Azenta, Inc.

Greetings and welcome to the Azenta Q4 2022 financial results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Monday, November 14th, 2022. I will now turn the conference over to Sarah Silverman, Head of Investor Relations.

Thank you, Operator, and good afternoon to everyone on the line today. We would like to welcome you to our earnings conference call for the fourth quarter of fiscal year 2022. Our fourth quarter earnings press release was issued after the close of the market today and is available on our investor relations website located at investors.azenta.com in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the Safe Harbor slide on our aforementioned PowerPoint presentation on our website, and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. We may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the event of business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. In addition, we may refer to certain estimates of COVID-based impacts. These figures are estimated based on our insights to the customer applications and or product types indicating such demands or constraints on regional demand or ability to deliver. On the call with me today is our President and Chief Executive Officer, Steve Schwartz, and our Chief Financial Officer, Lyndon Robertson. We will open the call with remarks from Steve on highlights of the fourth quarter. then Lyndon will provide a more detailed outlook into our financial results and our outlook. We will then take your questions at the end of the prepared remarks. With that, I would like to turn the call over to our CEO, Steve Schwartz.

Thank you, Sarah. Good afternoon, everyone, and thank you for joining us today. As we report on results from the final quarter of fiscal 2022, it's an appropriate time to discuss the very different company we are now compared to when we entered the fiscal year. In the space of just one year, we've completed the dramatic pivot from a company that was a life sciences arm of Brooks Automation to a standalone publicly traded life sciences company. It was no small task to separate into two companies, and our results show today that it's been successful. And though we realize we have more work to do, today's announcements are evidence of the decisive actions we're taking to continue to drive value for Resenta shareholders. Over the past decade, we transformed a small, cyclical semiconductor capital equipment components business into a global market leader. And as we did so, we leveraged the core technologies and cash flow from that business to create a unique world-class life sciences business that meaningfully outgrew the life sciences market over the past five years. Today, our revenues are four times greater than they were five years ago. Now, following the successful sale of the semiconductor business, we see this as the right time to reassess our approach to capturing the significant opportunity that lies in front of us and to make certain that we're doing all that we should to realize our purpose and, in doing so, deliver exceptional shareholder value. So today I report on two key initiatives that we're taking opportunistically to deliver that value and ensure the long-term success of the company. Today we announce a significant near-term return of capital to shareholders and a meaningful realignment of our operations to recapture growth rates ahead of market growth. First, I'll talk about capital allocation. Over the past decade, we built our successful life sciences business by focused execution with organic and inorganic growth, including 10 acquisitions at the cost of approximately $1 billion. Nine months ago, we completed the sale of the semiconductor automation business, which delivered a substantial return for our company and our shareholders. The resulting net cash balance of more than $2.5 billion ensured our ability to accelerate our growth ambitions as a standalone life sciences company. Toward that end, over the last four months, we continued our methodology of finding and acquiring precious assets that add to our valuable sample management solutions by acquiring Barkey and V Medical Systems. Both companies possess the characteristics of each of our most valuable acquisitions in that they strategically add to our technology and product and services portfolio, they're accretive to earnings in the first year as part of Azenta, and they're led by talented energetic management teams with proven track records of success. In addition, in the case of Barkey and B Medical, they also both provide sales synergy opportunities for other Resenta products and services, and they expand our offerings to sizable new markets. But even with these two new companies in our portfolio and the success we've had, at this point we find ourselves faced with the reality that our shares are significantly undervalued, so much so that at this time it's difficult to find any target acquisition that would give us as high a return as can be achieved by the repurchase of our own shares. So we believe it's in the best interest of our shareholders for us to return excess cash. Toward that end, today we announced the Board has authorized a $1.5 billion share repurchase program. We'll be aggressive in our share purchases with a target to return the first $500 million within approximately six months through a committed accelerated share repurchase program. It's our intention to repurchase a total of at least $1 billion worth of shares in the next year. It's important to note that this does not imply that we won't be acquisitive. We intend to continue to make both organic and inorganic investments as acquisitions are a powerful component of our growth strategy. Rather, this move is recognition that until we identify valuable targets that would require more substantial capital, we believe the cash should be in the hands of our investors rather than on our balance sheet. I'll now turn to the second initiative, which underscores the operational adjustments we're implementing. Over the period 2016 through 2021, we had cumulative revenue growth of more than 20% per year. more than twice the market growth rate. But as we finished the year, even a Q4 growth rate of 12% ex-COVID feels too close to the market growth rate and considerably below our expectation and our capability. In a year of tremendous change, we believe we got most things right, as we're now a fully functioning standalone life sciences company. In retrospect, we also think that the magnitude of the changes we made in our go-to-market approach caused some misalignment with customers that manifested in a slower growth rate of sales. Our branding initiative was first rate, but the restructuring of sales and customer contact points has caused some disruption in our sales channel. Fortunately, the fixes are straightforward, and we have the right team in place to implement them. It'll just take some time to gain traction. But rest assured, we're full speed ahead and encouraged by our progress, even over the past months. Since we recently separated from our chief operating and chief commercial officers, we Lyndon and I are back in our positions of responsibility to be more directly involved in the daily operations of Azenta, from product and service development to sales and customer satisfaction. We've hired new sales leadership, and we've dedicated more product and services experts to the sales effort. In genomics, this means scientists selling to scientists, and in products, the focus is on automated storage systems and consumables and instruments. The sales organization has signed up to specific operational deliverables for 2023 with the expectation that we'll see reinvigoration of growth as we move through the year. With our portfolio of best-in-class capabilities, there's no reason why we shouldn't be growing well above market growth rates. In the context of these changes that we're implementing to prepare for our next acceleration, I want to comment on one additional change that's consistent with our next phase of growth, and that relates to board governance. As we're now at the end of one full year as a standalone