Azenta, Inc. (AZTA) Earnings Call Transcript

Hello. Welcome. We saved the best for last. I am here to welcome -- you've got Liza Garcia again, UBS life science analyst -- life sciences and tools. So I am here with Lindon Robertson, the CFO of Azenta. We are fortunate enough to have him join us, and he will be doing a presentation first that he will begin, and then we will move into a fireside chat. So with that, Lindon, I will let you roll with it.

Thanks, Liza.

All right.

So thank you for all the attention and interest in Azenta today. I'll go right into the charts and save some time for some discussion with Liza, and there we go. Let me go back. So we do hit the safe harbor statement. Real quickly, we'll be providing some forward-looking statements that were not obligated to update. But in the normal regulation G on non-GAAP and GAAP, please encourage you to consider both conjunction with each other. Real quickly, I want to give you a snapshot of Azenta, fairly new life sciences stand-alone company. We've been around for a lot of years as a company, but we transformed ourselves, divested of the other portions of the company and converted it into cash. But over the last decade, we've been building up the life sciences portfolio. And you can see a sizable number for a new company. We've reached over $0.5 billion in revenue and with steady growth. And certainly, if you look at the bars from 2019 pre-COVID to now, where there's a touch of COVID in there, you could calculate this if that was a full year number, our fiscal year ends September 30, if you presented that was a full -- or fiscal year, you would do a CAGR of somewhere around 18% to 19%. You might shave off 1 or 2 of those points for COVID, but you can see it's a high double-digit teen or high teen grower. And on the right, you can see that even in this year off of a difficult COVID compare, we're hitting 14% growth on an LTM basis. And if you remove the organic -- or get down to organic and exclude the COVID, you're showing 18% again. So it really is post consistency, consistent high grower. The business is comprised of products and services, and what I will highlight is products. We really are deep in cryogenic environment management for biological samples, and we're also heavily capable in automation. And so robotic storage, automation. So it's not manual storage and products, it's about the automated and the penetration into automation and for ultra cold storage. In the services side, this is not the services for the products. That's in the product side of the business. This is service delivery with significant value around analytics of genomics and also Sample Repository Solutions, where we store and manage the valuable research assets on behalf of our customers. So it's a global footprint approaching 3,000 employees. And nice thing is we still have $2 billion of our cash, even after the recent acquisitions we've announced, $2 billion still available for strategic investments going forward. Give you a little more color on the genesis of the company real quickly. We went from almost nothing over a decade ago to $100 million company by ramping the cryogenics and automation of our products of ultra cold store systems, and we redesigned that whole platform for the industry. And it really swept the industry in terms of what you could do with a TwinBank structure of a storage device with -- that could store 1 million to 4 million to now almost unlimited number of samples, several million samples with automation in the center of it. And then in 2016, we've stepped into the services business of the Sample Repository Solutions where the company was storing millions of samples at the time when we acquired it. Now we've got tens of millions of samples. The next 5 years are quite interesting. The growth was really notable. And then in 2019, we acquired the genomic analysis business named GENEWIZ, and it transformed us into a space of doing similar -- the similarity being sample-based services but across millions of samples for customers. Instead of the storage or the handling of those samples in cold temperatures, now analyzing them in genomic equipment and, in some cases, doing the gene synthesis based on the structure that they were looking for. So over the course of 10 years, we went from nothing to a $0.5 billion business. And as I highlighted, 2022, we're reporting something more significant than that, and that's before the acquisitions that we've just announced in the recent month. So now I just want to give you this perspective, from the customer perspective. What's the challenge at the customer? How do we meet that? If you start from the beginning to end, you can think about this as how does the researcher get from sample to drug development or from a patient sample to a clinical research project. You need the sample sourcing, nowhere to get it, the collection of it, the formatting of it in some types of consumables. And then it becomes really critical. How do you store and preserve that? How do you keep track of it in the integrity of it? We do the analysis. The customer wants the analysis and the research on the samples, and the historical tracking of that analysis and what that asset can mean in the future for data and informatics then becomes very important. All of this is very relevant to our customers, and all of it is very relevant to our portfolio. So in gene therapy as a particular element of growth, and we have about 10% of our revenue currently driving in this space, and we have 3 really standout offerings that are highly differentiated. One, in the cell and gene space, we've seen a significant take-up in our automated cryo storage, where you want to make sure that in the minus 190-degree environment that the sample is highly preserved, that you know it's been there. You know where it's been. You know that it's not been taken out. You know that you have the inventory of it and that you can certify it to yourself, if not for others, where it has been and for how long. So this is a standout product by itself in the market. We also, in the analytics space, we've done a proprietary capability around the AAV ITR capability to help clarify the gene that -- the portion of the gene that is particularly troublesome to see and the readout, sometimes referred to as the hairpin. It helps to pull that structure apart and give a clear read on the first time through. And then finally, on the right, we recently acquired Barkey, a controlled-rate thawing device that is an over -- is placed in over 100 cell and gene therapy companies, and in many cases, is quoted in their SOPs to support their FDA approval. So good standing and stickiness with those customers, not because it's sticky, but because it's high value to them in helping to promote consistent research and care of those samples. So we're quite proud of this. Obviously, this 10% of the revenue is a growth engine under the covers of helping to feed the high growth. And when you think about the expansive portfolio here, it's end-to-end, all of those things that I highlighted that would be important to a customer end-to-end, and you could see how that 60-40 split of services and products breaks out. About 44% of the company is around the sequencing and synthesis in the genetics; about 17% there in that sample repository, where we store and handle tens of millions of samples and are able to give customers fast turnaround of their assets when they need it. You need it this week, we'll get it to you this week. If you need it tomorrow, we'll get it to you tomorrow. The high retrieval is highly valued by our customer base. And then in the products business. This is 2021 revenue split, by the way. The C&I is 25% of our total revenue, and the ultra cold storage is 14%. The C&I is coming down in percentage because that was a higher element of our COVID-based demand last year. But -- and so that's helped temper those growth rates down to that 14% level overall. But C&I is that, I'll say, that peripheral revenue