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Executives

Stephen Schwartz - President and CEO

Martin Headley - EVP and CFO

Analysts

Melanie San - UBS (ph)

Brooks Automation, Inc. (BRKS) UBS Global Healthcare Conference May 20, 2013 4:00 PM ET

Melanie San - UBS

Alright good afternoon everyone. Thank you for making it out to our last session of the day. And it’s Melanie San, happy to be your host for this session. Our next presenter will be Stephen Schwartz President and CEO and Martin Headley EVP and CFO of Brooke Automation. Thank you.

Stephen Schwartz

Thank you Malone good afternoon. We really appreciate your time today. Today I would like to introduce in a little bit more detail the trust that Brooks has in Life Sciences System space. I will begin by talking generally about the company and the business, and talk very specifically then about the market opportunity and our approach to the Life Sciences market and Martin will follow up with a review of the financial performance and also give some idea about the outlook for the company.

First I refer you to the Safe Harbor statements which are posted on our website www.brooks.com. What I would like to discuss today is how we are in the Life Sciences, the approach that we have, the challenges that we have and really why we think we are particularly well suited to serve growing and rather underserved business opportunity today.

On the first slide I show a breakdown of calendar year revenue mix for the company, approximately $500 million of revenue of which about 70% relates to the semiconductor front-end and adjacent technology markets. We serve those with Brooks product solutions which is made up of mostly automation solutions including robotics and wafer handling mechanisms, but also cryogenic pumps and vacuum and instrumentation, that controls the environment in which we manipulate the semiconductor wafers.

We run a Brooks Global Services business which comprises approximately $80 million out of $500 million revenue and a new market segment for us, Brooks Life Sciences Systems which in calendar year 2012 was a $53 million business unit, one that we believe provide significant growth and challenge and opportunity for the company.

The served market makeup that we have represents approximately $1.8 billion of served market today, about $1.5 billion or $1.6 billion of market opportunity comes from the core businesses of the company which includes semiconductor and adjacent market automation and cryogenic and vacuum technologies and then very interesting, a very fast growing market segment of Life Sciences Systems, where we actually manage the automated cold storage, automated tracking and movement of samples in a cold environment.

The market size today we believe is around $130 million available market, growing at approximately 20% per year. We have about 40% market share today, but very strong market position in the systems and the opportunities that are coming forward as we move toward the rapid growth biological sample storage in cryogenic temperatures.

On the semiconductor side briefly, the core drivers are driven by mobility applications and communications. We have very high level of engineering spend to capture designing wins to serve this industry as the line widths drop, as the challenges associated with contamination and economics are increasingly important.

We spend about $36 million per year to continue to get designing wins for equipment makers who serve the semiconductor industry. We are in a period now of rapid re-growth if you will of this business but the investments that we have made in engineering serve us well from a design win standpoint and we continue to gain market share in the most critical segments of the available market space.

In terms of the new product capabilities we added company to the portfolio by acquisition Crossing Automation, we acquired in October 2012. It was trailing 12 months revenue of approximately $50 million. It was accretive already in the March quarter and we anticipate that as we go beyond 2014 that the ROIC performance of this business will be greater than 15%.

There is a very significant amount of business driven by vacuum coating in MEMS CapEx which is related to mobile computing and the rapid growth of smartphone applications. We have products positioned now to serve what is called the advanced wafer level packaging or back-end applications, which basically an expansion of the front-end of the wafer remains whole farther into the back-end, it expands the size of our market using the current technologies we have as a company that we anticipate rapid growth during the next three years as it transitions to a significant amount of wafer level packaging.

And finally at some point in time there will be a transition from a 300 millimeter diameter wafer to a 450 millimeter diameter wafer. We continue to have designing wins, and position ourselves to be one of the few and certainly fewer suppliers of automation and vacuum technologies in the 450 millimeter wafer space.

We have launched products. We have shipped them now to 10 customers. We continue to grow our market position well in advance of the market, but we do anticipate in the coming years 450 will play a major role in the continued growth of the company and so we have made the necessary investments to make sure that we will be market leader when the industry makes its transition to 450 millimeter wafer diameters.