life sciences company, the Board sees this as an opportune time to further enhance the governance team by nominating two new outstanding independent directors who are known value creators in the life sciences space. We're excited to have announced that Dorothy Pui and Dr. Tina Nova have been nominated for election to our Board. They'll bring a combined 50 plus years of experience in the life sciences space and have proven track records of outperformance and value creation, with experiences including sales of companies and leading boards. Their invaluable perspectives will further enhance Azenta's strong momentum as we execute on our long-term strategy. As part of this transition, Dorothy and Tina will replace two of our directors who have elected not to stand for reelection at the next annual meeting. On behalf of the entire Board of Directors at Azenta, I would like to thank Dr. Mark Wrighton and Mr. Al Woollacott for their service and contributions. Over their tenure, they've been exceptional stewards of the company over the period of significant transformation and value creation and have been instrumental in transforming Azente into a global, world-class life sciences business. Timing for this transition is ideal and will continue to evolve the board as we accelerate into the future as a life sciences powerhouse. Before I turn the call to Lyndon, I'd like to give some additional information about Bee Medical Systems, which we introduced on our last call. We're incredibly excited about B Medical Systems for many reasons. First, it's a great purpose-driven business, saving lives for more than 40 years through innovations in cold chain products. They're market leaders because they're technology leaders, and we believe the world hasn't yet begun to fully take advantage of the sophistication of their offerings. Our attraction to the B Medical business is multifold. First, we believe there's tremendous value yet to be delivered to regions where the distribution of vaccines is still far behind need and demand. This is a multi-year source of opportunity and one that B Medical is positioned to serve better than any other company. And in doing so, not only do the products align perfectly with our Adenta portfolio, but the operational performance is also very consistent with ours. Specifically, we currently forecast that B Medical will generate revenue of at least 130 million euros in fiscal 23, a growth rate of approximately 25% from the equivalent period in 2022. And gross margins from the business are in the mid-40s, making B Medical's contributions to Azenta accretive to growth and earnings in fiscal 2023. It's a solid business and financially a positive contributor to Azenta. In addition to this forecast, we anticipate sales synergies by penetrating sales of B Medical's ultra-cold freezers and blood management systems into the target-rich North American market, where they have essentially zero presence today. This is a young initiative, but one with a lot of internal support, and we believe we'll see measurable expansion by the second half of the fiscal year. The second part of our value creation thesis deals with what's made uniquely possible for Azenta because of the addition of B medical systems to our portfolio. There's an opportunity to bring Azenta offerings to a vast population in fast-growing emerging markets where demand for biorepositories is just awakening, but still in need of a real solution. All of us in the Western world are familiar with the value of biosample collections and biorepositories as sources for research into population studies and treatments of specific disease types. Collection sites are plentiful as clinics and hospital networks, and there's adequate cold chain infrastructure in place to ensure that samples can be collected and transported without degradation. The same is not true for most fast-growing emerging markets, where there's no consistent means for biological samples to be retrieved and brought to a research center. This is the opportunity for B-Medical and Azenta to team up. As we assess this opportunity, we note that there are three key elements necessary to enable a foundation of high-quality biosamples that are essential for human health studies. First, the ability to source samples from a broad swath of the population. Second, the ability to securely transport these samples to a secure biorepository without degradation, that is, cold chain transportation. a reliable biorepository with secure cold chain redundancy, informatics capability, and operating procedures that ensure the sustained value of these samples over long periods of time. The combination of B-Medical and Azenta can play an enabling role in the fulfillment of this necessary capability. The B-Medical distribution network consists of more than 150 distributors who have relationships in countries. This is a well-functioning network for sales in countries that is enviable for anyone looking to get started in these fast-growing economies that represent approximately 3 billion people. Bee Medical has an installed base of tens of thousands of vaccine cold chain systems, and they deliver thousands of new systems every quarter, establishing a last-mile connection to millions of first-time patients each quarter. This last-mile cold chain capability that's in place to preserve a vaccine dose that has to remain cold in transport is the same mechanism that can be used in the opposite direction to retrieve a blood sample from a patient and return it in the same cold transport carrier back to the cold chain box to be stored safely until it can be retrieved and moved to a biorepository. The potential from samples collected in this fashion is game-changing, as the samples can be from a much more diverse swath of the population compared to just cities. Samples will have known cold chain care and hence be more usable and more valuable. Finally, the value of a collection from a biorepository will increase exponentially, and hence, the care taken to protect and preserve these samples will be worthy of real investment in infrastructure and process. We're pleased to be gaining traction on our first conversations as a unified solutions team, and we like what we're learning from very engaged principals who understand the value of this approach. This is incredibly exciting because it has the potential to enhance human health initiatives for heretofore underrepresented populations, and it allows the expansion of our Acenta offerings to serve the new population of billions of individuals. We'll report progress as we move forward, but we're excited about the capabilities that are enabled by B Medical and as an essential driver of the next level of healthcare in new markets. As we embark on fiscal 2023, we're energized about our prospects for the future. Our portfolio of capabilities positioned as never before to address a global opportunity that's not only expanding rapidly, but it's in ever more need of our scientific and technology solutions. We've significantly expanded the breadth of our offerings and the size of our market opportunity, both through products and geographic exposure. We've refocused our go-to-market activities and alignment around customer capture, and we believe this will be a potent combination that drives faster and sustained growth. Additionally, we're taking actions to drive near-term shareholder value while we preserve adequate capacity to make meaningful organic and inorganic investments to fulfill our strategic objectives. We're now a company of nearly 4,000 employees, ready to address the ever-increasing needs of our customers. We're driven by our purpose to enable health breakthroughs faster. We're enthusiastic about our work in support of our customers' missions, and we're committed to delivering on the promise of enabling world-class performance for our customers and their patients. We very much look forward to reporting our progress to you over the coming quarters as we accelerate into 2023, and we thank you for your interest and support as we work to deliver value to our customers and shareholders. I'll now turn the call over to Lyndon.

