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

Good afternoon. This is Paul Knight at KeyBanc. I'm the analyst on Azenta. I'd like to welcome Sara Silverman, Investor Relations; and Lindon Robertson, who's Chief Financial Officer. I think what the format is an overview, and then we'll open it up for questions. You can use it on the screen dialogue in front of you to ask questions or you can e-mail them to myself at [email protected]. With that, Lindon, I'll let you start with the presentation.

Excellent. Thanks, Paul, and thanks for inviting us, including us on your format here. We'll get right into it. Obviously, with the presentation, we always put the safe harbor upfront, and we won't be obligated to make updated statements. And we will use non-GAAP measures, which we would encourage everyone to use in context of GAAP measures as well. So as a company, we crossed over $0.5 billion in revenue last year. And we were separated out of a legacy company of semiconductor automation but that happened back in '21. And we continue the growth path through '22. As you can see, we turned in 8% reported growth. But if you exclude the organic metrics of FX as well as the ex COVID or remove the COVID demand headwinds, we were up 17% on a fiscal year that finished September 30. So in the first quarter, the December quarter, we turned in results with a little deceleration in our growth rate on an organic basis to 7%, still high-single digits but with a reported growth of 28%, highlighting the acquisition that was executed as of the 1st of October of B Medical. We also had already taken an acquisition of Barkey, a controlled rate thawing device. We'll say a little more about that as we move through. But you could see the type of growth rates that we're accustomed to are strong. And we have a global footprint of 3,500 employees around the globe, both on sales and service and reliance from the largest customers because of our presence and our capabilities. The balance sheet is unusually strong for a company of our size because we did sell the semiconductor company. It did place significant cash in our balance sheet. We finished the year at $1.4 billion. This is after paying out $0.5 billion on an ASR for stock repurchase. And we've committed another $0.5 billion from that. Therefore, we show about $900 million net of those commitments, to get to $900 million cash available for investment in operations. So very strong balance sheet, lots of opportunity for continued acquisitions, which we have a strong history of, and we'll say more about all of these aspects as we move forward. If you look at the history of the company, it's really a decade-long story, call it, 12 years, but it's started in the ultracold, cryogenic capabilities that came out of our legacy of the semiconductor capabilities that we had throughout our R&D and delivery process. And we brought a lot of precision and innovation to the format of ultracold automated stores. We don't -- we're not a freezer company. We are about automating and handling massive amounts of samples, think in the millions and at the most sensitive temperature levels, down to minus 190 with automation. So with that, that carried us toward the middle of the last decade. And in that time frame, we picked up the services business of storing millions of samples. At that time, we acquired a company that was storing already close to 20 million samples on behalf of customers globally. And we've more than doubled that over the last 5 years, that's grown to numbers in excess of 50 million of samples stored and that was transformative in that it added recurring revenue and it added really substantial relationships that required not just close handling, close work with each other but a lot of trust in -- based on high integrity of our storage of samples and fast access to samples that serve many, many customers. We'll share some of names in the near future here in the presentation. And then in 2019, we picked up another transformative acquisition, genomic analysis. It was an adjacency, clear adjacency to the cold chain but already handling millions of samples. This was a company that analyzes millions of samples each year from samples sent into them. So it's a sample-level solution. And there are some close relationships across companies that do the R&D, obviously, to store the samples and conduct the R&D, to conduct the analysis. And so the customer set is similar and much more expansive on the analysis. So we think that in the storage, we're talking hundreds of customers; in the analysis, we're talking thousands of customers. And that took us over the $0.5 billion mark as we grew on the base of what we had acquired. And so that was in conjunction with organic growth capability. And now with B Medical added, I would highlight that we're now a $700 million run rate company if you just look at the last quarter results and this quarter's guidance estimates. So if you think about our capabilities. The customer on their demand side, they need assistance on sourcing certain samples, which we can help solve. We can also help them with the formatting in the consumables space of samples, both in tubes as well as PCR plates and many boxes and storage devices. We can also, as I already highlighted, have tremendous strength in the automation of storage and logistics but particularly, the automation that brings precision handling and tracking where the sample has been at ultracold temperatures. And so a person never needs to touch the individual sample until you need them. Therefore, you never have to take a box of samples out of that minus 40, minus 80, minus 190-degree temperature setting and the inventory system is just inherent inside that automation. So