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

Well, thanks, everyone, for joining us this morning. My name is Matt Stanton. I'm a member of the Life Science Tools and Diagnostics team here at Jefferies. Happy to have the team from Azenta back with us at the conference again this year. Joining us from the company, we have CEO, Steve Schwartz; and CFO, Herman Cueto. Gentlemen, thanks for being here this morning.

I guess maybe to kick off, Steve, you recently announced a CEO transition plan after 14 years at Azenta. Why is now the right time? And maybe just talk a bit about the transition you've overseen into a pure-play life science tools company today?

Yes. Thanks, Matt. I appreciate the question. So I think it's always been a good time. So just to be really clear, the company is in a really good position. We're positioned for growth. The business units are really sturdy. We have 3 presidents running the businesses, and we feel we have tremendous confidence in them. We were able to articulate what the go-forward plans are at the Investor Day we had a few months ago. And I think everybody is confident about both the strategy and the way that we're staffed and invested to go after it. And we feel really confident about it. Herman joined us now, and we're getting on to be 9 months and the transactions that he's been put in place, the transition that he's implemented related to transforming the cost structure of the company, infrastructure, how we run feels incredibly consistent with the growth plans that we have. So how to achieve it and how to achieve it profitably. And I think the conversation then with the Board was, it's a really opportune time to make that transition. Things are in place and to give the next CEO the latitude to continue to run it with a longer runway than I have. So that part has been great. I'm personally particularly proud. We started as a semiconductor capital equipment company 10 years ago with no Life Sciences business, but we took 2 core technical capabilities, the ability to move semiconductor wafers around in automated environment, and the way to make mechanical cryogenics and we deployed those against life sciences opportunity and build what we think is a really unique portfolio of capability. So I'm really proud of that. I'm really proud of the team and the position the company is in right now.

That's helpful. And I guess shifting over to you, Herman. As Steve said, you've hit the ground running here. Since you started last fall, you've been a part of a number of initiatives. You have history at much larger companies, you're the CFO of the Medical business at Becton. You were at Bard when Becton did that deal, I think it was a $20 billion plus deal. Can you just talk about how some of your past experience is shaping your role here at Azenta and maybe especially on some of the margin initiatives you laid out at the Analyst Day, like site rationalization, portfolio of optimization, some of those items?

Yes, I think it's certainly set me up nicely. I mean both CR Bard and Becton were very acquisitive companies. And those acquisitive companies, you learn a lot. So how do you integrate, how do you leverage existing infrastructure and it positions me quite nicely and uniquely to take the job at Azenta. I often tell the story when I was meeting with Steve 9 or 10 months ago about this role. He asked me what I like about the company and what I always shared was that I actually like the challenges that it's currently facing. The -- when you look at where Azenta is as a company, there's been a lot of acquisitions through the years. We talked at Investor Day about 15-plus acquisitions over 10 years. And right now, we're at a place where how do we integrate it, how do we leverage it, 45 sites, how do we start to get the footprint to a place where it's scalable for growth.

Okay. Maybe shifting gears over to China. Your Multi-Omics business there has continued to impress. I think it was up mid-teens last quarter, number of quarters of double-digit growth here. This as well with the broader tools ecosystem seem pretty challenging, backdrop in China. I think you've talked about some demand drivers, share gains, new capacity adds, things like that. How do we think about the durability of that growth in China? And maybe just kind of a state of the union of what Azenta is seeing in China these days.

Do you want to start?

Yes. So we're really pleased by the performance of the China team for a couple of reasons. One, the outgrowth that you mentioned, Matt, is really extraordinary. But we doubled down our investments in China. We have a facility that we own in Suzhou. We have the ability to attract just top scientists who are able to serve customers, the sales force with a lot of confidence goes out and sells capability. And because we continue to make those investments and we stay at the forefront of the scientific discovery, we've been really successful. I do want to point out that on our tool side, on the equipment side, we've been down as others have seen, but it's a relatively small part of the business. So we're particularly pleased of the performance in China. But I would say, it's mostly because of the investments that we've made, the talent that we've been able to recruit and sustain as we go forward. Three weeks ago, I had the chance to be in Suzhou to celebrate the starting of the construction of our second building on our campus we made when we put the first building in place and just a lot of enthusiasm. We feel the capacity in the first building, we continue to serve customers extremely well. And we're always concerned about the implications of geopolitical kind of things. But right now, we've been really successful. And I think we're recognized as a key contributor to the 1,000 companies that are in the Suzhou area and we keep doing a good job. So we think it's robust but we pay close attention to the things that might shift quickly, but the team and the talent are exceptional, and we do believe that's why we're winning.