What we came here to talk about very specifically however is the growth driver related to the Life Sciences business. Currently the state of sample storage if you will is done by manual systems by and large. So most of the samples for chemical compounds for biological samples are stored in manual freezers or in liquid nitrogen cooled stainless steel doors, and there is a dramatic growth in the size of this industry.

There are billions of samples in cold storage today and simply by the means of the numbers the ability to manage and track these samples to preserve the integrity of the samples and to maintain the cold chain of custody, there is a significant need for automation in the cryogenic space and there are significant technical challenges associated with that and we believe that we have some solutions to address that very specifically.

We have relatively small business today. The current run rate is approximately $40 million per year but we have an enormous market growth opportunity in front of us and we are spending at a relatively high level of R&D investment to prepare ourselves both for the opportunities that exist today against current competition but more specifically to prepare ourselves for what we think is a market growth opportunity as we drive toward colder temperature, smaller source and highly automated systems.

We have an R&D spend today of approximately $12 million. We have changed the product portfolio in each of the three of temperature categories that we serve. The product introductions that we will depend upon to drive revenue for the next 12 months are largely either complete or in stages near completion, so that we will have a completely revamped portfolio 12 months from now.

In and around the Life Sciences space, what uniquely positions Brooks is that we are an automation company with cryogenic technology as a core capability and what we have found in the Life Science’s space is the conversions of cryogenics and automation and today there are a billion biological samples stored in the manual freezers or in stainless steel tanks and what people find is sample integrity and the means to track and make sure that they have the correct sample and that the sample has been properly cooled throughout its chain of custody. It's critical and virtually impossible to do by means of manual systems.

Thus market opportunity sets up particularly well for Brooks as we are able to, not just automate but automate in cryogenic temperatures and we believe that the handling of these samples, the storage of these samples, the tracking of these samples will allow us the opportunity to continue to grow around this space of automated sample management and move into the preparation of samples and transport of samples provides us with an opportunity that we believe will be in excess of $2 billion in and around the management the storage and tracking of samples.

To give you a little bit of background, throughout most of the 20th century samples were handled manually and for the last 50 years or so, majority of the samples are stored in mechanical freezers which have problems with frost, which have problems with tracking, which have problems with sample integrity and the means by which the industry began to change, where the pharmaceutical companies needed to store chemical compounds and needed to store millions of chemical compounds in automated systems.

So beginning in the 1990s, chemical compounds began to be stored in the automated systems with temperature control at 4 degree C or down to minus 20 degree C approximately where you make ice in your home freezer. So the sample degradation, the traceability concerns were very significant and so into the 21st we began to look at automated sample management systems to handle chemical compounds and more importantly now as we get down to storing samples like DNA, RNA, blood, tissue cells, we need to drive below minus 20 degree C to minus 80 degree C or further below the glass transition point, the minus 134 degree C, where there are significant technical challenges that we Brooks believe we can uniquely satisfy.

So, the systems that we developed, some of which are pictured here, the top system for example you can see, will store about a million samples and it will be able to manage 1,000 samples in and 1,000 out per hour, highly automated, highly capable, cold storage at the input and output ports and it enable researchers to reliably access and distribute to store samples in the automated cold store.

As we go towards the DNA storage, RNA storage for blood and tissue we see this is the fastest growing market opportunity for us and we see a dramatically underserved market today, below minus 134 degree C for cells and tissue which we think provides us with the unique opportunity to develop next generation products to automate below the glass transition point.

We began in the business by acquiring two companies. We acquired Nexus Biosystems in July 2011 and shortly before that we acquired a small company RTS Life Sciences and we formed Brooks Life Systems.

That gave us some market leadership position and installed base of 180 systems at more than a 100 different customers including all 20 of the top pharmaceutical companies and it gave us a technology foundation and market position from which we could build a very significant platform.

Since then we focused heavily on the growth of the biological sample storage. I will show a graph here with the blue bars represent accumulative installed base of storage for chemical compounds at minus 20 degree C and you could see in about 2006 there began to be some demand for automated sample storage at minus 80 degree C where we began to satisfy the needs for biological sample storage.

