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

Hi. Good afternoon. I'm Fernando Marin, Executive Director in the Life Sciences Tools and Diagnostics coverage team at Morgan Stanley. Before we begin, I'd like to remind you that important disclosure information can be found at the Morgan Stanley research disclosure website. If you have any questions, flitch out to your Morgan Stanley sales representative. With that, it's my pleasure to hold Azenta today. Speaking on behalf of the company is CFO, Lindon Robertson. Lindon, thanks for joining us today.

It's our pleasure. Thank you for having us.

And to start, maybe can you just provide the audience with a brief overview of the company's recent trajectory and key accomplishments and opportunities going forward?

Yes, really happy to. Azenta is a business that's really focused on sample-based solutions and our business offerings and our customer set is on a high demand environment that is caretaking of the integrity of samples, both on storage and ultra-cold environment. It's also taking care of them in a sample repository since analytical since in multiomics. And then we've recently started or acquired a business that handles vaccines in emerging markets heavily. When I say handle it, I mean, the storage in ultra-cold environments. The trajectory, perhaps it's good to reflect on what we've done this year. Year-to-date, and we're almost at the end of our fiscal year, by the way, September 30 fiscal year. But year-to-date through the third quarter, our revenue was up 18%. That was a 4% on a metric that's on an organic basis, excluding the C&I. And the reason we exclude C&I in this case is that the plastics business has certainly in a different space right now with a little bit of oversupply in the market. It's about 12% of our revenue year-to-date. But the 88% is up 4% organic growth. The nice thing that we call out on this trajectory is that in Q3, it's in an accelerating element. So 25% growth year-over-year in the June quarter, with 8% on an organic metric, excluding C&I. It was 2% organic rate, by the way, in the quarter lived with C&I included, but excluding it 8%. So we think we're on a really nice trajectory of revenue growth both on a base of organic, but we continue to apply capital dollars. And you can expect that, that's been our characteristics over the last 10 years. Higher growth even on an organic basis, but certainly acquisitive as well. And we continue to think that, that will be our model going forward. We don't have a long-term model in place currently. You'd expect us to have an Investor Day this next year to reestablish 1 margin profile is the second part of that trajectory, and we did see nice EBITDA improvement this last quarter following a first half cost reduction that enhances EBITDA for a couple of points we saw about almost 8% EBITDA this last quarter. And we would expect that this will moderate in the next quarter or 2, however, continue to accelerate as we go into 2024 with a couple more points of cost reduction and then growth contributing to that dropping to the bottom line with some leverage. So I think you'll see us crossing over some magical milestones there of double digits as we look into 2024 at some point. So we're excited about the trajectory we're on and the outlook and while we're talking just on the direction of the business, the shareholder is also seeing a nice return with -- we're on a path of returning $1 billion through buybacks this year.

Great. And we'll probably come back to a few points that you just touched on. But then maybe let's zoom in a little bit on the Consumables and Instruments business. So you mentioned -- you just mentioned, and also mentioned in the last quarter's call, thanks -- you mentioned oversupply, destocking, biopharma spend, cautiousness. What's the current outlook for business right now, how you guys seeing?

Yes. On the C&I, so our Consumables and Instruments business, I mentioned about 12% of our revenue year-to-date The majority of that revenue is consumables and plastics. The instrument is certainly an element of our automation on the benchtop generally correlates with consumables. What we did see this last quarter was some further growth of instruments, but consumables has been down year-over-year. And our wraparound in the COVID sales actually was at middle of last year. So I wouldn't -- I don't call any of this being COVID overhang. But it's the overhang of the oversupply due to COVID. What do I mean by that. It's during COVID, the supply chain required customers to order 9 months in advance. So for a period of time, everybody was caring next year inventory on their stock in customer sites and then distributors. And meanwhile, because demand was so high, more capacity was put online in injection molding. So I do think there's a couple of wrinkles here. We see this as a space that while there's destocking happening. I think there -- we've already seen some disclosures of injection molding being restructured, taking scrapped and taken off-line. I think there's a bit of a correction in that industry space. It's the thing for our shareholders to know, our investors to know. The consumable space, it's a nice revenue multiplier, peripheral revenue multiplier for us, and profit multiplier, it drops through. It sells naturally because our differentiated value proposition is high capacity automated ultra-cold storage. In other words, we're selling an automated storage system that may store 1 million samples may store tens of millions of samples. And as you fill a 1 million sample store business with plastic, you've put $300,000 of plastic in it. Our automation will handle anybody's tubes, but we always recommend our customers use our tubes. We get some overlapping sales from that, and it's a nice complement. But our huge -- our biggest differentiation is in our automation, our controlled environment for cold storage, our bio-repository and our analytics. And so we look at this space -- this is why we think it's important that investors not be too forwarded by the fact that we're at 2% organic growth overall, when, in fact, 88% portfolio is showing the 8%. And we -- I do think in our own results, I don't anticipate consumables will continue to decline. I think it's going to level off. It will wrap around and still be a slower element, but I don't think it will be the boat anchor that it has been right now.

