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

Thanks to everybody for coming to this conference with Azenta currently presenting. I'm Paul Knight, the analyst at KeyBanc on the company. I think I followed your company, Steve, for what could be a decade, but glad to have you here. Steve Schwartz, CEO; Herman Cueto, the new CFO, not that new, last year. And Sara Silverman in her last outing as Investor Relations head. So Congratulations. I think you're going to be Group CFO, Sara. So congratulations on that.

I thought, Steve, a lot of things have happened at, of course Azenta and the industry over this 4 years of COVID and/or post-COVID. But I remember meeting you 10 or 15 years ago and -- maybe it was 10, and you were about $22 million in Life Science sales, you were building it up and you've done a lot of M&A since, you're -- kind of outlined your new goals at Analyst Day. But is the goal still there to keep strategically building this up into -- you're already a leader in cold storage technology. And what's the goal with -- is it still the kind of the same Steve Schwartz strategy of building this up with strategic M&A. I don't think -- I think we've kind of moved our eye off that ball. I'd love for you to talk about the many successful things you've done, that will that resume again some days, some months, some year?

Sure. Thanks, Paul. And Paul, yes, it has been just a little over 10 years. So I appreciate that, and thanks for sticking with us. Yes. Paul, a couple of things. One, it's not a Steve Schwartz strategy so much as an Azenta one. And but really clearly, we -- I think in earlier days, we talked about how we're going to be a sample management company, how we're going to use automation and cold chain. We saw an opportunity to grow into the genomics space not just to manage the samples but to interrogate them. And now we're looking at some opportunities for sourcing. But I think what [ you're going to ] see is the portfolio, that we think we serve the industry best with, is complete. It's a relatively complete portfolio. So things that we do would be tuck-in kinds of things that would be additive from the standpoint of completeness in a portfolio, organic investment is where we see the next acceleration coming from -- and we feel good about it. We think that the opportunity from just the sheer number of samples that need to be cared for, the complexity of those collections, how measurements are done and the ability to source rare and valuable collections is really important. We think we have a complete portfolio. The topics that Herman brought to Analyst Day that we had last week as you attended, really related to now how do we continue to drive growth and profitability. But from an M&A standpoint, you'll see additions still in the future, but we have a complete portfolio, that would be capabilities that we just add to what we own.

And then on the construct, last week, you guided 1% to 3% industry growth, that's obviously -- this is kind of a reset year for everybody. I know -- that's kind of a consensus view amongst corporates this year in life science. What is your thinking about what is this normalized as we sit here maybe in 2025 and beyond?

Yes. So Paul, let me refresh that because indeed, we guided -- our plan against a 1% to 3% year, what we intended was that we're going to outgrow the industry in any format, any condition. We built a 5% to 8% growth plan from here through the end of '26 against an assumption of a 1% to 3% industry growth rate. So we're hopeful that it's better. We anticipate that even the start of '24 would be stronger, but we're listening to larger peers talk about their estimations for '24. We still stand by a 5% to 8% growth rate for 2024, but we're not seeing an acceleration of the market. So we put out a 5% to 8% growth rate against an assumption of a 1% to 3% industry. As the industry picks up, you would just take that gap that we have, and if it was a 5% industry growth, we'd be at -- in the double digit -- low double-digit range, and I think that's how we look at it. So we're bullish about the opportunity, continues to come away. We need the economy to pick up. We need China to get healthier for some of our peers, but we're really bullish on the opportunity and whether it accelerates here in '24 or starts to accelerate in '25, we're prepared for it, and we're eager to address it.

And then Herman, the guide on EBITDA margins was somewhere, what, in that 16%, 17% range. A lot of peers are still in the mid-20s. What has to happen to get to this, even above your current guide of 2026 at the 16% to 17% range?

