Azenta, Inc.

Greetings and welcome to the Azenta second quarter 2024 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 star followed by 11 on your telephone. As a reminder, this conference is being recorded Wednesday, March 8, 2024. I will now turn the conference over to Yvonne Perrin, Vice President, FP&A, and 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 2024. 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 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. On the call with me today is our President and Chief Executive Officer, Steve Schwartz, and our Chief Financial Officer, Herman Cuto. We will open the call with remarks from Steve on highlights of the second quarter. Then Herman will provide a more detailed look into our financial results and our outlook for fiscal year 2024. 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, Yvonne. Good afternoon, everyone, and thank you for joining us today. I'd like to start off by welcoming Yvonne to her new position as our head of investor relations. Yvonne is steeped in the knowledge of all aspects of Azenta by virtue of the fact that she's also been the leader of our global FP&A function for more than a year, and we're fortunate to have her leading IR here at Azenta. And Sarah Silverman, who many of you have gotten to know, has moved to become the CFO of our multi-omic segment. And of course, she's flourishing in that role as well. Before we get into the quarter, I want to address the announcement that we made in addition to our earnings release about my decision to retire as CEO after more than 14 years at Azenta. This decision follows a discussion with the board as part of the company's active succession planning process. To ensure a smooth transition, I will continue to serve as CEO until a successor is appointed. In the meantime, the board has initiated a search to identify my successor and has engaged Heidrick & Struggles, a leading executive search firm, to assist in the process of identifying and evaluating candidates. I'm confident now is the right time for a transition, and the board agrees. During my tenure, I've been fortunate to work with incredible people from whom I've learned much, and together we accomplished some incredible feats, including transforming from semiconductor capital equipment company Brooks Automation into Azenta, a standalone, publicly traded, pure play life sciences company. We've delivered outsized shareholder returns, and yet it seems like we're just getting started. At Azenta, we believe that's the way all companies should feel. I also want to express my gratitude for the strong support of the board of directors that's always been focused on delivering shareholder value and good governance. I'm confident that Azente is now in a position of strength with annual revenue of almost $700 million and in clear pursuit of our Ascend 2026 plan, which will create further value for shareholders in the future. Being part of this incredible company for the last 14 years with such an outstanding team has been a true privilege. Now I'll turn back to results from the quarter. Today I'll focus my remarks on a summary of solid Q2 results, our view on the current market environment, and an update on our outlook for the full year. Before I begin, I want to put today's comments into the perspective of a company in transition. We entered the second half of our fiscal year positive about our prospects for the next years because of all the work we've done over the past years to get into this position, specifically We're confident that the changes we've made to align the business units and sales organizations have fixed the company structure to best align our capabilities with our customers' businesses. And in the process, we successfully reduced annual expenses by more than $25 million, making us more efficient and putting us squarely on a path to accelerated profitability. Under Herman's leadership, we've initiated a program we call Ascend to lift EBITDA to the high teens by 2026 and on a path to exceed 20% thereafter. And we've developed and launched new innovative products and services in each of our segments that reinforce our ability to continue to outgrow the market in any environment by several hundred basis points. With that backdrop, we're pleased to report that Q2 was another strong quarter, and we're encouraged by the momentum we've seen in the first six months of the year. Even in what is still a down market, we delivered organic growth in all three of our business segments, a meaningful accomplishment in this environment. Now I'll turn to highlights from the quarter. In Q2, we delivered revenue of $159 million, which translates to both a reported and organic increase of 7% year-over-year. I'll briefly walk through each of the segments, beginning with sample management solutions. Revenue in the SMS segment grew 3% year-over-year and grew 8%, excluding the CNI line of business. Storage systems revenue was up 16%, our fourth consecutive quarter of double-digit year-over-year growth. Temple Repository Solutions was up 5% year-over-year. SMS is our largest segment and accounts for almost 50% of revenue. We've made strategic investments in highly differentiated products and service offerings, including the development of the BioArk Ultra store and in the move to automate our biorepositories. As we've detailed for you in the past, this market is fueled by two key factors. One, the sheer number of samples that are collected for future discovery, And two, the trend toward outsourcing of samples to our biorepositories for high-quality care and sample management. We see a bright future for all things SMS as our customers increasingly recognize the value of Azenta's sample management capabilities to improve their operations and speed to discovery. While the life sciences services market continues to face headwinds, we're pleased that the multi-omics segment revenue increased 1% year-over-year, meaningfully outpacing a downed market. In the next generation sequencing portion of our multiomics business, we're riding the next wave of technological advancement for research and discovery that enables processing of higher volumes of data at much lower costs. Our team is experienced not only in how to compete in this type of market environment, but also how to be profitable. Our success formula is clear. Invest in the latest technology, recruit top scientific talent, and put capacity in place in advance of what we know will be high demand for this service. We've honed this skill over several of these disruptive NGS technology cycles, and we're at it again. We currently have NovaSeq X Plus machines up and running in multiple sites. As an early adopter, we've already moved almost all of our NGS work to this technology. We're delivering at the leading edge of what our customers need, and we're working hard to deliver the better economics and superior cycle time our customers expect. In Q2, we saw modest organic revenue growth in next-generation sequencing on sample and data