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

All right. Good morning, everybody. Thanks for being here. Welcome to the Jefferies 2023 Global Healthcare Conference. I'm Brandon Couillard. I cover life science tools and diagnostics sector here at the firm. Very happy to have Azenta with us back at the conference this year and here to share an update on the story and their progress CFO, Lindon Robertson. Lindon?

Brandon, thank you very much, and welcome to the Jefferies conference. We are certainly delighted to be here and delighted that you'd spend time with us in this time. I'm going to get right into it. We'll be making some forward-looking statements. We'll be using some non-GAAP measures. So we point out the safe harbor statement. And of course, we point you to the fact that you should be looking at our GAAP metrics as well. And you'll find bridges at the back of our tables presentation to be available on our website later today. Quickly -- by the way, this is a fresh perspective of the company's presentation. First time I've given this exact presentation. So bear with me, but I'm excited to do it. We've structured the discussion today around these 3 points: one, while we're a young company in the newest structure, we're well established, and we've got a long track record behind us in the life sciences space, so we're going to spell that out and tell you a little more just at a glance about the company. And then we're going to talk a little more about the markets we serve and a little bit of color around some customer relationships. And then finally, we'll talk a little more on the value creation. And more pointedly, some actions that we've discussed recently on our earnings call around the realignment of the business and some of the cost takeouts aimed at accelerating growth capabilities as well as enhancing the profit profile going forward. So let's move right through it. At a quick, the investment thesis, I think, is really clear. We're a company that's based in sample-based services. So in other words, the biological sample is a core element of almost every research project, very little research happens in life sciences today. It doesn't require some sample collection, some sample analysis, some sample preservation. So we help in all those regards. We're quickly becoming on the heels of a $700 million company here. And we're positioned for more growth and more profit enhancement as we do that. The platform we have is global in nature. And so we're not talking about a regional business. We're talking about a global business, well equipped to satisfy global customers, also well equipped to take in new capabilities and then extrapolate growth on a global capability. The balance sheet can support that as well. We've got $1.5 billion on the balance sheet of cash and no debt at this last quarter end. And we'll talk a little more about what we're doing with that as we go through. But it's truly a unique company and one that has a track record behind it. A little more on the landscape. So the offerings, I'll just lightly touch again, when we say sample-based capabilities, think of us as in the automation, deep automation, in the most demanding environments of ultracold freezers. And so -- well, we could facilitate manual, that's not our game. Our game is we're going to help you with efficiency and automation. That is our focus. Biorepository services puts us in the outsourcing and storage of samples on behalf of customers. And so we're a trusted partner to most of the top pharma, and we'll highlight that. We do the analytics. In genomics, we are a fast turnaround time provider on all formats, and we'll give you a little more color on that. And then finally, we've touched the emerging markets with the acquisition of B Medical. So the offerings there is more focused on the vaccine preservation in the cold chain. So it's somewhat the last mile. As I highlighted, we're global, more than 9,000 customers this last year were served. And so this is not a niche. This is a broad-based fundamental business of infrastructure, products and services that every research lab would make use of. 180 countries, 3,500 employees demonstrates that global capability I highlighted. And of course, balanced portfolio, we'll talk a little more on the offerings. But I think what the eye catcher here is in the bottom right. You can see consistent and continuous growth over recent years. Over the last 4 years, approximately we project to double the revenue from that $330 million level to the $660 million this year in the midpoint of our guidance. Now if I give you a little more on the past trajectory, what brought us to today. You can think of this as a 12-year-old life sciences business. It was born out of the strength of automation in cryo in a much more demanding, much more precise requirement in the semiconductor fab of automation. But we took that automation capability and the cryo depth that we had in semiconductor and applied it to a new space 12 years ago, that being in the Life Sciences space. From there, you'll see us move in -- that we moved into the outsource of sample storage. After sweeping the market, by the way, in 2014 of the redesigned platforms and the ultra-cold freezers that -- with automation, we moved into the outsourced services and we moved into the analytics. And you can see -- and frankly, this is one of those pictures that tells a thousand words very quickly. It's continuous ramp of expansion of value and of growth of a business that now, as I said, is on the heels of $700 million. Let's now turn toward our markets that we serve and what we do for our customers. I think this is the exciting part, and you'll see the value very quickly and why it's a sustainable equation. In general, if you think about the research environment, it's generating samples all of the time. And so the population of samples on this earth continues to expand. Nobody wants to throw away a sample, very unusual. You will have discard. We'll do that for customers. But in general, the global population of samples continues to expand. And it's in the billions. Most -- more notably, we would say -- and by the way, we would assess -- past assessments, would say that expansion of samples somewhere between 7%, maybe 12% on an annual basis. But more notably, there's some secular trends within the sample research environment that makes it more demanding, more challenging for customers. There's a trend toward outsourcing. Customers don't -- you may think customers are storing multiple freezers. This is not just multiple freezers. It's thousands of freezers. It's tens of millions of samples at some customers. And in that trend, there's a fast trend toward outsourcing of storage in handling of samples. It improves the integrity of the samples. It improves the record keeping, the access of the asset database that those physical assets represent, and it enhances the value for future research. Second, in the demanding environment or the environment for research and for FDA approval has gotten increasingly slanted towards solutions that not