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

Thank you for joining us at the 26th Annual Needham Growth Conference. This is day 3 of 4. With me today is the Azenta team. We have Steve Schwartz, the CEO; Herman Cueto, CFO; and Director of IR and Corporate Communications, Sara Silverman. My name is David Saxon, and I'm an analyst on the Med Tech Research team here at Needham & Company. So in terms of the format, the Azenta team will do a presentation, and then we'll hop into Q&A. If anyone in the audience has a question, feel free to raise your hand, and we'll try to get to you. So with that, happy to turn it over to you guys.

Great. David, thank you, and thanks, everyone, for being here. We're always pleased to have a chance to be at the Needham Conference. It's a great way to kick off the year and see everyone, and we really appreciate the opportunity to be here. So thank you. I'm Steve Schwartz. I'll give an introduction a little bit and mostly people who are aware of the company will recognize what we have to say. We've also made some pretty significant modifications here over the last quarter, and I'll spend a moment there. And then I'll introduce Herman Cueto, who will have a chance to talk to you a little bit about some of the initiatives he has underway and how he's been thinking about the company. He's joined us now just about 90 days ago. And we couldn't be more pleased with Herman as the Chief Financial Officer. It seems like he's been with us considerably longer. But we will be making forward-looking statements. I refer you to our safe harbor statement at www.azenta.com. What I wanted to do is just outline for you what we think is a really unique, high-value portfolio in a space that's critical for Life Sciences and becoming more so. And the places we participate, what we do to enable breakthroughs faster for our customers is really an essential capability. We have a track record of growth. We're in the process of reestablishing and reinvigorating the profitability that's associated with that growth. We're talking about -- we'll give a little bit about the tailwinds that are behind the opportunities that we have as a company. And Herman will really talk about how do we convert this opportunity to drive considerably more value in the future. I do want to mention that since the last earnings call, we made significant changes to the company that really relate to driving shareholder value. The fourth quarter of our fiscal year ended September 30, we're October, 1 year. We grew organically in a market that was down. So even 2% growth against the peer performance in our space, although modest, was a pretty significant accomplishment based on the growth profile that we've demonstrated in the past as a company. On a reported basis, we were up 25%, as a result of an acquisition we've done exactly 1 year earlier. We continue to push from a profitability standpoint, but we were a positive free cash flow company, last quarter again, and we anticipate that we'll continue this trend into the future as it is a substantial threshold for us as a Life Sciences company, not just to be a stand-alone Life Sciences company from where we've been historically, but to be a cash generator, a profitable company. At the time of the earnings call in early November, we also guided with confidence that we'd be a 5% to 8% growth. We anticipate 5% to 8% top line revenue growth, in fiscal '24. We'll talk to you about the confidence that we have from what we see even in an uncertain market or what opportunities continues to drive our business. When we established Azenta as a Life Sciences company that had grown out of Brooks Automation, we -- when we separated with the semiconductor business, we sold it for $3 billion. We had a very significant cash position in November of 2022, we announced that the Board had approved a $1.5 billion share repurchase. We committed to $1 billion of that in 2023. And for the most part, we completed that in 2023. At the earnings call in November, we announced that we would then commit to the other $500 million that we had approved 1 year before, and we'll embark on that here and anticipate that we'll complete that here in 2024. So we still -- at the end of that repurchase, we'll still have $500 million approximately to continue to grow, to add capabilities to the company, to build out the portfolio, to make investments, not just in the top line growth, but to make investments in profitability. And you'll hear Herman talk about some of those initiatives that will consume some of that $500 million, but in anticipation of both growth and even a faster growth on the bottom line. And finally, at the Annual Shareholder Meeting on January 30, we anticipate that we will put 3 new board members on to the Board of Directors. So we added significant capability, in terms of this continued transformation to 100% Life Sciences company, we had Didier Hirsch and Dr. Martin Madaus, who are very strong operating executives with excellent track record in Life Sciences. We really look forward to their participation on the Board. And Edward Bose is a person from the investor community, who we think also brings us a very unique perspective. So we're really pleased about the transformation we continue to make, strengthening the Board, very strong balance sheet and market opportunities that we think will serve us well here for the next 10 years. And I'll detail some of those things very briefly. For those of you who aren't so familiar, let me introduce you a little bit to Azenta. We are an end-to-end capability provider for those who do discovery in Life Sciences. Very simply, the sourcing of biological samples of a known phenotype that researchers can ultimately extract data from, to begin to do cures and therapies, using the genome as the foundation for their research. So we source biological samples. We format them so they'd be stored in automated systems or managed in automated workflows and in consumables that go down to cryogenic temperatures, which is now essential as we get toward a cell and gene therapy world. We provide automated storage systems, and we provide outsourced storage of biological samples. We have about 60 million samples in our repositories. We have an installed base of large automated stores that have a capacity of about 0.5 billion samples. So it's a pretty significant portion of the approximately 2 billion samples that are stored cold on our -- we represent the market leader in the automated cold stores, for sure, and we're the #2 position player, growing rapidly in the repository