And to some of the points that you just mentioned, if we want to remain on the automated stores, right, the growth that is driving that business and the main customer applications, so that would be what?

Yes. It's an exciting space. We -- when we first stepped into life sciences space as back when we were the semi business, it was automated cold storage. At that time, it was heavily minus 20-degree capabilities for chemical compounds, which we still sell quite a bit of -- it's still quite prevalent. Every pharma company needs to store chemical compounds that they have developed and discovered in their discovery process for recordkeeping and for future research. But then in 2005, 2010 time frame, biologics really ramped up in testing and retention of those samples in automated stores from pharma, from bio-banks, from academics, from many sources. And so you saw us in the minus 80-degree space start to pick up in any given quarter now generally or minus 80 capacity in automated store systems surpasses their minus 20. In the past 2 or 3 years, it's quite interesting what has happened in either of these temperatures, we are able to apply this now in a manufacturing environment. We've seen a couple of more opportunities to apply high throughput automated ultra-cold storage into the manufacturing environment of pharma. And so we've got another vector of addressable market here that takes what we would have said 7 years ago was clearly a lumpy infrastructure sale business, still infrastructure sale business. but not quite as lumpy and it's starting to show a trajectory on more vectors.

That's great. And on the sample storage business specifically, how should we think about growth trajectory with that one. And specifically, if you could provide us the rationale behind the recently announced Boston repository, that will be all interesting.

Yes. So the Sample Repository business is a beautiful part of our financial model, the business model overall. So in the bio-repository business, we store tens of millions, actually 50 million plus samples on behalf of our customers. So while they're taking our infrastructure, they're also looking in past years to archive samples with us and now do some of what they refer to as their banking samples. So they will store many of their active research and clinical research samples with us and they will be retrieving some of those. So we will send them back to them on a very responsive and high access capability that is broadening that growth rate. The penetration level of outsourced storage is still relatively low. This last quarter is another quarter where the cold storage was double-digit growth of 10%. The overall Sample Repository business grew 6% this last quarter. So we have some admin. We have transport, kitting and logistics and then some informatics that moderate this, but the core of the business is the samples that we accumulate in the freezers. And the nice thing is, is that's backlog for the next quarter. And so when you see that growing 10%, that means -- but you've accumulated tens of millions of samples over multiple years. And in the last 1-year period, you build out 10% higher revenue this quarter than you did 1 year ago. That's a reflection of the sample of accumulation in the freezer. So it's a really nice business. I always say that we're really satisfied if this is high single digits, plus or minus, because you're always building that backlog for the future and it's got really nice margins. But recently, we've been seeing pretty good double-digit growth on a regular basis.

Right. And I want to make sure that we have time for genomics, we'll be great to hear what the growth prospects are in that part of the business and how introduction of recent technologies have been affecting or impacting that growth.