just require ultra-cold temperatures in the research, but also actually in the output of those solutions. And so you'll see documented dependencies on the ultra-cold temperatures in the process. More than 30% of the recent FDA approvals have documented and put requirements on the temperature control situation. So regulatory stringent requirements are making it more stringent. And so people are caring more and more about that environment. That tends to lead toward less manual, more automation, more standardization. And then right in the middle of that, when you think about cell and gene therapy, while there's only a few cell and gene therapy approvals has been made, it's been documented to have more than 2,000 in the pipeline of therapy trials. And so we still see cell and gene therapy as an undoubtable growth engine within the industry. And in that space, the demand is at minus 190 degrees Celsius with automation, with standards, with rigor, with ability to distribute reliably, all of these trends highlight why you can expect that Azenta's services resonate with our customers and serve our customers very well. You can look at our customer environment and some of the metrics that we have and you can see evidence of this. As I mentioned, more than 9,000 customers served in the past year. If you did your own research, you could find more than 24,000 citation references in scientific journals of either Azenta or the company name in the past or are products that have been -- in services that have been acquired. You would find that 20 of the top 20 pharmas, you would measure them by R&D are using our services or products on a continuous basis. It's really a remarkable set of achievements that we accomplished as an industry. We're servicing an industry, not a niche or a corner of the market, but an industry base. And we give you a few of the marquee names at the bottom. I'll highlight that pharma and biotech, by far, is our largest sector served, and the others are distant to that. At the same time, in Genomics I will highlight that academic is a distant, but #2. So academic is pretty prevalent in genomic analytics. But by far, across all of our offerings, pharma and biotech is our largest sector. I want to give you a color of a particular customer profile. This is a real customer, real situation, and it just gives you an example of what develops in when you have a global and full portfolio capability. Back -- as we acquired our very first systems in the automation and we redesigned it, we picked up customer relationships, and this customer was in that relationship because they were an early adopter of automation. Separate from that, in 2014, GENEWIZ was picked up as a service provider to this customer as well. We didn't pick up GENEWIZ until 2018 calendar year. And as we brought those together, you can start to see that there was multiple offerings already alive and burgeoning inside this customer relationship. By 2020, we had approached the customer and they had a process on the sample repository business, and we started an enterprise solution that would be a partner to that customer. We also started discussions about their infrastructure of automation, and we won significant contracts. And what you'd find along that way, we added an additional services. So we were able to do specific genomics, not just typical gene sequencing, but RNA sequencing. We did some procurement services, by the way, for sample procurement. We provide consumables to them along the way, and that continues to be revenue streams. But then 2022, out of the infrastructure discussions, we were able to deliver and install automated systems that gave them capacity in excess of 100 million samples. This gives you the picture of what large pharma does. And so this is a significant amount of capacity on site. Look at today, and you would count more than 5 million samples that we store as an outsourced service to this customer. This customer is substantial, but I'll highlight to you that we've not had a customer exceed 10% of our revenue in the course of the year -- in the years that I've been with the company. So concentration is not the issue. The demands of the industry is the need and the customer is able to turn to Azenta. And turns to us because of the capabilities we have. This kind of relationship is one, but we have several of these. What gives us that capability is the breadth and the focus of our portfolio. Keep in mind, it's the breadth, but also the focus of the portfolio. It's focused on sample-based services and solutions. But the breadth is that we can do everything in the cold chain of custody, and we can add to that the analytics as well as the gene synthesis in the customers' requirements. And so I'll highlight a couple of more strong points here not going around the entire wheel, but some people often offer will -- is there any part of this is recurring. If you look at the bottom right of the wheel sample repository solutions represents 17% of our revenue. The biggest portion of that is recurring. That's samples in our freezers, we keep building that out month after month. If you go around the upside of that right, that's the gene sequencing incentives of the business. So you can see that, that's approaching 40% of the revenue, just a little shy of 40% of our total revenue. And then on the left side is our products. And automation is the DNA of the company, efficiencies providing fast turnaround capability and efficiency, workflow, throughput solutions and then finally B Medical was our recent acquisition. And so that has become 17% of our revenue on a year-to-date basis, let me tell you a little more about B Medical. A little noise on this one because it's created some volatility. It's not a commercially driven business. It's a country-based project-oriented business that saves lives in emerging market -- primarily emerging markets. So these are tough to get to countries, locations, landscapes that doesn't have the infrastructure of modern cold chain. And so it's a rugged, durable cold chain often running on solar power that's installed with the systems. Key point, it's an established critical link in the human health cold chain in these markets. And it's a leader in these markets for cold chain. So our presence exceeds 150 countries. It includes 180 distributors, more agents than that across those countries. And so the footprint there is highly valuable to us as it sits today because those countries are still striving as the WHO is to increase the vaccination rate of those countries, increase -- I should say, eradicate the number of children that show up as never having a vaccination, trying to improve the vaccination rate of children. And that all fell behind during the COVID year. So a lot of progress was made up until 2020, but it fell behind in those 2 years. And so there's more energy to make further progress. The exciting part is this in the future. The future applications for Azenta is that as the -- this critical link in the human health for global health is in these countries is that our presence is already there. So