business. And we also have a world-class capability to interrogate these samples, to interrogate these biological samples and provide data to customers, the researchers who can then utilize the information from these rare and invaluable samples actually to do discovery. So this is a critical but not core capability that's necessary and utilized by every discovery company, the fact that we can provide services and capability to do it faster, to do it more economically and to do it with an assuredness that these are high fidelity samples that they can find at any time is a unique capability, unique portfolio in the industry. And more and more, we're seeing tailwinds that continue to support this as a rare and valuable opportunity to support discovery. I'll give you just a quick profile of the company. We look at ourselves as a company with both the reach and the resource to provide the strong penetration in this market. So as I mentioned, where we have a global footprint. We operate in more than 150 countries. We have $500 million on the balance sheet, that allows us to keep making investments in support of this type of research that goes on around the world. The customers we serve are global customers. And so when we have storage and sample management for a customer in Cambridge, Massachusetts, we do the same thing for them in France, in Germany and China. We can manage their global repository business in a way that no other company can. In the phases of growth, we started with core technical capabilities we had from Semiconductor business, Automation and Controlled Environment and a mechanical means, by which we can make cryogenic temperatures. And we started in the Sample Management business about 12 years ago. We built automated stores. We acquired companies that did that. We acquired an installed base to physically manage samples in cold in automated systems. Subsequent to that, after building a $100 million business, we acquired a world-class capability in genomics analysis, so we can interrogate those samples that we managed on behalf of customers and we rapidly grew both businesses, the Storage and Sample Management and the Genomics business to about a $500 million Life Sciences business, with an interesting core capability that's unmatched from a portfolio standpoint. What you'll see from us going forward is we'll continue to build on those platforms, which provide the opportunity for very strong growth. But on to that, we'll add automation capability to enhance our capability, not just to manage tens of millions of samples, but ultimately, hundreds of millions of samples. We'll expand our sample sourcing business because today, everything that we do in this platform that generates a $600 million or $700 million business, is on behalf of samples that are owned by customers. When we have the ability to source samples that belong to us, that are consented that we can manage in our platform and measure on our platform gives us a chance to sell this consented sample data to multiple companies. And so what allows us to do is to have leverage on utilizing the current platform that we have and expanding the opportunity for the management samples to be able to discover samples that can be sold to multiple customers. And finally, when we talk about automation, we are now in the Repository business where we'll be able to do fast turn, high fidelity, high-quality, very economical management of biological samples and will transform the market-leading Repository business we have already into one that's in order of magnitude more capable from a cost and speed standpoint. In terms of end market growth, there are a number of tailwinds that support the opportunity that we have. More than 50% of the outsourced research capabilities continues to grow. The things that we do as a company are critical for Life Sciences Discovery companies, but not core. And so the fact that we can manage samples and source samples and measure samples for them, they'll continue to outsource more of that. The more we can do it economically and with speed that they need to secure Discovery, the scientific capability that we have as a company continues to bring more business to us. Three years ago, we looked forward and we could see that the number of samples that were stored in an outsourced fashion was going to double in 5 years, 3 years later, we've observed that already. We continue to see another doubling over the next 5 years of the high-quality biological sample collections, is there a chance even for this to accelerate, the better we get at the more economically we can do it. We think this has a chance just to continue to accelerate. In the last quarter, that we reported in Q4, the Sample Storage business, our Sample-based Storage business in our Repository business grew 15%, and the Stores business, the Automated Stores business grew 38%. And this is a testament to the fact that the sheer sample count continues to grow up. So as we're able to provide outsourced services, we're able to provide stores, the sheer volume of the number of samples that DB store was driving an incredible growth in the business, and we don't see this abating anytime soon. And finally, the cell and gene therapy opportunity that continues to build in fits and starts, we have a cryogenic sample management capability that's essential, for cell and gene therapy capabilities, the fact that we've developed automated stores for cryogenic management, the samples positions us well for when this market expands. We believe we're fully established as the unique provider, the sole provider of automated cryogenic sample storage, and we think that cell and gene therapy will be a huge driver for us in the coming years. We're proud of our heritage, as a company is an Engineering and Scientific company and the fact that we serve the top 20 Pharma companies in every fashion. We follow the customer discoveries from the earliest research days, for the publications that we help them to provide all the way through to drug discovery and drug delivery. So we have a broad platform that customers know us in all parts of their organization, with research all the way to clinical delivery and we continue to build each of these capabilities out to make sure that we secure our position with the customers here in the future. And with that as a backdrop, I wanted to introduce Herman Cueto to you and have Herman take it from here to talk about some of the initiatives we have related to the profitability, how we're going to drive this portfolio for considerable continued growth.