Yes. So to clarify, we're in the service delivery business on the multiomics business. We make use of every platform, technology platform. And some will look at us and say, well, are you an arbitrage of capital for customers, not so much, I would say. That's an element of it. We'll make better use and utilization of capital equipment. I would dare to bet than anybody else because we have so much demand every day going through our equipment. But the beautiful thing that we're able to differentiate is that we run on every platform, a customer can leverage that because they won't have that capability in-house, but we can optimize on which platform will give the clear [ screed ] the best results, the most cost-effective results. So when new technology is introduced, we always get an early access to it. When I say that, necessarily earlier than market, but we're at the leading edge. In some cases, we get earlier in some platforms, but the latest splash on a couple of platforms, we've taken advantage of that. That will create some efficiencies in that particular installation. It gets blended into our total platform. It will produce productivity for sure. it will make the industry space more productive. I don't think it's going to change the shape of the financials in the near term. But in the long term, this has been a curve that I often look back and say, this is familiar with my -- in the IT days of Intel that the processing power keeps getting faster. If it's more productive. And everybody thought that the computing space was going to decline. It didn't have expanded because so many more applications are there. That's what we see in the multiomics space. In proteomics, we've now developed capabilities. And again, this is a service delivery model that we delight the customer, and we have the critical mass that they don't always have, and it's a really attractive part of our business as well.

Yes. No, it's a pretty interesting environment out there. If you want to spend a few -- a minute or 2 in the B Medical, that will be great, what -- you guys posted solid Q3 on that front. By now, there's probably learnings or things that you've been able to or learn from that acquisition will be great to hear.

Yes, that's right. So when I highlighted some of the total growth numbers going from 18% year-to-date, but showing 25% on a year-over-year. A piece of that was the incremental B Medical, not on the organic, but on the total reported because we acquired them last October 1. So that pickup in B Medical did show strength in the quarter. I always hesitate and I caution our investors that it's a business you cannot chime in and I could equally be talking about a quarter where it's smaller 1 quarter than the previous quarter. But in aggregate, we were able to lift the annual outlook from $100 million to $108 million. So it's a nice strength in the business than what we had seen a quarter earlier. So from that regard, it's an improvement in enhancement. We would tell people that this is a beautiful aspect as well. It's in emerging markets is in large part. It's addressing cold storage, ultracold storage for vaccines in the last mile of distribution. So it readies rural markets to be able to vaccinate massive populations that don't have access to modern infrastructure. The business, as is defined today, is a really nice business and it's doing wonderful things in the world and that it's facilitating an advancement of health and the vaccination rates have fallen behind during COVID years and with disruptions. And so what's ahead of us requires more vaccinations to occur, not less at a faster pace. Our vision for the business continues to be exciting as well. The reason we get this is it opens up that market or the emerging markets as it's defined today, but on the longer-term vision, we see this as potentially being a service model where not only are we helping to store vaccines but we're also able to perhaps collect samples back from the individuals being vaccinated, which has not been occurring. And this is one of the long-term hurdles in research. And that is how do you access a large amount of samples from broad population bases that have not been researched. And those are parts of the world that have not been researched. It's a sad statement, but that's the economic development of the world. And in the future, we see this as not just a need for global health, but a market for pharma. And so we're excited about the prospects of that vision.

Totally. Very exciting. Let's switch a little bit to the actual operation of the business, shown some of these topics. I know you -- in the last -- over the last few quarters and calls, you've been talking about changes to your go-to-market as well as business realignment of the operating units. And some of those changes hitting by the start of the next fiscal year, which for you guys in November. So if you can just navigate us a little bit about the whys and hows of those changes and when exactly they'll probably be completed.