we're able to take our bio-sample capabilities, that being biorepository services, that being analytics, that being cold chain preservation of vaccines that are already there, but supplement that with collection of bio-samples in those countries, for those countries as research is done on a global basis. And one thing that we've learned in the last 3 years is you don't solve a global health crisis in the mature markets, you solve it around the world. We see this as something that Azenta can bring value and that B Medical brings significant value in the future. Now I'm going to shift gears a bit towards what are we doing with our company to generate additional momentum and enhance our performance. Let's look back first over the last 8 years. You'll see 33% compounded growth rate. Here, I've given you a little more color on the light turquoise color at the top is in each individual year, how much revenue came from businesses acquired within that 12-month period as compared to the previous 12 months. So in other words, the purple slice is really the organic revenue base. So you can quickly -- again, a picture that tells a 1,000 words quickly see that we've grown every year, both from organic and M&A. As you look at this, you'll see 2021, 2022, these gray slices, we just highlighted how much is COVID revenue in those 2 bars. So that now you could look at the non-COVID on an organic basis, and you see expansion there. Our 2023 is the midpoint of what we recently guided and so you can see there is a little bit of deceleration on the organic base. And that's one of the questions that have weighed on our stock price recently, our valuations. And we look to obviously enhance this, and I'm going to identify as we have recently, 2 key actions that we've taken to make sure that we stay on this long path of organic expansion and again, be able to leverage the strong balance sheet that we have. First, we talked about a realignment of our business. In the sample management solutions element of our business, we're going to once again combine the sample repository solutions services where we store samples on behalf of customers. On our premises, we're going to combine our operating unit with our products business that provides the infrastructure and products to store samples in the cold chain at our customers. So that's a little bit familiar for those that have been with us for, say, 5 years. Prior to the GENEWIZ acquisition, we ran this business consolidated together. We had thought that perhaps providing the outsourced services with the multiomics or the genomics business, combining them together might lead to more synergies. It does lead to synergies. There are synergies across all 3 of these. But the key is, is that we were hindering a bit more on an Azenta level, just the ability to move with speed in the genomics business. So we're separating out the genomics business. We're putting a label on a multiomics because we've moved into proteomics and other analytics. And so we see this business is very key to have the marketing resources dedicated to the sales, the sales married with the operations as well as to the customer and making this very tightened up. We had started doing this in the last 2 quarters, and we saw progress and it gave us higher and higher, stronger conviction that we should realign the business. We announced this realignment this last earnings call. And by October 1, it will be fully in place with much of it in motion today. Second, we took out some costs. We've already completed $20 million of cost takeout and said that we would reinvest about 1/3 of that. So the very first box of this 2 points of enhancement is in the wood already, and that will show up this quarter. It was -- the takeout was completed last quarter. And so you'll see 2 points of underlying enhancement there on the EBITDA equation. And secondly, we announced another $15 million will be coming out by the end of this calendar year. In this equation, in this step of it, we're really focused on the businesses that we've acquired and integrating those operations and eliminating some of the excess that we've allowed to stay operating independently, but to integrate and take some of the common structure out. There will be some other cost actions there, but that is expected to finish by December. That will be at the end of our first fiscal quarter of 2024. And so in total, 4 points of EBITDA enhancement through this year will make us a stronger business, stronger profit profile and set us up for more leverage as we grow the business. So with those 2 actions, key realignment, energizing the marketing with the sales, with the customer has already shown progress, so we expect continued growth. And the combination of those will produce some leverage in our profit profile that we've talked about in the past. So we give you a quick update and continue to show the amount of capital deployment that we do. This is a rigor and discipline inside the company of significant CapEx and R&D. We're not taking back our investment, and we're not constraining investments. We're investing for growth, and we'll continue at this rate, probably more notable to all in the audience as we have committed a $1 billion share buyback. We're more than half through that. With the first half was an ASR that finished in early April. And we're into the second half of this $1 billion buyback would be finished by the end of this calendar year. And after that, we'll still have $900 million of cash on the balance sheet and without any debt. And so that's right for further M&A investment as well as potential returns to the investor. I put it into guidance. I won't linger on it too much, but you can see that the organic growth rates across the page lingered a bit and decelerated into negative. This still has COVID impacts in it. We didn't remove the COVID on this metric. But you can also see that this metrics start to improve in this current quarter guidance. So we turn this to positive in this current quarter guidance. We have confidence in this, and this reflects what we said back on May 9. Finally, I come back to the overall value proposition of the company. We're a sample-based solutions business. If you talk to a customer about who stores your sample, who provided your infrastructure, who would you turn to first point of reference as a company to help you with throughput and high-volume care of our samples and the highest integrity? I think the vast majority of the answers would come back as Azenta. You'll see that value proposition over and over again in the industry. Again, it comes from the focus of our portfolio, but also the breadth of our portfolio of offerings in the cold chain and analytics space. The platform is already built out, able to leverage additional investments as well as to win global customer relationships. And then finally, the balance sheet is there to support the future growth. So with that, I appreciate you tolerating my first pass through this version of our story, Brandon, I'll pause. I think we've got a minute for questions if any come to mind.