Maybe I'll just take a minute and introduce myself. My name is Herman Cueto. I'm the new CFO of Azenta. I started on October 16. So I'm right here at 90 days. I joined Azenta from Becton, Dickinson, where I most recently held the position of Senior Vice President of Finance. Over the last 90 days, I have spent a lot of time thinking about the transformation strategy, that we're going to start to talk to everybody about at the upcoming Investor Day. I've had an opportunity to go to some of our marquee locations in Indie, also in New Jersey. And in a couple of weeks, I'll be in Luxembourg to see the B Medical business firsthand. I've been greeted with such open arms by all of the wonderful people at Azenta. All of the things that I talk about, the crazy ideas that I have, everybody is just super supportive of what we're trying to do, and I couldn't be happier to be here right now. So maybe just a minute on the 3-segment structure. So, for those of you who follow Azenta, we've been talking about moving into a 3-segment structure at the start of this fiscal year, fiscal year '24. Sample Management Solutions will consolidate the Sample Repository business, the large automated Cold Storage business and the Consumables and Instruments business. The Multiomics business is really the renamed Genomics business, so think legacy GENEWIZ. And then B Medical is the company that we acquired in fiscal year '23, given the unique customer and revenue profile, we're going to keep that off on its own. The reason we did this, it's really simple. First, it's actually the way we run the company. So internally, this is the way we're structured. It's the way we run the company. And second, it's the way we actually go to market, the way we want to sell. So for example, in Multiomics, we have scientists selling to scientists. And in Sample Management Solutions, we have asset managers selling to asset managers. So it just makes a ton of sense from that perspective. I won't spend a ton of time on this slide. But it's just a breakdown of the 3 segments that we have. You get a look at the revenue mix across the 3 segments. But most importantly, what's important here for everybody to see is the diversity within the portfolio and even the balance of revenue within each of the segments. So it's a really great diversified portfolio that we feel really good about. So the next 2 slides are really focused on the 2 things that we're driving right now with Azenta. So the first thing is growth. And the next page, I'll talk a little bit about profitability. So we have a lot of momentum, across these 2 things. But when you look at a page like this, this is a company with a rich history of growth. It's not on the page, but it was on one of the pages that Steve shared. This company in 2011, when Brooks got into Life Sciences, was $10 million. So when you think about a decade, a little bit more than that to go from $10 million to something around $700 million, that's really hard to do. It's super impressive. And the way we've been able to do it is through internal, organic innovation and very strategic acquisition. So starting in 2016, we bought the BioStorage business. That's the backbone of the Sample Management Solutions business that you see today. In 2019, we bought GENEWIZ, that's the backbone of the Multiomics business. And then most recently, in fiscal year '23, we bought B Medical, and that got us into Cold Chain Solutions, but also has given us a foothold in the broadening and fast-growing emerging markets. Really focused on growth. We do believe that Azenta in any environment should at least outgrow the market. We're going to continue to invest behind that. That is something that we're keenly focused on. So one of the 2 main pillars that we're focused on at Azenta. And then second, and I'm going to start with this slide, we have already shown. So we're not trying to reissue guidance or anything like that. It's a share that -- it's a slide that we shared when we updated guidance in November, so no changes to it. But it tells a really interesting story. So when Azenta finished the first half of '23, we exited with a 2.9% margin -- EBITDA margin. It's not where we want to be. It's not the type of company we want to be. We quickly went and said, okay, look, it's time to go in and really find the cost savings opportunities. And in the second half of '23, we were able to go from 2.9% to about 6.4%. So really good acceleration. And we landed the full year at 4.6%. So that momentum we are seeing continue throughout fiscal year '24, where we've committed to 300 basis points of EBITDA margin expansion. While making strategic investments in the Boston bio repository, the U.K. lab and also the annualization of our sales force investments that we made last year. We feel really good about this. As I said, when I started, I've spent the last 90 days really thinking about the transformation strategy, and we're really looking forward to talking more about that when we get to Analyst Day. So to summarize, Azenta is a very differentiated end-to-end sample management company. Around $650 million or greater than $650 million of revenue in fiscal year '23, well positioned in its markets, and we have the capability and capacity to do more for our customers. And really what's more important, and Steve touched on this, Azenta has a very, very healthy balance sheet. We ended fiscal year '23 with $1.1 billion in cash. We have 0 debt. And we've committed to returning $500 million of that $1 billion back to shareholders through the share repurchase program. So that's going to leave us with $500 million, to run the company, to invest in this transformation that we're going to do and to find strategic tuck-in M&A. So we're positioned extremely well for the future. We're excited about it. And -- this is the plug for Investor Day. So it will be March 14 here in New York City. We're looking forward to seeing everybody there. And I'll turn it back over to you.