you know exactly where your samples are. And then, of course, the analysis and the data and information that goes with all of this, both the information of the samples but also the bio-inventory of those samples where they are. And so end-to-end exploration and management solutions has really defined our company thus far. And I would highlight that the trends that we see in the market really been in our favor. So if you think about the demand for sample collection, it is the asset database for research. And as the outsourced trends have become much more adopted, we expect that this continues to grow and the reliance outside of the structure and walls as well as outside the resources of the R&D centers is increasing, and we have benefited and we expect to continue to benefit from that. Cell and gene therapy, clearly, is a growth track inside all of R&D. We see much more in development these days. Lots of discussions whether this is accelerating or growing, but at a faster or slower rate, but there's no question that it's a growth element of the industry faster than the average. And so in this space, we're able to provide genomic support as well as end-to-end solutions on the ultracold management that's so vital in the cell and gene space. And that, of course, is important as even outside the cell and gene therapy at a much broader space, R&D and complex challenges arise when you recognize that more than 30% of the FDA drug approvals have required ultracold temperature environments. And so this is increasing demand, particularly when you think about where science is going with increasing participation in mRNA, we think that this trend continues. And then, of course, the global footprint demand. We've been a global partner to many of our customers helping to serve them on -- in North America and Europe and in Asia. And with the addition of B Medical, now we have presence in Africa, South America as well. And so more than 175 countries, the portfolio is growing and our reach is growing around the world. If I highlight in particular the cell and gene therapy needs, just as an example, I highlight that, one, the ultracold requirements is vital for not just control of a development process, but is vital to the integrity of the [indiscernible] of the sample being used. And whether that's a sample for R&D or eventually for a clinical application, this is vital. So it's good -- it's really vital for the science, it's critical for successful application and confirmation of cell and gene therapies. Sometimes in the research, the gene structures are not very readable. And the AAV-ITR sequencing and capabilities around NGS sequencing have proven to be breakthrough accelerators for our customers. And so these are proprietary methods and reagents and protocols that our team has developed and used in the analysis space in our genomics business. And we have several testimonies from our customers that this has been breakthrough, opened up spaces they could do more reliably and most critical to our customers accelerate the time line of research. And of course, the addition of the Barkey controlled rate thawing device, it's just one good example of where we took a gap that we could see that, and we filled it in with a quick acquisition of capability on controlled rate thawing. Much of the thawing in the industry is still done with water bath which is very unreliable very significantly in temperature and rate of thawing. This makes it extremely consistent and removes one of those wild variables from the development and the therapeutic process of applying the solution. So you can see that some of our solutions are very cut toward the secular growth trends of the industry. And there's no question that many customers, and certainly, household name customers know Azenta throughout. You'll see referenceable cases, whether it's through the strongest of scientists, the vast numbers of scientific references in journals. But I think most notably, you can see that the top pharma companies as you'd rate by R&D all use the Azenta offerings. Most of it includes the storage of their asset database that being their samples in our premises and in our infrastructure that we supply them for their own site for high-volume storage of samples. But many, many notable names. Nothing could be more fun than visiting and calling on these customers and seeing the support that we can give them in helping to solve the next problem. I referenced the acquisition of B Medical. B Medical extended our cold chain capability beyond the sample management side and took us into the vaccine preservation site. So while we've handled vaccines notably in our Sample Repository Solutions business, and we highlighted that we had contracts during the COVID time frame to help those that were developing and manufacturing those solutions. This is much more prevalent in markets that we typically have not served. So it helped put capabilities in Africa -- all over the world, but Africa, South America and Asia represented 80% of their revenue. And you can see that the 5 -- more than 0.5 million systems installed, 150 countries served. This has developed more than 40 years at the very origin of this came out of the Electrolux company. But they've been a stand-alone company for several years, and this is a capability we couldn't be more proud to have and certainly impacting and saving lives around the world and extending our capabilities. You can see in the chart, which some investors are very keen to know is that the ex-COVID demand did show a growth rate in excess of 20% from '20 to '22 when you remove the COVID demands and so I highlight that data on the page as well. If you add it all up, you've got a business with a portfolio