So Paul, I would say so that where we guided was 15% to 17%. So 16% at the midpoint. And when you think about what we're doing Paul, the things we talked about preparing for scale and growth, we talked about the tuck-in acquisitions that we've done through the years and the untapped synergies that are around us. So as we build this platform for scale and growth, and we do more integration type work. It's going to lead us to the cost-out savings that will get us to that margin. And we see that happening -- it's happening in '24 with our Phase 1 and Phase 2 cost initiatives. It will happen in '25 and '26. And then beyond that, we certainly will have our sights on 20% plus. And I think when we talk about automation and Steve gave a great example of the BioStore Ultra and what that could mean for our sample repository business, which right now is very labor intensive. So moving to a platform like that. I think, is going to be the next vector of value-creating initiatives that take us to that 20% range. And in the next Investor Day, I think that's what you're going to hear us talk a lot about is automation in the factories, the repositories and the labs.

I think investors have really for over many years wanted Azenta to be holding or owning 15 BioStorage facilities globally by now. Does BioArc make that more likely or maybe a better way to put it, a chance to make this storage business larger, faster?

We really think so, Paul. For two reasons. One, just the sheer capability, the economies of scale, the cycle time. But because it has such a dramatic reduction in carbon output, the opportunities, we -- the second one after Boston, the next one will go into our European repository. And so we think that will have a tremendous impact.

And then I think, Paul, Steve gave the great example of the footprint where you take our universe of samples that we store inside of Azenta and we could fit them in 3 BioArc Ultras and just the pure footprint savings. I think, also enables you to do more in the future if you did want to invest in a repository in a different location. I think that certainly makes it more attractive and easier to do.

Is it hard to win storage business?

You have to be patient. It's just hard work and persistence, Paul, there's so much inertia. And it's one of those things that once you get it, it really starts to come, we have an example with a large pharmaceutical company that had us come in and assess 6 different sites. And that -- it took us a couple of years to get that assessment started and within 18 months after that, we had consolidated 31 sites for them in terms of samples. So it takes a little while to get that escape velocity, if you will, but then you can start to move. And it's compelling. And nobody has ever gone backwards to say, "Gosh, we wish we'd kept the samples." No one's done that and they won't.

Is it a sticky M&A environment? Meaning, is there -- are there deals out there? Or are they kind of rare to find at the right price?

In terms of getting samples moved in?

No buying assets in the sector.

So I think there's always something to be done. Paul, these are -- because we've done 15 deals and they've all been private, I think those are -- there are other reasons just beside the price and relative price that make those attractive to sellers. And so we've always -- when we have an opportunity, generally, we've known the company for many years, and so there are compelling reasons beyond just a particular price. And usually, as valuations go up and down, our conversations are pretty steady. And so when we get to a point where there's a deal to be done, it's because it's really -- it's the right thing for both companies. And so we haven't had issues where -- and by the way there are deals we've not done just because pricing wasn't going to be right. There's not a -- there's never a forcing function for us. We have a lot of patience here. And unless it's right for the seller and the buyer, those are deals we just don't do. But the environment is good. It hasn't changed much at all for us, again, because they're private and they're strategically attached, and the sellers always know what they're going to get into when they come to Azenta.

We follow Lonza and Lonza doesn't really want to build -- or excuse me, they only want to build their own sites because they are obviously a high quality. They want to do it their way. Is that a little bit what you are all about in storage? Why would you want to acquire some -- as I looked at your presentation last week, some vertical manual refrigerator business when you can go in and build it now with your BioArc product, is that kind of what we would expect in storage at least, you're kind of, I'd rather go greenfield on it?

Yes. So -- but Paul, for 2 reasons. One is exactly, as you said, the other one is there are tens, if not hundreds, of biorepositories of various kinds. We're a bit different from one standpoint, we generally don't sell cubic feet of cold per month. That's not our business. We generally track individual samples, very few -- there's a handful of biorepositories that actually take care of the samples in the same way that we do. So the SOPs, the processes, the procedures that they have in place. So very few would be candidates. You won't see us ever taking a look at a company that just has cubic feet of storage. That's not our idea for a repository. We manage it like the customer wants, like the customer wishes they'd manage them themselves. And that's a really short list of potentials. And if those existed and they were priced fairly, necessarily, we would also automate those in time because that's the care that customer is willing to pay for. And I think, Paul, that's a handful of potentials. You can imagine, we know them. And we -- right now, we'll continue to compete, but all of those are also quite small.