Great. Thank you, thanks Herman. Again, if anyone has any questions in the audience, feel free to raise your hand and we'll get to you. I guess, just off the -- this last slide, I wanted to kind of start higher level and then we'll get into kind of the businesses. You made some recent commentary. I think it was last week, I guess, about expecting revenue growth to accelerate into the low teens, over the next couple of years, guidance for this fiscal year is 5% to 8%. So maybe talk about what's driving that acceleration? Is it market recovery? Is it commercial execution? And then the second part is, directionally, how should we think about the revenue growth profile of the 3 businesses and enabling you to see that acceleration?

Yes. So I'll -- I want to address, it's a sample-based business, which we continue to see the trend towards outsourcing. So it's going to take a little while to do that. We manage almost all samples for 2 large pharmaceutical companies today. 3 years ago, we didn't -- we had bits and pieces of those. We think the next 10 pharmaceutical companies are candidates for us to store tens of millions of samples for them. So we continue to see that as a tremendous opportunity. The more carbon footprint, the more floor space, the more complexity in those collections, we think we're uniquely positioned. So it will provide longer-term growth opportunities, we think we'll capture. On the Genomics side of the business, we don't do commoditized measurements, rather we do really specialized scientific measurements. We've been able to see sustained spending on critical research projects. And so the reason that even a 2% growth or flat in the Genomics business, although it's not been where we've been, the fact that peers are down 10% and 15%, we think we continue to outperform. So in a -- for example, a 6% growth market, we think both businesses provide us a chance to outgrow. The unknown here is B Medical. And on the B medical part, there's a lot of volatility in the business, but just still steady performance. We understand when we've won business, but not as well when the business will be let. Ultimately, when the contracts will be cut. But we think that we'll build on the B Medical business from vaccine delivery, to the first part of sourcing rare biological samples. So on the outbound side, the B Medical vaccine boxes are purchased by the World Health Organization, by UNICEF, by Gates foundation from a charitable organization standpoint. How do you deliver vaccines? But when the health worker goes and has contact with that child to inoculate them, it's an opportunity for them to bring a whole blood sample back using that same cold chain in reverse. And the customers for those samples of pharmaceutical companies. And so there's a product business on the outbound, as a services business back. And it will take some time to build that, but there's a tremendous amount of interest in the 50,000 B Medical boxes we have installed in remote areas of the world where the samples and the patients and the participants are most valuable and most interesting. So we continue to see the places that we exist in the marketplace, having growth drivers from almost every perspective, and we continue to be focused on that sample-based business. And we think it will provide opportunities for us to grow once again in the teens, as the markets stabilize and become healthier.