Yes. So the why of the changes is really important to understand. So as we separated from the legacy business in semiconductor, we stood up the life science business of Azenta at the end of calendar 2021 and formalize the brand name Azenta and we transitioned all of our various brands that we had acquired to that single brand name. And as we did that, we combined our -- we had our services business combined Sample Repository and Genomics. And there is some synergy there that as you're able to store and facilitate sample prep, you're also able to analyze. But what we've realized is we see a faster path for growth, more consistent path for growth. And that the Sample Repository business really is a total complement to how much infrastructure a customer has on site to store and their cold environment versus how much they want to store offsite. And when you're engaged in that discussion with a customer, you're talking to one person at that level, infrastructure on-site, outsource offsite. If you're talking to someone at the customer about sample analytics, the multiomics, they may at a procurement level be related, but at an implementation level, it's not the same individuals making the decision. So the individual PIs that are doing analysis are looking for business comfort level with a provider. And we took them to Azenta and they were looking for GENEWIZ. And so we reinvigorated our business around the rebranding and started marrying our old brands to these more closely, dedicating the sales team, enhancing the sales team with scientists selling to scientists a little more rigorously to underscore the autonomy and the capability for our genomics business to move faster on its own and taking the Sample Repository business, which a new engagement is a slower negotiation, and so by decoupling them a bit, we see that we're going to already see some results from where we've affected the sales team. And as we reorganize and report definitely this next year, I think we'll continue to see that momentum accelerate. In this last quarter, we saw genomics growth rate improve again to 8% year-over-year. And that was double-digit growth in the next-generation sequencing space and flat growth, flat revenue in Sanger based. So -- and solid growth in the gene synthesis. So I think those beginning actions are taking shape and creating some momentum. So the reorganization helps improve autonomy and speed with a customer and helps make a logical conversation on the infrastructure build out on cold storage. B Medical then being another piece, we'll keep that operating separately into the markets it serves because it's still serving in emerging markets. The sales won't be integrated there. And this is, we think, is very logical for optimal performance. So we look forward to the finalization and culmination of all those changes by October 1.

Great. And perhaps connected to that, you've announced 2 tranches of cost reduction programs by now. If you can remind us the size of these programs and what the costs are being taken out and when we can see the impact of financials.

I'm sorry, the beginning of the question.

The cost reduction program.

Oh, yes, the cost reduction program.

Few tranches announced.

Yes, thank you. So the first phase of our cost reductions were announced early in the fiscal year and completed in March. And so in the June quarter, we had a total of 2 points enhancement to our EBITDA structure fully in place. In fact, there was $20 million of cost takeout, but may grew for some of these investments in sales that I was just talking about in enhancing genomics as well as our sample management space. So that's, that's completed and behind us. Some of the investments are ongoing. And by the end of the calendar year, we're taking out another $15 million, and that was aimed primarily in integrating some of our past acquired businesses that we had not integrated the manufacturing side. And so we're making -- taking those steps now and aiming at $15 million of cost and expense reduction, it would be another 2 points roughly on a $700 million business. And that's, that's the underpinnings of lowering our structural cost and improving the leverage as we grow and getting our EBITDA margins back to those double-digit areas.

Yes. And precisely on that last point, how should investors be thinking about the margin generation trajectory for the business? I know there's been several things happening on that front.

Yes. So those cost reductions will help at the gross margin level, but that lowering of the centralized cost is the key in the business model. We've long seen the results of what leverage does as we control those costs, and as we've lowered those, that will enable us, again, we showed 8% EBITDA margins this last quarter. Our guidance is just the midpoint is a little below that, but it straddles that point for this coming quarter. And so I haven't put out 2024 number, so I won't do it today. We'll wait for our fiscal year-end. But I'm very inclined to say everybody should be optimistic about the progress in the 2024 for further enhancement.

Right. And Q3 was the first quarter in which you reported positive free cash flow. Maybe if you can talk a little bit more about the capacity for the business for continuing generating that positive cash flow going forward.

Yes. One of the criteria for setting up the life science business was to foresee its ability to generate its own cash. Not because we didn't have enough on the balance sheet, but you've got to be able to sustain and generate your own cash and fund your own business to be a viable business. And so we knew that we had that. In the first 2 quarters of this year, we had not in the tail end of last year as we separated the business, we had not generated operating free cash. So this year, this quarter, one, the higher EBITDA enhancement was contributed nicely to it. We actually had $15 million additional EBITDA in the quarter versus the prior quarter, off of the growth but also off of the margin improvements and the cost takeouts. Combined with that, the working capital, we had investments through COVID in inventory as well as larger receivables. And in this year, we put particular energy behind bringing those back to a more regular level and we're still in that process. So we're now seeing cash generated. I won't be able to say we're going to see it every single quarter, but I think the trajectory here is on an annual basis. We've got good capability to generate positive cash flow going forward.