Yes, yes. The GENEWIZ business. Do you have to have GENEWIZ to really win storage business?

It's just really helpful. This is not necessary, but its an adder. And by that, what I mean is we talk about the Lupus Research Alliance as a long-term project that we won. We have 3 more that are basically related to specific disease studies. And it's because we have the lab capability, the ability to manage samples, to coordinate the work of a number of researchers around the globe with a single repository and a single place to do some of the lab work. That's a really compelling argument for them because it enhances their capability. It standardizes the means by which they're going to get measurements and storage. And this is a slow build. But these are good long-term contracts. And the fact that we have 4 now and we continue to work with these rare disease studies, it's a really compelling story. So we think it's one of those things that over time, this will really prove to be a power of the portfolio. In addition to the things that we do for individual customers, the rare disease studies is a particular huge value add from a industry perspective.

Olink, when you mentioned Olink at your Analyst Day a few days ago, I think that was really -- raised the eyebrows, I think, because everybody kind of -- if you know Olink, they grew 40% in the year 2022 and probably the same in '23. Are you -- is that a significant service for you? You mentioned you're an Olink provider. I guess that means you're providing that as part of GENEWIZ.

Yes, we're a preferred provider known to Olink -- supported by OLink. So that's a business that we can take. It's a fast-growing business for us. We showed the new opportunities. You can break it with any more granularity, but the proteomics, the single cell and the preclinical and clinical services been a 20% grower over the past couple of years. We see tremendous promise here and it's a technology that we're really proud to deliver and I think we're a high-quality supplier. So we're going to continue to be aggressive going after that type of opportunity. Just the same way we have in NGS, the same way we have in synthesis, it's just one more -- it's one more capability in our portfolio that -- it's a place where we excel.

Yes. It seems to me like [indiscernible] will pay 38x revenue for GENEWIZ because you can use a next-gen sequencer as your detector element with Olink. Is that part of your offering today? Or is that getting added?

It's part of the offering.

Okay. And GENEWIZ overall guide. What's the long-term guide growth rate there from your Analyst Day?

Mid-single digits.

And Paul, when we say long term, that's between now and into '26. We're in a market environment that's a little bit uncertain, we'll outgrow the market, for sure, and again, against the 1% to 3% market growth estimate mid-single digit is outgrowth over the past -- we showed a '21 to '23 CAGR of 5% in the Multi-Omics business. and that was when peers were negative in the same period. So we think market outperformance is still really strong, and we're investing and established to continue to do that here in the near future.

Okay. And then a question we have had here today and often get is B Medical -- is the logistics aspect to B Medical, the first part of the synergy there?

So the logistics is -- the B Medical cold chain, the vaccine cold chain boxes, for the most part, the high value there is remote installation, solar-powered at a place where there's access for health for people who don't otherwise have electricity, access to vaccines, those kinds of things. We can create a cold chain where vaccines are delivered to the most vulnerable of the populations. At the same time, we can use that as the first stop on the reverse cold chain to be able to draw whole blood, for example, that's consented, put back into the vaccine cold chain boxes and preserved. And then when the next time the vaccine is delivered by a refrigerated vehicle, the whole blood can be picked up and that's the first part of human health initiatives to be able to use high-quality biological samples for surveillance, detection and ultimately for pharmaceutical companies to develop a cure. Indeed, it's a logistics capability that never existed before except for outbound vaccines. And we think it just holds tremendous promise, and we're aggressive in working with some countries on how we might get that initiated here.

How's the -- how has Barkey done? That 2022 acquisition?

So Barkey has been a great acquisition. It brings whole new capabilities. For people who may not be aware, this is thawing devices. And it's historically been for plasma thawing by a controlled mechanism rather than just a water bath, a controlled mechanism for plasma thawing. It's also more recently been used in incredibly high value for cell and gene therapy treatments. How those treatments are finally thawed in a control-grade fashion for administering to the patients. It's even written into a patent -- this very particular device is even written into a patent for the delivery of this vaccine. We think it's been highly successful. It's a capability that as the cell and gene therapy market picks up, we believe that it will be continued to be used for treatments. And far and away, it's the market leader. And to have a controlled process, we think is essential for the future of these treatments that need to be stored cryogenically and thawed properly.