around this wheel. You can see it approaches a 50-50 split just about for products versus services. One of the questions we often get, Paul, is that we have -- is the services and outgrowth of the products. And that's not quite the case. There's close relationship. It's an extension of our offerings. So we do have services inside our ultracold automated systems, and you can see that, that is 13% of our revenue including those services on post-warranty service. But when we think of services on the right side of this wheel, this is an extension of offering. The analytics and gene sequencing and then the synthesis of gene substances, mostly fragments and longer gene substances. And then sample repository solutions where we help store those samples for our customers. If I step back and help convey the strategy and the focus of our company, and we use this to test ourselves when we look at a new opportunity, a new direction, one, we remind ourselves, our objective is always to extend the leadership in the core markets that we serve. We don't like to be a close follower. We don't want to mimic somebody. We want to be demonstrated capable in being a leadership solution. And we've become an expert to help set standards in ultracold environment. We've often been the reference point in the cold chain of custody as we've developed those kinds of benchmark studies for standards. In the investment, we look for organic growth and fit with our existing business. But we also obviously look for the strategic M&A that could not only fit but also being a close adjacency. But it's got to be close to what we're doing today. You're not going to see us far off into left field, adding something where we don't participate or we're not relevant today. Significant margin expansion is a focus. And of course, that goes hand-in-hand with utilized balance -- utilizing the balanced capital deployment methods we have. In other words, you won't accomplish an ROIC objective if you're not enhancing the growth and the margins of the businesses you own. You can see that the consistency of growth over the last, call it, 7 years. 35% has included total growth of acquisitions, but in the purple, you can see the organic growth periods that we faced and have delivered and on a consistent basis, shown growth in and out of the COVID periods, and we're quite proud of what we've built as a stand-alone life sciences company here. Some of this -- much of it comes through M&A, and then we build on it on an organic basis. I just highlighted. But I think a common question is what is our criteria on that financial metric that I referenced earlier. We generally look for an ROIC that exceeds our weighted average cost of capital within 5 years. And this does require growth with profit leverage. And all those names to the left are companies that we've acquired over the last 12 years. And we've got a solid track record of building on those businesses once we've acquired them. And generally, we keep the leadership. In most every case, we've kept the leadership of the team for an extended period and the competencies of the business. And in some cases, these are tuck-ins of capabilities. In some cases, those are transformative as I've already highlighted. So we have a wide aperture of what we're interested in. With that, you kind of fill in the rest of the capital deployment approach when you consider our use of capital investment inside organically of about 6% to 9% historically, which I think is a good indicator looking forward. And then our R&D, for ourselves, our own capability, we generally spend 4% to 6%. That would show up most notably in our products business and in our genomics business, not quite as much in Sample Repository Solutions, although we do develop proprietary protocols in our management and operating practices there. But most of our R&D is in the products and in the genomics business. We do return capital. It's always been a principle of the company, and we did initiate the buyback of shares this past November. And we committed $1 billion of buyback to time out at the latest by the end of this calendar year 2023. We're into the first half of that by $0.5 billion and still in the midst of that ASR, the accelerated share repurchase. And then once that's complete, we anticipate doing an open market repurchase of another $0.5 billion to fulfill that commitment. We do have additional authorized levels for 2024 to be determined. But with that said, that $900 million is available for investment. And certainly, we would pursue M&A as well. So in quick summary, you got a company that while relatively new in our second full year as an Azenta standalone life sciences company, it's got a $700 million run rate, a track record of high growth, a little more modest growth in the recent quarters, and that's been a point of discussion, and we don't shy away from that. We've got some things to adjust, and we're in the mix of that. Margin expansion opportunities. There's still leverage in the business, and we feel strongly about this, and we think there's high potential of higher margins. The balance sheet, very strong and a good track record of deploying it. And with a business that is already globally spread out and capable to serve both on the sales level and a services level globally, we've attracted not just global partnerships with customers that win more business but we also have a platform to launch additional capabilities as we think about acquiring them. So we think we're strategically positioned to continue to accelerate and we couldn't be happier about that position that leaves us in a growing market. So Paul, with that, I've got to stop and be happy to take any questions that you or the audience may have.

