Azenta, Inc. (AZTA) Earnings Call Transcript

Great. Thank you, everybody. My name is Casey Woodring from the Life Science Tools and Diagnostics team here at JPMorgan. I'm pleased to introduce our next presenting company, Azenta Life Sciences. Joined with me here on stage is CEO, Steve Schwartz. Azenta is going to give a presentation, followed by a Q&A session. But with that, I'll just give it to Steve.

Great. Thanks, Casey, and good afternoon, everyone. I just want to start with -- I'm here for the distance. I hope my voice will come along with me, so I apologize. But it's good to see everyone and Casey, we're delighted to be here at the JPMorgan conference. So we really appreciate the invitation and the opportunity to present. As Casey mentioned, I'm Steve Schwartz. I'm the CEO of Azenta Life Sciences. We've been -- Azenta now is a stand-alone life sciences company for a year. So we just passed our 1-year anniversary as a stand-alone life sciences company. I would love to give you an update on where we are as a company, what we see shaping up for the near term, but also, in particular, what the long-term prospects are for the company. We believe we're a growth company and a tremendous growth environment in just the earliest innings and what we believe is a tremendous opportunity. We really like our position in a space that's being shaped today and the leadership positions that we have we think are in front of many of the demands that are coming from customer and from an industry and a science and technology space. I'd make a quick reference to the safe harbor statement. We will be making forward-looking statements. You can see a more complete disclosure on our website, www.azenta.com. First, let me just introduce Azenta to you. For people who are not so familiar, we finished fiscal '22, or a September 30 fiscal year-end. We finished another growth year in September, a $555 million of revenue is 8% growth year-over-year. When we back out a pretty significant COVID contribution, it was steady on the path that we've been on a 17% organic growth ex COVID year-over-year. We remain in position for strong continued growth here over the next several years based on a really solid portfolio of services and products. Balance right now at presences service is about 2x that of products. I'll talk in a moment about a recent acquisition that balances the products and service 50-50. It's neither objective nor a target for the company, but it just puts it into balance from the standpoint of how their revenue is split. We made an acquisition that closed just at the start of the fiscal year, our first full day of the fiscal year, October 3, and B Medical Systems added about 400 employees, but ex B Medical, we were about 3,500 employees on a global base. We have an extremely strong balance sheet as a result of the sale of our semiconductor operations business, which closed on the second of February in 2022, leaves us with $1.4 billion of cash, excluding $500 million in an accelerated share repurchase, which is just underway kicked off in the middle of November. So a little bit about Azenta, a little bit of our history. We started just over 10 years ago as a semiconductor capital equipment company with 2 core technical capabilities one in automation, the movement of semiconductor wafers in a particularly controlled environment. And the other is we have the capability to create a vacuum using cryogenic technologies, the mechanical means by which we could go to ultra-cold temperatures. And we started in fiscal 2011, which is 2010. And we acquired a series of small automated biological sample storage companies. And from there, we modified those designs with our strong engineering talent from the semiconductor side. And we've built a capability where we're the leader in automated cold storage. In the mid-1990s, automated cold storage was important for pharmaceutical companies handling chemical compounds. Once the genome was sequenced, the materials that were stored needed to be stored at colder temperatures. Biological samples stored at minus 20, minus 80 degrees C and now you see cells and tissue being stored below minus 135 degrees C. So our heritage and history in extremely cold temperatures combined with automation, put us into a strong leadership position as the #1 provider of automated cold stores. As we were in this business, we recognized that not only did we have the top 20 pharmaceutical companies storing samples in our automated cold stores, we also understood that the same pharmaceutical companies are stored in our cold stores storage samples off-site for archival storage and to be able to complete this workflow to participate with our customers to be able to offer a value solution -- a value-added solution, not just for the storage of samples on site, but also off-site and traffic and the logistics. We acquired the #1 independent bio-repository company, BioStorage Technologies. And so by the time we get to 2016, -- we were a more complete sample management company being able to help customers manage their live samples and their archived samples, and we're $100 million life sciences business. At that point, we also understood there were other opportunities in and around this cold chain of condition, the management of samples, where we also could provide a biological interrogation capability, genomics capability we acquired GENEWIZ 4 years ago in November of 2018, world-class capability and genomic services, both for the reading and writing of genes and it enhanced the product portfolio immensely. We had the ability to store and manage samples and also interrogate those