Is it correct for investors to view Azenta as having a cold chain catalog that's -- people refer to as this is the catalog, a source for cold chain technology?

We think so. We think that's appropriate. We think from the BioStore III Cryo systems that store, both the treatments themselves and the remnants that need to be stored for long-term periods. The CryoPod, which is in local transport and the thawing devices, we think are essential elements inside a hospital, and for literally the manufacturer and storage of these cell and gene therapies. So we do believe that's a -- as these become more prevalent, we think that will be a system that's used in health care and in manufacturing.

And Steve, what do you continue to carry over from your semiconductor days, applying it to Azenta?

Yes. So Paul, the capabilities are really similar. When you see the protection that someone applies around a silicon wafer, it's really clear. The parallels are pretty interesting. One is done at room temperature and the other is done at cryogenic temperature. But the care and the need for very specific process, contamination control and the registries of these individual treatments, individual wafers is really similar. So it's -- you can kind of see the future here. If you know the things that had to be done in the semiconductor field, you know what to do here.

Yes, yes. Does the in-source -- do you think in-sourcing happens in biologic production like we're seeing in semiconductor?

That's a tough one for us to call. And the beauty of it is we'll be there. However, it happens, we'll be there. So these are the capabilities we put into an outsourced supplier or into the factory. So we need to be ready to serve both, but it's a little bit beyond my knowledge of how that will go. But I think we'll see it start, I just don't know what the long-term trend will be. But one of the things that you and I have talked about in the past is on the cell and gene therapy side. The allogeneic treatments, we think are potential for just tremendous benefit. We built our portfolio around that high volume -- both high-volume production and high-volume treatment. And we see that will continue to hold tremendous promise. It's always a bit out in the future, but we've honed the portfolio to have that capability now, and we'll support autologous treatments here until then, but we do believe that there's a huge opportunity for allogeneic and our portfolio is completely prepared for that.

And Herman, what are the first things you want to carry over from your experience at BD and other organizations that you see as kind of low-hanging opportunity to Azenta.

I think it's the things that we talked about at Analyst Day, it's the unique experience that I bring where -- I come from an environment where we did a lot of acquisitions and tucking those acquisitions to extract value was a core competency that was built over many, many years that I uniquely had the benefit of living into for close to 20 years. That's really right now, some of the key learnings throughout my career that I'm able to leverage. We spend a lot of time on the strategy and where we're headed. I think that plays into it as well. But yes, I think, Paul, those are some of the key things. Those are the key things that come to mind.

Does Azenta have an ERP system that is where it's supposed to be?

Yes. Yes. So we already have the ERP systems that we'll use into the foreseeable future. They're already implemented, and we have one for our services business and one for our manufacturing business. They're the right products. We've met with the vendors, you wouldn't do anything differently. And where you see from a strategy perspective and building for scale and growth, what we're doing is really taking a small entity that might be on a QuickBooks-type system and plugging it into an infrastructure that we already have set up here at Azenta, which makes some of that transition from 13 to something lower somewhat less risky. There are a couple that will be a little bit of a heavier lift like in a manufacturing type environment, if there's a small entity that wasn't -- a lot of discipline around that, and we move it to that type of structure, that will be a bit of a learning and a learning curve and an implementation curve. But outside of that, I think this is relatively straightforward.

The share buyback, I mean, you're obviously over $1 billion in cash, what's the thinking there now? Is it I'm taking free cash to buy shares, I have an authorization left with x amount? What determines your allocation on repurchase now?