Yes. Now I agree with everything that Steve said. I often tell the story about the area where we are in Suzhou. As Steve said, there are a number of life sciences companies. And we have a very robust team there and a lot of the success that they enjoy is because of the consultative nature of what they do. So they're really looked at not only as a service provider, but also as a thought partner. So once the experiment goes through the machine, the answer is going to be the same no matter what, but it's really how you set up the experiment that gets the right output. And I think the combination of 400-plus advanced degree scientists, the consultative nature of what it is we do and what we enable, and China has really set us up for success. And you're seeing it, 4 quarters in a row of double-digit growth.

I guess maybe one more on China. You touched on the geopolitical and you were just saying 2 topics that come up a lot are the stimulus and then also biosecure both fairly dynamic situations. But how do we think about each of those for Azenta, are they kind of net neutral? Could they be positives in terms of 2 items people are pretty focused on within China these days?

Yes. I think the -- I think right now on the stimulus, it's really too early, Matt, and it's going to be broad. It's going to go across a number of different industries. We're, of course, staying close to it. But how it rolls out and plays out, I think it's anyone's guess. What I would say is that any stimulation that goes into the economy of China, I think, will certainly be a benefit of, but the timing of how it plays out and when it plays out, I think it's to be determined. In terms of biosecurity, really, it's the same thing, how that ends up playing out, is anyone's guess. As we had talked about in the past, we have a business, a gene synthesis business in China. We have the capability in the U.S. So if we were ever in a position where we had to shift, we have the ability to do that, there would be a cost component to that, but we do have the technology and the capability to move it if we had to.

Okay. And on the U.S. capacity, I mean, is that -- would that be -- I mean, there's some costs, but is that available now? You don't have to build that capacity, right? That's kind of there today?

Yes. We have it today.

Okay. Okay. Maybe shifting gears over to B Medical. You've announced kind of a number of different moves to that business, more recently discontinuing products, things like that. I think it would be helpful to just kind of level set folks on the revenue -- the go-forward revenue base for that business and how we should think about the various margin scenarios you've laid out off that go-forward revenue basis?

Yes. So I think as we outlined at Investor Day, if you were to start in 2023 and look at that business and backout the non-vaccine cold chain, you're probably looking at a base of about 100 million and we expect that to grow low single digits. Now we have confidence in that because when we look out into the funding environment, the funding agencies that enable vaccine cold chain, we feel that, that business can do that and it's supported by those forecasts. Internally, we're doing a lot to change the margin profile of that business. So we talked about getting out of medical refrigeration, blood management. And when we do that, those businesses, we were investing in. So as we start to pull those investments back, it actually puts more profitability into that B Medical P&L. The second thing is as we look at the Luxembourg manufacturing facility, it's a world-class facility, great engineering capabilities, great manufacturing capabilities. When we free up that floor space to put other more strategic products into that location, the cost profile of B-medical becomes a whole lot better. So the combination of getting out of less strategic product lines, opening up the floor space to put more strategic products in, really changes the profitability profile of B Medical. And we expect that, that business as we go through this transformation to have a 20% EBITDA margin.

Okay. That's helpful. Maybe one quick one on the 2Q call, you called that a few million dollars in SMS that was impacted, I guess, delayed a bit by supply chain. I think you talked about hoping to have that resolved late May, early June. As we sit here in early June, any kind of update on that? Did it work itself out?

Yes. I would say, it's still in the same spot that we had talked about.

Okay. And then I guess, Herman sticking with you, one question we've got a fair bit is just around the implied 4Q ramp and the step-up from 3Q to 4Q. I know you talked about it a bit on the call, but can you just remind us some of the biggest drivers, seasonality, maybe C&I coming back a bit? What are some of the levers to that and then your visibility and confidence into that 4Q ramp?

Yes. So as we said on the call, the ramp is about $20 million from Q3 to Q4. And when you unpack that a little bit, a chunk of it, $5-plus million is related to B Medical. And if you go back and look at the history, you see wherever we guide B Medical, we tend to do a little bit better. So we could see some of that come into Q3, not committing to it, but we could see that happen. In addition to that, we did have this couple million-dollar order as we just talked about the supply chain issue that we pulled out of -- it was the customer wanted it in the third quarter. But we purposefully pulled it out because we didn't want to commit to something that we couldn't deliver. So we pulled that. It's actually sitting in the fourth quarter. So it's a part of that ramp. And then, I would say, the third thing is the pricing dynamics that we have experienced in the Next Gen Sequencing business. That actually started in the fourth quarter of last year. So we expect that we'll start to cycle over some of those pricing headwinds, maybe it abates a little bit. And the combination of those 3 things and C&I, we talked about the -- that business really starting to see good visibility to an increased ordering pattern, the stores business continues to do really well, growing double digits, and then storage business also continues to do very well. So I think it's the combination of those things that give us confidence in the second half.