volumes that were, again, up significantly quarter over quarter. And while we met this increased volume, we were also able to hold gross margins year over year. In our experience from the last three generational shifts in NGS, we're at a pretty good point in the technology cycle and economics learning curves. In another validation of our strategy to invest ahead of discovery needs, we saw tremendous growth from our new multi-omics vectors, which include high throughput proteomics, single cell and spatial biology, as well as some of our new clinical services. In a trailing 12 months comparison for the period ended March 31, revenue for these new services was up 33% year over year to an annual run rate of approximately $30 million. Our synthesis business continued its strong recovery, delivering 13% organic revenue growth on a year over year basis, up 6% sequentially. We're seeing good acceptance of our newer growth vectors, including antibody production and viral packaging. In some ways, the regional look at services tells a more complex story, but it's also a testament to how we're leveraging our global presence. Our China business continues to perform extremely well, as in Q2, we delivered a fourth consecutive quarter of double-digit growth. We've reported to you consistently strong performance from China in what we know to be an outlier compared to what others are seeing in the market. By contrast, in North America, we continue to see softness across both NGS and Sanger sequencing. That said, we're seeing indications of improvement in that Sanger revenue was flat quarter to quarter after several sequential quarters of decline, and the reports of increased investment in biotech is promising news that the opportunities will once again increase, as small biotech companies have always been a meaningful source of GeneWiz multi-omics revenue. Finally, in Europe, we had another quarter of strong performance, growing 12%, led by NGS. Just two weeks ago, I had the pleasure to meet many of our customers at a well-attended grand opening of our NGS lab in Oxford, UK, where we're off to a strong start in a key market location. All in, we had a very solid quarter from our multi-omics business. Before I move on, I want to touch on an area that's important to us, which relates to the business from synergies we derive from the service offerings that include sample management solutions and multi-omics capabilities. Over the past two years, we've been working to educate customers on the benefits of integrated workflow solutions from our combined portfolio. We're seeing some good results from this endeavor as we currently have more than $40 million in our backlog that we can attribute to synergies across business segments. As we improve the benefits of lower cost and cycle time reduction, we anticipate more and greater opportunities will accrue to us. But already, this is a meaningful proof of the value of synergies from our portfolio, and we intend to build on this momentum. Now we'll turn to Be Medical, which is the smallest part of the company at roughly 15% of sales, but understandably gets a significant amount of attention. Be Medical is fundamentally a very good company. They operate in a supportive Luxembourg environment, have a team of very talented engineers, and they've developed manufacturing operations which are highly efficient and high quality. Their products are essential cold chain equipment for the distribution of life-saving cures, and as such, they're delivered under the approval of the FDA and other sanctioning bodies. They have high market share and incredible technologies. They're profitable and motivated to expand the value of their offerings to couple with Azenta for greater purpose and profit. And as you know, the hard part of the business is the unpredictable nature of the specific time is hard to forecast with any accuracy, as the typical funding sources are large, global, humanitarian, and health organizations, which are not predictable in terms of timing. We've taken some significant actions to better align the B medical business to Azenta. Some of these actions we outlined in our investor day presentation, and we've taken some additional decisions since then. We're now focused on the vaccine cold chain product lines only, and we plan to discontinue medical refrigeration and blood management product lines, which leaves us with a streamlined and focused B medical operation that will deliver at least 20% EBITDA in our outlook. And even with the consolidation of factory space, we still have capacity to manufacture more than $200 million in annual VCC revenue. These actions will not improve the visibility of our timing, but will definitely allow us greater profitability through this focus. I want to give two additional updates on B-Medical. First, we're still not confident in the timing of hard POs that will start the delivery of the $60 million of BCC products into the Democratic Republic of Congo. Second, because we have two quarters of actual and one quarter of guidance totaling approximately $60 million of B-Medical revenue, we're not in a position to hold our expectation for what we thought was a conservative $115 million to $120 million year. Instead, we'll reset expectations for fourth quarter revenue to be approximately $25 to $30 million. Even with this adjustment in B Medical revenue expectations, you'll hear from Herman that we reiterate our commitments for EBITDA and earnings improvement for this fiscal year. Nonetheless, we remain very positive about this business. We're operating with the largest opportunity pipeline in B Medical's history and have much confidence in revenue that will be ours. That said, we've skinnied down to the valuable, defensible essence of market-leading capabilities for vaccine delivery and maintain the potential for upside value from unlocking the true strategic intent to be medical, which is sample acquisition of the previously unreachable diversity of the African population. Toward that end, we're actively involved in three critical initiatives that are underway in Africa. In summary, our sample management business remains a steady and consistent source of growth, offering exceptional products. Our services solutions play a key role in discovery, and as mentioned, we're expanding our service offerings. Both business solutions are in high demand. We'll continue to make investments to lead the industry on both fronts, with a lot of blue sky ahead. As we maneuver through the slower market, this is the natural time to be hyper-focused on improving profitability. Our cost and operational efficiency initiatives are in full swing and already delivering ahead of plan, and we're preparing for the return of a healthier market. Herman will talk to you about the transformation initiatives he's leading to build long-term scale and efficiency for Aventa. As I turn the call over to Herman, I want to thank you for your interest and support of Aventa and for the support I've received from many of you over the years. Herman.