Anybody in the audience?

Want to maybe just touch on what you're seeing in the genomics market? A number of companies in the tool space kind of pointed the weakness there and what your outlook is?

Yes. So our view is that the analytics is fundamental to advancing research. And while I think every CFO and CEO on the globe right now is exercising austerity and that there will be some macro headwinds. We think unquestionably, the business and the commercial compelling nature for returns comes back to R&D advancing. And so if there's any slowdown in the macro, we think it's temporary. We don't see this as an ability or something that disables us. We think that we're able -- the technology advances or advancing capabilities, making more things possible. So we don't see this as a headwind of significance even in the near term, but certainly not in the long term.

You talked about still having plenty of dry powder for M&A. Are there any areas of the portfolio you'd like to add to or [ holds ] that you see? Or will kind of near-term focus mainly be on what you've already executed?

Yes. Well, we're focused on developing the business in particular around services and informatics space. We're always looking to complement the cold chain of custody in terms of capabilities. And I'll highlight that our service and products have now started being used in the manufacturing process. In other words, while many think of it as high-volume storage of biological samples for research. Some of those applications of cold is now required in manufacturing for high throughput. So we'll always be looking to complement and I think this is an evolving space for us. So we'll add in the silos. What you won't see, Brandon, is us going far off field. We won't go off into left field. We'll stay down the pipe here of what's relevant to us.

Very good. We'll have to leave it there. Lindon, thanks for being here. You all have a great day. Thank you.

Thank you.