Thank you, Steve. As Steve discussed, with a successful transformation into a life sciences company behind us, we are focused and well-positioned to take advantage of the growth opportunities ahead of us to create significant shareholder value. We continue to build our business, and when we peel back the estimated impacts of COVID, we see clear signs of healthy organic growth both in the Q4 and for the full year 2022 results. As I go through the financials, this will be a key focus to ensure you see the total reported results and the strong growth indicators excluding COVID impacts. I now refer you back to the slide deck available on our website, turning to slide three for some highlights. First, performance was strong in the quarter and full year. Fourth quarter revenue was $138 million, up 5 million or 4% sequentially. I'll say more in a few minutes, but this is up 12% on an organic year-over-year basis when adjusted to remove the estimated COVID impacts. On the sequential basis, growth in the quarter was notable in large automated stores, sample repository solutions, and in all areas of genomics. We also added Barkey to the business, contributing to the sequential growth. I will provide more details in my segment remarks. Earnings per share improvement was evident on a GAAP and non-GAAP basis. Non-GAAP earnings per share was 16 cents, up 4 cents year over year and sequentially. Adjusted EBITDA margin at 6.9% is reflecting investments and the softer gross margins. For the full year, Revenue was up 8% as reported, and on the organic basis, excluding the impact of COVID, was up 17%. Over this past year, we completed the transformation into a standalone life science business, and we are well established as the global market leader in our space. There is nobody else that provides the breadth and depth of sample management solutions and genomic analysis which we bring to market. The forward momentum we are observing in our business lines looks much like the Azinta our shareholders have seen in the past and reaffirms our position for future growth as we uniquely address the demanding needs for sample management and genetic analysis for our customers. And of course, the addition of B-Medical, which closed October 3rd, will bring further acceleration to the top line and is expected to be accretive to non-GAAP earnings per share in FY2023. After putting a half a billion of capital to work on acquisitions, the company has announced a plan for a substantial return of capital to our shareholders with a $1.5 billion repurchase authorization, and we plan to return $1 billion to shareholders over the next year, starting with a $500 million accelerated share repurchase program in the coming days. With all of this in motion, our balance sheet still has more than $400 million of additional cash resources available for investment and growth. And finally, while I will provide more color on the guidance later, in summary, fiscal 2023 is expected to grow approximately 30% compared to fiscal 2022. Let's move on to slide 4 to address Q4 results. Revenue of $138 million above our midpoint of expectations was flat year over year and up 4% versus Q3. Excluding estimated COVID-related revenues, the business grew 12% year-over-year on an organic basis. To the right, we have provided a table to provide steps from the flat reported revenue to the adjusted 12% growth excluding COVID impacts. From reported revenue, we removed four points of foreign exchange headwinds and three points of M&A tailwinds, which provides the organic growth of 2%. From there, we removed the impacts of COVID, which was an estimated $12 million of revenue in Q4 of 2021 and was approximately $1 million in this quarter. On a year-over-year basis, organic growth, when adjusted to remove the estimated COVID-related revenue from each period, was strong at 12%. Looking at the P&L on the left side, total GAAP earnings per share was a loss of $0.07, $0.02 better than Q3. The primary differences in the quarter compared to the third fiscal quarter were driven by M&A expenses related to the acquisition of B Medical and Barkey, and which was offset by improved interest income. Getting deeper into quarterly performance, let's look at the non-GAAP P&L to the right. Revenue increase of $5 million quarter to quarter carried lower gross margin, primarily driven by the product segment results. The softer gross margin combined with investments in operating expense translates into 7% adjusted EBITDA margin, while increased interest income supported improvement in the earnings per share. Turn to slide five for results for continuing operations on a full year basis. Organic growth was 9%, again, adjusting only for foreign exchange impacts and removing the benefit of the Barkey acquisition. In fiscal 2022, we faced a meaningful COVID headwind primarily in the consumables and instruments business. In total, we saw an estimated $22 million in COVID benefit in 2022 compared to a $53 million benefit in 2021. Organic growth, when adjusted to remove the estimated COVID impact from each period, was 17% year-over-year. On the left side of the chart, GAAP earnings per share improved 24 cents year-over-year. supported with top-line growth and the interest income on investments. On the right side, we see improvement of $0.03 year-over-year in non-GAAP earnings per share, again supported by expansion in the top line and interest income. Profit profile reflects gross margins of 47.3%, with pressures from labor inflation across the business, as well as lower leverage in the products business. This flows through to the operating margins, as does the investment we put into the business for continued growth. The full-year non-GAAP tax rate was 12.9%, culminating in full-year non-GAAP earnings per share of 51 cents, which is up 3 cents versus fiscal 2021. On a continuing operations basis, full-year adjusted EBITDA margin was 11.3%. Now, please turn over to slide six for a review for life science product segment results. Product segment revenue totaled $48 million for the quarter, consistent with expectations. As you can see, fourth quarter revenue was 9% lower year-over-year on a reported basis and 10% lower on an organic basis. This organic rate removed seven points of headwind from currency and eight points of benefit with the acquisition of Barkey. The driver of this decrease is mainly attributable to the 30% decline in consumables and instruments, which was impacted by the dramatic drop of COVID-related revenue, just as we expected. Fourth quarter organic growth for the segment, when adjusted to remove the estimated COVID-related revenue from each period, was 13% year-over-year. This double-digit growth is in the range that we have long described for the products business. This was supported by large automated systems and services, both of which grew double digits year over year in the quarter. Notably, our large automated systems posted another record bookings quarter. LifeScience products Q4 gross margin was 40.2%. Pressures on the margins are driven by numerous factors, including underabsorbed cost in the automated systems area due in part to our recent investments for volume capability in the future. Also, a weaker margin mix as the consumables and