Okay. And then I think you also made a comment about EBITDA margins getting into the mid-teens. So I guess where is that coming from? Is it in the COGS line? Is it in kind of the OpEx section, middle of the P&L? Any commentary there?

Yes. No. I mean it's going to come from both, David. As we think about the transformation strategy, I mean, there are things that we could do to automate inside of the factories that would help on the COGS line as an example. We have a network architecture that we're going to be looking to look at that more holistically. And both of those 2 things in combination will help cost of goods sold. But even beyond that, there's org simplification things that we need to do. And that's going to be really the key thing that we talk about at Investor Day.

Okay. And then looking at this fiscal year, 300 basis points of margin improvement that gets you into the 7%, 8% range. You're guiding fiscal -- the fiscal first quarter to break even. And then I think you've said you're exiting the year approaching double digits. So maybe talk about what drives that sequential improvement? It's a fairly steep ramp, I guess, you kind of mentioned some of the Phase 1, Phase 2 initiatives. So I guess talk about the ramp, what drives that?

I mean you certainly want to talk about the Phase 1 and Phase 2 initiatives coming through. So I would say in the first part of the year, you have the Phase 1 sort of finishing up right now. we have the Phase 2 starting. But don't forget, we do have to cycle through some of the investments that we've made in the sales force, so that will mute some of the stuff that you see in the first part of the year. So that's why you see a little bit of that acceleration in the back half. What I would say is both of those initiatives are well on track. And as I've said before, the teams have done a great job putting those plans in place. And even when time lines on certain initiatives ended up getting extended, they had Plan Bs to pull different things in. So, it's in a good place. We feel really good about the full year guide and the 300 basis points of margin expansion.

Okay. And then just remind me, so Phase 1 was -- that was just standing up a stand-alone cost structure, I think. Let me know if I'm right or wrong. And then what is exactly Phase 2? Where are those costs?

It's -- I would say -- so we said between Phase 1 and Phase 2 was about 400 basis points of margin expansion. It comes from a variety of things. I think the first wave was more around org simplification initiatives. Phase 2 was a combination of org simplification plus some network architecture. But as we've gotten into things and the network architecture, you get into regulatory deadlines, not deadlines, but regulatory considerations we had to go and course correct and do some more org simplification type initiatives. So it comes from a combination of both.

Okay. And so Phase 1 is finishing, you'll continue to get the benefit there. Phase 2, does that extend into fiscal '25 -- we like -- so okay. So off the 7%, 8% on the year, we should see some incremental expansion of that?

Just as we cycle into '25. That's the right way to think about it. So you get a partial -- I think 3/4 of it -- 3/4 of Phase 2, you'll see inside of fiscal year '24.

Okay. And then just on the share repurchase authorization, $500 million, I guess, is that $100 million per quarter starting in the fiscal 4, extending through the calendar '24?

It really starts -- it will start around now and go through the end of September. But we want to be smart about the way we do it. And there are considerations, the stock price that we're buying at might change the way or the volume that we buy on a given day. So we tried to set it up in a little bit of a strategic way.

Okay. And then -- just lastly, and then we'll dive into the businesses. So you will end with a healthy balance sheet. You've talked about $500 million. You have been acquisitive in the past. So maybe talk about kind of how you think about M&A going forward, and I'm sure you'll give more details in a couple of months. But what areas do you find attractive? And are you thinking $500 million acquisition? Or would it be smaller tuck-ins?