Sure. I've got -- starting with some from the audience, are you guiding on 2023 margins at this juncture, Lindon?

Not on a full year basis. We shifted our EBITDA to an exit point of 10% this last quarter. Our margins were a touch squeezed beyond our expectations this last quarter, and we tamped this down to be an exit point of 10% EBITDA.

And what's the kind of the margin you would expect on product versus service if you exit FY '23?

Yes. Well, we haven't put a lot of color to that. I can tell you that the bottom line EBITDA potential of both businesses is not so dissimilar. We would expect that both businesses have capability to strike that point. I would highlight to you that if you went back 5 years ago, I wouldn't have said that. Products had a lagging EBITDA at the time, but we've significantly improved the gross margin structure of products over the last 5 years, and it has a strong demonstrated capability to do that.

And long term, I can't remember the exact date. I think it was November of 2021, you had said an EBITDA margin of 26% is a goal. Where are you with having that long-term goal again?

Yes. So it's a great question. That target actually was a range and timed out to be 2024, we would get to a 24% to 26% EBITDA margin. And what we described last summer, after we hit a slower point in our growth curve and in a squeezed EBITDA margin we said we would stop referencing that model. And so I get the operative point of your question is when will we come back with a longer-term model. I do expect later this year is the right timing. And I would generally point to the end of the calendar year after we release our 10-K in the November time frame. Here's the reason I would say that is one, we feel strongly that we should have some proof points on the table, demonstrating our capabilities before we just go out to an investor with a promise of a model that -- we would like to see demonstrated proof points. We've got some initiatives in place that we've talked pretty widely with investors on publicly on -- in our disclosures as well in our earnings call on taking cost out. So for example, we have exercised a $20 million cost reduction this quarter. We'll see a full effect of that in the third quarter. We've highlighted that to be 2 points of margin enhancement. We've talked about market improvement -- marketing and sales improvement initiatives across the business. And with those proof points behind us that gives us better standing to come to investors at the end of the year. And of course, the second point here is we did add B Medical last October, and that will have given us 1 year of experience. So that right now is our thinking of coming out with an Investor Day somewhere around that time frame with revised commitments. And we do like having a long-term model out for people to see the vision that we have. What I would comment, Paul, is we see leverage in the business. So while it may not be 2024 on that same revenue number, we do see the potential to be those mid-20s in the EBITDA margin. So we'll help define that as we get out of this year.

Got it. Okay. And then the $20 million of cost cuts, where were those from Lindon?

Yes. So largely operations and back office, but I will tell you, every business participated a bit. What we highlighted is, we did not take away any capabilities, we leaned out the business. And think of this as having stood up the business about 1.5 years ago as a standalone business, we put structure in place to ensure that we execute without stumbling. And so now we have the opportunity looking at each of those functions and capabilities and saying, look, we invested for assurance of stability, and we invested for growth that didn't fully materialize, let's lean out the business. So we just did exactly that. We took out some resources mostly in operations and back office. And meanwhile, we also emphasize that we'll continue to invest to close some of the gaps in sales. Think of that as specialized sales around Gene Synthesis, for example, sequencing as well as additional sales coverage underneath our cryogenic automation offerings. So we feel really good about where we're headed for growth. So we'll continue to invest behind that, but we feel adamant that leaning out the business for margin enhancement is core to us.

Okay. And right, I mean I think one of the questions here is you kind of addressed the operating expenses. It sounds like some selected selling costs on these growth areas and then incremental margins would kind of be related to -- you start to see a margin pick up after this current quarter, meaning maybe the June quarter, I guess. Yes.