and profit multiplier for us as we sell our ultra cold systems. These sell well together and as well as separately. Now on the right, we highlight 2 acquisitions. Barkey was closed on July 1. And then the beginning of this week, we were so pleased to have signed a definitive agreement to acquire B Medical Systems. Both of these are exciting, and I'll highlight that the Barkey is that controlled-rate thawing device that is used in labs and clinical situations in a lot of spaces in the SOPs. B Medical, let me tell you a little more about that. This is exciting. So this space, you think about a global company. We're clearly global. We reach every corner of the market of the globe, I should say. They reach every corner of the globe but in a very different footprint than we do. So if you look at the bottom right, you'll see 85% of their revenue goes to Africa, Asia and South America. The other 15% serves U.S. and Europe or North America and Europe. So that in itself is a standout. If you look at what they provide, it shows up on the page is vaccine cold chain largely. Some have asked me why would you buy something in the cold storage space or in the freezer space. It's not. A small portion of the revenue is there, but our emphasis on this acquisition is the network and the capability to provide a rugged, configurable and intelligent piece of equipment to store vaccines in the most remote part of the world that may or may not have an electrical grid to support it, may or may not have a highway to deliver it but can survive and transmit that information back to the home base in terms of what the condition of that carrier device is. Is it open or closed? What is the temperature? And that network information is the operative word. That information is the operative word. So we have now developed our portfolio not just to extend our portion that weighs in on the Americas and Europe, and we were quite proud that we had 20% or 15% of our revenue in Asia. But now look at what this brings to us in the footprint, the offering capability and the relationships that they have bonded with the likes of UNICEF or The H Foundation. It's quite a remarkable business that the team at B Medical has built. The transaction itself was EUR 410 million, plus earn-out potential for them that they may earn over the course of 2023. We expect to close the deal early October. And in the revenue profile, the last 12 months, EUR 109 million. And we have gotten a question so we'll highlight and update everyone today that it's about EUR 19 million of that last 12 months was COVID-based revenue. So that gives you a feel that it's not COVID-driven entirely. In fact, on that aspect in 2021, the calendar year, that's not the last 12 months but the calendar year, it was EUR 28 million. And the calendar year '22, we highlighted, it's a little less than EUR 5 million, and yet the company will still be growing in 2022 if they meet their target objectives this year. So it's a standout in terms of growth capability, and it's about equipping the world with the necessity to address some of the world's most serious problems with rugged, configurable and intelligent equipment. It's one of many acquisitions that we're proud of. In the past, we have done upwards of a dozen or more acquisitions in the life sciences space. We have a pretty clear focus on how to do this, a good track record, a lot of athleticism inside our company. The fit that we look for is strategic relevance to us and our current offerings, how it complements or strengthens and also how it complements or strengthens our footprint of the market and helps us, in some cases, address an adjacency. We have a financial lens here primarily around ROIC that by the fifth year, we're looking for it to exceed the weighted average cost of capital, and that requires it that we have sustainable growth with some profit leverage to return those kind of returns against the purchase price that we pay. And so that is proven to be a good contingent model for us to make sure we're buying the right things, and we have walked away from deals that we didn't think would make those objectives. So this is a good way to say yes or no to a deal. We're quite proud of the ones that we've done, and we think we've added significant market cap value for our investors. The strategy we apply both going forward is really consistent. If you went back actually 8 or 9 years ago, I showed almost this exact chart in our summary of our strategy. It's that where we participate, we aim to be leadership in these core markets. We also invest continuously on those businesses. We acquire for continuous growth for organic growth, and we look for that M&A obviously as an adjunct growth and build-out of the company. We're looking for margin expansion continuously, and leverage in the business is really fundamental to our model that we see. And we're proud of that, what we built on the portfolio basis for that capability. And of course, part of our strategy goes back into that disciplined deployment of capital. Part of that disciplined deployment of capital, and I only provide this slide primarily for those of you interested and not aware, but we do in your modeling how much is the capital that we put into the business, think of a 6% to 8% typically. We spent a little more in the last 2 years because of the building we were putting up in China to replace some lease space. But operational capital is 6% to 8%. R&D tends to run 4% to 6%. I don't currently have a reason to think it will change substantially based on the acquisitions that we picked up. I think we'll probably continue to be in that range, but we'll update the models going forward after we get some experience with them. And again, we highlight we still -- after these acquisitions are completed, we still have about $2 billion of cash available for investment. The history of our ability so far to grow organically is in the dark, and in the inorganic is in the light color of the bars here. You could see in total, we've been able hit a trajectory of 40% growth over the last 5, 6 years. And we think we're on a good path, again, both organically on that 14% to 18% level depending on if you're looking at it in the last 12 months with or without COVID. But also with the acquisitions that we just announced, another USD 110 million plus. So on a quarterly guidance, we did hit a soft point in the quarter, and we just explained that to investors earlier this week. We see the fourth quarter, our September quarter, is essentially flat to that, just a little bit up. We do have the acquisition of Barkey helping to drive that, a little bit of strength in our services business. We expected to expand in our products. Still, a little more softness in our consumables business related to a drop-off in COVID. But in total, it will be a stable revenue top line. We're adding some investment in light of the footprint we have now with the strategic investments and what our global capability is. So we have provided an EPS that is a bit lower off of these results and with the investments, but we'll be plowing forward for the growth trajectory that we've been talking about. And Liza, you'll be happy to know that this is my summary slide. So $650 million company going forward. We had, as I highlighted, $550 million under our belts in the last 12 months. We're adding a company that brings in, in the last 12 months another USD 110 million plus. And so we're well over the $650 million mark here, approaching $700 million with good growth trajectory and track record. A hugely strong balance sheet, $2 billion for a company our size is tremendous with a track record of being able to deploy it for returns for the investors. And a platform that is global and just got a lot more global as we signed the deal to acquire B Medical in 40% of the world's population that is largely untouched from the modern life sciences industry. So with that, we really appreciate everybody's attention for us. And Liza, I'll come back to you for questions.

