samples they have at the end of each month, but it's structured under master services agreement. On the genomics side, it's a transactional service. In other words, somebody sends us a sample, and we return it within a couple of days if it's a simple read or a few weeks, if it's a longer read and similar on the synthesis will turn around their sample they sent to us back with the sequence or I should say, the data they send to us will turn the substance back to them within a couple of weeks or a few weeks. That is an individual transaction on a purchase order. The services business, in general, has been reporting just under 50% gross margin in the recent quarters. In the product side, it's a purchase order business. In other words, each large store system is a sales cycle tend to be 6 months, maybe 1 year, depending on if it's a customer that's never store-built a large store system, a large store system could be the length of this conference room, not as wide, but the length of it with a robot running down the middle with thousands of shelves on each side. With that, it might be a $1 million, it might be a $5 million install. That's an infrastructure purchase from a customer planned and negotiated and signed at a contract. Once the purchase order is done, there may be changes, but it's chargeable, those changes are chargeable. That's a pretty crisp deliverable by the company. The revenue is recognized by the way, on a percentage-of-completion basis because that project may be an 8 or a 12-month project sometimes faster, sometimes longer, depending on the customer's readiness but we'll recognize the revenue as we complete the project on a POC accounting basis. On the smaller systems, we will recognize our revenue on delivery, but again, the charge is a purchase order, and it's a very firm deliverable for what we've sold. On the product side, we've also been in the mid-to-high 40s in the recent quarters on our gross margin. The profit profile is actually quite comparable on both sides currently. I guess I didn't touch on B Medical, these tend to be project-oriented. In other words, you have a government perhaps it is a government or a government agency making a decision to establish a project, sometimes funded by the government, sometimes funded by Gavi or an organization such as the Gates Foundation. Often, procurement done through UNICEF or a procurement organization such as that and so the combination of that makes it a project-oriented lumpier business. Again, it's a purchase order. Once we get the order, we're delivering crisp and defined goods for the receipt of payment. That profit profile is very similar to the rest of our products business. Yes, sir. We're almost out of time. I'll tell you why, why don't I wrap up as the audience to stay respective of the Cowen conference time frame? I'll be happy to stay around for a minute or 2 and take questions from individuals in the audience. Max, thank you again. Appreciate the conference. Bye.