Yes. So the June quarter will have the full effect of the cost reduction. We'll be laying some investments in as we go across between now and the end of the year. So that's why we net down to 2 points just from cost reduction, but additional leverage will come through the size of the revenue. And so I think the watch point for us, and we encourage our investors to watch this is that we'll look for improvement in our sales equation, particularly in genomics to see this continue to accelerate, which we saw some positive signs in the December quarter. And then we also are looking for the consumables and instruments business to return to normal after a destocking occurs out of COVID where lead times were much longer. So we have a lot of confidence, but we have some proof points to demonstrate.

And then regarding GENEWIZ, specifically around Synthesis, I think you're really -- you've opened up capacity in China. You're trying to, I think, what fill that capacity to a greater degree at this juncture and also linked to the fact that just getting China back to normal helps.

That's right. And our China team has just done tremendous through the adversity and challenges of COVID in that market. One of the challenges that we had globally in Gene Synthesis was the export of Gene Synthesis product out of China. Not because of constraints of the geopolitical issues, it was because of some adjustments that they did in their customs inspection. So we started consolidating our shipments out, made it more reliable and predictable. We go through the exact same process but on a consolidated shipment, it makes it very reliable and predictable on the delivery. So we've fixed some turnaround time issues that was experienced in Europe and in North America. And we think we return that to growth as we put sales behind that now and recover some of those accounts and then expand into new accounts.

So it's a culmination of the logistics work you've done, reopening and some increased sales effort?

That's exactly right.

And then your share repurchase, you've done how much -- could you kind of -- it's $500 million through December, Lindon?

So we gave the bank $500 million in late November, and they are in the -- they are still in the process of the accelerated share repurchase. When we gave that $500 million, they gave us 6.1 million shares as the opening tranche but we will settle up for additional shares as we finish that buyback that they execute. And their tail end -- the longest that would take us into June. It may finish a little earlier given their share prices now. And then we will go into an open market purchase anticipated for the -- to complete another $500 million before we finish the calendar year-end. So we're excited about this, giving $1 billion back and with the prices, albeit we didn't wish for these price levels. But with these prices, we're able to take a significant number of shares off of the market relative to our starting point share -- change the ownership dynamics quite a lot. And by the end of the year, we'd still have close to $1 billion in place for investment, and we'll determine if we continue on that authorization in 2024.

Okay. Got it. 2 minutes remaining. You haven't guided to organic growth. You had a 7% in the September period last year, what are your thoughts around growth, Lindon?

Yes, the objective that we've set for this year is to move through to the double-digit territory and through the -- average low double digits for the year. That puts pressure on the second half. This has been a common discussion point with investors because admittedly our second quarter guide disappointed in that we didn't see confidence of projecting that higher growth rate yet in the second fiscal quarter that being the March quarter that we're in right now. So as we report that, we'll update investors. But our anticipation is the second half of our fiscal year moves into a double-digit capability, and our objective is to move the average across that mark into double digit. But you're right, 7% organic, ex COVID, says that we've got a ramp ahead of us. And the second quarter didn't start that ramp. We anticipate the actions that we're taking begins that in the second half. But we look forward to updating investors on our next earnings call.

Do you think you didn't need any -- is there anything structural beyond the $20 million in your opinion?

So we'll always -- you've known us for a long time. So it's inherent in our DNA, no pun intended, that we'll continue to lean out the business. But no, we're not looking for a substantive action beyond this one but we'll continue to lean out the business throughout operations. We've got a very seasoned operations leader dedicated from lots of years of experience on this. And of course, we have an eye on that toward productivity, not just in operations but in the back office and in sales. So I think you'll see enhancements of that productivity contributing to the leverage equation, not just waiting for top line growth.

Great. Well, we are out of time, but thank you, Sara, and thank you, Lindon, for your time.

We really appreciate it, Paul.

Okay. Absolutely.

Thank you.

Thank you.