What we anticipate as we get out to 2014 and 2015 is that there will be an incremental demand again as we look at cells and tissue to store samples in automated systems at approximately minus 150 degree and we have significant effort both in the minus degree C and the minus 80 degree C storage.

There are a number of drivers related to the market segmentation if you will. Commercial bio-banks are numerous. They are all over the world. They either sale tissue samples, they provide storage opportunities for customers who want someone else to store the samples. There is a high degree of traffic input and output but security of samples and management of samples is critical business that drives hundreds and billions of dollars of revenues today.

We see significant growth in population bio banking where people want to do studies on a specific population. Notable among these of the UK Biobank when we announced last week where we won multisystem, multimillion dollar order at the Tohoku Mega Biobank in Tohoku, Japan in the Sendai region where people want to do transitional studies and they want to study populations in the store millions or tens of millions of samples in every so many years go back and resample the same population.

So, you can see that there are number of applications here including Ag Bio Store. There are tens of millions of samples that are storing DNA for plants, for agricultural companies and this is a very significant growth opportunity that we believe will continue to drive business for the company.

In terms of makeup of the business, about 54% of the business is cold storage. Today 23% of the business that we have from revenue standpoint is services business. Consumables is a 13% today and instruments to support this business is approximately 10%.

We do see automated sample storage being approximately 50% of the business. We think there is opportunity to continue to grow the services businesses and consumables and as we continue to move forward this ought to about the profile for the business but significant growth coming from each of the segments that we represent here.

Finally, two years after we started into this business, we see that there is a significant demand, increasing demand for biological sample storage. We find that once customers move to an automated system from manual storage that they don’t go back to manual storage.

So we think that once people understand that reliability, packing density, the precision of the pick in place, the quality of the samples and the decreased manpower and footprint provide significant economic advantages even for large capital equipment purchases that there is a significant opportunity for continued growth in this space and we do see it as a one way directional change for anyone who stores both compound and biological samples.

We’re finding also that has government studies begin to fund research for the study of various diseases that they are beginning to insist that the samples were stored in automated sample management systems just because the integrity of the samples that they ultimately want to process.

The market position that we have carved out continues to be strong. We believe we win more than 65% of the systems business. We think with all of the product development that we have going on in the minus 20 space, minus 80 degree space and below that our market share will continue to increase beyond 65%.

We have seen some lumpiness of the business, some pressure from sequestration with some changes in spending from large pharma companies. However, we believe that business is beginning to pick up. We announced on our earnings call last week that we do anticipate that the order patterns will begin to recover in the current June quarter and that the back-half of the year will be certainly healthier than we’ve been able to demonstrate in the March quarter.

And finally, we do see significant growth in Asia. We see dramatic changes in Japan in and around the automated sample storage space and absolutely in China we see opportunities in India and so from a growth rate standpoint we do see significant opportunities beginning to arise and it is a place for Brooks as a great presence as result of semiconductor business. So, we have infrastructure built out and we will continue to make investments in Asia to capture share of what we think is very significant opportunity, even around automated sample storage.

So, with that I’d like to turn it to Martin to give some outlook.

Martin Headley

Thank you very much Steve and welcome everybody. At this juncture just take time to talk about the revenue trends and particularly the significant influence of semiconductor frontend capital equipment demands on our revenues. Although we’ve shown a lot of calendar year data in this presentation, please remember we are at September fiscal year end.

So, this chart is presented in relation to our September fiscal year end and you’ll see that the semiconductor cycled down and troughed in the December quarter which was the first quarter of our fiscal ’13. We saw recovery in the March quarter with a 50% increase in our revenues for semiconductor frontend products and starting to see a recovery from that trough quarter.

You’ll also see the orange bars at the top of this graph which represent the Life Sciences business that we entered through acquisition in fiscal 2011. And this is the business we feel confident, will be at over a $70 million run rate as we exit the current fiscal year and that the two quarters, the March quarter and the June quarter, which were impacted by the uncertainty, around government funding various pharma moves and sequestration will be resolved as we see a significant backlog of significant cold store projects actually coming to fruition and being awarded, the first being the Tohoku Project that Steve made reference to.