samples and provide data back to customers. So a very complete portfolio of capabilities. We continue to add small acquisitions to build out more capabilities. And by the time we finished 2022, we have a $550 million life sciences company. The core of the capabilities we have as a portfolio is we provide critical, but noncore capabilities to pharmaceutical, biopharma companies and to research institutions, where we can start by sourcing rare disease samples for them. We have a sourcing organization that allows us to go and find particular high-quality samples for their research. We bring samples in from the customer or from the -- from our customers who allow us to sort samples. We put them into formats so their findable, usable, automatable and we'll store these either in automated stores on site or to an archival storage. Ultimately, we can retreat those samples and interrogate them perform next-gen sequencing or saying or sequencing on them and provide a complete capability of bioinformatics data back to the customer. So this entire cold chain of condition, managing samples, precious samples for customers is a critical capability that we provide. And we're the only ones with this complete portfolio. It's a tremendous value-added capability for our customers. We think this strategically positions us in a unique and very strong space. The first of these trends is the sheer amount of R&D that continues to expand the outsourcing of R&D. And by our measures for the third consecutive year, we anticipate that the number of outsourced samples from research will double over the next 5 years that was true a year ago, it was true a year before that. We continue to see this momentum build and the management of billions of samples now has become an intractable problem for companies that need to do it perfectly, and it's something that we do perfectly as a core of our business. We believe that the cell and gene therapy market is just in the earliest days with tremendous growth potential. The critical areas that we provide capabilities here really relate to the management of the samples and cryogenically preserving these samples to make sure that cells that are live and viable are frozen at a particularly controlled rate or stored safely without any damage or risk to them from a temperature excursion standpoint. And most recently, we acquired a company, Barkey medical that allows us to do control rate thawing in these samples, so that they have been stored for a week, a month, a year, they're still viable sales when they come out. So managing this entire cold chain of condition, this capability in and around cell and gene therapy allows us a unique position in a market that we've seen grow 25% and 30% per year on quarter-on-quarter. So I think everybody is familiar with the importance of the cold chain. We see this expanding all the way from vaccines that are stored from 2 degrees to 8 degrees. And now all the way to cryogenic temperatures below minus 136 degrees C, our automated systems work at minus 196. So we run the entire spectrum of cold chain sample preservation with a particular expertise from end to end, from critical biological samples all the way through the delivery of vaccines. And finally, the importance of a global footprint has never been more prominent. The fact that wherever critical life sciences capabilities are going on, the continuous and constant capabilities have to be provided for customers in every location. We're a global organization. We operate in more than 150 countries today, and we're able to provide the same service in any country that we provide in any other. So for us, that's a critical capability. And for global customers that need to be able to depend on this capability. We have an established footprint, and we continue to make investments in that footprint, so that we can provide consistent service. Just a quick note on some of the cell and gene therapy capabilities that we provide. As I mentioned a few times, we're a reliable sample manager at all temperatures across the spectrum. But in particular, uniquely, we do automated cold storage for samples at minus 190 degrees C, well below the glass transition temperature and safe for cell and gene therapy. In our genomics side of the business, we have a particular array of AAV sequencing and synthesis capabilities for R&D and the number of applications that we have in the earliest days of some critical research continues to expand. So this is one of the fastest-growing segments of the company. And finally, the addition of the controlled-rate thing and cryopreservation of samples is becoming ever more critical by adding Barkey capabilities to the company. We're now at the patient bedside. So we've gone from a heavily R&D-focused capability all the way to clinical application and the treatment of patients. So we're particularly proud of our presence in cell and gene therapy. You'll see us continue to expand capabilities both organically and inorganically in and around this space serving cell and gene therapy, starting with our unique expertise and expanding to things that are critical for the safe and reliable delivery of treatments. The means by which we go about serving customers is truly unique. We start at the scientific end of the spectrum. We have in the genomics business, we have more than 400 PhD equivalent scientists who have conversations with scientists. We meet them as graduate students, as post docs, as researchers at different pharmaceutical companies. We've been cited more than 20,000 technical publications, and we pride ourselves in those introductions of the company to