instrument business has dropped, and the effect of cost headwinds from inflation and, to some extent, from foreign exchange. The operating income line is breakeven for the quarter, reflecting softer revenue on the base business and incremental expense structure with the addition of Barkey. Next, please turn over to slide seven for a review of our life science services segment results. Services business generated fourth quarter revenue of $89 million, an increase of 6% year-over-year, and up 4% on a sequential basis. Organic growth for the quarter was 10%, reflecting 9% growth in genomics and 10% growth in sample repository solutions. Both businesses expanded sequentially, with genomics expanding 6% and SRS 2% on a reported basis. The genomic services 9% year-to-year organic growth was supported by a return to double-digit growth at constant currency in the U.S. and China. Across the offerings, business growth at constant currency was led by NGS at 14% and nicely supported with Sanger growth of 8%. The gene synthesis business was 3% lower year-over-year, with the China business actually growing 11% and the other regions declining. As our synthesis samples are generated and shipped out of China, we have extended our commitment timelines to customers due to logistics challenges. That said, the local China business is not affected by this. We have initiatives in place to address this challenge over the coming months. Sample repository solutions organic growth of 10% year-over-year was driven by the storage revenue, which continues to expand our recurring revenue base. Excluding estimated COVID-related impacts in the fourth quarter, year over year, organic growth rate for the services segment was 11%. The services business delivered 45.8% gross margin, with a drop quarter to quarter and year to year driven by labor inflation, which continues to weigh on us, as well as margin headwinds in the gene synthesis business. The NGS and Sanger businesses are relatively stable. Q4 operating margin was 2.1%, down year-over-year driven by the gross margin trend, partially offset with the efficiency of operating expense. The adjusted EBITDA was approximately 8%. Let's turn over to slide 8 for the summary of cash flow for the quarter. Capital expenditures for the fourth quarter were $14 million, which included laboratory equipment for our genomics business, additional storage equipment and freezers, as well as investment to expand our SRS footprint in Indianapolis and our genomics lab here in the Boston area. For the full year, capital expenditures were $73 million, including $19 million for the new China building. Let's turn to slide 9 to review the balance sheet. As of September 30th, we had $2.3 billion of cash, restricted cash, and marketable securities with no debt outstanding. Following the close of our year, we finalized the B medical acquisition on October 3rd, leaving approximately $1.9 billion in cash. This enables us to return the capital to shareholders through the $1.5 billion authorization and to continue to invest for growth both organically and inorganically. Our working capital increase was driven substantially by the change in other current assets. This was primarily related to the fair value adjustment of the net investment hedge. Let's turn to slide 10 for our guidance on the first fiscal quarter and full year 2023. Revenue is expected to be in the range of $175 to $190 million, with a midpoint supporting growth of approximately 30% year-over-year. This includes an organic growth rate excluding COVID of approximately 9% at the midpoint. We estimate the foreign exchange impact to be a headwind of 5 points and the revenue from acquisitions to be a total of approximately $49 million. That is $4 million from Barkey, and we expect B medical systems to contribute approximately $45 million. Within our base business of products and services, both segments are projected to be stable sequentially. We expect products, including the $4 million from Barkey, to be in the range of $46 to $50 million, reflecting a high teens organic growth rate when excluding the impact of COVID. We expect services to be in the range of $86 to $93 million, which is approximately 6% year-to-year organic growth, excluding COVID. As we move through the year, we believe the business is set for a higher year-over-year growth in the second half. To complete the equation, our range around B medical expectations is $43 to $47 million in the first quarter. We will determine during this quarter if this is to be a part of the product segment or reported as a new segment. As you think about your models for next year and begin to incorporate B Medical, I would urge you to keep in mind that this business will likely be seasonal on a quarter-to-quarter basis and tends to have its strongest quarter in our first fiscal quarter. Adjusted EBITDA is anticipated to be $13 to $21 million. Non-GAAP earnings per share is expected to be $0.08 to $0.16. For the full year, we expect reported revenue growth of approximately 30% year-over-year. We expect that the B medical revenue will reach at least $130 million for the year. Excluding all acquisition revenue and a foreign exchange headwind of four points, we foresee an organic growth for the year being high single digits. Excluding the COVID impacts in each year, this sets expectations for low double-digit growth for the year. As indicated, this begins with approximately 9% ex-COVID organic growth in the first quarter, and we expect to see a return to high teens growth in the second half. Regarding the profit profile, we have confidence in our gross margin improving a couple of points this year. We will have additional operating expense driven by variable compensation levels returning to a par level accrual and some continued investments. For adjusted EBITDA, keeping in mind that our Q4 adjusted EBITDA was 7%, we expect to see this metric move up past 10% through the year for an average of approximately 10% for fiscal 2023. We'll likely see fluctuation between Q1 and Q2 adjusted EBITDA given B medical seasonally strong Q1. However, the trend from the first half to the second half will follow the improvement I just described. We estimate the non-GAAP tax rate will be in the range of 22% to 25%. We expect capital expenditures to be approximately 65 to 75 million. This completes the guidance discussion. In conclusion, we have an incredibly diverse profile for a company of our size and a profile aligned for higher growth. We are currently tracking to double-digit growth rates when excluding currency and COVID impacts. As these effects are expected to be significantly out of the comparison periods in the second half of 2023, We expect to see higher as reported growth rates by that time. As we execute toward our fiscal 2023 goals, we are committed to return substantial capital to our shareholders with our $1.5 billion share repurchase authorization in place. As Steve mentioned, this will not slow down our M&A efforts as we will retain a healthy capacity to invest for strategic growth. As always, we will continue to provide updates on our progress throughout the year. This concludes our prepared remarks. I will turn the call back over to the operator to take your question.

Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge that request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, to register a question, it is 1-4 on your telephone keypad. And your first question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question. And congrats on the print and the ASR announcement. I guess, Steve, you know, I had a couple of questions. One, I mean, let's start with the organic for the base business here. Double-digit, low double-digit organic. You know, you guys just did 12% Q4 organic. Maybe talk about the macro situation, you know, why perhaps organic can be a little bit better. And when do you think we can get back to that LRP organic of high-teens, Steve?

So, Vijay, thanks for the question. It's an important one for us. I'll give you a couple. We think we've done a pretty good job to understand where we are in the market. You know, we're making – it's not a uniform macro environment, so I'll give you a couple of pieces here. We had a record quarter for Sanger, a business we've been in for 20 years. We had a record there. We saw a nice bounce in the NGS business, and yet we're still having softness in our synthesis business. And Lyndon mentioned we have some issues associated with our ability from a logistics standpoint in China, and frankly, our ability to get the products to customers quickly enough. has caused us some issues with customers. So we think the market's healthy enough. We think the opportunities are there. And again, so I wouldn't call those macro. We're an aggressive enough player where we're doing things for customers. We think we can satisfy it and get the growth rates back. We have some logistic things to work. It'll take us a couple quarters probably on the synthesis side just to get there. But NGS, we're pretty aggressive. Sanger continues to go strong. On the product side, the bookings for the large automated stores are particularly strong, and that's a 2023 story as we get toward the back half. But the bookings have been record bookings for the large stores, but we'll start to see more revenue from that as we get to the second half of 23. And then on the consumables and instruments, we're finding the bottom there. And what I mean by that is when we get out of the COVID environment, We think we're probably to a run rate with sustained customers buying from us, and we'll have to get that growth back up. We had a really good automation move during the COVID environment, which is here to stay, and we need to make sure that that continues to sustain. But when COVID's down and some market share gains are up, it's tough to see where we are. But we think we're getting to the bottom there. And on the cryo business, we just continue to make good penetrations. That's a good healthy business. And the signs from customers are that the adoption of the automated systems is going to continue. And the ability for them to take the cryopods and the charging systems, we think, are really telling us that they're changing the way that they manage the workflow in cell and gene therapy. So I'll say that it feels like we're getting close to the bottom. The growth rates are lower here in the fourth quarter, lower in the first quarter than we anticipate. But we think all the things that we're doing are going to help us As we get to the second half of the year, we'll get back into consistent double-digit growth. And, you know, we think all those things are in motion. So I'd say as we exit 2023, we ought to be back on growth rates that we've been accustomed to and you have as well.

That's helpful commentary, Steve. And maybe the ASR and the share repo here, that's a pretty big commitment, $1 billion for a company of your size. That perhaps... seems to suggest, again, another way of getting back toward the bottom here in terms of growth rates. Maybe just talk about the timing of ASR and share repo here, Steve.

Maybe I'll comment. Just as a reminder for everybody, the ASR itself is about $500 million. So we announced an authorization for $1.5 billion with a plan to execute a full $1 billion within the next year. But the $500 million ASR will launch in the coming days. And, you know, depending on where prices are, it'll kind of set the pace for what we can accomplish out fast. Overall, I'll highlight to you that I think the market, according to our bankers, the market's going to be, you know, we'll be in a good spot to do $500 million ASR. It'll take a few months in most estimations based on our average daily trading volume. And that's why we give one year to do a full billion. So, Vijay, let me offer back to you if you want to come back with another question there, but trying to portray the characteristics we're seeing.