That's helpful. And maybe just quick on the [ingest] trends you talked about. I think 2Q is a bit of a mixed bag. Europe, North America still a bit challenged. Obviously, you guys have talked a lot about the pricing side of it. Just maybe give us an update on what you're seeing on the demand side for NGS?

I mean, the demand is really strong. So we've talked about this. We have pricing pressure really being offset by an increase in volume. And the team -- the Multi-Omics team has really done a phenomenal job of managing the situation. They've been through it 3 other times in our history. So they know how to manage the situation quite well. And what you're seeing is pricing pressure, but volume increases, which I think the NGS business was flat to up a little bit in the second quarter. But the remarkable thing is despite the pricing pressure, which drops through the margin at 100%, we were able to maintain our margins. So the fact that the team has been able to manage through that gives us one a lot of confidence in the profit profile of that business. But as we cycle through the pricing dynamics, we think that business will continue to be very strong for us.

Okay. And maybe one on C&I. Obviously, been impacted from kind of the destocking and broader tools dynamics that we've talked about. You noted that March consumable bookings were actually really strong and the bookings overall in 2Q where I think the best you've seen in a number of quarters. Any update on kind of how things have maybe trended here into April and May? And then I guess, can you just remind us of the lead time of that business is pretty short cycle where those good orders to kind of end the quarter will show up pretty quickly here in this quarter?

Yes. There -- it is largely a book and ship business. But you could have a bit of a lag if -- depending on what consumables ordered. If it's an A-level item, we'll have that in stock; if it's B, we'll have that in stock. If it goes a little bit lower than that, we may have to do some manufacturing. But think of that business as largely a book and ship business. Yes, we were very encouraged about the late ordering that we saw in March. And as I said on the call, it was the biggest month that we saw since pandemic. So that was really an encouraging thing. And we had a little bit of what I describe as a last week of the quarter dynamic, first week of the quarter dynamic. If you recall, the second quarter ended on a religious holiday. So we did have some timing dynamics that impacted us there. But yes, the consumables business is -- we feel good about that. The way it's guided, the things that we're seeing, I don't want to get into what we're seeing in April and May right now. But as I described on the call, the second quarter, all those things, we feel good about where we're positioned right now.

Okay. And maybe just one more thing just kind of taking a step back, talk about just comfort that the destock is largely behind us and maybe where your visibility sits today versus even 6 or 9 months ago, how that's improved, maybe nature of the conversations with customers, kind of what's giving you maybe a bit more confidence that we're returning to a more normalized demand pattern after a number of quarters of kind of a bull up effect here?

Yes. I think -- I would say, we've always had really good visibility to what the distributors were holding, what the end markets were doing. I don't think anything has changed there at all. But what we do see is that we are more in a place where what the customers are ordering are really going into the end markets. And we continue to have conversations with the teams. The teams are very close to the distributors. And in the United States, the stocking dynamics are largely behind us at this point. And even in Europe, we're at this point, we believe it's completely behind us. There was a little bit of a lag between the U.S. and the European market, but by now, we think we've completely cycled through the inventory dynamics.

Okay. Maybe shifting gears a bit over to cell and gene therapy. It was obviously a really exciting growth area. Funding had dried up a bit. It's coming back year-to-date, maybe some debate still around the duration and how that actually starts to be spent. But can you just remind us, I think, historically, cell and gene therapy have been kind of high single-digit mix, is that still the right ZIP coding?

Yes. It's less than 10% of the business. And we did -- that business did very well during the pandemic and a little bit post pandemic. But we did see a lull in that business last year where it was not growing, it was actually going backwards. But the second quarter, although it deteriorated year-over-year, we did see that sequentially it was starting to come back a little bit. There's a lot of talk about the funding environment. And we read the same things that everybody else reads, that it's starting to loosen up. But what we always talk about is there will -- there's a natural lag between when the funding actually happens and when we will receive an order. So we just need to be mindful of that. Where we really see it is on the consumables side of the business -- excuse me, on the instrument side of the business where there's a lot of demand for our products. It's just when does it convert to revenue. And I think we're in this lag dynamic of the funding turning on to when it actually becomes an order for us. But healthy demand for sure.

