Azenta, Inc.

Greetings and welcome to the Aventa Q2 2023 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 Tuesday, May 9, 2023. 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 second quarter of fiscal year 2023. Our second 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 the 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 the GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta 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 customer applications and or product types indicating such demand 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 second quarter. Then Lyndon will provide a more detailed look into our financial results and our outlook for the third fiscal quarter of 2023. 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. It's one year since we established ourselves as a standalone life sciences company, a year of hard work and many learnings, but one full of optimism and reinforced conviction about our purpose and opportunity. Over this period, we got a lot of things right. We continued to invest in new products, services, and applications to stay on the cutting edge of this dynamic field, keeping us close to the customers who were at the forefront of discovery and drug development. We increased our capability and capacity to deliver on this demand. We made strategic acquisitions of three more market-leading companies that will be important contributors to our future. Barkey adds a critical application in the cell and gene therapy cold chain. Zyeth brings a technology enabler for sample workflow solutions, and Be Medical vaults us into a unique position to serve fast-growing emerging markets. Additionally, we secured key customer wins, further verification that our offerings do indeed have the potential to transform how our customers run their businesses, and cemented us as a true partner in their development efforts. At the same time, as we introduced Zenta and went to market under this new brand, We reorganized our formerly specialized product and services sales teams around accounts and broadened their scope to represent all Azenta offerings. Over time, we found that we were most effective when utilizing specific expertise of our sales personnel, particularly in complex areas of genomics and the innovative area of automated cryo storage systems. We've also realized the importance to reinvigorate strong brands like GeneWiz and Fluidex within the Azenta framework. Fortunately, as we've made changes to go back to product and genomics dedicated sales, we've seen direct positive results. In addition, we came out of the chute prepared for sustained growth, which didn't materialize, in part because of the transition I just mentioned. And now, facing a more challenging macroeconomic environment, we're left with much more cost than we need at this time. We remain confident in the tremendous value of our portfolio to serve our customers in the life sciences space. And today, we further define meaningful actions we're taking to better align for growth and profitability as we deliver on this promise. In my remarks today, I'll focus on four areas. One, the return of growth for our genomics business, in particular, the recovery of our synthesis business. Two, our significant actions and investments for accelerated growth, including a realignment to the company in support of this critical proposition. Three, additional cost reductions that come with this realignment. And four, a reset of expectations for the near term as we prepare to deliver the full potential of this business. I'll start, though, by summarizing the overall business for the quarter. Our Q2 results were mixed. Performance in our services business was solid and continues to track as expected. However, on the product side, especially B medical, we had some shortcomings in the quarter. On a reported basis, we delivered 2% growth. Organic revenue excluding estimated COVID impacts declined 2% in the quarter. Today, all of my comments on growth will be organic growth rates excluding the impacts of COVID unless otherwise specified. Looking at the business by segment, the products business declined 2%, reflecting a softer quarter than initially expected. In the consumables business, we witnessed lower revenue as destocking kept our channel partners lighter than expectations. We do think these effects are temporary, and are not impacting all customers. But the range of reports from various distributors gives us little visibility into how long we might expect the channel to be slower. For now, we see Q3 consumables and instruments revenue flat to Q2. In stores, the revenue shortfall was a different story as large automated stores revenue was impacted by three customer projects that were delayed because their facilities were not ready for installation. That said, the stores revenue impact is a matter of timing, and the revenue will be delivered in the coming quarters. We remain at record backlog levels for automated stores, and the backlog is secure, but it puts more pressure on manufacturing and installation teams as more projects ship in the second half of the year. In cryo stores, we shipped a record number of manual freezers, but our automated cryo systems slowed due to budget uncertainty at large pharma companies, which delayed our ability to book and ship tools. The B3C cryo systems are critical tools for cell and gene therapy applications, and we're the only commercial provider of automated systems. So although the timing of orders was delayed, we do anticipate capturing this revenue once customer approvals are finalized. We believe this pause is consistent with the reprioritization of clinical trials work that's making its way through some of the large pharma companies. The largest impact on our results came from B Medical, which delivered $15 million of revenue in the quarter, after a record $42 million in Q1, and considerably below our expectations. The lower result was primarily impacted by timing delays in the cold chain business. And though timing of revenue remains difficult to predict, we're encouraged by the pipeline of opportunities that the team has generated. We're focused on delivering on the benefits we expect from this highly capable business, but admittedly, the timing to achieve certain revenue milestones has changed. Still, the value of B Medical is enabling a large upside for Acenta in new markets. Importantly, B Medical was accretive to earnings in the first half, just not at the level we'd anticipated. In services, performance was solid with genomics revenue coming in at the high end of our expectations and sample repository solutions delivering as expected. We're particularly pleased that genomics is back on a positive trajectory. Against the backdrop of January COVID impacts in China and a decrease in funding for small biotech companies, we performed remarkably well in the quarter. We had two very meaningful takeaways in the quarter. First, we delivered a 6% sequential increase in gene synthesis revenue and good momentum entering this quarter. I know it's been a while since you heard me say that. In the quarter, gene synthesis served more than 250 new PIs, and we performed several successful pilot runs that are key leading indicators of follow-on business. This sequential growth is a combination of a few elements. One, the delivery issues we had from our China facilities are confirmed to be remedied, as quality and turnaround times are back