Great. Awesome, so which comes down. Let's start with kind of COVID, right, so COVID-related revenues. How are you thinking -- can you kind of just frame for investors the pacing of that falling off? You've highlighted the B Medical portfolio and C&I. And kind of going from 2021, how would we think about maybe beyond this year, what you're thinking about COVID revenues?

Yes. So year-to-date, COVID revenues have added up roughly to $24 million, $25 million year-to-date. All of '21, we showed $53 million. And so clearly, it's coming down. We've only got $1 million in the next quarter factored in, and that's centered around C&I. We do have a little plus or minus in our services, but the consumables business was trickling off to almost nothing. And so with that, we'll see another headwind in that top line year-to-year growth next year because we have $25 million this year and less expected next year. It does not faze us. In other words, if you looked at the numbers I showed, 14% growth is our recorded number on the last 12 months. We have -- if you take out that COVID, you're showing 18% both on an organic and a basis without COVID. So I'm excited to tell you that the consistency of growth within and without COVID defines the company as a mid- to high teens growth capability, not just in 1 year, but since 2019. It's been that way, and I think the portfolio that's tuned going forward supports that. With that said, we did share this week that we'll wait to update our long-term model, which we always keep in front of investors, and we've had one out there for 2024. We indicated that we're a little behind the curve because of this reset in the second half of the fiscal year. And COVID is part of that in terms of the falloff, but we've also seen a little softening in the genomics space unrelated to COVID. But with that reset ahead of us, we'll redefine that time line but headed in the same trajectory even without the COVID.