people who ultimately run companies. So we're highly cited in scientific journals. We participate in a vast plethora of the molecular biologists are familiar with the Azenta and the GENEWIZ capabilities. All of the top 20 pharma company store samples in our automated stores and a vast majority of those also archived samples with us. So the trust that we have from the time that we meet these customers from a scientific standpoint, all the way through to the management of their product development, and ultimately, delivery of the vaccines has been critical. This is an important chain. It's the means by which we establish ourselves with customers and stay with them through their careers and through the life cycle of the research. I want to introduce to you B Medical Systems. The most recent of our acquisitions we closed at the beginning of October. It's a company unique in capability, a little bit different from the mainstream Azenta, but it requires a moment of explanation and something that's really got us enthusiastic about a tremendous opportunity. In the center of the photograph here, you see a vaccine cold chain box. This is literally a box that's used to store vaccine. There are more than 50,000 (sic) [ 500,000 ] of these distributed around the world. They're powered by sunlight. They're solar-powered vaccine containers, and they are distributed in the harshest most remote areas of the world. And the way it works is the vaccines are delivered by Toyota 4x4. Health worker goes out to this box, lifts the lid, takes out cold packs and vaccines and goes into the bush to the jungle, does inoculations of children for malaria or adults for particular diseases. So it's a vaccine distribution center, and we think about it as [ 50,000 ] vaccine distribution centers. So not just the cold box powered by solar. It is a GPS system. So you put this box down in one of the harshest environments where it's more than 100 degrees outside and 90% humidity. The box stays cold. We monitor the temperature outside the box, we monitor the temperature inside the box. We have an indication signal every time the lid is open, every time the lid is closed, and we know the precise coordinates of that vaccine cold chain box. So for a guaranteed 10-year performance, that box will perform, it will report every day. The temperature it will report -- any temperature [indiscernible] report its precise locations. The #1 provider of vaccine data to the World Health Organization today comes from the [ 50,000 ] boxes for part of the vaccine cold chain system. So it's an interesting business. It's a particularly rewarding business to be in. But more than that, we think it's a toehold into what could be the next opportunity for the company. When we use those boxes to deliver vaccines, it's only half of the cold chain opportunity. When a health worker is out in the field inoculating a child. At the same time, if they can draw a whole blood, put it back into the cold box back into the VCC box and the next time the vaccines are delivered to have these human health samples that are now cold and preserved and high-quality transported back to an in-country biorepository. The opportunity is not just to inoculate a child for vaccine for malaria, but to rather provide an opportunity for that country to be begin to work on human health issues that are for that country are particularly important. I think everybody's heard discussions around the importance of the African genome. This is an opportunity now to really get population studies done. So we see this as a really good business as it is and a tremendous future opportunity for us to exploit this cold chain where the hardest part of the cold chain has already been established. These cold boxes are already out in remote areas, ready to be the first step on the return journey for critical biological samples. So we're particularly enthusiastic about B Medical. It's a terrific team. It's a really good business and one that we'll continue to build upon and will bring Azenta capabilities in any country where these blue boxes are located. A little bit more about the portfolio. So with the addition of B Medical, I'll show you a pro forma look at the company about an even distribution between products and services. Each one on its own is a pretty healthy business. On the services side, we have a sample and repository services. We store 60 million samples for customers in our various repositories around the world. On the genomics side, we do Next Generation Sequencing and Sanger Sequencing, and we do more than 1 million sanger sequences every month. Just to give you a perspective. We have 3,000 drop boxes around the world. When a researcher goes home at night, they put their samples in the drop box, when they come back and look at their computer screen in the morning, the data from that gene read is on their screen. So it's a particularly high turn, high-quality, high-value service. And on the product side, we have products that are related to formatting the samples, to storing the samples, to providing all the automation in and around the protection of these critical samples. So again critical, but not core capability. We believe that we have leadership positions in each one of these segments and a particularly unique capability around the portfolio of offerings that we can bring to a customer, bringing all these capabilities to bear to manage the critical aspects of how they manage their samples and how they interrogate their samples in their site. So as we move forward, we continue to focus on being leaders in every segment that we're in and particular leaders in