I think right now, we're finishing up the $1.5 billion. So that's not based on free cash flow, Paul, that's cash that we had on the balance sheet from selling the semiconductor business. So we'll cycle through that. And our plan is to have that wrapped up by the end of fiscal year '24. And what you're going to be left with is about $500 million on the balance sheet by the time we get to that period. And the business will start to be generating cash. We expect to be cash flow positive in '24. And cash flow positive, but small numbers in '24, '25, you'll start to see it accelerate. We'll be investing in more of the transformation and then '26, it will accelerate even further. But when we think about what are we going to do with the money on the balance sheet, we always want to have money to run the company, the day-to-day operations, and you need a couple of hundred million dollars to do that. We're going to always be looking at strategic tuck-in M&A. That's going to be something that we're going to do. We'll invest in the transformation, R&D, CapEx, which will be focused around growth. And the option to return capital back to shareholders through a further share repurchase program is always something that's available to us if it makes sense to do so.

Yes. A question we've had is with the biologic marketplace, branded biologic growth rate, that's around a 10% to 12% growth rate marketplace. What would be the gaining factor on you getting to that level of growth? I guess the guidance you have on GENEWIZ, but...

Yes. The way I think about this is this, Paul, over the last 2 quarters on the analyst calls, we really tried to unpack the Azenta business. And you heard me talk about when you remove the inorganic and you remove some of the COVID stocking dynamics within the consumables and instruments business, you're in this range of what we guided, 5% to 8%. What we're guiding is our numbers that we're seeing right now. So that should give everybody a lot of confidence in our ability to hit those numbers. Now what takes us to the high end of the range and outperformance? One is certainly, we talk about this wave of samples and the conversion of this market towards automation, taking samples and outsourcing it. That would certainly be a vector for us to grow faster. In Multi-Omics, if cell and gene therapy funding opens up or biologics funding opens up, and that market changes, that's certainly going to be an accelerator to growth. And then we talked about the potential to acquire samples through the B Medical platform that's also not dialed in here. So I think when you think about where we are, the 5% to 8%, it should make everybody comfortable that those are numbers that we're seeing today. And we should be able to deliver. Those 3 things really take you above and beyond.

Yes. Okay. And then kind of wrapping it up. BioArc, does that also -- it just seems like this is kind of a transformational level of technology. Does that also offer a price advantage that customers will have to look at?

Ultimately, it provides that opportunity, Paul, but it comes from a different place. If the customer begins to prep the samples for automation when they come in, the economic advantages to both of us will be tremendous, meaning if they send this -- jars or unlabeled tubes, that's one thing. If they send us automation-ready samples, the efficiencies could be tremendous. And we'll encourage them to do that as those are offerings that we have too and the economic benefits accrue to both of us.

Yes. Very good. And then last but not least, you seem to have pulled out of the China slowdown earlier than most. What was behind that?

So two things, Paul. One, the products business, the tools business, part of our China business is just like everybody else has seen. So this is a dramatic decrease but we started with a small number. We're a heavily genomics and Multi-Omics-based business in China. And the team has just been really connected to customers. We sit in Suzhou, where there are hundreds, if not thousands, life sciences company, we serve them particularly well as almost their internal laboratory and the team just keeps delivering double-digit growth there in China just because of the proximity and the scientific skills that we have. So we've been fortunate, but that's a Multi-Omics-based business. For the most part in China, the tools business has gone like the rest of the market. We just have a vast majority of our China revenue on the Multi-Omics services side.

And you're in oligo production as well in China, right, Steve?

We are.

Is that an export-oriented business though?

So most of the oligos -- we used to manufacture the genes. So we use them as the raw inputs for us, we do a little bit of oligo business, Paul, but it's measured in the few million dollars in a year. It's not -- it's mostly for our internal use and some local supply.

In China?

Yes.

And then you have broader oligo gene supply as well, correct?

We do. But again, it's -- the oligo business is relatively small compared to the manufacturing of genes.

Okay, perfect. All right. With that, congratulations on the Analyst Day. Sara, you're going to what group?

Multi-Omics, she will be the CFO of the Multi-Omics group.

Yes, thanks Paul.

And based in -- headquarters?

I'll be out of the New Jersey office.

Okay. Great. Yes, that was -- I remember, that's near Manhattan, no?

Yes, right next...

In South Plainfield, New Jersey.

Yes, Plainfield. Okay. Well, I appreciate the time.

Great. Thank you, Paul.

Paul, thank you for having us.