Great. No, that's super helpful. Kind of macro and kind of demand trends have been top of mind for kind of customers and investors broadly. And you -- I guess just talking a little bit, you kind of cited that conservatism in that -- from among that customer group. I guess in your conversations, or obviously maybe not yours, but what is your sales force communicating about kind of this customer base?

In terms of the current...

The demand softening.

Yes, the demand softening. So let's set aside the currency impact, set aside that COVID and some of the China demand from lockdowns related to COVID. Then we come back to what we saw that drove a difference in our results in this recent quarter was a little softening of the growth rate. Still positive, but softening in the growth rate of genomics. And what we have seen in our analysis, and we really did a thorough self-inspection of all of our regions, all of our lines of businesses, what we saw was continued expansion of our customer base and maintaining an expansion of the PIs or buyers underneath of the customer entities. And so we're not old enough to say this is a market issue because we're just such a small piece of the market. We always look at it and say what could we have executed better to deliver the numbers. But at the same time, everywhere we look, it indicates to us that there may just be constrained spend in the market. We'll see if that holds out for others, but we're refocused to apply the right marketing, the right segmentation, the right approach to do that. But we did have anecdotal input that spending was constrained. Again, I don't bring that to you, Liza, as a statement of what we would take home and be satisfied with. We're looking to execute this thing back into double-digit growth for genomics.

Okay. So double-digit growth target. All right. Let's talk about price realization. I'd love to kind of hear more about your approach there and kind of thinking about applying that to the business lines, to your business lines, and how it varies and kind of your expectations for the balance of the year as kind of thinking about price.

Yes. So first, of course, the environment, the table is set for changing prices and raising prices with the inflationary environment. We've been facing labor inflation for the last 2 years. We look at this on every -- on a regular basis in every business. Your question has tuned so correctly, where we have a product that gets purchased on appeal, we could change the price pretty fast. And we've done that, and we take price in the product side, and we'll take more. In the genomics space and in the SRS space, we have more service agreements, master service agreements and broader relationships at the entity level. And that takes some time, but we're also taking some price there, and we'll continue to do so. Our expectation is that we're seeing a moderate level of improvement in the September quarter again and that we'll see more into 2023, but it does take a little longer to move a needle when you're dealing with master service agreements across large enterprises.

Great. And how long are those master service agreements usually for?

So they're in place and negotiated but without a specific term. So to be clear, we would have the right to change the price immediately, but these are relationships that we value and manage with. So we do this appropriately in light of the relationship, so we're not going to abuse that. I would emphasize, we take price on a regular basis each year not on a set calendar, but each business looks at that and manages that curve. But the environment is certainly ripe for more.

Definitely. Okay. So let's start at the Sample Repository Solutions business that you vented. Can you walk through maybe the particulars of like ordering trends in that business? It seems it's a lumpier business. There could be large orders. Can you kind of discuss the pipeline and expectations there?

Yes. So Sample Repository Solutions business is a great business. It -- first, it's very different than the rest of the business and the buildup of revenue for the current quarter because you walk into the quarter with the bulk of your revenue already sitting in the freezer. And so we've stored tens of millions in Sample Repository Business, and we're ready -- we build that on a monthly basis. So the growth element that we have is around the projects and new enterprise relationships that we sign and bring in more libraries up. So first, you may win a new customer, which we've highlighted that we had 2 large -- very large pharma companies or customers in the last year, and they have been bringing in. This quarter, by the way, we showed 19% year-to-year growth in Sample Repository Solutions, so it's growing tremendously. Team's just doing a great job and delighting the customers. So in doing so, we're managing the research assets. We're taking something off of their capital books. We're bringing it onto ours in a much more efficient dollar and sense for the customer and in a much more efficient carbon footprint, and we're giving them high and fast access to those samples for the research. So there's no -- there's really no friction in that happening. So in terms of the specific question, the backlog and the pipeline coming in, we continue to see promising pipeline for additional wins. We see a lot of interest around pharma, but also in research hospitals, and we've got some really proud moments in this business. But on the increment, you're always incrementing on a revenue base of tens of millions that you already have in the freezer. So I sometimes drive this thought that there's going to be seasons of high growth, seasons of low growth. The key is it's always growth. It's always growth moving forward because you're always adding more samples to your library and you're building out more this period than less.