You see in terms of another growth initiative is in the yellow bars which are our revenues into adjacent markets. Adjacent markets for us during fiscal 2011 was principally driven by some solutions we developed for LED applications, automating in particular the MOCVD process.

That LED capacity was significantly over built at that stage and we have very low levels of volumes in that area, but that's been substituted by a very nice growth from basically a standing start of equipment that's used in back end semiconductor and that business which is now over $25 million annual run rate should grow quite nicely with further additional incentive in the future as the industry goes to some advanced techniques.

You see the service business. The service business is also growing quite nicely. We had 4.5% organic growth in the March quarter from our service business. So we see nice recovery from the cyclical trough.

On calendar year basis our overall operation performance is shown on this slide here, slide 16. Our BPS and BGS, our technology business revenues were down 14% with the cycling down of semiconductor demands. You see the full year impact of the life science systems business and some growth as we grew out to nearly $54 million, overall on the calendar year basis from '11 to '12 our revenues declined only by about $41 million.

We challenged on gross margins both by lower volumes challenging us with fixed cost absorption and a slight mix issue associated with components in our semiconductor business that favored some lower margin products, but we should see that we get beyond that and I'll take you through a walk on the challenges and the successes we believe we'll have in the gross margin area soon.

Our R&D, we spent $47 million in calendar year 2012. This is about the right level. About 12 million of that is in the Life Science Systems area which is a very high component and we seek to keep our SG&A expenses below $100 million a year run rate. Overall you see a very nice adjusted EBITDA product from our operating performance.

In terms of in the quarters and the sequential performance of the quarters as we come from the semi trough, our revenues increased from $98 million to a $116.6 million. We've guided our June quarter to between $116 million and $124 million. So 120 million at the midpoint of that range.

Our gross margins improved from 31.9% to 32.1%. That was challenged by the decline in the higher profitability Life Science Systems business. We saw some nice improvements in particular in our Brooks Product Solutions business.

The research and development increase in the quarter was driven by developing some new products that came out, most notably the Bio Store 2, the new higher density, minus 80 degree store that's having strong acceptance we believe in the market and we kept our SG&A expenses roughly flat in the quarter.

So as we come out of the trough, although we actually allowed ourselves as it were to have a small loss in the December quarter because we saw the business coming back in the March quarter. We wanted to be prepared to respond to our customers demand, we did develop positive EBITDA and positive free cash flow and that's part of the Brooks model going forward that we should even at the trough points in any cycle have positive EBITDA and positive free cash flow.

In terms of those gross margin initiatives which are very important, we have worked for a while on supply chain consolidation in sourcing initiatives that will improve the material cost structure of most notably our Brooks Product Solution products, in particular the robotics and the cryo pumps.

We have a variety of value engineering programs to improve the cost profile of various critical products. Those are extremely successful and starting to come through. We are exiting our end of life in a variety of smaller volume, low margin products. This will have an adverse impact sequentially on revenues about $45 million as we go through that in the June quarter, but those were all very margin products and improve our profitability profile.

Importantly we are moving some of our higher volume products and subassemblies to low cost region contract manufacturing to make the business model a little more variable and less fixed cost intensive and we've been working on a variety of improved service procedures to reduce the cost of providing our warranty support.

We take all of those into account and we should be largely through a good part of these programs by the end of the current fiscal year, so by the end of September quarter. Our targets for gross profits are 38% for our Brooks product solutions, 32% for our Brooks Global Solutions, and Life Science is about 45%. That will be giving us an exit run rate for the company as a whole of around 38% leaving this current year and moving forward a potential to reach the 40% goal that we’ve set to ourselves.

So in summary we have significant growth opportunities in the market we currently serve, most notably Life Science System. We’re well positioned to capture and increase our market share. We do have the initiatives in place to improve our margins to our target levels of 40%.

We’re going to build on what is new for Brooks which is a multiyear profile of profitability and we have a very strong balance sheet to execute on this vision with over $145 million of cash in hand and no debt and we have capital model to provide returns to shareholders with the dividend program that currently provides 3% yield.

And with that I thank you for your attention.

Question-and-Answer Session

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