Understood. And, Lyndon, maybe one last one, if I may. If I just look at the guidance here for the year, 30% on annual the top line, inclusive of the acquisition, just some back of the envelope, Matt, that looks like share count is going to be 15% below. And if I go back to your original margin commitment, I think back at the end, it was 200, 300 basis points. And I understand it's a different environment, but assuming some margin expansion, we should be looking at at least 50%. EPS growth for fiscal 23. Does it seem right to you?

Well, I think that's probably a little aggressive. However, I'm not putting out an objective on the EPS. We'll watch how effective the market is in terms of taking shares back off the market. However, what I would highlight, bring you back to the EBITDA commentary we provided, that is, you know, as we leave the second half this year, and I should just kind of emphasize what we're very cognizant of is we finished the year weaker than the second half. So our 7% that we're coming off on the EBITDA basis is kind of our starting point off the fourth quarter. As we move through the year, we expect this to pass up through 10% mid-year and average about 10% for the year at least. So that's what we're focused on. This first step, um, going into this next quarter, we see a couple of points of, um, you know, we have competence in a couple of points of gross margin improvement in the first quarter. And we see, uh, um, some additional operating expenses we return. You can imagine this year wasn't our best performance, uh, against our plans. And so in the first quarter, we'll be picking up some variable compensation accruals that we had foregone, um, in the latter part of this year. So that will somewhat offset the gross margin. That's why the EBITDA pickup will start off slower. But as we move through the year with the revenue ramp that Steve described, I think you'll see that pass through the 10% and we'll finish the year up above that and average 10% for the year.

Thanks, guys.

I'll hop back in the queue.

Thanks, Vijay.

Your next question comes from the line of David Saxon with Needham. Your line is open.

Yeah. Hi, Stephen Linton. Good afternoon, and thanks for taking the questions. Maybe starting with genomics, I mean, you called out a rebound there, which is nice to hear. What are you seeing that gives you confidence that this can be a sustained recovery?

Yeah, so we hope it's a sustained recovery, David. So let me just give it a try. We really are adjusting, readjusting our go-to-market capabilities to make sure that we're out getting the new customers that we used to get. So we spent a lot of time in the academic world getting new opportunities, new customers, and then it would grow. Going to all the small startups and making sure that the people we'd been serving at other companies or at university were still purchasing from us. And we got away from that a little bit, going after some larger opportunities. But we're really... Confident that we need to be doing both. We're going to continue to serve the large customers with good account coverage, and we're going to go and make sure we're calling on the individual scientists. And that's really what's always fueled the business, and we got away from that a little bit. So we think that's a good long-term strategy for the company, and it's one that we'll get back to. And we really had... We've gotten away from that for just a little bit. But we think the opportunities are out there. We think the – you can see the growth in Sanger is pretty strong, but we think ours is growing more than the market. So we continue to gain share for people who are no longer doing that work themselves. So we think there's good sustained growth there. We think the technologies that we have in the NGS world are allowing us to continue to capture more business. So we feel really confident about that. As I mentioned, on the synthesis side, we're not quite as confident about our ability to ramp that yet, but we think we're – We think we're at the bottom and with a good chance to turn that on. And the customers that we serve, we're going to win because we turn things very quickly in high quality, and that's what we're going to sustain our focus on. So we think there's plenty of market opportunity and certainly tons of capability. It's just making sure we're connected to the customers so that we can bring that in and really challenge the lab capacity and manufacturing capacity we have in the company.

Okay, thanks. That's helpful. And then, Steve, another one for you. In the script, you called out sales synergies with B Medical and Barkey. Maybe can you give a little more color there? Can you quantify kind of how you're thinking about those synergies?

Sure. So I'll give you a few. When we talk about B Medical at 130 million euro, at least for 2023, we don't include some of these synergies for the ultra-cold freezers that they have for the blood management systems. We think those are big opportunities, for example, in North America, where we have the most significant sales coverage and opportunities to take this capability to hospitals or clinics or to blood banks. So there are a number of touch points that we have because we're in the sample management business that allows us to also promote their capabilities where we have sales coverage. And from the standpoint of Barkey, the fact that they're thawing where we have now blood management systems and we have plasma thawing devices, we think this is a great synergy. So wherever there's a place for blood management, there's a place for Barkey, where there is a place for cryogenics to store the cell and gene therapy application, there's a place for Barkey. So we're working on those synergies today where we have touch points or call points. We have one more thing in the portfolio to offer to those same customers.

Great. Thank you, and congrats on the quarter.

Thanks, David.

And as a brief reminder to all to register for a question, please press the 1 followed by the 4 on your telephone keypad. Your next question comes from the line of Jacob Johnson with Stevens. Your line is open.

Hey, good evening and congrats on a really nice quarter. Maybe first, just on the buyback, you know, a billion and a half is a pretty big number. Obviously, you've got a lot of cash. You know, why was that the right number? And then I think the inevitable question is, You know, M&A seems like something you're still interested in. Can you just talk about, you know, if something were to come along, what are your options to finance something like that?

Yeah, so we have a lot of opportunity for sure, but it's tough, Jacob, for us to be secure on something that's going to take that kind of cash. So from the standpoint of what's the right number, We've been really successful when we've had $100 million, $200 million, now $500 million to put to work. We feel really confident that that's a good number for us. The thing that we don't want to do is sit on cash for a long period of time. So we've had this much cash on the balance sheet now for nine months. We evaluate the prospects, and we think that it would be a really adequate cash position if we have $500 million that we can put to work. based on the landscape out there and the number of things that we've gone after. We also believe that success over these next couple of years, if we needed to have access to capital to a larger deal, that it'd be available to us. But right now we think it's better for the shareholders to have it and allow us a chance to come back if we need it another time, if there's something larger that comes present, we'd be all over it. And $500 million is a nice sum of money to do the kinds of things that we're doing about building a high-value portfolio here.