Right? And once you complete the share repurchase program of $1 billion, you still have roughly another $1 billion in balance sheet. When it comes to capital allocation going forward, what are sort of the guidelines or expectations that you have?

Yes, that's exactly right. As we sold the semiconductor business, left us with $2.5 billion on the balance sheet. And that afforded us to do the acquisitions, so some of which we've pointed to in B Medical, but we've done a couple of others. So over $500 million, closer to $600 million spent on acquisitions so far. But $1 billion committed and most of that returned already to shareholders as of our reporting in August, over $800 million or 20% of our shares have been taken off the table since last November. And we've got another $180 million since then to the end of the calendar year to execute. And you're right, another $1 billion available to us. That criteria, that lens that we look through is what is our need for acquisitions to build out the capital value of the business. We look at that through an ROIC lens. If it doesn't meet the hurdle, we walk away. If it meets the hurdle, we make sure that the strategy is sound, the fit is good, the returns are positive on an ROIC basis, and then we move forward. If we don't see the needs for the $1 billion, our principle that the company and the Board has taken is that, that cash return belongs to the shareholder. We have another $0.5 billion of the authorization of the buyback out there. And so as we finish the calendar year, we, and particularly the Board, will be determining whether we move forward with further return to the shareholder. And that, that will include a very crisp look at what our pipeline for M&A is going forward. I'd highlight that if we decide to continue to return to shareholders, it doesn't hold us back from M&A because we're not -- we're able to take on debt. We're able to raise equity down the road. So we'll forever be a growth company and acquiring. I'm confident in that, is our profile. The only question here is about putting this capital on our balance sheet to work on the best way for the shareholder.

That's great. And with the time left, I know there's one point that you guys touched on during the earnings call, which is China and Europe -- operation in China. Just going forward, at least for the rest of the calendar year, maybe to 2024, what are the high-level expectations of the operation in that business?

Yes. It's an interesting one. We saw quite a contrast in our performance of China. And we recognized that before we went to our earnings call this last quarter, and by August, when we released, we had seen several reports that people were seeing a slowdown we did more than just a double look out of -- we looked at it in a few different ways. But we didn't see a slowdown up and through their earnings call, and I would highlight, though, that we were also cautious in our commentary, and we continue to be cautious that we anticipate that if the macro environment there has impacts, we'll be exposed to that impact. And so we are cautious on that. But our experience through some very tough periods in COVID is that our team has been able to continuously execute with growth. And we have -- we're optimistic that, that's the outlook for us in China. And we're very proud of our team there. We've got strong leadership and a strong base of both operations and sales, and the customer set really accepts us as their solutions. So we're projecting for growth, and we always prepared for scenarios that are different.

Great. And last question. Most important opportunities heading into 2024 from what you see.

The important opportunities?

Just like growth opportunities in general heading this year. What -- the 1 or 2 things that [indiscernible] exciting?

Yes, I think there's -- the excitement for us is one, we couldn't be more proud of what we've built around the automated ultra store -- ultra-cold store systems. Automation looks to be just widely accepted by high in demand these days and at a large scale. And so we're excited about what that is in 2024. On the bio-repository side, we made 2 recent announcements that we shared publicly. One, we're establishing a bio-repository new one in Boston area, close to the Cambridge Center of Life Science Corridor there. And it will facilitate some of the most sensitive samples that the researchers just won't allow to move to Indianapolis or somewhere. So we will be able to improve their cost equation by putting it outside the belt line, the beltway there in the Boston area and Billerica. The lower cost higher utilization of freezer capacity, lower carbon footprint than they've seen, and for them, a dramatic better use of real estate in the Cambridge area, which is quite costly. So we're excited about that. In the longer-term prospects, some of these are already our global customers looking to do that locally. Some of those are new customers. So it's a growth vector on 2 directions on a bio-repository spot. So I'd highlight those 2, but we're making progress in genomics and B Medical. So it looks to be a good future.

And we cover a lot of ground. So thank you very much. Good luck.

Yes. I really appreciate it. And the conference is outstanding here at Morgan Stanley. So thank you for including us.

Thank you.