the offerings that we have. Our number one focus for the company, although we are quite acquisitive, our number one focus always is organic opportunities, how can we take the capabilities that we have and continue to grow by developing our own unique capabilities through innovative services and products. We're focused particularly now on driving margin expansion across the portfolio. We now have mass and capability where we need to begin to deliver even more expansion of margin, both at the gross margin line and operating margin. And we're going to continue to be disciplined in the use of our balance sheet. We have an ROIC focus on all of the acquisitions that we've done and in the past 12 years. We've always used ROIC as a critical hurdle and we've been tremendously successful, we think, with the value that we've added -- the value that we've added to the companies that we brought to Azenta. We have a strong track record of growth, both organic and inorganic growth. Over the past 7 years, we have a 35% CAGR. We are acquisitive. We've done approximately a dozen acquisitions, some whole companies, some small product lines, but you see strong organic growth as well as contributions from acquisitions throughout. We did a significant acquisition of BioStorage Technologies as we got into the bio-repository business. I mentioned GENEWIZ was at the beginning of fiscal '19, the end of calendar 2018 was transformative for the company, allowed us another platform to be able to provide more value to customers. And since we continue to add organic capabilities to the company and really drive growth by customer connection and the addition of a significant number of customers every quarter. We're particularly proud of our ability to do acquisitions. We always talk about the fact that in the past 12 years, we've met more than 1,000 different companies. We're really selective about what we do. It's got to be a strategic fit. We've got to make sure that it delivers the -- above our WACC within 5 years is our target. We give a bridge 5 to 7. We've never done an acquisition that hasn't met the model in the hurdle within 5 years, but we do have some patients if there's some of this particularly strategic that we need to get done. And or in a competitive environment that would be 5 to 7 years. They're all high growth and there's tremendous ability leverage from each one of these acquisitions. So we've done a -- we think, a pretty good job. We spent $1 billion in acquisitions to grow this business. And on to each one of the acquisitions, we continue to fund them to make sure that we can grow organically outside. So we're not a holding company. We're a portfolio company of capabilities, and if we bring an acquisition in, we have high expectations, not just for the performance that they have, but the performance they will have as part of Azenta. And to date, each of the acquisitions has contributed as we had anticipated. A lot of talk around capital deployment. We sold the semiconductor capital equipment business closed it on February 2 of 2022 for $3 billion. We netted just over $2.5 billion of cash. After that, we continue to look for ways to put that to work we announced in the middle of November that we were doing a significant return of capital in the form of share buyback. We committed $1 billion of share buyback, $500 million in the form of an accelerated share repurchase, which we initiated in the middle of November, and it's ongoing now. And we've committed another $0.5 billion when that finishes. So we anticipate sometime toward the end of June, the second $0.5 billion of share repurchase will commence. And we anticipate that likely by the end of 2023, we'll have completed that purchase of shares. From an OpEx standpoint, typically 6% to 9% of revenue. R&D, 4% to 6%, depending on programs and projects that are going on. And we still have a strong cash balance. So we've committed $1 billion. We announced an authorization for $1.5 billion. At the end of that repurchase ex the cash that the company continues to generate, we'll still have $500 million of cash on the balance sheet for additional acquisitions. We're active in the market. We see tremendous opportunities. We just don't see tremendous large opportunities, and that's why the repurchase of shares. Finally, just to give a summary. We're a highly differentiated, highly unique capability. We have competitors in every one of the segments. We have no competitors across the portfolio where we think we have tremendous value. This year, we'll be in excess of $700 million of run rate mentioned on the balance sheet. We're in a very comfortable position from a balance sheet standpoint. And what we're particularly enthusiastic about is at this size with critical mass to be a global company, we can put more capabilities on top of this global network as a company and continue to build out faster with sales organization with R&D, with global infrastructure where we're established in countries, and we believe this sets us up for tremendous growth. We're a $700 million company and something that's in the $12 billion to $15 billion of market opportunity. So we got nothing but upside. Market share is small. We're aggressive going after it, and we do see these as the earliest days, and we look forward to a strong growth here over the next 5-year period. We've got a really aggressive team going after strong capabilities that we're ready to go exercise and we're particularly pleased with the current position. So again, thanks for the ability to be here. Thanks, everybody, for your time. We're delighted to have a chance to present to you.