Yeah, just having $500 million is an enviable position, for sure. And then I think in the last week or so, there's been some who've called out some headwinds from the macro environment on kind of large-ticket freezer purchases. Doesn't sound like you're seeing that in the storage business or maybe in cryo either, but maybe just give you the opportunity to talk about kind of the macro backdrop for freezers and how we should think about growth in that offering in 2023.

Yeah, it's, you know, we, we heard, we heard the commentary and again, sometimes we, sometimes we just have different customers, a different customer base. We're not seeing that at present, you know, the business still feels pretty healthy and you know, we, we, For example, most of our cryo systems go to people who are doing cell and gene therapy work on a pretty large scale. So we have a large number of customers with repeat orders, and they've changed the means by which they handle those materials and they manage them and they go to manufacture. And those have moved now toward automation, and we think that's something that's pretty sustainable. And as we talked about, the large automated stores are by far the strongest order position that we've ever had as a company. And so we see that continuing to grow. Now that we're in the ultra-cold freezer business a little bit with B Medical, we'll learn about that. So I can't comment yet, but we'll learn about that here in the coming quarters. Got it. Thanks for asking the question, Steve. You bet, Jake.

Your next question comes from the line of Yuan Ji with B Riley. Your line is open.

Congrats on the quarter, and thank you for taking our questions. We have a couple of them. First, maybe somewhat repetitive here, so can you articulate the challenges you are facing right now and the plan that you guys have in place to address them?

Sorry, would you mind to repeat?

We had a little connection issue on our side, please.

Yeah, so can you articulate the challenges you guys are facing in different business segments and the plans you guys have in place to address them?

Let me comment a little bit because we addressed some of the momentum and we highlighted a little bit of the headwind that still remains. But in the products business, definitely the C&I segment is where we've had the biggest headwind on the COVID demands. And I would say even as Steve said, maybe we're finding bottom, but inventories are still out there. And I would say while we're taking orders, it's at a little bit of a slower rate than what we'd seen in the past years pre-COVID. So I wouldn't say it's back fully. But aside from that, and this really goes on the heels of the last question, from the previous analysts. The automated store systems, the Cryo business, really has shown nothing but steam. When I say that, our Cryo product line expanded 30% year over year for the year. Our automated large stores, we've reported now a couple of quarters this year of record bookings, and it's got a lot of momentum. And that represents significant infrastructure investment on our customer's part, as well as the relevance and the importance of the reliable infrastructure that we provide to them in that market. And that's at their site. Meanwhile, if I shift from there over to the services space and sample repository solutions, as we highlighted double-digit growth there already, We've seen steady winds and steady volumes still coming in, so we think that's been a steady grower for the recurring revenue business. Now I'm back over to genomics. In genomics, we did see some nice turnaround there in terms of, I should say, turnaround is probably the wrong word, some improvement in the growth rates back into the double digits. Frankly, even in China, we were up double digits year over year in the quarter. And I think everybody recognizes the challenging environment that they've had in the lockdowns. But in the rest of the world, we've seen growth. Europe's still a touch slower in the genomic space than what we would like to see. So, Yuan, I think that's still a focus for us. Still growing. but it's in the lower single digits in this quarter. But the Americas and China, it's really expanded all in the double digits in the quarter. So we've seen good momentum there. Now in terms of the actions, we've highlighted a few. Some of them are in our own structure in how we're managing the business. Steve and I are very much reengaged in all areas of the business currently. Um, we are looking at, uh, deploying marketing more at the, uh, product level rather than at the Azinta brand level, making sure that we're driving the, the fuel behind, um, each area. Um, but obviously we think there's tremendous value in the Azinta brand and we'll keep, we'll keep building on that when you take all of those. Um, uh, initiatives and there's more, but, but you take those and combine with it, the acquisitions of Barkey and, um, be medical. We'll fuel those businesses, but we'll be looking at the synergies that Steve highlighted, and we think those are the additional action focus from our side. So some repair done in terms of seeing some momentum in the growth rates in the quarter. We have some confidence that we'll be seeing our growth rates move from, you know, into the high single or higher growth rates in the latter part of the year to to give us a low double digit for the year growth on an organic basis. But then when you add that Be Medical and Barkey and you got 30% growth plan for this year. So let me pause there and see if that helps.

Yeah, that's super helpful. And maybe one follow up there is, like you mentioned, you are going to expand the product offering for Be Medical in North America. And then in XUS or in the territory of B-Medicals, you will expand your other part of the services. Just want to hear your thoughts on the OPEX investment on this different territory, and how should we think about the OPEX over the next 12 to 18 months?

So, Yuan, this is Steve. So I'll comment on the things that we're doing from an OPEX standpoint. We have pretty good sales coverage. We're going to continue to add more sales people to make sure that we cover not just the accounts, but also the specific technologies, products, and services that we have with those accounts. So you see our spending up just a little bit, but we're pretty close to where we need to be from the standpoint of sales coverage for those added capabilities. So those investments are, for the most part, in place. In terms of... So anyway, those are the things that are in place already, so I'll let Lyndon take it with the follow-up.