to our best-in-class standards. Customers we'd lost had been coming back to us for exactly these reasons. They just can't get the quality or turnaround time from other suppliers. And lower price from competitors doesn't make up for long turnaround times or diminished quality of results. And finally, strong focus by our account teams was the reason for our strong wins. This solidifies the notion that dedicated, highly skilled salespeople are essential for success in this business. To add to our business momentum, we launched two new gene synthesis offerings. The first being circular RNA synthesis, which targets the fast-growing RNA therapeutics market, where we completed several pilots with large pharma accounts. The second is a high-throughput lentiviral packaging solution to support high-throughput gene editing screens. To be clear, we have much more opportunity across gene synthesis and confidence about our sturdier position in the market. In the rest of the GeneWiz business, NGS and Sanger perform to expectation, and both subsegments are poised for continued growth throughout the remainder of the year. To round out services, SRS as a whole grew 5%, as expected, driven by double-digit growth in storage. We're pleased with the continued inflow of samples to our sites, as well as the traction we're seeing with new and existing customers. We want additional business with our existing large pharma and biotech customers, and these wins are a testament to the strength of the business and the value proposition of the Azenta sample storage management offering. In addition, our first automated multi-million sample store at our Indianapolis SRS site has gone live and we're in the process of adding a second automated store, as we're convinced that the future of biorepository business must incorporate automation, and we continue to be ahead of the curve on that front. We believe we're increasing the competitive gap with each investment we make in the innovation of state-of-the-art sample management solutions. Cell and gene therapy revenue grew 7% in the quarter, driven by more than 20% growth in genomics and 60% growth in SRS. The lower level of automated cryosystems orders kept us below 20% growth for CGT business this quarter. As I mentioned at the beginning of my remarks, our number one issue is top line sales. And we now have proof points that the realignment of sales activities and structure is supporting our return to higher growth and largely in our control as customer demand for products and services we offer is clear. We further determined that realignment to the business units is also key to allowing our account executives to best align our products and services to our customers' needs. So today we announced a business realignment to enhance our commercial strategy and accelerate growth and profitability. These changes build upon the previously announced cost reduction initiatives aimed to streamline and optimize the business. After thorough assessment, we've commenced the following changes. One, Over the past four months, we've moved to realign marketing and increase go-to-market decision-making within the genomics business. To further expand on the success of these initiatives, we're establishing a separate dedicated sales vertical for this business to enable the business to move quickly and efficiently in the fast-turning sequencing and synthesis markets. Since we acquired GeneWiz four years ago, we've expanded both scale and sophistication of our offerings. From genomics offerings of Sanger and next-generation sequencing and gene synthesis, we've enhanced our scientific power to offer many more services, including proteomics, metabolomics, single cell analysis, digital spatial arrays, bioinformatics, and a host of laboratory services. This is now a multi-omics platform, and the need for focused, highly capable sales is even more apparent, and hence, our dedicated sales alignment to this business unit. This is all about scientists selling to scientists. In recognition of this expanded service offering, We're establishing this multi-omics business unit, which will continue to be led by Dr. Ginger Zhou, a 12-year veteran of GeneWiz. We're also combining all sample management capabilities into one organization. We've demonstrated that in the selling process, our sample management products and services complement each other well and often engage the same customer decision maker. To that end, we're combining our SRS sample repository solutions business with our products business unit, which includes cold store systems as well as consumables and instruments. This sample management solutions business will be managed by David Wine, the current leader of the SRS business. This business unit will also have its own dedicated sales organization focused on all things sample management. Finally, in this reorganization, B Medical will maintain its own structure. We believe the new structure will best align portfolio offerings to end customers, thereby enhancing collaboration and responsiveness. Over the past few months, we've begun to move resources in this direction. The next changes will be to crystallize certain leadership reporting lines and moving towards formalizing this new structure. In addition to bringing the needed focus of business units through fully aligned sales directly to customers, this restructuring will allow us to deliver an incremental $15 million of EBITDA by the end of this calendar year. This is in addition to the cost reductions we initiated early in Q2. Our objective and initiatives are completely aligned to restore growth and profitability for the long-term goals we set out at our analyst day in Q1 2022. We're delayed in our delivery of that performance, but we're committed to achieving it. We've already begun implementing the changes, which will deliver positive momentum into 2024. Finally, our capital position remains strong. We ended the quarter with approximately $1.5 billion of cash on the balance sheet, We remain active in our share repurchase program, and we've already spent more than $550 million to repurchase more than 11 million shares since we started the program in November, which represents nearly 15% of outstanding shares, a reflection of our confidence in the long-term prospects for the company. Even after our share repurchase commitment for fiscal 2023, we'll have roughly a billion dollars in cash available for strategic investments. As I've described in my remarks today, there are many positive indicators as well as initiatives in progress to support growth and profitability enhancement. These developments take time, but we believe are also the right steps to deliver long-term performance and shareholder value. This is a period of tremendous promise for Azenta. We uniquely provide a portfolio of best-in-class trusted products and services that enable breakthroughs faster, the value proposition at the heart of all investments in the life sciences space. We're investing more in innovation and market-leading capabilities. We're bullish about our prospects, not satisfied with our results, but doing just what we should to increase growth and profitability. That said, we use this time to recalibrate expectations for the next quarters. We look forward to updating you on our progress, and we thank you for your interest and support as we work to deliver value to our customers and shareholders. And I'll now turn the call over to Lyndon.