Okay. And I want to touch on broader cross-selling here in a second. But just in terms of sticking with cell and gene therapy, I mean, in terms of your portfolio today, where are you seeing the most success? And is there room to kind of drive further penetration across your portfolio into some of these kind of key cell and gene therapy accounts that are scaling up, maybe moving to the clinic, going commercial? How would you describe the portfolio and the penetration today and maybe where there's still some opportunity going forward there?

Yes. So 2 things. One, we have cryogenic product line, and that's really critical for cell and gene therapy. And what we're finding is people are starting to put that in even early in developments, so they don't have to take a conversion when they go to manufacturing or to clinical applications. So that part is a little bit pent-up in some customers and it's full scale in others. So we feel very confident that, that will be the trend in the way that people move both to manufacture and to retain samples in automated cryo systems. So we feel confident about the position and it will take a market pickup for us to see it sustainably. On the research side, on the Multi-Omics side, the engagement we have with the small biotech firm, you go up and down with them, but we're starting to see that recovery and starting to see that spending come and we feel really confident that we're in a good position there to come back to where we were in the 2022 period. So we think the portfolio is positioned well. We think the team and the offerings are in a really good spot. It is going to take some market recovery for us to see it, but we're starting to see signs of it like we haven't in a couple of years, actually.

Okay. And maybe sticking with that cross-selling opportunity. I think you recently noted I think, $40 million of backlog that was tied to cross-selling synergies, I guess. Maybe first, just talk about where you're seeing the most traction? And then looking ahead, where there still might be some opportunity to drive further cross-selling opportunities across the portfolio?

Sure. So I'll break it into 2 parts. We -- as a perfect example, actually, we put an announcement out yesterday about the cooperation agreement we have with the Crohn's & Colitis Foundation. And this is exactly the type of situation. We'll help to manage the samples, we'll help to measure them, we'll format them, we'll care for all the things that need to be done. So the research, you can drug conclusions. And that's a perfect example. It's a multiyear collection opportunity to continue to build capability. We have a few of those in our portfolio. So we were able to announce one yesterday, but these are programs that start small, but ultimately, they get to -- in the Crohn's & Colitis Foundation, it will be ultimately thousands of samples, but some actually grow to millions of samples. And so those are tremendous opportunities for us. Where we find them is, typically, we find them through the Multi-Omics business and as we continue to explore where do the samples come from, how will you manage them, where do they go, how will you store them, we found that the Multi-Omics team is really well equipped to help them work on workflows and how do we manage samples. So these are opportunities that we think will continue to grow, $40 billion (sic) [ million ] of visibility is just the starting point. And I think the more that we demonstrate to customers that we have the capability, the more that we shorten their cycles, improve their workflows and allow them to do the research while we take care of all of the management measurement of samples is a great opportunity. And we think this momentum will continue. So $40 million for a company our size, it's a really meaningful number. And we are working on building that backlog and building that pipeline because once we secure it, then these programs last for years and they continue to grow.

Okay. And maybe in the last minute we have here, just to hit on capital allocation quick. You're still in a very attractive balance sheet position even after buying back a lot of stock here. Just talk about capital allocation priorities from here and with the CEO transition, should we think of M&A on pause? I think you guys have talked more about tuck-in type deals. So just what you guys are thinking?

I would say, we're fully committed to the $1.5 billion share repurchase and finishing that up as we exit our fiscal year '24, which is in September. We have line of sight, we have a glide path to get that done, and we're committed to doing that. When we finish that, as we had talked about, we'll probably have about $500 million on the balance sheet. But the business is continuing to -- is beginning to generate positive cash flow. So we've had 4 quarters in a row of positive cash flow. So that's a very good thing but that cash will be used, one, to run the company. So we would always want a couple of hundred million dollars to run the day-to-day operations. We think that's the right level. But two, we'll continue to look at strategic tuck-in M&A. I don't think we're looking for anything transformative or anything like that. It's really focused on strategic tuck-in, things that would be out on the periphery and really add to the platform that we currently have. The third thing is we're going through this transformation that's going to cost us. I mean, I think we said during the Analyst Day, it's probably somewhere between $40 million and $50 million, something like that. So we'll invest behind that. And then we always have the option, if it makes sense to do it, to buy more shares back in the future. And that's how we're thinking about capital allocation. I don't think any of that changes in the foreseeable future.

Super. Well thanks. We're out of time, gentlemen.