Yeah, on the operating expense, let me just give a little color. We said we'll be adding some in our base business, partly because of significant return to accruing for variable comp and stock comp for our teammates on the beginning of a fiscal year. We had taken most of those accruals out of the fourth quarter, to right-size the year for the payouts on a poor performance. But on a new year, you start accruing. When you take that and combine with the addition of B Medical, you're going to see some operating expense expansion. And I'll highlight to you that we see, I think it was roughly about $15 million from B Medical added in the first quarter. of operating expense that we'll be spending on that business. Now, as we go through the year, we'll be supporting that further, partly around the G&A structure as we highlighted previously. We put some of that investment in already, but B-Medical extends in a public company environment a little more structural requirements that we'll have that they didn't necessarily have in a compliance sense. So we're in good shape there, but I highlight that for your modeling. That's a significant jump.

Yeah, got it.

Thank you so much. Yeah. And your next question is a follow-up from the line of Vijay Kumar with Evercore.

Your line is open. Hey, guys. Thanks for squeezing me back in. One, just on this COVID assumptions for the guidance, What is the total COVID guidance, excuse me, COVID headwinds that the guidance is assuming for fiscal 23 in the base business and the B medical revenues of $130 million? Lyndon, does that include any COVID revenues?

Yeah. So the headwinds that we'll have roughly, think of 2022 as having $22 million of revenue for the full year. Most of that's in the first half. We only had modest amounts. And frankly, it was even more modest because we had the headwinds that we, or constraints in the China market in Q3 and a little bit in Q4. But in the first half, we had, if you recall, 10 to 11 million each quarter for CNI. So that's the biggest headwind. Once we get through first half, you're going to see this become pretty much just modest noise level. So with that said, going forward, we really have very modest expectations. Think of about a million a quarter plus or minus going forward, depending on whether we have any more disruptions in China. That might hold us back a little bit. But in our positive revenue that we'll be carrying, we still have some vaccine management going forward. We're doubtful that we'll see much in the CNI space. This quarter, it was just very very, very modest in the CNI space. And by the way, BJ, I'll point out to you and the other investors listening in, when you look at our chart deck this quarter, with the aim toward just giving a lot more clarity on this growth capability, peeling out the COVIDs, on the very last page of our chart deck, we did provide a table to give you the historical by quarter outlook. the breakout of the FX, the M&A, and then the COVID impacts by quarter. So you'll have a good historical baseline to use.

That's helpful, Lyndon. And sorry, on the B medical guidance of $130 million, is there any COVID revenues in that $130?

There'd be modest. In this current quarter, they have highlighted a couple million. So that's a good point. When I was referring to a million a quarter, Um, that is, uh, um, that that's a number on our base business and, um, be medical did highlight that at the 45 million that we're looking at this quarter, there'll be a couple of million. And, um, and I'll, I'll highlight that we don't foresee it's going to be more than that in the quarters going forward. Of course, that business, um, we'll move around. It's lumpy, as we said, a little bit unpredictable in terms of what kind of orders may come in on projects. But they don't foresee the COVID as the driver in 2022 nor 2023, I should say, predict on 23 as it was in 2022. Understood.

And if I could just squeeze a quick 30 second, Lyndon, on the margins here, 10% EBITDA margins, can you talk about what's the impact from FX, inflation, pricing, maybe acquisitions perhaps being a drag? Because I think if I go back to the LRP model, we're very expecting triple-digit margin expansion, right? Is that mostly a function of lower revenues in a volume leverage being low or do you have some additional impact from inflation in FX heading into 23?

So it depends. You know, if you're looking at a year over year basis, just keep in mind that from first half 22 to second half 22, we had the decline that you've seen. So we're coming off of a lower point at the end of 2022. And as I said, we'll see a couple of, we're pretty confident that we'll have a couple of points of gross margin improvement in the first quarter. And, um, and as we move through the year, we do expect that that'll sustain and continue. Um, it'll, um, I will highlight the B medical business. Um, we'll have a higher skew in this, um, December quarter. And when they, um, typically we'll have a little lower revenue in the follow on quarters. and that will bring down their leverage a little bit. But the rest of our business, we expect some stability and increasing. Now the FX impacts, we do anticipate a bit in our year over year headwinds of two to three points for the year. And in that context, we'll report on that as we move through the year. That's just based on where the rates sit currently.

Thanks, guys.

Thanks, Vijay.

And there are no further questions. I'll turn the call back to Lyndon Robertson for closing remarks. Thank you.

Thanks, Operator. Everybody, this was certainly an exciting year for us in a lot of regards. While we had headwinds in the past, in the middle of the year and we were certainly in action and a little bit recovery mode in Q4. We feel like we've turned the corner there in many regards. We still have work to be done. Transformations behind us, we're into a standalone life science business like nobody's seen before centered around infrastructure, services, around the sample. And we couldn't be more excited about the portfolio we have. but also about the prospects we have, not just with what we have ran in 2022, but what we've acquired and, um, and the teammates that have joined us, um, at Be Medical and at Barkey, um, already proving a tremendous value as we look into this quarter. Um, with that said, we look forward to, um, seeing you out on the street, so to speak. We'll be at, um, a conference, uh, just about each week for the next three weeks. and we look forward to engaging with you and meeting with you and seeing you at the end of the quarter. Thank you for being with us today and your interest in the company.

And all that does conclude the Azenta Q4 2022 financial results call. We thank you very much for your participation. You may now