Well, great, Steve. Now we'll shift to the Q&A portion. If anybody has a question, please feel free to raise your hand or submit one via the webcast. But I guess to start Steve, you saw stronger performance than your genomics business in the fourth quarter versus the third. Can you just talk about the trends you're seeing there across NGS synthesis and Sanger? What are the key demand drivers for those businesses? And why do those customers choose Azenta?

Okay, sure. Thanks. So a few things. We're -- we read and write genes. So that's part of our business. uniquely, we do that as well. So the 3 segments you broke out, the next-generation sequencing, we see that as we see that particularly strong. So the amount of research that's done, the consultative capability we have, we see strong persistent growth in that business, and we're getting close to a run rate of about $100 million a year. So that's a particularly strong business for us, and it's broad. So we see it across pharma, biopharma and academic institutions. On the Sanger side, this is the reading of a single gene, if you will. And this is technology, which is now getting to be 50 years old, and it's something that's going to sunset at any time. And we always hear that. We always anticipate it, but we don't see it. We -- it's a pretty consistent low single-digit grower, but it's the nature of what we do. So it's one of those things that we do with 3,000 drop boxes around the world, researchers want to measure a gene and they'll put those samples in the box as they go home. Well, the van will come around and pick it up, take it to one of our local labs, we'll measure it, and they have a result in the morning. It's still at twice the price, and it's a highly valued, high-quality service that we provide. The nature of the business, however, different from the science and nature of the business is -- it's a little bit difficult to get a 25-year-old PhD scientists to come and do a 50-year old technology. And so although this is in every core laboratory, it's something that people are doing less and less of. They can get a high quality, fast turnaround service from us. We love this business. So I think over the last 10 years, as we continue to add these sequences, we had refurbished units that we buy from customers, who are getting out of the business, and we continue to satisfy that. So the reason that we're a high single-digit grower in the space is something that we do particularly well, and we think it's going to sustain for a long time. The synthesis portion of our business is probably the softest of them. So the activity is steady. Over the past year, we have not been at the 20%, 25% growth rates. We had logistics issues we discussed getting through some of the activities in China. So the business remains strong. It's not been the fastest grower, but we think we've resolved the issues and we look forward to more growth in that business as well here in 2023.

That's helpful. Can you talk a little bit about the Sample Repository Solutions business? How that works? What types of customers do you serve there? And what's differentiated about Azenta Solution in that particular market?

Sure. So there are a lot of bio-repositories. And a lot of them were in the early 2000s, the genome was sequenced, people began to store biological samples. The nature of what we do is different from a lot of the bio-repositories you find. So we believe we're the #2 in terms of size and samples of bio-repository in the world, but we do things different from others. We manage sample-by-sample. So as opposed to selling cubic feet of cold storage at a particular temperature, the vast majority of our business for the bio-repository is we can tell you exactly the location. We charge the customer per sample per month. So it's a different, higher-value service. And now it's allowing us not just to go to -- from automated storage, but we are now putting a -- sorry, manual storages. We've been up putting automated storage systems into our biorepositories faster retrieval for the ability for the customer to see their sample at any time. So that's probably the difference. The other thing that I'll say is 5 years ago, it really wasn't possible for large pharmaceutical companies, who have 100 million samples in the collection to consider outsourcing to anyone because it was none of the size and scale, who could manage the samples of the way they do. But the capabilities that we've been able to build, the mass that we've been able to build, allows a customer to think about taking a 10 million sample slug and putting them into Azenta into one of our bio-repositories. And they have at least the same access, probably better access to their samples and knowledge of location than they do on their own site, and it's a capability that didn't exist before. So the only place they could go was just a small bio repository firm, and I think the samples would have been unsafe. So the math that we've built, the capability and proofs that we have with them has allowed us a different position and allows pharmaceutical companies now to consider outsourcing these vast collections to free up buildings worth of freezer space to take down carbon footprint and actually to manage the global collections a little bit more efficient.

So consumables and instruments was the area of your portfolio most impacted by COVID-related demand. Can you talk a bit about how the business has evolved over the recent quarters as that COVID-related revenues begin to tail off? What are your normalized growth expectations for that business?

Okay. That's particularly important because if anybody follows the revenue for the company, most of the COVID impact we had as a company was positive, and most of it became as a result of just a sheer deficiency of the number of multi plastic parts that people could get. So we do vials and tubes. We do PCR plates. And when COVID hit in 2020, about just over $50 million of revenue came as a result of our ability to satisfy some of this demand for molded consumable plastic parts in just 2021. In 2022, it was just over $20 million, and now we're baselined out. So we're -- the amount of COVID-related consumables and instruments business now is particularly smaller, might be upwards of $1 million a quarter. The growth rates here have been typically the exco, but the growth rates have particularly been around 10%, and we'd anticipate that as an opportunity continuing to go forward.

I'll pause here in case anybody in the crowd has any questions. It looks like we have one here.

[indiscernible]

Sure. So I'll repeat the question here. So the question is, what about pricing, what's our ability to drive pricing in the coming year? So it varies by parts of the business. I'll give you an example on one end of the spectrum, the long-term storage contracts we have in the bio-repository business are generally governed by master service agreements, which include the ability for us to raise price. They've always included the ability for us to raise price on an annual basis but not episodically, but at certain times of the year in places where we have a highly differentiated product in the automated cold stores, the automatic cryogenic systems, we're able to affect value pricing. There is the only place that you can get some of these capabilities. On the genomics side, it's more competitive. So the nature of competition is tougher. The elasticity there is different from other parts of the business. So point by point, business by business, we have the opportunity. So we're able to take advantage in some places, and we're cautious in others.

Steve, maybe just on large automated stores. In 4Q, you reported another record bookings for that business. Can you talk about what's driving demand there? How should we think about the timing for these bookings to translate into revenue?

Sure. So on the automated cold storage, we've been the market leader now since we got into the business. But in particular, we had, Casey, as you mentioned, we had particularly strong bookings in the second half of the fiscal year. So 2 things. One, historically, people would put a large automated store in for a population bio study for a rare disease study. So we go into an academic institution at a university at a government facility for population studies. And so you need large capacity. At the Tohoku University, for example, after the Fukushima earthquake to study the radiation damage, they put large automated stores in because they had 150,000 people that were tracking and periodically would take samples. So those are the kinds of studies that historically drove large automated stores. What we've seen now recently over the past 2 years is a new vector, and that's the manufacturers of biological materials that people, who sell antibodies are different things to customers. They put those in our automated stores to help manage their workflow, their manufacturing process and ultimately, the shipping. So the logistics of cold biological samples that ultimately gets sold to customers, people have modified their manufacturing method. So it gives us yet another vector in addition to the research and the biological sample collections, we can also use these things to run businesses. That's been a new and exciting change for us that we anticipate will drive pretty strong growth here in the future.

Looks like we have a question from the first row.